SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: October 23, 2000
Insight Midwest, L.P.
Insight Capital, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 333-33540 13-4079232
Delaware 333-33540-1 13-4079679
(State of incorporation) (Commission File No.) (IRS Employer Identification No.)
810 7th Avenue
New York, New York 10019
(Address of principal executive offices)
Registrant's telephone number: (917) 286-2300
Item 9. Regulation FD Disclosure.
We are conducting a $500 million bond offering to refinance a portion of
the bank debt of our subsidiaries. The offering will be a private placement
under Rule 144A of the Securities Act of 1933 and will be made only to qualified
institutional buyers and to a limited number of institutional accredited
investors. Included in the preliminary offering memorandum for the private
placement are certain historical and pro forma financial statements that have
not been previously publicly reported. Certain of the pro forma financial data
give effect to our previously reported proposed acquisition of cable television
systems from Insight Communications Company, L.P. ("Insight L.P.") and certain
subsidiaries of AT&T Corp. ("AT&T Cable Subsidiaries"), which is expected to be
completed on or about January 1, 2001, and also give effect to a proposed new
credit facility to finance the acquisition (the "Transactions"). A copy of the
pro forma financial statements as well as the historical financial statements of
the systems currently owned by the AT&T Cable Subsidiaries and Insight L.P. to
be acquired by us, which have not been previously publicly reported, are
provided below.
No assurance can be made that the Transactions or the bond offering will be
completed. The bond offering is presently expected to be completed prior to the
completion of the Transactions and is not conditioned upon the completion of the
Transactions.
The proposed bonds have not been registered under the Securities Act and
may not be offered or sold in the United States absent registration or an
applicable exemption from the registration requirements. This current report on
Form 8-K does not constitute an offer to sell or the solicitation of an offer to
buy any security and shall not constitute an offer, solicitation or sale of any
securities in any jurisdiction in which such offering sold would be unlawful.
1
PRO FORMA FINANCIAL STATEMENTS
The following tables set forth selected financial data of the Indiana,
Kentucky, Illinois, Ohio and Georgia systems which are systems in which we have
or will have a significant economic interest. The tables include data for:
. Insight Midwest on a historical basis;
. Insight Midwest on a pro forma basis;
. Insight Midwest on a pro forma as adjusted basis for the
Transactions (excluding Insight Ohio); and
. Insight Midwest on a pro forma as adjusted basis for the
Transactions (including Insight Ohio).
The historical data of Insight Midwest reflects the operations of Insight
Indiana for the year ended December 31, 1999 and the six months ended June 30,
2000 and the operations of Insight Kentucky from October 1, 1999 (date of
acquisition) through December 31, 1999 and for the six months ended June 30,
2000.
The pro forma data reflect the following events as if they had occurred on
January 1, 1999: (a) the issuance of the notes and the use of the net proceeds
therefrom to repay a portion of the Indiana and Kentucky credit facilities, (b)
the October 1999 acquisition of Insight Kentucky and (c) the issuance of our 9
3/4% senior notes due 2009 and the use of the net proceeds therefrom to repay a
portion of the Kentucky credit facility. The pro forma data does not give
effect to the Transactions.
The pro forma as adjusted financial data reflect the events described in
the preceding paragraph as well as the completion of the Transactions as if
they had occurred on January 1, 1999. The pro forma as adjusted financial data
set forth information both excluding and including Insight Ohio, as Insight
Ohio will become an unrestricted subsidiary under the indenture governing the
notes, and will be prohibited by the terms of its indebtedness from making
distributions to us.
The pro forma and pro forma as adjusted statement of operations do 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.
The data included in the pro forma statement of operations for the six
months ended June 30, 2000 under the column headings "Insight Midwest (as
reported)," "Illinois Systems Being Acquired from the AT&T Cable Subsidiaries,"
"Illinois Systems Purchased by and Being Acquired from Insight L.P.," "Other
Systems Being Acquired from Insight L.P." and "Insight Ohio" represent for:
. Insight Midwest (as reported), six months of operating results of
Insight Midwest (Insight Indiana and Insight Kentucky).
2
. Illinois Systems Being Acquired from the AT&T Cable Subsidiaries, six
months of operating results of the Illinois systems owned by the AT&T
Cable Subsidiaries for the full six months ended June 30, 2000 and
fifteen days of operating results of systems previously owned by
MediaOne, which we will acquire pursuant to the Transactions.
. Illinois Systems Purchased by and Being Acquired from Insight L.P., six
months of operating results of the Illinois systems which are to be
purchased from the AT&T Cable Subsidiaries by Insight L.P. and which we
will acquire pursuant to the Transactions.
. Other Systems Being Acquired from Insight L.P., six months of operating
results of systems owned by Insight L.P. which we will acquire pursuant
to the Transactions.
. Insight Ohio, six months of operating results of Insight Ohio which we
will acquire pursuant to the Transactions plus adjustments to reflect
such acquisition as if it had occurred at January 1, 2000.
The data included in the pro forma statement of operations for the year
ended December 31, 1999 under the column headings "Insight Midwest (as
reported)," "Kentucky," "Illinois Systems Being Acquired from the AT&T Cable
Subsidiaries," "Illinois Systems Purchased by and Being Acquired from Insight
L.P.," "Other Systems Being Acquired from Insight L.P." and "Insight Ohio"
represent for:
. Insight Midwest (as reported), twelve months of operating results of
Insight Midwest which includes twelve months of operating results of
Insight Indiana and three months of operating results (October 1, 1999
through December 31, 1999) of Insight Kentucky.
. Kentucky, nine months of operating results of InterMedia Capital
Partners VI, L.P., plus adjustments to reflect the October 1999
acquisition of Insight Kentucky and the refinancing of a portion of
Insight Kentucky's indebtedness through the issuance of our 9 3/4%
senior notes due 2009.
. Illinois Systems Being Acquired from the AT&T Cable Subsidiaries,
twelve months of operating results of the Illinois systems owned by the
AT&T Cable Subsidiaries for ten months in 1999 and by Tele-
Communications, Inc. (AT&T's cable predecessor) for two months in 1999,
which we will acquire pursuant to the Transactions, and seven months of
operating results for an Illinois system which was owned by the AT&T
Cable Subsidiaries as of June 1, 1999 and which we will acquire
pursuant to the Transactions.
. Illinois Systems Purchased by and Being Acquired from Insight L.P.,
twelve months of operating results of the Illinois systems owned by the
AT&T Cable Subsidiaries for ten months in 1999 and by Tele-
Communications, Inc. (AT&T's cable predecessor) for two months in 1999,
which are to be purchased from the AT&T Cable Subsidiaries by Insight
L.P. and which we will acquire pursuant to the Transactions and seven
months of operating results for an Illinois system which was owned by
the AT&T Cable Subsidiaries as of June 1, 1999 and is to be purchased
by Insight L.P. and which we will acquire pursuant to the Transactions.
3
. Other Systems Being Acquired from Insight L.P., twelve months of
operating results of systems owned by Insight L.P. for all of 1999
which we will acquire pursuant to the Transactions and nine months of
operating results of systems owned by Insight L.P. as of March 31, 1999
which we will acquire pursuant to the Transactions.
. Insight Ohio, twelve months of operating results of Insight Ohio which
we will acquire pursuant to the Transactions plus adjustments to
reflect such acquisition as if it had occurred at January 1, 1999.
As indicated in footnote (A) below, the pro forma as adjusted financial
data do not include results of certain of the Illinois systems which we will
acquire pursuant to the Transactions for the periods specified. If such results
were included in the financial data below, revenues and EBITDA on a pro forma
as adjusted basis excluding Insight Ohio would have been $298.3 million and
$133.0 million, respectively, for the six months ended June 30, 2000, and
$571.4 million and $257.1 million, respectively, for the year ended December
31, 1999. These revenues and EBITDA do not purport to be indicative of 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.
4
INSIGHT MIDWEST, L.P.
