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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q/A-1
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2001
Commission file numbers 333-33540
333-33540-1
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INSIGHT MIDWEST, L.P.
INSIGHT CAPITAL, INC.
(Exact name of registrants as specified in their charters)
Delaware 13-4079232
Delaware 13-4079679
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Nos.)
810 7th Avenue
New York, New York 10019
(Address of principal executive offices) (Zip code)
Registrants' telephone number, including area code: 917-286-2300
-----------------------
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports) and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrants'
classes of common stock, as of the latest practicable date.
Insight Midwest, L.P. - Not Applicable
Insight Capital, Inc. - Not Applicable
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the requirements of Form 10-Q and, therefore, do not include
all information and footnotes required by accounting principles generally
accepted in the United States. However, in our opinion, all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the results of operations for the relevant periods have been made. Results
for the interim periods are not necessarily indicative of the results to be
expected for the year. These financial statements should be read in conjunction
with the summary of significant accounting policies and the notes to the
consolidated financial statements included in our Annual Report on Form 10-K as
amended for the year ended December 31, 2000.
1
INSIGHT MIDWEST, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2001 2000
--------------------------------------
(unaudited) (Note 2)
Assets
Cash and cash equivalents $ 3,040 $ 5,735
Trade accounts receivable, net of allowance for doubtful accounts
of $1,313 and $979 as of March 31, 2001 and December 31, 2000 21,165 13,686
Launch funds receivable 11,124 13,077
Prepaid expenses and other assets 5,793 8,922
--------------------------------------
Total current assets 41,122 41,420
Fixed assets, net 1,006,937 681,490
Intangible assets, net 2,451,328 950,299
Deferred financing costs, net of accumulated amortization
of $1,595 and $2,962 as of March 31, 2001 and December 31, 2000 27,771 26,338
--------------------------------------
Total assets $ 3,527,158 $ 1,699,547
======================================
Liabilities and partners' capital
Accounts payable $ 34,168 $ 38,575
Accrued expenses and other liabilities 14,469 3,320
Accrued property taxes 15,458 11,699
Accrued programming costs 38,285 23,208
Deferred revenue 3,982 3,284
Interest payable 39,425 19,919
Preferred interest distribution payable 1,750 -
Due to affiliates 16,727 4,047
--------------------------------------
Total current liabilities 164,264 104,052
Deferred revenue 14,677 11,535
Preferred interests 181,547 -
Debt 2,096,808 1,347,523
Other non-current liabilities 11,666 -
--------------------------------------
Total liabilities 2,468,962 1,463,110
Partners' capital 1,058,196 236,437
--------------------------------------
Total liabilities and partners' capital $ 3,527,158 $ 1,699,547
======================================
See accompanying notes
2
INSIGHT MIDWEST, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands)
Three months ended March 31,
2001 2000
-------------------------------------------
Revenue $ 168,151 $ 92,503
Operating costs and expenses:
Programming and other operating costs 54,204 28,280
Selling, general and administrative 34,625 20,654
Management fees 4,939 2,678
Depreciation and amortization 85,770 46,128
-------------------------------------------
Total operating costs and expenses 179,538 97,740
Operating loss (11,387) (5,237)
Other income (expense):
Interest expense (47,755) (25,966)
Interest income 418 267
Other (230) 29
-------------------------------------------
Total other expense, net (47,567) (25,670)
Net loss before extraordinary item (58,954) (30,907)
Extraordinary loss from early extinguishment of debt (Note 6) (10,315) --
-------------------------------------------
Net loss (69,269) (30,907)
Accrual of preferred interests (4,766) --
-------------------------------------------
Net loss attributable to common interests $ (74,035) $ (30,907)
===========================================
See accompanying notes
3
INSIGHT MIDWEST, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three months ended March 31,
2001 2000
--------------------------------------------
Operating activities:
Net loss $ (69,269) $ (30,907)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 85,770 46,128
Extraordinary loss from early extinguishments of debt 10,315 --
Provision for losses on trade accounts receivable 2,449 1,567
Amortization of bond discount 185 --
Changes in operating assets and liabilities, net of the effects of
acquisitions:
Trade accounts receivable (1,995) 1,809
Launch funds receivable 4,969 --
Prepaid expenses and other assets 4,350 (1,138)
Accounts payable (10,723) 8,649
Accrued expenses and other liabilities 48,726 2,291
--------------------------------------------
Net cash provided by operating activities 74,777 28,399
--------------------------------------------
Investing activities:
Purchase of fixed assets (62,223) (41,415)
