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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) of the
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
Commission file numbers 333-33540
333-33540-1
_______________________
INSIGHT MIDWEST, L.P.
INSIGHT CAPITAL, INC.
(Exact name of registrants as specified in their charters)
Delaware 13-4079232
Delaware 13-4079679
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Nos.)
810 7th Avenue
New York, New York 10019
(Address of principal executive offices) (Zip code)
Registrants telephone number, including area code: 917-286-2300
_______________________
Indicate by check mark whether the registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports) and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Insight Midwest, L.P.--not applicable
Insight Capital, Inc.--not applicable
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the requirements of Form 10-Q and, therefore,
do not include all information and footnotes required by generally accepted
accounting principles. However, in the opinion of management, all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the results of operations for the relevant periods have been made. Results
for the interim periods are not necessarily indicative of the results to be
expected for the year. These financial statements should be read in conjunction
with the summary of significant accounting policies and the notes to the
consolidated financial statements included in the Company's Registration
Statement on Form S-4.
1
INSIGHT MIDWEST, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, September 30,
1999 2000
------------------ -----------------
(unaudited)
ASSETS
Cash and cash equivalents............................................ $ 35,996 $ 2,979
Trade accounts receivable (net of allowance for doubtful accounts of:
December 1999, $735; September 2000, $986)...................... 15,643 16,360
Prepaid expenses and other current assets............................ 6,976 6,341
------------ ------------
Total current assets.......................................... 58,615 25,680
Fixed assets, (net of accumulated depreciation of: December 1999,
$87,978; September 2000, $168,563).................................. 596,246 658,114
Intangible assets (net of accumulated amortization of: December
1999, $55,690; September 2000, $119,184)............................ 1,032,553 970,595
Deferred financing costs, net of amortization........................ 19,185 18,472
------------ ------------
Total assets...................................................... $1,706,599 $1,672,861
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable..................................................... $ 59,406 $ 47,442
Accrued expenses and other liabilities............................... 26,029 21,935
Interest payable..................................................... 19,397 16,743
Due to affiliates.................................................... 1,220 378
------------ ------------
Total current liabilities....................................... 106,052 86,498
Debt................................................................. 1,232,000 1,313,000
------------ ------------
Total liabilities................................................. 1,338,052 1,399,498
Partners' Capital.................................................... 368,547 273,363
------------ ------------
$1,706,599 $1,672,861
============ ============
See accompanying notes
2
INSIGHT MIDWEST, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
1999 2000 1999 2000
-------- --------- -------- --------
Revenue................................... $ 36,181 $ 94,939 $107,925 $282,176
Costs and expenses:
Programming and other operating costs.... 10,010 30,788 30,187 95,653
Selling, general and administrative...... 7,294 16,661 20,945 48,745
Management fees.......................... 1,024 2,767 3,238 8,182
Depreciation and amortization............ 22,707 49,901 66,147 144,081
-------- -------- ------- -------
41,035 100,117 120,517 296,661
-------- -------- ------- -------
Loss from operations..................... (4,854) (5,178) (12,592) (14,485)
Other income (expense):
Interest expense, net.................... (8,522) (27,641) (25,289) (80,239)
Other income............................. 34 22 55 95
-------- -------- -------- --------
Net loss.................................. $(13,342) $(32,797) $(37,826) $(94,629)
======== ======== ======== ========
See accompanying notes
3
INSIGHT MIDWEST, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
---------------------------------
1999 2000
---------- -----------
Operating activities:
Net loss.......................................................... $(37,826) $ (94,629)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization................................... 66,147 144,081
Provision for losses on trade accounts receivable............... (2,818) 5,337
Changes in operating assets and liabilities:
Trade accounts receivable.................................... 5,491 (6,054)
Due from and to affiliates................................... 1,561 (842)
Prepaid expenses and other assets............................ (1,424) 635
Accounts payable............................................. 13,639 (11,964)
Accrued expenses and other liabilities....................... (3,270) (4,094)
Interest payable............................................. 7,862 (2,654)
---------- ----------
Net cash provided by operating activities.......................... 49,362 29,816
---------- ----------
Investing activities:
Purchases of fixed assets....................................... (52,791) (142,455)
Increase in intangible assets................................... (265) (1,378)
---------- ----------
Net cash used in investing activities.............................. (53,056) (143,833)
---------- ----------
Financing activities:
Borrowings (repayment) from bank credit facility................ (6,000) 81,000
Debt issuance costs............................................. (4,114) --
---------- ----------
Net cash (used in) provided by financing activities................ (10,114) 81,000
---------- ----------
Net decrease in cash and cash equivalents.......................... (13,808) (33,017)
Cash and cash equivalents at beginning of period................... 19,493 35,996
---------- ----------
Cash and cash equivalents at end of period......................... $ 5,685 $ 2,979
---------- ----------
See accompanying notes
4
INSIGHT MIDWEST, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
A. Organization
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 Communications Company, Inc.'s ("Insight Inc.") cable television system
joint ventures with an affiliate of AT&T Broadband, LLC ("AT&T Broadband").
