SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 8-K/A-1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: January 5, 2001
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 Nos.) (IRS Employer Identification Nos.)
810 7th Avenue
New York, New York 10019
(Address of principal executive offices)
Registrant's telephone number: (917) 286-2300
Item 2. Acquisition or Disposition of Assets
On January 5, 2001, Insight Communications Company, L.P. ("Insight LP"),
the general partner of Insight Midwest, L.P. ("Insight Midwest"), consummated
various agreements with AT&T Broadband, LLC and its affiliates ("AT&T
Broadband") resulting in the contribution to Insight Midwest of additional cable
television systems serving approximately 530,000 customers. Pursuant to such
agreements, the following transactions occurred on January 5, 2001 (the
"Transactions"):
. Insight LP exchanged its Claremont, California system for AT&T Broadband's
system in Freeport, Illinois;
. Insight LP purchased from AT&T Broadband systems serving approximately
100,000 customers in Illinois;
. Insight LP contributed to Insight Midwest the systems purchased from AT&T
Broadband, as well as all of its other systems not already owned by Insight
Midwest, including the aforementioned Freeport, Illinois system (comprising
in total approximately 180,000 customers);
. AT&T Broadband contributed to Insight Midwest systems located in Illinois
serving approximately 250,000 customers.
Both Insight LP and AT&T Broadband contributed their respective systems to
Insight Midwest subject to an amount of indebtedness so that Insight Midwest
remains equally owned by Insight LP and AT&T Broadband. Insight LP continues to
serve as the general partner of Insight Midwest and manages and operates the
Insight Midwest systems.
In conjunction with the Transactions, a subsidiary of Insight Midwest,
which subsidiary serves as a holding company for all of Insight Midwest's
systems other than the Columbus, Ohio system, consummated on January 5, 2001 a
$1.75 billion credit facility from which it borrowed $663 million to repay the
Indiana and Kentucky credit facilities and $685 million to finance the
Transactions.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements:
Insight Midwest, L.P. (1)
Report of Independent Auditors--Ernst & Young LLP
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Operations and Partners' Capital for the years
ended December 31, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended December 31, 2000
and 1999
Notes to Consolidated Financial Statements
Insight Communications of Indiana, LLC (1)
Report of Independent Auditors--Ernst & Young LLP
Balance Sheet at December 31, 1998
Statement of Operations and Members' Equity for the period November 1, 1998
to December 31, 1998
Statement of Cash Flows for the period November 1, 1998 to December 31,
1998
Notes to Financial Statements
Noblesville, Indiana, Jeffersonville, Indiana, and Lafayette, Indiana Cable
Television Systems (1)
Report of Independent Auditors--Ernst & Young LLP
Combined Balance Sheet at October 31, 1998
Combined Statements of Operations for the year ended December 31, 1997 and
for the period January 1, 1998 to October 31, 1998
Combined Statements of Changes in Net Assets for the year ended December
31, 1997 and for the period January 1, 1998 to October 31, 1998
Combined Statements of Cash Flows for the year ended December 31, 1997 and
for the period January 1, 1998 to October 31, 1998
Notes to Combined Financial Statements
AT&T Insight Midwest Systems
Independent Auditors' Report--KPMG LLP
Combined Balance Sheet as of December 31, 2000
Combined Statement of Operations and Parent's Investment for the year
ended December 31, 2000
Combined Statement of Cash Flows for the year ended December 31, 2000
Notes to Combined Financial Statements
Independent Auditors' Report--KPMG LLP
Combined Balance Sheet as of December 31, 1999
Combined Statement of Operations and Parent's Investment for the year
ended December 31, 1999
Combined Statement of Cash Flows for the year ended December 31, 1999
Notes to Combined Financial Statements
Griffin, Georgia, Rockford, Illinois, Portland, Indiana and Scottsburg, Indiana
Cable Television Systems
Report of Independent Auditors--Ernst & Young LLP
Combined Balance Sheets as of December 31, 2000 and 1999
Combined Statements of Operations and Changes in Net Assets for the years
ended December 31, 2000 and 1999
Combined Statements of Cash Flows for the years ended December 31, 2000 and
1999
Notes to Combined Financial Statements
InterMedia Capital Partners VI, L.P. (2)
Report of Independent Accountants--PricewaterhouseCoopers LLP
Consolidated Balance Sheets at September 30, 1999 and December 31, 1998
Consolidated Statements of Operations for the nine months ended September
30, 1999 and for the period April 30, 1998 (commencement of operations)
to December 31, 1998
Consolidated Statements of Changes in Partners' Capital for the nine months
ended September 30, 1999 and for the period April 30, 1998 (commencement
of operations) to December 31, 1998
Consolidated Statements of Cash Flows for the nine months ended September
30, 1999 and for the period April 30, 1998 (commencement of operations)
to December 31, 1998
Notes to Consolidated Financial Statements
Insight Communications of Central Ohio, LLC
Report of Independent Auditors--Ernst & Young LLP
Balance Sheets at December 31, 2000 and 1999
Statements of Operations and Changes in Members' Deficit for the years
ended December 31, 2000, 1999 and 1998
Statements of Cash Flows for the years ended December 31, 2000, 1999 and
1998
Notes to Financial Statements
(b) Pro Forma Financial Information:
Pro Forma Statement of Operations for the year ended December 31, 2000
Pro Forma Balance Sheet as of December 31, 2000
________________
(1) Previously reported (as defined in Rule 12b-2 under the Securities Exchange
Act of 1934) in the Annual Report on Form 10-K for the year ended December
31, 2000 of the Registrants.
(2) Previously reported (as defined in Rule 12b-2 under the Securities Exchange
Act of 1934) in the Registration Statement on Form S-4 (Registration No.
333-33540) of the Registrants.
(c) Exhibits:
Exhibit No. Description
- ----------- -----------
2.1 Asset Contribution Agreement, dated August 15, 2000, by and
among, Command Cable of Eastern Illinois Limited Partnership,
MediaOne of Illinois, Inc., Northwest Illinois TV Cable
Company, S/D Cable Partners, Ltd., TCI American Cable
Holdings, L.P., TCI of Bloomington/Normal, Inc., TCI
Cablevision of Texas, Inc., UACC Midwest, Inc., United Cable
Television of Illinois Valley, Inc., United Cable Television
of Southern Illinois, Inc., TCI of Indiana Holdings, LLC,
Insight Communications Company, L.P. and Insight Midwest, L.P.
("Asset Contribution Agreement")*
2.2 Amendment to the Asset Contribution Agreement, dated January 5,
2001**
2.3 Asset Exchange Agreement, dated August 15, 2000, by and between
MediaOne of Illinois, Inc. and Insight Communications Company,
L.P. ("Asset Exchange Agreement")*
2.4 Amendment to the Asset Exchange Agreement, dated January 5,
2001**
2.5 Asset Purchase and Sale Agreement, dated August 15, 2000, by
and between TCI of Illinois, Inc., TCI of Racine, Inc., UACC
Midwest, Inc. and Insight Communications Company, L.P. ("Asset
Purchase and Sale Agreement")*
2.6 Amendment to the Asset Purchase and Sale Agreement, dated
January 5, 2001**
10.1 Credit Agreement, dated as of January 5, 2001, among Insight
Midwest Holdings, LLC, several banks and financial
institutions or entities, and The Bank of New York, as
administrative agent**
10.2 Amended and Restated Limited Partnership Agreement of Insight
Midwest, L.P., dated January 5, 2001**
____________
* Filed as an exhibit to the Current Report on Form 8-K, dated August 15,
2000, of Insight Communications Company, Inc. (File No. 0-26677) and
incorporated herein by reference.
