As filed with the Securities and Exchange Commission on March ___, 2000
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
INSIGHT MIDWEST, L.P.
INSIGHT CAPITAL, INC.
(Exact name of registrants as specified in their charters)
Delaware 4841 13-4079232
Delaware 4841 13-4079679
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Numbers) Identification Numbers)
incorporation or
organization)
126 East 56th Street
New York, New York 10022
(212) 371-2266
(Address, including zip code, and telephone number, including
area code, of registrants' principal executive offices)
Michael S. Willner
President and Chief Executive Officer
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)
Copies to:
Robert L. Winikoff, Esq.
Cooperman Levitt Winikoff Lester & Newman, P.C.
800 Third Avenue
New York, New York 10022
(212) 688-7000
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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(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. |_|________
CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------
Title of Each Class of Securities Amount to Proposed Proposed Amount of
to be Registered be Registered Maximum Maximum Registration
Offering Price Aggregate Fee
Per Unit(1) Offering Price(1)
- ----------------------------------------------------------------------------------------------------------------------------
9 3/4% Senior Notes due 2009 $200,000,000 100% $200,000,000 $52,800
- ----------------------------------------------------------------------------------------------------------------------------
- ----------
(1) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457 under the Securities Act of
1933.
The Registrants hereby amend this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrants 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 this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may
not sell these notes until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these notes and it is not soliciting an offer to buy these notes in any state
where the offer or sale is not permitted.
Subject to Completion, dated March , 2000
Preliminary Prospectus
Insight Midwest, L.P.
Insight Capital, Inc.
-------------------
Offer to Exchange $200,000,000 of our
9 3/4% Senior Notes due 2009
-------------------
The notes being offered by this prospectus are being issued in exchange
for notes sold by us in a private placement on October 1, 1999. The exchange
notes will be governed by the same indenture governing the initial notes The
exchange notes will be substantially identical to the initial notes, except the
transfer restrictions and registration rights relating to the initial notes will
not apply to the exchange notes.
o The exchange offer expires at 5:00 p.m., New York City time, on
_________, 2000, unless extended.
o No public market exists for the initial notes or the exchange notes.
We do not intend to list the exchange notes on any securities
exchange or to seek approval for quotation through any automated
quotation system.
-------------------
Before you tender your initial notes, you should consider carefully the
section entitled "Risk Factors" beginning on page 15 of this Prospectus.
-------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these notes or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
-------------------
The date of this prospectus is ____________, 2000.
TABLE OF CONTENTS
Page
----
Prospectus Summary.................................................. 1
Risk Factors........................................................ 15
Use of Proceeds..................................................... 22
Pro Forma Financial Statements...................................... 23
Selected Historical and Pro Forma Financial and Other
Data of Insight Midwest, L.P.................................... 26
Selected Consolidated Historical Financial and
Other Data of Systems Contributed by Insight
Communications to Insight Indiana.............................. 28
Selected Consolidated Historical Financial and
Other Data of Systems Contributed by TCI to
Insight Indiana................................................. 31
Selected Consolidated Historical Financial and
Other Data of Insight Kentucky.................................. 33
Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 36
Industry............................................................ 42
Business............................................................ 45
Legislation and Regulation.......................................... 69
Management.......................................................... 81
Certain Transactions................................................ 86
Principal Stockholders.............................................. 87
Description of Governing Documents.................................. 88
Description of Certain Indebtedness................................. 94
Description of Notes................................................ 96
Material Federal Tax Considerations................................. 138
Exchange Offer...................................................... 143
Book-entry; Delivery and Form....................................... 155
Plan of Distribution................................................ 158
Legal Matters....................................................... 159
Experts............................................................. 159
Available Information............................................... 160
Glossary............................................................ G-1
Index to Financial Statements....................................... F-1
Industry and Market Data
In this prospectus, we rely on and refer to information and statistics
regarding the cable television industry and our market share in the sectors in
which we compete. We obtained this information and statistics from various
third-party sources, discussions with our customers and our own internal
estimates. We believe that these sources and estimates are reliable, but we have
not independently verified them and cannot guarantee their accuracy or
completeness.
PROSPECTUS SUMMARY
This summary highlights some of the information in this prospectus. It
does not contain all the information that may be important to you. For a more
complete understanding of this offering, you should read the entire prospectus,
including the risk factors and financial statements.
Our Manager
Insight Communications Company, Inc. is the 8th largest cable television
system operator in the United States based on customers served after giving
effect to previously announced industry acquisitions. Insight Communications,
which provides cable television services to approximately 935,000 customers, has
tightly grouped clusters of cable television systems with approximately 98% of
its customers concentrated in the four contiguous states of Indiana, Kentucky,
Ohio and Illinois. Upon completion of its rebuild efforts, which is expected to
occur by the end of 2000, over 96% of its customers will be served from nine
headends allowing it to more economically deliver an array of entertainment,
information and telecommunication services, including interactive digital video,
high-speed data access and telephone service products. Our manager believes that
it is very well positioned to exploit the new business opportunities available
to cable television operators.
The Issuers
Insight Midwest, L.P. is owned equally by our manager, through its
subsidiary Insight Communications Company, L.P., and AT&T Broadband, LLC,
through its indirect subsidiary TCI of Indiana Holdings, LLC. Through our
subsidiaries Insight Communications of Indiana, LLC and Insight Communications
of Kentucky, L.P., we own and operate cable television systems in Indiana and
Kentucky, which passed approximately 1.2 million homes and served approximately
748,800 customers as of December 31, 1999. We are presently rebuilding our
systems and, upon completion of the rebuild, 99% of our customers will be
served by a two-way active, 750 MHz, hybrid fiber coaxial network which will
deliver a suite of entertainment, information and telecommunication services,
including our interactive Digital Gateway service, high-speed data service and
voice transmission.
Insight Indiana is the largest operator of cable television systems in the
State of Indiana. As of December 31, 1999, the Indiana systems passed
approximately 494,900 homes and served approximately 322,500 customers. The
Indiana systems are located primarily in the university cities of Bloomington,
Evansville and Lafayette and the demographically desirable areas of suburban
Indianapolis. Upon completion of our consolidation of headends, approximately
93% of Insight Indiana's customers will be served by three headends. The rebuild
and consolidation of headends are expected to be completed by the end of 2000.
Insight Kentucky is the largest operator of cable television systems in
the State of Kentucky. As of December 31, 1999, the Kentucky systems passed
approximately 668,500 homes and served approximately 426,300 customers. Over 95%
of the Kentucky systems are located in and around four of the five largest
cities in the state: Louisville, Lexington, Covington and Bowling Green. Upon
completion of our consolidation of headends, 100% of Insight Kentucky's
customers will be served by four headends. The rebuild and consolidation of
headends are expected to be completed by the end of 2000.
1
Business Strategy
Our business strategy is to become a competitive, full-service provider of
entertainment, information and telecommunication services. Our 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 in nearby or adjacent geographies.
Our marketing strategy is to offer our customers a suite of services on a
bundled basis. By bundling our products and services, we provide our customers
with an increased choice of services at a reduced cost, which we believe will
result in higher customer satisfaction, increased use of our services and
greater customer retention. We began offering new and enhanced products and
services, such as interactive digital video and high-speed data access, during
1999 and intend to offer telecommunication services under the AT&T brand name by
the end of 2000.
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
enhance customer awareness, increase use of our products and services and build
brand support. Our emphasis is on system reliability, engineering support and
superior customer satisfaction. In addition to our broad product offerings, we
also emphasize a high level of locally-focused content and customer service.
To facilitate the deployment of our enhanced products and services, we are
in the process of rebuilding almost all of our network to allow us to deliver
more information and entertainment services through our cable systems and to
provide for two-way communications capability, including telecommunication
services. We have rebuilt approximately 56% of our network miles as of December
31, 1999, and intend to have substantially all of our network rebuilt by the end
of 2000. We expect to complete our network rebuild in 2000 with a total
investment of approximately $166.8 million.
Recent Developments
Agreement in Principle with AT&T
On March 15, 2000, our manager reached an agreement in principle with AT&T
Corp. for the delivery of telephone service utilizing our cable television
systems under the "AT&T" brand name. The terms of the agreement in principle
provide that we will market, service and bill for local telephone service. AT&T
would be required to install and maintain the necessary switching equipment, and
would be the local exchange carrier of record. AT&T would pay us a fee for the
use of the local telephone lines, and will also compensate us for installation
and maintenance services at customers' residences. In addition, AT&T would pay
us commissions for sales we make to our customers. We expect to sell the
AT&T-branded local telephone service separately and as part of bundled
offerings, which would also include the sale of AT&T long-distance
2
telephone services. The agreement in principle is subject to the negotiation and
execution of definitive agreements.
Greenwood Letter of Intent
On March 21, 2000, we entered into a letter of intent with Cable One,
Inc., a subsidiary of The Washington Post Company, for the acquisition of a
cable television system serving approximately 16,000 customers in Greenwood,
Indiana as of December 31, 1999. Due to its geographic proximity, we intend to
integrate the Greenwood system with our Central District in Indiana. Our
acquisition of the Greenwood system would occur upon completion of a proposed
trade of systems between Cable One and AT&T Broadband, LLC. The transaction is
subject to the negotiation and execution of definitive agreements.
Expansion of Insight Midwest
On March 23, 2000, Insight Communications entered into a letter of intent
with AT&T Broadband to contribute to us additional cable television systems
serving approximately 537,000 customers, nearly doubling our customer base.
Through a series of transactions, Insight Communications will contribute to us
its interests in systems serving approximately 187,000 customers, and AT&T
Broadband will contribute systems serving approximately 350,000 customers.
Initially, Insight Communications would exchange its Claremont, California
system for a system in Freeport, Illinois, subject to completion by AT&T
Broadband of its proposed acquisition of MediaOne. The Freeport system would be
integrated into Insight Communication's Rockford, Illinois system, creating a
cluster of approximately 75,000 customers in the northern part of the state.
Insight Communications would also purchase from AT&T Broadband systems serving
approximately 100,000 customers in North Central Illinois. Concurrently with
this purchase, Insight Communications would contribute to us all of its systems
not already owned by us, including its newly purchased Illinois systems, its
expanded Rockford, Illinois cluster, its interest in its Columbus, Ohio system
and its Griffin, Georgia system, as well as its systems in Indiana not already
owned by us. At the same time, AT&T Broadband would contribute to us systems
located in Central and North Central Illinois serving approximately 250,000
customers. As a result, we would increase our customer base of approximately
748,800 as of December 31, 1999 to approximately 1.3 million. AT&T Broadband
would also receive an amount of cash from Insight Communications. Upon
completion of the transactions, we would remain equally owned by Insight
Communications and AT&T Broadband, and Insight Communications would continue to
serve as general partner and manage and operate our systems. The transactions
are subject to the negotiation and execution of definitive agreements.
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.
Initial Offering
The initial notes were originally issued by us on October 1, 1999, in a
private offering, in connection with the acquisition of the Kentucky systems and
the formation of Insight Midwest (the "Transactions"). We are parties to a
registration rights agreement with the initial purchasers pursuant to which we
agreed, among other things, to file a registration statement with respect to the
exchange notes on or before March 29, 2000, to use our reasonable best efforts
to have the registration statement declared effective by October 2, 2000, and
complete this exchange offer by November 13, 2000. We must pay liquidated
damages to the holders of the initial notes if we do not meet those deadlines.
3
Ownership Structure
[OWNERSHIP STRUCTURE CHART]
4
Summary of Exchange Offer
We are offering to exchange $200.0 million aggregate principal amount of
our exchange notes for $200.0 million aggregate principal amount of our initial
notes. To exchange your initial notes, you must properly tender them and we must
accept your tender. We will exchange all outstanding initial notes that are
validly tendered and not validly withdrawn.
Expiration Date.......................... The exchange offer will expire at 5:00
p.m., New York City time on ________,
2000, unless we extend it.
Registration Rights Agreement............ You have the right to exchange the
initial notes that you hold for
exchange notes with substantially
identical terms. This exchange offer
is intended to satisfy these rights.
Once the exchange offer is complete,
you will no longer be entitled to any
exchange or registration rights with
respect to your notes.
Accrued Interest on the Exchange
Notes and Initial Notes.................. The exchange notes will bear interest
from their issuance date. Holders of
initial notes which are accepted for
exchange will receive, in cash,
accrued interest on the initial notes
to, but not including, the issuance
date of the exchange notes. Such
interest will be paid with the first
interest payment on the exchange
notes.
Conditions to the Exchange Offer......... The exchange offer is subject to
customary conditions, which we may
waive. You should read the discussion
under "Exchange Offer - Conditions to
the Exchange Offer" for more
information regarding conditions of
the exchange offer.
Procedures for Tendering Initial Notes... If you are a holder of initial notes
and wish to accept the exchange offer,
you must either:
o complete, sign and date the
accompanying Letter of Transmittal,
or a facsimile of the Letter of
Transmittal; or
o arrange for The Depository Trust
Company to transmit required
information to the exchange agent in
connection with a book-entry
transfer.
You must mail or otherwise deliver
such documentation together with the
initial notes to the exchange agent at
the address set forth in this
prospectus under "The Exchange Offer -
Exchange Agent."
5
Representation Upon Tender............... By tendering your initial notes in
this manner, you will be representing,
among other things, that:
o the exchange notes you acquire in
the exchange offer are being
acquired in the ordinary course of
your business;
o you are not participating, do not
intend to participate, and have no
arrangement or understanding with
any person to participate, in the
distribution of the exchange notes
issued to you in the exchange offer;
and
o you are not a party related to us.
Procedures for Beneficial Owners......... If you are the beneficial owner of
initial notes registered in the name
of a broker, dealer or other nominee
and you wish to tender your notes, you
should contact the person in whose
name your notes are registered and
promptly instruct the person to tender
on your behalf.
Material Federal Tax Consequences........ It is our counsel's opinion that the
exchange of initial notes for exchange
notes will not result in any gain or
loss to you for federal income tax
purposes. Your holding period for the
exchange notes will include the
holding period for the initial notes
and your adjusted tax basis of the
exchange notes will be the same as
your adjusted tax basis of the initial
notes at the time of the exchange. For
additional information, you should
read the discussion under "Material
Federal Tax Considerations."
Failure to Exchange Will Affect
You Adversely............................ Initial notes that are not tendered,
or that are tendered but not accepted,
will be subject to the existing
transfer restrictions on the initial
notes after the exchange offer. We
will have no further obligation to
register the initial notes under the
Securities Act of 1933. If you do not
participate in the exchange offer, the
liquidity of your notes could be
adversely affected.
Guaranteed Delivery Procedures........... If you wish to tender your initial
notes and time will not permit your
required documents to reach the
exchange agent by the expiration date,
or the procedure for book-entry
transfer cannot be completed on time,
you may tender your notes according to
the guaranteed delivery procedures.
For additional information, you should
read the discussion under "Exchange
Offer - Guaranteed Delivery
Procedure."
6
Acceptance of Initial Notes;
Delivery of Exchange Notes............... Subject to customary conditions, we
will accept initial notes which are
properly tendered in the exchange
offer and not withdrawn, before 5:00
p.m., New York City time, on the
expiration date of the exchange offer.
The exchange notes will be delivered
as promptly as practicable following
the expiration date.
Use of Proceeds.......................... We will not receive any proceeds from
the exchange offer.
Exchange Agent........................... Harris Trust Company of New York is
the exchange agent for the exchange
offer.
7
Summary of Terms of the Exchange Notes
The exchange notes are substantially identical to the initial notes, with
limited exceptions. The exchange notes will evidence the same debt as the
initial notes. The exchange notes are subject to the same indenture as the
initial notes. For additional information, you should read the discussion under
"Description of Notes."
Issuers ................................. Insight Midwest, L.P. and Insight
Capital, Inc.
Notes Offered............................ $200.0 million in aggregate principal
amount of 9 3/4% Senior Notes due
2009.
Maturity Date............................ October 1, 2009.
Interest Rate and Payment Dates.......... Interest on the exchange notes will
accrue at the rate of 9 3/4% per
annum, payable semiannually in cash in
arrears on April 1 and October 1 of
each year.
Optional Redemption...................... On or after October 1, 2004, we may
redeem some or all of the exchange
notes at any time at the redemption
prices described in the section
"Description of Notes" under the
heading "Optional Redemption."
Prior to October 1, 2002, we may
redeem up to 35% of the exchange notes
with the proceeds of certain offerings
of our equity at the price listed in
the section "Description of Notes"
under the heading "Optional
Redemption."
Mandatory Repurchase Offer............... If we sell certain assets or we
experience specific kinds of changes
of control, we must offer to
repurchase the exchange notes at the
prices listed in the section
"Description of Notes" under the
heading "Repurchase at the Option of
Holders." See "Risk Factors-We may not
be able to finance a change of control
offer required by the indenture."
Ranking.................................. The exchange notes constitute senior
debt. They will:
o effectively rank behind all existing
and future indebtedness and other
liabilities of our subsidiaries;
o rank equally with all of our future
unsubordinated, unsecured debt that
does not expressly provide that it
is subordinated to the exchange
notes; and
o rank ahead of all our future debts
that expressly provide that they are
subordinated to the exchange notes.
8
As of December 31, 1999, the initial
notes were effectively subordinated to
approximately $1.1 billion of debt and
other liabilities.
Basic Covenants.......................... We will issue the exchange notes under
an indenture with Harris Trust Company
of New York, as trustee. The indenture
contains certain covenants that limit,
among other things, our ability and
the ability of our subsidiaries to:
o incur additional debt;
o pay dividends on our capital stock
or repurchase our capital stock;
o make investments;
o use assets as security in other
transactions; and
o sell certain assets or merge with or
into other companies.
For more details, see the section
"Description of Notes" under the
heading "Certain Covenants."
9
SUMMARY PRO FORMA COMBINED FINANCIAL AND OTHER DATA
The following tables set forth summary pro forma combined financial and
other data of the Indiana and Kentucky systems which are systems in which we
have a significant economic interest. Such data have been adjusted to illustrate
the estimated effects of the following transactions as if they had occurred on
January 1, 1999:
o the acquisition by Insight Midwest of the Kentucky systems;
o our receipt of the net proceeds from the sale of the initial notes;
and
o the application of the net proceeds from the sale of the initial
notes to repay the subordinated term loans of Insight Kentucky.
The summary pro forma combined financial and other data do not necessarily
show what our financial position or results of operations would have been had
the above 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:
o the pro forma financial statements;
o the historical financial statements of Insight Midwest; and
o the historical financial statements of InterMedia Capital Partners
VI, L.P, now known as Insight Kentucky, which were the Kentucky
systems prior to September 30, 1999.
All of these financial statements are included elsewhere in this
prospectus.
Our operations consist of our:
o Indiana systems, which are the cable television systems of Insight
Indiana and which are wholly owned and operated by us; and
o Kentucky systems, which are the cable television systems of Insight
Kentucky and which are wholly owned and operated by us.
10
SUMMARY PRO FORMA AND HISTORICAL FINANCIAL DATA
For the Year Ended December 31, 1999
--------------------------------------------------------------------
Insight Kentucky
Midwest(1) Systems(2) Adjustments(3) Total(4)
--------- --------- -------------- ---------
(dollars in thousands, except per customer data)
------------------------------------------------
Financial Data:
Revenues ......................................... $ 201,286 $ 159,197 $ -- $ 360,483
Programming and other operating
costs ........................................ 59,587 51,924 -- 111,511
Selling, general and
administrative ............................... 44,199 41,162 130 85,491
Depreciation and amortization .................... 109,110 91,707 5,513 206,330
--------- --------- --------- ---------
Operating loss ................................... (11,610) (25,596) (5,643) (42,849)
Loss from continuing
operations ................................... (62,677) (53,301) (26,458) (142,436)
EBITDA (5) ....................................... 97,333 80,385 (15,927) 161,791
Adjusted EBITDA (6) .............................. 103,432 67,626 3,131 174,189
Adjusted EBITDA margin (7) ....................... 51.4% 42.5% -- 48.3%
Net cash provided by operating
activities ................................... $ 102,918 $ 19,541 $ (5,013) $ 117,446
Net cash (used in) investing
activities ................................... (110,441) (46,773) -- (157,214)
Net cash provided by
financing activities ......................... 21,627 25,073 -- 46,700
Average monthly revenue
per customer (8) ............................. 39.08 41.85 -- 40.12
Ratio of earnings to fixed
charges (9) .................................. -- -- -- --
As of December 31, 1999
-----------------------
Balance Sheet Data:
Cash and cash equivalents ............................. $ 35,996
Fixed assets, net ..................................... 596,246
Total assets .......................................... 1,706,599
Total debt ............................................ 1,232,000
Partners' equity ...................................... 368,547
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SUMMARY TECHNICAL AND OPERATING DATA
as of December 31, 1999
Indiana Kentucky Total
Systems Systems Systems
------- ------- -------
Technical Data:
Network miles ................................................. 6,705 8,843 15,548
Number of headends ............................................ 36 20 56
Number of headends expected
as of December 31, 2000 (10) .............................. 8 4 12
Number of headends serving 95% of our
customers expected as of December
31, 2000 (10) ............................................. 3 4 7
Operating Data:
Homes passed (11) ............................................. 494,861 668,474 1,163,335
Basic customers (12) .......................................... 322,521 426,312 748,833
Basic penetration (13) ........................................ 65.2% 63.8% 64.4%
Digital customers (14) ........................................ 18,676 20,743 39,419
Premium units (15) ............................................ 224,340 329,857 554,197
Premium penetration (16) ...................................... 69.6% 77.4% 74.0%
(1) The financial data of Insight Midwest represents the combination of the
results of Insight Indiana from January 1, 1999 through December 31, 1999
and Insight Kentucky from October 1, 1999 (date of inception) through
December 31, 1999.
(2) The financial data of the Kentucky systems represents the results of
InterMedia Capital Partners VI, L.P. from January 1, 1999 through
September 30, 1999.
(3) Represents the following:
o the elimination of home office expenses of InterMedia Capital
Partners VI, L.P. and the recording of management fees of 3% of
gross revenues.
o the additional depreciation and amortization related to step-up in
value of the assets of Insight Kentucky for nine months which have
been valued based on the purchase price and preliminarily allocated
between fixed and intangible assets based on management's evaluation
of each individual operating system including such factors as the
age of the cable plant, the progress of rebuilds and franchise
relations. This resulted in a step-up in the carrying values of
fixed assets of approximately $160.3 million and intangible assets
of approximately $272.1 million. Fixed assets are being depreciated
over their estimated useful lives and intangible assets are
amortized over 15 years.
o the elimination of amortization of deferred financing costs from the
retirement of the subordinated term loans of Insight Kentucky and
the recording of amortization of the estimated financing costs for
the notes.
o the net increase in interest expense related to the retirement of
approximately $178.0 million of the subordinated term loans of
Insight Kentucky and the issuance of the notes.
See "Pro Forma Financial Statements."
12
(4) Represents the combined results of operations of the Insight Midwest and
the Kentucky systems.
(5) Represents earnings (loss) before interest, taxes, depreciation and
amortization. Our management believes that EBITDA is commonly used in the
cable television industry to analyze and compare cable television
companies on the basis of operating performance, leverage and liquidity.
However, EBITDA is not intended to be a performance measure that should be
regarded as an alternative to, or more meaningful than, either operating
income or net income as an indicator of operating performance or cash
flows as a measure of liquidity, as determined in accordance with
generally accepted accounting principles. EBITDA, as computed by
management, is not necessarily comparable to similarly titled amounts of
other companies. See our financial statements, including the statements of
cash flows, which are included elsewhere in this prospectus.
(6) Represents EBITDA prior to management and consulting fees and excluding
any non-cash items such as gain or losses on sales or exchanges of assets
and other non-recurring income and expense items.
The following table sets forth a reconciliation of EBITDA to Adjusted
EBITDA:
For the Year Ended December 31, 1999
--------------------------------------------------------------------
Insight Kentucky
Midwest Systems Adjustments Total
-------- --------- ---------- --------
(in thousands)
EBITDA ............................................... $ 97,333 $ 80,385 $(15,927) $161,791
Other (income) expense ............................... 142 1,548 -- 1,690
Loss (gain) on cable system exchange ................. 25 (15,822) 15,797 --
Management fees ...................................... 5,932 1,515 3,261 10,708
-------- -------- -------- --------
Adjusted EBITDA ...................................... $103,432 $ 67,626 $ 3,131 $174,189
======== ======== ======== ========
(7) Represents Adjusted EBITDA as a percentage of revenues.
(8) Represents average monthly revenue per average customer.
(9) For purposes of this calculation, "earnings" are defined as earnings
before fixed charges. Fixed charges consist of interest expense,
amortization of deferred financing and the portion of rent expense under
operating leases considered interest. For the year ended December 31,
1999, pro forma earnings before fixed charges were insufficient to cover
fixed charges for Insight Midwest and the Kentucky systems by $62.7
million and $53.3 million and on a pro forma combined basis by $142.4
million.
(10) Represents an estimate based on our current rebuild program scheduled to
be completed by the end of 2000.
(11) Homes passed are the number of single residence homes, apartments and
condominium units passed by the cable distribution network in a cable
system's service area.
(12) Basic customers are customers of a cable television system who receive a
package of over-the-air broadcast stations, local access channels and
certain satellite-delivered cable television services, other than premium
services, and who are usually charged a flat monthly rate for a number of
channels.
13
(13) Basic penetration means basic customers as a percentage of total number of
homes passed.
(14) Customers with a digital converter box.
(15) Premium units mean the number of subscriptions to premium services, which
are paid for on an individual basis.
(16) Premium penetration means premium service units as a percentage of the
total number of basic customers. A customer may purchase more than one
premium service, each of which is counted as a separate premium service
unit. This ratio may be greater than 100% if the average customer
subscribes to more than one premium service unit.
14
RISK FACTORS
You should carefully consider the risk factors set forth below, as well as
the other information in this prospectus, before tendering in initial notes in
exchange for exchange notes.
Your failure to participate in the exchange offer will have adverse consequences
Holders of initial notes who do not exchange their initial notes for
exchange notes pursuant to the exchange offer will continue to be subject to the
restrictions on transfer of the initial notes as a consequence of the issuance
of the initial notes pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act. In general,
initial notes may not be offered or sold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. We do not anticipate
that we will register the initial notes under the Securities Act.
Because of the lack of a public market for the exchange notes, you may not be
able to sell your exchange notes at all or at an attractive price
The exchange notes are a new issue of securities with no existing trading
market. We do not intend to have the exchange notes listed on a national
securities exchange, although we expect that they will be eligible for trading
on the PORTAL system. In addition, while several financial companies have
advised us that they currently intend to make a market in the exchange notes,
they are not obligated to do so, and may discontinue market making at any time
without notice. Accordingly, we cannot assure you as to the liquidity of the
market for the exchange notes or the prices at which you may be able to sell the
exchange notes.
Risks of investing in the exchange notes
We have substantial debt and have significant interest payment
requirements
We have a substantial amount of debt. As of December 31, 1999, our
outstanding consolidated indebtedness was $1.2 billion and our consolidated
interest expense was $50.9 million for the year ended December 31, 1999.
Assuming that the Transactions occurred on January 1, 1999, our consolidated
interest expense would have been $97.9 million and our earnings would have been
inadequate to cover our fixed charges by $142.4 for the year ended December 31,
1999. Subject to restrictions in the Indiana and Kentucky credit facilities and
the indenture, we may incur significant amounts of additional debt for working
capital, capital expenditures, acquisitions and other purposes.
Our high level of combined debt could have important consequences for you,
including the following:
o We may have difficulty borrowing money for working capital, capital
expenditures, acquisitions or other purposes;
o We will need to use a large portion of our revenues to pay principal
and interest on borrowings under the Indiana and Kentucky credit
facilities and the exchange notes, which will reduce the amount of
money available to finance our operations, capital expenditures and
other activities;
o Some of our debt has a variable rate of interest, which exposes us
to the risk of increased interest rates;
o We are more vulnerable to economic downturns and adverse
developments in our business;
15
o We are less flexible in responding to changing business and economic
conditions, including increased competition and demand for new
products and services; and
o We may not be able to implement our business strategy.
The exchange notes are obligations of a holding company which has no
operations and depends on its subsidiaries for cash
As a holding company, we will not hold any assets other than our
investments in and our advances to our operating subsidiaries. Consequently, our
subsidiaries conduct all of our consolidated operations and own substantially
all of our consolidated assets. Our only source of the cash we need to pay
current interest on the exchange notes and our other obligations and to repay
the principal amount of these obligations, including the exchange notes, is the
cash that our subsidiaries generate from their operations and their borrowings.
Our subsidiaries are not obligated to make funds available to us.
Our subsidiaries' ability to make payments to us will depend upon their
operating results and will be subject to applicable laws and contractual
restrictions. Our subsidiaries must make payments to Insight Communications
under their management agreements and some of their programming contracts. The
Kentucky and Indiana credit facilities permit Insight Kentucky and Insight
Indiana to distribute cash to us to pay interest on the exchange notes, but only
so long as there is no default under the credit facility. If there is a default
under the Kentucky or Indiana credit facilities, we would not have any cash to
pay interest on our obligations, including the exchange notes.
The exchange notes will be effectively subordinated to our subsidiaries'
debt
Our subsidiaries will not guarantee the exchange notes. Therefore, the
exchange notes will be effectively subordinated to all of our subsidiaries'
liabilities. Our subsidiaries' lenders will have the right to be paid before you
from any cash received or held by our subsidiaries. In the event of bankruptcy,
liquidation or dissolution of a subsidiary, following payment of its
liabilities, the subsidiary may not have assets remaining to make payments to
us. As of December 31, 1999, all of our outstanding indebtedness, other than the
notes, was incurred by our subsidiaries and totaled approximately $1.0 billion,
all of which is senior in right of payment to the exchange notes. Additionally,
the indenture permits our subsidiaries to incur additional indebtedness,
including secured indebtedness, under certain circumstances.
We and our subsidiaries may still be able to incur substantially more debt
which could exacerbate the risks described above
We and our subsidiaries may be able to incur substantial additional debt
in the future. If we or our subsidiaries do so, the risks described above could
intensify. The indenture does not fully prohibit us or our subsidiaries from
doing so. As of December 31, 1999, we had approximately $79.4 million available
for additional borrowings under the Indiana and Kentucky credit facilities. We
expect to continue to borrow under these facilities.
We may not be able to generate enough cash to service our debt
Our ability to make payments on and to refinance our debt, including the
exchange notes, and to fund planned capital expenditures will depend on our
ability to generate cash. This is subject, in part, to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control. Accordingly, we cannot assure you that our business will
generate sufficient cash flows from operations or future distributions will be
available to us in amounts sufficient to enable us to pay our indebtedness,
including the exchange notes, or to fund our other liquidity needs.
16
We may need to refinance all or a portion of our indebtedness, including
the exchange notes, on or before maturity. We cannot assure you that we will be
able to refinance any of our indebtedness on commercially reasonable terms or at
all.
Our subsidiaries' credit facilities impose significant restrictions
Our subsidiaries' credit facilities contain covenants that restrict our
subsidiaries' ability to:
o distribute funds or pay dividends to us;
o incur additional indebtedness or issue additional equity;
o create liens;
o repurchase or redeem equity interests and indebtedness;
o pledge or sell assets or merge with another entity; and
o make certain capital expenditures, investments or acquisitions.
Our subsidiaries' ability to comply with these provisions may be affected
by events beyond our control. If they were to breach of any of these covenants,
they would be in default under the credit facilities and they would be
prohibited from making distributions to us. Also, lenders could elect to declare
all amounts borrowed under the credit facilities, together with accrued interest
and other fees, to be due and payable. If that occurred, our obligations under
the exchange notes could also become payable immediately. Under such
circumstances, we may not be able to repay such amounts or the exchange notes.
We may not be able to finance a change of control offer required by the
indenture
Upon a change of control over us, the indenture requires us to offer to
purchase all of the exchange notes then outstanding at 101% of their principal
amount, plus accrued interest to the date of repurchase. If a change of control
were to occur, we cannot assure you that we would have sufficient funds to
purchase the outstanding exchange notes. In fact, we expect that we would
require third-party financing, but we cannot assure you that we would be able to
obtain that financing on favorable terms or at all.
Our subsidiaries' credit facilities restrict our ability to repurchase the
exchange notes, even when we are required to do so by the indenture in
connection with a change of control. A change of control could therefore result
in a default under such credit facilities and could cause the acceleration of
other debt of our subsidiaries. The inability to repay such debt, if accelerated
and to purchase all of the tendered exchange notes, would constitute an event of
default under the indenture.
Bankruptcy or fraudulent conveyance law may interfere with the payment of
the exchange notes
The incurrence of debt by us, such as the notes, may be subject to review
under U.S. federal bankruptcy law or relevant state fraudulent conveyance laws
if a bankruptcy case or lawsuit is commenced by or on behalf of unpaid creditors
of us. Under these laws, under certain circumstances a court could avoid or
subordinate the amounts owing under the exchange notes to presently existing and
future debt of us and take other actions detrimental to you. While we believe
that the circumstances under which the exchange notes could be avoided or
further subordinated are not present, we cannot assure you that a court passing
on the same question would reach the same conclusion.
17
Risks of our business
We have a history of net losses, and may not be profitable in the future
We have a history of net losses and expect to incur additional net losses
in the future. Insight Midwest reported a net loss of $62.7 million for the year
ended December 31, 1999. On a pro forma basis, had the Transactions occurred on
January 1, 1999, we would have reported a net loss of $142.4 million for the
year ended December 31, 1999.
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 and these systems may not generate sales at or exceeding
historical levels
None of our existing customers having been served by us for greater than
eighteen months and we are still in the process of integrating our new systems.
The historical financial information of the Indiana systems and the Kentucky
systems may not fully indicate our future operating results. This makes it
difficult for you to completely evaluate our performance.
Our programming costs are substantial and they may increase, which could
result in a decrease in profitability if we are unable to pass that
increase on to our customers
In recent years the cable industry has experienced a rapid escalation in
the cost of programming, and sports programming in particular. For 1997, 1998
and 1999, programming costs for our top 20 cable programming channels, excluding
premium channels, as ranked by Nielsen Media Research, increased significantly.
Our cable programming services are dependent upon our ability to procure
programming that is attractive to our customers at reasonable rates. Programming
costs may continue to escalate and we may not be able to pass programming cost
increases on to our customers. Our financial condition and results of operations
could be negatively affected by further increases in programming costs.
Programming has been and is expected to continue to be our largest single
expense item and accounted for approximately 43.9% of the total operating
expenses for the Indiana systems and approximately 40.7% of the total operating
expenses for the Kentucky systems for the year ended December 31, 1999.
We could lose our current access to favorable programming service rates
and experience increases in programming costs as a result
Because of our relationship with AT&T Broadband, we have the right to
purchase programming services for our systems at AT&T Broadband's costs plus a
small administrative surcharge. We believe AT&T Broadband's costs for
programming services is lower than the cost to us if we purchased such
programming services independently. If affiliates of AT&T Broadband were not to
continue as significant owners and we were unable to enter into a similar
arrangement, we believe our programming costs would increase. Losing access to
programming services at such favorable rates could have a material adverse
effect on our financial condition and results of operations.
If we are unable to successfully integrate our newly acquired cable
systems our business could be adversely affected
The integration of new cable systems by us will place significant demands
on our management and our operational, financial and marketing resources. We
expect to continue to acquire and enter into swaps and joint
18
ventures with respect to cable systems. Our current operating and financial
systems and controls may not be adequate. Any steps taken to improve these
systems and controls may not be sufficient to successfully integrate and manage
new cable systems in a timely manner, causing our business, financial condition
and results of operations could suffer materially.
As we introduce new and enhanced products and services, a failure to
predict and react to consumer demand or successfully integrate new
technology could adversely affect our business
The cable television industry is in the early stages of introducing new
and enhanced products and services utilizing new 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.
If our manager were to lose members of its senior management and could not
find appropriate replacements in a timely manner, our business could be
adversely affected
If any member of our manager's senior management team ceases to
participate in our business and operations, our profitability could suffer. Our
success is substantially dependent upon the retention of, and the continued
performance by, our manager's 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. Our manager does not have an employment agreement with
any member of its senior management team.
Our manager continually needs to hire, integrate and retain personnel for
customer relations and field operations positions which require a higher level
of technical expertise and the ability to communicate technical concepts to our
customers. There is no guarantee that our manager will be able to recruit or
retain these skilled workers. Failure to do so could impair our ability to
operate efficiently and maintain our reputation for high quality service and our
ability to retain current customers and attract new customers, which could cause
our financial performance to decline.
Our equity holders own and operate other cable operations and may not be
able to devote full time to our operations
Affiliates of AT&T Broadband and Insight Communications each own 50% of
our outstanding equity interests and Insight Communications manages our
operations. Under Insight Midwest's partnership agreement, each of the
affiliates of AT&T Broadband and our manager must approve certain specified
transactions involving Insight Midwest and its subsidiaries, including
significant acquisitions and dispositions. Accordingly, each of AT&T Broadband
and our manager have the ability to veto fundamental transactions, including
approval of merger transactions involving us and sales of all or substantially
all of our assets. AT&T Broadband and our manager each own and operate other
significant cable operations and may acquire additional cable operations in the
future. There can be no assurance that the interests of our equity holders will
not conflict with the interests of the holders of the exchange notes.
Our manager and its officers and employees devote a certain amount of time
to managing systems not owned by us. As a result, our manager and such persons
have less time to devote to managing our systems, which could impair our results
of operations. Moreover, allocating our manager's time and other resources could
give rise to conflicts of interest and could adversely affect our operating
performance.
Our franchises are subject to non-renewal or termination, which could
cause us to lose our right to operate some of our systems
We operate under non-exclusive franchises granted by local authorities
that are subject to renewal, renegotiation and termination from time to time.
Our cable systems are dependent upon the retention and
19
renewal of their respective local franchises. We may not be able to retain or
renew our franchises and any renewals may not be on terms favorable to us. The
non-renewal or termination of franchises with respect to a significant portion
of any of our cable systems could have a material adverse effect on our
business.
Our franchises are non-exclusive and local franchising authorities may
grant competing franchises in our markets
Our cable systems are operated under non-exclusive franchises granted by
local franchising authorities. As a result, competing operators of cable systems
and other potential competitors, such as municipal utility providers, may be
granted franchises and may build cable systems in markets where we hold
franchises. Any such competition could adversely affect our business.
System failures or miscalculations attributable to the Year 2000 issue
could disrupt our operations
The Year 2000 issue is the result of computer programs only being able to
use two digits rather than four to define a given year. Thus, date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. We believe that we have adequately addressed the Year 2000 issue, having
experienced no failure or disruptions in our internal operating systems to our
products and services or in those of our third party vendors or suppliers either
on or after January 1, 2000 to the date of this prospectus. However, it is
possible that future failure or disruptions stemming from Year 2000 issues may
yet result in our inability to process transactions, send invoices, accept
customer order or timely provide customers with products and services.
This prospectus includes forward-looking statements that may not be
accurate indicators of our future performance
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:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; or
o 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 the notes, 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.
Risks of our industry
The competition we face from other cable networks and alternative service
providers may cause us to lose market share
The impact from competition, particularly from direct broadcast satellite
television systems and companies that overbuild in our market areas, has
resulted in a decrease in customer growth rates. The
20
industry growth rate for basic customers for the year ended June 1999 was 1.9%
as compared to 2.3% for the year ended June 1997 while satellite penetration as
of June 1999 averaged 8.0% nationwide, up from 1.5% in June 1997. This in turn
has negatively impacted our financial performance. Increased competition may
continue to impact our financial performance. 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.
Competition in geographic areas where a secondary franchise is obtained
and a cable network is constructed under the terms of the franchise is called
"overbuilding." For example, a joint venture which is a related party of
Southern Indiana Gas and Electric Co. is overbuilding a portion of our
Evansville, Indiana system. We cannot predict whether competition from these or
future competitors will have a material adverse effect on us and our business
and operations.
We may be required to provide access to our networks to other Internet
service providers, which could significantly increase our competition and
adversely affect our ability to provide new products and services.
The U.S. Congress and the Federal Communications Commission have
been asked to require cable operators to provide access over their cable systems
to other Internet service providers. If we are required to provide open access,
it could prohibit us from entering into or limit our existing agreements with
Internet service providers, adversely impact our anticipated revenues from
high-speed Internet access services and complicate marketing and technical
issues associated with the introduction of these services. To date, the U.S.
Congress and the Federal Communications Commission have declined to impose these
requirements. This same open access issue is also being considered by some local
franchising authorities and several courts. Franchise renewals and transfers
could become more difficult depending upon the outcome of this issue.
Our business has been and continues to be subject to extensive
governmental legislation and regulation, and changes in this legislation and
regulation could increase our costs of compliance and reduce the profitability
of our business
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. 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.
21
USE OF PROCEEDS
The exchange offer is intended to satisfy our obligations under the
registration rights agreement. We will not receive any cash proceeds from the
issuance of the exchange notes in the exchange offer.
We received net proceeds of approximately $194.0 million from the private
offering of the initial notes. We used approximately $178.0 million of the net
proceeds to repay the subordinated term loans of Insight Kentucky and we used
the remainder for general corporate purposes. The interest rates of the term
loans are based, at Insight Kentucky's option, on an alternative base rate or on
a Eurodollar rate plus an additional margin. The weighted average interest rate
of the term loans at the time of repayment was 7.2%. Funds provided by these
subordinated term loans during the 12 months prior to repayment were used to
rebuild the existing Kentucky systems and for general corporate purposes of the
Kentucky systems.
22
PRO FORMA FINANCIAL STATEMENTS
The following table sets forth selected pro forma financial information
and other data of the 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, 1999:
o the acquisition by Insight Midwest of the Kentucky systems;
o our receipt of approximately $194.0 million, the net proceeds from
the sale of our 9 3/4% senior notes on October 1, 1999, which are
the initial notes referred to in this prospectus; and
o the application of the net proceeds from the sale of the initial
notes to repay the subordinated term loans of Insight Kentucky.
The pro forma statement of operations does not purport to be indicative of
what our results of operations would actually have been had the above
transactions been completed on the dates indicated or to project our results of
operations for any future date. When you read the pro forma statement of
operations, it is important that you read along with it our combined historical
financial statements and related notes, and the historical financial statements
and related notes of:
o the TCI Insight Systems, which are the systems contributed to
Insight Indiana by affiliates of AT&T Broadband
o TCI IPVI Systems, which are the Kentucky systems prior to April 30,
1998
o InterMedia Capital Partners VI, L.P., which are the Kentucky systems
from April 30, 1998 to September 30, 1999 which are included
elsewhere in this prospectus.
The data included in the pro forma statement of operations for the year
ended December 31, 1999 under the column heading "Insight Midwest" represents
the combination of the results of Insight Indiana from January 1, 1999 through
December 31, 1999 and Insight Kentucky from October 1, 1999 through December 31,
1999. The data included in the pro forma statement of operations for the year
ended December 31, 1999 under the column heading "Kentucky Systems" represents
the operating results of InterMedia Captial Partners VI, L.P. from January 1,
1999 through September 30, 1999.
23
INSIGHT MIDWEST, L.P.
PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
(in thousands)
For the Year Ended December 31, 1999
---------------------------------------------------------------------
Insight Kentucky
Midwest Systems Adjustments Total
--------- --------- ----------- ---------
Revenues ............................................. $ 201,286 $ 159,197 -- $ 360,483
Costs and expenses:
Programming and other operating
costs ........................................... 59,587 51,924 -- 111,511
Selling, general and
administrative .................................. 44,199 41,162 (3,131)(A) 85,491
3,261(A)
Depreciation and amortization ....................... 109,110 91,707 5,513(B) 206,330
--------- --------- --------- ---------
Operating loss ....................................... (11,610) (25,596) (5,643) (42,849)
Other income (expenses):
Gain (loss) on Cable System Exchange ................ (25) 15,822 (15,797)(C) --
Interest expense .................................... (50,900) (41,979) (424)(D) (97,897)
(4,594)(E)
Other expense ....................................... (142) (1,548) -- (1,690)
--------- --------- --------- ---------
Loss before income taxes ............................. (62,677) (53,301) (26,458) (142,436)
Income taxes ......................................... -- -- -- --
--------- --------- --------- ---------
Loss from continuing
operations ........................................... $ (62,677) $ (53,301) $ (26,458) $(142,436)
========= ========= ========= =========
24
Notes to Pro Forma Statement of Operations for the Year Ended December 31, 1999
(A) Eliminates Home office expenses of $3.1 million from Kentucky Systems and
the recording of incremental management fees in the amount of $3.3
million.