Purchase of intangible assets -- (112)
Purchase of cable television systems, net of cash acquired (61,982) --
--------------------------------------------
Net cash used in investing activities (124,205) (41,527)
--------------------------------------------
Financing activities:
Distributions of preferred interests (7,000) --
Proceeds from borrowings under credit facilities 1,379,000 --
Repayments of credit facilities (654,900) --
Repayment of debt in connection with cable system transactions (659,165) --
Debt issuance costs (11,202) --
--------------------------------------------
Net cash provided by financing activities 46,733 --
--------------------------------------------
Net decrease in cash and cash equivalents (2,695) (13,128)
Cash and cash equivalents, beginning of period 5,735 35,996
--------------------------------------------
Cash and cash equivalents, end of period $ 3,040 $ 22,868
============================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 36,837 $ 29,451
Supplemental disclosure of significant non-cash financing activities:
Contribution of cable system assets by partners $ 1,787,413 --
See accompanying notes
4
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
We were formed in September 1999 to serve as the holding company and a financing
vehicle for Insight Communications Company, Inc.'s ("Insight Inc.") cable
television system joint venture with AT&T Broadband, LLC ("AT&T Broadband"). We
are owned 50% by Insight Communications Company, L.P. ("Insight LP"), which is
wholly-owned by Insight Inc., and 50% by AT&T Broadband, through its indirect
subsidiary TCI of Indiana Holdings, LLC ("TCI").
The accompanying consolidated financial statements include the accounts of our
subsidiaries that own and operate cable television systems in Illinois, Indiana,
Kentucky, Ohio and Georgia.
2. Responsibility for Interim Financial Statements
Our accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnote disclosures required by accounting principles generally
accepted in the United States for complete financial statements.
In our opinion, the consolidated financial statements reflect all adjustments
considered necessary for a fair statement of the consolidated results of
operations and financial position for the interim periods presented. All such
adjustments are of a normal recurring nature. These unaudited interim
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes to consolidated financial statements
contained in our Annual Report on Form 10-K as amended for the year ended
December 31, 2000.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us 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. The results
of operations for the three months ended March 31, 2001 are not necessarily
indicative of the results to be expected for the year ending December 31, 2001
or any other interim period.
Certain 2000 amounts have been reclassified to conform to the 2001 presentation.
5
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Cable System Transactions
On January 5, 2001, we completed a series of transactions with Insight LP and
certain subsidiaries of AT&T Corp. (the "AT&T Cable Subsidiaries") for the
acquisition of additional cable television systems, primarily located in the
state of Illinois, valued at approximately $2.2 billion (the "AT&T
Transactions"), inclusive of systems valued at approximately $775.8 million,
contributed by Insight LP. The AT&T Transactions were financed through a credit
facility established on January 5, 2001, the Midwest Holdings Credit Facility
(Note 6). As a result of the AT&T Transactions, we acquired all of Insight LP's
wholly-owned systems serving approximately 280,000 customers, including systems
which Insight LP purchased from the AT&T Cable Subsidiaries. At the same time,
we acquired from the AT&T Cable Subsidiaries systems serving approximately
250,000 customers. The purchase price was preliminarily allocated to the cable
television assets acquired in relation to their estimated fair values as
increases to franchise rights. The purchase price allocation will be finalized
upon completion and receipt of appraisal reports.
Both Insight LP and the AT&T Cable Subsidiaries contributed their respective
systems to us subject to an amount of indebtedness such that we remain equally
owned by Insight LP and AT&T Broadband. Insight LP continues to serve as our
general partner and manages and operates our systems. As a result of the AT&T
Transactions, we currently own and operate cable television systems in Indiana,
Kentucky, Illinois, Ohio and Georgia which passed approximately 2.2 million
homes and served approximately 1.3 million customers as of March 31, 2001.
As a result of the AT&T Transactions, the financial results of Insight Ohio are
consolidated into our financial statements effective January 1, 2001. For
financing purposes, Insight Ohio is an unrestricted subsidiary under our
indentures and is prohibited by the terms of its indebtedness from making
distributions to us.
On January 11, 2001, we acquired Cable One, Inc.'s, Greenwood, Indiana cable
television system serving approximately 14,800 customers for $62.0 million. The
purchase price was allocated to the cable television assets acquired in relation
to their fair values as increases in property and equipment and franchise
rights.