** Filed as an exhibit to the Current Report on Form 8-K, dated January 5,
2001, of Insight Communications Company, Inc. (File No. 0-26677) and
incorporated herein by reference.
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: March 22, 2001 By: /s/ Elliot Brecher
--------------------
Elliot Brecher
Senior Vice President
and General Counsel
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 Capital, Inc.
(Registrant)
Date: March 22, 2001 By: /s/ Elliot Brecher
--------------------
Elliot Brecher
Senior Vice President
and General Counsel
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, 2000 and the related combined
statements of operations and parent's investment, and cash flows for the year
ended December 31, 2000. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the AT&T Insight
Midwest Systems as of December 31, 2000, and the results of their operations and
their cash flows for the year ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
Denver, Colorado
March 9, 2001
F-1
AT&T Insight Midwest Systems
(A combination of certain assets, as defined in note 1)
Combined Balance Sheet
(amounts in thousands)
Assets December 31, 2000
- ------ -----------------
Cash $ 991
Trade and other receivables, net 6,325
Property and equipment, at cost:
Land 668
Distribution systems 206,232
Support equipment and buildings 13,707
----------
220,607
Less accumulated depreciation 27,605
----------
193,002
----------
Intangible assets 1,115,115
Less accumulated amortization 51,266
----------
1,063,849
----------
$1,264,167
==========
Liabilities and Parent's Investment
- -----------------------------------
Accounts payable $ 1,055
Accrued expenses 5,119
----------
Total liabilities 6,174
----------
Parent's investment (note 3) 1,257,993
----------
Commitments and contingencies (note 4)
$1,264,167
==========
See accompanying notes to combined financial statements.
F-2
AT&T Insight Midwest Systems
(A combination of certain assets, as defined in note 1)
Combined Statement of Operations and Parent's Investment
(see note 2)
(amounts in thousands)
Year ended
December 31, 2000
-----------------
Revenue $ 176,910
Operating costs and expenses:
Operating (note 3) 75,828
Selling, general, and administrative 18,056
Management fees (note 3) 9,175
Depreciation 21,067
Amortization 28,759
----------
152,885
----------
Net earnings 24,025
Parent's investment:
Beginning of period 1,060,283
Change in due to parent (note 3) (25,200)
Acquisition of cable systems by subsidiaries of
parent (note 2)
198,885
----------
End of period $1,257,993
==========
See accompanying notes to combined financial statements.
F-3
AT&T Insight Midwest Systems
(A combination of certain assets, as defined in note 1)
Combined Statement of Cash Flows
(see note 2)
(amounts in thousands)
Year ended
December 31, 2000
-----------------
Cash flows from operating activities:
Net earnings $ 24,025
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 49,826
Changes in operating assets and liabilities:
Change in receivables and other assets (1,402)
Change in accruals, payables and other liabilities (7,663)
--------
Net cash provided by operating activities 64,786
--------
Cash flows from investing activities:
Capital expended for property and equipment (39,867)
Other investing activities, net (497)
--------
Net cash used in investing activities (40,364)
--------
Cash flows from financing activities -
change in amounts due to parent, net (25,200)
--------
Net change in cash (778)
Cash at beginning of period 1,769
--------
Cash at end of period $ 991
========
See accompanying notes to combined financial statements.
F-4
AT&T Insight Midwest Systems
(A combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
December 31, 2000
(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.
The above agreements were consummated on January 5, 2001.
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 are wholly-owned by
various cable subsidiaries 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."
As further described in note 2, certain of the cable systems included in
the combined financial statements of the AT&T Insight Midwest Systems were
acquired by AT&T and its subsidiaries in 2000. The AT&T Insight Midwest
Systems' combined financial statements include the assets, liabilities and
results of operations for such cable systems since their acquisition date.
F-5
AT&T Insight Midwest Systems
(A combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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 System's net assets are held by various wholly-
owned 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.
Receivables
-----------
Receivables are reflected net of an allowance for doubtful accounts.
Such allowance at December 31, 2000 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 twelve months ended December 31, 2000.
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.
Intangible Assets
-----------------
Intangible assets consist primarily of franchise costs. Franchise costs
represent the difference between the purchase price attributable to the
AT&T Insight Midwest Systems' service areas and amounts allocated to the
tangible and identifiable intangible assets of the AT&T Insight Midwest
Systems. 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, generally 15 years.
(continued)
F-6
AT&T Insight Midwest Systems
(A combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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.
New Accounting Pronouncements
-----------------------------
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB No. 101), "Revenue Recognition in
Financial Statements." The SEC delayed the date by which registrants must
apply the accounting and disclosures described in SAB No. 101 until the
fourth quarter of 2000. The implementation of SAB No. 101 did not have a
significant impact on the financial condition or results of operations of
AT&T Insight Midwest Systems.
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.
(continued)
F-7
AT&T Insight Midwest Systems
(A combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
(2) Business Combinations
---------------------
Acquisitions
------------
Merger with MediaOne Group, Inc. ("MediaOne")
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 received by AT&T in the
MediaOne Merger are included in the accompanying financial statements since
their date of acquisition by AT&T. Accordingly, the preliminary allocation
of the Company's portion of AT&T's purchase price to acquire MediaOne has
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 $148.2 million of franchise costs
which are amortized over 40 years.
(continued)
F-8
AT&T Insight Midwest Systems
(A combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
Pro Forma Operating Results (unaudited)
---------------------------------------
The following unaudited combined results of operations for the year ended
December 31, 2000 were prepared assuming the MediaOne Merger occurred on
January 1, 2000. These pro forma amounts are not necessarily indicative of
operating results that would have occurred if the MediaOne Merger had
occurred on January 1, 2000, nor does it intend to be a projection of
future results:
Year ended
December 31,
2000
------------
Revenue $187,849
Net earnings $ 25,459
(3) Parent's Investment
-------------------
Parent's investment in the AT&T Insight Midwest Systems at December 31,
2000 is summarized as follows (amounts in thousands):
December 31,
2000
-----------
Due to parent $1,214,860
Retained earnings 43,133
----------
$1,257,993
==========
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.
(continued)
F-9
AT&T Insight Midwest Systems
(A combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
The intercompany advances and expense allocation activity in amounts
due to parent consist of the following (amounts in thousands):
Year ended
December 31,
2000
------------
Beginning of period $1,041,175
Programming charges 47,040
Management fees 9,175
Cable system acquisitions 198,885
Cash transfers (81,415)
----------
End of period $1,214,860
==========
(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.
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.
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. The settlement agreement for the remaining affected
subscribers in the AT&T Insight Midwest Systems was approved in December,
2000. The settlement is not expected to have a material impact on the AT&T
Insight Midwest Systems' financial condition or results of operations.
(continued)
F-10
AT&T Insight Midwest Systems
(A combination of certain assets, as defined in note 1)
Notes to Combined Financial Statements
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.
