FILED PURSUANT TO RULE 424B3
FILE No. 333-59966
333-59966-01
Prospectus
Insight Midwest, L.P.
Insight Capital, Inc.
-------------------
Offer to Exchange $500,000,000 of our
10 1/2% Senior Notes due 2010
-------------------
The notes being offered by this prospectus are being issued in
exchange for notes sold by us in a private placement on November 6, 2000. The
exchange notes will be governed by the same indenture governing the initial
notes. The exchange notes will be substantially identical to the initial notes,
except the transfer restrictions and registration rights relating to the initial
notes will not apply to the exchange notes.
o The exchange offer expires at 5:00 p.m., New York City time,
on September 6, 2001, unless extended.
o No public market exists for the initial notes or the exchange
notes. We do not intend to list the exchange notes on any
securities exchange or to seek approval for quotation through
any automated quotation system.
Before you tender your initial notes, you should consider carefully
the section entitled "Risk Factors" beginning on page 13 of this prospectus.
-------------------
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these notes or passed upon
the adequacy or accuracy of this prospectus. Any representation to the contrary
is a criminal offense.
-------------------
The date of this prospectus is August 6, 2001.
TABLE OF CONTENTS
Prospectus Summary............................................................1
Risk Factors.................................................................13
Forward-Looking Statements...................................................18
Use of Proceeds..............................................................18
Pro Forma Financial Statements...............................................19
Pro Forma Operating Data.....................................................26
Selected Financial Data......................................................27
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................30
Business.....................................................................38
Legislation and Regulation...................................................58
Management...................................................................67
Certain Transactions.........................................................70
Principal Stockholders.......................................................71
Description of Governing Documents...........................................72
Description of Certain Indebtedness..........................................76
Description of Notes.........................................................80
U.S. Federal Tax Considerations.............................................113
Exchange Offer..............................................................117
Book-Entry; Delivery and Form...............................................126
Plan of Distribution........................................................128
Legal Matters...............................................................129
Experts.....................................................................129
Available Information.......................................................129
Glossary....................................................................G-1
Index to Financial Statements...............................................F-1
We have not authorized any dealer, salesperson or other person to
give you written information other than this prospectus or to make
representations as to matters not stated in this prospectus. You must not rely
on unauthorized information. This prospectus is not an offer to sell these
securities or our solicitation of your offer to buy these securities in any
jurisdiction where that would not be permitted or legal. Neither the delivery of
this prospectus or any sales made hereunder after the date of this prospectus
shall create an implication that the information contained herein or the affairs
of Insight Midwest and Insight Capital have not changed since the date hereof.
Industry and Market Data
In this prospectus, we rely on and refer to information and
statistics regarding the cable television industry and our market share in the
sectors in which we compete. We obtained this information and statistics from
various third-party sources, discussions with our customers and our own internal
estimates. We believe that these sources and estimates are reliable, but we have
not independently verified them and cannot guarantee their accuracy or
completeness.
- i -
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
This summary highlights some of the information in this prospectus.
It does not contain all the information that may be important to you. For a more
complete understanding of this offering, you should read the entire prospectus,
including the risk factors and financial statements.
Our Manager
Insight Communications Company, Inc. is the ninth largest cable
television system operator in the United States based on customers served.
Through its wholly-owned and managed systems, Insight Communications currently
serves approximately 1.4 million customers, 99% of which are concentrated in the
four contiguous states of Indiana, Kentucky, Illinois and Ohio. In addition to
its geographic concentration, our manager's communications network is
tightly-grouped, or "clustered," with approximately 95% of our manager's
customers served from thirteen headends after giving effect to the network
upgrades expected to be substantially completed during 2001. As a result, the
amount of capital necessary to deploy new and enhanced products and services is
significantly reduced on a per home basis because of the large number of
customers served by a single headend. A headend processes signals received for
distribution to customers over our network. Clustering enables us to efficiently
deploy a bundled suite of entertainment, information and communications
services. This combination of geographic concentration and clustering has
enabled our manager to offer, under the Insight Digital brand, a complete bundle
of interactive digital video, high-speed data access and telephone services.
To facilitate delivery of telephone services, we have entered into a
ten-year agreement with AT&T Broadband that will allow us to deliver to our
customers local telephone service under the AT&T Digital brand. Under the terms
of the agreement, we will lease for a fee certain capacity on our network to
AT&T Broadband. We will provide certain services and support for which it will
receive additional payments. The capital required to deploy telephone services
over our networks will be shared, with AT&T Broadband responsible for switching
and transport facilities. We believe that we will be able to achieve higher
penetration levels by marketing our telephone services under the AT&T brand and
leveraging AT&T's telephone expertise with our strong local presence and
established customer relationships.
The Issuers
We are owned 50% by our manager and 50% by an indirect subsidiary of
AT&T Broadband, which is a subsidiary of AT&T Corp. Through our subsidiaries, we
own and operate cable television systems in Indiana, Kentucky, Illinois, Ohio
and Georgia which pass approximately 2.1 million homes and serve approximately
1.3 million customers. As a result of our upgrade efforts, as of the end of
2000, we estimate that 94% of our customers (other than those served by the new
Illinois systems) were passed by our upgraded network, which enables delivery of
an advanced suite of entertainment, information and communications services,
including our interactive digital video, high-speed data access and telephone
services. Upon completion of our planned network upgrades during 2001, over 99%
of our customers (other than customers served by the recently acquired Illinois
systems) will be served by the upgraded network. We expect that the upgrade of
the new Illinois systems will be completed during 2002.
Recognizing the opportunities presented by newly available products
and services, the strength of our market characteristics and favorable changes
in the regulatory environment, we deployed a strategy to become a competitive,
full service provider of entertainment, information and communications services
for the communities served by our networks. We intend to capitalize on our
highly clustered cable television systems to economically upgrade the
technological capabilities of our broadband networks in order to deploy enhanced
new services.
We believe that an integrated package of existing multi-channel
video, new and enhanced products and services, such as interactive digital
video, including video-on demand or near video-on-demand, high-speed Internet
access and telephone services, coupled with our commitment to locally focused
customer service, will enhance our ability to acquire and retain customers in a
competitive environment while increasing revenues per customer. To augment this
growth, we will continue to seek strategic acquisitions that fit our clustering
and operating strategy.
We have had a history of generating significant operating losses and
net losses and expect to continue to do so for the foreseeable future, primarily
as a result of depreciation and amortization expenses associated with our
- --------------------------------------------------------------------------------
- 1 -
- --------------------------------------------------------------------------------
acquisitions and capital expenditures related to construction and upgrading of
our systems, and interest costs on borrowed money. In addition, we have a
substantial amount of debt, which could have important consequences to you.
Our principal offices are located at c/o Insight Communications
Company, Inc., 810 Seventh Avenue, New York, New York 10019, and our telephone
number is (917) 286-2300.
Initial Offering
The initial notes were originally issued by us on November 6, 2000
in a private offering. We are parties to a registration rights agreement with
the initial purchasers pursuant to which we agreed, among other things, to file
a registration statement with respect to the exchange notes on or before May 5,
2001, to use our reasonable best efforts to have the registration statement
declared effective by November 6, 2001, and complete this exchange offer by
December 6, 2001. Although we filed a registration statement with respect to the
exchange notes on May 2, 2001, we must pay liquidated damages to the holders of
the initial notes if we do not meet the additional deadlines.
- --------------------------------------------------------------------------------
- 2 -
- --------------------------------------------------------------------------------
Summary of Exchange Offer
We are offering to exchange $500.0 million aggregate principal
amount of our exchange notes for $500.0 million aggregate principal amount of
our initial notes. To exchange your initial notes, you must properly tender them
and we must accept your tender. We will exchange all outstanding initial notes,
subject to certain restrictions, that are validly tendered and not validly
withdrawn.
Expiration Date............................ The exchange offer will expire
at 5:00 p.m., New York City
time, on September 6, 2001,
unless we extend it.
Registration Rights Agreement.............. You have the right, subject to
certain restrictions, to
exchange the initial notes that
you hold for exchange notes with
substantially identical terms.
This exchange offer is intended
to satisfy these rights. Once
the exchange offer is complete,
you will no longer be entitled
to any exchange or registration
rights with respect to your
initial notes.
Accrued Interest on the Exchange
Notes and Initial Notes.................... The exchange notes will bear
interest from their issuance
date. Holders of initial notes
which are accepted for exchange
will receive, in cash, accrued
and unpaid interest on the
initial notes to, but not
including, the issuance date of
the exchange notes. Such
interest will be paid with the
first interest payment on the
exchange notes.
Conditions to the Exchange Offer........... The exchange offer is subject to
customary conditions, which we
may waive. You should read the
discussion under "Exchange
Offer--Conditions to the
Exchange Offer" for more
information regarding conditions
of the exchange offer.
Procedures for Tendering Initial Notes..... If you are a holder of initial
notes and wish to accept the
exchange offer, you must either:
o complete, sign and date
the accompanying letter
of transmittal, or a
facsimile of the letter
of transmittal; or
o arrange for The
Depository Trust
Company to transmit
required information to
the exchange agent in
connection with a
book-entry transfer.
You must mail or otherwise
deliver such documentation
together with the initial notes
to the exchange agent for
receipt by the exchange agent on
or prior to the expiration date
at the address set forth in this
prospectus under "Exchange
Offer--Exchange Agent."
Representation Upon Tender................. By tendering your initial notes
in this manner, you will be
representing, among other
things, that:
o the exchange notes you
acquire in the exchange
offer are being
acquired in the
ordinary course of your
business;
- --------------------------------------------------------------------------------
- 3 -
- --------------------------------------------------------------------------------
o you are not
participating, do not
intend to participate,
and have no
arrangement or
understanding with any
person to participate,
in the distribution of
the exchange notes
issued to you in the
exchange offer; and
o you are not a party
related to us.
Procedures for Beneficial Owners............... If you are the beneficial
owner of initial notes
registered in the name of a
broker, dealer or other
nominee and you wish to
tender your initial notes,
you should contact the
person in whose name your
initial notes are registered
and promptly instruct the
person to tender on your
behalf within the time
period set forth below in
"Exchange Offer" for the
valid tender of such notes.
Material U.S. Federal Tax Consequences......... The exchange of initial
notes for exchange notes
will not result in any gain
or loss to you for U.S.
federal income tax purposes.
Your holding period for the
exchange notes will include
the holding period for the
initial notes and your
adjusted tax basis of the
exchange notes will be the
same as your adjusted tax
basis of the initial notes
at the time of the exchange.
For additional information,
you should read the
discussion under "U.S.
Federal Tax Considerations."
Failure to Exchange Will
Affect You Adversely .......................... Initial notes that are not
tendered, or that are
tendered but not accepted,
will, subject to certain
exceptions, be subject to
the existing transfer
restrictions on the initial
notes after the exchange
offer and we will have no
further obligation to
register the initial notes
under the Securities Act of
1933. If you do not
participate in the exchange
offer, the liquidity of your
initial notes could be
adversely affected. See
"Risk Factors--Your failure
to participate in the
exchange offer will have
adverse consequences."
Guaranteed Delivery Procedures................. If you wish to tender your
initial notes and time will
not permit your required
documents to reach the
exchange agent by the
expiration date, or the
procedure for book-entry
transfer cannot be completed
on or prior to the
expiration date, you may
tender your initial notes
according to certain
guaranteed delivery
procedures. For additional
information, you should read
the discussion under
"Exchange Offer--Guaranteed
Delivery Procedure."
Acceptance of Initial Notes;
Delivery of Exchange Notes..................... Subject to customary
conditions, we will accept
initial notes which are
properly tendered in the
exchange offer and not
withdrawn, before 5:00 p.m.,
New York City time, on the
expiration date of the
exchange offer. The exchange
notes will be delivered as
promptly as practicable
following the expiration
date.
- --------------------------------------------------------------------------------
- 4 -
- --------------------------------------------------------------------------------
Use of Proceeds................................ We will not receive any
proceeds from the exchange
offer.
Exchange Agent................................. The Bank of New York is the
exchange agent for the
exchange offer.
- --------------------------------------------------------------------------------
- 5 -
- --------------------------------------------------------------------------------
Summary of Terms of the Exchange Notes
The exchange notes are substantially identical to the initial notes, with
limited exceptions. The exchange notes will evidence the same debt as the
initial notes. The exchange notes are subject to the same indenture as the
initial notes. For additional information, you should read the discussion under
"Description of Notes."
Issuers ................................... Insight Midwest, L.P. and
Insight Capital, Inc.
Notes Offered.............................. $500.0 million in aggregate
principal amount of 10 1/2%
senior notes due 2010.
Maturity Date.............................. November 1, 2010.
Interest Rate and Payment Dates............ Interest on the exchange notes
will accrue at the rate of
10 1/2% per annum, payable
semiannually in cash in arrears
on May 1 and November 1 of each
year.
Optional Redemption........................ On or after November 1, 2005, we
may redeem some or all of the
exchange notes at any time at
the redemption prices described
in the section "Description of
Notes" under the heading
"Optional Redemption."
Prior to November 1, 2003, we
may redeem up to 35% of the
exchange notes with the proceeds
of certain offerings of our
equity at the price listed in
the section "Description of
Notes" under the heading
"Optional Redemption."
Mandatory Repurchase Offer................. If we sell certain assets or we
experience specific kinds of
changes of control, we must
offer to repurchase the exchange
notes at the prices listed in
the section "Description of
Notes" under the heading
"Repurchase at the Option of
Holders." See "Risk Factors--We
may not be able to finance a
change of control offer required
by the indenture."
Ranking.................................... The exchange notes constitute
senior debt. They will:
o effectively rank
behind all existing
and future
indebtedness and other
liabilities of our
subsidiaries;
o rank equally with our
9 3/4% senior notes
due 2009;
o rank equally with all
of our future
unsubordinated,
unsecured debt that
does not expressly
provide that it is
subordinated to the
exchange notes; and
o rank ahead of all our
future debts that
expressly provide that
they are subordinated
to the exchange notes.
As of March 31, 2001, the
initial notes were effectively
subordinated to approximately
$1.73 billion of debt and other
liabilities, excluding Insight
Ohio.
- --------------------------------------------------------------------------------
- 6 -
Basic Covenants............................ We will issue the exchange notes
under an indenture with The Bank
of New York, as trustee. The
indenture contains certain
covenants that limit, among
other things, our ability and
the ability of our subsidiaries
to:
o incur additional debt;
o pay dividends on our
capital stock or
repurchase our capital
stock;
o make investments;
o use assets as security
in other transactions;
and
o sell certain assets or
merge with or into
other companies.
For more details, see the
section "Description of Notes"
under the heading "Certain
Covenants."
- --------------------------------------------------------------------------------
- 7 -
- --------------------------------------------------------------------------------
SUMMARY FINANCIAL AND OTHER DATA
As of December 31, 2000, our operations consisted of our:
o Indiana systems, wholly-owned and operated by our subsidiary,
Insight Communications Midwest; and
o Kentucky systems, wholly-owned by our subsidiary, Insight
Kentucky.
Effective January 1, 2001, pursuant to the AT&T transactions, we
acquired additional cable television systems from certain cable subsidiaries of
AT&T Corp., which included the Illinois systems then owned by the AT&T cable
subsidiaries, including the Freeport, Illinois system which was exchanged for
Insight LP's Claremont, California system. In addition, effective January 1,
2001, we acquired the cable television systems of Insight LP.
The following tables set forth summary financial and other data for
us:
o on a historical basis;
o on a pro forma basis excluding Insight Ohio; and
o on a pro forma basis including Insight Ohio.
The pro forma data for the year ended December 31, 2000 reflect the
following events:
o Issuance of the initial notes and the use of the net proceeds
therefrom to repay a portion of the Indiana and Kentucky
credit facilities;
o The AT&T transactions;
o Assumption of debt in connection with the AT&T transactions;
and
o Entering into the Midwest Holdings credit facility and the
application of a portion of the net proceeds therefrom to
repay, in full, the remaining balances of the Kentucky and
Indiana credit facilities.
The pro forma financial data for the year ended December 31, 2000
and the historical data for the three months ended March 31, 2001 set forth
information both excluding and including Insight Ohio, as Insight Ohio is an
unrestricted subsidiary under the indenture governing the notes, and is
prohibited by the terms of its indebtedness from making distributions to us.
The summary pro forma financial and other data 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.
As indicated in footnote (6) below, the pro forma financial data do
not include results of certain of the Illinois systems which we acquired
pursuant to the AT&T transactions for the periods specified. If such results
were included in the financial data below, revenues and EBITDA on a pro forma
basis 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.
It is important that you read the summary financial and other data,
along with the historical financial statements and related notes which are
included elsewhere in this prospectus.
- --------------------------------------------------------------------------------
- 8 -
- --------------------------------------------------------------------------------
Three Months Ended
March 31, 2001
--------------------------
Insight
Midwest
Insight Excluding
Midwest Insight Ohio
------- ------------
(in thousands, except per
customer data)
Financial Data:
Revenues ....................................... 168,151 155,040
Costs and Expenses:
Programming and other operating costs ....... 54,204 49,113
Selling, general and administrative ......... 39,564 36,641
Depreciation and amortization ............... 85,770 83,050
------- -------
Operating loss ................................. (11,387) (13,764)
Interest expense, net .......................... 47,337 46,850
Other expense .................................. 230 254
EBITDA(1) ...................................... 63,838 58,717
Adjusted EBITDA(2) ............................. 79,322 73,829
Adjusted EBITDA margin(3) ...................... 47.2% 47.6%
Capital Expenditures ........................... 62,223 58,718
Net cash provided by operating activities ...... 74,777 72,357
Net cash used in investing activities .......... 124,205 120,700
Net cash provided by financing activities ...... 46,733 53,733
Average monthly revenue per customer(4) ........ 43.80 43.28
Ratio of earnings to fixed charges(5) ..........
Year Ended December 31, 2000
----------------------------------------
Pro Forma Pro Forma
Insight Including Excluding
Midwest Insight Ohio Insight Ohio
------- ------------ ------------
(in thousands, except per customer data)
Financial Data:
Revenues(6) ................................... $379,720 $647,843 $598,094
Costs and Expenses:
Programming and other operating costs(7) ... 130,306 239,719 220,692
Selling, general and administrative ........ 73,378 119,378 107,334
Depreciation and amortization .............. 195,669 329,361 305,396
-------- -------- --------
Operating loss ................................ 19,633 40,615 35,328
Interest expense, net ......................... 112,135 194,382 192,590
Other expense ................................. 342 854 580
EBITDA(1)(6) .................................. 175,694 287,892 269,488
Adjusted EBITDA(2) ............................ 187,000 309,199 289,028
Adjusted EBITDA margin(3) ..................... 49.2% 47.7% 48.3%
Capital Expenditures .......................... $196,103
Net cash provided by operating activities ..... 60,151
Net cash used in investing activities ......... 199,812
Net cash provided by financing activities ..... 109,400
Average monthly revenue per customer(4) ....... 42.65
Ratio of earnings to fixed charges(5) .........
- --------------------------------------------------------------------------------
- 9 -
- --------------------------------------------------------------------------------
As of March 31, 2001
------------------------
Insight
Midwest
Insight Excluding
Midwest Insight Ohio
------- ------------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents........ 3,040 1,574
Fixed Assets, net................ 1,006,937 929,432
Total Assets..................... 3,527,158 3,443,687
Total Debt....................... 2,096,808 2,071,808
Partners' Capital................ 1,058,196 1,192,347
As of December 31, 2000, except where noted
-------------------------------------------
Pro Forma
Indiana Kentucky Illinois Ohio Total
Systems Systems Systems (8) System Systems
------- ------- ----------- ------ -------
Technical Data:
Network miles.................................... 7,752 8,998 7,876 2,686 27,312
Number of headends............................... 28 11 39 1 79
Number of headends expected upon completion of
upgrades during 2001(9)....................... 6 5 8 1 20
Number of headends serving 95% of our customers
expected upon completion of upgrades during
2001(9)....................................... 3 4 5 1 13
Operating Data:
Homes passed(10)................................. 515,800 748,000 685,100 184,400 2,133,300
Basic customers(11).............................. 320,000 442,000 431,100 85,400 1,278,500
Basic penetration(12)............................ 62.0% 59.1% 62.9% 46.3% 59.9%
Digital ready homes(13).......................... 246,800 404,700 364,700 47,800 1,064,000
Digital customers(14)............................ 27,900 47,000 63,800 13,400 152,000
Digital penetration(15).......................... 11.3% 11.6% 17.5% 28.0% 14.3%
Premium units(16)................................ 208,000 290,700 345,200 84,700 928,600
Premium penetration(17).......................... 65.0% 65.8% 80.1% 99.2% 72.6%
Cable modem customers(18)........................ 7,800 15,700 23,400 4,900 51,800
- ----------
(1) Represents earnings (loss) before interest, taxes, depreciation and
amortization. Our management believes that EBITDA is commonly used in the
cable television industry to analyze and compare cable television
companies on the basis of operating performance, leverage and liquidity.
However, EBITDA is not intended to be a performance measure that should be
regarded as an alternative to, or more meaningful than, either operating
income or net income as an indicator or operating performance or cash
flows as a measure of liquidity, as determined in accordance with
generally accepted accounting principles. EBITDA, as computed by
management, is not necessarily comparable to similarly titled amounts of
other companies. See our financial statements, including the statements of
cash flows, which appear elsewhere in this prospectus.
(2) Represents EBITDA prior to management fees, non-cash items and other
non-recurring income and expense items. The following table sets forth a
reconciliation of EBITDA to Adjusted EBITDA:
- --------------------------------------------------------------------------------
- 10 -
- --------------------------------------------------------------------------------
Three Months Ended
March 31, 2001
----------------------------
Insight
Midwest
Insight Excluding
Midwest Insight Ohio
------- ------------
(in thousands)
EBITDA............................... 63,838 58,717
Other expense........................ 230 254
Management fees...................... 4,939 4,543
Extraordinary loss................... 10,315 10,315
------ ------
Adjusted EBITDA...................... 79,322 73,829
====== ======
Year Ended December 31, 2000
-----------------------------------------------
Pro Forma Pro Forma
Insight Including Excluding
Midwest Insight Ohio Insight Ohio
------- ------------ ------------
(in thousands)
EBITDA............................... $175,694 $287,892 $269,488
Other expense........................ 342 854 580
Management fees...................... 10,964 20,453 18,960
-------- -------- --------
Adjusted EBITDA...................... $187,000 $309,199 $289,028
======== ======== ========
(3) Represents Adjusted EBITDA as a percentage of revenues.
(4) Represents average monthly revenue per average customer.