4. Pro Forma Results of Operations
Our unaudited pro forma results of operations for the three months ended March
31, 2001 and 2000, assuming each of the acquisitions and exchanges described in
Note 3 occurred as of January 1, 2000 are as follows (in thousands):
Three months ended March 31,
2001 2000
-------------------------------------------
Revenue 168,359 145,888
Net loss before extraordinary item
and accrual of preferred interests (59,605) (57,966)
Net loss attributable to common interests (74,686) (57,966)
6
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Long-Lived Assets
Fixed assets consist of:
March 31, December 31,
2001 2000
--------------------------------------------
(in thousands)
Land, buildings and improvements $ 36,679 $ 15,809
Cable television equipment 1,284,278 857,674
Furniture, fixtures and office equipment 10,923 6,844
--------------------------------------------
1,331,880 880,327
Less accumulated depreciation and amortization (324,943) (198,837)
--------------------------------------------
Total fixed assets $ 1,006,937 $ 681,490
============================================
Intangible assets consist of:
March 31, December 31,
2001 2000
--------------------------------------------
(in thousands)
Franchise rights $ 2,673,437 $ 1,086,647
Goodwill 3,237 1,190
--------------------------------------------
2,676,674 1,087,837
Less accumulated amortization (225,346) (137,538)
--------------------------------------------
Total intangible assets $ 2,451,328 $ 950,299
============================================
6. Debt
Debt consists of:
March 31, December 31,
2001 2000
--------------------------------------------
(in thousands)
Insight Ohio Credit Facility $ 25,000 $ -
Insight Midwest Holdings Credit Facility 1,379,000 -
Insight Indiana Credit Facility -- 298,600
Insight Kentucky Credit Facility -- 356,300
Insight Midwest 9 3/4% Senior Notes 200,000 200,000
Insight Midwest 10 1/2% Senior Notes 500,000 500,000
--------------------------------------------
2,104,000 1,354,900
Less unamortized discount on Notes (7,192) (7,377)
--------------------------------------------
Total debt $ 2,096,808 $ 1,347,523
============================================
7
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Debt (continued)
Insight Ohio Credit Facility
On January 5, 2001, in connection with the AT&T Transactions, we acquired
Insight Ohio and the existing debt of Insight Ohio. Insight Ohio's credit
facility (the "Ohio Credit Facility") provides for revolving credit loans of up
to $25.0 million. The Ohio Credit Facility has a six-year maturity from the date
of borrowings, with reductions to the amount of the commitment commencing after
three years. Our obligations under the Ohio Credit Facility are secured by
substantially all the assets of Insight Ohio. The Ohio Credit Facility requires
Insight Ohio to meet certain financial and other debt covenants. Loans under the
Ohio Credit Facility bear interest, at our option, at the prime rate or at a
Eurodollar rate. In addition to the index rates, we pay an additional margin
percentage tied to Insight Ohio's ratio of total debt to adjusted annualized
operating cash flow.
Insight Midwest Holdings Credit Facility
On January 5, 2001, through a wholly-owned subsidiary ("Insight Midwest
Holdings") which holds all of our cable television systems other than the Ohio
System, we entered into a credit facility (the "Midwest Holdings Credit
Facility") to finance the AT&T Transactions and to repay the outstanding
indebtedness under the Indiana and Kentucky Credit Facilities. The Midwest
Holdings Credit Facility expires in 2009 and provides for maximum borrowings of
$1.75 billion. Obligations under this credit facility are secured by a pledge of
the outstanding equity interests of Midwest Holdings and its subsidiaries.
The Midwest Holdings Credit Facility requires Insight Midwest Holdings to meet
certain financial and other debt covenants. Borrowings under this credit
facility bear interest at either an alternative base rate or Eurodollar rate,
plus an additional margin yield to Insight Midwest Holdings' leverage ratio, of
between 0.5% and 2.75%.
As a result of the repayment of the Indiana and Kentucky Credit Facilities on
January 5, 2001, we recorded an extraordinary charge of $10.3 million related to
the write-off of unamortized deferred financing costs related to these credit
facilities.
8
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Debt (continued)
Debt Facility Principal Payments
As of March 31, 2001, annual principal payments required on our debt are as
follows (in thousands):
2001 --
2002 2,500
2003 3,750
2004 78,750
2005 81,250
Thereafter 1,937,750
-------------------
$2,104,000
===================
Interest Rate Swap and Collar Agreements
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133, as amended by SFAS No.