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 $1,328,158
for the year ended December 31, 2000.
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:
2001 $355
2002 329
2003 308
2004 316
2005 180
Thereafter 165
It is expected that, in the normal course of business, expiring leases
will be renewed or replaced.
F-11
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
F-12
AT&T INSIGHT MIDWEST SYSTEMS
(A combination of certain assets, as defined in note 1)
COMBINED BALANCE SHEETS
(amounts in thousands)
December 31,
1999
------------
Assets
Cash................................................. 1,769
Trade and other receivables, net..................... 4,303
Property and equipment, at cost:
Land............................................... 639
Distribution systems............................... 121,647
Support equipment and buildings.................... 11,048
---------
133,334
Less accumulated depreciation...................... 6,665
---------
126,669
---------
Intangible assets.................................... 954,840
Less accumulated amortization...................... 22,507
---------
932,333
---------
1,065,074
=========
Liabilities and Parent's Investment
Accounts payable..................................... 740
Accrued expenses..................................... 4,051
---------
Total liabilities................................ 4,791
---------
Parent's investment (note 3)......................... 1,060,283
---------
Commitments and contingencies (note 4)............... 1,065,074
=========
See accompanying notes to combined financial statements.
F-13
AT&T INSIGHT MIDWEST SYSTEMS
(A combination of certain assets, as defined in note 1)
COMBINED STATEMENTS OF OPERATIONS AND PARENT'S INVESTMENT
(see Note 2)
(amounts in thousands)
New Insight Old Insight
------------------|-----------------
Ten months |
ended |Two months ended
December 31, 1999|February 28, 1999
-----------------|-----------------
|
|
Revenue................................................................ 118,509 | 20,742
Operating costs and expenses: |
Operating (note 3)................................................... 49,115 | 8,131
Selling, general, and administrative................................. 13,590 | 2,553
Management fees (note 3)............................................. 5,497 | 900
Depreciation......................................................... 11,058 | 2,158
Amortization......................................................... 20,141 | 1,713
--------- | -------
99,401 | 15,455
--------- | -------
Net earnings....................................................... 19,108 | 5,287
Parent's investment: |
Beginning of period.................................................. 892,683 | 414,696
Change in due to parent (note 3)..................................... (13,727) | (4,707)
Acquisition of cable systems by subsidiaries of AT&T Corp. (note 2).. 162,219 | --
--------- | -------
End of period...................................................... 1,060,283 | 415,276
========= | =======
See accompanying notes to combined financial statements.
F-14
AT&T INSIGHT MIDWEST SYSTEMS
(A combination of certain assets, as defined in note 1)
COMBINED STATEMENTS OF CASH FLOWS
(see note 2)
(amounts in thousands)
New Insight |Old Insight
-------------|------------
Ten months | Two months
ended | ended
December 31,|February 28,
1999 | 1999
------------|------------
|
|
Cash flows from operating activities: |
Net earnings......................................................................... 19,108 | 5,287
Adjustments to reconcile net earnings to net cash provided by operating activities: |
Depreciation and amortization...................................................... 31,199 | 3,871
Changes in operating assets and liabilities: |
Change in receivables and other assets............................................ 143 | (1,606)
Change in accruals, payables and other liabilities................................ 1,820 | (339)
------- | ------
Net cash provided by operating activities........................................ 52,270 | 7,213
------- | ------
Cash flows from investing activities: |
Capital expended for property and equipment.......................................... (40,155) | (4,165)
Other investing activities, net...................................................... 1,929 | 972
------- | ------
Net cash used in investing activities............................................ (38,226) | (3,193)
------- | ------
Cash flows from financing activities-- |
Change in amounts due to parent, net................................................. (13,727) | (4,707)
------- | ------
Net change in cash................................................................... 317 | (687)
Cash at beginning of period.......................................................... 1,452 | 2,139
------- | ------
Cash at end of period................................................................ 1,769 | 1,452
======= | ======
See accompanying notes to combined financial statements.
F-15
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 September 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.
The above agreements were consummated effective on January 1, 2001.
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 are wholly-owned by various cable
subsidiaries 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.
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 System's net assets are held by various wholly-
owned 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
F-16
AT&T INSIGHT MIDWEST SYSTEMS
(A combination of certain assets, as defined in note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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.
Receivables
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at December 31, 1999 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 ten months ended
December 31, 1999 and the two months ended February 28, 1999.
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.
Intangible Assets
Intangible assets consist primarily of franchise costs. Franchise costs
represent the difference between the value attributable to the AT&T Insight
Midwest Systems' service areas and amounts allocated to the tangible assets of
the AT&T Insight Midwest Systems. 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
F-17
AT&T INSIGHT MIDWEST SYSTEMS
(A combination of certain assets, as defined in note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB No. 101), "Revenue Recognition in Financial
Statements." The SEC delayed the date by which registrants must apply the
accounting and disclosures described in SAB No. 101 until the fourth quarter of
2000. The implementation of SAB No. 101 did not have a significant impact on the
financial condition or results of operations of the AT&T Insight Midwest
Systems.
(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.
F-18
AT&T INSIGHT MIDWEST SYSTEMS
(A combination of certain assets, as defined in note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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.
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.
F-19
AT&T INSIGHT MIDWEST SYSTEMS
(A combination of certain assets, as defined in note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The following table reflects the June 1, 1999 balance sheet of the 1999
Exchange systems contributed from AT&T Broadband to 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 received by AT&T in the MediaOne Merger are
included in the accompanying financial statements since their date of
acquisition by AT&T. Accordingly, the preliminary allocation of the Company's
portion of AT&T's purchase price to acquire MediaOne has 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
========
F-20
AT&T INSIGHT MIDWEST SYSTEMS
(A combination of certain assets, as defined in note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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 $148.2 million of franchise costs which are amortized over 40
years.
Pro Forma Operating Results (unaudited)
The following unaudited combined results of operations for the year ended
December 31, 1999 was 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 (amounts in
thousands):
Year ended
December 31,
1999
------------
Revenue........................................... 174,939
Net earnings...................................... 26,679
(3) Parent's Investment
Parent's investment in the AT&T Insight Midwest Systems at December 31, 1999
is summarized as follows (amounts in thousands):
December 31,
1999
------------
Due to parent..................................... 1,041,175
Retained earnings since March 1, 1999............. 19,108
---------
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 results 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.
F-21
AT&T INSIGHT MIDWEST SYSTEMS
(A combination of certain assets, as defined in note 1)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The intercompany advances and expense allocation activity in amounts due to
parent consist of the following (amounts in thousands):
New Insight Old Insight
------------ ------------
Ten months Two months
ended ended
December 31, February 28,
1999 1999
------------ ------------
Beginning of period................................................................ 892,683 282,834
Programming charges.............................................................. 30,083 5,282
Management fees.................................................................. 5,497 900
Cable system acquisitions........................................................ 162,219 --
Cash transfers................................................................... (49,307) (10,889)
--------- -------
End of period...................................................................... 1,041,175 278,127
========= =======
(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.
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. The settlement agreement for the remaining
affected subscribers in the AT&T Insight Midwest Systems was approved in
December, 2000. The settlement is not expected to have a material impact on the
AT&T Insight Midwest Systems' financial condition or results of operations.
