REPORT OF INDEPENDENT AUDITORS
The Members
Insight Communications of Indiana, LLC
We have audited the accompanying balance sheet of Insight Communications of
Indiana, LLC as of December 31, 1998 and the related statements of operations
and members' equity, and cash flows for the period from November 1, 1998 (date
of inception) through December 31, 1998. 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 consolidated financial position of Insight
Communications of Indiana, LLC, at December 31, 1998 and the results of its
operations and its cash flows for the period from November 1, 1998 (date of
inception) through December 31, 1998, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
New York, New York
March 31, 1999
1
INSIGHT COMMUNICATIONS OF INDIANA, LLC
BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
ASSETS
Cash and cash equivalents............................................................................ $ 19,493
Trade accounts receivable, net of allowance for doubtful accounts of $339............................ 6,701
Prepaid expenses and other........................................................................... 651
Fixed assets, net.................................................................................... 129,776
Intangible assets, net............................................................................... 367,029
Deferred financing costs, net of amortization........................................................ 3,682
--------
$527,332
--------
--------
LIABILITIES AND MEMBERS' EQUITY
Accounts payable..................................................................................... 12,467
Accrued expenses and other liabilities............................................................... 4,324
Interest payable..................................................................................... 5,824
Due to Tele-Communications, Inc...................................................................... 522
Debt................................................................................................. 460,000
--------
483,137
Members' equity...................................................................................... 44,195
--------
$527,332
--------
--------
See accompanying notes.
2
INSIGHT COMMUNICATIONS OF INDIANA, LLC
STATEMENT OF OPERATIONS AND MEMBERS' EQUITY
FOR THE PERIOD FROM NOVEMBER 1, 1998 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1998
(IN THOUSANDS)
Revenue............................................................................................... $ 23,925
Costs and expenses:
Programming and other operating costs............................................................... 6,206
Selling, general and administrative................................................................. 4,653
Depreciation and amortization....................................................................... 13,998
--------
24,857
--------
Loss from operations.................................................................................. (932)
Other income (expense):
Interest expense.................................................................................... (5,824)
Other............................................................................................... (64)
--------
Net loss.............................................................................................. (6,820)
Members' equity at November 1, 1998 (date of inception)............................................... 51,015
--------
Members' equity at December 31, 1998.................................................................. $ 44,195
--------
--------
See accompanying notes.
3
INSIGHT COMMUNICATIONS OF INDIANA, LLC
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM NOVEMBER 1, 1998 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
Operating activities:
Net loss.......................................................................................... $ (6,820)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization.................................................................. 13,998
Provision for losses on trade accounts receivable.............................................. 226
Changes in operating assets and liabilities:
Trade accounts receivable................................................................... (552)
Prepaid expenses and other.................................................................. (651)
Accounts payable and accrued expenses....................................................... 7,223
Due to Tele-Communications, Inc............................................................. 522
Interest payable............................................................................ 5,824
---------
Net cash provided by operating activities......................................................... 19,770
---------
Investing activities:
Purchases of fixed assets......................................................................... (4,022)
Increase in intangible assets..................................................................... (573)
---------
Net cash used in investing activities............................................................. (4,595)
---------
Financing activities:
Proceeds from bank credit facility................................................................ 460,000
Repayment of amounts due to Tele-Communications, Inc.............................................. (214,552)
Repayment of amounts due to Insight Communications Company, LP.................................... (237,448)
Debt issuance costs............................................................................... (3,682)
---------
Net cash provided by financing activities......................................................... 4,318
---------
Cash and cash equivalents, December 31, 1998...................................................... $ 19,493
---------
---------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest....................................................................................... $ --
---------
---------
See accompanying notes.
4
INSIGHT COMMUNICATIONS OF INDIANA, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
A. ORGANIZATION AND BASIS OF PRESENTATION
Pursuant to the terms of a Contribution Agreement dated October 31, 1998,
Insight Communications Company, L.P. ("Insight") and Tele-Communications, Inc.
("TCI") contributed certain of their cable television systems located in Indiana
and Northern Kentucky to Insight Communications of Indiana, LLC ("Insight
Indiana"), a newly formed limited liability corporation, in exchange for 50%
equity interests therein. The cable television systems contributed to Insight
Indiana by Insight included the Jasper and Evansville systems that were acquired
by Insight from TCI on October 31, 1998 and the Noblesville, Jeffersonville and
Lafayette systems. Pursuant to the terms of the Insight Indiana operating
agreement (the "Operating Agreement"), Insight Indiana has a twelve year life,
unless extended by TCI and Insight. In addition, the Operating Agreement states
that Insight 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 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 ($89.1 million). In addition, the historical values of the Noblesville,
Jeffersonville and Lafayette systems have been increased by $44.3 million, an
amount equivalent to 50% of the difference between the fair value of such
systems and their respective carrying values. Furthermore, in connection with
Insight's acquisition of the Jasper and Evansville systems, the historical
values of such systems were increased by $112 million, an amount equivalent to
the difference between the fair value of such systems and their carrying values.
The aggregate step-up to 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 million and franchise costs of $181.6 million. The accompanying
financial statements include the results of operations of Insight Indiana from
November 1, 1998 (date of inception) through December 31, 1998.
Because Insight Indiana is a limited liability company, the liability of
its members is limited to their respective investments.
B. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the 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. Launch fees are deferred and amortized over the period of the
underlying contract. 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.