(5) For purposes of this calculation, "earnings" are defined as earnings
before fixed charges. Fixed charges consist of interest expense,
amortization of deferred financing and the portion of rent expense under
operating leases considered interest. For the three months ended March 31,
2001, earnings before fixed charges were insufficient to cover fixed
charges on a historical basis including Insight Ohio and excluding Insight
Ohio by $59.0 million and $60.9 million, respectively. For the year ended
December 31, 2000, earnings before fixed charges were insufficient to
cover fixed charges on a historical basis, on a pro forma basis excluding
Insight Ohio and on a pro forma including Insight Ohio by $132.1 million,
$228.5 million and $235.9 million, respectively.
(6) The pro forma data includes the results of operations for the Illinois
systems which we acquired pursuant to the AT&T 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 periods 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 indicated 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
- --------------------------------------------------------------------------------
- 11 -
- --------------------------------------------------------------------------------
(7) Does not reflect potential future cost savings related to programming
discounts that the Insight LP systems contributed to us pursuant to the
AT&T transactions will receive, due to our affiliation with AT&T
Broadband.
(8) Includes our Griffin, Georgia system.
(9) The upgrades of the newly acquired Illinois systems are scheduled to be
completed by the end of 2002.
(10) Homes passed are the number of single residence homes, apartments and
condominium units passed by the cable distribution network in a cable
system's service area.
(11) Basic customers are customers of a cable television system who receive a
package of over-the-air broadcast stations, local access channels and
certain satellite-delivered cable television services, other than premium
services, and who are usually charged a flat monthly rate for a number of
channels.
(12) Basic penetration means basic customers as a percentage of total number of
homes passed.
(13) Digital ready homes means the total number of homes passed to which
digital service is available.
(14) Customers with a digital converter box.
(15) Digital penetration means digital service units as a percentage of digital
ready homes.
(16) Premium units mean the number of subscriptions to premium services, which
are paid for on an individual unit basis.
(17) Premium penetration means premium service units as a percentage of the
total number of basic customers. A customer may purchase more than one
premium service, each of which is counted as a separate premium service
unit. This ratio may be greater than 100% if the average customer
subscribes to more than one premium service unit.
(18) Customers receiving high-speed Internet service.
- --------------------------------------------------------------------------------
- 12 -
RISK FACTORS
You should carefully consider the risk factors set forth below, as
well as the other information in this prospectus, before tendering in initial
notes in exchange for exchange notes.
Your failure to participate in the exchange offer will have adverse
consequences
Holders of initial notes who do not exchange their initial notes for
exchange notes pursuant to the exchange offer will continue to be subject to the
restrictions on transfer of the initial notes as a consequence of the issuance
of the initial notes pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act. In general,
initial notes may not be offered or sold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. We do not anticipate
that we will register the initial notes under the Securities Act.
Because of the lack of a public market for the exchange notes, you may not
be able to sell your exchange notes at all or at an attractive price
The exchange notes are a new issue of securities with no existing
trading market. We do not intend to have the exchange notes listed on a national
securities exchange, although we expect that they will be eligible for trading
on the PORTAL system. In addition, while several financial companies have
advised us that they currently intend to make a market in the exchange notes,
they are not obligated to do so, and may discontinue market making at any time
without notice. Accordingly, we cannot assure you as to the liquidity of the
market for the exchange notes or the prices at which you may be able to sell the
exchange notes.
We have substantial debt and have significant interest payment
requirements, which may adversely affect our ability to obtain financing
in the future to finance our operations and our ability to react to
changes in our business
We have a substantial amount of debt. The following table shows
certain important credit statistics about us.
As of March 31, 2001
----------------------
(dollars in thousands)
Total debt.................... 2,096,808
Partners' capital............. 1,058,196
Debt to equity ratio.......... 2.0x
Our high level of combined debt could have important consequences
for you, including the following:
o Our ability to obtain additional financing in the future for
capital expenditures, acquisitions, working capital or other
purposes may be limited;
o We will need to use a large portion of our revenues to pay
interest on our borrowings, which will reduce the amount of
money available to finance our operations, capital
expenditures and other activities;
o Some of our debt has a variable rate of interest, which
exposes us to the risk of increased interest rates; and
o Our indebtedness may limit our ability to withstand
competitive pressures and reduce our flexibility in responding
to changing business and economic conditions.
We depend upon our operating subsidiaries for cash to fund our obligations
Our subsidiaries conduct all of our consolidated operations and own
substantially all of our consolidated assets. The only source of the cash we
need to pay our obligations is the cash that our subsidiaries generate from
- 13 -
their operations and their borrowings. The ability of our operating subsidiaries
to generate cash is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control.
Accordingly, we cannot assure you that our subsidiaries will generate cash flow
from operations in amounts sufficient to enable us to pay our indebtedness.
Our ability to access the cash flow of our subsidiaries may be contingent
upon our ability to refinance the debt of our subsidiaries and we may be
required to refinance certain debt prior to maturity
Our subsidiaries' ability to make payments to us will depend upon
their operating results and will be subject to applicable laws and contractual
restrictions. Our subsidiaries must make payments to Insight LP under their
management agreements. Our ability to receive cash from our subsidiaries is
restricted by the terms of the Midwest Holdings credit facility. The Midwest
Holdings credit facility permits the subsidiaries of Insight Midwest Holdings,
LLC to distribute cash to us, but only so long as there is no default under such
credit facility. If there is a default under the Midwest Holdings credit
facility, we would not have any cash to pay interest on our obligations. The
terms of its indebtedness prohibit Insight Ohio from making distributions to us.
Furthermore, borrowings under the Midwest Holdings credit facility
are secured and will mature prior to our outstanding notes. Accordingly, we may
need to refinance all or a portion of our indebtedness, including the exchange
notes, on or before maturity. We cannot assure you that we will be able to
refinance any of our indebtedness on commercially reasonable terms or at all.
Since the exchange notes will be effectively subordinated to the debt of
our subsidiaries, our subsidiaries' lenders will have the right to be paid
before you
Our subsidiaries will not guarantee the exchange notes. Therefore,
the exchange notes will be effectively subordinated to all of our subsidiaries'
liabilities. Our subsidiaries' lenders will have the right to be paid before you
from any cash received or held by our subsidiaries. In the event of bankruptcy,
liquidation or dissolution of a subsidiary, following payment of its
liabilities, the subsidiary may not have assets remaining to make payments to
us. As of December 31, 2000, as adjusted to give effect to the AT&T
transactions, excluding Insight Ohio, all of our outstanding debt other than the
exchange notes would have totaled approximately $1.53 billion, all of which is
senior in payment to the exchange notes. Additionally, the indenture governing
the exchange notes permits us and/or our subsidiaries to incur additional
indebtedness, including secured indebtedness, under certain circumstances.
We and our subsidiaries may still be able to incur substantially more debt
which could exacerbate the risks described above
We and our subsidiaries may be able to incur substantial additional
debt in the future. If we or our subsidiaries do so, the risks described above
could intensify. The indenture governing the exchange notes does not fully
prohibit us or our subsidiaries from doing so. As of December 31, 2000, as
adjusted to give effect to the AT&T transactions, we had approximately $400.0
million available (subject to certain borrowing conditions) for additional
borrowings under the Midwest Holdings credit facility. We expect to continue to
borrow under this facility.
We may not be able to generate enough cash to service our debt, including
the exchange notes
Our ability to make payments on and to refinance our debt, including
the exchange notes, and to fund planned capital expenditures will depend on our
ability to generate cash. This is subject, in part, to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control. Accordingly, we cannot assure you that our business will
generate sufficient cash flows from operations or that future distributions will
be available to us in amounts sufficient to enable us to pay our indebtedness,
including the exchange notes, or to fund our other liquidity needs.
We may need to refinance all or a portion of our indebtedness,
including the exchange notes, on or before maturity. We cannot assure you that
we will be able to refinance any of our indebtedness on commercially reasonable
terms or at all.
- 14 -
The Midwest Holdings' credit facility requires us to comply with various
financial and operating restrictions which could limit our ability to
compete as well as our ability to expand
The Midwest Holdings credit facility contains covenants that
restrict Midwest Holdings' subsidiaries ability to:
o distribute funds or pay dividends to us;
o incur additional indebtedness or issue additional equity;
o repurchase or redeem equity interests and indebtedness;
o pledge or sell assets or merge with another entity;
o create liens; and
o make certain capital expenditures, investments or
acquisitions.
Such restrictions could limit our ability to compete as well as our
ability to expand. The ability of Midwest Holdings' subsidiaries to comply with
these provisions may be affected by events beyond our control. If they were to
breach any of these covenants, they would be in default under the credit
facility and they would be prohibited from making distributions to us.
Under certain circumstances, lenders could elect to declare all
amounts borrowed under the credit facility, together with accrued interest and
other fees, to be due and payable. If that occurred, our obligations under the
exchange notes could also become payable immediately. Under such circumstances,
we may not be able to repay such amounts or the exchange notes.
We may not be able to finance a change of control offer required by the
indenture
If we were to experience a change of control, the indenture
governing the exchange notes requires us to offer to purchase all of the
exchange notes then outstanding at 101% of their principal amount, plus accrued
interest to the date of repurchase. A change of control under the indenture may
also constitute a change of control under the indenture governing our 9 3/4%
senior notes, pursuant to which we would be required to offer to repurchase
those notes. If a change of control were to occur, we cannot assure you that we
would have sufficient funds to purchase the exchange notes or our 9 3/4% senior
notes. In fact, we expect that we would require third-party financing, but we
cannot assure you that we would be able to obtain that financing on favorable
terms or at all.
The Midwest Holdings credit facility restricts our ability to
repurchase the exchange notes, even when we are required to do so by the
indenture in connection with a change of control. A change of control could
therefore result in a default under such credit facility and could cause the
acceleration of our other debt or any debt of the Midwest Holdings subsidiaries.
The inability to repay such debt, if accelerated and to purchase all of the
tendered exchange notes, would constitute an event of default under the
indenture.
We have a history of net losses, and may not be profitable in the future
We have a history of net losses and expect to incur additional net
losses in the future. We reported a net loss of $69.3 million and $30.9 million
for the three months ended March 31, 2001 and 2000 and $132.1 million and $62.7
million for the years ended December 31, 2001 and 2000. On a pro forma basis
after giving effect to the AT&T transactions, we would have reported a net loss
of $235.9 million for the year ended December 31, 2000.
We have and will continue to have a substantial amount of interest
expense in respect of debt incurred and depreciation and amortization expenses
relating to acquisitions of cable systems as well as expansion and upgrade
programs. Such expenses have contributed to the net losses we experienced. We
expect that we will continue to incur such non-operating expenses at increased
levels as a result of our recent acquisitions and our network upgrade program,
which expenses will result in continued net losses.
- 15 -
We have a limited history of operating our current cable television
systems and these systems may not generate sales at or exceeding
historical levels
We have served the customers of our existing Indiana systems for two
and one-half years and the customers of our existing Kentucky systems for one
and one-half year, and we are still in the process of integrating these systems.
We are still in the process of integrating our newly purchased Illinois systems.
The historical financial information of our systems may not fully indicate our
future operating results. This makes it difficult for you to completely evaluate
our performance.
Our programming costs are substantial and they may increase, which could
result in a decrease in profitability if we are unable to pass that
increase on to our customers
In recent years the cable industry has experienced a rapid
escalation in the cost of programming, and sports programming in particular. For
1998 through 2000, programming costs increased significantly. Our cable
programming services are dependent upon our ability to procure programming that
is attractive to our customers at reasonable rates. Programming costs may
continue to escalate and we may not be able to pass programming cost increases
on to our customers. Our financial condition and results of operations could be
negatively affected by further increases in programming costs. Programming has
been and is expected to continue to be our largest single expense item and
accounted for approximately 46% of the total operating expenses for our systems,
without giving effect to the AT&T transactions, for the year ended December 31,
2000.
The competition we face from other cable networks and alternative service
providers may cause us to lose market share
The impact from competition, particularly from direct broadcast
satellite television systems and companies that overbuild in our market areas,
has resulted in a decrease in customer growth rates as well as a loss of
subscribers. The industry growth rate for basic customers for the years ended
December 2000 and 1999 was 1.8% in each year, while satellite penetration as of
December 2000 averaged 17.1% nationwide, up from 11.5% in December 1999. This in
turn has negatively impacted our financial performance. Increased competition
may continue to impact our financial performance. Many of our potential
competitors have substantially greater resources than we do, and we cannot
predict the market share our competitors will eventually achieve, nor can we
predict their ability to develop products which will compete with our planned
new and enhanced products and services such as high-speed data access,
video-on-demand and telephone services.
Direct broadcast satellite service consists of television
programming transmitted via high-powered satellites to individual homes, each
served by a small satellite dish. Legislation permitting direct broadcast
satellite operators to transmit local broadcast signals was enacted on November
29, 1999. This eliminates a significant competitive advantage that cable system
operators have had over direct broadcast satellite operators. Direct broadcast
satellite operators have begun delivering local broadcast signals in the largest
markets and there are plans to expand such carriage to many more markets over
the next year.
Since our cable systems are operated under non-exclusive franchises,
competing operators of cable systems and other potential competitors, such as
municipalities and municipal utility providers, may be granted franchises to
build cable systems in markets where we hold franchises. Competition in
geographic areas where a secondary franchise is obtained and a cable network is
constructed is called "overbuilding." As of December 31, 2000, approximately
10.2% of the homes passed by our cable systems were overbuilt. An affiliate of
Southern Indiana Gas and Electric Co. has overbuilt our Evansville, Indiana
system and passes approximately 75,900 homes also passed by us. In addition,
Knology Inc. and TotaLink of Kentucky LLC have each obtained a franchise to
provide cable television service in our City of Louisville, Kentucky system
which passes approximately 61,900 homes. TotaLink of Kentucky, LLC is also in
discussions with the Jefferson County local franchising authority to obtain a
franchise to provide cable television in our system which passes approximately
139,200 homes. In addition, Ameritech has overbuilt our Columbus, Ohio system
and passes approximately 142,700 homes also passed by us. In our newly acquired
Illinois system, the cities of Galesburg which passes approximately 17,000 homes
and Springfield which passes approximately 60,900 homes are considering
municipal overbuilds. We cannot predict what affect competition from these or
future competitors will have on our business and operations.
- 16 -
We will face competition from providers of alternatives to our Internet
and telephone services
Several telephone companies are introducing digital subscriber line
technology (also known as DSL), which allows Internet access over traditional
phone lines at data transmission speeds greater than those available by a
standard telephone modem. Although these transmission speeds are not as great as
the transmission speeds of a cable modem, we believe that the transmission
speeds of digital subscriber line technology are sufficiently high that such
technology will compete with cable modem technology. We cannot predict the
impact DSL technology will have on our Internet access services or on our
operations.
As we expand our offerings to include telephone services, our AT&T
digital branded telephone services will be subject to competition from existing
providers, including both local exchange telephone companies and long-distance
carriers. We cannot predict the extent to which the presence of these
competitors will influence customer penetration in our telephone service areas.
We expect that the most significant competitors for our Internet
access and telephone service offerings will be the existing local exchange
telephone companies as well as resellers using the local exchange telephone
companies' communications networks. These competitors are currently the
predominant providers of Internet and telephone services in our markets.
We may be required to provide access to our networks to other Internet
service providers, which could significantly increase our competition and
adversely affect our ability to provide new products and services
The U.S. Congress and the Federal Communications Commission have
been asked to require cable operators to provide access over their cable systems
to other Internet service providers. If we are required to provide open access,
it could prohibit us from entering into or limit our existing agreements with
Internet service providers, adversely impact our anticipated revenues from
high-speed Internet access services and complicate marketing and technical
issues associated with the introduction of these services. To date, the U.S.
Congress and the Federal Communications Commission have declined to impose these
requirements although the FCC has recently issued a notice of inquiry on this
matter. This same open access issue is also being considered by some local
franchising authorities and several courts. Franchise renewals and transfers
could become more difficult depending upon the outcome of this issue.
Our business has been and continues to be subject to extensive
governmental legislation and regulation, and changes in this legislation
and regulation could increase our costs of compliance and reduce the
profitability of our business
The cable television industry is subject to extensive legislation
and regulation at the federal and local levels, and, in some instances, at the
state level, and many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Operating in a
regulated industry increases the cost of doing business generally. We may also
become subject to additional regulatory burdens and related increased costs. As
we continue to introduce additional communications services, we may be required
to obtain federal, state and local licenses or other authorizations to offer
such services. We may not be able to obtain such licenses or authorizations in a
timely manner, or at all, or conditions could be imposed upon such licenses and
authorizations that may not be favorable to us.
- 17 -
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of
our financial condition; or
o state other "forward-looking" information.
We believe it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
accurately predict or over which we have no control. The risk factors listed in
this section, as well as any cautionary language in this prospectus, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. You should be aware that the occurrence of the events described in
these risk factors and elsewhere in this prospectus could have a material
adverse effect on our business, operating results and financial condition.
USE OF PROCEEDS
The exchange offer is intended to satisfy our obligations under the
registration rights agreement. We will not receive any cash proceeds from the
issuance of the exchange notes in the exchange offer.
We received net proceeds of approximately $486.0 million from the
private offering of the initial notes. We used approximately $219.0 million of
the net proceeds to repay a portion of the existing debt under the Indiana
credit facility and approximately $267.0 million to repay a portion of the
existing debt under the Kentucky credit facility.
The Indiana credit facility would have matured in December 2006,
with quarterly reductions in the amount of the outstanding loans and commitments
to have commenced in March 2001. The Kentucky credit facility would have matured
on various dates between October 2006 and December 2007, with quarterly
reductions in the amount of the outstanding revolving credit loans and
commitments to have commenced in June 2001. These credit facilities were repaid,
in full, in January 2001. Borrowings under these credit facilities were used for
general corporate purposes, including upgrades of our network.
- 18 -
PRO FORMA FINANCIAL STATEMENTS
The following tables set forth selected financial data of the
Indiana, Kentucky, Illinois, Ohio and Georgia systems which are systems in which
we have a significant economic interest. The tables include data for us:
o on a historical basis;
o on a pro forma basis excluding Insight Ohio; and
o on a pro forma basis including Insight Ohio.
The pro forma data for the year ended December 31, 2000 reflect the
following events:
o Issuance of the initial notes and the use of the net proceeds
therefrom to repay a portion of the Indiana and Kentucky
credit facilities;
o The AT&T transactions;
o Assumption of debt in connection with the AT&T transactions;
and
o Entering into the Midwest Holdings credit facility and the
application of a portion of the net proceeds therefrom to
repay, in full, the remaining balances of the Kentucky and
Indiana credit facilities.
The following tables set forth information both excluding and
including Insight Ohio, as Insight Ohio is an unrestricted subsidiary under the
indenture governing the notes, and is prohibited by the terms of its
indebtedness from making distributions to us.
The pro forma and pro forma as adjusted statement of operations do
not purport to be indicative of what our results of operations would actually
have been had the above transactions been completed on the dates indicated or to
project our results of operations for any future date.
The data included in the pro forma statement of operations under the
column headings "Insight Midwest (as reported)," "Illinois Systems Acquired from
the AT&T cable subsidiaries," "Illinois Systems Purchased by and Acquired from
Insight LP," "Other Systems Acquired from Insight LP" and "Insight Ohio"
represent for:
o Insight Midwest (as reported): twelve months of operating
results of Insight Midwest (Insight Communications Midwest and
Insight Kentucky).
o Illinois Systems Acquired from the AT&T cable subsidiaries:
twelve months of operating results of the Illinois systems
owned by the AT&T cable subsidiaries and operating results of
the Illinois systems owned by the AT&T cable subsidiaries
(including six and one-half months of operating results of
systems previously owned by MediaOne), which we acquired
pursuant to the AT&T transactions.
o Illinois Systems Purchased by and Acquired from Insight LP:
twelve months of operating results of the Illinois systems
which were purchased from the AT&T cable subsidiaries by
Insight LP, which we acquired pursuant to the AT&T
transactions.
o Other Systems Acquired from Insight LP: twelve months of
operating results of systems owned by Insight LP which we
acquired pursuant to the AT&T transactions.
o Insight Ohio (as adjusted): twelve months of operating results
of Insight Ohio, of which we acquired the remaining 25% equity
interest on August 8, 2000, as adjusted to reflect such
acquisition as if it had occurred at January 1, 2000.
As indicated in footnote (A) below, the pro forma financial data do
not include results of certain of the Illinois systems which we acquired
pursuant to the AT&T transactions for the periods specified. If such results
were
- 19 -
included in the financial data below, 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.
- 20 -
INSIGHT MIDWEST, L.P.
PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 2000
(in thousands)
Illinois Pro Forma Pro Forma
Systems Other Insight Insight As Adjusted
Acquired Systems Midwest Ohio Pro Midwest
Insight From the Acquired Excluding Forma As Including
Midwest As AT&T Cable from Pro Forma Insight Ohio Adjusted Insight Ohio
Reported Subsidiaries Insight LP Adjustments (A) (F) (A)
---------- ------------ ---------- ----------- ------------ --------- ------------
Revenues .............. $ 379,720 $ 176,910 $ 41,464 $ 598,094 $ 49,749 $ 647,843
Costs and expenses:
Programming and other
operating costs .. 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, net .. (342) (238) (580) (274) (854)
--------- --------- --------- --------- --------- --------- ---------
Net (loss) income ..... $(132,110) $ 24,025 $ (470) $(119,943) $(228,498) $ (7,353) $(235,851)
========= ========= ========= ========= ========= ========= =========
- 21 -
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 AT&T 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
amortization of deferred financing issuance costs for the initial notes
and $489,000 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) and the issuance of the 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
AT&T 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 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
increase in amortization of approximately $26.1 million related to the
pre-acquisition intangibles, resulting from a reduced period of
amortization from 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:
- 22 -
Insight Ohio
Insight Ohio Pro Forma Pro Forma As
As Reported Adjustment Adjusted
------------ ---------- ------------
(in thousands)
Revenues............................................... $49,749 $49,749
Costs and 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 expense, net............................ (1,792) (1,792)
Other 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 which 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.
- 23 -
INSIGHT MIDWEST, L.P.
PRO FORMA BALANCE SHEET
December 31, 2000
(in thousands)
Illinois Systems
Contributed By And
Insight Purchased From Other Systems
Midwest AT&T Cable Being Acquired Pro Forma
As Reported Subsidiaries from Insight LP Adjustments
----------- ------------------- --------------- -----------
ASSETS
Cash and cash equivalents............... $ 5,735 $ 991 $ 2
Trade accounts receivable, net.......... 13,686 6,325 1,002
Launch funds receivable................. 13,077 1,077
Prepaid expenses and other current
assets............................... 8,922 1,007
---------- ---------- -------- --------
Total current assets............... 41,420 7,316 3,088
Fixed assets, net....................... 681,490 193,002 46,960
Intangible assets, net.................. 976,637 1,063,849 90,004 $239,438(A)
2,543(A)
---------- ---------- -------- --------
Total Assets....................... $1,699,547 $1,246,167 $140,052 $241,981
========== ========== ======== ========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and other current
liabilities.......................... $96,721 $6,174 $4,535
Deferred income taxes...................