F-22
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 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.
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 $1,037,000 and $157,000 for 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.
F-23
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"), as of December 31, 2000 and 1999, and
the related combined statements of operations and changes in net assets, and
cash flows for the years 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 audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the Combined Systems,
as of December 31, 2000 and 1999, and the combined results of their operations
and their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States.
Ernst & Young LLP
New York, New York
March 12, 2001
F-24
GRIFFIN GA, ROCKFORD, IL, PORTLAND, IN AND SCOTTSBURG, IN
CABLE TELEVISION SYSTEMS
COMBINED BALANCE SHEETS
(in thousands)
December 31,
2000 1999
------------------------------
Assets
Cash and cash equivalents $ 2 $ 412
Trade accounts receivable, net of allowance for doubtful accounts
of $22 as of December 31, 2000 and 1999 1,002 1,110
Launch funds receivable 1,077 1,763
Prepaid expenses and other assets 1,007 208
--------------------------
Total current assets 3,088 3,493
Fixed assets, net 46,960 42,637
Intangible assets, net of accumulated amortization of $26,901 and
$19,490 as of December 31, 2000 and 1999, respectively 90,004 97,416
--------------------------
Total assets $140,052 $143,546
==========================
Liabilities and net assets
Accounts payable $ 632 $ 2,665
Accrued expenses and other liabilities 1,359 881
Accrued programming costs 2,544 1,551
Due to affiliates 10,391 12,716
--------------------------
Total current liabilities 14,926 17,813
Deferred revenue 1,066 1,203
--------------------------
Total liabilities 15,992 19,016
Net assets 124,060 124,530
--------------------------
Total liabilities and net assets $140,052 $143,546
==========================
See accompanying Notes
F-25
GRIFFIN GA, ROCKFORD, IL, PORTLAND, IN AND SCOTTSBURG, IN
CABLE TELEVISION SYSTEMS
COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN THE NET ASSETS
(in thousands)
Year ended December 31,
2000 1999
-----------------------------------
Revenue $ 41,464 $ 34,899
Operating costs and expenses:
Programming and other operating costs 14,558 11,195
Selling, general and administrative 9,348 7,135
Depreciation and amortization 17,790 15,719
-----------------------------------
Total operating costs and expenses 41,696 34,049
Operating income (loss) (232) 850
Other income (238) 173
-----------------------------------
Net income (loss) (470) 1,023
Net assets, beginning of period 124,530 102,307
Contribution of cable system assets (Note A) -- 21,200
------------------------------------
Net assets, end of period $124,060 $124,530
===================================
See accompanying Notes
F-26
GRIFFIN GA, ROCKFORD, IL, PORTLAND, IN AND SCOTTSBURG, IN
CABLE TELEVISION SYSTEMS
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2000 1999
---------------------------------
Operating activities:
Net income (loss) $ (470) $ 1,023
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 17,790 15,719
Provision for losses on trade accounts receivable 908 434
Changes in operating assets and liabilities:
Trade accounts receivable (801) (465)
Launch funds receivable 687 1,763
Prepaid expenses and other assets (799) (2,340)
Accounts payable (2,033) 1,312
Accrued expenses and other liabilities 1,335 269
Due to affiliates (2,325) 6,549
---------------------------------
Net cash provided by operating activities 14,292 24,264
---------------------------------
Investing activities:
Purchase of fixed assets (14,702) (24,518)
---------------------------------
Net cash used in investing activities (14,702) (24,518)
---------------------------------
Net decrease in cash and cash equivalents (410) (254)
Cash and cash equivalents, beginning of year 412 666
---------------------------------
Cash and cash equivalents, end of year $ 2 $ 412
=================================
F-27
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. 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 reflects
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 (Note C).
On March 22, 1999 the Partnership exchanged its Franklin, Virginia cable system
("Franklin") servicing approximately 9,200 subscribers for Falcon Cable's
Scottsburg Indiana system ("Scottsburg") servicing approximately 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 ($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 $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 a straight-line basis
over a period of 15 years.
F-28
GRIFFIN GA, ROCKFORD, IL, PORTLAND, IN AND SCOTTSBURG, IN
CABLE TELEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
A. Description of Business and Basis of Presentation (continued)
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
Net income............................................ 1,243
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 the costs of doing business that the
Combined Systems would have incurred on a stand alone basis as disclosed in Note
C. Management believes that these allocations are reasonable.
B. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Concentration of Credit Risk
A significant portion of the customer base is concentrated within the local
geographical area of each of the individual cable television systems. The
Combined Systems generally extend credit to customers and the ultimate
collection of accounts receivable could be affected by the local economy.
Management performs continuous credit evaluations of the Combined Systems'
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, connection 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
F-29
GRIFFIN GA, ROCKFORD, IL, PORTLAND, IN AND SCOTTSBURG, IN
CABLE TELEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
B. Summary of Significant Accounting Policies (continued)
and amortized over the period of the underlying contract.
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, 2000 and 1999. The average net intercompany balances were $11.6
million and $9.4 million for the years ended December 31, 2000 and 1999,
respectively.
For purposes of this statement, 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 costs capitalized for labor and
overhead incurred in connection with the installation of cable television
systems. Depreciation is calculated using the straight-line method over
estimated useful lives ranging from 5 to 12 years.
Fixed assets consist of:
December 31,
2000 1999
-------------------------
(in thousands)
Land, buildings and improvements $ 468 $ 352
Cable television equipment 70,057 56,075
Furniture, fixtures and office equipment 886 282
-----------------------
71,411 56,709
Less accumulated depreciation and amortization (24,451) (14,072)
-----------------------
Total fixed assets $ 46,960 $ 42,637
=======================
F-30
GRIFFIN GA, ROCKFORD, IL, PORTLAND, IN AND SCOTTSBURG, IN
CABLE TELEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
B. Summary of Significant Accounting Policies (continued)
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. The
Combined Systems amortize cable television franchise costs over periods up to 15
years using the straight-line method.
Long-Lived Assets
The carrying value of long-lived assets is reviewed if facts and circumstances
suggest that they may be impaired. Upon a determination that the carrying
value of long-lived assets will not be recovered from the undiscounted future
cash flows generated from such assets, the carrying value of such long-lived
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 a
recent analysis, management believes that no impairment of long-lived assets
existed at December 31, 2000 or 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
combined 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.
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 each of the years ended December 31, 2000 and 1999, these charges totaled
$1.4 million.
F-31
GRIFFIN GA, ROCKFORD, IL, PORTLAND, IN AND SCOTTSBURG, IN
CABLE TELEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
D. Commitment and Contingencies
Operating Lease Agreements
The Combined Systems had rental expense under various operating lease agreements
of $492,000 and $519,000 for the years ended December 31, 2000 and 1999,
respectively. Future minimum rental payments required under operating leases as
of December 31, 2000 are as follows:
2001...................................... $ 93,600
2002...................................... 16,100
2003...................................... 550
2004...................................... --
2005...................................... --
Thereafter............................. --
----------
Total $ 110,250
==========
Litigation
The Combined Systems are subject to 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 our 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
In June 1998, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133, as amended by SFAS No.