Insight Midwest is owned 50% by 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 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
734,000 customers as of September 30, 2000.
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. Therefore, subject to certain matters that require
TCI's approval as specified in Insight Midwest's partnership agreement, Insight
L.P. controls Insight Indiana, 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.
Insight Indiana's systems passed approximately 506,000 homes and served
approximately 316,000 customers as of September 30, 2000.
5
INSIGHT MIDWEST, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
A. Organization (continued)
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, owned and operated 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, Insight L.P. contributed its interest in the IPVI Partnership
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. Similar 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
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.
Insight Kentucky's systems passed approximately 716,000 homes and served
approximately 418,000 customers as of September 30, 2000.
B. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
6
INSIGHT MIDWEST, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
B. Basis of Presentation (continued)
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the Company's financial statements and
footnotes thereto for the year ended December 31, 1999, included in the
Company's Registration Statement on Form S-4.
C. Significant Accounting Policies
Recent Accounting Policies
In June 1998, the FASB issued Statement 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 company 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 the adoption of this
statement will be material.
Change in Estimate
Effective January 1, 2000 the Company changed the estimated useful lives of
fixed assets which related to the Company's current rebuild program. The
changes in estimated useful lives were made to reflect managements' evaluation
of the economic lives of the newer rebuilt plant. This change was made on a
prospective basis and resulted in an increase in net income for the three and
nine months ended September 30, 2000 of approximately $5.9 and $12.6 million,
respectively.
D. Pro Forma Results of Operations (unaudited)
The pro forma unaudited results of operations for the period ended
September 30, 1999 assuming the acquisition of the IPVI Partnership had been
consummated on January 1, 1999, follows (in thousands):
Revenues $ 267,192
Net loss 114,228
E. Commitments and Contingencies
The Company is a party to or may be affected by various matters under
litigation. Management believes that the ultimate outcome of these matters will
not have a significant adverse effect on either the Company's future results of
operations or financial position.
7
INSIGHT MIDWEST, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
F. Recent Developments
Greenwood Agreement
On September 26, 2000, the Company entered into an agreement with Cable
One, Inc., a subsidiary of The Washington Post Company, for the acquisition of a
cable television system serving approximately 14,800 customers in Greenwood,
Indiana for the purchase price of $62.0 million. The acquisition is subject to
closing conditions, including the completion of a proposed trade of systems
between Cable One and an affiliate of AT&T Corp., and is expected to be
completed on or about January 2, 2001.
Telephony Agreements
On July 17, 2000, Insight Indiana, Insight Kentucky and other affiliates of
Insight Inc. entered into definitive agreements with 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.
Expansion of Insight Midwest
On August 15, 2000, the Company entered into definitive agreements with
AT&T Broadband and Insight L.P. for the acquisition of additional cable
television systems. Through a series of transactions, the Company will acquire
all of Insight L.P's remaining wholly-owned systems serving approximately
279,600 customers, including systems which it will purchase from AT&T Broadband.
At the same time the Company will acquire from AT&T Broadband systems serving
approximately 248,800 customers. As a result, the Company will serve
approximately 1.3 million customers, approximately 99% of which will be
concentrated in the four contiguous states of Indiana, Kentucky, Illinois and
Ohio. The Ohio system (currently owned by Insight L.P.), which serves
approximately 84,200 customers, will become an unrestricted subsidiary under the
indentures governing the Company's senior notes, and will be prohibited by the
terms of its indebtedness from making distributions to the Company. Upon
completion of the transaction, Insight Midwest will remain equally owned by
Insight L.P. and TCI, and Insight L.P. 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.