Deferred revenue........................ 14,819 1,066
Due to related parties.................. 4,047 10,391
Debt.................................... 1,347,523 $685,500(A)
Preferred interests.....................
---------- ---------- -------- --------
Total liabilities.................. 1,463,110 6,174 15,992 685,500
Partners' capital....................... 236,437 1,257,993 124,060 (443,519)
---------- ---------- -------- --------
Total liabilities and Partners'
capital............................ $1,699,547 $1,264,167 $140,052 $241,981
========== ========== ======== ========
Insight Midwest As Pro Forma Pro Forma Insight
Adjusted Excluding Insight Ohio As Midwest Including
Insight Ohio Adjusted(B) Insight Ohio
------------------ ---------------- ------------------
ASSETS
Cash and cash equivalents............... $ 6,728 $ 1,169 $ 7,897
Trade accounts receivable, net.......... 21,013 2,782 23,795
Launch funds receivable................. 14,154 1,936 16,090
Prepaid expenses and other current
assets............................... 9,929 437 10,366
---------- -------- ----------
Total current assets............... 51,824 6,324 58,148
Fixed assets, net....................... 921,452 76,587 998,039
Intangible assets, net.................. 2,372,471 154,273 2,526,744
---------- -------- ----------
Total Assets....................... $3,345,747 $237,184 $3,582,931
========== ======== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and other current
liabilities.......................... $107,430 $16,112 $123,542
Deferred income taxes...................
Deferred revenue........................ 15,885 2,550 18,435
Due to related parties.................. 14,438 1,502 15,940
Debt.................................... 2,033,023 25,000 2,058,023
Preferred interests..................... 180,281 180,281
---------- -------- ----------
Total liabilities.................. 2,170,776 225,445 2,396,221
Partners' capital....................... 1,174,971 11,739 1,186,710
---------- -------- ----------
Total liabilities and Partners'
capital............................ $3,345,747 $237,184 $3,582,931
========== ======== ==========
- 24 -
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 AT&T cable subsidiaries ad the Illinois systems
purchased by and being acquired from Insight LP 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 AT&T
transactions;
o Write-off of deferred financing costs of approximately $8.9 million
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 pro forma adjustment as follows:
Pro Forma
Insight Ohio Pro Forma Insight Ohio
As Reported Adjustment(1) As 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 and 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 AND MEMBERS' EQUITY (DEFICIT)
Accounts payable and 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
Members' equity (deficit) (142,086) 153,825 11,739
--------- -------- --------
Total liabilities and members' equity (deficit) $ 83,359 $153,825 $237,184
========= ======== ========
- ----------
(1) Reflects a step-up in value of intangible assets of Insight Ohio of $164.1
million (net of amortization recorded since August 2000) which will be
recorded by us in the consolidated Insight Midwest financial statements,
and will be 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 of appraisal reports.
However, we do not believe that any adjustment resulting from the final
allocation of purchase price will be material.
- 25 -
PRO FORMA OPERATING DATA
In the table below we provide you with pro forma operating data as
follows:
o The Insight Midwest systems, which are currently operated by
Insight Midwest;
o The acquired systems which we acquired pursuant to the AT&T
transactions; and
o The total systems, which includes the Insight Midwest systems
and the systems which we acquired pursuant to the AT&T
transactions.
As of December 31, 2000
--------------------------------
Insight
Midwest Acquired Total
Systems Systems Systems
------- ------- -------
Homes passed................ 1,214,500 918,800 2,133,300
Basic customers............. 736,900 541,600 1,278,500
Basic penetration........... 60.7% 58.9% 59.9%
Digital ready homes......... 651,400 412,600 1,064,000
Digital customers........... 74,900 77,100 152,000
Digital penetration......... 11.5% 18.7% 14.3%
Premium units............... 488,600 440,000 928,600
Premium penetration......... 66.3% 81.2% 72.6%
Cable modem customers....... 23,600 28,200 51,800
- 26 -
SELECTED FINANCIAL DATA
In the table below, we provide you with our selected consolidated
historical financial data, including our predecessors, as of and for the three
months ended March 31, 2000 and 2001 and as of and for the five years ended
December 31, 2000. We have prepared the selected financial information using:
o our unaudited financial statements for the three months ended
March 31, 2001 and 2000;
o our audited financial statements for the year ended December
31, 2000;
o our audited financial statements for the year ended December
31, 1999, which includes the Insight Communication Midwest
(formerly known as Insight Communications of Indiana, LLC)
systems for the year ended December 31, 1999 and the Insight
Kentucky systems from October 1, 1999 (date of acquisition)
through December 31, 1999;
o the audited financial statements of Insight Communications
Midwest for the period from November 1, 1998 through December
31, 1998, which includes the Insight Communications Midwest
systems which were contributed by Insight LP and AT&T
Broadband as of October 31, 1998;
o the audited financial statements for the Noblesville,
Jeffersonville and Lafayette, Indiana cable television systems
for the ten-month period ended October 31, 1998 and for the
year ended December 31, 1997, which includes the Lafayette
system from December 16, 1997 (date of acquisition); and
o the unaudited financial statements for the Noblesville,
Jeffersonville and Lafayette, Indiana cable television systems
for the year ended December 31, 1996.
In our opinion, the unaudited financial data for the three months
ended March 31, 2001 and 2000 and for the year ended December 31, 1996 have been
prepared on the same basis as the audited financial statements and includes all
normal recurring adjustments and accruals necessary for a fair presentation of
such information.
When you read this selected consolidated historical financial and
other data, it is important that you read along with it the historical financial
statements and related notes in our consolidated financial statements included
in this prospectus, as well as "Management's Discussion and Analysis of
Financial Condition and Results of Operations," also included in this
prospectus.
- 27 -
Three Months Ended
March 31, Year Ended December 31,
------------------- ------------------------------------------------------------
2001 2000 2000 1999 1998(1) 1997 1996
-------- ------- -------- -------- ------- ------- -------
(dollars in thousands)
Statement of Operations Data:
Revenues ...................... $168,151 $92,503 $379,720 $201,286 $57,411 $22,055 $19,264
Operating costs:
Programming and other
operating costs ............. 54,204 28,280 130,306 59,587 15,234 5,852 5,064
Selling, general and
administrative .............. 39,564 23,332 73,378 44,199 9,856 3,296 2,933
Depreciation and amortization 85,770 46,128 195,669 109,110 24,788 5,498 3,941
-------- -------- --------- -------- ------ ------ ------
Operating income (loss) ....... (11,387) (5,237) (19,633) (11,610) 7,533 7,409 7,326
-------- -------- --------- -------- ------ ------ ------
Interest expense, net ......... (47,337) (25,699) (112,135) (50,900) (5,824)
Other income (expense) ........ (230) 29 (342) (167) (91) (26) 5
Extraordinary loss ............ (10,315) -- -- -- -- -- --
-------- -------- --------- -------- ------ ------ ------
Net income (loss) ............. $(69,269) $(30,907) $(132,110) $(62,677) $1,618 $7,383 $7,331
======== ======== ========= ======== ====== ====== ======
Other Financial Data:
EBITDA (2) .................... $63,838 $40,920 $175,694 $97,333 $32,230 $12,881 $11,272
Adjusted EBITDA (3) ........... 79,322 43,569 187,000 103,432 33,006 12,907 11,267
Adjusted EBITDA margin (4) .... 47.2% 47.1% 49.2% 51.4% 57.5% 58.5% 58.5%
Capital expenditures .......... $196,103 $107,901 $25,454 $17,246 $6,371
Net cash provided by operating
activities .................... $74,777 $28,399 60,151 102,917 41,375 13,339
Net cash used in investing
activities .................... 124,205 41,527 199,812 110,441 26,052 25,891
Net cash provided by financing
activities .................... 46,733 -- 109,400 21,627 4,318 12,588
Ratio of earnings to fixed
charges (5) ................... -- -- -- -- 1.3x 264.7x --
Balance Sheet Data (as of end
of period):
Cash and cash equivalents ........ $3,040 $22,868 $5,735 $35,996 $19,493 $143 $107
Fixed assets, net ................ 1,006,937 612,685 681,490 596,246 129,776 45,783 30,960
Total assets ..................... 3,527,158 1,686,632 1,699,547 1,706,599 527,332 105,289 30,193
Total debt ....................... 2,096,808 1,232,000 1,347,523 1,232,000 460,000
Partners' capital ................ 1,058,196 337,640 236,437 368,547 44,195 102,134
- ----------
(1) Represents the combination of the operating results of Insight
Communications Midwest from November 1, 1998 to December 31, 1998 and the
Noblesville, Indiana, Jeffersonville, Indiana and Lafayette, Indiana Cable
Television Systems of Insight LP from January 1, 1998 to October 31, 1998,
including depreciation and amortization of approximately $14.0 million and
approximately $10.8 million during the periods from November 1, 1998 to
December 31, 1998 and from January 1, 1998 to October 31, 1998,
respectively. The combination of the two periods is not necessarily
indicative of what the results of Insight Communications Midwest or the
Noblesville, Indiana, Jeffersonville, Indiana and Lafayette, Indiana Cable
Television Systems would have been for the 1998 calendar year.
(2) Represents earnings (loss) before interest, taxes, depreciation and
amortization. We believe 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 us, is not necessarily
comparable to similarly titled amounts of other companies. See our
financial statements, including the statements of cash flows, which appear
elsewhere in this prospectus.
(3) Represents EBITDA prior to management fees and other non-recurring income
and expense items. The following table sets forth a reconciliation of
EBITDA to Adjusted EBITDA:
- 28 -
Three Months Ended
March 31, Year Ended December 31,
------------------- ------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
------ ------ -------- -------- -------- -------- --------
EBITDA ............... 63,838 40,920 $175,694 $ 97,333 $ 32,230 $ 12,881 $ 11,272
Other (income) expense 230 (29) 342 167 91 26 (5)
Management fees ...... 4,939 2,678 10,964 5,932 685 -- --
Extraordinary loss ... 10,315 -- -- -- -- -- --
------ ------ -------- -------- -------- -------- --------
Adjusted EBITDA ...... 79,322 43,569 $187,000 $103,432 $ 33,006 $ 12,907 $ 11,267
====== ====== ======== ======== ======== ======== ========
(4) Represents Adjusted EBITDA as a percentage of total revenues.
(5) For purposes of this calculation, "earnings" are defined as earnings
before fixed charges. Fixed charges consist of interest expense,
amortization of deferred financing and the portion of rent expense under
operating leases considered interest. For the three months ended March 31,
2001 and the years ended December 31, 2000 and 1999, earnings before fixed
charges were insufficient to cover fixed charges by $59.0 million, $132.1
million and $62.7 million, respectively.
- 29 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
On October 31, 1998, our manager exchanged its Utah systems for AT&T
Broadband's Evansville, Indiana system. Simultaneously, our manager completed a
contribution agreement with AT&T Broadband forming Insight Communications
Midwest (formerly Insight Communications of Indiana, LLC) and contributed
certain of its Indiana systems, the Noblesville, Lafayette and Jeffersonville
systems (the "Insight Contributed Systems"), as well as the Evansville system to
Insight Communications Midwest. At the same time, AT&T Broadband contributed
most of its Indiana systems to Insight Communications Midwest.
On October 1, 1999, our manager acquired a combined 50% interest in
InterMedia Capital Partners VI, L.P. (now known as Insight Communications of
Kentucky) from related parties of Blackstone Cable Acquisition Company, LLC,
related parties of InterMedia Capital Management VI, LLC and a subsidiary and
related party of AT&T Broadband, for approximately $341.5 million (inclusive of
expenses), and we assumed debt of approximately $742.1 million.
On October 1, 1999, our manager completed an agreement with
affiliates of AT&T Broadband, pursuant to which our manager and affiliates of
AT&T Broadband each contributed their respective 50% interests in Insight
Communications Midwest and in Insight Kentucky in exchange for a 50% interest in
us.
On July 17, 2000, we entered into a ten-year agreement with AT&T
Broadband that allows AT&T Broadband to provide telephone services under the
AT&T Digital brand using our network infrastructure and AT&T Broadband's
switching and transport facilities.
On August 8, 2000, our manager completed the purchase of the
remaining 25% common equity interest in Insight Ohio, which it previously did
not own. At the same time, the Insight Ohio operating agreement was amended to
provide our manager with 70% of its total voting power.
Effective January 1, 2001, we completed a series of transactions
with our manager and the AT&T cable subsidiaries that increased by 530,000 the
number of customers we serve. Specifically, we acquired:
o all of our manager's systems not already owned by us as well
as systems which our manager acquired from the AT&T cable
subsidiaries (comprising in total approximately 280,000
customers); and
o systems from the AT&T cable subsidiaries located in Illinois
serving approximately 250,000 customers.
We acquired the systems from our manager and the AT&T cable
subsidiaries ubject to indebtedness in the amount of $685.5 million. We remain
equally owned by our manager and AT&T Broadband. Our manager continues to serve
as our general partner and manages and operates our systems.
Results of Operations
Substantially all of our historical revenues of each of our systems
were earned from customer fees for cable television programming services
including premium and pay-per-view services and ancillary services, such as
rental of converters and remote control devices and installations, and from
selling advertising. In addition, we earned revenues from commissions for
products sold through home shopping networks.
We have generated increases in revenues and Adjusted EBITDA for each
of the past three fiscal years, primarily through a combination of acquisitions,
internal customer growth, increases in monthly revenue per customer and growth
in advertising and increasingly new revenue from selling new services including
high-speed data access and interactive digital video.
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
- 30 -
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.
As the Insight Contributed Systems and Insight Communications
Midwest are the predecessors of Insight Midwest, the following discussion
includes the results of Insight Midwest for the year ended December 31, 2000;
the results of operations of Insight Communications Midwest for the year ended
December 31, 1999 combined with the results of operations for Insight Kentucky
for the period October 1, 1999 through December 31, 1999; and the results of
operations for Insight Contributed Systems for the period January 1, 1998
through October 31,1998 combined with the results of operations of Insight
Communications Midwest for the period November 1, 1998 (date of inception)
through December 31, 1998. The following table reflects these results of
operations:
Year Ended December 31,
----------------------------------
2000 1999 1998
-------- -------- -------
(in thousands)
Revenues................................................................... $379,720 $201,286 $57,411
Operating costs and expenses:
Programming and other operating costs................................ 130,306 59,587 15,234
Selling, general and administrative (including management fees)...... 73,378 44,199 9,856
Depreciation and amortization........................................ 195,669 109,110 24,788
-------- -------- -------
Operating income (loss).................................................... (19,633) (11,610) 7,533
EBITDA..................................................................... 175,694 97,333 32,230
Adjusted EBITDA............................................................ 187,000 103,432 33,006
Interest expense, net...................................................... 112,135 50,900 5,824
Net income (loss).......................................................... (132,110) (62,677) 1,618
Net cash provided by operating activities.................................. 60,151 102,917 41,375
Net cash used in investing activities...................................... 199,812 110,441 26,052
Net cash provided by financing activities.................................. 109,400 21,627 4,318
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 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):
Three Months Ended March 31,
-------------------------------------------------------------------
2001 2000
--------------------------------- ---------------------------
(dollars in thousands)
Revenues by % of Total Revenues by % of Total
Service Offering Revenues Service 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%
-------- --- -------- ---
$168,151 100% $ 92,503 100%
======== === ======== ===
- 31 -
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 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:
o The first full quarter of results generated by the systems
contributed in the AT&T transactions and
o 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.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues increased 88.6% to $379.7 million for the year ended
December 31, 2000 compared to $201.3 million for the year ended December 31,
1999. The results were impacted by the acquisition of Insight Kentucky on
October 1, 1999. The incremental revenue generated from the Kentucky systems
approximated $173.4 million accounting for 97.2% of the consolidated revenue
increase. In addition, revenues increased as a result of rate increases and
growth in advertising revenues.
- 32 -
Revenues by service offering are as follows:
Year Ended December 31,
----------------------------------------------------------------------
2000 1999
--------------------------------- ------------------------------
(dollars in thousands)
Revenues by % of Total Revenues by % of Total
Service Offering Revenues Service Offering Revenues
---------------- ---------- ---------------- ----------
Basic $270,739 72% $143,426 71%
Premium 34,291 9% 18,983 9%
Pay-Per-View 4,638 1% 2,827 1%
Digital 11,292 3% 6,239 3%
Advertising sales 27,385 7% 15,340 8%
Data services 8,671 2% 1,263 1%
Other 22,704 6% 13,208 7%
-------- --- -------- ---
$379,720 100% $201,286 100%
======== === ======== ===
Revenues per customer per month averaged $42.65 for the year ended
December 31, 2000 compared to $39.08 for the year ended December 31, 1999. The
increase is primarily attributable to customer rate increases as Insight
Communications Midwest continued to activate nodes in rebuilt areas resulting in
higher basic rates. The average monthly basic revenue per customer increased by
approximately $2.56 or 8.4% from $27.85 for the year ended December 31, 1999 to
$30.41 for the year ended December 31, 2000. In addition, we continued the roll
out of our high speed data service which increased our average monthly revenue
per customer by approximately $.73 per month.
Programming and other operating costs increased 118.7% to $130.3
million for the year ended December 31, 2000 compared to $59.6 million for the
year ended December 31, 1999. The Kentucky systems accounted for approximately
87.9% or approximately $62.2 million of the total increase. Excluding these
systems, these costs increased by approximately $8.5 million accounting for
12.1% of the total increase, primarily as a result of increased programming
rates and additional programming carried by our systems.
Selling, general and administrative expenses excluding management
fees increased 63.1% to $62.4 million for the year ended December 31, 2000
compared to $38.3 million for the year ended December 31, 1999. The increase is
primarily attributable to the Kentucky systems.
Depreciation and amortization expense increased 79.3% to $195.7
million for the year ended December 31, 2000 compared to $109.1 million for the
year ended December 31, 1999. This increase was primarily due to the Kentucky
acquisition discussed above and additional capital expenditures associated with
the rebuilds of our systems, partially offset by a decrease in depreciation
expense attributable to a change in estimate as of January 1, 2000 which
resulted in new assets being depreciated over longer lives.
For the year ended December 31, 2000, an operating loss of $19.6
million was incurred as compared to $11.6 million for the year ended December
31, 1999, for reasons set forth above.
EBITDA increased 80.5% to $175.7 million for the year ended December
31, 2000 as compared to $97.3 for the year ended December 31, 1999 primarily
reflecting the acquisition of the Kentucky systems. EBITDA represents earnings
(loss) before interest, taxes, depreciation and amortization. Our management
believes that EBITDA is commonly used in the cable television industry to
analyze and compare cable television companies on the basis of operating
performance, leverage and liquidity. However, EBITDA is not intended to be a
performance measure that should be regarded as an alternative to, or more
meaningful than, either operating income or net income as an indicator of
operating performance or cash flows as a measure of liquidity, as determined in
accordance with generally accepted accounting principles. EBITDA, as computed by
management, is not necessarily comparable to similarly titled amounts of other
companies.
- 33 -
Net interest expense increased 120.3% to $112.1 million for the year
ended December 31, 2000 compared to $50.9 million for the year ended December
31, 1999. The increase was primarily due to higher average outstanding
indebtedness related to the acquisitions. Average debt outstanding during the
year ended December 31, 2000 was $1.3 billion at an average interest rate of
8.8%.
For the year ended December 31, 2000 a net loss of $132.1 million
was realized for the reasons set forth above.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues increased 250.6% to $201.3 million for the year ended
December 31, 1999, as compared to the prior year. The incremental revenue
generated from AT&T Broadband's contributed systems and the Evansville system
approximated $77.4 million accounting for 53.8% of the total increase in
combined revenue. The contribution of Insight Kentucky to Insight Midwest on
October 1, 1999 accounted for approximately $57.0 million or 39.6% of the
revenue increase. In addition, revenues increased as a result of internal
customer growth and rate increases. Excluding the transactions described above,
revenues increased by approximately $9.5 million due to an increase of
approximately 1,800 customers on average, and by approximately $7.2 million
attributable to an increase of approximately $5.98 in the average monthly
revenue per customer. The increase in the average monthly revenue per customer
is primarily attributable to customer rate increases as the Insight Contributed
Systems turned on nodes in upgraded areas resulting in higher monthly basic
rates.
Programming and other operating costs increased 291.1% to $59.6
million for the year ended December 31, 1999 as compared to the prior year of
which the additional Indiana systems contributed by AT&T Broadband and the
Evansville system accounted for approximately 49.7% of the increase and the
Insight Kentucky systems accounted for approximately 42.9% of the increase.
Excluding this transaction, these costs increased by 21.5% to $18.5 million,
primarily as a result of increased programming costs and additional programming
carried by our systems.
Selling, general and administrative expenses excluding management
fees increased 317.3% to $38.3 million for the year ended December 31, 1999 as
compared to the prior year of which the additional Indiana systems contributed
by AT&T Broadband and the Evansville system accounted for approximately 69.0% of
the increase and the Insight Kentucky systems accounted for approximately 34.5%
of the increase. Excluding these transactions, these costs decreased by 11.0% to
$8.2 million.
Management fees for the year ended December 31, 1998 totaled
approximately $700,000 reflecting only two months of charges to Insight
Communications Midwest compared to the year ended December 31, 1999 which
reflects charges to Insight Communications Midwest totaling approximately $4.3
million and charges to Insight Kentucky of approximately $1.6 million for the
period October 1 through December 31, 1999.
Depreciation and amortization expense increased 340.2% to $109.1
million for the year ended December 31, 1999 as compared to the prior year. Of
the $84.3 million increase, approximately 59.8% was attributable to the
additional Indiana systems contributed by AT&T Broadband and the Evansville
system while the Insight Kentucky systems accounted for approximately 29.7% of
the increase. Excluding these transactions, these costs increased by 35.6% to
$33.6 million, primarily due to additional capital expenditures associated with
the network upgrades of the Insight Contributed Systems.
Operating income decreased to a loss of $11.6 million for the year
ended December 31, 1999, a decrease of 254.1% as a result of the items discussed
above.
Adjusted EBITDA increased 213.4% to $103.4 million for the year
ended December 31, 1999 as compared to the prior year reflecting the additional
Indiana systems contributed by AT&T Broadband and the Evansville system in
addition to the contribution of the Insight Kentucky systems which accounted for
approximately 89.7% of the increase on a combined basis.