(B) Reflects additional deprecation and amortization related to step-up in
value of the assets of Insight Kentucky for nine months which have been
valued based on the purchase price and preliminarily allocated between
fixed and intangible assets based on management's evaluation of each
individual operating system including such factors as the age of the cable
plant, the progress of rebuilds and franchise relations. This resulted in
a step-up in the carrying values of fixed assets of approximately $160.3
million and intangible assets of approximately $272.1 million. Fixed
assets are being depreciated over their estimated useful lives and
intangible assets are amortized over 15 years.
(C) Eliminates gains and losses from cable system exchanges.
(D) Includes the elimination of amortization of deferred financing costs from
the retirement of the subordinated term loans of Insight Kentucky and the
recording of amortization of the estimated financing costs for the notes.
(E) Reflects the net increase in interest expense related to the retirement of
approximately $178.0 million of the subordinated term loans of Insight
Kentucky and the issuance of the notes.
25
SELECTED HISTORICAL AND PRO FORMA FINANCIAL
AND OTHER DATA OF INSIGHT MIDWEST, L.P.
In the table below, we provide you with selected historical and pro forma
financial information and other operating data of Insight Midwest, L.P. as if
the Transactions had occurred on January 1, 1999. We have prepared the pro forma
selected financial information using the pro forma financial statements on pages
23 to 25 of this prospectus for the year ended December 31, 1999. The pro forma
financial and other data does not purport to be indicative of what our results
of operations would have been had the Transactions been completed at the
beginning of the period indicated. When you read the selected pro forma
historical financial and other data, it is important that you also read
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which is included in this prospectus.
Year Ended Year Ended
December 31, 1999* December 31, 1999
------------------ -----------------
Historical Pro Forma
(dollars in thousands)
Statement of Operations Data:
Revenue ....................................................................... $ 201,286 $ 360,483
Operating Costs:
Programming and other operating costs ..................................... 59,587 111,511
Selling, general and administrative ....................................... 44,199 85,491
Depreciation and amortization ............................................. 109,110 206,330
----------- -----------
Operating loss ................................................................ (11,610) (42,849)
----------- -----------
Interest expense, net ......................................................... (50,900) (97,897)
Other expense ................................................................. (167) (1,690)
Net loss ...................................................................... $ (62,677) $ (142,436)
=========== ===========
Other Financial Data:
EBITDA(1) ..................................................................... $ 97,333 $ 161,791
Adjusted EBITDA(2) ............................................................ 103,432 174,189
Adjusted EBITDA margin(3) ..................................................... 51.4% 48.3%
Capital expenditures .......................................................... 107,901 170,389
Net cash provided by operating activities ..................................... 102,918 117,446
Net cash (used in) investing activities ....................................... (110,441) (157,214)
Net cash provided by (used in) financing activities ........................... 21,627 46,700
Ratio of earnings to fixed charges(4) ......................................... -- --
Balance Sheet Data:
Cash and cash equivalents ..................................................... $ 35,996
Fixed assets, net ............................................................. 596,246
Total assets .................................................................. 1,706,599
Total debt .................................................................... 1,232,000
Partners (deficit) equity ..................................................... 368,547
* Includes the results of Insight Indiana for the twelve months ended December
31, 1999 and Insight Kentucky for the period of October 1, 1999 through December
31, 1999.
26
(1) Represents earnings (loss) before interest, taxes, depreciation and
amortization. Our management believes that EBIDTA 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, EBIDTA 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. EBIDTA, as computed by
management, is not necessarily comparable to similarly titled amounts of
other companies.
(2) Represents EBITDA prior to management and consulting fees and excluding
any non-cash items such as gains or losses on sales or exchanges of assets
and other non-recurring income and expense items. The following table sets
forth a reconciliation of EBITDA to Adjusted EBITDA:
Year ended Year ended
December 31, 1999 December 31, 1999
----------------- -----------------
Historical Pro Forma
(in thousands)
EBITDA ................................... $ 97,333 $161,791
Other (income) expense ................... 167 1,690
Management fees .......................... 5,932 10,708
-------- --------
Adjusted EBITDA .......................... $103,432 $174,189
======== ========
(3) Represents Adjusted EBITDA as a percentage of total revenues.
(4) For purposes of this calculation, "earnings" are defined as earnings
before fixed charges. Fixed charges consist of interest expense,
amortization of deferred financing and the portion of rent expense under
operating leases considered interest. For the year ended December 31,
1999, on a historical and pro forma basis, earnings before fixed charges
were insufficient to cover fixed charges by $62.7 million and $142.4
million.
27
SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OTHER DATA OF SYSTEMS
CONTRIBUTED BY
INSIGHT COMMUNICATIONS TO INSIGHT INDIANA
In the table below, we provide you with selected historical information
and other operating data of Insight Indiana with respect to systems contributed
to Insight Indiana by Insight Communications on October 31, 1998. We have
prepared the consolidated selected financial information using: (1) the audited
financial statements for the Noblesville, Jeffersonville, and Lafayette, Indiana
cable television systems for the year ended December 31, 1997, which includes
the Lafayette system from December 16, 1997 (date of acquisition), and for the
ten-month period ended October 31, 1998, and (2) the audited financial
statements of Insight Indiana for Insight Communications of Indiana LLC, which
includes the cable television systems contributed by Insight Communications and
the TCI Insight Systems, for the period November 1, 1998 to December 31, 1998.
In our opinion, the unaudited financial data for the years ended December 31,
1995 and 1996 have been prepared on the same basis as the audited consolidated
financial statements and includes all normal recurring adjustments and accruals
necessary for a fair presentation of such information. When you read this
selected consolidated historical financial and other data, it is important that
you also read the historical financial statements and related notes of Insight
Communications of Indiana, LLC and Noblesville, Jeffersonville and Lafayette,
Indiana cable television systems, as well as "Management's Discussion and
Analysis of Financial Condition and Results of Operations," which are included
in this prospectus.
Ten-Month Two-Month
Period from Period from
January 1, November 1,
Year Ended December 31, 1998 to 1998 to
----------------------------------------- October 31, December 31,
1995 1996 1997 1998 1998
-------- -------- -------- -------- --------
(in thousands)
Statement of Operations Data:
Revenues ...................................... $ 17,762 $ 19,264 $ 22,055 $ 33,486 $ 23,925
Costs and expenses:
Programming and other
operating costs ....................... 4,426 5,064 5,852 9,028 6,206
Selling, general and
administrative ........................ 2,708 2,933 3,296 5,203 4,653
Depreciation and amortization ............. 3,225 3,941 5,498 10,790 13,998
-------- -------- -------- -------- --------
Operating income (loss) ................... 7,403 7,326 7,409 8,465 (932)
-------- -------- -------- -------- --------
Interest expense, net ......................... -- -- -- -- (5,824)
Other income (expense) ........................ (18) 5 (26) (27) (64)
-------- -------- -------- -------- --------
Net income (loss) ......................... $ 7,385 $ 7,331 $ 7,383 $ 8,438 $ (6,820)
======== ======== ======== ======== ========
28
Ten-Month Two-Month
Period from Period from
January 1, November 1,
Year Ended December 31, 1998 to 1998 to
--------------------------------------------- October 31, December 31,
1995 1996 1997 1998 1998
--------- --------- --------- --------- ---------
(in thousands)
Other Financial Data:
EBITDA(1) ................................. $ 10,610 $ 11,272 $ 12,881 $ 19,228 $ 13,002
Adjusted EBITDA(2) ........................ 10,628 11,267 12,907 19,255 13,751
Adjusted EBITDA margin(3) ................. 59.8% 58.5% 58.5% 57.5% 57.5%
Capital expenditures ...................... $ 5,819 $ 6,371 $ 17,246 $ 21,432 $ 4,022
Net cash provided by operating
activities ............................ 13,339 21,605 19,770
Net cash (used in) investing
activities ............................ (25,891) (21,457) (4,595)
Net cash provided by financing
activities ............................ 12,588 -- 4,318
Ratio of earnings to fixed
charges(4) ............................ 264.7x 310.1x --
Balance Sheet Data:
Cash and cash equivalents ................. $ 47 $ 107 $ 143 $ 291 $ 19,493
Fixed assets, net ......................... 25,893 30,960 45,783 59,304 129,776
Total assets .............................. 25,137 30,193 105,289 116,386 527,332
Total debt(5) ............................. -- -- -- -- 460,000
Partners' deficit (members'
equity) ............................... 102,134 110,572 44,195
(1) Represents earnings (loss) before interest, taxes, depreciation and
amortization and extraordinary items. Our management believes that EBITDA is
commonly used in the cable television industry to analyze and compare cable
television companies on the basis of operating performance, leverage and
liquidity. However, EBITDA is not intended to be a performance measure that
should be regarded as an alternative to, or more meaningful than, either
operating income or net income as an indicator of operating performance or cash
flows as a measure of liquidity, as determined in accordance with generally
accepted accounting principles. EBITDA, as computed by management, is not
necessarily comparable to similarly titled amounts of other companies.
(2) Represents EBITDA prior to management and consulting fees and excluding any
non-cash items such as gains or losses on sales or exchanges of assets and other
non-recurring income and expense items.
(Footnotes continued on next page)
29
(Footnotes continued from previous page)
The following table sets forth a reconciliation of EBITDA to Adjusted EBITDA:
Ten-Month Two-Month
Period from Period from
January 1, November 1,
Year Ended December 31, 1998 to 1998 to
--------------------------------------------- October 31, December 31,
1995 1996 1997 1998 1998
-------- -------- -------- -------- --------
(in thousands)
EBITDA .................................. $ 10,610 $ 11,272 $ 12,881 $ 19,228 $ 13,002
Other (income) expense .................. 18 (5) 26 27 64
Management fees ......................... -- -- -- -- 685
-------- -------- -------- -------- --------
Adjusted EBITDA ......................... $ 10,628 $ 11,267 $ 12,907 $ 19,255 $ 13,751
======== ======== ======== ======== ========
(3) Represents Adjusted EBITDA as a percentage of total revenues.
(4) For purposes of this calculation, "earnings" are defined as earnings before
fixed charges. Fixed charges consist of interest expense, amortization of
deferred financing and the portion of rent expense under operating leases
considered interest. For the two-month period ended December 31, 1998, earnings
before fixed charges were insufficient to cover fixed charges by $6.8 million.
(5) Prior to the formation of Insight Indiana, the Insight Communications
systems contributed to Insight Indiana did not have any specific debt or related
interest expense allocated to their systems' operations.
30
SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OTHER DATA OF
SYSTEMS CONTRIBUTED BY TCI TO INSIGHT INDIANA
In the table below, we provide you with selected consolidated historical
information and other operating data of Insight Indiana with respect to systems
contributed to Insight Indiana by affiliates of AT&T Broadband. We have prepared
the consolidated selected financial information using the audited financial
statements for the TCI Insight Systems for the years ended December 31, 1996 and
1997 and for the ten month period ended October 31, 1998. In our opinion, the
unaudited financial data for the year ended December 31, 1995 has been prepared
on the same basis as the audited consolidated financial statements and includes
all normal recurring adjustments and accruals necessary for a fair presentation
of such information. When you read this selected consolidated historical
financial and other data, it is important that you also read the historical
financial statements and related notes of the TCI Insight Systems, as well as
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included in this prospectus.
Ten-Month
Period from
January 1,
Year Ended December 31, 1998 to
------------------------------------------ October 31,
1995 1996 1997 1998
-------- -------- -------- --------
(dollars in thousands)
Statement of Operations Data:
Revenue ..................................................... $ 78,076 $ 88,191 $ 93,543 $ 80,357
Costs and expenses:
Programming and other operating costs ................... 22,051 27,243 28,012 24,375
Selling, general and administrative ..................... 15,400 18,098 15,315 14,892
Depreciation & amortization ............................. 14,276 14,063 13,461 12,223
-------- -------- -------- --------
Operating income ............................................ 26,349 28,787 36,755 28,867
-------- -------- -------- --------
Other income (expense) ...................................... 7 (3) 96 (159)
Income from continuing operations ........................... 26,356 28,784 36,851 28,708
Income tax expense .......................................... (10,542) (10,022) (12,828) (9,969)
-------- -------- -------- --------
Net income .................................................. $ 15,814 $ 18,762 $ 24,023 $ 18,739
======== ======== ======== ========
Other Financial Data:
EBITDA(1) ................................................... $ 40,632 $ 42,847 $ 50,312 $ 40,931
Adjusted EBITDA(2) .......................................... 43,241 47,049 53,948 44,147
Adjusted EBITDA margin(3) ................................... 55.4% 53.3% 57.7% 54.9%
Capital expenditures ........................................ $ 9,612 $ 6,623 $ 5,068 $ 11,927
Net cash provided by operating activities ................... 40,479 31,059 33,870 28,718
Net cash (used in) investing activities ..................... (78,208) (5,868) (4,966) (11,884)
Net cash provided by (used in) financing activities ......... 37,076 (24,364) (29,950) (15,938)
Ratio of earnings to fixed charges(4) ....................... 70.0x 71.2x 72.0x 76.4x
31
Balance Sheet Data:
Cash and cash equivalents ...................... $ 219 $ 1,046 $ -- $ 896
Fixed assets, net .............................. 63,384 60,774 56,932 60,600
Total assets ................................... 226,144 218,993 211,723 212,182
Total debt(5) .................................. -- -- -- --
Parent's investment (deficit) .................. 153,216 147,614 141,088 (85,512)
(1) Represents earnings (loss) before interest, taxes, depreciation and
amortization. Our management believes that EBITDA is commonly used in the cable
television industry to analyze and compare cable television companies on the
basis of operating performance, leverage and liquidity. However, EBITDA is not
intended to be a performance measure that should be regarded as an alternative
to, or more meaningful than, either operating income or net income as an
indicator of operating performance or cash flows as a measure of liquidity, as
determined in accordance with generally accepted accounting principles. EBITDA,
as computed by management, is not necessarily comparable to similarly titled
amounts of other companies.
(2) Represents EBITDA prior to management and consulting fees and excluding any
non-cash items such as gains or losses on sales or exchanges of assets and other
non-recurring income and expense items. The following table sets forth a
reconciliation of EBITDA to Adjusted EBITDA:
Ten-Month Period
from January 1,
Year Ended December 31, 1998 to
------------------------------------------------- October 31,
1995 1996 1997 1998
-------- -------- -------- --------
(in thousands)
EBITDA ........................................... $ 40,632 $ 42,847 $ 50,312 $ 40,931
Other (income) expense ........................... (7) 3 (96) 159
Management fees .................................. 2,616 4,199 3,732 3,057
-------- -------- -------- --------
Adjusted EBITDA .................................. $ 43,241 $ 47,049 $ 53,948 $ 44,147
======== ======== ======== ========
(3) Represents Adjusted EBITDA as a percentage of total revenues.
(4) For purposes of this calculation, "earnings" are defined as earnings before
fixed charges. Fixed charges consist of interest expense, amortization of
deferred financing costs and the portion of rent expense under operating leases
considered interest.
(5) Prior to the formation of Insight Indiana, the TCI systems, which were later
contributed to Insight Indiana, did not have any specific debt or related
interest expense allocated to their systems' operations.
32
SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OTHER DATA OF
INSIGHT KENTUCKY
In the table below, we provide you with selected historical information
and other operating data of Insight Kentucky. We have prepared the selected
financial information using the audited financial statements for: (1) the TCI
IPVI Systems for the years ended December 31, 1996 and 1997 and for the
four-month period ended April 30, 1998, (2) InterMedia Capital Partners VI, L.P.
for the periods April 30, 1998 to December 31, 1998 and January 1, 1999 to
September 30, 1999. In our opinion, the unaudited financial data for the year
ended December 31, 1995 have been prepared on the same basis as the audited
consolidated financial statements and include all normal recurring adjustments
and accruals necessary for a fair presentation of such information. When you
read this selected consolidated historical financial and other data, it is
important that you also read the historical financial statements and related
notes of TCI IPVI and InterMedia Capital Partners VI, L.P., as well as
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included in this prospectus.
Nine Month
period from
January 1,
1999 through
Year Ended December 31, September
1995 1996 1997 1998(1) 30, 1999
--------- --------- --------- --------- ---------
(dollars in thousands)
Statement of Operations Data:
Revenue ........................................... $ 148,642 $ 170,682 $ 185,496 $ 195,507 $ 159,197
Operating costs:
Programming and other operating costs ........... 50,155 57,420 62,788 65,328 51,924
Selling, general and administrative ............. 30,300 37,057 43,906 44,416 41,162
Depreciation and amortization ................... 45,485 44,985 45,864 103,514 91,707
--------- --------- --------- --------- ---------
Operating income (loss) ........................... 22,702 31,220 32,938 (17,751) (25,596)
--------- --------- --------- --------- ---------
Other income (expense):
Gain on cable systems exchanges ................. -- -- -- -- 15,822
Interest expense ................................ (19,134) (20,414) (19,627) (45,222) (41,979)
Other income (expense) .......................... (16) 570 (65) 1,554 (1,548)
Income (loss) from continuing operations .......... 3,552 11,376 13,246 (61,419)
(53,301)
Income tax expense ................................ (2,138) (4,663) (5,565) (1,971) --
--------- --------- --------- --------- ---------
Net income (loss) ................................. $ 1,414 $ 6,713 $ 7,681 $ (63,390) $ (53,301)
========= ========= ========= ========= =========
Other Financial Data:
EBITDA(2) ......................................... $ 68,171 $ 76,775 $ 78,737 $ 87,317 $ 80,385
Adjusted EBITDA(3) ................................ 73,379 82,832 84,997 89,148 67,626
Adjusted EBITDA margin(4) ......................... 49.4% 48.5% 45.8% 45.6% 42.5%
Capital expenditures .............................. $ 78,689 $ 84,061 $ 12,859 $ 47,381 $ 62,488
Net cash provided by operating activities ......... 54,155 56,738 24,291 47,146 19,541
Net cash (used in) investing activities ........... (187,203) (84,105) (12,984) (51,069) (46,773)
Net cash provided by (used in) financing
activities ................................ 133,048 27,367 (11,307) 6,525 25,073
Ratio of earnings to fixed charges(5) ............. 1.2x 1.5x 1.6x -- --
33
Balance Sheet Data:
Cash and cash equivalents .................... $ -- $ -- $ -- $ 2,602 $ 443
Fixed assets, net ............................ 185,861 242,171 226,999 243,100 259,892
Total assets ................................. 820,471 861,458 830,936 904,490 867,349
Total debt ................................... 281,000 325,000 322,500 726,000 742,141
Partners' equity ............................. 271,268 261,348 260,222 126,900 73,599
(1) The financial data of Insight Kentucky represents the combination of the
results of the TCI IPVI Systems from January 1, 1998 through April 30,
1998 and InterMedia Capital Partners VI, L.P. from April 30, 1998 through
December 31, 1998. The combination of the two periods is not necessarily
indicative of what the results of InterMedia Capital Partners VI, L.P. or
TCI IPVI would have been for the 1998 calendar year.
(2) Represents earnings (loss) before interest, taxes, depreciation and
amortization. Our management believes that EBITDA is commonly used in the
cable television industry to analyze and compare cable television
companies on the basis of operating performance, leverage and liquidity.
However, EBITDA is not intended to be a performance measure that should be
regarded as an alternative to, or more meaningful than, either operating
income or net income as an indicator of operating performance or cash
flows as a measure of liquidity, as determined in accordance with
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 prior to management and consulting fees and excluding
any non-cash items such as gains or losses on sales or exchanges of assets
and other non-recurring income and expense items. The following table sets
forth a reconciliation of EBITDA to Adjusted EBITDA:
Nine Months
Year Ended December 31, Ended
------------------------------------------------------------ September
1995 1996 1997 1998 30, 1999
-------- -------- -------- -------- --------
(in thousands)
EBITDA ..................................... $ 68,171 $ 76,775 $ 78,737 $ 87,317 $ 80,385
Other (income) expense ..................... 16 (570) 65 (1,554) 1,548
Gain on system exchange .................... -- -- -- -- (15,822)
Management fees ............................ 5,192 6,627 6,195 3,385 1,515
-------- -------- -------- -------- --------
Adjusted EBITDA ............................ $ 73,379 $ 82,832 $ 84,997 $ 89,148 $ 67,626
======== ======== ======== ======== ========
(4) Represents Adjusted EBITDA as a percentage of total revenues.
34
(5) For purposes of this calculation, "earnings" are defined as earnings
before fixed charges. Fixed charges consist of interest expense,
amortization of deferred financing costs and the portion of rent expense
under operating leases considered interest. For the year ended December
31, 1998 and the nine-month period ended September 30, 1999, earnings
before fixed charges were insufficient to cover fixed charges by $63.4
million and $53.3 million.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
Because of corporate transactions completed over the past three years,
including the contribution agreement with an affiliate of AT&T Broadband 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.
On October 31, 1998 our manager exchanged its Utah systems for AT&T
Broadband's Evansville, Indiana system. Simultaneously, our manager completed a
contribution agreement with AT&T Broadband forming Insight Indiana and
contributed certain of its Indiana systems, the Noblesville, Lafayette and
Jeffersonville systems (the "Insight Contributed Systems"), as well as the
Evansville system to Insight Indiana. At the same time, AT&T Broadband
contributed most of its Indiana systems to Insight Indiana.
On October 1, 1999, our manager acquired a combined 50% interest in
InterMedia Capital Partners VI, L.P. (the "IPVI Partnership") from related
parties of Blackstone Cable Acquisition Company, LLC, related parties of
InterMedia Capital Management VI, LLC and a subsidiary and related party of AT&T
Broadband, for approximately $341.5 million (inclusive of expenses), and we
assumed debt of approximately $742.1 million.
On October 1, 1999, our manager completed an agreement with affiliates of
AT&T Broadband, pursuant to which our manager and affiliates of AT&T Broadband
each contributed their respective 50% interests in Insight Indiana and in
Insight Kentucky in exchange for a 50% interest in Insight Midwest, L.P.
General
Substantially all of the historical revenues of each of our systems 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 earned revenues from commissions for products sold
through home shopping networks.
We have generated increases in revenues and Adjusted EBITDA for each of
the past three fiscal years, primarily through internal customer growth,
increases in monthly revenue per customer and growth in advertising.
Results of Operations
As the Insight Contributed Systems are the predecessors of Insight
Midwest, the following discussion includes the results of operations of the
Insight Contributed Systems for the year ended December 31, 1997, the results of
operations for Insight Contributed Systems for the period January 1, 1998
through October 31,1998 combined with the results of operations of Insight
Indiana for the period November 1, 1998 (date of inception) through December 31,
1998; and the results of operations of Insight Indiana for the year ended
December 31, 1999 combined with the results of operations for Insight Kentucky
for the period October 1, 1999 through December 31, 1999. The following table
reflects these results of operations:
36
(in thousands)
Year ended December 31,
-----------------------------------------------------
1997 1998 1999
--------- --------- ---------
Revenue .......................................................... $ 22,055 $ 57,411 201,286
Costs and expenses:
Programming and other operating costs ....................... 5,852 15,234 59,587
Selling, general and administrative ......................... 3,296 9,856 44,199
Depreciation and amortization ............................... 5,498 24,788 109,110
--------- --------- ---------
14,646 49,878 212,896
--------- --------- ---------
Operating income (loss) .......................................... 7,409 7,533 (11,610)
Adjusted EBITDA ................................................. 12,907 33,006 103,432
Interest expense ................................................ -- 5,824 50,900
Net income (loss) ............................................... 7,383 1,618 (62,677)
Net cash provided by operating activities ....................... 13,339 41,375 102,918
Net cash (used in) investing activities ......................... (25,891) (26,052) (110,441)
Net cash provided by financing activities ....................... 12,588 4,318 21,627
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues increased 250.6% to $201.3 million for the year ended December
31, 1999, as compared to the prior year. The incremental revenue generated from
AT&T Broadband's contributed systems and the Evansville system approximated
$77.4 million accounting for 53.8% of the total increase in combined revenue.
The contribution of Insight Kentucky to Insight Midwest on October 1, 1999
accounted for approximately $57.0 million or 39.6% of the revenue increase. In
addition, revenues increased as a result of internal customer growth and rate
increases. Excluding the transactions described above, revenues increased by
approximately $9.6 million due to an increase of approximately 1,800 customers
on average, and by approximately $7.6 million attributable to an increase of
approximately $5.98 in the average monthly revenue per customer. The increase in
the average monthly revenue per customer is primarily attributable to customer
rate increases as the Insight Contributed Systems turned on nodes in rebuilt
areas resulting in higher monthly basic rates.
Programming and other operating costs increased 291.1% to $59.6 million
for the year ended December 31, 1999 as compared to the prior year of which the
additional Indiana systems contributed by AT&T Broadband and the Evansville
system accounted for approximately 49.7% of the increase and the Insight
Kentucky systems accounted for approximately 42.9% of the increase. Excluding
this transaction, these costs increased by 21.4% to $18.5 million, primarily as
a result of increased programming costs and additional programming carried by
our systems.
Selling, general and administrative expenses increased 317.3% to $38.3
million for the year ended December 31, 1999 as compared to the prior year of
which the additional Indiana systems contributed by AT&T Broadband and the
Evansville system accounted for approximately 69.0% of the increase and the
Insight Kentucky systems accounted for approximately 34.5% of the increase.
Excluding these transactions, these costs decreased by 11.0% to $8.2 million.
Management fees for the year ended December 31, 1998 totaled approximately
$700,000 reflecting only two months charges to Insight Indiana compared to the
year ended December 31, 1999 which reflects charges to Insight Indiana totaling
approximately $4.3 million and charges to Insight Kentucky of approximately $1.6
million for the period October 1 through December 31, 1999.
37
Depreciation and amortization expense increased 340.2% to $109.1 million
for the year ended December 31, 1999 as compared to the prior year. Of the $84.3
million increase, approximately 59.8% was attributable to the additional Indiana
systems contributed by AT&T Broadband and the Evansville system while the
Insight Kentucky systems accounted for approximately 29.7% of the increase.
Excluding these transactions, these costs increased by 35.6% to $33.6 million,
primarily due to additional capital expenditures associated with the rebuilds of
the Insight Contributed Systems.
Operating income decreased to a loss of $11.6 million for the year ended
December 31, 1999, a decrease of 254.1% as a result of the items discussed
above.
Adjusted EBITDA increased 213.4% to $103.4 million for the year ended
December 31, 1999 as compared to the prior year reflecting the additional
Indiana systems contributed by AT&T Broadband and the Evansville system in
addition to the contribution of the Insight Kentucky systems which accounted for
approximately 97.0% of the increase on a combined basis. Adjusted EBITDA
represents earnings (loss) before interest, taxes, depreciation and
amortization, extraordinary items and any non-cash items such as gains or losses
on sales or exchanges of assets and other non-recurring income and expense
items. Adjusted, 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. Adjusted EBITDA, as computed by management, is not
necessarily comparable to similarly titled amounts of other companies.
Interest expense increased to $50.9 million for the year ended December
31, 1999 reflecting: (a) interest on the Insight Indiana credit facility
totaling approximately $34.3 million, (b) interest on the Insight Kentucky
credit facility for the period from October 1, 1999 through December 31, 1999
totaling approximately $11.9 million and (c) interest on the Insight Midwest
Senior Notes for the period from October 1, 1999 through December 31, 1999
totaling approximately $4.7 million. Interest expense increased by $45.1 million
over the prior year as 1998 reflected only two months of borrowing under the
Insight Indiana credit facility.
Net income of $1.6 million for the year ended December 31, 1998 decreased
by $64.3 million to a net loss of $62.7 million for the year ended December 31,
1999 primarily reflecting increased depreciation and amortization charges and
increased interest expense.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues increased 160.3% to $57.4 million for the year ended December 31,
1998, as compared to the prior year. The results were impacted by two
significant transactions: (a) on December 16, 1997, the Lafayette, Indiana
system was acquired in an exchange for Insight's Phoenix, Arizona system. The
Lafayette system accounted for $16.3 million of revenue during the year ended
December 31, 1998 versus $725,000 for the year ended December 31, 1997
accounting for 44.0% of the total increase in revenue, and (b) the contribution
of the Indiana systems by AT&T Broadband and the Evansville system to Insight
Indiana. The incremental revenue generated from AT&T Broadband's contributed
systems and the Evansville system approximated $15.8 million accounting for
44.7% of the total increase in combined revenue. In addition, revenues increased
as a result of internal customer growth and rate increases. Excluding the
transactions described above, revenues increased by approximately $800,000 due
to an increase of approximately 2,043 customers on average, and by approximately
$2.5 million attributable to an increase of approximately $3.69 in the average
monthly revenue per customer. The increase in the
38
average monthly revenue per customer is primarily attributable to customer rate
increases as the Insight Contributed Systems began turning on nodes in rebuilt
areas resulting in higher monthly basic rates.
Programming and other operating costs increased 160.3% to $15.2 million
for the year ended December 31, 1998 as compared to the prior year. Excluding
the Lafayette exchange, the Indiana systems contributed by AT&T Broadband to
Insight Indiana and the Evansville system, these costs increased by 14.2% to
$6.7 million, primarily as a result of increased programming costs and
additional programming carried by our systems.
Selling, general and administrative expenses increased 178.2% to $9.2
million for the year ended December 31, 1998 as compared to the prior year.
Excluding the Lafayette exchange, the Indiana systems contributed by AT&T
Broadband to Insight Indiana and the Evansville system, these costs increased by
22.0% to $4.0 million, primarily reflecting increased marketing activity
associated with new product introductions.
Depreciation and amortization expense increased 350.9% to $24.8 million
for the year ended December 31, 1998 as compared to the prior year. Of the $19.3
million increase, $1.8 million was attributable to the Lafayette exchange, $7.9
million was attributable to the Indiana systems contributed by AT&T Broadband to
Insight Indiana and the Evansville system, while the remainder was primarily due
to additional capital expenditures associated with the rebuilds of the Insight
Contributed Systems.
Operating income for the year ended December 31, 1998 was $7.5 million, a
1.7% increase over the prior year, as a result of the items discussed above.
Adjusted EBITDA increased 155.7% to $33.0 million for the year ended
December 31, 1998 as compared to the prior year reflecting the Lafayette
exchange and the contribution of AT&T Broadband's cable systems and Evansville
to Insight Indiana which together accounted for $18.3 million or 91.0% of this
increase.
Interest expense increased to $5.8 million for the year ended December 31,
1998 reflecting borrowings on the Insight Indiana Credit Facility for the period
from November 1, 1998 through December 31, 1998. As there was no debt recorded
on the records of the Insight Contributed Systems, there was no interest expense
recorded for the year ended December 31, 1997. Average debt outstanding during
1998 was $460.0 million at an average interest rate of 7.6%.
Net income decreased 78.1% to $1.6 million for the year ended December 31,
1998 primarily reflecting increased depreciation and amortization charges.
Liquidity and Capital Resources
Our business requires cash for operations, debt service, capital
expenditures and acquisitions. The cable television business has substantial
ongoing capital requirements for the construction, expansion and maintenance of
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 and borrowings under
our credit facilities and we expect to continue to meet such requirements from
cash flow from operations and available borrowings under our credit facilities.
39
For the year ended December 31, 1999, we spent approximately $107.9
million in capital expenditures largely to support our network rebuild, digital
converter purchases and, to a lesser extent, network extensions. For the year
ended December 31, 1999, cash from operations totaled $102.9 million which,
together with borrowing under our credit facilities, funded the above-noted
capital expenditures.
It is anticipated that during 2000, we will have approximately $192.4
million of capital expenditures exclusive of any capital expenditures required
for the deployment of telephony. Included in the planned 2000 capital
expenditures is $77.4 million for the upgrade of most of our Indiana and
Kentucky 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 2000 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.
As of December 31, 1999, we had indebtedness of approximately $1.2
billion, including $1.0 billion outstanding under senior bank credit facilities.
The senior credit facilities consisted of:
o $550.0 million reducing revolving credit/term loan facility maturing
in December 2006, which supports our Indiana systems, of which
$470.0 million was outstanding; and
o $675.0 million reducing revolving credit/term loan facility maturing
in October 2006, which supports our Kentucky systems, of which
$562.0 million was outstanding.
The weighted average interest rates for amounts outstanding under
the senior credit facilities at December 31, 1999 were 8.13% and 8.52% for
Insight Indiana and Insight Kentucky, respectively. The facilities contain
covenants restricting, among other things, our ability to make capital
expenditures, acquire or dispose of assets, incur additional debt, pay dividends
or other distributions, create liens on assets, make investments and engage in
transactions with related parties. The facilities also require compliance with
certain financial ratios, require us to enter into interest rate protection
agreements and contain customary events of default.
On October 1, 1999, in connection with our formation, we completed an
offering of $200.0 million principal amount of our 9 3/4% senior notes due 2009.
The net proceeds of the offering were used to repay certain outstanding debt of
the Kentucky systems. Interest on the notes is payable on April 1 and October 1
of each year, commencing April 1, 2000. The indenture relating to the senior
notes imposes certain limitations on our ability to, among other things, incur
debt, make distributions, make investments and sell assets.
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
40
interest rate swaps and collars. The counterparties to our swap and collar
agreements are major financial institutions.
As of December 31, 1999, we had hedged approximately $190 million, or
40.4%, of our borrowings under our 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 $2.84 million. Our interest rate swap and collar agreements expire
in varying amounts through 2002.
As of December 31, 1999, we had hedged approximately $500 million, or 89%,
of our borrowings under our Insight Kentucky 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 $620,000. 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,
1999, the estimated fair value of our interest rate swap and collar agreements
for Indiana and Kentucky were approximately $7.1 million. These amounts
represent 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 Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities." ("SFAS
No. 133"), which as amended by SFAS 137 is effective for fiscal years beginning
after June 15, 2000. We adopted the new statement effective January 1, 2000. The
statement will require Insight Midwest 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.
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
To date, costs incurred that were directly related to addressing the Year
2000 problem have not been material. We reviewed our cable systems to inventory
our equipment and sent letters to our programming suppliers and other vendors.
We did not use a consultant but worked closely with AT&T Broadband, adopting its
Year 2000 program and to a large extent utilizing its independent
certifications. In addition, we tested our billing system by entering years such
as 2001 and determined it to be working properly.
41
INDUSTRY
The following section and other parts of this prospectus contain cable
industry terms which readers of this prospectus may find unfamiliar. We have
therefore included a glossary in this prospectus beginning on page G-1 to assist
you.
Unless otherwise specified, all cable television industry statistical data
in this prospectus are from Paul Kagan & Associates, a leading cable television
industry publisher.
Overview
As of December 31, 1999, approximately 96.6 million U.S. households had
access to, or were passed by, cable television. In the aggregate, these cable
systems serve approximately 67.3 million customers, representing a penetration
of 69.7% of the homes passed. The cable industry has grown steadily from
approximately 57.2 million basic customers in the United States in 1993 to
approximately 67.3 million as of December 31, 1999, with a projected growth to
73.7 million basic customers by the end of 2009, representing a compound annual
growth rate of 1.1%. It is estimated that the annual revenues received from U.S.
cable customers exceeded $36.9 billion in 1999.
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 over $20 billion from 1996 to 1998, including
$7.7 billion in 1998 alone, to rebuild their network in order to create new
capability for the delivery of more channels, digital and high definition
television programming and two-way interactive services. It is estimated that
86% of cable homes are passed by activated two-way plant, with 53% of such homes
passed by systems with 750 MHz or higher capacity.
According to the 1999 FCC Report on Competition, as of October 1999, 64.2%
of all cable subscribers were served by systems with more than 54 channels and
4.8% of subscribers received greater than 91 channels. As cable continues to
expand its channel capacity, we expect that the industry's competitive position
relative to direct broadcast satellite television systems 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
42
multichannel market to nearly 15.0% of the total number of households with
televisions. During this period, cable television has increased its penetration
to 69.7% of the homes passed from 63.1% 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 video-on-demand, premium
services, incremental special interest programming and interactive informational
services.
As of December 31, 1999, an estimated 5.1 million homes subscribed to a
digital cable service. The number of digital service customers is expected to
increase approximately 100% to 10.6 million homes by the end of 2000,
representing a penetration of 10.9% of the homes passed, and to approximately
50.1 million homes by 2009, representing a penetration of 47.2% of the homes
passed.
High-Speed Data
The broad bandwidth of cable network enables data to be transmitted 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. At December 31, 1999, approximately 19.0 million
homes were passed by cable systems offering high-speed, residential cable
Internet services, which is projected to increase to approximately 39.0 million
homes by the end of 2000, and to more than 67 million homes by 2005.
43
Over 1.6 million 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 100% to approximately 3.3 million homes by the end of
2000, representing a penetration of 4.9% of basic customers that will have been
marketed this service. It is further expected that data service customers will
increase to approximately 18.6 million homes by the end of 2009, representing a
penetration of 25.2% of basic customers that will have been marketed this
service.
The cable industry also has developed standards so that inter-operable,
non-proprietary cable modems were made available in retail outlets beginning in
the second half of 1999. Such availability allows 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
created by Cable Television Laboratories, Inc. 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.
Telecommunications
During the last several years, the cable industry has been developing the
capability to provide telecommunication 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. At December 31, 1999, it
is estimated that there were 230,000 cable telephony customers, representing a
penetration of 8.0% of the homes that have been marketed this service.
Recent developments, including AT&T's purchase of TCI and the proposed
joint ventures between AT&T and Insight and Time Warner, and AT&T's pending
acquisition of MediaOne, will likely accelerate the pace of development of the
voice telecommunication business. The number of cable telephony customers is
expected to be approximately 620,000 homes by the end of 2000, representing a
penetration of 9.0% of the homes that will have been marketed this service and
approximately 25.4 million homes by 2009, representing a penetration of 38.0% of
the homes that will have been marketed this service.
44
BUSINESS
Our Manager
Insight Communications is the 8th largest cable television system operator
in the United States based on customers served after giving effect to previously
announced industry acquisitions. Insight Communications, which provides cable
television services to approximately 935,000 customers, has tightly grouped
clusters of cable television systems with approximately 98% of its customers
concentrated in the four contiguous states of Indiana, Kentucky, Ohio and
Illinois. Upon completion of its rebuild efforts, which is expected occur by the
end of 2000, over 96% of its customers will be served from seven headends
allowing it to more economically deliver an array of entertainment, information
and telecommunication services, including interactive digital video, high-speed
data access and telephone service products. Our manager believes that it is very
well positioned to exploit the new business opportunities available to cable
television operators.
The Issuers
Insight Midwest, L.P. is owned equally by our manager, through its
subsidiary Insight Communications Company, L.P., and AT&T Broadband, LLC,
through its indirect subsidiary TCI of Indiana Holdings, LLC. Through our
subsidiaries Insight Indiana and Insight Kentucky we own and operate cable
television systems in Indiana and Kentucky, which passed approximately 1.2
million homes and served approximately 748,800 customers as of December 31,
1999. We are presently rebuilding our systems and, upon completion of the
rebuild, 99% of our customers will be served by a two-way active, 750 MHz,
hybrid fiber coaxial network which will deliver a suite of entertainment,
information and telecommunication services, including our interactive Digital
Gateway service, high-speed data service and voice transmission.
Insight Indiana is the largest operator of cable television systems in the
State of Indiana. As of December 31, 1999, the Indiana systems passed
approximately 494,900 homes and served approximately 322,500 customers. The
Indiana systems are located primarily in the university cities of Bloomington,
Evansville and Lafayette and the demographically desirable areas of suburban
Indianapolis. Upon completion of our consolidation of headends, approximately
93% of Insight Indiana's customers will be served by three headends. The rebuild
and consolidation of headends are expected to be completed by the end of 2000.
Insight Kentucky is the largest operator of cable television systems in
the State of Kentucky. As of December 31, 1999, the Kentucky systems passed
approximately 668,500 homes and served approximately 426,300 customers. Over 95%
of the Kentucky systems are located in and around four of the five largest
cities in the state: Louisville, Lexington, Covington and Bowling Green. Upon
completion of our consolidation of headends, 100% of Insight Kentucky's
customers will be served by four headends. The rebuild and consolidation of
headends are expected to be completed by the end of 2000.
Our marketing strategy is to offer our customers a suite of services on a
bundled basis. By bundling our products and services, we provide our customers
with an increased choice of services at a reduced cost, which we believe will
result in higher customer satisfaction, increased use of our services and
greater customer retention. We began offering new and enhanced products and
45
services, such as interactive digital video and high-speed data access, during
1999 and intend to offer telecommunication services under the AT&T brand name by
the end of 2000.
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
enhance customer awareness, increase use of our products and services and build
brand support. Our emphasis is on system reliability, engineering support and
superior customer satisfaction. In addition to our broad product offerings, we
also emphasize a high level of locally-focused content and customer service.
To facilitate the deployment of our enhanced products and services, we are
in the process of rebuilding almost all of our network to allow us to deliver
more information and entertainment services through our cable systems and to
provide for two-way communications capability, including telecommunication
services. Approximately 56% of our network miles had been rebuilt as of December
31, 1999. We intend to complete our network rebuild in 2000 with a total
investment of approximately $166.8 million.
Recognizing the opportunities presented by newly available products and
services, the strength of our market characteristics and favorable changes in
the regulatory environment, we 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.
Business Strategy
Our business strategy is to become a competitive, full-service provider of
entertainment, information and telecommunication services. Our strategy is
centered on the development of new and enhanced products and services for the
communities served by our networks and consists of the following elements:
Focus on operating 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
46
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 cable network
We have committed to rebuild our cable network expeditiously in order to
provide new and enhanced products and services, increase the programming and
telecommunication 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 2000, we expect that substantially all of our customers will
be served by systems with at least 750 MHz bandwidth and two-way active
capability. As each system's rebuild progresses, we will deploy new and enhanced
products and services. In 1999, we invested approximately $49.8 million and $9.9
million in the Indiana systems and the Kentucky systems, and we plan to invest
approximately $48.3 million and $29.1 million more to rebuild the Indiana
systems and the Kentucky systems by the end of 2000.
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 direct broadcast satellite television
systems, and incumbent telephone companies. To accelerate the deployment of
these services, our manager has entered into arrangements with several industry
leaders, including: (1) an agreement in principle with AT&T to provide
telecommunication services; (2) an agreement with Excite@Home to provide
high-speed data services; (3) an agreement with DIVA Systems Corporation to
provide video-on-demand; and (4) an agreement with Liberate Technologies to
utilize their software platform for the deployment of interactive television
services.
Leverage strong local presence to enhance customer and community relations
Excellent 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. A
significant number 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.
47
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 direct broadcast satellite television systems 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 some of our
markets, we are the only broadcaster of local college and high school sporting
events, which allows us to provide important programming that builds customer
loyalty.
To support our business strategy, we have developed a financial strategy
to pursue value-enhancing transactions in nearby or adjacent geographies. To
augment our internal customer growth, we will seek acquisitions that
strategically fit our clustering and operating strategy. We do not currently
have any binding agreements for any future acquisitions. There is no assurance
that any additional acquisitions will be completed.
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
state-of-the-art 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 new and enhanced products and services, including interactive digital
video, high-speed data services and telecommunication services.
As of December 31, 1999, our systems were comprised of approximately
15,500 miles of network passing approximately 1,163,300 homes resulting in a
density of approximately 75 homes per mile. As of that date, our systems were
made up of an aggregate of 56 headends. We intend to continue our strategy of
consolidating headends by eliminating approximately 44 headends by December 31,
2000, at which point 100% of our customers will be served by 12 headends. As of
December 31, 1999, approximately 28% of our network was less than 450 MHz,
approximately 14% of our network was greater than or equal to 450 MHz and less
than 750 MHz and approximately 58% of our network was at 750 MHz. After
completion of our rebuild which is scheduled to be completed by the end of 2000,
99% of our customers will be served by 750MHz.
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. For example, at December 31, 1999, an average of
approximately 729 homes were being served by each fiber node of the Indiana
systems and 727 homes were being served by each fiber node of the Kentucky
systems. 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
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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.
The following chart outlines the status of the network capacities
currently and as planned, based on our current rebuild program:
Percent of Network Miles
-----------------------------------------------------------------
Greater than or Percent of
Equal to 450 MHz Network
Less than and less than Two-Way
450 MHz 750 MHz 750 MHz Capable
--------- ---------------- ------- -----------
As of December 31, 1999 ............................ 28.4% 13.6% 58.0% 72.4%
As of December 31, 2000* ........................... -- -- 99.0% 99.0%
* Estimate based on our current rebuild program. There can be no assurance
that our current rebuild program will be achieved.
Products and Services
Traditional cable television services
We offer our customers a full array of traditional cable television
services and programming offerings. We tailor both our basic line-up and our
additional channel offerings to each regional system in response to
demographics, programming preferences, competition and local regulation. We
offer a basic level of service which includes up to 25 channels of television
programming. Approximately 90.5% of our customers choose to pay an additional
amount to receive additional channels under our "Classic" or "expanded" 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, 1999, premium units as a percentage of basic subscribers was
approximately 74.0%.