137, is effective for the Combined Systems beginning January 1, 2001. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No. 133 will require the Combined Systems to recognize
all derivatives on the balance sheet at fair value. The Combined Systems do not
anticipate the adoption of this Statement will have a material impact on its
combined financial statements.
F-32
GRIFFIN GA, ROCKFORD, IL, PORTLAND, IN AND SCOTTSBURG, IN
CABLE TELEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
F. Subsequent Event
Contribution of Combined Systems
On January 5, 2001, the Partnership completed a series of transactions with
certain subsidiaries of AT&T Corp. (the "AT&T Subsidiaries") whereby the
Partnership contributed to Insight Midwest, L.P. ("Insight Midwest") (a 50-50
partnership between the Partnership and an indirect subsidiary of AT&T
Broadband, of which the Partnership is the general partner) additional cable
television systems, including the Combined Systems. Through a series of
transactions, the Partnership contributed to Insight Midwest its interests in
systems serving approximately 180,000 customers, including the approximately
88,000 customers served by the Combined Systems. In addition, the Partnership
purchased from the AT&T Subsidiaries and immediately contributed to Insight
Midwest, systems serving approximately 100,000 customers and the AT&T
Subsidiaries contributed systems serving approximately 250,000 customers.
Insight Midwest remains equally owned by the Partnership and AT&T Broadband, and
the Partnership continues to serve as the general partner and manages and
operates the Insight Midwest systems.
F-33
Report of Independent Auditors
The Members
Insight Communications of Central Ohio, LLC
We have audited the accompanying balance sheets of Insight Communications of
Central Ohio, LLC (the "Company") as of December 31, 2000 and 1999, and the
related statements of operations and changes in members' deficit and cash flows
for the three years ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2000 and 1999, and the results of its operations and its cash flows for the
three years ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
March 12, 2001
F-34
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
BALANCE SHEETS
(in thousands)
December 31,
2000 1999
-----------------------------
Assets
Cash and cash equivalents $ 1,169 $ 882
Trade accounts receivable, net of allowance for doubtful accounts of $390 and
$558 as of December 31, 2000 and 1999, respectively 2,782 2,376
Launch funds receivable 1,936 1,474
Prepaid expenses and other assets 437 231
-----------------------------
Total current assets 6,324 4,963
Fixed assets, net 76,587 51,455
Intangible assets, net 448 388
Due from related parties - 158
-----------------------------
Total assets $ 83,359 $ 56,964
=============================
Liabilities and members' deficit
Accounts payable and accrued expenses $ 10,862 $ 12,198
Deferred revenue 545 585
Series A preferred dividend payable 5,250 5,250
-----------------------------
Total current liabilities 16,657 18,033
Capital lease obligations - 43
Deferred revenue 2,005 1,823
Due to related parties 1,502 -
Series A preferred interest 140,000 140,000
Series B preferred interest 40,281 35,556
Senior credit facility 25,000 11,000
-----------------------------
Total liabilities and preferred interests 225,445 206,455
Members' deficit (142,086) (149,491)
-----------------------------
Total liabilities and members' deficit $ 83,359 $ 56,964
=============================
See accompanying notes
F-35
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
STATEMENTS OF OPERATIONS AND CHANGES IN MEMBERS' DEFICIT
(in thousands)
Year ended December 31,
2000 1999 1998
----------------------------------------------------
Revenue $ 49,749 $ 46,747 $ 47,956
Operating costs and expenses:
Programming and other operating costs 19,027 16,446 17,682
Selling, general and administrative 12,044 11,173 12,013
Severance and transaction structure costs - - 4,822
Depreciation and amortization 10,882 7,148 5,311
----------------------------------------------------
Total operating costs and expenses 41,953 34,767 39,828
Operating income 7,796 11,980 8,128
Other income (expense):
Interest expense (1,883) (505) -
Interest income 91 208 59
Other (274) 92 (422)
----------------------------------------------------
Total other expense, net (2,066) (205) (363)
Net income 5,730 11,775 7,765
Accrual of preferred interests (18,725) (17,928) (6,649)
----------------------------------------------------
Income (loss) attributable to common interests (12,995) (6,153) 1,116
Members' deficit, beginning of period (149,491) (144,718) -
Net assets contributed - - 25,571
Capital contributions 20,400 2,000 10,000
Preferred membership interest - - (170,000)
Capital distributions - (620) (11,405)
----------------------------------------------------
Members' deficit, end of period $(142,086) $(149,491) $(144,718)
====================================================
See accompanying notes
F-36
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2000 1999 1998
------------------------------------------
Operating activities:
Net income $ 5,730 $ 11,775 $ 7,765
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 10,882 7,148 5,311
Provision for losses on trade accounts receivable 1,058 918 917
Changes in operating assets and liabilities:
Trade accounts receivable (1,464) 1,028 (1,441)
Launch funds receivable (462) (1,474) --
Prepaid expenses and other assets (190) (1,681) (423)
Accounts payable and accrued expenses (1,202) 5,749 2,270
Due to affiliates 1,643 (1,038) --
------------------------------------------
Net cash provided by operating activities 15,995 22,425 14,399
------------------------------------------
Investing activities:
Purchase of property and equipment (35,982) (26,656) (7,369)
Purchase of intangible assets (91) (98) (300)
Proceeds from disposal of property and equipment -- -- 11
Increase in amounts due to/from related parties -- -- 979
------------------------------------------
Net cash used in investing activities (36,073) (26,754) (6,679)
------------------------------------------
Financing activities:
Principal payments on capital lease obligations (35) (112) (180)
Capital contributions 20,400 2,000 10,000
Capital distributions -- (620) (11,405)
Preferred interest distribution (14,000) (13,766) --
Borrowings under senior credit facility 14,000 11,000 --
------------------------------------------
Net cash used in financing activities 20,365 (1,498) (1,585)
------------------------------------------
Net increase (decrease) in cash and cash equivalents 287 (5,827) 6,135
Cash and cash equivalents, beginning of year 882 6,709 574
------------------------------------------
Cash and cash equivalents, end of year $ 1,169 $ 882 $ 6,709
==========================================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,276 $ 293 $ -
See accompanying notes
F-37
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS
1. Business Organization and Purpose
Insight Communications of Central Ohio, LLC (the "Company") provides basic and
expanded cable television services to homes in the eastern parts of Columbus,
Ohio and surrounding areas. The Company was formed on July 23, 1998 in order to
acquire substantially all of the assets and liabilities comprising the cable
television system of Coaxial Communications of Central Ohio, Inc. ("Coaxial").
On August 21, 1998, Coaxial contributed to the Company all of the assets and
liabilities comprising Coaxial's cable television system (the "System") for
which Coaxial received a 25% non-voting common membership interest as well as
100% of the voting preferred membership interests in the Company (the "Preferred
Interests"). In conjunction therewith, Insight Holdings of Ohio, LLC ("Insight
Holdings"), a wholly-owned subsidiary of Insight Communications Company, L.P.
("Insight LP") contributed $10.0 million in cash to the Company for which it
received a 75% non-voting common membership interest in Insight Ohio.