137, was adopted as of January 1, 2001. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments embedded in other contracts and
for hedging activities. SFAS No. 133 requires us to recognize all derivatives on
the balance sheet at fair value.
On January 1, 2001, our derivative financial instruments, which were obtained to
manage our exposure to interest rate risk, included interest rate swap and
collar agreements, which qualified as cash flow hedges. On January 1, 2001, we
recorded as a component of other comprehensive income a $1.9 million transition
adjustment loss representing the cumulative effect of adopting SFAS No. 133.
Changes in the fair value of such cash flow hedges are recognized in
stockholders' equity as a component of comprehensive income. For the three
months ended March 31, 2001, the change in the fair value (loss) was $(9.8)
million.
7. Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"), sets forth rules for the reporting and display of
comprehensive income (net income plus all other changes in net assets from
non-owner sources) and its components in the financial statements. For the three
months ended March 31, 2001, components of other comprehensive income consisted
of interest rate swaps of $11.7 million, including the transition adjustment
loss mentioned above. For the three months ended March 31, 2000, there were no
components of other comprehensive income.
9
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Related Party Transactions
We purchase substantially all of our pay television and other programming from
affiliates of AT&T Broadband. Charges for such programming were $30.2 million
and $13.6 million for the three months ended March 31, 2001 and 2000. As of
March 31, 2001 and December 31, 2000, $23.6 million and $9.8 million of accrued
programming costs were due to affiliates of AT&T Broadband. We believe that the
programming rates charged by the affiliates of AT&T Broadband are lower than
those available from independent parties.
9. Commitments and Contingencies
Litigation
Insight Kentucky and certain prior owners of the Kentucky Systems have been
named in class actions regarding the pass-through of state and local property
tax charges to customers by the prior owners of the Kentucky Systems. The
plaintiffs seek monetary damages and the enjoinment of the collection of such
taxes. We believe that the Kentucky Systems have substantial and meritorious
defenses to these claims.
We 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 our consolidated financial condition.
10
INSIGHT CAPITAL, INC.
BALANCE SHEETS - RESTATED
(in thousands)
March 31, December 31,
2001 2000
--------------------------------------
(unaudited) (Note 3)
Assets
Cash $ 1 $ 1
Deferred financing costs, net 13,102 13,468
--------------------------------------
Total assets $ 13,103 $ 13,469
======================================
Liabilities and shareholders' deficit
Accrued interest $ 31,625 $ 13,625
--------------------------------------
Total current liabilities 31,625 13,625
Senior notes 692,808 692,623
--------------------------------------
Total liabilities 724,433 706,248
Shareholders' deficit:
Common stock; $.01 par value; 1,000 shares authorized, issued and outstanding -- --
Additional paid in capital 1 1
In-substance distribution of proceeds related to senior notes to be paid by
Insight Midwest (Note 4) (658,430) (658,430)
Accumulated deficit (52,901) (34,350)
--------------------------------------
Total shareholders' deficit (711,330) (692,779)
--------------------------------------
Total liabilities and shareholders' deficit $ 13,103 $ 13,469
======================================
See accompanying notes
11
INSIGHT CAPITAL, INC.
STATEMENTS OF OPERATIONS - RESTATED
(unaudited)
(in thousands)
Three months ended March 31,
2001 2000
-----------------------------------------------------
Expenses:
Amortization $ (366) $ (193)
Interest expense (18,185) (4,875)
-----------------------------------------------------
Net loss $ (18,551) $ (5,068)
=====================================================
See accompanying notes
12
INSIGHT CAPITAL, INC.
STATEMENTS OF CASH FLOWS - RESTATED
(unaudited)
(in thousands)
Three months ended March 31,
2001 2000
----------------------------------------------------
Cash flows from operating activities:
Net loss $ (18,551) $ (5,068)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization of deferred financing costs 366 193
Interest expense paid by affiliate 18,185 4,875
----------------------------------------------------
Net cash provided by operating activities -- --
----------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 1
----------------------------------------------------
Net cash provided by financing activities -- 1
----------------------------------------------------
Net increase in cash -- 1
Cash, beginning of period 1 --
----------------------------------------------------
Cash, end of period $ 1 $ 1
====================================================
See accompanying notes
13
INSIGHT CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. Nature of Business
Insight Capital, Inc. (the "Company"), a Delaware corporation, was formed on
September 23, 1999, for the sole purpose of being a co-issuer of the senior
notes described in Note 4, which allows certain investors the ability to be
holders of the debt. The Company has no operations. The outstanding shares of
the Company are owned by Insight Midwest, L.P. ("Insight Midwest").