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 or Expanded Service. This expanded level of service
includes a group of satellite-delivered or non-broadcast channels such as
ESPN, CNN, Discovery Channel and Lifetime.
49
o Premium Channels. These channels provide unedited, commercial-free movies,
sports and other special event entertainment programming such as HBO,
Cinemax, Starz! 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, we will deploy 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 telecommunication
services under the AT&T brand during 2000.
Interactive Digital Video
The implementation of interactive digital technology significantly
enhances and expands 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 competition from
direct broadcast satellite television systems. Because of the significantly
increased bandwidth and two-way transmission capability of our state-of-the-art
technical platform, which continues to be 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 offer a video-on-demand service in selected markets that allows 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
continue to be activated with two-way communication network capability, enabling
us to provide truly interactive and locally based Internet-style products and
services.
Our manager has 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 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.
SourceSuite, LLC, an equally owned joint venture between our manager and
Source Media, Inc., provides its interactive program guide known as SourceGuide
in our Digital Gateway.
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SourceGuide enables customers to navigate through program lists, as opposed to
viewing a scrolling screen, and delivers other interactive functions such as
ordering pay-per-view. SourceSuite's LocalSource product is designed to allow us
to provide our customers with an Internet type experience on a television
platform using only a TV remote control. With the LocalSource product, we are
able to deliver interactive programming that is both informative and
entertaining, and we expect to provide 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 "Your Community Today" provides both current local information as well as
national updates on topics such as news, weather, sports, business,
horoscopes, soaps and lotteries;
o LocalGuide is a source for current community information such as a Dining
Guide, Cinema Guide, Events Guide, Kidzone and Games;
o My Neighborhood provides information on local topics such as schools,
religion, town hall and transportation; and
o QuickSource is an on-demand library of useful facts on a range of subjects
from health to legal to car care or insurance.
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.
Our manager has entered into an agreement with Liberate Technologies that
enables us to utilize the Liberate software platform for the deployment of
interactive television services. The Liberate software includes a wide range of
products and services, including Liberate TV Navigator and Liberate TV Connect.
The acquisition by Liberate of the VirtualModem technology from SourceSuite
extends the Liberate software to a broader range of cable television set-top
boxes. With the addition of VirtualModem, the Liberate software will provide us
with an interactive software platform for our existing base of limited-memory
customer set-top boxes as well as the new generation of set-top boxes, in each
case supporting our interactive applications such as LocalSource.
Our manager has also entered into an agreement with DIVA Systems
Corporation, which has allowed us to become 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.
Customers receive the movies electronically over the network and have full VCR
functionality, including pause, play, fast forward and rewind. The movies are
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.
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 the types of service they
receive and fit individual interests. The packages will be generally developed
but tailored to satisfy the tastes and needs of the specific local market and
will be generally available for an additional $4.95 each per month. Currently,
we offer three core programming packages in all of our digital markets and
provide a discount by allowing customers
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to purchase all three packages for the price of two. The packages may include
the following:
o The Family Pak, which is comprised of networks such as Discovery, BBC
America, Much Music and the Sci-Fi Channel;
o The Movie Pak, 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 Pak, which consists of several ESPN channels, The Golf Channel,
Fox Sports World and Classic Sports.
In addition to these core programming packages, we have developed
additional niche packages, such as Spanish channels or music video channels,
reflective of local customer tastes.
Our manager recently launched its Digital Gateway service in one of its
other systems in Rockford, Illinois. In addition to the core digital product,
our manager added LocalSource in the Rockford system in May 1999 and launched
the video-on-demand application in the Rockford system in November 1999. The
Rockford, Illinois system was the first cable television system in the United
States to offer video-on-demand service as part of its digital platform.
As the rebuilds of the Indiana systems are completed during 2000, we will
migrate the AT&T Broadband digital product to our interactive digital product.
Additionally, in 2000, we expect to convert the Kentucky systems from the
existing InterMedia Capital Partners VI, L.P. digital product to our interactive
digital product. While the AT&T Broadband and InterMedia Capital Partners VI,
L.P. digital products were targeted to fill programming voids and compete with
direct broadcast satellite television systems, our Digital Gateway service is
designed to provide our customers with an Internet style experience as well as
enhanced 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 and the Kentucky systems with our
Digital Gateway service from the 10% to 15% penetration that the AT&T Broadband
digital products currently achieve within two years of launch. Within twelve
months of our manager's launch of the Digital Gateway in its Rockford, Illinois
system, several of the activated areas have achieved 18% digital penetration,
with incremental revenue per digital customer of $24.00 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. Our manager has signed a distribution
agreement with Excite@Home to launch high-speed data service in all of our
markets. As of December 31, 1999, Excite@Home served 2,336 of our customers in
the Indiana systems and 6,000 of our customers in the Kentucky systems.
The broad bandwidth of our cable network enables data to be transmitted 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
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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.
In addition to being an Internet service provider, Excite@Home offers its
own content. Excite@Home aggregates high quality web sites for customers to
explore and also offers various chat rooms, newsgroups, on-line stores, gaming
channels, on demand Fox News, 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.
Our Insight@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 are offering the Insight@Home service to cable
customers at a price of $29.95 per month plus $10 to $15 to lease the cable
modem. Customers may also purchase the cable modem. Non-cable customers are
charged an additional $10 per month for the service. Both cable and non-cable
customers are charged a $150 installation fee, which we may, at our discretion,
discount to promote usage of cable modems. Insight@Home also provides several
additional services, such as the ability to dial-up away from the customer's
home, 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 by selling advertisers and retailers
space on our local home pages in exchange for a fee or a share of the revenues.
Telecommunications
On March 15, 2000, our manager reached an agreement in principle with AT&T
Corp. for the delivery of telephone service utilizing our cable television
systems under the "AT&T" brand name. The terms of the agreement in principle
provide that we will market, service and bill for local telephone service. AT&T
would be required to install and maintain the necessary switching equipment, and
would be the local exchange carrier of record. AT&T would pay us a fee for the
use of the local telephone lines, and will also compensate us for installation
and maintenance services at customers' residences. In addition, AT&T would pay
us commissions for sales we make to our customers. We expect to sell the
AT&T-branded local telephone service separately and as part of bundled
offerings, which would also include the sale of AT&T long-distance telephone
services. The agreement in principle is subject to the negotiation and execution
of definitive agreements.
Business Background of Our Manager
Insight Communications was co-founded in 1985 as a limited partnership
under the name Insight Communications Company, L.P. 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 Communications.
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Between 1985 and 1988, our manager assembled a group of systems that
reflected its focused acquisition criteria of high housing growth in markets
with attractive demographics. As a result of this strategy, our manager 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, Insight Communications' 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,
Insight Communications' management team has been involved in the development and
deployment of full service telecommunications networks since 1989. Through a
then-related entity, Insight Communications Company UK, L.P., Insight
Communications' management and related parties of Insight Communications 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 related entity. NTL is currently the largest operator of local
broadband communications systems in the United Kingdom, after giving effect to
previously announced transactions.
As a result of its management's British experience, Insight Communications
recognized that the technology and products developed in the United Kingdom
would migrate to the United States in similar form. Insight Communications
focused on planning to rebuild its network promptly after it became clear that
the 1996 Telecom Act would encourage competition in the telecommunications
industries. Insight Communications 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. Insight
Communications' original acquisition strategy, which focused on customer growth,
was very successful. However, Insight Communications' management team recognized
the opportunity to evolve from its 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 telecommunication products and services.
Recognizing the opportunities presented by newly available products and
services and favorable changes in the regulatory environment, Insight
Communications executed a series of asset swaps, acquisitions and entered into
several joint ventures that resulted in Insight Communications' current
composition. The largest of these transactions were the 50/50 joint ventures
formed with AT&T Broadband and it affiliates in October 1998 with respect to the
Indiana systems and in October 1999 with respect to the Kentucky systems. As of
December 31, 1997, Insight Communications' systems had approximately 180,000
customers with the two largest concentrations in Utah and Indiana, which
together represented less than half of its customers. Insight Communications
believes that it has successfully transformed its assets so that today it owns,
operates and manages a cable television network serving approximately 935,000
customers with approximately 98% of its customers clustered in the contiguous
states of Illinois, Indiana, Ohio and Kentucky. Insight Communications' current
assets are reflective of its strategy to own systems that have high ratios of
customers to headends.
In July 1999, the holders of the partnership interests of Insight
Communications Company, L.P. exchanged their respective partnership interests
for common stock of Insight
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Communications. As a result, Insight Communications Company, L.P. became a
wholly-owned subsidiary of Insight Communications. Simultaneous with the
exchange, Insight Communications consummated an initial public offering of
26,450,000 shares of its Class A common stock, raising an aggregate of
approximately $650.0 million. Insight Communications is currently listed on the
Nasdaq National Market under the symbol "ICCI."
Our Systems
The Indiana and Kentucky systems serve approximately 748,800 customers and
represent approximately 80% of our manager's total customers. We are the largest
operator of cable systems in both states. We receive tangible and intangible
benefits from our partnership with affiliates of AT&T Broadband including (a)
substantial programming discounts and (b) participation in AT&T Broadband
affiliate meetings, which affords us in-depth knowledge and understanding about
the principal and material issues and challenges facing the cable television
industry.
We are able to realize significant operational synergies due to the size
of the clusters in these states and the demographic proximity of all of our
systems. In both states we are in the process of rebuilding our system
infrastructures to enable us to deliver new technologies, products and services
to provide our customers with greater value and choices in the face of growing
competition. The highly clustered nature of our systems will enable us to (a)
more efficiently invest our marketing dollars and maximize our brand awareness,
(b) more economically introduce new and enhanced services and (c) reduce our
overall operating and maintenance costs as a result of our ability to deploy
fiber and reduce the number of headends we use throughout our systems. As a
result, we believe we will be able to achieve improved operating performance on
both a combined and system wide basis.
The Indiana Systems
General
As of December 31, 1999, the Indiana systems passed approximately 494,900
homes and served approximately 322,500 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, was a 50/50 joint venture
between Insight Communications and an affiliate of AT&T Broadband until the
contribution of its equity interests on October 1, 1999 into Insight Midwest,
L.P. Insight Communications Company, L.P., our manager, serves as manager of the
Indiana systems.
We believe that further rebuilding of the Indiana systems will yield
opportunities for cash flow growth. We have increased our capital investments in
the Indiana systems, with initial emphasis on rebuilding the network, activating
two-way transmission and combining headends. By the end of 2000, we expect that
93% of our customers in Indiana 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 Central District
As of December 31, 1999, the Central District passed approximately 77,800
homes and served approximately 60,000 customers, principally in the community of
Bloomington. The City of 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 $37,000 per year, while the median family income is
approximately $47,500 per year. Household income differs from family income by
including income from all persons in all households, including persons living
alone and other non-family households.
Interactive digital video was launched in Bloomington by AT&T Broadband
prior to the formation of Insight Indiana. Upon completion of our rebuild, we
will migrate the Bloomington digital customers to our interactive Digital
Gateway service. The Bloomington system began deploying the Insight@Home service
during the first quarter of 2000. Bloomington and parts of Monroe County are
expected to be rebuilt to 750 MHz during the second quarter of 2000, with the
remainder of the district projected to be rebuilt to 750 MHz by the end of 2000.
The Southwest District
At December 31, 1999, the Southwest District passed approximately 120,000
homes and served approximately 67,000 customers, principally in the communities
of Evansville and Jasper. The median household income for the area is
approximately $36,500 per year, while the median family income is approximately
$47,000 per year.
A related party of Southern Indiana Gas and Electric Co. is overbuilding a
portion of our Southwest system. Southern Indiana Gas and Electric Co. has
obtained franchises to provide cable television service in the City of
Evansville and neighboring areas and commenced service in April 1999. We believe
Southern Indiana Gas and Electric Co. is currently offering cable service to an
estimated 20,000 homes in our service area and is expected to make the service
available to additional homes, and has commenced offering telephone and data
service. We responded to this competition by rebuilding the network to 750 MHz
and have introduced our interactive Digital Gateway service, including DIVA's
video-on-demand service and the LocalSource interactive information service. We
have also launched the Insight@Home service in Evansville.
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, 1999, the Jeffersonville District passed approximately
45,600 homes and served approximately 26,500 customers, principally in the
community of Jeffersonville. The Jeffersonville District is in the Louisville,
Kentucky metropolitan area, but our Louisville, Kentucky system was not part of
our Jeffersonville District as of December 31, 1999.
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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 $36,800 per year, while the median family
income is approximately $44,900 per year. Due to its geographic proximity, we
intend to integrate the Jeffersonville District with our Louisville, Kentucky
system in the spring of 2000 to achieve operational synergies.
We launched Insight@Home in the Jeffersonville District in April
1999. We have rebuilt the network to 750MHz and plan to introduce our
interactive Digital Gateway service with the LocalSource product and the DIVA
video-on-demand service upon the integration of the Jeffersonville headend into
the Louisville headend in the spring of 2000.
The Northwest District
As of December 31, 1999, the Northwest District passed approximately
115,300 homes and served approximately 79,600 customers, principally in the
communities of Lafayette, Kokomo, Fowler and Hartford City. The City of
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
$39,900 per year, while the median family income is approximately $51,600 per
year.
Most of the Lafayette, Kokomo, Fowler and Hartford City systems have been
rebuilt to 750 MHz, with a few areas being finished in 2000. We launched the
Insight@Home service in all of the markets. AT&T Broadband launched a digital
service in the Kokomo market in late 1998. We plan to migrate those customers to
our digital service in 2000, simultaneously with the launch throughout the
district of our interactive Digital Gateway service, including the LocalSource
product and DIVA's video-on-demand service.
The Northeast District
As of December 31, 1999, the Northeast District passed approximately
154,200 homes and served approximately 100,000 customers, principally in the
suburban communities near Indianapolis, including Anderson, Richmond and
Noblesville. 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 $46,700 per year, while the median family income is approximately
$56,300 per year.
The Northeast District is expected to be rebuilt to 750 MHz by the summer
of 2000. We have launched the Insight@Home service throughout the district. AT&T
Broadband launched digital service in several of the markets in 1998, and we
plan to migrate those customers to our interactive Digital Gateway service
during 2000, simultaneously with the launch throughout the district of our
Digital Gateway service, including the LocalSource product and DIVA's
video-on-demand service.
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The Kentucky Systems
General
As of December 31, 1999, the Kentucky systems passed approximately 668,500
homes and served approximately 426,300 customers. The Kentucky systems are owned
by Insight Kentucky Partners II, L.P., which is the largest cable operator in
the state. Our manager acquired a combined 50% interest in Insight Kentucky's
parent on October 1, 1999, with related parties of AT&T Broadband holding the
other 50% interest. Simultaneous with this acquisition, all of the equity
interests were contributed into Insight Midwest. Insight Communications Company,
L.P., our manager, serves as manager of the Kentucky systems.
Over 95% of the Kentucky systems are located in and around four of the
five largest cities in the state: Louisville, Lexington, Covington, and Bowling
Green. Upon completion of the rebuild, 100% of Insight Kentucky's customers will
be served by a two-way active, 750 MHz, hybrid fiber coaxial network.
Additionally, following the consolidation of headends, 100% of the systems'
customers will be served by four headends. The rebuild and consolidation of
headends are expected to be completed by the end of 2000.
Summary statistics for the Kentucky systems are as follows:
Louisville
As of December 31, 1999, the Louisville system passed approximately
373,900 homes and served approximately 235,600 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 $40,000 while the median family income is approximately
$48,500.
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, 2000. The system is also in the process of interconnecting six
headends, which will allow the entire system to be served from a single headend.
In addition, we plan to integrate the Jeffersonville, Indiana District into the
Louisville system by the spring of 2000.
InterMedia Capital Partners VI, L.P. launched its digital service in
Louisville in November 1998. The service already has approximately 12,400
customers in Kentucky. We plan to migrate these customers to our interactive
Digital Gateway service, including the LocalSource product and the DIVA
video-on-demand service concurrent with the integration of the Jeffersonville
District by the spring of 2000. The Louisville system recently launched the
Insight@Home service.
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Lexington
As of December 31, 1999, the Lexington system passed approximately 118,800
homes and served approximately 83,900 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 $44,000, while the median family income is
approximately $56,000.
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
September 30, 2000. InterMedia Capital Partners VI, L.P. launched its digital
service in Lexington in October of 1998 and achieved penetration levels of
approximately 16% in the areas where digital is available. We plan to migrate
these customers to our interactive Digital Gateway service, including the
LocalSource product and the DIVA video-on-demand service, by mid-year 2000. The
Lexington system has launched the Insight@Home service.
Covington
As of December 31, 1999, the Covington system passed approximately 126,700
homes and served approximately 73,300 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 $44,500, while the median family income is approximately $53,800.
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
September 30, 2000. The Covington system recently launched the Insight@Home
service. Digital service is also available in Covington. We plan to migrate the
customers of this digital service to our interactive Digital Gateway service,
including the LocalSource product and the DIVA video-on-demand service, by
mid-year 2000.
Bowling Green
As of December 31, 1999, the Bowling Green system passed approximately
33,400 homes and served approximately 22,500 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 $36,500, while the median family income is approximately $45,400.
The Bowling Green system is fully rebuilt to two-way 750 MHz hybrid fiber
coaxial cable. Recently, digital and Insight@Home services have been launched in
Bowling Green. We plan to migrate the customers of this digital service to our
interactive Digital Gateway service, including the LocalSource product and the
DIVA video-on-demand service, by late 2000.
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Carrollton
As of December 31, 1999, the Carrolton system passed approximately 4,500
homes and served approximately 2,500 customers from a single headend. Major
employers in the Carrollton area include Dow Corning, Elf-Atochem, Meritor,
North American Stainless, and Celotex. The median household income for the area
is approximately $27,000, while the median family income is approximately
$32,900.
The Carrollton 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
year end 2000.
Customer Rates
Rates charged to customers vary based on the market served and service
selected. As of December 31, 1999, the average monthly fee was approximately
$12.46 for basic service and an additional monthly fee of approximately $15.17
for Classic service for the Indiana systems and approximately $11.49 for basic
service and an additional monthly fee of approximately $16.64 for Classic
service for the Kentucky systems. As of December 31, 1999, the weighted average
revenue, including special promotions, for our monthly combined basic and
classic service was approximately $27.98. The national average was $28.92 for
the same services as of December 31, 1999, as reported by Paul Kagan &
Associates.
A one-time installation fee, which we may reduce during promotional
periods, is charged to new customers, as well as reconnected customers. We
charge 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 customer 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 also 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, cross channel TV spots and direct mail
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
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aggressively promote our services utilizing both broad and targeted marketing
tactics, including outdoor billboards, outbound telemarketing, retail
partnerships, direct mail, door-to-door sales, cross-channel promotion, print
and broadcast.
We build awareness of the Insight Communications' 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 telecommunication service though our
manager's proposed agreement with AT&T, we intend to aggressively pursue
co-marketing campaigns with AT&T. We launched a campaign in Evansville, Indiana
where customers subscribing to the digital service who are also AT&T long
distance customers realize savings off of their cable and long distance bills.
We expect to rollout similar programs in other systems until we are able to
provide the complete package of entertainment, information and telecommunication
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.
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 Broadband, we have the right to
purchase programming services for our systems directly through AT&T Broadband's
programming supplier Satellite Services, Inc. We believe that Satellite Services
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, 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 our
manager and recent developments in the telecommunications industry. We have
received numerous awards recognizing our ongoing community relations. We believe
that our ongoing community
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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 all of our local management teams to take leadership roles 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.
Cable industry recognition and awards for excellence in marketing and
programming have been received by several of our systems including 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 direct broadcast
satellite television systems 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 some of our 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 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 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 other public institutions;
o The maintenance of insurance and indemnity bonds; and
o The payment of fees to communities.
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These local franchises are subject to limits imposed by federal law.
As of December 31, 1999, we held 327 franchises in the aggregate,
consisting of 139 in the Indiana systems and 188 in the Kentucky systems. 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 December 31, 1999:
Percentage of Number of Percentage
Number of Total Basic Total Basic
Year of Franchise Expiration Franchises Franchises Customers Customers
- ---------------------------- ---------- ---------- --------- ---------
Expired* ..................................... 1 0.3% 2,571 0.3%
2000 ......................................... 18 5.5 26,509 3.5
2001 ......................................... 7 2.1 5,242 0.7
2002 ......................................... 15 4.6 44,604 6.0
2003 ......................................... 22 6.7 18,676 2.5
After 2003 ................................... 264 80.8 651,231 87.0
------- ----- ------- -----
Total ........................................ 327 100.0% 748,833 100.0%
======= ===== ======= =====
* This franchise is currently operating under an overlapping system's
franchise agreement. Formal consolidation is currently underway.
The Cable Act provides, 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 Act 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.
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.
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Congress has enacted legislation and the FCC has adopted regulatory
policies providing a more favorable operating environment for new and existing
technologies, in particular direct broadcast satellite television systems
operators, that have the potential to provide increased competition to cable
systems. Recently enacted legislation permits direct broadcast satellite
companies to retransmit local television signals, eliminating one of the
objections of consumers about switching to satellites.
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 our cable communications systems. Currently, our most significant
wireline competition is from a related party of Southern Indiana Gas and
Electric Co., which has been awarded cable franchises in the Evansville, Indiana
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 telecommunication services also poses some
threat to cable operators.
Franchised cable systems compete with private cable systems for the right
to service condominiums, apartment complexes and other multiple unit residential
developments. The operators of these private systems, known as satellite master
antenna television systems, often enter into exclusive agreements with apartment
building owners or "homeowners" associations that preclude franchised cable
television operators from serving residents of such private complexes. However,
the 1984 Cable Act gives franchised cable operators the right to use existing
compatible easements within their franchise areas on nondiscriminatory terms and
conditions. Accordingly, where there are preexisting compatible easements, cable
operators may not be unfairly denied access or discriminated against with
respect to access to the premises served by those easements. Conflicting
judicial decisions have been issued interpreting the scope of the access right
granted by the 1984 Cable Act, particularly with respect to easements located
entirely on private property.
The 1996 Telecom Act may exempt some of our competitors from regulation as
cable systems. The 1996 Telecom Act amends the definition of a "cable system"
such that providers of competitive video programming are only regulated and
franchised as "cable systems" if they use public rights-of-way. Thus, a broader
class of entities providing video programming, including operators of satellite
master antenna television systems, may be exempt from regulation as cable
television systems under the 1996 Telecom Act. This exemption may give these
entities a competitive advantage over us.
Direct broadcast television systems use digital video compression
technology to increase the channel capacity of their systems. Direct broadcast
satellite television system programming is currently available to individual
households, condominiums and apartment and office complexes through
conventional, medium and high-power satellites. High-power direct broadcast
satellite television system service is currently being provided by DIRECTV,
Inc., and EchoStar
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Communications Corporation, and medium-power service is being provided by
PrimeStar, Inc. DIRECTV recently acquired PrimeStar's medium-power direct
broadcast satellite business and United States Satellite Broadcasting. These and
other recently announced transactions have resulted in DIRECTV and EchoStar
obtaining additional high-power channel capacity of direct broadcast satellite
television systems through the acquisition of other direct broadcast satellite
television system facilities and channel capacity. DIRECTV and EchoStar have
thereby significantly increased the number of channels on which they can provide
programming to customers. Direct broadcast satellite television systems have
some advantages over cable systems that were not rebuilt, such as greater
channel capacity and digital picture quality. In addition, legislation has
recently been enacted which permits direct broadcast satellite television
systems to deliver television stations in their local markets. The disadvantages
of direct broadcast satellite television systems currently include expensive
up-front customer equipment and installation costs and a lack of local
programming and service.
Several telephone companies are introducing digital subscriber line
technology, which allows Internet access over traditional phone lines at data
transmission speeds greater than those available by modem. Although these
transmission speeds are not as great as the transmission speeds of a cable
modem, we believe that the transmission speeds of digital subscriber line
technology are sufficiently high that such technology will compete with cable
modem technology. The FCC is currently considering its authority to promulgate
rules to facilitate the deployment of these services and regulate areas
including high-speed data and interactive Internet services. We cannot predict
the outcome of any FCC proceedings, or the impact of that outcome on the success
of our Internet access services or on our operations.
Cable operators also compete with wireless program distribution services
such as analog and digital multichannel, multipoint distribution service, which
use microwave frequencies to transmit video programming over-the-air to
customers. There are operators of multipoint multichannel distribution systems
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 that can
be used to provide video services similar to multipoint multichannel
distribution systems. The FCC held spectrum auctions for local multipoint
distribution service licenses in 1998 and 1999.
As we expand our offerings to include local telephone services, we will be
subject to competition from existing providers, including both local exchange
telephone companies and long-distance carriers. The telecommunications industry
is highly competitive and many telephone service providers may have greater
financial resources than we have, or have established relationships with
regulatory authorities. We cannot predict the extent to which the presence of
these competitors will influence customer penetration in our local telephone
service areas.
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.
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The most competitive alternatives to the incumbent cable operator are
operators of direct broadcast satellite systems, operators of multipoint
distribution systems and direct wireline overbuilders.
o Direct broadcast satellite television systems have more channels and
better picture and sound quality over cable operators who have not rebuilt
their systems nor added digital. However, direct broadcast satellite
television systems have a limited ability to offer locally produced
programming, and do not have a significant local presence in the
community. In addition, direct broadcast satellite television systems are
more expensive than cable, especially if it is desired to be on more than
one TV in the household. Finally, direct broadcast satellite television
systems do 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 telecommunication.
o Multipoint multichannel distribution systems offers a lower cost
alternative to direct broadcasting satellite television systems, but
serious transmission limitations caused by the need to have line of sight
access to customers have hampered its growth. Multipoint multichannel
distribution systems are 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 telecommunication. Hybrid platforms, using the telephone
for upstream, have 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 December 31, 1999, we employed 1,346 full-time employees and 71
part-time employees. In addition to our current employees, we also receive
assistance and management expertise for our systems from the employees of our
manager. We consider our relations with our employees to be good. Other than 21
employees, none of our employees is subject to a collective bargaining
obligation. 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
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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.
We own and lease parcels of real property for signal reception sites which
house our antenna towers and headends, microwave complexes and business offices
which includes our principal executive offices. In addition, we own our cable
systems' distribution networks, various office fixtures, test equipment and
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
Certain of the Insight Indiana and Insight Kentucky systems were named in
class actions in which the plaintiffs generally alleged that late fees charged
by the systems were not reasonably related to the costs incurred by the cable
systems as a result of the late payment. Plaintiffs sought compensation from the
systems for late fees charged in past periods. These actions were settled in
March 2000 pursuant to a settlement agreement entered into with the defendants
and their attorneys.
Various local franchising authorities in the Kentucky systems filed basic
service rate orders requiring us to cease collecting state and local property
taxes from customers. We have announced that certain of our Kentucky systems
will grant a one-time credit to customers as a result of settlement agreements
with local franchising authorities. However, the Telecommunications Board of
Northern Kentucky has commenced administrative proceedings relating to such rate
order which we are vigorously defending. There can be no assurance that we will
enter into a similar settlement agreement in Northern Kentucky. As part of the
settlements, AT&T Broadband has agreed to reimburse the Kentucky systems for
rate refunds payable to customers in those communities subject to rate orders.
Insight Kentucky and certain prior owners of the Kentucky systems,
including affiliates of AT&T Broadband, have been named in class actions
generally alleging that the Kentucky systems have improperly passed through
state and local property tax charges to customers. The plaintiffs in these
actions seek monetary damages and the enjoinment of the collection of such
taxes. Such class actions are (i) Alfred P. Sykes, Jr., Charles Pearl, Linda
Pearl vs. InterMedia Partners of Kentucky, L.P. and TCI TKR of Jefferson County,
Inc., which was filed on March 26, 1999 in Jefferson County
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Circuit Court and consolidated with James F. Dooley vs. TCI TKR of Jefferson
County and InterMedia Partners of Kentucky, L.P., which was filed on March 24,
1999 in Jefferson County Circuit Court, and (ii) Charles Shaw and Loretta Shaw
vs. TCI TKR of Northern Kentucky, Inc. TCI TKR of Southern Kentucky, Inc., TCI
Cablevision of North Central Kentucky, Inc., TCI Cablevision of Kentucky, Inc.
and InterMedia Partners of Kentucky, L.P., which was filed on June 4, 1999 in
the Franklin County Circuit Court. The classes have been certified in these
actions and we are defending these actions vigorously. Plaintiff's counsel filed
an additional class action lawsuit in Boone County Circuit Court entitled R.
Stafford Johnson v. Insight Kentucky Partners II, L.P., TCI/TKR of Northern
Kentucky, Inc. et. al. on October 27, 1999, making the same allegations as the
other filed actions. This lawsuit was dismissed on January 21, 2000, due to the
existence of Franklin County case which was held to be a superior action with
identical issues. We believe that the Kentucky systems have substantial and
meritorious defenses to these claims, especially claims by customers that reside
in the communities that have entered into settlement agreements with the
Kentucky systems, as described above. We have filed motions to dismiss both the
Jefferson County and Franklin County actions. The Franklin County court has
denied such motion, and the denial order is currently under reconsideration. The
Jefferson County Court has yet to issue an order with respect to such motion to
dismiss. On April 30, 1999, InterMedia Capital Partners VI, L.P. submitted a
request for indemnity to affiliates of AT&T Broadband for certain losses arising
out of these matters pursuant to the contribution agreement dated October 30,
1997 under which these systems were contributed to InterMedia Capital Partners
VI, L.P.
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 us and our manager. The following is a summary of federal laws
and regulations materially affecting the growth and operation of the cable
television industry and a description of certain state and local laws. We
believe that the regulation of the cable television industry remains a matter of
interest to Congress, the FCC and other regulatory authorities. There can be no
assurance as to what, if any, future actions such legislative and regulatory
authorities may take or the effect thereof on us and our manager.
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
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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 direct broadcast satellite television systems.
Satisfaction of this test deregulates all rates.
For cable systems not subject to effective competition, the 1992 Cable Act
required the FCC to adopt a formula for franchising authorities to assure that
basic cable rates are reasonable; allowed the FCC to review rates for cable
programming service tiers, other than per-channel or per-program services, in
response to complaints filed by franchising authorities and/or cable customers;
prohibited cable television systems from requiring basic customers to purchase
service tiers above basic service in order to purchase premium services if the
system is technically capable of compliance; required the FCC to adopt
regulations to establish, on the basis of actual costs, the price for
installation of cable service, remote controls, converter boxes and additional
outlets; and allowed the FCC to impose restrictions on the retiering and
rearrangement of cable services under certain limited circumstances. The 1996
Telecom Act limited the class of complainants regarding cable programming
service tier rates to franchising authorities only, after first receiving two
rate complaints from local customers, and ended FCC regulation of cable
programming service tier rates on March 31, 1999. The 1996 Telecom Act also
relaxes existing uniform rate requirements by specifying that such requirements
do not apply where the operator faces effective competition, and by exempting
bulk discounts to multiple dwelling units, although complaints about predatory
pricing may be lodged with the FCC.
The FCC's implementing regulations contain standards for the regulation of
basic service rates. Local franchising authorities 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, converter boxes and remote control devices,
for example, and installation services be unbundled from the provision of cable
service and based upon actual costs plus a reasonable profit. The regulations
also provide that future rate increases may not exceed an inflation-indexed
amount, plus increases in certain costs beyond the cable operator's control,
such as taxes, franchise fees and increased programming costs. Cost-based
adjustments to these capped rates can also be made in the event a cable
television operator adds or deletes channels. There is also a streamlined
cost-of-service methodology available to justify a rate increase on the basic
tier for "significant" system 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." A "small system" is defined as a cable television
system which has, on a headend basis, 15,000 or fewer basic customers. A "small
cable company" is defined as an entity serving a total of 400,000 or fewer basic
customers that is not affiliated with a larger cable television company, that is
to say that a larger cable television company does not own more than a 20
percent equity share or exercise de jure control. This small system rate-setting
methodology almost always results in rates which exceed those produced by the
cost-of-service rules applicable to larger cable television operators.
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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. Our manager was a "small cable
company" prior to the October 30, 1998 completion of the AT&T Broadband joint
venture relating to our Indiana systems, but it no longer enjoys this status
and, as a result, we are no longer entitled to this benefit. However, as noted
above, the systems with less than 15,000 customers owned by us prior to the
completion of the AT&T Broadband transaction remain eligible for "small system"
rate regulation.
Finally, there are regulations which require cable television systems to
permit customers to purchase video programming on a per channel or a per program
basis without the necessity of subscribing to any tier of service, other than
the basic service tier, unless the cable television system is technically
incapable of doing so. Generally, this exemption from compliance with the
statute for cable television systems that do not have such technical capability
is available until a cable television system obtains the capability, but not
later 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, that is to say that the system is located in the station's area of
dominant influence, to elect every three years whether to require the cable
television system to carry the station, subject to certain exceptions, or
whether the cable television system will have to negotiate for "retransmission
consent" to carry the station. The next election between must-carry and
retransmission consent will be October 1, 2002. A cable television system is
generally required to devote up to one-third of its activated channel capacity
for the carriage of local commercial television stations whether pursuant to
mandatory carriage requirements or the retransmission consent requirements of
the 1992 Cable Act. Local non-commercial television stations are also given
mandatory carriage rights, subject to certain exceptions, within the larger of:
(a) a 50 mile radius from the station's city of license; or (b) the station's
Grade B contour, a measure of signal strength. Unlike commercial stations,
noncommercial stations are not given the option to negotiate retransmission
consent for the carriage of their signal. In addition, cable television systems
have to obtain retransmission consent for the carriage of all "distant"
commercial broadcast stations, except for certain "superstations," which are
commercial satellite-delivered independent stations such as WGN. To date,
compliance with the "retransmission consent" and "must carry" provisions of the
1992 Cable Act has not had a material effect on us, although this result may
change in the future depending on such factors as market conditions, channel
capacity and similar matters when such arrangements are renegotiated. The FCC
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.
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Deletion of Certain Programming
Cable television systems that have 1,000 or more customers must, upon the
appropriate request of a local television station, delete the simultaneous or
nonsimultaneous network programming of a distant station when such programming
has also been contracted for by the local station on an exclusive basis. FCC
regulations also enable television stations that have obtained exclusive
distribution rights for syndicated programming in their market to require a
cable television system to delete or "black out" such programming from other
television stations which are carried by the cable television system.
Franchise Fees
Although franchising authorities may impose franchise fees under the 1984
Cable Act, such payments cannot exceed 5% of a cable television system's annual
gross revenues. Under the 1996 Telecom Act, franchising authorities may not
exact franchise fees from revenues derived from telecommunications services,
although they may be able to exact some additional compensation for the use of
public rights-of-way. Franchising authorities are also empowered, in awarding
new franchises or renewing existing franchises, to require cable television
operators to provide cable-related facilities and equipment and to enforce
compliance with voluntary commitments. In the case of franchises in effect prior
to the effective date of the 1984 Cable Act, franchising authorities may enforce
requirements contained in the franchise relating to facilities, equipment and
services, whether or not cable-related. The 1984 Cable Act, under certain
limited circumstances, permits a cable operator to obtain modifications of
franchise obligations.
Renewal of Franchises
The 1984 Cable Act and the 1992 Cable Act establish renewal procedures and
criteria designed to protect incumbent franchisees against arbitrary denials of
renewal and to provide specific grounds for franchising authorities to consider
in making renewal decisions, including a franchisee's performance under the
franchise and community needs. Even after the formal renewal procedures are
invoked, franchising authorities and cable television operators remain free to
negotiate a renewal outside the formal process. Nevertheless, renewal is by no
means assured, as the franchisee must meet certain statutory standards. Even if
a franchise is renewed, a franchising authority may impose new and more onerous
requirements such as 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.
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
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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 providing video programming directly to customers within their local
exchange telephone service areas. Consequently, the 1996 Telecom Act permits
telephone companies to compete directly with operations of cable television
systems. Under the 1996 Telecom Act and FCC rules adopted to implement the 1996
Telecom Act, local exchange carriers may provide video service as broadcasters,
common carriers, or cable operators. In addition, local exchange carriers and
others may also provide video service through "open video systems," a regulatory
regime that may give them more flexibility than traditional cable television
systems. Open video system operators, including local exchange carriers, can,
however, be required to obtain a local cable franchise, and they can be required
to make payments to local governmental bodies in lieu of cable franchise fees.
In general, open video system operators must make their systems available to
programming providers on rates, terms and conditions that are reasonable and
nondiscriminatory. Where carriage demand by programming providers exceeds the
channel capacity of an open video system, two-thirds of the channels must be
made available to programmers unaffiliated with the open video system operator.
The 1996 Telecom Act generally prohibits local exchange carriers from
purchasing any ownership interest in a cable television system exceeding 10%
located within the local exchange carriers telephone service area, prohibits
cable operators from purchasing local exchange carriers whose service areas are
located within the cable operator's franchise area, and prohibits joint ventures
between operators of cable television systems and local exchange carriers
operating in overlapping markets. There are some statutory exceptions, including
a rural exemption that permits buyouts in which the purchased cable television
system or local exchange carrier serves a non-urban area with fewer than 35,000
inhabitants, and exemptions for the purchase of small cable television systems
located in non-urban areas. Also, the FCC may grant waivers of the buyout
provisions in certain circumstances.
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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.
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 serve more than 30% of all multi-channel video
programming distributors nationwide. Attributable interests for these purposes
include voting interests of 5% or more, non-voting interests of 33% or more of
the total assets (debt plus equity), officerships, directorships and general
partnership interests. The FCC has stayed the effectiveness of its 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 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
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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 video
programming. The FCC also has adopted additional standards applicable to cable
television systems using frequencies in the 108 to 137 MHz and 225 to 400 MHz
bands in order to prevent harmful interference with aeronautical navigation and
safety radio services and has also established limits on cable television system
signal leakage. Periodic testing by cable television operators for compliance
with the technical standards and signal leakage limits is required and an annual
filing of the results of these measurements is required. The 1992 Cable Act
requires the FCC to periodically update its technical standards to take into
account changes in technology. Under the 1996 Telecom Act, local franchising
authorities may not prohibit, condition or restrict a cable television system's
use of any type of customer equipment or transmission technology.
The FCC has adopted regulations to implement the requirements of the 1992
Cable Act designed to improve the compatibility of cable television systems and
consumer electronics equipment. These regulations, among other things, generally
prohibit cable television operators from scrambling their basic service tier.
The 1996 Telecom Act directs the FCC to set only minimal standards to assure
compatibility between television sets, VCRs and cable television systems, and to
rely on the marketplace. Pursuant to the 1992 Cable Act, the FCC has adopted
rules to assure the competitive availability to consumers of customer premises
equipment, such as converters, used to access the services offered by cable
television systems and other multichannel video programming distributors.
Pursuant to those rules, consumers are given the right to attach compatible
equipment to the facilities of their multichannel video programming distributors
so long as the equipment does not harm the network, does not interfere with the
services purchased by other customers and is not used to receive unauthorized
services. As of July 1, 2000, multichannel video programming distributors, other
than operators of direct broadcast satellite television systems, 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 multichannel video
programming distributors with set-top units purchased or leased from retail
outlets. As of January 1, 2005, multichannel video
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programming distributors will be prohibited from distributing new set-top
equipment integrating both security and non-security functions to their
customers.
Pursuant to the 1992 Cable Act, the FCC has adopted rules implementing an
emergency alert system. The rules require all cable television systems to
provide an audio and video emergency alert system message on at least one
programmed channel and a video interruption and an audio alert message on all
programmed channels. The audio alert message is required to state which channel
is carrying the full audio and video emergency alert system message. The FCC
rules permit cable television systems either to provide a separate means of
alerting persons with hearing disabilities of emergency alert system messages,
such as a terminal that displays emergency alert system messages and activates
other alerting mechanisms or lights, or to provide audio and video emergency
alert system messages on all channels. Cable television systems with 10,000 or
more basic customers per headend were required to install emergency alert system
equipment capable of providing audio and video emergency alert system 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 emergency alert system message on all programmed
channels or installing emergency alert system equipment capable of providing
audio alert messages on all programmed channels, a video interrupt on all
channels, and an audio and video emergency alert system message on one
programmed channel. This must be accomplished by October 1, 2002.
Inside Wiring; Customer Access
In a 1997 order, the FCC established rules that require an incumbent cable
operator upon expiration of a multiple dwelling unit service contract to sell,
abandon, or remove "home run" wiring that was installed by the cable operator in
a multiple dwelling unit building. These inside wiring rules are expected to
assist building owners in their attempts to replace existing cable operators
with new programming providers who are willing to pay the building owner a
higher fee, where such a fee is permissible. Additionally, the FCC has proposed
to restrict exclusive contracts between building owners and cable operators or
other multichannel video programming distributors. The FCC has also 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 multiple dwelling units, such
as on roofs. This new order may limit the extent to which multiple dwelling unit
owners may enforce certain aspects of multiple dwelling unit agreements which
otherwise would prohibit, for example, placement of direct broadcast satellite
television systems television receiving antennae in multiple dwelling unit
areas, such as apartment balconies or patios, under the exclusive occupancy of a
renter.
Pole Attachments
The FCC currently regulates the rates and conditions imposed by certain
public utilities for use of their poles unless state public service commissions
are able to demonstrate that they adequately regulate the rates, terms and
conditions of cable television pole attachments. A number of states and the
District of Columbia have certified to the FCC that they adequately regulate the
rates, terms and conditions for pole attachments. Illinois and Kentucky, states
in which we operate, have made such a certification. In the absence of state
regulation, the FCC administers such pole
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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, generally known as ASCAP, and BMI,
Inc., the two major performing rights organizations in the
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United States. Both the American Society of Composers and Publishers and BMI
offer "through to the viewer" licenses to the cable networks which cover the
retransmission of the cable networks' programming by cable television systems to
their customers.
Licenses to perform copyrighted music by cable television systems
themselves, including on local origination channels, in advertisements inserted
locally on cable television networks, and in cross-promotional announcements,
must be obtained by the cable television operator from the American Society of
Composers and Publishers, BMI and/or SESAC, Inc.
State and Local Regulation
Cable television systems generally are operated pursuant to nonexclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. The terms and conditions of franchises vary materially
from jurisdiction to jurisdiction, and even from city to city within the same
state, historically ranging from reasonable to highly restrictive or burdensome.
Franchises generally contain provisions governing fees to be paid to the
franchising authority, length of the franchise term, renewal, sale or transfer
of the franchise, territory of the franchise, design and technical performance
of the system, use and occupancy of public streets and number and types of cable
television services provided. The terms and conditions of each franchise and the
laws and regulations under which it was granted directly affect the
profitability of the cable television system. The 1984 Cable Act places certain
limitations on a franchising authority's ability to control the operation of a
cable television system. The 1992 Cable Act prohibits exclusive franchises, and
allows franchising authorities to exercise greater control over the operation of
franchised cable television systems, especially in the area of customer service
and rate regulation. The 1992 Cable Act also allows franchising authorities to
operate their own multichannel video distribution system without having to
obtain a franchise and permits states or local franchising authorities to adopt
certain restrictions on the ownership of cable television systems. Moreover,
franchising authorities are immunized from monetary damage awards arising from
regulation of cable television systems or decisions made on franchise grants,
renewals, transfers and amendments. The 1996 Telecom Act prohibits a franchising
authority from either requiring or limiting a cable television operator's
provision of telecommunications services.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable television systems, and a number of states
have adopted legislation subjecting cable television systems to the jurisdiction
of centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. To date, none of the states in
which we currently operate has enacted state level regulation.
The foregoing describes all material present and proposed federal, state
and local regulations and legislation relating to the cable television industry.
Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements, currently are the subject
of a variety of judicial proceedings, legislative hearings and administrative
and legislative proposals which could change, in varying degrees, the manner in
which cable television systems operate. Neither the outcome of these proceedings
nor their impact upon the cable television industry or us can be predicted at
this time.
Internet Access Service
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We offer a service which enables consumers to access the Internet at high
speeds via high capacity broadband transmission facilities and cable modems. We
compete with many other providers of Internet access services which are known as
Internet service providers. Internet service providers 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 Internet service providers 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
Internet service providers. 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 Internet service providers that it condition its approval of
the merger of AT&T and TCI, now known as AT&T Broadband, LLC, on a requirement
that those companies allow access by Internet service providers to their
broadband facilities. Several local jurisdictions also are reviewing this issue.
Recently, a U.S. District Court in Oregon upheld a requirement, imposed by a
local franchising authority in the context of a franchise transfer, that the
cable operator, if it chooses to provide Internet service, must provide open
access to its system for other Internet service providers. That decision has
been appealed. In the wake of this opinion, several other communities have begun
to consider whether to impose a similar requirement.