Interest expense increased to $50.9 million for the year ended
December 31, 1999 reflecting: (a) interest on the Indiana credit facility
totaling approximately $34.3 million, (b) interest on the Kentucky credit
facility for the period from October 1, 1999 through December 31, 1999 totaling
approximately $12.0 million and (c) interest on
- 34 -
our 9 3/4% senior notes due 2009 for the period from October 1, 1999 through
December 31, 1999 totaling approximately $4.9 million. Interest expense
increased by $45.1 million over the prior year as 1998 reflected only two months
of borrowing under the Indiana credit facility.
Net income of $1.6 million for the year ended December 31, 1998
decreased by $64.3 million to a net loss of $62.7 million for the year ended
December 31, 1999 primarily reflecting increased depreciation and amortization
charges and increased interest expense.
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, and private and public debt and equity.
For the year ended December 31, 1999 and the year ended December 31,
2000, we spent $107.9 million and $196.1 million, respectively, for capital
expenditures largely to support our network upgrades, digital converter
purchases and to a lesser extent network extensions. For the year ended December
31, 1999 and the year ended December 31, 2000, cash from operations totaled
$102.9 million and $60.1 million, respectively, which together with borrowings
under our credit facilities, funded the above noted capital expenditures.
For the year ending December 31, 2001, it is anticipated that we
will spend approximately $300 million on capital expenditures, including capital
expenditures required for success-based deployment of new services and telephone
services and the upgrade of the Illinois cable television systems, which will
involve the wide deployment of fiber optics and other capital projects
associated with implementing our clustering strategy.
We have concluded a number of financing transactions, which fully
support our operating plan. These transactions are detailed as follows:
On October 1, 1999, in connection with our formation, we completed
an offering of $200.0 million principal amount of 9 3/4% senior notes due 2009.
The net proceeds of the offering were used to repay certain outstanding debt of
the Kentucky systems. On November 6, 2000, we completed an offering of $500.0
million principal amount of 10 1/2% senior notes due 2010. The net proceeds of
the offering of $486.0 million were used to repay a portion of the Indiana and
Kentucky credit facilities. Interest on our 9 3/4% senior notes is payable on
April 1 and October 1 of each year and interest on our 10 1/2% senior notes is
payable on May 1 and November 1 of each year. The indentures relating to these
senior notes impose certain limitations on our ability to, among other things,
incur debt, make distributions, make investments and sell assets.
Effective January 1, 2001, we consummated the AT&T transactions with
our manager and the AT&T cable subsidiaries. As a result of these AT&T
transactions, the number of customers we serve increased by 530,000. In
conjunction with the AT&T transactions, our subsidiary Insight Midwest Holdings,
LLC, which subsidiary serves as a holding company for all of our 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 AT&T transactions,
providing for unused availability of approximately $402 million to support the
aforementioned capital expenditures. In connection with the financing of the
AT&T transactions, Insight LP borrowed approximately $20.0 million from Midwest
Holdings pursuant to a three-year revolving note. On February 15, 2001, Insight
LP repaid the note in full including interest.
The Midwest Holdings credit facility permits the distribution of
cash from our operating subsidiaries to us to enable us to pay interest on our 9
3/4% senior notes and 10 1/2% senior notes, so long as there exists no default
under the credit facility. The Midwest Holdings credit facility contains
covenants restricting, among other things, the ability of Midwest Holdings and
its subsidiaries to acquire or dispose of assets, make investments and engage in
transactions with related parties. The facility also requires compliance with
certain financial ratios, and contains customary events of default.
- 35 -
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 our senior notes, and is prohibited by the terms of its
indebtedness from making distributions to us. Insight Ohio has a $25.0 million
reducing revolving credit facility, maturing in September 2004, which supports
the Ohio system. As of December 31, 2000, $25.0 million was outstanding under
this credit facility.
Insight Holdings of Ohio LLC, our wholly owned subsidiary, owns 100%
of the common equity of Insight Ohio and Coaxial Communications of Central Ohio,
Inc. owns 100% of the preferred equity of Insight Ohio. Such common and
preferred equity was issued in August 1998 as part of a financing plan which
resulted in (i) Coaxial Communications contributing the Ohio system to Insight
Ohio, (ii) Coaxial Communications and Phoenix Associates, an affiliate of
Coaxial Communications, issuing $140.0 million principal amount of 10% senior
notes due 2006, (iii) Coaxial LLC and Coaxial Financing Corp., an affiliate of
Coaxial LLC, issuing $55.9 million principal amount at maturity of 12 7/8%
senior discount notes due 2008 and (iv) the Coaxial 10% senior notes and the
Coaxial 12 7/8% senior discount notes being conditionally guaranteed by Insight
Ohio.
Interest on the Coaxial 10% senior notes is payable on February 15
and August 15 of each year. The indenture governing the Coaxial 10% senior notes
imposes certain limitations on the ability of Coaxial Communications, Phoenix
and Insight Ohio to, among other things, incur debt, make distributions, make
investments and sell assets. Interest on the Coaxial 12 7/8% senior discount
notes does not accrue and is not payable prior to August 15, 2003. Thereafter,
cash interest on the Coaxial 12 7/8% senior discount notes will be payable on
February 15 and August 15 of each year, commencing on February 15, 2004. The
indenture governing the Coaxial 12 7/8% senior discount notes imposes certain
limitations on the ability of Coaxial LLC, Coaxial Financing, Coaxial
Communications and Insight Ohio to, among other things, incur debt, make
distributions, make investments and sell assets.
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 $402 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.
Impact of Recently Issued Accounting Standards
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133,
as amended by SFAS No. 137, became effective for us on January 1, 2001. SFAS No.
133 requires us to recognize all derivatives on the balance sheet at fair value.
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 December 31, 2000, our
interest rate swap and collar agreements expire in varying amounts through 2002.
The fair market value of our long-term debt approximates its
carrying value as it bears interest at floating rates of interest and current
fair market value of the senior notes approximates par value. As of December 31,
2000, the estimated fair value of our interest rate swap and collar agreements
was approximately $(1.9 million), which amount represents the amount required to
enter into offsetting contracts with similar remaining maturities based on
quoted market prices.
As of December 31, 2000, we had entered into interest rate swaps
that approximated $701.0 million, or 95.4%, of our borrowings under all of our
credit facilities. A significant portion of such interest rate swaps were kept
in place as of December 31, 2000 in anticipation of a need to hedge additional
borrowings incurred in connection with our refinancing on January 5, 2001, the
effects of which are mentioned below. Accordingly, a hypothetical 100 basis
point increase in interest rates along the entire interest rate yield curve
would increase our annual interest
- 36 -
expense by approximately $299.0 million. These statistics are not necessarily
indicative of our current interest rate exposure, as these facilities were
replaced by the Midwest Holdings credit facility on January 5, 2001 in
connection with the AT&T transactions which resulted in an increase in our
outstanding borrowings.
As of January 5, 2001, primary market risk exposures and methods for
managing such exposure had not changed. Additionally, the notional amount of our
interest rate swaps was also unchanged at approximately $701.0 million or 51% of
our borrowings under all our credit facilities. Accordingly, a hypothetical 100
basis point increase in interest rates along the entire interest rate yield
curve would increase our projected interest expense by approximately $6.7
million for the year ending December 31, 2001.
- 37 -
BUSINESS
Our Manager
Insight Communications Company, Inc. is the ninth largest cable
television system operator in the United States based on customers served.
Through its wholly-owned and managed systems, Insight Communications currently
serves approximately 1.4 million customers, 99% of which are concentrated in the
four contiguous states of Indiana, Kentucky, Illinois and Ohio. In addition to
its geographic concentration, our manager's communications network is
tightly-grouped, or "clustered," with approximately 95% of our manager's
customers served from thirteen headends after giving effect to the network
upgrades expected to be substantially completed during 2001. As a result, the
amount of capital necessary to deploy new and enhanced products and services is
significantly reduced on a per home basis because of the large number of
customers served by a single headend. A headend processes signals received for
distribution to customers over our network. Clustering enables us to efficiently
deploy a bundled suite of entertainment, information and communications
services. This combination of geographic concentration and clustering has
enabled our manager to offer, under the Insight Digital brand, a complete bundle
of interactive digital video, high-speed data access and telephone services.
To facilitate delivery of telephone services, we have entered into a
ten-year agreement with AT&T Broadband that will allow us to deliver to our
customers local telephone service under the AT&T Digital brand. Under the terms
of the agreement, we will lease for a fee certain capacity on our network to
AT&T Broadband. We will provide certain services and support for which it will
receive additional payments. The capital required to deploy telephone services
over our networks will be shared, with AT&T Broadband responsible for switching
and transport facilities. We believe that we will be able to achieve higher
penetration levels by marketing our telephone services under the AT&T brand and
leveraging AT&T's telephone expertise with our strong local presence and
established customer relationships.
The Issuers
We are owned 50% by our manager and 50% by an indirect subsidiary of
AT&T Broadband, which is a subsidiary of AT&T Corp. Through our subsidiaries, we
own and operate cable television systems in Indiana, Kentucky, Illinois, Ohio
and Georgia which pass approximately 2.1 million homes and serve approximately
1.3 million customers. As a result of our upgrade efforts, as of the end of
2000, we estimate that 94% of our customers (other than those served by the new
Illinois systems) were passed by our upgraded network, which enables delivery of
an advanced suite of entertainment, information and communications services,
including our interactive digital video, high-speed data access and telephone
services. Upon completion of our planned network upgrades during 2001, over 99%
of our customers (other than customers served by the recently acquired Illinois
systems) will be served by the upgraded network. We expect that the upgrade of
the new Illinois systems will be completed during 2002.
Recognizing the opportunities presented by newly available products
and services, the strength of our market characteristics and favorable changes
in the regulatory environment, we deployed a strategy to become a competitive,
full service provider of entertainment, information and communications services
for the communities served by our networks. We intend to capitalize on our
highly clustered cable television systems to economically upgrade the
technological capabilities of our broadband networks in order to deploy enhanced
new services.
We believe that an integrated package of existing multi-channel
video, new and enhanced products and services, such as interactive digital
video, including video-on demand or near video-on-demand, high-speed Internet
access and telephone services, coupled with our commitment to locally focused
customer service, will enhance our ability to acquire and retain customers in a
competitive environment while increasing revenues per customer. To augment this
growth, we will continue to seek strategic acquisitions that fit our clustering
and operating strategy.
Strategy
Our strategy is to be a competitive, full-service provider of
entertainment, information and communications services. This strategy is
centered on the deployment of new and enhanced products and services for the
communities served by our networks and consists of the following elements:
- 38 -
Focus on operating large, tightly-grouped clusters of cable systems with
attractive technical and demographic profiles
We operate large, tightly-grouped clusters of cable systems, most of
which have attractive technical and demographic profiles. Our systems are
characterized by high housing densities and high ratios of customers to
headends. As a result, the amount of capital necessary to deploy new and
enhanced products and services is significantly reduced on a per home basis
because of the large number of customers served by a single headend. We believe
that the highly clustered nature of our systems enables us to more efficiently
deploy our marketing dollars and maximize our ability to enhance customer
awareness, increase use of our products and services and build brand support.
Furthermore, our clustered systems, across 95% of our customers, providing for
headends serving an average of 100,000 customers upon completion of our planned
network upgrades allow us to be capital efficient as we invest in necessary
technology. Our demographic profile is characterized by good housing growth and
low unemployment in growing communities, many of which are centered around large
universities and/or major commercial enterprises. We believe that households
with our demographic profile are more likely to subscribe to these new and
enhanced products and services than the national average demographic profile.
Expeditiously upgrade our network
We are upgrading our network expeditiously in order to provide new
and enhanced products and services, increase the programming and communications
choices for our customers, improve our competitive position and increase overall
customer satisfaction. We are in the process of upgrading almost all of our
network to provide at least 750 MHz bandwidth capacity, or "bandwidth," and
two-way active capability with 700 homes per fiber node, which can be further
subdivided four times. Nodes are the point of interface between our headends and
our network. The result will be a significant increase in network capacity,
quality and reliability which facilitates the delivery of new and enhanced
products and services and reduced operating costs. Our aggressive investment in
our broadband cable network upgrade allows us to expeditiously offer these
services to substantially all of our customers.
Introduce new and enhanced products and services, including interactive
Insight Digital service, high-speed data service and telephone service
Our marketing strategy is to offer our customers an array of
entertainment, information and communications services on a bundled basis. By
bundling our products and services, we provide our customers with an increased
choice of services in value-added packages, which we believe results in higher
customer satisfaction, increased use of our services and greater customer
retention. We have conducted research and held numerous focus group sessions in
our local markets, which lead us to believe that these services have high
customer appeal. We expect that our ability to provide bundled services will
provide us with a strong competitive advantage over alternative video providers,
such as direct broadcast satellite television systems, and incumbent telephone
companies. To accelerate the deployment of these services, we have entered into
arrangements with several industry leaders, including: (1) AT&T Broadband to
provide telephone services; (2) Excite@Home and RoadRunner to provide high-speed
data services; (3) DIVA Systems Corporation to provide video-on-demand; (4)
Liberate Technologies to utilize its software platform for the deployment of
interactive television services; (5) SourceSuite, LLC to provide an interactive
program guide as well as local information and community guides; and (6)
Commerce.TV Corporation to provide e-commerce over our networks.
Leverage strong local presence to enhance customer and community relations
Excellent customer service is a key element of our strategy. We are
dedicated to quality customer service and seek a high level of customer
satisfaction by employing localized customer care, extensively using market
research and providing customers with an attractively priced product offering. A
significant number of our customers visit their local office on a monthly basis
providing us the opportunity to demonstrate and sell our new and enhanced
products and services. Our localized customer care initiatives create
substantial marketing and promotion opportunities, which we believe are
effective in the deployment of interactive, digital and high-speed data
products. We believe that we achieve customer satisfaction levels that are
substantially above industry averages. Annually, we commission Peter D. Hart
Research Associates to survey our customers with respect to service and product
knowledge. Based upon our most recent survey conducted in November 2000, our
customers continue to be highly satisfied with our service.
- 39 -
In addition, we are dedicated to fostering strong relations in the
communities we serve. We sponsor local charities and community causes through
staged events and promotional campaigns, including the industry's Cable in the
Classroom program. Our emphasis on customer service and strong community
involvement has led to higher customer satisfaction, reduced customer churn and
excellent franchise relationships. To further strengthen community relations and
differentiate us from direct broadcast satellite television systems and other
multichannel video providers, we provide locally produced and oriented
programming that offers, among other things, community information, local
government proceedings and local specialty interest shows. In some of our
markets, we are the only broadcaster of local college and high school sporting
events, which allows us to provide important programming that builds customer
loyalty.
Pursue value-enhancing transactions in nearby or adjacent geographies
To support our strategy, we intend to pursue value-enhancing
transactions. To augment our internal customer growth, we will seek to swap or
acquire systems that strategically fit our clustering and operating strategy. We
do not currently have any agreements, commitments or understandings for any
future acquisitions. There is no assurance that any additional acquisitions will
be completed. We believe that by acquiring or swapping systems in close
proximity we can improve revenue growth and operating margins. This is achieved
through the consolidation of headends and spread of fixed costs over larger
systems and the increase of operating efficiencies associated with larger
systems.
Technical Overview
We believe that in order to achieve consistently high levels of
customer service, reduce operating costs, maintain a strong competitive position
and deploy important new technologies, we will need to install and maintain a
state-of-the-art technical platform. The deployment of cable which has a
capacity for a very large number of channels, known as fiber optic cable, an
increase in the bandwidth to 750 MHz or higher, the activation of a two-way
communications network and the installation of digital equipment will allow us
to deliver new and enhanced products and services, including interactive digital
video, high-speed data services and telephone services provided by AT&T
Broadband.
As of December 31, 2000, our systems, including the new Illinois
systems, were comprised of 27,312 miles of network serving approximately 1.3
million customers and passing approximately 2.1 million homes resulting in a
density of approximately 78.1 homes per mile. As of that date, our systems were
made up of an aggregate of 79 headends. We intend to continue our strategy of
consolidating headends by eliminating approximately 59 headends, at which point
95% of our customers will be served by thirteen headends. At the end of 2000, we
estimate that 94% of our customers (other than those served by the new Illinois
systems) were passed by our upgraded network. After completion of our planned
network upgrades, over 99% of our customers will be served by a network that is
two-way active and 750 MHz.
Our network design calls for a digital two-way active network with
fiber optic cable carrying signals from the headend to the distribution point
within our customers' neighborhoods. The signals are transferred to our network
at the node for delivery to our customers. We have designed the fiber system to
be capable of subdividing the nodes if traffic on the network requires
additional capacity.
We believe that active use of fiber optic technology as a supplement
to coaxial cable plays a major role in expanding channel capacity and improving
the performance of our systems. Fiber optic strands are capable of carrying
hundreds of video, data and voice channels over extended distances without the
extensive signal amplification typically required for coaxial cable. We will
continue to deploy fiber optic cable to further reduce amplifier cascades while
improving picture quality and system reliability.
A direct result of this extensive use of fiber optics is an
improvement in picture quality and a reduction of outages because system
failures will be both significantly reduced and will impact far fewer customers
when they do occur. Our design allows our systems to have the capability to run
multiple separate channel line-ups from a single headend and to insert targeted
advertisements into specific neighborhoods based on node location.
To enable us to deliver telephone services, AT&T Broadband is
required to install and maintain the necessary switching and transport
facilities. We are required to deploy the necessary equipment at the headends
and
- 40 -
at our customers' homes, and are responsible for expanding and upgrading our
network to provide the required capacity. We intend to increase the reliability
of the services by implementing centralized powering and status monitoring on
our networks as telephone services are deployed in our systems. Centralized
power provides the reliability, including lifeline reliability, required in
delivering telephone services. The existing commercial power structure employed
by cable networks is subject to the general power disruptions experienced by the
local power utility. Centralized power will provide immediate battery back-up
for a limited duration followed by unlimited gas-powered generator back-up. This
reliability will not only benefit the delivery of telephone service, but also
the reliability of the other products and services delivered over the network.
Status monitoring will enable us to examine key components of our network so
that we can diagnose problems before they become critical and interfere with the
stability of our network.
Products and Services
Traditional Cable Television Services
We offer our customers a full array of traditional cable television
services and programming offerings. We tailor both our basic line-up and our
additional channel offerings to each regional system in response to
demographics, programming preferences, competition and local regulation. We
offer a basic level of service which includes up to 25 channels of television
programming. Excluding our new Illinois systems, as of December 31, 2000,
approximately 91.8% of our customers chose to pay an additional amount to
receive additional channels under our "Classic" or "expanded" service. Premium
channels, which are offered individually or in packages of several channels, are
optional add-ons to the basic service or the classic service. As of December 31,
2000, premium units as a percentage of basic subscribers was approximately
72.6%, including our new Illinois systems.
Our analog cable television service offering includes the following:
o Basic Service. All of our customers receive the basic level of
service, which generally consists of local broadcast
television and local community programming, including
government and public access, and may include a limited number
of satellite programs.
o Classic Service or Expanded Service. This expanded level of
service includes a group of satellite-delivered or
non-broadcast channels such as ESPN, CNN, Discovery Channel
and Lifetime.
o Premium Channels. These channels provide unedited,
commercial-free movies, sports and other special event
entertainment programming such as HBO, Cinemax, Starz! and
Showtime. We offer subscriptions to these channels either
individually or in premium channel packages.
o Pay-Per-View. These analog channels allow customers with
addressable set top boxes to pay to view a single showing of a
recently released movie or a one-time special sporting event
or music concert on an unedited, commercial-free basis.
New and Enhanced Products and Services
As network upgrades have been activated, we deploy new and enhanced
products and services in most of our markets, including interactive digital
video and high-speed data services. In addition, we are offering telephone
services marketed under the AT&T Digital brand.
Interactive Digital Video
The implementation of interactive digital technology significantly
enhances and expands the video and service offerings we provide to our
customers. Most digital launches by other cable operators have been limited to
simply offering more channels as a defensive move against competition from
direct broadcast satellite television systems. Because of the significantly
increased bandwidth and two-way transmission capability of our state-of-the-art
technical platform, which continues to be built in conjunction with our digital
launches, we have designed a more extensive digital product that is rich in
program offerings and highly interactive with our customers. Our interactive
digital service is designed to exploit the advantages of a broadband network in
the existing generation of set-top devices. The digital service encompasses
three interactive applications: (1) an interactive program guide; (2)
- 41 -
interactive local information and community guides; and (3) a video-on-demand
service. Our experience with our initial interactive digital launches is very
encouraging.
We have conducted numerous focus groups and commissioned research
studies, the findings of which have helped to develop our interactive digital
strategy. We believe that our digital penetration will continue to increase as a
result of our differentiated services such as a graphically rich local
information network and video-on-demand pay-per-view with full VCR
functionality.
We are packaging a "Digital Gateway" brand. For $6.95 per month, our
customers receive the following services:
o A digital converter box;
o An interactive navigational program guide for all analog and
digital channels;
o A local, interactive Internet-style service;
o A significant multiplexing of premium channels for customers
who separately subscribe to premium channels, such as HBO and
Showtime;
o Pay-per-view video-on-demand; and
o A digital 40-channel audio music service.
We have entered into an agreement with Liberate Technologies that
enables us to utilize the Liberate software platform for the deployment of
interactive television services on the Motorola DCT-2000 and DCT-5000 digital
set-top boxes. The Liberate software provides the middleware component of our
interactive digital product. As of December 31, 2000, we deployed 100,000
DCT-2000 set-top boxes with Liberate's C-Lite system. Our plan includes the
aggressive roll-out of these systems, and when the DCT-5000 becomes available in
commercial quantities, we intend to sell premium digital services using the
DCT-5000 and Liberate's middleware.
We have also entered into an agreement with DIVA Systems
Corporation, which allowed us to become the first cable operator to offer DIVA's
video-on-demand services as part of a digital tier package. DIVA provides a true
video-on-demand service over the cable television infrastructure. Customers
receive the movies electronically over the network and have full VCR
functionality, including pause, play, fast forward and rewind. The movies are
delivered with a high quality digital picture and digital sound. DIVA is
designed to provide movies at prices comparable to those charged for videotape
rentals, pay-per-view and near video-on-demand movies, but with far greater
convenience and functionality.
We have also entered into an agreement with Commerce.TV to provide
e-commerce over our networks. Commerce.TV owns a proprietary software and
database network which would provide our customers with the ability to purchase
products from third party merchants and track the status of their orders using a
set-top box remote control. We will be launching Commerce.TV in our Lexington,
Kentucky system early in the second quarter of 2001.