PRO FORMA STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2000
(in thousands)
Illinois Illinois
Systems Systems Other
Being Purchased by Systems Pro Forma
Acquired and Being Being As Adjusted
Insight from the Acquired Acquired Excluding
Midwest Pro Forma Pro AT&T Cable from from Transaction Insight
(as reported) Adjustments Forma Subsidiaries Insight L.P. Insight L.P. Adjustments (A) Ohio
------------- ----------- -------- ------------ ------------ ------------ --------------- -----------
Revenues.......... $187,237 $ -- $187,237 $53,892 $26,063 $20,164 $ -- $ 287,356
Costs and
expenses:
Programming and
other
operating
costs......... 64,864 -- 64,864 22,921 11,037 7,244 -- 106,066
Selling, general
and
administrative.. 37,500 -- 37,500 8,487 4,162 4,422 (1,717)(D) 52,854
Depreciation and
amortization.. 94,180 415 (B) 94,595 16,903 6,213 8,650 21,783 (E) 148,670
526 (F)
-------- ------- -------- ------- ------- ------- -------- ---------
Operating income
(loss).......... (9,307) (415) (9,722) 5,581 4,651 (152) (20,592) (20,234)
Other income
(expense):
Interest income
(expense)....... (52,598) (4,411)(C) (57,009) -- -- -- (29,733)(G) (86,742)
Other income
(expense)....... 73 -- 73 -- -- (10) -- 63
-------- ------- -------- ------- ------- ------- -------- ---------
Income (loss) from
continuing
operations...... $(61,832) $(4,826) $(66,658) $ 5,581 $ 4,651 $ (162) $(50,325) $(106,913)
======== ======= ======== ======= ======= ======= ======== =========
Pro Forma
As Adjusted
Including
Insight Insight
Ohio Ohio
----------- -----------
Revenues.......... $ 23,946 $ 311,302
Costs and
expenses:
Programming and
other
operating
costs......... 9,333 115,399
Selling, general
and
administrative.. 5,485 58,339
Depreciation and
amortization.. 11,242(H) 159,912
----------- -----------
Operating income
(loss).......... (2,114) (22,348)
Other income
(expense):
Interest income
(expense)....... (704) (87,446)
Other income
(expense)....... 40 103
----------- -----------
Income (loss) from
continuing
operations...... $ (2,778) $(109,691)
=========== ===========
5
Notes to Pro Forma Statement of Operations for the Six Months Ended June 30,
2000
(A) The pro forma as adjusted data includes the results of operations for the
Illinois systems which we will acquire pursuant to the Transactions only
for the periods during which they were owned by the AT&T Cable Subsidiaries
during the six months ended June 30, 2000. Listed below are the revenues
and EBITDA for such systems for the periods during which they were not
owned by the AT&T Cable Subsidiaries. The results below are not included in
the pro forma as adjusted data for the period indicated. If these results
were included in the financial data above, revenues and EBITDA would have
been $298.3 million and $133.0 million for the six months ended June 30,
2000. These revenues and EBITDA do not purport to be indicative of 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.
January 1, 2000 through June 15, 2000
---------------------------------------
Revenues EBITDA
------------------- ------------------
(in thousands)
Previous MediaOne systems......... $10,939 $4,515
(B) Includes the elimination of amortization of deferred financing costs of
$285,000 resulting from the repayment of a portion of the borrowings under
the Indiana and Kentucky credit facilities and the recording of $700,000
amortization of deferred financing issuance costs for the notes.
(C) Reflects the net increase in interest expense related to the repayment of
approximately $486.0 million of borrowings under the Indiana and Kentucky
credit facilities (decrease in interest expense of $20.0 million) and the
issuance of the notes (increase in interest expense of $24.4 million).
(D) Adjusts management fee expense so that management fees are equivalent to
3% of gross revenues which is the percentage that Insight L.P. will charge
the systems. Prior management fees of these systems averaged between 3%
and 5% of gross revenues.
(E) Includes additional amortization related to a step-up in value of the
intangible assets of the Illinois systems being acquired from the AT&T
Cable Subsidiaries, and the Illinois systems purchased by and being
acquired from Insight L.P. totalling $225.1 million, which will be
amortized on a straight-line basis over fifteen years. In addition,
includes an increase in amortization of approximately $14.3 million
related to the pre-acquisition intangibles, resulting from a reduced
period of amortization. The preliminary purchase price has been allocated
to franchise rights. The purchase price allocation will be finalized upon
completion of our acquisition of the systems and receipt of appraisal
reports. However, we do not believe that any adjustment resulting from the
final allocation of purchase price will be material.
(F) Includes the elimination of deferred financing costs of $349,000 resulting
from the repayment of borrowings under the Indiana and Kentucky credit
facilities and the recording of $875,000 in amortization of the deferred
financing costs of the proposed new credit facility.
(G) Reflects the net increase in interest expense related to the refinancing
of Indiana and Kentucky credit facility borrowings (net increase in
interest expense of $2.4 million), borrowings under the proposed new
credit facility to fund the acquisition of Illinois systems purchased by
and being acquired from Insight L.P. (increase in interest expense of
$14.1 million), and borrowings that we will assume pursuant to the
Transactions (increase in interest expense of $13.2 million).
6
Notes to Pro Forma Statement of Operations for the Six Months Ended June 30,
2000
(H) Includes the operating results of Insight Ohio for the six months ended
June 30, 2000 and a transaction adjustment as follows:
Operating Results
for the Six Months Transaction As
Ended June 30, 2000 Adjustment Adjusted
------------------- ----------- --------
(in thousands)
Revenues......................... $23,946 $ -- $23,946
Costs and expenses:
Programming and other operating
costs....................... 9,333 -- 9,333
Selling, general and
administrative.............. 5,485 -- 5,485
Depreciation and amortization.. 4,893 6,349(1) 11,242
------- ------- -------
Operating income (loss).......... 4,235 (6,349) (2,114)
Other income (expense):
Interest expense............... (704) -- (704)
Other income................... 40 -- 40
------- ------- -------
Income (loss) from continuing
operations.................... $ 3,571 $(6,349) $(2,778)
======= ======= =======
- ---------------------
(1) Reflects amortization related to a step-up in value of intangible
assets of Insight Ohio of $153.0 million, which will be amortized over
twelve years. The preliminary purchase price has been allocated to
franchise rights. The purchase price allocation will be finalized upon
completion of our acquisition of Insight Ohio and receipt of appraisal
reports. However, we do not believe that any adjustment resulting from
the final allocation of purchase price will be material.
7
INSIGHT MIDWEST, L.P.
PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
(in thousands)
Illinois Illinois
Systems Systems
Being Purchased Other
Acquired by and Systems
from Being Being
Insight the AT&T Acquired Acquired
Midwest Pro Forma Cable from from Transaction
(as reported) Kentucky (A) Adjustments Pro Forma Subsidiaries Insight L.P. Insight L.P. Adjustments (B)
------------- ------------ ----------- --------- ------------ ------------ ------------ ---------------
Revenues.......... $201,286 $159,197 $ -- $ 360,483 $96,093 $43,158 $34,899 $ 451 (E)
636 (F)
Costs and
expenses:
Programming and
other
operating
costs......... 59,587 51,924 -- 111,511 39,667 17,579 11,195 126 (E)
196 (F)
Selling, general
and
administrative.. 44,199 41,292 -- 85,491 15,316 7,224 7,135 91 (E)
107 (F)
(2,547)(G)
Depreciation and
amortization.. 109,110 97,220 829 (C) 207,159 25,589 9,481 15,719 86 (E)
202 (F)
47,553 (H)
1,053 (I)
-------- -------- -------- --------- ------- ------- ------- ---------
Operating income
(loss).......... (11,610) (31,239) (829) (43,678) 15,521 8,874 850 (45,780)
Other income
(expense):
Interest expense.. (50,900) (46,997) (11,332)(D) (109,229) -- -- -- (1)(E)
(64,252)(J)
Other income
(expense)....... (167) (1,523) -- (1,690) -- -- 173 (58)(F)
-------- -------- -------- --------- ------- ------- ------- ---------
Income (loss) from
continuing
operations...... $(62,677) $(79,759) $(12,161) $(154,597) $15,521 $ 8,874 $ 1,023 $(110,091)
======== ======== ======== ========= ======= ======= ======= =========
Pro Forma Pro Forma
As As
Adjusted Adjusted
Excluding Including
Insight Insight Insight
Ohio Ohio Ohio
---------- ---------- ----------
Revenues.......... $ 535,720 $46,747 $ 582,467
Costs and
expenses:
Programming and
other
operating
costs......... 180,274 16,017 196,291
Selling, general
and
administrative.. 112,817 11,602 124,419
Depreciation and
amortization.. 306,842 19,847(K) 326,689
---------- ---------- ----------
Operating income
(loss).......... (64,213) (719) (64,932)
Other income
(expense):
Interest expense.. (173,482) (297) (173,779)
Other income
(expense)....... (1,575) 92 (1,483)
---------- ---------- ----------
Income (loss) from
continuing
operations...... $(239,270) $ (924) $(240,194)
========== ========== ==========
8
Notes to Pro Forma Statement of Operations for the Year Ended December 31, 1999
(A) Includes the historical operating results of the Kentucky systems for the
nine months ended September 30, 1999 and pro forma adjustments to reflect
the October 1999 acquisition of Insight Kentucky by Insight Midwest and
the refinancing of Insight Kentucky's indebtedness through the issuance of
our 9 3/4% senior notes, as follows:
Kentucky Systems
For the Nine
Months Ended
September 30,
1999 Adjustments Total
---------------- ----------- --------
(in thousands)
Revenues.......................... $159,197 $ -- $159,197
Cost and expenses:
Programming and other operating
costs........................ 51,924 -- 51,924
Selling, general and
administrative............... 41,162 130 41,292
Depreciation and amortization... 91,707 5,513 97,220
-------- -------- --------
Operating loss.................... (25,596) (5,643) (31,239)
Gain (loss) on cable system
exchange....................... 15,822 (15,797) 25
Interest expense.................. (41,979) (5,018) (46,997)
Other expense..................... (1,548) -- (1,548)
-------- -------- --------
Loss from continuing operations... $(53,301) $(26,458) $(79,759)
======== ======== ========
(B) The pro forma as adjusted data includes the results of operations for the
Illinois systems which we will acquire pursuant to the Transactions only
for the periods during which they were owned by the AT&T Cable
Subsidiaries in 1999. Listed below are the revenues and EBITDA for such
systems for the periods during which they were not owned by the AT&T Cable
Subsidiaries. The results below are not included in the pro forma as
adjusted data for the periods indicated. If such results were included in
the financial data above, revenues and EBITDA would have been
$571.4 million and $257.1 million for the years ended December 31, 1999.
These revenues and EBITDA do not purport to be indicative of 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.
Year Ended
December 31,
1999
----------------
Revenues EBITDA
-------- -------
(in thousands)
Previous MediaOne systems:............................... $25,992 $11,161
Five Months
Ended May 31,
1999
---------------
Revenues EBITDA
-------- ------
(in thousands)
Previous Time Warner systems:............................. $9,696 $4,870
(C) Includes the elimination of amortization of deferred financing costs of
$571,000 resulting from the repayment of a portion of the borrowings under
the Indiana and Kentucky credit facilities and the recording of $1.4
million of amortization of the deferred financing costs for the notes.
(D) Reflects the net increase in interest expense related to the repayment of
approximately $486.0 million of borrowings under the Indiana and Kentucky
credit facilities (decrease in interest expense of $37.4 million) and the
issuance of the notes (increase in interest expense of $48.8 million).
(E) Includes the operating results of the Scottsburg system, acquired by
Insight L.P. in March 1999, for the three-month period ended March 31,
1999.
(F) Includes the operating results of the Portland system, acquired by Insight
L.P. in March 1999, for the three-month period ended March 31, 1999.
9
(G) Adjusts management fee expense so that management fees are equivalent to
3% of gross revenues, which is the percentage that Insight L.P. will
charge the systems. Prior management fees of these systems averaged
between 3% and 5% of gross revenues.
(H) Includes additional amortization related to step-up in value of the
intangible assets of the Illinois systems being acquired from the AT&T
Cable Subsidiaries and the Illinois systems purchased by and being
acquired from Insight L.P. totaling $225.1 million over a period of
fifteen years. In addition, includes an increase in amortization of
approximately $32.6 million related to the pre-acquisition intangibles,
resulting from a reduced period of amortization. The preliminary purchase
price has been allocated to franchise rights. The purchase price
allocation will be finalized upon completion of our acquisition of the
systems and receipt of appraisal reports. However, we do not believe that
any adjustment resulting from the final allocation of purchase price will
be material.
(I) Includes the elimination of deferred financing costs of $697,000 resulting
from the repayment of borrowings under the Indiana and Kentucky credit
facility borrowings and the recording of $1.8 million in amortization of
the deferred financing costs of the proposed new credit facility.
(J) Reflects the net increase in interest expense related to the refinancing
of Indiana and Kentucky credit facility borrowings under the proposed new
credit facility (net increase in interest expense of $9.6 million),
borrowings under the proposed new credit facility to fund the acquisition
of Illinois systems purchased by and being acquired from Insight L.P.
(increase in interest expense of $28.3 million), and borrowings that we
will assume pursuant to the Transactions (increase in interest expense of
$26.4 million).
(K) Includes the operating results of Insight Ohio for the year ended December
31, 1999 and a transaction adjustment as follows:
Operating Results
for the Year
Ended December Transaction As
31, 1999 Adjustment Adjusted
----------------- ----------- --------
Revenues........................ $46,747 $ -- $46,747
Costs and expenses:
Programming and other
operating costs............ 16,017 -- 16,017
Selling, general and
administrative............. 11,602 -- 11,602
Depreciation and
amortization............... 7,148 12,699 (1) 19,847
------- -------- -------
Operating income (loss)......... 11,980 (12,699) (719)
Other income (expense):
Interest expense................ (297) -- (297)
Other income.................... 92 -- 92
------- -------- -------
Income (loss) from continuing
operations................... $11,775 $(12,699) $ (924)
---------------------
(l) Reflects amortization related to a step up in value of intangible
assets of Insight Ohio of $153.0 million over a period of twelve
years. Such amortization schedule is applied based upon the
remaining attractive terms of the franchises. The preliminary
purchase price has been allocated to franchise rights. The
purchase price allocation will be finalized upon completion of
our acquisition of Insight Ohio and receipt of appraisal reports.
However, we do not believe that any adjustment resulting from the
final allocation of purchase price will be material.
10
INSIGHT MIDWEST, L.P.