On August 21, 1998, Coaxial and Phoenix Associates, a related entity, issued
$140.0 million of 10% Senior Notes ("Senior Notes") due in August 2006. The
Senior Notes are non-recourse and are secured by the issued and outstanding
Series A Preferred Interest and are conditionally guaranteed by the Company. On
August 21, 1998, Coaxial Financing Corp. and Coaxial LLC, related entities,
issued 12 7/8% Senior Discount Notes due in August 2008 ("Senior Discount
Notes"). The Senior Discount Notes have a face amount of $55.9 million and $30.0
million of gross proceeds was received upon issuance. The Senior Discount Notes
are non-recourse and are secured by the issued and outstanding Series B
Preferred Interest, 100% of the common stock of Coaxial and the notes issued by
Coaxial DJM LLC and Coaxial DSM LLC to Coaxial LLC. The Senior Discount Notes
are also conditionally guaranteed by the Company.
The Preferred Interests have distribution priorities that provide for
distributions to Coaxial and indirectly to Phoenix Associates and Coaxial LLC in
amounts equal to the payments required on the Senior Notes and the Senior
Discount Notes. The accreted value of the Senior Discount Notes was $40.3
million as of December 31, 2000. Additionally, the Preferred Interests have
liquidation preferences equal to their carrying value. Distributions by the
Company are subject to certain financial covenants and other conditions set
forth in its Senior Credit Facility.
On August 8, 2000, the Company purchased Coaxial's 25% non-voting common equity
interest in the Company. The purchase price was 800,000 shares of common stock
of Insight LP's general partner, Insight Communications Company, Inc. ("Insight
Inc.") and cash in the amount of $2.6 million. In connection with the purchase,
the Company's operating agreement was amended to, among other things, remove
certain participating rights of the principals of Coaxial and certain of its
affiliates (the "Coaxial Entities"). Additionally, the agreement was amended to
incorporate 70% of Insight Ohio's total voting power into the common equity
interests of the Company and 30% of Insight Ohio's total voting power into the
Preferred Interests of the Company.
F-38
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. Business Organization and Purpose (continued)
The Company is prohibited by the terms of its indebtedness from making
distributions to Insight Inc. The Company's conditional guarantee of the Senior
Notes and the Senior Discount Notes remains in place. If at any time the Senior
Notes or Senior Discount Notes are repaid or significantly modified, the
principals of the Coaxial Entities may require Insight Inc. to purchase their
preferred interests in the Coaxial Entities for a purchase price equal to the
difference, if any, of $32.6 million less the then market value of 800,000
shares of Insight Inc.'s common stock issued on August 8, 2000. The fair value
of such contingent consideration was $7.1 million.
2. Summary of Significant Accounting Policies
Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of current assets and liabilities approximate their fair
market value because of the immediate or short-term maturity of these financial
instruments.
Revenue Recognition
Revenue includes service, connection and launch fees. Service fees are recorded
in the month 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. Launch fees are deferred and amortized over
the period of the underlying contract.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit
F-39
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
risk consist primarily of trade accounts receivable. The Company's customer
base consists of a number of homes concentrated in the central Ohio area. The
Company continually monitors the exposure for credit losses and maintains
allowances for anticipated losses. The Company had no significant concentrations
of credit risk as of December 31, 2000 or 1999.
Property and Equipment
Property and equipment are stated at cost. Maintenance and repairs are expensed
as incurred. Upon retirement or disposal of assets, the cost and related
accumulated depreciation and amortization are removed from the balance sheet,
and any gain or loss is reflected in the statement of operations. Depreciation
and amortization is calculated using the straight-line method over the estimated
useful lives of the related assets as follows:
Cable television ("CATV") systems 10 to 15 years
Furniture & Equipment 5 years
Leasehold improvements Life of lease
Depreciation expense for the years ended December 31, 2000, 1999 and 1998 was
$10.9 million, $7.1 million and $5.3 million, respectively. The carrying value
of assets held under capital leases as of December 31, 2000 and 1999 was $8,000
and $117,000, respectively.
The Company internally constructs certain CATV systems. Construction costs
capitalized include payroll, fringe benefits and other overhead costs associated
with construction activity.
Intangible Assets
Franchise costs are amortized over the lives of the related franchises which
range from 7 to 15 years. Other intangible assets are amortized over the
estimated useful lives of the related assets up to 15 years.
Long-Lived Assets
The carrying value of long-lived assets is reviewed if facts and circumstances
suggest that that they may be impaired. Upon a determination that the carrying
value of long-lived assets will not be recovered from the undiscounted future
cash flows generated from such assets, the carrying value of such long-lived
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 a
recent analysis, management believes that no impairment of long-lived assets
existed at December 31, 2000 or 1999.
F-40
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Summary of Significant Accounting Policies (continued)
Marketing and Promotional Costs
Marketing and promotional costs are expensed as incurred. Marketing and
promotional expense, primarily for campaign and telemarketing-related efforts,
was $1.3 million, $1.3 million and $2.2 million for the years ended December 31,
2000, 1999 and 1998, respectively.
Recent Accounting Pronouncements
In June 1998, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133, as amended by SFAS No.
137, is effective for the Company beginning January 1, 2001. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No. 133 will require the Company to recognize all
derivatives on the balance sheet at fair value. The Company does not anticipate
the adoption of this Statement to have a material impact on its financial
statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
3. Income Taxes
The Company is a limited liability corporation. Therefore, each member reports
his distributive share of income or loss on his respective income tax returns.
Prior to August 21, 1998, the Operating Unit was an operating unit within
Coaxial, which in turn was a subchapter S Corporation. Therefore, each
shareholder reported his distributive share of income or loss on his respective
tax return. As a result, the Company does not provide for federal or state
income taxes in its accounts. In the event that the limited liability
corporation election is terminated, deferred taxes related to book and tax
temporary differences would be required to be reflected in the financial
statements. As a limited liability company, the liability of the Company's
members are limited to their respective investments.
F-41
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. 401(k) Plan
The Company sponsors various 401(k) Plans (the "Plans") for the benefit of its'
employees. All employees who have completed six months of employment and have
attained the age of 18 are eligible to participate in the Plans. The Company
makes matching contributions equal to a portion of the employees' contribution
up to 5% of the employees' wages. Company contributions to the Plans were
$129,000, $120,000 and $145,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
5. Credit Facility
The Company has a Senior Credit Facility ("Senior Credit Facility") which
provides for revolving credit loans of up to $25.0 million to finance capital
expenditures and for working capital and general purposes, including the upgrade
of the System's cable plant and for the introduction of new video services. The
Senior Credit Facility has a six-year maturity from the date of borrowings, with
reductions to the amount of the commitment commencing after three years. The
amount available for borrowing is reduced by any outstanding letter of credit
obligations. The Company's obligations under the Senior Credit Facility are
secured by substantially all the assets of the Company.
The Senior Credit Facility requires the Company to meet certain financial and
other debt covenants. Loans under the Senior Credit Facility bear interest, at
the Company's option, at the prime rate or at a Eurodollar rate. In addition to
the index rates, the Company pays an additional margin percentage tied to its
ratio of total debt to adjusted annualized operating cash flow.
Interest expense including fees paid to the lender was $1.9 million and $500,000
for the years ended December 31, 2000 and 1999, respectively. The weighted
average interest rate in effect as of December 31, 2000 and 1999 was 8.84% and
7.9%, respectively.