2. Restatement
The accompanying financial statements have been adjusted to reflect the full
amount of the Senior Notes, the proceeds of which were received by Insight
Midwest in 2000 and 1999 (Note 4), deferred financing costs and related interest
expense for all periods presented. The effect of the restatement was to increase
total assets by $13.1 million and $13.5 million, to increase total liabilities
by $724.4 million and $706.2 million and to decrease equity, representing the
net in-substance distribution related to the Senior Notes, by $711.3 million and
$692.8 million as of March 31, 2001 and December 31, 2000, respectively.
Additionally, as a result of the restatement, the Company recorded a net loss of
$18.6 million and $5.1 million, for the three months ended March 31, 2001 and
2000, respectively. Prior to the restatement, no statements of operations were
presented.
3. Responsibility for Interim Financial Statements
The accompanying unaudited financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnote disclosures required by accounting principles
generally accepted in the United States for complete financial statements.
In management's opinion, the financial statements reflect all adjustments
considered necessary for a fair statement of the financial position as of the
interim dates presented. These unaudited interim financial statements should be
read in conjunction with the audited financial statements and notes to financial
statements contained in the Company's Annual Report on Form 10-K as amended for
the year ended December 31, 2000.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the Company 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. Actual results could differ from those estimates.
14
INSIGHT CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. Notes Payable
On October 1, 1999, the Company and Insight Midwest completed a $200.0 million
offering of 9 3/4% senior notes due in October 2009. The proceeds of the
offering were used to repay certain debt of Insight Midwest. Interest payments
on these Senior Notes, which commenced on April 1, 2000, are payable
semi-annually on April 1 and October 1.
In April 2000, the Company and Insight Midwest completed an exchange offer
pursuant to which the 9 3/4% Senior Notes were exchanged for identical notes
registered under the Securities Act of 1933.
On November 6, 2000, the Company and Insight Midwest completed a $500.0 million
offering of 10 1/2% senior notes due in November 2010. Insight Midwest received
proceeds of $487.5 million, net of an underwriting fee of $5.0 million and a
bond discount of $7.5 million. The proceeds of the offering were used to repay
certain debt of Insight Midwest. Interest payments on these Senior Notes, which
commence on May 1, 2001, are payable semi-annually on May 1 and November 1.
In May 2001, the Company and Insight Midwest completed an exchange offer
pursuant to which the 10 1/2% Senior Notes were exchanged for identical notes
registered under the Securities Act of 1933.
The 9 3/4% Senior Notes and 10 1/2% Senior Notes are redeemable on or after
October 1, 2004 and November 1, 2005, respectively. In addition, Insight Midwest
can redeem up to 35% of the 9 3/4% Senior Notes and 10 1/2% Senior Notes prior
to October 1, 2002 and November 1, 2005, respectively, with the net proceeds
from certain sales of Insight Midwest's equity. Each holder of the Senior Notes
may require redemption of all or part of that holder's notes upon certain
changes of control. Although the Company is a co-issuer of the Senior Notes, it
has no substantial assets or any operations and will not have access to
additional sources of cash flow to make any payments on such debt. All future
funding on the Senior Notes, including principal and interest payments, are
dependent upon the operating results of Insight Midwest.
The Senior Notes are general unsecured obligations and are subordinate to all
Insight Midwest's liabilities, the amounts of which were $1.76 billion and
$770.5 million as of March 31, 2001 and December 31, 2000. The Senior Notes
contain certain financial and other debt covenants.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Some of the information in this quarterly report contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You should
read statements that contain these words carefully because they:
. discuss our future expectations;
. contain projections of our future results of operations or of our
financial condition; or
. state other "forward-looking" information.
We believe it is important to communicate our expectations to our investors.
However, there may be events in the future that we are not able to accurately
predict or over which we have no control. The risk factors listed in our Annual
Report on Form 10-K as amended for the year ended December 31, 2000, as well as
any cautionary language in this quarterly report, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. You should
be aware that the occurrence of the events described in these risk factors and
elsewhere in this quarterly report could have a material adverse effect on our
business, operating results and financial condition.