PRO FORMA BALANCE SHEET
June 30, 2000
(in thousands)
Illinois
Illinois Systems
Systems Purchased Other
Being by and Systems Pro Forma
Acquired Being Being As
from Acquired Acquired Adjusted
Insight the AT&T from from Excluding
Midwest (as Pro Forma Cable Insight Insight Transaction Insight Insight
reported) Adjustments(A) Pro Forma Subsidiaries L.P. L.P. Adjustments(B) Ohio Ohio
----------- -------------- ---------- ------------ --------- --------- -------------- ---------- --------
ASSETS
Cash and cash
equivalents...... $ 18,162 $ -- $ 18,162 $ 1,366 $ 551 $ 1 $ -- $ 20,080 $ 5,770
Trade accounts
receivable, net.. 14,100 -- 14,100 3,922 1,521 1,112 -- 20,655 879
Prepaid expenses
and other
current assets... 5,930 -- 5,930 276 84 2,716 -- 9,006 3,328
Fixed assets, net.. 630,949 -- 630,949 137,509 46,253 43,986 -- 858,697 62,379
Intangible assets,
net.............. 991,650 -- 991,650 782,750 296,922 93,516 225,072 2,389,910 153,311(C)
Other assets....... 19,007 9,420 28,427 -- -- -- 8,402 36,829 108
----------- -------- ---------- -------- -------- --------- -------- ---------- --------
Total assets.... $ 1,679,798 $ 9,420 $1,689,218 $925,823 $345,331 $ 141,331 $233,474 $3,335,177 $225,775
=========== ======== ========== ======== ======== ========= ======== ========== ========
LIABILITIES AND PARTNERS'
CAPITAL
Accounts payable... $ 49,949 $ -- $ 49,949 $ 489 $ 258 $ 1,302 $ -- $ 51,998 $ 5,246
Accrued expenses
and other current
liabilities...... 18,813 -- 18,813 11,811 1,748 2,794 -- 35,166 14,119
Interest payable... 20,384 -- 20,384 -- -- -- -- 20,384 343
Due to affiliates.. 2,937 -- 2,937 -- -- 12,867 -- 15,804 422
Credit facilities.. 1,081,000 (486,000) 595,000 -- -- -- 643,000 1,238,000 25,000
Notes payable...... 200,000 500,000 700,000 -- -- -- -- 700,000 --
Preferred
interests........ -- -- -- -- -- -- -- -- 177,845
----------- -------- ---------- -------- -------- --------- -------- ---------- --------
Total
liabilities... 1,373,083 14,000 1,387,083 12,300 2,006 16,963 643,000 2,061,352 222,975
Partners'
(deficiency)
equity........... 306,715 (4,580) 302,135 913,523 343,325 124,368 (409,526) 1,273,825 2,800
----------- -------- ---------- -------- -------- --------- -------- ---------- --------
$ 1,679,798 $ 9,420 $1,689,218 $925,823 $345,331 $ 141,331 $233,474 $3,335,177 $225,775
=========== ======== ========== ======== ======== ========= ======== ========== ========
Pro Forma
As
Adjusted
Including
Insight
Ohio
----------
ASSETS
Cash and cash
equivalents...... $ 25,850
Trade accounts
receivable, net.. 21,534
Prepaid expenses
and other
current assets... 12,334
Fixed assets, net.. 921,076
Intangible assets,
net.............. 2,543,221
Other assets....... 36,937
----------
Total assets.... $3,560,952
==========
LIABILITIES AND PARTNERS'
CAPITAL
Accounts payable... $ 57,244
Accrued expenses
and other current
liabilities...... 49,285
Interest payable... 20,727
Due to affiliates.. 16,226
Credit facilities.. 1,263,000
Notes payable...... 700,000
Preferred
interests........ 177,845
----------
Total
liabilities... 2,284,327
Partners'
(deficiency)
equity........... 1,276,625
----------
$3,560,952
==========
11
Notes to Pro Forma Balance Sheet as of June 30, 2000
(A) Reflect the following assumptions:
. receipt of estimated net proceeds from the notes of approximately $486.0
million;
. repayment of borrowings under the Indiana and Kentucky credit facilities
of approximately $486.0 million;
. write-off of deferred financing costs of approximately $4.6 million
associated with the repayment of borrowings under the Indiana and
Kentucky credit facilities; and
. recording of estimated deferred financing costs of approximately $14.0
million associated with the offering of the notes.
(B) Reflect the following:
. a step-up in value of intangible assets of the Illinois systems being
acquired from the AT&T Cable Subsidiaries, and the Illinois systems
purchased by and being acquired from Insight L.P. totalling $225.1
million. The preliminary purchase price has been allocated to franchise
rights. The purchase price allocation will be finalized upon completion
of our acquisition of the systems and receipt of appraisal reports.
However, we do not believe that any adjustment resulting from the final
allocation of purchase price will be material;
. refinancing of borrowings under the proposed new credit facility;
. borrowings of $333.0 million under the proposed new credit facility to
fund the acquisition of Illinois systems purchased by and being acquired
from Insight L.P.;
. borrowings of $310.0 million that we will assume pursuant to the
Transactions;
. write-off of deferred financing costs of approximately $5.6 million
associated with the refinancing of borrowings with proceeds of the
proposed new credit facility; and
. recording of estimated deferred financing costs of approximately $14.0
million associated with the proposed new credit facility.
12
(C) Includes the balance sheet of Insight Ohio as of June 30, 2000 and a
transaction adjustment as follows:
June 30, Transaction As
2000 Adjustment Adjusted
--------- ----------- --------
(in thousands)
Cash and cash equivalents................... $ 5,770 $ -- $ 5,770
Trade accounts receivable, net.............. 879 -- 879
Prepaid expenses and other current assets... 3,328 -- 3,328
Fixed assets, net........................... 62,379 -- 62,379
Intangible assets, net...................... 302 153,009(1) 153,311
Other assets................................ 108 -- 108
--------- -------- --------
Total assets................................ $ 72,766 $153,009 $225,775
========= ======== ========
Accounts payable............................ $ 5,246 $ -- $ 5,246
Accrued expenses and other current
liabilities.............................. 14,119 -- 14,119
Interest payable............................ 343 -- 343
Due to affiliates........................... 422 -- 422
Credit facility............................. 25,000 -- 25,000
Preferred interests......................... 177,845 -- 177,845
--------- -------- --------
Total liabilities........................... 222,975 -- 222,975
Members equity.............................. (150,209) 153,009 2,800
--------- -------- --------
Total liabilities and members equity........ $ 72,766 $153,009 $225,775
========= ======== ========
---------------------
(1) Reflects a step-up in value of intangible assets of Insight Ohio of
$153.0 million, which will be amortized over twelve years. The
preliminary purchase price has been allocated to franchise rights. The
purchase price allocation will be finalized upon completion of our
acquisition of Insight Ohio and receipt of appraisal reports. However,
we do not believe that any adjustment resulting from the final
allocation of purchase price will be material.
13
INSIGHT MIDWEST, L.P. PRO FORMA OPERATING DATA
In the table below we provide you with pro forma operating data as
follows:
. The Insight Midwest systems, which are currently operated by Insight
Midwest;
. The acquired systems which we will acquire pursuant to the
Transactions; and
. The total systems, which includes the Insight Midwest systems and the
systems which we will acquire pursuant to the Transactions.
As of June 30, 2000
------------------------------
Insight
Midwest Acquired Total
Systems Systems Systems
--------- -------- ---------
Homes passed..................................... 1,211,300 867,800 2,079,100
Basic customers.................................. 733,800 528,300 1,262,100
Basic penetration................................ 60.6% 60.9% 60.7%
Digital customers................................ 44,800 63,700 108,500
Premium units.................................... 487,600 460,400 948,000
Premium penetration.............................. 66.5% 87.1% 75.1%
Cable modem customers............................ 15,400 12,400 27,800
14
INDEPENDENT AUDITORS' REPORT
The Board of Directors
AT&T Broadband, LLC:
We have audited the accompanying combined balance sheet of The AT&T
Insight Midwest Systems (a combination of certain assets as defined in note 1
to the combined financial statements) as of December 31, 1999, and the related
combined statements of operations and parent's investment, and cash flows for
the period from March 1, 1999 to December 31, 1999 ("New Insight" or
"Successor") and of The AT&T Insight Midwest Systems for the period from
January 1, 1999 to February 28, 1999 ("Old Insight" or "Predecessor"). These
combined financial statements are the responsibility of the Companies'
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 aforementioned Successor combined financial statements
present fairly, in all material respects, the financial position of New Insight
as of December 31, 1999, and the results of their operations and their cash
flows for the Successor period, in conformity with generally accepted
accounting principles. Further, in our opinion, the aforementioned Predecessor
combined financial statements present fairly, in all material respects, the
results of Old Insight operations and their cash flows for the Predecessor
period, in conformity with generally accepted accounting principles.
As discussed in note 1, effective March 9, 1999, AT&T Corp., parent
company of New Insight, acquired Tele-Communications, Inc., parent company of
Old Insight, in a business combination accounted for as a purchase. As a result
of the acquisition, the combined financial information for the periods after
the acquisition is presented on a different cost basis than that for the
periods before the acquisition and therefore, is not comparable.