There are currently few laws or regulations which specifically regulate
communications or commerce over the Internet. Section 230 of the Communications
Act, added to that act by the 1996 Telecom Act, declares it to be the policy of
the United States to promote the continued development of the Internet and other
interactive computer services and interactive media, and to preserve the vibrant
and competitive free market that presently exists for the Internet and other
interactive computer services, unfettered by federal or state regulation. One
area in which Congress did attempt to regulate content over the Internet
involved the dissemination of obscene or indecent materials. The provisions of
the 1996 Telecom Act generally referred to as the Communications Decency Act
were found to be unconstitutional 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
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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
Insight Communications Company, L.P. is the sole general partner of
Insight Midwest. Insight Communications is the sole general partner of Insight
Communications Company, L.P. The following table sets forth certain information,
with respect to the executive officers of Insight Capital and Insight
Communications. Insight Communications, through Insight Communications Company,
L.P., serves as manager of Insight Midwest. See "Prospectus Summary - Ownership
Structure." The table also includes the members of the Advisory Committee of
Insight Midwest.
The executive officers of Insight Capital and our manager and members of
the Advisory Committee of Insight Midwest are:
Name Age Position
- ---- --- --------
Sidney R. Knafel.............69 Chairman of the Board of Insight Capital
and Insight Communications and
Chairman of the Advisory Committee
Michael S. Willner...........48 President and Chief Executive Officer of
Insight Capital and Insight
Communications and Member of the
Advisory Committee
Kim D. Kelly.................43 Executive Vice President, Chief
Operating and Financial Officer and
Secretary of Insight Capital and Insight
Communications and Member of the
Advisory Committee
William R. Fitzgerald........43 Member of the Advisory Committee
Derek Chang..................32 Member of the Advisory Committee
Key employees of our manager who provide assistance and management
expertise to our systems include:
Name Age Position
- ---- --- --------
Elliot Brecher ..............34 Senior Vice President and General
Counsel
E. Scott Cooley..............40 Senior Vice President, Insight
Communications of Indiana
Charles E. Dietz.............53 Senior Vice President of Engineering
Lori Urias Gehris............40 Vice President of Training
William Gilbert..............49 Vice President of Advertising Sales
Elizabeth M. Grier...........39 Vice President of Administration
Pamela Euler Halling.........53 Senior Vice President of Marketing and
Programming
Charles King.................53 Regional Director
Daniel Mannino...............41 Senior Vice President and Controller
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Susane Newell.................39 Vice President of Programming
Judy Poole....................53 Senior Vice President of Human
Resources
Colleen Quinn.................47 Senior Vice President of Corporate
Relations
Mary Rhodes...................50 Vice President of Customer Service
Administration
Steven E. Sklar...............36 Senior Vice President of Finance and
Business Development
James A. Stewart..............48 Senior Vice President of Operations
Heather Wright................32 Vice President of Strategic Marketing
Sidney R. Knafel, a director of Insight Communications, has been Chairman
of the Board of Insight Communications since 1985. He was the founder, Chairman
and an equity holder of Vision Cable Communications, Inc. from 1971 until its
sale in 1981. Mr. Knafel is presently the managing partner of SRK Management
Company, a private investment company, and also serves as Chairman of
BioReliance Corporation, a biological testing company. He is a director of NTL
Incorporated, CoreComm Limited, General American Investors Company, Inc., IGENE
Biotechnology, Inc. and Source Media, Inc., as well as several private
companies. Mr. Knafel is a graduate of Harvard College and Harvard Business
School.
Michael S. Willner, a director of Insight Communications, co-founded and
has served as President and Chief Executive Officer of Insight Communications
since 1985. Previously, Mr. Willner served as Executive Vice President and Chief
Operating Officer of Vision Cable from 1979 through 1985, Vice President of
Marketing for Vision Cable from 1977 to 1979 and General Manager of Vision
Cable's Bergen County, New Jersey cable television system from 1975 to 1977.
Currently, Mr. Willner is a director of NTL Incorporated. He is also a director
of Source Media, Inc. He serves on the board of C-SPAN and the National Cable
Television Association where he is a member of the Executive Committee and
serves as Treasurer. Mr. Willner is a graduate of Boston University's College of
Communication and serves on the school's Executive Committee.
Kim D. Kelly, a director of Insight Communications, has been Executive
Vice President and Chief Financial Officer of Insight Communications since 1990.
Ms. Kelly has also been Chief Operating Officer of Insight Communications 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 National Cable
Television Association Subcommittee for Telecommunications Policy, as well as
the National Cable Television Association Subcommittees for Accounting. She also
serves as a director of Bank of New York Hamilton Funds and Source Media, Inc.
and serves on the boards of Community Antenna Television Association, Cable in
the Classroom and Cable Advertising Bureau. Ms. Kelly is a graduate of George
Washington University.
William R. Fitzgerald has served as the Executive Vice President and Chief
Operating Officer of AT&T Broadband since November 1998. Prior to this
appointment and the merger of Tele-Communications, Inc. with AT&T Corp. in 1999,
Mr. Fitzgerald served as Executive Vice President of Corporate Development and
Partnership Relations and Senior Vice President of Corporate Development from
1996 to 1999 at TCI Communications. Prior to that, Mr. Fitzgerald
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was Senior Vice President and a partner at Daniels & Associates, a leading
brokerage and investment banking firm to the communications industry, from 1988
to 1996. Mr. Fitzgerald is a graduate of the Indiana University School of
Business and the Kellogg School of Business at Northwestern University.
Derek Chang has served as Executive Vice President of Corporate
Development and Partnership Relations for AT&T Broadband since 1999. Prior to
this appointment and the merger of Tele-Communications, Inc. with AT&T Corp. in
1999, Mr. Chang was Assistant to Leo J. Hindery, Jr., the President and Chief
Executive Officer of Tele-Communications. Prior to joining TCI Communications in
1997, Mr. Chang served as Treasurer of InterMedia Partners, L.P. from 1994 to
1997. He is a member of the National Association of Minorities in
Communications. Mr. Chang is a graduate of Yale University and Stanford
University's Graduate School of Business.
Elliot Brecher has served as the Senior Vice President and General Counsel
of Insight Communications since January 2000. He is of counsel to the law firm
Cooperman Levitt Winikoff Lester & Newman, P.C., which has served as Insight
Communications' legal counsel for over the past 15 years. He joined that firm in
February 1994 and served as a partner from January 1996 until joining Insight
Communications. Prior to that, he was an associate of the law firm Rosenman &
Colin from October 1988. Mr. Brecher received his law degree from Fordham
University.
E. Scott Cooley joined Insight Communications in 1998 as Senior Vice
President of Operations with responsibility for Insight Communications' Indiana
systems. Formerly, Mr. Cooley was an employee of TCI Communications 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 TCI Communications' southern Indiana, Illinois and Missouri systems
serving 260,000 customers. In 1997, he received TCI Communications' Manager of
the Year award. Mr. Cooley serves as a member of the Indiana Cable Television
Association and its subcommittee for public relations.
Charles E. Dietz joined Insight Communications as Senior Vice President,
Engineering in 1996. From 1973 to 1995, Mr. Dietz was employed by Vision Cable
Communications serving as Vice President of Technical Operations from 1988
through 1991, becoming Vice President of Operations in 1991.
Lori Urias Gehris joined Insight Communications as the National Training
Director in 1991 and has since become Vice President of Training. Her previous
experience includes three years as Regional Training Manager for Comcast Cable
and from 1981 to 1985 she was employed as an Account Executive and Telemarketing
Trainer for Mountain Bell.
William Gilbert has served 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 Communications, 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.
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Elizabeth M. Grier joined Insight Communications in 1989 and became Vice
President of Administration in May of 1994. Previously, Ms. Grier served as
Legal Affairs Manager. Prior to joining Insight Communications, Ms. Grier was
employed by Microband Wireless Cable Company.
Pamela E. Halling joined Insight Communications as Vice President,
Marketing in 1988 and has since become Senior Vice President of Marketing and
Programming. Prior to joining Insight Communications, she had served since 1985
as 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. She began her cable television career in 1973
with Continental Cablevision.
Charles F. King has been Regional Director of Insight Kentucky since 1999.
He was the Regional Director of Intermedia's Western Kentucky Region, which
services approximately 260,000 customers, from 1987 to 1999. Prior to that, Mr.
King was Director of Operations of Rollins Communications from 1985 to 1987 and
Vice President and General Manager of Summit Communications from 1981 to 1985.
Mr. King is a member of the Board of Directors of the Kentucky Cable Television
Association and a member of the Society of Cable Television Engineers.
Daniel Mannino joined Insight Communications as Controller in 1989 and
became Vice President and Controller in 1991 and Senior Vice President in 1999.
Previously, Mr. Mannino was employed by Vision Cable from 1983 to 1989, becoming
its Controller in 1986. Mr. Mannino is a certified public accountant.
Susane Newell has served as Vice President of Programming for Insight
Communications since 1998. Prior to joining Insight Communications, 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.
Judy Poole joined Insight Communications in 1998 as Vice President of
Human Resources and became Senior Vice President of Human Resources in 1999.
Prior to joining Insight Communications, Ms. Poole spent 13 years at Cablevision
Systems, most recently as Corporate Director of Employee Relations.
Colleen Quinn joined Insight Communications as Senior Vice President of
Corporate Relations in 1999. Prior to joining Insight Communications, Ms. Quinn
was the Senior Vice President, Government Affairs, of the New York City
Partnership and Chamber of Commerce from 1997 to April 1999. She has also held
positions at MacAndrews & Forbes Holdings, Inc. and the Revlon Foundation as
Vice President from 1996 to 1997 and at Pacific Telesis Group as Executive
Director and Director of Government Relations from 1993 to 1996.
Mary Rhodes joined Insight Communications 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.
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Steven E. Sklar joined Insight Communications 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 Vice President-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 Communications in 1987 as a Vice
President, and now serves as Senior Vice President of Operations with
responsibility for Insight Communications' 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.
Heather Wright joined Insight Communications in 1997 as the Director of
Strategic Marketing and became Vice President of Strategic Marketing in 1999.
Prior to joining Insight Communications, Ms. Wright was employed by The Walt
Disney Company from 1993 to 1997, most recently as National Account Manager for
The Disney Channel.
Except as described in this prospectus, there are no arrangements or
understandings between any Member of the Advisory Committee or executive officer
and any other person pursuant to which that person was elected or appointed to
his or her position.
Advisory Committee
The Partnership Agreement of Insight Midwest provides for a five member
Advisory Committee. Insight Communications, through Insight Communications
Company, L.P., is entitled to designate three of the members of the Advisory
Committee. The remaining members are designated by AT&T Broadband, through TCI
of Indiana Holdings. Insight Communications' designees are Sidney R. Knafel,
Michael S. Willner and Kim D. Kelly. AT&T Broadband's designees are William
Fitzgerald and Derek Chang. The Advisory Committee serves in an advisory
capacity only. Insight Communications Company, L.P. is the general partner of
Insight Midwest and has the exclusive authority to manage the business,
operations and affairs of Insight Midwest, subject to certain approval rights of
AT&T Broadband. See "Description of Governing Documents-Partnership Agreement"
for a description of the Partnership Agreement.
Executive and Advisory Committee Compensation
None of the executive officers of Insight Capital are compensated for
their services as such officers. Rather, executive management personnel of
Insight Capital will receive compensation from Insight Communications. None of
the members of the Advisory Committee of Insight Midwest are compensated for
their services as such members, but are entitled to reimbursement for travel
expenses.
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CERTAIN TRANSACTIONS
On November 17, 1999, our manager formed a joint venture with Source
Media, Inc., to conduct all lines of business of Source Media relating to its
VirtualModem and Interactive Channel products and businesses. Our manager
capitalized the joint venture with $13.0 million in exchange for its 50% equity
interest. As part of the transaction, our manager's subsidiary acquired 842,105
shares of Source Media's common stock for $12.0 million and warrants to purchase
up to an additional 4,596,786 shares at an exercise price of $20 per share.
Our manager is entitled to designate three members of the board of
directors of Source Media. Our manager's designees are Sidney R. Knafel,
Chairman of the Board and a director of our manager, Michael S. Willner, the
President, Chief Executive Officer and a director of our manager, and Kim D.
Kelly, Executive Vice President, Chief Operating and Financial Officer and a
director of our manager.
Our manager is currently providing the joint venture's interactive
services to customers of its systems under a letter of intent entered into on
July 29, 1998. Pursuant to the letter of intent, we pay Interactive Channel 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 share
50% of all revenues, other than advertising revenues, generated by LocalSource.
On March 3, 2000, our manager and Source Media sold all of the joint
venture's Virtual Modem business to Liberate Technologies in exchange for the
issuance to each of our manager's subsidiary and Source Media of 886,000 shares
of Liberate common stock. The joint venure continues to own and operate its
programming assets, LocalSource and SourceGuide, and has entered into preferred
content and programming services agreements with Liberate.
Our manager, Insight Communications Company, L.P., receives a management
fee for each twelve-month period equal to 3% of substantially all revenue
arising out of or in connection with the operations of the Indiana and Kentucky
systems. Our manager owns 50% of the partnership interests of Insight Midwest
and Insight Midwest owns 100% of the common stock of Insight Capital. In
addition, Sidney Knafel, Michael Willner and Kim Kelly, who are each executive
officers of our manager, are members of and collectively constitute a majority
of Insight Midwest's advisory committee.
Under a distribution agreement with Excite@Home, Insight Kentucky provides
high-speed Internet access to customers over its distribution network in certain
of its cable television systems. In January 1999, Insight Kentucky and certain
of its affiliates entered into related agreements with Excite@Home for the
issuance to Insight Kentucky of warrants to purchase shares of Excite@Home's
Series A Common Stock ("Excite@Home Stock") at an exercise price of $5.25 per
share, as adjusted for a two-for-one stock split which occurred on June 17,
1999. Under the provisions of the agreements, Insight Kentucky estimates that it
may purchase up to 459,200 shares of Excite@Home Stock. The warrants become
vested and exercisable, subject to certain forfeiture and other conditions,
based on operational targets which include offering the Excite@Home service by
Insight Kentucky in its service areas and obtaining specified numbers of
Excite@Home customers over the remaining six-year term of the Excite@Home
distribution agreement.
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PRINCIPAL STOCKHOLDERS
Insight Capital is a wholly-owned subsidiary of Insight Midwest.
The following table sets forth information with respect to the beneficial
ownership of Insight Midwest's partnership interests:
Percent of
Partnership
Name and Address of Beneficial Owner Type of Interest Interests
------------------------------------ ---------------- ---------
Insight Communications Company, L.P. (1) ................................................ General Partner 50%
TCI of Indiana Holdings, LLC (2) ........................................................ Limited Partner 50%
(1) Insight Communications Company, L.P. is a wholly-owned subsidiary of
Insight Communications, a corporation whose Class A common stock is quoted
on The Nasdaq National Market. The management of Insight Communications,
which includes Sidney R. Knafel, Michael S. Willner and Kim D. Kelly,
through their ownership of Insight Communications' Class B common stock,
have approximately 41% of Insight Communications' voting power.
(2) TCI of Indiana Holdings is an indirect wholly-owned subsidiary of AT&T, a
publicly held company.
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DESCRIPTION OF GOVERNING DOCUMENTS
Partnership Agreement
Organization and Duration
Insight Midwest was formed as a Delaware limited partnership in order to
consolidate the Indiana systems and the Kentucky systems under one holding
company. Unless sooner terminated in accordance with the terms of the
Partnership Agreement, Insight Midwest will continue until October 2011.
General Partner and Limited Partner
Insight Communications Company, L.P. is the general partner of Insight
Midwest, and TCI of Indiana Holdings, a subsidiary of AT&T Broadband LLC, is the
limited partner. Other than with respect to certain partnership matters that
require the approval of AT&T Broadband LLC, Insight Communications, through
Insight Communications Company, L.P., has the exclusive authority to manage the
business, operations and affairs of Insight Midwest and the exclusive right to
exercise all rights incident to the ownership of all partnership or corporate
interests held by Insight Midwest, including the Indiana systems and the
Kentucky systems, subject to certain approval rights of AT&T Broadband LLC.
Insight Communications, through Insight Communications Company, L.P., manages
the Indiana Systems and the Kentucky Systems controlled by Insight Midwest
pursuant to separate Management Agreements between Insight Communications
Company, L.P. and each of Insight Indiana and Insight Kentucky.
Advisory Committee
The Partnership Agreement provides for an Advisory Committee consisting of
five individual representatives of the partners, three of whom are appointed by
Insight Communications, through Insight Communications Company, L.P., and two of
whom are appointed by AT&T Broadband LLC, through TCI of Indiana Holdings.
Insight Communications has appointed Sidney Knafel, Michael Willner and Kim
Kelly as its initial representatives; and AT&T Broadband LLC has appointed
William Fitzgerald and Derek Chang as its initial representatives.
The Advisory Committee serves in an advisory capacity only. Insight
Communications Company, L.P. is the general partner of Insight Midwest and has
the exclusive authority to manage the business, operations and affairs of
Insight Midwest, subject to certain approval rights of AT&T Broadband LLC.
Approval Rights of AT&T Broadband LLC
The Partnership Agreement prohibits Insight Communications Company, L.P.
and Insight Communications from causing Insight Midwest or its subsidiaries from
taking certain actions without the approval of AT&T Broadband LLC. The following
is a summary of certain material actions or events that require AT&T Broadband
LLC's approval:
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o selling or disposing of assets that would result in the allocation
of income or gain to AT&T Broadband pursuant to Internal Revenue
Code Section 704(c) with certain permitted exceptions;
o incurring any indebtedness or consummating any asset acquisition,
such that immediately after the incurrence of such indebtedness or
consummation of such asset acquisition, Insight Midwest's Operating
Cash Flow Ratio would exceed 7.0 to 1.0;
o entering into any agreement evidencing indebtedness or any amendment
to an agreement governing indebtedness that includes any borrower
other than Insight Midwest or its subsidiaries or that provides that
Insight Midwest may be deemed in default thereunder as a result of a
default by Insight Communications Company, L.P. or its affiliates;
o entering into any amendment to, or refinancing of, any indebtedness
that would affect any keepwell or guarantee issued by AT&T
Broadband;
o consummating one or more asset dispositions in any consecutive
twelve-month period having an aggregate value in excess of $25.0
million with certain permitted exceptions;
o engaging in any merger, consolidation, recapitalization or other
reorganization, with certain permitted exceptions;
o entering into any transaction with Insight Communications Company,
L.P. or AT&T Broadband or their affiliates, with certain permitted
exceptions;
o selecting a new general partner of Insight Midwest;
o liquidating or dissolving except in accordance with the provisions
of the Partnership Agreement;
o issuing or redeeming any partnership interest or convertible
interest, with certain permitted exceptions;
o admitting any additional partners;
o converting Insight Midwest to corporate form or changing the
partnership tax classification of Insight Midwest;
o commencing any bankruptcy or insolvency proceedings;
o commencing, instituting or settling any lawsuit on behalf of Insight
Midwest for any amount in excess of $3,000,000;
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o engaging in new lines of business not described in the Partnership
Agreement or acquiring cable television systems other than in
Kentucky and specific parts of Indiana;
o calling for additional capital contributions;
o making any distribution to the partners other than distributions
permitted pursuant to the Partnership Agreement;
o amending Insight Midwest's Management Incentive Plan or either of
the Management Agreements with Insight Communications;
o entering into, conducting or participating in the business of
providing or engaging in any Internet backbone service;
o changing Insight Midwest's public accountants; or
o transferring, issuing or redeeming any subsidiary equity interest.
Capital Contributions and Distributions
Other than the contribution of the Indiana and Kentucky systems formerly
owned by affiliates of Insight Communications and AT&T Broadband, which
contribution occurred in October 1999, neither partner will be required to make
any capital contributions to Insight Midwest.
All distributions by Insight Midwest will be made in proportion to the
partners' percentage interests. Distributions prior to the liquidation of
Insight Midwest must be approved by AT&T Broadband and Insight Communications
Company, L.P., except that Insight Midwest will be required to make quarterly
distributions of cash, subject to contractual restrictions on distributions by
Insight Midwest, to Insight Communications Company, L.P. to the extent of the
estimated tax liabilities of Insight Communications Company, L.P. as a result of
the allocation to Insight Communications Company, L.P. of Insight Midwest's
income and gain and pro rata distributions to AT&T Broadband.
Partner Liquidity-Buy/Sell Rights
At any time after October 2004, other than at certain times specified in
the Partnership Agreement, either AT&T Broadband LLC or Insight Communications
Company, L.P. (the "Initiating Partner") will have the right to commence the
buy/sell process described below by delivering a notice to the other partner
(the "Non-Initiating Partner"). The Initiating Partner will be required to
specify its estimate of the fair market value of Insight Midwest's assets and
the resulting amount that would be distributed to the partners if Insight
Midwest were liquidated in accordance with the Partnership Agreement following a
sale of the assets at the specified value, subject to certain assumptions (the
"Offer Price"). The Non-Initiating Partner will have the right to postpone the
buy/sell process one time only for a period of six months, subject to certain
restrictions in the Partnership Agreement.
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If AT&T Broadband is the Non-Initiating Partner, AT&T Broadband will have
the right to purchase Insight Communications Company, L.P.'s partnership
interest at the Offer Price or to elect to sell AT&T Broadband's interest to
Insight Communications Company, L.P. at the Offer Price or exit the partnership
pursuant to an alternative tax-advantaged structure. If AT&T Broadband elects to
exit the partnership by negotiating an alternative structure, the parties will
be required to negotiate in good faith and use commercially reasonable efforts
for a period not to exceed sixty days to agree on an alternative structure. If
an alternative structure cannot be agreed upon, AT&T Broadband will have the
right to sell its partnership interest to Insight Communications Company, L.P.
at the Offer Price or to terminate the buy/sell process, subject in the latter
case to Insight Communications Company, L.P.'s right to require AT&T Broadband
to purchase Insight Communications Company, L.P.'s partnership interest at the
Offer Price.
If Insight Communications Company, L.P. is the Non-Initiating Partner,
Insight Communications Company, L.P. will have the right to sell its interest to
AT&T Broadband at the Offer Price, or to purchase AT&T Broadband's interest at
the Offer Price. If Insight Communications Company, L.P. elects to purchase AT&T
Broadband's interest, AT&T Broadband will have the right to sell its partnership
interest to Insight Communications Company, L.P. at the Offer Price, or to exit
the partnership by negotiating an alternative tax-advantaged structure. If AT&T
Broadband elects to exit the partnership by negotiating an alternative
structure, the parties will be required to negotiate in good faith and use
commercially reasonable efforts for a period not to exceed sixty days to agree
on an alternative structure. If an alternative structure cannot be agreed upon,
AT&T Broadband will have the right to require Insight Communications Company,
L.P. to purchase its partnership interest at the Offer Price or to terminate the
buy/sell process, subject in the latter case to Insight Communications Company,
L.P.'s right to require AT&T Broadband to purchase Insight Communications
Company, L.P.'s partnership interest at the Offer Price.
If either of Insight Communications Company, L.P. or AT&T Broadband
becomes obligated to purchase the partnership interest of the other partner
pursuant to the terms of the Partnership Agreement but defaults in its
obligation, then the non-defaulting Partner will have the right either to
purchase the partnership interest of the defaulting Partner for a cash price
equal to 95% of the Offer Price, to cause the partnership to be liquidated or
dissolved in accordance with the liquidation provisions of the Partnership
Agreement, or to terminate the buy/sell process and continue the partnership.
Limitations on the Activities of Insight Midwest
The Partnership Agreement prohibits Insight Midwest and its subsidiaries
from engaging in any business involving the provision of multipoint distribution
systems, multichannel multipoint distribution systems, direct-to-home satellite
systems or Internet backbone services without the consent of both partners.
Admission of Additional Partners and Amendments
Insight Midwest may issue additional equity interests in Insight Midwest,
and admit new persons as additional partners of Insight Midwest, only with the
approval of Insight Communications Company, L.P. and AT&T Broadband. The
Partnership Agreement may be
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amended only with the approval of Insight Communications Company, L.P. and AT&T
Broadband.
Removal of Insight Communications Company, L.P. as General Partner
Under certain limited circumstances specified in the Partnership Agreement
where Insight Communications Company, L.P.'s conduct has resulted in material
harm to Insight Midwest or AT&T Broadband, AT&T Broadband will have the right to
replace Insight Communications Company, L.P. as general partner or purchase all
of Insight Communications Company, L.P.'s partnership interest in Insight
Midwest at fair market value and, upon consummation of such purchase, remove
Insight Communications Company, L.P. as a partner.
Withdrawal of Partners and Assignment of Partnership Interests
Without AT&T Broadband's consent, the Partnership Agreement prohibits
Insight Communications Company, L.P. from withdrawing as general partner of
Insight Midwest. Subject to certain permitted exceptions, the Partnership
Agreement also prohibits Insight Communications Company, L.P. from assigning its
partnership interest without the approval of AT&T Broadband and will prohibit
AT&T Broadband from assigning its partnership interest without the approval of
Insight Communications Company, L.P.
Dissolution and Liquidation
The principal events upon which Insight Midwest will dissolve are:
o the withdrawal of Insight Communications Company, L.P. as general
partner unless AT&T Broadband continues the partnership;
o the expiration of the term of Insight Midwest;
o an election to liquidate or dissolve the partnership made by a
non-defaulting partner pursuant to the terms of the buy/sell
provisions of the Partnership Agreement, see "-Partner
Liquidity-Buy/Sell Rights;"
o the sale or disposition of all or substantially all the assets of
Insight Midwest; or
o the agreement of Insight Communications Company, L.P. and AT&T
Broadband LLC.
Management Agreements
Insight Communications, through Insight Communications Company, L.P.,
manages the Indiana and Kentucky systems pursuant to separate Management
Agreements with each of Insight Indiana and Insight Kentucky. Insight
Communications Company, L.P. has full and exclusive authority to manage the day
to day operations and conduct the business of the Indiana and Kentucky systems.
Insight Indiana and Insight Kentucky remain responsible for all expenses and
liabilities relating to the construction, development, operation, maintenance,
repair and ownership of the systems.
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Management Fee
As compensation to Insight Communications Company, L.P. for the
performance of its services, Insight Indiana and Insight Kentucky will each pay
to Insight Communications Company, L.P. a management fee for each twelve-month
period equal to 3% of all revenue arising out of or in connection with the
operation of the business of the Indiana and Kentucky systems, excluding
proceeds from the sale of assets or from extraordinary or non-recurring items
and all interest, dividend and royalties and other types of investment income
that do not arise from the operation of the business of the Indiana and Kentucky
systems in the ordinary course. Insight Communications Company, L.P. will also
be entitled to the reimbursement of all expenses necessarily incurred in its
capacity as manager.
Termination
The Management Agreements with respect to Insight Indiana or Insight
Kentucky will terminate automatically upon the termination of the applicable
entity, and will also be terminable as follows:
o with respect to the Indiana systems Management Agreement, by either
Insight Indiana or Insight Communications Company, L.P. upon a sale
or distribution of all the assets of Insight Indiana;
o with respect to the Kentucky systems Management Agreement, by either
Insight Kentucky or Insight Communications Company, L.P. upon a sale
or distribution of all the assets of Insight Kentucky;
o with respect to either of the Management Agreements, upon the
removal of Insight Communications Company, L.P. as general partner
of Insight Midwest pursuant to the terms of the Partnership
Agreement, other than in connection with the transfer by Insight
Communications Company, L.P. of its partnership interest to an
affiliate;
o with respect to the Indiana systems Management Agreement, by either
Insight Indiana or Insight Communications Company, L.P. should the
other party breach any agreement or covenant contained in the
Management Agreement and that breach continues for a period of
ninety days; and
o with respect to the Kentucky systems Management Agreement, by either
Insight Kentucky or Insight Communications Company, L.P. should the
other party breach any agreement or covenant contained in the
Management Agreement and that breach continues for a period of
ninety days.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
Financings of Insight Indiana and Insight Kentucky are currently effected
through stand-alone credit facilities, each having a separate lending group. The
credit facilities of Insight Indiana and Insight Kentucky are non-recourse to us
and none of the 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.
Indiana Credit Facility
On October 31, 1998, Insight Indiana entered into a senior 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 company 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 any amounts payable by Insight Indiana to us.
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, in the case of alternate base loans ranging in increments
from 0.75% when such ratio equals or exceeds 6.0:1.0 and zero when such ratio is
less than 5.0:1.0, and, in the case of Eurodollar loans, ranging in increments
from 2.0% when such ratio equals or exceeds 6.0:1.0 and 0.75% when such 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, enter into mergers, incur additional
indebtedness, pay dividends or other distributions, create liens on assets, make
investments, and engage in transactions with related parties. In addition, the
Insight Indiana credit facility requires compliance with certain 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 Communications and TCI and for general corporate
activities. As of December 31, 1999, there was approximately $470 million
outstanding under the Insight Indiana credit facility.
The Insight Indiana credit facility has been amended to permit the
distribution to us of amounts equal to the interest then due and owing on the
notes, assuming that the maturity of the notes has not been accelerated and,
before and after giving effect to such payment, no default exists under the
facility.
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Kentucky Credit Facility
Effective October 1, 1999, Insight Kentucky amended its senior credit
facility with a group of banks and other financial institutions led by Toronto
Dominion (Texas), Inc. The Kentucky credit facility, as amended, provides for
two term loans of $100.0 million and $250.0 million and for revolving credit
loans of up to $325.0 million. Loans under the Kentucky credit facility may be
used to refinance debt, finance acquisitions, capital expenditures and for
working capital and general corporate purposes as permitted by the agreement.
The term loans will mature in September and December 2007 and the revolving
credit loans will mature in October 2006, with quarterly reductions in the
amount of outstanding revolving credit loans and commitments commencing in June
2001. Obligations under the Kentucky credit facility are guaranteed by Insight
Kentucky and Insight Kentucky Partners II, L.P. and are secured by all of the
partnership interests of Insight Kentucky and its subsidiaries and any
intercompany notes made in favor of Insight Kentucky and its subsidiaries.
Revolving loans under the Kentucky credit facility bear interest, at Insight
Kentucky's option, at an alternate base or Eurodollar rate, plus an additional
margin tied to Insight Kentucky's ratio of total debt to annualized cash flow,
in the case of alternate base revolving loans ranging from 1.0% when such ratio
exceeds 6.0:1.0 and zero when such ratio is less than or equal to 4.5:1.0, and,
in the case of Eurodollar revolving loans, ranging from 2.0% when such ratio
exceeds 6.0:1.0 and 0.75% when such ratio is less than or equal to 4.0:1.0. The
term loans under the Kentucky credit facility also bear interest, at Insight
Kentucky's option, at an alternate base or Eurodollar rate, plus an additional
margin tied to Insight Kentucky's. ratio of total debt to annualized cash flow.
The Kentucky credit facility contains a number of covenants that, among
other things, restrict the ability of Insight Kentucky to make capital
expenditures, acquire or dispose of assets, enter into mergers, incur additional
indebtedness, pay dividends or other distributions, create liens on assets, make
investments, and engage in transactions with related parties. The Kentucky
credit facility permits the distribution to us of amounts equal to the interest
then due and owing on the notes, assuming that the maturity of the notes has not
been accelerated and, before and after giving effect to such payment, no default
exists under the facility. In addition, the Kentucky credit facility requires
compliance with certain financial ratios, requiring Insight Kentucky to enter
into interest rate protection agreements covering at least 50%, subject to
increase to 60% under certain circumstances, of its total indebtedness and also
contains customary events of default. To date, the proceeds of term and
revolving credit borrowings under the Insight Kentucky credit facility have been
used primarily to repay indebtedness secured by or relating to the cable system
assets transferred to Insight Kentucky by Insight Communications and AT&T
Broadband and for general corporate activities. As of December 31, 1999, there
was approximately $562 million outstanding under the $675.0 million Kentucky
credit facility.
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DESCRIPTION OF NOTES
The initial notes were issued and the exchange notes will be issued under
an indenture among us and Harris Trust Company of New York, as trustee. The
terms of the notes include those stated in the indenture and those made part of
the indenture by reference to the Trust Indenture Act.
The form and terms of the exchange notes are the same in all material
respects as the form and terms of the initial notes, except that the exchange
notes will have been registered under the Securities Act and therefore will not
bear legends restricting their transfer. The initial notes have not been
registered under the Securities Act and are subject to transfer restrictions.
The following description is a summary of the material provisions of the
indenture. It does not restate the indenture in its entirety. We urge you to
read the indenture because it, and not this description, define your rights as
holders of these notes. Copies of the indenture are available as set forth below
under "-Additional Information." Certain defined terms used in this description
but not defined below under "-Certain Definitions" have the meanings assigned to
them in the indenture.
The registered holder of a note will be treated as the owner of it for all
purposes. Only registered holders will have rights under the indenture.
Brief Description of the Notes
The Notes
The notes:
o are our general unsecured obligations;
o are senior in right of payment to any of our existing and future
subordinated Indebtedness;
o are equal in right of payment to all of our existing and future
unsubordinated, unsecured Indebtedness; and
o are effectively subordinated in right of payment to all of our
future secured Indebtedness to the extent of the value of the assets
securing such Indebtedness.
Substantially all of our operations are conducted through Insight
Midwest's Subsidiaries and, therefore, we are dependent upon the cash flow of
Insight Midwest's Subsidiaries to meet our obligations, including our
obligations under the notes. Any right of ours to receive assets of any of
Insight Midwest's Subsidiaries will be effectively subordinated to the claims of
that Subsidiary's creditors, including trade creditors. As of December 31, 1999,
the aggregate amount of Indebtedness and other obligations of our Subsidiaries,
including Capital Lease Obligations, trade payables and borrowings under the
Amended Kentucky Credit Facility and the Amended Indiana Credit Facility, that
would effectively rank senior in right of payment to our obligations under the
notes was approximately $1.1 billion. Both the Amended Kentucky Credit Facility
and the Amended Indiana Credit Facility permit the payment of dividends to us to
permit us to pay interest
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on the notes in the absence of a default under such credit facilities. See "Risk
Factors-We have substantial debt and have significant interest payment
requirements" and "Risk Factors-The notes are obligations of a holding company
which has no operations and depends on its subsidiaries for cash."
All of our subsidiaries are "Restricted Subsidiaries." However, under the
circumstances described below under the subheading "-Certain
Covenants-Designation of Restricted and Unrestricted Subsidiaries," we will be
permitted to designate certain of our subsidiaries as "Unrestricted
Subsidiaries." Our Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants in the indenture.
Principal, Maturity and Interest
The indenture provides for the issuance by us of notes with a maximum
aggregate principal amount outstanding at any time of $400.0 million. The
initial notes have an aggregate principal amount of $200.0 million. We may issue
additional notes (the "Additional Notes") from time to time after this offering.
Any offering of Additional Notes is subject to the covenant described below
under the caption "-Certain Covenants-Incurrence of Indebtedness and Issuance of
Preferred Stock." The notes and any Additional Notes subsequently issued under
the indenture would be treated as a single class for all purposes under the
indenture, including, without limitation, waivers, amendments, redemptions and
offers to purchase. We will issue notes in denominations of $1,000 and integral
multiples of $1,000. The notes will mature on October 1, 2009.
Interest on the notes will accrue at the rate of 9 3/4% per annum and will
be payable semi-annually in arrears on April 1 and October 1, commencing on
April 1, 2000. We will make each interest payment to the holders of record on
the immediately preceding March 15 and September 15.
Interest on the notes will accrue from the date of original issuance or,
if interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
Methods of Receiving Payments on the Notes
If a holder has given wire transfer instructions to us, we will pay all
principal, interest and premium and Liquidated Damages, if any, on that holder's
notes in accordance with those instructions. All other payments on notes will be
made at the office or agency of the paying agent and registrar for the notes
within the City and State of New York unless we elect to make interest payments
by check mailed to the holders at their addresses set forth in the register of
holders.
Paying Agent and Registrar for the Notes
The trustee will initially act as paying agent and registrar. We may
change the paying agent or registrar without prior notice to the holders, and we
or any of our Subsidiaries may act as paying agent or registrar.
Transfer and Exchange
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A holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and we may require a
holder to pay any taxes and fees required by law or permitted by the indenture.
We are not required to transfer or exchange any note selected for redemption.
Also, we are not required to transfer or exchange any note for a period of 15
days before a selection of notes to be redeemed.
Optional Redemption
At any time prior to October 1, 2002, we may on any one or more occasions
redeem up to 35% of the aggregate principal amount of notes issued under the
indenture at a redemption price of 109.75% of the principal amount of the notes
redeemed, plus accrued and unpaid interest and Liquidated Damages, if any, to
the redemption date, with the net cash proceeds of one or more Equity Offerings;
provided that:
o at least 65% of the notes issued under the indenture remains
outstanding immediately after the occurrence of any such redemption,
excluding notes held by us and our Subsidiaries; and
o the redemption occurs within 90 days of the date of the closing of
any such Equity Offering.
Except pursuant to the preceding paragraph, the notes will not be
redeemable at our option prior to October 1, 2004.
On or after October 1, 2004, we may redeem all or a part of the notes upon
not less than 30 nor more than 60 days' notice, at the redemption prices,
expressed as percentages of principal amount, set forth below plus accrued and
unpaid interest and Liquidated Damages, if any, thereon, to the applicable
redemption date, if redeemed during the twelve-month period beginning on October
1, of the years indicated below:
Year Percentage
- ---- ----------
2004............................................................ 104.875%
2005............................................................ 103.250%
2006............................................................ 101.625%
2007 and thereafter............................................. 100.000%
Mandatory Redemption
We are not required to make mandatory redemption or sinking fund payments
with respect to the notes.
Repurchase at the Option of Holders
Change of Control
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If a Change of Control occurs, each holder of notes will have the right to
require us to repurchase all or any part (equal to $1,000 or an integral
multiple of $1,000) of that holder's notes pursuant to a Change of Control Offer
on the terms set forth in the indenture. In the Change of Control Offer, we will
offer a Change of Control Payment in cash equal to 101% of the aggregate
principal amount of notes repurchased plus accrued and unpaid interest and
Liquidated Damages, if any, on the notes repurchased, to the date of purchase.
Within 30 days following any Change of Control, we will mail a notice to the
trustee and each holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase notes on the Change
of Control Payment Date specified in the notice, which date shall be no earlier
than 30 days and no later than 60 days from the date such notice is mailed,
pursuant to the procedures required by the indenture and described in such
notice. We will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent those
laws and regulations are applicable in connection with the repurchase of the
notes as a result of a Change of Control. To the extent that the provisions of
any securities laws or regulations conflict with the Change of Control
provisions of the indenture, we will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations under
the Change of Control provisions of the indenture by virtue of such conflict.
On the Change of Control Payment Date, we will, to the extent lawful:
o accept for payment all notes or portions of notes properly tendered
pursuant to the Change of Control Offer;
o deposit with the paying agent an amount equal to the Change of
Control Payment in respect of all notes or portions of notes
properly tendered; and
o deliver or cause to be delivered to the trustee the notes so
accepted together with an Officers' Certificate stating the
aggregate principal amount of notes or portions of notes being
purchased by us.
The paying agent will promptly mail to each holder of notes properly
tendered the Change of Control Payment for such notes, and we will execute and
issue and the trustee will promptly authenticate and mail, or cause to be
transferred by book entry, to each holder a new note equal in principal amount
to any unpurchased portion of the notes surrendered, if any; provided that each
such new note will be in a principal amount of $1,000 or an integral multiple of
$1,000.
The provisions described above that require us to make a Change of Control
Offer following a Change of Control will be applicable regardless of whether any
other provisions of the indenture are applicable. Except as described above with
respect to a Change of Control, the indenture does not contain provisions that
permit the holders of the notes to require that we repurchase or redeem the
notes in the event of a takeover, recapitalization or similar transaction.
We will not be required to make a Change of Control Offer upon a Change of
Control if a third party makes the Change of Control Offer in the manner, at the
times and otherwise in compliance with the requirements set forth in the
indenture applicable to a Change of Control Offer made by us and purchases all
notes or portions of notes properly tendered and not withdrawn under such Change
of Control Offer.
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The definition of Change of Control includes a phrase relating to the
direct or indirect sale, lease, transfer, conveyance or other disposition of
"all or substantially all" of the properties or assets of us and our
Subsidiaries taken as a whole. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of notes to require us to repurchase such notes as a result of a sale,
lease, transfer, conveyance or other disposition of less than all of the assets
of us and our Subsidiaries taken as a whole to another Person or group may be
uncertain.
The Amended Kentucky Credit Facility and the Amended Indiana Credit
Facility currently limit Insight Midwest's Subsidiaries' ability to pay
dividends or make other distributions to us, and prohibit such payments in the
case of a default or event of default thereunder. A Change of Control may
constitute a default under the Amended Kentucky Credit Facility and the Amended
Indiana Credit Facility. In the event a Change of Control occurs, Insight
Midwest could seek the consent of its Subsidiaries' lenders to provide
sufficient funds to us for the purchase of the notes or could attempt to
refinance the borrowings that contain such restrictions. If Insight Midwest does
not obtain such consent or repay such borrowings, we will likely not have the
financial resources to purchase the notes and such Subsidiaries would be
prohibited from paying dividends to us for the purpose of such purchase. In any
event, there can be no assurance that Insight Midwest's Subsidiaries will have
the resources available to make any such dividend or distribution. In addition,
any future credit agreements or other agreements relating to Indebtedness to
which we become a party may prohibit or otherwise limit us from purchasing any
notes prior to their maturity, and may also provide that certain change of
control events with respect to us would constitute a default thereunder. In the
event a Change of Control occurs at a time when we are prohibited from
purchasing notes, we could seek the consent of their lenders to the purchase of
notes or could attempt to refinance the borrowings that contain such
prohibition. If we do not obtain such a consent or repay such borrowings, we
will remain prohibited from purchasing notes. In such case, our failure to
purchase tendered notes would constitute an Event of Default under the
Indenture. See "Risk Factors-Change of Control."
Asset Sales
We will not, and will not permit any of our Restricted Subsidiaries to,
consummate an Asset Sale unless:
(1) we, or the Restricted Subsidiary, as the case may be, receive
consideration at the time of such Asset Sale at least equal to the
fair market value of the assets or Equity Interests issued or sold
or otherwise disposed of;
(2) such fair market value is determined by our Boards of Directors and
evidenced by a resolution of the Boards of Directors set forth in an
Officers' Certificate delivered to the trustee; and
(3) at least 75% of the consideration received in such Asset Sale by us
or such Restricted Subsidiary is in the form of cash or Cash
Equivalents. For purposes of this provision, each of the following
shall be deemed to be cash:
o any Indebtedness or other liabilities, as shown on our or such
Restricted Subsidiary's most recent balance sheet, of us or
any Restricted Subsidiary,
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other than contingent liabilities and Indebtedness that is by
its terms subordinated to the notes, that are assumed by the
transferee of any such assets pursuant to an agreement that
releases us or such Restricted Subsidiary from further
liability; and
o any securities, notes or other obligations received by us or
any such Restricted Subsidiary from such transferee that are
converted within 45 days of the applicable Asset Sale by us or
such Restricted Subsidiary into cash, to the extent of the
cash received in that conversion.
Notwithstanding the foregoing, we and our Restricted Subsidiaries may
engage in Asset Swaps; provided that, (1) immediately after giving effect to
such Asset Swap, we would be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Debt to Cash Flow Ratio test set forth in the first
paragraph of the covenant described below under the caption "-Certain
Covenants-Incurrence of Indebtedness and Issuance of Preferred Stock" and (2)
our or the Restricted Subsidiary's Boards of Directors, as the case may be,
determines that such Asset Swap is fair to us or such Restricted Subsidiary, as
the case may be, from a financial point of view and such determination is
evidenced by a resolution of such Boards of Directors set forth in an Officers'
Certificate delivered to the Trustee.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
we may apply those Net Proceeds at our option:
(1) to a permanent repayment or reduction of Indebtedness, other than
subordinated Indebtedness, of us or a Restricted Subsidiary and, if
the Indebtedness repaid is revolving credit Indebtedness, to
correspondingly reduce commitments with respect thereto;
(2) to acquire all or substantially all of the assets of a Permitted
Business;
(3) to acquire Voting Stock of a Permitted Business from a Person that
is not a Subsidiary of us; provided, that (a) after giving effect
thereto, we and our Restricted Subsidiaries collectively own a
majority of such Voting Stock and (b) such acquisition is otherwise
made in accordance with the indenture, including, without
limitation, the "Restricted Payments" covenant;
(4) to make capital expenditures; or
(5) to acquire other long-term tangible assets that are used or useful
in a Permitted Business.
