AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 11, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INSIGHT COMMUNICATIONS COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4841 13-4053502
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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126 EAST 56TH STREET
NEW YORK, NEW YORK 10022
(212) 371-2266
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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SIDNEY R. KNAFEL
CHAIRMAN OF THE BOARD
INSIGHT COMMUNICATIONS COMPANY, INC.
126 EAST 56TH STREET
NEW YORK, NEW YORK 10022
(212) 371-2266
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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Copies to:
ROBERT L. WINIKOFF, ESQ. PHILIP E. COVIELLO, ESQ.
ELLIOT E. BRECHER, ESQ. MARC D. JAFFE, ESQ.
COOPERMAN LEVITT WINIKOFF LESTER & NEWMAN, P.C. LATHAM & WATKINS
800 THIRD AVENUE 885 THIRD AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10022
(212) 688-7000 (212) 906-1200
FAX: (212) 755-2839 FAX: (212) 751-4864
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
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CALCULATION OF REGISTRATION FEE
PROPOSED
TITLE OF EACH CLASS MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
Class A Common Stock, $.01 par value per share.......................... $517,500,000.00 $143,865
(1) Estimated pursuant to Rule 457(o) under the Securities Act of 1933 solely
for the purpose of calculating the registration fee.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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We will amend and complete the information in this prospectus. Although we are
permitted by U.S. federal securities laws to offer these securities using this
prospectus, we may not sell them or accept your offer to buy them until the
registration statement filed with the SEC relating to these securities is
effective. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy these securities in any jurisdiction where
that would not be permitted or legal.
SUBJECT TO COMPLETION--MAY 11, 1999
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PROSPECTUS
, 1999
INSIGHT COMMUNICATIONS COMPANY, INC.
[LOGO]
,000,000 SHARES OF CLASS A COMMON STOCK
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INSIGHT COMMUNICATIONS COMPANY, INC.:
o Based on customers served, we are currently the 10th largest cable television
system operator in the United States after giving effect to the proposed
acquisition of the Kentucky cable television systems and the proposed
provision of consulting services to additional cable television systems
located in Indiana.
o We own, operate and manage cable television systems serving approximately
1,046,000 customers in six states, with approximately 98% of our customers
clustered in Indiana, Kentucky, Ohio and Illinois, on a pro forma basis.
o We operate a state-of-the-art, highly clustered set of cable television
systems that allows us to offer our customers an array of entertainment,
information and telecommunication services on a bundled basis.
o Insight Communications Company, Inc.
126 East 56th Street
New York, New York 10022
(212) 371-2266
PROPOSED SYMBOL & MARKET:
o ICCIA/Nasdaq National Market
THE OFFERING:
o We are offering ,000,000 shares of our Class A common stock.
o The underwriters have an option to purchase an additional ,000,000 shares
from us to cover over-allotments.
o We currently estimate that the price of the shares will be between $ and
$ .
o This is our initial public offering and no public market currently exists for
our shares.
o We intend to use the net proceeds from this offering to finance: (a) the
acquisition of the Kentucky cable television systems; (b) the introduction of
new and enhanced products and services for our customers; (c) an equity
investment in our telephone joint venture with AT&T; (d) other strategic
acquisitions; and (e) general corporate activities.
INSIGHT'S COMMON STOCK:
o Each share of Class A common stock is entitled to one vote and each share of
Class B common stock is entitled to ten votes. After this offering, the
holders of Class B common stock will have % of our total voting power.
PER SHARE TOTAL
Public offering price: $ $
Underwriting fees:
Proceeds to Insight:
THIS INVESTMENT INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 12.
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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DONALDSON, LUFKIN & JENRETTE
MORGAN STANLEY DEAN WITTER
CIBC WORLD MARKETS
DEUTSCHE BANK SECURITIES
The undersigned is facilitating Internet distribution.
DLJDIRECT INC.
[MAP SHOWING INSIGHT'S SERVICE AREA]
TABLE OF CONTENTS
PAGE
----
Prospectus Summary............................. 3
Risk Factors................................... 12
Use of Proceeds................................ 19
Dividend Policy................................ 19
Capitalization................................. 20
Dilution....................................... 22
Pro Forma Financial Statements................. 23
Selected Consolidated Historical Financial and
Other Data................................... 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 31
Industry....................................... 37
Business....................................... 39
Legislation and Regulation..................... 61
PAGE
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Management..................................... 70
Certain Transactions........................... 75
Principal Stockholders......................... 75
Corporate Structure............................ 76
Description of Recent Transactions............. 77
Description of Certain Indebtedness............ 81
Description of Capital Stock................... 84
Shares Eligible for Future Sale................ 86
Underwriters................................... 88
Legal Matters.................................. 91
Experts........................................ 91
Available Information.......................... 91
Glossary....................................... 92
Index to Financial Statements.................. F-1
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As used in this prospectus,
o "National Systems" refers to the cable television systems wholly-owned and
operated by us, which consist of the Rockford, Illinois system, the Griffin,
Georgia system, the Claremont, California system, the Scottsburg, Indiana
system and the Portland, Indiana system;
o "Columbus System" refers to the cable television system of Insight
Communications of Central Ohio, LLC ("Insight Ohio"), in which we own a 75%
non-voting equity interest and serve as manager;
o "Indiana Systems" refers to the cable television systems of Insight
Communications of Indiana, LLC ("Insight Indiana"), in which we own a 50%
equity interest and serve as manager;
o "Kentucky Systems," refers to the TCI IPVI Systems prior to April 30, 1998 and
to the cable television systems of InterMedia Capital Partners VI, L.P.
("InterMedia VI") subsequent to April 30, 1998, in which we will own a 50%
equity interest and will serve as manager upon completion of the proposed
acquisition (the "Kentucky Acquisition"); and
o "Managed Indiana Systems" refers to the cable television systems in Indiana
which are being acquired by an affiliate of AT&T Broadband & Internet Services
("AT&T BIS") and for which we will provide certain consulting services,
subject to the ultimate control of AT&T BIS.
All references to our performance "on a pro forma basis" give effect to our
systems, the Kentucky Acquisition and, except in the technical discussion of
headends, network miles, fiber nodes, network capacity and density, the
provision of consulting services to the Managed Indiana Systems as if acquired
or serviced at the beginning of the related period or as of the applicable date,
and to adjustments made to our historical financial statements that present our
financial information as if shares of common stock, rather than limited
partnership interests, were outstanding and as if we were taxed as a C
corporation in all periods presented.
"Pro forma proportional basis revenues" and "pro forma proportional basis
EBITDA" represent our ownership interest in the National, Columbus, Indiana and
Kentucky Systems as if acquired at the beginning of the applicable period or as
of the applicable date. Pro forma proportional basis revenues and pro forma
proportional basis EBITDA are not intended to be performance measures that
should be regarded as an alternative to, or more meaningful than our net income
as determined in accordance with generally accepted accounting principles. We
have included pro forma proportional basis revenues and pro forma proportional
basis EBITDA as we believe that some analysts will find such information useful
in evaluating us.
Unless otherwise specified, all cable television industry statistical data
in this prospectus are from Paul Kagan & Associates, a leading cable television
industry publisher.
PROSPECTUS SUMMARY
The following section highlights the key information contained in this
prospectus. You should read the entire prospectus, including the "Risk Factors"
and the financial statements and all notes. Prior to the exchange of limited
partnership interests for common stock to occur upon consummation of this
offering, we operated as a limited partnership, and all taxable earnings were
taxed directly to our then-existing partners.
INSIGHT
We are the 10th largest cable television system operator in the United
States based on customers served, with approximately 1,046,000 customers as of
December 31, 1998, on a pro forma basis. We have a tightly grouped cluster of
cable television systems with approximately 98% of our customers concentrated in
the four contiguous states of Indiana, Kentucky, Ohio and Illinois. Our systems
have a very high concentration of customers served by each headend or technical
center of the network allowing us to more economically deliver an array of
entertainment, information and telecommunication services, including interactive
digital, high-speed data access and telephony products. Upon completion of our
rebuild efforts, which is expected to occur in 2000, over 96% of our customers
will be served from nine headends. In addition to our optimal state-of-the-art
technical configuration, our market research indicates that our clusters have
attractive market characteristics and demographics for offering new and enhanced
products and services that take advantage of the significant bandwidth of our
cable network. We believe that because of this advantageous combination, we are
very well positioned to exploit the new business opportunities available to
cable television operators.
As of December 31, 1998, on a pro forma basis, our systems:
o passed 1,624,477 homes
o served 1,045,612 customers
For the year ended December 31, 1998, we had:
on a pro forma basis:
o revenues of $375.7 million
o EBITDA of $178.6 million
on a pro forma proportional basis:
o revenues of $244.5 million
o EBITDA of $112.2 million
Cable companies, including ours, currently are expanding their channel
offerings, adding digital video services, offering high-speed data services for
access to the Internet and beginning to offer voice telephony to residential and
business customers. Each of these businesses represents a significant
opportunity to increase the number of customers, and the revenues and cash flows
generated over the cable platform. For the United States cable industry, as
reported by Paul Kagan & Associates, the number of digital service customers is
projected to increase to approximately 44.1 million by 2008 (representing a
penetration of 42.2% of the homes passed). The number of high-speed data
customers is projected to increase to approximately 15.2 million by 2008
(representing a penetration of 18.0% of the homes that have been marketed this
service). The number of residential telephony customers is projected to increase
to approximately 19.6 million by 2008 (representing a penetration of 24.0% of
the homes that have been marketed this service). Revenues from the combined,
advanced broadband network services are estimated to increase to $42.4 billion,
representing 43.8% of the cable industry's revenues in 2008, up from $910
million, or 2.8%, in 1998.
Our marketing strategy is designed to capitalize on these trends by
offering our customers an array of entertainment, information and
telecommunication services on a bundled basis. By bundling our products and
services, our customers would have an increased choice of services at a reduced
cost resulting in higher customer satisfaction, higher penetration and reduced
churn. Because our broadband cable network can offer such a wide variety of
communication services, we believe our service offering will provide us with a
competitive advantage over alternative wireline and wireless telecommunications
and multichannel video providers, such as incumbent telephone companies and
direct broadcast satellite television systems. We began offering new and
enhanced products and services, such as interactive digital video and high-speed
data access, during the second quarter of 1999, and intend to offer
telecommunication services beginning in 2000.
3
We have conducted research and held numerous focus group sessions in our
local markets leading us to believe that products and services such as
interactive digital video, high-speed data access and telephony will have high
customer appeal. As a result of our capital investment, we expect to be able to
provide these products and services on a cost effective basis capitalizing on
the high bandwidth capabilities of our cable network. Likewise, we believe that
the highly clustered nature of our systems will enable us to more efficiently
invest our marketing dollars and maximize our ability to establish customer
awareness, increase penetration and build brand support. In addition to our
broad product offering, we also emphasize a high level of locally focused
customer service. Our emphasis is on system reliability, engineering support and
superior customer satisfaction.
To facilitate the deployment of our enhanced products and services, we are
in the process of rebuilding almost all of our network to provide at least 750
MHz bandwidth with two-way active capability. We have rebuilt approximately 28%
of our network miles as of March 31, 1999 on a pro forma basis and intend to
have approximately 71% of our network at or above 750 MHz by the end of 1999. We
intend to complete our network rebuild in 2000 having invested a total of
approximately $233.8 million.
BUSINESS STRATEGY
Our management team developed and is executing a clear strategy to become a
competitive, full-service provider of entertainment, information and
telecommunication services. We developed this strategy because we recognize the
opportunities presented by new technology, the strength of our market
characteristics and favorable changes in the regulatory environment.
Our operating strategy is centered on the development of new and enhanced
products and services for the communities served by our networks and consists of
the following elements:
o Focus on operating clusters with attractive technical and demographic
profiles;
o Expeditiously rebuild our broadband cable network;
o Introduce new and enhanced products and services; and
o Leverage strong local presence to enhance customer and community
relations.
To support our business strategy, we have developed a financial strategy to
pursue value-enhancing transactions and preserve our financial flexibility by
maintaining an appropriate capital structure.
BUSINESS BACKGROUND
Sidney R. Knafel and Michael S. Willner co-founded Insight in 1985 as a
partnership with a small group of investors, including Continental Cablevision,
the third largest cable operator in the United States at that time. After
MediaOne acquired Continental, we reached an agreement to repurchase its
interest in our company by the end of 1999. We replaced this important
relationship by acquiring the Indiana Systems in a 50/50 joint venture with TCI,
now known as AT&T BIS, the largest cable operator in the United States, pro
forma for its proposed acquisition of MediaOne. We believe that a relationship
with a major cable operator is an advantage to us because it helps us to
participate in the rapidly changing technical developments in the industry and
allows us to procure programming, equipment and services at better prices. We
already have benefited from our new AT&T BIS relationship by being one of the
first companies to enter into a joint venture arrangement with AT&T for the
delivery of voice telephony services to residential and small business markets.
We also benefit from having two nationally recognized financial investors,
Vestar Capital Partners III, LP and Sandler Capital Partners IV, L.P. This
combination of strategic and financial relationships gives us a clear view of
the issues confronting the telecommunications industry and increased access to
capital, which we can utilize when analyzing and pursuing new business
opportunities.
Our management team has significant experience in the cable television
industry, with senior management averaging 21 years of experience in the
industry. This senior management team will collectively own approximately %
of the common stock after this offering. Besides its experience in domestic
cable operations, our management team also has the benefit of an extensive
involvement with the deployment of bundled telecommunications services including
cable telephony in the United Kingdom. Messrs. Knafel and Willner formed Insight
Communications Company UK, L.P. in 1989, which at the time of its merger with a
predecessor of NTL, had approximately 1.4 million homes under franchise. NTL is
currently one of the three largest operators of local broadband
telecommunications systems in the United Kingdom with over 5 million homes in
its franchised areas. Messrs. Knafel and Willner are active board members of
NTL.
4
The following table presents a profile of our systems and systems in which
we have an economic interest or service on a pro forma basis as of and for the
year ended December 31, 1998 (except as otherwise indicated). See "--Summary Pro
Forma Combined Financial and Other Data."
SELECTED TECHNICAL, OPERATING AND FINANCIAL DATA
(DOLLARS IN THOUSANDS)
MANAGED
NATIONAL COLUMBUS INDIANA KENTUCKY INDIANA
SYSTEMS(1) SYSTEM(2) SYSTEMS(3) SYSTEMS(4) SYSTEMS(5)
---------- ----------- -------- -------- --------
TECHNICAL DATA:
Network miles.......................... 1,727 2,644 7,422 8,052
Number of headends..................... 5 1 45 18
Number of headends expected as of March
31, 2000(6)......................... 5 1 11 4
Number of headends serving 90% of our
customers expected as of March 31,
2000(6)............................. 2 1 3 4
OPERATING DATA:
Homes passed........................... 148,864 171,753 493,482 650,734 159,644
Basic customers........................ 86,917 87,637 334,026 424,215 112,817
Basic penetration...................... 58.4% 51.0% 67.7% 65.2% 70.7%
Premium units.......................... 92,521 90,032 231,372 347,005 44,596
Premium penetration.................... 106.4% 102.7% 69.3% 81.8% 39.5%
Number of addressable homes............ 30,532 73,362 75,850 130,799 22,000
FINANCIAL DATA:
Revenues............................... $41,314 $47,956 $138,861 $195,507 $ 48,800
EBITDA(7).............................. 18,360 18,261 74,508 85,763
EBITDA margin.......................... 44.4% 38.1% 53.7% 43.9%
OTHER DATA:
Insight's ownership.................... 100% 75% 50% 50% 0%
Location of systems.................... CA, GA, IL OH IN KY IN
Date of acquisition/consulting......... Various August 1998 Various Pending Pending
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(1) Represents the National Systems, including the Rockford system, which was
acquired on January 22, 1998. Includes the financial data of the Scottsburg
system and the Portland system, which are wholly-owned by us. The technical,
operating and other data of the Scottsburg and Portland systems are included
with the Indiana Systems since they are managed by Insight Indiana.
(2) Represents the Columbus System, which was acquired by Insight Ohio on
August 21, 1998. The results of operations of the Columbus System are not
consolidated since we do not have voting control. See "Description of Recent
Transactions--The Transactions to Acquire the Columbus System."
(3) Represents the Indiana Systems, which were contributed to Insight Indiana on
October 31, 1998. Also includes the technical, operating and other data of
the Scottsburg system, which was acquired on March 22, 1999, and the
Portland system, which was acquired on March 31, 1999, since they are
managed by Insight Indiana. The financial data of the Scottsburg and
Portland systems are included with the National Systems since they are
wholly-owned by us. See "Description of Recent Transactions--The
Transactions to Acquire the Indiana Systems."
(4) Represents the Kentucky Systems, in which we expect to acquire our ownership
interest during the second half of 1999. There can be no assurance that the
Kentucky Acquisition will be consummated. See "Description of Recent
Transactions--The Transactions to Acquire the Kentucky Systems."
(5) Represents the Managed Indiana Systems, to which we expect to provide
consulting services commencing in the fourth quarter of 1999. There can be
no assurance that this transaction will be consummated. See "Business--The
Systems--The Indiana Systems--The Managed Indiana Systems."
(6) Represents an estimate based on our current rebuild program.
(7) Represents earnings (loss) before interest, taxes, depreciation and
amortization and with respect to the Columbus System, before severance and
transaction structure costs of $4.8 million associated with the contribution
of the Columbus System to Insight Ohio.
5
RECENT DEVELOPMENTS
THE KENTUCKY ACQUISITION
In April 1999, we entered into an agreement with certain affiliates of
Blackstone Capital Partners III Merchant Banking Fund L.P. (collectively,
"Blackstone Capital"), certain affiliates of InterMedia Capital Management, LLC
(collectively, "ICM") and a subsidiary and related party of AT&T BIS to purchase
their combined 50% interest in InterMedia VI for $327.2 million, subject to
adjustment, which was calculated based upon the total outstanding debt of
InterMedia VI, which was $730.4 million, including accrued interest thereon, as
of February 28, 1999. We also entered into an agreement with AT&T BIS, whereby
upon consummation of the Kentucky Acquisition we will each own a 50% interest,
and we will manage and operate the Kentucky Systems.
InterMedia VI was formed by AT&T BIS, Blackstone Capital and ICM to acquire
cable television systems which, as of December 31, 1998, on a pro forma basis,
served approximately 424,000 basic customers and passed approximately 651,000
homes primarily in four operating clusters in the State of Kentucky. InterMedia
VI is the largest cable operator in the state, with over 95% of its systems
located in four of the five largest cities in the state: Louisville, Lexington,
Covington and Bowling Green. Presently, more than 87% of the systems' customers
are served by four headends, which is consistent with our operating strategy to
own highly clustered properties. For the year ended December 31, 1998, the
Kentucky Systems had revenues of $195.5 million and EBITDA of $85.8 million.
The Kentucky Systems are near the end of a major rebuild program. As of
December 31, 1998, approximately 49% of the network miles had 750 MHz capacity
and we intend to complete this rebuild to 750 MHz capacity by the end of 1999
covering substantially all of our customers. In addition, after completion of
the rebuilds 100% of the customers will be served by four headends. The
consummation of the Kentucky Acquisition is subject to several conditions
including (a) receipt (or waiver) of all necessary material consents from third
parties, (b) absence of any material adverse changes in the conditions,
properties or business of the Kentucky Systems and (c) notification, approval
and compliance with the requirements of appropriate governmental agencies,
including, without limitation, transfer of cable television franchises. We
anticipate that the acquisition will be consummated during the second half of
1999. There can be no assurance that the Kentucky Acquisition will be
consummated on the terms described in this prospectus, or at all. This offering
is not contingent or in any way dependent on the Kentucky Acquisition.
MANAGED INDIANA SYSTEMS
We expect to enter into a five-year agreement with AT&T BIS to provide
consulting services to cable television systems being acquired by AT&T BIS,
which systems as of December 31, 1998 passed approximately 160,000 homes and
served approximately 113,000 customers in the State of Indiana. AT&T BIS will
acquire these systems from Charter Communications as part of a series of swaps
between AT&T BIS, Charter and InterMedia Partners IV, L.P. We anticipate that
the acquisition of these systems by AT&T BIS will be consummated during the
fourth quarter of 1999 and that we will earn an annual fee of 3% of gross
revenues in exchange for providing consulting services. For the year ended
December 31, 1998, the Managed Indiana Systems had revenues of approximately
$48.8 million. Nearly all of the Managed Indiana Systems are contiguous to the
Indiana Systems.
PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are located at 126 East 56th Street, New
York, New York 10022. Our telephone number is (212) 371-2266.
6
THE OFFERING
Class A common stock offered................ shares(1)
Common stock to be outstanding after this
offering:
Class A................................... shares (1)(2)
Class B................................... shares(2)
Total................................ shares (1)(2)
Use of proceeds............................. We intend to use the net proceeds of $ million from this
offering to finance: (a) the Kentucky Acquisition; (b) the
introduction of new and enhanced products and services for our
customers; (c) an equity investment in our telephone joint venture
with AT&T; (d) other strategic acquisitions; and (e) general
corporate activities.
Voting rights of common stock............... Each share of Class A common stock is entitled to one vote and each
share of Class B common stock is entitled to ten votes. After this
offering, the holders of Class B common stock will have % of
our total voting power.
Proposed Nasdaq National Market symbol ..... ICCIA
- ------------------
(1) Excludes shares of Class A common stock if the underwriters'
over-allotment option is exercised in full. You should read the discussion
under "Underwriters" for additional information concerning the
over-allotment option.
(2) This number of shares excludes:
o shares of Class A common stock and shares of Class B
common stock issuable upon exercise of stock options outstanding
upon completion of the exchange of partnership interests for common
stock, of which options to purchase shares of Class A common
stock and
shares of Class B common stock will be then exercisable.
o additional shares of common stock reserved for issuance under
our stock option plan. You should read the discussion under
"Management--1999 Stock Option Plan" for additional information
concerning our stock option plan.
Except as otherwise indicated, the information in this prospectus assumes
that the Class A common stock being offered will be sold at $ per share,
which is the mid-point of the range set forth on the cover page of this
prospectus, and that the underwriters' over-allotment option is not exercised.
7
SUMMARY PRO FORMA COMBINED FINANCIAL AND OTHER DATA
The following table sets forth Summary Pro Forma Combined Financial and
Other Data of the National, Columbus, Indiana and Kentucky Systems and Managed
Indiana Systems which are systems in which we have or will have a significant
economic interest. Such data have been adjusted to illustrate the estimated
effects of the following transactions (the "Transactions") as if they had
occurred on January 1, 1998: (a) the acquisition by us of the Rockford system on
January 22, 1998; (b) the acquisition of the Columbus System by Insight Ohio on
August 21, 1998; (c) the formation of Insight Indiana and related contributions
of systems by AT&T BIS and us on October 31, 1998; (d) the systems exchanged on
March 22, 1999 between Falcon Cablevision ("Falcon") and us, whereby we swapped
our Franklin system in exchange for Falcon's Scottsburg system and cash;
(e) the acquisition by us of the Portland system on March 31, 1999; (f) the
proposed acquisition by us of the Kentucky Systems, which is expected to be
completed in the second half of 1999; (g) the proposed provision of consulting
services to the Managed Indiana Systems, which is expected to commence during
the fourth quarter of 1999; (h) the exchange of limited partnership interests in
Insight Communications Company, L.P. ("Insight L.P.") for our common stock; and
(i) the receipt of approximately $422.0 million of net proceeds in connection
with this offering. The Summary Pro Forma Combined Financial and Other Data do
not purport to be indicative of what our financial position or results of
operations would have been had the Transactions been completed on the dates
indicated or to project our results of operations for any future date. When you
read this Summary Pro Forma Combined Financial and Other Data, it is important
that you read along with it the Pro Forma Financial Statements and our
historical financial statements and related notes, and the historical financial
statements of the TCI Insight Systems (which are the systems contributed to
Insight Indiana by AT&T BIS), Insight Ohio, TCI IPVI Systems (which are the
Kentucky Systems prior to April 30, 1998) and Intermedia VI (which are the
Kentucky Systems subsequent to April 30, 1998) which are included elsewhere in
this prospectus.
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998
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PRO FORMA
-----------------------------------------------------------------------------
NATIONAL COLUMBUS INDIANA KENTUCKY
SYSTEMS(1) SYSTEM(2) SYSTEMS(3) SYSTEMS(4)
PERCENTAGE OWNED 100% 75% 50% 50% ADJUSTMENTS(5) TOTAL
----------- ----------- ---------- ----------- -------------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER CUSTOMER DATA)
FINANCIAL DATA:
Revenues......................... $ 41,314 $ 47,956 $138,861 $ 195,507 $(47,956) $ 375,682
Operating expense.............. 11,069 17,431 39,604 65,328 (17,431) 116,001
Selling, general and
administrative............... 11,885 17,086 24,749 44,416 (17,086) 81,050
Depreciation and amortization.. 19,649 5,311 83,401 121,084 (5,311) 224,134
--------- --------- -------- --------- -------- ----------
Operating income (loss).......... (1,289) 8,128 (8,893) (35,321) (8,128) (45,503)
EBITDA(6)........................ 18,360 18,261 74,508 85,763 (18,261) 178,631
EBITDA margin(7)................. 44.4% 38.1% 53.7% 43.9% 47.6%
System cash flow(8).............. $ 20,653 $ 20,124 $ 77,774 $ 89,148 $(20,124) $ 187,575
Monthly revenue
per customer(9)................ 32.64 44.52 36.00 38.62 36.92
OTHER DATA:
Homes passed..................... 148,864 171,753 493,482 650,734 159,644 1,624,477
Basic customers.................. 86,917 87,637 334,026 424,215 112,817 1,045,612
Basic penetration................ 58.4% 51.0% 67.7% 65.2% 70.7% 64.4%
Premium units.................... 92,521 90,032 231,372 347,005 44,596 805,526
Premium penetration.............. 106.5% 102.7% 69.3% 81.8% 39.5% 77.0%
8
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The Summary Historical and Pro Forma Financial Data set forth below were
derived from our consolidated financial statements and the pro forma combined
financial statements. The Summary Statement of Operations Data for the years
ended December 31, 1994, 1995, 1996, 1997 and 1998 and the Balance Sheet Data as
of December 31, 1998 were derived from our audited consolidated financial
statements. The summary pro forma data have been adjusted to illustrate the
estimated effects of the Transactions as if they had occurred on January 1, 1998
for the Statement of Operations Data and December 31, 1998 for the Balance Sheet
Data.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
HISTORICAL
------------------------------------------------------- PRO FORMA
1994 1995 1996 1997(10) 1998 1998(11)
---------- --------- --------- --------- ---------- ---------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 52,820 $ 57,108 $ 61,839 $ 67,698 $ 112,902 $ 375,682
Costs and expenses:
Operating expenses.................... 13,852 15,364 16,774 18,397 30,376 116,001
Selling, general and administrative... 13,323 13,629 14,062 15,020 24,471 81,050
Depreciation and amortization......... 14,649 13,937 15,694 18,125 43,849 224,134
---------- --------- --------- --------- ---------- ---------
Operating income........................ 10,996 14,178 15,309 16,156 14,206 (45,503)
Other income (expense):
Gain on cable systems exchange........ -- -- -- 78,931 111,746 --
Gain on contribution of cable systems
to joint venture................... -- -- -- -- 44,312 --
Equity in losses of Insight Ohio...... -- -- -- -- (3,251) (6,632)
Costs related to pursuance of sale of
assets............................. -- (763) -- -- -- --
Interest expense, net................. (17,031) (17,965) (17,644) (15,962) (28,106) (82,902)
Other income (expense)................ 365 (52) -- -- (444) 729
---------- --------- --------- --------- ---------- ---------
Income (loss) before income taxes,
extraordinary item and minority
interest.............................. (5,670) (4,602) (2,335) 79,125 138,463 (134,208)
Extraordinary loss from early
extinguishment of debt................ -- -- (480) (5,243) (3,267) --
---------- --------- --------- --------- ---------- ---------
Income (loss) before income taxes and
minority interest..................... (5,670) (4,602) (2,815) 73,882 135,196 (134,208)
Minority interest....................... -- -- -- -- 3,410 62,341
---------- --------- --------- --------- ---------- ---------
Net income (loss) before income taxes... (5,670) (4,602) (2,815) 73,882 138,606 (71,867)
Income taxes.......................... -- -- -- -- -- --
---------- --------- --------- --------- ---------- ---------
Net income (loss)....................... (5,670) (4,602) (2,815) 73,882 138,606 (71,867)
Accretion of redeemable Class B common
units................................. -- -- -- -- (5,729) (5,729)
Accretion to redemption value of
preferred limited units............... (2,500) (2,604) (5,421) (15,275) -- --
---------- --------- --------- --------- ---------- ---------
Net income (loss) applicable to common
units................................. $ (8,170) $ (7,206) $ (8,236) $ 58,607 $ 132,877 $ (77,596)
---------- --------- --------- --------- ---------- ---------
---------- --------- --------- --------- ---------- ---------
Pro forma loss per share(12)..................................................................... $
---------
---------
9
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
HISTORICAL
------------------------------------------------------- PRO FORMA
1994 1995 1996 1997 1998 1998(11)
---------- --------- --------- --------- ---------- ---------
(IN THOUSANDS)
OTHER FINANCIAL DATA:
Net cash provided by operating
activities......................... $ 12,557 $ 13,337 $ 15,976 $ 10,436 $ 44,760 $ --
EBITDA(6)............................. 25,645 28,115 31,003 34,281 58,055 178,631
EBITDA margin(7)...................... 48.6% 49.2% 50.1% 50.6% 51.4% 47.5%
System cash flow(8)................... $ 29,172 $ 31,691 $ 34,601 $ 38,228 $ 62,732 $ 187,575
Capital expenditures.................. 12,492 15,154 16,414 27,981 44,794 --
AS OF DECEMBER 31, 1998
---------------------------------
PRO FORMA
HISTORICAL AS ADJUSTED(13)
-------------- ---------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.................................................... $ 19,902 $ 22,327
Property, plant and equipment, net........................................... 155,412 401,830
Total assets................................................................. 659,837 1,831,312
Total debt................................................................... 573,663 1,204,663
Partners' deficit............................................................ 7,928 --
Stockholders' equity......................................................... -- 369,072
- ------------------
(1) Represents the National Systems, including the Rockford system which was
acquired on January 22, 1998. Includes the financial data of the Scottsburg
system and the Portland system, which are wholly-owned by us. The other
data of the Scottsburg and Portland systems are included with the Indiana
Systems since they are managed by Insight Indiana.
(2) Represents the Columbus System, which was acquired by Insight Ohio on
August 21, 1998. We account for the Columbus System using the equity method
of accounting due to our 75% non-voting equity interest. See "Description
of Recent Transactions--The Transactions to Acquire the Columbus System."
(3) Represents the Indiana Systems, which were contributed to Insight Indiana
on October 31, 1998. We own 50% of Insight Indiana but control its
operations and, therefore, consolidate the operating results. We also
include the other data of the Scottsburg system, which was acquired on
March 22, 1999, and the Portland system, which was acquired on March 31,
1999, with the Indiana Systems since these systems are managed by Insight
Indiana. The financial data of the Scottsburg and Portland systems are
included with the National Systems since they are wholly-owned by us. See
"Description of Recent Transactions--The Transactions to Acquire the
Indiana Systems."
(4) Represents the Kentucky Systems, in which we expect to acquire a 50%
ownership interest during the second half of 1999. It is contemplated that
we will control the operations of the Kentucky Systems and, therefore,
consolidate the operating results. There can be no assurance that the
acquisition of the Kentucky Systems will be consummated. See "Description
of Recent Transactions--The Transactions to Acquire the Kentucky Systems."
(5) Represents the elimination of the operating results of the Columbus System,
which is not consolidated by us. See "Pro Forma Financial Statements."
(6) Represents earnings (loss) before interest, taxes, depreciation and
amortization and with respect to the Columbus System, before severance and
transaction structure costs of $4.8 million associated with the
contribution of the Columbus System to Insight Ohio. We believe that EBITDA
is a meaningful
(Footnotes continued on next page)
10
(Footnotes continued from previous page)
measure of performance as it is commonly used in the cable television
industry to analyze and compare cable television companies on the basis of
operating performance, leverage and liquidity. However, EBITDA is not
intended to be a performance measure that should be regarded as an
alternative to, or more meaningful than, either operating income or net
income as an indicator of operating performance or cash flows as a measure
of liquidity, as determined in accordance with generally accepted
accounting principles. EBITDA is not necessarily comparable to similarly
titled amounts of other companies. See our financial statements, including
the Statements of Cash Flows, which are combined later in this prospectus.
(7) Represents EBITDA as a percent of total revenues.
(8) Represents EBITDA (as defined above) before corporate overhead and
management fees. We believe that system cash flow is a meaningful measure
of performance as it is commonly used in the cable television industry to
analyze and compare cable television companies on the basis of operating
performance, leverage and liquidity. However, system cash flow is not
intended to be a performance measure that should be regarded as an
alternative to, or more meaningful than, either operating income or net
income as an indicator of operating performance or cash flows as a measure
of liquidity, as determined in accordance with generally accepted
accounting principles. System cash flow is not necessarily comparable to
similarly titled amounts of other companies. See our financial statements,
including the Statements of Cash Flows, which are included later in this
prospectus.
(9) Represents average monthly revenue per average customer. For the National
Systems, the average monthly revenue per average customer includes
approximately 10,900 customers from the Scottsburg and Portland systems,
currently managed by Insight Indiana, but whose financial results are
currently consolidated with the National Systems as they are wholly-owned
by us.
(10) The 1997 historical financial statements have been restated to reflect a
change in accounting for cable system exchanges. See the notes to our
financial statements included elsewhere in the prospectus.
(11) Represents the combined results of operations of the National, Indiana and
Kentucky Systems, and our equity interest in the Columbus System.
Based upon our ownership interest in the National, Columbus and Indiana
Systems, and our interest in the Kentucky Systems which is expected to be
acquired in the second half of 1999, pro forma revenues, pro forma monthly
revenue per customer and pro forma system cash flow approximated $244.5
million, $37.38 and $119.7 million, respectively, for the year ended
December 31, 1998. Pro forma revenues, pro forma monthly revenue per
customer and pro forma system cash flow are not intended to be performance
measures that should be regarded as alternatives to, or more meaningful
than other measures in accordance with generally accepted accounting
principles. The pro forma data exclude a one-time non-recurring charge to
earnings to record a net deferred tax liability at December 31, 1998 of
approximately $45 million that would have been recognized upon the exchange
of limited partnership interests in Insight L.P. for our common stock.
(12) Pro forma loss per share is calculated based on weighted average common
shares outstanding of for the year ended December 31, 1998.
(13) Gives effect to the Transactions as if they had each occurred on
January 1, 1998.
11
RISK FACTORS
Before you invest in our Class A common stock, you should be aware that
there are various risks, including those described below. You should carefully
consider these risk factors, together with all of the other information included
in this prospectus, before you decide whether to purchase shares of our Class A
common stock.
WE HAVE A HISTORY OF NET LOSSES AND WILL EXPERIENCE NET LOSSES IN THE FUTURE
We reported net loss applicable to the common units of $8.2 million,
$7.2 million and $8.2 million for the years ended December 31, 1994, 1995 and
1996, respectively. We reported net income applicable to the common units of
$58.6 million and $132.9 million for the years ended December 31, 1997 and 1998,
respectively, as a result of gains resulting from swaps of cable systems. We
have and will continue to have a substantial amount of interest expense in
respect of debt incurred and depreciation and amortization expenses relating to
acquisitions of cable systems as well as expansion and rebuild programs. Such
expenses have contributed to the net losses we experienced. We expect that we
will continue to incur such non-operating expenses at increased levels as a
result of our network rebuild program and recent acquisitions, which expenses
will result in continued net losses.
WE HAVE A LIMITED HISTORY OF OPERATING OUR CURRENT CABLE TELEVISION SYSTEMS
WHICH MAKES IT DIFFICULT FOR YOU TO COMPLETELY EVALUATE OUR PERFORMANCE
We have grown rapidly since December 1997 having completed on a pro forma
basis three acquisitions, three asset swaps and two joint ventures of cable
television systems. The Indiana joint venture with AT&T BIS, the acquisition by
Insight Ohio of the Columbus System, the proposed acquisition of the Kentucky
Systems and the proposed provision of consulting services to the Managed Indiana
Systems, increased the number of customers served by systems we own, operate and
manage on a pro forma basis from approximately 180,000 to approximately
1,046,000. With only approximately 15% of our existing customers having been
served by us for in excess of one year, we are still in the process of
integrating our new systems. Furthermore, as a result of these recent
transactions, our historical financial information and the historical financial
information of the Indiana Systems, the Columbus System and the Kentucky Systems
may not be indicative of our future operating results.
THE KENTUCKY ACQUISITION MAY NOT BE CONSUMMATED AND IF NOT CONSUMMATED, OUR
MANAGEMENT WILL HAVE BROAD DISCRETION WITH RESPECT TO THE USE OF THE PROCEEDS
ALLOCATED FOR THE ACQUISITION
In April 1999, we entered into an agreement to purchase a 50% interest in
InterMedia VI for $327.2 million, subject to adjustment, which was calculated
based upon InterMedia's total outstanding debt. The consummation of this
transaction is subject to several conditions including:
o Receipt (or waiver) of all necessary material consents from third
parties;
o Absence of any material adverse changes in the conditions, properties or
business of the Kentucky Systems; and
o Notification, approval and compliance with the requirements of
appropriate governmental agencies, including, without limitation,
transfer of cable television franchises.
If these conditions are not met, the Kentucky Acquisition will not be
consummated. There can be no assurance that the Kentucky Acquisition will be
consummated on the terms described in this prospectus, or at all. This offering
is not contingent or in any way dependent on the Kentucky Acquisition.
If the Kentucky Acquisition is not consummated, a significant portion of
the net proceeds from this offering will not be designated for a specific use.
Therefore, our management will have broad discretion with respect to the use of
such proceeds.
12
OUR ABILITY TO FURTHER DEVELOP CERTAIN OF OUR SYSTEMS MAY BE RESTRICTED BY THE
RIGHTS OF OTHER EQUITY OWNERS
The Indiana Systems and the Columbus System are not, and the Kentucky
Systems will not be, wholly-owned by us. Pursuant to the respective operating
agreements between us and the other equity owners, the other equity owners have
approval rights for certain significant actions which may be taken with respect
to our systems. Such approval rights may interfere with our future operating
strategies.
Commencing on October 30, 2003, AT&T BIS has the right to require us to
redeem its 50% interest in Insight Indiana. If the Kentucky Acquisition is
consummated, AT&T BIS will have a similar right with respect to its 50% interest
in the proposed joint venture for the Kentucky Systems. If AT&T BIS elects to
redeem its interest, we may not have sufficient cash available or be able to
obtain financing on acceptable terms to redeem its interest. We may in the
future enter into other joint venture agreements that have similar redemption
provisions. See "Description of Recent Transactions--The Transactions to Acquire
the Indiana Systems" and "--The Transactions to Acquire the Kentucky Systems."
OUR PROGRAMMING COSTS ARE SUBSTANTIAL AND THEY MAY INCREASE
Our cable programming services are dependent upon our ability to procure
programming that is attractive to our customers at reasonable rates. Programming
has been and is expected to continue to be our largest single expense item and
accounted for approximately 41.3% and 43.8% of our total operating expenses for
the years ended December 31, 1997 and 1998, respectively. In recent years the
cable industry has experienced a rapid escalation in the cost of programming,
and sports programming in particular. For 1997 and 1998, programming costs for
our top 20 cable programming channels (excluding premium channels), as ranked by
Nielsen Media Research, increased approximately 11.0% and 18.6%, respectively,
excluding costs of new channel additions during such periods. This increase in
programming costs was partially offset by the increased availability to us of
advertising inserts on these channels and the increased value of all advertising
inserts. This escalation in programming costs may continue and we may not be
able to pass programming cost increases on to our customers.
WE COULD LOSE OUR CURRENT ACCESS TO FAVORABLE PROGRAMMING SERVICE RATES
Because of our relationship with AT&T BIS, we have the right to purchase
programming services for the Indiana Systems and, upon consummation of the
Kentucky Acquisition, for the Kentucky Systems, at AT&T BIS' cost plus a small
administrative surcharge. We believe that the cost of AT&T BIS' programming
services is lower than the cost we would incur if we purchased such programming
services independently. If AT&T BIS were not to continue as our significant
partner and we were unable to enter into a similar arrangement, we believe our
programming costs would increase. Loss of access to programming services at such
favorable rates could have a material adverse effect on our financial condition
and results of operations.
Since 1986, MediaOne Group, Inc. (formerly known as Continental
Cablevision, Inc.) has held a significant interest in Insight allowing us to buy
programming services for the National Systems and the Columbus System at
MediaOne's cost. Under a 1997 agreement with MediaOne, we will redeem MediaOne's
interest in Insight in November 1999. At such time, we will no longer be
entitled to buy programming services at MediaOne's cost. We believe we will
experience some increases in programming costs for the National Systems and the
Columbus System. Loss of access to programming services at such favorable rates
could have a material adverse effect on our financial condition and results of
operations.
You should read "Business--Programming Supply" for additional information
concerning programming service rates.
WE ARE SUBJECT TO RISKS AS WE INTEGRATE NEW CABLE SYSTEMS
Since December 1997, we have completed on a pro forma basis three
acquisitions, three asset swaps and two joint ventures of cable systems.
Approximately 85% of our customers on a pro forma basis were acquired through
acquisitions and other transactions consummated since that date. We expect to
continue to
13
acquire and enter into swaps and joint ventures with respect to cable systems as
an element of our business strategy. The integration of these new cable systems
will place significant demands on our management and our operational, financial
and marketing resources. Our current operating and financial systems and
controls may not be adequate and any steps taken to improve these systems and
controls may not be sufficient. Our business, financial condition and results of
operations could suffer materially if we fail to successfully integrate and
manage new cable systems in a timely manner.
WE ARE SUBJECT TO THE RISKS OF INTRODUCING NEW AND ENHANCED PRODUCTS AND
SERVICES
The cable television industry is in the early stages of introducing new and
enhanced products and services utilizing new technology allowing for products
such as video-on-demand, high-speed Internet access and voice telephony
services. Introduction of new and enhanced products and services includes
various risks. In order to successfully introduce new and enhanced products and
services, we must anticipate and meet the demand for new products and services,
as well as integrate technology. Our inability to effectively introduce, market
and sell new and enhanced products and services or to anticipate consumer demand
for such products and services could have a material adverse effect on our
business, results of operations, prospects and financial condition. In addition,
many of the new and enhanced products and services we intend to offer may also
be offered by well established competitors that have substantially greater
financial resources and market presence than us. You should read the discussion
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources" for additional information
concerning our anticipated capital expenditures to fund these new and enhanced
products and services and the discussion under "Business--New and Enhanced
Products and Services" for additional information concerning the new and
enhanced products and services that we are preparing to introduce to our
customers. You should also read "Business--Competition" for additional
information.
WE ARE DEPENDENT ON OUR PERSONNEL
Our success is substantially dependent upon the retention of, and the
continued performance by, our senior management, including Sidney Knafel,
Chairman of the Board of Directors, Michael Willner, President and Chief
Executive Officer, and Kim Kelly, Executive Vice President and Chief Operating
and Financial Officer. We do not have an employment agreement with any member of
our senior management team. If any member of our senior management team becomes
unable or unwilling to participate in the business and operations of Insight,
our future business and operations could be materially and adversely effected.
You should read the discussion under "Management--Directors and Executive
Officers" for information concerning the experience of these individuals.
Our success will also depend upon our ability to attract and retain
personnel for customer relations and field operations. We continually need to
hire, integrate and retain personnel for positions which require a higher level
of technical expertise and the ability to communicate technical concepts to our
customers. There is no guarantee that we will be able to recruit or retain these
skilled workers. Failure to do so could have a material adverse effect on our
business, results of operations, prospects and financial condition.
WE OPERATE IN A VERY COMPETITIVE BUSINESS ENVIRONMENT
We face competition from:
o Alternative methods of receiving and distributing television signals and
satellite delivered programs, including direct broadcast satellite
television systems ("DBS");
o Multipoint multichannel distribution systems ("MMDS"), master antenna
television ("MATV") systems and satellite master antenna television
("SMATV") systems;
o Facilities-based distributors, such as utility and telephone companies,
commonly referred to as overbuilders;
o Other sources of news, information and entertainment such as off-air
television broadcast programming, newspapers, movie theaters, live
sporting events and home video products, including videotape cassette
recorders and digital video disc players; and
14
o Data transmission and Internet service providers.
Competition in geographic areas where a secondary franchise is obtained and
a cable network is constructed pursuant to the terms of the franchise is called
"overbuilding." A cable subsidiary of Ameritech Corporation ("Ameritech"), the
telephone local exchange carrier in Columbus, Ohio, has overbuilt a majority of
the homes passed by our Columbus System. In addition, a joint venture affiliated
with Southern Indiana Gas and Electric Co. ("SIGECO") is overbuilding a portion
of our Evansville, Indiana system and there is a small overbuild by
FrontierVision of our Kentucky Systems relating to approximately 7,400 homes in
Boone County, Kentucky. We cannot predict whether competition from these or
future competitors will have a material effect on us and our business and
operations.
The impact from competition, particularly from DBS and companies that
overbuild in our market areas, has resulted in a decrease in customer growth
rates, an increase in customers subscribing to the basic only level of service
and a decrease in our premium customers. Many of our potential competitors have
substantially greater resources than us, and we cannot predict the market share
our competitors will eventually achieve, nor can we predict their ability to
develop products which will compete with our planned new and enhanced products
and services such as high-speed data access and video-on-demand. You should read
"Business--Competition" for additional information.
OUR NON-EXCLUSIVE FRANCHISES ARE SUBJECT TO NON-RENEWAL OR TERMINATION IN
CERTAIN CIRCUMSTANCES
Cable television companies operate under non-exclusive franchises granted
by local authorities which are subject to renewal and renegotiation from time to
time. Our cable systems are dependent upon the retention and renewal of their
respective local franchises. A franchise is generally granted for a fixed term
ranging from five to fifteen years, but in many cases is terminable if the
franchisee fails to comply with its material provisions. Franchises typically
impose conditions relating to the operation of the cable television system,
including requirements relating to the payment of fees, system bandwidth
capacity, customer service, franchise renewal and termination. No assurance can
be given that our cable systems will be able to retain or renew such franchises
or that the terms of any such renewals will be on terms as favorable as their
respective existing franchises. Furthermore, it is possible that a franchise
authority might grant a franchise to another cable company or a local utility or
telephone company. The non-renewal or termination of franchises or the granting
of competing franchises with respect to a significant portion of any of our
cable systems would have a material adverse effect on our business, results of
operations, prospects and financial condition. You should read the discussion
under "Business--Franchises" for additional information concerning our
franchises.
OUR BUSINESS HAS BEEN AND CONTINUES TO BE SUBJECT TO EXTENSIVE GOVERNMENTAL
LEGISLATION AND REGULATION
The cable television industry is subject to extensive legislation and
regulation at the federal and local levels, and, in some instances, at the state
level, and many aspects of such regulation are currently the subject of judicial
proceedings and administrative or legislative proposals. The rules and
regulations governing our business have at times had a material adverse effect
on our business. For example, rules issued under the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"), resulted in
significant reductions in our pricing which reduced operating cash flow and our
ability to support capital rebuild programs. The Telecommunications Act of 1996
(the "1996 Telecom Act") materially altered federal, state and local laws and
regulations pertaining to cable television, telecommunications and other related
services. In particular, the 1996 Telecom Act substantially amends the
Communications Act of 1934 (the "Communications Act") to restrict the ability of
the FCC and, in certain instances, franchising authorities, to regulate rates
under the 1992 Cable Act. In addition, operating in a regulated industry
increases the cost of doing business generally. We may also become subject to
additional regulatory burdens and related increased costs. As we continue to
offer telecommunication services, we may be required to obtain federal, state
and local licenses or other authorizations to offer such services. We may not be
able to obtain such licenses or authorizations in a timely manner, or at all, or
conditions could be imposed upon such licenses and authorizations that may not
be favorable to us. Future changes in legislation or regulations could have an
adverse impact on us and our business operations. You should read "Legislation
and Regulation" for additional information.
15
WE HAVE A SIGNIFICANT AMOUNT OF INDEBTEDNESS AND SUCH INDEBTEDNESS RESTRICTS US
We have a significant amount of debt. We borrowed this money to fund our
acquisitions and for capital expenditures such as expanding and rebuilding our
network. As of December 31, 1998 on a pro forma basis, our consolidated
indebtedness totaled approximately $1.3 billion.
Our level of outstanding indebtedness can have material adverse
consequences to us and to you. These consequences include:
o Our ability to obtain additional financing in the future for capital
expenditures, acquisitions, working capital or other purposes may be
limited;
o A material portion of our cash flow from operations will be dedicated to
the payment of, and interest on, our debt; and
o This indebtedness may limit our ability to withstand competitive
pressures and reduce our flexibility in responding to changing business
and economic conditions.
In addition, such indebtedness subjects us and each of our subsidiaries to
various financial and operating restrictions and covenants which could limit our
ability to compete as well as our ability to expand. Such restrictions and
covenants may, among other things, include:
o A limit on the amount of additional indebtedness that may be incurred and
the ability to pay dividends or make capital contributions;
o Limitations on investments, loans and other payments, certain
transactions with affiliates and certain mergers and acquisitions; and
o A requirement to maintain specified financial ratios and meet certain
financial tests.
Our and our subsidiaries' ability to comply with such restrictions and
covenants can be affected by events beyond our control, and there can be no
assurance that we or our subsidiaries will achieve operating results that would
permit compliance with such terms. A failure to comply with the covenants and
other terms of the indebtedness could result in events of default, which could
permit acceleration of the debt.
There can be no assurance that we will continue to generate cash and obtain
financing sufficient to meet our debt service, capital expenditure and working
capital obligations. You should read the discussion under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" for additional information.
WE MAY NEED ADDITIONAL FINANCING
Our capital investment program may not generate projected results and we
may need to obtain additional financing to provide for, among other things:
o Planned capital expenditures;
o Unanticipated expenses and cost overruns;
o Technologies and services which may be introduced in the future; and
o Other events which we cannot predict at this time.
There can be no guarantee that we will be able to issue additional debt or
sell stock or other additional equity on satisfactory terms, or at all, to meet
our future financing needs. Our failure to raise additional financing could have
a material adverse effect on our business, results of operations, prospects and
financial condition.
16
THERE HAS BEEN NO PRIOR MARKET FOR OUR CLASS A COMMON STOCK
Prior to this offering, there was no market for our Class A common stock.
The initial public offering price of the Class A common stock will be determined
by negotiations among us and the representatives of the underwriters. You should
read the discussion under "Underwriting--Pricing of the Offering" for additional
information.
We will apply to list the Class A common stock on The Nasdaq National
Market. The NMS listing does not, however, guarantee that a trading market for
the Class A common stock will develop or, if a market does develop, the depth of
the trading market for the Class A common stock.
THERE IS A POTENTIAL FOR VOLATILITY OF THE MARKET PRICE OF OUR CLASS A COMMON
STOCK
The market price of the shares of our Class A common stock may be
significantly affected by various factors including:
o Actual or anticipated fluctuations in our operating results;
o New products or services or new contracts by us or our competitors;
o Legislative and regulatory developments;
o Conditions and trends in the telecommunications industry;
o Failure to meet analysts' expectations;
o General market conditions; and
o Other factors beyond our control.
In addition, the stock market has, from time to time, experienced
significant price and volume fluctuations that have particularly affected the
market prices for the common stock of telecommunications companies and that have
often been unrelated to the operating performance of particular companies. These
broad market fluctuations may also adversely affect the market price of our
Class A common stock.
EXISTING STOCKHOLDERS MAY SELL THEIR COMMON STOCK
Upon completion of the exchange of partnership interests for common stock
and without giving effect to this offering, there will be shares of
common stock outstanding. At any time commencing six months after this offering,
Vestar, who will hold of such shares of common stock, will be
entitled to demand registration of their shares under the Securities Act of 1933
at our expense. All of the shares of common stock issued and exchanged for
partnership interests also may be sold under Rule 144 of the Securities Act,
depending on the holding period of such securities and subject to significant
restrictions in the case of shares held by persons deemed to be our affiliates.
We cannot predict the effect, if any, that future sales of shares, or the
availability of shares for future sale, will have on the market price of the
Class A common stock. Sales of substantial amounts of common stock, or the
perception that such sales could occur, may adversely affect prevailing market
prices for the Class A common stock. We, as well as our officers and directors
and certain of our affiliates who in the aggregate will own shares of
common stock upon completion of the exchange of partnership interests for common
stock, have agreed not to offer, sell, contract to sell or otherwise dispose of
any common stock for a period of 180 days after the date of this prospectus
without the written consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
MEMBERS OF MANAGEMENT, AS MAJOR STOCKHOLDERS, POSSESS UNEQUAL VOTING RIGHTS
RESULTING IN DISPROPORTIONATE CONTROL
We have two classes of common stock--Class A which carries one vote per
share and Class B which carries ten votes per share. Upon the completion of this
offering, investors in this offering will own % of the outstanding Class A
common stock and our directors and executive officers will own % of the
outstanding Class A common stock. Our directors and executive officers will own
100% of the outstanding Class B common stock. As a result of their stock
ownership, our directors and executive officers will have
17
the power to elect all of our directors and control stockholder decisions on
other matters such as amendments to our certificate of incorporation and bylaws,
and mergers or other fundamental corporate transactions. The interests of our
controlling stockholders, including our management, may conflict with the
interests of the other holders of Class A common stock.
The disproportionate voting rights of the Class A common stock relative to
the Class B common stock may make us a less attractive target for a takeover
than we otherwise might be or render more difficult or discourage a merger
proposal or a tender offer.
WE MAY BE ADVERSELY AFFECTED BY THE YEAR 2000 PROBLEM
We are evaluating the impact of the Year 2000 problem on our business
operations, as well as our products and services. Areas that could be adversely
impacted by the Year 2000 problem include the following:
o Information processing and financial reporting systems;
o Customer billing systems;
o Customer service systems;
o Cable headend equipment including addressable controllers and advertising
insertion equipment; and
o Services from third-party vendors.
System failure or miscalculation could result in an inability to process
transactions, send invoices, accept customer orders or provide customers with
products and services.
For a description of our Year 2000 compliance efforts you should read
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."
THIS PROSPECTUS INCLUDES FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," and "continue" or similar words. You should
read statements that contain these words carefully because they: (a) discuss our
future expectations; (b) contain projections of our future results of operations
or of our financial condition; or (c) state other "forward-looking" information.
We believe it is important to communicate our expectations to our investors.