KPMG LLP
Denver, Colorado
October 11, 2000
15
AT&T INSIGHT MIDWEST SYSTEMS
(A combination of certain assets, as defined in note 1)
COMBINED BALANCE SHEETS
(in thousands)
June 30, December 31,
2000 1999
----------- ------------
(unaudited)
Assets
Cash.................................................. $ 1,917 1,769
Trade and other receivables, net...................... 5,443 4,303
Property and equipment, at cost:
Land................................................ 668 639
Distribution systems................................ 184,760 121,647
Support equipment and buildings..................... 14,162 11,048
---------- ---------
199,590 133,334
Less accumulated depreciation....................... 15,828 6,665
---------- ---------
183,762 126,669
---------- ---------
Intangible assets..................................... 1,114,045 954,840
Less accumulated amortization....................... 34,013 22,507
---------- ---------
1,080,032 932,333
---------- ---------
$1,271,154 1,065,074
========== =========
Liabilities and Parent's Investment
Accounts payable...................................... $ 747 740
Accrued expenses...................................... 13,559 4,051
---------- ---------
Total liabilities................................. 14,306 4,791
---------- ---------
Parent's investment (note 3).......................... 1,256,848 1,060,283
---------- ---------
Commitments and contingencies (note 4)
$1,271,154 1,065,074
========== =========
See accompanying notes to combined financial statements.
16
AT&T Insight Midwest Systems
(A combination of certain assets, as defined in note 1)
COMBINED STATEMENTS OF OPERATIONS AND PARENT'S INVESTMENT
(in thousands)
New Insight Old Insight
------------------------------- -----------------
Six months Ten months Two months
ended ended ended
June 30, 2000 December 31, 1999 February 28, 1999
------------- ----------------- -----------------
(unaudited)
Revenue..................................................................... $ 79,955 118,509 20,742
Operating costs and expenses:
Operating (note 3)........................................................ 33,958 49,115 8,131
Selling, general, and administrative...................................... 8,610 13,590 2,553
Management fees (note 3).................................................. 4,039 5,497 900
Depreciation.............................................................. 9,183 11,058 2,158
Amortization.............................................................. 13,933 20,141 1,713
---------- --------- -------
69,723 99,401 15,455
---------- --------- -------
Net earnings............................................................ 10,232 19,108 5,287
Parent's investment:
Beginning of period....................................................... 1,060,283 892,683 414,696
Change in due to parent (note 3).......................................... (12,552) (13,727) (4,707)
Acquisition of cable systems by subsidiaries of AT&T Corp. (note 2)....... 198,885 162,219 --
---------- --------- -------
End of period........................................................... $1,256,848 1,060,283 415,276
========== ========= =======
See accompanying notes to combined financial statements.
17
AT&T INSIGHT MIDWEST SYSTEMS
(A combination of certain assets, as defined in note 1)
COMBINED STATEMENTS OF CASH FLOWS
(see note 2)
(in thousands)
New Insight Old Insight
------------------------ ------------
Six months Ten months Two months
ended ended ended
June 30, December 31, February 28,
2000 1999 1999
----------- ------------ ------------
(unaudited)
Cash flows from operating activities:
Net earnings........................................................................... $ 10,232 $ 19,108 $ 5,287
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization........................................................ 23,116 31,199 3,871
Changes in operating assets and liabilities:
Change in receivables and other assets.............................................. (307) 143 (1,606)
Change in accruals, payables and other liabilities.................................. 468 1,820 (339)
-------- -------- -------
Net cash provided by operating activities......................................... 33,509 52,270 7,213
-------- -------- -------
Cash flows from investing activities:
Capital expended for property and equipment............................................ (22,402) (40,155) (4,165)
Other investing activities, net........................................................ 1,593 1,929 972
-------- -------- -------
Net cash used in investing activities............................................. (20,809) (38,226) (3,193)
-------- -------- -------
Cash flows from financing activities:
Change in amounts due to parent, net................................................... (12,552) (13,727) (4,707)
-------- -------- -------
Net cash used in financing activities............................................. (12,552) (13,727) (4,707)
-------- -------- -------
Net change in cash..................................................................... 148 317 (687)
Cash at beginning of period............................................................ 1,769 1,452 2,139
-------- -------- -------
Cash at end of period.................................................................. $ 1,917 $ 1,769 $ 1,452
======== ======== =======
See accompanying notes to combined financial statements.
18
AT&T Insight Midwest Systems
(A combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(Amounts as of and for the period ended June 30, 2000 are unaudited)
(1) Basis of Presentation and Summary of Significant Accounting Policies
On August 15, 2000, subsidiaries of AT&T Corp. ("AT&T") entered into
certain agreements with Insight Communications Company, L.P. ("Insight") and
Insight Midwest, L.P. ("Insight Midwest"). In accordance with the terms of the
agreements, such subsidiaries agreed to contribute certain cable television
systems serving approximately 252,000 customers located in Illinois (the
"Contributed Systems") to Insight Midwest, a partnership in which AT&T
currently holds a 50% partnership interest. In addition, such subsidiaries
agreed to sell certain cable television systems serving approximately 94,000
customers located in Illinois (the "Sold Systems") to Insight and to exchange a
cable television system serving approximately 10,000 customers in and around
Freeport, Illinois (the "Exchanged System") for a cable television system in
and around Claremont, California. Insight will contribute the Sold Systems and
the Exchanged System to Insight Midwest. Following the above described
transactions, both AT&T and Insight will continue to have a 50% partnership
interest in Insight Midwest.
Consummation of the above agreements is subject to the satisfaction or
waiver of customary conditions to closing, including but not limited to the
receipt of all necessary governmental consents and approvals. As a result,
there can be no assurance that the agreements between the AT&T subsidiaries and
Insight will be consummated or, if consummated, as to the date of such
consummation.
The accompanying combined financial statements include the specific
accounts directly related to the activities of the Contributed Systems, the
Sold Systems and the Exchanged Systems (collectively, the "AT&T Insight Midwest
Systems"). The AT&T Insight Midwest Systems' net assets are wholly-owned by
various cable subsidiaries and partnerships of AT&T. All significant inter-
entity accounts and transactions have been eliminated in combination. The
combined net assets of AT&T Insight Midwest Systems are referred to as
"Parent's Investment."
On March 9, 1999, AT&T acquired AT&T Broadband, LLC ("AT&T Broadband",
formerly known as Tele-Communications, Inc.) in a merger (the "AT&T Merger").
In the AT&T Merger, AT&T Broadband became a subsidiary of AT&T. For financial
reporting purposes, the AT&T Merger was deemed to have occurred on March 1,
1999. The combined financial statements for periods prior to March 1, 1999
include those AT&T Insight Midwest Systems that were then owned by Tele-
Communications, Inc. and are referred to herein as "Old Insight." The combined
financial statements for periods subsequent to February 28, 1999 are referred
to herein as "New Insight." Due to the application of purchase accounting in
connection with the AT&T Merger, the predecessor combined financial statements
of Old Insight are not comparable to the successor combined financial
statements of New Insight. In the following text, "AT&T Insight Midwest
Systems" and "the Company" refer to both Old Insight and New Insight. See note
2.
19
AT&T INSIGHT MIDWEST SYSTEMS
(A combination of certain assets, as defined in Note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
As further described in note 2, certain of the cable systems included in
the combined financial statements of New Insight were acquired by AT&T and its
subsidiaries in 2000 and 1999. The AT&T Insight Midwest Systems' combined
financial statements include the assets, liabilities and results of operations
for such cable systems since their respective acquisition dates.
Certain costs of AT&T are charged to the Company based on AT&T Insight
Midwest Systems' number of customers (see note 3). Although such allocations
are not necessarily indicative of the costs that would have been incurred by
the AT&T Insight Midwest Systems on a stand alone basis, management believes
that the resulting allocated amounts are reasonable.
The AT&T Insight Midwest Systems' net assets are held by various wholly-
owned cable subsidiaries and partnerships of AT&T. Accordingly, the balance
sheets of the AT&T Insight Midwest Systems do not reflect all of the assets and
liabilities that would be indicative in a stand alone business. In particular,
the AT&T Insight Midwest Systems do not constitute a taxable entity, therefore,
no provision has been made for income tax expense or benefit in the
accompanying combined financial statements.