Upon the completion of the network upgrades of the Indiana, Kentucky
and Illinois systems, we will continue to migrate the previous owners' digital
products to our interactive Insight Digital product. While the previous owners'
digital products were targeted to fill programming voids, our interactive
Insight Digital service is designed to provide our customers with an
Internet-style experience as well as enhanced programming choices, which have
resulted in higher penetration and customer satisfaction and reduced churn. Our
interactive Insight Digital service has experienced average penetration in the
Rockford, Illinois, Columbus, Ohio and Evansville, Indiana systems of between
20% and 30% in less than two years from launch.
- 42 -
High-Speed Data
We offer high-speed data service for personal computers through
Excite@Home over our network in all of our upgraded systems except for our
Columbus, Ohio system, which utilizes the RoadRunner service. As of December 31,
2000, the high-speed data service was made available in 1.5 million of our homes
and served approximately 51,800 of our customers, including our new Illinois
systems. The Illinois systems we acquired from the AT&T cable subsidiaries
pursuant to the AT&T transactions which offer Excite@Home have achieved an
average Excite@Home penetration of 7.6% as of December 31, 2000.
The broad bandwidth of our cable network enables data to be
transmitted up to 100 times faster than traditional telephone-based modem
technologies, and the cable connection does not interfere with normal telephone
activity or usage. For example, cable's on-line customers can download large
files from the Internet in a fraction of the time it takes when using any widely
available telephone modem technology. Moreover, surfing the Internet on a
high-speed network removes the long delays for Web pages to fully appear on the
computer screen, allowing the experience to more closely approximate the
responsiveness of changing channels on a television set. In addition, the cable
modem is always on and does not require the customer to dial into an Internet
service provider and await authorization. We believe that these factors of speed
and easy accessibility will increase the use and impact of the Internet.
Although other high-speed alternatives are being developed to compete with
cable, we believe that the cable platform currently is best able to deliver
these services.
In addition to being an Internet service provider, Excite@Home
offers its own content for our customers. Excite@Home aggregates high quality
web sites for customers to explore and also offers various chat rooms,
newsgroups, on-line stores, gaming channels, on demand Fox News, NBA and MTV
video clips, and easy to use search engines and tip wizards. We expect to offer
our customers content of local interest, including community information, local
news, sports, entertainment, and weather, through our local home page.
Our Insight@Home service offers unlimited access to the Internet.
The service includes three e-mail addresses and 15 megabytes of space with which
to create a personal web site. We are offering the Insight@Home service to cable
customers at a price of $29.95 per month plus $10 to $15 to lease the cable
modem. Customers may also purchase the cable modem. Non-cable customers are
charged an additional $10 per month for the service. Both cable and non-cable
customers are charged a $150 installation fee, which we may, at our discretion,
discount to promote usage of cable modems. Insight@Home also provides several
additional services, such as the ability to dial-up away from the customer's
home, multiple computer access and Internet fax services, which provides
additional revenue potential. In addition to customer fees, we expect to
generate advertising and e-commerce revenue by selling advertisers and retailers
space on our local home pages in exchange for a fee or a share of the revenues.
Telephone Services
On July 17, 2000, we entered into a ten-year agreement with AT&T
Broadband that will allow us to deliver to our customers local telephone service
under the AT&T Digital brand using our network infrastructure and AT&T
Broadband's switching and transport facilities. We will lease certain capacity
on our network to AT&T Broadband for a monthly fee for each of the first four
lines ordered by a customer. Additionally, AT&T Broadband is required to pay us
a fee for each customer installation. We are compensated on a per transaction
basis for sales of AT&T Broadband services as AT&T Broadband's agent. For our
provision of billing and collection services and for the provision of customer
care for customers that buy bundled Insight Communications/AT&T Broadband
services, AT&T Broadband is required to pay us a monthly fee per customer. We
also receive an additional fee if revenue exceeds the projected target revenue
for local service lines and features, such as enhanced caller ID or voice mail.
AT&T Broadband is the regulated telephone carrier for the telephone
services provided to our customers. The AT&T Broadband digital telephone
services are marketed and carried under the AT&T Digital brand as part of our
bundle of Insight Digital services. We market the services, as AT&T Broadband's
agent, both on a stand-alone basis and bundled with our other products and
services, such as interactive digital video and high-speed data access. We also
bill our customers for AT&T Broadband's services, as well as provide
installation, maintenance and marketing support for AT&T Broadband's services.
Pursuant to the agreement, the services are to be provided in the territories in
which we currently provide cable television service, other than the newly
acquired Illinois systems. If both parties agree, the agreements can be expanded
to include the new Illinois systems.
- 43 -
The capital required to deploy telephone services over our networks
is a shared obligation. We are responsible for upgrading and maintaining our
network to meet specified measures of quality, including increasing the capacity
on our network to a maximum capacity of two lines per residential household
passed, assuming a specified service penetration rate. We also acquire and
install equipment to be located at the customer premises that is required to
provide telephone services. We anticipate AT&T Broadband will use portions of
our network to permit AT&T Broadband to offer an average of two telephone lines
to each customer. AT&T Broadband is responsible for switching and transport
facilities. Our manager believes that we will be able to achieve higher
penetration levels by marketing our telephone services under the AT&T brand and
leveraging AT&T's telephone expertise with our strong local presence and
established customer relationships.
Business Background of Our Manager
Insight Communications was co-founded in 1985 as a limited
partnership under the name Insight Communications Company, L.P. by Sidney R.
Knafel and Michael S. Willner after a previous association with one another at
Vision Cable Communications where Mr. Knafel was co-founder and Chairman and Mr.
Willner held various operating positions, ultimately holding the position of
Executive Vice President and Chief Operating Officer. Vision Cable was sold to
The Newhouse Group Inc. in 1981 and Mr. Willner remained there to run the cable
operations until 1985 when he and Mr. Knafel formed Insight Communications.
In addition to many years of conventional cable television
experience, Insight Communications' management team has been involved in the
development and deployment of full service communications networks since 1989.
Through a then related entity, Insight Communications Company UK, L.P., Insight
Communications' management and related parties entered the cable television
market in the United Kingdom, where today modern networks are widely deployed.
Messrs. Knafel and Willner remain on the board of NTL Incorporated, the publicly
traded successor to the former Insight UK related entity. NTL is currently the
largest operator of local broadband communications systems in the United
Kingdom.
As a result of our management's British experience, Insight
Communications recognized that the technology and products developed in the
United Kingdom would migrate to the United States in similar form. Insight
Communications focused on planning to upgrade our network promptly after it
became clear that the 1996 Telecom Act would encourage competition in the
communications industries. Insight Communications understood, however, that the
new products and services available with new technology were best deployed in
markets which provided for efficiencies for branding and technical investment.
Insight Communications' original acquisition strategy, which focused on customer
growth, was very successful. However, Insight Communications' management team
recognized the opportunity to evolve from our role as a cable television
operator providing only home video entertainment into a full service alternative
communications network providing not only standard video services, but also
interactive digital video, high-speed data access and communications products
and services.
Recognizing the opportunities presented by newly available products
and services and favorable changes in the regulatory environment, Insight
Communications executed a series of asset swaps, acquisitions and entered into
several joint ventures that resulted in its current composition. The largest of
these transactions were the 50/50 joint ventures formed with AT&T Broadband and
its affiliates in October 1998 with respect to the Indiana systems, in October
1999 with respect to the Kentucky systems and most recently on January 5, 2001
with respect to the new Illinois systems. As of December 31, 1997, Insight
Communications' systems had approximately 180,000 customers with the two largest
concentrations in Utah and Indiana, which together represented less than half of
its customers. Insight Communications believes that it has successfully
transformed its assets so that as of December 31, 2000, without giving effect to
the AT&T transactions, it owned, operated and managed a cable television network
serving approximately 1.0 million customers with approximately 98% of its
customers clustered in the contiguous states of Indiana, Kentucky, Illinois and
Ohio. Insight Communications' current assets are reflective of its strategy to
own systems that have high ratios of customers to headends.
In July 1999, the holders of the partnership interests of Insight LP
exchanged their respective partnership interests for common stock of Insight
Communications. As a result, Insight LP became a wholly-owned subsidiary of
Insight Communications. Simultaneous with the exchange, Insight Communications
consummated an initial public offering of 26,450,000 shares of its Class A
common stock, raising an aggregate of approximately $650.0 million. Insight
Communications' Class A common stock is currently listed on The Nasdaq National
Market under the symbol "ICCI."
- 44 -
Our Systems
Our systems in Indiana, Kentucky, Illinois, Ohio and Georgia serve
approximately 1.3 million customers. We are the largest operator of cable
systems in both Indiana and Kentucky and the second largest in Illinois. Our
systems are clustered or are capable of being clustered to serve an average of
100,000 customers per headend.
We are able to realize significant operational synergies due to the
size of the clusters in these states and the demographic proximity of all of our
systems. In all of our systems, we have nearly completed upgrading our system
infrastructures to enable us to deliver new technologies, products and services
to provide our customers with greater value and choices in the face of growing
competition. The highly clustered nature of our systems enables us to (a) more
efficiently invest our marketing dollars and maximize our brand awareness, (b)
more economically introduce new and enhanced services, and (c) reduce our
overall operating and maintenance costs as a result of our ability to deploy
fiber and reduce the number of headends we use throughout our systems. As a
result, we believe we will be able to achieve improved operating performance on
both a combined and system-wide basis. Our relationship with AT&T Broadband
provides us with substantial purchasing economies for both our programming and
hardware needs.
The Indiana Systems
General
As of December 31, 2000, the Indiana systems passed approximately
515,800 homes and served approximately 320,000 customers. The Indiana systems
are owned by Insight Communications Midwest, which is the largest cable operator
in the state. Insight Communications Midwest, which was capitalized on October
31, 1998, was a 50/50 joint venture between Insight LP and an indirect
subsidiary of AT&T Broadband until the contribution of its equity interests on
October 1, 1999 into us. Through Insight LP, Insight Communications serves as
manager of the Indiana systems. In addition, we believe that there are
additional opportunities to augment our position in Indiana through additional
acquisitions and swaps.
We believe that further upgrading of the Indiana systems will yield
opportunities for cash flow growth. We have increased our capital investments in
the Indiana systems, with initial emphasis on upgrading the network, activating
two-way transmission and combining headends. Upon completion of our
consolidation of headends, we expect that approximately 95% of our customers in
Indiana will be served by three headends. Upon implementation of our
state-of-the-art technical platform, we deploy new services based on our
marketing strategy of bundling products.
Insight Communications manages the day-to-day operations of Indiana
and Kentucky cable television systems owned by InterMedia Partners Southeast, an
affiliate of AT&T Broadband, which serve approximately 121,200 customers. The
systems are operated by employees of our Indiana and Kentucky systems, and the
overhead for these systems is allocated and charged against the cash flow of the
managed systems.
The Indiana systems are organized in four management districts:
The Central District
As of December 31, 2000, the Central District passed approximately
116,800 homes and served approximately 78,800 customers, principally in the
community of Bloomington. This includes approximately 28,300 homes passed and
approximately 14,800 customers served by the Greenwood, Indiana system which we
acquired on January 11, 2001. The City of Bloomington, located 45 miles south of
Indianapolis, is the home of Indiana University. Besides the University, major
employers include United Technology and General Electric. The median household
income for the area is approximately $37,000 per year, while the median family
income is approximately $47,500 per year. Household income differs from family
income by including income from all persons in all households, including persons
living alone and other non-family households.
Digital video service was launched in Bloomington by AT&T Broadband
prior to the formation of Insight Communications Midwest. Upon completion of our
network upgrade, we will migrate the Bloomington digital customers to our
interactive Insight Digital service. The Bloomington system began deploying the
Insight@Home
- 45 -
service during the second quarter of 2000. Bloomington and parts of Monroe
County were upgraded to 750 MHz during the second quarter of 2000. We expect to
substantially complete the upgrade of this district by the end of 2001.
The Southwest District
As of December 31, 2000, the Southwest District passed approximately
122,700 homes and served approximately 59,900 customers, principally in the
communities of Evansville and Jasper. The median household income for the area
is approximately $36,500 per year, while the median family income is
approximately $47,000 per year. Major employers include Alcoa, Whirlpool and
Bristol-Myers Squibb.
In February 2000, we completed the network upgrade of the Southwest
District to 750 MHz and we are currently migrating the digital customers to our
interactive Insight Digital service, including DIVA's video-on-demand service
and the LocalSource interactive information service. We have also launched the
Insight@Home service in Evansville.
A related party of Southern Indiana Gas and Electric Co. has
overbuilt the City of Evansville. Southern Indiana Gas and Electric Co. has
obtained franchises to provide cable television service in the City of
Evansville and neighboring areas and commenced service in April 1999. We believe
the Southern Indiana Gas and Electric Co. overbuild passes approximately 75,900
homes in our service area and is expected to pass additional homes, and has
commenced offering telephone and data service.
The Evansville system recently won a competitive bid to supply a
data network to the Evansville school system, as well as a contract to provide
video services to the University of Evansville. We are working with TCI Network
Solutions to supply this data network and have signed a five-year contract to
connect 42 K-12 schools to the data network. Our share of the revenues from this
contract will be $500,000 over the life of the contract.
The Northwest District
As of December 31, 2000, the Northwest District passed approximately
98,700 homes and served approximately 69,100 customers, principally in the
communities of Lafayette, Kokomo, Fowler and Hartford City. The City of
Lafayette is the home of Purdue University. Besides Purdue University, major
employers include Great Lakes Chemical, Lafayette Life Insurance, General Motors
and Delco Remy. The median household income for the area is approximately
$39,900 per year, while the median family income is approximately $51,600 per
year.
The upgrades of the Lafayette, Kokomo and Fowler systems to 750 MHz
were substantially completed at the end of 2000. We launched the Insight@Home
service in all of these markets. AT&T Broadband launched a digital service in
the Kokomo market in late 1998. We are in the process of migrating those
customers to our digital service, simultaneous with the launch throughout the
district of our interactive Insight Digital service, including the LocalSource
products and, during the first quarter of 2001, DIVA's video-on-demand service.
The Northeast District
As of December 31, 2000, the Northeast District passed approximately
177,600 homes and served approximately 112,200 customers in Richmond as well as
in the suburban communities near Indianapolis, including Anderson and
Noblesville. Indianapolis is the state capital of Indiana and is the twelfth
largest city in the United States. Major employers include General Motors, Eli
Lilly and Belden Wire and Cable. The median household income for the area is
approximately $46,700 per year, while the median family income is approximately
$56,300 per year.
The upgrade of the Northeast District to 750 MHz is expected to be
completed by the end of first quarter 2001. We have launched the Insight@Home
service throughout the district. AT&T Broadband launched digital service in
several of the markets in 1998, and we are in the process of migrating those
customers to our interactive Insight Digital service, simultaneous with the
launch throughout the district of our Insight Digital service, including the
LocalSource product and, during the second quarter of 2001, DIVA's
video-on-demand service.
- 46 -
The Kentucky Systems
General
As of December 31, 2000, the Kentucky systems passed approximately
748,000 homes and served approximately 442,000 customers. This includes
approximately 40,900 homes passed and approximately 22,400 customers served by
the Jeffersonville, Indiana system, which is owned by Insight Communications
Midwest and operated by the management of the Louisville, Kentucky system. The
Kentucky systems are owned by Insight Kentucky Partners II, L.P., which is the
largest cable operator in the state. Our manager acquired a combined 50%
interest in Insight Kentucky's parent on October 1, 1999, with related parties
of AT&T Broadband holding the other 50% interest. Simultaneous with this
acquisition, all of the equity interests were contributed into us. Through
Insight LP, Insight Communications serves as manager of the Kentucky systems.
Our Kentucky systems are located in and around four of the five
largest cities in the state: Louisville, Lexington, Covington, and Bowling
Green. Upon completion of the network upgrade, over 99% of Insight Kentucky's
customers will be served by a two-way active, 750 MHz network. Additionally,
upon completion of our consolidation of headends, approximately 99% of the
systems' customers will be served by four headends. The network upgrades and
consolidation of headends are substantially completed.
Summary statistics for the Kentucky systems are as follows:
Louisville
As of December 31, 2000, the Louisville system passed approximately
447,700 homes and served approximately 254,500 customers. Louisville is
Kentucky's largest city and is located in the northern region of the state,
bordering Indiana. Louisville is located within a day's drive of nearly 50% of
the United States population, which makes it an important crossroads for trade
and business. Major employers in the Louisville metropolitan area include
Humana, UPS, General Electric and Ford. The median household income for the area
is approximately $40,000 while the median family income is approximately
$48,500. Knology Inc. and TotaLink of Kentucky, LLC have each been granted a
franchise to provide cable television service in the City of Louisville, where
we currently serve 61,900 customers. See "Legal Proceedings."
The Louisville system substantially completed a network upgrade and
we served substantially all of our customers with two-way, 750 MHz cable at the
end of 2000. The system is also in the process of interconnecting six headends,
which will allow the entire system to be served from a single headend. In the
spring of 2000, we began managing our Jeffersonville, Indiana system through the
Louisville system.
InterMedia Capital Partners VI, L.P. launched its digital service in
Louisville in November 1998. The service had approximately 24,500 customers in
Kentucky as of December 31, 2000. We are migrating these customers to our
interactive Insight Digital service, including the LocalSource product and the
DIVA video-on-demand service. The Louisville system has launched the
Insight@Home service.
Lexington
As of December 31, 2000, the Lexington system passed approximately
122,300 homes and served approximately 84,000 customers from a single headend.
Lexington is Kentucky's second largest city, located in the central part of the
state. Major employers in the Lexington area include the University of Kentucky,
Toyota and Lexmark International. The median household income for the area is
approximately $44,000, while the median family income is approximately $56,000.
The Lexington system has completed a network upgrade and, at the end
of 2000, we served all of our customers with two-way, 750 MHz cable. InterMedia
Capital Partners VI, L.P. launched its digital service in Lexington in October
of 1998. We are migrating these customers to our interactive Insight Digital
service, including the LocalSource product and the DIVA video-on-demand service.
The Lexington system has launched the Insight@Home service.
- 47 -
Covington
As of December 31, 2000, the Covington system passed approximately
143,800 homes and served approximately 80,900 customers from a single headend.
Covington is Kentucky's fifth largest city. Major employers in the Covington
area include Delta Airlines, Toyota, Citicorp and DHL. The median household
income for the area is approximately $44,500, while the median family income is
approximately $53,800.
The Covington system has completed a network upgrade and, at the end
of 2000, we served all of our customers with two-way, 750 MHz cable. The
Covington system recently launched the Insight@Home service. Digital service is
also available in Covington. We are migrating the customers of this digital
service to our interactive Insight Digital service, including the LocalSource
product and the DIVA video-on-demand service.
Bowling Green
As of December 31, 2000, the Bowling Green system passed
approximately 34,200 homes and served approximately 22,500 customers from a
single headend. Bowling Green is located 120 miles south of Louisville, 110
miles southwest of Lexington and 70 miles north of Nashville, Tennessee. Bowling
Green is the fourth largest city in Kentucky and is the home of Western Kentucky
University. Major employers in the Bowling Green area include Fruit of the Loom,
Camping World, Desa International and Holley Replacement Parts. The median
household income for the area is approximately $36,500, while the median family
income is approximately $45,400.
The Bowling Green system is fully upgraded to two-way, 750 MHz
cable. Recently, digital and Insight@Home services have been launched in Bowling
Green. We are migrating the customers of this digital service to our interactive
Insight Digital service, including the LocalSource product.
The Illinois Systems
The Illinois systems are owned and operated by Insight
Communications Midwest, and were contributed to us on January 5, 2001 pursuant
to the AT&T transactions. Through Insight LP, Insight Communications serves as
manager of the Illinois systems. These systems are located primarily in
second-tier markets, including Springfield, Rockford, Peoria, Dixon and
Champaign/Urbana. The Rockford system was contributed by Insight Communications
and the other Illinois systems were acquired from the AT&T cable subsidiaries
pursuant to the AT&T transactions.
In total, the Illinois systems pass approximately 664,900 homes and
served 418,000 customers as of December 31, 2000, making us the second largest
operator of cable television systems in the State of Illinois. These systems are
served by networks with approximately 2,320 miles having a capacity greater than
or equal to 750 MHz, 4,160 miles having a capacity greater than or equal to 450
MHz and less than 750 MHz, and 1,020 miles having a capacity less than 450 MHz.
Consistent with our strategy of expeditiously upgrading our network to
facilitate the deployment of our enhanced products and services, we are
upgrading the network of the Illinois systems and intend to migrate the digital
customers to our interactive Insight Digital service. We expect to invest
approximately $56.0 million to upgrade these systems, and that the upgrades will
be completed during 2002. In the interim, we will launch Insight Digital on a
node-by-node basis as system upgrades are completed. We anticipate the initial
deployments of the DIVA video-on-demand service by the end of 2001 in selected
areas in the Illinois systems.
The Illinois systems are organized in five management districts:
The Rockford District
As of December 31, 2000, the Rockford District passed approximately
127,600 homes and served approximately 81,500 customers. Rockford is Illinois'
second largest city. Major employers in the Rockford metropolitan area include:
Chrysler Corporation, Rockford Health System, Sundstrand Corporation and Swedish
American Health Systems. The median household income for the area is
approximately $39,300 per year, while the median family income is approximately
$47,800 per year.
We completed the upgrade of the Rockford system in February 2000,
and began launching our Insight Digital service on a node-by-node basis as
system upgrades were completed beginning in February 1999. Since launching our
Insight Digital service in the Rockford system, the activated areas achieved
approximately 19.5%
- 48 -
digital penetration from its customers, with incremental revenue per digital
customer of approximately $21 per month. Average monthly revenue per customer
increased by approximately 21.0% for the year ended December 31, 2000, compared
to the year ended December 31, 1999, primarily as a result of the increase in
digital penetration. We launched the Insight@Home service throughout the system
in April 2000, and have achieved a penetration of 2.8% as of December 31, 2000.
The Peoria District
As of December 31, 2000, the Peoria District passed approximately
194,700 homes and served approximately 125,200 customers, principally in the
communities of Bloomington and Peoria. Bloomington is located in the north
central part of the state. The Bloomington system is home to Illinois State
University with over 20,000 students and Illinois Wesleyan University with over
2,000 students. Peoria is the fourth largest city in Illinois, located in the
north central part of the state. Major employers in the Peoria area include
Maytag, Gates Rubber and the headquarters of Caterpillar. The median household
income for the area is approximately $26,000, while the median family income is
approximately $34,000. The City of Galesburg is considering a municipal
overbuild passing approximately 17,000 homes as of December 31, 2000.