However, there may be events in the future that we are not able to accurately
predict or over which we have no control. The risk factors listed in this
section, as well as any cautionary language in this prospectus, provide examples
of risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Before you invest in our Class A common stock, you should be aware that the
occurrence of the events described in these risk factors and elsewhere in this
prospectus could have a material adverse effect on our business, operating
results and financial condition.
18
USE OF PROCEEDS
The estimated net proceeds from the sale of the shares of Class A
common stock offered by us will be approximately $ million (approximately
$ million if the underwriters' over-allotment option is exercised in full),
after deducting the estimated underwriting discounts and offering expenses.
We intend to use the net proceeds of this offering to finance: (a) the
Kentucky Acquisition; (b) the introduction of new and enhanced products and
services for our customers; (c) an equity investment in our telephone joint
venture with AT&T; (d) other strategic acquisitions; and (e) general corporate
activities. You should read the discussion under "Business--The Systems--The
Kentucky Systems" for further information concerning the Kentucky Systems and
"Business--Products and Services--New and Enhanced Products and
Services--Telephony" for further information concerning the joint venture with
AT&T. The amounts actually spent by us may vary significantly and will depend on
a number of factors, including our future revenues and the other factors
described under "Risk Factors."
Pending our use of the net proceeds of this offering, approximately
$ million will temporarily reduce the debt outstanding under our senior
revolving credit facility (the "Insight Credit Facility") and the remainder will
be invested in short-term investment grade investments. We expect that the
Kentucky Acquisition will be consummated during the second half of 1999. There
can be no assurance that the Kentucky Acquisition will be consummated on the
terms described in this prospectus, or at all. This offering is not contingent
or in any way dependent on the Kentucky Acquisition. If the Kentucky Acquisition
is not consummated, a significant portion of the net proceeds from this offering
will not be designated for a specific use. See "Risk Factors--The Kentucky
Acquisition may not be consummated and if not consummated, our management will
have broad discretion with respect to the use of the proceeds allocated for the
acquisition."
As of December 31, 1998, there was approximately $111.1 million outstanding
under the Insight Credit Facility which has a final maturity in December 2005.
For the year ended December 31, 1998, the interest rates for loans outstanding
under the Insight Credit Facility ranged from approximately 7.3% to 9.8% and the
weighted average interest rate as of December 31, 1998 was 8.84%. Loans obtained
under the Insight Credit Facility during the past 12 months were for the rebuild
of our cable network, the introduction of new and enhanced products and services
for our customers, strategic acquisitions and general corporate activities. You
should read the discussion under "Description of Certain Indebtedness--Credit
Facilities" for further information about the Insight Credit Facility.
DIVIDEND POLICY
We have never paid any cash dividends and intend, for the foreseeable
future, to retain any future earnings for the development of our business. The
Insight Credit Facility restricts our ability to pay dividends. Our future
dividend policy will be determined by the Board of Directors on the basis of
various factors, including our results of operations, financial condition,
capital requirements and investment opportunities.
19
CAPITALIZATION
The following table sets forth our consolidated cash and cash equivalents
and capitalization as of December 31, 1998, and as adjusted to give effect to:
o Our receipt of the net proceeds from our sale of shares of
Class A common stock at an assumed initial public offering price of
$ per share, after deducting the underwriting discount and
estimated offering expenses payable by us in this offering
o The application of the net proceeds therefrom as described under "Use of
Proceeds"
And as further adjusted:
o To give effect to the Kentucky Acquisition
In addition, the following table should be read in conjunction with our
financial statements and the accompanying notes, which are contained later in
this prospectus. For a description of our corporate structure, see "Corporate
Structure."
DECEMBER 31, 1998
-------------------------------------
AS FURTHER
ACTUAL AS ADJUSTED ADJUSTED
-------- ----------- ----------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents................................................... $ 19,902 $ $
-------- --------- --------
-------- --------- --------
Total debt:
Insight Credit Facility................................................... $111,100 $ (1) $ (2)
Insight Indiana Credit Facility(3)........................................ 460,000
Kentucky Credit Facilities(4)............................................. --
Note payable to MediaOne.................................................. 2,563
-------- --------- --------
Total debt(5).......................................................... 573,663
Redeemable Class B common units............................................. 51,319
Partners' deficit........................................................... (7,928)
Total stockholders' equity:(6)
Class A common stock, $.01 par value; shares authorized;
shares issued and outstanding (as adjusted,
shares issued and outstanding).........................................
Class B common stock, $.01 par value; shares issued and
outstanding............................................................
Additional paid-in capital................................................
Accumulated deficit.......................................................
Total stockholders' equity.............................................
Total capitalization........................................................
- ------------------
(1) As adjusted, there was approximately $ million of unused credit
commitments, of which approximately $ million could have been borrowed
under the most restrictive covenants of the Insight Credit Facility. See
"Description of Certain Indebtedness--Credit Facilities."
(2) As further adjusted, there was approximately $ million of unused credit
commitments, of which approximately $ million could have been borrowed
under the most restrictive covenants of the Insight Credit Facility. See
"Description of Certain Indebtedness--Credit Facilities."
(3) There was approximately $90.0 million of unused credit commitments, of which
approximately $49.6 million could have been borrowed under the most
restrictive covenants of the Insight Indiana Credit Facility. See
"Description of Certain Indebtedness--Credit Facilities."
(4) There was approximately $126.0 million of unused credit commitments, of
which approximately $103.5 million could have been borrowed under the most
restrictive covenants of the Kentucky Credit Facilities. See "Description of
Certain Indebtedness--Credit Facilities."
(Footnotes continued on next page)
20
(Footnotes continued from previous page)
(5) Since the financial statements of Insight Ohio, which contain the financial
information of the Columbus System, are not consolidated with the financial
statements of Insight, total long-term debt does not include any debt under
the Insight Ohio Credit Facility. There was no debt outstanding under the
Insight Ohio Credit Facility as of December 31, 1998. There was
approximately $25 million of unused credit commitments, of which
approximately $25 million could have been borrowed under the most
restrictive covenants of the Insight Ohio Credit Facility. Insight Ohio has
guaranteed on a conditional basis $140.0 million aggregate principal amount
of 10% Senior Notes due 2006 (the "Senior Notes") issued by Coaxial
Communications of Central Ohio, Inc. ("Coaxial") and Phoenix Associates, an
affiliate of Coaxial ("Phoenix"), and approximately $55.9 million aggregate
principal amount at maturity of 12 7/8% Senior Discount Notes due 2008 (the
"Senior Discount Notes") issued by Coaxial LLC and Coaxial Financing Corp.
See "Description of Recent Transactions--The Transactions to Acquire the
Columbus System" and "Description of Certain Indebtedness."
(6) Gives pro forma effect to the exchange of limited partnership interests in
Insight L.P. for our common stock upon consummation of this offering.
21
DILUTION
The difference between the public offering price per share of our Class A
common stock and the pro forma net tangible book value per share of our Class A
and Class B common stock after this offering constitutes the dilution to
investors in this offering. Net tangible book value per share is determined by
dividing our net tangible book value (total tangible assets less total
liabilities) by the number of outstanding shares of Class A and Class B common
stock.
As of December 31, 1998, our net tangible book value was a deficit of
$423.7 million, or $ per share of Class A and Class B common stock. After
giving effect to the sale of shares of our Class A common stock at
an assumed initial public offering price of $ per share (the midpoint of the
estimated range of the initial public offering price), less the estimated
expenses of this offering, our pro forma net negative tangible book value as of
December 31, 1998 would have been $ , or $
per share of Class A and Class B common stock, representing an immediate
decrease in our net negative tangible book value of $ per share to current
stockholders and an immediate dilution of $ per share to new investors. The
following table illustrates the foregoing information as of December 31, 1998
with respect to dilution to new investors on a per share basis:
Assumed initial public offering price of the Class A common stock.......... $
Net tangible book value (deficit) per share before the offering............
------
Increase per share attributable to the offering(1)......................... $
Net tangible book value (deficit) per share after the offering(2)..........
------
Dilution per share to new investors(2)(3).................................. $
------
------
- ------------------
(1) After deducting the underwriting discounts and estimated expenses payable by
us in this offering.
(2) Does not give effect to the Kentucky Acquisition which is expected to
further increase the net negative tangible book value per share
to $ .
(3) Dilution is determined by subtracting net tangible book value per share
after giving effect to this offering from the assumed initial public
offering price paid by new investors.
The following table sets forth, with respect to our current stockholders
and new investors, a comparison of the number of shares of common stock acquired
from us, the percentage ownership of such shares, the total consideration paid,
the percentage of total consideration paid and the average price per share:
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
----------------- ----------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------ ------- ------ ------- ---------
Existing stockholders................................. % $ % $
New Investors.........................................
------ ----- ------ -----
Total................................................. % $ %
------ ----- ------ -----
------ ----- ------ -----
These computations do not give effect to either of the following:
o shares of Class A common stock and shares of
Class B common stock issuable upon exercise of stock options outstanding
upon completion of the exchange of partnership interests for common
stock, of which options to purchase shares of Class A common
stock and shares of Class B common stock will be then exercisable
o additional shares of common stock reserved for issuance under
our stock option plan.
To the extent that shares of common stock are issued in connection with the
stock option arrangements, there will be further dilution to new investors.
22
PRO FORMA FINANCIAL STATEMENTS
The following table sets forth selected pro forma financial information and
other data of the National, Columbus, Indiana and Kentucky Systems and the
Managed Indiana Systems and pro forma adjusted financial information for the
National, Columbus, Indiana and Kentucky Systems which have been adjusted to
illustrate the estimated effects of the following Transactions as if they had
occurred on January 1, 1998: (a) the acquisition by us of the Rockford system on
January 22, 1998; (b) the acquisition of the Columbus System by Insight Ohio on
August 21, 1998; (c) the formation of Insight Indiana and related contribution
of systems by AT&T BIS and us; (d) the systems exchange on March 22, 1999
between Falcon and us, whereby we swapped our Franklin system in exchange for
Falcon's Scottsburg system and cash; (e) the acquisition by us of the Portland
system on March 31, 1999; (f) the proposed acquisition by us of the Kentucky
Systems, which is expected to be completed in the second half of 1999; (g) the
proposed provision of consulting services to the Managed Indiana Systems, which
is expected to commence during the fourth quarter of 1999; (h) the exchange of
limited partnership interests in Insight L.P. for our common stock; and (i) the
receipt of approximately $372.0 million of net proceeds in connection with this
offering. The 1998 Pro Forma Statement of Operations does not include the
receipt of management fees by us from Insight Indiana or consulting fees from
the Kentucky Systems. The 1998 Pro Forma Statement of Operations does not
purport to be indicative of what our results of operations would actually have
been had the Transactions been completed on the dates indicated or to project
our results of operations for any future date. When you read the 1998 Pro Forma
Statement of Operations, it is important that you read along with it our
historical financial statements and related notes and the historical financial
statements and related notes of the TCI Insight Systems (which are the systems
contributed to Insight Indiana by AT&T BIS), Insight Ohio, TCI IPVI Systems
(which are the Kentucky Systems prior to April 30, 1998) and InterMedia VI
(which are the Kentucky Systems subsequent to April 30, 1998), which are
included elsewhere in this prospectus.
The pro forma financial statements exclude a one-time non-recurring charge
to earnings to record a net deferred tax liability at December 31, 1998 of
approximately $45.0 million that would have been recognized upon the exchange of
limited partnership interests in Insight L.P. for our common stock.
23
INSIGHT COMMUNICATIONS
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
NATIONAL NATIONAL COLUMBUS COLUMBUS
(AS REPORTED)(1) ADJUSTMENTS(2),(3) (AS ADJUSTED) (AS REPORTED)(14) ADJUSTMENTS(15) (AS ADJUSTED)
---------------- ------------------ ------------- ----------------- --------------- -------------
Revenues............. $112,902 $ (75,927)(5) $ 41,314 $47,956 $ (47,956) $ --
1,383 (6)
(1,757)(7)
919 (8)
2,329 (9)
1,465 (10)
Costs & expenses:
Programming and
other operating
costs............. 30,376 (19,692)(5) 11,069 17,431 (17,431) --
396 (6)
(736)(7)
725 (9)
Selling, general and
administrative.... 24,471 (12,887)(5) 11,885 17,086 (17,086) --
249 (6)
(340)(7)
392 (9)
Depreciation and
amortization...... 43,849 (25,420)(5) 19,649 5,311 (5,311) --
558 (6)
(101)(7)
763 (9)
-------- ---------- --------- ------- --------- -------
Operating income..... 14,206 (15,495) (1,289) 8,128 (8,128) --
Other income
(expenses):
Gain on cable system
exchange and
contribution of
cable systems to
joint venture..... 156,058 (156,058)(11) -- -- -- --
Equity in loss of
Insight Ohio...... (3,251) 3,251 (13) -- -- 837 837
Interest income
(expense)......... (28,106) 5,820 (5) (9,133) 59 (59) --
13,153 (12)
Other income
(expense)......... (444) 466 (5) (264) (421) 421 --
(52)(7)
(234)(9)
-------- ---------- --------- ------- --------- -------
Income (loss) before
extraordinary item
and minority
interest and income
taxes............... 138,463 (149,149) (10,686) 7,766 (6,929) 837
Extraordinary loss
from early
extinguishment of
debt................ (3,267) 3,267 (11) -- -- -- --
Minority interest.... 3,410 (3,410)(13) -- -- -- --
-------- ---------- --------- ------- --------- -------
Net income (loss)
before income
taxes............... 138,606 (149,292) (10,686) 7,766 (6,929) 837
Income taxes......... -- -- -- -- -- --
-------- ---------- --------- ------- --------- -------
Net income (loss).... 138,606 (149,292) (10,686) 7,766 (6,929) 837
-------- ---------- --------- ------- --------- -------
Accretion of
redeemable Class B
common stock
units............... (5,729) -- (5,729) -- -- --
Preferred interest... -- -- -- (6,649) 6,649 --
-------- ---------- --------- ------- --------- -------
Net income (loss)
applicable to common
units............... $132,877 $ (149,292) $ (16,415) $ 1,117 $ (280) $ 837
-------- ---------- --------- ------- --------- -------
-------- ---------- --------- ------- --------- -------
Net income (loss) per
share
INDIANA INDIANA KENTUCKY
(AS REPORTED)(16) ADJUSTMENTS (AS ADJUSTED) ADJUSTMENTS(4) SUBTOTAL (AS REPORTED)(23) ADJUSTMENTS
----------------- ----------- ------------- -------------- --------- ----------------- -----------
Revenues............. $80,357 $ 58,504(17) $ 138,861 $ -- $ 180,175 $ 195,507 $ --
Costs & expenses:
Programming and
other operating
costs............. 24,375 15,229(17) 39,604 -- 50,673 65,328 --
Selling, general and
administrative.... 14,892 9,857(17) 24,749 -- 36,634 44,416 --
Depreciation and
amortization...... 12,223 21,788(17) 83,401 -- 103,050 103,514 17,570(24)
49,390(18)
------- --------- --------- -------- --------- --------- ---------
Operating income..... 28,867 (37,760) (8,893) -- (10,182) (17,751) (17,570)
Other income
(expenses):
Gain on cable system
exchange and
contribution of
cable systems to
joint venture..... -- -- -- -- -- -- --
Equity in loss of
Insight Ohio...... -- -- -- (7,469)(21) (6,632) -- --
Interest income
(expense)......... -- (5,818)(19) (36,560) -- (45,693) (44,899) --
(13,153)(12)
(17,589)(19)
Other income
(expense)......... (159) (79)(17) (238) -- (502) 1,231 --
------- --------- --------- -------- --------- --------- ---------
Income (loss) before
extraordinary item
and minority
interest and income
taxes............... 28,708 (74,399) (45,691) (7,469) (63,009) (61,419) (17,570)
Extraordinary loss
from early
extinguishment of
debt................ -- -- -- -- -- -- --
Minority interest.... -- -- -- 22,846 (22) 22,846 -- --
------- --------- --------- -------- --------- --------- ---------
Net income (loss)
before income
taxes............... 28,708 (74,399) (45,691) 15,377 (40,163) (61,419) (17,570)
Income taxes......... (9,969) 9,969(20) -- -- -- (1,971) 1,971(25)
------- --------- --------- -------- --------- --------- ---------
Net income (loss).... 18,739 (64,430) (45,691) 15,377 (40,163) (63,390) (15,599)
------- --------- --------- -------- --------- --------- ---------
Accretion of
redeemable Class B
common stock
units............... -- -- -- -- (5,729) -- --
Preferred interest... -- -- -- -- -- -- --
------- --------- --------- -------- --------- --------- ---------
Net income (loss)
applicable to common
units............... $18,739 $ (64,430) $ (45,691) $ 15,377 $ (45,892) $ (63,390) $ (15,599)
------- --------- --------- -------- --------- --------- ---------
------- --------- --------- -------- --------- --------- ---------
Net income (loss) per
share
KENTUCKY SUB OTHER
(AS ADJUSTED) TOTAL ADJUSTMENTS TOTAL
------------- --------- ----------- ---------
Revenues............. $ 195,507 $ 375,682 $ -- $ 375,682
Costs & expenses:
Programming and
other operating
costs............. 65,328 116,001 -- 116,001
Selling, general and
administrative.... 44,416 81,050 -- 81,050
Depreciation and
amortization...... 121,084 224,134 -- 224,134
--------- --------- ------- ---------
Operating income..... (35,321) (45,503) -- (45,503)
Other income
(expenses):
Gain on cable system
exchange and
contribution of
cable systems to
joint venture..... -- -- -- --
Equity in loss of
Insight Ohio...... -- (6,632) -- (6,632)
Interest income
(expense)......... (44,899) (90,592) 7,790(26) (82,802)
Other income
(expense)......... 1,231 729 -- 729
--------- --------- ------- ---------
Income (loss) before
extraordinary item
and minority
interest and income
taxes............... (78,989) (141,998) 7,790 (134,208)
Extraordinary loss
from early
extinguishment of
debt................ -- -- -- --
Minority interest.... -- 22,846 39,495(27) 62,341
--------- --------- ------- ---------
Net income (loss)
before income
taxes............... (78,989) (119,152) 47,285 (71,867)
Income taxes......... -- -- -- --
--------- --------- ------- ---------
Net income (loss).... (78,989) (119,152) 47,285 (71,867)
--------- --------- ------- ---------
Accretion of
redeemable Class B
common stock
units............... -- (5,729) -- (5,729)
Preferred interest... -- -- -- --
--------- --------- ------- ---------
Net income (loss)
applicable to common
units............... $ (78,989) $(124,881) $47,285 $ (77,596)
--------- --------- ------- ---------
--------- --------- ------- ---------
Net income (loss) per
share
24
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(1) Includes: (a) the full year's operating results for the Franklin, Claremont
and Griffin systems; (b) ten months of operating results of our Utah
systems which were swapped for the Evansville and Jasper systems; (c) the
full year's operating results of the Indiana systems contributed by us to
Insight Indiana; (d) two months of the operating results of the TCI Insight
Systems (which are the systems contributed to Insight Indiana by AT&T BIS);
(e) the operating results of the Rockford system since January 22, 1998;
and (f) corporate overhead expenses.
(2) Does not include management fees received by us from Insight Indiana and
consulting fees received by us from the Kentucky Systems in the amount of
3% of revenues.
(3) Excludes a one-time non-recurring charge to earnings to record a net
deferred tax liability at December 31, 1998 of approximately $45 million
that would have been recognized upon the exchange of limited partnership
interests for common stock in a corporation.
(4) These adjustments are included in order to combine the full year's results
of operations of the National, Columbus and Indiana Systems.
(5) Eliminates operating results of: (a) the systems contributed by us to
Insight Indiana for ten months; (b) the Utah systems for ten months; and
(c) Insight Indiana for two months.
(6) Includes operating results of the Rockford system from January 1, 1998 to
January 21, 1998.
(7) Eliminates the operating results of the Franklin system and includes the
operating results of the Scottsburg system.
(8) Includes the Insight Ohio management fee from January 1, 1998 to
August 21, 1998.
(9) Includes the full year's operating results of the Portland system.
(10) Includes the Managed Indiana Systems' consulting fee for the full year.
(11) Eliminates extraordinary item and gains from cable system exchange and gain
on contribution of systems to Insight Indiana.
(12) Adjusts interest expense to reflect our contribution of debt to Insight
Indiana.
(13) Eliminates AT&T BIS' minority interest in Insight Indiana and our equity in
losses of Insight Ohio.
(14) Includes the full year's operating results of the Columbus System which we
have owned since August 21, 1998.
(15) Eliminates 100% of Insight Ohio's operating results as reported (which does
not reflect our cost structure prior to August 21, 1998) and records our
75% non-voting equity interest.
(16) Includes ten months of operating results of the TCI Insight Systems
contributed to Insight Indiana which includes ten months of the Evansville
and Jasper systems acquired by us from AT&T BIS.
(17) Includes ten months of operating results of our systems contributed to
Insight Indiana and two months of operating results of Insight Indiana.
(18) Includes additional depreciation and amortization related to step-up in
value of the Insight Indiana Systems for ten months. See Notes C and D of
our consolidated financial statements.
(19) Adjusts interest expense related to contributed debt of AT&T BIS as if such
contribution had occurred on January 1, 1998.
(20) Eliminates income tax provision due to pro forma combined net loss.
(21) Includes the amortization of the difference between our investment in
Insight Ohio and Insight Ohio's underlying equity.
(22) Includes AT&T BIS' minority interest in Insight Indiana.
(23) Includes the operating results of the TCI IPVI systems for the period from
January 1, 1998 through April 30, 1998 and the operating results of
InterMedia VI for the period from April 30, 1998 through December 31, 1998.
(24) Includes additional amortization related to step-up in value of the
Kentucky Systems over a period of ten years.
(25) Eliminates income tax provision due to pro forma combined net loss.
(26) Includes reduction in interest expense related to the paydown of
$95 million of debt.
(27) Includes AT&T BIS' minority interest in the Kentucky Systems.
25
INSIGHT COMMUNICATIONS PRO FORMA BALANCE SHEET
DECEMBER 31, 1998
NATIONAL NATIONAL INSIGHT OHIO INSIGHT OHIO
(AS REPORTED)(1) ADJUSTMENTS (AS ADJUSTED) (AS REPORTED)(7) ADJUSTMENTS (AS ADJUSTED)
---------------- ----------- ------------- ---------------- ----------- -------------
ASSETS
Cash and cash
equivalents....... $ 19,902 $ (19,493)(2) $ 232 $ 6,709 $ (6,709)(8) $ --
(177)(3)
Trade accounts
receivable, net of
allowance......... 7,988 (6,701)(2) 1,205 2,706 (2,706)(8) --
(82)(3)
Due from related
parties........... -- -- -- 149 (149)(8) --
Due from TCI....... -- 522 (2) 522 -- -- --
Due from Insight
Ohio.............. 1,039 -- 1,039 -- -- --
Prepaid expenses &
other current
assets............ 1,598 (203)(2) 1,380 166 (166)(8) --
(15)(3)
Investment in
Insight Ohio...... 6,749 (6,749)(4) -- -- 6,749 (4) 6,749
Investments........ -- -- -- -- -- --
Fixed assets,
net............... 155,412 (129,776)(2) 28,954 31,900 (31,900)(8) --
(1,352)(3)
1,765 (3)
2,905 (5)
Intangible assets,
net............... 467,149 (370,711)(2) 96,381 337 (337)(8) --
(57)(3)
Other assets....... -- -- -- -- -- --
-------- --------- --------- -------- --------- ---------
Total assets....... $659,837 $(530,124) $ 129,713 $ 41,967 $ (35,218) $ 6,749
-------- --------- --------- -------- --------- ---------
-------- --------- --------- -------- --------- ---------
LIABILITIES &
PARTNERS' CAPITAL
Accounts payable... $ 24,290 $ (12,467)(2) $ 10,332 $ 3,230 $ (3,230)(8) $ --
(239)(3)
(1,252)(3)
Accrued expenses
and other
liabilities....... 4,068 (3,876)(2) -- 6,807 (6,807)(8) --
(192)(3)
Due to
affiliates........ 88 -- 88 -- -- --
Interest payable... 7,661 (5,824)(2) 1,837 -- -- --
Dividend payable... -- -- -- 6,649 (6,649)(8) --
Accrued interest... -- -- -- -- -- --
Deferred interest
payable........... -- -- -- -- -- --
Deferred revenue... -- -- -- -- -- --
Other.............. -- 1,765 (3) 4,670 -- -- --
-- 2,905 (5) -- -- -- --
Deferred income
taxes............. -- 45,000 (6) 45,000 -- -- --
Debt............... 573,663 (460,000)(2) 113,663 -- -- --
-------- --------- --------- -------- --------- ---------
Total
liabilities....... 609,770 (434,180) 175,590 16,686 (16,686) --
Minority
interest.......... 6,676 -- 6,676 -- -- --
Preferred
interest.......... -- -- -- 170,000 (170,000)(8) --
Common limited
units............. 51,319 -- 51,319 -- -- --
Partners'
(deficiency)/equity.. (7,928) (44,195)(2) (58,872) (144,719) 144,719 6,749
-- (6,749)(4) -- -- 6,749 (4) --
Stockholders'
equity............ -- (45,000)(6) (45,000) -- -- --
-------- --------- --------- -------- --------- ---------
$659,837 $(530,124) $ 129,713 $ 41,967 $ (35,218) $ 6,749
-------- --------- --------- -------- --------- ---------
-------- --------- --------- -------- --------- ---------
INDIANA INDIANA KENTUCKY KENTUCKY SUB
(AS REPORTED) ADJUSTMENTS(9) (AS ADJUSTED) (AS REPORTED)(10) ADJUSTMENTS (AS ADJUSTED) TOTAL
------------- -------------- ------------- ----------------- ----------- ------------- ----------
ASSETS
Cash and cash
equivalents....... $ -- $ 19,493 $ 19,493 $ 2,602 $ -- $ 2,602 $ 22,327
Trade accounts
receivable, net of
allowance......... -- 6,701 6,701 15,160 -- 15,160 23,066
Due from related
parties........... -- -- -- 7,532 -- 7,532 7,532
Due from TCI....... -- (522) (522) -- -- -- --
Due from Insight
Ohio.............. -- -- -- -- -- -- 1,039
Prepaid expenses &
other current
assets............ -- 651 651 1,049 -- 1,049 3,080
Investment in
Insight Ohio...... -- -- -- -- -- -- 6,749
Investments........ -- -- -- -- -- -- --
Fixed assets,
net............... -- 129,776 129,776 243,100 -- 243,100 401,830
Intangible assets,
net............... -- 370,711 370,711 632,002 -- 632,002 1,099,094
Other assets....... -- -- -- 3,045 -- 3,045 3,045
--------- ---------- --------- --------- --------- --------- ----------
Total assets....... $ -- $ 526,810 $ 526,810 $ 904,490 $ -- $ 904,490 $1,567,762
--------- ---------- --------- --------- --------- --------- ----------
--------- ---------- --------- --------- --------- --------- ----------
LIABILITIES &
PARTNERS' CAPITAL
Accounts payable... $ -- $ 12,467 $ 12,467 $ 1,387 $ -- $ 1,387 $ 24,186
Accrued expenses
and other
liabilities....... -- 4,324 4,324 22,154 -- 22,154 26,478
Due to
affiliates........ -- -- -- 2,913 -- 2,913 3,001
Interest payable... -- 5,824 5,824 -- -- -- 7,661
Dividend payable... -- -- -- -- -- -- --
Accrued interest... -- -- -- 5,529 -- 5,529 5,529
Deferred interest
payable........... -- -- -- -- -- -- --
Deferred revenue... -- -- -- 19,196 -- 19,196 19,196
Other.............. -- -- -- 411 -- 411 5,081
-- -- -- -- -- -- --
Deferred income
taxes............. -- -- -- -- -- -- 45,000
Debt............... -- 460,000 460,000 726,000 -- $ 726,000 1,299,663
--------- ---------- --------- --------- --------- --------- ----------
Total
liabilities....... -- 482,615 482,615 777,590 -- 777,590 1,435,795
Minority
interest.......... -- -- -- -- -- -- 6,676
Preferred
interest.......... -- -- -- -- -- -- --
Common limited
units............. -- -- -- -- -- -- 51,319
Partners'
(deficiency)/equity -- 44,195 44,195 126,900 -- 126,900 118,972
-- -- -- -- -- -- --
Stockholders'
equity............ -- -- -- -- -- -- (45,000)
--------- ---------- --------- --------- --------- --------- ----------
$ -- $ 526,810 $ 526,810 $ 904,490 $ -- $ 904,490 $1,567,762
--------- ---------- --------- --------- --------- --------- ----------
--------- ---------- --------- --------- --------- --------- ----------
OTHER
ADJUSTMENTS(11) TOTAL
--------------- ----------
ASSETS
Cash and cash
equivalents....... $ -- $ 22,327
Trade accounts
receivable, net of
allowance......... -- 23,066
Due from related
parties........... -- 7,532
Due from TCI....... -- --
Due from Insight
Ohio.............. -- 1,039
Prepaid expenses &
other current
assets............ -- 3,080
Investment in
Insight Ohio...... -- 6,749
Investments........ -- --
Fixed assets,
net............... -- 401,830
Intangible assets,
net............... 263,550 1,362,644
Other assets....... -- 3,045
--------- ----------
Total assets....... $ 263,550 $1,831,312
--------- ----------
--------- ----------
LIABILITIES &
PARTNERS' CAPITAL
Accounts payable... $ -- $ 24,186
Accrued expenses
and other
liabilities....... -- 26,478
Due to
affiliates........ -- 3,001
Interest payable... -- 7,661
Dividend payable... -- --
Accrued interest... -- 5,529
Deferred interest
payable........... -- --
Deferred revenue... -- 19,196
Other.............. -- 5,081
-- --
Deferred income
taxes............. -- 45,000
Debt............... (95,000) 1,204,663
--------- ----------
Total
liabilities....... (95,000) 1,340,795
Minority
interest.......... 63,450 70,126
Preferred
interest.......... -- --
Common limited
units............. -- 51,319
Partners'
(deficiency)/equity (126,900) --
7,928 --
Stockholders'
equity............ 414,072 369,072
--------- ----------
$ 263,550 $1,831,312
--------- ----------
--------- ----------
26
NOTES TO PRO FORMA BALANCE SHEET
(1) Includes assets and liabilities of the Franklin, Claremont, Griffin and
Rockford systems and the Indiana Systems.
(2) Eliminates assets and liabilities of the systems Insight contributed to
Insight Indiana.
(3) Eliminates assets of the Franklin system and includes the fixed assets of
the Scottsburg system, including net working capital adjustment on the
exchange of systems.
(4) Eliminates our investment in Insight Ohio and reflects investment in
Insight Ohio at Insight Ohio.
(5) Reflects the fixed assets of the Portland system.
(6) Includes deferred tax liability that would have been recognized upon the
exchange of limited partnership interests in Insight L.P. for our common
stock.
(7) Includes assets and liabilities of Insight Ohio which was formed on
August 21, 1998.
(8) Eliminates 100% of Insight Ohio's assets and liabilities.
(9) Includes assets and liabilities contributed to Insight Indiana by AT&T BIS
which includes the Evansville and Jasper systems acquired by Insight
Indiana from AT&T BIS in October 1998.
(10) Reflects the assets and liabilities of InterMedia VI.
(11) Reflects the following assumptions: (a) receipt of net proceeds from the
offering of $422 million; (b) acquisition of the Kentucky Systems for
$327 million; (c) reduction of our debt of $95 million; and
(d) elimination of the partners' deficit upon the exchange of limited
partnership interests in Insight L.P. for our common stock.
27
INSIGHT COMMUNICATIONS PRO FORMA OPERATING DATA
AS OF DECEMBER 31, 1998
---------------------------------------------------------------------------------------------
MANAGED
NATIONAL COLUMBUS INDIANA KENTUCKY INDIANA TOTAL TOTAL SYSTEMS
SYSTEMS(1) SYSTEM(2) SYSTEMS(3) SYSTEMS(4) SYSTEMS(5) SYSTEMS(6) PROPORTIONAL(7)
---------- -------- ---------- ---------- ---------- ---------- ---------------
Homes passed................... 148,864 171,753 493,482 650,734 159,644 1,624,477 849,787
Basic customers................ 86,917 87,637 334,026 424,215 112,817 1,045,612 531,766
Basic penetration.............. 58.4% 51.0% 67.7% 65.2% 70.7% 64.4% 62.6%
Premium units.................. 92,521 90,032 231,372 347,005 44,596 805,526 449,234
Premium penetration............ 106.4% 102.7% 69.3% 81.8% 39.5% 77.0% 84.5%
NOTES TO OPERATING DATA
(1) Represents the National Systems, including the Rockford system which was
acquired on January 22, 1998. The operating data of the Scottsburg system
and the Portland system, which are wholly-owned by us, are included with the
Indiana Systems since they are managed by Insight Indiana.
(2) Represents the Columbus System, which was acquired by Insight Ohio on
August 21, 1998. See "Description of Recent Transactions--The Transactions
to Acquire the Columbus System."
(3) Represents the Indiana Systems, which were contributed to Insight Indiana on
October 31, 1998. Also includes the operating data of the Scottsburg system,
which was acquired on March 22, 1999, and the Portland system, which was
acquired on March 31, 1999, since these systems are managed by Insight
Indiana. See "Description of Recent Transactions--The Transactions to
Acquire the Indiana Systems."
(4) Represents the Kentucky Systems, in which we expect to acquire a 50%
ownership interest during the second half of 1999. We expect that we
will control the operations of the Kentucky Systems and, therefore,
consolidate the operating results. There can be no assurance that the
acquisition of the Kentucky Systems will be consummated. See "Description of
Recent Transactions--The Transactions to Acquire the Kentucky Systems."
(5) Represents the Managed Indiana Systems, to which we expect to provide
consulting services commencing in the fourth quarter of 1999. There can be
no assurance this transaction will be consummated.
(6) Represents the National Systems, the Columbus System, the Indiana Systems,
the Kentucky Systems and the Managed Indiana Systems.
(7) Represents the National Systems (equity ownership 100%), the Columbus System
(equity ownership 75%), the Indiana Systems (equity ownership 50%), the
Kentucky Systems (equity ownership 50%) and the Managed Indiana Systems
(equity ownership 0%), giving effect only to our pro forma percentage equity
ownership in such systems.
28
SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OTHER DATA
In the table below, we provide you with selected consolidated historical
information and other operating data of Insight. We have prepared the
consolidated selected financial information using our consolidated financial
statements for the five years ended December 31, 1998. When you read this
Selected Consolidated Historical Financial and Other Data, it is important that
you read along with it the historical financial statements and related notes in
our consolidated financial statements included herein, as well as "Management's
Discussion and Analysis of Financial Condition and Results of Operations," also
included herein.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
HISTORICAL
--------------------------------------------------------
1994 1995 1996 1997(1) 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues............................................ $ 52,820 $ 57,108 $ 61,839 $ 67,698 $112,902
Costs and expenses:
Programming and other operating costs............ 13,852 15,364 16,774 18,397 30,376
Selling, general and administrative.............. 13,323 13,629 14,062 15,020 24,471
Depreciation and amortization.................... 14,649 13,937 15,694 18,125 43,849
-------- -------- -------- -------- --------
41,824 42,930 46,530 51,542 98,696
-------- -------- -------- -------- --------
Operating income.................................... 10,996 14,178 15,309 16,156 14,206
Other income (expense):
Gain on cable systems exchange................... -- -- -- 78,931 111,746
Gain on contribution of cable systems to Joint
Venture........................................ -- -- -- -- 44,312
Equity in losses of Insight Ohio................. (3,251)
Costs related to pursuance of sale of assets..... -- (763) -- -- --
Interest expense, net............................ (17,031) (17,965) (17,644) (15,962) (28,106)
Other income (expense)........................... 365 (52) (444)
-------- -------- -------- -------- --------
(16,666) (18,780) (17,644) 62,969 124,257
Income (loss) before income taxes, extraordinary
item, and minority interest...................... (5,670) (4,602) (2,335) 79,125 138,463
Extraordinary loss from early extinguishment of
debt............................................. -- -- (480) (5,243) (3,267)
-------- -------- -------- -------- --------
Income (loss) before income taxes and minority
interest......................................... (5,760) (4,602) (2,815) 73,882 135,196
Minority interest................................... -- -- -- -- 3,410
-------- -------- -------- -------- --------
Net income (loss) before income taxes............... (5,760) (4,602) (2,815) 73,882 138,606
Income taxes........................................ -- -- -- -- --
-------- -------- -------- -------- --------
Net income (loss)................................... (5,670) (4,602) (2,815) 73,882 138,606
Accretion of redeemable Class B common units........ -- -- -- -- (5,729)
Accretion to redemption value of preferred limited
units............................................ (2,500) (2,604) (5,421) (15,275) --
-------- -------- -------- -------- --------
Net income (loss) applicable to common units........ $ (8,170) $ (7,206) $ (8,236) $ 58,607 $132,877
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Pro forma loss per share............................ -- -- -- -- $
--------
--------
29
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
HISTORICAL
--------------------------------------------------------
1994 1995 1996 1997(1) 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
OTHER FINANCIAL DATA:
Net cash provided by operating activities........... $ 12,557 $ 13,337 $ 15,976 $ 10,436 $ 44,760
EBITDA(2)........................................... 25,645 28,115 31,003 34,281 58,055
EBITDA margin(3).................................... 48.6% 49.2% 50.1% 50.6% 51.4%
System cash flow(4)................................. $ 29,172 $ 31,691 $ 34,601 $ 38,228 $ 62,732
Capital expenditures................................ 12,492 15,154 16,414 27,981 44,794
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 662 $ 479 $ 738 $ 1,082 $ 19,902
Property, plant and equipment, net.................. 24,322 30,190 36,079 63,842 155,412
Total assets........................................ 63,428 64,510 68,574 158,103 659,837
Total debt.......................................... 170,236 172,975 178,327 207,488 573,663
Partners' deficit................................... 160,808 169,601 177,837 127,982 7,928
- ------------------
(1) The 1997 historical financial statements have been restated to reflect a
change in accounting for cable system exchanges. See the notes to our
financial statements included elsewhere in this prospectus.
(2) Represents earnings (loss) before interest, taxes depreciation and
amortization. We believe that EBITDA is a meaningful measure of performance
as it is commonly used in the cable television industry to analyze and
compare cable television companies on the basis of operating performance,
leverage and liquidity. However, EBITDA is not intended to be a performance
measure that should be regarded as an alternative to, or more meaningful
than, either operating income or net income as an indicator of operating
performance or cash flows as a measure of liquidity, as determined in
accordance with generally accepted accounting principles. EBITDA, as
computed by management is not necessarily comparable to similarly titled
amounts of other companies. See the financial statements, including the
Statements of Cash Flows, which are included later in this prospectus.
(3) Represents EBITDA as a percent of total revenues.
(4) Represents EBITDA (as defined above) before home office expenses and
management fees. We believe that system cash flow is a meaningful measure of
performance as it is commonly used in the cable television industry to
analyze and compare cable television companies on the basis of operating
performance, leverage and liquidity. However, system cash flow is not
intended to be a performance measure that should be regarded as an
alternative to, or more meaningful than, either operating income or net
income as an indicator of operating performance or cash flows as a measure
of liquidity, as determined in accordance with generally accepted accounting
principles. System cash flow, as computed by management is not necessarily
comparable to similarly titled amounts of other companies. See the financial
statements, including the Statements of Cash Flows, which are included later
in this prospectus.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Because of the recently consummated and pending corporate transactions,
including the contribution agreement with AT&T BIS with respect to the Indiana
Systems and the Kentucky Acquisition, we do not believe the discussion and
analysis of our historical financial condition and results of operations below
are indicative of our future performance. In the contribution agreement with
AT&T BIS, we exchanged our Utah systems for AT&T BIS' Evansville, Indiana system
and simultaneously contributed all of our Indiana systems including Evansville
and AT&T BIS contributed most of its Indiana systems into the joint venture. The
financial results and analysis include the results of the acquisition of the
Rockford, Illinois system from January 22, 1998, the contribution agreement with
AT&T BIS since October 31, 1998, and Columbus System management fees since
August 21, 1998. Because of the timing of these corporate transactions, coupled
with the expected close of the Kentucky Acquisition in the second half of 1999,
our future operating results are likely to be substantially different from what
is presented in the following analysis.
GENERAL
Substantially all of our historical revenues were earned from customer fees
for cable television programming services including premium and pay-per-view
services and ancillary services (such as rental of converters and remote control
devices and installations) and from selling advertising. In addition, we earn
revenues from commissions for products sold through home shopping networks and,
since August 21, 1998, from management fees for managing Insight Ohio.
We have generated increases in revenues and EBITDA for each of the past
three fiscal years primarily through internal customer growth, increases in
monthly revenue per customer and growth in advertising and specifically in 1998
from acquisitions, swaps and a joint venture.
RESULTS OF OPERATIONS
The following table is derived for the periods presented from our
consolidated financial statements that are included in this prospectus and sets
forth certain statement of operations data for our consolidated operations.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1996 1997(1) 1998
----------------------- ------------------------ ----------------------
(DOLLARS IN THOUSANDS)
Revenue......................................... $ 61,839 $ 67,698 $ 112,902
Costs and expenses:
Programming and other operating costs......... 16,774 18,397 30,376
Selling, general and administrative........... 14,062 15,020 24,471
Depreciation and amortization................. 15,694 18,125 43,849
--------- --------- ---------
46,530 51,542 98,696
--------- --------- ---------
Operating income................................ 15,309 16,156 14,206
EBITDA.......................................... 31,003 34,281 58,055
Interest expense................................ (17,644) (15,962) (28,106)
Net income (loss)............................... (2,815) 73,882 138,606
- ------------------------
(1) The 1997 historical financial statements have been restated to reflect a
change in accounting for cable system exchanges. See the notes to our
financial statements included elsewhere in this prospectus.
31
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues increased 66.8% to $112.9 million for the year ended December 31,
1998 as compared to the prior year. The results were impacted by two significant
transactions including: (a) on January 22, 1998 we purchased the Rockford,
Illinois system which contributed $23.1 million of revenue during the year
accounting for 51.1% of the total increase in consolidated revenue, and (b) on
October 31, 1998, we consummated an exchange and contribution agreement with
AT&T BIS. Our 1998 results include revenue from our Utah systems, which were
exchanged as part of the joint venture with AT&T BIS, for the first ten months
and for Insight Indiana for the last two months. The incremental revenue
generated from AT&T BIS' contributed systems approximated $11.2 million
accounting for 24.8% of the consolidated revenue increase. In addition, revenues
increased as a result of internal customer growth, rate increases and growth in
advertising revenues.
Revenues per customer per month averaged $32.80 for the year compared to
$32.22 for the prior year primarily reflecting an increase in advertising
revenue per customer per month which averaged $1.60 during 1998 compared to
$0.43 in 1997. This helped offset the lack of growth in basic revenue per
customer which remained unchanged at $24.24 because of the Rockford system which
has lower revenue per customer per month reflecting its limited channel
offering. Following the completion of our planned rebuild, rate increases will
be implemented consistent with the expanded channel offering which should result
in an increase in the average revenue per customer closer to the national
average of $27.43.
Programming and other operating costs increased 65.1% to $30.4 million for
the year ended December 31, 1998 as compared to the prior year. Excluding the
Rockford system and the Indiana Systems contributed by AT&T BIS, these costs
increased by 17.9% to $21.7 million, primarily as a result of increased
programming costs and additional programming carried by our systems.
Selling, general and administrative expenses increased 62.9% to
$24.5 million for the year ended December 31, 1998 as compared to the prior year
primarily reflecting increased marketing activity associated with new product
introductions and increased corporate expenses.
Depreciation and amortization expense increased 141.9% to $43.8 million for
the year ended December 31, 1998 as compared to the prior year. This increase
was primarily due to the acquisitions and additional capital expenditures
associated with the rebuilds of our systems.
Operating income for the year ended December 31, 1998 was $14.2 million, a
12.1% decrease over the prior year, as a result of the items discussed above.
EBITDA increased 69.4% to $58.1 million for the year ended December 31,
1998 as compared to the prior year reflecting the acquisitions plus the results
of the items described above.
Interest expense increased 76.1% to $28.1 million for the year ended
December 31, 1998 compared to the prior year. The increase was primarily due to
higher average outstanding indebtedness related to acquisitions. Average debt
outstanding during 1998 was $344.0 million at an average interest rate of 8.2%.
Net income increased 87.6% to $138.6 million for the year ended
December 31, 1998 primarily reflecting gains related to system swaps aggregating
$156 million. Excluding these one-time gains we generated a net loss totaling
$17.4 million.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues increased 9.5% to $67.7 million during the year ended
December 31, 1997 as compared to the prior year, due primarily to internal
customer growth and, to a lesser extent, rate increases. Increases in customers
served accounted for 49.6% of the total increase in revenues. During 1997, we
gained 7,879 basic customers representing an annual increase of 4.6%. The
average monthly revenue per customer for 1997 was approximately $32.22, as
compared to approximately $30.76 for the prior year. The average monthly basic
revenue per customer, which accounts for 75% of total average monthly revenue
per customer, increased 6.9% to $24.31 during the year, reflecting rate
increases associated with rebuilds and annual rate increases implemented
primarily during the fourth quarter.
32
Programming and other operating costs increased 9.7% to $18.4 million for
the year ended December 31, 1997 as compared to the prior year. The increase
over the prior year reflects additional programming and increased programming
costs.
Selling, general and administrative expenses increased 6.8% to
$15.0 million for the year ended December 31, 1997 as compared to the prior
year. The increase was primarily due to higher marketing and personnel expenses.
Depreciation and amortization expense increased 15.5% to $18.1 million for
the year ended December 31, 1997 as compared to the prior year reflecting
increased capital expenditures from rebuilds and plant extension for our
existing systems.
Operating income increased 5.5% to $16.2 million for the year ended
December 31, 1997 as compared to the prior year. The operating income increased
primarily due to rate increases and other revenue increases described above,
offset by increases in programming expenses, operating expenses and depreciation
expenses.
Interest expense decreased 9.5% to $16.0 million for the year ended
December 31, 1997 as compared to the prior year. The decrease over the prior
year reflects the retirement of our 11.25% senior subordinated notes on
March 3, 1997. These notes were replaced with bank borrowings on which the
average interest rate was 8.4% for the year ended December 31, 1997.
EBITDA increased 10.6% to $34.3 million for the year ended December 31,
1997 as compared to the prior year. This increase reflects the results of the
items described above.
Net income totaled $73.9 million for the year ended December 31, 1997 as
compared to the prior year primarily reflecting gains related to system swaps
aggregating $78.9 million. Excluding these one-time gains we generated a net
loss totaling $5.0 million.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires cash for operations, debt service, capital
expenditures and acquisitions. The cable television business has substantial
on-going capital requirements for the construction, expansion and maintenance of
its broadband networks. Expenditures have primarily been used to rebuild and
upgrade our existing cable network, and in the future will be used for plant
extensions, new services, converters and system rebuilds. Historically we have
been able to meet our cash requirements with cash flow from operations,
borrowings under our credit facilities and equity contributions from our
partners.
During 1998, we spent $44.8 million in capital expenditures largely to
support our plant rebuild, digital converter purchases and to a lesser extent
plant extensions. Cash from operations totaled $44.7 million which together with
borrowing under our credit facilities, funded capital expenditures totaling
$44.8 million. We also had digital converter purchases totaling $8.0 million
associated with the contribution agreement with AT&T BIS relating to the Indiana
Systems.
It is anticipated that during 1999, we will have approximately
$123 million of capital expenditures. Included in the planned 1999 capital
expenditures is $89.0 million for the upgrading of certain of our cable
television systems, which will involve the wide deployment of fiber optics and
other capital projects associated with implementing our clustering strategy. The
amount of such capital expenditures for years subsequent to 1999 will depend on
numerous factors including the level of success in deploying our new services
which will impact the amount of capital we will need for digital converters and
other network service infrastructure to support demand for new products and
services.
During 1998, we acquired the Rockford, Illinois system for $97.0 million
excluding fees and cash associated with the acquisition. In addition, we
acquired a 75% non-voting interest in Insight Ohio which owns and operates the
Columbus System for $10.0 million. We funded these acquisitions through existing
credit facilities.
33
At December 31, 1998, we had aggregate indebtedness of $573.7 million,
which consisted of borrowings totaling $571.1 million under senior bank credit
facilities and a note payable to MediaOne due November 1999 in the amount of
$2.6 million. The senior bank facilities consisted of:
o $140.0 million eight year reducing revolver credit facility, which
supports our National Systems, of which $111.1 million was outstanding at
December 31, 1998.
o $550.0 million eight year revolving credit/term loan which supports our
Indiana Systems, of which $460.0 million was borrowed.
We believe these facilities are sufficient to support our current operating
plan for the National and Indiana Systems. With respect to the Kentucky
Acquisition, we project aggregate indebtedness outstanding of approximately $730
million as of February 28, 1998. For financing purposes, we intend to combine
the operations of the Kentucky and Indiana Systems to meet our overall financial
objectives and achieve a balanced financial leverage across all of our
operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our revolving credit and term loan agreements bear interest at floating
rates. Accordingly, we are exposed to potential losses related to changes in
interest rates. We do not enter into derivatives or other financial instruments
for trading or speculative purposes; however, in order to manage our exposure to
interest rate risk, we enter into derivative financial instruments, typically
interest rate swaps and collars. The counterparties to our swap and collar
agreements are major financial institutions. As of December 31, 1998, we had
hedged approximately $301 million (53%) of our borrowings under our Insight
Credit Facility and Insight Indiana Credit Facility. Accordingly, a hypothetical
100 basis point increase in interest rates along the entire interest rate yield
curve would increase our annual interest expense by approximately $2.7 million.
As of December 31, 1998, our interest rate swap and collar agreements expire in
varying amounts through 2003.
The fair market value of our long-term debt approximates its carrying value
as it bears interest at floating rates of interest. As of December 31, 1998, the
estimated fair value of our interest rate swap and collar agreements was
approximately $1.2 million, which amount represents the amount required to enter
into offsetting contracts with similar remaining maturities based on quoted
market prices.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. We expect to adopt the new statement
effective January 1, 2000. The statement will require us to recognize all
derivatives on the balance sheet at fair value. Although we have not completed
our assessment of the impact of FASB No. 133 on our results of operations and
financial position, we do not anticipate that the adoption of this statement
will be material.
INFLATION AND CHANGING PRICES
Our systems' 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. We do not expect inflation to have a
material effect on our results of operations.
YEAR 2000 COMPLIANCE
STATE OF READINESS
We are evaluating the impact of the Year 2000 problem on our business
systems and our ability to deliver our products and services to our customers.
This evaluation includes a review of our information technology systems, cable
network equipment and other imbedded technologies. We are also evaluating the
potential impact as a result of our reliance on third-party suppliers that may
have the Year 2000 problem. We believe the following business systems and
equipment are vulnerable to the Year 2000 problem:
o Information processing and financial reporting systems;
o Customer billing systems;
34
o Customer service systems; and
o Cable headend equipment including addressable controllers and
advertising insertion equipment.
We have developed a program to assess and address the Year 2000 problem.
This program consists of the following six phases:
1. Inventorying and assessing the impact on affected technology and
systems;
2. Developing solutions for affected technology and systems;
3. Modifying or replacing affected technology and systems;
4. Testing and verifying solutions;
5. Implementing solutions; and
6. Developing contingency plans.
As of April 30, 1999, the status of our Year 2000 compliance program was as
follows: Phase 1 was substantially complete, with an expected completion date of
May 31, 1999. Phases 2, 3, 4 and 5 were underway with expected completion by
September 30, 1999. We are working on contingency plans at this time, which will
include customer notification and plans for additional personnel.
The completion dates set forth above are based on current expectations. Due
to uncertainties inherent in Year 2000 remediation, however, no assurances can
be given as to whether such projects will be completed on such dates.
COSTS
To date, costs incurred that were directly related to addressing the Year
2000 problem have not been material. We have reviewed our cable systems to
inventory our equipment and have sent letters to our programming suppliers and
other vendors. We have not used a consultant but have worked closely with AT&T
BIS, adopting its Year 2000 program and to a large extent utilizing its
independent certifications. In addition, we have tested our billing system by
entering years such as 2001 and have determined it to be working properly.
We do not expect that the total cost of our Year 2000 remediation program
will be material. This includes the cost of replacing advertising insertion
equipment and a local addressable controller in one system.
RISKS
We purchase most of our technology from third parties. We have been
communicating with all vendors with whom we do business to determine their Year
2000 readiness and to determine the extent to which we are vulnerable to the
Year 2000 problem related to those third parties. To assess Year 2000 compliance
and any potential exposure to the Year 2000 problem, we have sent letters to
such third parties requesting that they certify as to their Year 2000
preparedness. To date, all of these critical third parties have been contacted,
and we have not been made aware of any Year 2000 compliance problems.
There can be no assurance that third-party systems on which our systems
rely will be Year 2000 ready or timely converted into systems compatible with
our systems. Our failure or a third party's failure to become Year 2000 ready,
or our inability to become compatible with third parties with which we have a
material relationship, may have a material adverse effect on us, including
significant service interruption or outages. We cannot currently estimate the
extent of any such adverse effects.
35
CONTINGENCY PLANNING
We are working on contingency plans to minimize the effect of any potential
Year 2000 related disruptions. We intend to prepare plans which relate to
systems, software, equipment and services we deem to be critical to customer
service and business operations and expect them to be in place by September
1999. These services include:
o The failure of addressable controllers contained in the cable television
system headends could disrupt the delivery of services to customers and
could necessitate crediting customers for failure to receive services;
o Customer service networks and/or automated voice response systems
failure could prevent access to customer account information, hamper
installation scheduling and disable the processing of pay-per-view
requests;
o Billing system failure could result in a loss of customer records which
could disrupt the ability to bill customers for a protracted period; and
o Advertising insertion equipment failure could impede or prevent the
insertion of advertising spots resulting in loss of advertising
revenues.
The financial impact of any or all of the above worst-case scenarios has
not been and cannot be estimated by us due to the numerous uncertainties and
variables associated with such scenarios.
36
INDUSTRY
OVERVIEW
Approximately 95.6 million U.S. households currently have access to (or are
passed by) cable television. In the aggregate, these cable systems serve
approximately 65.9 million customers, representing a penetration of 69.0% of the
homes passed. The cable industry has grown steadily from approximately 57.0
million basic customers in the United States in 1992 to approximately 65.9
million in 1998, a compound annual growth rate of 2.6%. It is estimated that the
annual revenues received from U.S. cable customers exceeded $33.0 billion in
1998.
Cable television continues to evolve. The enactment in February 1996 of the
sweeping telecommunications reform law, the first comprehensive revision of the
federal telecommunications laws since 1934, is having a dramatic impact on the
industry's development. As the new law opens up local telephone markets to
competition for the first time and brings regulatory relief and flexibility to
cable companies, we believe the new law will continue to facilitate growth of
the cable industry. Significant investments in new infrastructure and services
are being made as cable companies enter new businesses in addition to the
conventional cable business.