Overview
Consistent with our strategy of pursuing value-enhancing transactions that fit
our geographic and clustering strategy, on January 5, 2001, we completed a
series of transactions with certain cable subsidiaries of AT&T Corp. that
increased by 530,000 the number of customers we serve. We refer in this report
to all of the preceding transactions, including related bank financing, as the
"AT&T transactions." Specifically, we acquired:
. all of Insight LP's systems not already owned by us as well as systems
which Insight LP acquired from the AT&T cable subsidiaries (comprising
in total approximately 280,000 customers); and
. systems from the AT&T cable subsidiaries located in Illinois serving
approximately 250,000 customers.
We acquired the systems from Insight LP and the AT&T cable subsidiaries subject
to indebtedness in the amount of $685.0 million. We remain equally owned by
Insight LP and AT&T Broadband. Insight LP continues to serve as our general
partner and manage and operate our systems.
Results of Operations
Substantially all of our revenues were earned from customer fees for cable
television programming services including premium and pay-per-view services and
ancillary services, such as rental of converters and remote control devices,
installations and from selling advertising. In
16
addition, we earn revenues from commissions for products sold through home
shopping networks.
We have had a history of net losses and expect to continue to report net losses
for the foreseeable future. The principal reasons for our prior and anticipated
net losses include depreciation and amortization expenses associated with our
acquisitions and capital expenditures related to construction and upgrading of
our systems, and interest costs on borrowed money. We cannot predict what
impact, if any, continued losses will have on our ability to finance our
operations in the future.
The following table is derived for the periods presented from our consolidated
financial statements that are included in this report and sets forth certain
statement of operations data for our consolidated operations.
Three Months Ended March 31,
2001 2000
-------------------------------------------
(in thousands)
Revenue $ 168,151 $ 92,503
Operating costs and expenses:
Programming and other operating costs 54,204 28,280
Selling, general and administrative 34,625 20,654
Management fees 4,939 2,678
Depreciation and amortization 85,770 46,128
--------------------- ---------------------
Total operating costs and expenses 179,538 97,740
--------------------- ---------------------
Operating loss (11,387) (5,237)
EBITDA 63,838 40,920
Interest expense 47,755 25,966
Net loss before extraordinary item (58,954) (30,907)
Extraordinary loss on early extinguishment of debt (10,315) -
Net loss (69,269) (30,907)
Net cash provided by operating activities 74,777 28,399
Net cash used in investing activities 124,205 41,527
Net cash provided by financing activities 46,733 -
EBITDA represents earnings before interest, taxes, depreciation and
amortization. Our management believes that EBITDA is commonly used in the cable
television industry to analyze and compare cable television companies on the
basis of operating performance, leverage and liquidity. However, EBITDA is not
intended to be a performance measure that should be regarded as an alternative
to, or more meaningful than, either operating income or net income as an
indicator of operating performance or cash flows as a measure of liquidity, as
determined in accordance with generally accepted accounting principles. EBITDA,
as computed by manangement, is not necessarily comparable to similarly titled
amounts of other companies. Refer to our financial statements, including our
statements of cash flows, which appear elsewhere in this quarterly report.
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
Revenues increased $75.6 million to $168.2 million for the three months ended
March 31, 2001 compared to $92.5 million for the three months ended March 31,
2000. The increase in revenues
17
is primarily the result of the cable television systems contributed in the AT&T
transactions, including the Ohio Systems. The incremental revenue generated by
the cable television systems contributed approximated $70.0 million, which
represents 92.6% of the increase in consolidated revenue. In addition, the
existing systems increased revenues for digital and high-speed data by $4.6
million, a combined 106.7% growth rate. Revenues by service offering were as
follows for the three months ended March 31, (in thousands):
2001 2000
Revenues by % of Revenues by
Service Total Service % of Total
Offering Revenues Offering Revenues
------------- -------------- -------------- --------------
Basic $116,789 69% $66,913 72%
Premium 14,999 9% 8,777 10%
Pay-Per-View 1,286 1% 1,060 1%
Digital 9,517 5% 2,582 3%
Advertising Sales 9,600 6% 5,897 6%
Data Services 6,477 4% 1,473 2%
Other 9,483 6% 5,801 6%
------------- -------------- -------------- --------------
Total $168,151 100% $92,503 100%
============= ==============
Average monthly revenue per customer was $43.80 for the three months ended March
31, 2001 compared to $41.20 for the three months ended March 31, 2000 primarily
reflecting the continued successful rollout of new product offerings in the
Indiana, Kentucky and Ohio markets. Average monthly revenue per customer for
high-speed data and interactive digital video increased to $3.66 for the three
months ended March 31, 2001 compared to $1.81 for the comparable period in 2000.