8
INSIGHT MIDWEST, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
F. Recent Developments (continued)
November 2000 Notes Offering
On November 6, 2000, the Company completed an offering of $500.0 million
principal amount of 10 1/2% senior notes due 2010. The Company used the net
proceeds of $487.5 million to repay a portion of the outstanding debt under the
credit facilities of its subsidiaries.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
Some of the information in this quarterly report 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:
. discuss our future expectations;
. contain projections of our future results of operations or of our financial
condition; or
. 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
our most recent registration statement, as well as any cautionary language in
this quarterly report, 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. You should be aware that the
occurrence of the events described in these risk factors and elsewhere in this
quarterly report could have a material adverse effect on our business, operating
results and financial condition.
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, 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.
10
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 our 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 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 Insight Indiana is the predecessor of Insight Midwest, the following
discussion includes the results of operations of Insight Indiana for the three
and nine months ended September 30, 1999 and the results of Insight Midwest for
the three and nine months ended September 30, 2000. The following table
reflects these results of operations:
Three months ended Nine months ended
------------------------ ---------------------
September 30, September 30,
------------- -------------
1999 2000 1999 2000
---- ---- ---- ----
(in thousands) (in thousands)
Revenues $ 36,181 $ 94,939 $107,925 $ 282,176
Costs and expenses:
Programming and other operating costs 10,010 30,788 30,187 95,653
Selling, general and administrative 7,294 16,661 20,945 48,745
Management fees 1,024 2,767 3,238 8,182
Depreciation and amortization 22,707 49,901 66,147 144,081
--------- --------- --------- ---------
41,035 100,117 120,517 296,661
--------- --------- --------- ---------
Operating loss (4,854) (5,178) (12,592) (14,485)
EBITDA 17,887 44,745 53,610 129,691
Interest expense 8,522 27,641 25,289 80,239
Net loss (13,342) (32,797) (37,826) (94,629)
Net cash provided by (used in) operating activities 19,497 (8,847) 49,362 29,816
Net cash used in investing activities (17,696) (56,030) (53,056) (143,833)
Net cash provided by (used in) financing activities (16,114) 32,000 (10,114) 81,000
11
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Revenues increased 162.4% to $94.9 million for the three months ended
September 30, 2000 compared to $36.2 million for the three months ended
September 30, 1999. The results were impacted by the acquisition of Insight
Kentucky on October 1, 1999. The incremental revenue generated from the Kentucky
systems approximated $57.6 million accounting for 98.0% of the consolidated
revenue increase. In addition, revenues increased as a result of rate increases
and growth in advertising revenues.
Revenues per customer per month averaged $43.12 for the three months ended
September 30, 2000 compared to $37.55 for the three months ended September 30,
1999. The increase is primarily attributable to customer rate increases as
Insight Indiana turned on nodes in rebuilt areas resulting in higher basic
rates.
Programming and other operating costs increased 207.6% to $30.8 million for
the three months ended September 30, 2000 compared to $10.0 million for the
three months ended September 30, 1999. The Kentucky systems accounted for
approximately 98.1% or approximately $20.4 million of the total increase.
Excluding these systems, these costs increased by approximately $0.4 million
accounting for 1.9% of the total increase, primarily as a result of increased
programming rates and additional programming carried by our systems.
Selling, general and administrative expenses increased 128.4% to $16.7
million for the three months ended September 30, 2000 compared to $7.3 million
for the three months ended September 30, 1999. The Kentucky systems accounted
for approximately 100.9% or approximately $9.5 million of the total increase.
Depreciation and amortization expense increased 119.8% to $49.9 million for
the three months ended September 30, 2000 compared to $22.7 million for the
three months ended September 30, 1999. This increase was primarily due to the
acquisitions of the cable systems discussed above and additional capital
expenditures associated with the rebuilds of our systems, partially offset by a
decrease in depreciation expense attributable to a change in estimate as of
January 1, 2000 which resulted in assets being depreciated over longer lives.
For the three months ended September 30, 2000, an operating loss of $5.2
million was incurred as compared to $4.9 million for the three months ended
September 30, 1999, for reasons set forth above.
EBITDA increased 150.2% to $44.7 million for the three months ended
September 30, 2000 as compared to $17.9 million for the three months ended
September 30, 1999 primarily reflecting the acquisition of the Kentucky systems.
EBITDA 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
12
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.
Interest expense increased 224.3% to $27.6 million for the three months
ended September 30, 2000 compared to $8.5 million for the three months ended
September 30, 1999. The increase was primarily due to higher average outstanding
indebtedness related to the acquisitions. Average debt outstanding during the
three months ended September 30, 2000 was $1.3 billion at an average interest
rate of 8.4%.