5
INSIGHT COMMUNICATIONS OF INDIANA, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
B. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Cash Equivalents
Insight Indiana considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Fixed Assets
Fixed assets are stated at cost, which includes amounts capitalized for
labor and overhead expended in connection with the installation of cable
television systems. Depreciation for furniture, fixtures, office equipment,
buildings and equipment is computed using the straight-line method over
estimated useful lives ranging from 3 to 10 years. 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 fifteen 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 Insight Indiana, the carrying value of such intangible
assets would be considered impaired and will be reduced by a charge to
operations in the amount of the impairment. Based on its most recent analysis,
management 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. These costs are
being amortized on a straight line basis over the life of the applicable loan.
Marketing and Promotional Costs
Marketing and promotional costs are expensed as incurred. For the period
from November 1, 1998 (date of inception) through December 31, 1998, marketing
and promotional expense approximated $205,000.
Income Taxes
No provision has been made in the accompanying financial statements for
federal, state, or local income taxes since the income or loss of Insight
Indiana is reportable by the individual partners in their respective tax
returns.
6
INSIGHT COMMUNICATIONS OF INDIANA, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
B. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). Insight Indiana expects to adopt the Statement effective January 1,
2000. The Statement will require Insight Indiana to recognize all derivatives on
the balance sheet at fair value. Although management has not completed its
assessment of the impact of SFAS No. 133 on its results of operations, and
financial position, management does not anticipate that the adoption of this
Statement will be material.
C. FIXED ASSETS
Fixed assets consist of:
DECEMBER 31, 1998
-----------------
(IN THOUSANDS)
Land, buildings and improvements................. $ 4,010
Cable television equipment....................... 149,194
Furniture, fixtures and office equipment......... 6,681
---------
159,885
Less accumulated depreciation and amortization... (30,109)
---------
$ 129,776
---------
---------
D. INTANGIBLE ASSETS
Intangible assets consist of:
DECEMBER 31, 1998
-----------------
(IN THOUSANDS)
Franchise rights................................. $ 378,631
Goodwill......................................... 930
---------
379,561
Less accumulated amortization.................... (12,532)
---------
$ 367,029
---------
---------
E. DEBT
Debt consists of:
DECEMBER 31, 1998
-----------------
(IN THOUSANDS)
Revolving credit facility........................ $ 160,000
Term loan........................................ 300,000
---------
$ 460,000
---------
---------
7
INSIGHT COMMUNICATIONS OF INDIANA, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
E. DEBT--(CONTINUED)
At December 31, 1998, Insight Indiana has a credit facility (the "Credit
Facility") that provides for term loans of $300 million and for revolving credit
loans of up to $250 million. The 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 Insight Indiana's assets. Loans under the Credit Facility
bear interest at an alternate base or Eurodollar rate plus an additional margin
tied to certain debt ratios of Insight Indiana. The Credit Facility requires
Insight Indiana to meet certain debt financial covenants. For the two months
ended December 31, 1998, average interest rates approximated 7.60%.
At December 31, 1998 required annual principal payments under the
aforementioned Credit Facility are as follows (in thousands):
2001............................................. $ 55,000
2002............................................. 74,250
2003............................................. 90,750
Thereafter....................................... 240,000
---------
$ 460,000
---------
---------
F. FINANCIAL INSTRUMENTS
Concentrations of Credit Risk
Financial instruments that potentially subject Insight Indiana to
significant concentrations of credit risk consist principally of cash
investments and accounts receivable. Insight Indiana maintains cash and cash
equivalents, with various financial institutions. Insight Indiana'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 Insight Indiana's customer base.
The following methods and assumptions were used by Insight Indiana 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 its fair value.
Debt: The carrying amounts of Insight Indiana's borrowings under its
credit facility approximate its fair value as it bears interest at floating
rates.
The carrying amounts and fair values of Insight Indiana's financial
instruments at December 31 approximate fair value.
Insight Indiana 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 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 Insight Indiana has entered into various interest rate swap
and collar agreements
8
INSIGHT COMMUNICATIONS OF INDIANA, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1998
F. FINANCIAL INSTRUMENTS--(CONTINUED)
effectively fixing interest rates at 4.4% to 5.1% on $75 million notional value
of debt. The fair values of the swap agreements are not recognized in the
financial statements and approximated $.1 million at December 31, 1998.
G. 401(k) PLAN
Insight Indiana sponsors a savings and investment 401(k) Plan (the "Plan")
for the benefit of its employees. All employees who have completed six months of
employment and have attained age 21 are eligible to participate in the Plan.
Insight Indiana makes matching contributions equal to a percentage of the
employee's contribution. For the two months ended December 31, 1998, the
matching contribution approximated $71,000.
H. COMMITMENTS AND CONTINGENCIES
Insight Indiana 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............................................. $ 477
2000............................................. 191
2001............................................. 143
2002............................................. 130
2003............................................. 119
Thereafter....................................... 378
-------
$ 1,438
-------
-------
Rental expense for the two month period ended December 31, 1998
approximated $.1 million.
I. RELATED PARTY TRANSACTIONS
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.
In connection with the formation of Insight Indiana, $214.6 million and
$237.5 million of intercompany debt due to TCI and Insight was assumed. During
November 1998, such amounts were repaid. Insight Indiana pays Insight a
management fee equivalent to 3% of its revenue. For the two month period ended
December 31, 1998, such management fee approximated $.7 million.
9
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Insight Communications Company, Inc.