Pending the final application of any Net Proceeds, we may temporarily
reduce revolving credit borrowings or otherwise invest the Net Proceeds in any
manner that is not prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $20.0 million, we will make an Asset
Sale Offer to all holders of notes and all
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holders of other Indebtedness that is pari passu with the notes containing
provisions similar to those set forth in the indenture relating to the notes
with respect to offers to purchase or redeem with the proceeds of sales of
assets to purchase the maximum principal amount of notes and such other pari
passu Indebtedness that may be purchased out of the Excess Proceeds. The offer
price in any Asset Sale Offer will be equal to 100% of principal amount plus
accrued and unpaid interest and Liquidated Damages, if any, to the date of
purchase, and will be payable in cash. If any Excess Proceeds remain after
consummation of an Asset Sale Offer, we may use such Excess Proceeds for any
purpose not otherwise prohibited by the indenture. If the aggregate principal
amount of notes and such other pari passu Indebtedness tendered into such Asset
Sale Offer exceeds the amount of Excess Proceeds, the trustee will select the
notes and such other pari passu Indebtedness to be purchased on a pro rata basis
based on the principal amount of notes and such other pari passu Indebtedness
tendered. Upon completion of each Asset Sale Offer, the amount of Excess
Proceeds will be reset at zero.
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with each repurchase of notes
pursuant to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the Asset Sales provisions of the
indenture, we will comply with the applicable securities laws and regulations
and will not be deemed to have breached its obligations under the Asset Sale
provisions of the indenture by virtue of such conflict.
Selection and Notice
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as follows:
(1) if the notes are listed on any national securities exchange, in
compliance with the requirements of the principal national
securities exchange on which the notes are listed; or
(2) if the notes are not listed on any national securities exchange, on
a pro rata basis, by lot or by such method as the trustee shall deem
fair and appropriate.
No notes of $1,000 or less will be redeemed in part. Notices of redemption
will be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each holder of notes to be redeemed at its registered
address. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount of that note
that is to be redeemed. A new note in principal amount equal to the unredeemed
portion of the original note will be issued in the name of the holder thereof
upon cancellation of the original note. Notes called for redemption become due
on the date fixed for redemption. On and after the redemption date, interest
ceases to accrue on notes or portions of them called for redemption.
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Certain Covenants
Restricted Payments
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of our or any of our Restricted
Subsidiaries' Equity Interests, including, without limitation, any
payment in connection with any merger or consolidation involving us
or any of our Restricted Subsidiaries, or to the direct or indirect
holders of our or any of our Restricted Subsidiaries' Equity
Interests in their capacity as such, other than dividends or
distributions payable in our Equity Interests (other than
Disqualified Stock) or to us or one of our Restricted Subsidiaries;
(2) purchase, redeem or otherwise acquire or retire for value,
including, without limitation, in connection with any merger or
consolidation involving us, any of our Equity Interests or of any
direct or indirect parent of us;
(3) make any payment on or with respect to, or purchase, redeem, defease
or otherwise acquire or retire for value any Indebtedness that is
subordinated to the notes, except a payment of interest or principal
at the Stated Maturity thereof; or
(4) make any Restricted Investment (all such payments and other actions
set forth in this clause and clauses (1) through (3) above being
collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default has occurred and be continuing or
would occur as a consequence thereof; and
(2) we would, at the time of such Restricted Payment and after giving
pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable fiscal quarter, have been
permitted to incur at least $1.00 of additional Indebtedness, other
than Permitted Debt, pursuant to the Debt to Cash Flow Ratio test
set forth in the first paragraph of the covenant described below
under the caption "-Incurrence of Indebtedness and Issuance of
Preferred Stock;" and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments declared or made after the date of the
indenture, excluding Restricted Payments made pursuant to the
second, third and fourth clauses of the next succeeding paragraph,
shall not exceed, at the date of determination, the sum, without
duplication, of:
(a) an amount equal to our Consolidated Cash Flow from the date of
the indenture to the end of our most recently ended full
fiscal quarter for which internal financial statements are
available, taken as a single accounting period, less the
product of 1.2 times our Consolidated Interest Expense
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from the date of the indenture to the end of our most recently
ended full fiscal quarter for which internal financial
statements are available, taken as a single accounting period;
plus
(b) an amount equal to 100% of Capital Stock Sale Proceeds less
any such Capital Stock Sale Proceeds used in connection with:
o an Investment made pursuant to the clause (6) of the
definition of "Permitted Investments;" or
o an incurrence of Indebtedness pursuant to the clause (8)
of the covenant described under the caption "-Incurrence
of Indebtedness and Issuance of Preferred Stock;" plus
(c) to the extent that any Restricted Investment that was made
after the date of the indenture is sold for cash or otherwise
liquidated or repaid for cash, the lesser of: (1) the cash
return of capital with respect to such Restricted Investment,
less the cost of disposition, if any, and (2) the initial
amount of such Restricted Investment; plus
(d) to the extent that the Board of Directors designates any
Unrestricted Subsidiary that was designated as such after the
date of the Indenture as a Restricted Subsidiary, the lesser
of (1) the aggregate fair market value of all Investments
owned by us and our Restricted Subsidiaries in such Subsidiary
at the time such Subsidiary was designated as an Unrestricted
Subsidiary and (2) the then aggregate fair market value of all
Investments owned by us and our Restricted Subsidiaries in
such Unrestricted Subsidiary.
So long as no Default has occurred and is continuing or would be caused
thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment
would have complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any of our subordinated Indebtedness or of any of our
Equity Interests in exchange for, or out of the net cash proceeds of
the substantially concurrent sale (other than to one of our
Subsidiaries or an employee stock ownership plan or to a trust
established by us or any of our Subsidiaries for the benefit of its
employees) of, our Equity Interests other than Disqualified Stock;
provided that the amount of any such net cash proceeds that are
utilized for any such redemption, repurchase, retirement, defeasance
or other acquisition will be excluded from clause (3)(b) of the
preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of us or any Restricted Subsidiary with
the net cash proceeds from an incurrence of Permitted Refinancing
Indebtedness;
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(4) regardless of whether any Default then exists, the payment of any
dividend by one of our Restricted Subsidiaries to the holders of its
Equity Interests on a pro rata basis;
(5) the payment of any dividend or distribution to Insight
Communications for the repurchase, redemption or other acquisition
or retirement for value by Insight Communications of any of its
Equity Interests held by any member of its or any of its
Subsidiaries' management pursuant to any management equity
subscription agreement or stock option agreement in effect as of the
date of the indenture; provided that the aggregate price paid for
all such repurchased, redeemed, acquired or retired Equity Interests
shall not exceed $1.0 million in any twelve-month period;
(6) regardless of whether any Default then exists, the payment of any
dividend or distribution to the extent necessary to permit direct or
indirect beneficial owners of Capital Stock of Insight Midwest to
pay federal, state or local income tax liabilities that would arise
solely from income of Insight Midwest or any of its Restricted
Subsidiaries, as the case may be, for the relevant taxable period
and attributable to them solely as a result of Insight Midwest (and
any intermediate entity through which the holder owns such Capital
Stock) or any of its Restricted Subsidiaries being a limited
liability company, partnership or similar entity for federal income
tax purposes;
(7) the retirement, redemption or repurchase of our Equity Interests
pursuant to clauses (ii) or (iii) of Section 10.1(b) of the
Partnership Agreement as a result of the occurrence of a Formal
Determination (as defined in the Partnership Agreement) and which
relates to FCC or other regulatory violations described in the
Partnership Agreement; and
(8) other Restricted Payments in an aggregate amount not to exceed $25.0
million.
The amount of all Restricted Payments other than cash shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued to or by us or such Restricted Subsidiary,
as the case may be, pursuant to the Restricted Payment. The fair market value of
any assets or securities that are required to be valued by this covenant will be
determined by the Board of Directors whose resolution with respect thereto shall
be delivered to the trustee. The Board of Directors' determination must be based
upon an opinion or appraisal issued by an accounting, appraisal or investment
banking firm of national standing if the fair market value exceeds $20.0
million. Not later than the date of making any Restricted Payment, we will
deliver to the trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by this "Restricted Payments" covenant were computed, together with a
copy of any fairness opinion or appraisal required by the indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
We will not, and will not permit any of our Subsidiaries to, directly or
indirectly, create, incur, issue, assume, guarantee or otherwise become directly
or indirectly liable, contingently or otherwise, with respect to (collectively,
"incur") any Indebtedness including Acquired Debt, and
105
we will not issue any Disqualified Stock and will not permit any of our
Subsidiaries to issue any shares of preferred stock; provided, however, that we
may incur Indebtedness including Acquired Debt or issue Disqualified Stock, and
our Restricted Subsidiaries may incur Indebtedness or issue preferred stock, if
our Debt to Cash Flow Ratio at the time of incurrence of such Indebtedness or
the issuance of such Disqualified Stock or preferred stock, after giving pro
forma effect to such incurrence or issuance as of such date and to the use of
proceeds therefrom as if the same had occurred at the beginning of our most
recently ended fiscal quarter for which internal financial statements are
available, would have been no greater than 8.0 to 1.
This covenant does not prohibit the incurrence of any of the following
items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by us and our Restricted Subsidiaries of additional
Indebtedness and letters of credit under Credit Facilities in an
aggregate principal amount at any one time outstanding under this
clause (with letters of credit being deemed to have a principal
amount equal to the maximum potential liability of us and our
Restricted Subsidiaries thereunder) not to exceed $1.225 billion;
(2) the incurrence by us and our Restricted Subsidiaries of the Existing
Indebtedness;
(3) the incurrence by us of Indebtedness represented by the initial
notes and the exchange notes;
(4) the incurrence by us or any of our Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case, incurred for
the purpose of financing all or any part of the purchase price or
cost of construction or improvement of property, plant or equipment
used in our business or such Restricted Subsidiary's business, in an
aggregate principal amount, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause, not to exceed $25.0
million at any time outstanding;
(5) the incurrence by us or any of our Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net
proceeds of which are used to refund, refinance or replace
Indebtedness other than intercompany Indebtedness that was permitted
by the indenture to be incurred under the first paragraph of this
covenant or clauses (2), (3) or (4) of this paragraph;
(6) the incurrence by us or any of our Restricted Subsidiaries of
intercompany Indebtedness between or among us and any of our
Restricted Subsidiaries; provided, however, that:
(a) if Insight Midwest or Insight Capital is the obligor on such
Indebtedness, such Indebtedness must be expressly subordinated
to the prior payment in full in cash of all Obligations with
respect to the notes, and
(b) (i) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person
other than us or one of our
106
Restricted Subsidiaries and (ii) any sale or other transfer of
any such Indebtedness to a Person that is not either us or one
of our Restricted Subsidiaries will be deemed, in each case,
to constitute an incurrence of such Indebtedness by us or such
Restricted Subsidiary, as the case may be, that was not
permitted by this clause (6);
(7) the incurrence by us or any of our Subsidiaries of Hedging
Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness
that is permitted by the terms of the indenture to be outstanding;
(8) the incurrence by us or any Restricted Subsidiary of additional
Indebtedness in an aggregate principal amount at any time
outstanding not to exceed 200% of the net cash proceeds received by
Insight Midwest from the sale of its Equity Interests other than
Disqualified Stock after the date of the indenture to the extent
such net cash proceeds have not been applied to make Restricted
Payments or to effect other transactions pursuant to the covenant
described above under the caption "-Restricted Payments" or to make
Permitted Investments pursuant to clause (6) of the definition of
Permitted Investments;
(9) the guarantee by us of Indebtedness of us or one of our Restricted
Subsidiaries that was permitted to be incurred by another provision
of this covenant;
(10) the accrual of interest, the accretion or amortization of original
issue discount, the payment of interest on any Indebtedness in the
form of additional Indebtedness with the same terms, and the payment
of dividends on Disqualified Stock in the form of additional shares
of the same class of Disqualified Stock will not be deemed to be an
incurrence of Indebtedness or an issuance of Disqualified Stock for
purposes of this covenant;
(11) the incurrence by us or any of our Restricted Subsidiaries of
additional Indebtedness in an aggregate principal amount, or
accreted value, as applicable, at any time outstanding, including
all Permitted Refinancing Indebtedness incurred to refund, refinance
or replace any Indebtedness incurred pursuant to this clause, not to
exceed $50.0 million;
(12) the incurrence by us or any Restricted Subsidiary of Indebtedness
represented by notes issued to Affiliates in respect of, and amounts
equal to, advances made by such Affiliates to enable us or any
Restricted Subsidiary to make payments in connection with the notes
or the Amended Kentucky Credit Facility; and
(13) the incurrence by our Unrestricted Subsidiaries of Non-Recourse
Debt, provided, however, that if any such Indebtedness ceases to be
Non-Recourse Debt of an Unrestricted Subsidiary, that event will be
deemed to constitute an incurrence of Indebtedness by one of our
Restricted Subsidiaries that was not permitted by this clause.
107
We will not, and will not permit any of our Restricted Subsidiaries to,
incur any Indebtedness, including Permitted Debt, that is contractually
subordinated in right of payment to any other Indebtedness of us or such
Restricted Subsidiary, as applicable, unless such Indebtedness is also
contractually subordinated in right of payment to the notes on substantially
identical terms; provided, however, that no Indebtedness of us or a Restricted
Subsidiary shall be deemed to be contractually subordinated in right of payment
to any other Indebtedness of us or such Restricted Subsidiary solely by virtue
of being unsecured.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described above, or is entitled to be incurred
pursuant to the first paragraph of this covenant, we will be permitted to
classify such item of Indebtedness on the date of its incurrence or later
reclassify all or a portion of such item of Indebtedness, in any manner that
complies with this covenant. Indebtedness under Credit Facilities outstanding on
the date on which notes are first issued and authenticated under the indenture
shall be deemed to have been incurred on such date in reliance on the exception
provided by clause (1) of the definition of Permitted Debt.
Sale and Leaseback Transactions
We will not, and will not permit any of our Restricted Subsidiaries to,
enter into any sale and leaseback transaction. However, we or any Restricted
Subsidiary may enter into a sale and leaseback transaction if:
(1) we or that Restricted Subsidiary, as applicable, could have (a)
incurred Indebtedness in an amount equal to the Attributable Debt
relating to such sale and leaseback transaction under the Debt to
Cash Flow Ratio test in the first paragraph of the covenant
described above under the caption "-Incurrence of Indebtedness and
Issuance of Preferred Stock" and (b) created a Lien on such property
securing Attributable Debt pursuant to the covenant described below
under the caption "-Liens;"
(2) the net cash proceeds of that sale and leaseback transaction are at
least equal to the fair market value, as determined in good faith by
the Board of Directors and set forth in an Officers' Certificate
delivered to the trustee, of the property that is the subject of
that sale and leaseback transaction; and
(3) the transfer of assets in that sale and leaseback transaction is
permitted by, and we or that Restricted Subsidiary applies the
proceeds of such transaction in compliance with, the covenant
described above under the caption "-Repurchase at the Option of
holders-Asset Sales."
Liens
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, create, incur, assume or suffer to exist any Lien of any
kind on any asset now owned or hereafter acquired, except Permitted Liens.
108
Dividend and Other Payment Restrictions Affecting Subsidiaries
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, create or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Equity
Interests to us or any of our Restricted Subsidiaries, or with
respect to any other interest or participation in, or measured by,
its profits, or pay any indebtedness owed to us or any of our
Restricted Subsidiaries;
(2) make loans or advances or guarantee any such loans or advances to us
or any of our Restricted Subsidiaries; or
(3) transfer any of its properties or assets to us or any of our
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) Existing Indebtedness as in effect on the date of the indenture and
any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof,
provided that such amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacement or
refinancings are no more restrictive, taken as a whole, with respect
to such dividend and other payment restrictions than those contained
in such Existing Indebtedness, as in effect on the date of the
indenture;
(2) the indenture and the notes;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by us or any of our Restricted Subsidiaries as in effect at
the time of such acquisition, except to the extent such Indebtedness
or Capital Stock was incurred in connection with or in contemplation
of such acquisition, which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person,
other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the indenture to be
incurred;
(5) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(6) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions on the property so
acquired of the nature described in clause (3) of the preceding
paragraph;
109
(7) any agreement for the sale or other disposition of a Restricted
Subsidiary that restricts distributions by that Restricted
Subsidiary pending its sale or other disposition;
(8) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being
refinanced;
(9) Liens securing Indebtedness that limit the right of the debtor to
dispose of the assets subject to such Lien;
(10) provisions with respect to the disposition or distribution of assets
or property in joint venture agreements, asset sale agreements,
stock sale agreements and other similar agreements entered into in
the ordinary course of business;
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business;
(12) restrictions contained in the terms of Indebtedness permitted to be
incurred under the covenant described under the caption "-Incurrence
of Indebtedness and Issuance of Preferred Stock;" provided that such
restrictions are no more restrictive than the terms contained in the
Amended Kentucky Credit Facility and the Amended Indiana Credit
Facility; and
(13) restrictions that are not materially more restrictive than customary
provisions in comparable financings and our the management
determines that such restrictions will not materially impair our
ability to make payments as required under the notes.
Merger, Consolidation or Sale of Assets
Neither of us may directly or indirectly: (1) consolidate or merge with or
into another Person; or (2) sell, assign, transfer, convey or otherwise dispose
of all or substantially all of the properties or assets of us and our Restricted
Subsidiaries taken as a whole, in one or more related transactions, to another
Person; unless:
(1) either: (a) we shall the surviving corporation; or (b) the Person
formed by or surviving any such consolidation or merger, if other
than us, or to which such sale, assignment, transfer, conveyance or
other disposition shall have been made is a corporation, limited
liability company or limited partnership organized or existing under
the laws of the United States, any state thereof or the District of
Columbia;
(2) the Person formed by or surviving any such consolidation or merger,
if other than us, or the Person to which such sale, assignment,
transfer, conveyance or other disposition shall have been made
assumes all our obligations under the notes, the indenture and the
registration rights agreement pursuant to agreements reasonably
satisfactory to the trustee;
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(3) immediately after such transaction no Default or Event of Default
exists; and
(4) we or the Person formed by or surviving any such consolidation or
merger, if other than us, or to which such sale, assignment,
transfer, conveyance or other disposition shall have been made will,
on the date of such transaction after giving pro forma effect
thereto and any related financing transactions as if the same had
occurred at the beginning of the applicable fiscal quarter, be
permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Debt to Cash Flow Ratio test set forth in the first
paragraph of the covenant described above under the caption
"-Incurrence of Indebtedness and Issuance of Preferred Stock."
In addition, we may not, directly or indirectly, lease all or
substantially all of our properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation or Sale of
Assets" covenant will not apply to a sale, assignment, transfer, conveyance or
other disposition of assets between or among us and any of the Restricted
Subsidiaries.
Transactions with Affiliates
We will not, and will not permit any of our Restricted Subsidiaries to,
directly or indirectly, make any payment to, or sell, lease, transfer, exchange
or otherwise dispose of any of their properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction or
series of transactions, contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any of our Affiliates, officers or
directors (each, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable to
us or the relevant Restricted Subsidiary than those that would have
been obtained in a comparable transaction by us or such Restricted
Subsidiary with an unrelated Person, as determined by the Board of
Directors and evidenced by a resolution of the Board of Directors;
and
(2) we deliver to the trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in
excess of $10.0 million, a resolution of the Board of
Directors set forth in an Officers' Certificate certifying
that such Affiliate Transaction complies with this covenant
and that such Affiliate Transaction has been approved by a
majority of the disinterested members of the Board of
Directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in
excess of $20.0 million, an opinion as to the fairness to the
holders of such Affiliate Transaction from a financial point
of view issued by an accounting, appraisal or investment
banking firm of national standing; provided, however, that
this clause (b) shall not apply to any transaction between or
among Insight Midwest, Insight Communications, AT&T and their
respective Subsidiaries.
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The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreement entered into by us or any of our Restricted
Subsidiaries in the ordinary course of business and consistent with
our past practice or that of such Restricted Subsidiary;
(2) transactions between or among us or our Restricted Subsidiaries;
(3) transactions with a Person that is our Affiliate solely because we
own an Equity Interest in such Person;
(4) payment of reasonable directors fees to Persons who are not
otherwise our Affiliates;
(5) sales of Equity Interests other than Disqualified Stock to our
Affiliates;
(6) Restricted Payments that are permitted by the provisions of the
indenture described above under the caption "-Restricted Payments;"
(7) payment of management fees to Insight Communications Company, L.P.
pursuant to the Management Agreements;
(8) any transactions or arrangements entered into, or payments made,
pursuant to the terms of the Amended Kentucky Credit Facility or the
Amended Indiana Credit Facility;
(9) Permitted Investments;
(10) any transactions or arrangements in existence on the date of the
Indenture; and
(11) any arrangement with affiliates of Source Media for the distribution
of cable television services or programming.
Designation of Restricted and Unrestricted Subsidiaries
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate
fair market value of all outstanding Investments owned by us and our Restricted
Subsidiaries in the Subsidiary so designated will be deemed to be an Investment
made as of the time of such designation and will either reduce the amount
available for Restricted Payments under the first paragraph of the covenant
described above under the caption "-Restricted Payments" or reduce the amount
available for future Investments under one or more clauses of the definition of
Permitted Investments, as we shall determine. That designation will only be
permitted if such Investment would be permitted at that time and if such
Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary. The Board of Directors may redesignate any Unrestricted Subsidiary
to be a Restricted Subsidiary if the redesignation would not cause a Default.
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Reports
Whether or not required by the Commission, so long as any notes are
outstanding, we will furnish to the holders of notes, within the time periods
specified in the Commission's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms
10-Q and 10-K if we were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual information
only, a report on the annual financial statements by our certified
independent accountants; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if we were required to file such reports.
In addition, following the completion of this exchange offer, whether or
not required by the Commission, we will file a copy of all of the information
and reports referred to in clauses (1) and (2) above with the Commission for
public availability within the time periods specified in the Commission's rules
and regulations, unless the Commission will not accept such a filing, and make
such information available to securities analysts and prospective investors upon
request. In addition, we have agreed that, for so long as any notes remain
outstanding, we will furnish to the holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
If we have designated any of our Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph shall include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the financial condition and results of operations of us and our
Restricted Subsidiaries separate from the financial condition and results of
operations of our Unrestricted Subsidiaries.
Restrictions on Activities of Insight Capital
Insight Capital will not hold any material assets, become liable for any
material obligations, other than the notes, or engage in any significant
business activities; provided that Insight Capital may be a co-obligor with
respect to Indebtedness if Insight Midwest is a primary obligor of such
Indebtedness and the net proceeds of such Indebtedness are received by Insight
Midwest or one or more of Insight Midwest's Restricted Subsidiaries other than
Insight Capital.
Payments for Consent
We will not, and will not permit any of our Subsidiaries to, directly or
indirectly, pay or cause to be paid any consideration to or for the benefit of
any holder of notes for or as an inducement to any consent, waiver or amendment
of any of the terms or provisions of the Indenture or the notes unless such
consideration is offered to be paid and is paid to all holders of
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the notes that consent, waive or agree to amend in the time frame set forth in
the solicitation documents relating to such consent, waiver or agreement.
Events of Default and Remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the notes;
(2) default in payment when due of the principal of, or premium, if any,
on the notes;
(3) failure by us or any of our Restricted Subsidiaries to comply with
the provisions described under the captions "-Repurchase at the
Option of holders" or "-Certain Covenants-Merger, Consolidation or
Sale of Assets;"
(4) failure by us or any of our Restricted Subsidiaries for 30 days
after written notice thereof has been given to us by the trustee or
to us and the trustee by the holders of at least 25% of the
aggregate principal amount of the notes outstanding to comply with
any of their other covenants or agreements in the indenture;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by us or any of our Restricted
Subsidiaries, or the payment of which is guaranteed by us or any of
our Restricted Subsidiaries, whether such Indebtedness or guarantee
was created before or after the date of the indenture, if that
default:
(a) is caused by a failure to pay principal of, or interest or
premium, if any, on such Indebtedness prior to the expiration
of the grace period provided in such Indebtedness on the date
of such default (a "Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its
express maturity, and, in each case, the principal amount of
any such Indebtedness, together with the principal amount of
any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so
accelerated, aggregates $25.0 million or more;
(6) failure by us or any of our Restricted Subsidiaries to pay final
judgments which are non-appealable aggregating in excess of $25.0
million, net of applicable insurance which has not been denied in
writing by the insurer, which judgments are not paid, discharged or
stayed for a period of 60 days; and
(7) certain events of bankruptcy or insolvency described in the
indenture with respect to us or any of our Restricted Subsidiaries.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to us, any Subsidiary that is a
Significant Subsidiary or any group of Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding notes will become due
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and payable immediately without further action or notice. If any other Event of
Default occurs and is continuing, the trustee or the holders of at least 25% in
principal amount of the then outstanding notes may declare all the notes to be
due and payable immediately.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, holders of a majority
in principal amount of the then outstanding notes may direct the trustee in its
exercise of any trust or power. The trustee may withhold from holders of the
notes notice of any continuing Default or Event of Default if it determines that
withholding notice is in their interest, except a Default or Event of Default
relating to the payment of principal or interest.
The holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except (1) a continuing Default or Event of Default in the payment
of interest or Liquidated Damages on, or the principal of, the notes or (2) in
respect of a covenant or provision which under the indenture cannot be modified
or amended without the consent of the holder of each note affected by such
modification or amendment.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by us or on our behalf with the intention
of avoiding payment of the premium that we would have had to pay if we then had
elected to redeem the notes pursuant to the optional redemption provisions of
the indenture, an equivalent premium will also become and be immediately due and
payable to the extent permitted by law upon the acceleration of the notes. If an
Event of Default occurs prior to October 1, 2004, by reason of any willful
action or inaction taken or not taken by us or on our behalf with the intention
of avoiding the prohibition on redemption of the notes prior to October 1, 2004,
then the premium specified in the indenture will also become immediately due and
payable to the extent permitted by law upon the acceleration of the notes.
We are required to deliver to the trustee within 90 days after the end of
each fiscal year a statement regarding compliance with the indenture. Upon
becoming aware of any Default or Event of Default, we are required to deliver to
the trustee a statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of us, as
such, shall have any liability for any of our obligations under the notes, the
indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each holder of notes by accepting a note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the notes. The waiver may not be effective to
waive liabilities under the federal securities laws.
Legal Defeasance and Covenant Defeasance
We may, at our option and at any time, elect to have all of their
obligations discharged with respect to the outstanding notes ("Legal
Defeasance") except for:
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(1) the rights of holders of outstanding notes to receive payments in
respect of the principal of, or interest or premium and Liquidated
Damages, if any, on such notes when such payments are due from the
trust referred to below;
(2) our obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost
or stolen notes and the maintenance of an office or agency for
payment and money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee,
and our obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, we may, at our option and at any time, elect to have our
obligations released with respect to certain covenants that are described in the
indenture ("Covenant Defeasance") and thereafter any omission to comply with
those covenants shall not constitute a Default or Event of Default with respect
to the notes. In the event Covenant Defeasance occurs, certain events, not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events, described under "Events of Default" will no longer constitute an Event
of Default with respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) we must irrevocably deposit with the trustee, in trust, for the
benefit of the holders of the notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in
such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the
principal of, or interest and premium and Liquidated Damages, if
any, on the outstanding notes on the stated maturity or on the
applicable redemption date, as the case may be, and we must specify
whether the notes are being defeased to maturity or to a particular
redemption date;
(2) in the case of Legal Defeasance, we shall have delivered to the
trustee an Opinion of Counsel reasonably acceptable to the trustee
confirming that (a) we have received from, or there has been
published by, the Internal Revenue Service a ruling or (b) since the
date of the indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based
thereon such Opinion of Counsel shall confirm that, the holders of
the outstanding notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and
will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, we shall have delivered to the
trustee an Opinion of Counsel reasonably acceptable to the trustee
confirming that the holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had
not occurred;
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(4) no Default or Event of Default shall have occurred and be continuing
either: (a) on the date of such deposit, other than a Default or
Event of Default resulting from the borrowing of funds to be applied
to such deposit; or (b) or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument other than the indenture to which we or any
of our Subsidiaries is a party or by which we or any of our
Subsidiaries are bound;
(6) we must have delivered to the trustee an Opinion of Counsel to the
effect that, assuming no intervening bankruptcy of us between the
date of deposit and the 91st day following the deposit and assuming
that no holder is an "insider" of us under applicable bankruptcy
law, after the 91st day following the deposit, the trust funds will
not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors'
rights generally;
(7) we must deliver to the trustee an Officers' Certificate stating that
the deposit was not made by us with the intent of preferring the
holders of notes over our other creditors with the intent of
defeating, hindering, delaying or defrauding our creditors or
others; and
(8) we must deliver to the trustee an Officers' Certificate and an
Opinion of Counsel, each stating that all conditions precedent
relating to the Legal Defeasance or the Covenant Defeasance have
been complied with.
Amendment, Supplement and Waiver
Except as provided in the next three succeeding paragraphs, the indenture
or the notes may be amended or supplemented with the consent of the holders of
at least a majority in principal amount of the notes then outstanding,
including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, notes, and any existing default or
compliance with any provision of the indenture or the notes may be waived with
the consent of the holders of a majority in principal amount of the then
outstanding notes, including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, notes.
Without the consent of each holder affected, an amendment or waiver may
not, with respect to any notes held by a non-consenting holder:
(1) reduce the principal amount of notes whose holders must consent to
an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note or
alter the provisions with respect to the redemption of the notes,
other than provisions relating to the covenants described above
under the caption "-Repurchase at the Option of holders";
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(3) reduce the rate of or change the time for payment of interest on any
note;
(4) waive a Default or Event of Default in the payment of principal of,
or interest or premium, or Liquidated Damages, if any, on the notes,
except a rescission of acceleration of the notes by the holders of
at least a majority in aggregate principal amount of the notes and a
waiver of the payment default that resulted from such acceleration;
(5) make any note payable in money other than that stated in the notes;
(6) make any change in the provisions of the indenture relating to
waivers of past Defaults or the rights of holders of notes to
receive payments of principal of, or interest or premium or
Liquidated Damages, if any, on the notes;
(7) waive a redemption payment with respect to any note, other than a
payment required by one of the covenants described above under the
caption "-Repurchase at the Option of holders"; or
(8) make any change in the preceding amendment and waiver provisions.
Notwithstanding the preceding, without the consent of any holder of notes,
we and the trustee may amend or supplement the indenture or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of our obligations to holders of notes
in the case of a merger or consolidation or sale of all or
substantially all our assets;
(4) to make any change that would provide any additional rights or
benefits to the holders of notes or that does not adversely affect
the legal rights under the indenture of any such holder; or
(5) to comply with requirements of the Commission in order to effect or
maintain the qualification of the indenture under the Trust
Indenture Act.
Satisfaction and Discharge
The indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated, except lost, stolen or
destroyed notes that have been replaced or paid and notes for
whose payment money has theretofore been deposited in trust
and thereafter repaid to us, have been delivered to the
trustee for cancellation; or
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(b) all notes that have not been delivered to the trustee for
cancellation have become due and payable by reason of the
making of a notice of redemption or otherwise or will become
due and payable within one year and we have irrevocably
deposited or caused to be deposited with the trustee as trust
funds in trust solely for the benefit of the holders, cash in
U.S. dollars, non- callable Government Securities, or a
combination thereof, in such amounts as will be sufficient
without consideration of any reinvestment of interest, to pay
and discharge the entire indebtedness on the notes not
delivered to the trustee for cancellation for principal,
premium and Liquidated Damages, if any, and accrued interest
to the date of maturity or redemption;
(2) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit or shall occur as a result of such
deposit and such deposit will not result in a breach or violation
of, or constitute a default under, any other instrument to which
either of us is a party or by which either of us is bound;
(3) we have paid or caused to be paid all sums payable by us under the
indenture; and
(4) we have delivered irrevocable instructions to the trustee under the
indenture to apply the deposited money toward the payment of the
notes at maturity or the redemption date, as the case may be.
In addition, we must deliver an Officers' Certificate and an Opinion of
Counsel to the trustee stating that all conditions precedent to satisfaction and
discharge have been satisfied.
Concerning the Trustee
If the trustee becomes a creditor of us, the indenture limits its right to
obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise. The trustee will
be permitted to engage in other transactions; however, if it acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding
notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
shall occur and be continuing, the trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
holder of notes, unless such holder shall have offered to the trustee security
and indemnity satisfactory to it against any loss, liability or expense.
Additional Information
Anyone who receives this prospectus may obtain a copy of the indenture
without charge by writing to Insight Midwest, L.P., c/o Insight Communications
Company, Inc., 126 East 56th Street, New York, NY 10022, Attention: Ms. Colleen
Quinn.
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Certain Definitions
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such
specified Person, whether or not such Indebtedness is incurred in
connection with, or in contemplation of, such other Person merging
with or into, or becoming a Subsidiary of, such specified Person;
and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of more than 10% of
the Voting Stock of a Person shall be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" shall have correlative meanings.
"Amended Indiana Credit Facility" means that certain credit agreement,
dated as of October 31, 1998, by and among Insight Communications of Indiana,
LLC, The Bank of New York, as administrative agent, and the other lenders party
thereto, as amended by Amendment No. 1 dated as of September 24, 1999, and as
the same may hereafter be further amended, modified, supplemented or renewed in
accordance with its terms and all other loan documents, including the security
agreement, delivered pursuant thereto.
"Amended Kentucky Credit Facility" means the Amended and Restated
Revolving Credit and Term Loan Agreement dated as of October 1, 1999 among
Insight Kentucky Partners I, L.P. (f/k/a InterMedia Partners VI, L.P.), Toronto
Dominion (Texas), Inc., as administrative agent, and the other lenders party
thereto.
"Asset Acquisition" means (a) an Investment by us or any Restricted
Subsidiary in any other Person pursuant to which such Person shall become a
Restricted Subsidiary or shall be consolidated or merged with or into us or any
Restricted Subsidiary, or (b) any acquisition by us or any Restricted Subsidiary
of the assets of any Person that constitute substantially all of an operating
unit, a division or line of business of such Person or that is otherwise outside
of the ordinary course of business.
"Asset Sale" means:
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(1) the sale, lease, conveyance or other disposition of any assets or
rights, other than sales of inventory in the ordinary course of
business; provided that the sale, conveyance or other disposition of
all or substantially all of the assets of us and our Subsidiaries
taken as a whole will be governed by the provisions of the indenture
described above under the caption "-Repurchase at the Option of
holders-Change of Control" and/or the provisions described above
under the caption "-Certain Covenants-Merger, Consolidation or Sale
of Assets" and not by the provisions of the Asset Sale covenant; and
(2) the issuance of Equity Interests in any of our Restricted
Subsidiaries or the sale of Equity Interests in any of our
Subsidiaries.
Notwithstanding the preceding, the following items shall not be deemed to
be Asset Sales:
(1) any single transaction or series of related transactions that
involves assets having a fair market value, as determined by the
Board of Directors and evidenced by a resolution of the Board of
Directors, of less than $5.0 million;
(2) a transfer of assets between or among us and our Wholly Owned
Restricted Subsidiaries,
(3) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary to us or to another Wholly Owned Restricted Subsidiary;
(4) the sale or lease of equipment, inventory, accounts receivable or
other assets in the ordinary course of business;
(5) the sale or other disposition of cash or Cash Equivalents;
(6) a Restricted Payment or Permitted Investment that is permitted by
the covenant described above under the caption "-Certain
Covenants-Restricted Payments;" and
(7) the incurrence of Permitted Liens and the disposition of assets
related to such Permitted Liens by the secured party pursuant to a
foreclosure.
"Asset Swap" means an exchange of assets by us or one of our Restricted
Subsidiaries for:
(1) one or more Permitted Businesses;
(2) a controlling equity interest in any Person whose assets consist
primarily of one or more Permitted Businesses; and/or
(3) long-term assets that are used in a Permitted Business in a
like-kind exchange pursuant to Section 1031 of the Internal Revenue
Code or any similar or successor provision of the Internal Revenue
Code.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value of the obligation of the lessee
for net rental payments during the
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remaining term of the lease included in such sale and leaseback transaction
including any period for which such lease has been extended or may, at the
option of the lessor, be extended. Such present value shall be calculated using
a discount rate equal to the rate of interest implicit in such transaction,
determined in accordance with GAAP.
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person," as that term is used in Section 13(d)(3)
of the Exchange Act, such "person" shall be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire by conversion or
exercise of other securities, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition. The terms
"Beneficially Owns" and "Beneficially Owned" shall have a corresponding meaning.
"Board of Directors" means:
(1) with respect to a corporation, the board of directors of the
corporation;
(2) with respect to a partnership, the board of directors of the general
partner of the partnership;
(3) with respect to Insight Midwest at our option, the board of
directors of Insight Communications or the Advisory Committee of
Insight Midwest; and
(4) with respect to any other Person, the board or committee of such
Person serving a similar function.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents,
however designated, of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests, whether general or limited; and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or
distributions of assets of, the issuing Person.
"Capital Stock Sale Proceeds" means the aggregate net cash proceeds,
including the fair market value of the non-cash proceeds, as determined by an
independent appraisal firm, received by Insight Midwest after the date of the
indenture:
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(1) as a contribution to the common equity capital or from the issue or
sale of Equity Interests of Insight Midwest other than Disqualified
Stock; or
(2) from the issue or sale of convertible or exchangeable Disqualified
Stock or convertible or exchangeable debt securities of Insight
Midwest that have been converted into or exchanged for such Equity
Interests, other than Equity Interests or Disqualified Stock or debt
securities sold to a Subsidiary of Insight Midwest.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof,
provided that the full faith and credit of the United States is
pledged in support thereof, having maturities of not more than one
year from the date of acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities
of one year or less from the date of acquisition, bankers'
acceptances with maturities not exceeding one year and overnight
bank deposits, in each case, with any lender party to the Credit
Agreement or with any domestic commercial bank having capital and
surplus in excess of $500.0 million and a Thomson Bank Watch Rating
of "B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3)
above entered into with any financial institution meeting the
qualifications specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Rating Services and in
each case maturing within one year after the date of acquisition;
and
(6) money market funds having assets in excess of $100.0 million, at
least 90% of the assets of which constitute Cash Equivalents of the
kinds described in clauses (1) through (5) of this definition.
"Change of Control" means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or other
disposition, other than by way of merger or consolidation, in one or
a series of related transactions, of all or substantially all of the
properties or assets of us and our Restricted Subsidiaries, taken as
a whole, to any "person" (as that term is used in Section 13(d)(3)
of the Exchange Act) other than a Principal or a Permitted Holder
and its Related Parties;
(2) the adoption of a plan relating to the liquidation or dissolution of
Insight Midwest;
(3) the consummation of any transaction, including, without limitation,
any merger or consolidation, the result of which is that any
"person" (as defined above), other
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than the Principals and/or one or more of the Permitted Holders and
their Related Parties, becomes the Beneficial Owner, directly or
indirectly, of more than 50% of the Voting Stock of Insight Midwest,
measured by voting power rather than number of shares;
(4) the consummation of any transaction, including, without limitation,
any merger or consolidation, the result of which is that any
"person" (as defined above) other than a Permitted Holder and its
Related Parties, becomes the Beneficial Owner, directly or
indirectly, of more than 50% of the Voting Stock of Insight
Communications, measured by voting power rather than number of
shares;
(5) during any consecutive two-year period, the first day on which
individuals who constituted the Board of Directors of Insight
Communications as of the beginning of such two-year period, together
with any new directors who were nominated for election or elected to
such Board of Directors with the approval of a majority of the
individuals who were members of such Board of Directors, or whose
nomination or election was previously so approved at the beginning
of such two-year period, cease to constitute a majority of the Board
of Directors of Insight Communications; or
(6) Insight Communications consolidates with, or merges with or into,
any Person, or any Person consolidates with, or merges with or into,
Insight Communications, in any such event pursuant to a transaction
in which any of the outstanding Voting Stock of Insight
Communications or such other Person is converted into or exchanged
for cash, securities or other property, other than any such
transaction where the Voting Stock of Insight Communications
outstanding immediately prior to such transaction is converted into
or exchanged for Voting Stock other than Disqualified Stock of the
surviving or transferee Person constituting a majority of the
outstanding shares of such Voting Stock of such surviving or
transferee Person immediately after giving effect to such issuance.
"Common Stock" of any Person means all Capital Stock of such Person that
is generally: entitled to (1) vote in the election of directors of such Person
or (2) if such Person is not a corporation, vote or otherwise participate in the
selection of the governing body, partners, managers or others that will control
the management and policies of such Person.
"Consolidated Cash Flow" means, with respect to any specified Person for
any period, the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss plus any net loss realized
by such Person or any of its Restricted Subsidiaries in connection
with an Asset Sale, to the extent such losses were deducted in
computing such Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period, to the extent that such
provision for taxes was deducted in computing such Consolidated Net
Income; plus
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(3) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or
not capitalized, including, without limitation, amortization of debt
issuance costs and original issue discount, non-cash interest
payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to
Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance
financings, and net of the effect of all payments made or received
pursuant to Hedging Obligations, to the extent that any such expense
was deducted in computing such Consolidated Net Income; plus
(4) depreciation, amortization, including amortization of goodwill and
other intangibles, and other non-cash expenses, excluding any such
non-cash expense to the extent that it represents an accrual of or
reserve for cash expenses in any future period, of such Person and
its Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted
in computing such Consolidated Net Income; minus
(5) non-cash items increasing such Consolidated Net Income, including
the partial or entire reversal of reserves taken in prior periods,
for such period, other than the accrual of revenue in the ordinary
course of business, in each case, on a consolidated basis and
determined in accordance with GAAP.
Notwithstanding the preceding, the provision for taxes based on the income or
profits of, and the depreciation and amortization and other non-cash charges of,
one of our Restricted Subsidiaries shall be added to Consolidated Net Income to
compute our Consolidated Cash Flow only to the extent that a corresponding
amount would be permitted at the date of determination to be dividend to us by
such Restricted Subsidiary without prior approval that has not been obtained,
pursuant to the terms of its charter and all agreements, instruments, judgments,
decrees, orders, statutes, rules and governmental regulations applicable to that
Subsidiary or its stockholders.
"Consolidated Indebtedness" means, with respect to any Person as of any
date of determination, the sum, without duplication, of (a) the total amount of
Indebtedness of such Person and its Restricted Subsidiaries, plus (b) the total
amount of Indebtedness of any other Person, to the extent that such Indebtedness
has been Guaranteed by the referent Person or one or more of its Restricted
Subsidiaries, plus (c) the aggregate liquidation value of all Disqualified Stock
of such Person and all preferred stock of Restricted Subsidiaries of such
Person, in each case, determined on a consolidated basis in accordance with
GAAP.
"Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication, the sum of (a) the consolidated interest expense of
such Person and its Restricted Subsidiaries for such period, whether paid or
accrued, including, without limitation, amortization of original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, all calculated after taking into
account the effect of all Hedging Obligations, (b) the consolidated interest
expense of such Person and its Restricted Subsidiaries that was capitalized
during such
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period, (c) any interest expense on Indebtedness of another Person that is
guaranteed by such Person or one of its Restricted Subsidiaries or secured by a
Lien on assets of such Person or one of its Restricted Subsidiaries, whether or
not such Guarantee or Lien is called upon, and (d) the product of (A) all
dividend payments on any series of preferred stock of such Person or any of its
Restricted Subsidiaries, times (B) a fraction, the numerator of which is one and
the denominator of which is one minus the then current combined federal, state
and local statutory tax rate of such Person, expressed as a decimal, in each
case, on a consolidated basis and in accordance with GAAP.
"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) the Net Income, but not loss, of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of
dividends or distributions paid in cash to the specified Person or a
Wholly Owned Restricted Subsidiary thereof;
(2) the Net Income of any Restricted Subsidiary shall be excluded to the
extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is
not at the date of determination permitted without any prior
governmental approval that has not been obtained or, directly or
indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Subsidiary or its
stockholders;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition
shall be excluded;
(4) the cumulative effect of a change in accounting principles shall be
excluded; and
(5) the Net Income, but not loss, of any Unrestricted Subsidiary shall
be excluded, whether or not distributed to the specified Person or
one of its Subsidiaries, except for purposes of the covenants
described under the caption "Certain Covenants Restricted Payments"
and "Incurrence of Indebtedness and Issuance of Preferred Stock" in
which case the Net Income of any Unrestricted Subsidiary will be
included to the extent it would otherwise be included under clause
(1) of this definition above.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of us who:
(1) was a member of such Board of Directors on the date of the
indenture; or
(2) was nominated for election or elected to such Board of Directors
with the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election.