For the three months ended September 30, 2000 a net loss of $32.8 million
was realized for the reasons set forth above.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Revenues increased 161.5% to $282.2 million for the nine months ended
September 30, 2000 compared to $107.9 million for the nine months ended
September 30, 1999. The results were impacted by the acquisition of Insight
Kentucky on October 1, 1999. The incremental revenue generated from the Kentucky
systems approximated $171.6 million accounting for 98.5% of the consolidated
revenue increase. In addition, revenues increased as a result of rate increases
and growth in advertising revenues.
Revenues per customer per month averaged $42.28 for the nine months ended
September 30, 2000 compared to $37.30 for the nine months ended September 30,
1999. The increase is primarily attributable to customer rate increases as
Insight Indiana turned on nodes in rebuilt areas resulting in higher basic
rates.
Programming and other operating costs increased 216.9% to $95.7 million for
the nine months ended September 30, 2000 compared to $30.2 million for the nine
months ended September 30, 1999. The Kentucky systems accounted for
approximately 92.2% or approximately $60.3 million of the total increase.
Excluding these systems, these costs increased by approximately $5.2 million
accounting for 7.8% of the total increase, primarily as a result of increased
programming rates and additional programming carried by our systems.
Selling, general and administrative expenses increased 132.7% to $48.7
million for the nine months ended September 30, 2000 compared to $20.9 million
for the nine months ended September 30, 1999. The Kentucky systems accounted
for approximately 99.1% of the total increase.
Depreciation and amortization expense increased 117.8% to $144.1 million
for the nine months ended September 30, 2000 compared to $66.1 million for the
nine months ended September 30, 1999. This increase was primarily due to the
acquisitions of the cable systems discussed above and additional capital
expenditures associated with the rebuilds of our systems, partially offset by a
decrease in depreciation expense attributable to a change in estimate as of
January 1, 2000 which resulted in assets being depreciated over longer lives.
13
For the nine months ended September 30, 2000, an operating loss of $14.5
million was incurred as compared to $12.6 million for the nine months ended
September 30, 1999, for reasons set forth above.
EBITDA increased 141.9% to $129.7 million for the nine months ended
September 30, 2000 as compared to $53.6 for the nine months ended September 30,
1999 primarily reflecting the acquisition of the Kentucky systems. EBITDA
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.
Interest expense increased 217.3% to $80.2 million for the nine months
ended September 30, 2000 compared to $25.3 million for the nine months ended
September 30, 1999. The increase was primarily due to higher average outstanding
indebtedness related to the acquisitions. Average debt outstanding during the
nine months ended September 30, 2000 was $1.3 billion at an average interest
rate of 8.5%.
For the nine months ended September 30, 2000 a net loss of $94.6 million
was realized for the reasons set forth above.
Liquidity and Capital Resources
Our business requires cash for operations, debt service, capital
expenditures and acquisitions. The cable television business has substantial on-
going capital requirements for the construction, expansion and maintenance of
its broadband networks. Expenditures have primarily been used to rebuild and
upgrade our existing cable network, and in the future will be used for plant
extensions, new services, converters and system rebuilds. Historically, we have
been able to meet our cash requirements with cash flow from operations and
borrowings under our credit facilities. The completion of our recently announced
acquisitions (discussed below under "Recent Developments") and the upgrade of
our cable networks to launch telephony will require additional financing, for
which we are currently negotiating a new credit facility
For the nine months ended September 30, 2000 and September 30, 1999, we
spent $142.5 million and $52.8 million, respectively, in capital expenditures
largely to support our plant rebuild, digital converter purchases and to a
lesser extent network extensions. For the nine months ended September 30, 2000
and September 30, 1999, cash from operations totaled $29.8 million and $49.4
million, which together with borrowings under our credit facilities, funded the
above noted capital expenditures.
14
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 $101.1 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.
At September 30, 2000, we had indebtedness of approximately $1.3 billion,
including $1.1 billion outstanding under senior bank credit facilities. The
senior credit facilities consisted of:
. $550.0 million reducing revolver credit/term facility, maturing in December
2006, which supports our Indiana systems, of which $510.0 million was
borrowed; and
. $675.0 million reducing revolving credit/term loan facility, maturing in
October 2006, which supports our Kentucky systems, of which $603.0 million
was borrowed.