We have audited the accompanying combined balance sheets of the Noblesville IN,
Jeffersonville IN and Lafayette IN cable television systems (collectively the
"Combined Systems") included in Insight Communications Company, L.P., as of
December 31, 1997 and October 31, 1998, and the related combined statements of
operations, changes in net assets, and cash flows for the year ended
December 31, 1997 and the period from January 1, 1998 to October 31, 1998. These
combined financial statements are the responsibility of the Combined Systems'
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 combined financial position of the Combined Systems,
included in Insight Communications Company, L.P., at December 31, 1997 and
October 31, 1998, and the combined results of their operations and their cash
flows for the year ended December 31, 1997 and the period from January 1, 1998
to October 31, 1998, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
New York, New York
September 13, 1999
10
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31, OCTOBER 31,
1997 1998
------------ -----------
ASSETS
Cash and cash equivalents........................................................... $ 143 $ 291
Trade accounts receivable, net of allowance for doubtful accounts of $22 in 1997 and
$40 in 1998....................................................................... 798 1,456
Prepaid expenses.................................................................... 517 141
Fixed assets, net................................................................... 45,783 59,304
Intangible assets, net.............................................................. 58,048 55,194
-------- ---------
Total assets........................................................................ $105,289 $ 116,386
-------- ---------
-------- ---------
LIABILITIES AND NET ASSETS
Accounts payable.................................................................... $ 1,420 $ 3,085
Accrued expenses and other liabilities.............................................. 1,735 2,729
-------- ---------
Total liabilities................................................................... 3,155 5,814
Net assets.......................................................................... 102,134 110,572
-------- ---------
Total Liabilities and Net Assets.................................................... $105,289 $ 116,386
-------- ---------
-------- ---------
See accompanying notes.
11
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, OCTOBER 31,
1997 1998
------------ -----------
Revenue............................................................................. $ 22,055 $33,486
Costs and expenses:
Programming and other operating costs............................................. 5,852 9,028
Selling, general and administrative............................................... 3,296 5,203
Depreciation and amortization..................................................... 5,498 10,790
-------- -------
14,646 25,021
-------- -------
Operating income.................................................................... 7,409 8,465
Other expense....................................................................... (26) (27)
-------- -------
Net income.......................................................................... $ 7,383 $ 8,438
-------- -------
-------- -------
See accompanying notes.
12
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
COMBINED STATEMENTS OF CHANGES IN NET ASSETS
(DOLLARS IN THOUSANDS)
Balance at January 1, 1997........................................................................... $ 14,751
Effect of cable system exchange (see Note A)....................................................... 80,000
Net income......................................................................................... 7,383
--------
Balance at December 31, 1997......................................................................... 102,134
Net income......................................................................................... 8,438
--------
Balance at October 31, 1998.......................................................................... $110,572
--------
--------
See accompanying notes.
13
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
TEN MONTHS
YEAR ENDED ENDED
DECEMBER 31, OCTOBER 31,
1997 1998
------------ -----------
Operating activities
Net income........................................................................ $ 7,383 $ 8,438
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................................... 5,497 10,790
Provision for losses on trade accounts receivable........................... 192 281
Changes in operating assets and liabilities:
Trade accounts receivable................................................ (686) (939)
Prepaid expenses and other assets........................................ (349) 376
Accounts payable......................................................... 846 1665
Accrued expenses and other liabilities................................... 456 994
-------- ---------
Net cash provided by operating activities........................................... 13,339 21,605
-------- ---------
Investing activities
Purchases of fixed assets........................................................... (17,246) (21,432)
Increase in intangible assets....................................................... (8,645) (25)
-------- ---------
Net cash used in investing activities............................................... (25,891) (21,457)
-------- ---------
Financing activities
Net proceeds from system exchange................................................... 12,588 --
-------- ---------
Net cash provided by financing activities........................................... 12,588 --
-------- ---------
Net increase in cash and cash equivalents........................................... 36 148
Cash and cash equivalents, beginning of year........................................ 107 143
-------- ---------
Cash and cash equivalents, end of year.............................................. $ 143 $ 291
-------- ---------
-------- ---------
See accompanying notes.
14
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998
A. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
The cable television systems operating in the metropolitan areas of
Noblesville, IN; Jeffersonville, IN; and Lafayette, IN (the "Combined Systems")
are principally engaged in the cable television business under non-exclusive
franchise agreements, which expire at various times beginning in 1999. Through
October 31, 1998 the Combined Systems were owned by Insight Communications
Company, L.P. (the "Partnership").
BASIS OF PRESENTATION
The accompanying combined financial statements of the Combined Systems
reflect the "carved out" historical financial position, results of operations,
changes in net assets and cash flows of the operations of the Combined Systems
as if they had been operating as a separate company. Significant intercompany
accounts and transactions between the Combined Systems have been eliminated.
Significant accounts and transactions with the Partnership and its affiliates
are disclosed as related party transactions (See Note C). Effective December 16,
1997 the Partnership exchanged its Phoenix, Arizona system ("Phoenix") servicing
36,250 subscribers for Cox Communications, Inc.'s Lafayette, Indiana system
("Lafayette") servicing approximately 38,100 subscribers. In addition to the
Lafayette system received, the Partnership received $12.6 million in cash. The
Lafayette purchase price ($80 million) 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. Purchase price
adjustments for differences in working capital between the Phoenix and Lafayette
systems were not significant.
Accordingly, the results of operations of the Layafette system are included
in the accompanying financial statements from the date of acquisition.
The pro forma unaudited results of operations of the Combined Systems for
the year ended December 31, 1997 assuming the acquisition of the Lafayette
system occurred on January 1, 1997 is as follows (in thousands):
Revenues................................................... $40,203
Income before extraordinary item........................... 10,932
Net income................................................. 10,932
Effective as of October 31, 1998, the Combined Systems' financial
statements reflect the new basis of accounting arising from their contribution
into Insight Communications of Indiana LLC ("Insight Indiana") (See Note E).