Many cable operators are rebuilding their infrastructure to deliver new
technologies, products and services to provide their customers with greater
value and choices in the face of growing competition in their core businesses.
Modern network architecture now can connect customers to a broadly enhanced
range of video, voice and high-speed data communication possibilities, as well
as improved signal reliability, better quality and superior two-way transmission
capability. Cable operators spent approximately $7.7 billion in 1998 to rebuild
their network in order to create new capability for the delivery of more
channels, digital and HDTV programming and two-way interactive services. It is
estimated that 56% of all homes with cable television are passed by activated
digital two-way cable network (with an estimated increase to 86% by the end of
1999), allowing for the deployment by cable television operators of digital,
interactive, high-speed data access and telecommunication products.
According to the National Cable Television Association, in 1998, the
channel capacity of cable television systems increased to an average of 61
channels, up from 53 channels in 1997. As cable continues to expand its channel
capacity, we expect that the industry's competitive position relative to DBS and
other multichannel video providers should be further enhanced.
The core businesses of cable television are subject to increasing
competition. Satellite, wireless and wireline competitors are increasing their
market share in the delivery of multichannel programming. During the past five
years, alternative providers have increased their share of the multichannel
market to nearly 13.0% of the total number of households with televisions.
During this period, cable television has increased its market share to 69.0% of
the homes passed from 61.5% as the overall market has increased due to
population growth as well as increased awareness of multichannel distribution.
Meanwhile, cable operators are rebuilding their networks in order to begin
competing in other telecommunications and entertainment services. A brief
explanation of some of the major new businesses under development is described
below.
DIGITAL VIDEO
Cable companies are using their rebuilt digital networks to offer a wide
array of new broadband video services to customers. Through the use of
compressed digital video technology, which converts, on average, one analog
channel into a digital format and compresses such signal into 8 to 12 digital
channels, cable operators are able to greatly increase their channel offerings.
The digitally compressed signal is uplinked to a satellite, which sends the
signal back down to a cable system's headend to be distributed, via optical
fiber and coaxial cable, to the customer's home. At the home, a set-top video
terminal converts the digital signal back into analog channels that can be
viewed on a normal television set. We believe the implementation of digital
technology will significantly enhance the quantity and quality of channel
offerings, allowing the cable operator to offer near video-on-demand, premium
services and incremental niche programming.
An estimated 1.5 million homes currently subscribe to a digital cable
service. The number of digital service customers is expected to increase
approximately seven times to 9.8 million homes by the end of 2000
37
(representing a penetration of 10.0% of the homes passed) and to approximately
44.1 million homes by 2008 (representing a penetration of 42.2% of the homes
passed).
HIGH-SPEED DATA
The broad bandwidth of cable network enables data to be transmitted at a
significantly faster speed than traditional telephone lines (up to 100 times
faster than traditional telephone-based modem technologies), and the cable
connection does not interfere with normal telephone activity or usage. For
example, cable's on-line customers can download large files from the Internet in
a fraction of the time it takes when using any widely available telephone modem
technology. Moreover, surfing the Internet on a high-speed network removes the
long delays for Web pages to fully appear on the computer screen, allowing the
experience to more closely approximate the responsiveness of changing channels
on a television set. In addition, the cable modem is always on and does not
require the customer to dial into an Internet service provider and await
authorization. We believe that these factors of speed and easy accessibility
will increase the use and impact of the Internet among our customers. Although
other high-speed alternatives are being developed to compete with cable, we
believe that the cable platform currently is best able to deliver these
services.
In 1998, cable companies delivered Internet services into over 100 markets
throughout the United States. In 1999, approximately 48.3 million homes will be
passed by cable systems offering high-speed, residential cable Internet
services, which is projected to increase to approximately 63.5 million homes by
2000, and to more than 104.6 million homes by 2008.
Over 500,000 cable customers currently subscribe to cable access to the
Internet. The number of cable high-speed data service customers is expected to
increase more than 6.6 times to approximately 3.3 million homes by the end of
2000 (representing a penetration of 9.1% of the homes that will have been
marketed this service). It is further expected that data service customers will
increase to approximately 15.2 million homes by the end of 2008 (representing a
penetration of 18.0% of the homes that will have been marketed this service).
The cable industry also has developed standards so that inter-operable,
non-proprietary cable modems will be made available in retail outlets beginning
in the second half of 1999. Such availability will allow customers to use their
modems in different systems while decreasing our need to maintain an inventory
of such equipment. In March 1998, the Data Over Cable Service Interface
Specifications ("DOCSIS") created by Cable Television Laboratories, Inc.
("CableLabs") and others was approved by the International Telecommunications
Union as an international standard for transmitting data over cable systems.
CableLabs also established a formal certification process for cable modem
equipment suppliers to obtain a compliance certificate for their data delivery
devices based on this standard.
TELEPHONY
During the last several years, the cable industry has been developing the
capability to provide telephony services. At least seven of the nation's largest
cable operators now offer residential and/or commercial phone service in more
than 25 markets overall and cable companies have reached interconnection
agreements in 40 states and the District of Columbia. For example, Cablevision
Systems Corporation and Cox Communications are each now offering packages of
local, regional and long distance service to homes and businesses at prices
averaging 15% below those offered by the incumbent telephone companies in their
respective distribution areas. Penetration rates are running as high as 15% to
20% of the homes that have been marketed this service. Other operators who have
launched this service include MediaOne Group, Inc. and Jones Intercable, Inc.
Recent developments, including AT&T's purchase of TCI and the proposed
joint ventures between AT&T and six cable operators, including Insight and Time
Warner, and AT&T's proposed acquisition of MediaOne, will likely accelerate the
pace of development of the voice telephony business. The number of cable
telephony customers is expected to be approximately 1.9 million homes by the end
of 2000 (representing a penetration of 10.0% of the homes that will have been
marketed this service) and approximately 19.6 million homes by 2008
(representing a penetration of 24.0% of the homes that will have been marketed
this service).
38
BUSINESS
GENERAL
We are the 10th largest cable television system operator in the United
States based on customers served, with approximately 1,046,000 customers as of
December 31, 1998, on a pro forma basis. We have a tightly grouped cluster of
cable television systems with approximately 98% of our customers concentrated in
the four contiguous states of Indiana, Kentucky, Ohio and Illinois. Our systems
have a very high concentration of customers served by each headend or technical
center of the network allowing us to more economically deliver an array of
entertainment, information and telecommunication services, including interactive
digital, high-speed data access and telephony products. Upon completion of our
rebuild efforts, which is expected to occur in 2000, over 96% of our customers
will be served from nine headends. In addition to our optimal state-of-the-art
technical configuration, our market research indicates that our clusters has
attractive market characteristics and demographics for offering new and enhanced
products and services that take advantage of the significant bandwidth of our
cable network. We believe that because of this advantageous combination, we are
very well positioned to exploit the new business opportunities available to
cable television operators.
As of December 31, 1998, on a pro forma basis, our systems:
o passed 1,624,477 homes
o served 1,045,612 customers
For the year ended December 31, 1998, we had:
on a pro forma basis:
o revenues of $375.7 million
o EBITDA of $178.6 million
on a pro forma proportional basis:
o revenues of $244.5 million
o EBITDA of $112.2 million
Recognizing the opportunities presented by newly available products and
services, the strength of our market characteristics and favorable changes in
the regulatory environment, our management team developed and executed a
strategy to become a competitive, full service provider of entertainment,
information and telecommunication services for the communities served by our
networks. We intend to capitalize on our highly clustered cable television
systems to economically rebuild the technological capabilities of our broadband
networks in order to deploy enhanced new services. We believe that an integrated
package of existing multi-channel video, new and enhanced products and services,
such as interactive digital video (including video-on-demand or near
video-on-demand), high-speed Internet access and telephone services, coupled
with our commitment to locally focused customer service, will enhance our
ability to acquire and retain customers in a competitive environment while
increasing revenues per customer. To augment this growth, we will continue to
seek strategic acquisitions that fit our clustering and operating strategy.
Our marketing strategy is designed to capitalize on these trends by
offering our customers an array of entertainment, information and
telecommunication services on a bundled basis. By bundling our products and
services, our customers would have an increased choice of services at a reduced
cost resulting in higher customer satisfaction, higher penetration and reduced
churn. Because our broadband cable network can offer such a wide variety of
communication services, we believe our service offering will provide us with a
competitive advantage over alternative wireline and wireless telecommunications
and multichannel video providers, such as incumbent telephone companies and
direct broadcast satellite television systems. We began offering new and
enhanced products and services, such as interactive digital video and high-speed
data access, during the second quarter of 1999 and intend to offer
telecommunication services beginning in 2000.
We have conducted research and held numerous focus group sessions in our
local markets leading us to believe that products and services such as
interactive digital video, high-speed data access and telephony will have high
customer appeal. As a result of our capital investment, we expect to be able to
provide these
39
products and services on a cost effective basis capitalizing on the high
bandwidth capabilities of our cable network. Likewise, we believe that the
highly clustered nature of our systems will enable us to more efficiently invest
our marketing dollars and maximize our ability to establish customer awareness,
increase penetration and build brand support. In addition to our broad product
offering, we also emphasize a high level of locally focused customer service.
Our emphasis is on system reliability, engineering support and superior customer
satisfaction.
To facilitate the deployment of our enhanced products and services, we are
in the process of rebuilding almost all of our network to provide at least 750
MHz bandwidth with two-way active capability. We have rebuilt approximately 28%
of our network miles as of March 31, 1999 on a pro forma basis and intend to
have approximately 71% of our network at or above 750 MHz by the end of 1999. We
expect to complete our network rebuild in 2000 having invested a total of
approximately $233.8 million.
The following table presents a profile of our systems and systems in which
we have an economic interest or service on a pro forma basis as of and for the
year ended December 31, 1998 (except as otherwise indicated).
SELECTED TECHNICAL, OPERATING AND FINANCIAL DATA
(DOLLARS IN THOUSANDS)
MANAGED
NATIONAL COLUMBUS INDIANA KENTUCKY INDIANA
SYSTEMS(1) SYSTEM(2) SYSTEMS(3) SYSTEMS(4) SYSTEMS(5)
---------- ----------- -------- -------- --------
TECHNICAL DATA:
Network miles............................... 1,727 2,644 7,422 8,052
Number of headends.......................... 5 1 45 18
Number of headends expected as of March 31,
2000(6).................................. 5 1 11 4
Number of headends serving 90% of
our customers expected as of
March 31, 2000(6)........................ 2 1 3 4
OPERATING DATA:
Homes passed................................ 148,864 171,753 493,482 650,734 159,644
Basic customers............................. 86,917 87,637 334,026 424,215 112,817
Basic penetration........................... 58.4% 51.0% 67.7% 65.2% 70.7%
Premium units............................... 92,521 90,032 231,372 347,005 44,596
Premium penetration......................... 106.5% 102.7% 69.3% 81.8% 39.5%
Number of addressable homes................. 30,532 73,362 75,850 130,799 22,000
FINANCIAL DATA:
Revenues.................................... $41,314 $47,956 $138,861 $195,507 $48,800
EBITDA(7)................................... 18,360 18,261 74,508 85,763
EBITDA margin............................... 44.4% 38.1% 53.7% 43.9%
OTHER DATA:
Insight's ownership......................... 100% 75% 50% 50% 0%
Location of systems......................... CA, GA, IL OH IN KY IN
Date of acquisition/consulting.............. Various August 1998 Various Pending Pending
- ------------------
(1) Represents the National Systems, including the Rockford system, which was
acquired on January 22, 1998. Includes the financial data of the Scottsburg
system and the Portland system, which are wholly-owned by us. The technical,
operating and other data of the Scottsburg and Portland systems are included
with the Indiana Systems since they are managed by Insight Indiana.
(Footnotes continued on next page)
40
(Footnotes continued from previous page)
(2) Represents the Columbus System, which was acquired by Insight Ohio on
August 21, 1998. The results of operations of the Columbus System are not
consolidated since we do not have voting control. See "Description of Recent
Transactions--The Transactions to Acquire the Columbus System."
(3) Represents the Indiana Systems, which were contributed to Insight Indiana on
October 31, 1998. Also includes the technical, operating and other data of
the Scottsburg system, which was acquired on March 22, 1999, and the
Portland system, which was acquired on March 31, 1999, since they are
managed by Insight Indiana. The financial data of the Scottsburg and
Portland systems are included with National Systems since they are
wholly-owned by us. See "Description of Recent Transactions--The
Transactions to Acquire the Indiana Systems."
(4) Represents the Kentucky Systems, in which we expect to acquire our ownership
interest during the second half of 1999. There can be no assurance that the
Kentucky Acquisition will be consummated. See "Description of Recent
Transactions--The Transactions to Acquire the Kentucky Systems."
(5) Represents the Managed Indiana Systems, to which we expect to provide
consulting services commencing in the fourth quarter of 1999. There can be
no assurance that this transaction will be consummated. See "Business--The
Systems--The Indiana Systems--The Managed Indiana Systems."
(6) Represents an estimate based on our current rebuild program.
(7) Represents earnings (loss) before interest, taxes, depreciation and
amortization and with respect to the Columbus System, before severance and
transaction structure costs of $4.8 million associated with the contribution
of the Columbus System to Insight Ohio.
BUSINESS STRATEGY
Our operating strategy is centered on the development of new and enhanced
products and services for the communities served by our telecommunications
network and consists of the following elements:
FOCUS ON OPERATING CLUSTERS WITH ATTRACTIVE TECHNICAL AND DEMOGRAPHIC PROFILES
We operate highly clustered systems, most of which have attractive
technical and demographic profiles. Our systems are characterized by high
housing densities and high ratios of customers to headends. As a result, the
amount of capital necessary to deploy new and enhanced products and services is
significantly reduced on a per home basis because of the large number of
customers served by a single headend. We believe that the highly clustered
nature of our systems enables us to more efficiently invest our marketing
dollars and maximize our ability to establish customer awareness, increase
penetration and build brand support. Our demographic profile is characterized by
strong new housing growth and low unemployment in rapidly growing communities,
most of which are centered around large universities and/or major commercial
enterprises. We believe that households with our demographic profile are more
likely to subscribe to these new and enhanced products and services than the
national average demographic profile.
EXPEDITIOUSLY REBUILD OUR BROADBAND CABLE NETWORK
We are committed to rebuild our cable network expeditiously in order to
provide new and enhanced products and services, increase the programming and
telecommunications choices for our customers, improve our competitive position
and increase overall customer satisfaction. We are in the process of rebuilding
almost all of our network to provide at least 750 MHz bandwidth and two-way
active capability. The result will be a significant increase in network
capacity, quality and reliability which facilitates the delivery of new and
enhanced products and services and reduced operating costs. Our aggressive
investment in our broadband cable network rebuild will allow us to expeditiously
offer these services to substantially all of our customers. By the end of 1999,
we expect that approximately 85% of our customers on a pro forma basis will be
served by systems with at least 750 MHz bandwidth and two-way active capability,
with the balance being substantially complete by the end of 2000. As each
system's rebuild progresses, we will deploy new and enhanced products and
services allowing us to provide these new services in many of our markets by
late
41
1999. In 1998, we invested approximately $46.6 million, and we plan to invest
approximately $89.0 million more to rebuild our systems by the end of 1999.
INTRODUCE NEW AND ENHANCED PRODUCTS AND SERVICES
Our marketing strategy is to offer our customers an array of entertainment,
information and telecommunication services on a bundled basis. We believe by
bundling our products and services our customers will have an increased choice
at a reduced cost resulting in higher customer satisfaction, higher penetration
and reduced churn. We have conducted research and held numerous focus group
sessions in our local markets which lead us to believe that these services will
have high customer appeal. We expect that our ability to provide bundled
services will provide us with a strong competitive advantage over alternative
video providers, such as DBS, and incumbent telephone companies. To accelerate
the deployment of these services, we have partnered with several industry
leaders, including AT&T, @Home and 3Com.
LEVERAGE STRONG LOCAL PRESENCE TO ENHANCE CUSTOMER AND COMMUNITY RELATIONS
Strong customer service is a key element of our business strategy. We are
dedicated to quality customer service and seek a high level of customer
satisfaction by employing localized customer care, extensively using market
research and providing customers with an attractively priced product offering.
Approximately 40% of our customers visit their local office on a monthly basis
providing us the opportunity to demonstrate and sell our new and enhanced
products and services. Our localized customer care initiatives create
substantial marketing and promotion opportunities which we believe will be
effective in the deployment of interactive and high-speed data products. In
addition, we are dedicated to fostering strong relations in the communities we
serve. We sponsor local charities and community causes through staged events and
promotional campaigns, including the industry's Cable in the Classroom program.
Our emphasis on customer service and strong community involvement has led to
higher customer satisfaction, reduced customer churn and excellent franchise
relationships. To further strengthen community relations and differentiate us
from DBS and other multichannel video providers, we provide locally produced and
oriented programming that offers, among other things, community information,
local government proceedings and local specialty interest shows. In certain
markets, we are the only broadcaster of local college and high school sporting
events, which allows us to provide unique programming and builds customer
loyalty.
To support our business strategy, we have developed a financial strategy to
pursue value-enhancing transactions. To augment our internal customer growth, we
will seek acquisitions that strategically fit our clustering and operating
strategy. We will seek strategic acquisitions based upon disciplined criteria
with a focus on the following four primary factors:
o A high ratio of customers to headends;
o Market significance;
o Geographic proximity to our other systems; and
o An acceptable return on investment.
Since initiating this strategy in early 1997, we have completed on a pro
forma basis a total of three acquisitions, three asset swaps and two joint
ventures. As of December 31, 1997, our cable systems had approximately 180,000
customers and were located in seven states with no clear clustering of
properties. After completing these transactions, including a joint venture in
Indiana with AT&T BIS, an asset swap with Cox Communications, the proposed
transaction to acquire the Kentucky Systems and the proposed provision of
consulting services to the Managed Indiana Systems, we owned, operated and
managed, as of December 31, 1998 on a pro forma basis, cable television systems
serving approximately 1,046,000 customers with approximately 98% of our
customers clustered in the State of Indiana; Rockford, Illinois; Columbus, Ohio;
and the State of Kentucky.
42
TECHNICAL OVERVIEW
We believe that in order to achieve consistently high levels of customer
service, reduce operating costs, maintain a strong competitive position and
deploy important new technologies, we will need to install and maintain a fiber
rich technical platform. The deployment of fiber optics, an increase in the
bandwidth to 750 MHz or higher, the activation of a two-way communications
network and the installation of digital equipment will allow us to deliver
interactive digital, video, high-speed data services and telecommunication
services.
As of December 31, 1998 on a pro forma basis, our systems were comprised of
approximately 19,850 miles of network passing approximately 1,465,000 homes
resulting in a density of approximately 74 homes per mile. As of that date, our
systems on a pro forma basis were made up of an aggregate of 70 headends. We
intend to continue our strategy of consolidating headends by eliminating
approximately 54 headends by March 31, 2000, at which point 96% of our customers
will be served by nine headends. As of December 31, 1998 on a pro forma basis,
approximately 29% of our network was at 450-550 MHz, while approximately 30% of
our network was at 600 MHz or higher.
Our network design calls for a digital two-way active network with a fiber
optic trunk system carrying signals to nodes within our customers'
neighborhoods. The signals are transferred to coaxial network at the node for
delivery to our customers. At December 31, 1998, an average of approximately
1,500 homes were being served by each fiber node. We have designed the fiber
system to be capable of subdividing the nodes if traffic on the network requires
additional capacity.
We believe that active use of fiber optic technology as a supplement to
coaxial cable will play a major role in expanding channel capacity and improving
the performance of our systems. Fiber optic strands are capable of carrying
hundreds of video, data and voice channels over extended distances without the
extensive signal amplification typically required for coaxial cable. We will
continue to deploy fiber optic cable to further reduce amplifier cascades while
improving picture quality and system reliability.
A direct result of this extensive use of fiber optics is an improvement in
picture quality and a reduction of outages because system failures will be both
significantly reduced and will impact far fewer customers when they do occur.
Our design allows our systems to have the capability to run multiple separate
channel line-ups from a single headend and to insert targeted advertisements
into specific neighborhoods based on node location.
As of December 31, 1998 on a pro forma basis, approximately 32% of our
customers had addressable converters in their homes. Addressable technology
enables us to electronically control the cable television services being
delivered to the customer's home. Addressable technology allows us to
electronically upgrade or downgrade services to a customer immediately, from our
customer service center, without the delay or expense associated with
dispatching a technician to the customer's home. Addressable technology also
reduces premium service theft, is an effective enforcement tool in the
collection of delinquent payments and enables us to offer pay-per-view services,
including movies and special events, more conveniently.
The following chart outlines the status of the network capacities currently
and as planned over the next three years, based on our current rebuild program:
PERCENT OF NETWORK MILES
-----------------------------------------------
GREATER THAN OR PERCENT OF
EQUAL TO 450 GREATER THAN OR NETWORK
LESS THAN MHZ AND LESS EQUAL TO 750 TWO-WAY
450 MHZ THAN 750 MHZ MHZ CAPABLE
--------- --------------- --------------- ----------
As of March 31, 1999 on a pro forma basis................ 39.9% 32.3% 27.8% 35.8%
As of December 31, 1999*................................. 7.6 21.0 71.4 74
As of December 31, 2000*................................. 2.3 7.0 90.7 94
- ------------------
* Estimate based on our current rebuild program. There can be no assurance that
our current rebuild program will be achieved.
43
PRODUCTS AND SERVICES
TRADITIONAL CABLE TELEVISION SERVICES
We offer our customers a full array of traditional cable television
services and programming offerings. All of our customers receive a basic service
of up to 17 channels of television programming. Approximately 94% of our
customers choose to pay an additional amount to receive up to 50 additional
channels under our "classic" service. Premium channels, which are offered
individually or in packages of several channels, are optional add-ons to the
basic service or the classic service. As of December 31, 1998 on a pro forma
basis, premium units as a percentage of basic subscribers was approximately 77%.
We tailor both our basic line-up and our additional channel offerings to each
regional system in response to demographics, programming preferences,
competition, price sensitivity and local regulation.
Our cable television service offering includes the following:
o Basic Service. All of our customers receive the basic level of service,
which generally consists of local broadcast television and local
community programming (including government and public access) and may
include a limited number of satellite programs.
o Classic Service. This expanded level of service includes a group of
satellite-delivered or non-broadcast channels such as ESPN, CNN,
Discovery Channel and Lifetime.
o Premium Channels. These channels provide unedited, commercial-free
movies, sports and other special event entertainment programming such as
HBO, Cinemax and Showtime. We offer subscriptions to these channels
either individually or in premium channel packages.
o Pay-Per-View. These analog channels allow customers with addressable set
top boxes to pay to view a single showing of a recently released movie or
a one-time special sporting event or music concert on an unedited,
commercial-free basis.
NEW AND ENHANCED PRODUCTS AND SERVICES
As rebuilds are activated during 1999, we are deploying new and enhanced
products and services in most of our markets, including interactive digital
video and high-speed data services. In addition, we intend to deploy telephony
services in 2000.
Interactive Digital Video
The implementation of interactive digital technology will significantly
enhance and expand the video and service offerings we provide to our customers.
Most digital launches by other cable operators have been limited to simply
offering more channels as a defensive move against DBS competition. Because of
the significantly increased bandwidth and two-way transmission capability of our
state-of-the-art technical platform, which is being built in conjunction with
our digital launches, we have the capacity to design a more extensive digital
product that is rich in program offerings and highly interactive with our
customers. For example, we expect to offer a video-on-demand service that will
allow our customers significantly more viewing options. Our interactive digital
services also allow us to offer customized information for our customers that is
rich in local content and targeted to a specific system or community. Our
systems also are being activated with two-way communication network capability,
enabling us to provide truly interactive and locally based Internet-style
products and services.
We have conducted numerous focus groups and commissioned research studies,
the findings of which have helped to develop our interactive digital strategy.
We believe that our digital penetration will increase as a result of our
differentiated services such as a graphically rich local information network and
video-on-demand pay-per-view with full VCR functionality. In addition, nearly
75% of the homes passed by our systems still do not have an online account to
use the Internet, which we believe will make our local information product
particularly appealing to this group.
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In most of our digital launches, we are providing a package of digital
services, known as "Digital Gateway." For $6.95 per month, our customers can
purchase Digital Gateway and receive the following services:
o A digital converter box;
o An interactive navigational program guide for all analog and digital
channels;
o A local, interactive Internet-style service;
o A significant multiplexing of premium channels for customers who
separately subscribe to premium channels, such as HBO and Showtime;
o Pay-per-view video-on-demand; and
o A digital 40-channel audio music service.
We have entered into a letter of intent with Source Media, Inc. ("Source
Media") to provide their LocalSource product in our Digital Gateway. The
LocalSource product is designed to deliver the Internet experience to the
television platform. LocalSource delivers interactive programming that is both
informative and entertaining and provides extensive communications tools to
support interaction between customers, advertisers, sponsors, merchants and
direct marketers resulting in multimedia addressable advertising opportunities
for both local and national advertisers. The service is divided into four
sub-categories:
o DailySource provides both current local information as well as national
news updates;
o LocalGuide provides a complete and current community guide that covers
everything from school homework assignments to restaurant specials,
sporting events or movie schedules;
o FastFacts is an on-demand library of useful facts on a range of subjects
from health to legal to car care or insurance; and
o MyTV is a service that allows customers to customize their screens by
selecting menus and viewing choices based upon their own tastes.
Other LocalSource applications that are under development include CableMail
and SourceNet. CableMail will allow customers to have e-mail accounts accessible
from their television sets and SourceNet will provide Internet access to the
World Wide Web, also through the set top box and the television set. We believe
that LocalSource is a compelling introduction to cable's broadband capability
which will stimulate early demand for data services and make cable a more
essential service for the customer, resulting in increased customer satisfaction
and penetration and reduced churn.
We have signed a letter of intent with DIVA Systems Corporation ("DIVA"),
which will allow us to be the first cable operator to offer DIVA's
video-on-demand services as part of a digital tier package. DIVA provides a true
video-on-demand service over the cable television infrastructure. We initially
intend to launch DIVA's video-on-demand product in Rockford, Illinois, in July
1999 and later this year in Columbus, Ohio and Bloomington, Indiana. A
video-on-demand launch is also being considered for Evansville, Indiana later
this year, with additional launches in Indiana and Kentucky expected in 2000. We
expect that our video-on-demand service will offer immediate in-home access to a
diverse and continuously available selection of hundreds of movies. Customers
will receive the movies electronically over the network and will have full VCR
functionality, including pause, play, fast forward and rewind. The movies will
be delivered with a high quality digital picture and digital sound. DIVA is
designed to provide movies at prices comparable to those charged for videotape
rentals, pay-per-view and near video-on-demand movies, but with far greater
convenience and functionality. Although we expect fully to finalize our
negotiations with DIVA, there can be no assurance that they will come to a
successful conclusion.
In addition to the Digital Gateway service, customers can select additional
digital packages, each of which includes a number of popular cable networks.
These packages allow viewers to customize their service to fit individual
interests. The packages will be tailored to satisfy the tastes and needs of the
specific local market but will be generally developed and available for an
additional $4.95 each per month. Currently, we are planning to offer three core
programming packages in all of our markets and to provide a discount by
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allowing customers to purchase all three packages for the price of two. The
packages may include the following:
o The Family Pack, which is comprised of networks, such as six different
Discovery networks, BBC America, Much Music and the Sci-Fi Channel;
o The Movie Pack, which is comprised of specialty movie networks, such as
six Encore theme channels, Turner Classic Movies, the Independent Film
Channel and Romance Classics; and
o The Sports Pack, which consists of several ESPN channels, The Golf
Channel, Fox Sports World and Classic Sports.
In addition to these core programming packages, we intend to develop
additional niche packages, such as Spanish channels or music video channels,
reflective of local customer tastes.
We recently launched most of the Digital Gateway service in Rockford,
Illinois, added LocalSource in May 1999 and will add the video-on-demand
application in July 1999. We will launch the Digital Gateway service in all of
our markets as rebuilds are completed. As the rebuilds of the Indiana Systems
are completed during 2000, we will migrate the AT&T BIS digital product to our
interactive digital product. Additionally, in 2000, we expect to convert the
Kentucky Systems from the InterMedia VI digital product to our interactive
digital product. While the AT&T BIS and InterMedia VI digital products were
targeted to fill programming voids and compete with DBS, our Digital Gateway
service is designed to provide our customers with an Internet style experience
as well as programming choices, which we believe will result in higher
penetration and customer satisfaction and reduced churn. Therefore, we expect to
achieve improved penetration in the Indiana Systems with our Digital Gateway
service from the 10% to 15% penetration that the AT&T BIS digital product
currently achieves.
In the small markets where we do not plan a rebuild, we have launched a
digital product which is packaged and priced similarly but is not interactive.
We launched this type of limited digital service in Griffin, Georgia in December
1998 and achieved over 10% penetration within four months of launch with
incremental revenue per digital customer of over $16.00 per month.
High-Speed Data
We plan to introduce high-speed data service for personal computers over
our network in all of our rebuilt systems. The broad bandwidth of cable network
enables data to be transmitted at a significantly faster speed than traditional
telephone lines (up to 100 times faster than traditional telephone-based modem
technologies), and the cable connection does not interfere with normal telephone
activity or usage. For example, cable's on-line customers can download large
files from the Internet in a fraction of the time it takes when using any widely
available telephone modem technology. Moreover, surfing the Internet on a
high-speed network removes the long delays for Web pages to fully appear on the
computer screen, allowing the experience to more closely approximate the
responsiveness of changing channels on a television set. In addition, the cable
modem is always on and does not require the customer to dial into an Internet
service provider and await authorization. We believe that these factors of speed
and easy accessibility will increase the use and impact of the Internet.
Although other high-speed alternatives are being developed to compete with
cable, we believe that the cable platform currently is best able to deliver
these services.
We have signed a distribution agreement with @Home to launch high-speed
data service in all of our markets serving 50,000 or more homes passed, except
for Columbus, Ohio. With respect to the Columbus System and our small system
markets, we are considering separate distribution agreements with @Home,
RoadRunner and other Internet service providers.
In addition to being an Internet service provider, @Home offers its own
content. @Home aggregates high quality web sites for customers to explore and
also offers various chat rooms, newsgroups, on-line stores, gaming channels, on
demand CNN, NBA and MTV video clips, and easy to use search engines and tip
wizards. We expect to offer our customers content of local interest, including
community information, local news, sports, entertainment, and weather, through
our local home page.
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The @Home service offers unlimited access to the Internet. The service
includes three e-mail addresses and 15 megabytes of space with which to create a
personal web site. We will also offer remote access and multiple computer access
for an additional charge. We are offering the @Home service to cable customers
at a price of $29.95 per month plus $15 to lease the cable modem. Non-cable
customers will be charged an additional $10 per month for the service. Both
cable and non-cable customers will be charged an installation fee of $150, which
we may, at our discretion, discount to promote usage of cable modems. @Home also
provides several premium services, such as dial-up access, multiple computer
access and internet fax services, which should provide additional revenue
potential. In addition to customer fees, we expect to generate advertising and
e-commerce revenue.
While we will initially lease cable modems to customers, we expect a
significant portion of our customers to purchase a cable modem once the DOCSIS
open standard has been implemented by vendors and such vendors sell the cable
modems in retail outlets and pre-install them in new computers. The purchase of
cable modems by our customers will reduce our need to maintain an inventory of
such equipment. We do not, however, anticipate significant retail activity until
2000.
We believe our cable systems have attractive demographics for high-speed
data. Based on research of our systems at November 1998 by Peter D. Hart
Research Associates Inc., approximately 49% of our then customers had personal
computers in the home and approximately 51% of those that had computers were
currently on-line. We believe university markets, such as Bloomington and
Lafayette, Indiana, Lexington and Bowling Green, Kentucky and Columbus, Ohio and
affluent suburbs like Noblesville, Indiana are particularly well suited for this
product as each of these markets has above average personal computer
penetration.
Telephony
In December 1998, we entered into a letter of intent with AT&T to form a
joint venture to provide local phone services to residential consumers and
certain small business customers under the "AT&T" brand name over our cable
infrastructure (the "Telephony Joint Venture"). The Telephony Joint Venture
would have the exclusive right to license our cable infrastructure for such
services and would have access to wholesale bulk long distance services and
certain other network services from AT&T. We believe there is significant
potential for the Telephony Joint Venture based both on our management's
experience in the U.K. cable market and the success of other operators such as
Cox Communications and Cablevision since entering this business.
All of our systems would be included in the Telephony Joint Venture, and we
expect to invest up to 49% of the equity capital for the joint venture on terms
to be negotiated. Under the Telephony Joint Venture, we would be responsible for
rebuilding our cable systems and activating two-way network. In exchange for
this contribution, we would receive an initial connectivity payment for any
cable television system passing a specified number of homes and meeting certain
specified technical standards. The Telephony Joint Venture would also pay us
monthly connectivity payments based on the number of customers for maintenance
of our network. In addition, we would participate in the profitability of the
business based on our equity interest in the joint venture. There can be no
assurance that a definitive agreement will be successfully negotiated with AT&T,
or, if negotiated, that such agreement will be on the terms described in this
prospectus. See "Description of Recent Transactions--The Transaction with AT&T."
BUSINESS BACKGROUND
Insight was co-founded in 1985 as a limited partnership by Sidney R. Knafel
and Michael S. Willner after a previous association with one another at Vision
Cable Communications where Mr. Knafel was co-founder and Chairman and
Mr. Willner held various operating positions, ultimately holding the position of
Executive Vice President and Chief Operating Officer. Vision Cable was sold to
The Newhouse Group Inc. in 1981 and Mr. Willner remained there to run the cable
operations until 1985 when he and Mr. Knafel formed Insight.
47
Between 1985 and 1988, we assembled a group of systems that reflected
our focused acquisition criteria of high housing growth in markets with
attractive demographics. As a result of this strategy, we owned largely suburban
systems in high growth corridors of major metropolitan areas. Through housing
growth and increased basic penetration in the five years ended December 31,
1997, our systems achieved growth rates for homes passed and customers of 4.8%
and 5.9%, respectively, over twice the national average and one of the highest
internal growth rates in the industry.
In addition to many years of conventional cable television experience, our
management team has been involved in the development and deployment of full
service telecommunications networks since 1989. Through a then affiliated
entity, Insight Communications Company UK, L.P., our management and certain of
our affiliates entered the cable television market in the United Kingdom, where
today modern hybrid fiber-coaxial networks are widely deployed. Messrs. Knafel
and Willner remain on the board of NTL Incorporated, the publicly traded
successor to the former Insight UK affiliate. NTL is currently one of the three
largest operators of local broadband communications systems in the United
Kingdom.
As a result of our management's British experience, we recognized that the
technology and products developed in the United Kingdom would migrate to the
United States in similar form. We focused on planning to rebuild our network
promptly after it became clear that the 1996 Telecom Act would encourage
competition in the telecommunications industries. We understood, however, that
the new products and services available with new technology were best deployed
in markets which provided for efficiencies for branding and technical
investment. Our original acquisition strategy, which focused on customer growth,
was very successful. However, our management team recognized the opportunity to
evolve from our role as a cable television operator providing only home video
entertainment into a full service alternative telecommunications network
providing not only standard video services, but also interactive digital video,
high-speed data access and voice telephony products and services.
Recognizing the opportunities presented by newly available products and
services and favorable changes in the regulatory environment, we executed a
series of asset swaps and acquisitions and entered into a key joint venture that
resulted in our current composition. The largest of these transactions was the
50/50 joint venture formed between Insight and AT&T BIS in October 1998. Prior
to December 31, 1997, our systems had approximately 180,000 customers with the
two largest concentrations in Utah and Indiana, which together represented less
than half of our customers. We believe that we have successfully transformed our
assets so that today on a pro forma basis we own, operate and manage a cable
television network serving approximately 1,046,000 customers with approximately
98% of our customers clustered in the contiguous states of Illinois, Indiana,
Ohio and Kentucky. Our current assets are reflective of our strategy to own
systems that have high ratios of customers to headends.
The following is a list of significant recent transactions that were
designed to implement our new business strategy:
o Lafayette, Indiana. In December 1997, we exchanged with Cox
Communications our suburban Phoenix, Arizona system serving approximately
36,200 customers for a system in Lafayette, Indiana serving approximately
38,100 customers plus approximately $12.6 million paid in cash to
Insight. The Phoenix system comprised only 8% of its designated market
area and was made up of three separate headends while the Lafayette
system is made up of a single headend, is the major operator in the
market and is located in a region where we have substantial assets.
o Rockford, Illinois. In January 1998, we purchased a cable system serving
approximately 66,000 customers in the Rockford, Illinois area. The system
is made up of a single headend and is the primary cable system in the
market.
o Columbus, Ohio. In August 1998, we acquired a 75% non-voting interest in
a cable system serving approximately 90,000 customers in the eastern
portion of the City of Columbus and the surrounding suburban communities.
The Columbus System, which is made up of a single headend, passes
one-third of the homes in the Columbus area.
o Indiana Joint Venture. In October 1998, we exchanged with AT&T BIS our
Utah systems serving approximately 56,200 customers for systems in
Evansville and Jasper, Indiana serving approximately
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63,000 customers. Simultaneously with this transaction, we contributed
approximately 157,000 of our Indiana customers and AT&T BIS contributed
approximately 162,000 of its Indiana customers to a newly formed joint
venture in which AT&T BIS and we each have a 50% interest. We have
management control of the Indiana joint venture, which upon formation
became the largest cable operator in Indiana.
o Kentucky Joint Venture. In April 1999, we entered into an agreement with
Blackstone Capital, ICM and a subsidiary and related party of AT&T BIS to
purchase, subject to certain conditions, their combined 50% interest in
InterMedia VI, which serves approximately 426,000 basic customers
throughout Kentucky. Pursuant to the agreement, we would have management
control of the Kentucky joint venture, which is the largest cable
operator in Kentucky. There can be no assurance that the Kentucky
Acquisition will be consummated on the terms described in this
prospectus, or at all. This offering is not contingent or in any way
dependent on the Kentucky Acquisition.
One of our original investors was Continental Cablevision, the third
largest cable operator in the United States at that time. After MediaOne
acquired Continental, we reached an agreement to repurchase its interest in our
company by the end of 1999. We replaced this important relationship by acquiring
the Indiana Systems in a 50/50 joint venture with TCI, now known as AT&T BIS,
the largest cable operator in the United States, pro forma for its proposed
acquisition of MediaOne. We believe that a relationship with a major cable
operator is an advantage to us because it helps us to participate in the rapidly
changing technical developments in the industry and allows us to procure
programming, equipment and services at better prices. We already have benefited
from our new AT&T BIS relationship by being one of the first companies to enter
into a joint venture arrangement with AT&T for the delivery of voice telephony
services to residential and small business markets. We also benefit from having
two nationally recognized financial investors, Vestar Capital Partners III, L.P.
and Sandler Capital Partners IV, L.P. This combination of strategic and
financial relationships gives us a clear view of the issues confronting the
telecommunications industry and increased access to capital, which we can
utilize when analyzing and pursuing new business opportunities.
THE SYSTEMS
Our operations are conducted through the Indiana Systems, the National
Systems and the Columbus System, and will also be conducted upon the
consummation of the Kentucky Acquisitions through the Kentucky Systems.
THE INDIANA SYSTEMS
As of December 31, 1998 on a pro forma basis for the Scottsburg and
Portland systems, the Indiana Systems passed approximately 493,500 homes and
served approximately 334,000 customers. The Indiana Systems are owned by Insight
Indiana, which is the largest cable operator in the state. Insight Indiana,
which was capitalized on October 31, 1998, is a 50/50 joint venture between
Insight and AT&T BIS in which we serve as manager of the Indiana Systems. See
"Description of Recent Transactions--The Transactions to Acquire the Indiana
Systems." We receive tangible and intangible benefits from our partnership with
AT&T BIS, including (a) substantial programming discounts for the Indiana
Systems and (b) participation in AT&T BIS affiliate meetings, which affords us
in-depth knowledge and understanding about principal and material issues and
challenges facing the cable television industry.
The Scottsburg system and the Portland system, which are included in the
Indiana Systems as discussed above, passed approximately 17,600 homes and served
approximately 10,500 customers as of December 31, 1998. Both of these systems
are wholly-owned by us but are managed by Insight Indiana.
We believe that further investment in the Indiana Systems will yield
opportunities for cash flow growth. We will increase capital investments, with
initial emphasis on rebuilding the network, activating two-way transmission and
combining headends. By March 2000, we expect that 90% of our customers in
Indiana, including the customers of the Managed Indiana Systems, will be served
by three headends. Upon implementation of our state-of-the-art technical
platform, we will be deploying new services based on our marketing strategy of
bundling products. In addition, we believe that there are additional
opportunities to augment our position in the state through additional
acquisitions and swaps.
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The Indiana Systems are organized in five management districts:
The Bloomington District
As of December 31, 1998, the Bloomington District passed approximately
77,400 homes and served approximately 58,400 customers. Bloomington, located 45
miles south of Indianapolis, is the home of Indiana University. Besides the
University, major employers include United Technology and General Electric. The
median household income for the area is approximately $36,000 per year, while
the median family income is approximately $45,500 per year.
Interactive digital video was launched in Bloomington by AT&T BIS prior to
the formation of Insight Indiana. Upon completion of our rebuild, we will
migrate the Bloomington digital customers to our Digital Gateway service. The
Bloomington system is expected to begin deploying @Home by the end of 1999.
Bloomington and parts of Monroe County are expected to be rebuilt to 750 MHz by
the end of 1999 with the remainder of the district projected to be rebuilt to
750 MHz by the end of 2000.
The Evansville District
As of December 31, 1998 on a pro forma basis, the Evansville District
passed approximately 121,600 homes and served 73,200 customers. The median
household income for the area is approximately $34,800 per year, while the
median family income is approximately $44,700 per year.
An affiliate of SIGECO is overbuilding a portion of our Evansville system.
SIGECO has obtained franchises to provide cable television service in the City
of Evansville and neighboring areas and commenced service in April 1999. SIGECO
is currently offering cable service to an estimated 3,000 customers in our
service area and is expected to make the service available to additional homes
and has announced plans to offer telephone and data service by late summer or
early fall of 1999. We have responded to this competition by advancing our
rebuild plans for Evansville. We are rebuilding the network to 750 MHz and plan
to introduce the Digital Gateway service, including video-on-demand service and
the LocalSource interactive information service, by late summer of 1999. We also
plan to launch the @Home service in Evansville during the third quarter of 1999.
The Evansville system recently won a competitive bid to supply a data
network to the Evansville school system. We are working with TCI Network
Solutions to supply this data network and have signed a five-year contract to
connect 42 K-12 schools to the data network. Our share of the revenues from this
contract will be $500,000 over the life of the contract.
The Jeffersonville District
As of December 31, 1998, the Jeffersonville District passed approximately
41,500 homes and served approximately 24,600 customers, including the Scottsburg
system, which passed 7,200 homes and served approximately 4,500 customers. The
Jeffersonville District is in the Louisville, Kentucky metropolitan area.
Jeffersonville's economy is largely influenced by Louisville, Kentucky's largest
city, which has developed a diverse economy by adding major service companies
such as UPS and Columbia Healthcare to its strong manufacturing base whose major
employers include General Electric and Ford Motor Company. The median household
income for the area is approximately $35,000 per year, while the median family
income is approximately $42,900 per year. We launched @Home in the
Jeffersonville system in April 1999. Our Digital Gateway service is expected to
be launched in the second half of 1999.
The Lafayette District
As of December 31, 1998, the Lafayette District passed approximately
102,500 homes and served approximately 77,100 customers, including the Lafayette
District is the Portland system, which passed approximately 11,100 homes and
served approximately 6,400 customers. Lafayette is the home of Purdue
University. Besides the University, major employers include Great Lakes
Chemical, Lafayette Life Insurance, General Motors and Delco Remy. The median
household income for the area is approximately $38,000 per year, while the
median family income is approximately $49,300 per year.
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Most of the Lafayette, Kokomo, Fowler and Hartford City systems are
expected to be rebuilt to 750 MHz by the end of 1999, with a few areas being
finished in 2000. We launched @Home in the Lafayette market in May 1999 and
expect to launch @Home in the remaining markets by the end of 1999. AT&T BIS
launched a digital service in the Kokomo market in late 1998. We plan to migrate
those customers to our Digital Gateway service in 2000, simultaneously with the
launch throughout the district of our Digital Gateway service.
The Anderson District
As of December 31, 1998, the Anderson District passed approximately 150,500
homes and served approximately 100,800 customers largely in the suburban
communities near Indianapolis. Indianapolis is the state capital of Indiana and
is the twelfth largest city in the United States. Major employers include
General Motors, Eli Lily and Belden Wire and Cable. The median household income
for the area is approximately $43,900 per year, while the median family income
is approximately $52,700 per year.
We launched @Home in Noblesville in early May 1999 and plan to extend the
offering throughout the district by the end of 1999. AT&T BIS launched a Digital
Gateway service in several of the markets in 1998, and we plan to migrate those
customers to our Digital Gateway service in 2000, simultaneously with the launch
throughout the district of our Digital Gateway service.
The Managed Indiana Systems
We expect to enter into a five-year agreement with AT&T BIS to provide
consulting services to cable television systems being acquired by AT&T BIS,
which systems as of December 31, 1998 passed approximately 159,600 homes and
served approximately 112,800 customers in the State of Indiana. AT&T BIS will
acquire these systems from Charter Communications as part of a series of swaps
between AT&T BIS, Charter and InterMedia Partners IV, L.P. We anticipate that
the acquisition of these systems by AT&T BIS will be consummated during the
fourth quarter of 1999 and that we will earn an annual fee of 3% of gross
revenues in exchange for providing consulting services. For the year ended
December 31, 1998, the Managed Indiana Systems had revenues of $48.8 million.
Nearly all of the Managed Indiana Systems are contiguous to the Indiana Systems.
THE NATIONAL SYSTEMS
The National Systems passed approximately 148,900 homes and served
approximately 86,900 customers on a pro forma basis as of December 31, 1998. The
National Systems have three major clusters: Rockford, Illinois; Griffin,
Georgia; and Claremont, California.
In addition to our traditional video and data services, we intend to begin
offering telecommunication services in 2000.
Rockford, Illinois
As of December 31, 1998, the Rockford system passed approximately 99,700
homes and served approximately 65,200 customers from a single headend. Rockford
is Illinois' second largest city. Major employers in the Rockford metropolitan
area include: Chrysler Corporation, Rockford Health System, Sundstrand
Corporation and Swedish American Health Systems. The median household income for
the area is approximately $39,300 per year, while the median family income is
approximately $47,800 per year.
Immediately after acquiring the system in January 1998, we began rebuilding
the existing channel-bound, 42 channel system to 750 MHz. We are adding 11
analog channels and launching our digital cable service on a node-by-node basis
as the network is activated. We launched our Digital Gateway service during
February 1999 to approximately 3,500 homes. We expect to introduce @Home
high-speed data services to our Rockford customers during the third quarter of
1999. We plan to complete the rebuild of the Rockford system by the end of 1999.
51
Griffin, Georgia
As of December 31, 1998, the Griffin system passed approximately 19,200
homes and served approximately 12,700 customers from a single headend. Major
employers in the area include Springs Industries, NACOM and William Carter
Apparel. The median household income for the area is approximately $34,700 per
year, while the median family income is approximately $40,500 per year.
We launched our digital service in the Griffin system in December 1998,
bringing many new entertainment options to our customers. Being a smaller market
that still has unused channel capacity, we launched a scaled-down version of our
Digital Gateway service, similar to our full digital service except that it is
not interactive. Despite a more limited product offering, we have achieved
significant success with over 10% penetration within four months of launch
generating incremental revenue per month of over $16.00 per digital customer.
The Griffin launch was the first digital deployment of our multi-tiered approach
in the country. We have no current plans to launch @Home in the Griffin market.
Instead of launching a fully two-way data service, we are considering a cable
modem technology that will utilize telephone lines for upstream communications.
Claremont, California
As of December 31, 1998, the Claremont systems passed approximately 30,000
homes and served approximately 9,000 customers from three headends. The largest
portion of the system is in Claremont, which is located 30 miles east of Los
Angeles on the lower slopes of the San Gabriel Mountains. The community is
primarily residential with about 90% of the city's structures used as
residences. Claremont is the home of the Claremont Colleges, which includes
Claremont McKenna College, Harvey Mudd College, Pitzer College, Pomona College,
Scripps College and the Claremont Graduate University. The community has very
attractive demographics, with more than 50% of the residents holding a
bachelor's degree and a graduate or professional degree. Besides the Colleges,
major employers in the Claremont area include the Claremont Unified School
District, Bausch & Lomb and Hi-Rel Connectors, Inc. The median household income
for the area is approximately $38,200 per year, while the median family income
is approximately $42,400 per year. The smaller portion of the system serves
Artesia and Bell/Cudehy, California, which are also located east of Los Angeles.
We are currently contemplating a digital launch in Claremont which will be
similar to our digital launch in Griffin, Georgia.
THE COLUMBUS SYSTEM
As of December 31, 1998, the Columbus System passed approximately 171,800
homes and served approximately 87,600 customers from a single headend. The
system is located in the eastern portion of the City of Columbus and surrounding
suburban communities. We own 75% of the non-voting common membership interests
of Insight Ohio, the entity that was formed to acquire the Columbus System.
Coaxial owns the remaining 25% of the non-voting common membership interests and
100% of the voting preferred membership interests. We serve as manager of
Insight Ohio and of the three shareholders of Coaxial, and thereby have
effective control of the management and affairs of Coaxial, its shareholders and
Insight Ohio. See "Description of Recent Transactions--The Transactions to
Acquire the Columbus System."
The City of Columbus is the 34th largest designated market area, is the
capital of Ohio and is the home of Ohio State University. In addition to the
state government and university, the Columbus economy is well diversified with
the significant presence of prominent companies such as The Limited, Merck,
Wendy's, Nationwide Insurance, Borden and Worthington Industries. The area's
strong economy provides for a well-paid employment base with an unemployment
rate of approximately 2.9%. The median household income for our service area is
approximately $47,800 per year, while the median family income is approximately
$57,000 per year.
The Columbus System enjoys a high level of population growth in the
suburban communities east of Columbus. Over the past three years, more than
14,600 homes passed have been added to the Columbus System through network
extensions, primarily in new housing developments. This represents a 3.1%
compound annual growth rate of homes passed for the Columbus System, which we
believe is one of the highest levels in the cable television industry for a
major cable system.
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In 1996, Ameritech obtained a citywide cable television franchise for the
City of Columbus. Ameritech has built its citywide franchise, both in our
service area and in the Time Warner service area on the west side of Columbus.
We and Time Warner service virtually distinct areas and therefore do not compete
with one another. The areas of the Columbus System served by both Insight and
Ameritech pass approximately 120,000 homes, representing 71% of the Columbus
System's total homes passed.
We are currently rebuilding the Columbus System to 870 MHz. We expect to
begin servicing customers from our rebuilt network by June 1999. We will begin
launching our Digital Gateway service, including DIVA's video-on-demand service
and the LocalSource interactive information service, during the second quarter
of 1999. We expect to launch a high-speed data service during the fourth quarter
of 1999.
When we acquired the Columbus System, we implemented a strategy to end deep
discounting as a defense against Ameritech. We believed that a relatively small
customer loss, caused by discontinuing discounts, would be preferable in
exchange for increasing the average monthly revenue per customer. As a result of
this strategy, from June 30, 1998 to December 31, 1998, the average monthly
revenue per customer increased from approximately $43.30 to $46.85, while the
number of customers decreased from approximately 91,100 to 88,600. Ameritech
seems to have responded to this strategy by recently announcing a $1.75 increase
in the price of their standard cable service and a $0.26 increase in the price
of pay-per-view movies.
As with our National, Indiana and Kentucky Systems, we intend to launch a
voice telephony alternative to Ameritech through our joint venture with AT&T.
Time Warner, the other major cable television provider in the market, also has
announced a joint venture agreement with AT&T.
THE KENTUCKY SYSTEMS
In April 1999, we entered into an agreement with Blackstone Capital, ICM
and a subsidiary and related party of AT&T BIS to purchase their combined 50%
interest in InterMedia VI for $327.2 million, subject to adjustment, which was
calculated based upon InterMedia's total outstanding debt, which was $730.4
million as of February 28, 1999. We also entered into an agreement with AT&T
BIS, whereby upon consummation of the Kentucky Acquisition we will each own a
50% interest, and we will manage and operate the Kentucky Systems. InterMedia VI
was formed by AT&T BIS, Blackstone Capital and ICM to acquire cable television
systems which, as of December 31, 1998, served approximately 424,000 basic
customers and passed approximately 651,000 homes primarily in four operating
clusters in the State of Kentucky. InterMedia VI is the largest cable operator
in the state, with over 95% of its systems located in four of the five largest
cities in the state: Louisville; Lexington; Covington; and Bowling Green.
Presently, more than 87% of the systems' customers are served by four headends,
which is precisely consistent with our operating strategy to own highly
clustered properties.
In addition to our traditional video and data services, we intend to begin
offering telecommunications services in 2000.
Summary statistics for the Kentucky Systems are as follows:
Louisville
On a pro forma basis, as of December 31, 1998, the Louisville system passed
approximately 362,400 homes and served approximately 234,800 customers.
Louisville is Kentucky's largest city and is located in the northern region of
the state, bordering Indiana. Louisville is located within a day's drive of
nearly 50% of the United States population, which makes it an important
crossroads for trade and business. Major employers in the Louisville
metropolitan area include Humana, UPS, General Electric and Ford. The median
household income for the area is approximately $38,100 while the median family
income is approximately $46,100.
The Louisville system is currently undergoing a rebuild and we intend to
serve all of its customers with two-way 750 MHz hybrid fiber coaxial cable by
December 31, 1999. The system is also in the process of interconnecting six
headends, which will allow the entire system to be served from a single headend.
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InterMedia VI launched its digital service in Louisville in November 1998.
The service already has approximately 4,600 customers. The Louisville system
recently launched the @Home service.
Lexington
As of December 31, 1998, the Lexington system passed approximately 115,700
homes and served approximately 79,900 customers from a single headend. Lexington
is Kentucky's second largest city, located in the Blue Grass region, in the
central part of the state. Major employers in the Lexington area include the
University of Kentucky, Toyota and Lexmark International. The median household
income for the area is approximately $40,400, while the median family income is
approximately $51,500.
The Lexington system is currently undergoing a rebuild and we intend to
serve all of its customers with two-way 750 MHz hybrid fiber coaxial cable by
December 31, 1999. InterMedia VI launched its digital service in Lexington in
October of 1998 and has achieved penetration levels of 16% in the areas where
digital is available. The Lexington system has launched the @Home service.