Interim Results (unaudited)
The accompanying interim combined financial statements as of and for the
six months ended June 30, 2000 are unaudited but, in the opinion of management,
reflect all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation of the results for such periods. The results of operations
for any interim period are not necessarily indicative of results for the full
year.
Receivables
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at June 30, 2000 and December 31, 1999, respectively, 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. Interest capitalized was not significant for the six months ended
June 30, 2000, the ten months ended December 31, 1999 and the two months ended
February 28, 1999, respectively.
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
sale of properties in their entirety.
20
AT&T INSIGHT MIDWEST SYSTEMS
(A combination of certain assets, as defined in Note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Intangible Assets
Intangible assets consist primarily of franchise costs. Franchise costs
represent the difference between the costs of acquiring cable television
systems and amounts allocated to their tangible net assets. Such amounts are
generally amortized on a straight-line basis over 40 years. Costs incurred by
the AT&T Insight Midwest Systems in negotiating and renewing franchise
agreements are amortized on a straight-line basis over the average lives of the
franchise, 15 years.
Impairment of Long-lived Assets
The Company periodically reviews the carrying amounts of property and
equipment and its identifiable 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 distribution system.
Statement of Cash Flows
With the exception of certain system acquisitions and asset transfers (see
note 2), transactions effected through the intercompany account due to (from)
parent have been considered constructive cash receipts and payments for
purposes of the combined statement of cash flows.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
21
AT&T INSIGHT MIDWEST SYSTEMS
(A combination of certain assets, as defined in Note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(2) Business Combinations
AT&T Merger
The AT&T Merger has been accounted for using the purchase method of
accounting and has been deemed to be effective as of March 1, 1999 for
financial reporting purposes. Accordingly, the Company's portion of the
allocation of AT&T's purchase price to acquire AT&T Broadband has been
reflected in the combined financial statements of the AT&T Insight Midwest
Systems as of March 1, 1999.
The following table reflects the March 1, 1999 balance sheet of New
Insight, as adjusted to give effect to the purchase accounting adjustments
resulting from the allocation to the net assets of the Company of AT&T's
purchase price to acquire AT&T Broadband:
(amounts in
thousands)
-----------
Assets
Cash......................................................... $ 1,452
Receivables.................................................. 3,690
Property and equipment....................................... 71,832
Intangible assets............................................ 818,088
--------
$895,062
========
Liabilities and Parent's Investment
Accounts payable and accrued expenses........................ $ 2,379
Parent's Investment.......................................... 892,683
--------
$895,062
========
As a result of the application of purchase accounting, New Insight
recorded its assets and liabilities at their fair values on March 9, 1999. The
most significant purchase accounting adjustments related to intangible assets.
The intangible assets include $792.0 million assigned to New Insight's
franchise costs which are amortized over 40 years.
22
AT&T INSIGHT MIDWEST SYSTEMS
(A combination of certain assets, as defined in Note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Acquisitions
Exchange
During the second quarter of 1999, AT&T Broadband paid cash and traded
cable television systems serving customers located in Florida, Hawaii, Maine,
New York, Ohio, Texas and Wisconsin in exchange for cable television systems
serving customers located in Illinois, New Jersey, Oregon and Pennsylvania (the
"1999 Exchange"). The 1999 Exchange was consummated pursuant to an agreement
that was executed in November 1998. The 1999 Exchange was deemed to be
effective as of June 1, 1999 for financial reporting purposes and the acquired
systems were recorded using the purchase method of accounting.
Certain of the Illinois cable television systems acquired by AT&T
Broadband in the 1999 Exchange are included in the accompanying financial
results of the AT&T Insight Midwest Systems and are reflected as a contribution
from AT&T Broadband. Accordingly, the assets, liabilities and results of
operations of such systems have been reflected in the combined financial
statements of the AT&T Insight Midwest Systems since June 1, 1999.
The following table reflects the June 1, 1999 balance sheet of the 1999
Exchange systems included in the AT&T Insight Midwest Systems:
(amounts in
thousands)
-----------
Assets
Receivables.................................................. $ 483
Property and equipment....................................... 25,670
Intangible assets............................................ 136,658
--------
$162,811
========
Liabilities and Parent's Investment
Accounts payable and accrued expenses........................ $ 592
Parent's Investment.......................................... 162,219
--------
$162,811
========
The above operating assets and liabilities have been included in the
accompanying combined financial statements at their fair values at June 1,
1999. The most significant purchase accounting adjustments related to
intangible assets. The intangible assets include approximately $131.8 million
of franchise costs which are amortized over 40 years.
Merger with MediaOne Group, Inc. ("MediaOne") (unaudited)
On June 15, 2000, AT&T completed the acquisition of MediaOne in a cash and
stock transaction valued at approximately $56 billion (the "MediaOne Merger").
The MediaOne Merger was accounted for under the purchase method of accounting.
Certain cable television systems acquired by AT&T in the MediaOne Merger are
included in the accompanying financial statements
23
AT&T INSIGHT MIDWEST SYSTEMS
(A combination of certain assets, as defined in Note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
since their date of acquisition by AT&T. Accordingly, the preliminary estimates
of the fair values of such systems' net assets have been reflected in the
accompanying combined financial statements of the AT&T Insight Midwest Systems
as of June 15, 2000.
The following table reflects the June 15, 2000 balance sheet of the cable
systems which were acquired in the MediaOne Merger and included in the AT&T
Insight Midwest Systems, as adjusted to give effect to the preliminary purchase
accounting adjustments:
(amounts in
thousands)
-----------
Assets
Cash......................................................... $ 304
Receivables.................................................. 620
Property and equipment....................................... 47,588
Intangible assets............................................ 159,419
--------
$207,931
========
Liabilities and Parent's Investment
Accounts payable and accrued expenses........................ $ 9,046
Parent's Investment.......................................... 198,885
--------
$207,931
========
The preliminary purchase accounting adjustments in the table above reflect
the preliminary estimates of fair value at June 15, 2000. A final allocation of
AT&T's purchase price will be made upon receipt of final third party
appraisals. The most significant preliminary purchase accounting adjustments
related to intangible assets. The preliminary intangible assets include
approximately $146.0 million of franchise costs which are amortized over 40
years.
Pro Forma Operating Results (unaudited)
The following unaudited combined results of operations for the six months
ended June 30, 2000 and the year ended December 31, 1999 were prepared assuming
the AT&T Merger, the 1999 Exchange, and the MediaOne Merger occurred on January
1, 1999. These pro forma amounts are not necessarily indicative of operating
results that would have occurred if the AT&T Merger, the 1999 Exchange, and the
MediaOne Merger had occurred on January 1, 1999, nor does it intend to be a
projection of future results:
Six months Year ended
ended June December 31,
30, 2000 1999
---------- ------------
(amounts in thousands)
Revenue............................................ $90,894 174,939
Net earnings....................................... $10,485 26,679
24
AT&T INSIGHT MIDWEST SYSTEMS
(A combination of certain assets, as defined in Note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(3) Parent's Investment
Parent's investment in the AT&T Insight Midwest Systems at June 30, 2000
and December 31, 1999 is summarized as follows (amounts in thousands):
June 30, December 31,
2000 1999
----------- ------------
(unaudited)
Due to parent....................................... $1,227,508 1,041,175
Retained earnings since March 1, 1999............... 29,340 19,108
---------- ---------
$1,256,848 1,060,283
========== =========
The non-interest bearing amount due to parent includes AT&T's equity in
acquired systems, advances for operations, acquisitions and construction costs,
as well as the amounts owed as a result of the allocation of certain costs from
AT&T.
As a result of AT&T's 100% ownership of the AT&T Insight Midwest Systems,
the non-interest bearing amounts due to parent have been classified as a
component of Parent's investment in the accompanying combined balance sheets.
Such amounts are due on demand.
The AT&T Insight Midwest Systems purchase, at AT&T's cost, certain pay
television and other programming through a certain indirect subsidiary of AT&T.
Charges for such programming are included in operating expenses in the
accompanying combined financial statements.
Certain subsidiaries of AT&T provide administrative services to the AT&T
Insight Midwest Systems and have assumed managerial responsibility of the AT&T
Insight Midwest Systems' cable television system operations and construction.