The Peoria system is currently undergoing a network upgrade from 550
MHz to 860 MHz, which is expected to be completed during 2002. An AT&T cable
subsidiary launched digital service and achieved penetration levels of nearly
18% in areas where digital service is available. We plan to migrate these
customers to our interactive Insight Digital service, including the Local Source
product and the DIVA video-on-demand service, by the end of 2002. The system has
launched the @Home service and has achieved penetration levels of over 7% as of
December 31, 2000.
The Dixon District
As of December 31, 2000, the Dixon District passed approximately
67,200 homes and served approximately 46,400 customers, principally in the
communities of Rock Falls, Peru and Dixon. Dixon is located in the north/central
part of the State of Illinois. Major employers in the Dixon area include the
State of Illinois, Raynor Manufacturing Company and Borg Warner Automotive. The
median household income for the area is approximately $25,200, while the median
family income is approximately $30,700.
The Dixon system currently operates with a 750 MHz network, with
areas within the Dixon District undergoing a network upgrade from 450 MHz to 860
MHz, which is expected to be completed by the end of 2002. An AT&T cable
subsidiary launched digital service and achieved penetration levels of nearly
12% in areas where the service is available. We plan to migrate these customers
to our interactive Insight Digital service, including the LocalSource product
and the DIVA video-on-demand service during 2002.
The Springfield District
As of December 31, 2000, the Springfield District passed
approximately 179,300 homes and served approximately 115,100 customers,
principally in the communities of Decatur and Springfield. Springfield is the
capital of Illinois and the third largest city in the state, located in the
central part of the state. The major employer in the Springfield area is the
State of Illinois. The median household income for the area is approximately
$28,000, while the median family income is approximately $36,500. The City of
Springfield, in which our system passes approximately 60,900 homes, is
considering a municipal overbuild utilizing an existing plant owned by the city.
The Springfield District is currently undergoing a network upgrade
from 450 MHz to two-way, 750 MHz. An AT&T cable subsidiary launched digital
service in the system and achieved penetration levels of over 20% in the areas
where the service is available. We plan to migrate these customers to our
interactive Insight Digital service, including the Local Source product and the
DIVA video-on-demand service, by the end of 2002. The system has begun to
roll-out the Insight@Home service on a node-by-node basis.
The Champaign District
As of December 31, 2000, the Champaign District passed approximately
96,100 homes and served approximately 49,800 customers. Champaign/Urbana is
located in the eastern central part of the state. The
- 49 -
Champaign District is home to the University of Illinois with over 36,000
students. Major employers in the Champaign and Urbana areas include the
University of Illinois, Kraft Foods and the Carle Clinic Association. The median
household income for the area is approximately $22,300 and the median family
income for the area is approximately $34,000.
The Champaign District serves substantially all of its customers by
a two-way, 750 MHz network. An AT&T cable subsidiary launched digital service in
the system and had approximately 5,400 customers as of December 31, 2000. We
plan to migrate these customers to our interactive Insight Digital service,
including the Local Source service and the DIVA video-on-demand service, by the
end of 2001. The Champaign District has launched the @Home service and as of
December 31, 2000 had over 6,300 customers.
The Griffin, Georgia System
Our Griffin, Georgia system is owned and operated by Insight
Communications Midwest, and was contributed to us on January 5, 2001 pursuant to
the AT&T transactions. Through Insight LP, Insight Communications serves as
manager of the Griffin system. As of December 31, 2000, the Griffin, Georgia
system passed approximately 20,100 homes and served approximately 13,100
customers from a single headend. Major employers in the area include Springs
Industries, North American Component Manufacturing and William Carter Apparel.
The median household income for the area is approximately $34,700 per year,
while the median family income is approximately $40,500 per year.
We launched our digital service in the Griffin system in December
1998, bringing many new entertainment options to its customers. Griffin, being a
smaller market that still has unused channel capacity, has a scaled-down version
of the Insight Digital service, similar to the full digital service except that
it is not interactive. Despite a more limited product offering, we have achieved
significant success with nearly 18% penetration within two years of launch
generating incremental revenue per month of over $19.00 per digital customer.
The Griffin launch was the first digital deployment of our multi-tiered approach
in the country. We will begin upgrading the Griffin system to enhance the
digital service during 2001.
The Ohio System
In connection with the AT&T transactions, the common equity of
Insight Communications of Central Ohio, LLC, the entity holding the Ohio system,
was contributed to us. As of December 31, 2000, the Ohio system passed
approximately 184,400 homes and served approximately 85,400 customers from a
single headend. The system serves the eastern portion of the City of Columbus
and adjacent suburban communities within eastern Franklin County and the
contiguous counties of Delaware, Licking, Fairfield and Pickaway. The City of
Columbus is the 34th largest designated market area, the capital of Ohio and the
home of Ohio State University. In addition to the state government and
university, the Columbus economy is well diversified with the significant
presence of prominent companies such as The Limited, Merck, Wendy's, Nationwide
Insurance, Borden and Worthington Industries. The area's strong economy provides
for a well-paid employment base with a current unemployment rate of
approximately 2.3%. The median household income for our service area is
approximately $47,800 per year, while the median family income is approximately
$57,000 per year.
We are currently upgrading the Ohio system to 870 MHz, and began
servicing customers from our upgraded network in November 1999. We are currently
launching our interactive Insight Digital service, on a node-by-node basis,
including DIVA's video-on-demand service and the LocalSource interactive
information service. As of December 31, 2000, approximately 60,000 customers
were served by the upgraded network with approximately 47,800 customers served
by activated digital nodes, and approximately 13,400 customers have subscribed
to our interactive digital service, representing a penetration of over 28%. We
entered into an affiliation agreement with RoadRunner and a network service
agreement with High Speed Access Corp. to deploy the RoadRunner high-speed data
service. The RoadRunner service was launched during the second quarter of 2000,
and has achieved a penetration of 4.5% as of December 31, 2000. In addition, the
Ohio system provides exclusive sports programming under the "Central Ohio
Sport!" brand, featuring sporting events from Ohio State University.
In 1996, Ameritech obtained a citywide cable television franchise
for the City of Columbus and suburban communities in Franklin County. Ameritech
has built its citywide franchise, both in our service area and in the Time
Warner service area on the west side of Columbus. We and Time Warner service
virtually distinct areas and
- 50 -
therefore do not compete with one another. The areas of the Ohio system served
by both us and Ameritech pass approximately 142,700 homes, representing 77.3% of
the Ohio system's total homes passed.
As with our Indiana, Kentucky and Illinois systems, we intend to
launch a telephone service alternative to Ameritech through the arrangement with
AT&T Broadband. Time Warner, the other major cable television provider in the
market, also has previously announced that it is negotiating a telephone
services agreement with AT&T Broadband.
Customer Rates
Rates charged to customers vary based on the market served and
service selected as shown below:
Average Monthly Revenue
per Customer
as of December 31, 2000
------------------------------------
Basic Service Classic Service
------------- ---------------
Indiana systems............... $12.59 $16.12
Kentucky systems.............. 12.77 19.33
As of December 31, 2000, the weighted average revenue for our
monthly combined basic and classic service was approximately $31.12. The
national average was estimated to be $30.08 for the same services as of December
31, 2000, as reported by Paul Kagan & Associates.
A one-time installation fee, which we may reduce during promotional
periods, is charged to new customers, as well as reconnected customers. We
charge monthly fees for set top boxes and remote control devices. We also charge
administrative fees for delinquent payments for service. Customers are free to
discontinue service at any time without additional charge and may be charged a
reconnection fee to resume service. Commercial customers, such as hotels, motels
and hospitals, are charged negotiated monthly fees and a non-recurring fee for
the installation of service. Multiple dwelling unit accounts may be offered a
bulk rate in exchange for single-point billing and basic service to all units.
Sales and Marketing
Our strategy is to sell multiple services to our customers,
including video, high-speed data and telephone services. We regularly use
targeted telemarketing campaigns to sell to our existing customer base. Our
customer service representatives are trained and given the support to use their
daily contacts with customers as opportunities to sell our new service
offerings.
Due to the nature of the communities we serve, we are able to market
our services in ways not typically used by urban cable operators. We can market
products and services to our customers at our local offices where many of our
customers pay their cable bills in person. Examples of our in-store marketing
include the promotion of premium services as well as point-of-purchase displays
that will allow customers to experience our high-speed Internet service and
digital products. We aggressively promote our services utilizing both broad and
targeted marketing tactics, including outdoor billboards, outbound
telemarketing, retail partnerships, direct mail, door-to-door sales,
cross-channel promotion, print and broadcast.
We build awareness of the Insight Communications brand through
advertising campaigns and strong community relations. As a result of our
branding efforts and consistent service standards, we believe we have developed
a reputation for quality and reliability. We also believe that our marketing
strategies are particularly effective due to our regional clustering and market
significance, which enables us to reach a greater number of both current and
potential customers in an efficient, uniform manner.
Programming Suppliers
Most cable companies purchase their programming product directly
from the program networks by entering into a contractual relationship with the
program supplier. The vast majority of these program suppliers offer the
- 51 -
cable operator license fee rate cards with size-based volume discounts and other
financial incentives, such as launch and marketing support and cross-channel
advertising.
Currently there are over 130 cable networks competing for carriage
on our analog and digital platforms. We have continued to leverage both our
systems' analog upgrades and newly deployed digital packages as an incentive to
our suppliers to secure long term programming deals with reasonable price
structures and other creative financial arrangements to offset license fee
increases.
Because of our relationship with AT&T Broadband, we have the right
to purchase programming services for our systems directly through AT&T
Broadband's programming supplier Satellite Services, Inc. We believe that
Satellite Services has attractive programming costs. Additionally, given the
clustering of our systems in the Midwest, we have been successful in affiliating
with regionally based programming products such as sports and news, at lower
than average license fees.
Prior to November 1999, the cable systems contributed by Insight
Communications to us pursuant to the AT&T transactions were entitled to buy
programming services at the favorable rates being charged to MediaOne Group.
Since that time, such systems have been purchasing programming services at
higher rates. These systems are now able to purchase programming services at the
more favorable rates charged by Satellite Services.
Commitment to Community Relations
We believe that maintaining strong community relations will continue
to be an important factor in ensuring our long-term success. Our
community-oriented initiatives include educational programs and the sponsorship
of programs and events recognizing outstanding local citizens. In addition,
members of our management team host community events for political and business
leaders as well as representatives of the local media where they discuss our
operations and recent developments in the telecommunications industry. We have
received numerous awards recognizing our ongoing community relations. We believe
that our ongoing community relations initiatives result in consumer and
governmental goodwill and name recognition, which have increased customer
loyalty and will likely facilitate any future efforts to provide new
communications services.
We encourage all of our local management teams to take leadership
roles in community and civic activities. Over the years, our systems have
received numerous awards in recognition of their efforts to support local causes
and charities as well as programs that encourage a better way of life in the
communities they serve. Awards have been received from such diverse
organizations as the Epilepsy Foundation, the YMCA Black Achievers, the Domestic
Violence Center and Project Welcome Home, which provides assistance to less
fortunate people in the community.
Cable industry recognition and awards for excellence in marketing
and programming have been received by several of our systems including the
Lafayette, Indiana system.
All of our systems provide ongoing support for Cable in the
Classroom, an industry initiative that earns recognition both locally and
nationally for its efforts in furthering the education of children. Our newest
public affairs initiative, "In the Know," further underscores our commitment to
education by bringing the vast uses of high-speed Internet access into each
accredited school in our service area. "In the Know" builds upon the cable
industry's pledge to provide free high-speed Internet access to local schools.
We have taken that pledge a step further to offer students and teachers the
resources of broadband content and robust cable programming to enrich the
learning experience.
With cable modems in the classroom, teachers and students alike can
benefit from the speedy downloads and access to advanced applications to enhance
the learning experience. In addition to providing this advanced technology free
of charge, we intend to introduce programming enhancements in partnership with
various cable networks. As an increasing number of areas become serviceable for
high-speed service, "In the Know" is designed to incorporate multi-faceted
synergies with these programmers in order to provide specialized educational
offerings for each of our systems.
One of the advantages a local cable operator has over nationally
distributed competitors is its ability to develop local programming. To further
strengthen community relations and differentiate us from direct broadcast
- 52 -
satellite television systems and other multichannel video providers, we provide
locally produced and oriented programming. Several of our systems have full
production capabilities, with in-house and/or mobile production studios to
create local content. To attract viewers, we offer a broad range of local
programming alternatives, including community information, local government
proceedings and local specialty interest shows. In some of our markets, we are
the exclusive broadcaster of local college and high school sporting events,
which we believe provides unique programming and builds customer loyalty. We
believe that our emphasis on local programming creates significant opportunities
for increased advertising revenues. Locally originated programming will also
play an integral role in the deployment of our new and enhanced products and
services. Customized local content will be available to our customers through
our digital cable and high-speed data services, as users will be able to access
local information, such as weather reports, school closings and community event
schedules on-demand.
Franchises
Cable television systems are constructed and operated under
fixed-term non-exclusive franchises or other types of operating authorities that
are granted by either local governmental or centralized state authorities. These
franchises typically contain many conditions, such as:
o Time limitations on commencement and completion of
construction;
o Conditions of service, including the number of channels, the
provision of free service to schools and other public
institutions;
o The maintenance of insurance and indemnity bonds; and
o The payment of fees to communities.
These local franchises are subject to limits imposed by federal law.
(1) As of December 31, 2000, we held 517 franchises in the
aggregate, consisting of 165 in Indiana, 195 in Kentucky, 124
in Illinois, 29 in Ohio and 4 in Georgia. Many of these
franchises require the payment of fees to the issuing
authorities of 3% to 5% of gross revenues, as defined by each
franchise agreement, from the related cable system.
The 1984 Cable Act prohibits franchising authorities from imposing
annual franchise fees in excess of 5% of gross annual revenues and also permits
the cable television system operator to seek renegotiation and modification of
franchise requirements if warranted by changed circumstances that render
performance commercially impracticable.
The following table summarizes information relating to the year of
expiration of our franchises, excluding the managed systems, as of December 31,
2000:
Year of Number of Percentage of Number of Percentage Total
Franchise Expiration Franchises Total Franchises Basic Customers Basic Customers
-------------------- ---------- ---------------- --------------- ---------------
Expired*........................ 17 3.3% 13,463 1.1%
2001............................ 30 5.8 82,523 6.4
2002............................ 23 4.4 41,928 3.3
2003............................ 40 7.7 102,416 8.0
2004............................ 35 6.8 54,015 4.2
After 2004...................... 372 72.0 984,176 77.0
- ----------
* Such franchises are operated on a month-to-month basis and are in the
process of being renewed.
The Cable Acts provide, among other things, for an orderly franchise
renewal process which limits a franchising authority's ability to deny a
franchise renewal if the incumbent operator follows prescribed renewal
procedures. In addition, the Cable Acts established comprehensive renewal
procedures which require, when properly elected by an operator, that an
incumbent franchisee's renewal application be assessed on its own merits and not
as part of a comparative process with competing applications.
- 53 -
We believe that our cable systems generally have good relationships
with their respective franchise authorities. We have never had a franchise
revoked or failed to have a franchise renewed.
Competition
Cable systems face increasing competition from alternative methods
of receiving and distributing their core video business. Both wireline and
wireless competitors have made inroads in competing against incumbent cable
operators. The extent to which a cable operator is competitive depends, in part,
upon its ability to provide to customers, at a reasonable price, a greater
variety of programming and other communications services than are available
off-air or through alternative delivery sources and upon superior technical
performance and customer service.
Congress has enacted legislation and the FCC has adopted regulatory
policies providing a more favorable operating environment for new and existing
technologies, in particular direct broadcast satellite television systems
operators, that have the potential to provide increased competition to cable
systems. Recently enacted legislation permits direct broadcast satellite
companies to retransmit local television signals, eliminating one of the
objections of consumers about switching to satellites.
The 1996 Telecom Act makes it easier for local exchange telephone
companies and others to provide a wide variety of video services competitive
with services provided by cable systems. Various local exchange telephone
companies currently are providing video services within and outside their
telephone service areas through a variety of distribution methods, including the
deployment of broadband cable networks and the use of wireless transmission
facilities. Local exchange telephone companies in various states have either
announced plans, obtained local franchise authorizations or are currently
competing with our cable communications systems. Local exchange telephone
companies and other companies also provide facilities for the transmission and
distribution to homes and businesses of interactive computer-based services,
including the Internet, as well as data and other non-video services. The
ability of local exchange telephone companies to cross-subsidize video, data and
telecommunication services also poses some threat to cable operators.
Franchised cable systems compete with private cable systems for the
right to service condominiums, apartment complexes and other multiple unit
residential developments. The operators of these private systems, known as
satellite master antenna television systems often enter into exclusive
agreements with apartment building owners or homeowners' associations that
preclude franchised cable television operators from serving residents of such
private complexes. However, the 1984 Cable Act gives franchised cable operators
the right to use existing compatible easements within their franchise areas on
nondiscriminatory terms and conditions. Accordingly, where there are preexisting
compatible easements, cable operators may not be unfairly denied access or
discriminated against with respect to access to the premises served by those
easements. Conflicting judicial decisions have been issued interpreting the
scope of the access right granted by the 1984 Cable Act, particularly with
respect to easements located entirely on private property.
The 1996 Telecom Act may exempt some of our competitors from
regulation as cable systems. The 1996 Telecom Act amends the definition of a
"cable system" such that providers of competitive video programming are only
regulated and franchised as "cable systems" if they use public rights-of-way.
Thus, a broader class of entities providing video programming, including
operators of satellite master antenna television systems, may be exempt from
regulation as cable television systems under the 1996 Telecom Act. This
exemption may give these entities a competitive advantage over us.
Cable television systems are operated under non-exclusive franchises
granted by local authorities thereby allowing more than one cable system to be
built in the same area. Although the number of municipal and commercial
overbuild cable systems is small, the potential profitability of a cable system
is adversely affected if the local customer base is divided among multiple
systems. Additionally, constructing a competing cable system is a capital
intensive process which involves a high degree of risk. We believe that in order
to be successful, a competitor's overbuild would need to be able to serve the
homes in the overbuilt area on a more cost-effective basis than we can. Any such
overbuild operation would require either significant access to capital or access
to facilities already in place that are capable of delivering cable television
programming. As of December 31, 2000, our Evansville, Indiana and Columbus, Ohio
systems were overbuilt. As a result, approximately 9.5% of the total homes
passed by our systems were overbuilt as of such date.
- 54 -
Direct broadcast satellite television systems use digital video
compression technology to increase the channel capacity of their systems. Direct
broadcast satellite television systems' programming is currently available to
individual households, condominiums and apartment and office complexes through
conventional, medium and high-power satellites. High-power direct broadcast
satellite television system service is currently being provided by DIRECTV,
Inc., and EchoStar Communications Corporation. Direct broadcast satellite
television systems have some advantages over cable systems that were not
upgraded, such as greater channel capacity and digital picture quality. In
addition, legislation was recently enacted which permits direct broadcast
satellite television systems to retransmit the signals of local television
stations in their local markets. However, direct broadcast satellite television
systems have a limited ability to offer locally produced programming, and do not
have a significant local presence in the community. In addition, direct
broadcast satellite television systems packages can be more expensive than
cable, especially if the subscriber intends to view the service on more than one
television in the household. Finally, direct broadcast satellite television
systems do not have the same full two-way capability, which we believe will
limit their ability to compete in a meaningful way in interactive television,
high-speed data and voice communications. Direct broadcast satellite has enjoyed
a 17.1% average penetration nationwide, and we believe that satellite
penetration in our various markets generally is in accordance with such average.
Several telephone companies are introducing digital subscriber line
technology, which allows Internet access over traditional phone lines at data
transmission speeds greater than those available by a standard telephone modem.
Although these transmission speeds are not as great as the transmission speeds
of a cable modem, we believe that the transmission speeds of digital subscriber
line technology are sufficiently high that such technology will compete with
cable modem technology. The FCC is currently considering its authority to
promulgate rules to facilitate the deployment of these services and regulate
areas including high-speed data and interactive Internet services. We cannot
predict the outcome of any FCC proceedings, or the impact of that outcome on the
success of our Internet access services or on our operations.
Additionally, the FCC adopted regulations allocating frequencies in
the 28 GegaHertz (GHz) band for a new service that can be used to provide video
services similar to multipoint multichannel distribution systems, which transmit
television channels from a fixed station to multiple receiving facilities
located at fixed points. The FCC has completed spectrum auctions for local
multipoint distribution service licenses.
As we expand our offerings to include telephone services, our AT&T
Digital branded services will be subject to competition from existing providers,
including both local exchange telephone companies and long-distance carriers.
The telecommunications industry is highly competitive and many telephone service
providers may have greater financial resources than we have, or have established
relationships with regulatory authorities. We cannot predict the extent to which
the presence of these competitors will influence customer penetration in our
telephone service areas. While we intend to add our telephone service offering
to our various markets, the service has only recently been launched in selected
markets and has not yet achieved any material penetration levels.
Other new technologies may become competitive with services that
cable communications systems can offer. Advances in communications technology,
as well as changes in the marketplace and the regulatory and legislative
environment are constantly occurring. Thus, we cannot predict the effect of
ongoing or future developments on the cable communications industry or on our
operations.
Employees
As of December 31, 2000, after giving effect to the AT&T
transactions, we employed approximately 2,600 full-time employees and 120
part-time employees. We consider our relations with our employees to be good.
Properties
A cable television system consists of three principal operating
components:
o The first component, the signal reception processing and
originating point called a "headend," receives television,
cable programming service, radio and data signals that are
transmitted by means of off-air antennas, microwave relay
systems and satellite earth systems. Each headend includes a
tower, antennae or other receiving equipment at a location
favorable for receiving broadcast signals and one or more
earth stations that receives signals transmitted by satellite.
The headend facility also houses the
- 55 -
electronic equipment, which amplifies, modifies and modulates
the signals, preparing them for passage over the system's
network of cables.
o The second component of the system, the distribution network,
originates at the headend and extends throughout the system's
service area. A cable system's distribution network consists
of microwave relays, coaxial or fiber optic cables placed on
utility poles or buried underground and associated electronic
equipment.
o The third component of the system is a "drop cable," which
extends from the distribution network into each customer's
home and connects the distribution system to the customer's
television set.
We own and lease parcels of real property for signal reception sites
which house our antenna towers and headends, microwave complexes and business
offices which includes our principal executive offices. In addition, we own our
cable systems' distribution networks, various office fixtures, test equipment
and service vehicles. The physical components of our cable systems require
maintenance and periodic upgrading to keep pace with technological advances. We
believe that our properties, both owned and leased, are in good condition and
are suitable and adequate for our business operations as presently conducted and
as proposed to be conducted.