As of December 31, 2000, required annual principal payments under the Senior
Credit Facility are as follows (in thousands):
2001 $ -
2002 2,500
2003 3,750
2004 18,750
2005 -
Thereafter -
-----------
Total $25,000
===========
F-42
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. Related Party Transactions
Through August 8, 2000, Insight Holdings managed the operations of the Company
under an operating agreement dated August 21, 1998 which provided for a
management fee equal to 3% of the Company's gross operating revenues. In
connection with the purchase of Coaxial's 25% common equity interest in the
Company, the Company's operating agreement was amended to provide for Insight LP
to serve as manager of the Company. Fees under this operating agreement were
$1.5 million, $1.4 million and $493,000 for the years ended December 31, 2000,
1999 and 1998, respectively. Prior to August 21, 1998, programming and other
operating costs included management fees for services provided by an affiliate
of the Company. Such expenses were $1.4 million for the period from January 1,
1998 to August 21, 1998.
7. Long-Lived Assets
Fixed Assets
Fixed assets consist of:
December 31,
2000 1999
-------------------------
(in thousands)
Land, buildings and improvements $ 1,394 $ 1,204
Cable television equipment 139,583 103,826
Furniture, fixtures and office equipment 460 424
-------------------------
141,437 105,454
Less accumulated depreciation and amortization (64,850) (53,999)
-------------------------
Total fixed assets $ 76,587 $ 51,455
=========================
Intangible Assets
Intangible assets consist of:
December 31,
2000 1999
-------------------------
(in thousands)
Franchise costs $ 7,606 $ 7,422
Other intangible assets 268 361
-------------------------
7,874 7,783
Less accumulated amortization (7,426) (7,395)
-------------------------
Total intangible assets $ 448 $ 388
=========================
F-43
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consists of:
December 31,
2000 1999
-------------------------
(in thousands)
Accounts payable $ 5,679 $ 9,127
Accrued programming costs 2,134 1,890
Other 3,049 1,181
-------------------------
Total accounts payable and accrued expenses $ 10,862 $ 12,198
=========================
9. Commitments and Contingencies
Operating Lease Agreements
The Company leases land for tower locations, office equipment, office space and
vehicles under various operating lease agreements. Rental expense related to
operating lease agreements was $144,000, $126,000 and $106,000 for the years
ended December 31, 2000, 1999 and 1998, respectively. These amounts exclude
year-to-year utility pole leases of $196,000 for the year ended December 31,
2000 and $191,000 for the years ended December 31, 1999 and 1998, which provide
for payments based on the number of poles used.
Future minimum rental commitments required under non-cancelable operating leases
as of December 31, 2000 was $25,000 due in 2001.
Litigation
The Company is party in or may be affected by various matters under litigation.
Management believes that the ultimate outcome of these matters will not have a
significant adverse effect on either the Company's future results of operations
or financial position.
F-44
INSIGHT COMMUNICATIONS OF CENTRAL OHIO, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. Subsequent Event
Contribution of Insight Ohio
On January 5, 2001, Insight Midwest, L.P. ("Insight Midwest"), a 50-50
partnership between Insight LP and an indirect subsidiary of AT&T Broadband,
LLC, completed a series of transactions with Insight LP and certain subsidiaries
of AT&T Corp. (the "AT&T Subsidiaries") for the acquisition of additional cable
television systems valued at approximately $2.2 billion, including the common
equity of the Company (the "AT&T Transactions"). As a result of the AT&T
Transactions, Insight Midwest acquired all of Insight LP's wholly-owned systems
serving approximately 280,000 customers, including the approximately 85,000
customers served by the Company and including systems which Insight LP purchased
from the AT&T Subsidiaries. At the same time, Insight Midwest acquired from the
AT&T Subsidiaries systems serving approximately 250,000 customers.
The Company is prohibited by the terms of its indebtedness from making
distributions to Insight Midwest. Insight Midwest remains equally owned by
Insight LP and AT&T Broadband, and Insight LP continues to serve as the general
partner of Insight Midwest and manages and operates the Insight Midwest systems.
Although the financial results of the Company will be consolidated into Insight
Midwest as a result of the AT&T Transactions, for financing purposes, the
Company is an unrestricted subsidiary under the indentures of Insight Midwest
and Insight Inc. The Company's conditional guarantee of the Senior Notes and the
Senior Discount Notes remains in place.
F-45
INSIGHT MIDWEST
PRO FORMA STATEMENT OF OPERATIONS
For the year ended December 31, 2000
(in thousands)
Illinois
Systems Pro Forma
Contributed By Pro Forma as Adjusted
And Purchased Insight Insight
From AT&T Other Systems Communications Insight Ohio Midwest
Insight Cable Being Acquired Excluding Proforma Including
Midwest Subsidiaries From Proforma Insight Ohio As adjusted Insight Ohio
As Reported (A) Insight LP Adjustments (A) (F) (A)
-------------- ------------- ------------ ------------- -------------- ------------- --------------
Revenues $ 379,720 $ 176,910 $ 41,464 $ 598,094 $ 49,749 $ 647,843
Costs & expenses:
Programming and other
operating cost 130,306 75,828 14,558 220,692 19,027 239,719
Selling, general and
administrative 73,378 27,231 9,348 (2,623) (D) 107,334 12,044 119,378
Depreciation and amortization 195,669 49,826 17,790 42,046 (E) 305,396 23,965 329,361
65 (B)
-------------- ------------- ------------ ----------- -------------- ------------- -------------
Operating income (loss) (19,633) 24,025 (232) (39,488) (35,328) (5,287) (40,615)
Other income (expense):
Interest expense, net (112,135) - - (80,455) (C) (192,590) (1,792) (194,382)
Other expense (342) - (238) (580) (274) (854)
-------------- ------------- ------------ ----------- -------------- ------------- -------------
Net Loss $(132,110) $ 24,025 $ (470) $(119,943) $(228,498) $ (7,353) $(235,851)
============== ============= ============ =========== ============== ============= =============
1
Notes to Pro Forma Statement of Operations for the Year Ended December 31, 2000
(A) The pro forma data includes the results of operations for the Illinois
systems, acquired pursuant to the Transactions, only for the periods during
which they were owned by the AT&T Cable Subsidiaries during the year ended
December 31, 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 data for
the period indicated. If these results were included in the financial data
above, revenues and EBITDA excluding Insight Ohio would have been $609.0
million and $274.0 million and revenues and EBITDA including Insight Ohio
would have been $658.8 million and $292.4 million for the year ended
December 31, 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
$1.8 million resulting from the repayment of the borrowings under the
Indiana and Kentucky credit facilities and the recording of $1.4 million of
amortization of deferred financing issuance costs for the Insight Midwest
10 1/2% senior notes and $489,000 of amortization of the deferred
financing costs for the Midwest Holdings credit facility
(C) Reflects the net increase in interest expense related to the repayment of
all borrowings under the Indiana and Kentucky credit facilities (decrease
in interest expense of $93.4 million), the issuance of the Insight Midwest
10 1/2% senior notes to repay a portion of the Indiana and Kentucky credit
facilities (increase in interest expense of $43.7 million), borrowings
under the Midwest Holdings credit facility to repay a portion of the
Indiana and Kentucky credit facilities, to fund the acquisition of Illinois
systems purchased from the AT&T Cable Subsidiaries, and borrowings that we
assumed pursuant to the Transactions (increase in interest expense of
$130.1 million).