Covington
As of December 31, 1998, the Covington system passed approximately 119,200
homes and served approximately 71,300 customers from a single headend. Covington
is Kentucky's fifth largest city. Major employers in the Covington area include
Delta, Toyota, Citicorp and DHL. The median household income for the area is
approximately $42,700, while the median family income is approximately $51,500.
The Covington system is currently undergoing a rebuild and is expected to
serve all of its customers with two-way 750 MHz hybrid fiber coaxial cable by
December 31, 1999. The Covington system recently launched the @Home service.
There is a small overbuild by FrontierVision of the Covington system relating to
approximately 7,400 homes in Boone County. Pursuant to an agreement with
FrontierVision, we will aquire the FrontierVision Covington customers, including
those located in the overbuild.
Bowling Green
As of December 31, 1998, the Bowling Green system passed approximately
31,900 homes and served approximately 21,800 customers from a single headend.
Bowling Green is located 120 miles south of Louisville, 110 miles southwest of
Lexington and 70 miles north of Nashville, Tennessee. Bowling Green is the
fourth largest city in Kentucky and is the economic center for Southcentral
Kentucky and is the home of Western Kentucky University. Major employers in the
Bowling Green area include Fruit of the Loom, Camping World, Desa International
and Holley Replacement Parts. The median household income for the area is
approximately $34,500, while the median family income is approximately $41,800.
The Bowling Green system is fully rebuilt to two-way 750 MHz hybrid fiber
coaxial cable. Recently, digital and @Home services have been launched in
Bowling Green. We plan to launch our Digital Gateway service in 2000 and migrate
those customers currently served by the existing digital service to our Digital
Gateway service.
Other Kentucky Systems
InterMedia VI has entered into an agreement to exchange the Danville
system, which passes 21,500 homes and serves 16,500 customers, for
FrontierVision's Carrollton, Kentucky system. Consummation of this exchange
agreement is subject to various conditions.
CUSTOMER RATES
Monthly customer rates for services vary from market to market. As of
December 31, 1998, our average monthly basic service rate for residential
customers was $8.76, monthly classic service rates for residential customers
ranged from $11.43 to $20.00, and per channel premium service rates (not
including special promotions) ranged from $5.95 to $15.28 per service. As of
December 31, 1998, the weighted average revenue (including special promotions)
for our monthly combined basic and classic service was approximately $24.00,
which is below the national average of $27.43 as reported by Paul Kagan &
Associates.
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A one-time installation fee, which we may reduce during promotional
periods, is charged to new customers, as well as reconnected customers. Insight
charges monthly fees for set top boxes and remote control devices. We also
charge administrative fees for delinquent payments for service. Customers are
free to discontinue service at any time without additional charge and may be
charged a reconnection fee to resume service. Commercial customers, such as
hotels, motels and hospitals, are charged negotiated monthly fees and a
non-recurring fee for the installation of service. Multiple dwelling unit
accounts may be offered a bulk rate in exchange for single-point billing and
basic service to all units.
SALES AND MARKETING
We seek to increase penetration levels for our basic service, classic
service, premium channels and enhanced products and services through a variety
of marketing, branding and promotional strategies. We seek to maximize our
revenue per customer through the use of packaging strategies to market premium
services and to develop and promote niche programming services. We regularly use
targeted telemarketing campaigns to sell these packages and services to our
existing customer base. Our customer service representatives are trained and
given the support to use their daily contacts with customers as opportunities to
sell our new service offerings.
Due to the nature of the communities we serve, we are able to market our
services in ways not typically used by urban cable operators. We can market
products and services to our customers at our local offices where many of our
customers pay their cable bills in person. Examples of our in-store marketing
include the promotion of premium services as well as point-of-purchase displays
that will allow customers to experience our high-speed Internet service and
digital products. We aggressively promote our services utilizing both broad and
targeted marketing tactics, including outbound telemarketing, direct mail,
cross-channel promotion, print and broadcast.
We build awareness of the Insight brand through advertising campaigns and
strong community relations. As a result of our branding efforts and consistent
service standards, we believe we have developed a reputation for quality and
reliability. We also believe that our marketing strategies are particularly
effective due to our regional clustering, and market significance which enables
us to reach a greater number of both current and potential customers in an
efficient, uniform manner.
Prior to the introduction of telephony service by the Telephony Joint
Venture we intend to aggressively pursue co-marketing campaigns with AT&T. We
expect to launch a campaign in Evansville, Indiana whereby customers subscribing
to the digital service who are also AT&T long distance customers will realize
savings off of their cable and long distance provided they remain customers of
us and AT&T. We expect to rollout similar programs in other systems until we are
able to provide the complete package of entertainment, information and telephony
products on a bundled basis.
PROGRAMMING SUPPLY
Most cable companies purchase their programming product directly from the
program networks by entering into a contractual relationship with the program
supplier. The vast majority of these program suppliers offer the cable operator
license fee rate cards with size-based volume discounts and other financial
incentives, such as launch and marketing support and cross-channel advertising.
Due to our different strategic partnerships, we have had the benefit of
securing our programming from a variety of sources. Since 1986, our partnership
with MediaOne has enabled us to purchase our core program product, for both our
National Systems and the Columbus System, at MediaOne's cost. While these rates
have been more favorable due to MediaOne's overall size, we have been very
aggressive in successfully negotiating additional programming deals directly
with our suppliers, depending upon our respective systems' needs and location.
In anticipation of redeeming MediaOne's interest in Insight, we have
continued to secure competitive programming agreements, independent of our
current MediaOne partnership. While it is expected that certain product license
fees will incur increases (e.g., sports) due to the loss of MediaOne's volume
benefit, we believe that through a combination of our own market purchasing
power, the possibility of new strategic
55
MSO alliances and the utilization of programming co-operatives, such as
Tele-synergy and the National Cable Television Cooperative, we will be able to
secure rates which will be consistent with the cable industry average. No
assurance can be given that we will be able to secure such rates. Programming
co-operatives leverage their cable members' total service customer size to
maximize volume discounts to purchase programming at reduced license fees.
Currently there are over 130 cable networks competing for carriage on our
analog and digital platforms. We have continued to leverage both our systems'
analog rebuilds and newly deployed digital packages as an incentive to our
suppliers to secure long term programming deals with reasonable price structures
and other creative financial arrangements to offset license fee increases.
Because of our relationship with AT&T BIS, we will have the right to
purchase programming services for the Indiana Systems and, upon consummation of
the Kentucky Acquisition, for the Kentucky Systems, directly through AT&T BIS'
programming supplier Satellite Services, Inc. ("SSI"). We believe that SSI has
attractive programming costs. Additionally, given the clustering of our systems
in the Midwest, we have been successful in affiliating with regionally based
programming products such as sports and news, at lower than average license
fees.
COMMITMENT TO COMMUNITY RELATIONS
We believe that maintaining strong community relations will continue to be
an important factor in ensuring our long-term success. Our community-oriented
initiatives include educational programs and the sponsorship of programs and
events recognizing outstanding local citizens. In addition, certain members of
our management team host community events for political and business leaders as
well as representatives of the local media where they discuss the operations of
Insight and recent developments in the telecommunications industry. We have
received numerous awards recognizing our ongoing community relations. We believe
that our ongoing community relations initiatives result in consumer and
governmental goodwill and name recognition, which have increased customer
loyalty and will likely facilitate any future efforts to provide new
telecommunications services.
We encourage local management to take a leadership role in community and
civic activities. Over the years, our systems have received numerous awards in
recognition of their efforts to support local causes and charities as well as
programs that encourage a better way of life in the communities they serve.
Awards have been received from such diverse organizations as the Epilepsy
Foundation, the YMCA Black Achievers, the Domestic Violence Center and Project
Welcome Home, which provides assistance to less fortunate people in the
community.
The Griffin, Georgia system recently received the Star Award from the Cable
Association of Georgia for the production and airing of "Stay in School" and
"Parents Volunteer" public service announcements. The Rockford, Illinois system
received awards and recognition from 13 community organizations in 1998. Cable
industry recognition and awards for excellence in marketing and programming have
been received by several of our systems including the Columbus System and the
Lafayette, Indiana system.
All of our systems provide ongoing support for Cable in the Classroom, an
industry initiative that earns recognition both locally and nationally for its
efforts in furthering the education of children.
One of the advantages a local cable operator has over nationally
distributed competitors is its ability to develop local programming. To further
strengthen community relations and differentiate us from DBS and other
multichannel video providers, we provide locally produced and oriented
programming. Several of our systems have full production capabilities, with
in-house and/or mobile production studios to create local content. To attract
viewers, we offer a broad range of local programing alternatives, including
community information, local government proceedings and local specialty interest
shows. In certain markets, we are the exclusive broadcaster of local college and
high school sporting events, which we believe provides unique programming and
builds customer loyalty. We believe that our emphasis on local programming
creates significant opportunities for increased advertising revenues. Locally
originated programming will also play an integral role in the deployment of our
new and enhanced products and services. Customized local content will
56
be available to our customers through our digital cable and high-speed data
services, as users will be able to access local information, such as weather
reports, school closings and community event schedules on-demand.
FRANCHISES
Cable television systems are constructed and operated under fixed-term
non-exclusive franchises or other types of operating authorities (collectively
referred to herein as "franchises") that are granted by either local
governmental or centralized state authorities. These franchises typically
contain many conditions, such as:
o Time limitations on commencement and completion of construction;
o Conditions of service, including the number of channels, the provision of
free service to schools and certain other public institutions;
o The maintenance of insurance and indemnity bonds; and
o The payment of fees to communities.
Certain provisions of these local franchises are subject to limits imposed by
federal law.
As of January 31, 1999 on a pro forma basis, we held 392 franchises in the
aggregate, consisting of 158 in the Indiana Systems, 15 in the National Systems,
28 in the Columbus System and 191 in the Kentucky Systems. As of the same date,
no such franchises accounted for more than 5% of our total revenues. Many of
these franchises require the payment of fees to the issuing authorities of 3% to
5% of gross revenues (as defined by each franchise agreement) from the related
cable system. The 1984 Cable Act prohibits franchising authorities from imposing
annual franchise fees in excess of 5% of gross annual revenues and also permits
the cable television system operator to seek renegotiation and modification of
franchise requirements if warranted by changed circumstances that render
performance commercially impracticable.
The following table summarizes information relating to the year of
expiration of our franchises as of January 31, 1999 on a pro forma basis:
PERCENTAGE OF NUMBER OF PERCENTAGE OF
NUMBER OF TOTAL BASIC TOTAL BASIC
YEAR OF FRANCHISE EXPIRATION FRANCHISES** FRANCHISES CUSTOMERS** CUSTOMERS
- ----------------------------------------- ------------ ------------- ----------- -------------
Expired*................................. 6 1.0% 20,576 2.2%
1999..................................... 10 3.5 12,218 1.3
2000..................................... 21 9.5 39,624 4.3
2001..................................... 13 5.0 21,842 2.4
2002..................................... 22 10.4 50,536 5.5
After 2002............................... 320 70.6 781,512 84.3
------ ----- ------- -----
Total.................................... 392 100.0% 926,308 100.0%
------ ----- ------- -----
------ ----- ------- -----
- ------------------
* We operate these franchises on a month-to-month basis. We are in the process
of renewing them.
** Does not reflect the Managed Indiana Systems, and does not include the
proposed exchange of InterMedia VI's Danville, Kentucky system for
FrontierVision's Carrollton, Kentucky system.
The Cable Acts provide, among other things, for an orderly franchise
renewal process which limits a franchising authority's ability to deny a
franchise renewal if the incumbent operator follows prescribed renewal
procedures. In addition, the Cable Acts established comprehensive renewal
procedures which require, when properly elected by an operator, that an
incumbent franchisee's renewal application be assessed on its own merits and not
as part of a comparative process with competing applications.
We believe that our cable systems generally have good relationships with
their respective franchise authorities. We never had a franchise revoked or
failed to have a franchise renewed.
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COMPETITION
Cable systems face increasing competition from alternative methods of
receiving and distributing their core video business. Both wireline and wireless
competitors have made inroads in competing against incumbent cable operators.
The extent to which a cable operator is competitive depends, in part, upon its
ability to provide to customers, at a reasonable price, a greater variety of
programming and other communications services than are available off-air or
through alternative delivery sources and upon superior technical performance and
customer service.
The 1996 Telecom Act makes it easier for local exchange telephone companies
and others to provide a wide variety of video services competitive with services
provided by cable systems. Various local exchange telephone companies currently
are providing video services within and outside their telephone service areas
through a variety of distribution methods, including the deployment of broadband
cable networks and the use of wireless transmission facilities. Local exchange
telephone companies in various states have either announced plans, obtained
local franchise authorizations or are currently competing with certain of our
cable communications systems. Currently, our most significant wireline
competition is from an affiliate of Ameritech Corporation, which has been
awarded cable franchises in the Columbus, Ohio metropolitan area that are
currently served by us as the incumbent cable operator. Local exchange telephone
companies and other companies also provide facilities for the transmission and
distribution to homes and businesses of interactive computer-based services,
including the Internet, as well as data and other non-video services. The
ability of local exchange telephone companies to cross-subsidize video, data and
telephony services also poses some threat to cable operators.
The 1996 Telecom Act may exempt some of our competitors from regulation as
cable systems. The 1996 Telecom Act amends the definition of a "cable system"
such that providers of competitive video programming are only regulated and
franchised as "cable systems" if they use public rights-of-way. Thus, a broader
class of entities providing video programming (including SMATV system operators)
may be exempt from regulation as cable television systems under the 1996 Telecom
Act. This exemption may give these entities a competitive advantage over us.
Congress has enacted legislation and the FCC has adopted regulatory
policies providing a more favorable operating environment for new and existing
technologies, in particular DBS operators, that have the potential to provide
increased competition to cable systems. We expect satellite companies to be
permitted to retransmit local television signals in the near future which will
eliminate one of the objections of consumers about switching to satellites.
DBS systems use digital video compression technology to increase the
channel capacity of their systems. DBS programming is currently available to
individual households, condominiums and apartment and office complexes through
conventional, medium and high-power satellites. High-power DBS services are
currently being provided by DIRECTV, Inc. and EchoStar Communications
Corporation, and medium-power service is being provided by PrimeStar, Inc.
Recently announced transactions would result in DIRECTV and EchoStar obtaining
additional high-power DBS channel capacity through the acquisition of other DBS
facilities. In addition, DIRECTV has acquired PrimeStar's medium-power DBS
business. If these transactions are approved, DIRECTV and EchoStar will be able
to significantly increase the number of channels on which they can provide
programming to customers. DBS has certain advantages over cable systems that
were not rebuilt, such as increased channel capacity and digital picture
quality. Alternatively, its disadvantages currently include expensive up-front
customer equipment and installation costs and a lack of local programming and
service.
Cable operators also compete with wireless program distribution services
such as analog and digital multichannel, multipoint distribution service,
commonly known as MMDS, which use microwave frequencies to transmit video
programming over-the-air to customers. There are MMDS operators who are
authorized to provide or are providing broadcast and satellite programming to
customers in areas served by our cable systems. Additionally, the FCC adopted
regulations allocating frequencies in the 28 GHz band for a new service called
local multipoint distribution service, commonly known as LMDS, that can be used
to provide video services similar to MMDS. The FCC held spectrum auctions for
LMDS licenses in February-March 1998, and scheduled a further auction which
commenced in April 1999.
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Other new technologies may become competitive with services that cable
communications systems can offer. Advances in communications technology, as well
as changes in the marketplace and the regulatory and legislative environment are
constantly occurring. Thus, we cannot predict the effect of ongoing or future
developments on the cable communications industry or on our operations.
The most competitive alternatives to the incumbent cable operator are DBS
operators, MMDS operators and direct wireline overbuilders.
o DBS has more channels and better picture and sound quality over cable
operators who have not rebuilt their systems nor added digital. However,
DBS does not offer locally produced programming, nor does it have a
significant local presence in the community. In addition, DBS is more
expensive than cable, especially if it is desired to be on more than one
TV in the household. Finally, DBS does not have the same full two-way
capability, which we believe will limit its ability to compete in a
meaningful way in high-speed data and voice telephony.
o MMDS offers a lower cost alternative to DBS, but serious transmission
limitations caused by the need to have line of sight access to customers
have hampered its growth. MMDS is also not currently capable of
delivering a fully two-way alternative to cable's high-speed data and has
no immediate plans to deliver voice telephony. Hybrid platforms, using
the telephone for upstream, have certain speed and technical limitations
when compared to a broadband network.
Cable television systems are operated under non-exclusive franchises
granted by local authorities thereby allowing more than one cable system to be
built in the same area. Although the number of municipal and commercial
overbuild cable systems is small, the potential profitability of a cable system
is adversely affected if the local customer base is divided among multiple
systems. Additionally, constructing a competing cable system is a capital
intensive process which involves a high degree of risk. We believe that in order
to be successful, a competitor's overbuild would need to be able to serve the
homes in the overbuilt area on a more cost-effective basis than we can. Any such
overbuild operation would require either significant access to capital or access
to facilities already in place that are capable of delivering cable television
programming.
EMPLOYEES
As of March 31, 1999, we employed 1,032 full-time employees and 53
part-time employees. We consider our relations with our employees to be good.
Other than 21 employees, none of our employees are subject to collective
bargaining agreements. Such 21 employees are represented by Local 4900 of the
Communications Workers of America, AFL-CIO-CLC. Their union contract expired on
October 30, 1998 and we are currently negotiating a new contract.
PROPERTIES
A cable television system consists of three principal operating components:
o The first component, the signal reception processing and originating
point called a "headend," receives television, cable programming service,
radio and data signals that are transmitted by means of off-air antennas,
microwave relay systems and satellite earth systems. Each headend
includes a tower, antennae or other receiving equipment at a location
favorable for receiving broadcast signals and one or more earth stations
that receives signals transmitted by satellite. The headend facility also
houses the electronic equipment which amplifies, modifies and modulates
the signals, preparing them for passage over the system's network of
cables.
o The second component of the system, the distribution network, originates
at the headend and extends throughout the system's service area. A cable
system's distribution network consists of microwave relays, coaxial or
fiber optic cables placed on utility poles or buried underground and
associated electronic equipment.
o The third component of the system is a "drop cable," which extends from
the distribution network into each customer's home and connects the
distribution system to the customer's television set.
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We own and lease parcels of real property for signal reception sites
(antenna towers and headends), microwave complexes and business offices
(including our principal executive offices). In addition, we own our cable
systems' distribution networks, various office fixtures, test equipment and
certain service vehicles. The physical components of our cable systems require
maintenance and periodic rebuilding to keep pace with technological advances. We
believe that our properties, both owned and leased, are in good condition and
are suitable and adequate for our business operations as presently conducted and
as proposed to be conducted.
LEGAL PROCEEDINGS
The Utah systems that we transferred to AT&T BIS in exchange for systems in
Indiana have been named in class actions concerning late fee charges and
practices. Plaintiffs generally allege that the late fees charged by the systems
are not reasonably related to the costs incurred by the cable systems as a
result of the late payment. Plaintiffs seek compensation from the systems for
late fees charged in past periods. The cases are at various stages of
litigation. The exchange agreement between AT&T BIS and Insight states that the
litigation will remain a liability of Insight.
Some of the systems AT&T BIS contributed to Insight Indiana have been named
in class actions concerning late fee charges and practices. Plaintiffs
allegations are similar to those in the litigation concerning the Utah systems.
The cases are at various stages of litigation. The asset contribution agreement
between AT&T BIS and Insight states that the litigation will remain a liability
of AT&T BIS.
We believe there are no other pending or threatened legal proceedings that,
if adversely determined, would have a material adverse effect on us.
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LEGISLATION AND REGULATION
The cable television industry is regulated by the FCC, some state
governments and the applicable local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
Congress and various federal agencies have in the past, and may in the future,
materially affect Insight. The following is a summary of federal laws and
regulations materially affecting the growth and operation of the cable
television industry and a description of certain state and local laws. We
believe that the regulation of the cable television industry remains a matter of
interest to Congress, the FCC and other regulatory authorities. There can be no
assurance as to what, if any, future actions such legislative and regulatory
authorities may take or the effect thereof on Insight.
FEDERAL LEGISLATION
The principal federal statute governing the cable television industry is
the Communications Act. As it affects the cable television industry, the
Communications Act has been significantly amended on three occasions, by the
1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act. The 1996 Telecom
Act altered the regulatory structure governing the nation's telecommunications
providers. It removed barriers to competition in both the cable television
market and the local telephone market. Among other things, it also reduced the
scope of cable rate regulation. In addition, the 1996 Telecom Act required the
FCC to undertake a number of rulemakings to implement the legislation, some of
which have yet to be completed.
FEDERAL REGULATION
The FCC, the principal federal regulatory agency with jurisdiction over
cable television, has adopted regulations covering such areas as cross-ownership
between cable television systems and other communications businesses, carriage
of television broadcast programming, cable rates, consumer protection and
customer service, leased access, indecent programming, programmer access to
cable television systems, programming agreements, technical standards, consumer
electronics equipment compatibility, ownership of home wiring, program
exclusivity, equal employment opportunity, consumer education and lockbox
enforcement, origination cablecasting and sponsorship identification, children's
programming, signal leakage and frequency use, maintenance of various records,
and antenna structure notification, marking and lighting. The FCC has the
authority to enforce these regulations through the imposition of substantial
fines, the issuance of cease and desist orders and/or the imposition of other
administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities often used in connection with cable
operations. A brief summary of certain of these federal regulations as adopted
to date follows.
Rate Regulation
The 1984 Cable Act codified existing FCC preemption of rate regulation for
premium channels and optional non-basic program tiers. The 1984 Cable Act also
deregulated basic cable rates for cable television systems determined by the FCC
to be subject to effective competition. The 1992 Cable Act substantially changed
the previous statutory and FCC rate regulation standards. The 1992 Cable Act
replaced the FCC's old standard for determining effective competition, under
which most cable television systems were not subject to rate regulation, with a
statutory provision that resulted in nearly all cable television systems
becoming subject to rate regulation of basic service. The 1996 Telecom Act
expands the definition of effective competition to cover situations where a
local telephone company or its affiliate, or any multichannel video provider
using telephone company facilities, offers comparable video service by any means
except DBS. Satisfaction of this test deregulates all rates.
For cable systems not subject to effective competition, the 1992 Cable Act
required the FCC to adopt a formula for franchising authorities to assure that
basic cable rates are reasonable; allowed the FCC to review rates for cable
programming service tiers ("CPST") (other than per-channel or per-program
services) in response to complaints filed by franchising authorities and/or
cable customers; prohibited cable television systems from requiring basic
customers to purchase service tiers above basic service in order to purchase
premium services if the system is technically capable of compliance; required
the FCC to adopt regulations to establish, on the basis of actual costs, the
price for installation of cable service, remote controls, converter
61
boxes and additional outlets; and allowed the FCC to impose restrictions on the
retiering and rearrangement of cable services under certain limited
circumstances. The 1996 Telecom Act limited the class of complainants regarding
CPST rates to franchising authorities only, after first receiving two rate
complaints from local customers, and ended FCC regulation of CPST rates on
March 31, 1999. The 1996 Telecom Act also relaxes existing uniform rate
requirements by specifying that such requirements do not apply where the
operator faces effective competition, and by exempting bulk discounts to
multiple dwelling units, although complaints about predatory pricing may be
lodged with the FCC.
The FCC's implementing regulations contain standards for the regulation of
basic service rates. Local franchising authorities and the FCC, respectively,
are empowered to order a reduction of existing rates which exceed the maximum
permitted level for basic services and associated equipment, and refunds can be
required. The FCC adopted a benchmark price cap system for measuring the
reasonableness of existing basic service rates. Alternatively, cable operators
have the opportunity to make cost-of-service showings which, in some cases, may
justify rates above the applicable benchmarks. The rules also require that
charges for cable-related equipment (e.g., converter boxes and remote control
devices) and installation services be unbundled from the provision of cable
service and based upon actual costs plus a reasonable profit. The regulations
also provide that future rate increases may not exceed an inflation-indexed
amount, plus increases in certain costs beyond the cable operator's control,
such as taxes, franchise fees and increased programming costs. Cost-based
adjustments to these capped rates can also be made in the event a cable
television operator adds or deletes channels. There is also a streamlined
cost-of-service methodology available to justify a rate increase on the basic
tier for "significant" system rebuilds or upgrades.
As a further alternative, in 1995 the FCC adopted a simplified
cost-of-service methodology which can be used by "small cable systems" owned by
"small cable companies" (the "small system rules"). A "small system" is defined
as a cable television system which has, on a headend basis, 15,000 or fewer
basic customers. A "small cable company" is defined as an entity serving a total
of 400,000 or fewer basic customers that is not affiliated with a larger cable
television company (i.e., a larger cable television company does not own more
than a 20 percent equity share or exercise de jure control). This small system
rate-setting methodology almost always results in rates which exceed those
produced by the cost-of-service rules applicable to larger cable television
operators. Once the initial rates are set they can be adjusted periodically for
inflation and external cost changes as described above. When an eligible "small
system" grows larger than 15,000 basic customers, it can maintain its then
current rates but it cannot increase its rates in the normal course until an
increase would be warranted under the rules applicable to systems that have more
than 15,000 customers. When a "small cable company" grows larger than 400,000
basic customers, the qualified systems it then owns will not lose their small
system eligibility. If a small cable company sells a qualified system, or if the
company itself is sold, the qualified systems retain that status even if the
acquiring company is not a small cable company. Insight was a "small cable
company" prior to the October 30, 1998 consummation of the AT&T BIS transaction
but it no longer enjoys this status. However, as noted above, the systems with
less than 15,000 customers owned by Insight prior to the consummation of the
AT&T BIS transaction remain eligible for "small system" rate regulation.
Finally, there are regulations which require cable television systems to
permit customers to purchase video programming on a per channel or a per program
basis without the necessity of subscribing to any tier of service, other than
the basic service tier, unless the cable television system is technically
incapable of doing so. Generally, this exemption from compliance with the
statute for cable television systems that do not have such technical capability
is available until a cable television system obtains the capability, but not
later than December 2002.
Carriage of Broadcast Television Signals
The 1992 Cable Act contains signal carriage requirements which allow
commercial television broadcast stations that are "local" to a cable television
system (i.e., the system is located in the station's Area of Dominant Influence)
to elect every three years whether to require the cable television system to
carry the station, subject to certain exceptions, or whether the cable
television system will have to negotiate for "retransmission consent" to carry
the station. The next election between must-carry and retransmission consent
will be October 1, 1999. A cable television system is generally required to
devote up to one-third of
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its activated channel capacity for the carriage of local commercial television
stations whether pursuant to mandatory carriage requirements or the
retransmission consent requirements of the 1992 Cable Act. Local non-commercial
television stations are also given mandatory carriage rights, subject to certain
exceptions, within the larger of: (i) a 50 mile radius from the station's city
of license; or (ii) the station's Grade B contour (a measure of signal
strength). Unlike commercial stations, noncommercial stations are not given the
option to negotiate retransmission consent for the carriage of their signal. In
addition, cable television systems have to obtain retransmission consent for the
carriage of all "distant" commercial broadcast stations, except for certain
"superstations" (i.e., commercial satellite-delivered independent stations such
as WGN). To date, compliance with the "retransmission consent" and "must carry"
provisions of the 1992 Cable Act has not had a material effect on Insight,
although this result may change in the future depending on such factors as
market conditions, channel capacity and similar matters when such arrangements
are renegotiated. The FCC has initiated a rulemaking proceeding on the carriage
of television signals in high definition and digital formats. The outcome of
this proceeding could have a material effect on the number of services that a
cable operator will be required to carry.
Deletion of Certain Programming
Cable television systems that have 1,000 or more customers must, upon the
appropriate request of a local television station, delete the simultaneous or
nonsimultaneous network programming of a distant station when such programming
has also been contracted for by the local station on an exclusive basis. FCC
regulations also enable television stations that have obtained exclusive
distribution rights for syndicated programming in their market to require a
cable television system to delete or "black out" such programming from other
television stations which are carried by the cable television system.
Franchise Fees
Although franchising authorities may impose franchise fees under the 1984
Cable Act, such payments cannot exceed 5% of a cable television system's annual
gross revenues. Under the 1996 Telecom Act, franchising authorities may not
exact franchise fees from revenues derived from telecommunications services,
although they may be able to exact some additional compensation for the use of
public rights-of-way. Franchising authorities are also empowered, in awarding
new franchises or renewing existing franchises, to require cable television
operators to provide cable-related facilities and equipment and to enforce
compliance with voluntary commitments. In the case of franchises in effect prior
to the effective date of the 1984 Cable Act, franchising authorities may enforce
requirements contained in the franchise relating to facilities, equipment and
services, whether or not cable-related. The 1984 Cable Act, under certain
limited circumstances, permits a cable operator to obtain modifications of
franchise obligations.
Renewal of Franchises
The 1984 Cable Act and the 1992 Cable Act establish renewal procedures and
criteria designed to protect incumbent franchisees against arbitrary denials of
renewal and to provide specific grounds for franchising authorities to consider
in making renewal decisions, including a franchisee's performance under the
franchise and community needs. Even after the formal renewal procedures are
invoked, franchising authorities and cable television operators remain free to
negotiate a renewal outside the formal process. Nevertheless, renewal is by no
means assured, as the franchisee must meet certain statutory standards. Even if
a franchise is renewed, a franchising authority may impose new and more onerous
requirements such as rebuilding facilities and equipment, although the
municipality must take into account the cost of meeting such requirements.
Similarly, if a franchising authority's consent is required for the purchase or
sale of a cable television system or franchises, such authority may attempt to
impose burdensome or onerous franchise requirements in connection with a request
for such consent. Historically, franchises have been renewed for cable
television operators that have provided satisfactory services and have complied
with the terms of their franchises. At this time, we are not aware of any
current or past material failure on our part to comply with our franchise
agreements. We believe that we have generally complied with the terms of our
franchises and have provided quality levels of service.
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The 1992 Cable Act makes several changes to the process under which a cable
television operator seeks to enforce its renewal rights which could make it
easier in some cases for a franchising authority to deny renewal. Franchising
authorities may consider the "level" of programming service provided by a cable
television operator in deciding whether to renew. For alleged franchise
violations occurring after December 29, 1984, franchising authorities are no
longer precluded from denying renewal based on failure to substantially comply
with the material terms of the franchise where the franchising authority has
"effectively acquiesced" to such past violations. Rather, the franchising
authority is estopped if, after giving the cable television operator notice and
opportunity to cure, it fails to respond to a written notice from the cable
television operator of its failure or inability to cure. Courts may not reverse
a denial of renewal based on procedural violations found to be "harmless error."
Channel Set-Asides
The 1984 Cable Act permits local franchising authorities to require cable
television operators to set aside certain television channels for public,
educational and governmental access programming. The 1984 Cable Act further
requires cable television systems with thirty-six or more activated channels to
designate a portion of their channel capacity for commercial leased access by
unaffiliated third parties to provide programming that may compete with services
offered by the cable television operator. The 1992 Cable Act requires leased
access rates to be set according to a formula determined by the FCC.
OWNERSHIP
The 1996 Telecom Act repealed the statutory ban against local exchange
carriers ("LECs") providing video programming directly to customers within their
local exchange telephone service areas. Consequently, the 1996 Telecom Act
permits telephone companies to compete directly with operations of cable
television systems. Under the 1996 Telecom Act and FCC rules adopted to
implement the 1996 Telecom Act, LECs may provide video service as broadcasters,
common carriers, or cable operators. In addition, LECs and others may also
provide video service through "open video systems" ("OVS"), a regulatory regime
that may give them more flexibility than traditional cable television systems.
OVS operators (including LECs) can, however, be required to obtain a local cable
franchise, and they can be required to make payments to local governmental
bodies in lieu of cable franchise fees. In general, OVS operators must make
their systems available to programming providers on rates, terms and conditions
that are reasonable and nondiscriminatory. Where carriage demand by programming
providers exceeds the channel capacity of an OVS, two-thirds of the channels
must be made available to programmers unaffiliated with the OVS operator.
The 1996 Telecom Act generally prohibits LECs from purchasing cable
television systems (i.e, any ownership interest exceeding 10%) located within
the LEC's telephone service area, prohibits cable operators from purchasing LECs
whose service areas are located within the cable operator's franchise area, and
prohibits joint ventures between operators of cable television systems and LECs
operating in overlapping markets. There are some statutory exceptions, including
a rural exemption that permits buyouts in which the purchased cable television
system or LEC serves a non-urban area with fewer than 35,000 inhabitants, and
exemptions for the purchase of small cable television systems located in
non-urban areas. Also, the FCC may grant waivers of the buyout provisions in
certain circumstances.
The 1996 Telecom Act makes several other changes to relax ownership
restrictions and regulations of cable television systems. The 1996 Telecom Act
repeals the 1992 Cable Act's three-year holding requirement pertaining to sales
of cable television systems. The statutory broadcast/cable cross-ownership
restrictions imposed under the 1984 Cable Act have been eliminated, although the
FCC's regulations prohibiting broadcast/cable common-ownership currently remain
in effect. The FCC's rules also generally prohibit cable operators from offering
satellite master antenna service separate from their franchised systems in the
same franchise area, unless the cable operator is subject to "effective
competition" there.
The 1996 Telecom Act amends the definition of a "cable system" under the
Communications Act so that competitive providers of video services will be
regulated and franchised as "cable systems" only if they use public
rights-of-way. Thus, a broader class of entities providing video programming may
be exempt from regulation as cable television systems under the Communications
Act.
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Pursuant to the 1992 Cable Act, the FCC has imposed limits on the number of
cable television systems which a single cable television operator can own. In
general, no cable television operator can have an attributable interest in cable
television systems which pass more than 30% of all homes nationwide.
Attributable interests for these purposes include voting interests of 5% or more
(unless there is another single holder of more than 50% of the voting stock),
officerships, directorships and general partnership interests. The FCC has
recently initiated a Notice of Proposed Rulemaking reviewing these cable
attribution rules, including whether various corporate, financial, partnership
or business relationships that confer influence or control over an entity
engaged in provision of cable services should be subject to regulation. The FCC
has stayed the effectiveness of its existing horizontal ownership rules pending
the outcome of the appeal from the U.S. District Court decision holding the
multiple ownership limit provision of the 1992 Cable Act unconstitutional. The
FCC has also recently issued a Notice of Proposed Rulemaking seeking comment on
possible further revisions to the horizontal ownership rules.
The FCC has also adopted rules which limit the number of channels on a
cable television system which can be occupied by national video programming
services in which the entity which owns the cable television system has an
attributable interest. The limit is 40% of the first 75 activated channels.
The 1996 Telecom Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utilities Holding Company Act of 1935, as
amended. Electric utilities must establish separate subsidiaries known as
"exempt telecommunications companies" and must apply to the FCC for operating
authority. Due to their resources, electric utilities could be formidable
competitors to traditional cable television systems.
Access to Programming
The 1992 Cable Act imposed restrictions on the dealings between cable
operators and cable programmers. Of special significance from a competitive
business posture, the 1992 Cable Act precludes video programmers affiliated with
cable companies from favoring their affiliated cable operators over competitors
and requires such programmers to sell their programming to other multichannel
video distributors. This provision limits the ability of vertically integrated
cable programmers to offer exclusive programming arrangements to cable
companies.
Privacy
The 1984 Cable Act imposes a number of restrictions on the manner in which
cable television operators can collect and disclose data about individual system
customers. The statute also requires that the system operator periodically
provide all customers with written information about its policies regarding the
collection and handling of data about customers, their privacy rights under
federal law and their enforcement rights. In the event that a cable television
operator was found to have violated the customer privacy provisions of the 1984
Cable Act, it could be required to pay damages, attorneys' fees and other costs.
Under the 1992 Cable Act, the privacy requirements were strengthened to require
that cable television operators take such actions as are necessary to prevent
unauthorized access to personally identifiable information.
Franchise Transfers
The 1992 Cable Act requires franchising authorities to act on any franchise
transfer request submitted after December 4, 1992 within 120 days after receipt
of all information required by FCC regulations and by the franchising authority.
Approval is deemed to be granted if the franchising authority fails to act
within such period.
Technical Requirements
The FCC has imposed technical standards applicable to all classes of
channels which carry downstream National Television System Committee ("NTSC")
video programming. The FCC also has adopted additional standards applicable to
cable television systems using frequencies in the 108 to 137 MHz and 225 to 400
MHz bands in order to prevent harmful interference with aeronautical navigation
and safety radio services and has also established limits on cable television
system signal leakage. Periodic testing by cable television
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operators for compliance with the technical standards and signal leakage limits
is required and an annual filing of the results of these measurements is
required. The 1992 Cable Act requires the FCC to periodically update its
technical standards to take into account changes in technology. Under the 1996
Telecom Act, local franchising authorities may not prohibit, condition or
restrict a cable television system's use of any type of customer equipment or
transmission technology.
The FCC has adopted regulations to implement the requirements of the 1992
Cable Act designed to improve the compatibility of cable television systems and
consumer electronics equipment. These regulations, among other things, generally
prohibit cable television operators from scrambling their basic service tier.
The 1996 Telecom Act directs the FCC to set only minimal standards to assure
compatibility between television sets, VCRs and cable television systems, and to
rely on the marketplace. Pursuant to the 1992 Cable Act, the FCC has adopted
rules to assure the competitive availability to consumers of customer premises
equipment, such as converters, used to access the services offered by cable
television systems and other multichannel video programming distributors
("MVPD"). Pursuant to those rules, consumers are given the right to attach
compatible equipment to the facilities of their MVPD so long as the equipment
does not harm the network, does not interfere with the services purchased by
other customers and is not used to receive unauthorized services. As of July 1,
2000, MVPDs (other than DBS operators) are required to separate security from
non-security functions in the customer premises equipment which they sell or
lease to their customers and offer their customers the option of using component
security modules obtained from the MVPD with set-top units purchased or leased
from retail outlets. As of January 1, 2005, MVPDs will be prohibited from
distributing new set-top equipment integrating both security and non-security
functions to their customers.
Pursuant to the 1992 Cable Act, the FCC has adopted rules implementing an
Emergency Alert System ("EAS"). The rules require all cable television systems
to provide an audio and video EAS message on at least one programmed channel and
a video interruption and an audio alert message on all programmed channels. The
audio alert message is required to state which channel is carrying the full
audio and video EAS message. The FCC rules permit cable television systems
either to provide a separate means of alerting persons with hearing disabilities
of EAS messages, such as a terminal that displays EAS messages and activates
other alerting mechanisms or lights, or to provide audio and video EAS messages
on all channels. Cable television systems with 10,000 or more basic customers
per headend were required to install EAS equipment capable of providing audio
and video EAS messages on all programmed channels by December 31, 1998. Cable
television systems with 5,000 or more but fewer than 10,000 basic customers per
headend will have until October 1, 2002 to comply with that requirement. Cable
television systems with fewer than 5,000 basic customers per headend will have a
choice of providing either a national level EAS message on all programmed
channels or installing EAS equipment capable of providing audio alert messages
on all programmed channels, a video interrupt on all channels, and an audio and
video EAS message on one programmed channel. This must be accomplished by
October 1, 2002.
Inside Wiring; Customer Access
In a 1997 order, the FCC established rules that require an incumbent cable
operator upon expiration of a multiple dwelling unit ("MDU") service contract to
sell, abandon, or remove "home run" wiring that was installed by the cable
operator in a MDU building. These inside wiring rules are expected to assist
building owners in their attempts to replace existing cable operators with new
programming providers who are willing to pay the building owner a higher fee,
where such a fee is permissible. Additionally, the FCC has proposed to restrict
exclusive contracts between building owners and cable operators or other
multichannel video programming distributors. The FCC has also recently issued an
order preempting state, local and private restrictions on over-the-air reception
antennas placed on rental properties in areas where a tenant has exclusive use
of the property, such as balconies or patios. However, tenants may not install
such antennas on the common areas of MDUs, such as on roofs. This new order may
limit the extent to which MDU owners and Insight may enforce certain aspects of
MDU agreements which otherwise would prohibit, for example, placement of DBS
receive antennae in MDU areas (such as apartment balconies or patios) under the
exclusive occupancy of a renter.
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Pole Attachments
The FCC currently regulates the rates and conditions imposed by certain
public utilities for use of their poles unless state public service commissions
are able to demonstrate that they adequately regulate the rates, terms and
conditions of cable television pole attachments. A number of states and the
District of Columbia have certified to the FCC that they adequately regulate the
rates, terms and conditions for pole attachments. Illinois, Kentucky and Ohio,
states in which Insight operates, have made such a certification. In the absence
of state regulation, the FCC administers such pole attachment and conduit use
rates through use of a formula which it has devised. Pursuant to the 1996
Telecom Act, the FCC has adopted a new rate formula for any attaching party,
including cable television systems, which offers telecommunications services.
This new formula will result in higher attachment rates than at present, but
they will apply only to cable television systems which elect to offer
telecommunications services. Any increases pursuant to this new formula will not
begin until 2001, and will be phased in by equal increments over the five
ensuing years. The FCC recently ruled that the provision of Internet services
will not, in and of itself, trigger use of the new formula. The FCC has also
initiated a proceeding to determine whether it should adjust certain elements of
the current rate formula. If adopted, these adjustments could increase rates for
pole attachments and conduit space.
Other FCC Matters
FCC regulation pursuant to the Communications Act also includes matters
regarding a cable television system's carriage of local sports programming;
restrictions on origination and cablecasting by cable television operators;
rules governing political broadcasts; equal employment opportunity; deletion of
syndicated programming; registration procedure and reporting requirements;
customer service; closed captioning; obscenity and indecency; program access and
exclusivity arrangements; and limitations on advertising contained in
nonbroadcast children's programming.
Copyright
Cable television systems are subject to federal copyright licensing
covering carriage of broadcast signals. In exchange for making semi-annual
payments to a federal copyright royalty pool and meeting certain other
obligations, cable television operators obtain a statutory license to retransmit
broadcast signals. The amount of this royalty payment varies, depending on the
amount of system revenues from certain sources, the number of distant signals
carried, and the location of the cable television system with respect to
over-the-air television stations. Any future adjustment to the copyright royalty
rates will be done through an arbitration process to be supervised by the U.S.
Copyright Office. Cable television operators are liable for interest on
underpaid and unpaid royalty fees, but are not entitled to collect interest on
refunds received for overpayment of copyright fees.
Various bills have been introduced into Congress over the past several
years that would eliminate or modify the cable television compulsory license.
Without the compulsory license, cable television operators would have to
negotiate rights from the copyright owners for all of the programming on the
broadcast stations carried by cable television systems. Such negotiated
agreements would likely increase the cost to cable television operators of
carrying broadcast signals. The 1992 Cable Act's retransmission consent
provisions expressly provide that retransmission consent agreements between
television broadcast stations and cable television operators do not obviate the
need for cable operators to obtain a copyright license for the programming
carried on each broadcaster's signal.
Copyrighted music performed in programming supplied to cable television
systems by pay cable networks (such as HBO) and basic cable networks (such as
USA Network) is licensed by the networks through private agreements with the
American Society of Composers and Publishers ("ASCAP") and BMI, Inc. ("BMI"),
the two major performing rights organizations in the United States. Both ASCAP
and BMI offer "through to the viewer" licenses to the cable networks which cover
the retransmission of the cable networks' programming by cable television
systems to their customers.
Licenses to perform copyrighted music by cable television systems
themselves, including on local origination channels, in advertisements inserted
locally on cable television networks, and in cross-promotional
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announcements, must be obtained by the cable television operator. Cable
television industry negotiations with ASCAP, BMI and SESAC, Inc. (a smaller
performing rights organization) are in progress.
STATE AND LOCAL REGULATION
Cable television systems generally are operated pursuant to nonexclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. The terms and conditions of franchises vary materially
from jurisdiction to jurisdiction, and even from city to city within the same
state, historically ranging from reasonable to highly restrictive or burdensome.
Franchises generally contain provisions governing fees to be paid to the
franchising authority, length of the franchise term, renewal, sale or transfer
of the franchise, territory of the franchise, design and technical performance
of the system, use and occupancy of public streets and number and types of cable
television services provided. The terms and conditions of each franchise and the
laws and regulations under which it was granted directly affect the
profitability of the cable television system. The 1984 Cable Act places certain
limitations on a franchising authority's ability to control the operation of a
cable television system. The 1992 Cable Act prohibits exclusive franchises, and
allows franchising authorities to exercise greater control over the operation of
franchised cable television systems, especially in the area of customer service
and rate regulation. The 1992 Cable Act also allows franchising authorities to
operate their own multichannel video distribution system without having to
obtain a franchise and permits states or local franchising authorities to adopt
certain restrictions on the ownership of cable television systems. Moreover,
franchising authorities are immunized from monetary damage awards arising from
regulation of cable television systems or decisions made on franchise grants,
renewals, transfers and amendments. The 1996 Telecom Act prohibits a franchising
authority from either requiring or limiting a cable television operator's
provision of telecommunications services.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable television systems, and a number of states
have adopted legislation subjecting cable television systems to the jurisdiction
of centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. To date, none of the states in
which Insight currently operates has enacted state level regulation.
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
television industry. Other existing federal regulations, copyright licensing
and, in many jurisdictions, state and local franchise requirements, currently
are the subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying degrees,
the manner in which cable television systems operate. Neither the outcome of
these proceedings nor their impact upon the cable television industry or Insight
can be predicted at this time.
INTERNET ACCESS SERVICE
We offer a service which enables consumers to access the Internet at high
speeds via high capacity broadband transmission facilities and cable modems. We
compete with many other providers of Internet access services (referred to as
"Internet Service Providers" or "ISPs"). ISPs include such companies as America
Online and Mindspring Enterprises as well as major telecommunications providers,
including AT&T and local exchange telephone companies. Recently, several ISPs
asked the FCC as well as local authorities to require cable companies offering
Internet access services over their broadband facilities to allow access to
those facilities on an unbundled basis to other ISPs. In a recent report on the
deployment of advanced telecommunications capability under Section 706 of the
1996 Telecom Act, the FCC declined to convene a proceeding to consider whether
to impose such an access requirement on cable companies. However, the FCC
indicated that it would continue to monitor the issue of broadband deployment.
Also, the FCC denied requests by certain ISPs that it condition its approval of
the merger of AT&T and TCI (now known as AT&T BIS) on a requirement that those
companies allow access by ISPs to their broadband facilities. Several local
jurisdictions also are reviewing this issue.
There are currently few laws or regulations which specifically regulate
communications or commerce over the Internet. Section 230 of the Communications
Act, added to that act by the 1996 Telecom Act, declares it to be the policy of
the United States to promote the continued development of the Internet and
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other interactive computer services and interactive media, and to preserve the
vibrant and competitive free market that presently exists for the Internet and
other interactive computer services, unfettered by federal or state regulation.
One area in which Congress did attempt to regulate content over the Internet
involved the dissemination of obscene or indecent materials. The provisions of
the 1996 Telecom Act, generally referred to as the Communications Decency Act,
were found to be unconstitutional by the United States Supreme Court in 1997.
LOCAL TELECOMMUNICATIONS SERVICES
The 1996 Telecom Act provides that no state or local laws or regulations
may prohibit or have the effect of prohibiting any entity from providing any
interstate or intrastate telecommunications service. States are authorized,
however, to impose "competitively neutral" requirements regarding universal
service, public service, public safety and welfare, service quality and consumer
protection. State and local governments also retain their authority to manage
the public rights-of-way and may require reasonable, competitively neutral
compensation for management of the public rights-of-way when cable operators
provide telecommunications service.
We may in the future allow our cable infrastructure to be used for the
provision of local telecommunications services to residential and business
consumers. Local telecommunications service is subject to regulation by state
utility commissions. Use of local telecommunications facilities to originate and
terminate long distance services (a service commonly referred to as "exchange
access") is subject to regulation both by the FCC and by state utility
commissions. As a provider of local exchange service, we would be subject to the
requirements imposed upon local exchange carriers by the 1996 Telecom Act. These
include requirements governing resale, telephone number portability, dialing
parity, access to rights-of-way and reciprocal compensation. Our ability to
successfully offer local telecommunications service will be dependent, in part,
on the opening of local telephone networks by incumbent local telephone
companies as required of them by the 1996 Telecom Act. In January 1999, the
United States Supreme Court reversed and vacated in part an earlier decision of
a federal court of appeals striking down portions of the FCC's 1996 rules
governing local telecommunications competition. The Supreme Court held that the
FCC has authority under the Communications Act to establish rules to govern the
pricing of facilities and services provided by incumbent local exchange carriers
to open their local networks to competition. Also, as a result of that Supreme
Court decision, the FCC must determine what network elements of incumbent local
exchange carriers must be made available to other providers and under what
circumstances those elements must be made available. How the FCC resolves those
questions will impact our ability to provide local telecommunications service in
competition with incumbent local exchange telephone companies.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Our current directors and executive officers are as follows:
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
Sidney R. Knafel................................ 68 Chairman of the Board
Michael S. Willner.............................. 46 President, Chief Executive Officer and Director
Kim D. Kelly.................................... 42 Executive Vice President, Chief Operating and
Financial Officer and Director
Thomas L. Kempner............................... 71 Director Nominee
James S. Marcus................................. 69 Director Nominee
Prakash A. Melwani.............................. 40 Director Nominee
Daniel S. O'Connell............................. 45 Director Nominee
Other key employees include:
Steven E. Sklar................................. 35 Senior Vice President of Finance and Business
Development
James A. Stewart................................ 47 Senior Vice President of Operations
E. Scott Cooley................................. 38 Senior Vice President, Insight Communications of
Indiana
Pamela Euler Halling............................ 51 Senior Vice President of Marketing and
Programming
Charles E. Dietz................................ 51 Senior Vice President of Engineering
Daniel Mannino.................................. 39 Vice President and Controller
Gregory B. Graff................................ 38 Senior Vice President and General Manager of
Insight Ohio
William Gilbert................................. 48 Vice President of Advertising Sales
Susane Newell................................... 37 Vice President of Programming
Elizabeth Grier................................. 38 Vice President of Administration
Judy Poole...................................... 52 Vice President of Human Resources
Mary Rhodes..................................... 49 Vice President of Customer Service
Administration
Sidney R. Knafel has been Chairman of Insight since 1985. He is a director
of NTL, Inc., one of the three largest cable and telecommunications operators in
the United Kingdom. He was the founder, Chairman and an equity holder of Vision
Cable Communications, Inc. from 1971 until its sale in 1981. Mr. Knafel is
presently the managing partner of SRK Management Company, a private investment
company, and also serves as Chairman of BioReliance Corporation, a biological
testing company. He is a director of Cellular Communications of Puerto Rico,
Inc., CoreComm Incorporated, General American Investors Company, Inc. and IGENE
Biotechnology, Inc. as well as several private companies. Mr. Knafel is a
graduate of Harvard College and the Harvard Graduate School of Business
Administration.
Michael S. Willner co-founded and has served as President of Insight since
1985. Previously, Mr. Willner served as Executive Vice President and Chief
Operating Officer of Vision Cable from 1979 through 1985, Vice President of
Marketing for Vision Cable from 1977 to 1979 and General Manager of Vision
Cable's Bergen County, New Jersey cable television system from 1975 to 1977.
Currently, Mr. Willner is a director of NTL, Inc. He is also a director of
Source Media, Inc., a technology and programming provider of Internet services
on digital cable platforms. He serves on the board of C-SPAN and the National
Cable Television Association ("NCTA") where he chairs the association's State
and Local
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Government Committee. Mr. Willner graduated from Boston University's College of
Communication and serves on the school's Executive Committee.
Kim D. Kelly has been Executive Vice President and Chief Financial Officer
of Insight since 1990. Ms. Kelly has also been Chief Operating Officer of
Insight since January 1998. Prior thereto, she served from 1982 to 1990 with
Marine Midland Bank, becoming its Senior Vice President in 1988, with primary
responsibility for media lending activities. Ms. Kelly serves as a member of the
NCTA Subcommittee for Telecommunications Policy, as well as the NCTA
Subcommittees for Accounting. She also serves on the boards of CATA, Cable in
the Classroom and CAB. Ms. Kelly is a graduate of George Washington University.
Thomas L. Kempner is a nominee to become a member of the board of directors
upon the consummation of this offering. He is and has been Chairman and Chief
Executive Officer of Loeb Partners Corporation, investment bankers, New York,
and its predecessors since February 1978. He is currently a director of Alcide
Corporation, CCC Information Services Group, Inc., Energy Research Corp., IGENE
Biotechnology, Inc., Intermagnetics General Corp., Northwest Airlines, Inc., and
Roper Starch Worldwide, Inc. Mr. Kempner graduated from Yale University.
James S. Marcus is a nominee to become a member of the board of directors
upon the consummation of this offering. He is a limited partner of Goldman,
Sachs & Co., investment bankers. He is currently a director of American Biltrite
Inc. and Kellwood Company. Mr. Marcus is a graduate of Harvard College and
Harvard Business School.
Prakash A. Melwani is a nominee to become a member of the board of
directors upon the consummation of this offering. He is a managing director of
Vestar Capital Partners, manager of over $1 billion in private equity capital,
and was a founding partner of Vestar at inception in 1988. Mr. Melwani is a
director of International AirParts Corporation, McHugh Software International,
Inc. and Pinnacle Automation, Inc., all companies in which Vestar has a
significant equity interest. Mr. Melwani graduated from Cambridge University
with a B.A. degree and received a graduate degree from Harvard University.
Daniel S. O'Connell is a nominee to become a member of the board of
directors upon the consummation of this offering. He was the founder in 1988 of
Vestar Capital Partners. He is currently the Chief Executive Officer of Vestar.
He is a director of Advanced Organics, Inc., Aearo Corporation, Cluett American
Corp., Remington Products Company L.L.C., Russell-Stanley Holdings, Inc. and
Siegel & Gale Holdings, Inc., all companies in which Vestar has a significant
equity interest. Mr. O'Connell graduated from Brown University and received a
graduate degree from Yale University.
Steven E. Sklar joined Insight in 1998 as Senior Vice President of Finance
and Business Development. From 1996 through 1998, Mr. Sklar was with Encore
Media Group, most recently as Division Vice President. He previously held the
position of VP--International Business Development at Encore. Mr. Sklar was with
Home Box Office from 1992-1996 where he held various positions, most recently
serving as Director of International Operations. He was also employed by Marine
Midland Bank, where he served as Assistant Vice President for the
Media/Commercial Lending Division.
James A. Stewart joined Insight in 1987 as a Vice President, and now serves
as Senior Vice President of Operations with responsibility for Insight's systems
outside of the Indiana cluster. Formerly, Mr. Stewart was Operations Manager for
National Guardian Security Services. He was also employed by Viacom
International, Inc.'s cable television division for eight years, where he
ultimately became Vice President and General Manager of Viacom Cablevision's
Nashville, Tennessee system.