The combined financial statements have been adjusted to include the
allocation of certain expenses incurred by the Partnership on the Combined
Systems' behalf, based upon the ratio of Combined System subscribers to total
Partnership subscribers. These allocations reflect all costs of doing business
that the Combined Systems would have incurred on a stand alone basis as
disclosed in Note C. Management believes that these allocations are reasonable.
15
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1998
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
A significant portion of the customer base is concentrated within the local
geographical area of each of the individual cable television systems. The
Combined Systems generally extend credit to customers and the ultimate
collection of accounts receivable could be affected by the local economy.
Management performs continuous credit evaluations of its customers and may
require cash in advance or other special arrangements from certain customers.
Management does not believe that there is a significant credit risk which could
have a significant effect on the financial condition of the Combined Systems.
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. Launch fees are deferred and amortized over the period of the
underlying contract. 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.
STATEMENT OF CASH FLOWS
The Combined Systems participate in a cash management system with
affiliates whereby cash receipts are transferred to a centralized bank account
from which centralized payments to various suppliers and creditors are made on
behalf of the Combined Systems. The excess of such cash receipts over payments
is included in net assets. Amounts shown as cash represent the Combined Systems'
net cash receipts not transferred to the centralized account as of December 31,
1997 and October 31, 1998. For purposes of this statement, cash and cash
equivalents includes all highly liquid investments purchased with original
maturities of three months or less.
FIXED ASSETS
Fixed assets are stated at cost, which includes amounts capitalized for
labor and overhead expanded in connection with the installation of cable
television systems. Depreciation is computed using the straight-line method over
estimated useful lives ranging from 5 to 10 years. Management
16
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1998
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
does not believe that any events or changes in circumstances indicate that the
carrying value of these long-lived assets may not be recovered. Fixed assets
consist of the following:
DECEMBER 31 OCTOBER 31
1997 1998
----------- ----------
(IN THOUSANDS)
Land, buildings and improvements......... $ 2,243 $ 2,024
Cable television equipment............... 53,431 75,446
Furniture, fixtures and office
equipment.............................. 1,420 894
Less accumulated depreciation and
amortization........................... (11,311) (19,060)
------- --------
$45,783 $ 59,304
------- --------
------- --------
INTANGIBLE ASSETS
Intangible assets consist of franchise costs and goodwill. Costs incurred
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 cost of the properties acquired
over the amounts assigned to the tangible assets at the date of acquisition.
During 1997 and 1998, the Combined Systems amortized cable television franchises
over periods up to 15 years using the straight-line method. The carrying value
of intangible assets, will be reviewed if facts and circumstances suggest that
that they may be impaired. Upon a determination that the carrying value of
intangible assets will not be recovered from the undiscounted future cash flows
of the acquired business, the carrying value of such intangible assets would be
considered impaired and would be reduced by a charge to operations in the amount
of the impairment. Based on its recent analysis, management believes that no
material impairment of long-lived assets exists at October 31, 1998.
INCOME TAXES
As a U.S. partnership, the Partnership is not subject to federal and most
state income taxes and, therefore, no income taxes are recorded in the
accompanying financial statements.
C. RELATED PARTIES
In the normal course of business, the Combined Systems had various
transactions with the Partnership and its affiliates, generally on terms
resulting from a negotiation between the affected units that in management's
view resulted in reasonable allocations.
The assets of the Combined Systems serve as security under the
Partnership's lending agreements. No amount of interest charged under these
agreements has been allocated to the Combined Systems' operations. Interest
expense on a consolidated basis for the Partnership was approximately
$16.0 million and $28.1 million for the years ended December 31, 1997 and 1998,
respectively.
17
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, 1998
Included in the Combined Systems' operating expenses are charges for
programming and promotional services provided by the Partnership. These charges
are based on customary rates and are in the ordinary course of business. For the
year ended December 31, 1997 and the ten months ended October 31, 1998 these
charges totaled $4.3 million and $7.2 million, respectively.
D. COMMITMENT AND CONTINGENCIES
The Combined Systems had rental expense of approximately $83,000 and
$112,000 for the year ended December 31, 1997 and the ten months ended
October 31, 1998, respectively, under various lease agreements for offices,
utility poles, warehouses and computer equipment. Future minimum rental payments
required under operating leases over the next five years are as follows:
(IN
THOUSANDS)
-------------
1999.................................................. $40,831
2000.................................................. 1,150
2001.................................................. 500
2002.................................................. 500
2003.................................................. 500
Thereafter............................................ 1,208
-------
$44,689
-------
-------
E. SUBSEQUENT EVENT (UNAUDITED)
Effective October 31, 1998, the Partnership and Tele-Communications, Inc.
("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 Communications of Indiana, LLC ("Insight Indiana")
in exchange for 50% equity interests therein. All three of the Combined Systems
were contributed into Insight Indiana effective October 31, 1998. The
Partnership recognized a gain of $44.3 million on the contribution of the
Combined Systems to Insight Indiana, equivalent to 50% of the difference between
the carrying value of such systems and their fair value.