(D) Adjusts management fee expense so that management fees are equivalent to 3%
of gross revenues which is the percentage that Insight LP 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 acquired from the AT&T Cable
Subsidiaries and the Illinois systems purchased by and being acquired from
Insight LP, totaling $239.4 million, which will be amortized on a
straight-line basis over fifteen years (increase in depreciation and
amortization expense of $15.9 million). Also, this includes, an additional
2
increase in amortization of approximately $26.1 million related to the pre-
acquisition intangibles, resulting from a reduced period of amortization
for 40 years to fifteen years. The preliminary purchase price has been
allocated to franchise rights. The purchase price allocation will be
finalized upon completion 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 historical operating results of the Insight Ohio systems for
the year ended December 31, 2000, pro forma adjustments, as follows:
Insight Insight Ohio
Ohio Proforma Proforma
As Reported Adjustment as Adjusted
-------------- ------------- --------------
Revenues $ 49,749 $ 49,749
Costs & expenses:
Programming and other
operating costs 19,027 19,027
Selling, general and
administrative 12,044 12,044
Depreciation and amortization 10,882 13,083 (1) 23,965
-------------- ------------- --------------
Operating income (loss) 7,796 (13,083) (5,287)
Other income (expense):
Interest income
(expense), net (1,792) - (1,792)
Other income (expense) (274) - (274)
-------------- ------------- --------------
Net income (loss) $ 5,730 $(13,083) $ (7,353)
============== ============= ==============
(1) Reflects actual amortization related to a step up in value of
intangible assets of Insight Ohio of $164.1 million will be recorded
by us in the consolidated Insight Midwest financial statements, and
will be amortized over twelve years. Such amortization schedule is
applied based upon the remaining attractive terms of the franchise.
The preliminary purchase price has been allocated to franchise rights
and goodwill. The purchase price allocation will be finalized upon
completion and receipt of appraisal reports. However, we do not
believe that any adjustment resulting from the final allocation of
purchase price will be material
3
INSIGHT MIDWEST
PRO FORMA BALANCE SHEET
December 31, 2000
(in thousands)
Illinois
Systems Other
Contributed By Systems Insight Pro Forma
And Purchased Being Communications Proforma Insight
Insight From AT&T Acquired As Adjusted Insight Communications
Midwest Cable From Pro Forma Excluding Ohio Including
As Reported Subsidiaries Insight LP Adjustments Insight Ohio As Adjusted(B) Insight Ohio
----------- ------------ ---------- ----------- -------------- ------------- --------------
ASSETS
Cash and cash equivalents $ 5,735 $ 991 $ 2 $ $ 6,728 $ 1,169 $ 7,897
- -
Trade accounts receivable, net 13,686 6,325 1,002 21,013 2,782 23,795
Launch funds receivable 13,077 1,077 14,154 1,936 16,090
Prepaid expenses & other
current assets 8,922 - 1,007 9,929 437 10,366
------------ ----------- ----------- ----------- ------------ ------------ ------------
Total current assets 41,420 7,316 3,088 - 51,824 6,324 58,148
Fixed assets, net 681,490 193,002 46,960 921,452 76,587 998,039
Intangible assets, net 976,637 1,063,849 90,004 239,438 (A) 2,372,471 154,273 2,526,744
2,543 (A)
------------ ----------- ----------- ----------- ------------ ------------ ------------
Total assets 1,699,547 1,264,167 140,052 241,981 3,345,747 237,184 3,582,931
============ =========== =========== =========== ============ ============ ============
LIABILITIES & PARTNERS' CAPITAL
Accounts payable & other
current liabilities 96,721 6,174 4,535 107,430 16,112 123,542
- -
Deferred income taxes - - - - -
Deferred revenue 14,819 - 1,066 15,885 2,550 18,435
Due to related parties 4,047 - 10,391 14,438 1,502 15,940
Debt 1,347,523 - 685,500 (A) 2,033,023 25,000 2,058,023
-
Preferred interests - - - 180,281 180,281
------------ ----------- ----------- ----------- ------------ ------------ ------------
Total liabilities 1,463,110 6,174 15,992 685,500 2,170,776 225,445 2,396,221
Partners' (deficiency) capital 236,437 1,257,993 124,060 (443,519) 1,174,971 11,739 1,186,710
------------ ----------- ----------- ----------- ------------ ------------ ------------
Total liabilities &
partners' capital $ 1,699,547 $1,264,167 $ 140,052 $ 241,981 $ 3,345,747 $ 237,184 $ 3,582,931
============ =========== =========== =========== ============ ============ ============
4
Notes to Pro Forma Balance Sheet as of December 31, 2000
(A) Reflect the following:
o A step-up in value of intangible assets of the Illinois systems
acquired from the AT&T Cable Subsidiaries and the Illinois systems
purchased by and being acquired from Insight L.P. totaling $239.4
million. The preliminary purchase price has been allocated to
franchise rights. The purchase price allocation will be finalized upon
completion and receipt of appraisal reports. However, we do not
believe that any adjustment resulting from the final allocation of
purchase price will be material;
o Borrowings of $379.5 million under the Midwest Holdings credit
facility to fund the acquisition of the Illinois systems and related
financing costs;
o Borrowings of $306.0 million that we assumed pursuant to the
Transaction;
o Write-off of deferred financing costs of approximately $8.9 associated
with the refinancing of borrowings with the proceeds of the Midwest
Holdings credit facility; and
o Recording of deferred financing costs of approximately $11.5 million
associated with the Midwest Holdings credit facility
(B) Includes the balance sheet of Insight Ohio as of December 31, 2000,
including a Proforma adjustment as follows:
5
Pro Forma
Insight
Insight Ohio
Ohio Pro Forma as
As Reported Adjustment (1) Adjusted
-------------- --------------- --------------
ASSETS
Cash and cash equivalents $ 1,169 $ 1,169
Trade accounts receivable, net 2,782 2,782
Launch funds receivable 1,936 1,936
Prepaid expenses & other
current assets 437 437
-------------- -------------- ---------------
Total current assets 6,324 - 6,324
Fixed assets, net 76,587 76,587
Intangible assets, net 448 $153,825 154,273
-------------- -------------- ---------------
Total assets 83,359 153,825 237,184
============== ============== ===============
LIABILITIES & STOCKHOLDERS' EQUITY
Accounts payable & other current
liabilities 16,112 16,112
Deferred income taxes -
Deferred revenue 2,550 2,550
Due to related parties 1,502 1,502
Debt 25,000 25,000
Preferred interests 180,281 180,281
-------------- -------------- ---------------
Total liabilities 225,445 - 225,445
Stockholders' equity (142,086) 153,825 11,739
-------------- -------------- ---------------
Total liabilities &
stockholders' equity $ 83,359 $153,825 $237,184
============== ============== ===============
(1) Reflects a step-up in value of intangible assets of Insight Ohio of
$164.1 million which will be recorded by us in the consolidated
Insight midwest financial statements, and will be being amortized over
twelve years. The preliminary purchase price has been allocated to
franchise rights and goodwill. The purchase price allocation will be
finalized upon completion and receipt of appraisal reports. However,
we do not believe that any adjustment resulting from the final
allocation of purchase price will be material
6