Scott Cooley joined Insight in 1998 as Senior Vice President of Operations
with responsibility for Insight's Indiana cluster. Formerly, Mr. Cooley was an
employee of AT&T BIS for 18 years, having worked in the areas of technical
operations and purchasing and as general manager of the Bloomington system. In
1994, he was appointed area manager of AT&T BIS' southern Indiana, Illinois and
Missouri systems serving 260,000 customers. In 1997, he received AT&T BIS'
Manager of the Year award.
Pamela E. Halling joined Insight as Vice President, Marketing in 1988 and
has since become Senior Vice President of Marketing and Programming. Prior to
joining Insight, she had served since 1985 as
71
Director of Consumer Marketing for the Disney Channel. Previously, she was Vice
President of Affiliate Marketing for Rainbow Programming Holdings, Inc. and a
marketing consultant for TCI.
Charles E. Dietz joined Insight as Senior Vice President, Engineering in
1996. From 1973 to 1995, Mr. Dietz was employed by Vision Cable serving as Vice
President of Technical Operations from 1988 through 1991, becoming Vice
President of Operations in 1991.
Daniel Mannino joined Insight as Controller in 1989 and became Vice
President and Controller in 1991. Previously, Mr. Mannino was employed by Vision
Cable from 1983 to 1989, becoming its Controller in 1986. Mr. Mannino is a
certified public accountant.
Gregory B. Graff has served as Senior Vice President and General Manager of
Insight Ohio since August of 1998. Prior to joining Insight, Mr. Graff served as
Senior Vice President, Marketing, Programming and Advertising of Coaxial
Communications since 1997. He joined Coaxial as Vice President, Marketing and
Sales in 1995. Prior to joining Coaxial, Mr. Graff was Director of Marketing for
KBLCOM's Paragon Cable operation in San Antonio, Texas. He began his cable
television career in 1984 with Continental Cablevision.
William Gilbert has serviced as Vice President of Advertising Sales at
Insight Media Advertising since 1998. From 1988 to 1998, Mr. Gilbert served as
Vice President Advertising sales and New Business for Coaxial Communications in
Columbus. Prior to joining Coaxial, he spent several years with Warner-Amex
Cable both in its corporate office and at the system level. Mr. Gilbert has
19 years of advertising sales, marketing and financial experience in the cable
television industry.
Susane Newell has served as Vice President of Programming for Insight since
1998. Prior to joining Insight, Ms. Newell served as Corporate Director of
Programming for Century Communications from 1995 to 1998. From 1991 to 1994 she
served as Corporate Programming Manager for TeleCable Corporation. Ms. Newell is
an attorney and has also served as Director of New Business Development for
Bellcore and station manager for an independent broadcast station.
Elizabeth Grier joined Insight in 1989 and became Vice President of
Administration in May of 1994. Previously, Ms. Grier served as Legal Affairs
Manager. Prior to joining Insight, Ms. Grier was employed by Microband Wireless
Cable Company.
Judy Poole has served as Vice President of Human Resources for Insight
since 1998. Prior to joining Insight, Ms. Poole spent 13 years at Cablevision
Systems, most recently as Corporate Director of Employee Relations.
Mary Rhodes joined Insight in 1986 and became Vice President of Customer
Service Administration in 1996. Ms. Rhodes previously served as general manager
of our Jeffersonville, Indiana and Sandy, Utah cable systems.
All directors hold office until the next annual meeting of stockholders and
until their successors have been elected and qualify. All executive officers
serve at the discretion of the Board of Directors. We and certain members of
management have agreed to cause the election of two directors designated by
Vestar so long as Vestar continues to own at least 25% of the common stock it
owns upon closing of this offering, and one such director so long as Vestar
continues to own at least 15% of such common stock.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon closing of the offering, we will appoint an audit committee, a
compensation committee and a stock option committee. The audit committee will
consist of three directors, two of whom will be independent directors. Its
functions are to (i) recommend the appointment of independent accountants,
(ii) review the arrangements for and scope of the audit by independent
accountants, (iii) review the independence of the independent accountants,
(iv) consider the adequacy of the system of internal accounting controls and
review any proposed corrective actions, (v) review and monitor our policies
regarding business ethics and conflicts of interest, (vi) discuss with
management and the independent accountants our draft annual financial statements
and key accounting and reporting matters, and (vii) review the activities and
recommendations of our accounting department.
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The compensation committee will consist of four directors, two of whom will
be independent directors. The compensation committee has authority to review and
make recommendations to the Board of Directors with respect to the compensation
of our executive officers.
The stock option committee will consist of two directors, each of whom will
be a "non-employee" director. The stock option committee administers our 1999
stock option plan (the "Plan") and determines, among other things, the time or
times at which options will be granted, the recipients of grants, whether a
grant will consist of incentive stock options, nonqualified stock options and
stock appreciation rights (in tandem with an option or free-standing) or a
combination thereof, the option periods, whether an option is exercisable for
Class A common stock or Class B common stock, the limitations on option exercise
and the number of shares to be subject to such options, taking into account the
nature and value of services rendered and contributions made to our success. The
stock option committee also has authority to interpret the Plan and, subject to
certain limitations, to amend provisions of the Plan as it deems advisable.
COMPENSATION OF DIRECTORS
Those directors who are not also our employees will receive an annual
retainer as fixed by the board, which may be in the form of cash or stock
options, or a combination of both. Non-employee directors will also receive
reimbursement of out-of-pocket expenses incurred for each Board or committee
meeting attended.
EXECUTIVE COMPENSATION
The following table summarizes the compensation for services rendered to
Insight paid in 1998 to the Chief Executive Officer and Insight's other most
highly paid executive officers who received total annual salary and bonus in
excess of $100,000 (collectively, the "Named Executives"):
ANNUAL COMPENSATION
--------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
- ------------------------------------------------------------------------ ---- -------- --------
Sidney R. Knafel ....................................................... 1998 $250,000 $ --
Chairman of the Board
Michael S. Willner ..................................................... 1998 500,000 100,000
President and Chief Executive Officer
Kim D. Kelly ........................................................... 1998 450,000 90,000
Executive Vice President and Chief Financial and Operating Officer
1999 STOCK OPTION PLAN
The Board of Directors adopted our Plan on , 1999. We have
reserved shares of common stock with respect to which options and
stock appreciation rights ("SARs") may be granted under the Plan. The purpose of
the Plan is to promote the interests of Insight and its stockholders by
strengthening our ability to attract and retain competent employees, to make
service on our Board of Directors more attractive to present and prospective
non-employee directors and to provide a means to encourage stock ownership and
proprietary interest in Insight by officers, non-employee directors and valued
employees and other individuals upon whose judgment, initiative and efforts the
financial growth of Insight largely depends.
The Plan may be administered by either the entire Board of Directors or a
committee consisting of two or more members of the Board of Directors, each of
whom is a "non-employee director." The Plan will be administered by a stock
option committee of the Board of Directors consisting of two non-employee
directors.
Incentive stock options ("ISOs") may be granted only to officers and key
employees of Insight and its subsidiaries. Nonqualified stock options and SARs
may be granted to our officers, employees, directors, agents and consultants. In
determining the eligibility of an individual for grants under the Plan, as well
as in determining the number of shares to be optioned to any individual, the
stock option committee takes into
73
account the recommendations of our President, Michael S. Willner, the position
and responsibilities of the individual being considered, the nature and value to
Insight or its subsidiaries of his or her service or accomplishments, his or her
present or potential contribution to the success of Insight or its subsidiaries,
the number and terms of options and SARs already held by an individual and such
other factors as the stock option committee may deem relevant. In making
recommendations to the stock option committee, Mr. Willner focuses upon
individuals who would be motivated by a direct economic stake in the equity of
Insight. Options may provide for their exercise into shares of any class of our
common stock, Class A or Class B.
The Plan provides for the granting of ISOs to purchase our common stock at
not less than the fair market value on the date of the option grant and the
granting of nonqualified options and SARs with any exercise price. SARs granted
in tandem with an option have the same exercise price as the related option.
Upon completion of the exchange of partnership interests for common stock,
options for an aggregate of shares will have been granted, subject
to stockholder approval, to various individuals, including
. The Plan contains certain limitations
applicable only to ISOs granted thereunder. To the extent that the aggregate
fair market value, as of the date of grant, of the shares to which ISOs become
exercisable for the first time by an optionee during the calendar year exceeds
$100,000, the option will be treated as a nonqualified option. In addition, if
an optionee owns more than 10% of the total voting power of all classes of
Insight's capital stock at the time the individual is granted an ISO, the option
price per share cannot be less than 110% of the fair market value per share and
the term of the ISO cannot exceed five years. No option or SAR may be granted
under the Plan after , 2009, and no option or SAR may be
outstanding for more than ten years after its grant.
Upon the exercise of an option, the holder must make payment of the full
exercise price. Such payment may be made in cash, check or, under certain
circumstances, in shares of any class of Insight's common stock, or any
combination thereof. SARs, which give the holder the privilege of surrendering
such rights for the appreciation in the common stock between the time of the
grant and the surrender, may be settled, in the discretion of the Board or
committee, as the case may be, in cash, common stock, or in any combination
thereof. The exercise of an SAR granted in tandem with an option cancels the
option to which it relates with respect to the same number of shares as to which
the SAR was exercised. The exercise of an option cancels any related SAR with
respect to the same number of shares as to which the option was exercised.
Generally, options and SARs may be exercised while the recipient is performing
services for Insight and within three months after termination of such services.
The Plan may be terminated at any time by the Board of Directors, which may
also amend the Plan, except that without stockholder approval, it may not
increase the number of shares subject to the Plan or change the class of persons
eligible to receive options under the Plan.
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CERTAIN TRANSACTIONS
On July 29, 1998, we entered into a letter of intent with Interactive
Channel, Inc. ("ICI"), a subsidiary of Source Media, Inc., for the distribution
and marketing of ICI's interactive programming services of LocalSource to
customers of our systems. Michael S. Willner, the President, Chief Executive
Officer and a director of Insight, is a director of Source Media. Pursuant to
the letter of intent, we would pay ICI a monthly license fee for the right to
distribute LocalSource in an amount that is based on the number of digital
customers as adjusted for penetration. We would share 50% of all revenues, other
than advertising revenues, generated by LocalSource. There can be no assurance
that a definitive agreement will be successfully negotiated with ICI, or, if
negotiated, that such agreement will be on the terms described in this
prospectus. See "Business--Products and Services--New and Enhanced Products and
Services--Interactive Digital Video."
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock upon completion of the exchange of partnership
interests for common stock by each of the following:
o each person who is known by us to beneficially own more than 5% of our
common stock;
o each of our directors and nominees;
o each of our Named Executives; and
o all directors and executive officers as a group.
Unless otherwise indicated, the address of each person named in the table
below is Insight Communications Company, Inc., 126 East 56th Street, New York,
New York 10022. The amounts and percentage of common stock beneficially owned
are reported on the basis of regulations of the SEC governing the determination
of beneficial ownership of securities. Under the rules of the SEC, a person is
deemed to be a "beneficial owner" of a security if that person has or shares
"voting power," which includes the power to vote or to direct the voting of such
security, or "investment power," which includes the power to dispose of or to
direct the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has a right to acquire
beneficial ownership within 60 days. Under these rules, more than one person may
be deemed a beneficial owner of the same securities and a person may be deemed
to be a beneficial owner of securities as to which such person has no economic
interest. The information set forth in the following table excludes any shares
purchased in the offering by the respective beneficial owner:
CLASS A COMMON STOCK(1)
---------------------------------------- PERCENT OF VOTE
CLASS B AS A SINGLE CLASS(1)
BEFORE OFFERING AFTER OFFERING COMMON STOCK(2) --------------------
------------------ ------------------ ------------------ BEFORE AFTER
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT OFFERING OFFERING
Sidney R. Knafel(3).............
Michael S. Willner..............
Kim D. Kelly....................
Thomas L. Kempner...............
James S. Marcus.................
Prakash A. Melwani..............
Daniel S. O'Connell.............
All executive officers,
directors and nominees as a
group (7 persons).............
- ------------------
* Percentage of common stock beneficially owned does not exceed one percent.
(1) Holders of Class A common stock are entitled to one vote per share and
holders of Class B common stock are entitled to ten votes per share. Holders
of both classes of common stock will vote together as a single class on all
matters presented for a vote, except as otherwise required by law.
(2) No shares of Class B common stock will be sold in this offering.
(3) Includes shares held by ICI Communications, Inc., of which
Mr. Knafel is the sole stockholder. Mr. Knafel and certain persons and
entities associated with Mr. Knafel holding an aggregate of shares of
common stock have agreed with Vestar not to sell any shares during the
18-month period following the closing of the offering.
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CORPORATE STRUCTURE
The following chart sets forth our pro forma corporate structure:
[Chart of corporate structure]
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DESCRIPTION OF RECENT TRANSACTIONS
THE TRANSACTIONS TO ACQUIRE THE COLUMBUS SYSTEM
GENERAL
Insight Ohio, which owns the Columbus System, was formed as a Delaware
limited liability company. On August 21, 1998, a series of transactions were
consummated to facilitate, among other things, the acquisition by Insight Ohio
of the Columbus System. Pursuant to these transactions:
o Coaxial contributed to Insight Ohio substantially all of the assets
comprising the Columbus System for which Coaxial received a 25%
non-voting common membership interest in Insight Ohio as well as voting
Series A Preferred Interests and voting Series B Preferred Interests
(together, the "Preferred Interests");
o Insight Holdings of Ohio, LLC, a wholly-owned subsidiary of Insight
("IHO"), contributed $10.0 million in cash to Insight Ohio for which it
received a 75% non-voting common membership interest in Insight Ohio;
o Coaxial and Phoenix effected a private offering of the Senior Notes;
o Coaxial LLC, which is a 67.5% shareholder of Coaxial, and Coaxial
Financing Corp. effected a private offering of the Senior Discount Notes;
and
o IHO became the manager of Insight Ohio, Coaxial LLC and the two other
shareholders of Coaxial, which are Coaxial DJM LLC and Coaxial DSM LLC
(Coaxial LLC, Coaxial DJM LLC and Coaxial DSM LLC referred to as the
"Individual LLCs") and IHO thereby has effective control of the
management and affairs of Insight Ohio, Coaxial and the three Individual
LLCs.
As a result of these transactions, we indirectly own 75% of the non-voting
common membership interest in Insight Ohio and Coaxial owns the remaining 25%
non-voting common membership interest and the voting Preferred Interests in
Insight Ohio. Since Coaxial is owned by the three Individual LLCs, which are
entities in which we have no ownership or economic interest, we have not
consolidated the financial statements of Insight Ohio with our financial
statements.
DISTRIBUTIONS
Distributions to Coaxial on the Preferred Interests will be in such amounts
as to allow for the payment of interest on the Notes, with the Series A
Preferred Interests to receive payments in priority to the Series B Preferred
Interests. Insight Ohio will then make distributions to IHO and Coaxial in an
amount equal to an estimate of certain of their respective tax liabilities.
Insight Ohio will then distribute to IHO a management fee equal to 3% of gross
revenues. Thereafter, distributions to IHO and Coaxial are made only upon
approval of the management committee of Insight Ohio. Distributions in respect
of the membership interests of Insight Ohio and the management fee are
restricted under each of the indentures governing the Notes (together, the
"Indentures") and the Insight Ohio Credit Facility.
REDEMPTION OF THE PREFERRED INTERESTS
The Series A Preferred Interests have a liquidation preference of $140
million. Subject to IHO's agreement to use its commercially reasonable efforts
to obtain a refinancing proposal, Insight Ohio will be required to redeem the
Series A Preferred Interests in full upon acceleration or maturity of the Senior
Notes, commencement of the enforcement of remedies under the pledge agreement in
respect of the collateral securing the Senior Notes, the passage of ten days and
upon request for redemption by the holders of the Senior Notes. Insight Ohio may
not otherwise redeem the Series A Preferred Interests, in whole or in part,
without the consent of the sole members of each of the three Individual LLCs
(who together are referred to as the "Principals").
The Series B Preferred Interests have an initial liquidation preference of
$30 million. Subject to IHO's agreement to use its commercially reasonable
efforts to obtain a refinancing proposal, Insight Ohio will be
77
required to redeem the Series B Preferred Interests in full upon acceleration or
maturity of the Senior Discount Notes, commencement of the enforcement of
remedies under the Senior Discount Notes pledge agreement in respect of the
collateral securing the Senior Discount Notes, the passage of ten days and upon
request for redemption by the holders of the Senior Discount Notes. Insight Ohio
may not otherwise redeem the Series B Preferred Interests, in whole or in part,
without the consent of the Principals. Notwithstanding the foregoing, Insight
Ohio will not redeem the Series B Preferred Interests if it is also required to
redeem the Series A Preferred Interests and it has not yet done so.
The Series A Preferred Interests have priority over the Series B Preferred
Interests with respect to redemption, if both Preferred Interests are required
to be redeemed.
MANAGEMENT OF INSIGHT OHIO
Pursuant to the terms of the operating agreement of Insight Ohio, the
management of Insight Ohio is delegated to IHO. IHO may not resign as the
manager without the consent of Coaxial and the consent of the Principals (except
in the case of a permitted transfer of all of IHO's membership interest to a
successor, who will then become the manager). If Coaxial and the Principals
consent to IHO's resignation as manager, Insight Ohio will dissolve unless the
members of Insight Ohio and the Principals elect to continue the business of
Insight Ohio and agree to a successor manager.
IHO is entitled to reimbursement from Insight Ohio for certain expenses
incurred that directly relate to its management of the business and operations
of Insight Ohio, including any such expenses incurred in connection with the
management of the Individual LLCs. However, IHO is not entitled to reimbursement
from Insight Ohio for corporate overhead.
TRANSFER OF INTERESTS
IHO and Coaxial may not sell, pledge or otherwise transfer any part of
their respective membership interests in Insight Ohio, unless approved by the
other member and the Principals, subject to a number of significant exceptions.
In addition, IHO may elect at any time, by delivering written notice of its
election to Coaxial and the Principals, to require that a person designated by
the Principals purchase all of IHO's membership interest, for a nominal purchase
price. IHO would cease to manage Insight Ohio and the Individual LLCs upon
consummation of the sale.
INDIVIDUAL LLCS' MANAGEMENT AGREEMENTS
All of the issued and outstanding capital stock of Coaxial is held by the
Individual LLCs. Each Individual LLC has entered into a management agreement
with IHO. Except for certain events, each Individual LLC has delegated to IHO
all rights and powers of the member of such Individual LLC with respect to the
management and conduct of the Individual LLC's activities and operation insofar
as they relate to the ownership of shares of Coaxial and any Discount Notes. IHO
is not entitled to any compensation from any Individual LLC under any of the
respective management agreements and is not deemed a partner, co-venturer or
other participant in the business or operations of any Individual LLC. IHO is
not deemed a member of any Individual LLC.
THE TRANSACTIONS TO ACQUIRE THE INDIANA SYSTEMS
GENERAL
Insight Indiana, which owns the Indiana Systems, was formed as a Delaware
limited liability company. On October 31, 1998, a series of transactions were
consummated to facilitate, among other things, the capitalization of Insight
Indiana. Pursuant to these transactions:
o We exchanged our Utah systems for systems owned by affiliates of AT&T BIS
in Evansville and Jasper, Indiana (the "TCI Exchange Systems");
78
o We contributed to Insight Indiana the TCI Exchange Systems together with
other systems that we owned and operated in Indiana and Kentucky, subject
to debt (the "Insight Debt"), for which we received a 50% membership
interest in Insight Indiana;
o Several affiliates of AT&T BIS, including TCI of Indiana Holdings, LLC,
collectively contributed to Insight Indiana certain systems that they
owned and operated in Indiana, subject to debt (the "TCI Debt"), for
which TCI of Indiana Holdings, LLC ("TCI Holdings") received a 50%
membership interest in Insight Indiana;
o Insight Indiana entered into the $550 million Insight Indiana Credit
Facility;
o The Insight Debt and the TCI Debt was repaid from funds drawn down from
the Insight Indiana Credit Facility; and
o Insight became the manager of Insight Indiana.
DISTRIBUTIONS
Insight Indiana is required to make distributions to us in an amount equal
to an estimate of certain of our tax liabilities and then make a pro rata
distribution to TCI Holdings. Insight Indiana may make additional distributions
only upon approval by us and TCI Holdings. Distributions in respect of the
membership interests of Insight Indiana are restricted under the Insight Indiana
Credit Facility. We are entitled to receive a management fee from Insight
Indiana equal to 3% of the total gross operating revenues of Insight Indiana.
MANAGEMENT OF INSIGHT INDIANA
Pursuant to the terms of the operating agreement of Insight Indiana, the
management of Insight Indiana is delegated to us. We may not resign as manager
without the consent of TCI Holdings. If TCI Holdings consents to our resignation
as manager, Insight Indiana will dissolve unless the members elect to continue
the business of Insight Indiana and either TCI Holdings elects to become the new
manager or, if TCI Holdings does not so elect, Insight and TCI Holdings agree to
a successor manager. The operating agreement prohibits Insight Indiana from
taking certain actions, including most significant dispositions of assets,
without the consent of TCI Holdings and Insight, unless we reimburse TCI
Holdings for any adverse tax consequences.
TRANSFERS OF INTERESTS
Neither we nor TCI Holdings may sell, pledge or otherwise transfer our
respective membership interests in Insight Indiana unless such transfer is
approved by the other member or such transfer is to an affiliate. Commencing on
October 30, 2003, we and AT&T BIS each have the right to commence a process
whereby we or AT&T BIS would each have the right to redeem the other's 50%
interest in Insight Indiana.
THE TRANSACTIONS TO ACQUIRE THE KENTUCKY SYSTEMS
In April 1999, we entered into an agreement with Blackstone Capital, ICM
and a subsidiary and related party of AT&T BIS to purchase their combined 50%
interest in InterMedia VI for $327.2 million, which was calculated based upon
InterMedia's total outstanding debt, which was $730.4 million as of
February 28, 1999. The purchase price is subject to adjustment for certain
events including an increase in the purchase price by 50% of all capital
expenditures incurred by InterMedia VI between April 13, 1999 and consummation
of the Kentucky Acquisition, which capital expenditures relate to rebuilds of
the Kentucky Systems' network capacity and the purchase of digital converters
and related inventory. Pending consummation of the Kentucky Acquisition, ICM
will continue to manage InterMedia VI. The consummation of the Kentucky
Acquisition is subject to several conditions including (a) receipt (or waiver)
of all necessary material consents from third parties, (b) absence of any
material adverse changes in the conditions, properties or business of the
Kentucky Systems and (c) notification, approval and compliance with the
requirements of appropriate governmental agencies, including, without
limitation, transfer of cable television franchises. We anticipate that the
acquisition will be consummated during the second half of 1999. There can be no
assurance that the Kentucky Acquisition will be consummated on the terms
described in this prospectus, or at all. This offering is not contingent or in
any way dependent on the Kentucky Acquisition.
79
In April 1999, we also entered into an agreement with TCI Holdings to form
a new limited partnership which will serve as a holding company for both Insight
Indiana and the Kentucky Systems. Insight and TCI Holdings would each have a 50%
interest in this new entity. This reorganization is subject to the consummation
of the Kentucky Acquisition and several other conditions set forth in the
agreement.
THE TRANSACTION WITH AT&T
In December 1998, we entered into a letter of intent with AT&T to form the
Telephony Joint Venture which would provide local or any-distance communications
services (other than mobile wireless services, video entertainment services and
high-speed Internet access services) to residential consumers and certain small
business customers under the "AT&T" brand name over our cable network. The
Telephony Joint Venture would have the exclusive right to use our cable network
for such services and would have access to wholesale bulk long distance services
and certain other network services from AT&T. AT&T would have majority
representation on the Board of Directors of the Telephony Joint Venture, appoint
all officers of the Telephony Joint Venture and manage the day-to-day operations
of the Telephony Joint Venture. The Telephony Joint Venture would have a 15-year
term with one five-year extension at AT&T's sole election.
The following points summarize the material terms under the letter of
intent: (a) we are required to invest between 35% and 49% in the joint venture;
(b) we will receive payments based on number of homes passed upon receipt of
certification; (c) we will be responsible to upgrade our plant to meet certain
telephone certification requirements; (d) the joint venture will be responsible
for all capital associated with customer premise equipment and operating
expenses; and (e) we will receive a monthly operating payment for the license of
our plant to the joint venture.
Formation of the Telephony Joint Venture is subject to certain conditions
precedent, including the successful negotiation of definitive agreements. We
cannot predict if or when such conditions would be met or that the terms of the
definitive agreements will be on the same terms described in this prospectus.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
CREDIT FACILITIES
Financings of Insight, Insight Indiana and Insight Ohio are currently
effected through three stand-alone credit facilities, each having a separate
lending group. The credit facilities of Insight Indiana and Insight Ohio are
non-recourse to us, and none of the three credit facilities has any
cross-default provisions relating directly to each other. Each credit facility
has different revolving credit and term periods and contains separately
negotiated, specifically tailored covenants.
INSIGHT CREDIT FACILITY
On December 21, 1998, we entered into a restatement of the Insight Credit
Facility with a group of banks and other financial institutions led by The Bank
of New York. The Insight Credit Facility provides for revolving credit loans of
up to $140 million (including a letter of credit subfacility of up to
$5 million). Loans under the Insight Credit Facility may be used for working
capital, capital expenditures and other general purposes, including
acquisitions. The Insight Credit Facility matures in December 2005, with
quarterly reductions in the amount of outstanding loans and commitments
commencing in March 2000. Obligations under the Insight Credit Facility are
secured by substantially all of our assets and our subsidiaries (excluding
Insight Indiana and Insight Ohio). Loans under the Insight Credit Facility bear
interest, at our option, at an alternate base or Eurodollar rate, plus an
additional margin tied to our ratio of total debt to adjusted annualized
operating cash flow ("leverage ratio"), in the case of alternate base rate loans
ranging in increments from 1.25% when the leverage ratio exceeds 6.5:1.0 and
zero when the leverage ratio is less than 4.5:1.0, and, in the case of
Eurodollar loans, ranging in increments from 2.5% when the leverage ratio
exceeds 6.5:1.0 and 1.0% when the leverage ratio is less than 3.5:1.0.
The Insight Credit Facility contains a number of covenants that, among
other things, restricts our ability to make capital expenditures, acquire or
dispose of assets, incur additional indebtedness, pay dividends or other
distributions, create liens on assets, make investments, and engage in
transactions with affiliates. In addition, the Insight Credit Facility requires
compliance with certain financial ratios, requires us to enter into interest
rate protection agreements covering at least 40% of our total indebtedness and
also contains customary events of default. To date, the proceeds of term and
revolving credit borrowings under the Insight Credit Facility have been used for
the introduction of new and enhanced products and services for our customers,
strategic acquisitions and general corporate activities. As of March 31, 1999,
there was approximately $124.1 million outstanding under the Insight Credit
Facility.
INSIGHT INDIANA CREDIT FACILITY
On October 31, 1998, Insight Indiana entered into a senior credit facility
(the "Insight Indiana Credit Facility") with a group of banks and other
financial institutions led by The Bank of New York. The Insight Indiana Credit
Facility provides for term loans of $300 million and for revolving credit loans
of up to $250 million (including a letter of credit subfacility of up to $25
million). Loans under the Insight Indiana Credit Facility may be used to finance
acquisitions, capital expenditures and for working capital and general purposes.
The Insight Indiana Credit Facility matures in December 2006, with quarterly
reductions in the amount of outstanding loans and commitments commencing in
March 2001. Obligations under the Insight Indiana Credit Facility are secured by
the membership interests of Insight Indiana owned by us and TCI Holdings and any
amounts payable by Insight Indiana to us and TCI Holdings. Loans under the
Insight Indiana Credit Facility bear interest, at Insight Indiana's option, at
an alternate base or Eurodollar rate, plus an additional margin tied to Insight
Indiana's ratio of total debt to adjusted annualized operating cash flow
("leverage ratio"), in the case of alternate base loans ranging in increments
from 0.75% when the leverage ratio equals or exceeds 6.0:1.0 and zero when the
leverage ratio is less than 5.0:1.0, and, in the case of Eurodollar loans,
ranging in increments from 2.0% when the leverage ratio equals or exceeds
6.0:1.0 and 0.75% when the leverage ratio is less than 3.5:1.0.
The Insight Indiana Credit Facility contains a number of covenants that,
among other things, restricts the ability of Insight Indiana to make capital
expenditures, acquire or dispose of assets, incur additional indebtedness, pay
dividends or other distributions, create liens on assets, make investments, and
engage in transactions with affiliates. In addition, the Insight Indiana Credit
Facility requires compliance with certain
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financial ratios, requires Insight Indiana to enter into interest rate
protection agreements covering at least 40% of its total indebtedness and also
contains customary events of default. To date, the proceeds of term and
revolving credit borrowings under the Insight Indiana Credit Facility have been
used primarily to repay indebtedness secured by or relating to the cable system
assets transferred to Insight Indiana by Insight and TCI and for general
corporate activities. As of March 31, 1999, there was approximately
$466.0 million outstanding under the Insight Indiana Credit Facility.
INSIGHT OHIO CREDIT FACILITY
On October 7, 1998, Insight Ohio entered into a senior credit facility (the
"Insight Ohio Credit Facility") with a group of banks and other financial
institutions led by Canadian Imperial Bank of Commerce. The Insight Ohio Credit
Facility provides for revolving credit loans of $25.0 million to finance capital
expenditures and for working capital and general purposes, including the rebuild
of the Columbus System's network and for the introduction of new video services.
The Insight Ohio Credit Facility has a six-year maturity, with quarterly
reductions to the amount of the commitment commencing on March 31, 2002. The
obligations under the Insight Ohio Credit Facility are secured by substantially
all of the assets of Insight Ohio. Loans under the Insight Ohio Credit Facility
bear interest, at Insight Ohio's option, at the prime or Eurodollar rate, plus
an additional margin tied to Insight Ohio's ratio of total debt to adjusted
annualized operating cash flow, in the case of prime rate loans, 0.75% or, if
under a 5.0:1.0 ratio, 0.25%; and in the case of Eurodollar loans, 2.0% or, if
under a 5.0:1.0 ratio, 1.5%.
The Insight Ohio Credit Facility contains a number of covenants that, among
other things, restricts the ability of Insight Ohio to make capital
expenditures, acquire or dispose of assets, incur additional indebtedness, pay
dividends or other distributions, create liens on assets, make investments, and
engage in transactions with affiliates. In addition, the Insight Ohio Credit
Facility requires compliance with certain financial ratios, and also contains
customary events of default. As of March 31, 1999, there was no debt outstanding
under the Insight Ohio Credit Facility.
KENTUCKY CREDIT FACILITIES
On April 30, 1998, InterMedia Partners VI, L.P. ("InterMedia Partners"), a
subsidiary of InterMedia VI, entered into a senior credit facility ("Kentucky
Credit Facility One") with a group of banks and other financial institutions led
by Toronto Dominion (Texas), Inc., as amended on March 23, 1999. Kentucky Credit
Facility One provides for two term loans of $100.0 million and $250.0 million
and for revolving credit loans of up to $325.0 million (including up to $5.0
million of immediately available funds). Loans under Kentucky Credit Facility
One may be used to refinance debt, finance acquisitions, capital expenditures
and for working capital and general corporate purposes. The term loans mature in
September and December 2007 and the revolving credit loans mature in October
2006, with quarterly reductions in the amount of outstanding revolving credit
loans and commitments commencing in June 2001. Obligations under Kentucky Credit
Facility One are secured by all of the partnership interests of InterMedia
Partners and any intercompany notes made in favor of InterMedia Partners.
Revolving loans under Kentucky Credit Facility One bear interest, at InterMedia
Partners' option, at an alternate base or Eurodollar rate, plus an additional
margin tied to InterMedia Partners' ratio of total debt to annualized cash flow
("leverage ratio"), in the case of alternate base revolving loans ranging in
increments from 0.875% when the leverage ratio exceeds 6.5:1.0 and zero when the
leverage ratio is less than or equal to 5.0:1.0, and, in the case of Eurodollar
revolving loans, ranging in increments from 1.875% when the leverage ratio
exceeds 6.5:1.0 and 0.500% when the leverage ratio is less than or equal to
4.0:1.0. The term loans under Kentucky Credit Facility One also bear interest,
at InterMedia Partners' option, at an alternate base or Eurodollar rate, plus an
additional margin tied to InterMedia Partners' leverage ratio.
Kentucky Credit Facility One contains a number of covenants that, among
other things, restrict the ability of InterMedia Partners to make capital
expenditures, acquire or dispose of assets, incur additional indebtedness, pay
dividends or other distributions, create liens on assets, make investments, and
engage in transactions with affiliates. In addition, Kentucky Credit Facility
One requires compliance with certain financial ratios, requires InterMedia
Partners to enter into interest rate protection agreements covering at least 50%
of its total indebtedness and also contains customary events of default. Certain
subsidiaries of AT&T BIS have agreed to advance InterMedia Partners and
InterMedia Group (as defined below) up to
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$489.5 million under certain events, including InterMedia Partners being unable
to make payments under Kentucky Credit Facility One. As of March 31, 1999, there
was approximately $555.0 million outstanding under Kentucky Credit Facility One.
On April 30, 1998, InterMedia Partners Group VI, L.P. ("InterMedia Group"),
a subsidiary of InterMedia VI, entered into a credit facility ("Kentucky Credit
Facility Two") with a group of banks and other financial institutions led by
Toronto Dominion (Texas), Inc., as amended on March 23, 1999. Kentucky Credit
Facility Two provides for a subordinated term loan of $125.0 million. Loans
under Kentucky Credit Facility Two may be used to refinance debt and to make
contributions to subsidiaries. The term loan matures in April 2008, with
quarterly installments payable commencing in June 2001. Obligations under
Kentucky Credit Facility Two are secured by all of the partnership interests of
InterMedia Partners and InterMedia Group and any intercompany notes made in
favor of InterMedia Group. The term loan bears interest, at InterMedia Group's
option, at an alternate base or at an Eurodollar rate, plus in the case of
Eurodollar term loans an additional margin of 2.75%.
Kentucky Credit Facility Two contains a number of covenants that, among
other things, restrict the ability of InterMedia Group to make capital
expenditures, acquire or dispose of assets, incur additional indebtedness, pay
dividends or other distributions, create liens on assets, make investments, and
engage in transactions with affiliates. In addition, Kentucky Credit Facility
Two requires compliance with certain financial ratios, requires InterMedia Group
to enter into interest rate protection agreements covering at least 50% of its
total indebtedness and also contains customary events of default. Certain
subsidiaries of AT&T BIS have agreed to advance InterMedia Group and InterMedia
Partners up to $489.5 million under certain events, including InterMedia Group
being unable to make payments under Kentucky Credit Facility Two. As of March
31, 1999, there was approximately $125.0 million outstanding under Kentucky
Credit Facility Two.
On April 30, 1998, InterMedia Partners Group entered into another credit
facility ("Kentucky Credit Facility Three") with a group of banks and other
financial institutions led by Toronto Dominion (Texas), Inc., as amended on
March 23, 1999. Kentucky Credit Facility Three provides for a subordinated term
loan of $60 million. Loans under Kentucky Credit Facility Three may be used to
refinance debt and to make contributions to subsidiaries. The term loan matures
in May 1999. The term loans under Kentucky Credit Facility Three bear interest,
at InterMedia Group's option, at an alternate base or at an Eurodollar rate,
plus in the case of Eurodollar term loans an additional margin of 0.30%. As of
March 31, 1999, there was approximately $53.0 million outstanding under Kentucky
Credit Facility Three.
COLUMBUS NOTES
In connection with the contribution of the Columbus System to Insight Ohio,
Coaxial and Phoenix issued $140.0 million aggregate principal amount of their
Senior Notes, and Coaxial LLC and Coaxial Financing Corp. issued approximately
$55.9 million aggregate principal amount at maturity of their Senior Discount
Notes. Each series of Notes is conditionally guaranteed on a senior unsecured
basis by Insight Ohio. Such guarantees will only become effective to the extent
and at the time the holders of the Notes are unable to realize proceeds from the
enforcement of the mandatory redemption provisions of the preferred interests
discussed below.
Interest on the Senior Notes is payable semi-annually on each February 15
and August 15. Cash interest on the Senior Discount Notes will not begin to
accrue until August 15, 2003, and thereafter will be payable semi-annually on
each February 15 and August 15. Insight Ohio has outstanding the Series A
Preferred Interests and the Series B Preferred Interests with liquidation
preferences equal in amount to the principal or accreted amounts of the Notes
and providing for distributions in amounts equal to the interest payments on the
Notes. The Series A Preferred Interests relating to the Senior Notes have
priority over the Series B Preferred Interests relating to the Senior Discount
Notes with respect to both distributions and redemptions. Furthermore, the
conditional guarantee of the Senior Discount Notes is subordinated to the prior
payment in full of all obligations with respect to the conditional guarantee of
the Senior Notes. The Indentures impose restrictions on the ability of the
issuers of the Notes and Insight Ohio to, among other things, make capital
expenditures, acquire or dispose of assets, incur additional indebtedness, pay
dividends or other distributions, create liens on assets, make investments, and
engage in transactions with affiliates. The issuers of the Notes are prohibited
from conducting any business activities.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capitalization consists of shares of Class A common
stock, par value $.01 per share, shares of Class B common stock, par
value $.01 per share, and shares of preferred stock, par value $.01
per share.
Concurrently with the consummation of this offering, the holders of the
general and limited partnership interests of Insight L.P. will exchange all of
their partnership interests for Class A and Class B common stock in accordance
with a formula based on the initial public offering price of this offering. As a
result, Insight L.P. will become a wholly-owned subsidiary of Insight. Our
assets and liabilities will remain with Insight L.P. and our business operations
will continue to be conducted through Insight L.P.
Upon completion of the exchange of partnership interests for common stock
and without giving effect for this offering, shares of Class A common
stock will be outstanding, held of record by persons, and shares of
Class B common stock will be outstanding, held of record by persons. No
shares of preferred stock will be outstanding.
COMMON STOCK
The rights of the holders of Class A and Class B common stock are
substantially identical in all respects, except for their voting rights. Only
members of our management and certain permitted transferees, as defined in our
certificate of incorporation (collectively, the "Management Group"), may hold
Class B common stock. There is no limitation on who may hold Class A common
stock. Holders of Class A common stock are entitled to one vote per share.
Holders of Class B common stock are entitled to ten votes per share. Holders of
all classes of common stock entitled to vote will vote together as a single
class on all matters presented to the stockholders for their vote or approval,
except as otherwise required by the General Corporation Law of the State of
Delaware ("Delaware Law"). Under Delaware Law, the holders of each class of
common stock are entitled to vote as a separate class with respect to any
amendment to our certificate of incorporation that would increase or decrease
the aggregate number of authorized shares of such class, increase or decrease
the par value of such class, or modify or change the powers, preferences or
special rights of the shares of such class so as to affect such class adversely.
Our certificate of incorporation does not provide for cumulative voting for the
election of our directors, with the result that stockholders owning or
controlling more than 50% of the total votes cast for the election of directors
can elect all of the directors. See "Risk Factors--Members of management, as
major stockholders, possess unequal voting rights resulting in disproportionate
control."
Subject to the dividend rights of holders of preferred stock, holders of
both classes of common stock are entitled to receive dividends when, as and if
declared by the board of directors out of funds legally available for this
purpose. In the event of our liquidation, dissolution or winding up, the holders
of both classes of common stock are entitled to receive on a pro rata basis any
assets remaining available for distribution after payment of our liabilities and
after provision has been made for payment of liquidation preferences to all
holders of preferred stock. Holders of Class A and Class B common stock have no
conversion or redemption provisions or preemptive or other subscription rights,
except that in the event any shares of Class B common stock held by a member of
the Management Group are transferred outside the Management Group, such shares
will be converted automatically into shares of Class A common stock on a
one-for-one basis. The outstanding shares of Class A and Class B common stock
are, and the shares of Class A common stock being sold by us and offered by this
prospectus, when issued and paid for as set forth in this prospectus, will be
fully paid and nonassessable.
PREFERRED STOCK
Our certificate of incorporation authorizes us to issue shares of
"blank check" preferred stock having rights senior to our common stock. Our
Board of Directors is authorized, without further stockholder approval, to issue
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, redemption terms and liquidation preferences, and to fix
the number of shares constituting any series and the designations of these
series.
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The issuance of preferred stock may have the effect of delaying or
preventing a change of control of Insight. The issuance of preferred stock could
decrease the amount of earnings and assets available for distribution to the
holders of common stock or could adversely affect the voting power or other
rights of the holders of Class A and Class B common stock. We currently have no
plans to issue any shares of preferred stock.
LIMITATION OF LIABILITY
As permitted by Delaware Law, our certificate of incorporation provides
that our directors shall not be personally liable to us or our stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability:
o for any breach of the director's duty of loyalty to us or our
stockholders;
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o under Section 174 of the Delaware Law, relating to unlawful payment of
dividends or unlawful stock purchases or redemption of stock; or
o for any transaction from which the director derives an improper personal
benefit.
As a result of this provision, we and our stockholders may be unable to obtain
monetary damages from a director for breach of his or her duty of care.
Our certificate of incorporation and by-laws provide for the
indemnification of our directors and officers (and, to the extent authorized by
the Board of Directors in its sole and absolute discretion, employees and
agents) to the fullest extent authorized by, and subject to the conditions set
forth in the Delaware Law, except that we will indemnify a director or officer
in connection with a proceeding (or part thereof) initiated by such person only
if the proceeding (or part thereof) was authorized by our Board of Directors.
The indemnification provided under the certificate of incorporation and by-laws
includes the right to be paid the expenses (including attorneys's fees) in
advance of any proceeding for which indemnification may be had, provided that
the payment of these expenses (including attorneys' fees) incurred by a
director, officer, employee or agent in advance of the final disposition of a
proceeding may be made only upon delivery to us of an undertaking by or on
behalf of the director, officer, employee or agent to repay all amounts so paid
in advance if it is ultimately determined that the director or officer is not
entitled to be indemnified.
Under the by-laws, we have the power to purchase and maintain insurance on
behalf of any person who is or was one of our directors, officers, employees or
agents, against any liability asserted against the person or incurred by the
person in any such capacity, or arising out of the person's status as such, and
related expenses, whether or not we would have the power to indemnify the person
against such liability under the provisions of the Delaware Law. We currently
have no plans to purchase director and officer liability insurance on behalf of
our directors and officers.
DELAWARE ANTI-TAKEOVER LAW
We will be subject to the provisions of Section 203 of the Delaware Law.
Section 203 prohibits publicly held Delaware corporations from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation's voting stock. These provisions could have the effect of
delaying, deferring or preventing a change of control of Insight or reducing the
price that certain investors might be willing to pay in the future for shares of
our Class A common stock.
TRANSFER AGENT
The transfer agent for our Class A common stock will be The Bank of New
York, a New York banking corporation.
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SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon the consummation of this offering, we will have shares of
common stock issued and outstanding. All of the shares of Class A common
stock to be sold in this offering and any shares sold upon exercise of the
underwriters' over-allotment option will be freely tradable without restrictions
or further registration under the Securities Act, except for any shares
purchased by an "affiliate" of Insight as that term is defined in Rule 144 under
the Securities Act, which will be subject to the resale limitations of
Rule 144. All other outstanding shares of common stock will be "restricted
securities" as that term is defined in Rule 144 and are also subject to certain
restrictions on disposition. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rule 144 or Rule 701 under the Securities Act. Sales of restricted
securities in the public market, or the availability of such shares for sale,
could have an adverse effect on the price of the Class A common stock. See "Risk
Factors--There has been no prior market for the Class A common stock," "-- There
is a potential for volatility of the market price of the Class A common stock"
and "Dilution."
REGISTRATION RIGHTS
We and Vestar have entered into a registration rights agreement, pursuant
to which we have granted to Vestar various demand rights to cause us to file a
registration statement under the Securities Act covering resales of all shares
of common stock held by Vestar, and to cause such registration statement to
become effective. The registration rights agreement also grants "piggyback"
registration rights permitting Vestar to include its registrable securities in a
registration of securities by us. We are obligated to pay the expenses of such
registrations.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
Class A common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of either
of the following:
o 1% of the number of shares of Class A common stock then outstanding,
which will equal approximately shares immediately after this
offering; and
o the average weekly trading volume of the common stock on The Nasdaq Stock
Market during the four calendar weeks preceding the filing of a notice on
Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about Insight.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an "affiliate," is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering. The sale of such shares, or the perception that
sales will be made, could adversely effect the price of our Class A common stock
after the offering because a greater supply of shares would be, or would be
perceived to be, available for sale in the public market.
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FURTHER RESTRICTIONS ON TRANSFER FOR CERTAIN PERSONS
Each of us, our executive officers and directors and certain of our
affiliates has agreed that, for a period of 180 days from the date of this
prospectus, they will not, without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation do either of the following:
o offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
o enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of the common
stock.
Either of the foregoing transaction restrictions will apply regardless of
whether a covered transaction is to be settled by the delivery of common stock
or such other securities, in cash or otherwise. Upon completion of the exchange
of partnership interests for common stock, these stockholders will own in the
aggregate shares of common stock. In addition, during such period, we
have agreed not to file any registration statement with respect to, and each of
our executive officers and directors has agreed not to make any demand for, or
exercise any right with respect to, the registration of any shares of common
stock or any securities convertible into or exercisable for common stock without
the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. See "Underwriters."
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UNDERWRITERS
Subject to the terms and conditions contained in an underwriting agreement,
dated , 1999, the underwriters named below, who are represented
by Donaldson, Lufkin & Jenrette Securities Corporation, Morgan Stanley & Co.
Incorporated, CIBC World Markets Corp. and Deutsche Bank Securities Inc., have
severally agreed to purchase from us the number of shares set forth opposite
their names below:
UNDERWRITERS NUMBER OF SHARES
- ---------------------------------------------------------------------------- ----------------
Donaldson, Lufkin & Jenrette Securities Corporation.........................
Morgan Stanley & Co. Incorporated...........................................
CIBC World Markets Corp.....................................................
Deutsche Bank Securities Inc................................................
Total.......................................................................
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of certain legal matters by their counsel and
to certain other conditions including the effectiveness of the registration
statement, the continuing correctness of our representations, the receipt of a
"comfort letter" from our accountants, the listing of the Class A common stock
on the NMS and no occurrence of an event that would have a material adverse
effect on us. The underwriters are obligated to purchase and accept delivery of
all the shares, other than those covered by the over-allotment option described
below, if they purchase any of the shares.
The underwriters propose initially to offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to certain dealers at the public offering
price less a concession not in excess of $ per share. The underwriters may
allow, and such dealers may re-allow, a concession not in excess of $ per
share on sales to certain other dealers. After the initial offering of the
shares to the public, the representatives may change the public offering price
and such concessions. The underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. The amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of Class A common stock.
NO EXERCISE FULL EXERCISE
----------- -------------
Per share...................................................... $ $
Total.......................................................... $ $
We have granted to the underwriters an option, exercisable for 30 days from
the date of the underwriting agreement, to purchase up to
additional shares at the public offering price less the underwriting fees. The
underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the underwriters
exercise such option, each underwriter will become obligated, subject to certain
conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
We estimate our expenses relating to the offering to be $ .
We and the underwriters have agreed to indemnify each other against certain
civil liabilities, including liabilities under the Securities Act.
Each of us, our executive officers and directors and certain of our
affiliates has agreed that, for a period of 180 days from the date of this
prospectus, they will not, without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation do either of the following:
o offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
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directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
o enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock.
Either of the foregoing transaction restrictions will apply regardless of
whether a covered transaction is to be settled by the delivery of common stock
or such other securities, in cash or otherwise. In addition, during such period,
we have agreed not to file any registration statement with respect to, and each
of our executive officers and directors has agreed not to make any demand for,
or exercise any right with respect to, the registration of any shares of common
stock or any securities convertible into or exercisable for common stock without
the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
At our request, the underwriters have reserved up to five percent of the
shares offered hereby for sale at the initial public offering price to certain
of our employees, members of their immediate families and other individuals who
are our business associates. The number of shares of Class A common stock
available for sale to the general public will be reduced to the extent these
individuals purchase such reserved shares. Any reserved shares not purchased
will be offered by the underwriters to the general public on the same basis as
the other shares offered hereby.
Application will be made to list the Class A common stock on the NMS under
the symbol "ICCIA." In order to meet the requirements for listing the Class A
common stock on the NMS, the underwriters have undertaken to sell lots of 100 or
more shares to a minimum of 400 beneficial owners.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of Class A common
stock included in this offering in any jurisdiction where action for that
purpose is required. The shares included in this offering may not be offered or
sold, directly or indirectly, nor may this prospectus or any other offering
material or advertisement in connection with the offer and sale of any such
shares be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons who receive this prospectus are
advised to inform themselves about and to observe any restrictions relating to
this offering of Class A common stock and the distribution of this prospectus.
This prospectus is not an offer to sell or a solicitation of an offer to buy any
shares of Class A common stock included in this offering in any jurisdiction
where that would not be permitted or legal.
CIBC World Markets Corp. or its affiliates have provided and may in the
future provide investment banking or other financial advisory services to us and
our affiliates in the ordinary course of business, for which they have received
and are expected to receive customary fees and expenses. The Insight Ohio Credit
Facility was provided by a group of banks led by Canadian Imperial Bank of
Commerce, an affiliate of CIBC World Markets Corp. CIBC World Markets was the
initial purchaser of the Senior Notes and the Senior Discount Notes issued in
connection with the acquisition of the Columbus System. See "Description of
Recent Transactions" and "Description of Certain Indebtedness."
We have received a commitment from DLJ Bridge Finance, Inc., an affiliate
of Donaldson, Lufkin & Jenrette Securities Corporation, that if this offering is
not completed prior to the consummation of the Kentucky Acquisition, financing
for the Kentucky Acquisition will be provided by a group of banks led by DLJ
Bridge Finance. In consideration for this commitment, we paid DLJ Bridge Finance
a commitment fee of $3,500,000 and agreed to pay it an additional fee if the
financing is drawn on.
Any underwriters who own indebtedness under the Insight Credit Facility
will receive their proportionate share of the repayment of the credit facility
with the proceeds from the sale of the common stock. Because potentially more
than 10% of the proceeds from this offering, not including underwriting
compensation, may be received by such underwriters, as lenders under the Insight
Credit Facility, this offering is being conducted in accordance with
Rule 2710(c)(8) of the Conduct Rules of the National Association of Securities
Dealers, which requires that the initial public offering price be no higher than
that recommended by a "qualified independent underwriter." In accordance with
this requirement, Donaldson, Lufkin & Jenrette Securities Corporation has
assumed the responsibilities of acting as a qualified independent underwriter
and recommended an initial public offering price in compliance with the
requirements of Rule 2720 of the
89
Conduct Rules of the NASD. In connection with this offering, Donaldson, Lufkin &
Jenrette Securities Corporation has performed due diligence investigations and
reviewed and participated in the preparation of this prospectus and the
registration statement of which this prospectus forms a part. As compensation
for the services of Donaldson, Lufkin & Jenrette Securities Corporation as a
qualified independent underwriter, Insight has agreed to pay Donaldson, Lufkin &
Jenrette Securities Corporation $5,000.
STABILIZATION
In connection with this offering, certain underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Class A common stock. Specifically, the underwriters may overallot this
offering, creating a syndicate short position. In addition, the underwriters may
bid for and purchase shares of Class A common stock in the open market to cover
syndicate short positions or to stabilize the price of the Class A common stock.
In addition, the underwriting syndicate may reclaim selling concessions from
syndicate members if Donaldson, Lufkin & Jenrette Securities Corporation
repurchases previously distributed Class A common stock in syndicate covering
transactions, in stabilizing transactions or otherwise or if Donaldson, Lufkin &
Jenrette Securities Corporation receives a report that indicates that the
clients of such syndicate members have "flipped" the Class A common stock. These
activities may stabilize or maintain the market price of the Class A common
stock above independent market levels. The underwriters are not required to
engage in these activities and may end any of these activities at any time.
PRICING OF THIS OFFERING
Prior to the offering, there has been no established market for the
Class A common stock. The initial public offering price for the shares of
Class A common stock offered by this prospectus will be determined by
negotiation among Insight and the representatives of the underwriters. The
factors to be considered in determining the initial public offering price
include:
o The history of and the prospects for the industry in which we compete;
o Our past and present operations;
o Our historical results of operations;
o Our prospects for future earnings;
o The recent market prices of securities of generally comparable companies;
and
o General conditions of the securities market at the time of this offering.
90
LEGAL MATTERS
The validity of the shares of Class A common stock offered hereby will be
passed upon for Insight by Cooperman Levitt Winikoff Lester & Newman, P.C., New
York, New York. In connection with this offering, Latham & Watkins, New York,
New York, will pass upon certain legal matters for the underwriters. Affiliates
and members of Cooperman Levitt Winikoff Lester & Newman, P.C. will own in the
aggregate shares of Class A common stock upon the closing of the offering.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998 and 1997, and for each of the three
years in the period ended December 31, 1998, and the financial statements of
Insight Communications of Central Ohio, LLC at December 31, 1998 and for the
year then ended, as set forth in their reports. We have included our financial
statements and the financial statements of Insight Communications of Central
Ohio, LLC in this prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's reports, given on their authority as experts in
accounting and auditing.
The combined financial statements of TCI Insight Systems as of October 31,
1998 and December 31, 1997 and for the ten-month period ended October 31, 1998
and for each of the years in the two-year period ended December 31, 1997 have
been included herein and in this prospectus in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
The combined financial statements of TCI IPVI Systems as of April 30, 1998
and December 31, 1997 and for the four-month period ended April 30, 1998 and for
each of the years in the two-year period ended December 31, 1997 and have been
included herein and in this prospectus in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The financial statements of InterMedia Capital Partners VI, L.P., as of
December 31, 1998 and for the period April 30, 1998 (commencement of operations)
to December 31, 1998 included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The financial statements of Central Ohio Cable System Operating Unit as of
December 31, 1997 and for the two years then ended, included in this Prospectus,
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report and are included herein in reliance upon the authority
of said firm as experts in giving said reports.
AVAILABLE INFORMATION
Insight has filed with the SEC a registration statement on Form S-1
(including all amendments, exhibits, schedules and supplements thereto), under
the Securities Act and the rules and regulations thereunder, for the
registration of the Class A common stock offered hereby. Although this
prospectus, which forms a part of the registration statement, contains all
material information included in the registration statement, parts of the
registration statement have been omitted as permitted by the rules and
regulations of the SEC. For further information with respect to Insight and the
Class A common stock offered hereby, reference is made to the registration
statement. Statements contained in this prospectus as to the contents of any
contracts or other document referred to herein are not necessarily complete and,
where such contract or other document is an exhibit to the registration
statement, each such statement is qualified in all respects by the provisions of
such exhibit, to which reference is hereby made. The registration statement can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the SEC's regional offices at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. The public may obtain information
regarding the Washington, D.C. Public Reference Room by calling SEC at
1-800-SEC-0330. In addition, the registration statement is publicly available
through the SEC's site on the Internet's World Wide Web, located at:
http://www.sec.gov.