As compensation for these services, the AT&T Insight Midwest Systems pay a
monthly fee calculated on a per-subscriber basis.
The intercompany advances and expense allocation activity in amounts due
to parent consist of the following (amounts in thousands):
New Insight Old Insight
------------------------- ------------
Six months Ten months Two months
ended ended ended
June 30, December 31, February 28,
2000 1999 1999
----------- ------------ ------------
(unaudited)
Beginning of period................... $1,041,175 892,683 282,834
Programming charges................. 21,457 30,083 5,282
Management fees..................... 4,039 5,497 900
Cable system acquisitions........... 198,885 162,219 --
Cash transfers...................... (38,048) (49,307) (10,889)
---------- --------- -------
End of period......................... $1,227,508 1,041,175 278,127
========== ========= =======
25
AT&T INSIGHT MIDWEST SYSTEMS
(A combination of certain assets, as defined in Note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(4) Commitments and Contingencies
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") imposed certain rate regulations on the cable television
industry. Under the 1992 Cable Act, all cable systems are subject to rate
regulation, unless they face "effective competition," as defined by the 1992
Cable Act and expanded in the Telecommunications Act of 1996 (the "1996 Act"),
in their local franchise area.
Although the Federal Communications Commission (the "FCC") has established
regulations required by the 1992 Cable Act, local government units (commonly
referred to as local franchising authorities) are primarily responsible for
administering the regulation of a cable system's basic service tier. The FCC
historically administered rate regulation of any cable programming service tier
("CPST"). The FCC's authority to regulate CPST rates expired on March 31, 1999.
The Company 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.
Certain plaintiffs have filed or threatened separate class action
complaints against cable systems across the United States 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. In March 2000, a
settlement agreement was executed with respect to certain late fee class action
complaints, which involves certain of the AT&T Insight Midwest Systems. On
October 11, 2000 the court approved the settlement agreement with the exception
of certain customers, including customers in Illinois, which did not receive
notice regarding the settlement. A hearing has been scheduled for December 18,
2000 with respect to the settlement action on the customers which were excluded
from the October 11, 2000 settlement approval. The settlement is not expected
to have a material impact on the AT&T Insight Midwest Systems' financial
condition or results of operations.
The AT&T Insight Midwest Systems have contingent liabilities related to
legal proceedings and other matters arising in the ordinary course of business.
Although it is reasonably possible the AT&T Insight Midwest Systems may incur
losses upon conclusion of such matters, an estimate of any loss or range of
loss cannot be made. In the opinion of management, it is expected that amounts,
if any, which may be required to satisfy such contingencies will not be
material in relation to the accompanying combined financial statements.
26
AT&T INSIGHT MIDWEST SYSTEMS
(A combination of certain assets, as defined in Note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The AT&T Insight Midwest Systems lease business offices, have entered into
pole rental agreements and use certain equipment under lease arrangements.
Rental expense for such arrangements amounted to $639,000, $1,037,000 and
$157,000 for the six months ended June 30, 2000, the ten months ended December
31, 1999 and the two months ended February 28, 1999, respectively.
Future minimum lease payments under noncancelable operating leases for
each of the next five years are summarized as follows (amounts in thousands):
Years ending December 31:
2000............................................. $525
2001............................................. 382
2002............................................. 345
2003............................................. 324
2004............................................. 325
Thereafter....................................... 209
It is expected that, in the normal course of business, expiring leases
will be renewed or replaced.
27
Report of Independent Auditors
The Board of Directors
Insight Communications Company, Inc.
We have audited the accompanying combined balance sheets of the Griffin,
GA, Rockford, IL, Portland, IN and Scottsburg, IN cable television systems
(collectively, the "Combined Systems") included in Insight Communications
Company, L.P., as of December 31, 1999, and the related combined statements of
operations and changes in net assets, and cash flows for the year then ended.
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 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 combined financial position of the Combined
Systems, included in Insight Communications Company, L.P., as of December 31,
1999, and the combined results of their operations and their cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States.
Ernst & Young LLP
New York, New York
October 11, 2000
28
GRIFFIN GA, ROCKFORD, IL, PORTLAND, IN AND SCOTTSBURG, IN
CABLE TELEVISION SYSTEMS
COMBINED BALANCE SHEETS
(in thousands)
December 31, June 30,
1999 2000
------------ -----------
(unaudited)
Assets
Cash and cash equivalents............................. $ 412 $ 1
Trade accounts receivable, net of allowance for
doubtful accounts of $22 in 1999 and 2000.......... 1,110 1,112
Prepaid expenses and other current assets............. 768 2,716
-------- --------
Total current assets.............................. 2,290 3,829
Fixed assets, net..................................... 42,637 43,986
Intangible assets, net of accumulated amortization of
$19,490 and $23,390 at December 31, 1999 and June
30, 2000, respectively............................. 97,416 93,516
-------- --------
Total assets...................................... $142,343 $141,331
======== ========
Liabilities and Net Assets
Accounts payable...................................... $ 4,216 $ 1,302
Accrued expenses and other current liabilities........ 881 2,794
Due to affiliates..................................... 12,716 12,867
-------- --------
Total current liabilities......................... 17,813 16,963
Net assets............................................ 124,530 124,368
-------- --------
Total liabilities and net assets.................. $142,343 $141,331
======== ========
See accompanying notes.
29
GRIFFIN GA, ROCKFORD, IL, PORTLAND, IN AND SCOTTSBURG, IN
CABLE TELEVISION SYSTEMS
COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
(in thousands)
Six months
Year ended ended
December 31, June 30,
1999 2000
------------ -----------
(unaudited)
Revenue................................................ $ 34,899 $ 20,164
Costs and expenses:
Programming and other operating costs................ 11,195 7,244
Selling, general and administrative.................. 7,135 4,422
Depreciation and amortization........................ 15,719 8,650
-------- --------
Operating income (loss)................................ 850 (152)
Other income (expense)................................. 173 (10)
-------- --------
Net income (loss)...................................... 1,023 (162)
-------- --------
Net assets, beginning of period........................ 102,307 124,530
Contribution of cable system assets (Note A)........... 21,200 --
-------- --------
Net assets, end of period.............................. $124,530 $124,368
======== ========
See accompanying notes.
30
GRIFFIN GA, ROCKFORD, IL, PORTLAND, IN AND SCOTTSBURG, IN
CABLE TELEVISION SYSTEMS
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended Six months
December 31, ended June 30,
1999 2000
------------ --------------
(unaudited)
Operating activities:
Net income (loss).................................. $ 1,023 $ (162)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 15,719 8,650
Provision for losses on trade accounts receiv-
able............................................ 434 326
Changes in operating assets and liabilities:
Trade accounts receivable...................... (465) (328)
Prepaid expenses and other current assets...... (577) (1,948)
Accounts payable............................... 1,312 (2,913)
Accrued expenses and other current liabili-
ties.......................................... 269 1,913
Due to affiliates.............................. 6,549 151
-------- -------
Net cash provided by operating activities.......... 24,264 5,689
-------- -------
Investing activities:
Purchases of fixed assets.......................... (24,518) (6,100)
-------- -------
Net cash used in investing activities.............. (24,518) (6,100)
-------- -------
Net decrease in cash and cash equivalents.......... (254) (411)
Cash and cash equivalents, beginning of period..... 666 412
-------- -------
Cash and cash equivalents, end of period........... $ 412 $ 1
======== =======
See accompanying notes.
31
GRIFFIN GA, ROCKFORD, IL, PORTLAND, IN AND SCOTTSBURG, 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 areas of Griffin, GA;
Rockford, IL; Portland, IN; and Scottsburg, IN (the "Combined Systems") are
principally engaged in the cable television business under non-exclusive
franchise agreements, which expire at various times beginning in 2000. The
Combined Systems are owned by Insight Communications Company, L.P. (the
"Partnership"). The Partnership is owned by Insight Communications Company,
Inc. ("Insight Inc.").