Excluding the systems acquired in the AT&T transactions, the number of
high-speed data service customers increased to 39,800 as of March 31, 2001 from
12,400 as of March 31, 2000, while digital customers increased to 136,600 as of
March 31, 2001 from 54,700 as of March 31, 2000.
Programming and other operating costs increased $25.9 million to $54.2 million
for the three months ended March 31, 2001 compared to $28.3 million for the
three months ended March 31, 2000. The increase in programming and other
operating costs is primarily the result of the cable television systems
contributed in the AT&T transactions. The incremental expense generated by the
contribution of these systems approximated $23.4 million, which represents 90.1%
of the increase in programming and other operating costs. Excluding these
systems, programming and other operating costs increased by approximately $2.6
million or 9.9% primarily as a result of increased programming rates and
additional programming carried by our existing systems.
Selling, general and administrative expenses increased $14.0 million to $34.6
million for the three months ended March 31, 2001 compared to $20.7 million for
the three months ended March 31, 2000. The increase in selling, general and
administrative expenses is primarily the result of the acquisition of the cable
television systems contributed in the AT&T transactions. The incremental
selling, general and administrative expenses generated by the acquisition of the
Illinois systems approximated $12.9 million, which represents 92.4% of the
increase. Excluding these systems, these costs increased by approximately $1.1
million accounting for approximately
18
7.6% of the total increase, primarily reflecting increased marketing activity
associated with new product introductions.
Depreciation and amortization expense increased $39.6 million to $85.8 million
for the three months ended March 31, 2001 compared to $46.1 million for the
three months ended March 31, 2000. The increase in depreciation and amortization
expense is primarily the result of the cable television systems contributed in
the AT&T transactions. The incremental depreciation and amortization expense
generated by these systems approximated $29.5 million, which represents 74.5% of
the increase. Excluding these systems, depreciation and amortization increased
by approximately $10.1 million or 25.5% primarily due to capital expenditures
made to rebuild the existing cable equipment during previous quarters.
EBITDA increased 56.0% to $63.8 million for the three months ended March 31,
2001 as compared to $40.9 million for the three months ended March 31, 2000 for
the following reasons:
. The first full quarter of results generated by the systems contributed
in the AT&T transactions and
. Offsetting these operating results in 2001 was a $10.3 million
extraordinary loss recorded during the three months ended March 31,
2001 due to early extinguishments of debt.
Interest expense increased $21.8 million to $47.8 million for the three months
ended March 31, 2001 compared to $26.0 million for the three months ended March
31, 2000. The increase in interest expense is primarily the result of higher
outstanding debt required by the acquisition of the cable television systems
acquired in the AT&T transactions and funding of capital expenditures during the
past year.
For the three months ended March 31, 2001, the net loss was $69.3 million for
the reasons set forth above.
Liquidity and Capital Resources
Our business requires cash for operations, debt service, capital expenditures
and acquisitions. The cable television business has substantial on-going capital
requirements for the construction, expansion and maintenance of its broadband
networks. Expenditures have primarily been used to upgrade our existing cable
network, and in the future will be used for network extensions, new services,
converters and network upgrades. Historically, we have been able to meet our
cash requirements with cash flow from operations, borrowings under our credit
facilities, issuances of private equity and accessing other public sources.
For the three months ended March 31, 2001 and March 31, 2000, we spent $62.2
million and $41.4 million in capital expenditures largely to support our plant
rebuild, digital converter purchases and to a lesser extent network extensions.
We will continue to incur capital expenditures particularly for success-based
deployment of new services, including telephony and for the upgrade of the
Illinois cable television systems, which involve the use of fiber optics and
other capital projects associated with implementing our clustering strategy.
19
On January 5, 2001, in connection with the AT&T transactions, Insight Midwest
Holdings entered into the $1.75 billion Midwest Holdings Credit Facility from
which it borrowed $663.0 million to repay the Indiana and Kentucky credit
facilities and $685.0 million to finance the AT&T transactions.
On January 5, 2001, we acquired all of the common equity interests of Insight
Ohio as part of the AT&T transactions. Insight Ohio is an unrestricted
subsidiary under the indentures governing and our notes, and is prohibited by
the terms of its indebtedness from making distributions to us.