91
GLOSSARY
The following is a description of certain terms used in this Prospectus:
Addressability........................ Addressable technology enables the cable television operator to
electronically control from its central facilities the cable television
services delivered to the customer. This technology facilitates pay-per-
view services, reduces service theft, and provides a cost-effective method
to upgrade and downgrade programming services to customers.
Amplifier Cascades.................... The operation of two or more amplifiers in series so that the output of
one device feeds the input of the next device.
Bandwidth............................. Bandwidth measures the information-carrying capacity of a communication
channel and indicates the range of usable frequencies that can be carried
by a cable television system.
Basic Customer........................ A customer to a cable television system who receives the Basic Service
Tier and who is usually charged a flat monthly rate for a number of
channels.
Basic Penetration..................... Basic customers as a percentage of total number of homes passed.
Basic Service Tier.................... A package of over-the-air broadcast stations, local access channels and
certain satellite-delivered cable television services (other than premium
services).
Broadband............................. The ability to deliver multiple channels and/or services to customers.
Cable Modem........................... A device similar to a telephone modem that sends and receives signals over
a cable television network at speeds up to 100 times the capacity of a
typical telephone modem.
Channel Capacity...................... The number of traditional video programming channels that can be carried
over a communications system.
Clustering............................ A general term used to describe the strategy of operating cable television
systems in a specific geographic region, thus allowing for the achievement
of economies of scale and operating efficiencies in such areas as system
management, marketing and technical functions.
Converter............................. An electronic device that permits tuning of a cable television signal to
permit reception by customer television sets and VCRs and provides a means
of access control for cable television programming.
Density............................... A general term used to describe the number of homes passed per mile of
network.
Digital Video......................... A distribution technology where video content is delivered in digital
format.
Direct Broadcast Satellite (DBS)...... A service by which packages of television programming are transmitted via
high-powered satellites to individual homes, each served by a small
satellite dish.
92
Fiber Optic Cable..................... A cable made of glass fibers through which signals are transmitted as
pulses of light to the distribution portion of the cable television system
which in turn goes to the customer's home. Capacity for a very large
number of channels can be more easily provided.
Fiber Optic Trunk System.............. The use of fiber optic cable from the headend to the distribution portion
of the cable television system.
Headend............................... A collection of hardware, typically including earth stations, satellite
receivers, towers, off-air antennae, modulators, amplifiers [, lasers] and
video cassette playback machines within which signals are processed and
then combined for distribution within the cable television network.
Equipment to process signals from the customer's home also are contained
at the headend.
Homes Passed.......................... A home is deemed to be passed if it can be connected to the distribution
system without further extension of the distribution network.
MSO................................... A term used to describe cable television companies that are multiple
system operators.
Multiplexing.......................... Additional screens of premium channels, such as HBO and Showtime, which
cable operators provide for no additional fees, provided the customer
subscribes to the primary premium channel.
Multipoint Multichannel
Distribution Service (MMDS)......... A one-way radio transmission of television channels over microwave
frequencies from a fixed station transmitting to multiple receiving
facilities located at fixed points.
Must Carry............................ The provisions of the 1992 Cable Act that require cable television
operators to carry local commercial and noncommercial television broadcast
stations on their systems.
Network............................... The distribution network element of a cable television system consisting
of coaxial and fiber optic cable leaving the headend on power or telephone
company poles or buried underground.
Node.................................. The interface between the fiber optic and coaxial distribution network.
Outage................................ The loss of service due to a failure in the distribution network.
Overbuild............................. The construction of a second cable television system in a franchise area
in which such a system had previously been constructed.
Pay-Per-View.......................... Programming offered by a cable television operator on a per-program basis
which a customer selects and for which a customer pays a separate fee.
Premium Penetration................... Premium service units as a percentage of the total number of basic service
subscribers. A customer may purchase more than one premium service, each
of which is counted as a separate premium service unit. This ratio may be
greater than 100% if the average customer subscribes to more than one
premium service unit.
Premium Service....................... Individual cable programming service available only for monthly
subscriptions on a per-channel basis.
93
Premium Units......................... The number of subscriptions to premium services, which are paid for on an
individual basis.
Rebuild............................... The replacement or upgrade of an existing cable system, usually undertaken
to improve its technological performance and/or to expand the system's
channel capacity in order to provide more services.
Satellite Master Antenna Television
System (SMATV)...................... A video programming delivery system to multiple dwelling units.
Telephone Modem....................... A device either inserted in a computer or attached externally that encodes
(modulates) or decodes (demodulates) an analog telephone signal to a data
format that the computer can process.
Telephony............................. The provision of telephone service.
Tiers................................. Varying levels of cable services consisting of differing combinations of
several over-the-air broadcast and satellite delivered cable television
programming services.
94
INDEX TO FINANCIAL STATEMENTS
PAGE
----
INSIGHT COMMUNICATIONS COMPANY, L.P.
Report of Independent Auditors--Ernst & Young LLP........................................................ F-3
Insight Communications Company, L.P. Consolidated Balance Sheets at December 31, 1997 and 1998........... F-4
Insight Communications Company, L.P. Consolidated Statements of Operations for the years ended
December 31, 1996, 1997, and 1998..................................................................... F-5
Insight Communications Company, L.P. Consolidated Statements of Changes in Partners' Deficiency for the
years ended December 31, 1996, 1997, and 1998......................................................... F-6
Insight Communications Company, L.P. Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997, and 1998..................................................................... F-7
Insight Communications Company, L.P Notes to Consolidated Financial Statements........................... F-8
INTERMEDIA CAPITAL PARTNERS, VI, L.P.
Report of Independent Accountants--PricewaterhouseCoopers LLP............................................ F-18
InterMedia Capital Partners VI, L.P. Consolidated Balance Sheet at December 31, 1998..................... F-19
InterMedia Capital Partners VI, L.P. Consolidated Statement of Operations for the period April 30, 1998
(commencement of operations) to December 31, 1998..................................................... F-20
InterMedia Capital Partners VI, L.P. Consolidated Statement of Changes in Partners' Capital for the
period April 30, 1998 (commencement of operations) to December 31, 1998............................... F-21
InterMedia Capital Partners VI, L.P. Consolidated Statement of Cash Flows for the period April 30, 1998
(commencement of operations) to December 31, 1998..................................................... F-22
InterMedia Capital Partners VI, L.P. Notes to Consolidated Financial Statements.......................... F-23
TCI IPVI
Report of Independent Auditors--KPMG LLP................................................................. F-33
TCI IPVI Combined Balance Sheets at December 31, 1997 and April 30, 1998................................. F-34
TCI IPVI Combined Statements of Operations and Parent's Investment for each of the years in the two-year
period ended December 31, 1997 and for the four month period ended April 30, 1998..................... F-35
TCI IPVI Combined Statements of Cash Flows for each of the years in the two-year period ended
December 31, 1997 and for the four month period ended April 30, 1998................................... F-36
TCI IPVI Notes to Combined Financial Statements........................................................... F-37
TCI INSIGHT SYSTEMS
Report of Independent Auditors--KPMG LLP................................................................. F-44
TCI Insight Systems Combined Balance Sheets as of October 31, 1998 and December 31, 1997................. F-45
TCI Insight Systems Combined Statements of Operations and Parent's Investment for the ten month period
ended October 31, 1998, and the years ended December 31, 1997 and 1996................................ F-46
TCI Insight Systems Combined Statements of Cash Flows for the ten month period ended October 31, 1998,
and the years ended December 31, 1997 and 1996........................................................ F-47
TCI Insight Systems Notes to Combined Financial Statements............................................... F-48
F-1
PAGE
----
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
Report of Independent Auditors--Ernst & Young LLP........................................................ F-54
Insight Communications of Central Ohio, LLC Balance Sheet at December 31, 1998........................... F-55
Insight Communications of Central Ohio, LLC Statement of Operations and Changes in Members' Deficit for
the year ended December 31, 1998...................................................................... F-56
Insight Communications of Central Ohio, LLC Statement of Cash Flows for the year ended December 31,
1998.................................................................................................. F-57
Insight Communications of Central Ohio, LLC Notes to Financial Statements................................ F-58
CENTRAL OHIO CABLE OPERATING UNIT
Report of Independent Public Accountants--Arthur Andersen LLP............................................ F-62
Central Ohio Cable System Operating Unit Statement of Net Assets to be Contributed as of December 31,
1997.................................................................................................. F-63
Central Ohio Cable System Operating Unit Statements of Operations Related to Net Assets to be Contributed
for the years ended December 31, 1996 and 1997........................................................ F-64
Central Ohio Cable System Operating Unit Statements of Cash Flows for the years ended December 31, 1996
and 1997.............................................................................................. F-65
Central Ohio Cable System Operating Unit Notes to Financial Statements................................... F-66
F-2
REPORT OF INDEPENDENT AUDITORS
The Partners
Insight Communications Company, L.P.
We have audited the accompanying consolidated balance sheets of Insight
Communications Company, L.P. (A Limited Partnership) as of December 31, 1997 and
1998, and the related consolidated statements of operations, changes in
partners' deficiency, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Insight
Communications Company, L.P. (A Limited Partnership) at December 31, 1997 and
1998, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
As discussed in Note C to the consolidated financial statements, in 1998 the
Partnership changed its method of accounting for cable system exchanges.
/s/ ERNST & YOUNG LLP
New York, New York
March 31, 1999
F-3
INSIGHT COMMUNICATIONS COMPANY, L.P.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
--------------------------
1997 1998
----------- -----------
(RESTATED)
ASSETS
Cash and cash equivalents................................................................ $ 1,082 $ 19,902
Cash on deposit with qualified intermediary.............................................. 12,646 --
Trade accounts receivable, net of allowance for doubtful accounts of $130 in 1997 and
$409 in 1998........................................................................... 1,330 7,988
Due from affiliated companies............................................................ 57 --
Due from Insight Communications of Central Ohio, LLC..................................... -- 1,039
Prepaid expenses......................................................................... 926 500
Other assets............................................................................. 2,273 1,098
Fixed assets, net........................................................................ 63,842 155,412
Intangible assets, net................................................................... 72,499 462,355
Deferred financing costs, net of amortization of $0 in 1997 and $143 in 1998............. 3,448 4,794
Investment in Insight Communications of Central Ohio, LLC................................ -- 6,749
--------- ---------
$ 158,103 $ 659,837
--------- ---------
--------- ---------
LIABILITIES AND PARTNERS' DEFICIENCY
Accounts payable......................................................................... $ 6,478 $ 24,290
Accrued expenses and other liabilities................................................... 7,183 4,068
Due to affiliates........................................................................ -- 88
Interest payable......................................................................... 1,389 7,661
Debt..................................................................................... 207,488 573,663
--------- ---------
222,538 609,770
Minority interest........................................................................ -- 6,676
Warrants................................................................................. 3,547 --
Redeemable preferred limited units, 26,525,042 and 0 units outstanding in 1997 and 1998,
respectively........................................................................... 60,000 --
Redeemable Class B common units, 0 and 47,215,859 units outstanding in 1997 and 1998,
respectively, net of issuance costs of $4,410.......................................... -- 51,319
Partners' deficiency:
General partner........................................................................ (1,728) (528)
Limited partners, 52,634,399 and 41,974,421 units issued and outstanding in 1997 and
1998, respectively.................................................................. (126,254) (7,400)
--------- ---------
(127,982) (7,928)
--------- ---------
$ 158,103 $ 659,837
--------- ---------
--------- ---------
See accompanying notes.
F-4
INSIGHT COMMUNICATIONS COMPANY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1997 1998
---------------- ------------------ -------------
(RESTATED)
Revenue............................................................ $ 61,839 $ 67,698 $ 112,902
Costs and expenses:
Programming and other operating costs............................ 16,774 18,397 30,376
Selling, general and administrative.............................. 14,062 15,020 24,471
Depreciation and amortization.................................... 15,694 18,125 43,849
--------- --------- ---------
46,530 51,542 98,696
--------- --------- ---------
Operating income................................................... 15,309 16,156 14,206
Other income (expense):
Gain on cable systems exchange................................... -- 78,931 111,746
Gain on contribution of cable systems to Joint Venture........... -- -- 44,312
Interest expense................................................. (17,644) (15,962) (28,106)
Equity in losses of Insight Communications of Central Ohio, LLC.. -- -- (3,251)
Other expense.................................................... -- -- (444)
--------- --------- ---------
(17,644) 62,969 124,257
--------- --------- ---------
Income (loss) before extraordinary item and minority interest...... (2,335) 79,125 138,463
Extraordinary loss from early extinguishment of debt............... (480) (5,243) (3,267)
--------- --------- ---------
Income (loss) before minority interest............................. (2,815) 73,882 135,196
Minority interest.................................................. -- -- 3,410
--------- --------- ---------
Net income (loss).................................................. (2,815) 73,882 138,606
Accretion of redeemable Class B common units....................... -- -- (5,729)
Accretion to redemption value of preferred limited units........... (5,421) (15,275) --
--------- --------- ---------
Net income (loss) applicable to common units....................... $ (8,236) $ 58,607 $ 132,877
--------- --------- ---------
--------- --------- ---------
See accompanying notes.
F-5
INSIGHT COMMUNICATIONS COMPANY, L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIENCY
(DOLLARS IN THOUSANDS)
LIMITED PARTNERS
GENERAL -------------------------
PARTNER AMOUNT UNITS TOTAL
------- --------- ------------ ---------
Balance at December 31, 1995................................. $(2,232) $(167,369) 80,259,565 $(169,601)
Net loss for year.......................................... (28) (2,787) -- (2,815)
Accretion of preferred limited units....................... (54) (5,367) -- (5,421)
------- --------- ------------ ---------
Balance at December 31, 1996................................. (2,314) (175,523) 80,259,565 (177,837)
Net income for year (Restated)............................. 739 73,143 -- 73,882
Purchase of limited partner's interest....................... -- (10,250) (27,625,166) (10,250)
Purchase of warrants....................................... -- 366 -- 366
Accretion of preferred limited units....................... (153) (15,122) -- (15,275)
Depreciation of warrants................................... -- 1,132 -- 1,132
------- --------- ------------ ---------
Balance at December 31, 1997 (Restated)...................... (1,728) (126,254) 52,634,399 (127,982)
Net income for year........................................ 1,386 137,220 -- 138,606
Accretion of redeemable Class B common units............... (57) (5,672) -- (5,729)
Purchase of limited partners' units........................ (165) (16,321) (13,189,066) (16,486)
Warrants exercised......................................... 10 957 2,529,088 967
Warrants lapsed............................................ 35 3,512 -- 3,547
Purchase of warrants....................................... (9) (842) -- (851)
------- --------- ------------ ---------
Balance at December 31, 1998................................. $ (528) $ (7,400) 41,974,421 $ (7,928)
------- --------- ------------ ---------
------- --------- ------------ ---------
See accompanying notes.
F-6
INSIGHT COMMUNICATIONS COMPANY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------------------
1996 1997 1998
-------------- ---------------- ------------
(RESTATED)
Operating activities:
Net income (loss)......................................................... $ (2,815) $ 73,882 $ 138,606
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization.......................................... 15,694 18,125 43,849
Amortization of debt discount and deferred interest.................... 1,546 259 --
Equity in losses of Insight Communications of Central Ohio, LLC........ -- -- 3,251
Gain on cable systems exchange......................................... -- (78,931) (111,746)
Gain on contribution of cable systems to joint venture................. -- -- (44,312)
Extraordinary loss from early extinguishment of debt................... 480 2,002 3,267
Minority interest...................................................... -- -- (3,410)
Provision for losses on trade accounts receivable...................... 670 695 1,288
Changes in operating assets and liabilities:
Trade accounts receivable............................................ (647) (1,058) (7,545)
Due from and to affiliates........................................... (4) 12 (894)
Prepaid expenses and other assets.................................... (474) (1,663) 1,707
Accounts payable..................................................... (623) 2,046 17,774
Accrued expenses and other liabilities............................... 943 (1,782) (3,347)
Interest payable..................................................... 1,206 (3,151) 6,272
-------- ---------- ----------
Net cash provided by operating activities................................. 15,976 10,436 44,760
-------- ---------- ----------
Investing activities:
Purchases of fixed assets................................................. (16,414) (27,981) (44,794)
Purchase of cable television system, net of working capital acquired...... -- -- (84,101)
Investment in Insight Communications of Central Ohio, LLC................. -- -- (10,000)
Increase in intangible assets............................................. (175) -- (3,295)
-------- ---------- ----------
Net cash used in investing activities..................................... (16,589) (27,981) (142,190)
-------- ---------- ----------
Financing activities:
Proceeds from bank credit facility........................................ 11,000 140,252 753,900
Repayment of amounts due to Tele-Communications, Inc...................... -- -- (214,532)
Principal payments on bank credit facility................................ (6,800) (108,044) (387,725)
Purchase of warrants...................................................... -- (320) 116
Issuance of Class B common units.......................................... -- -- 50,000
Class B common unit issuance costs........................................ -- -- (4,410)
Purchase of redeemable preferred limited units............................ -- -- (60,000)
Purchase of limited partners' interest.................................... -- (10,250) (16,486)
Debt issuance costs....................................................... (3,330) (3,747) (4,613)
-------- ---------- ----------
Net cash provided by financing activities................................. 870 17,891 116,250
-------- ---------- ----------
Net increase in cash and cash equivalents................................. 257 346 18,820
Cash and cash equivalents, beginning of year.............................. 479 736 1,082
-------- ---------- ----------
Cash and cash equivalents, end of year.................................... $ 736 $ 1,082 $ 19,902
-------- ---------- ----------
-------- ---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest, net of amount capitalized.................................... $ 15,639 $ 19,103 $ 21,834
-------- ---------- ----------
-------- ---------- ----------
See accompanying notes.
F-7
INSIGHT COMMUNICATIONS COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
A. ORGANIZATION
Insight Communications Company, L.P., (the "Partnership"), is a Delaware
limited partnership, that owns, operates, and manages cable television systems.
Pursuant to the partnership agreement, the Partnership will terminate by
December 31, 2020 unless further extended. As of December 31, 1998, the
Partnership operates cable television systems in Illinois, California, Georgia,
Indiana, Kentucky and Virginia. As the Partnership is a limited partnership, the
liability of its limited partners is limited to their respective investment in
the Partnership.
The general partner of the Partnership is ICC Associates, L.P. ("ICC" or
the "General Partner"), a limited partnership whose general partner is Insight
Communications Inc. ("ICI"). ICC also holds an interest of approximately
4,554,000 common limited partnership units ("Common Units") in the Partnership.
B. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Partnership and Insight Communications of Indiana, LLC, ("Insight Indiana") a
50% owned joint venture in which the Partnership has effective control through
majority representation on its management committee (see Note D). The minority
interest liability represents Tele-Communications, Inc.'s ("TCI") 50% ownership
interest in Insight Indiana. All significant intercompany balances and
transactions have been eliminated in consolidation. The Partnership's 75% non-
voting common interest in Insight Communications of Central Ohio, LLC ("Insight
Ohio") is accounted for under the equity method (see Note E).
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Revenues include service fees, connection fees, and launch fees. Service
fees are recorded in the month the cable television and pay television services
are provided to subscribers. Connection fees are charged for the hook-up of new
customers and are recognized as current revenues to the extent of direct selling
costs incurred. Where material, any fees in excess of such costs are deferred
and amortized into income over the period that subscribers are expected to
remain connected to the system. Launch fees are deferred and amortized over the
period of the underlying contract.
Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Fixed Assets
Fixed assets include amounts capitalized for labor and overhead expended in
connection with the installation of cable television systems and are stated at
cost. Depreciation for furniture, fixtures, office equipment, buildings, and
equipment is computed using the straight-line method over estimated useful lives
ranging from 3 to 19 years.
F-8
INSIGHT COMMUNICATIONS COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
B. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Leasehold improvements are being amortized using the straight-line method over
the remaining terms of the leases or the estimated lives of the improvements,
whichever period is shorter. Management does not believe that any events or
changes in circumstances indicate that the carrying amount of these long-lived
assets may not be recovered.
Intangible Assets
Intangible assets consist of franchise costs and goodwill. Costs incurred
in negotiating and renewing franchise agreements are capitalized and amortized
over the life of the franchise. Franchise rights acquired through the purchase
of cable television systems represent the excess of the cost of the properties
acquired over the amounts assigned to the tangible assets at the date of
acquisition and are amortized using the straight-line method over a period of up
to 15 years. Goodwill is amortized using the straight-line method over a period
of 40 years. The carrying value of intangible assets will be reviewed if facts
and circumstances suggest that they may be impaired. If this review indicates
that the intangible assets will not be recovered from the undiscounted future
cash flows of the Partnership, an impairment loss would be recorded by the
amount that the carrying value exceeds fair value. Based on its most recent
analysis, the Partnership believes that no material impairment of intangible
assets exists as of December 31, 1998.
Deferred Financing Costs
Deferred financing costs relate to costs, primarily legal fees and bank
facility fees, incurred to negotiate and secure bank loans (see Note H). These
costs are being amortized on a straight line basis over the life of the
applicable loan.
Income Taxes
No provision has been made in the accompanying financial statements for
Federal, State or Local income taxes since income or losses of the Partnership
is reportable by the individual partners in their respective tax returns. At
December 31, 1998, had the Partnership converted to a corporation, the
Partnership would have recognized a one-time non-recurring charge to earnings of
approximately $45 million to record a net deferred tax liability associated with
the change from a limited partnership to a corporation.
Allocation of Profits and Losses
Profits and losses are allocated between the partners for financial
reporting purposes based on cash distribution and liquidating distribution
preferences per the partnership agreement. For the years ended December 31,
1996, 1997 and 1998, losses were allocated 1% to the General Partner for its
interest and 99% to the limited partners.
The partnership agreement, as amended, provides for, among other matters,
the allocation of all items of profit and loss and the priority and allocation
of cash distributions. The General Partner also owns Common Units in the
Partnership.
F-9
INSIGHT COMMUNICATIONS COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
B. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Advertising Costs
The cost of advertising is expensed as incurred. For the years ended
December 31, 1996, 1997, and 1998 advertising expense approximated $274,000,
$369,000, and $702,000, respectively.
Impact of Recently Issued Accounting Standards
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (the "Statement"). The Partnership expects
to adopt the Statement effective January 1, 2000. The Statement will require the
Partnership to recognize all derivatives on the balance sheet at fair value.
Although management has not completed its assessment of the impact of the
Statement on its results of operations and financial position, management does
not anticipate that the adoption of this Statement will be material.
C. ACQUISITIONS AND GAIN ON CABLE SYSTEM EXCHANGES
Effective December 16, 1997, the Partnership exchanged their Phoenix,
Arizona system ("Phoenix") servicing 36,250 subscribers for Cox Communications,
Inc.'s Lafayette, Indiana system ("Lafayette") servicing 38,100 subscribers.
Pursuant to Section 1031 of the Internal Revenue Code, such transaction was
treated as a tax free like-kind exchange. In addition to the Lafayette system
received, the Partnership received $12.6 million in cash. In its 1997 financial
statements, the Partnership accounted for the aforementioned system exchange at
book value as the Partnership did not consider the exchange as an exchange of
businesses, but rather as an exchange of like-kind productive assets. In
addition, the Partnership recognized a gain of approximately $10.9 million to
the extent that the aforementioned proceeds received exceeded the proportionate
share of the carrying value of the Phoenix system surrendered. In connection
with the Partnership exploring various sources of financing, including a
potential initial public offering, the Partnership changed its accounting policy
related to this exchange and has accounted for the aforementioned exchange as a
sale and purchase of assets. This change in accounting was made as a result of
the Securities and Exchange Commission ("SEC") viewpoint that swapping of
businesses, even if in the same line of business, should be accounted for at
fair value under the guidance of APB opinion No. 16, "Business Combinations."
Accordingly, the accompanying 1997 financial statements include a gain of
$79.0 million on the sale of the Phoenix system. The Lafayette purchase price
was allocated to the cable television assets acquired in relation to their fair
values as increases in property and equipment of $22.4 million and franchise
costs of $56.6 million. Effective November 1, 1998, the Partnership contributed
the Lafayette system into Insight Indiana (see Note D).
On January 22, 1998, the Partnership acquired a cable television system
located in Rockford, Illinois ("Rockford") for $97 million. This acquisition has
been accounted for as a purchase. The Partnership paid for the acquisition with
borrowings under its credit facility and with the $12.6 million of cash received
in the aforementioned Phoenix/Lafayette swap and held on deposit with a
qualified intermediary. The purchase price was allocated to the cable television
assets acquired in relation to their fair values as increases in property and
equipment of $11.5 million and franchise costs of $85.5 million. Franchise
costs, arising from the acquisition, are being amortized over a period of 15
years. The results of operations of Rockford have been included in the
accompanying statements of operations since its acquisition date.
Effective October 31, 1998, the Partnership exchanged its Sandy, Brigham
City and Vernal, Utah systems (the "Utah Systems") servicing approximately
56,200 subscribers with TCI for their Jasper and Evansville, Indiana systems
servicing approximately 63,000 subscribers. This transaction has been accounted
for by the Partnership as a sale of the Utah Systems and purchase of the Jasper
and Evansville systems. Accordingly, the Evansville and Jasper systems have been
included in the accompanying consolidated balance sheets at their fair values
(approximately $125.0 million) and the Partnership recognized a gain on the sale
of the Utah Systems of approximately $112.0 million which amount represents the
difference between the carrying value of the Utah
F-10
INSIGHT COMMUNICATIONS COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
C. ACQUISITIONS AND GAIN ON CABLE SYSTEM EXCHANGES--(CONTINUED)
Systems and the fair value of the Evansville and Jasper systems. The Evansville
and Jasper systems purchase price was allocated to the cable television assets
acquired in relation to their fair values as increases in property and equipment
of $24 million and franchise costs of $101 million. Franchise costs arising from
the acquisition of the Evansville and Jasper systems are being amortized on the
straight-line method over a period of 15 years. In a simultaneous transaction,
the Jasper and Evansville systems were contributed by the Partnership into
Insight Indiana, a newly formed limited liability company (See Note D).
D. INSIGHT INDIANA
Effective October 31, 1998, the Partnership and TCI entered into a
contribution agreement ("Contribution Agreement"). Pursuant to the terms of the
Contribution Agreement, the Partnership and TCI contributed certain of their
cable television systems located in Indiana and Northern Kentucky to Insight
Indiana (a newly formed limited liability corporation) in exchange for 50%
equity interests therein. The cable television systems contributed to Insight
Indiana by the Partnership included the Jasper and Evansville systems that were
acquired by the Partnership from TCI. Pursuant to the terms of the Insight
Indiana Operating Agreement, Insight Indiana has a twelve year life, unless
extended by TCI and the Partnership. In addition, the Operating Agreement states
that the Partnership is the manager of Insight Indiana and effectively controls
its board, including all of the operating and financial decisions pertaining to
Insight Indiana. Accordingly, the accompanying consolidated financial statements
include the accounts of Insight Indiana since its inception on October 31, 1998.
The Partnership has accounted for the TCI contributed systems as a purchase.
Accordingly, the historical carrying values of the TCI contributed systems have
been increased by an amount equivalent to 50% of the difference between the fair
value of the systems and their respective carrying values. In addition, in
accordance with EITF 90-13, "Accounting for Simultaneous Common Control
Mergers", the Partnership recognized a gain of $44.3 million on the contribution
of its systems to Insight Indiana, equivalent to 50% of the difference between
the carrying value of such systems and their fair value. The aforementioned fair
value was allocated to the cable television assets contributed by TCI in
relation to their fair values as increases in property and equipment of $58.0
million and franchise costs of $181.6 million. In connection with the
contribution of TCI's cable television systems, TCI contributed $214.6 million
of intercompany debt owed by such systems to TCI. Similarly, the Partnership
contributed $237.4 million of debt pertaining to the systems that it contributed
to Insight Indiana. During November 1998, Insight Indiana repaid such amounts to
TCI and the Partnership, which payments were funded by borrowings under its
credit facility.
The pro forma unaudited results of operations of the Partnership for the
years ended December 31 assuming the contribution of the TCI systems occurred on
January 1, 1997 is as follows (in thousands):
1997 1998
-------- --------
Revenues.............................................................. $141,991 $175,667
Income before extraordinary item...................................... 108,689 116,900
Net income............................................................ 75,343 113,633
The Partnership earns a management fee for managing Insight Indiana
equivalent to 3% of Insight Indiana's revenues. For the two months ended
December 31, 1998, the Partnership earned approximately $.7 million of
management fees from Insight Indiana.
E. INSIGHT OHIO
On August 21, 1998, the Partnership and Coaxial Communications of Central
Ohio, Inc. ("Coaxial") entered into a contribution agreement (the "Coaxial
Contribution Agreement") pursuant to which Coaxial contributed to Insight Ohio
(a newly formed limited liability company) substantially all of the assets and
liabilities of its cable television systems located in Columbus, Ohio and the
Partnership contributed to Insight
F-11
INSIGHT COMMUNICATIONS COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
E. INSIGHT OHIO--(CONTINUED)
Ohio $10 million in cash. As a result of the Coaxial Contribution Agreement,
Coaxial owns 25% of the non-voting common equity and the Partnership owns 75% of
the non-voting common equity of Insight Ohio. In addition, Coaxial also received
two separate series of voting preferred equity (Series A Preferred Interest--
$140 million and Series B Preferred Interest--$30 million) of Insight Ohio
(collectively the "Voting Preferred"). The Voting Preferred provides for cash
distributions to Coaxial and certain of its affiliates as follows;
Series A--10% and Series B--12 7/8%. Insight Ohio cannot redeem the Series A
Preferred interest or the Series B Preferred Interest without the permission of
the Principals of Coaxial; however, Insight Ohio is required to redeem the
Series B Preferred Interest on August 21, 2008. Coaxial has pledged the
Series A Preferred Interest and Series B Preferred Interest as security for $140
million of 10% senior notes due in 2006 issued by Coaxial and affiliate and
$55.9 million of aggregate principal amount at maturity of 12 7/8% senior
discount notes due in 2008 issued by Coaxial's majority shareholder and an
affiliate, respectively. The Discount Notes and Senior Notes are conditionally
guaranteed by Insight Ohio.
The Partnership is the manager of Insight Ohio, however, certain operating
decisions (approval of capital budgets) require the approval of a majority of
the holders of the Voting Preferred. Insight Ohio was formed solely for the
purpose of completing the aforementioned transaction. The Partnership earns a
management fee from Insight Ohio equal to 3% of Insight Ohio's revenues. For the
period from August 21, 1998 through December 31, 1998, the Partnership earned
approximately $.5 million in management fees from Insight Ohio.
The Partnership is accounting for its investment in Insight Ohio under the
equity method of accounting. The Partnership is amortizing the difference
between its initial $10 million investment and its 75% interest in Insight
Ohio's deficiency in assets over a period of 12 1/2 years, which period
represents the average life of Insight Ohio's tangible and intangible assets.
Accordingly, the accompanying statement of operations for the year ended
December 31, 1998 includes the Partnership's share of Insight Ohio's operating
income (approximately $.1 million) and the amortization of the aforementioned
deficiency in assets (approximately $3.3 million) from August 21, 1998 (the
effective date of the Coaxial Contribution Agreement) through December 31, 1998.
At December 31, 1998, Insight Ohio has a $25 million revolving line of
credit. At December 31, 1998, no amounts were outstanding under this line of
credit.
F. FIXED ASSETS
Fixed assets consist of:
DECEMBER 31,
----------------------------
1997 1998
------------ ------------
(IN THOUSANDS)
Land, buildings and improvements...................................... $ 3,595 $ 4,903
Cable television equipment............................................ 80,621 181,635
Furniture, fixtures and office equipment.............................. 3,384 8,941
-------- --------
87,600 195,479
Less accumulated depreciation and amortization........................ (23,758) (40,067)
-------- --------
$ 63,842 $155,412
-------- --------
-------- --------
F-12
INSIGHT COMMUNICATIONS COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
G. INTANGIBLE ASSETS
Intangible assets consist of:
DECEMBER 31,
----------------------------
TYPE 1997 1998
- ---------------------------------------------------------------------- ------------ ------------
(IN THOUSANDS)
Franchise rights...................................................... $ 86,969 $493,302
Goodwill.............................................................. 7,450 6,943
-------- --------
94,419 500,245
Less accumulated amortization......................................... (21,920) (37,890)
-------- --------
$ 72,499 $462,355
-------- --------
-------- --------
H. DEBT
Debt consists of:
DECEMBER 31,
----------------------------
1997 1998
------------ ------------
(IN THOUSANDS)
Revolving credit facility............................................. $ 89,800 $111,100
Insight Indiana credit facility....................................... -- 460,000
Term loan............................................................. 110,000 --
Note payable to Media One............................................. 7,688 2,563
-------- --------
$207,488 $573,663
-------- --------
-------- --------
In November, 1996, the Partnership entered into a second amended and
restated credit facility ("Amended Credit Facility"), which superseded the
Partnership's prior credit facility. The Amended Credit Facility provided for
loans totaling $220 million. On January 22, 1998, the Partnership entered into a
third amended and restated credit facility which increased the maximum amount of
borrowings under the amended and restated credit facility to $340 million. As a
result of the contribution of certain of the Partnership's cable television
systems to Insight Indiana and the execution by Insight Indiana of its own
credit facility, the Partnership entered into a fourth amended and restated
credit agreement which expires in December 2005 and reduced the maximum amount
of borrowings to $140 million. Borrowings under the fourth amended and restated
credit facility bear interest at either the Alternative Base Rate (ABR) or
reserve-adjusted London Interbank Offered Rate (LIBOR), plus the Applicable
Margin as defined. The Applicable Margin varies based upon levels of total
leverage ranging from 0.0% to 0.625% under the ABR option and 1.0% to 1.875%
under the LIBOR option. The second and third amended and restated credit
facilities contained similar rates for interest. At December 31, 1998,
approximately $111 million was outstanding under this facility.
The fourth amended and restated credit facility is subject to numerous
restrictive covenants, including but not limited to, restrictions on incurrence
of indebtedness, mergers, acquisitions, asset sales, distributions, and capital
expenditures. In addition, there are a series of financial tests including those
measuring the Partnership's coverage ratios and leverage. For the years ended
December 31, 1996, 1997, and 1998 average interest rates were 10.7%, 8.4% and
8.2%, respectively. Such amended credit facility is secured by substantially all
the present and future assets of the Partnership other than those of Insight
Indiana.
In March 1993, the Partnership issued $108 million aggregate principal
amount of 11 1/4% Notes due in full on March 1, 2000. Effective March 1, 1997,
the Partnership repurchased such notes for $111.2 million which resulted in an
extraordinary loss of $5.2 million.
F-13
INSIGHT COMMUNICATIONS COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
H. DEBT--(CONTINUED)
On November 24, 1997, the Partnership purchased the limited partnership
interest held by Media One for $10.3 million. The Partnership paid $2.6 million
in cash and issued a two-year senior subordinated note payable for
$7.7 million. The note bears interest at a rate of 9% payable annually.
Remaining principal payments approximate $2.6 million at December 31, 1998 and
are due on November 24, 1999. Should the Partnership default on any portion of
the aforementioned senior subordinated note, Media One would be entitled to a
pro-rata share of the limited partnership units purchased by the Partnership.
At December 31, 1998, Insight Indiana has a credit facility that provides
for long term loans of $300 million and for revolving credit loans of up to $250
million. The Insight Indiana credit facility matures in December 2006, and
contains quarterly reductions in the amount of outstanding loans and commitments
commencing in March 2001. Obligations under this credit facility are secured by
substantially all of the assets of Insight Indiana. Loans under the Insight
Indiana credit facility bear interest at an ABR or LIBOR plus an additional
margin tied to certain debt ratios of Insight Indiana. The credit facility
requires Insight Indiana to meet certain debt financial covenants. At
December 31, 1998 approximately $460 million was outstanding under the facility.
At December 31, 1998 required annual principal payments under the
aforementioned credit facilities and the Media One note are as follows (in
thousands):
1999.......................................................... $ 2,563
2000.......................................................... --
2001.......................................................... 65,000
2002.......................................................... 90,250
2003.......................................................... 114,750
Thereafter.................................................... 301,100
--------
$573,663
--------
--------
I. REDEEMABLE CLASS B COMMON UNITS,WARRANTS AND REDEEMABLE PREFERRED LIMITED
UNITS
On January 29, 1998, the Partnership issued 47,215,859 non-interest bearing
Class B Common Units ("Class B Units") to Vestar Capital Partners III, LP
("Vestar") in exchange for $50 million in cash, resulting in Vestar holding a
45% ownership interest on a fully diluted basis in the Partnership. In
connection with the issuance of the Class B Units, the Partnership paid
placement fees and expenses of $1.7 million to Vestar and $2.7 million to an
investment banking institution which amounts have been netted against the
aforementioned proceeds. The Class B Unit agreement includes a put/call
arrangement whereby the Class A partners or the Class B partners may call or
put, respectively, the Class B units during a 60 day period commencing in July
2004 at their fair market value. Distributions between the Class A Units and
Class B Units follow ownership percentage interests until the Class B Units earn
a 25% annual internal rate of return at which time distributions are amended to
approximately 30% to the Class B Unit holders and 70% to the Class A Unit
holders. In addition, management can earn up to 6% of the Class B holdings upon
achieving certain performance measures. At December 31, 1998, the Partnership
has accreted the Class B Units in an amount equivalent to the aforementioned 25%
internal rate of return. The Class B Units agreement provides for demand and
piggyback registration rights after an initial public offering of common equity
of the Partnership or its corporate successor.
In connection with a prior debt issuance, the Partnership issued detachable
warrants which were valued at $5.6 million at the date of issuance. Each warrant
entitles the holder thereof to purchase 4.22 Common Units in the Partnership at
an exercise price of $1.61 per warrant. For accounting purposes, the value of
the warrants was determined by management assuming that a sale had occurred as
of each year end and without regard to the illiquid nature of the warrants.
During 1997 and 1998, the Partnership acquired 176,490 and 512,200 warrants for
approximately $.3 million and approximately $.8 million, respectively. The value
of the warrants at
F-14
INSIGHT COMMUNICATIONS COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
I. REDEEMABLE CLASS B COMMON UNITS, WARRANTS AND REDEEMABLE PREFERRED LIMITED
UNITS--(CONTINUED)
December 31, 1997 was approximately $3.5 million, which was estimated based on a
valuation of the Partnership prepared by management. During 1998, 599,310
warrants were converted into 2,529,088 Partnership units and 383,303 units
expired. Accordingly, at December 31, 1998, no warrants are outstanding.
In 1993, the Partnership issued redeemable preferred limited units to a
group of investors for a gross purchase price of $27 million. During January
1998, all of the remaining units were redeemed for $60 million pursuant to a
negotiated agreement. Prior to such redemption, the units had a liquidation
preference equal to the capital contribution plus a cumulative return on such
capital at an annual rate of 12 1/2%. In addition, the units shared in the
increase in the equity value of the Partnership. At December 31, 1997 the
preferred limited units have been accreted to $60 million in the accompanying
consolidated balance sheet. At December 31, 1996 and 1997, the accreted
redemption value of the preferred limited units was derived by the Partnership
in the same manner as the value of the warrants.
J. FINANCIAL INSTRUMENTS
Concentrations of Credit Risk
Financial instruments that potentially subject the Partnership to
significant concentrations of credit risk consist principally of cash
investments and accounts receivable.
The Partnership maintains cash and cash equivalents, with various financial
institutions. These financial institutions are located throughout the country
and the Partnership's policy is designed to limit exposure to any one
institution.
Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of customers comprising the Partnership's
customer base.
The following methods and assumptions were used by the Partnership in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the
balance sheet for cash and cash equivalents approximates fair value.
Debt: The carrying amounts of the Partnership's borrowings under its
revolving credit arrangements approximate fair value as they bear interest
at floating rates.
The carrying amounts and fair values of the Partnership's financial
instruments at December 31 approximate fair value.
As required by its credit facilities, the Partnership enters into
interest-rate swap agreements to modify the interest characteristics of its
outstanding debt from a floating rate to a fixed rate basis. These agreements
involve the payment of fixed rate amounts in exchange for floating rate interest
receipts over the life of the agreement without an exchange of the underlying
principal amount. The differential to be paid or received is accrued as interest
rates change and is recognized as an adjustment to interest expense related to
the debt. The related amount payable to or receivable from counterparties is
included in other liabilities or assets. At December 31, 1998 the Partnership
has entered into various interest rate swap and collar agreements effectively
fixing interest rates between 5.35% and 6.16% on $301 million notional value of
debt. The fair values of the swap agreements are not recognized in the financial
statements and approximated $1.2 million at December 31, 1998.
F-15
INSIGHT COMMUNICATIONS COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
K. RELATED PARTY TRANSACTIONS
The Partnership has an agreement with Media One which enables the
Partnership to obtain certain services (principally pay and basic cable
programming services) and equipment at rates lower than those which would be
available from independent parties. Management believes that the loss of such
favorable rates could have a material adverse effect on the financial condition
and results of operations of the Partnership. In each of the years ended
December 31, 1996, 1997, and 1998, programming and other operating costs include
approximately $.2 million of expenses related to programming services paid to
Media One.
In addition, in connection with the Contribution Agreement (see note D),
Insight Indiana purchases substantially all of its pay television and other
programming from affiliates of TCI. Charges for such programming were
$1.4 million for the period from November 1, 1998 through December 31, 1998.
Management believes that the programming rates charged by TCI affiliates are
lower than those which would be available for independent parties.
During the years ended December 31, 1996, 1997 and 1998 the Partnership
reimbursed ICI for officers' salaries paid on its behalf of approximately
$1.7 million, $1.6 million and $1.8 million, respectively.
The General Partner leases, from an unaffiliated third party, office space
in New York City for the Partnership's principal executive offices, and the
Partnership reimburses the General Partner for the rent for such offices. For
the years ended December 31, 1996, 1997 and 1998, the Partnership paid
$.4 million, $.4 million, and $.5 million for rent to the General Partner.
L. 401(k) PLAN
The Partnership sponsors a savings and investment 401(k) Plan (the "Plan")
for the benefit of its employees. ICI is also a sponsor of the Plan. All
employees who have completed six months of employment and have attained age 21
are eligible to participate in the Plan. The Partnership makes matching
contributions equal to 25% of the employee's contribution which is not in excess
of 5% of the employee's wages. During 1996, 1997 and 1998 the Partnership
matched contributions of approximately $49,000, $51,000 and $188,000,
respectively.
M. COMMITMENTS AND CONTINGENCIES
The Partnership leases and subleases equipment and office space under
operating lease arrangements expiring through December 31, 2015. Future minimum
rental payments required under operating leases are as follows:
(IN THOUSANDS)
1999....................................................... $1,571
2000....................................................... 1,220
2001....................................................... 1,165
2002....................................................... 433
2003....................................................... 218
Thereafter................................................. 381
------
$4,988
------
------
Rental expense for the years ended December 31, 1996, 1997 and 1998
approximated $.7 million, $.7 million and $1 million, respectively.
Certain of the Partnership's individual systems have been named in
purported class actions in various jurisdictions concerning late fee charges and
practices. Certain of the Partnership's cable television systems charge late
fees to subscribers who do not pay their cable bills on time. Plaintiffs
generally allege that the late fees charged by such cable television systems are
not reasonably related to the costs incurred by the cable
F-16
INSIGHT COMMUNICATIONS COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
M. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
television systems as a result of the late payment. Plaintiffs seek to require
cable television systems to provide compensation for alleged excessive late fee
charges for past periods. These cases are at various stages of the litigation
process. Based upon the facts available, management believes that, although no
assurances can be given as to the outcome of these actions, the ultimate
disposition of these matters should not have a material adverse effect upon the
financial condition or results of operations of the Partnership.
The Partnership is subject to other various legal proceedings that arise in
the ordinary course of business. While it is impossible to determine with
certainty the ultimate outcome of these matters, it is management's opinion that
the resolution of these matters will not have a material adverse affect on the
consolidated financial condition of the Partnership.
N. SUBSEQUENT EVENTS
On March 22, 1999, the Partnership exchanged its Franklin, Virginia cable
system ("Franklin") servicing 9,182 subscribers for Falcon Cablevision's
Scottsburg Indiana ("Scottsburg") cable system servicing 4,785 subscribers. In
addition, the Partnership received $8 million in cash. In addition, on
March 31, 1999, the Partnership acquired Michigan and Indiana Cable Associates,
Ltd's Portland, Indiana and Americable International--Michigan Inc's Fort
Recovery, Ohio cable systems ("Portland") servicing approximately 6,100
subscribers for approximately $10.9 million. The preliminary purchase price was
allocated to the cable television assets acquired in relation to their fair
values as increases in property and equipment of $2.3 million and franchise
costs of $8.6 million. The Partnership will account for the acquisition of the
Scottsburg and Portland systems as purchases.
Subsequent to December 31, 1998, the Partnership entered into an agreement
with Blackstone Capital Partners III Merchant Fund L.P. ("Blackstone") to
purchase its 50% interest in InterMedia Capital Partners VI, L.P (the
"InterMedia VI Partnership") for approximately $327 million subject to
adjustment. InterMedia VI Partnership was formed in August 1996 by TCI,
Blackstone and Intermedia Partners to acquire and operate contributed cable
television systems servicing approximately 430,000 subscribers in four major
markets in Kentucky, including Louisville, Lexington and Covington.
The pro forma unaudited results of operations for the year ended
December 31, 1998 assuming the acquisition of the InterMedia VI Partnership had
been consummated on January 1, 1998, follows (in thousands):
1998
--------
Revenues...................................................... $308,409
Income before extraordinary item.............................. 59,474
Net income.................................................... 59,617
Subject to consummation of the acquisition, the Partnership will be
appointed the manager of the IPVI Partnership and will earn a management fee
equivalent to 3% of the IPVI Partnership's revenues.
F-17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
InterMedia Capital Partners VI, L.P.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of partners' capital and of cash flows
present fairly, in all material respects, the financial position of InterMedia
Capital Partners VI, L.P. (the Partnership) and its subsidiaries at
December 31, 1998, and the results of their operations and their cash flows for
the period from April 30, 1998 (commencement of operations) to December 31, 1998
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
San Francisco, California
March 26, 1999
F-18
INTERMEDIA CAPITAL PARTNERS VI, L.P.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
DECEMBER 31,
1998
------------
ASSETS
Cash and cash equivalents........................................................................... $ 2,602
Accounts receivable, net of allowance for doubtful accounts of $2,692............................... 15,160
Receivable from affiliates.......................................................................... 7,532
Prepaids and other current assets................................................................... 1,049
--------
Total current assets................................................................................ 26,343
Intangible assets, net.............................................................................. 632,002
Property and equipment, net......................................................................... 243,100
Other non-current assets............................................................................ 3,045
--------
Total assets........................................................................................ $904,490
--------
--------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued liabilities............................................................ $ 23,541
Payable to affiliates............................................................................... 2,913
Deferred revenue.................................................................................... 11,429
Accrued interest.................................................................................... 5,529
--------
Total current liabilities........................................................................... 43,412
Deferred channel launch revenue..................................................................... 7,767
Long-term debt...................................................................................... 726,000
Other long-term liabilities......................................................................... 411
--------
Total liabilities................................................................................... 777,590
--------
Commitments and contingencies
Total partners' capital............................................................................. 126,900
--------
Total liabilities and partners' capital............................................................. $904,490
--------
--------
See accompanying notes to the consolidated financial statements
F-19
INTERMEDIA CAPITAL PARTNERS VI, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
FOR THE PERIOD
APRIL 30, 1998
(COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1998
----------------------------
Revenues:
Basic and cable services.......................................................... $ 91,970
Pay service....................................................................... 18,500
Other service..................................................................... 20,995
--------
131,465
--------
Costs and expenses:
Program fees...................................................................... 30,106
Other direct expenses............................................................. 11,794
Selling, general and administrative expenses...................................... 27,884
Management and consulting fees.................................................... 1,350
Depreciation and amortization expenses............................................ 88,135
--------
159,269
--------
Loss from operations................................................................ (27,804)
--------
Other income (expense):
Interest and other income......................................................... 323
Interest expense.................................................................. (38,561)
Other expense..................................................................... (640)
--------
(38,878)
--------
Net loss............................................................................ $(66,682)
--------
--------
See accompanying notes to the consolidated financial statements.
F-20
INTERMEDIA CAPITAL PARTNERS VI, L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS CAPITAL
(DOLLARS IN THOUSANDS)
FOR THE PERIOD
APRIL 30, 1998
(COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1998
-------------------------------
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------- -------- --------
Cash contributions.............................................................. $ 2 $102,032 $102,034
In-kind contributions........................................................... -- 100,000 100,000
Syndication costs............................................................... -- (8,452) (8,452)
Net loss........................................................................ -- (66,682) (66,682)
--- -------- --------
Balance at December 31, 1998.................................................... $ 2 $126,898 $126,900
--- -------- --------
--- -------- --------
See accompanying notes to the consolidated financial statements.
F-21
INTERMEDIA CAPITAL PARTNERS VI, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE PERIOD
APRIL 30, 1998
(COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1998
----------------------------
Cash flows from operating activities:
Net loss........................................................................... $ (66,682)
Depreciation and amortization................................................... 88,528
Changes in assets and liabilities:
Accounts receivable........................................................... (3,455)
Receivable from affiliate..................................................... (7,532)
Prepaids and other current assets............................................. (739)
Other non-current assets...................................................... (3,035)
Accounts payable and accrued liabilities...................................... 10,557
Payable to affiliates......................................................... 2,913
Deferred revenue.............................................................. 2,962
Deferred channel launch revenue............................................... 5,314
Other long-term liabilities................................................... 226
Accrued interest.............................................................. 5,529
----------
Cash flows from operating activities................................................. 34,586
----------
Cash flows from investing activities:
Costs incurred in connection with contributed systems.............................. (3,629)
Property and equipment............................................................. (36,745)
Intangible assets.................................................................. (66)
----------
Cash flows from investing activities................................................. (40,440)
----------
Cash flows from financing activities:
Debt issue costs................................................................... (7,395)
Proceeds from long-term debt....................................................... 726,000
Repayment of debt assumed, net of cash acquired.................................... (803,731)
Contributed capital................................................................ 102,034
Syndication costs.................................................................. (8,452)
----------
Cash flows from financing activities................................................. 8,456
----------
Net change in cash and cash equivalents.............................................. 2,602
Cash and cash equivalents, beginning of period....................................... --
----------
Cash and cash equivalents, end of period............................................. $ 2,602
----------
----------
See accompanying notes to the consolidated financial statements.
F-22
INTERMEDIA CAPITAL PARTNERS VI, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. THE PARTNERSHIP AND BASIS OF PRESENTATION
InterMedia Capital Partners VI, L.P. ("ICP-VI"), a Delaware limited
partnership, was formed in October 1997 for the purpose of acquiring and
operating cable television systems located in the state of Kentucky. The
Partnership commenced business on April 30, 1998 upon contribution of cable
television systems serving subscribers throughout western and central Kentucky
(the "Systems") with significant concentrations in the state's four largest
cities: Lexington, Louisville, Covington and Bowling Green. ICP-VI and its
directly and indirectly majority-owned subsidiaries, InterMedia Partners Group
VI, L.P. ("IPG-VI"), InterMedia Partners VI, L.P. ("IP-VI"), and InterMedia
Partners of Kentucky, L.P. ("IP-KY") are collectively referred to as the
"Partnership." Prior to April 30, 1998, the Partnership had no operations.
On April 30, 1998, the Partnership obtained capital contributions from its
limited and general partners of $202,034, including an in-kind contribution of
the Systems. InterMedia Capital Management VI, LLC ("ICM-VI LLC"), a Delaware
limited liability company, is the 0.001% general partner of ICP-VI. The Systems
were contributed by affiliates of Tele-Communications, Inc. ("TCI"), a 49.5%
limited partner of ICP-VI. TCI's 49.5% interest consists of a 49.005% direct
ownership interest issued in exchange for its in-kind contribution (see
Note 3--Contribution of Cable Properties) and an indirect ownership of 0.495%
through its 49.55% limited partner interest in InterMedia Capital Management VI,
L.P. ("ICM-VI LP"), a California limited partnership, which owns a 0.999%
limited partner interest in ICP-VI. Blackstone Cable Acquisition Company, LLC
("Blackstone"), a 49.5% limited partner of ICP-VI, contributed $100,000 in cash.
As of December 31, 1998, the Partnership served approximately 426,400
subscribers (unaudited) and encompassed approximately 655,200 homes passed
(unaudited).
The Partnership's contributed cable television systems were structured as
leveraged transactions and a significant portion of the assets contributed are
intangible assets which are being amortized over one to fourteen years.
Therefore, as was planned, the Partnership has incurred substantial book losses.
Of the total net losses of $66,682, non-cash charges have aggregated $88,528.
These charges consist of $35,036 of depreciation of property and equipment and
$53,492 of amortization of intangible assets predominately related to franchise
rights.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of ICP-VI and
its directly and indirectly majority-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
Cash equivalents
The Partnership considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue recognition
Cable television service revenue is recognized in the period in which the
services are provided to customers. Deferred revenue represents revenue billed
in advance and deferred until cable service is provided.
Property and equipment
Additions to property and equipment, including new customer installations,
are recorded at cost. Self-constructed fixed assets include materials, labor and
overhead. Costs of disconnecting and reconnecting cable service are expensed.
Expenditures for maintenance and repairs are charged to expense as incurred.
Expenditures for major renewals and improvements are capitalized. Capitalized
plant is written down to recoverable values whenever recoverability through
operations or sale of the systems becomes doubtful.
F-23
INTERMEDIA CAPITAL PARTNERS VI, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Depreciation is computed using the double-declining balance method over the
following estimated useful lives:
YEARS
------
Cable television plant............................................. 5-10
Buildings and improvements......................................... 10
Furniture and fixtures............................................. 3-7
Equipment and other................................................ 3-10
Intangible assets
The Partnership has franchise rights to operate cable television systems in
various towns and political subdivisions. Franchise rights are being amortized
over the lesser of the remaining lives of the franchises or the base
fourteen-year term of ICP-VI which expires on April 30, 2012. Remaining
franchise lives range from one to eighteen years.
The Partnership acquired a long term programming agreement (the
"Programming Agreement"), as described in Note 3--"Contribution of Cable
Properties." The Programming Agreement is valued at $150,000 and is being
amortized on a straight line basis over the fourteen year term of ICP-VI.
Debt issue costs are included in intangible assets and are being amortized
over the terms of the related debt.