Legal Proceedings
Insight Kentucky and certain prior owners of the Kentucky systems,
including affiliates of AT&T Broadband, have been named in class actions
generally alleging that the Kentucky systems have improperly passed through
state and local property tax charges to customers. The plaintiffs in these
actions seek monetary damages and the enjoinment of the collection of such
taxes. The amount of damages sought by the plaintiffs is not ascertainable at
this time. To date, the class of potential plaintiffs has not been certified by
the court; therefore, it is not yet possible to estimate the potential damages.
If certification is granted, the plaintiffs will then be required to prepare a
statement of alleged damages. Such class actions are (i) Alfred P. Sykes, Jr.,
Charles Pearl, Linda Pearl vs. InterMedia Partners of Kentucky, L.P. and TCI TKR
of Jefferson County, Inc., which was filed on March 26, 1999 in Jefferson County
Circuit Court and consolidated with James F. Dooley vs. TCI TKR of Jefferson
County and InterMedia Partners of Kentucky, L.P., which was filed on March 24,
1999 in Jefferson County Circuit Court, and (ii) Charles Shaw and Loretta Shaw
vs. TCI TKR of Northern Kentucky, Inc. TCI TKR of Southern Kentucky, Inc., TCI
Cablevision of North Central Kentucky, Inc., TCI Cablevision of Kentucky, Inc.
and InterMedia Partners of Kentucky, L.P., which was filed on June 4, 1999 in
the Franklin County Circuit Court. The classes have not been certified in these
actions and we are defending these actions vigorously. Plaintiff's counsel filed
an additional class action lawsuit in Boone County Circuit Court entitled R.
Stafford Johnson v. Insight Kentucky Partners II, L.P., TCI/TKR of Northern
Kentucky, Inc. et. al. on October 27, 1999, making the same allegations as the
other filed actions. This lawsuit was dismissed on January 21, 2000, due to the
existence of the Franklin County case, which was held to be a superior action
with identical issues. We believe that the Kentucky systems have substantial and
meritorious defenses to these claims, especially claims by customers that reside
in the communities that have entered into settlement agreements with the
Kentucky systems, as described above. Motions to dismiss both the Jefferson
County and Franklin County actions were denied and we have filed appeals of
these decisions to the Supreme Court of Kentucky. In addition, the Kentucky
systems have filed a declaratory judgement action in the United States District
Court for the Eastern District of Kentucky asking the federal courts to declare
that the issues at bar in the purported class actions are preempted under
federal law. This action was dismissed by the District Court and is on appeal to
the 6th Circuit Court of Appeals. On April 30, 1999, InterMedia Capital Partners
VI, L.P. submitted a request for indemnity to affiliates of AT&T Broadband for
certain losses arising out of these matters pursuant to the contribution
agreement dated October 30, 1997 under which these systems were contributed to
InterMedia Capital Partners VI, L.P.
The City of Louisville, Kentucky has granted additional franchises
to Knology, Inc. and TotaLink of Kentucky, LLC. Our Kentucky subsidiary's
franchise from the City of Louisville provides us with the right to challenge
the grant of any subsequent franchises that are on terms more favorable than our
own. Pursuant to such franchise provision, we filed for declaratory judgment in
the Jefferson County Circuit Court against the City of Louisville, Kentucky for
its grant of a more favorable franchise to Knology on November 2, 2000, and to
TotaLink on December 21, 2000. In the Knology action, the City of Louisville has
filed a motion for summary judgment seeking a declaration of the court that the
franchises are substantially similar as a matter of law. We have opposed this
motion and are currently awaiting a ruling. The TotaLink action is awaiting
finalization of a discovery
- 56 -
schedule. On November 8, 2000, Knology filed a federal court action in the
United States District Court for the Western District of Kentucky, naming
Insight LP and our Kentucky operating subsidiary as defendants. The action also
named the City of Louisville, Kentucky as a defendant. The suit seeks money
damages and injunctive relief for alleged violations of the antitrust laws, the
Communications Act of 1934, as amended (the "Communications Act"), and the Civil
Rights Act of 1899, arising out of our having filed, under provisions of our own
franchise from the City, the state court challenge to Knology's cable television
franchise awarded by the City. The federal court has granted Knology a
preliminary injunction, effectively lifting the stay of Knology's franchise that
resulted from our filing of the state court action. Knology has recently filed a
statement of damages in the federal case seeking $16.5 million in lost profits,
plus treble damages under antitrust laws in the total amount of $49 million. We
believe the claims in the federal action to be without merit and intend to
defend it vigorously.
We believe there are no other pending or threatened legal
proceedings that, if adversely determined, would have a material adverse effect
on us.
- 57 -
LEGISLATION AND REGULATION
The cable television industry is regulated by the FCC, some state
governments and the applicable local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
Congress and various federal agencies have in the past, and may in the future,
materially affect us. The following is a summary of federal laws and regulations
materially affecting the growth and operation of the cable television industry
and a description of certain state and local laws. We believe that the
regulation of the cable television industry remains a matter of interest to
Congress, the FCC and other regulatory authorities. There can be no assurance as
to what, if any, future actions such legislative and regulatory authorities may
take or the effect thereof on us.
Federal Legislation
The principal federal statute governing the cable television
industry is the Communications Act. As it affects the cable television industry,
the Communications Act has been significantly amended on three occasions, by the
1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act. The 1996 Telecom
Act altered the regulatory structure governing the nation's telecommunications
providers. It removed barriers to competition in both the cable television
market and the local telephone market. Among other things, it also reduced the
scope of cable rate regulation. In addition, the 1996 Telecom Act required the
FCC to undertake a number of rulemakings to implement the legislation, some of
which have yet to be completed, and such proceedings may materially affect the
cable television industry.
Federal Regulation
The FCC, the principal federal regulatory agency with jurisdiction
over cable television, has adopted regulations covering such areas as
cross-ownership between cable television systems and other communications
businesses, carriage of television broadcast programming, cable rates, consumer
protection and customer service, leased access, indecent programming, programmer
access to cable television systems, programming agreements, technical standards,
consumer electronics equipment compatibility, ownership of home wiring, program
exclusivity, equal employment opportunity, consumer education and lockbox
enforcement, origination cablecasting and sponsorship identification, children's
programming, signal leakage and frequency use, maintenance of various records,
and antenna structure notification, marking and lighting. The FCC has the
authority to enforce these regulations through the imposition of substantial
fines, the issuance of cease and desist orders and/or the imposition of other
administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities often used in connection with cable
operations. A brief summary of certain of these federal regulations as adopted
to date follows.
Rate Regulation
The 1984 Cable Act codified existing FCC preemption of rate
regulation for premium channels and optional non-basic program tiers. The 1984
Cable Act also deregulated basic cable rates for cable television systems
determined by the FCC to be subject to effective competition. The 1992 Cable Act
substantially changed the previous statutory and FCC rate regulation standards.
The 1992 Cable Act replaced the FCC's old standard for determining effective
competition, under which most cable television systems were not subject to rate
regulation, with a statutory provision that resulted in nearly all cable
television systems becoming subject to rate regulation of basic service. The
1996 Telecom Act expanded the definition of effective competition to cover
situations where a local telephone company or its affiliate, or any multichannel
video provider using telephone company facilities, offers comparable video
service by any means except direct broadcast satellite television systems.
Satisfaction of this test deregulates all rates.
For cable systems not subject to effective competition, the 1992
Cable Act required the FCC to adopt a formula for franchising authorities to
assure that basic cable rates are reasonable; allowed the FCC to review rates
for cable programming service tiers, other than per-channel or per-program
services, in response to complaints filed by franchising authorities and/or
cable customers; prohibited cable television systems from requiring basic
customers to purchase service tiers above basic service in order to purchase
premium services if the system is technically capable of compliance; required
the FCC to adopt regulations to establish, on the basis of actual costs, the
price for installation of cable service, remote controls, converter boxes and
additional outlets; and allowed the
- 58 -
FCC to impose restrictions on the retiering and rearrangement of cable services
under certain limited circumstances. The 1996 Telecom Act limited the class of
complainants regarding cable programming service tier rates to franchising
authorities only, and ended FCC regulation of cable programming service tier
rates on March 31, 1999. The 1996 Telecom Act also relaxes existing uniform rate
requirements by specifying that such requirements do not apply where the
operator faces effective competition, and by exempting bulk discounts to
multiple dwelling units, although complaints about predatory pricing may be
lodged with the FCC.
The FCC's implementing regulations contain standards for the
regulation of basic service rates. Local franchising authorities and the FCC,
respectively, are empowered to order a reduction of existing rates which exceed
the maximum permitted level for basic services and associated equipment, and
refunds can be required. The FCC adopted a benchmark price cap system for
measuring the reasonableness of existing basic service rates. Alternatively,
cable operators have the opportunity to make cost-of-service showings which, in
some cases, may justify rates above the applicable benchmarks. The rules also
require that charges for cable-related equipment, converter boxes and remote
control devices, for example, and installation services be unbundled from the
provision of cable service and based upon actual costs plus a reasonable profit.
The regulations also provide that future rate increases may not exceed an
inflation-indexed amount, plus increases in certain costs beyond the cable
operator's control, such as taxes, franchise fees and increased programming
costs. Cost-based adjustments to these capped rates can also be made in the
event a cable television operator adds or deletes channels. There is also a
streamlined cost-of-service methodology available to justify a rate increase on
the basic tier for "significant" system upgrades.
As a further alternative, in 1995 the FCC adopted a simplified
cost-of-service methodology which can be used by "small cable systems" owned by
"small cable companies." A "small system" is defined as a cable television
system which has, on a headend basis, 15,000 or fewer basic customers. A "small
cable company" is defined as an entity serving a total of 400,000 or fewer basic
customers that is not affiliated with a larger cable television company, that is
to say that a larger cable television company does not own more than a 20
percent equity share or exercise de jure control. This small system rate-setting
methodology almost always results in rates that exceed those produced by the
cost-of-service rules applicable to larger cable television operators. Once the
initial rates are set they can be adjusted periodically for inflation and
external cost changes as described above. When an eligible "small system" grows
larger than 15,000 basic customers, it can maintain its then current rates but
it cannot increase its rates in the normal course until an increase would be
warranted under the rules applicable to systems that have more than 15,000
customers. When a "small cable company" grows larger than 400,000 basic
customers, the qualified systems it then owns will not lose their small system
eligibility. If a small cable company sells a qualified system, or if the
company itself is sold, the qualified systems retain that status even if the
acquiring company is not a small cable company. We were a "small cable company"
prior to the October 30, 1998 completion of the AT&T Broadband transaction but
we no longer enjoy this status and as a result, we are no longer entitled to
this benefit. However, as noted above, the systems with less than 15,000
customers owned by us prior to the completion of the AT&T Broadband transaction
remain eligible for "small system" rate regulation.
Finally, there are regulations which require cable television
systems to permit customers to purchase video programming on a per channel or a
per program basis without the necessity of subscribing to any tier of service,
other than the basic service tier, unless the cable television system is
technically incapable of doing so. Generally, this exemption from compliance
with the statute for cable television systems that do not have such technical
capability is available until a cable television system obtains the capability,
but not later than October 2002.
Carriage of Broadcast Television Signals
The 1992 Cable Act contains signal carriage requirements which allow
commercial television broadcast stations that are "local" to a cable television
system, that is to say that the system is located in the station's area of
dominant influence, to elect every three years whether to require the cable
television system to carry the station, subject to certain exceptions, or
whether the cable television system will have to negotiate for "retransmission
consent" to carry the station. The next election between must-carry and
retransmission consent will be October 1, 2002. A cable television system is
generally required to devote up to one-third of its activated channel capacity
for the carriage of local commercial television stations whether pursuant to
mandatory carriage requirements or the retransmission consent requirements of
the 1992 Cable Act. Local non-commercial television stations are also given
mandatory carriage rights, subject to certain exceptions, within the larger of:
(i) a 50 mile radius from the station's city of license; or (ii) the station's
Grade B contour, a measure of signal strength. Unlike commercial stations,
noncommercial stations are not given the option to negotiate retransmission
consent for the carriage of their signal.
- 59 -
In addition, cable television systems have to obtain retransmission consent for
the carriage of all "distant" commercial broadcast stations, except for certain
"superstations," which are commercial satellite-delivered independent stations
such as WGN. To date, compliance with the "retransmission consent" and "must
carry" provisions of the 1992 Cable Act has not had a material effect on us,
although this result may change in the future depending on such factors as
market conditions, channel capacity and similar matters when such arrangements
are renegotiated. The FCC recently completed a rulemaking proceeding on the
carriage of television signals in high definition and digital formats. The
outcome of this proceeding could have a material effect on the number of
services that a cable operator will be required to carry. Local television
broadcast stations transmitting solely in a digital format are entitled to
carriage. Stations transmitting in both digital and analog formats, which is
permitted during the current transition period, have no carriage rights for the
digital format during the transition.
Deletion of Certain Programming
Cable television systems that have 1,000 or more customers must,
upon the appropriate request of a local television station, delete the
simultaneous or nonsimultaneous network programming of a distant station when
such programming has also been contracted for by the local station on an
exclusive basis. FCC regulations also enable television stations that have
obtained exclusive distribution rights for syndicated programming in their
market to require a cable television system to delete or "black out" such
programming from other television stations which are carried by the cable
television system.
Franchise Fees
Although franchising authorities may impose franchise fees under the
1984 Cable Act, such payments cannot exceed 5% of a cable television system's
annual gross revenues. Under the 1996 Telecom Act, franchising authorities may
not exact franchise fees from revenues derived from telecommunications services,
although they may be able to exact some additional compensation for the use of
public rights-of-way. Franchising authorities are also empowered, in awarding
new franchises or renewing existing franchises, to require cable television
operators to provide cable-related facilities and equipment and to enforce
compliance with voluntary commitments. In the case of franchises in effect prior
to the effective date of the 1984 Cable Act, franchising authorities may enforce
requirements contained in the franchise relating to facilities, equipment and
services, whether or not cable-related. The 1984 Cable Act, under certain
limited circumstances, permits a cable operator to obtain modifications of
franchise obligations.
Renewal of Franchises
The 1984 Cable Act and the 1992 Cable Act establish renewal
procedures and criteria designed to protect incumbent franchisees against
arbitrary denials of renewal and to provide specific grounds for franchising
authorities to consider in making renewal decisions, including a franchisee's
performance under the franchise and community needs. Even after the formal
renewal procedures are invoked, franchising authorities and cable television
operators remain free to negotiate a renewal outside the formal process.
Nevertheless, renewal is by no means assured, as the franchisee must meet
certain statutory standards. Even if a franchise is renewed, a franchising
authority may impose new and more onerous requirements such as upgrading
facilities and equipment, although the municipality must take into account the
cost of meeting such requirements. Similarly, if a franchising authority's
consent is required for the purchase or sale of a cable television system or
franchises, such authority may attempt to impose burdensome or onerous franchise
requirements in connection with a request for such consent. Historically,
franchises have been renewed for cable television operators that have provided
satisfactory services and have complied with the terms of their franchises. At
this time, we are not aware of any current or past material failure on our part
to comply with our franchise agreements. We believe that we have generally
complied with the terms of our franchises and have provided quality levels of
service.
The 1992 Cable Act makes several changes to the process under which
a cable television operator seeks to enforce its renewal rights which could make
it easier in some cases for a franchising authority to deny renewal. Franchising
authorities may consider the "level" of programming service provided by a cable
television operator in deciding whether to renew. For alleged franchise
violations occurring after December 29, 1984, franchising authorities are no
longer precluded from denying renewal based on failure to substantially comply
with the material terms of the franchise where the franchising authority has
"effectively acquiesced" to such past violations. Rather, the franchising
authority is estopped if, after giving the cable television operator notice and
opportunity to cure, it
- 60 -
fails to respond to a written notice from the cable television operator of its
failure or inability to cure. Courts may not reverse a denial of renewal based
on procedural violations found to be "harmless error."
Channel Set-Asides
The 1984 Cable Act permits local franchising authorities to require
cable television operators to set aside certain television channels for public,
educational and governmental access programming. The 1984 Cable Act further
requires cable television systems with thirty-six or more activated channels to
designate a portion of their channel capacity for commercial leased access by
unaffiliated third parties to provide programming that may compete with services
offered by the cable television operator. The 1992 Cable Act requires leased
access rates to be set according to a formula determined by the FCC.
Ownership
The 1996 Telecom Act repealed the statutory ban against local
exchange carriers providing video programming directly to customers within their
local exchange telephone service areas. Consequently, the 1996 Telecom Act
permits telephone companies to compete directly with operations of cable
television systems. Under the 1996 Telecom Act and FCC rules adopted to
implement the 1996 Telecom Act, local exchange carriers may provide video
service as broadcasters, common carriers, or cable operators. In addition, local
exchange carriers and others may also provide video service through "open video
systems," a regulatory regime that may give them more flexibility than
traditional cable television systems. Open video system operators (including
local exchange carriers) can, however, be required to obtain a local cable
franchise, and they can be required to make payments to local governmental
bodies in lieu of cable franchise fees. In general, open video system operators
must make their systems available to programming providers on rates, terms and
conditions that are reasonable and nondiscriminatory. Where carriage demand by
programming providers exceeds the channel capacity of an open video system,
two-thirds of the channels must be made available to programmers unaffiliated
with the open video system operator.
The 1996 Telecom Act generally prohibits local exchange carriers
from purchasing a greater than 10% ownership interest in a cable television
system located within the local exchange carrier's telephone service area,
prohibits cable operators from purchasing local exchange carriers whose service
areas are located within the cable operator's franchise area, and prohibits
joint ventures between operators of cable television systems and local exchange
carriers operating in overlapping markets. There are some statutory exceptions,
including a rural exemption that permits buyouts in which the purchased cable
television system or local exchange carrier serves a non-urban area with fewer
than 35,000 inhabitants, and exemptions for the purchase of small cable
television systems located in non-urban areas. Also, the FCC may grant waivers
of the buyout provisions in certain circumstances.
The 1996 Telecom Act made several other changes to relax ownership
restrictions and regulations of cable television systems. The 1996 Telecom Act
repealed the 1992 Cable Act's three-year holding requirement pertaining to sales
of cable television systems. The statutory broadcast/cable cross-ownership
restrictions imposed under the 1984 Cable Act have been eliminated, although the
FCC's regulations prohibiting broadcast/cable common-ownership currently remain
in effect. The FCC's rules also generally prohibit cable operators from offering
satellite master antenna service separate from their franchised systems in the
same franchise area, unless the cable operator is subject to "effective
competition" there.
The 1996 Telecom Act amended the definition of a "cable system"
under the Communications Act so that competitive providers of video services
will be regulated and franchised as "cable systems" only if they use public
rights-of-way. Thus, a broader class of entities providing video programming may
be exempt from regulation as cable television systems under the Communications
Act.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the
number of subscribers which a single cable television operator can serve. In
general, no cable television operator can have an attributable interest in cable
television systems which serve more than 30% of all multichannel video
programming subscribers nationwide. Attributable interests for these purposes
include voting interests of 5% or more, unless there is another single holder of
more than 50% of the voting stock, officerships, directorships and general
partnership interests. The FCC has also adopted rules which limit the number of
channels on a cable television system which can be occupied by national
- 61 -
video programming services in which the entity which owns the cable television
system has an attributable interest. The limit is 40% of the first 75 activated
channels. The U.S. Court of Appeals for the District of Columbia Circuit has
upheld the constitutionality of such restrictions. A petition for certiorari has
been denied by the Supreme Court. The U.S. Court of Appeals for District of
Columbia Circuit has recently decided an appeal on the rules themselves. In that
decision, the Court reversed and remanded the horizontal and vertical ownership
rules for further proceedings.
The 1996 Telecom Act provides that registered utility holding
companies and subsidiaries may provide telecommunications services, including
cable television, notwithstanding the Public Utilities Holding Company Act of
1935, as amended. Electric utilities must establish separate subsidiaries known
as "exempt telecommunications companies" and must apply to the FCC for operating
authority. Due to their resources, electric utilities could be formidable
competitors to traditional cable television systems.
Access to Programming
The 1992 Cable Act imposed restrictions on the dealings between
cable operators and cable programmers. Of special significance from a
competitive business posture, the 1992 Cable Act precludes video programmers
affiliated with cable companies from favoring their affiliated cable operators
over competitors and requires such programmers to sell their programming to
other multichannel video distributors. This provision limits the ability of
vertically integrated cable programmers to offer exclusive programming
arrangements to cable companies. The prohibition on certain types of exclusive
programming arrangements is set to expire on October 5, 2002, unless the FCC
determines that extension of the prohibition is necessary to preserve and
protect competition in video programming distribution. We expect the FCC to make
a determination on this issue in 2001.
Privacy
The 1984 Cable Act imposes a number of restrictions on the manner in
which cable television operators can collect and disclose data about individual
system customers. The statute also requires that the system operator
periodically provide all customers with written information about its policies
regarding the collection and handling of data about customers, their privacy
rights under federal law and their enforcement rights. In the event that a cable
television operator was found to have violated the customer privacy provisions
of the 1984 Cable Act, it could be required to pay damages, attorneys' fees and
other costs. Under the 1992 Cable Act, the privacy requirements were
strengthened to require that cable television operators take such actions as are
necessary to prevent unauthorized access to personally identifiable information.
Franchise Transfers
The 1992 Cable Act requires franchising authorities to act on any
franchise transfer request submitted after December 4, 1992 within 120 days
after receipt of all information required by FCC regulations and by the
franchising authority. Approval is deemed to be granted if the franchising
authority fails to act within such period.
Technical Requirements
The FCC has imposed technical standards applicable to all classes of
channels which carry downstream National Television System Committee video
programming. The FCC also has adopted additional standards applicable to cable
television systems using frequencies in the 108 to 137 MHz and 225 to 400 MHz
bands in order to prevent harmful interference with aeronautical navigation and
safety radio services and has also established limits on cable television system
signal leakage. Periodic testing by cable television operators for compliance
with the technical standards and signal leakage limits is required and an annual
filing of the results of these measurements is required. The 1992 Cable Act
requires the FCC to periodically update its technical standards to take into
account changes in technology. Under the 1996 Telecom Act, local franchising
authorities may not prohibit, condition or restrict a cable television system's
use of any type of customer equipment or transmission technology.