18
INSIGHT COMMUNICATIONS OF INDIANA, LLC
CONDENSED BALANCE SHEET
JUNE 30, 1999
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Cash and cash equivalents............................................................................ $ 19,998
Trade accounts receivable, net of allowance for doubtful accounts of $336............................ 4,299
Due from affiliate................................................................................... 2,900
Prepaid expenses and other........................................................................... 1,707
Fixed assets, net.................................................................................... 135,714
Intangible assets, net............................................................................... 354,413
Deferred financing costs, net of amortization........................................................ 6,180
--------
$525,211
--------
--------
LIABILITIES AND MEMBERS' EQUITY
Accounts payable..................................................................................... $ 22,506
Accrued expenses and other liabilities............................................................... 4,764
Interest payable..................................................................................... 5,471
Due to Tele-Communications, Inc...................................................................... 2,859
Debt................................................................................................. 466,000
--------
501,600
Members' equity...................................................................................... 23,611
--------
$525,211
--------
--------
See accompanying notes.
19
INSIGHT COMMUNICATIONS OF INDIANA, LLC
CONDENSED STATEMENT OF OPERATIONS AND MEMBERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
(IN THOUSANDS)
Revenue............................................................................................ $ 71,744
Costs and expenses:
Programming and other operating costs............................................................ 20,177
Selling, general and administrative.............................................................. 15,865
Depreciation and amortization.................................................................... 43,440
--------
79,482
--------
Loss from operations............................................................................... (7,738)
Other income (expense):
Gain on cable system exchange.................................................................... 3,900
Interest expense................................................................................. (16,767)
Other............................................................................................ 21
--------
Net loss........................................................................................... (20,584)
Members' equity at December 31, 1998............................................................... 44,195
--------
Members' equity at June 30, 1999................................................................... $ 23,611
--------
--------
See accompanying notes.
20
INSIGHT COMMUNICATIONS OF INDIANA, LLC
CONDENSED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Operating activities
Net loss............................................................................................ $ (20,584)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization.................................................................... 43,440
Gain on cable system exchange.................................................................... (3,900)
Provision for losses on trade accounts receivable................................................ 746
Changes in operating assets and liabilities:
Trade accounts receivable..................................................................... 1,656
Due from affiliates........................................................................... (2,900)
Prepaid expenses and other.................................................................... (1,056)
Accounts payable and accrued expenses......................................................... 10,479
Due to Tele-Communications, Inc............................................................... 2,337
Interest payable.............................................................................. (353)
----------
Net cash provided by operating activities........................................................... 29,865
----------
Investing activities
Purchases of fixed assets........................................................................... (31,144)
Increase in intangible assets....................................................................... (4,216)
----------
Net cash used in investing activities............................................................... (35,360)
----------
Financing activities
Proceeds from bank credit facility.................................................................. 6,000
----------
Net cash provided by financing activities........................................................... 6,000
----------
Net increase in cash and cash equivalents........................................................... 505
Cash and cash equivalents, beginning of period...................................................... 19,493
----------
Cash and cash equivalents, end of period............................................................ $ 19,998
----------
----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest......................................................................................... $ --
----------
----------
See accompanying notes.
21
INSIGHT COMMUNICATIONS OF INDIANA, LLC
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
A. ORGANIZATION
Pursuant to the terms of a Contribution Agreement dated November 1, 1998,
Insight Communications Company, L.P. ("Insight") and Tele-Communications, Inc.
("TCI") contributed certain of their cable television systems located in Indiana
and Northern Kentucky to Insight Communications of Indiana, LLC ("Insight
Indiana"), in exchange for 50% equity interests therein. Pursuant to the terms
of the Insight Indiana operating agreement (the "Operating Agreement"), Insight
Indiana has a twelve year life, unless extended by TCI and Insight. In addition,
the Operating Agreement states that Insight is the manager of Insight Indiana
and effectively controls its board, including all of the operating and financial
decisions pertaining to Insight Indiana.
Because Insight Indiana is a limited liability company, the liability of
its members is limited to their respective investments.
B. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
six month period are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.
C. GAIN ON CABLE SYSTEM EXCHANGE
On February 1, 1999 Insight Indiana exchanged its Oldham, Kentucky cable
system ("Oldham") servicing approximately 8,500 subscribers for Intermedia
Partners of Kentucky L.P.'s Henderson, Kentucky cable system ("Henderson")
servicing approximately 10,600 subscribers. This transaction has been accounted
for by Insight Indiana as a sale of the Oldham system and a purchase of the
Henderson system. Accordingly, based upon the preliminary purchase price
allocation, the Henderson system has been included in the accompanying condensed
balance sheet at its fair value (approximately $21.0 million) and Insight
Indiana recognized a gain on the sale of the Oldham system of approximately $3.9
million, which amount represents the difference between the carrying value of
the Oldham system and its fair value. This amount was allocated to the Henderson
system purchase price as an increase in franchise costs of $3.9 million.
Franchise costs arising from the acquisition of the Henderson system are being
amortized on a straight-line method over a period of 15 years.
D. COMMITMENTS AND CONTINGENCIES
Certain of Insight Indiana's individual systems have been named in
purported class actions in various jurisdictions concerning late fee charges and
practices. Certain of Insight Indiana'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 television systems as
a result of late payment. Plaintiffs seek to require television systems to
provide compensation for alleged excessive late fee charges for past periods.
22
INSIGHT COMMUNICATIONS OF INDIANA, LLC
NOTES TO THE CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
JUNE 30, 1999
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 Insight Indiana.
Insight Indiana 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
financial condition of Insight Indiana.
E. RELATED PARTY TRANSACTIONS
Insight Indiana pays Insight a management fee equivalent to 3% of its
revenue. For the six month period ended June 30, 1999, such management fee
approximated $2.2 million.