Costs associated with potential acquisitions are initially deferred. For
acquisitions which are completed, related costs are capitalized as part of the
purchase price of assets acquired. For those acquisitions not completed, related
costs are expensed in the period the acquisition is abandoned.
Capitalized intangibles are written down to recoverable values whenever
recoverability through operations or sale of the systems becomes doubtful. Each
year, the Partnership evaluates the recoverability of the carrying value of its
intangible assets by assessing whether the projected cash flows, including
projected cash flows from sale of the systems, is sufficient to recover the
unamortized costs of these assets.
Interest rate swaps
Under an interest rate swap, the Partnership agrees with another party to
exchange interest payments at specified intervals over a defined term. Interest
payments are calculated by reference to the notional amount based on the
difference between the fixed and variable rates pursuant to the swap agreement.
The net interest received or paid as part of the interest rate swap is accounted
for as an adjustment to interest expense.
Income taxes
No provision or benefit for income taxes is reported by the Partnership
because, as partnerships, the tax effects of ICP-VI and its majority-owned
subsidiaries' results of operations accrue to the partners.
Partners' capital
Syndication costs incurred to raise capital have been charged to partners'
capital.
F-24
INTERMEDIA CAPITAL PARTNERS VI, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Allocation of profits and losses
Profits and losses are allocated in accordance with the provisions of
ICP-VI's partnership agreement, dated October 30, 1997, generally as follows:
Losses are allocated first to the partners to the extent of and in
accordance with relative capital contributions; second, to the partners
which loaned money to the Partnership to the extent of and in accordance
with relative loan amounts; and third, to the partners in accordance with
relative capital contributions.
Profits are allocated first to the partners which loaned money to the
Partnership and to the extent of and proportionate to previously allocated
losses relating to such loans; second, among the partners in accordance
with relative capital contributions, in an amount sufficient to yield a
pre-tax return of 10% per annum on their capital contributions; and third,
5.3% to the general partner and 14.7% to ICM-VI LP, and 80% to the limited
and general partners in accordance with relative capital contributions.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Disclosures about fair value of financial instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to estimate
the fair value:
Current assets and current liabilities: The carrying value of
receivables, payables, deferred revenue, and accrued liabilities
approximates fair value due to their short maturity.
Long-term debt: The fair value of the Partnership's borrowings under
the bank term loans and revolving credit facility are estimated based on
the borrowing rates currently available to the Partnership for obligations
with similar terms.
Interest rate swaps: The estimated fair value of the interest rate
swaps is based on the current value in the market for agreements with
similar terms and adjusted for the holding period.
New accounting pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income (FAS 130), which establishes standards for reporting and disclosure of
comprehensive income and its components. FAS 130 is effective for fiscal years
beginning after December 15, 1997 and requires reclassification of financial
statements for earlier periods to be provided for comparative purposes. The
Partnership's total comprehensive loss for all periods presented herein did not
differ from those amounts reported as net loss in the consolidated statement of
operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133).
FAS 133 is effective for all quarters of all fiscal years beginning after
June 15, 1999 (January 1, 2000 for the Partnership). FAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
F-25
INTERMEDIA CAPITAL PARTNERS VI, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. Management of the Partnership anticipates that, due to its limited
use of derivative instruments, the adoption of FAS 133 will not have a
significant effect on the Partnership's results of operation, financial position
or cash flows.
3. CONTRIBUTION OF CABLE PROPERTIES
On April 30, 1998, the Partnership borrowed $730,000 under new bank term
loans and a revolving credit facility and received equity contributions from its
partners of $202,034, consisting of $102,034 in cash and $100,000 of in-kind
contributions from TCI and another limited partner of ICP-VI. ICP-VI assumed
debt from TCI of $803,743 and issued a combined 49.5% limited partner interest
to TCI and another limited partner, in exchange for the contributed systems with
a fair market value of $753,743 and a long-term programming fee discount
agreement valued at $150,000. The TCI debt assumed was repaid with proceeds from
the borrowings under the bank loans and the cash contributions received from
ICP-VI's partners.
The total cost of the Systems contributed was as follows:
Value of debt assumed from TCI................................ $803,743
Costs incurred in connection with the contributed systems..... 3,629
Value of equity exchanged..................................... 100,000
--------
$907,372
--------
--------
The Partnership's allocation of costs related to the contributed systems is
as follows:
Tangible assets............................................... $234,143
Intangible assets............................................. 528,033
Programming agreement......................................... 150,000
Current assets................................................ 12,037
Current liabilities........................................... (12,389)
Non-current liabilities....................................... (4,452)
--------
Net assets contributed........................................ $907,372
--------
--------
4. INTANGIBLE ASSETS
Intangible assets as of December 31, 1998 consist of the following:
Franchise rights.............................................. $528,073
Programming agreement......................................... 150,000
Debt issue costs.............................................. 7,395
Other......................................................... 26
--------
685,494
Accumulated amortization...................................... (53,492)
--------
$632,002
--------
--------
F-26
INTERMEDIA CAPITAL PARTNERS VI, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
5. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1998 consist of the following:
Land.......................................................... $ 6,028
Cable television plant........................................ 213,826
Buildings and improvements.................................... 2,470
Furniture and fixtures........................................ 2,958
Equipment and other........................................... 20,279
Construction in progress...................................... 30,246
--------
275,807
Accumulated depreciation...................................... (32,707)
--------
$243,100
--------
--------
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of December 31, 1998 consist of
the following:
Accounts payable.............................................. $ 1,387
Accrued program costs......................................... 2,974
Accrued franchise fees........................................ 2,050
Accrued copyright fees........................................ 346
Accrued capital expenditures.................................. 7,248
Accrued property and other taxes.............................. 4,523
Other accrued liabilities..................................... 5,013
--------
$ 23,541
--------
--------
7. CHANNEL LAUNCH REVENUE
During the period ended December 31, 1998, the Partnership received
payments of $1,776 from certain programmers to launch and promote their new
channels. Also, during 1998 the Partnership recorded receivables from two
programmers, of which $5,855 remains outstanding at December 31, 1998. In
connection with the contribution of the Systems, the Partnership assumed
deferred launch support revenue and obligations of $4,452. Of the total amount
recorded, the Partnership recognized advertising revenue of $911 for
advertisements provided by the Partnership to promote the new channels. The
remainder is being amortized over the remaining terms of the program agreements
which range between eight and ten years, of which $1,406 was amortized and
recorded as other service revenue for the period ended December 31, 1998.
F-27
INTERMEDIA CAPITAL PARTNERS VI, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
8. LONG-TERM DEBT
Long-term debt as of December 31, 1998 consists of the following:
Senior Debt:
Bank revolving credit facility, $325,000 commitment as of December 31, 1998, interest
currently at LIBOR plus 1.625% (6.817%) or ABR plus .625% (8.625%) payable quarterly,
matures October 31, 2006............................................................... $199,000
Bank Term Loan A; interest at LIBOR plus 2.000% (7.188%) payable quarterly, matures
September 30, 2007..................................................................... 100,000
Bank Term Loan B; interest at LIBOR plus 2.125% (7.313%) payable quarterly, matures
December 31, 2007...................................................................... 250,000
--------
Total senior debt...................................................................... 549,000
--------
Subordinated Debt:
Bank Term Loan A; interest at LIBOR plus 2.750% (7.935%) payable quarterly, matures
April 30, 2008......................................................................... 125,000
Bank Term Loan B; $60,000 commitment as of December 31, 1998, interest at LIBOR plus
0.300% (5.5500%) payable quarterly, matures May 31, 1999............................... 52,000
--------
Total subordinated debt................................................................ 177,000
--------
Total debt............................................................................. $726,000
--------
--------
The Partnership's bank debt is outstanding under a revolving credit
facility and term loan agreements executed by the Partnership on April 30, 1998
(the "Bank Facility"). The revolving credit facility currently provides for
$325,000 of available credit. Starting June 30, 2001, revolving credit facility
commitments will be permanently reduced quarterly by increments ranging from
$7,500 to $40,000 through maturity on October 31, 2006. The senior Term Loan A
requires quarterly principal payments of $250 starting June 30, 2001 with final
payments in two equal installments of $47,125 on March 31 and September 30,
2007. The senior Term Loan B requires quarterly principal payments of $625
starting June 30, 2001 with final payments in two equal installments of $117,188
on September 30 and December 31, 2007. The subordinated Term Loan A requires
quarterly principal payments of $313 starting June 30, 2001 with final payments
in two equal installments of $58,281 on January 31 and April 30, 2008.
Total borrowings outstanding under the subordinated Term Loan B are due and
payable on May 31, 1999. The Partnership plans to extend the maturity date to
early 2000 and renegotiate the terms of the subordinated Term Loan B. The
renegotiations are expected to result in higher interest rates on the loan. If
the Partnership is not able to successfully extend the due date, the borrowings
under the subordinated Term Loan B will be repaid with additional capital
contributions from TCI and Blackstone. Accordingly, subordinated Term Loan B has
been classified as a Long-Term Debt.
Advances under the Bank Facility are available under interest rate options
related to the base rate of the administrative agent for the Bank Facility
("ABR") or LIBOR. Interest rates vary on borrowings under the revolving credit
facility from LIBOR plus 0.500% to LIBOR plus 1.875% or ABR to ABR plus 0.875%
based on the Partnership's ratio of senior debt to annualized semi-annual cash
flow, as defined ("Senior Leverage Ratio"). Interest rates vary on borrowings
under the senior Term Loan A from LIBOR plus 1.500% to LIBOR plus 2.125% or ABR
plus 0.500% to ABR plus 1.125%, and under the senior Term Loan B from LIBOR plus
1.750% to LIBOR plus 2.250% or ABR plus 0.750% to ABR plus 1.250% based on the
Partnership's Senior Leverage Ratio. Interest rates on borrowings under the
subordinated Term Loan A are at LIBOR plus 2.75% or ABR plus 2.75%, and under
the subordinated Term Loan B are at LIBOR plus 0.300% or ABR plus 0.300%. The
Bank Facility requires quarterly interest payments, or more frequent interest
payments if a shorter period is selected under the LIBOR option, and quarterly
payment of fees on the unused portion of the revolving credit facility and
F-28
INTERMEDIA CAPITAL PARTNERS VI, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
8. LONG-TERM DEBT--(CONTINUED)
the subordinated Term Loan B at 0.375% per annum when the Senior Leverage Ratio
is greater than 5.0:1.0 and at 0.250% when the Senior Leverage Ratio is less
than or equal to 5.0:1.0.
The Partnership has entered into interest rate swap agreements in the
aggregate notional principal amount of $500,000 to establish long-term fixed
interest rates on its variable rate debt. Under the swap agreements, the
Partnership pays quarterly interest at fixed rates ranging from 5.850% to 5.865%
and receives quarterly interest payments equal to LIBOR. The agreements expire
July 2003. At December 31, 1998, the fair market value of the interest rate
swaps was approximately $(14,493).
Borrowings under the Bank Facility, excluding the subordinated Term Loan B,
("Permanent Debt") are secured by the partnership interests of IPG-VI and
IP-VI's subsidiaries and negative pledges of the stock and assets of certain TCI
subsidiaries that are parties to an agreement ("Keepwell Agreement") to support
the Permanent Debt. Under the Keepwell Agreement, the TCI subsidiaries are
required to make loans to IPG-VI and IP-VI in an amount not to exceed $489,500
if (i) IPG-VI or IP-VI fails to make payment of principal in accordance with the
respective debt agreements, or (ii) amounts due under the respective debt
agreements have been accelerated for non-payment or bankruptcy. The subordinated
Bank Term Loan B is secured by guarantees of TCI and Blackstone.
The debt agreements contain certain covenants which restrict the
Partnership's ability to encumber assets, make investments or distributions,
retire partnership interests, pay management fees currently, incur or guarantee
additional indebtedness and purchase or sell assets. The debt agreements also
include financial covenants which require minimum interest and debt coverage
ratios and specify maximum debt to cash flows ratios.
Annual maturities of long-term debt at December 31, 1998 are as follows:
1999.......................................................... $ --
2000.......................................................... 52,000
2001.......................................................... 3,562
2002.......................................................... 4,750
2003.......................................................... 4,750
Thereafter.................................................... 660,938
--------
$726,000
--------
--------
Borrowings under the Bank Facility are at rates that would be otherwise
currently available to the Partnership. Accordingly, the carrying amounts of
bank borrowings outstanding as of December 31, 1998, approximate their fair
value.
9. RELATED PARTY TRANSACTIONS
ICM-VI LP provides certain management and administrative services to the
Partnership for a per annum fee of 1% of ICP-VI's total non-preferred partner
contributions ("ICM Management Fee") offset by certain expenses of the
Partnership, as defined, up to an amount equal to $500. In order to support the
Partnership's debt, 50% of the net ICM Management Fee is deferred until the
Partnership's Senior Leverage Ratio is less than five times. The remaining 50%
of the net ICM Management Fee is payable quarterly in advance. Any deferred ICM
Management Fee bears interest at 10%, compounded annually, payable upon payment
of the deferred management fee.
Based on current capital contributions, the management fee per annum is
$2,020 less partnership expenses of $500.
F-29
INTERMEDIA CAPITAL PARTNERS VI, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
9. RELATED PARTY TRANSACTIONS--(CONTINUED)
Pursuant to ICP-VI's partnership agreement, on April 30, 1998 the
Partnership prepaid $1,000 of the ICM Management Fee. ICM Management Fee expense
for the period ended December 31, 1998 amounted to $1,013. At December 31, 1998,
the Partnership has a non-current payable to ICM-VI LP of $13.
In connection with raising its capital, the Partnership paid transaction
fees of $4,942 to both TCI and Blackstone on April 30, 1998. The amount has been
recorded as syndication costs.
InterMedia Management, Inc. ("IMI") is the sole member of ICM-VI LLC. IMI
has entered into an agreement with the Partnership to provide accounting and
administrative services at cost. IMI also provides such services to other cable
systems which are affiliates of the Partnership. Administrative fees charged by
IMI for the period ended December 31, 1998 were $2,495. Receivable from
affiliate includes $628 of advances to IMI, net of administrative fees charged
by IMI, and operating expenses paid by IMI on behalf of the Partnership.
The Partnership pays monitoring fees of $250 per annum to each of TCI and
Blackstone. 50% of the monitoring fees are deferred until the Partnership's
Senior Leverage Ratio is less than five times in order to support the
Partnership's debt. The remaining 50% is payable quarterly in advance. Any
deferred monitoring fees bear interest at 10%, compounded annually, payable upon
payment of the deferred monitoring fees.
Pursuant to ICP-VI's partnership agreement, on April 30, 1998, the
Partnership prepaid its monitoring fees for the period from April 30, 1999
through April 29, 2000. The Partnership recorded monitoring fee expense of $333
for the period from April 30, 1998 through December 31, 1998 and has a
non-current payable of $83 each to TCI and Blackstone at December 31, 1998.
As an affiliate of TCI, the Partnership is able to purchase programming
services from a subsidiary of TCI. Management believes that the overall
programming rates made available through this relationship are lower than the
Partnership could obtain separately. Such volume rates may not continue to be
available in the future should TCI's ownership in the Partnership significantly
decrease. Programming fees charged by the TCI subsidiary for the period ended
December 31, 1998 amounted to $22,183. Payable to affiliates includes
programming fees payable to the TCI subsidiary of $2,913 at December 31, 1998.
The Partnership entered into an agreement with an affiliate of TCI to
manage the Partnership's advertising business and related services for an annual
fixed fee per advertising sales subscriber, as defined by the agreement. In
addition to the annual fixed fee, TCI will be entitled to varying percentage
shares of the incremental growth in annual cash flow from advertising sales
above specified targets. Management fees charged by the TCI subsidiary for the
period ended December 31, 1998 amounted to $563. Receivable from affiliates at
December 31, 1998 includes $6,904 of receivables from TCI for advertising sales.
10. CABLE TELEVISION REGULATION
Cable television legislation and regulatory proposals under consideration
from time to time by Congress and various federal agencies have in the past, and
may in the future, materially affect the Partnership and the cable television
industry.
The cable industry is currently regulated at the federal and local levels
under the Cable Act of 1984, the Cable Act of 1992 (the "1992 Act"), the
Telecommunications Act of 1996 (the "1996 Act") and regulations issued by the
Federal Communications Commission ("FCC") in response to the 1992 Act. FCC
regulations govern the determination of rates charged for basic, expanded basic
and certain ancillary services, and cover a number of other areas including
customer service and technical performance standards, the required transmission
of certain local broadcast stations and the requirement to negotiate
retransmission consent from major network and certain local television stations.
Among other provisions, the 1996 Act will eliminate rate regulation on the
expanded basic tier effective March 31, 1999.
F-30
INTERMEDIA CAPITAL PARTNERS VI, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
10. CABLE TELEVISION REGULATION--(CONTINUED)
Current regulations issued in connection with the 1992 Act empower the FCC
and/or local franchise authorities to order reductions of existing rates which
exceed the maximum permitted levels and require refunds measured from the date a
complaint is filed in some circumstances or retroactively for up to one year in
other circumstances. Management believes it has made a fair interpretation of
the 1992 Act and related FCC regulations in determining regulated cable
television rates and other fees based on the information currently available.
Many aspects of regulations at the federal and local levels are currently
the subject of judicial review and administrative proceedings. In addition, the
FCC continues to conduct rulemaking proceedings to implement various provisions
of the 1996 Act. It is not possible at this time to predict the ultimate outcome
of these reviews or proceedings or their effect on the Partnership.
11. COMMITMENTS AND CONTINGENCIES
The Partnership is committed to provide cable television services under
franchise agreements with remaining terms of up to eighteen years. Franchise
fees of up to 5% of gross revenues are payable under these agreements.
Current FCC regulations require that cable television operators obtain
permission to retransmit major network and certain local television station
signals. The Partnership has entered into long-term retransmission agreements
with all applicable stations in exchange for in-kind and/or other consideration.
The Partnership is subject to litigation and other claims in the ordinary
course of business. In the opinion of management, the ultimate outcome of any
existing litigation or other claims will not have a material adverse effect on
the Partnership's financial position, results of operations or cash flows.
The Partnership has entered into pole rental agreements and leases certain
of its facilities and equipment under non-cancelable operating leases. Minimum
rental commitments at December 31, 1998 for the next five years and thereafter
under these leases are as follows:
1999............................................................. $ 641
2000............................................................. 558
2001............................................................. 274
2002............................................................. 129
2003............................................................. 100
Thereafter....................................................... 156
------
$1,858
------
------
Rent expense, including pole rental agreements was $1,003, for the period
ended December 31, 1998.
12. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENT OF CASH FLOWS
During the period from April 30, 1998 through December 31, 1998, the
Partnership paid interest of $32,465.
As described in Note 3 (Contribution of Cable Properties), on April 30,
1998 the Partnership received, from TCI and another limited partner, in-kind
contributions of cable television systems located in Kentucky. In connection
with the contribution, the Partnership repaid debt assumed of $803,743 and
incurred fees of $3,629.
13. EMPLOYEE BENEFIT PLAN
The Partnership participates in the InterMedia Partners Tax Deferred
Savings Plan, which covers all full-time employees who have completed at least
six months of employment. Such Plan provides for a base employee contribution of
1% and a maximum of 15% of compensation. The Partnership's matching
contributions under such Plan are at the rate of 50% of the employee's
contributions, up to a maximum of 5% of compensation.
F-31
INTERMEDIA CAPITAL PARTNERS VI, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
14. SUBSEQUENT EVENTS
On February 1, 1999, the Partnership exchanged with Insight Communications
of Indiana, LLC its cable television assets located in and around Henderson,
Kentucky for cable television assets located in and around Oldham County,
Kentucky plus $4,000, subject to adjustments. The exchange is expected to result
in a gain.
On February 17, 1999 and March 11, 1999, the Partnership entered into
agreements with FrontierVision to exchange its cable television assets located
in and around Danville, Kentucky for cable television assets located in and
around Boone County, Kentucky plus $11,689, subject to adjustments. The
exchanges are expected to result in a gain.
On March 8, 1999, the Partnership's general and limited partners, except
for TCI, entered into a letter of intent with Insight Communications Company,
L.P. to sell their partnership interests in ICP-VI. The sale is expected to
close during the third quarter of 1999. Upon the sale, Insight Communications
Company L.P. is expected to manage the Partnership.
15. EVENTS SUBSEQUENT TO THE REPORT OF INDEPENDENT ACCOUNTANTS (UNAUDITED)
On April 18, 1999, the Partnership's general and limited partners, except
for TCI, entered into an agreement with Insight Communications Company, L.P. for
the sale of their partnership interests in ICP-VI.
On April 30, 1999 the Partnership was named as an additional defendant
in a purported class action which was originally filed in January 1998 against
TCI and certain of its affiliates in the State of Kentucky concerning late fee
charges and practices. Certain cable systems owned by the Partnership charge
late fees to customers who do not pay their cable bills on time. These late fee
cases challenge the amount of the late fees and the practices under which they
are imposed. The Plaintiffs raise claims under state consumer protection
statutes, other state statutes, and common law. Plantiffs generally allege that
the late fees charged by the Partnership's cable systems in the State of
Kentucky are not reasonably related to the costs incurred by the cable systems
as a result of late payment. Plaintiffs seek to require cable systems to reduce
their late fees on a prospective basis and to provide compensation for alleged
excessive late fee charges for past periods. Based upon the facts available
management believes that, although no assurances can be given as to the outcome
of these actions, the ultimate disposition of these matters should not have a
material adverse effect upon the financial condition of the Partnership.
F-32
INDEPENDENT AUDITORS' REPORT
The Board of Directors:
Tele-Communications, Inc.:
We have audited the accompanying combined balance sheets of the TCI
IPVI Systems (as defined in Note 1 to the combined financial statements) as of
April 30, 1998 and December 31, 1997, and the related combined statements of
operations and parent's investment (deficit), and cash flows for the four-month
period ended April 30, 1998 and for each of the years in the two-year period
ended December 31, 1997. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the TCI IPVI Systems
as of April 30, 1998 and December 31, 1997, and the results of their operations
and their cash flows for the four-month period ended April 30, 1998 and for each
of the years in the two-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Denver, Colorado
May 7, 1999
F-33
TCI IPVI SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED BALANCE SHEETS
DECEMBER 31, APRIL 30,
1997 1998
------------ ----------
(AMOUNTS IN THOUSANDS)
ASSETS
Trade and other receivables, net..................................................... $ 12,916 $ 11,944
Property and equipment, at cost:
Land............................................................................ 1,956 1,956
Distribution systems............................................................ 343,989 354,042
Support equipment and buildings................................................. 31,110 31,718
-------- ----------
377,055 387,716
Less accumulated depreciation................................................... 150,056 158,616
-------- ----------
226,999 229,100
-------- ----------
Intangible assets.................................................................... 715,670 784,316
Less accumulated amortization................................................... 127,592 133,443
-------- ----------
588,078 650,873
-------- ----------
Other assets......................................................................... 2,943 2,919
-------- ----------
$830,936 $ 894,836
-------- ----------
-------- ----------
LIABILITIES AND PARENT'S INVESTMENT (DEFICIT)
Accounts payable and accrued expenses................................................ $ 18,624 $ 13,049
Debt to banks (note 3)............................................................... 322,500 322,500
Intercompany notes owed to TCI (notes 1 and 5)....................................... -- 489,488
Deferred income taxes (note 4)....................................................... 229,590 254,698
-------- ----------
Total liabilities............................................................... 570,714 1,079,735
Parent's investment (deficit) (note 5)............................................... 260,222 (184,899)
-------- ----------
Commitments and contingencies (note 6)............................................... $830,936 $ 894,836
-------- ----------
-------- ----------
See accompanying notes to combined financial statements.
F-34
TCI IPVI SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS AND PARENT'S INVESTMENT (DEFICIT)
YEARS ENDED JANUARY 1, 1998
DECEMBER 31, THROUGH
---------------------------- APRIL 30,
1996 1997 1998
------------ ------------ -------------
(AMOUNTS IN THOUSANDS)
Revenue.................................................................. $170,682 $185,496 $ 64,042
Operating costs and expenses:
Operating (note 5)..................................................... 57,420 62,788 23,428
Selling, general and administrative.................................... 30,430 37,711 13,147
Management fees (note 5)............................................... 6,627 6,195 2,035
Depreciation........................................................... 27,751 27,996 9,528
Amortization........................................................... 17,234 17,868 5,851
-------- -------- ---------
139,462 152,558 53,989
-------- -------- ---------
Operating income............................................... 31,220 32,938 10,053
Interest expense......................................................... (20,414) (19,627) (6,661)
Other income (expense)................................................... 570 (65) 1,871
-------- -------- ---------
Earnings before income taxes................................... 11,376 13,246 5,263
Income tax expense (note 4).............................................. (4,663) (5,565) (1,971)
-------- -------- ---------
Net earnings................................................... 6,713 7,681 3,292
Parent's investment (deficit):
Beginning of period.................................................... 271,268 261,348 260,222
Change in due to Tele-Communications, Inc. ("TCI"), (notes 1 and 5).... (16,633) (8,807) 41,075
Intercompany notes owed to TCI (notes 1 and 5)......................... -- -- (489,488)
-------- -------- ---------
End of period.......................................................... $261,348 $260,222 $(184,899)
-------- -------- ---------
-------- -------- ---------
See accompanying notes to combined financial statements.
F-35
TCI IPVI SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 1, 1998
DECEMBER 31, THROUGH
---------------------------- APRIL 30,
1996 1997 1998
------------ ------------ ---------------
(AMOUNTS IN THOUSANDS)
Cash flows from operating activities:
Net earnings.......................................................... $ 6,713 $ 7,681 $ 3,292
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization...................................... 44,985 45,864 15,379
Deferred income tax expense (benefit).............................. (1,142) 1,690 (1,532)
Other non cash charges............................................. 270 438 146
Changes in operating assets and liabilities:
Change in receivables............................................ (1,837) (2,753) 972
Change in other assets........................................... (299) (42) (122)
Change in accounts payable and accrued expenses.................. 8,048 (28,587) (5,575)
-------- ---------- ---------
Net cash provided by operating activities..................... 56,738 24,291 12,560
-------- ---------- ---------
Cash flows from investing activities:
Capital expended for property and equipment........................... (84,061) (12,859) (10,636)
Other investing activities............................................ (44) (125) 7
-------- ---------- ---------
Net cash used in investing activities......................... (84,105) (12,984) (10,629)
-------- ---------- ---------
Cash flows from financing activities:
Change in due to TCI.................................................. (16,633) (8,807) (1,931)
Borrowing of debt..................................................... 60,000 103,500 --
Repayment of debt..................................................... (16,000) (106,000) --
-------- ---------- ---------
Net cash provided by (used) in financing activities........... 27,367 (11,307) (1,931)
-------- ---------- ---------
Net increase (decrease) in cash............................... -- -- --
Cash:
Beginning of period......................................... -- -- --
-------- ---------- ---------
End of period............................................... $ -- $ -- $ --
-------- ---------- ---------
-------- ---------- ---------
See accompanying notes to combined financial statements.
F-36
TCI IPVI SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1998 TO APRIL 30, 1998, AND
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. BASIS OF PRESENTATION
The combined financial statements include the accounts of eight of TCI's
cable television systems and five related advertising sales offices serving
certain subscribers within Kentucky (collectively, the "TCI IPVI Systems"). This
combination was created in connection with the Partnership formation discussed
below. Through February 1998, the TCI IPVI Systems were either 100%-owned or
majority-owned by TCI. In March 1998, through a series of transactions, TCI
acquired the remaining interest in the majority-owned entities from a third
party. As a result of these transactions, the TCI IPVI Systems' combined
financial statements include a March 1998 allocation of TCI's cost to acquire
such interest. Such allocation resulted in $69,646,000 of franchise costs and
$26,640,000 of deferred tax liabilities. All significant inter-entity accounts
and transactions have been eliminated in combination. The combined net assets of
TCI IPVI Systems are referred to as "Parent's Investment (Deficit)."
TCI's ownership interest in the IPVI Systems, as described above, were
acquired through transactions whereby TCI acquired various larger cable entities
(the "Original Systems"). The TCI IPVI System's combined financial statements
include an allocation of certain purchase accounting adjustments, including the
related deferred tax effects, from TCI's acquisition of the Original Systems.
Such allocation and the related franchise cost amortization was based on the
relative fair market value of the systems involved. In addition, certain costs
of TCI are charged to the TCI IPVI Systems based on their number of customers
(see note 5). Although such allocations are not necessarily indicative of the
costs that would have been incurred by the TCI IPVI Systems on a stand alone
basis, management believes that the resulting allocated amounts are reasonable.
Partnership Formation
Effective April 30, 1998, TCI and InterMedia Capital Management VI, L.P.
("InterMedia") executed a transaction under a Contribution Agreement, whereby
TCI contributed certain cable television systems and advertising sales offices,
the TCI IPVI Systems, to a newly formed partnership between TCI, Blackstone
Cable Acquisition Company, LLC, and InterMedia Capital Management VI, LLC (the
"Partnership") in exchange for an approximate 49.5% ownership interest in the
Partnership. TCI's 49.5% interest consists of a 49.005% direct ownership
interest issued in exchange for its contribution and an indirect ownership of
.495% through its 49.55% limited partner interest in InterMedia. In connection
with the contribution, the Partnership assumed $322.5 million of bank debt and
$489.5 million of intercompany interest bearing notes owed by the TCI IPVI
Systems to TCI and its affiliates. These amounts were subsequently paid by the
Partnership, net of certain post close adjustments. The accompanying combined
financial statements reflect the financial position, results of operations and
cash flows of the TCI IPVI Systems immediately prior to the contribution
transaction, and, therefore, do not include the effects of such transactions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Receivables
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at April 30, 1998 and December 31, 1997 was not significant.
Property and Equipment
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired. Construction costs, labor and applicable
overhead related to installations, and interest during construction are
capitalized. During the four-month period ended April 30, 1998 and for the years
ended December 31, 1997 and 1996, interest capitalized was not significant.
F-37
TCI IPVI SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)--(CONTINUED)
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1998 TO APRIL 30, 1998, AND
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Depreciation is computed on a straight-line basis using estimated useful
lives of 3 to 15 years for distribution systems and 3 to 40 years for support
equipment and buildings.
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. At the time of ordinary retirements, sales or other
dispositions of property, the original cost and cost of removal of such property
are charged to accumulated depreciation, and salvage, if any, is credited
thereto. Gains or losses are only recognized in connection with the sales of
properties in their entirety.
Intangible Assets
Intangible assets are comprised of franchise costs that represent the
difference between the cost of acquiring cable television systems and amounts
assigned to their tangible assets. Such amounts are generally amortized on a
straight-line basis over 40 years. Costs incurred by the TCI IPVI Systems in
negotiating and renewing franchise agreements are amortized on a straight-line
basis over the life of the franchise, generally 10 to 20 years.
Impairment of Long-Lived Assets
Management periodically reviews the carrying amounts of property, plant and
equipment and its intangible assets to determine whether current events or
circumstances warrant adjustments to such carrying amounts. If an impairment
adjustment is deemed necessary, such loss is measured by the amount that the
carrying value of such assets exceeds their fair value. Considerable management
judgment is necessary to estimate the fair value of assets, accordingly, actual
results could vary significantly from such estimates. Assets to be disposed of
are carried at the lower of their financial statement carrying amount or fair
value less costs to sell.
Revenue Recognition
Cable revenue for customer fees, equipment rental, advertising,
pay-per-view programming and revenue sharing agreements is recognized in the
period that services are delivered. Installation revenue is recognized in the
period the installation services are provided to the extent of direct selling
costs. Any remaining amount is deferred and recognized over the estimated
average period that customers are expected to remain connected to the cable
television system.
Combined Statements of Cash Flows
Transactions effected through the intercompany account with TCI (except for
the Dividend discussed in Note 5) have been considered constructive cash
receipts and payments for purposes of the combined statements of cash flows.
During 1998, TCI completed a series of transactions to acquire the
remaining interest of the group of entities that own the TCI IPVI Systems. This
transaction resulted in a non cash increase in franchise costs, parent's
investment (deficit), and deferred income tax liability of $69,646,000,
$43,006,000 and $26,640,000, respectively.
Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the combined financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
F-38
TCI IPVI SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)--(CONTINUED)
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1998 TO APRIL 30, 1998, AND
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
3. DEBT TO BANKS
As described in note 1, the bank debt of the TCI IPVI Systems was paid by
the Partnership subsequent to the contribution of the TCI IPVI Systems to the
Partnership.
Debt to banks consisted of borrowings under a $340,000,000 unsecured
revolving credit facility. The revolving credit facility's maximum commitment
were scheduled to be gradually reduced in increasing quarterly increments
commencing March 31, 1997 in amounts ranging from 2.50% to 5.75% of the
commitment level at that date through the December 31, 2002 expiration date. The
TCI IPVI Systems were permitted to make prepayments in multiples of $5,000,000
prior to the expiration date.
This facility provided for interest rates based on either the agent bank's
base rate (the higher of the prime rate or 1/2% above the Federal funds rate),
certificate of deposit-based rate, Eurodollar rate or some combination of the
above, plus an applicable margin, subject to selection by the TCI IPVI Systems.
The applicable margin was determined based on the maintenance of certain
leverage ratios. The interest rate, including the applicable margin, was 6.219%,
at April 30, 1998 and averaged approximately 6.06% during 1998.
The revolving line of credit facility required an annual commitment fee,
payable quarterly, at the rate of .375% of the average daily amount of the
available commitment.
The most significant debt covenants of this agreement stipulated that the
TCI IPVI Systems was not to pay cash dividends, may not fall below predetermined
annualized cash flow levels relative to existing debt levels, nor to obtain
additional borrowings or make principal payments on subordinated debt if certain
predetermined cash flow levels relative to debt service were not maintained.
Additionally, the TCI IPVI Systems had agreed to maintain certain defined debt
to cash flow and leverage ratios.
The minimum mandatory principal repayments required as of April 30, 1998
based upon the current level of indebtedness under the aforementioned facility
were as follows:
1998.......................................................... $ 74,980
1999.......................................................... 47,175
2000.......................................................... 59,755
2001.......................................................... 59,755
2002.......................................................... 72,335
Thereafter.................................................... 8,500
--------
$322,500
--------
--------
4. INCOME TAXES
The TCI IPVI Systems were included in the consolidated federal income tax
return of TCI. Income tax expense for the TCI IPVI Systems is based on those
items in the consolidated calculation applicable to the TCI IPVI Systems.
Intercompany tax allocation represents an apportionment of tax expense or
benefit (other than deferred taxes) among subsidiaries of TCI in relation to
their respective amounts of taxable earnings or losses. The payable or
receivable arising from the intercompany tax allocation is recorded as an
increase or decrease in amounts due to TCI. Deferred income taxes are based on
the book and tax basis differences of the assets and liabilities within the TCI
IPVI Systems.
F-39
TCI IPVI SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)--(CONTINUED)
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1998 TO APRIL 30, 1998, AND
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
4. INCOME TAXES--(CONTINUED)
Income tax expense for the four-month period ended April 30, 1998 and for
the years ended December 31, 1997 and 1996 consists of:
CURRENT DEFERRED TOTAL
------- -------- -------
AMOUNTS IN THOUSANDS
Four-month period ended April 30, 1998:
Intercompany allocation................................................ $(3,503) $ -- $(3,503)
Federal................................................................ -- 1,332 1,332
State and local........................................................ -- 200 200
-------- -------- -------
$(3,503) $ 1,532 $ (1,971)
-------- -------- -------
-------- -------- -------
Year ended December 31, 1997:
Intercompany allocation................................................ $(3,875) $ -- $(3,875)
Federal................................................................ -- (1,470) (1,470)
State and local........................................................ -- (220) (220)
------- -------- -------
$(3,875) $ (1,690) $(5,565)
------- -------- -------
------- -------- -------
Year ended December 31, 1996:
Intercompany allocation................................................ $(5,805) $ -- $(5,805)
Federal................................................................ -- 993 993
State and local........................................................ -- 149 149
------- -------- -------
$(5,805) $ 1,142 $(4,663)
------- -------- -------
------- -------- -------
Income tax expense differs from the amounts computed by applying the
federal income tax rate of 35% as a result of the following:
YEARS ENDED
DECEMBER 31, JANUARY 1, 1998
------------------- THROUGH
1996 1997 APRIL 30, 1998
------ ------ ---------------
AMOUNTS IN THOUSANDS
Computed "expected" tax expense..................................... $(3,981) $(4,636) $(1,842)
State and local income taxes, net of federal income tax benefit..... 96 (144) 130
Amortization not deductible for tax purposes........................ (778) (785) (259)
-------- -------- --------
$(4,663) $(5,565) $(1,971)
-------- -------- ---------
-------- -------- ---------
F-40
TCI IPVI SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)--(CONTINUED)
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1998 TO APRIL 30, 1998, AND
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
4. INCOME TAXES--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and deferred tax liabilities at October 31,
1998 and December 31, 1997 are presented below:
DECEMBER 31, APRIL 30,
1997 1998
------------ ---------
AMOUNTS IN THOUSANDS
Deferred tax asset--principally due to non-deductible
accruals............................................... $ 357 $ 328
-------- ---------
Deferred tax liabilities:
Property and equipment, principally due to differences
in depreciation..................................... 43,477 43,802
Franchise costs, principally due to differences in
amortization and initial basis...................... 186,470 211,224
-------- ---------
Total gross deferred tax liabilities................ 229,947 255,026
-------- ---------
Net deferred tax liability.......................... $229,590 $ 254,698
-------- ---------
-------- ---------
5. PARENT'S INVESTMENT (DEFICIT)
Parent's investment (deficit) in the TCI IPVI Systems at April 30, 1998
and December 31, 1997 is summarized as follows:
DECEMBER 31, APRIL 30,
1997 1998
------------ ---------
AMOUNTS IN THOUSANDS
Due to TCI.............................................. $260,421 $ 301,496
Accumulated deficit..................................... (199) (486,395)
-------- ---------
$260,222 $(184,899)
-------- ---------
-------- ---------
The amount due to TCI includes non-interest bearing advances for
operations, acquisitions and construction costs, as well as, the non-interest
bearing amounts owed as a result of the allocation of certain costs from TCI.
On April 30, 1998, in connection with Partnership formation described
above, TCI caused the TCI IPVI Systems to effect a dividend to TCI aggregating
$489,488,000 (the "Dividend"). The Dividend resulted in an increase to the
interest bearing intercompany notes owed to TCI and a corresponding increase to
accumulated deficit.
As a result of TCI's controlling ownership of the TCI IPVI Systems, the
non-interest bearing amounts due to TCI have been classified as a component of
Parent's investment (deficit) in the accompanying combined balance sheets.
The TCI IPVI Systems purchase, at TCI's cost, substantially all of their
pay television and other programming from affiliates of TCI. Charges for such
programming were $14,787,000, $39,288,000, and $37,006,000 for the four-months
ended April 30, 1998 and the years ended December 31, 1997 and 1996,
respectively, and are included in operating expenses in the accompanying
combined financial statements.
Certain subsidiaries of TCI provide administrative services to the TCI IPVI
Systems and have assumed managerial responsibility of the TCI IPVI Systems'
cable television system operations and construction. As compensation for these
services, the TCI IPVI Systems pay a monthly fee calculated on a per-subscriber
basis.
F-41
TCI IPVI SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)--(CONTINUED)
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1998 TO APRIL 30, 1998, AND
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
5. PARENT'S INVESTMENT (DEFICIT)--(CONTINUED)
Prior to February 1, 1997 certain of the TCI IVPI systems were managed by
TKR Cable Company ("TKR"). In accordance with the management agreement, the
systems paid a management fee equal to 3.5% of revenue. Management fees
resulting from this agreement aggregated $4,102,000 in 1996.
The intercompany advances and expense allocation activity in amounts due to
TCI consists of the following:
YEARS ENDED
DECEMBER 31, JANUARY 1, 1998
-------------------- THROUGH
1996 1997 APRIL 30, 1998
-------- -------- ---------------
AMOUNTS IN THOUSANDS
Beginning of period............................................ $285,861 $269,228 $ 260,421
Programming charges............................................ 37,006 39,288 14,787
Management fees................................................ 6,627 6,195 2,035
Tax allocations................................................ 5,805 3,875 3,503
Cash transfer.................................................. (66,071) (58,165) 20,750
-------- -------- ---------
End of period.................................................. $269,228 $260,421 $ 301,496
-------- -------- ---------
-------- -------- ---------
6. COMMITMENTS AND CONTINGENCIES
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") imposed certain rate regulations on the cable television
industry. Under that 1992 Cable Act, all cable systems are subject to rate
regulation, unless they face "effective competition," as defined by the 1992
Cable Act and expanded in the Telecommunications Act of 1996 (the "1996 Act"),
in their local franchise area.
Although the Federal Communications Commission (the "FCC") has established
regulations required by the 1992 Cable Act, local government units (commonly
referred to as local franchising authorities) are primarily responsible for
administering the regulation of a cable system's basic service tier ("BST").
The FCC itself directly administered rate regulation of any cable programming
service tier ("CPST"). The FCC's authority to regulate CPST rates expired on
March 31, 1999. The FCC has taken the position that it will still adjudicate
CPST complaints filed after this sunset date (but not later than 180 days after
the last CPST rate increase imposed prior to March 31, 1999), and will strictly
limit its review (and possible refund orders) to the time period predating the
sunset date.
Under the FCC's rate regulations, most cable systems were required to
reduce their BST and CPST rates in 1993 and 1994, and have since had their rate
increases governed by a complicated price structure that allows for the recovery
of inflation and certain increased costs, as well as providing some incentive
for expanding channel carriage. Operators also have the opportunity to bypass
this "benchmark" regulatory structure in favor of the traditional
"cost-of-service" regulation in cases where the latter methodology appears
favorable. Premium cable services offered on a per-channel or per-program basis
remain unregulated, as do affirmatively marketed packages consisting entirely of
new programming product.
The management of the TCI IPVI Systems believes that it has complied in all
material respects with the provisions of the 1992 Cable Act and the 1996 Act,
including its rate setting provisions. However, certain franchising authorities
have filed Local Rate Orders challenging the rates of certain of the TCI IPVI
Systems. If, as a result of the review process, a system cannot substantiate its
rates, it could be required to retroactively reduce its rates to the appropriate
benchmark and refund the excess portion of rates received. Any refunds of the
excess portion of CPST rates would be retroactive to the date of complaint. Any
refunds of the excess portion of BST or equipment rates would be retroactive to
one year prior to the implementation of the rate reductions. TCI has indemnified
the Partnership for certain rate refund liabilities of the TCI IPVI Systems
through March 31, 1999.
Certain plaintiffs have filed or threatened separate class action
complaints against certain of the systems of TCI IPVI Systems, alleging that the
systems' practice of assessing an administrative fee to subscribers whose
payments are delinquent constitutes an invalid liquidated damage provision, a
breach of contract, and violates
F-42
TCI IPVI SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)--(CONTINUED)
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1998 TO APRIL 30, 1998, AND
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
6. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
local consumer protection statutes. Plaintiffs seek recovery of all late fees
paid to the subject systems as a class purporting to consist of all subscribers
who were assessed such fees during the applicable limitation period, plus
attorney fees and costs.
The TCI IPVI Systems have contingent liabilities related to legal
proceedings and other matters arising in the ordinary course of business.
Although it is possible the TCI IPVI Systems may incur losses upon conclusion of
the matters referred to above, an estimate of any loss or range of loss cannot
presently be made. Based upon the facts available, management believes that,
although no assurance can be given as to the outcome of these actions, the
ultimate disposition should not have a material adverse effect upon the combined
financial condition of the TCI IPVI Systems.
The TCI IPVI Systems lease business offices, have entered into pole rental
agreements and use certain equipment under lease arrangements. Rental expense
under such arrangements amounted to $711,000, $2,441,000 and $1,865,000 in for
the four-month period ended April 30, 1998, and the years ended December 31,
1997 and 1996, respectively.
Future minimum lease payments under noncancellable operating leases for
each of the next five years are summarized as follows (amounts in thousands):
YEARS ENDING APRIL 30,
- ----------------------------------------------------------------
1999............................................................ $ 752
2000............................................................ 619
2001............................................................ 461
2002............................................................ 376
2003............................................................ 308
Thereafter...................................................... 1,590
------
$4,106
------
------
TCI formed a year 2000 Program Management Office (the "PMO") to organize
and manage its year 2000 remediation efforts. The PMO is responsible for
overseeing, coordinating and reporting on TCI's year 2000 remediation efforts,
including the year 2000 remediation efforts of the TCI IPVI Systems prior to the
Contribution. Subsequent to the date of the Contribution, the year 2000
remediation efforts of the TCI IPVI Systems are no longer the responsibility of
TCI or the PMO.
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. There can be
no assurance that the TCI IPVI Systems or the systems of other companies on
which the TCI IPVI Systems relies will be converted in time or that any such
failure to convert by the TCI IPVI Systems or other companies will not have a
material adverse effect on it financial position, results of operations or cash
flows.
F-43
INDEPENDENT AUDITORS' REPORT
The Board of Directors:
TCI Communications, Inc.:
We have audited the accompanying combined balance sheets of the TCI Insight
Systems (as defined in Note 1 to the combined financial statements) as of
October 31, 1998 and December 31, 1997, and the related combined statements of
operations and parent's investment (deficit), and cash flows for the ten-month
period ended October 31, 1998 and for each of the years in the two-year period
ended December 31, 1997. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the TCI Insight
Systems as of October 31, 1998 and December 31, 1997, and the results of their
operations and their cash flows for the ten-month period ended October 31, 1998
and for each of the years in the two-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Denver, Colorado
March 5, 1999
F-44
TCI INSIGHT SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
DECEMBER OCTOBER 31,
31, 1997 1998
----------- ------------
ASSETS
Cash.................................................................................. $ -- $ 896
Trade and other receivables, net...................................................... 5,153 5,113
Property and equipment, at cost:
Land................................................................................ 217 217
Distribution systems................................................................ 107,216 117,346
Support equipment and buildings..................................................... 11,782 12,716
--------- --------
119,215 130,279
Less accumulated depreciation....................................................... 62,283 69,679
--------- --------
56,932 60,600
--------- --------
Franchise costs....................................................................... 187,858 187,768
Less accumulated amortization....................................................... 38,386 42,303
--------- --------
149,472 145,465
--------- --------
Other assets.......................................................................... 166 108
--------- --------
$ 211,723 $212,182
--------- --------
--------- --------
LIABILITIES AND PARENT'S INVESTMENT (DEFICIT)
Cash overdraft........................................................................ $ 599 $ --
Accounts payable and accrued expenses................................................. 4,411 3,728
Deferred income taxes (note 3)........................................................ 65,625 63,966
Intercompany notes owed to TCI (notes 1 and 4)........................................ -- 230,000
--------- --------
Total liabilities................................................................... 70,635 297,694
Parent's investment (deficit) (note 4)................................................ 141,088 (85,512)
--------- --------
Commitments and contingencies (note 5)................................................ $ 211,723 $212,182
--------- --------
--------- --------
See accompanying notes to combined financial statements.
F-45
TCI INSIGHT SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS AND PARENT'S INVESTMENT (DEFICIT)
(AMOUNTS IN THOUSANDS)
YEARS ENDED
DECEMBER 31, JANUARY 1, 1998
---------------------------- THROUGH
1996 1997 OCTOBER 31, 1998
------------ ------------ ----------------
Revenue................................................................. $ 88,191 $ 93,543 $ 80,357
Operating costs and expenses:
Operating (note 4).................................................... 27,243 28,012 24,375
Selling, general and administrative................................... 13,899 11,583 11,835
Management fees (note 4).............................................. 4,199 3,732 3,057
Depreciation.......................................................... 9,205 8,545 8,222
Amortization.......................................................... 4,858 4,916 4,001
-------- -------- --------
59,404 56,788 51,490
-------- -------- --------
Operating income................................................... 28,787 36,755 28,867
Other income (expense).................................................. (3) 96 (159)
-------- -------- --------
Earnings before income taxes....................................... 28,784 36,851 28,708
Income tax expense (note 3)............................................. (10,022) (12,828) (9,969)
-------- -------- --------
Net earnings....................................................... 18,762 24,023 18,739
Parent's investment (deficit):
Beginning of period................................................... 153,216 147,614 141,088
Change in due to TCI Communications, Inc. ("TCIC").................... (24,364) (30,549) (15,339)
Intercompany notes owed to TCI (notes 1 and 4)........................ -- -- 230,000
-------- -------- --------
End of period........................................................... $147,614 $141,088 $(85,512)
-------- -------- --------
-------- -------- --------
See accompanying notes to combined financial statements.
F-46
TCI INSIGHT SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEARS ENDED JANUARY 1, 1998
DECEMBER 31, THROUGH
-------------------- OCTOBER 31,
1996 1997 1998
-------- -------- ---------------
Cash flows from operating activities:
Net earnings............................................................ $ 18,762 $ 24,023 $ 18,739
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization........................................ 14,063 13,461 12,223
Deferred income tax expense.......................................... (1,229) (1,366) (1,659)
Changes in operating assets and liabilities:
Change in receivables.............................................. (273) (2,471) 40
Change in other assets............................................. 57 200 58
Change in accounts payable and accrued expenses.................... (321) 23 (683)
-------- -------- ---------
Net cash provided by operating activities.......................... 31,059 33,870 28,718
-------- -------- ---------
Cash flows from investing activities:
Capital expended for property and equipment............................. (6,623) (5,068) (11,927)
Other investing activities.............................................. 755 102 43
-------- -------- ---------
Net cash used in investing activities.............................. (5,868) (4,966) (11,884)
-------- -------- ---------
Cash flows from financing activities:
Change in due to TCIC................................................... (24,364) (30,549) (15,339)
Change in cash overdraft................................................ -- 599 (599)
-------- -------- ---------
Net cash used in financing activities.............................. (24,364) (29,950) (15,938)
-------- -------- ---------
Net increase (decrease) in cash.................................... 827 (1,046) 896
Cash:
Beginning of period............................................. 219 1,046 --
-------- -------- ---------
End of period................................................... $ 1,046 $ -- $ 896
-------- -------- ---------
-------- -------- ---------
See accompanying notes to combined financial statements.
F-47
TCI INSIGHT SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 31, 1998,
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. BASIS OF PRESENTATION
The combined financial statements include the accounts of twelve of TCIC's
cable television systems and three related advertising sales offices serving
certain subscribers within Indiana (collectively, the "TCI Insight Systems").
The TCI Insight Systems are wholly-owned by various subsidiaries of TCIC. TCIC
is a subsidiary of Tele-Communications, Inc. ("TCI"). All significant
inter-entity accounts and transactions have been eliminated in combination. The
combined net assets of TCI Insight Systems are referred to as "Parent's
Investment."
The TCI Insight Systems were acquired through a series of transactions
whereby TCIC acquired various larger cable entities (the "Original Systems").
The TCI Insight System's combined financial statements include an allocation of
certain purchase accounting adjustments, including the related deferred tax
effects, from TCIC's acquisition of the Original Systems. Such allocation and
the related franchise cost amortization is based on the relative fair market
value of systems acquired. In addition, certain costs of TCI are charged to the
TCI Insight Systems based on their number of subscribers (see note 4). Although
such allocations are not necessarily indicative of the costs that would have
been incurred by the TCI Insight Systems on a stand alone basis, management
believes that the resulting allocated amounts are reasonable.
Limited Liability Company Formation
Effective October 31, 1998, TCIC and Insight Communications L.P.
("Insight") executed a transaction under a Contribution and Purchase Agreement,
whereby TCIC contributed and exchanged certain cable television systems and
advertising sales offices to a newly formed Limited Liability Company between
TCIC and Insight (the "LLC") in exchange for an approximate 50% ownership
interest in the LLC and certain cable systems. In connection with the
contribution, the LLC assumed $214.6 million of the intercompany amounts owed by
the TCI Insight Systems to TCIC and its affiliates. These interest bearing notes
were subsequently paid by the LLC. The accompanying combined financial
statements reflect the financial position, results of operations and cash flows
of the TCI Insight Systems immediately prior to the contribution and exchange
transactions, and, therefore, do not include the effects of such transactions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Receivables
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at October 31, 1998 and December 31, 1997 was not significant.
Property and Equipment
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired. Construction costs, labor and applicable
overhead related to installations, and interest during construction are
capitalized. During the ten-month period ended October 31, 1998 and for the
years ended December 31, 1997 and 1996, interest capitalized was not
significant.
Depreciation is computed on a straight-line basis using estimated useful
lives of 3 to 15 years for distribution systems and 3 to 40 years for support
equipment and buildings.
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. At the time of ordinary retirements, sales or other
dispositions of property, the original cost and cost of removal of such property
are charged to accumulated depreciation, and salvage, if any, is credited
thereto. Gains or losses are only recognized in connection with the sales of
properties in their entirety.
F-48
TCI INSIGHT SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 31, 1998,
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Franchise Costs
Franchise costs include the difference between the cost of acquiring cable
television systems and amounts assigned to their tangible assets. Such amounts
are generally amortized on a straight-line basis over 40 years. Costs incurred
by the TCI Insight Systems in negotiating and renewing franchise agreements are
amortized on a straight-line basis over the life of the franchise, generally 10
to 20 years.
Impairment of Long-Lived Assets
Management periodically reviews the carrying amounts of property, plant and
equipment and its intangible assets to determine whether current events or
circumstances warrant adjustments to such carrying amounts. If an impairment
adjustment is deemed necessary, such loss is measured by the amount that the
carrying value of such assets exceeds their fair value. Considerable management
judgment is necessary to estimate the fair value of assets, accordingly, actual
results could vary significantly from such estimates. Assets to be disposed of
are carried at the lower of their financial statement carrying amount or fair
value less costs to sell.
Revenue Recognition
Cable revenue for customer fees, equipment rental, advertising,
pay-per-view programming and revenue sharing agreements is recognized in the
period that services are delivered. Installation revenue is recognized in the
period the installation services are provided to the extent of direct selling
costs. Any remaining amount is deferred and recognized over the estimated
average period that customers are expected to remain connected to the cable
television system.
Combined Statements of Cash Flows
Transactions effected through the intercompany account (except for the
dividend discussed in Note 4) with TCIC have been considered constructive
cash receipts and payments for purposes of the combined statements of cash
flows.
Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the combined financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
3. INCOME TAXES
The TCI Insight Systems were included in the consolidated federal income
tax return of TCI. Income tax expense for the TCI Insight Systems is based on
those items in the consolidated calculation applicable to the TCI Insight
Systems. Intercompany tax allocation represents an apportionment of tax expense
or benefit (other than deferred taxes) among subsidiaries of TCI in relation to
their respective amounts of taxable earnings or losses. The payable or
receivable arising from the intercompany tax allocation is recorded as an
increase or decrease in amounts due to TCIC. Deferred income taxes are based on
the book and tax basis differences of the assets and liabilities within the TCI
Insight Systems.