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"Credit Facilities" means, one or more debt facilities, including, without
limitation, the Amended Kentucky Credit Facility and the Amended Indiana Credit
Facility, or commercial paper facilities, in each case with banks or other
institutional lenders providing for revolving credit loans, term loans,
receivables financing, including through the sale of receivables to such lenders
or to special purpose entities formed to borrow from such lenders against such
receivables, or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time.
"Debt to Cash Flow Ratio" means, as of any date of determination (the
"Determination Date"), the ratio of (a) our Consolidated Indebtedness as of such
Determination Date to (b) four times our Consolidated Cash Flow for the most
recent full fiscal quarter ending immediately prior to such Determination Date
for which internal financial statements are available (the "Measurement
Period"), determined on a pro forma basis after giving effect to all
acquisitions or dispositions of assets made by us and our Subsidiaries from the
beginning of such quarter through and including such Determination Date,
including any related financing transactions, as if such acquisitions and
dispositions had occurred at the beginning of such quarter. For purposes of
calculating Consolidated Cash Flow for the Measurement Period immediately prior
to the relevant Determination Date, (a) any Person that is a Restricted
Subsidiary on the Determination Date, or would become a Restricted Subsidiary on
such Determination Date in connection with the transaction that requires the
determination of such Consolidated Cash Flow, will be deemed to have been a
Restricted Subsidiary at all times during the Measurement Period; (b) any Person
that is not a Restricted Subsidiary on such Determination Date, or would cease
to be a Restricted Subsidiary on such Determination Date in connection with the
transaction that requires the determination of such Consolidated Cash Flow, will
be deemed not to have been a Restricted Subsidiary at any time during such
Measurement Period; and (c) if we or any Restricted Subsidiary shall have in any
manner (x) acquired, including through an Asset Acquisition or the commencement
of activities constituting such operating business, or (y) disposed of,
including by way of an Asset Sale or the termination or discontinuance of
activities constituting such operating business, any operating business during
such Measurement Period or after the end of such period and on or prior to such
Determination Date, such calculation will be made on a pro forma basis in
accordance with generally accepted accounting principles consistently applied,
as if, in the case of an Asset Acquisition or the commencement of activities
constituting such operating business, all such transactions had been consummated
on the first day of such Measurement Period, and, in the case of an Asset Sale
or termination or discontinuance of activities constituting such operating
business, all such transactions had been consummated prior to the first day of
such Measurement Period.
"Default" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof, or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the holder
thereof, in whole or in part, on or prior to the date that is 91 days after the
date on which the notes mature. Notwithstanding the preceding sentence, any
Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require us to repurchase such Capital Stock
upon the occurrence of a change of control or an asset sale shall not constitute
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Disqualified Stock if the terms of such Capital Stock provide that we may not
repurchase or redeem any such Capital Stock pursuant to such provisions unless
such repurchase or redemption complies with the covenant described above under
the caption "-Certain Covenants-Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock, but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock.
"Equity Offering" means an offering by a Person of its shares of Equity
Interests other than Disqualified Stock however designated and whether voting or
non-voting, and any and all rights, warrants or options to acquire such Equity
Interests other than Disqualified Stock.
"Existing Indebtedness" means up to $10.0 million in aggregate principal
amount of Indebtedness of us and our Subsidiaries, other than Indebtedness under
the Amended Kentucky Credit Facility and the Amended Indiana Credit Facility, in
existence on the date of the indenture, until such amounts are repaid.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the indenture.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any specified Person, the
obligations of such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates.
"Indebtedness" means, with respect to any specified Person, any
indebtedness of such Person, whether or not contingent, in respect of:
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit or reimbursement agreements in respect thereof;
(3) banker's acceptances;
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(4) representing Capital Lease Obligations of such Person and all
Attributable Debt in respect of sale and leaseback transactions
entered into by such Person;
(5) the balance deferred and unpaid of the purchase price of any
property, except any such balance that constitutes an accrued
expense or trade payable; or
(6) representing any Hedging Obligations,
if and to the extent any of the preceding items, other than letters of credit
and Hedging Obligations, would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person, whether or not such Indebtedness is assumed by
the specified Person, and, to the extent not otherwise included, the Guarantee
by the specified Person of any indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness issued
with original issue discount; and
(2) the principal amount thereof, together with any interest thereon
that is more than 30 days past due, in the case of any other
Indebtedness.
"Insight Communications" means Insight Communications Company, Inc.
"Insight Midwest" means Insight Midwest, L.P.
"Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons, including Affiliates, in the forms
of loans (including Guarantees or other obligations), advances or capital
contributions (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP and include the
designation of a Restricted Subsidiary as an Unrestricted Subsidiary. If we or
any of our Restricted Subsidiaries sells or otherwise disposes of any Equity
Interests of any of our direct or indirect Restricted Subsidiaries such that,
after giving effect to any such sale or disposition, such Person is no longer
our Subsidiary, we shall be deemed to have made an Investment on the date of any
such sale or disposition equal to the fair market value of the Equity Interests
of such Subsidiary not sold or disposed of in an amount determined as provided
in the final paragraph of the covenant described above under the caption
"-Certain Covenants-Restricted Payments." The acquisition by us or any of our
Restricted Subsidiaries of a Person that holds an Investment in a third Person
shall be deemed to be an Investment by us or such Restricted Subsidiary in such
third Person in an amount equal to the fair market value of the Investment held
by the acquired Person in such third Person in an amount determined as provided
in the final paragraph of the covenant described above under the caption
"-Certain Covenants-Restricted Payments."
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"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest, hypothecation, assignment for security or encumbrance
of any kind in respect of such asset, whether or not filed, recorded or
otherwise perfected under applicable law, including any conditional sale or
capital lease or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code or equivalent statutes of any jurisdiction.
"Management Agreements" means the management agreements between Insight
Communications Company, L.P. and each of Insight Indiana and Insight Kentucky as
each is in effect on the date of the indenture.
"Net Income" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:
(1) any gain, but not loss, together with any related provision for
taxes on such gain, but not loss, realized in connection with: (a)
any Asset Sale; or (b) the disposition of any securities by such
Person or any of its Restricted Subsidiaries or the extinguishment
of any Indebtedness of such Person or any of its Restricted
Subsidiaries; and
(2) any extraordinary gain, but not loss, together with any related
provision for taxes on such extraordinary gain, but not loss.
"Net Proceeds" means the aggregate cash proceeds received by us or any of
our Restricted Subsidiaries in respect of any Asset Sale, including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale, net of:
(1) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, and all Federal, state, provincial,
foreign and local taxes required to be paid or accrued as a
liability under GAAP, as a consequence of such Asset Sale;
(2) all payments made on any indebtedness which is secured by any assets
subject to such Asset Sale, in accordance with the terms of any Lien
upon or other security arrangement of any kind with respect to such
assets, or which must by its terms, or in order to obtain a
necessary consent to such Asset Sale, or by applicable law, be
repaid out of the proceeds from such Asset Sale;
(3) all distributions and other payments required to be made to minority
interest holders in Restricted Subsidiaries or joint ventures as a
result of such Asset Sale; and
(4) the deduction of appropriate amounts to be provided by the seller as
a reserve, in accordance with GAAP, against any liabilities
associated with the assets disposed of in such Asset Sale and
retained by us or any Restricted Subsidiary after such Asset Sale.
"Non-Recourse Debt" means Indebtedness:
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(1) as to which neither we nor any of our Restricted Subsidiaries (a)
provides credit support of any kind, including any undertaking,
agreement or instrument that would constitute Indebtedness, (b) is
directly or indirectly liable as a guarantor or otherwise, or (c)
constitutes the lender;
(2) no default with respect to which, including any rights that the
holders thereof may have to take enforcement action against an
Unrestricted Subsidiary, would permit upon notice, lapse of time or
both any holder of any other Indebtedness, other than the notes, of
us or any of our Restricted Subsidiaries to declare a default on
such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and
(3) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of us or any of our
Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Partnership Agreement" means the limited partnership agreement of Insight
Midwest, L.P., dated October 1, 1999.
"Permitted Business" means a cable television, media and communications,
entertainment, telecommunications or data transmission business, businesses
ancillary, complementary or reasonably related thereto and reasonable extensions
thereof.
"Permitted Holders" means Sidney R. Knafel, Michael S. Willner and Kim D.
Kelly.
"Permitted Investments" means:
(1) any Investment in us or in one of our Restricted Subsidiaries;
(2) any Investment in Cash Equivalents;
(3) any Investment by us or any of our Subsidiaries in a Person, if as a
result of such Investment:
(a) such Person becomes a Restricted Subsidiary of one of us; or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets
to, or is liquidated into, one of us or one of our Restricted
Subsidiaries; provided that such Person's primary business is
a Permitted Business;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"-Repurchase at the Option of holders-Asset Sales;"
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(5) any Investment in prepaid expenses, negotiable instruments held for
collection and lease, utility and workers' compensation, performance
and other similar deposits;
(6) Investments made out of the net cash proceeds of the issue and sale,
other than to a Subsidiary of Insight Midwest, of Equity Interests
other than Disqualified Stock of Insight Midwest, to the extent
that:
(a) such net cash proceeds have not been applied to make a
Restricted Payment or to effect other transactions pursuant to
the covenant described above under the caption "-Restricted
Payments," or
(b) such net cash proceeds have not been used to incur
Indebtedness pursuant to clause (8) of the covenant described
above under the caption "-Incurrence of Indebtedness and
Issuance of Preferred Stock;"
(7) the extension of credit to vendors, suppliers and customers in the
ordinary course of business;
(8) any Investment existing as of the date of the indenture, and any
amendment, modification, extension or renewal thereof to the extent
such amendment, modification, extension or renewal does not require
us or any Restricted Subsidiary to make any additional cash or
non-cash payments or provide additional services in connection
therewith;
(9) any acquisition of assets solely in exchange for the issuance of our
Equity Interests other than Disqualified Stock;
(10) Hedging Obligations;
(11) loans and advances to officers, directors and employees of us and
the Restricted Subsidiaries for business-related travel expenses,
moving expenses and other similar expenses in each case incurred in
the ordinary course of business not to exceed $1.0 million
outstanding at any time; and
(12) other Investments in any Person, other than Insight Communications
or an Affiliate of Insight Communications that is not also a
Subsidiary of one of us, having an aggregate fair market value,
measured on the date each such Investment was made and without
giving effect to subsequent changes in value, when taken together
with all other Investments made pursuant to this clause (12) since
the date of the indenture not to exceed $50.0 million.
"Permitted Liens" means:
(1) Liens securing Indebtedness and other Obligations under Credit
Facilities that was permitted by the terms of the indenture to be
incurred;
(2) Liens in favor of us or a Restricted Subsidiary;
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(3) Liens on property or assets, or any shares of Capital Stock or
secured indebtedness of a Person existing at the time such Person is
merged with or into or consolidated with one of us or one of our
Restricted Subsidiaries; provided that such Liens were in existence
prior to the contemplation of such merger or consolidation and do
not extend to any assets other than those of the Person merged into
or consolidated with us or the Restricted Subsidiary;
(4) Liens on property existing at the time of acquisition thereof by us
or any of our Restricted Subsidiaries; provided that such Liens were
in existence prior to the contemplation of such acquisition;
(5) Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like
nature incurred in the ordinary course of business;
(6) Liens to secure Indebtedness, including Capital Lease Obligations,
permitted by clause (4) of the second paragraph of the covenant
entitled "-Certain Covenants-Incurrence of Indebtedness and Issuance
of Preferred Stock" covering only the assets acquired with such
Indebtedness;
(7) Liens existing on the date of the indenture;
(8) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently
concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made
therefor;
(9) Liens securing Permitted Refinancing Indebtedness; provided that any
such Lien does not extend to or cover any property, Capital Stock or
Indebtedness other than the property, shares or debt securing the
Indebtedness so refunded, refinanced or extended;
(10) Statutory liens or landlords', carriers', warehouseman's,
mechanics', suppliers', materialmen's, repairmen's or other like
Liens arising in the ordinary course of business which do not secure
any Indebtedness and with respect to amounts not yet delinquent or
being contested in good faith by appropriate proceedings, if a
reserve or other appropriate provision, if any, as shall be required
in conformity with GAAP shall have been made therefor;
(11) Easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering
in any material respect with the ordinary conduct of the business of
us or any of our Restricted Subsidiaries;
(12) Attachment or judgment Liens not giving rise to a Default or an
Event of Default;
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(13) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and
other types of social security;
(14) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations, bankers'
acceptance, surety and appeal bonds, government contracts,
performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business,
exclusive of obligations for the payment of borrowed money;
(15) Liens of franchisors or other regulatory bodies arising in the
ordinary course of business;
(16) Liens arising from filing Uniform Commercial Code financing
statements regarding leases or other Uniform Commercial Code
financing statements for precautionary purposes relating to
arrangements not constituting Indebtedness;
(17) Liens securing reimbursement obligations with respect to letters of
credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof;
(18) Liens encumbering customary initial deposits and margin deposits,
and other Liens that are within the general parameters customary in
the industry and incurred in the ordinary course of business, in
each case, securing Indebtedness under Hedging Obligations and
forward contracts, options, future contracts, future options or
similar agreements or arrangements designed solely to protect us or
any of our Restricted Subsidiaries from fluctuations in interest
rates, currencies or the price of commodities;
(19) Liens consisting of any interest or title of a licensor in the
property subject to a license;
(20) Liens on the Capital Stock of Unrestricted Subsidiaries;
(21) Liens arising from sales or other transfers of accounts receivable
which are past due or otherwise doubtful of collection in the
ordinary course of business;
(22) Any extensions, substitutions, replacements or renewals of the
foregoing; and
(23) Liens incurred in the ordinary course of business of us or any of
our Restricted Subsidiaries with respect to obligations that do not
exceed $20.0 million at any one time outstanding.
"Permitted Refinancing Indebtedness" means any Indebtedness of us or any
of our Subsidiaries issued in exchange for, or the net proceeds of which are
used to extend, refinance, renew, replace, defease or refund other Indebtedness
of us or any of our Subsidiaries, other than intercompany Indebtedness; provided
that:
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(1) the principal amount, or accreted value if applicable, of such
Permitted Refinancing Indebtedness does not exceed the principal
amount, or accreted value if applicable, of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded, plus
all accrued interest thereon and the amount of all expenses and
premiums incurred in connection therewith;
(2) such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life
to Maturity of, the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the
notes, such Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and is subordinated in
right of payment to, the notes on terms at least as favorable to the
holders of notes as those contained in the documentation governing
the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and
(4) such Indebtedness is incurred either by us or by the Subsidiary who
is the obligor on the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Principals" means AT&T Broadband and Insight Communications.
"Related Party" means, with respect to any Person:
(1) any controlling stockholder, 80% (or more) owned Subsidiary, or
immediate family member (in the case of an individual) of such
Person; or
(2) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons
beneficially holding an 80% or more controlling interest of which
consist of any one or more such Persons and/or such other Persons
referred to in the immediately preceding clause (1).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof.
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"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Capital Stock
entitled, without regard to the occurrence of any contingency, to
vote in the election of directors, managers or trustees thereof is
at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person, or a
combination thereof; and
(2) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are such Person or one or
more Subsidiaries of such Person, or any combination thereof.
"Unrestricted Subsidiary" means any Subsidiary of either of us, or any
successor to any of us, that is designated by the Board of Directors as an
Unrestricted Subsidiary pursuant to a Board Resolution, but only to the extent
that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with one of us or any of our Restricted Subsidiaries
unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to us or such Restricted
Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of us; and
(3) is a Person with respect to which neither we nor any of our
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or
preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results.
Any designation of one of our Subsidiaries as an Unrestricted Subsidiary
shall be evidenced to the trustee by filing with the trustee a certified copy of
the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the preceding
conditions and was permitted by the covenant described above under the caption
"-Certain Covenants-Restricted Payments." If, at any time, any Unrestricted
Subsidiary would fail to meet the preceding requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by one of our Restricted Subsidiaries as of such date and,
if such Indebtedness is not permitted to be incurred as of such date under the
covenant described under the caption "-Certain Covenants-Incurrence of
Indebtedness and Issuance of Preferred Stock," we shall be in default of such
covenant. Our Boards of Directors may at any time designate any
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Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by one of our
Restricted Subsidiaries of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (1) such Indebtedness
is permitted under the covenant described under the caption "-Certain
Covenants-Incurrence of Indebtedness and Issuance of Preferred Stock,"
calculated on a pro forma basis as if such designation had occurred at the
beginning of the four-quarter reference period; and (2) no Default or Event of
Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or
other required payments of principal, including payment at final
maturity, in respect thereof, by (b) the number of years, calculated
to the nearest one-twelfth, that will elapse between such date and
the making of such payment; by
(2) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any specified Person means a
Restricted Subsidiary of such Person all of the outstanding Capital Stock or
other ownership interests of which, other than directors' qualifying shares,
shall at the time be owned by such Person or by one or more Wholly Owned
Restricted Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
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MATERIAL FEDERAL TAX CONSIDERATIONS
Set forth below are the material United States federal income tax
consequences relevant to, in the opinion of Cooperman Levitt Winikoff Lester &
Newman, P.C., our legal counsel, the exchange offer. Except where noted, the
following deals only with the notes held as capital assets within the meaning of
section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"), by a
holder of notes that is an individual citizen or resident of the United States
or is a United States corporation that has purchased the notes pursuant to their
original issue. The following does not deal with special situations such as
those of broker-dealers, tax-exempt organizations, individual retirement
accounts and other tax deferred accounts, financial institutions, insurance
companies, or persons holding notes as part of a hedging or conversion
transaction or a straddle. Furthermore, the following is based upon the
provisions of the Code and regulations, rulings and judicial decisions
promulgated under the Code as of the date hereof. Such authorities may be
repealed, revoked, or modified, possibly with retroactive effect, so as to
result in United States federal income tax consequences different from those
discussed below. In addition, except as otherwise indicated, the following does
not consider the effect of any applicable foreign, state, local or other tax
laws or estate or gift tax considerations.
As used in this prospectus, a "United States person" is:
(1) a citizen or resident of the U.S.;
(2) a corporation, partnership or other entity created or organized in
or under the laws of the U.S. or any of its political subdivision;
(3) an estate the income of which is subject to U.S. federal income
taxation regardless of its source;
(4) a trust if:
(a) a United States court is able to exercise primary supervision
over the administration of the trust; and
(b) one or more United States persons have the authority to
control all substantial decisions of the trust;
(5) a certain type of trust in existence on August 20, 1996, which was
treated as a United States person under the Code in effect
immediately prior to such date and which has made a valid election
to be treated as a United States person under the Code; and
(6) any person otherwise subject to U.S. federal income tax on a net
income basis in respect of its worldwide taxable income.
A "U.S. holder" is a beneficial owner of a note who is a United States
Person. A "foreign holder" is a beneficial owner of a note who is not a U.S.
holder.
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Prospective investors are advised to consult their own tax advisors with
regard to the application of the tax considerations discussed below to their
particular situations, as well as the application of any state, local, foreign
or other tax laws, or subsequent revisions of such laws.
Federal Income Taxation of U.S. Holders
Exchange of Notes
The exchange of exchange notes pursuant to the exchange offer will not be
treated as a taxable sale, exchange or other disposition of the corresponding
initial notes because the terms of the exchange notes are not materially
different from the terms of the initial notes. Accordingly:
(1) no gain or loss will be realized by a U.S. holder upon receipt of an
exchange note;
(2) the holding period of the exchange note will include the holding
period of the initial note exchanged therefor; and
(3) the adjusted tax basis of the exchange notes will be the same as the
adjusted tax basis of the initial notes exchanged.
The filing of a shelf registration statement should not result in a
taxable exchange to us or any holder of a note.
Payments of Interest
A U.S. holder of an exchange note generally will be required to report as
ordinary income for federal income tax purposes interest received or accrued on
the exchange note in accordance with the U.S. holder's method of tax accounting.
Market Discount
If a U.S. holder purchases an exchange note for an amount that is less
than its "stated redemption price at maturity" (which is the stated principal
amount), the amount of the difference will be treated as "market discount" for
federal income tax purposes unless such difference is less than a specified de
minimis amount. Under the de minimis exception, an exchange note is considered
to have no market discount if the excess of the stated redemption price at
maturity of the exchange note over the holder's tax basis in such note
immediately after its acquisition is less than 0.25% of the stated redemption
price at maturity of the exchange note multiplied by the number of complete
years to the maturity date of the exchange note after the acquisition date.
Under the market discount rules, a U.S. holder of an exchange note that
does have market discount is required to treat any principal payment on, or any
gain from the sale, exchange, retirement or other disposition of an exchange
note as ordinary income to the extent of the accrued market discount not
previously included in income at the time of such payment or disposition. In
addition, such a holder may be required to defer until maturity of the exchange
note or its earlier disposition in a taxable transaction the deduction of all or
a portion of the interest expense on any indebtedness incurred or continued to
purchase or carry such exchange note.
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Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the exchange note, unless
the U.S. holder elects to accrue the market discount on a constant interest
method. A U.S. holder of an exchange note may elect to include market discount
in income currently as it accrues (on either a ratable or constant interest
method), in which case the rule described above regarding deferral of interest
deductions will not apply. This election to include market discount in income
currently, once made, applies to all market discount obligation acquired on or
after the first taxable year to which the election applies and may not be
revoked without the consent of the Internal Revenue Service.
Bond Premium
A U.S. holder who purchases an exchange note for an amount in excess of
its stated redemption price at maturity will be considered to have purchased the
exchange note with "amortizable bond premium" equal to the amount of such
excess. A U.S. holder generally may elect to amortize the premium on the
constant yield to maturity method. The amount amortized in any year under such
method will be treated as a reduction of the holder's interest income from the
exchange note during such year and will reduce the holder's adjusted tax basis
in the exchange note by such amount. A holder of an exchange note that does not
make the election to amortize the premium will not reduce its tax basis in the
exchange note, and thus effectively will realize a smaller gain, or a larger
loss, on a taxable disposition of the exchange note than it would have realized
had the election been made. The election to amortize the premium on a constant
yield to maturity method, once made, applies to all debt obligations held or
acquired by the electing holder on or after the first day of the first taxable
year to which the election applies and may not be revoked without the consent of
the Internal Revenues Service.
Sale, Exchange or Retirement
A U.S. holder's tax basis in an exchange note generally will equal the
purchase price paid therefor, increased by market discount previously included
in income by such U.S. holder and decreased by any amortized premium applied to
reduce interest and any principal payments on the exchange note. Upon the sale,
exchange or retirement, including redemption, of an exchange note, a holder of
an exchange note generally will recognize gain or loss equal to the difference
between the amount of cash and the fair market value of other property received
from the sale, exchange or retirement of the exchange note (other than in
respect of accrued and unpaid interest on the exchange note) and the adjusted
tax basis in the exchange note. Such gain or loss generally will be capital gain
or loss, except to the extent of any accrued market discount, which will be
taxed as ordinary income. Amounts received attributable to accrued but unpaid
interest will be treated as ordinary interest income.
Under current law, net capital gains of individuals generally are subject
to the following maximum federal tax rates:
(1) twenty percent, for property held more than one year; and
(2) beginning in the year 2006, eighteen percent, for property acquired
after the year 2000 and held for more than five years.
The deductibility of capital losses is subject to limitations.
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Federal Income Taxation of Foreign Holders
The following is a summary of certain United States Federal income tax
consequences of the ownership and sale or other disposition of the exchange
notes by a foreign holder.
If the income or gain on the exchange notes is "effectively connected with
the conduct of a trade or business within the United States" of the foreign
holder of the exchange notes, such income or gain will be subject to tax
essentially in the same manner as if the exchange notes were held by a United
States person, as discussed above, and in the case of a foreign person that is a
foreign corporation, may also be subject to the federal branch profits tax.
If the income on the exchange notes is not effectively connected with the
conduct of a trade or business within the United States, then under the
"portfolio interest" exception to the general rules for the withholding of tax
on interest paid to a foreign holder, a foreign holder will not be subject to
United States tax, or to withholding, on interest on an exchange note, provided
that:
(1) the foreign holder does not actually or constructively own 10% or
more of a capital or profits interest in us within the meaning of
Section 871(h)(3) of the Code;
(2) the foreign holder is not a controlled foreign corporation that is
considered related to us within the meaning of Section 864(d)(4) of
the Code; and
(3) we, our paying agent or the person who would otherwise be required
to withhold tax received either:
(a) a statement on Internal Revenue Service Form W-8, signed under
penalties of perjury by the beneficial owner of the exchange
note, in which the owner certifies that the owner is not a
United States person and which provides the owner's name and
address; or
(b) a statement signed under penalties of perjury by a financial
institution holding the exchange note on behalf of the
beneficial owners, together with a copy of each beneficial
owner's Form W-8.
Recently finalized regulations, which generally became effective on
January 1, 2000, add certain alternative certification procedures. A foreign
holder who does not qualify for the "portfolio interest" exception will be
subject to United States withholding tax at a flat rate of 30% (or a lower
applicable treaty rate upon delivery of requisite certification of eligibility)
on interest payments on the exchange notes which are not effectively connected
with the conduct of a trade or business within the United States.
If the gain on the exchange notes is not effectively connected with the
conduct of a trade or business within the United States, then gain recognized by
a foreign holder upon the redemption, sale or exchange of an exchange note,
including any gain representing accrued market discount, will not be subject to
United States tax unless the foreign holder is an individual present in the
United States for 183 days or more during the taxable year in which the exchange
note is redeemed, sold or exchanged, and certain other requirements are met, in
which case the foreign
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holder will be subject to United States tax at a flat rate of 30%, unless exempt
by applicable treaty upon delivery of requisite certification of eligibility.
Foreign holders who are individuals may also be subject to tax pursuant to
provisions of United States federal income tax law applicable to certain United
States expatriates.
Federal Estate Taxation of Foreign Holders
An exchange note that is held by an individual who at the time of death is
not a citizen or resident of the United States will not be subject to U.S.
federal estate tax as a result of such individual's death, provided that, at the
time of the individual's death, payments of interest with respect to such
exchange note would have qualified for the portfolio interest exception.
Federal Income Tax Backup Withholding
Certain (generally, non-corporate) U.S. holders may be subject to back-up
withholding at a rate of 31% on payments of principal, premium and interest on,
and the proceeds of the disposition of the exchange notes if the holder:
(1) fails to provide a taxpayer identification number;
(2) furnishes an incorrect taxpayer identification number;
(3) is notified by the Internal Revenue Service that he or she has
failed to report properly payments of interest and dividends and the
Internal Revenue Service has notified us that he or she is subject
to backup withholding; or
(4) fails, under certain circumstances, to provide a signed statement,
certified under penalties of perjury, that the taxpayer
identification number provided is correct and that he or she is not
subject to backup withholding.
The amount of any backup withholding deducted from a payment to a U.S.
holder is allowable as a credit against the U.S. holder's federal income tax
liability, provided that certain required information is furnished to the
Internal Revenue Service. Certain holders, (including, among others,
corporations and foreign individuals who comply with certain certification
requirements described above under "Foreign Holders") are not subject to backup
withholding. Holders should consult their tax advisors as to their qualification
for exemption from backup withholding and the procedure for obtaining such an
exemption.
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EXCHANGE OFFER
Registration Rights Agreement
The initial notes were originally issued on October 1, 1999 to Donaldson,
Lufkin & Jenrette Securities Corporation, Morgan Stanley & Co., Incorporated,
BNY Capital Markets, Inc. and Wasserstein Perella Securities, Inc. pursuant to a
purchase agreement dated September 28, 1999. The initial purchasers subsequently
resold the notes to qualified institutional buyers in reliance on Rule 144A
under the Securities Act, and outside the United States in accordance with
Regulation S under the Securities Act. We are parties to a registration rights
agreement with the initial purchasers entered into as a condition to the closing
under the purchase agreement. Pursuant to the registration rights agreement, we
agreed, for the benefit of the holders of the initial notes, at our cost to:
o file an exchange offer registration statement on or before March 29,
2000 with the Securities and Exchange Commission with respect to the
exchange offer for the notes; and
o use our reasonable best efforts to have the registration statement
declared effective under the Securities Act by October 2, 2000.
Upon the registration statement being declared effective, we will offer
the exchange notes in exchange for surrender of the initial notes. We will keep
the exchange offer open for not less than 20 business days, or longer if
required by applicable law, after the date on which notice of the exchange offer
is mailed to the holders of the initial notes. For each initial note surrendered
to us pursuant to the exchange offer, the holder of such initial note will
receive an exchange note having a principal amount equal to that of the
surrendered initial note.
Under existing interpretations of the staff of the Securities and Exchange
Commission contained in several no-action letters to third parties, we believe
that the exchange notes will in general be freely tradeable after the exchange
offer without further registration under the Securities Act. However, any
purchaser of initial notes who is an "affiliate" of ours or who intends to
participate in the exchange offer for the purpose of distributing the exchange
notes:
o will not be able to rely on these interpretations of the staff of
the Securities and Exchange Commission;
o will not be able to tender its initial notes in the exchange offer;
and
o must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or
transfer of the initial notes, unless such sale or transfer is made
pursuant to an exemption from such requirements.
As contemplated by these no-action letters and the registration rights
agreement, each holder accepting the exchange offer is required to represent to
us in the letter of transmittal that:
o neither the holder nor any such other person is an "affiliate" of
ours within the meaning of Rule 405 under the Securities Act;
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o the holder or any such other person is not engaged in, does not
intend to engage in, and has no arrangement or understanding with
any person to participate in, a distribution of the exchange notes;
and
o it is acquiring the exchange notes in the ordinary course of
business;
Each holder participating in the exchange offer for the purpose of
distributing the exchange notes it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale of the exchange notes and cannot rely on those no-action letters.
For a description of the procedures for resales by broker-dealers, see
"Plan of Distribution."
Shelf Registration Statement
If:
o we are not permitted to consummate this exchange offer because the
exchange offer is not permitted by applicable law or Commission
policy (after we have unsuccessfully sought a no-action letter from
the Commission allowing us to consummate the exchange offer); or
o any holder of transfer restricted securities notifies us prior to
the 30th business day following the effective date of the
registration statement that:
o it is prohibited by law or Commission policy from
participating in the exchange offer; or
o it may not resell the exchange notes acquired by it in the
exchange offer to the public without delivering a prospectus
and the prospectus contained in the registration statement is
not appropriate or available for such resales; or
o that it is a broker-dealer and owns notes acquired directly
from us or one of our affiliates;
then we will file with the Commission a shelf registration statement relating to
all transfer restricted securities. We will use our reasonable best efforts to
file the shelf registration statement within 30 days of the earlier of the date
we determine that we cannot consummate this exchange offer or the date we
receive notice from a holder as described in the previous sentence. We will use
our reasonable best efforts to cause the shelf registration statement to be
declared effective by the Commission within 90 days after we are required to
file the shelf registration statement. However, the deadlines for filing and
effectiveness of the shelf registration statement shall not be earlier than such
deadlines for the registration statement.
For purposes of the preceding, "transfer restricted securities" means
o each initial note until
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o the date on which such initial note has been exchanged in the
exchange offer for an exchange note which may be resold to the
public by the holder thereof without complying with the
prospectus delivery requirements of the Securities Act;
o the date on which such initial note has been effectively
registered under the Securities Act and disposed of in
accordance with the shelf registration statement; or
o the date on which such initial note is distributed to the
public pursuant to Rule 144 under the Securities Act and
o each exchange note held by a broker-dealer until the date on which
such exchange note is disposed of by a broker-dealer pursuant to the
"Plan of Distribution" contained herein (including the delivery of
this prospectus).
The registration rights agreement provides that if:
o we fail to file the registration statement or shelf registration
statement required by the registration rights agreement on or before
the date specified for such filing;
o the registration statement or the shelf registration statement is
not declared effective by the Securities and Exchange Commission on
or prior to the date specified in the registration rights agreement
for such effectiveness;
o we fail to complete the exchange offer within 30 business days of
the September 29, 2000 deadline for effectiveness of the
registration statement; or
o the shelf registration statement or the registration statement is
filed and declared effective but thereafter ceases to be effective
or usable in connection with resales of transfer restricted
securities during the period specified in the registration rights
agreement (each such event referred to in this clause and the three
preceding clauses are referred to as a "registration default");
then we will pay liquidated damages to each holder of notes, with respect to the
first 90-day period immediately following the occurrence of the first
registration default in an amount equal to $.05 per week per $1,000 principal
amount of notes held by such holder.
The amount of the liquidated damages will increase by an additional $.05
per week per $1,000 principal amount of notes with respect to each subsequent
90-day period until all registration defaults have been cured, up to a maximum
amount of liquidated damages for all registration defaults of $.50 per week per
$1,000 principal amount of notes.
All accrued liquidated damages will be payable to holders of the initial
notes in cash on the semi-annual interest payment dates on the notes, commencing
with the first such date occurring after any such registration default, until
such registration default is cured.
Following the cure of all registration defaults, the accrual of liquidated
damages will cease.
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Holders of notes will be required to make certain representations to us
(as described in the registration rights agreement) in order to participate in
the exchange offer and will be required to deliver certain information to be
used in connection with the shelf registration statement and to provide comments
on the shelf registration statement within the time periods set forth in the
registration rights agreement in order to have their notes included in the shelf
registration statement and benefit from the provisions regarding liquidated
damages set forth above. By acquiring transfer restricted securities, a holder
will be deemed to have agreed to indemnify us against certain losses arising out
of information furnished by such holder in writing for inclusion in any shelf
registration statement. Holders of notes will also be required to suspend their
use of the prospectus included in the shelf registration statement under certain
circumstances upon receipt of written notice to that effect from us.
Expiration Date; Extensions; Amendments; Termination
The exchange offer will expire at 5:00 p.m., New York City time, on _____,
2000, unless we extend it in our reasonable discretion. The expiration date of
the exchange offer will be at least 30 days after we mail notice of the exchange
offer to holders as provided in Rule 14e-1(a) under the Securities Exchange Act
of 1934 and the registration rights agreement.
To extend the expiration date, we will need to notify the exchange agent
of any extension by oral, promptly confirmed in writing, or written notice. We
will also need to notify the holders of the initial notes by mailing an
announcement or by means of a press release or other public announcement
communicated, unless otherwise required by applicable law or regulation, before
9:00 A.M., New York City time, on the next business day after the previously
scheduled expiration date.
We expressly reserve the right:
o to delay acceptance of any initial notes, to extend the exchange
offer or to terminate the exchange offer and not permit acceptance
of initial notes not previously accepted if any of the conditions
described below under "--Conditions to the Exchange Offer" have
occurred and have not been waived by us, if permitted to be waived,
by giving oral or written notice of the delay, extension or
termination to the exchange agent; or
o to amend the terms of the exchange offer in any manner.
If we amend the exchange offer in a manner determined by us to constitute
a material change, we will promptly disclose the amendment in a manner
reasonably calculated to inform the holders of the initial notes of the
amendment including providing public announcement, or giving oral or written
notice to the holders of the initial notes. A material change in the terms of
the exchange offer could include a change in the timing of the exchange offer, a
change in the exchange agent and other similar changes in the terms of the
exchange offer. If any material change is made to the terms of the exchange
offer, we will disclose the change by means of a post-effective amendment to the
registration statement of which this prospectus is a part and will distribute an
amended or supplemented prospectus to each registered holder of initial notes.
In addition, we will also extend the exchange offer for an additional five to
ten business days as required by the Securities Exchange Act, depending on the
significance of the amendment, if the
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exchange offer would otherwise expire during that period. Any delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral, promptly confirmed in writing, or written notice to the
exchange agent.
Procedures for Tendering Initial Notes
To tender your initial notes in this exchange offer, you must use one of
the three alternative procedures described below:
Regular Delivery Procedure: Complete, sign and date the letter of
transmittal, or a facsimile of the letter of
transmittal. Have the signatures on the letter
of transmittal, guaranteed if required by the
letter of transmittal. Mail or otherwise
deliver the letter of transmittal or the
facsimile, together with the certificates
representing your initial notes being tendered
and any other required documents, to the
exchange agent on or before 5:00 p.m., New
York City time, on the expiration date.
Book-entry Delivery Procedure: Send a timely confirmation of a book-entry
transfer of your initial notes, if this
procedure is available, into the exchange
agent's account at The Depository Trust
Company ("DTC") as contemplated by the
procedures for book-entry transfer described
under "--Book-Entry Delivery Procedure" below,
on or before 5:00 p.m., New York City time, on
the expiration date.
Guaranteed Delivery Procedure: If time will not permit you to complete your
tender by using the procedures described above
before the expiration date, comply with the
guaranteed delivery procedures described under
"--Guaranteed Delivery Procedure" below.
The method of delivery of initial notes, the letter of transmittal and all
other required documents is at your election and risk. Instead of delivery by
mail, we recommend that you use an overnight or hand-delivery service. If you
choose the mail, we recommend that you use registered mail, properly insured,
with return receipt requested. In all cases, you should allow sufficient time to
assure timely delivery. You should not send any letters of transmittal or
initial notes to us. You must deliver all documents to the exchange agent at its
address provided below. You may also request your respective brokers, dealers,
commercial banks, trust companies or nominees to tender your initial notes on
your behalf.
Only a holder of initial notes may tender initial notes in this exchange
offer. For purposes of this exchange offer, a holder is any person in whose name
initial notes are registered on our books or any other person who has obtained a
properly completed bond power from the registered holder.
If you are the beneficial owner of initial notes that are registered in
the name of a broker, dealer, commercial bank, trust company or other nominee
and you wish to tender your notes, you must contact this registered holder
promptly and instruct this registered holder to tender these
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notes on your behalf. If you wish to tender these initial notes on your own
behalf, you must, before completing and executing the letter of transmittal and
delivering your initial notes, either make appropriate arrangements to register
the ownership of these notes in your name or obtain a properly completed bond
power from the registered holder. The transfer of registered ownership may take
considerable time.
You must have any signatures on a letter of transmittal or a notice of
withdrawal guaranteed by an eligible institution. An eligible institution is:
o a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc.;
o a commercial bank or trust company having an office or correspondent
in the United States; or
o an eligible guarantor institution within the meaning of Rule 17Ad-15
under the Securities Exchange Act.
However, signatures on a letter of transmittal do not have to be
guaranteed if initial notes are tendered:
o by a registered holder, or by a participant in DTC in the case of
book-entry transfers, whose name appears on a security position
listing as the owner, who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions"
on the letter of transmittal and only if the exchange notes are
being issued directly to this registered holder, or deposited into
this participant's account at DTC in the case of book-entry
transfers; or
o for the account of an eligible institution.
If the letter of transmittal or any bond powers are signed by:
o the recordholder(s) of the initial notes tendered: The signature
must correspond with the name(s) written on the face of the initial
notes without alteration, enlargement or any change whatsoever;
o a participant in DTC: The signature must correspond with the name as
it appears on the security position listing as the holder of the
initial notes;
o a person other than the registered holder of any initial notes.
These initial notes must be endorsed or accompanied by bond powers
and a proxy that authorize this person to tender the initial notes
on behalf of the registered holder, in satisfactory form to us as
determined in our sole discretion, in each case, as the name of the
registered holder or holders appears on the initial notes;
o trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or
representative capacity. These persons should so indicate such
capacities when signing. Unless waived by us,
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evidence satisfactory to us of their authority to so act must also
be submitted with the letter of transmittal.
Book-Entry Delivery Procedure
Any financial institution that is a participant in DTC's system may make
book-entry deliveries of initial notes by causing DTC to transfer these initial
notes into the exchange agent's account at DTC according to DTC's procedures for
transfer. To effectively tender notes through DTC, the financial institution
that is a participant in DTC will electronically transmit its acceptance through
the Automatic Tender Offer Program. DTC will then edit and verify the acceptance
and send an agent's message to the exchange agent for its acceptance. An agent's
message is a message transmitted by DTC to the exchange agent stating that DTC
has received an express acknowledgment from the participant in DTC tendering the
initial notes that the participant has received and agrees to be bound by the
terms of the letter of transmittal, and that we may enforce this agreement
against the participant. The exchange agent will make a request to establish an
account for the initial notes at DTC for purposes of the exchange offer within
two business days after the date of this prospectus.
A delivery of initial notes through a book-entry transfer into the
exchange agent's account at DTC will only be effective if an agent's message or
the letter of transmittal or a facsimile of the letter of transmittal with any
required signature guarantees and any other required documents is transmitted to
and received by the exchange agent at the address indicated below under
"--Exchange Agent" on or before the expiration date unless the guaranteed
delivery procedures described below are complied with. Delivery of documents to
DTC does not constitute delivery to the Exchange Agent.
Guaranteed Delivery Procedure
If you are a registered holder of initial notes and desire to tender your
notes, and (1) these notes are not immediately available, (2) time will not
permit your notes or other required documents to reach the exchange agent before
the expiration date, or (3) the procedures for book-entry transfer cannot be
completed on a timely basis and an agent's message delivered, you may still
tender in this exchange offer if:
o you tender through an eligible institution, on or before the
expiration date, the exchange agent receives a properly completed
and duly executed letter of transmittal or facsimile of the letter
of transmittal and a notice of guaranteed delivery, substantially in
the form provided by us, with your name and address as holder of the
initial notes and the amount of notes tendered, stating that the
tender is being made by this letter and notice and guaranteeing that
within three New York Stock Exchange trading days after the
expiration date the certificates for all the initial notes tendered,
in proper form for transfer, or a book-entry confirmation with an
agent's message, as the case may be, and any other documents
required by the letter of transmittal will be deposited by the
eligible institution with the exchange agent; and
o the certificates for all your tendered initial notes in proper form
for transfer, or a book-entry confirmation, as the case may be, and
all other documents required by
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the letter of transmittal are received by the exchange agent within
three New York Stock Exchange trading days after the expiration
date.
Acceptance of Initial Notes for Exchange; Delivery of Exchange Notes
Your tender of initial notes will constitute an agreement between you and
us governed by the terms and conditions provided in this prospectus and in the
letter of transmittal.
We will be deemed to have received your tender as of the date when your
duly signed letter of transmittal accompanied by your initial notes tendered, or
a timely confirmation of a book-entry transfer of these notes into the exchange
agent's account at DTC with an agent's message, or a notice of guaranteed
delivery from an eligible institution is received by the exchange agent.
All questions as to the validity, form, eligibility, including time of
receipt, acceptance and withdrawal tenders will be determined by us in our sole
discretion. Our determination will be final and binding.
We reserve the absolute right to reject any and all initial notes not
properly tendered or any initial notes which, if accepted, would, in our opinion
or our counsel's opinion, be unlawful. We also reserve the absolute right to
waive any conditions of this exchange offer or irregularities or defects in
tender as to particular notes. Our interpretation of the terms and conditions of
this exchange offer, including the instructions in the letter of transmittal,
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of initial notes must be cured within
the time that we shall determine. Neither the exchange agent, any other person
or we will be under any duty to give notification of defects or irregularities
with respect to tenders of initial notes. Neither the exchange agent nor we will
incur any liability for any failure to give notification of these defects or
irregularities. Tenders of initial notes will not be deemed to have been made
until the irregularities have been cured or waived. The exchange agent will
return without cost to their holders any initial notes that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived as promptly as practicable following the expiration date.
If all the conditions to the exchange offer are satisfied or waived on the
expiration date, we will accept all initial notes properly tendered and will
issue the exchange notes promptly thereafter. Please refer to the section of
this prospectus entitled "--Conditions to the Exchange Offer" below. For
purposes of this exchange offer, initial notes will be deemed to have been
accepted as validly tendered for exchange when, as and if, we give oral or
written notice of acceptance to the exchange agent.
We will issue the exchange notes in exchange for the initial notes
tendered by a notice of guaranteed delivery by an eligible institution only
against delivery to the exchange agent of the letter of transmittal, the
tendered initial notes and any other required documents, or the receipt by the
exchange agent of a timely confirmation of a book-entry transfer of initial
notes into the exchange agent's account at DTC with an agent's message, in each
case, in form satisfactory to us and the exchange agent.
If any tendered initial notes are not accepted for any reason or if
initial notes are submitted for a greater principal amount than the holder
desires to exchange, the unaccepted or
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non-exchanged initial notes will be returned without expense to the tendering
holder, or, in the case of initial notes tendered by book-entry transfer
procedures described above, will be credited to an account maintained with the
book-entry transfer facility, as promptly as practicable after withdrawal,
rejection of tender or the expiration or termination of the exchange offer.
In addition, we reserve the right in our sole discretion, but in
compliance with the provisions of the indenture, to:
o purchase or make offers for any initial notes that remain
outstanding after the expiration date, or, as described under
"-Expiration Date; Extensions; Amendments; Termination," to
terminate the exchange offer as provided by the terms of our
registration rights agreement, and
o purchase initial notes in the open market, in privately negotiated
transactions or otherwise, to the extent permitted by applicable
law.