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. On November 6, 2000, we completed an offering of $500.0
million principal amount of 10 1/2% senior notes due 2010. The net proceeds of
the offering of $487.5 million were used to repay outstanding borrowings under
Insight Indiana's and Insight Kentucky's credit facilities. This is the first
step in financing the expansion of Insight Midwest, as discussed below under
"Recent Developments". Interest on the 9 3/4% notes is payable on April 1 and
October 1 of each year and interest on the 10 1/2% notes is payable on May 1 and
November 1 of each year. The indentures relating to the senior notes impose
certain limitations on our ability to, among other things, incur debt, make
distributions, make investments and sell assets.
The weighted average interest rates for amounts outstanding under the
senior credit facilities at September 30, 2000 were 8.8% and 8.6% 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, 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.
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Recent Developments
Greenwood Agreement
On September 26, 2000, we entered into an agreement with Cable One, Inc., a
subsidiary of The Washington Post Company, for the acquisition of a cable
television system serving approximately 14,800 customers in Greenwood, Indiana
for the purchase price of $62.0 million. The Greenwood system is located only
six miles from our existing systems in Indiana and, as such, we intend to
integrate its cable plant with our existing network and run its operations out
of our existing Indiana systems. The acquisition is subject to closing
conditions, including the completion of a proposed trade of systems between
Cable One and an affiliate of AT&T Corp., and is expected to be completed on or
about January 2, 2001.
Telephony Agreements
On July 17, 2000, Insight Indiana, Insight Kentucky and other affiliates of
Insight Inc. entered into definitive agreements with 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.
Expansion of Insight Midwest
On August 15, 2000, we entered into definitive agreements with AT&T
Broadband and Insight L.P. for the acquisition of additional cable television
systems. Through a series of transactions, we will acquire all of Insight L.P's
remaining wholly-owned systems serving approximately 279,600 customers,
including systems which it will purchase from AT&T Broadband. At the same time
we will acquire from AT&T Broadband systems serving approximately 248,800
customers. As a result, we will serve approximately 1.3 million customers,
approximately 99% of which will be concentrated in the four contiguous states of
Indiana, Kentucky, Illinois and Ohio. The Ohio system (currently owned by
Insight L.P.), which serves approximately 84,200 customers, will become an
unrestricted subsidiary under the indentures governing the notes, and will be
prohibited by the terms of its indebtedness from making distributions to us.
Upon completion of the transaction, we will remain equally owned by Insight L.P.
and an affiliate of AT&T Broadband, and Insight L.P. will continue to serve as
the general partner and manage and operate our systems. The consummation of the
definitive agreements is subject to several conditions, including the receipt of
all necessary regulatory approvals.
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Impact of Recently Issued Accounting Standards
In June 1998, the FASB issued Statement 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 company 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 the adoption of this
statement will be material.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Our revolving credit and term loan agreements bear interest at floating
rates. Accordingly, we are exposed to potential losses related to changes in
interest rates. We do not enter into derivatives or other financial instruments
for trading or speculative purposes; however, in order to manage our exposure to
interest rate risk, we enter into derivative financial instruments, typically
interest rate swaps and collars. The counterparties to our swap and collar
agreements are major financial institutions. As of September 30, 2000, our
interest rate swap and collar agreements expire in varying amounts through 2002.
The fair market value of our long-term debt approximates its carrying value
as the credit facilities borrowings bear interest at floating rates of interest
and the current fair market value of senior notes approximates par value. As of
September 30, 2000, the estimated fair value of our interest rate swap and
collar agreements was approximately $4.2 million, which amount represents the
amount required to enter into offsetting contracts with similar remaining
maturities based on quoted market prices.
As of September 30, 2000, we had entered into interest rate swaps that
approximated $690.0 million, or 62.0%, of our borrowings under our Insight
Indiana credit facility and 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 $4.2 million.
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Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
We filed the following report on form 8-K during the third quarter of the
year ending December 31, 2000:
Current report on form 8-K filed August 25, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2000
INSIGHT MIDWEST, L.P.
By: Insight Commuincations 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 Office
By: /s/ Kim D. Kelly
---------------------
Kim D. Kelly
Executive Vice President and Chief Financial &
Operating Officer
INSIGHT CAPITAL, INC.
By: /s/ Michael S. Willner
----------------------------
Michael S. Willner
President and Chief Executive Officer and Director
By: /s/ Kim D. Kelly
----------------------
Kim D. Kelly
Executive Vice President and Chief Financial &
Operating Officer
19