F. SUBSEQUENT EVENTS
Insight Midwest L.P., a newly formed 50-50 joint venture between Insight
and TCI, plans to complete a $200 million high yield offering of senior notes in
September 1999. The proceeds of this offering will be used to refinance certain
debt that will be assumed in connection with the acquisition of cable television
systems located in Kentucky. In addition, contemporaneously with the closing of
the offering and acquisition, Insight Indiana LLC will become a wholly owned
subsidiary of Insight Midwest.
23
INTERMEDIA CAPITAL PARTNERS VI, L.P.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(UNAUDITED)
ASSETS
Cash and cash equivalents........................................................... $ 2,602 $ 4,422
Accounts receivable, net of allowance for doubtful accounts of $2,692 and $1,210,
respectively...................................................................... 15,160 13,438
Receivable from affiliates.......................................................... 7,532 8,143
Prepaids and other current assets................................................... 1,049 1,084
-------- ---------
Total current assets................................................................ 26,343 27,087
-------- ---------
Intangible assets, net.............................................................. 632,002 596,441
Property and equipment, net......................................................... 243,100 250,149
Other non-current assets............................................................ 3,045 2,861
-------- ---------
Total assets........................................................................ $904,490 $ 876,538
-------- ---------
-------- ---------
LIABILITIES AND PARTNERS' CAPITAL
Short-term debt..................................................................... $ -- $ 62,039
Accounts payable and accrued liabilities............................................ 23,541 19,814
Payable to affiliates............................................................... 2,913 3,212
Deferred revenue.................................................................... 11,429 12,785
Accrued interest.................................................................... 5,529 5,879
-------- ---------
Total current liabilities........................................................... 43,412 103,729
-------- ---------
Deferred channel launch revenue..................................................... 7,767 6,091
Long-term debt...................................................................... 726,000 676,000
Other long-term liabilities......................................................... 411 1,206
-------- ---------
Total liabilities................................................................... 777,590 787,026
-------- ---------
Commitments and contingencies
Total partners' capital............................................................. 126,900 89,512
-------- ---------
Total liabilities and partners' capital............................................. $904,490 $ 876,538
-------- ---------
-------- ---------
See accompanying notes to the condensed consolidated financial statements.
24
INTERMEDIA CAPITAL PARTNERS VI, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
FOR THE
SIX MONTHS
ENDED
JUNE 30, 1999
-------------
(UNAUDITED)
Revenues
Basic and cable services........................................................................ $ 73,346
Pay service..................................................................................... 15,283
Other service................................................................................... 14,903
---------
103,532
---------
Costs and expenses
Program fees.................................................................................... 24,979
Other direct expenses........................................................................... 9,281
Selling, general and administrative expenses.................................................... 22,276
Management and consulting fees.................................................................. 1,010
Depreciation and amortization expenses.......................................................... 60,314
---------
117,860
---------
Loss from operations.............................................................................. (14,328)
---------
Other income (expense)
Interest and other income......................................................................... 378
Gain on exchange of cable systems................................................................. 5,013
Interest expense.................................................................................. (28,451)
---------
(23,060)
---------
Net loss.......................................................................................... $ (37,388)
---------
---------
See accompanying notes to the condensed consolidated financial statements.
25
INTERMEDIA CAPITAL PARTNERS VI, L.P.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
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
Net loss (unaudited)......................................................... -- (37,388) (37,388)
--- -------- --------
Balance at June 30, 1999 (unaudited)......................................... $ 2 $ 89,510 $ 89,512
--- -------- --------
--- -------- --------
See accompanying notes to the condensed consolidated financial statements
26
INTERMEDIA CAPITAL PARTNERS VI, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE SIX
MONTHS ENDED
JUNE 30, 1999
-------------
(UNAUDITED)
Cash flows from operating activities
Net loss........................................................................................ $ (37,388)
Depreciation and amortization................................................................ 60,535
Loss on disposal of fixed assets............................................................. 14
Gain on exchange of cable systems............................................................ (5,013)
Changes in assets and liabilities:
Accounts receivable....................................................................... 1,524
Receivable from affiliates................................................................ (635)
Prepaids and other current assets......................................................... (49)
Other non-current assets.................................................................. 184
Accounts payable and accrued liabilities.................................................. 281
Payable to affiliates..................................................................... 299
Deferred revenue.......................................................................... 1,598
Deferred channel launch revenue........................................................... (1,484)
Other long-term liabilities............................................................... 762
Accrued interest.......................................................................... 383
---------
Cash flows from operating activities.............................................................. 21,011
---------
Cash flows from investing activities
Proceeds from exchange of cable systems......................................................... 17,246
Property and equipment.......................................................................... (38,375)
Intangible assets............................................................................... (1,062)
---------
Cash flows from investing activities.............................................................. (22,191)
---------
Cash flows from financing activities
Proceeds from long-term debt.................................................................... 3,000
---------
Cash flows from financing activities.............................................................. 3,000
---------
Net change in cash and cash equivalents........................................................... 1,820
Cash and cash equivalents, beginning of period.................................................... 2,602
---------
Cash and cash equivalents, end of period.......................................................... $ 4,422
---------
---------
See accompanying notes to the condensed consolidated financial statements.
27
INTERMEDIA CAPITAL PARTNERS VI, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
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 18, 1999, the Partnership's general and limited partners, other
than AT&T Broadband Internet Services ("AT&TBIS"), formerly Tele-Communications,
Inc. entered into an agreement with Insight Communications Company, L.P. to sell
their partner interests in ICP-VI. The sale is expected to close during the
third or fourth quarter of 1999. Upon the sale, Insight Communications Company,
L.P. is expected to manage the Partnership.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements include all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation of the Partnership's financial position as of June 30,
1999 and its results of operations and cash flows for the six months ended
June 30, 1999. The results of operations and cash flows for the six months ended
June 30, 1999 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1999. These condensed consolidated financial
statements should be read in conjunction with the Partnership's audited
consolidated financial statements for the period from April 30, 1998
(commencement of operations) through December 31, 1998.