F-49
TCI INSIGHT SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 31, 1998,
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
3. INCOME TAXES--(CONTINUED)
Income tax expense for the ten-month period ended October 31, 1998 and for
the years ended December 31, 1997 and 1996 consists of:
CURRENT DEFERRED TOTAL
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Ten-month period ended October 31, 1998:
Intercompany allocation............................................. $(11,628) $ -- $(11,628)
Federal............................................................. -- 1,507 1,507
State and local..................................................... -- 152 152
-------- ------ --------
$(11,628) $1,659 $ (9,969)
-------- ------ --------
-------- ------ --------
Year ended December 31, 1997:
Intercompany allocation............................................. $(14,194) $ -- $(14,194)
Federal............................................................. -- 1,241 1,241
State and local..................................................... -- 125 125
-------- ------ --------
$(14,194) $1,366 $(12,828)
-------- ------ --------
-------- ------ --------
Year ended December 31, 1996:
Intercompany allocation............................................. $(11,251) $ -- $(11,251)
Federal............................................................. -- 1,117 1,117
State and local..................................................... -- 112 112
-------- ------ --------
$(11,251) $1,229 $(10,022)
-------- ------ --------
-------- ------ --------
Income tax expense differs from the amounts computed by applying the
federal income tax rate of 35% as a result of the following:
JANUARY 1, 1998
YEARS ENDED DECEMBER 31, THROUGH
---------------------------------------------------- OCTOBER 31,
1996 1997 1998
------------------------ ------------------------ ---------------
(AMOUNTS IN THOUSANDS)
Computed "expected" tax expense........................... $(10,074) $(12,897) $ (10,048)
State and local income taxes, net of federal income tax
benefit................................................. 73 81 98
Other..................................................... (21) (12) (19)
-------- -------- ---------
$(10,022) $(12,828) $ (9,969)
-------- -------- ---------
-------- -------- ---------
F-50
TCI INSIGHT SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 31, 1998,
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
3. INCOME TAXES--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and deferred tax liabilities at October 31,
1998 and December 31, 1997 are presented below:
DECEMBER 31, OCTOBER 31,
1997 1998
------------ -----------
(AMOUNTS IN THOUSANDS)
Deferred tax asset--principally due to non-deductible accruals.... $ 80 $ 79
-------- -------
Deferred tax liabilities:
Property and equipment, principally due to differences in
depreciation................................................. 13,124 12,822
Franchise costs, principally due to differences in amortization
and initial basis............................................ 52,581 51,223
-------- -------
Total gross deferred tax liabilities......................... 65,705 64,045
-------- -------
Net deferred tax liability...................................... $ 65,625 $63,966
-------- -------
-------- -------
4. PARENT'S INVESTMENT (DEFICIT)
Parent's investment (deficit) in the TCI Insight Systems at
October 31, 1998 and December 31, 1997 is summarized as follows:
DECEMBER 31, OCTOBER 31,
1997 1998
------------ -----------
(AMOUNTS IN THOUSANDS)
Due to TCIC....................................................... $ 93,231 $ 77,892
Retained earnings (deficit)....................................... 47,857 (163,404)
-------- ---------
$141,088 $ (85,512)
-------- ---------
-------- ---------
The amount due to TCIC includes advances for operations, acquisitions and
construction costs, as well as, the non-interest bearing amounts owed as a
result of the allocation of certain costs from TCIC.
On September 30, 1998, TCIC caused the TCI Insight Systems to effect
a dividend from the TCI Insight Systems to TCIC aggregating $230,000,000 (the
"Dividend"). The Dividend resulted in an increase to the intercompany
notes owed to TCIC and a corresponding decrease to retained earnings.
As a result of TCIC's 100% ownership of the TCI Insight Systems, the
non-interest bearing amounts due to TCIC have been classified as a component of
Parent's investment (deficit) in the accompanying combined balance sheets.
The TCI Insight Systems purchase, at TCIC's cost, substantially all of
their pay television and other programming from affiliates of TCIC. Charges for
such programming were $18,037,000, $18,269,000, and $16,986,000 for the
ten-months ended October 31, 1998 and the years ended December 31, 1997 and
1996, respectively, and are included in operating expenses in the accompanying
combined financial statements.
Certain subsidiaries of TCIC provide administrative services to the TCI
Insight Systems and have assumed managerial responsibility of the TCI Insight
Systems' cable television system operations and construction. As compensation
for these services, the TCI Insight Systems pay a monthly fee calculated on a
per-subscriber basis.
F-51
TCI INSIGHT SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 31, 1998,
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
4. PARENT'S INVESTMENT--(CONTINUED)
The intercompany advances and expense allocation activity in amounts due to
TCIC consists of the following:
JANUARY 1, 1998
YEARS ENDED DECEMBER 31, THROUGH
---------------------------------------------------- OCTOBER 31,
1996 1997 1998
------------------------ ------------------------ ---------------
(AMOUNTS IN THOUSANDS)
Beginning of period....................................... $148,144 $123,780 $ 93,231
Programming charges....................................... 16,986 18,269 18,037
Management fees........................................... 4,199 3,732 3,057
Tax allocations........................................... 11,251 14,194 11,628
Cash transfer............................................. (56,800) (66,744) (48,061)
-------- -------- ---------
End of period............................................. $123,780 $ 93,231 $ 77,892
-------- -------- ---------
-------- -------- ---------
5. COMMITMENTS AND CONTINGENCIES
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") imposed certain rate regulations on the cable television
industry. Under the 1992 Cable Act, all cable systems are subject to rate
regulation, unless they face "effective competition," as defined by the 1992
Cable Act and expanded in the Telecommunications Act of 1996 (the "1996 Act"),
in their local franchise area.
Although the Federal Communications Commission (the "FCC") has established
regulations required by the 1992 Cable Act, local government units (commonly
referred to as local franchising authorities) are primarily responsible for
administering the regulation of a cable system's basic service tier ("BST").
The FCC itself directly administered rate regulation of any cable programming
service tier ("CPST"). The FCC's authority to regulate CPST rates expired on
March 31, 1999. The FCC has taken the position that it will still adjudicate
CPST complaints filed after this sunset date (but not later than 180 days after
the last CPST rate increase imposed prior to March 31, 1999), and will strictly
limit its review (and possible refund orders) to the time period predating the
sunset date.
Under the FCC's rate regulations, most cable systems were required to
reduce their BST and CPST rates in 1993 and 1994, and have since had their rate
increases governed by a complicated price structure that allows for the
recovery of inflation and certain increased costs, as well as providing some
incentive for expanding channel carriage. Operators also have the opportunity to
bypass this "benchmark" regulatory structure in favor of the traditional
"cost-of-service" regulation in cases where the latter methodology appears
favorable. Premium cable services offered on a per-channel or per-program basis
remain unregulated, as do affirmatively marketed packages consisting entirely of
new programming product.
The management of the TCI Insight Systems believes that it has complied in
all material respects with the provisions of the 1992 Cable Act and the 1996
Act, including its rate setting provisions. If, as a result of the review
process, a system cannot substantiate its rates, it could be required to
retroactively reduce its rates to the appropriate benchmark and refund the
excess portion of rates received. Any refunds of the excess portion of CPST
rates would be retroactive to the date of complaint. Any refunds of the excess
portion of BST or equipment rates would be retroactive to one year prior to the
implementation of the rate reductions.
Certain plaintiffs have filed or threatened separate class action
complaints against certain of the systems of TCI Insight Systems, alleging that
the systems' practice of assessing an administrative fee to subscribers whose
payments are delinquent constitutes an invalid liquidated damage provision, a
breach of contract, and violates local consumer protection statutes. Plaintiffs
seek recovery of all late fees paid to the subject systems as a class purporting
to consist of all subscribers who were assessed such fees during the applicable
limitation period, plus attorney fees and costs.
The TCI Insight Systems have contingent liabilities related to legal
proceedings and other matters arising in the ordinary course of business.
Although it is possible the TCI Insight Systems may incur losses upon conclusion
of the matters referred to above, an estimate of any loss or range of loss
cannot presently be made.
F-52
TCI INSIGHT SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 31, 1998,
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
5. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Based upon the facts available, management believes that, although no assurance
can be given as to the outcome of these actions, the ultimate disposition should
not have a material adverse effect upon the combined financial condition of the
TCI Insight Systems.
The TCI Insight Systems lease business offices, have entered into pole
rental agreements and use certain equipment under lease arrangements. Rental
expense under such arrangements amounted to $1,142,000, $1,557,000 and
$1,231,000 in for the ten-month period ended October 31, 1998, and the years
ended December 31, 1997 and 1996, respectively.
Future minimum lease payments under noncancellable operating leases for
each of the next five years are summarized as follows (amounts in thousands):
YEARS ENDING
OCTOBER 31,
- -------------------------------------------------------------
1999......................................................... $ 413
2000......................................................... 325
2001 302
2002......................................................... 202
2003 161
Thereafter................................................... 367
-------
$ 1,770
-------
-------
TCI formed a year 2000 Program Management Office (the "PMO") to organize
and manage its year 2000 remediation efforts. The PMO is responsible for
overseeing, coordinating and reporting on TCIC's year 2000 remediation efforts,
including the year 2000 remediation efforts of the TCI Insight Systems prior to
the Contribution. Subsequent to the date of the Contribution, the year 2000
remediation efforts of the TCI Insight Systems are no longer the responsibility
of TCI, TCIC or the PMO.
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. There can be
no assurance that the TCI Insight Systems or the systems of other companies on
which the TCI Insight Systems relies will be converted in time or that any such
failure to convert by the TCI Insight Systems or other companies will not have a
material adverse effect on it financial position, results of operations or cash
flows.
F-53
REPORT OF INDEPENDENT AUDITORS
The Members
Insight Communications of Central Ohio, LLC
We have audited the accompanying balance sheet of Insight Communications of
Central Ohio, LLC as of December 31, 1998, and the related statements of
operations and changes in members' deficit and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Insight Communications of
Central Ohio, LLC at December 31, 1998, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
New York, New York
April 5, 1999
F-54
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
BALANCE SHEET
(IN THOUSANDS)
DECEMBER 31,
1998
------------
ASSETS
Current assets:
Cash.............................................................................................. $ 6,709
Subscriber receivables, less allowance for doubtful accounts of $306.............................. 1,186
Other accounts receivable, less allowance for doubtful accounts of $145........................... 1,520
Prepaid expenses and other current assets......................................................... 166
----------
Total current assets................................................................................ 9,581
Property and equipment, at cost:
Land and Land Improvements........................................................................ 260
CATV systems...................................................................................... 71,032
Equipment......................................................................................... 7,102
Furniture......................................................................................... 333
Leasehold improvements............................................................................ 71
----------
78,798
Less--Accumulated depreciation and amortization..................................................... (46,898)
----------
Total property and equipment, net................................................................... 31,900
Intangible assets, at cost:
Franchise costs................................................................................... 7,385
Other Intangible Assets........................................................................... 300
Less--Accumulated amortization.................................................................... (7,348)
----------
Total intangible assets, net........................................................................ 337
Due from related parties............................................................................ 149
----------
Total assets........................................................................................ $ 41,967
----------
----------
LIABILITIES, PREFERRED INTERESTS, AND MEMBERS' DEFICIT
Current liabilities:
Current portion of capital lease obligations...................................................... $ 123
Accounts payable.................................................................................. 3,230
Accrued Liabilities............................................................................... 4,404
Preferred A Dividend Payable...................................................................... 5,211
Preferred B Dividend Payable...................................................................... 1,438
----------
Total Current Liabilities........................................................................... 14,406
Capital Lease Obligations........................................................................... 105
Other Deferred Credits.............................................................................. 1,146
Due to related parties.............................................................................. 1,029
Preferred A Interest................................................................................ 140,000
Preferred B Interest................................................................................ 30,000
----------
Total liabilities and preferred interests........................................................... 186,686
Members' deficit.................................................................................... (144,719)
----------
Total liabilities and members' deficit.............................................................. $ 41,967
----------
----------
See accompanying notes.
F-55
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
STATEMENT OF OPERATIONS AND CHANGES IN MEMBERS' DEFICIT
(IN THOUSANDS)
YEAR ENDED
DECEMBER 31,
1998
------------
Revenues............................................................................................ $ 47,956
Operating expenses:
Service and administrative........................................................................ 29,695
Severance and transaction structure costs......................................................... 4,822
Depreciation and amortization..................................................................... 5,311
----------
Total operating expenses............................................................................ 39,828
----------
Operating income.................................................................................... 8,128
Other expenses...................................................................................... (422)
Interest income..................................................................................... 59
----------
Net income.......................................................................................... $ 7,765
Accrual of preferred interests...................................................................... (6,649)
----------
Net income attributable to common interests......................................................... 1,116
Net assets contributed.............................................................................. $ 25,571
Capital contributions............................................................................... 10,000
Preferred membership interests...................................................................... (170,000)
Capital distributions............................................................................... (11,406)
----------
Members' deficit, end of year....................................................................... $ (144,719)
----------
----------
See accompanying notes.
F-56
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
DECEMBER 31,
1998
------------
Cash flows from operating activities:
Net income........................................................................................ $ 7,765
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................................. 5,311
Changes in certain assets and liabilities:
Subscriber receivables......................................................................... (524)
Other accounts receivable, prepaid expenses and other current assets........................... (423)
Accounts payable and accrued expenses.......................................................... 2,270
--------
Net cash provided by operating activities........................................................... $ 14,399
--------
Cash flows from investing activities:
Capital expenditures for property and equipment................................................... (7,369)
Proceeds from disposal of property and equipment.................................................. 11
Increase in other intangible assets............................................................... (300)
Increase in amounts due to/from related parties................................................... 979
--------
Net cash used in investing activities............................................................... $ (6,679)
--------
Cash flows from financing activities:
Principal payments on capital lease obligations................................................... (179)
Capital contributions............................................................................. 10,000
Capital distributions............................................................................. (11,406)
--------
Net cash used in financing activities............................................................... $ (1,585)
--------
Net increase in cash................................................................................ 6,135
Cash, beginning of year............................................................................. 574
--------
Cash, end of year................................................................................... $ 6,709
--------
--------
See accompanying notes.
F-57
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BUSINESS ORGANIZATION AND PURPOSE
Insight Communications of Central Ohio, LLC ("Insight Ohio" or the
"Company") was formed on July 23, 1998 in order to acquire all of the assets and
liabilities comprising the cable television system of Coaxial Communications of
Central Ohio, Inc. ("Coaxial"). On August 21, 1998, Coaxial contributed to
Insight Ohio all of the assets and liabilities comprising Coaxial's cable
television systems for which Coaxial received a 25% non-voting common membership
interest in Insight Ohio as well as 100% of the voting preferred membership
interests of Insight Ohio ("Series A and Series B Preferred Interests"). In
conjunction therewith, Insight Holdings of Ohio, LLC ("IHO") contributed
$10 million in cash to Insight Ohio for which it received a 75% non-voting
common membership interest in Insight Ohio. The accompanying financial
statements include the operations of the cable television systems contributed by
Coaxial to Insight Ohio, as if the aforementioned contribution had occurred as
of January 1, 1998 (the beginning of the year). The amounts included in the
accompanying financial statements for periods prior to August 21, 1998 represent
the operations of the cable system operating unit (the "Operating Unit" and
predecessor to Insight Ohio), which, prior to such date, was an operating unit
within Coaxial. The amounts included in the accompanying financial statements
for the Operating Unit include only those assets, liabilities, revenues, and
expenses directly related to the cable television system contributed to Insight
Ohio. Insight Ohio provides basic and expanded cable services to homes in
Columbus, Ohio and surrounding areas.
On August 21, 1998, Coaxial and Phoenix Associates, a related entity,
issued $140 million of 10% Senior Notes ("Senior Notes") due in 2006. The Senior
Notes are non-recourse and are secured by all of the issued and outstanding
Series A Preferred Interest in Insight Ohio and are conditionally guaranteed by
Insight Ohio. On August 21, 1998, Coaxial Financing Corp. and Coaxial LLC,
related entities, issued 12 7/8% Senior Discount Notes due 2008 ("Discount
Notes"). The Discount Notes have a face amount of $55,869,000 and approximately
$30 million of gross proceeds were received upon issuance. The Discount Notes
are non-recourse, secured by 100% of the common stock of Coaxial, and
conditionally guaranteed by Insight Ohio.
As a result of the transaction described above, Insight Ohio incurred
severance costs and transaction structure costs of approximately $4,822,000
which have been reflected in the accompanying statements of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash
Insight Ohio considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Values
In December 1991, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments", which requires disclosure of fair value information
about both on and off balance sheet financial instruments for which it is
practicable to estimate that value. The carrying amounts of current assets and
liabilities approximate their fair market value because of the immediate or
short term maturity of these financial instruments.
F-58
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Revenue Recognition
Service fees are recorded in the month cable television and pay television
services are provided to subscribers. Connection fees are charges for the
hook-up of new customers and are recognized as current revenues to the extent of
direct selling costs incurred. Any fees in excess of such costs are deferred and
amortized to income over the estimated average period that subscribers are
expected to remain connected to the system.
Concentration of Credit Risk
Financial instruments that potentially subject Insight Ohio to
concentrations of credit risk consist principally of trade accounts receivable.
Insight Ohio's customer base consists of a number of homes concentrated in the
central Ohio area. Insight Ohio continually monitors the exposure for credit
losses and maintains allowances for anticipated losses. As of December 31, 1998,
Insight Ohio had no significant concentrations of credit risk.
Property and Equipment
Property and equipment are stated at cost, while maintenance and repairs
are expensed as incurred. Upon retirement or disposal of assets, the cost and
related accumulated depreciation and amortization are removed from the balance
sheet, and any gain or loss is reflected in earnings. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of the related assets as follows:
10 to
CATV systems............................................. 15 years
Equipment................................................ 5 years
Furniture................................................ 5 years
Leasehold improvements................................... Life of lease
Assets held under capital leases at December 31, 1998 were approximately
$228,000.
Insight Ohio internally constructs certain CATV systems. Construction costs
capitalized include payroll, fringe benefits and other overhead costs associated
with construction activity.
Insight Ohio reviews its property, plant and equipment and other long term
assets when events or changes in circumstances indicate the carrying amounts may
not be recoverable. When such conditions exist, management estimates the future
cash flows from operations or disposition. If the estimated undiscounted future
cash flows are less than the carrying amount of the asset, an adjustment to
reduce the carrying amount would be recorded, and an impairment loss would be
recognized. Insight Ohio does not believe that there is an impairment of such
assets.
Franchise Costs
Franchise costs are amortized using the straight-line method over the lives
of the related franchises which range from 7 to 15 years.
Home Office Expenses
Home office expenses of approximately $1,373,000 in 1998 (included in
selling and administrative expenses) include billings for legal fees, management
fees, salaries, travel and other management expenses for services provided by an
affiliated services company. Effective August 21, 1998, IHO provides such
services for which it earns a fee (see note 6).
F-59
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense, primarily
for campaign and telemarketing-related efforts, was approximately $2,152,000 in
1998.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivatives Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal years
beginning after June 15, 1999. Insight Ohio does not anticipate the adoption of
this Statement to have a material impact on its financial statements.
3. INCOME TAXES
Effective August 21, 1998, Insight Ohio is a limited liability corporation.
Therefore, each member reports his distributive share of income or loss on his
respective income tax returns. Prior to August 21, 1998, the Operating Unit was
an operating unit within Coaxial, which in turn was a Subchapter S Corporation.
Therefore, each shareholder reported his distributive share of income or loss on
his respective income tax return. As a result, Insight Ohio does not provide for
Federal or State income taxes in its accounts. In the event that the limited
liability corporation election is terminated, deferred taxes related to book and
tax temporary differences would be required to be reflected in the financial
statements. As a limited liability company, the liability of Insight Ohio's
members are limited to their respective investments.
4. 401(K) PLAN
Insight Ohio sponsors a 401(k) Plan (the "Plan") for the benefit of its
employees. All employees who have completed six months of employment and have
attained the age of 21 are eligible to participate in the Plan. Insight Ohio
makes matching contributions equal to a portion of the employee's wages. Insight
Ohio contributions to the Plan approximated $145,000 in 1998.
5. CREDIT FACILITY
Insight Ohio has a Senior Credit Facility ("Senior Credit Facility") with a
group of banks and other financial institutions. The Senior Credit Facility
provides for revolving credit loans of $25 million to finance capital
expenditures and for working capital and general purposes, including the upgrade
of the System's cable plant and for the introduction of new video services. The
Senior Credit Facility has a six-year maturity, with reductions to the amount of
the commitment commencing after three years. The amount available for borrowing
is reduced by any outstanding letter of credit obligations. Insight Ohio's
obligations under the Senior Credit Facility are secured by substantially all
the tangible and intangible assets of Insight Ohio. Loans under the Senior
Credit Facility bear interest, at Insight Ohio's option, at the prime rate or at
a Eurodollar rate. In addition to the index rates, Insight Ohio pays an
additional margin percentage tied to its ratio of total debt to adjusted
annualized operating cash flow.
The Senior Credit Facility contains a number of covenants that, among other
things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness, incur
guaranty obligations, pay dividends or make capital distributions, including
distributions on the Preferred Interests that are required to pay the Senior
Notes and the Discount Notes in the event of a payment default under the Senior
Credit Facility, create liens on assets, make investments, make acquisitions,
engage in mergers or
F-60
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
5. CREDIT FACILITY--(CONTINUED)
consolidations, engage in certain transactions with subsidiaries and affiliates
and otherwise restrict certain activities.
6. RELATED PARTY TRANSACTIONS
Effective August 21, 1998, the Company entered into a management agreement
with IHO, which allows IHO to manage the operations of Insight Ohio. IHO earns a
management fee equivalent to 3% of Insight Ohio's gross operating revenues. Fees
under this management agreement aggregated $493,000 for the period from
August 21 through December 31, 1998.
Insight Ohio has a receivable from and payable to related parties as of
December 31, 1998 of approximately $149,000 and $1,029,000, respectively,
relating to working capital requirements.
Insight Ohio pays rent to a partnership owned by Coaxial's shareholders for
two facilities. Total charges for rent were approximately $63,000 in 1998.
7. OPERATING LEASE AGREEMENTS
Insight Ohio leases land for tower locations, office equipment, office
space, vehicles and the use of utility poles under various operating lease
agreements. Rental expense for all operating leases was approximately $106,000
in 1998. These amounts exclude year-to-year utility pole leases of $191,000
which provide for payments based on the number of poles used.
Minimum rental commitments required under non-cancelable operating leases
are as follows:
1999........................................................... $38,400
2000........................................................... 26,400
2001 and thereafter............................................ 200
-------
$65,000
-------
-------
8. CAPITAL LEASE AGREEMENTS
Insight Ohio leases vehicles, computer and other equipment under capital
leases. These leases have terms ranging from four to five years. Future minimum
payments under these leases are as follows:
FOR THE YEARS ENDING DECEMBER 31,
- -------------------------------------------------------------
1999....................................................... $ 139,000
2000....................................................... 81,000
2001....................................................... 30,000
2002....................................................... 3,000
---------
253,000
Less: Amount representing interest......................... (25,000)
Less: Current portion of capital lease obligations......... (123,000)
---------
Long-term capital lease obligations........................ $ 105,000
---------
---------
9. COMMITMENTS AND CONTINGENCIES
Insight Ohio is party in or may be affected by various matters under
litigation. Management believes that the ultimate outcome of these matters will
not have a significant adverse effect on either Insight Ohio's future results of
operations or financial position.
F-61
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Coaxial Communications of Central Ohio, Inc.:
We have audited the accompanying statement of net assets to be contributed of
Central Ohio Cable System Operating Unit as of December 31, 1997 and the related
statements of operations and cash flows relating to the net assets to be
contributed for each of the two years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements of net assets to be contributed were
prepared to present the net assets of Central Ohio Cable System Operating Unit
to be contributed to a newly formed company pursuant to the Contribution
Agreement described in Note 10, and is not intended to be a complete
presentation of Central Ohio Cable System Operating Unit.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets to be contributed of Central Ohio Cable
System Operating Unit as described in Note 10, as of December 31, 1997, and the
results of its operations and cash flows for each of the two years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/S/ ARTHUR ANDERSEN LLP
Columbus, Ohio,
July 17, 1998
F-62
CENTRAL OHIO CABLE SYSTEM OPERATING UNIT
STATEMENT OF NET ASSETS TO BE CONTRIBUTED
DECEMBER 31, 1997
--------------------
ASSETS
Current assets:
Cash...................................................................................... $ 573,989
Subscriber receivables, less allowance for doubtful accounts of $202,000.................. 661,183
Other accounts receivable, less allowance for doubtful accounts of $172,000............... 1,037,145
Prepaid expenses and other current assets................................................. 201,429
------------
Total current assets........................................................................ 2,473,746
------------
Property and equipment, at cost:
CATV systems.............................................................................. 64,949,357
Equipment................................................................................. 6,941,263
Furniture................................................................................. 211,232
Leasehold improvements.................................................................... 70,409
------------
72,172,261
Less--Accumulated depreciation and amortization........................................... (42,433,809)
------------
Total property and equipment, net........................................................... 29,738,452
------------
Intangible assets, at cost:
Franchise rights and other................................................................ 7,392,000
Less--Accumulated amortization............................................................ (7,323,026)
------------
Total intangible assets, net................................................................ 68,974
------------
Other assets:
Due from related parties.................................................................. 98,584
------------
Total other assets.......................................................................... 98,584
------------
Total assets................................................................................ $ 32,379,756
------------
------------
LIABILITIES AND NET ASSETS
Current liabilities:
Current portion of capital lease obligations.............................................. $ 213,103
Accounts payable.......................................................................... 2,804,766
Accrued liabilities....................................................................... 3,596,922
------------
Total current liabilities................................................................... 6,614,791
------------
Capital lease obligations................................................................... 194,194
------------
Total liabilities........................................................................... 6,808,985
Commitments and contingencies
Net assets to be contributed.............................................................. 25,570,771
------------
Total liabilities and net assets............................................................ $ 32,379,756
------------
------------
The accompanying notes to financial statements are an integral part of these
statements.
F-63
CENTRAL OHIO CABLE SYSTEM OPERATING UNIT
STATEMENTS OF OPERATIONS RELATED TO NET ASSETS TO BE CONTRIBUTED
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
----------- -----------
Operating revenues:
Service fees..................................................................... $44,763,413 $42,544,417
Advertising...................................................................... 3,072,567 3,373,064
Connection fees.................................................................. 395,673 282,374
Other............................................................................ 2,186,172 2,029,632
----------- -----------
Total operating revenues...................................................... 50,417,825 48,229,487
----------- -----------
Operating expenses:
Service and administrative....................................................... 26,932,679 28,889,394
Depreciation..................................................................... 4,812,346 4,755,017
Amortization..................................................................... 522,216 482,675
----------- -----------
Total operating expenses...................................................... 32,267,241 34,127,086
----------- -----------
Operating income................................................................... 18,150,584 14,102,401
Other expenses..................................................................... (320,456) (321,732)
Other income....................................................................... 72,072 50,276
Interest income.................................................................... 29,449 69,990
----------- -----------
Net income from net assets to be contributed
(Note 3)......................................................................... $17,931,649 $13,900,935
----------- -----------
----------- -----------
The accompanying notes to financial statements are an integral part of these
statements.
F-64
CENTRAL OHIO CABLE SYSTEM OPERATING UNIT
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997
------------ ------------
Cash flows from operating activities:
Net income...................................................................... $ 17,931,649 $ 13,900,935
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................... 5,334,562 5,237,692
Loss on disposals of property and equipment..................................... 69,187 77,452
Changes in certain assets and liabilities:
(Increase) decrease in assets--
Subscriber receivables..................................................... (252,414) 182,395
Other accounts receivable, prepaid expenses and other current assets....... 580,700 325,215
Increase (decrease) in liabilities--
Accounts payable........................................................... (361,633) 421,658
Accrued liabilities........................................................ (1,317,378) (691,513)
Deferred income............................................................ (9,613) --
------------ ------------
Net cash provided by operating activities.................................. 21,975,060 19,453,834
------------ ------------
Cash flows from investing activities:
Capital expenditures for property and equipment................................. (5,992,164) (5,528,669)
Proceeds from disposal of property and equipment................................ 17,667 25,753
(Increase) decrease in amounts due from related parties......................... 263,559 (50,981)
------------ ------------
Net cash used in investing activities...................................... (5,710,938) (5,553,897)
------------ ------------
Cash flows from financing activities:
Principal payments on capital lease obligations................................... $ (234,630) $ (264,649)
Cash used for activities not included in net assets to be contributed............. (15,793,342) (13,967,020)
------------ ------------
Net cash used in financing activities...................................... (16,027,972) (14,231,669)
------------ ------------
Net increase (decrease) in cash................................................... 236,150 (331,732)
Cash, beginning of year......................................................... 669,571 905,721
------------ ------------
Cash, end of year............................................................... $ 905,721 $ 573,989
------------ ------------
------------ ------------
Supplemental Disclosure of Investing and Financing Noncash Transactions:
During 1996 and 1997, the Operating Unit entered into capital leases to
acquire vehicles and equipment totaling $198,985 and $56,707, respectively.
The accompanying notes to financial statements are an integral part of these
statements.
F-65
CENTRAL OHIO CABLE SYSTEM OPERATING UNIT
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BUSINESS ORGANIZATION AND PURPOSE
Central Ohio Cable System Operating Unit (the Operating Unit or the
System), an operating unit within Coaxial Communications of Central Ohio, Inc.
(Coaxial), operates a cable television system which provides basic and expanded
cable services to homes in Columbus, Ohio and surrounding areas. The Operating
Unit's financial statements include only those assets, liabilities, revenues and
expenses directly related to the cable television system to be contributed (see
Note 10).
All costs pertaining to the Operating Unit are specifically identifiable
and are included in the Operating Unit's financial statements. No allocation of
costs is necessary.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash
The Operating Unit considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Values
In December 1991, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," which requires disclosure of fair value information
about both on- and off-balance sheet financial instruments for which it is
practicable to estimate that value. The carrying amounts of current assets and
liabilities approximate their fair market value because of the immediate or
short-term maturity of these financial instruments.
Operating Revenue Recognition
Service fees are recorded in the month cable television and pay television
services are provided to subscribers. Connection fees are charges for the
hook-up of new customers and are recognized as current revenues to the extent of
direct selling costs incurred. Any fees in excess of such costs are deferred and
amortized to income over the estimated average period that subscribers are
expected to remain connected to the system.
Concentration of Credit Risk
Financial instruments that potentially subject the Operating Unit to
concentrations of credit risk consist principally of trade accounts receivable.
The Operating Unit's customer base consists of a number of homes concentrated in
the central Ohio area. The Operating Unit continually monitors the exposure for
credit losses and maintains allowances for anticipated losses. As of December
31, 1997, the Operating Unit had no significant concentrations of credit risk.
F-66
CENTRAL OHIO CABLE SYSTEM OPERATING UNIT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Property and Equipment
Property and equipment are stated at cost, while maintenance and repairs
are expensed as incurred. Upon retirement or disposal of assets, the cost and
related accumulated depreciation and amortization are removed from the balance
sheet, and any gain or loss is reflected in earnings. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of the related assets as follows:
YEARS
-------------
CATV systems............................................................................. 10 to 15
Equipment................................................................................ 5
Furniture................................................................................ 5
Leasehold improvements................................................................... Life of lease
The Operating Unit internally constructs certain CATV systems. Construction
costs capitalized include payroll, fringe benefits and other overhead costs
associated with construction activity.
The Operating Unit reviews its property, plant and equipment and other long
term assets when events or changes in circumstances indicate the carrying
amounts may not be recoverable. When such conditions exist, management estimates
the future cash flows from operations or disposition. If the estimated
undiscounted future cash flows are less than the carrying amount of the asset,
an adjustment to reduce the carrying amount would be recorded, and an impairment
loss would be recognized. The Operating Unit does not believe that there is an
impairment of such assets.
Intangible Assets
Intangible assets are amortized using the straight-line method over the
estimated useful lives of the related assets as follows:
YEARS
-------
Franchise rights.............................................................................. 7 to 15
Home Office Expenses
Home office expenses of approximately $1,697,000 and $1,498,000 in 1996 and
1997 (included in selling and administrative expenses) include billings for
legal fees, management fees, salaries, travel and other management expenses for
services provided by an affiliated services company.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense primarily
for campaign and telemarketing-related efforts was approximately $1,060,000 and
$1,025,000 in 1996 and 1997, respectively.
Change in Net Assets
The components of the change in net assets are as follows:
1996 1997
----------- -----------
Beginning Balance........................................................ $23,498,549 $25,636,856
Net income............................................................. 17,931,649 13,900,935
Advances, loans and repayments by Coaxial.............................. (15,793,342) (13,967,020)
----------- -----------
Ending Balance........................................................... $25,636,856 $25,570,771
----------- -----------
----------- -----------
F-67
CENTRAL OHIO CABLE SYSTEM OPERATING UNIT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Advances, loans and repayments by Coaxial represent cash generated by the
Operating Unit that was used by Coaxial primarily for lending to related parties
and paying of notes payable. The advances, loans and repayments consist of the
following:
1996 1997
------------ ------------
Advances................................................................ $(11,446,090) $(10,519,748)
Loans................................................................... 9,914,315 2,938,723
Repayments.............................................................. (14,261,567) (6,385,995)
------------ ------------
$(15,793,342) $(13,967,020)
------------ ------------
------------ ------------
3. INCOME TAXES
The Operating Unit is an operating unit within Coaxial, which is a
Subchapter S corporation. Therefore, each shareholder reports his distributive
share of income or loss on his respective income tax returns. As a result, the
Operating Unit does not provide for Federal or state income taxes in its
accounts.
4. THRIFT PLAN
The Operating Unit participates in an employer sponsored Thrift Plan (the
Plan) for employees having at least one full year of service. Employees can
contribute up to 6% of their salary to the Plan which is matched 50% by the
Operating Unit. Employees can also contribute an additional 1% to 10% which is
not matched by the Operating Unit. Employees become fully vested in matching
contributions after 5 years. There is no partial vesting. The Operating Unit's
contributed approximately $111,000 and $133,000 to the Plan in 1996 and 1997,
respectively.
5. WORKERS' COMPENSATION RESERVES
The Operating Unit is partially self-insured for workers' compensation
benefits. The amounts charged to expense for workers' compensation were
approximately $110,200 and $89,200 for 1996 and 1997, respectively, and were
based on actual and estimated claims incurred. The liability for workers'
compensation obligations, as of December 31, 1996 and 1997, is approximately
$131,000 and $78,000, respectively.
6. RELATED PARTY TRANSACTIONS
The Operating Unit has a receivable from a related party as of December 31,
1997 and 1996 of $98,584 and $47,603, respectively, relating to the leasing of
fiber optic facilities.
The Operating Unit pays rent to a partnership owned by Coaxial's
shareholders for two facilities. Total charges for rent were approximately
$72,000 in 1996 and $99,500 in 1997.
7. OPERATING LEASE AGREEMENTS
The Operating Unit leases land for tower locations, office equipment,
office space, vehicles and the use of utility poles under various operating
lease agreements. Rental expense for all operating leases was approximately
$160,500 in 1996 and $218,500 in 1997. These amounts exclude year-to-year
utility pole leases of $186,400 and $182,700, respectively, which provide for
payments based on the number of poles used.
Minimum rental commitments required under noncancellable operating leases
are as follows:
1998.......................................................... $157,214
1999.......................................................... 146,389
2000.......................................................... 89,421
2001.......................................................... 200
--------
$393,224
--------
--------
F-68
CENTRAL OHIO CABLE SYSTEM OPERATING UNIT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
8. CAPITAL LEASE AGREEMENTS
The Operating Unit leases vehicles, computer equipment and Xerox equipment
under capital leases. These leases have various terms of 4-5 years. Future
minimum payments under the leases are as follows:
FOR THE YEARS ENDING DECEMBER 31,
- ------------------------------------------------------------
1998........................................................ $ 244,516
1999........................................................ 124,019
2000........................................................ 66,283
2001........................................................ 24,370
2002........................................................ 3,005
----------
462,193
Less: Amount representing interest.......................... 54,896
Less: Current portion of capital lease obligations.......... 213,103
----------
Long-term capital lease obligations......................... $ 194,194
----------
----------
As of December 31, 1997, the Operating Unit has assets held under capital
leases as follows:
Total costs................................................. $1,151,354
Related accumulated amortization............................ (628,973)
----------
Net book value as of December 31, 1997...................... $ 522,381
----------
----------
9. COMMITMENTS AND CONTINGENCIES
The Operating Unit is party in or may be affected by various matters under
litigation. Management believes that the ultimate outcome of these matters will
not have a significant adverse effect on either the Operating Unit's future
results of operations or financial position.
Capital expenditures for the Operating Unit for 1998 are expected to be
approximately $5,515,000.
10. SUBSEQUENT EVENT
On June 30, 1998, Coaxial and Insight Communications Company, L.P.
(Insight) entered into a Contribution Agreement (the Contribution Agreement)
pursuant to which Coaxial will contribute to a newly formed subsidiary (a
limited liability company) of Coaxial (the Operating Company) substantially all
of the assets and liabilities comprising the Operating Unit, and Insight will
contribute $10 million in cash to the Operating Company. As a result of this
Contribution Agreement, Coaxial will own 25% of the non-voting common equity and
Insight will own 75% of the non-voting common equity of the Operating Company,
subject to possible adjustments pursuant to the Contribution Agreement. Coaxial
will also own two separate series of voting preferred equity (a $140 preferred
equity interest and a $30 million preferred equity interest) of the Operating
Company; the voting preferred equity interest will provide for distributions to
Coaxial equal in amount to the payments on the senior and senior discount notes
described below. Insight or an affiliate will serve as the manager of the
Operating Company.
The closing of the Contribution Agreement is conditioned upon, among other
things, the private placement of $140 million senior notes by Coaxial and
Phoenix Associates (a related entity) and the private placement of $30 million
of senior discount notes by the majority shareholder of Coaxial.
F-69
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
INSIGHT COMMUNICATIONS COMPANY, INC.
[Logo]
,000,000 SHARES OF CLASS A COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
DONALDSON, LUFKIN & JENRETTE
MORGAN STANLEY DEAN WITTER
CIBC WORLD MARKETS
DEUTSCHE BANK SECURITIES
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of Insight have
not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all
dealers, whether or not participating in this offering, that effect transactions
in these securities may be required to deliver a prospectus. This is in addition
to the dealer's obligation to deliver a prospectus when acting as an underwriter
in this offering and when selling previously unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth various expenses, other than underwriting
discounts, which will be incurred in connection with this offering:
SEC registration fee.......................................... $ 143,865
NASDAQ listing fee............................................ 10,000
NASD filing fee............................................... 30,500
Blue sky fees and expenses.................................... *
Printing and engraving expenses............................... *
Legal fees and expenses....................................... *
Accounting fees and expenses.................................. *
Transfer Agent fees........................................... *
Miscellaneous expenses........................................ *
----------
Total.................................................... *
- ------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any threatened, pending or completed actions, suits or
proceedings in which such person is made a party by reason of such person being
or having been a director, officer, employee of or agent to the Registrant. The
statute provides that it is not exclusive of other rights to which those seeking
indemnification may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise. The Registrant's by-laws
provides for indemnification by the Registrant of any director or officer (as
such term is defined in the by-laws) of the Registrant who is or was a director
of any of its subsidiaries, or, at the request of the Registrant, is or was
serving as a director or officer of, or in any other capacity for, any other
enterprise, to the fullest extent permitted by law. The by-laws also provide
that the Registrant shall advance expenses to a director or officer and, if
reimbursement of such expenses is demanded in advance of the final disposition
of the matter with respect to which such demand is being made, upon receipt of
an undertaking by or on behalf of such director or officer to repay such amount
if it is ultimately determined that the director or officer is not entitled to
be indemnified by the Registrant. To the extent authorized from time to time by
the board of directors of the Registrant, the Registrant may provide to any one
or more employees of the Registrant, one or more officers, employees and other
agents of any subsidiary or one or more directors, officers, employees and other
agents of any other enterprise, rights of indemnification and to receive payment
or reimbursement of expenses, including attorneys' fees, that are similar to the
rights conferred in the by-laws of the Registrant on directors and officers of
the Registrant or any subsidiary or other enterprise. The by-laws do not limit
the power of the Registrant or its board of directors to provide other
indemnification and expense reimbursement rights to directors, officers,
employees, agents and other persons otherwise than pursuant to the by-laws. The
Registrant intends to enter into agreements with certain directors, officers and
employees who are asked to serve in specified capacities at subsidiaries and
other entities.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
payments of unlawful dividends or unlawful stock repurchases or redemptions, or
(iv) for any transaction from which the director derived an improper personal
benefit. The Registrant's certificate of incorporation provides for such
limitation of liability.
II-1
The Registrant intends to maintain policies of insurance under which its
directors and officers will be insured, within the limits and subject to the
limitations of the policies, against certain expenses in connection with the
defense of, and certain liabilities which might be imposed as a result of,
actions, suits or proceedings to which they are parties by reason of being or
having been such directors or officers.
Reference is also made to Section of the underwriting agreement filed
as Exhibit 1.1 to the registration statement for information concerning the
underwriters' obligation to indemnify the Registrant and its officers and
directors in certain circumstances.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant has not issued any common stock since its formation on
March 9, 1999. Concurrently with the consummation of the offering to which this
registration statement relates, the holders of the general and limited
partnership interests of Insight Communications Company, L.P. will exchange all
of their partnership interests for the Registrant's Class A and Class B common
stock in accordance with a formula based on the initial public offering price of
the Class A common stock being issued pursuant to the offering. The offering and
sale of the shares of common stock will not be registered under the Securities
Act of 1933 because the offering and sale will be made in reliance on the
exemption provided by Section 4(2) of the Securities Act of 1933 and Rule 506
thereunder for transactions by an issuer not involving a public offering (with
the recipients representing their intentions to acquire the securities for their
own accounts and not with a view to the distribution thereof and acknowledging
that the securities will be issued in a transaction not registered under the
Securities Act of 1933).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following is a list of Exhibits filed herewith as part of the
registration statement:
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
1.1* -- Form of Underwriting Agreement between Registrant and the underwriters
2.1 -- Asset Contribution Agreement by and among Insight Communications of Indiana, LLC ("Insight
Indiana"), Insight Communications Company, L.P. ("Insight LP"), UACC Midwest, Inc., TCI of Kokomo,
Inc., TCI of Indiana, Inc., Heritage Cablevision Associates, A Limited Partnership and TCI of
Indiana Holdings, LLC dated as of May 14, 1998
2.2 -- Contribution Agreement by and between Coaxial Communications of Central Ohio, Inc. ("Coaxial") and
Insight LP, dated as of June 30, 1998
2.3 -- Amendment to Contribution Agreement by and between Coaxial and Insight LP, dated as of July 15,
1998
2.4 -- Second Amendment to Contribution Agreement by and among Coaxial, Insight LP and Insight Holdings
of Ohio, LLC ("IHO"), dated as of August 21, 1998
2.5 -- Asset Exchange Agreement by and among Insight LP, TCI of Indiana, Inc. and UACC Midwest, Inc.,
dated May 14, 1998
2.6 -- Asset Exchange Agreement by and between Insight LP and CoxCom, Inc., dated as of November 26, 1997
2.7 -- Asset Purchase Agreement by and between A-R Cable Services, Inc. and Insight LP, dated as of
August 12, 1997
2.8 -- Purchase Agreement, dated as of April 18, 1999, among InterMedia Capital Management VI, LLC,
InterMedia Management Inc., Robert J. Lewis, TCI ICM VI, Inc., InterMedia Capital Management VI,
L.P., Blackstone KC Capital Partners, L.P., Blackstone KC Offshore Capital Partners, L.P.,
Blackstone Family Investment Partnership III L.P., Leo J. Hindery, Jr., TCI IP-VI, LLC and
Insight L.P.
2.9 -- Contribution and Formation Agreement, dated April 18, 1999, between TCI of Indiana Holdings, LLC
and Insight L.P.
3.1* -- Certificate of Incorporation of Registrant
3.2* -- By-laws of Registrant
II-2
EXHIBIT
NUMBER DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
4.1* -- Form of certificate evidencing shares of Class A common stock
5.1* -- Opinion of Cooperman Levitt Winikoff Lester & Newman, P.C.
10.1* -- 1999 Stock Option Plan
10.2* -- Fourth Amended and Restated Credit Agreement, dated as of December 21, 1998, among Insight LP,
several lenders and The Bank of New York
10.3* -- Credit Agreement, dated as of October 30, 1998, among Insight Indiana, several lenders and The
Bank of New York
10.4* -- Revolving Credit Agreement, dated as of October 7, 1998, among Insight Communications of Central
Ohio, LLC ("Insight Ohio"), several lenders and Canadian Imperial Bank of Commerce
10.5 -- Operating Agreement of Insight Indiana by and between Insight LP and TCI of Indiana Holdings, LLC,
dated as of May 14, 1998
10.6 -- Management Agreement by and between Insight Indiana and Insight LP, dated as of October 30, 1998
10.7 -- Operating Agreement of Insight Ohio by and among Coaxial, IHO, Barry Silverstein, Dennis
McGillicuddy and D. Stevens McVoy, dated as of August 21, 1998
10.8 -- Management Agreement of Coaxial LLC by and among Coaxial LLC, IHO and Barry Silverstein, dated as
of August 21, 1998
10.9 -- Management Agreement of Coaxial DJM LLC by and between Coaxial DJM LLC, IHO and Dennis
McGillicuddy, dated as of August 21, 1998
10.10 -- Management Agreement of Coaxial DSM LLC by and between Coaxial DSM LLC, IHO and D. Stevens McVoy,
dated as of August 21, 1998
10.11 -- Parent Undertaking given by Insight LP for and in favor of Coaxial, Phoenix Associates, Coaxial
LLC, Coaxial DJM LLC, Coaxial DSM LLC, Barry Silverstein, Dennis McGillicuddy and D. Stevens
McVoy, dated as of August 21, 1998
10.12* -- Management Agreement by and between Coaxial and Insight Ohio, dated as of August 21, 1998
10.13 -- Operating Agreement of IHO by and between Insight LP and IHO, dated as of August 21, 1998
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consents of KPMG LLP
23.3 -- Consent of PricewaterhouseCoopers LLP
23.4 -- Consent of Arthur Andersen LLP
23.5* -- Consent of Cooperman Levitt Winikoff Lester & Newman, P.C. (included in Exhibit 5.1)
23.6* -- Consent of Thomas L. Kempner
23.7* -- Consent of James S. Marcus
23.8* -- Consent of Daniel S. O'Connell
23.9* -- Consent of Prakash A. Melwani
24.1 -- Power of Attorney (included on the signature page of Part II of this registration statement)
27.1 -- Financial Data Schedule of Insight Communications Company, L.P.
- ------------------
* To be filed by Amendment
(b) Financial Statement Schedule.
S-1 Report of Independent Auditors on Financial Statement Schedule.
S-2 Schedule II--Valuation and Qualifying Accounts.
II-3
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) That for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(b) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in "Calculation of
Registration Fee" table in the effective registration statement;
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(4) That for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(5) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of this offering.
(6) To provide to the representatives at the closing specified in the
underwriting agreement, certificates in such denominations and registered
in such names as required by the representatives to permit prompt delivery
to each purchaser.
(7) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of Registrant pursuant to Item 14 of this Part II to the
registration statement, or otherwise, Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of expenses
incurred or paid by a director, officer or controlling person of Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.
II-4
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, REGISTRANT HAS
DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON THE 11TH DAY OF MAY, 1999.
INSIGHT COMMUNICATIONS COMPANY, INC.
By: /s/ MICHAEL S. WILLNER
-----------------------------------
Michael S. Willner
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael S. Willner and Kim D. Kelly, and each of
them, with full power to act without the other, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all capacities to sign any
and all amendments (including post-effective amendments) to this registration
statement with respect to the proposed issuance, sale and delivery of Class A
common stock, or any registration statement for this offering that is to be
effective upon the filing pursuant to rule 462(b) under the Securities Act of
1933, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
-------------------------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
- ------------------------------------------ ---------------------------------------------------- ------------
/s/ SIDNEY R. KNAFEL Chairman of the Board May 11, 1999
- ------------------------------------------
Sidney R. Knafel
/s/ MICHAEL S. WILLNER President, Chief Executive Officer and Director May 11, 1999
- ------------------------------------------ (Principal Executive Officer)
Michael S. Willner
/s/ KIM D. KELLY Executive Vice President, Chief Financial and May 11, 1999
- ------------------------------------------ Operating Officer and Director (Principal Financial
Kim D. Kelly and Accounting Officer)
II-5
REPORT OF INDEPENDENT AUDITORS
The Partners of
Insight Communications Company, L.P.
We have audited the consolidated financial statements of Insight Communications
Company, L.P. as of December 31, 1998 and 1997 and for each of the three years
in the period ended December 31, 1998, and have issued our report thereon dated
April 5, 1999 (included elsewhere in this Registration Statement). Our audits
also included the financial statement schedule listed in Item 16(b) of this
Registration Statement. This schedule is the responsibility of the Partnership's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
New York, New York
March 31, 1999
S-1
INSIGHT COMMUNICATIONS COMPANY, L.P.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
CHARGED TO CHARGED TO
BEGINNING COSTS & OTHER DEDUCTIONS ENDING
DESCRIPTION BALANCE EXPENSE ACCOUNTS (1) BALANCE
- ------------------------------------------------------- --------- ---------- ---------- ---------- -------
Year ended December 31, 1996
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts...................... $ 146 $ 670 $ -- $ (710) $ 106
Year ended December 31, 1997
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts...................... 106 695 -- (671) 130
Year ended December 31, 1998
Reserves and allowances deducted from asset accounts:
Allowance for doubtful accounts...................... 130 1,288 -- (1,009) 409
- ------------------------
(1) Uncollectible accounts written off, net of recoveries.
S-2
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- -------------------------------------------------------------------------------------------- -----------
1.1* -- Form of Underwriting Agreement between Registrant and the underwriters
2.1 -- Asset Contribution Agreement by and among Insight Communications of Indiana, LLC
("Insight Indiana"), Insight Communications Company, L.P. ("Insight LP"), UACC
Midwest, Inc., TCI of Kokomo, Inc., TCI of Indiana, Inc., Heritage Cablevision
Associates, A Limited Partnership and TCI of Indiana Holdings, LLC dated as of
May 14, 1998
2.2 -- Contribution Agreement by and between Coaxial Communications of Central Ohio, Inc.
("Coaxial") and Insight LP, dated as of June 30, 1998
2.3 -- Amendment to Contribution Agreement by and between Coaxial and Insight LP, dated as of
July 15, 1998
2.4 -- Second Amendment to Contribution Agreement by and among Coaxial, Insight LP and
Insight Holdings of Ohio, LLC ("IHO"), dated as of August 21, 1998
2.5 -- Asset Exchange Agreement by and among Insight LP, TCI of Indiana, Inc. and UACC
Midwest, Inc., dated May 14, 1998
2.6 -- Asset Exchange Agreement by and between Insight LP and CoxCom, Inc., dated as of
November 26, 1997
2.7 -- Asset Purchase Agreement by and between A-R Cable Services, Inc. and Insight LP, dated
as of August 12, 1997
2.8 -- Purchase Agreement, dated as of April 18, 1999, among InterMedia Capital
Management VI, LLC, InterMedia Management Inc., Robert J. Lewis, TCI ICM VI, Inc.,
InterMedia Capital Management VI, L.P., Blackstone KC Capital Partners, L.P.,
Blackstone KC Offshore Capital Partners, L.P., Blackstone Family Investment
Partnership III L.P., Leo J. Hindery, Jr., TCI IP-VI, LLC and Insight L.P.
2.9 -- Contribution and Formation Agreement, dated April 18, 1999, between TCI of Indiana
Holdings, LLC and Insight L.P.
3.1* -- Certificate of Incorporation of Registrant
3.2* -- By-laws of Registrant
4.1* -- Form of certificate evidencing shares of Class A common stock
5.1* -- Opinion of Cooperman Levitt Winikoff Lester & Newman, P.C.
10.1* -- 1999 Stock Option Plan
10.2* -- Fourth Amended and Restated Credit Agreement, dated as of December 21, 1998, among
Insight LP, several lenders and The Bank of New York
10.3* -- Credit Agreement, dated as of October 30, 1998, among Insight Indiana, several lenders
and The Bank of New York
10.4* -- Revolving Credit Agreement, dated as of October 7, 1998, among Insight Communications
of Central Ohio, LLC ("Insight Ohio"), several lenders and Canadian Imperial Bank of
Commerce
10.5 -- Operating Agreement of Insight Indiana by and between Insight LP and TCI of Indiana
Holdings, LLC, dated as of May 14, 1998
10.6 -- Management Agreement by and between Insight Indiana and Insight LP, dated as of
October 30, 1998
10.7 -- Operating Agreement of Insight Ohio by and among Coaxial, IHO, Barry Silverstein,
Dennis McGillicuddy and D. Stevens McVoy, dated as of August 21, 1998
10.8 -- Management Agreement of Coaxial LLC by and among Coaxial LLC, IHO and Barry
Silverstein, dated as of August 21, 1998
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- -------------------------------------------------------------------------------------------- -----------
10.9 -- Management Agreement of Coaxial DJM LLC by and between Coaxial DJM LLC, IHO and Dennis
McGillicuddy, dated as of August 21, 1998
10.10 -- Management Agreement of Coaxial DSM LLC by and between Coaxial DSM LLC, IHO and D.
Stevens McVoy, dated as of August 21, 1998
10.11 -- Parent Undertaking given by Insight LP for and in favor of Coaxial, Phoenix
Associates, Coaxial LLC, Coaxial DJM LLC, Coaxial DSM LLC, Barry Silverstein, Dennis
McGillicuddy and D. Stevens McVoy, dated as of August 21, 1998
10.12* -- Management Agreement by and between Coaxial and Insight Ohio, dated as of August 21,
1998
10.13 -- Operating Agreement of IHO by and between Insight LP and IHO, dated as of August 21,
1998
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consents of KPMG LLP
23.3 -- Consent of PricewaterhouseCoopers LLP
23.4 -- Consent of Arthur Andersen LLP
23.5* -- Consent of Cooperman Levitt Winikoff Lester & Newman, P.C. (included in Exhibit 5.1)
23.6* -- Consent of Thomas L. Kempner
23.7* -- Consent of James S. Marcus
23.8* -- Consent of Daniel S. O'Connell
23.9* -- Consent of Prakash A. Melwani
24.1 -- Power of Attorney (included on the signature page of Part II of this registration
statement)
27.1 -- Financial Data Schedule of Insight Communications Company, L.P.
- ------------------
* To be filed by Amendment