The terms of any of the purchases or offers described above could differ
from the terms of the exchange offer.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, you may withdraw tenders
of initial notes at any time before 5:00 p.m., New York City time, on the
expiration date.
For a withdrawal to be effective, you must send a written or facsimile
transmission notice of withdrawal to the exchange agent before 5:00 p.m., New
York City time, on the expiration date at the address provided below under
"-Exchange Agent" and before acceptance of your tendered initial notes for
exchange by us.
Any notice of withdrawal must:
o specify the name of the person having tendered the initial notes to
be withdrawn;
o identify the initial notes to be withdrawn, including, if
applicable, the registration number or numbers and total principal
amount of these notes;
o be signed by the person having tendered the initial notes to be
withdrawn in the same manner as the original signature on the letter
of transmittal by which these initial notes were tendered, including
any required signature guarantees, or be accompanied by documents of
transfer sufficient to permit the trustee for the initial notes to
register the transfer of these notes into the name of the person
having made the original tender and withdrawing the tender; and
o state that you are withdrawing your tender of initial notes.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of all notices of withdrawal and our determination
will be final and binding on all parties. Initial notes that are withdrawn will
be deemed not to have been validly tendered for exchange in
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this exchange offer.
You may retender properly withdrawn initial notes in this exchange offer
by following one of the procedures described under "--Procedures for Tendering
Initial Notes" above at any time before the expiration date.
Conditions to the Exchange Offer
With exceptions, we will not be required to accept initial notes for
exchange, or issue exchange notes in exchange for any initial notes, and we may
terminate or amend the exchange offer as provided in this prospectus before the
acceptance of the initial notes, if:
o the exchange offer violates applicable law or any interpretation of
the staff of the Securities and Exchange Commission;
o any required governmental approval has not been obtained; or
o a court or any governmental authority has issued an injunction,
order or decree that would prevent or impair our ability to proceed
with the exchange offer.
These conditions are for our sole benefit. We may assert any of these
conditions regardless of the circumstances giving rise to any of them. We may
also waive these conditions, in whole or in part, at any time and from time to
time, if we determine in our reasonable discretion, but within the limits of
applicable law, that any of the foregoing events or conditions has occurred or
exists or has not been satisfied. Our failure at any time to exercise any of
rights will not be deemed a waiver of these rights and these rights will be
deemed ongoing rights which we may assert at any time and from time to time.
If we determine that we may terminate the exchange offer, as provided
above, we may:
o refuse to accept any initial notes and return any initial notes that
have been tendered to their holders;
o extend the exchange offer and retain all initial notes tendered
before the expiration date, allowing, however, the holders of
tendered initial notes to exercise their rights to withdraw their
tendered initial notes; or
o waive any termination event with respect to the exchange offer and
accept all properly tendered initial notes that have not been
withdrawn or otherwise amend the terms of the exchange offer in any
respect as provided under "--Expiration Date; Extensions;
Amendments; Termination."
If we determine that we may terminate the exchange offer, we may be
required to file a shelf registration statement with the Securities and Exchange
Commission as described under "--Shelf Registration Statement." The exchange
offer is not dependent upon any minimum principal amount of initial notes being
tendered for exchange.
Accounting Treatment
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We will record the exchange notes at the same carrying value as the
initial notes, as reflected in our accounting records on the date of the
exchange. Accordingly, we will not recognize any gain or loss for accounting
purposes. We will amortize the costs of the exchange offer and the unamortized
expenses related to the issuance of the exchange notes over the term of the
exchange notes.
Exchange Agent
We have appointed Harris Trust Company of New York as exchange agent for
the exchange offer. You should direct all questions and requests for assistance
or additional copies of this prospectus or the letter of transmittal to the
exchange agent as follows:
Harris Trust Company of New York
Wall Street Plaza
88 Pine Street--19th Floor
New York, New York 10005
Attention: Reorganization Department
Fax number: (212) 701-7636
Fees and Expenses
We will bear the expenses of soliciting tenders under the exchange offer.
The principal solicitation for tenders under the exchange offer is being made by
mail; however, our officers and other employees may make additional
solicitations by telegraph, telephone, telecopy or in person.
We will not make any payments to brokers, dealers or other persons
soliciting acceptances of the exchange offer. However, we will pay the exchange
agent reasonable and customary fees for its services and will reimburse the
exchange agent for its reasonable out-of-pocket expenses in connection with the
exchange offer. We may also pay brokerage houses and other custodians, nominees
and fiduciaries the reasonable out-of-pocket expenses incurred by them in
forwarding copies of the prospectus, letters of transmittal and related
documents to the beneficial owners of the initial notes, and in handling or
forwarding tenders for exchange.
We will pay the expenses incurred in connection with the exchange offer,
including fees and expenses of the exchange agent and trustee and accounting,
legal, printing and related fees and expenses.
We will generally pay all transfer taxes, if any, applicable to the
exchange of initial notes under the exchange offer. However, tendering holders
will pay the amount of any transfer taxes, whether imposed on the registered
holder or any other person, if:
o certificates representing exchange notes or initial notes for
principal amounts not tendered or accepted for exchange are to be
delivered to, or are to be registered or issued in the name of, any
person other than the registered holder of the initial notes
tendered; or
o tendered initial notes are registered in the name of any person
other than the person signing the letter of transmittal; or
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o a transfer tax is imposed for any reason other than the exchange of
initial notes under the exchange offer.
If satisfactory evidence of payment of these taxes or exemption therefrom
is not submitted with the letter of transmittal, the amount of the transfer
taxes will be billed directly to the tendering holder.
Your Failure to Participate in the Exchange Offer Will Have Adverse Consequences
If you do not properly tender your initial notes in the exchange offer,
your initial notes will remain outstanding and continue to accrue interest.
However, you will not be able to resell, offer to resell or otherwise transfer
the initial notes unless they are registered under the Securities Act or unless
you resell them, offer to resell or otherwise transfer them under an exemption
from the registration requirements of, or in a transaction not governed by, the
Securities Act. In addition, you will no longer be able to obligate us to
register the initial notes under the Securities Act, except in the limited
circumstances provided under our registration rights agreement. To the extent
the initial notes are tendered and accepted in the exchange offer, the trading
market, if any, for the initial notes would be adversely affected. You should
refer to "Risk Factors--Your failure to participate in the exchange offer will
have adverse consequences."
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BOOK-ENTRY; DELIVERY AND FORM
Principal and interest payments on global securities registered in the
name of DTC's nominee will be made in immediate available funds to DTC's nominee
as the registered owner of the global securities. We and the trustee will treat
DTC's nominee as the owner of the global securities for all other purposes as
well. Accordingly, we, the trustee, any paying agent and the initial purchaser
will have no direct responsibility or liability for any aspect of the records
relating to payments made on account of beneficial interests in the global
securities or for maintaining, supervising or reviewing any records relating to
these beneficial interests. It is DTC's current practice, upon receipt of any
payment of principal or interest, to credit direct participants' accounts on the
payment date according to their respective holdings of beneficial interests in
the global securities. These payments will be the responsibility of the direct
and indirect participants and not of DTC, the trustee or us.
So long as DTC or its nominee is the registered owner or holder of the
global security, DTC or its nominee, as the case may be, will be considered the
sole owner or holder of the notes represented by the global security for the
purposes of:
o receiving payment on the notes;
o receiving notices; and
o for all other purposes under the Indentures and the notes.
Beneficial interests in the notes will be evidenced only by, and transfers
of the notes will be effected only through, records maintained by DTC and its
participants.
Except as described below, owners of beneficial interests in a global
security will not be entitled to receive physical delivery of certificated notes
in definitive form and will not be considered the holders of the global security
for any purposes under the Indentures. Accordingly, each person owning a
beneficial interest in a global security must rely on the procedures of DTC.
And, if that person is not a participant, the person must rely on the procedures
of the participant through which that person owns its interest, to exercise any
rights of a holder under the Indentures. Under existing industry practices, if
we request any action of holders or an owner of a beneficial interest in a
global security desires to take any action under the Indentures, DTC would
authorize the participants holding the relevant beneficial interest to take that
action. The participants then would authorize beneficial owners owning through
the participants to take the action or would otherwise act upon the instructions
of beneficial owners owning through them.
DTC has advised us that it will take any action permitted to be taken by a
holder of notes only at the direction of one or more participants to whose
account with DTC interests in the global security are credited. Further, DTC
will take action only as to the portion of the aggregate principal amount at
maturity of the notes as to which the participant or participants has or have
given the direction.
Although DTC, Euroclear and Cedel have agreed to the procedures described
above in order to facilitate transfers of interests in global securities among
participants in DTC, Euroclear and Cedel, they are under no obligation to
perform these procedures, and the procedures may be
155
discontinued at any time. None of us, the trustee, any agent of the initial
purchaser or ours will have any responsibility for the performance by DTC,
Euroclear and Cedel or their respective participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations.
DTC has provided the following information to us. DTC is a:
o limited-purpose trust company organized under the New York Banking
Law;
o a banking organization within the meaning of the New York Banking
Law;
o a member of the U.S. Federal Reserve System;
o a clearing corporation within the meaning of the New York Uniform
Commercial Code; and
o a clearing agency registered under the provisions of Section 17A of
the Securities Exchange Act.
Certificated Notes
Notes represented by a global security are exchangeable for certificated
notes only if:
o DTC notifies us that it is unwilling or unable to continue as
depository or if DTC ceases to be a registered clearing agency, and
a successor depository is not appointed by us within 90 days;
o determine not to require all of the notes to be represented by a
global security and notifies the trustee of their decision; or
o an event of default or an event which, with the giving of notice or
lapse of time, or both, would constitute an Event of Default
relating to the notes represented by the global security has
occurred and is continuing.
Any global security that is exchangeable for certificated notes in
accordance with the preceding sentence will be transferred to, and registered
and exchanged for, certificated notes in authorized denominations and registered
in the names as DTC or its nominee may direct. However, a global security is
only exchangeable for a global security of like denomination to be registered in
the name of DTC or its nominee. If a global security becomes exchangeable for
certificated notes:
o certificated notes will be issued only in fully registered form in
denominations of $1,000 or integral multiples of $1,000;
o payment of principal, premium, if any, and interest on the
certificated notes will be payable, and the transfer of the
certificated notes will be registrable, at the office or agency we
maintain for these purposes; and
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o no service charge will be made for any issuance of the certificated
notes, although the issuers may require payment of a sum sufficient
to cover any tax or governmental charge imposed in connection with
the issuance.
Transfers between participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear or Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
notes, cross-market transfers between the participants in DTC, on the one hand,
and Euroclear or Cedel participants, on the other hand, will be effected through
DTC in accordance with DTC's rules on behalf of Euroclear or Cedel, as the case
may be, by its respective depositary; however, such cross-market transactions
will require delivery of instructions to Euroclear or Cedel, as the case may be,
by the counterparts in such system in accordance with the rules and procedures
and within the established deadlines, Brussels time, of such system. Euroclear
or Cedel, as the case may be, will, if the transaction meets its settlement
requirements, deliver instructions to its respective depositary to take action
to effect final settlement on its behalf by delivering or receiving interests in
the relevant global notes in DTC, and making or receiving payment in accordance
with normal procedures for same-day funds settlement applicable to DTC.
Euroclear participants and Cedel participants may not deliver instructions
directly to the depositories for Euroclear or Cedel.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a global note from a participant in
DTC will be credited, and any such crediting will be reported to the relevant
Euroclear or Cedel participant, during the securities settlement processing day,
which must be a business day for Euroclear and Cedel, immediately following the
settlement date of DTC. Cash received in Euroclear or Cedel as a result of sales
of interest in a global security by or through a Euroclear or Cedel participant
to a participant in DTC will be received with value on the settlement date of
DTC but will be available in the relevant Euroclear or Cedel cash account only
as of the business day for Euroclear or Cedel following DTC's settlement date.
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PLAN OF DISTRIBUTION
A broker-dealer that is the holder of initial notes that were acquired for
the account of such broker-dealer as a result of market-making or other trading
activities, other than initial notes acquired directly from us or any of our
affiliates, may exchange such initial notes for exchange notes pursuant to the
exchange offer; provided, that each broker-dealer that receives exchange notes
for its own account in exchange for initial notes, where such initial notes were
acquired by such broker-dealer as a result of market-making or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such exchange notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of exchange notes received in exchange for initial notes where such
initial notes were acquired as a result of market-making activities or other
trading activities. We have agreed that for a period of 180 days after
consummation of the exchange offer or such time as any broker-dealer no longer
owns any registrable securities, we will make this prospectus, as it may be
amended or supplemented from time to time, available to any broker-dealer for
use in connection with any such resale. All dealers effecting transactions in
the exchange notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers or any other holder of exchange notes. Exchange notes received by
broker-dealers for their own account pursuant to the exchange offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the exchange notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
exchange notes. Any broker-dealer that resells exchange notes that were received
by it for its own account pursuant to the exchange offer and any broker or
dealer that participates in a distribution of such exchange notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of exchange notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after consummation of the exchange offer or such
time as any broker-dealer no longer owns any registrable securities, we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. We have agreed to pay all expenses incident to the
exchange offer and to our performance of, or compliance with, the registration
rights agreement, other than commissions or concessions of any brokers or
dealers, and will indemnify the holders of the notes, including any
broker-dealers, against certain liabilities, including liabilities under the
Securities Act.
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LEGAL MATTERS
The validity of the exchange notes offered hereby will be passed upon for
us by Cooperman Levitt Winikoff Lester & Newman, P.C., New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1999 and for the year then ended and the
consolidated financial statements of Insight Communications of Indiana, LLC at
December 31, 1998 and for the two month period ended December 31, 1998, and the
combined financial statements of Noblesville, Indiana, Jeffersonville, Indiana
and Lafayette, Indiana Cable Television Systems at October 31, 1998 and for the
ten month period ended October 31, 1998 and the year ended December 31, 1997, as
set forth in their reports. We've included our financial statements in this
prospectus and appearing 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 for the ten-month period ended October 31, 1998 and for the year
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 for the four-month period ended April 30, 1998 and for the year 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 consolidated financial statements of InterMedia Capital Partners VI,
L.P., as of September 30, 1999 and December 31, 1998 and for the nine month
period ended September 30, 1999 and the period from April 30, 1998 (commencement
of operations) to December 31, 1998 included in this Registration Statement 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.
159
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4, including all amendments, exhibits, schedules and
supplements, to register the exchange notes. Although this prospectus, which
forms a part of the registration statement, contain all material information
included in the registration statement, parts of the registration statement have
been omitted as permitted by the rules of the Commission. For further
information about us and the exchange notes offered in this prospectus, you
should refer to the registration statement and its exhibits. You may read and
copy any document we file with the Commission at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices at 7 World Trade Center,
Suite 1300, New York, New York 10048 and at 500 West Madison Street, Suite
1400,Chicago, Illinois 60661. Copies of such material may be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, NW, Washington,
D.C. 20549, at prescribed rates. You can also review such material by accessing
the Commission's Internet web site at http://www.sec.gov. This site contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission.
As a result of the exchange offer, we will be subject to the periodic
reporting and other informational requirements of the Securities Exchange Act.
So long as we are subject to these periodic reporting requirements, we will
continue to furnish the information required thereby to the Commission. We will
be required to file periodic reports with the Commission pursuant to the
Securities Exchange Act during our current fiscal year and thereafter so long as
the exchange notes are held by at least 300 registered holders. We do not
anticipate that, for periods following December 31, 2001, the exchange notes
will be held of record by more than 300 registered holders. Therefore, we do not
expect to be required to comply with the periodic reporting requirements imposed
under the Securities Exchange Act after that date. However, we have agreed that,
whether or not we are required to do so by the rules and regulations of the
Commission, for so long as any of the notes remain outstanding, we will furnish
to the holders of the notes and file with the Commission, unless the Commission
will not accept such a filing:
o all quarterly and annual financial information that would be
required to be contained in such a filing with the Commission on
Forms 10-Q and 10-K if we were required to file such forms,
including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, regarding a discussion of
the annual information only, a report thereon by our certified
independent public accountants; and
o all reports that would be required to be filed with the Commission
on Form 8-K if we were required to file such reports.
In addition, for so long as any of the notes remain outstanding, we have
agreed to make available to any prospective purchaser of the notes or beneficial
owner of the notes in connection with any sale thereof, the information required
by Rule 144A(d)(4) under the Securities Act.
160
GLOSSARY
The following is a description of certain terms used in this prospectus:
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.
G-1
Digital video..................... A distribution technology where video content
is delivered in digital format.
Direct broadcast satellite
television system................. A service by which packages of television
programming are transmitted via high-powered
satellites to individual homes, each served
by a small satellite dish.
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, 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...................... The number of single residence homes,
apartments and condominium units passed by
the cable distribution network in a cable
system's service area.
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...................... A one-way radio transmission of television
channels over microwave system 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.
Near video-on-demand.............. A pay-per-view service that allows customers
to select and order a movie of their choice
from a selection of movies being broadcast on
several dedicated channels.
G-2
Each movie is broadcast on multiple channels
to offer the customer several start times for
the same movie and the customer joins the
movie in progress when it is purchased.
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.
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................. 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
G-3
(demodulates) an analog telephone signal to a
data format that the computer can process.
Tiers............................. Varying levels of cable services consisting
of differing combinations of several
over-the-air broadcast and satellite
delivered cable television programming
services.
Video-on-demand................... A pay-per-view service that allows customers
to select and order a movie of their choice
from a large film library. The movie will
play in its entirety as soon as it is
ordered.
G-4
Index to Financial Statements
Page
----
Insight Midwest, L.P.
Report of Independent Auditors--Ernst & Young LLP.........................F-3
Insight Midwest, L.P. Consolidated Balance Sheet at
December 31, 1999.....................................................F-4
Insight Midwest, L.P. Consolidated Statement of Operations and
Partners' Capital for the year ended December 31, 1999................F-5
Insight Midwest, L.P. Consolidated Statement of Cash Flows for
the year ended December 31, 1999 .....................................F-6
Insight Midwest, L.P. Notes to Consolidated Financial Statements..........F-7
Insight Communications of Indiana, LLC
Report of Independent Auditors--Ernst & Young LLP.........................F-20
Insight Communications of Indiana, LLC Balance Sheet at
December 31, 1998.....................................................F-21
Insight Communications of Indiana, LLC Statement of Operations
and Members' Equity for the period November 1, 1998 to
December 31, 1998.....................................................F-22
Insight Communications of Indiana, LLC Statement of Cash Flows
for the period November 1, 1998 to December 31, 1998..................F-23
Insight Communications of Indiana, LLC Notes to Financial Statements......F-24
Noblesville, Indiana, Jeffersonville, Indiana, and Lafayette, Indiana Cable
Television Systems
Report of Independent Auditors--Ernst & Young LLP.........................F-31
Noblesville, Indiana, Jeffersonville, Indiana, and Lafayette,
Indiana Cable Television Systems Combined Balance Sheet
at October 31, 1998...................................................F-32
Noblesville, Indiana, Jeffersonville, Indiana, and Lafayette,
Indiana Cable Television Systems Combined Statements of
Operations for the year ended December 31, 1997 and for
the period January 1, 1998 to October 31, 1998....................... F-33
Noblesville, Indiana, Jeffersonville, Indiana and Lafayette,
Indiana Cable Television Systems Combined Statement of
Changes in Net Assets for the year ended December 31, 1997
and for the period January 1, 1998 to October 31, 1998................F-34
Noblesville, Indiana, Jeffersonville, Indiana, and Lafayette,
Indiana Cable Television Systems Combined Statements of
Cash Flows for the year ended December 31, 1997 and for
the period January 1, 1998 to October 31, 1998........................F-35
Noblesville, Indiana, Jeffersonville, Indiana, and Lafayette,
Indiana Cable Television Systems Notes to Combined
Financial Statements..................................................F-36
F-1
Index to Financial Statements
Page
----
TCI Insight Systems
Report of Independent Auditors--KPMG LLP.................................F-42
TCI Insight Systems Combined Balance Sheets as of October 31, 1998........F-43
TCI Insight Systems Combined Statements of Operations and Parent's
Investment (Deficit) for the ten month period ended
October 31, 1998, and the year ended December 31, 1997................F-44
TCI Insight Systems Combined Statements of Cash Flows for the
ten month period ended October 31, 1998, and the year
ended December 31, 1997...............................................F-45
TCI Insight Systems Notes to Combined Financial Statements................F-46
TCI IPVI Systems
Report of Independent Auditors--KPMG LLP..................................F-55
TCI IPVI Systems Combined Balance Sheets at April 30, 1998................F-56
TCI IPVI Systems Combined Statements of Operations and Parent's
Investment (Deficit) for the year ended December 31, 1997 and for
the four month period ended April 30, 1998............................F-57
TCI IPVI Systems Combined Statements of Cash Flows for the year
ended December 31, 1997 and for the four month period
ended April 30, 1998..................................................F-58
TCI IPVI Systems Notes to Combined Financial Statements...................F-59
InterMedia Capital Partners VI, L.P.
Report of Independent Accountants--PricewaterhouseCoopers LLP.............F-70
InterMedia Capital Partners VI, L.P. Consolidated Balance
Sheets at September 30, 1999 and December 31, 1998....................F-71
InterMedia Capital Partners VI, L.P. Consolidated Statement of
Operations for the Nine months ended September 30, 1999
and for the period April 30, 1998 (commencement of
operations) to December 31, 1998......................................F-72
InterMedia Capital Partners VI, L.P. Consolidated Statement of
Changes in Partners' Capital for the nine months ended
September 30, 1999 and for the period April 30, 1998
(commencement of operations) to December 31, 1998.....................F-73
InterMedia Capital Partners VI, L.P. Consolidated Statement
of Cash Flows for the nine months ended September 30, 1999 and
for the period April 30, 1998 (commencement of operations)
to December 31, 1998..................................................F-74
InterMedia Capital Partners VI, L.P. Notes to Consolidated
Financial Statements..................................................F-75
Note--Prior to the completion of the offering of notes in October 1999, Insight
Midwest, L.P. and Insight Capital, Inc. had no assets, liabilities, contingent
liabilities or operations.
F-2
REPORT OF INDEPENDENT AUDITORS
The Partners
Insight Midwest, L.P.
We have audited the accompanying consolidated balance sheet of Insight Midwest,
L.P. as of December 31, 1999 and the related consolidated statements of
operations and partners' capital, and cash flows for the year ended December 31,
1999. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our 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 Midwest,
L.P., at December 31, 1999 and the consolidated results of their operations and
their cash flows for the year ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
New York, New York
March 29, 2000
F-3
INSIGHT MIDWEST, L.P.
CONSOLIDATED BALANCE SHEET
December 31, 1999
(in thousands)
ASSETS
Current Assets
Cash and cash equivalents $ 35,996
Trade accounts receivable, net of allowance for doubtful accounts of $735 15,643
Prepaid expenses and other 6,976
----------
Total current assets 58,615
Fixed assets, net 596,246
Intangible assets, net 1,032,553
Deferred financing costs, net of
amortization 19,185
----------
$1,706,599
==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 59,406
Accrued expenses and other liabilities 26,029
Interest payable 19,397
Due to affiliates 1,220
----------
Total current liabilities 106,052
Debt 1,232,000
----------
Total liabilities 1,338,052
Partners' Capital 368,547
----------
$1,706,599
==========
See accompanying notes
F-4
INSIGHT MIDWEST, L.P.
CONSOLIDATED STATEMENT OF OPERATIONS AND PARTNERS' CAPITAL
For the year ended December 31, 1999
(in thousands)
Revenue $ 201,286
Costs and expenses:
Programming and other operating costs 59,587
Selling, general and administrative 38,267
Management fees 5,932
Depreciation and amortization 109,110
---------
212,896
Loss from operations (11,610)
Other expense:
Interest expense (50,900)
Other (167)
---------
Net loss (62,677)
Partners' Capital at January 1, 1999 44,195
Partners' Contribution 387,029
---------
Partners' Capital at December 31, 1999 $ 368,547
=========
See accompanying notes
F-5
INSIGHT MIDWEST, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended December 31, 1999
(dollars in thousands)
Operating activities:
Net loss $ (62,677)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 109,110
Provision for losses on trade accounts receivable 1,239
Changes in operating assets and liabilities:
Trade accounts receivable (6,272)
Prepaid expenses and other 2,885
Accounts payable and accrued expenses 41,585
Due to affiliates 3,475
Interest payable 13,573
Net cash provided by operating activities 102,918
---------
Investing activities:
Purchases of fixed assets (107,901)
Increase in intangible assets (2,540)
Net cash used in investing activities (110,441)
---------
Financing activities:
Repayment of bank credit facility (170,661)
Issuance of high yield senior notes 200,000
Debt issuance costs (7,712)
Net cash provided by financing activities 21,627
---------
Net increase in cash and cash equivalents 14,104
Cash and cash equivalents, beginning of period 21,892
---------
Cash and cash equivalents, end of period $ 35,996
=========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 37,904
=========
Supplemental disclosures of significant non cash financing activities:
Contribution of cable system assets by partner $ 387,029
=========
See accompanying notes
F-6
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
A. Organization and Basis of Presentation
Insight Midwest, L.P. ("Insight Midwest"or the "Company") was formed in
September 1999 to serve as the holding company and a financing vehicle for
Insight's cable television system joint ventures with an affiliate of AT&T
Broadband, LLC (formerly Tele-Communications, Inc.) ("AT&T Broadband"). Insight
Midwest is owned 50% by Insight Communications Company, Inc. ("Insight Inc."),
through its subsidiary Insight Communications Company, L.P. ("Insight L.P."),
and 50% by TCI of Indiana Holdings, LLC ("TCI"), an indirect subsidiary of AT&T
Broadband. On October 1, 1999 Insight Midwest issued $200.0 million of 9 3/4%
Senior Notes due 2009 with Insight Capital, Inc., as co-issuer, a wholly-owned
subsidiary of Insight Midwest. On October 1, 1999 the joint ventures Indiana and
Kentucky systems and operations were consolidated under Insight Midwest, as
described further below. Through its operating subsidiaries Insight Indiana and
Insight Kentucky (defined below), Insight Midwest owns and operates cable
television systems in Indiana and Kentucky which passed approximately 1.2
million homes and served approximately 749,000 customers as of December 31,
1999.
Insight Indiana
On October 31, 1998 Insight L.P. and TCI contributed certain of their
cable television systems located in Indiana and Northern Kentucky (the "Indiana
systems") to Insight Communications of Indiana, LLC ("Insight Indiana") in
exchange for 50% equity interests therein. The cable television systems
contributed to Insight Indiana by Insight L.P. included the Jasper and
Evansville systems that were acquired by Insight L.P. from TCI on October 31,
1998 and the Noblesville, Jeffersonville and Lafayette systems already owned by
Insight L.P. (the "Insight Contributed Systems"). Insight L.P. entered into a
management agreement with Insight Indiana, pursuant to which Insight L.P. agreed
to manage the Indiana systems for an annual fee of 3% of the gross revenues of
the Indiana systems. On October 1, 1999, as part of a joint venture
restructuring, Insight Indiana became a wholly-owned subsidiary of Insight
Midwest and amended its management agreement with Insight L.P., confirming the
3% management fee. In addition to managing the day-to-day operations of the
Indiana systems, Insight L.P. is the general partner and therefore effectively
controls Insight Midwest, including all of the operating and financial
decisions pertaining to the Indiana systems. Pursuant to their terms of
respective governing agreements, the terms of Insight Midwest and Insight
Indiana will continue for twelve years through October 1, 2011, unless extended
by Insight L.P. and TCI.
In accordance with the foregoing, the historical carrying values of the
Indiana systems contributed by TCI were increased by an amount equivalent to 50%
of the
F-7
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
A. Organization and Basis of Presentation (continued)
difference between the fair value of the Indiana systems and their respective
carrying values ($89.1 million) as of October 31, 1998. In addition, the
historical values of the Insight Contributed Systems were 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 as of October 31, 1998.
Furthermore, in connection with Insight L.P.'s acquisition of the Jasper and
Evansville systems, the historical values of such systems were increased by
$112.0 million, an amount equivalent to the difference between the fair value of
such systems and their carrying values as of October 31, 1998. 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 $58.0 million and franchise costs of $181.6 million. Neither Insight L.P. nor
TCI is contractually required to contribute additional capital to Insight
Midwest and, because Insight Midwest is a limited partnership, neither Insight
L.P. nor TCI is liable for the obligations of Insight Indiana or the Indiana
systems. For the purposes of this financial statement, Insight Indiana is
considered the predecessor to Insight Midwest.
Insight Indiana's systems passed approximately 495,000 homes and served
approximately 323,000 customers as of December 31, 1999.
Insight Kentucky
On October 1, 1999, Insight L.P. acquired a combined 50% interest in
InterMedia Capital Partners VI, L.P. (the "IPVI Partnership") from related
parties of Blackstone Cable Acquisition Company, LLC, related parties of
InterMedia Capital Management VI, LLC and a subsidiary and related party of AT&T
Broadband, for approximately $341.5 million (inclusive of expenses), and Insight
Midwest assumed debt of approximately $742.1 million. The IPVI Partnership,
through several intermediary partnerships, own and operate cable television
systems in four major markets in Kentucky: Louisville, Lexington, Bowling Green
and Covington (the "Kentucky systems"). On October 1, 1999, concurrently with
this acquisition, the Kentucky systems were contributed to Insight Midwest. As a
result of the IPVI Partnership's historical ownership structure, the Kentucky
systems are owned and operated by Insight Kentucky Partners II, L.P. ("Insight
Kentucky"), a third-tier subsidiary partnership of Insight Midwest. Also on
October 1, 1999, Insight L.P. entered into a management agreement with Insight
Kentucky, pursuant to which Insight L.P. manages the Kentucky systems in
consideration for a 3% management fee. Similarly to Insight Indiana, subject to
certain matters that require TCI's approval as specified in Insight Midwest's
partnership agreement, Insight L.P. effectively controls Insight Kentucky,
including all of the operating and financial decisions
F-8
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
A. Organization and Basis of Presentation (Continued)
pertaining to the Kentucky systems. Insight Kentucky and each of the other
Kentucky partnerships also have twelve-year terms through October 1, 2011,
unless extended by Insight L.P.and TCI.
The assets of Insight Kentucky have been valued based on the purchase
price and have been preliminarily allocated between fixed and intangible assets
based on management's evaluation of each individual operating system including
such factors as the age of the cable plant, the progress of rebuilds and
franchise relations. This resulted in a step-up in the carrying values of fixed
assets of approximately $160.3 million and intangible assets of approximately
$272.1 million. Fixed assets are being depreciated over their estimated useful
lives and intangible assets are amortized over 15 years (See Note B).
Insight Kentucky's systems passed approximately 669,000 homes and served
approximately 426,000 customers as of December 31, 1999.
As a result of the above transactions, the accompanying financial
statements include the results of operations of:
A. Insight Indiana for the year ended December 31, 1999; and
B. Insight Kentucky for the period from October 1, 1999 (date of
acquisition) through December 31, 1999.
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.
F-9
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
B. Significant Accounting Policies (continued)
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.
Cash Equivalents
Insight Midwest 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 30 years. For the year ended December 31, 1999, depreciation
expense approximated $55.0 million. 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. The carrying
value of fixed assets is reviewed if facts and circumstances suggest that they
may be impaired. If this review indicates that the carrying value of the fixed
assets will not be recovered from the undiscounted future cash flows of the
Company, an impairment loss would be recognized for the amount that the asset's
carrying value exceeds its fair value. Management believes that no material
impairment of fixed assets existed at December 31, 1999.
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 the individual systems comprising Insight Midwest, 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, 1999.
F-10
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (CONTINUED)
DECEMBER 31, 1999
B. Significant Accounting Policies (continued)
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 year
ended December 31, 1999, marketing and promotional expense approximated $1.1
million.
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
Midwest is reportable by the individual partners in their respective tax
returns.
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"), which as amended by SFAS 137 is effective for fiscal years beginning
after June 15, 2000. The Statement will require Insight Midwest 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. ProForma Results of Operations (unaudited)
The pro forma unaudited results of operations for the year ended December
31, 1999 assuming the acquisition of the IPVI Partnership had been consummated
on January 1, 1999, follows (in thousands):
Revenues $ 360,483
Loss before extraordinary item 142,436
Net loss 142,436
F-11
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
D. Fixed Assets
Fixed assets consist of:
December 31, 1999
-----------------
(in thousands)
Land, buildings and improvements $ 12,887
Cable television equipment 661,530
Furniture, fixtures and office equipment 9,807
---------
684,224
Less accumulated depreciation and amortization (87,978)
---------
$ 596,246
=========
E. Intangible Assets
Intangible assets consist of:
December 31, 1999
-----------------
(in thousands)
Franchise rights $ 1,096,370
Goodwill 1,190
-----------
1,097,560
Less accumulated amortization (65,007)
-----------
$ 1,032,553
===========
F-12
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
F. Debt
Debt consists of:
December 31, 1999
-----------------
(in thousands)
Insight Indiana Credit Facility $ 470,000
Insight Kentucky Credit Facility 562,000
Insight Midwest Senior Notes 200,000
------------
$ 1,232,000
============
Insight Indiana Credit Facility
At December 31, 1999, Insight Indiana had a credit facility that provides
for term loans of $300.0 million and for revolving credit loans of up to $250.0
million (the "Insight Indiana Credit Facility"). 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 all of the membership
interests of Insight Indiana and any amounts payable to its members. 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, 1999, $470.0 million was outstanding under the Insight Indiana
Credit Facility. For the two months ended December 31, 1998 and the year ended
December 31, 1999 interest rates approximated 7.60% and 7.43%, respectively.
Insight Kentucky Credit Facility
The Kentucky credit facility (the "Insight Kentucky Credit Facility")
provides for two term loans of $100.0 million and $250.0 million and for
revolving credit loans of up to $325.0 million. Loans under the Insight Kentucky
Credit Facility may be used to refinance debt, finance acquisitions, capital
expenditures and for working capital and general corporate purposes as permitted
by the agreement. 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 the Insight Kentucky Credit Facility are guaranteed by
Insight Kentucky and Insight Kentucky Partners II, L.P. (a subsidiary of Insight
Kentucky Partners I, L.P.-See Note A), and are secured by all of the partnership
interests of Insight Kentucky Partners I, L.P ( a subsidiary of Insight
Kentucky-See Note A) and its subsidiaries and any intercompany notes made in
favor of Insight Kentucky Partners I, L.P. and its subsidiaries. Revolving loans
under the Insight Kentucky Credit Facility bear interest, at the Company's
option at an alternate base or eurodollar rate, plus an additional margin tied
to the Company's ratio of total debt to annualized cash flow. The term loans
under the Insight Kentucky Credit Facility also bear
F-13
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
F. Debt (continued)
interest, at the Company's option, at an alternate base or Eurodollar rate, plus
an additional margin. For the three months December 31, 1999, average interest
rates approximated 8.47%.
The Insight Kentucky Credit Facility contains a number of covenants that,
among other things, restrict the ability of Insight Kentucky to make capital
expenditures, acquire or dispose of assets, enter into mergers, incur additional
indebtedness, pay dividends or other distributions, create liens on assets, make
investments, and engage in transactions with related parties. The Insight
Kentucky Credit Facility permits the distribution to the Company of amounts
equal to the interest then due and owing on the notes, assuming that the
maturity of the notes has not been accelerated and, before and after giving
effect to such payment, no default exists under the facility.
In addition, the Insight Kentucky Credit Facility requires compliance with
certain financial ratios, requiring Insight Kentucky to enter into interest rate
protection agreements covering at least 50%, subject to increase to 60% under
certain circumstances, of its total indebtedness and also contains customary
events of default. As of December 31, 1999, there was approximately $562.0
million outstanding under the $675.0 million Insight Kentucky Credit Facility.
The Insight Midwest Senior Notes
On October 1, 1999, contemporaneously with the closing of Insight
Kentucky, Insight Midwest completed a $200 million high yield offering of 9 3/4
% senior notes due 2009 (the "Insight Midwest Senior Notes"). The proceeds of
the offering were used to repay certain debt of the IPVI Partnership. Interest
on the Insight Midwest Senior Notes accrues at the rate of 9 3/4% per annum and
is payable semi-annually on April 1 and October 1, commencing on April 1, 2000.
The Insight Midwest Senior Notes are redeemable on or after October 1,
2004. In addition, up to 35% of the Insight Midwest Senior Notes may be redeemed
prior to October 1, 2002 with the net proceeds from certain sales of Insight
Midwest's equity. Each holder of the Insight Midwest Senior Notes may require
Insight Midwest to redeem all or part of that holder's notes upon a change of
control. The Insight Midwest Senior Notes are general unsecured obligations, and
are subordinate to all liabilities of Insight Midwest's subsidiaries, the amount
of which was approximately $1.1 billion as of December 31, 1999.
The Insight Midwest Senior Notes contain certain covenants that limit,
among other things, the ability of Insight Midwest and its subsidiaries to incur
additional debt;
F-14
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
F. Debt (continued)
pay dividends on Insight Midwest's capital stock or repurchase Insight Midwest's
capital stock; make investments; use assets as security in other transactions;
and sell certain assets or merge with or into other companies.
At December 31, 1999, required annual principal payments under the Insight
Indiana and Insight Kentucky Credit Facilities and the Insight Midwest Senior
Notes are follows (in thousands):
2000 $ --
2001 98,000
2002 107,750
2003 129,250
2004 152,500
Thereafter 744,500
----------
$1,232,000
==========
Insight Midwest 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, 1999 Insight Midwest has entered into various interest rate swap
and collar agreements effectively fixing interest rates at 4.5% to 6.25%, plus
applicable margin on $690 million notional value of debt which expire at various
dates ranging from December, 2000 to July, 2003.
G. @Home Warrants
Under a distribution agreement with At Home Corporation ("@Home"), Insight
Midwest provides high-speed Internet access to subscribers over its distribution
network in certain of its cable television systems. In connection with the
capital acquisition, Insight Kentucky has agreements whereby @Home issued
warrants to Insight Kentucky to purchase shares of @Home Series A Common Stock
("@Home Stock") at an exercise price of $5.25 per share, as adjusted for a
two-for-one stock split which occurred on June 17, 1999. Under the provisions of
the agreement, Insight Kentucky estimates that it may purchase up to 459,200
shares of @Home Stock. The warrants become vested and excerisable, subject to
certain forfeiture and other conditions, based on operational targets which
include offering the @Home service by Insight Kentucky in its service areas and
obtaining specified numbers of @Home subscribers over the remaining six-year
term of the @Home distribution agreement. Insight Kentucky has not recognized
any income related to the warrants for the year ended December 31, 1999.
F-15
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
H. Financial Instruments
Concentrations of Credit: Financial instruments that potentially subject Insight
Midwest to significant concentrations of credit risk consist principally of cash
investments and accounts receivable. Insight Midwest maintains cash and cash
equivalents with various financial institutions. These financial institutions
are located throughout the country and Insight Midwest'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 Midwest's customer base.
The following methods and assumptions were used by Insight Midwest 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 Midwest's borrowings under its credit
facilities approximate its fair value as it bears interest at floating rates.
The carrying amounts of Insight Midwest's senior notes approximate its
fair values and it bears interest at a fixed rate.
The fair values of the swap agreements are not recognized in the financial
statements and approximated $7.2 million at December 31, 1999, based on market
trading value.
I. 401(k) Plan
Insight Midwest through its subsidiaries, Insight Indiana and Insight
Kentucky, 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 Midwest makes matching contributions equal to a percentage of the
employee's contribution. For the period ended December 31, 1999, the matching
contributions approximated $248,000 for Insight Indiana and $54,000 for Insight
Kentucky for the period October 1, 1999 through December 31, 1999.
F-16
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
J. Commitments and Contingencies
Insight Midwest 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):
2000........................................... $ 1,223
2001........................................... 664
2002........................................... 432
2003........................................... 334
2004........................................... 219
Thereafter..................................... 420
Rental expense for the year ended December 31, 1999 approximated $1.2
million.
In September 1999, the IPVI Partnership received a tentative property tax
assessment from the Kentucky Revenue Cabinet with a total valuation of $1,197
million. This valuation could result in an additional property tax liability of
approximately $1.4 million for the three months ended December 31, 1999 to
Insight Kentucky. However, based on the information currently available to
Insight Kentucky and taking into account the advice of Insight Kentucky's
counsel, management believes that the accrued property tax liability included in
Insight Kentucky's financial statements is adequate.
F-17
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
K. Related Party Transactions
Insight Midwest purchases substantially all of its pay television and
other programming from affiliates of TCI. Charges for such programming were
$29.6 million for the year ended December 31, 1999. Management believes that the
programming rates charged by TCI affiliates are lower than those which would be
available for independent parties.
On October 1, 1999, Insight L.P. entered into management agreements with
each of Insight Indiana and Insight Kentucky pursuant to which Insight L.P.,
manages Insight Indiana and Insight Kentucky for an annual fee of 3% of the
gross revenues of the Indiana systems and the Kentucky systems. For the year
ended December 31, 1999, Insight Indiana was charged a management fee of
approximately $4.4 million by Insight L.P. For the period from October 1, 1999
through December 31, 1999, Insight Kentucky was charged a management fee of
approximately $1.6 million by Insight L.P.
In 1999, management agreements were put into place, whereby Insight
Indiana would manage Insight L.P's Portland and Scottsburg, Indiana systems. For
the year ended December 31, 1999 Insight L.P. was charged a management fee of
approximately $95,000.
L. Subsequent Events
On March 21, 2000, Insight Midwest entered into a letter of intent with
Cable One, Inc., a subsidiary of The Washington Post Company, for the
acquisition of a cable television system serving approximately 16,000 customers
in Greenwood, Indiana. The acquisition of the Greenwood system would occur upon
completion of a proposed trade of systems between Cable One and AT&T Broadband,
LLC. The transaction is subject to the negotiation and execution of definitive
agreements.
On March 15, 2000, Insight Inc. reached an agreement in principle with
AT&T Corp. for the delivery of telephone service utilizing Insight Midwest's
cable television systems under the "AT&T" brand name. The terms of the agreement
in principle provide that Insight Inc.and its affiliates will market, service
and bill for local telephone service. AT&T would be required to install and
maintain the necessary switching equipment, and would be the local exchange
carrier of record. AT&T would pay Insight Inc.and its affiliates a fee for the
use of the local telephone lines, and will also compensate Insight Inc. and its
affiliates for installation and maintenance services at customers' residences.
In addition, AT&T would pay Insight Inc.and its affiliates commissions for sales
made to customers.
F-18
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
L. Subsequent Events (continued)
The agreement in principle is subject to the negotiation and execution of
definitive agreements and covers areas serviced by Insight Midwest.
On March 23, 2000, Insight L.P. entered into a letter of intent with
AT&T Broadband to contribute to Insight Midwest additional cable television
systems serving approximately 537,000 customers. Through a series of
transactions, Insight L.P. will contribute to Insight Midwest its interests in
systems serving approximately 187,000 customers, and AT&T Broadband will
contribute systems serving approximately 350,000 customers. Initially, Insight
L.P. would exchange its Claremont, California system for a system in Freeport,
Illinois, subject to completion by AT&T Broadband of its proposed acquisition of
MediaOne. The Freeport system would be integrated into Insight L.P.'s Rockford,
Illinois system, creating a cluster of approximately 75,000 customers in the
northern part of the state. Insight L.P. would also purchase from AT&T Broadband
systems serving approximately 100,000 customers in North Central Illinois.
Concurrently with this purchase, Insight L.P. would contribute to Insight
Midwest all of its systems not already owned by Insight Midwest, including its
newly purchased Illinois systems, its expanded Rockford, Illinois cluster, its
interest in its Columbus, Ohio system and its Griffin, Georgia system, as well
as its systems in Indiana not already owned byInsight Midwest. At the same time,
AT&T Broadband would contribute to Insight Midwest systems located in Central
and North Central Illinois serving approximately 250,000 customers. As a result,
Insight Midwest would increase its customer base of approximately 748,800 as of
December 31, 1999 to approximately 1.3 million. AT&T Broadband would receive an
amount of cash from Insight L.P. Upon completion of the transactions, Insight
Midwest would remain equally owned by Insight L.P. and AT&T Broadband, and
Insight L.P. would continue to serve as general partner and manage and operate
Insight Midwest's systems. The transactions are subject to the negotiation and
execution of definitive agreements.
F-19
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
F-20
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
--------
Total liabilities 483,137
Members' equity 44,195
--------
$527,332
========
See accompanying notes.
F-21
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
(dollars 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.
F-22
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 $ --
=========
Supplemental disclosures of significant non cash financing activities:
Contribution of cable system assets by partner $ 44,195
=========
See accompanying notes.
F-23
Insight Communications of Indiana, LLC
Notes to Financial Statements
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.