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.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133"). FAS 133 was amended in June 1999
by FAS 137. FAS 133 is currently effective for all quarters of all fiscal years
beginning after June 15, 2000 (January 1, 2001 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 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
28
INTERMEDIA CAPITAL PARTNERS VI, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. THE PARTNERSHIP AND BASIS OF PRESENTATION--(CONTINUED)
limited use of derivative instruments, the adoption of FAS 133 will not have a
significant effect on the Partnership's results of operations, financial
position or cash flows.
2. CONTRIBUTION OF CABLE PROPERTIES
On April 30, 1998, the Partnership borrowed $730,000 under 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 affiliates of AT&TBIS, and another limited partner of ICP-VI.
ICP-VI assumed debt from AT&TBIS of $803,743 and issued a combined 49.5% limited
partner interest to AT&TBIS 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 AT&TBIS debt assumed
was repaid with proceeds from the borrowings under the bank loans and the cash
contributions received from the partners.
The total cost of the Systems contributed was as follows:
Value of debt assumed from AT&TBIS............................................. $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
--------
--------
3. EXCHANGES OF CABLE PROPERTIES
On February 1, 1999, the Partnership exchanged with Insight Communications
of Indiana, LLC its cable television assets located in and around Henderson,
Kentucky ("Exchanged Assets") for cable television assets located in and around
Oldham County, Kentucky plus cash of $3,986. The cable system assets received
have been recorded at fair market value, subject to final valuation adjustments.
The exchange resulted in a gain of $1,470, calculated as the difference between
the fair value of the assets received and the net book value of the Exchanged
Assets, plus net proceeds received of $3,986.
On February 17, 1999 and March 11, 1999, the Partnership entered into
agreements with FrontierVision Operating Partnership, L.P. ("FrontierVision") to
exchange its cable television assets located in central Kentucky for cable
television assets located in northern Kentucky. On June 1, 1999 the Partnership
completed the exchange with respect to certain of the systems and entered into
related management agreements, whereby the Partnership will manage and operate
the remaining systems of
29
INTERMEDIA CAPITAL PARTNERS VI, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
3. EXCHANGES OF CABLE PROPERTIES--(CONTINUED)
FrontierVision in northern Kentucky and FrontierVision will manage and operate
the Partnership's remaining systems in central Kentucky. The management
agreements, which provide the Partnership with effective control over the
remaining systems, will terminate upon completion of the exchanges which are
expected to close during the third or fourth quarter of 1999.
The Partnership received cash of $4,221 from FrontierVision in connection
with the exchanged systems. The Partnership also received cash of $9,039 in
exchange for a note payable, representing the boot on the remaining systems to
be exchanged. The note accrues interest at 5.00% compounded annually and is
satisfied upon close of the exchange of the remaining systems. The cable system
assets received have been recorded at fair market value, subject to final
valuation adjustments. The exchange resulted in a gain of $3,543. The remaining
exchange is expected to result in a gain.
4. @HOME WARRANTS
Under a distribution agreement with At Home Corporation ("@Home"), the
Partnership provides high-speed Internet access to subscribers over the
Partnership's distribution network in certain of its cable television systems.
In January 1999, the Partnership and certain of its affiliates entered into
related agreements whereby @Home would issue to the Partnership and its
affiliates warrants to purchase shares of @Home's Series A Common Stock ("@Home
Stock") at an exercise price of five dollars and twenty-five cents per share, as
adjusted for a two-for-one stock split which occurred on June 17, 1999. Under
the provisions of the agreements, management estimates that the Partnership may
purchase up to 459,200 shares of @Home Stock. The warrants become vested and
exercisable, subject to certain forfeiture and other conditions, based on
operational targets which include offering the @Home service by the Partnership
in its service areas and obtaining specified numbers of @Home subscribers over
the remaining six-year term of the @Home distribution agreement. The Partnership
has not recognized any income related to the warrants for the six months ended
June 30, 1999.
5. CHANNEL LAUNCH REVENUE
During 1998 the Partnership received payments and recorded receivables from
certain programmers to launch and promote their new channels. During the six
months ended June 30, 1999, the Partnership recognized advertising revenue of
$441 for advertisements provided by the Partnership to promote the new channels.
The remaining deferred channel launch revenue is being amortized over the
respective terms of the program agreements which range between eight and ten
years. During the six months ended June 30, 1999, $1,043 of the remaining
deferred channel launch payments was amortized and recorded as other service
revenue.
30
INTERMEDIA CAPITAL PARTNERS VI, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
6. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(UNAUDITED)
SENIOR DEBT:
Note payable; interest at 5.00% (see Note 3)...................................... $ -- $ 9,039
Bank revolving credit facility, $325,000 commitment as of June 30, 1999, interest
currently at LIBOR plus 1.375% (6.43%) or ABR plus .625% (8.125%) payable
quarterly, matures October 31, 2006............................................ 199,000 201,000
Bank Term Loan A; interest at LIBOR plus 1.75% (6.81%) payable quarterly, matures
September 30, 2007............................................................. 100,000 100,000
Bank Term Loan B; interest at LIBOR plus 2.00% (7.06%) payable quarterly, matures
December 31, 2007.............................................................. 250,000 250,000
-------- ---------
Total senior debt.............................................................. 549,000 560,039
-------- ---------
SUBORDINATED DEBT:
Bank Term Loan A; interest at LIBOR plus 2.750% (7.82%) payable quarterly, matures
April 30, 2008................................................................. 125,000 125,000
Bank Term Loan B; $60,000 commitment as of June 30, 1999, interest at LIBOR plus
0.500% (5.56%) payable quarterly, matures January 1, 2000...................... 52,000 53,000
-------- ---------
Total subordinated debt........................................................ 177,000 178,000
-------- ---------
726,000 738,039
Less: Current portion of long-term debt........................................ -- (62,039)
-------- ---------
Long-term debt................................................................. $726,000 $ 676,000
-------- ---------
-------- ---------
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.