As of March 31, 2001, we had aggregate consolidated indebtedness of $2.10
billion, including $1.40 billion outstanding under senior bank credit
facilities. The senior bank credit facilities consisted of:
. $1.75 billion Midwest Holdings Credit Facility maturing in 2009, which
will be utilized to support Insight Midwest's operations and
build-out, of which $1.38 billion was borrowed. The remaining
availability of $370.0 million will be used to support the
aforementioned capital expenditures; and
. $25.0 million Insight Ohio Credit Facility maturing in 2004, which was
fully-borrowed.
The weighted average interest rate for amounts outstanding under our senior
credit facilities as of March 31, 2001 was 8.0%. The facilities contain
covenants restricting, among other things, our ability to make capital
expenditures, acquire or dispose of assets, make investments and engage in
transactions with related parties. The facilities also require compliance with
certain financial ratios and contain customary events of default.
We have a substantial amount of debt. We believe that the Midwest Holdings
credit facility and our cash flow from operations are sufficient to support our
current operating plan. We intend to draw upon the $370.0 million of unused
availability under the Midwest Holdings credit facility as discussed above to
fund any shortfall resulting from the inability of our cash from operations to
fund our capital expenditures, meet our debt service requirements or otherwise
fund our operations.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
Our revolving credit and term loan agreements bear interest at floating rates.
Accordingly, we are exposed to potential losses related to changes in interest
rates. We do not enter into derivatives or other financial instruments for
trading or speculative purposes. In order to manage our exposure to interest
rate risk, we enter into derivative financial instruments, typically interest
rate swaps and collars. The counterparties to our swap and collar agreements are
major financial institutions. As of March 31, 2001, our interest rate swap and
collar agreements expire in varying amounts through July 2003.
The fair market value of our long-term debt approximates its carrying value as
the credit facility borrowings bear interest at floating rates of interest and
current fair market value of the senior notes approximates par value. As of
March 31, 2001, the estimated fair value (loss) of our interest rate swap and
collar agreements was approximately $(11.7) million, which represents the amount
required to enter into offsetting contracts with similar remaining maturities
based on quoted market prices and is reflected in our financial statements as
other non-current liabilities. Changes in the fair value of derivative financial
instruments are either recognized in income or in stockholders' equity as a
component of other comprehensive income depending on whether the derivative
financial instruments qualify for hedge accounting.
As of March 31, 2001, we had entered into interest rate swaps that approximated
$625.0 million, or 44.5%, of our borrowings under all of our credit facilities.
Accordingly, a hypothetical 100 basis point increase in interest rates along the
entire interest rate yield curve would increase our annual interest expense by
approximately $7.8 million.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
We filed the following reports on Form 8-K during the three months ended March
31, 2001:
Date Report
Date of Report Filed with SEC Items Reported
- ------------------------- ---------------------- ----------------------------------------------------
January 5, 2001 January 22, 2001 Item 2 - Acquisition or Disposition of Assets
Item 7 - Financial Statements, Pro Forma Financial
Information and Exhibits
January 5, 2001 March 23, 2001 Item 2 - Acquisition or Disposition of Assets
(Amendment No. 1) Item 7 - Financial Statements, Pro Forma Financial
Information and Exhibits *
- ------------
* Included historical financial statements for Insight Midwest, L.P. and its
predecessors, AT&T Insight Midwest Systems, systems contributed on January
5, 2001 to Insight Midwest, L.P. by Insight Communications Company, L.P.,
InterMedia Capital Partners VI, L.P. and Insight Communications of Central
Ohio. Also included pro forma financial statements of Insight Midwest, L.P.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
Date: June 13, 2001
INSIGHT MIDWEST, L.P.
By: Insight Communications Company, L.P.,
its general partner
By: Insight Communications Company, Inc.,
its general partner
By: /s/ Michael S. Willner
---------------------------
Michael S. Willner
President and Chief Executive Office
By: /s/ Kim D. Kelly
---------------------
Kim D. Kelly
Executive Vice President and Chief Financial &
Operating Officer
INSIGHT CAPITAL, INC.
By: /s/ Michael S. Willner
----------------------------
Michael S. Willner
President and Chief Executive Officer and Director
By: /s/ Kim D. Kelly
----------------------
Kim D. Kelly
Executive Vice President and Chief Financial &
Operating Officer
23