F-24
Insight Communications of Indiana, LLC
Notes to Financial Statements (continued)
B. Significant Accounting Policies (continued)
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.
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
F-25
Insight Communications of Indiana, LLC
Notes to Financial Statements (continued)
B. Significant Accounting Policies (continued)
cash flows of the individual system comprising 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.
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.
F-26
Insight Communications of Indiana, LLC
Notes to Financial Statements (continued)
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
========
F-27
Insight Communications of Indiana, LLC
Notes to Financial Statements (continued)
E. Debt (continued)
At December 31, 1998, Insight Indiana had 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.
F-28
Insight Communications of Indiana, LLC
Notes to Financial Statements (continued)
F. Financial Instruments (continued)
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 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.
F-29
Insight Communications of Indiana, LLC
Notes to Financial Statements (continued)
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.
F-30
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
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., 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
F-31
Noblesville In, Jeffersonville In, and Lafayette In
Cable Television Systems
Combined Balance Sheets
(dollars in thousands)
October 31, 1998
----------------
Assets
Cash and cash equivalents $ 291
Trade accounts receivable, net of allowance for doubtful accounts
of $40 1,456
Prepaid expenses 141
Fixed assets, net 59,304
Intangible assets, net 55,194
--------
Total assets $116,386
========
Liabilities and Net Assets
Accounts payable $ 3,085
Accrued expenses and other liabilities 2,729
--------
Total liabilities 5,814
Net assets 110,572
--------
Total Liabilities and Net Assets $116,386
========
See accompanying notes.
F-32
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.
F-33
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.
F-34
Noblesville In, Jeffersonville In, and Lafayette In
Cable Television Systems
Combined Statements of Cash Flows
(dollars in thousands)
Year ended Ten months
December 31, ended October
1997 31, 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 period 107 143
---------------------------
Cash and cash equivalents, end of period $ 143 $ 291
===========================
See accompanying notes.
F-35
Noblesville In, Jeffersonville In, and Lafayette In
Cable Television Systems
Notes to Combined Financial Statements
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):
F-36
Noblesville In, Jeffersonville In, and Lafayette In
Cable Television Systems
Notes to Combined Financial Statements (continued)
A. Description of Business and Basis of Presentation (continued)
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.
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.
F-37
Noblesville In, Jeffersonville In, and Lafayette In
Cable Television Systems
Notes to Combined Financial Statements (continued)
B. Summary of Significant Accounting Policies (continued)
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 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:
F-38
Noblesville In, Jeffersonville In, and Lafayette In
Cable Television Systems
Notes to Combined Financial Statements (continued)
B. Summary of Significant Accounting Policies (continued)
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.
F-39
Noblesville In, Jeffersonville In, and Lafayette In
Cable Television Systems
Notes to Combined Financial Statements (continued)
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.
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
==============
F-40
Noblesville In, Jeffersonville In, and Lafayette In
Cable Television Systems
Notes to Combined Financial Statements (continued)
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.
F-41
Independent Auditors' Report
The Board of Directors
Tele-Communications, Inc.:
We have audited the accompanying combined balance sheet of the TCI Insight
Systems (as defined in Note 1 to the combined financial statements) as of
October 31, 1998, 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 the year 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 the results of their operations and their
cash flows for the ten-month period ended October 31, 1998 and for the year
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Denver, Colorado
March 5, 1999
F-42
TCI Insight Systems
(A combination of certain assets, as defined in note 1)
Combined Balance Sheet
(amounts in thousands)
October 31,
1998
----------
Assets
Cash $ 896
Trade and other receivables, net 5,113
Property and equipment, at cost:
Land 217
Distribution systems 117,346
Support equipment and buildings 12,716
---------
130,279
Less accumulated depreciation 69,679
---------
60,600
---------
Franchise costs 187,768
Less accumulated amortization 42,303
---------
145,465
---------
Other assets 108
=========
$ 212,182
=========
Liabilities And Parent's Deficit
Cash overdraft $ --
Accounts payable and accrued expenses 3,728
Deferred income taxes (note 3) 63,966
Intercompany notes owed to Tele-Communications, Inc. ("TCI") (notes 1 and 4) 230,000
---------
Total liabilities 297,694
Parent's deficit (note 4) (85,512)
---------
$ 212,182
=========
Commitments and contingencies (note 5)
See accompanying notes to combined financial statements.
F-43
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)
January 1,
Year ended 1998 through
December 31, October 31,
1997 1998
-----------------------
Revenue $ 93,543 $ 80,357
Operating costs and expenses:
Operating (note 4) 28,012 24,375
Selling, general and administrative 11,583 11,835
Management fees (note 4) 3,732 3,057
Depreciation 8,545 8,222
Amortization 4,916 4,001
-----------------------
56,788 51,490
-----------------------
Operating income 36,755 28,867
Other income (expense) 96 (159)
Earnings before income taxes 36,851 28,708
Income tax expense (note 3) (12,828) (9,969)
-----------------------
Net earnings 24,023 18,739
Parent's investment (deficit):
Beginning of period 147,614 141,088
Change in due to TCI (30,549) (15,339)
Intercompany notes owed to TCI (notes 1 and 4) -- (230,000)
-----------------------
End of period $ 141,088 $ (85,512)
=======================
See accompanying notes to combined financial statements.
F-44
TCI Insight Systems
(A combination of certain assets, as defined in note 1)
Combined Statements of Cash Flows
(amounts in thousands)
January 1,
Year ended 1998 through
December 31, October 31,
1997 1998
--------------------------
Cash flows from operating activities:
Net earnings $ 24,023 $ 18,739
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 13,461 12,223
Deferred income tax expense (1,366) (1,659)
Changes in operating assets and liabilities:
Change in receivables (2,471) 40
Change in other assets 200 58
Change in accounts payable and accrued expenses 23 (683)
--------------------------
Net cash provided by operating activities 33,870 28,718
--------------------------
Cash flows from investing activities:
Capital expended for property and equipment (5,068) (11,927)
Other investing activities 102 43
--------------------------
Net cash used in investing activities (4,966) (11,884)
--------------------------
Cash flows from financing activities:
Change in due to TCI (30,549) (15,339)
Change in cash overdraft 599 (599)
--------------------------
Net cash used in financing activities (29,950) (15,938)
--------------------------
Net increase (decrease) in cash (1,046) 896
--------------------------
Cash:
Beginning of period 1,046 --
--------------------------
End of period $ -- $ 896
==========================
See accompanying notes to combined financial statements.
F-45
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 Year Ended December 31, 1997
1. Basis of Presentation
The combined financial statements include the accounts of twelve of TCI's cable
television systems and three related advertising sales offices serving certain
subscribers within Indiana (collectively, the "TCI Insight Systems"). The TCI
Insight Systems were indirectly wholly-owned by TCI in all periods presented
herein. All significant inter-entity accounts and transactions have been
eliminated in combination. The combined net assets of TCI Insight Systems
including amounts due to TCI are referred to as "Parent's Investment."
The TCI Insight Systems were acquired through a series of transactions whereby
TCI 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 TCI'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, TCI and Insight Communications L.P. ("Insight")
executed a transaction under a Contribution and Purchase Agreement, whereby TCI
contributed and exchanged certain cable television systems and advertising sales
offices to a newly formed Limited Liability Company between TCI 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 interest bearing notes owed by the TCI
Insight Systems to TCI and its affiliates. These amounts 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.
F-46
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 Year Ended December 31, 1997
2. Summary of Significant Accounting Policies
Receivables
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at October 31, 1998 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 year ended
December 31, 1997 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.
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
F-47
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 Year Ended December 31, 1997
2. Summary of Significant Accounting Policies (continued)
based on an analysis of undiscounted cash flows, 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, and pay-per-view
programming 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 TCI 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
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 Year Ended December 31, 1997
3. Income Taxes (continued)
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 Insight Systems. The
income tax amounts included in the accompanying combined financial statements
approximate the amounts that would have been reported if the TCI Insight Systems
would have filed a separate income tax return.
Income tax expense for the ten-month period ended October 31, 1998 and for the
year ended December 31, 1997 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)
======================================
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 Year Ended December 31, 1997
3. Income Taxes (continued)
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,
Year ended 1998 through
December 31, October 31,
1997 1998
----------------------------
(amounts in thousands)
Computed "expected" tax expense. $ (12,897) $ (10,048)
State and local income taxes, net of federal
income tax benefit 81 98
Other (12) (19)
----------------------------
$ (12,828) $ (9,969)
============================
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 are
presented below:
(amount in
thousands)
Deferred tax asset--principally due to
non-deductible accruals $ 79
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation 12,822
Franchise costs, principally due to differences
in amortization and initial basis 51,223
---------
Total gross deferred tax liabilities 64,045
---------
Net deferred tax liability $ 63,966
=========
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 Year Ended December 31, 1997
4. Parent's Investment (Deficit)
Parent's deficit in the TCI Insight Systems at October 31, 1998 is summarized as
follows:
amounts
in thousands
Due to TCI $ 77,892
Accumulated deficit (163,404)
------------
$ (85,512)
============
The amount due to TCI 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 TCI.
On September 30, 1998, TCI caused the TCI Insight Systems to effect a dividend
from the TCI Insight Systems to TCI aggregating $230,000,000 (the "Dividend").
The Dividend resulted in an increase to the intercompany notes owed to TCI and a
corresponding decrease to retained earnings.
As a result of TCI's 100% ownership of the TCI Insight Systems, the non-interest
bearing amounts due to TCI have been classified as a component of Parent's
deficit in the accompanying combined balance sheet.
The TCI Insight Systems purchase, at TCI's cost, substantially all of their pay
television and other programming from affiliates of TCI. Charges for such
programming were $18,037,000 and $18,269,000 for the ten-months ended October
31, 1998 and for the year ended December 31, 1997, respectively, and are
included in operating expenses in the accompanying combined financial
statements.
Certain subsidiaries of TCI 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 Year Ended December 31, 1997
4. Parent's Investment (Deficit) (continued)
The intercompany advances and expense allocation activity in amounts due to TCI
consists of the following:
January 1,
Year ended 1998 though
December 31, October 31,
1997 1998
--------------------------
(amounts in thousands)
Beginning of period $123,780 $ 93,231
Programming charges 18,269 18,037
Management fees 3,732 3,057
Tax allocations 14,194 11,628
Cash transfer (66,744) (48,061)
--------------------------
End of period $ 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.
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
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 Year Ended December 31, 1997
5. Commitments and Contingencies (continued)
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. 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
F-53
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 Year Ended December 31, 1997
5. Commitments and Contingencies (continued)
arrangements amounted to $1,142,000 and $1,557,000 for the ten-month period
ended October 31, 1998 and for the year ended December 31, 1997, 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 TCI'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 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 its financial position, results of operations or cash
flows.
F-54
Independent Auditors' Report
The Board of Directors
Tele-Communications, Inc.:
We have audited the accompanying combined balance sheet of the TCI IPVI Systems
(as defined in Note 1 to the combined financial statements) as of April 30,
1998, 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
the year 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 the results of their operations and their cash flows
for the four-month period ended April 30, 1998 and for the year ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Denver, Colorado
May 7, 1999
F-55
TCI IPVI Systems
(A combination of certain assets, as defined in note 1)
Combined Balance Sheet
April 30, 1998
--------------
(amounts in thousands)
Assets
Trade and other receivables, net $ 11,944
Property and equipment, at cost:
Land 1,956
Distribution systems 354,042
Support equipment and buildings 31,718
-----------
387,716
-----------
Less accumulated depreciation 158,616
-----------
229,100
-----------
Intangible assets 784,316
Less accumulated amortization 133,443
-----------
650,873
-----------
Other assets 2,919
-----------
$ 894,836
===========
Liabilities and Parent's Deficit
Accounts payable and accrued expenses $ 13,049
Debt to banks (note 3) 322,500
Intercompany notes owed to TCI (notes 1 and 5) 489,488
Deferred income taxes (note 4) 254,698
-----------
Total liabilities 1,079,735
-----------
Parent's deficit (note 5) (184,899)
-----------
$ 894,836
===========
Commitments and contingencies (note 6)
See accompanying notes to combined financial statements.
F-56
TCI IPVI Systems
(A combination of certain assets, as defined in note 1)
Combined Statements of Operations and Parent's Investment (Deficit)
Year ended January 1,
December 31, 1998 through
1997 April 30, 1998
--------------------------------
(amounts in thousands)
Revenue $ 185,496 $ 64,042
Operating costs and expenses:
Operating (note 5) 62,788 23,428
Selling, general and administrative 37,711 13,147
Management fees (note 5) 6,195 2,035
Depreciation 27,996 9,528
Amortization 17,868 5,851
---------------------------
152,558 53,989
Operating income 32,938 10,053
Interest expense (19,627) (6,661)
Other income (expense) (65) 1,871
---------------------------
Earnings before income taxes 13,246 5,263
Income tax expense (note 4) (5,565) (1,971)
---------------------------
Net earnings 7,681 3,292
Parent's investment (deficit):
Beginning of period 261,348 260,222
Change in due to Tele-Communications, Inc. ("TCI"),
(notes 1 and 5) (8,807) 41,075
Intercompany notes owed to TCI (notes 1 and 5) - (489,488)
---------------------------
End of period $ 260,222 $ (184,899)
===========================
See accompanying notes to combined financial statements.
F-57
TCI IPVI SYSTEMS
(A combination of certain assets, as defined in note 1)
COMBINED STATEMENTS OF CASH FLOWS
January 1, 1998
Year ended through
December 31, 1997 April 30, 1998
--------------------------------------
(amounts in thousands)
Cash flows from operating activities:
Net earnings $ 7,681 $ 3,292
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 45,864 15,379
Deferred income tax expense (benefit) 1,690 (1,532)
Other non cash charges 438 146
Changes in operating assets and liabilities:
Change in receivables (2,753) 972
Change in other assets (42) (122)
Change in accounts payable and accrued expenses (28,587) (5,575)
---------------------------------
Net cash provided by operating activities 24,291 12,560
---------------------------------
Cash flows from investing activities:
Capital expended for property and equipment (12,859) (10,636)
Other investing activities (125) 7
---------------------------------
Net cash used in investing activities (12,984) (10,629)
---------------------------------
Cash flows from financing activities:
Change in due to TCI (8,807) (1,931)
Borrowing of debt 103,500 --
Repayment of debt (106,000) --
---------------------------------
Net cash used in financing activities (11,307) (1,931)
---------------------------------
Net change in cash -- --
---------------------------------
Cash:
Beginning of period -- --
---------------------------------
End of period $ -- $ --
=================================
See accompanying notes to combined financial statements.
F-58
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 Year Ended December 31, 1997
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 including amounts due to TCI are referred to as "Parent's
Investment (Deficit)."
TCI's ownership interests 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
F-59
TCI IPVI 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 April 30, 1998
and for the Year Ended December 31, 1997
1. Basis of Presentation (continued)
$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 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 year ended
December 31, 1997, 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-60
TCI IPVI 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 April 30, 1998
and for the Year Ended December 31, 1997
2. Summary of Significant Accounting Policies (continued)
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 based on an analysis of undiscounted cash flows,
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 and pay-per-view
programming 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
F-61
TCI IPVI 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 April 30, 1998
and for the Year Ended December 31, 1997
2. Summary of Significant Accounting Policies (continued)
cash increase in franchise costs, parent's investment, 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.
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.
F-62
TCI IPVI 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 April 30, 1998
and for the Year Ended December 31, 1997
3. Debt to Banks (continued)
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 (amounts in thousands):
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. The
income tax amounts included in the accompanying combined financial statements
approximate the amounts that would have been reported if the TCI IPVI Systems
would have filed a separate income tax return.
Income tax expense for the four-month period ended April 30, 1998 and for the
year ended December 31, 1997 consists of:
F-63
TCI IPVI 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 April 30, 1998
and for the Year Ended December 31, 1997
4. Income Taxes (continued)
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)
===================================
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
Year ended through
December 31 , April 30,
1997 1998
--------------------------
(amounts in thousands)
Computed "expected" tax expense $ (4,636) $ (1,842)
State and local income taxes, net of federal
income tax benefit (144) 130
Amortization not deductible for tax purposes (785) (259)
--------------------------
$ (5,565) $ (1,971)
==========================
F-64
TCI IPVI 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 April 30, 1998
and for the Year Ended December 31, 1997
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 April 30, 1998 are
presented below:
(amounts in thousands)
Deferred tax asset--principally due to non-deductible
accruals $ 328
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation 43,802
Franchise costs, principally due to differences in
amortization and initial basis 211,224
-------------
Total gross deferred tax liabilities 255,026
-------------
Net deferred tax liability $ 254,698
=============
5. Parent's Investment (Deficit)
Parent's deficit in the TCI IPVI Systems at April 30, 1998 is summarized as
follows:
(amounts in thousands)
Due to TCI $ 301,496
Accumulated deficit (486,395)
-------------
$ (184,899)
=============
F-65
TCI IPVI 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 April 30, 1998
and for the Year Ended December 31, 1997
5. Parent's Investment (Deficit) (continued)
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 deficit in the accompanying combined balance sheet.
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 and $39,288,000 for the four-months ended April 30,
1998 and for the year ended December 31, 1997, respectively, and are included in
operating expenses in the accompanying combined statements of operations.
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.
The intercompany advances and expense allocation activity in amounts due to TCI
consists of the following:
F-66
TCI IPVI 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 April 30, 1998
and for the Year Ended December 31, 1997
5. Parent's Investment (Deficit) (continued)
Year ended January 1,
December 31, 1998 through
1997 April 30, 1998
-------------------------------
(amounts in thousands)
Beginning of period $ 269,228 $ 260,421
Programming charges 39,288 14,787
Management fees 6,195 2,035
Tax allocations 3,875 3,503
Cash transfer (58,165) 20,750
-------------------------
End of period $ 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
F-67
TCI IPVI 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 April 30, 1998
and for the Year Ended December 31, 1997
6. Commitments and Contingencies (continued)
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 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.
F-68
TCI IPVI 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 April 30, 1998
and for the Year Ended December 31, 1997
6. Commitments and Contingencies (continued)
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 and $2,441,000 for the four-month
period ended April 30, 1998, and for the year ended December 31, 1997,
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 its financial position, results of operations or cash
flows.
F-69
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 September
30, 1999 and December 31, 1998, and the results of their operations and their
cash flows for the nine months ended September 30, 1999 and the period from
April 30, 1998 (commencement of operations) to December 31, 1998 in conformity
with accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States 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
January 5, 2000
F-70
InterMedia Capital Partners VI, L.P.
Consolidated Balance Sheets
(dollars in thousands)
- --------------------------------------------------------------------------------
September 30, December 31,
1999 1998
Assets
Cash and cash equivalents $ 443 $ 2,602
Accounts receivable, net of allowance for
doubtful accounts of $1,070 and $2,692, respectively 17,984 15,160
Receivable from affiliates 6,613 7,532
Prepaids and other current assets 1,105 1,049
-------- --------
Total current assets 26,145 26,343
Intangible assets, net 579,929 632,002
Property and equipment, net 259,892 243,100
Other non-current assets 1,383 3,045
-------- --------
Total assets $867,349 $904,490
======== ========
Liabilities and Partners' Capital
Current poriton long term debt $ 55,141 $ --
Accounts payable and accrued liabilities 23,168 23,541
Payable to affiliates -- 2,913
Deferred revenue 12,892 11,429
Accrued interest 520 5,529
-------- --------
Total current liabilities 91,721 43,412
Deferred channel launch revenue 6,576 7,767
Long-term debt 687,000 726,000
Other long-term liabilities 8,453 411
-------- --------
Total liabilities 793,750 777,590
-------- --------
Commitments and contingencies
Partners' Capital
Total partners' capital 73,599 126,900
-------- --------
Total liabilities and partners' capital $867,349 $904,490
======== ========
See accompanying notes to the consolidated financial statements
F-71
InterMedia Capital Partners VI, L.P.
Consolidated Statements of Operations
(dollars in thousands)
- --------------------------------------------------------------------------------
For the period
April 30, 1998
For the nine (commencement
months ended of operations) to
September 30, December 31,
1999 1998
Revenues
Basic and cable services $ 113,564 $ 91,970
Pay service 22,883 18,500
Other service 22,750 20,995
--------- ---------
159,197 131,465
--------- ---------
Costs and expenses
Program fees 37,481 30,106
Other direct expenses 14,443 11,794
Selling, general and administrative expenses 39,647 27,884
Management and consulting fees 1,515 1,350
Depreciation and amortization expenses 91,707 88,135
--------- ---------
184,793 159,269
--------- ---------
Loss from operations (25,596) (27,804)
--------- ---------
Other income (expense)
Interest and other income 264 323
Interest expense (41,979) (38,561)
Gain on exchange of cable systems 15,822 --
Other expense (1,812) (640)
--------- ---------
(27,705) (38,878)
--------- ---------
Net loss $ (53,301) $ (66,682)
========= =========
See accompanying notes to the consolidated financial statements
F-72
InterMedia Capital Partners VI, L.P.
Consolidated Statements 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 -- (53,301) (53,301)
--------- --------- ---------
Balance at September 30, 1999 $ 2 $ 73,597 $ 73,599
========= ========= =========
See accompanying notes to the consolidated financial statements
F-73
InterMedia Capital Partners VI, L.P.
Consolidated Statements of Cash Flows
(dollars in thousands)
- --------------------------------------------------------------------------------
For the period
April 30, 1998
For the nine (commencement
months ended of operations) to
September 30, December 31,
1999 1998
Cash flows from operating activities
Net loss $ (53,301) $ (66,682)
Loss on disposal of fixed assets 2,442 --
Depreciation and amortization 92,132 88,528
Gain on exchange of cable systems (15,822) --
Changes in assets and liabilities:
Accounts receivable (2,636) (3,455)
Receivable from affiliates 919 (7,532)
Prepaids and other current assets 288 (739)
Other non-current assets 1,663 (3,035)
Accounts payable and accrued liabilities 2,519 10,557
Payable to affiliates (2,913) 2,913
Deferred revenue 1,120 2,962
Deferred channel launch revenue (971) 5,314
Other long-term liabilities (883) 226
Accrued interest (5,016) 5,529
--------- ---------
Cash flows from operating activities 19,541 34,586
--------- ---------
Cash flows from investing activities
Costs incurred in connection with contributed systems -- (3,629)
Proceeds from exchange of cable systems 16,737 --
Property and equipment (62,488) (36,745)
Intangible assets (1,022) (66)
--------- ---------
Cash flows from investing activities (46,773) (40,440)
--------- ---------
Cash flows from financing activities
Debt issue costs -- (7,395)
Proceeds from long-term debt 16,141 726,000
Proceeds from interest rate swap termination option
agreements 8,932 --
Repayment of debt assumed, net of cash acquired -- (803,731)
Contributed capital -- 102,034
Partner draw -- (8,452)
--------- ---------
Cash flows from financing activities 25,073 8,456
--------- ---------
Net change in cash and cash equivalents (2,159) 2,602
Cash and cash equivalents, beginning of period 2,602 --
--------- ---------
Cash and cash equivalents, end of period $ 443 $ 2,602
========= =========
See accompanying notes to the consolidated financial statements
F-74
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.
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." 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. 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
AT&T Broadband Internet Services ("AT&TBIS"), formerly
Tele-Communications, Inc., a 49.5% limited partner of ICP-VI. AT&TBIS'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.
On April 18, 1999, the Partnership's general and limited partners, other
than AT&TBIS entered into an agreement with Insight Communications
Company, L.P. ("Insight") to sell their partner interest in ICP-VI. The
sale closed on October 1, 1999, and Insight began managing the
Partnership.
As of September 30, 1999, the Partnership served approximately 427,700
subscribers (unaudited) and encompassed approximately 673,900 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 $119,983, non-cash charges have
aggregated $167,280. These charges consist of $73,972 of depreciation of
property and equipment, $106,688 of amortization of intangible assets
predominately related to franchise rights and $2,442 of loss on disposal
of fixed assets, offset by a $15,822 gain on exchange of cable systems.
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.
F-75
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
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.
Installation fees are recognized immediately into revenue to the extent of
direct selling costs incurred. Any fees in excess of such costs are
deferred and amortized into income over the period that customers are
expected to remain connected to the cable television system.
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.
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.
F-76
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
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.
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.
F-77
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
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 and related derivatives: The estimated fair value of
the interest rate swaps and related derivatives 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 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
fiscal 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 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.
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 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 ICP-VI's partners.
F-78
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
The total cost of the Systems contributed was as follows:
Value of AT&TBIS Debt assumed $ 803,743
Costs incurred in connection with the contributed systems 3,629
Value of IP-VI equity issued 100,000
---------
$ 907,372
=========
The Partnership's allocation of costs related to the contributed systems
is as follows:
December 31,
1998
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. Exchange 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"), serving approximately 10,700
(unaudited) basic subscribers, for cable television assets located in and
around Oldham County, Kentucky, serving approximately 8,300 (unaudited)
basic subscribers, plus net cash of $3,758. The cable system assets
received have been recorded at fair market value, allocated as follows:
Property and equipment $ 4,475
Franchise rights 12,665
-------
Total $ 17,140
=======
The exchange resulted in a gain of $1,255, 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 $3,758.
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
F-79
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
located in central Kentucky, serving approximately 16,800 (unaudited)
basic subscribers, for cable television assets located in northern
Kentucky, serving approximately 11,000 (unaudited) basic subscribers. On
June 1, 1999 the Partnership completed the exchange with respect to
certain of the systems and entered into related management agreements.
Pursuant to the terms of the management agreements, the Partnership
managed and operated the remaining systems of FrontierVision in northern
Kentucky and FrontierVision managed and operated the Partnership's
remaining systems in central Kentucky. The management agreements, which
provided the Partnership with effective control over the remaining
systems, terminated upon completion of the exchanges of the remaining
systems on September 30, 1999.
The cable system assets received have been recorded at fair market value,
allocated as follows:
Property and equipment $ 6,328
Franchise rights 11,011
-------
Total $17,339
=======
The Partnership received cash of $12,979 from FrontierVision in connection
with the exchanged systems. The exchanges resulted in a gain of $14,567
for the nine months ended September 30, 1999, respectively.
5. Intangible Assets
Intangible assets consist of the following:
September 30, December 31,
1999 1998
Franchise rights $ 522,945 $ 528,073
Programming agreement 147,631 150,000
Debt issue costs 7,395 7,395
Other 105 26
---------- ----------
678,076 685,494
Accumulated amortization (98,147) (53,492)
---------- ----------
$ 579,929 $ 632,002
========== ==========
F-80
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
6. Property and Equipment
Property and equipment consist of the following:
September 30, December 31,
1999 1998
Land $ 5,990 $ 6,028
Cable television plant 242,943 213,826
Buildings and improvements 2,727 2,470
Furniture and fixtures 4,060 2,958
Equipment and other 26,932 20,279
Construction in progress 45,509 30,246
---------- ----------
328,161 275,807
Accumulated depreciation (68,269) (32,707)
---------- ----------
$ 259,892 $ 243,100
========== ==========
7. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
September 30, December 31,
1999 1998
Accounts payable $ 10,567 $ 1,387
Accrued program costs 1,112 2,974
Accrued franchise fees 723 2,050
Accrued copyright fees 172 346
Accrued capital expenditures 192 7,248
Accrued property and other taxes 8,604 4,523
Other accrued liabilities 1,798 5,013
--------- ---------
$ 23,168 $ 23,541
========= =========
8. Channel Launch Revenue
During the periods ended September 30, 1999 and December 31, 1998 the
Partnership received payments and recorded receivables from certain
programmers to launch and promote their new channels. As of September 30,
1999 and December 31, 1998 the Partnership had receivables from
programmers of $5,476 and $5,855, respectively. In connection with the
contribution of the Systems, the Partnership assumed deferred launch
support revenue and obligations of $4,452. The
F-81
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Partnership recognized advertising revenue for advertisements provided by
the Partnership to promote the new channels of $441 and $911, during the
nine months ended September 30, 1999 and the period from April 30, 1998
(commencement of operations) through December 31, 1998, respectively. The
remaining deferred channel launch revenue is being amortized over the
respective terms of the program agreements which range between eight and
ten years. The Partnership amortized and recorded as other service revenue
$1,880 and $1,406 of the remaining deferred channel launch revenue during
the nine months ended September 30, 1999 and the period from April 30,
1998 (commencement of operations) through December 31, 1998, respectively.
9. @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
six-year term of the @Home distribution agreement. The Partnership has not
recognized any income related to the warrants for the nine months ended
September 30, 1999.
F-82
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
10. Long-term Debt
Long-term debt consists of the following:
September 30, December 31,
1999 1998
Senior Debt
Bank revolving credit facility, $325,000 commitment as of
September 30, 1999, interest currently at LIBOR plus 1.375%
(6.81%) or ABR plus .625% (8.625%) payable
quarterly, matures October 31, 2006 $ 212,000 $ 199,000
Bank Term Loan A; interest at LIBOR plus 1.750% (7.19%)
payable quarterly, matures September 30, 2007 100,000 100,000
Bank Term Loan B; interest at LIBOR plus 2.000% (7.44%)
payable quarterly, matures December 31, 2007 250,000 250,000
--------- ---------
Total senior debt 562,000 549,000
--------- ---------
Subordinated Debt
Bank Term Loan A; interest at LIBOR plus 2.750% (8.13%)
payable quarterly, matures April 30, 2008 125,000 125,000
Bank Term Loan B; $60,000 commitment as of September 30, 1999,
interest at LIBOR plus 0.500% (5.84%) or ABR (8.25%)
payable quarterly, matures January 1, 2000 55,141 52,000
--------- ---------
Total subordinated debt 180,141 177,000
--------- ---------
Total debt 742,141 726,000
Less current portion of long-term debt (55,141)
--------- ---------
Total long-term debt $ 687,000 $ 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
F-83
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
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 extended the maturity date of subordinated Term Loan B to
January 1, 2000 and increased the applicable margin from 0.300% to 0.500%
for the period June 1, 1999 through September 30, 1999 and 0.625%
thereafter. On October 1, 1999 under the management of Insight, the
Partnership refinanced the borrowings outstanding under the subordinated
Term Loan B.
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%. 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
agreements expire July 2003. At September 30, 1999 and December 31, 1998,
the fair market value of the interest rate swaps was approximately $8,437
and $(14,493), respectively.
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 which has been deferred and is being amortized over the
remaining terms of the interest rate swap agreements. $570 was amortized
and recorded against interest expense during the three and nine months
ended September 30, 1999. At September 30, 1999, the fair market value of
the Option Agreements was approximately $(10,334).
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
F-84
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
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 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 September 30, 1999 are as follows:
2000 $ 55,141
2001 3,562
2002 4,750
2003 4,750
Thereafter 673,938
---------
$ 742,141
=========
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 September 30, 1999 approximate their
fair value.
11. 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. Prior to
September 30, 1999, 50% of the net ICM Management Fee was deferred until
the Partnership's Senior Leverage Ratio was less than five times in order
to support the Partnership's debt. Any deferred ICM Management Fee bore
interest at 10%, compounded annually, payable upon payment of the deferred
management fee. Effective September 30, 1999 such deferral was not
required pursuant to an amendment to the Partnership's debt agreements.
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
expenses for the nine months ended September 30, 1999 and the period from
April 30, 1998 (commencement of operations) through December 31, 1998
amounted to $1,140 and $1,013, respectively. On September 30, 1999 the
Partnership paid the total
F-85
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
outstanding deferred ICM Management Fee and related interest due to ICM-VI
LP. At December 31, 1998, the Partnership had a non-current payable to
ICM-VI LP of $13.
The Partnership pays monitoring fees of $250 per annum to each of AT&TBIS
and Blackstone. Prior to September 30, 1999, 50% of the monitoring fees
were deferred until the Partnership's Senior Leverage Ratio was less than
five times in order to support the Partnership's debt. Any deferred
monitoring fees bore interest at 10%, compounded annually, payable upon
payment of the deferred monitoring fees. Effective September 30, 1999 such
deferral was not required pursuant to an amendment to the Partnership's
debt agreements. Management and consulting fees of $1,515 and $1,350 for
the nine months ended September 30, 1999 and the period from April 30,
1998 (commencement of operations) through December 31, 1998, respectively,
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 had a non-current payable of $83
each to AT&TBIS and Blackstone at December 31, 1998. In contemplation of
the sale of certain of the partners' interest in ICP-VI (as described in
Note 16 - Subsequent Events) and the amendments to the partnership and
debt agreements, the Partnership received from Blackstone its prepaid
monitoring fees net of deferred monitoring fees and related interest
outstanding at September 30, 1999. At September 30, 1999 the Partnership
has a receivable of $28 from AT&TBIS representing prepaid monitoring fees,
net of deferred monitoring fees and related interest.
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 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 nine months ended September 30,
1999 and the period from April 30, 1998 (commencement of operations)
through December 31, 1998 were $3,131 and $2,495, respectively. Receivable
from affiliates includes $2,850 and $628 at September 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 those which 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 nine
months ended September 30, 1999 and the period April 30, 1998
(commencement of operations) through December 31, 1998 amounted to $28,523
and $22,183, respectively. Payable to affiliates at 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
F-86
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
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 nine months
ended September 30, 1999 and the period April 30, 1998 (commencement of
operations) through December 31, 1998 amounted to $231 and $563,
respectively. Receivables from affiliates at September 30, 1999 and
December 31, 1998 includes $3,632 and $6,904, respectively, of receivables
from AT&TBIS for advertising sales.
As part of its normal course of business the Systems are involved in
transactions with affiliates of ICP-VI which own and operate cable
television systems. Such transactions include purchases and sales, at
cost, of inventories used in construction of cable plant. Receivables from
affiliates at September 30, 1999 includes $131 of receivables from
affiliated systems.
12. 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
eliminated rate regulation on the expanded basic tier effective March 31,
1999.
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.
13. Commitments and Contingencies
The Partnership is committed to provide cable television services under
franchise agreements with
F-87
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
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.
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 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.
In September 1999 the Partnership received a tentative property tax
assessment from the Kentucky Revenue Cabinet with a total valuation of
$1,197,571. This valuation could result in an additional property tax
liability of approximately $4,149 for the nine months ended September 30,
1999. However, based on the information currently available to the
Partnership and taking into account the advice of the Partnership's
counsel, management believes that the accrued property tax liability
included in the Partnership's financial statements is adequate.
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 September 30, 1999 for the next five years
and thereafter under these leases are as follows:
1999 $ 154
2000 552
2001 264
2002 129
2003 100
Thereafter 162
-------
$ 1,361
=======
F-88
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Rent expense, including pole rental agreements was $1,099 and $1,003 for
the nine months ended September 30, 1999 and the period from April 30,
1998 (commencement of operations) through December 31,1998, respectively.
14. Supplemental Disclosures to Consolidated Statement of Cash Flows
During the nine months ended September 30, 1999 and the period from April
30, 1998 through December 31, 1998, the Partnership paid interest of
$46,942 and $32,465, respectively.
As described in Note 3 (Contribution of Cable Properties), on April 30,
1998 the Partnership received, from AT&TBIS 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.
15. 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.
16. Subsequent Events
On October 1, 1999, the Partnership's general and limited partners, other
than AT&TBIS, sold their partner interests in ICP-VI to Insight. Upon
consummation of the sale, Insight began managing the Partnership. Also on
October 1, 1999, under Insight's management, the Partnership refinanced
its borrowings outstanding under the subordinated Term Loan B.
F-89
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 these 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
Midwest and Insight Capital have not changed since the date hereof.
Until _______, 2000 (90 days after the date of this prospectus), all dealers,
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Insight Midwest, L.P.
Section 17-108 of the Delaware Revised Uniform Limited Partnership Act
(the "Partnership Act") provides that a limited partnership may indemnify and
hold harmless any partners or other persons from and against any and all claims
and demands whatsoever, subject to such standards and restrictions set forth in
the partnership agreement. Accordingly, Section 12.1 of the Limited Partnership
Agreement of Insight Midwest, L.P., dated as of October 1, 1999, provides that
each partner of the Partnership and their respective members, partners,
officers, directors, shareholders, employees and agents, the employees, officers
and agents of the Partnership, and the members of the Advisory Committee
(collectively, the "Indemnified Persons") will be indemnified, defended and held
harmless by the Partnership from any liability, loss or damage incurred by the
Indemnified Person by reason of any act performed or omitted to be performed by
the Indemnified Person in connection with the business of the Partnership and
its subsidiaries, including costs and attorney's fees and any amounts expended
in the settlement of any claims of liability, loss or damage; provided that if
the liability, loss, damage or claim arises out of any action or inaction of an
Indemnified Person, indemnification under Section 12.1 shall not be available if
the action or inaction is finally adjudicated to have constituted fraud, gross
negligence, breach of fiduciary duty (which shall not be construed to encompass
mistakes in judgement or any breach of any Indemnified Person's duty of care
that did not constitute gross negligence), or willful misconduct by the
Indemnified Person; and provided further that indemnification under Section 12.1
shall be recoverable only from the assets of the Partnership and not from any
assets of the partners of the Partnership. Article 12 further provides that the
Partnership may pay for insurance covering liability of the Indemnified Person
for negligence in operations of the Partnership's affairs.
Insight Capital, Inc.
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 Registrants. 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. Insight Capital's by-laws
provide for indemnification by Insight Capital of any director or officer (as
such term is defined in the by-laws) of Insight Capital who is or was a director
of any of its subsidiaries, or, at the request of Insight Capital, 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 Insight Capital 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 Insight Capital. To the extent authorized from time to time by
the board of directors of Insight Capital, Insight Capital may provide to any
one or more employees of Insight
II-1
Capital, 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 Insight Capital on directors and officers of Insight Capital or
any subsidiary or other enterprise. The by-laws do not limit the power of
Insight Capital 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.
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. Insight Capital's certificate of incorporation provides for such
limitation of liability.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits
The following exhibits are filed as part of this Registration Statement:
Exhibit Number Exhibit Description
- -------------- -------------------
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 (filed as Exhibit 2.1 to
Insight Communications Company, Inc.'s Registration Statement on Form S-1
(Registration No. 333-78293) and incorporated herein by reference)
2.2 Asset Exchange Agreement by and among Insight LP, TCI of Indiana, Inc.
and UACC Midwest, Inc., dated May 14, 1998 (filed as Exhibit 2.5 to
Insight Communications Company, Inc.'s Registration Statement on Form S-1
(Registration No. 333-78293) and incorporated herein by reference)
2.3 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. (filed as Exhibit 2.8 to Insight Communications
Company, Inc.'s Registration Statement on Form S-1 (Registration No.
333-78293) and incorporated herein by reference)
2.4 Contribution and Formation Agreement, dated April 18, 1999, between TCI
of Indiana Holdings, LLC and Insight LP (filed as Exhibit 2.9 to Insight
Communications Company,
II-2
Inc.'s Registration Statement on Form S-1 (Registration No. 333-78293)
and incorporated herein by reference)
3.1 Certificate of Limited Partnership of Insight Midwest
3.2 Limited Partnership Agreement of Insight Midwest
3.3 Certificate of Incorporation of Insight Capital
3.4 By-laws of Insight Capital
4.1 Indenture, dated as of October 1, 1999, among Insight Midwest, Insight
Capital and Harris Trust Company of New York, as Trustee*
4.2 Registration Rights Agreement, dated as of October 1, 1999, among
Insight Midwest, Insight Capital, Donaldson, Lufkin & Jenrette
Securities Corporation, Morgan Stanley & Co., Incorporated, BNY Capital
Markets, Inc. and Wasserstein Perella Securities, Inc.
5.1 Opinion of Cooperman Levitt Winikoff Lester & Newman, P.C.*
10.1 Credit Agreement, dated as of October 30, 1998 (the "Indiana Credit
Facility"), among Insight Indiana, the several lenders and The Bank of
New York (filed as Exhibit 10.3 to Insight Communications Company,
Inc.'s Registration Statement on Form S-1 (Registration No. 333-78293)
and incorporated herein by reference)
10.2 Amendment to the Indiana Credit Facility dated September 24, 1999
10.3 Amended and Restated Revolving Credit and Term Loan Agreement, dated as
of October 1, 1999, among Insight Kentucky Partners I, L.P., several
lenders and Toronto Dominion (Texas), Inc.*
10.4 Amended and Restated Operating Agreement of Insight Indiana dated as of
October 1,1999
10.5 Amended and Restated Management Agreement by and between Insight Indiana
and Insight LP, dated as of October 1, 1999
10.6 Amended and Restated Partnership Agreement of Insight Communications of
Kentucky, L.P. dated as of October 1, 1999
10.7 Management Agreement of Insight Kentucky by and between Insight LP and
Insight Kentucky Partners II, L.P., dated as of October 1, 1999
21.1 Subsidiaries of Insight Midwest
23.1(a) Consent of Ernst & Young LLP
23.1(b) Consent of Ernst & Young LLP
23.1(c) Consent of Ernst & Young LLP
23.2(a) Consent of KPMG LLP
23.2(b) Consent of KPMG LLP
23.3 Consent of PricewaterhouseCoopers LLP
23.4 Consent of Cooperman Levitt Winikoff Lester & Newman, P.C. (included in
Exhibit 5.1)*
27.1 Financial Data Schedules for Insight Midwest
27.2 Financial Data Schedules for Insight Capital
99.1 Form of Letter of Transmittal with respect to the exchange offer*
99.2 Form of Instruction Letter to Registered Shareholders*
99.3 Form of Notice of Guaranteed Delivery*
- --------------
* To be filed by amendment
(b) Financial Statement Schedules
None.
II-3
Item 22. Undertakings.
Insight Midwest, L.P. and Insight Capital, Inc. (the "Registrants") hereby
undertake:
(1) To file, during any period in which offers or sales are being made, a
post- effective amendment to this Registration Statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) 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 a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement; (iii) 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;
(2) 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; and
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of Form S-4, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the Registration Statement through the date
of responding to the request.
The undersigned Registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
The undersigned Registrants hereby undertake as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
Registrants undertake that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
II-4
The Registrants undertake that every prospectus (i) that is filed pursuant
to the immediately preceding paragraph, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933 and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the Registration Statement and will not be used until
such amendment is effective, and that, for purposes 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.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrants pursuant to the foregoing provisions, or otherwise, the
Registrants have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrants of expenses
incurred or paid by a director, officer or controlling person of the Registrants
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, the Registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by them is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrants hereby undertake that:
(1) For purposes of determining any liability under the Securities Act of
1933, 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 the Registrants 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) For the purpose of determining any liability under the Securities Act
of 1933, 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.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act, the 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 March 29, 2000.
INSIGHT MIDWEST, L.P.
By: Insight Communications Company, L.P.,
its general partner
By: Insight Communications Company, Inc.,
its general partner
By: /s/ Michael S. Willner
_______________________________________
Michael S. Willner,
President and Chief Executive Officer
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.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature
appears below constitutes and appoints Michael S. Willner and Kim D. Kelly as
such person's true and lawful attorney-in-fact and agent, acting alone, with
full powers of substitution and revocation, for such person and in such person's
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement and to file
the same with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent, acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Signature Title Date
--------- ----- ----
/s/ Sidney R. Knafel Chairman of the Board and Member March 29, 2000
- -------------------------- of the Advisory Committee
Sidney R. Knafel
/s/ Michael S. Willner President, Chief Executive March 29, 2000
- -------------------------- Officer and Member of the
Michael S. Willner Advisory Committee
(Principal executive officer)
II-6
/s/ Kim D. Kelly Executive Vice President, March 29, 2000
- -------------------------- Chief Operating and Financial
Kim D. Kelly Officer and Member of the
Advisory Committee
(principal financial officer
and principal accounting officer)
Member of the Advisory Committee
- --------------------------
William R. Fitzgerald
Member of the Advisory Committee
- --------------------------
Derek Chang
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act, the 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 March 29, 2000.
INSIGHT CAPITAL, INC.
By: /s/ Michael S. Willner
__________________________________
Michael S. Willner,
President and Chief Executive Officer
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.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature
appears below constitutes and appoints Michael S. Willner and Kim D. Kelly as
such person's true and lawful attorney-in-fact and agent, acting alone, with
full powers of substitution and revocation, for such person and in such person's
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement and to file
the same with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent, acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Signature Title Date
--------- ----- ----
/s/ Sidney R. Knafel Chairman of the Board March 29, 2000
- --------------------------
Sidney R. Knafel
/s/ Michael S. Willner President, Chief Executive March 29, 2000
- -------------------------- Officer and Director
Michael S. Willner (principal executive officer)
II-8
/s/ Kim D. Kelly Executive Vice President, March 29, 2000
- --------------------------- Chief Operating and Financial
Kim D. Kelly Officer and Director
(principal financial officer
and principal accounting officer)
II-9