Basis of Presentation
The accompanying combined financial statements of the Combined Systems
reflect the "carved out" historical financial position, results of operations
and 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).
On March 22, 1999 the Partnership exchanged its Franklin, Virginia cable
system ("Franklin") servicing 9,200 subscribers for Falcon Cable's Scottsburg
("Scottsburg") Indiana system servicing 4,100 subscribers. In addition, the
Partnership received $8.0 million in cash. This transaction has been accounted
for by the Partnership as a sale of the Franklin system and a purchase of the
Scottsburg system. In addition, on March 31, 1999 the Partnership acquired
Americable International of Florida Inc.'s Portland, Indiana and Fort Recovery,
Ohio cable systems ("Portland") servicing approximately 6,100 subscribers for
$10.9 million. This acquisition has been accounted for as a purchase.
Accordingly, the Scottsburg and Portland systems have been included in the
accompanying combined balance sheets at their fair values (approximately $21.2
million). The Scottsburg and Portland systems' purchase price was allocated to
the cable television assets acquired in relation to their fair values as
increases in property and equipment of approximately $4.3 million and franchise
costs of $16.9 million. Franchise costs arising from the acquisition of the
Scottsburg and Portland systems are being amortized on the straight-line method
over a period of 15 years.
The pro forma unaudited results of operations of the Combined Systems for
the year ended December 31, 1999 assuming the acquisition of the Scottsburg and
Portland systems occurred on January 1, 1999 is as follows (in thousands):
Revenues......................................................... $35,986
Income before extraordinary item................................. 1,243
Net income....................................................... 1,243
32
GRIFFIN GA, ROCKFORD, IL, PORTLAND, IN AND SCOTTSBURG, IN
CABLE TELEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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.
The accompanying unaudited financial statements for the six months ended
June 30, 2000, have been prepared in accordance with generally accepted
accounting principles for interim financial information and with Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000.
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 that could
have a significant effect on the financial condition of the Combined Systems.
Revenue Recognition
Revenues include service fees, connection fees and launch fees. Service
fees are recorded in the month the cable television and pay television services
are provided to subscribers. Connection fees are charged for the hook-up of new
customers and are recognized as current revenues to the extent of direct
selling costs incurred. Launch fees are deferred and amortized over the period
of the underlying contract. Any fees in excess of such costs are deferred and
amortized into income over the period that subscribers are expected to remain
connected to the system.
33
GRIFFIN GA, ROCKFORD, IL, PORTLAND, IN AND SCOTTSBURG, IN
CABLE TELEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Statement of Cash Flows
The Combined Systems participate in a cash management system with
affiliates whereby cash receipts are transferred to a centralized Partnership
bank account from which centralized payments to various suppliers and creditors
are made on behalf of the Combined Systems. Amounts shown as cash represent the
Combined Systems' net cash receipts not transferred to the centralized account
as of December 31, 1999 and June 30, 2000. The average net intercompany
balances were $9.4 million and $12.8 million for the year ended December 31,
1999 and the six month period ended June 30, 2000, respectively.
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 expended 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 12 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 (in thousands):
December 31, June 30,
1999 2000
------------ -----------
(unaudited)
Land, buildings and improvements................. $ 352 $ 392
Cable television equipment....................... 56,075 61,505
Furniture, fixtures and office equipment......... 282 910
Less accumulated depreciation and amortization... (14,072) (18,821)
-------- --------
$ 42,637 $ 43,986
======== ========
Depreciation expense for the year ended December 31, 1999 and the six
months ended June 30, 2000 was $7.8 million and $4.8 million, respectively.
Intangible Assets
Intangible assets consist primarily of franchise costs. 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 fair value of the tangible assets at the date of acquisition.
During 1999, the Combined Systems amortized cable television franchise costs
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
34
GRIFFIN GA, ROCKFORD, IL, PORTLAND, IN AND SCOTTSBURG, IN
CABLE TELEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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 fair value. Based on its recent analysis, management
believes that no impairment of long-lived assets exists at December 31, 1999.
Income Taxes
As a U.S. partnership, the Partnership is not subject to federal and most
state income taxes and, therefore, no income taxes are recorded in the
accompanying financial statements.
C. Related Parties
In the normal course of business, the Combined Systems had various
transactions with the Partnership and its affiliates, generally on terms 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 $5.8
million for the year ended December 31, 1999 and approximately $100,000 for the
six months ended June 30, 2000.
Included in the Combined Systems' operating expenses are charges for
general, administrative 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, 1999, and the six months ended June
30, 2000, these charges totaled approximately $1.4 million and $680,000,
respectively.
D. Commitment and Contingencies
The Combined Systems had rental expense of approximately $522,000 and
$519,000 for the year ended December 31, 1999 and the six months ended June 30,
2000, 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:
2000.......................................... $172,200
2001.......................................... 93,600
2002.......................................... 16,100
2003.......................................... 550
2004.......................................... --
Thereafter.................................... --
--------
$282,450
========
35
GRIFFIN GA, ROCKFORD, IL, PORTLAND, IN AND SCOTTSBURG, IN
CABLE TELEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The Combined Systems are subject to other various legal proceedings that
arise in the ordinary course of business. While it is impossible to determine
with certainty the ultimate outcome of these matters, it is management's
opinion that the resolution of these matters will not have a material adverse
affect on the financial condition of the Combined Systems.
E. Recent Accounting Pronouncements
During 1999, the Combined Systems adopted Statement of Position 98-1,
"Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1). SOP 98-1 requires that companies capitalize
qualifying costs incurred during the application development stage of a
software project. All other costs incurred in connection with an internal use
software project are to be expensed as incurred. The adoption of SOP 98-1 did
not have a material impact on the Combined Systems financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 133, as amended by SFAS No. 137, is effective for all
fiscal years beginning after June 15, 2000. SFAS No. 133 will require the
Combined Systems to recognize all derivatives on the balance sheet at fair
value. Although management has not completed its assessment of the impact of
this standard on its results of operations and financial position, management
does not anticipate that adoption of this standard will be material.
F. Subsequent Events (Unaudited)
Telephony Agreements
On July 17, 2000, Insight Inc. and its affiliates entered into definitive
agreements with AT&T Broadband, LLC ("AT&T Broadband") for the provision by
AT&T Broadband of all-distance telephone service utilizing the cable systems'
infrastructure under the AT&T brand name. Telephony revenues are to be
attributed to AT&T Broadband who, in turn, will pay the cable affiliate a
monthly per line access fee. AT&T Broadband will also pay the cable affiliate
for marketing, installation and billing support. AT&T Broadband would be
required to install and maintain the necessary switching equipment, and would
be the local exchange carrier of record. It is expected that the cable
affiliates will market the telephone services both independently and as part of
a bundle of services.
Contribution of Combined Systems
On August 15, 2000, the Partnership entered into definitive agreements
with AT&T Broadband for the contribution to Insight Midwest L.P. (a partnership
between the Partnership and AT&T Broadband of which the Partnership is the
general partner) of additional cable television systems, including the Combined
Systems. Through a series of transactions, the Partnership will contribute to
Insight Midwest its interests in systems serving approximately 182,400
customers,
36
GRIFFIN GA, ROCKFORD, IL, PORTLAND, IN AND SCOTTSBURG, IN
CABLE TELEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
including the approximately 88,100 customers served by the Combined Systems. In
addition, the Partnership will purchase from AT&T Broadband and immediately
contribute to Insight Midwest, systems serving approximately 97,200 customers
and AT&T Broadband will contribute systems serving approximately 248,800
customers. Upon completion of the transactions, Insight Midwest will remain
equally owned by the Partnership and AT&T Broadband, and the Partnership will
continue to serve as the general partner and manage and operate the Insight
Midwest systems. The consummation of the definitive agreements is subject to
several conditions, including the receipt of all necessary regulatory
approvals.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Insight Midwest, L.P.
(Registrant)
By: Insight Communications Company, L.P.,
its general partner
By: Insight Communications Company, Inc.,
its general partner
Date: October 23, 2000 By: Elliot Brecher
---------------------------------------
Elliot Brecher
Senior Vice President
and General Counsel