The borrowings outstanding under the subordinated Term Loan B were
initially due and payable on May 31, 1999. On May 14, 1999 the Partnership
amended the terms and conditions of the subordinated Term Loan B. The amendment
extends the maturity date of the subordinated Term Loan B to January 1, 2000 and
increases the applicable margin to 0.500% for the period June 1, 1999 through
September 30, 1999 and 0.625% thereafter.
31
INTERMEDIA CAPITAL PARTNERS VI, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
6. LONG-TERM DEBT--(CONTINUED)
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%. Interest
rates under the subordinated Term Loan B are at LIBOR plus 0.500% through
September 30, 1999 and LIBOR plus 0.625% thereafter. 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 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 differential to be
paid or received in connection with an individual swap agreement is accrued as
interest rates change over the period for which the payment or receipts relate.
The agreements expire July 2003 (see Note 10 -Subsequent Event).
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
AT&TBIS subsidiaries that are parties to an agreement ("Keepwell Agreement") to
support the Permanent Debt. Under the Keepwell Agreement, the AT&TBIS
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 payments 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 Term Loan B is secured by guarantees of AT&TBIS and Blackstone
Cable Acquisition Company, LLC, a 49.5% limited partner of ICP-VI
("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.
7. RELATED PARTY TRANSACTIONS
InterMedia Capital Management VI, L.P. ("ICM-VI LP"), a California limited
partnership, which owns a 0.999% limited partner interest in ICP-VI, provides
certain management and
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INTERMEDIA CAPITAL PARTNERS VI, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
7. RELATED PARTY TRANSACTIONS--(CONTINUED)
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.
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 six-month period ended June 30, 1999 amounted to $760. At June 30, 1999
and December 31, 1998, the Partnership has a non-current payable to ICM-VI LP of
$646 and $13, respectively.
The Partnership pays monitoring fees of $250 per annum to each of AT&TBIS
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. Management and consulting fees of
$1,010 for the six months ended June 30, 1999 include both the ICM Management
Fee and 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 $250
for the six months ended June 30, 1999 and has a non-current payable of $145 and
$83 each to AT&TBIS and Blackstone at June 30, 1999 and December 31, 1998,
respectively.
In connection with raising its capital, the Partnership paid aggregate
transaction fees of $4,942 to AT&TBIS and Blackstone on April 30, 1998. The
amount has been recorded as syndication costs.
InterMedia Management, Inc. ("IMI") is the sole member of InterMedia
Capital Management VI, LLC, a Delaware limited liability company, the 0.001%
general partner of ICP-VI. 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 six months ended
June 30, 1999 were $1,989. Receivable from affiliate includes $763 and $628 at
June 30, 1999 and December 31, 1998, respectively, of advances to IMI, net of
administrative fees charged by IMI and operating expenses paid by IMI on behalf
of the Partnership.
As an affiliate of AT&TBIS, the Partnership is able to purchase programming
services from a subsidiary of AT&TBIS. 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 AT&TBIS's ownership in the Partnership
significantly decrease. Programming fees charged by the AT&TBIS subsidiary for
the six months ended June 30,
33
INTERMEDIA CAPITAL PARTNERS VI, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
7. RELATED PARTY TRANSACTIONS--(CONTINUED)
1999 amounted to $18,686. Payable to affiliates at June 30, 1999 and
December 31, 1998 represents programming fees payable to the AT&TBIS subsidiary.
The Partnership entered into an agreement with an affiliate of AT&TBIS 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, AT&TBIS is entitled to varying percentage
shares of the incremental growth in annual cash flow from advertising sales
above specified targets. Management fees charged by the AT&TBIS subsidiary for
the six months ended June 30, 1999 amounted to $187. Receivable from affiliates
at June 30, 1999 and December 31, 1998 includes $7,380 and $6,904, respectively,
of receivables from AT&TBIS for advertising sales.
8. COMMITMENTS AND CONTINGENCIES
The Partnership is committed to provide cable television services under
franchise agreements with remaining terms of up to seventeen 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 retransmission agreements with all
applicable stations in exchange for in-kind and/or other consideration.
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
AT&TBIS 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. Plaintiffs 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 on 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 position, results of operations or
cash flows of the Partnership.
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.
34
INTERMEDIA CAPITAL PARTNERS VI, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
9. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENT OF CASH FLOWS
During the six months ended June 30, 1999, the Partnership paid interest of
$27,643.
10. SUBSEQUENT EVENT
On July 12, 1999, the Partnership entered into early termination option
agreements ("Option Agreements") with banks which are parties to the
Partnership's interest rate swap agreements. Under the terms of the Option
Agreements, the banks may terminate the interest rate swap agreements between
May 2001 and July 2003, the expiration date of the agreements. In exchange for
the early termination option, the Partnership received a cash payment of $8,932.
35