The FCC has adopted regulations to implement the requirements of the
1992 Cable Act designed to improve the compatibility of cable television systems
and consumer electronics equipment. These regulations, among other things,
generally prohibit cable television operators from scrambling their basic
service tier. The 1996 Telecom Act directs the FCC to set only minimal standards
to assure compatibility between television sets, VCRs
- 62 -
and cable television systems, and otherwise to rely on the marketplace. Pursuant
to the 1992 Cable Act, the FCC has adopted rules to assure the competitive
availability to consumers of customer premises equipment, such as converters,
used to access the services offered by cable television systems and other
multichannel video programming distributors. Pursuant to those rules, consumers
are given the right to attach compatible equipment to the facilities of their
multichannel video programming distributors so long as the equipment does not
harm the network, does not interfere with the services purchased by other
customers and is not used to receive unauthorized services. As of July 1, 2000,
multichannel video programming distributors, other than operators of direct
broadcast satellite television systems, are required to separate security from
non-security functions in the customer premises equipment which they sell or
lease to their customers and offer their customers the option of using component
security modules obtained from the multichannel video programming distributors
with set-top units purchased or leased from retail outlets. As of January 1,
2005, multichannel video programming distributors will be prohibited from
distributing new set-top equipment integrating both security and non-security
functions to their customers.
Pursuant to the 1992 Cable Act, the FCC has adopted rules
implementing an emergency alert system. The rules require all cable television
systems to provide an audio and video emergency alert system message on at least
one programmed channel and a video interruption and an audio alert message on
all programmed channels. The audio alert message is required to state which
channel is carrying the full audio and video emergency alert system message. The
FCC rules permit cable television systems either to provide a separate means of
alerting persons with hearing disabilities of emergency alert system messages,
such as a terminal that displays emergency alert system messages and activates
other alerting mechanisms or lights, or to provide audio and video emergency
alert system messages on all channels. Cable television systems with 10,000 or
more basic customers per headend were required to install EAS equipment capable
of providing audio and video emergency alert system messages on all programmed
channels by December 31, 1998. Cable television systems with 5,000 or more but
fewer than 10,000 basic customers per headend will have until October 1, 2002 to
comply with that requirement. Cable television systems with fewer than 5,000
basic customers per headend will have a choice of providing either a national
level emergency alert system message on all programmed channels or installing
emergency alert system equipment capable of providing audio alert messages on
all programmed channels, a video interrupt on all channels, and an audio and
video emergency alert system message on one programmed channel. This must be
accomplished by October 1, 2002.
Inside Wiring; Customer Access
In a 1997 order, the FCC established rules that require an incumbent
cable operator upon expiration of a multiple dwelling unit service contract to
sell, abandon, or remove "home run" wiring that was installed by the cable
operator in a multiple dwelling unit building. These inside wiring rules are
expected to assist building owners in their attempts to replace existing cable
operators with new programming providers who are willing to pay the building
owner a higher fee, where such a fee is permissible. Additionally, the FCC has
proposed to restrict exclusive contracts between building owners and cable
operators or other multichannel video programming distributors. The FCC has also
issued an order preempting state, local and private restrictions on over-
the-air reception antennas placed on rental properties in areas where a tenant
has exclusive use of the property, such as balconies or patios. However, tenants
may not install such antennas on the common areas of multiple dwelling units,
such as on roofs. This order limits the extent to which multiple dwelling unit
owners may enforce certain aspects of multiple dwelling unit agreements which
otherwise would prohibit, for example, placement of direct broadcast satellite
television systems television receiving antennae in multiple dwelling unit
areas, such as apartment balconies or patios, under the exclusive occupancy of a
renter.
Pole Attachments
The FCC currently regulates the rates and conditions imposed by
certain public utilities for use of their poles unless state public service
commissions are able to demonstrate that they adequately regulate the rates,
terms and conditions of cable television pole attachments. A number of states
and the District of Columbia have certified to the FCC that they adequately
regulate the rates, terms and conditions for pole attachments. Illinois, Ohio
and Kentucky, states in which we operate, have made such a certification. In the
absence of state regulation, the FCC administers such pole attachment and
conduit use rates through use of a formula which it has devised. Pursuant to the
1996 Telecom Act, the FCC has adopted a new rate formula for any attaching
party, including cable television systems, which offers telecommunications
services. This new formula will result in higher attachment rates than at
present, but they will apply only to cable television systems which elect to
offer telecommunications services. Any
- 63 -
increases pursuant to this new formula begin in 2001, and will be phased in by
equal increments over the five ensuing years. The FCC ruled that the provision
of Internet services will not, in and of itself, trigger use of the new formula.
However, the U.S. Court of Appeals for the Eleventh Circuit held that, since
Internet provision is neither a "cable service" or a "telecommunications
service," neither rate formula applies and, therefore, public utilities are free
to charge what they please. The Supreme Court has agreed to review this
decision. The FCC has also initiated a proceeding to determine whether it should
adjust certain elements of the current rate formula. If adopted, these
adjustments could increase rates for pole attachments and conduit space.
Other FCC Matters
FCC regulation pursuant to the Communications Act also includes
matters regarding a cable television system's carriage of local sports
programming; restrictions on origination and cablecasting by cable television
operators; rules governing political broadcasts; equal employment opportunity;
deletion of syndicated programming; registration procedure and reporting
requirements; customer service; closed captioning; obscenity and indecency;
program access and exclusivity arrangements; and limitations on advertising
contained in nonbroadcast children's programming.
The FCC has recently issued a Notice of Inquiry covering a wide
range of issues relating to Interactive Television ("ITV"). Examples of ITV
services are interactive electronic program guides and access to a graphic
interface that provides supplementary information related to the video display.
In the near term, cable systems are likely to be the platform of choice for the
distribution of ITV services. The FCC has posed a series of questions including
the definition of ITV, the potential for discrimination by cable systems in
favor of affiliated ITV providers, enforcement mechanisms, and the proper
regulatory classification of ITV service.
Copyright
Cable television systems are subject to federal copyright licensing
covering carriage of broadcast signals. In exchange for making semi-annual
payments to a federal copyright royalty pool and meeting certain other
obligations, cable television operators obtain a statutory license to retransmit
broadcast signals. The amount of this royalty payment varies, depending on the
amount of system revenues from certain sources, the number of distant signals
carried, and the location of the cable television system with respect to
over-the-air television stations. Any future adjustment to the copyright royalty
rates will be done through an arbitration process to be supervised by the U.S.
Copyright Office. Cable television operators are liable for interest on
underpaid and unpaid royalty fees, but are not entitled to collect interest on
refunds received for overpayment of copyright fees.
Various bills have been introduced into Congress over the past
several years that would eliminate or modify the cable television compulsory
license. Without the compulsory license, cable television operators would have
to negotiate rights from the copyright owners for all of the programming on the
broadcast stations carried by cable television systems. Such negotiated
agreements would likely increase the cost to cable television operators of
carrying broadcast signals. The 1992 Cable Act's retransmission consent
provisions expressly provide that retransmission consent agreements between
television broadcast stations and cable television operators do not obviate the
need for cable operators to obtain a copyright license for the programming
carried on each broadcaster's signal.
Copyrighted music performed in programming supplied to cable
television systems by pay cable networks, such as HBO, and basic cable networks,
such as USA Network, is licensed by the networks through private agreements with
the American Society of Composers and Publishers, generally known as ASCAP, and
BMI, Inc., the two major performing rights organizations in the United States.
Both the American Society of Composers and Publishers and BMI offer "through to
the viewer" licenses to the cable networks which cover the retransmission of the
cable networks' programming by cable television systems to their customers.
Licenses to perform copyrighted music by cable television systems
themselves, including on local origination channels, in advertisements inserted
locally on cable television networks, and in cross-promotional announcements,
must be obtained by the cable television operator from the American Society of
Composers and Publishers, BMI and/or SESAC, Inc.
- 64 -
State and Local Regulation
Cable television systems generally are operated pursuant to
nonexclusive franchises, permits or licenses granted by a municipality or other
state or local government entity. The terms and conditions of franchises vary
materially from jurisdiction to jurisdiction, and even from city to city within
the same state, historically ranging from reasonable to highly restrictive or
burdensome. Franchises generally contain provisions governing fees to be paid to
the franchising authority, length of the franchise term, renewal, sale or
transfer of the franchise, territory of the franchise, design and technical
performance of the system, use and occupancy of public streets and number and
types of cable television services provided. The terms and conditions of each
franchise and the laws and regulations under which it was granted directly
affect the profitability of the cable television system. The 1984 Cable Act
places certain limitations on a franchising authority's ability to control the
operation of a cable television system. The 1992 Cable Act prohibits exclusive
franchises, and allows franchising authorities to exercise greater control over
the operation of franchised cable television systems, especially in the area of
customer service and rate regulation. The 1992 Cable Act also allows franchising
authorities to operate their own multichannel video distribution system without
having to obtain a franchise and permits states or local franchising authorities
to adopt certain restrictions on the ownership of cable television systems.
Moreover, franchising authorities are immunized from monetary damage awards
arising from regulation of cable television systems or decisions made on
franchise grants, renewals, transfers and amendments. The 1996 Telecom Act
prohibits a franchising authority from either requiring or limiting a cable
television operator's provision of telecommunications services.
Various proposals have been introduced at the state and local levels
with regard to the regulation of cable television systems, and a number of
states have adopted legislation subjecting cable television systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility. To date, none of
the states in which we currently operate has enacted state level regulation.
The foregoing describes all material present and proposed federal,
state and local regulations and legislation relating to the cable television
industry. Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements, currently are the subject
of a variety of judicial proceedings, legislative hearings and administrative
and legislative proposals which could change, in varying degrees, the manner in
which cable television systems operate. Neither the outcome of these proceedings
nor their impact upon the cable television industry or us can be predicted at
this time.
Internet Access Service
We offer a service which enables consumers to access the Internet at
high speeds via high capacity broadband transmission facilities and cable
modems. We compete with many other providers of Internet access services which
are known as Internet service providers. Internet service providers include such
companies as America Online and Mindspring Enterprises as well as major
telecommunications providers, including AT&T and local exchange telephone
companies. Recently, several Internet service providers asked the FCC as well as
local authorities to require cable companies offering Internet access services
over their broadband facilities to allow access to those facilities on an
unbundled basis to other Internet service providers. In a recent report on the
deployment of advanced telecommunications capability under Section 706 of the
1996 Telecom Act, the FCC declined to convene a proceeding to consider whether
to impose such an access requirement on cable companies. However, the FCC
indicated that it would continue to monitor the issue of broadband deployment
and, to that end, the FCC has recently issued a notice of inquiry in which it
asks, among other things, questions regarding what regulatory approach it should
pursue. Also, the FCC denied requests by certain Internet service providers that
it condition its approval of the merger of AT&T Broadband and TCI, now known as
AT&T Broadband, on a requirement that those companies allow access by Internet
service providers to their broadband facilities. Several local jurisdictions
also are reviewing this issue. Last year, the Ninth Circuit overturned a
requirement, imposed by a local franchising authority in the context of a
franchise transfer, that the cable operator, if it chooses to provide Internet
service, must provide open access to its system for other Internet service
providers on the ground that Internet access is not a cable service and thus is
not subject to local franchising authority regulation. U.S. District Courts in
Virginia and Florida have also held that a local franchising authority cannot
impose an open access requirement. The Virginia ruling was affirmed by the
Fourth Circuit.
There are currently few laws or regulations which specifically
regulate communications or commerce over the Internet. Section 230 of the
Communications Act, added to that act by the 1996 Telecom Act, declares it to be
- 65 -
the policy of the United States to promote the continued development of the
Internet and other interactive computer services and interactive media, and to
preserve the vibrant and competitive free market that presently exists for the
Internet and other interactive computer services, unfettered by federal or state
regulation. One area in which Congress did attempt to regulate content over the
Internet involved the dissemination of obscene or indecent materials. The
provisions of the 1996 Telecom Act, generally referred to as the Communications
Decency Act, were found to be unconstitutional, in part, by the United States
Supreme Court in 1997. In response, Congress passed the Child Online Protection
Act. The constitutionality of this act is currently being challenged in the
courts.
Local Telecommunications Services
The 1996 Telecom Act provides that no state or local laws or
regulations may prohibit or have the effect of prohibiting any entity from
providing any interstate or intrastate telecommunications service. States are
authorized, however, to impose "competitively neutral" requirements regarding
universal service, public safety and welfare, service quality and consumer
protection. State and local governments also retain their authority to manage
the public rights-of-way and may require fair and reasonable, competitively
neutral and non-discriminatory compensation for management of the public
rights-of-way when cable operators provide telecommunications service. State and
local governments must publicly disclose such required payments.
We have entered into a ten-year agreement with AT&T Broadband that
will allow AT&T Broadband to provide to customers telephone services using our
network infrastructure and AT&T Broadband's switching and long distance
transport facilities. Local telecommunications service is subject to regulation
by state utility commissions. Use of local telecommunications facilities to
originate and terminate long distance services, a service commonly referred to
as "exchange access," is subject to regulation both by the FCC and by state
utility commissions. As a provider of local exchange service, AT&T Broadband
would be subject to the requirements imposed upon local exchange carriers by the
1996 Telecom Act. These include requirements governing resale, telephone number
portability, dialing parity, access to rights-of-way and reciprocal
compensation. AT&T Broadband's ability to successfully offer local
telecommunications service will be dependent, in part, on the opening of local
telephone networks by incumbent local telephone companies as required of them by
the 1996 Telecom Act.
In January 1999, the United States Supreme Court reversed and
vacated in part an earlier decision of a federal court of appeals striking down
portions of the FCC's 1996 rules governing local telecommunications competition.
The Supreme Court held that the FCC has authority under the Communications Act
to establish rules to govern the pricing of facilities and services provided by
incumbent local exchange carriers ("ILECs") to open their local networks to
competition. However, on July 18, 2000, the United States Court of Appeals for
the Eighth Circuit vacated several FCC rules concerning interconnection and
pricing of ILEC network elements, including a rule that mandates that ILECs set
prices for unbundled network elements at the lowest cost network configuration,
and another rule that would have required the ILECs to bundle combinations of
network elements at the competing carrier's request. The U.S. Supreme Court
decided to review this decision (consolidated with four other lower court
challenges to the FCC's interconnection rules) in its next session, which
commences in October 2001. In April 2000, the FCC ruled that incumbent local
exchange carriers must use their "best efforts" to acquire intellectual property
rights from third party vendors for the benefit of a competing carrier seeking
unbundled access to network elements associated with such intellectual property
rights.
- 66 -
MANAGEMENT
Insight LP is our sole general partner. Insight Communications is
the sole general partner of Insight LP. The following table sets forth certain
information with respect to the executive officers of Insight Capital and
Insight Communications. Insight Communications, through Insight LP, serves as
our manager. The table also includes the members of the Advisory Committee of
Insight Midwest.
The executive officers and key employees of Insight Capital and our
manager and members of the Advisory Committee of Insight Midwest are:
Name Age Position
- ---- --- --------
Sidney R. Knafel................ 70 Chairman of the Board of Insight Capital and Insight
Communications and Chairman of the Advisory Committee
Michael S. Willner.............. 49 President and Chief Executive Officer of Insight Capital and
Insight Communications and Member of the Advisory Committee
Kim D. Kelly.................... 45 Executive Vice President and Chief Operating and Financial
Officer of Insight Capital and Insight Communications and Member
of the Advisory Committee
Daniel E. Somers................ 52 Member of the Advisory Committee
David Jefferson................. 49 Member of the Advisory Committee
Elliot Brecher.................. 36 Senior Vice President, General Counsel and Secretary of Insight
Communications
Greg Capranica.................. 42 Senior Vice President, Operations, Illinois Region of Insight
Communications
E. Scott Cooley................. 41 Senior Vice President, Employee Relations and Development of
Insight Communications
Charles E. Dietz................ 54 Senior Vice President, Engineering of Insight Communications
Gregory B. Graff................ 40 Senior Vice President, Operations, Western Kentucky Region of
Insight Communications
Pamela Euler Halling............ 53 Senior Vice President, Marketing and Programming of Insight
Communications
Daniel Mannino.................. 41 Senior Vice President and Controller of Insight Communications
Judy Poole...................... 54 Senior Vice President, Human Resources of Insight Communications
Colleen Quinn................... 48 Senior Vice President, Corporate Relations of Insight
Communications
Mary Rhodes..................... 51 Senior Vice President, Customer Service of Insight Communications
David Servies................... 41 Senior Vice President, Operations, Indiana Region of Insight
Communications
James A. Stewart................ 49 Senior Vice President, Operations, Eastern Kentucky and National
Regions of Insight Communications
Sidney R. Knafel, a director of Insight Communications, has been
Chairman of the Board of Insight Communications since 1985. He was the founder,
Chairman and an equity holder of Vision Cable Communications, Inc. from 1971
until its sale in 1981. Mr. Knafel is presently the managing partner of SRK
Management Company, a private investment company, and also serves as Chairman of
BioReliance Corporation, a biological testing company. He is a director of NTL
Incorporated, General American Investors Company, Inc., IGENE Biotechnology,
Inc. and Source Media, Inc., as well as several private companies. Mr. Knafel is
a graduate of Harvard College and Harvard Business School.
Michael S. Willner, a director of Insight Communications, co-founded
and has served as President and Chief Executive Officer since 1985. Previously,
Mr. Willner served as Executive Vice President and Chief Operating Officer of
Vision Cable from 1979 through 1985, Vice President of Marketing for Vision
Cable from 1977 to 1979 and General Manager of Vision Cable's Bergen County, New
Jersey cable television system from 1975 to 1977. Currently, Mr. Willner is a
director of NTL Incorporated. He is also a director of Source Media, Inc. and
Commerce.TV. He is Chairman of the National Cable Telecommunications
Association's Board of Directors
- 67 -
and Executive Committee. He also serves on the boards of C-SPAN, CableLabs and
the Walter Kaitz Foundation. Mr. Willner is a graduate of Boston University's
College of Communication and serves on the school's Executive Committee.
Kim D. Kelly, a director of Insight Communications, has been
Executive Vice President and Chief Financial Officer of Insight Communications
since 1990. Ms. Kelly has also been Chief Operating Officer of Insight
Communications since January 1998. Prior thereto, she served from 1982 to 1990
with Marine Midland Bank, becoming its Senior Vice President in 1988, with
primary responsibility for media lending activities. Ms. Kelly is a member of
the Cable Advertising Bureau's Board of Directors, serving as its Chairperson.
She also serves as a member of the National Cable Telecommunications Association
Subcommittee for Telecommunications Policy, as well as the National Cable
Telecommunications Association Subcommittees for Accounting and Diversity
Initiatives. Ms. Kelly also serves as a director of Bank of New York Hamilton
Funds and Source Media, Inc. and serves on the board of directors of Cable in
the Classroom. Ms. Kelly is a graduate of George Washington University.
Daniel E. Somers has served as President and Chief Executive Officer
of AT&T Broadband since October 1999 and Senior Executive Vice President and
Chief Financial Officer of AT&T Corp. from May 1997 to September 1999. Prior to
joining AT&T in May 1997, Mr. Somers was Chairman and Chief Executive Officer
for Bell Cablemedia, plc, of London for two years and, from 1992 to 1995, Mr.
Somers was Executive Vice President and Chief Financial Officer for Bell Canada
International. Mr. Somers also serves as a director of Lubrizol Corporation,
Excite@Home, Cablevision Systems Corp. and CableLabs.
David Jefferson has served as Executive Vice President of AT&T
Broadband Cable Affiliates and Commercial Sales since March 2000. Mr. Jefferson
joined AT&T Corp. in 1972 and held a number of executive positions including
Vice President Local Services--Atlantic States Region, Customer Care Vice
President, Market and Business Development Vice President and Sales Operations
Vice President.
Elliot Brecher has served as Senior Vice President and General
Counsel of Insight Communications since January 2000. Previously, he was
associated with the law firm Cooperman Levitt Winikoff Lester & Newman, P.C.,
which served as Insight Communications' legal counsel until July 2000. He joined
that firm in February 1994 and served as a partner from January 1996 until
joining Insight Communications. Prior to that, he was an associate of the law
firm Rosenman & Colin from October 1988. Mr. Brecher received his law degree
from Fordham University.
Gregory Capranica joined Insight in early 2001 as District Vice
President in Springfield, Illinois, and was quickly promoted to Senior Vice
President, Operations, Illinois Region. A 20-year veteran in various capacities
of the cable industry, Mr. Capranica was most recently General Manager for the
Chicago Suburbs division of AT&T Broadband. Prior to his tenure at AT&T
Broadband, Mr. Capranica held management level positions for Times Mirror Cable
and Cox Communications.
E. Scott Cooley joined Insight Communications in 1998 as Senior Vice
President, Operations with responsibility for Insight Communications' Indiana
cluster. In October 2000, he became Senior Vice President, Employee Relations
and Development of Insight Communications. Formerly, Mr. Cooley was an employee
of TCI Communications for 18 years, having worked in the areas of technical
operations and purchasing and as general manager of the Bloomington system. In
1994, he was appointed area manager of TCI Communications' southern Indiana,
Illinois and Missouri systems serving 260,000 customers. In 1997, he received
TCI Communications' Manager of the Year award. Mr. Cooley is currently the
president of the Indiana Cable Telecommunications Association and serves as a
member of the subcommittee for public relations.
Charles E. Dietz joined Insight Communications as Senior Vice
President, Engineering in 1996. From 1973 to 1995, Mr. Dietz was employed by
Vision Cable Communications serving as Vice President of Technical Operations
from 1988 through 1991, becoming Vice President of Operations in 1991.
Gregory B. Graff served as Senior Vice President and General Manager
of Insight Ohio since its acquisition by Insight Communications in August 1998.
In June 2000, he became the Senior Vice President, Operations, Western Kentucky
Region of Insight Communications. Previously, Mr. Graff served as Senior Vice
President, Marketing, Programming and Advertising for Coaxial Communications of
Central Ohio, Inc. from 1997 to 1999, Vice President, Marketing and Sales for
Coaxial Communications from 1995 to 1997, and Director of
- 68 -
Marketing for KBLCOM's Paragon Cable operation in San Antonio, Texas. He began
his cable television career in 1984 with Continental Cablevision.
Pamela E. Halling joined Insight Communications as Vice President,
Marketing in 1988 and has since become Senior Vice President of Marketing and
Programming. Prior to joining Insight Communications, she had served since 1985
as Director of Consumer Marketing for the Disney Channel. Previously, she was
Vice President of Affiliate Marketing for Rainbow Programming Holdings, Inc. and
a marketing consultant for TCI. She began her cable television career in 1973
with Continental Cablevision.
Daniel Mannino joined Insight Communications as Controller in 1989
and became Vice President and Controller in 1991 and Senior Vice President in
1999. Previously, Mr. Mannino was employed by Vision Cable from 1983 to 1989,
becoming its Controller in 1986. Mr. Mannino is a certified public accountant.
Judy Poole joined Insight Communications in 1998 as Vice President,
Human Resources and became Senior Vice President, Human Resources in 1999. Prior
to joining Insight Communications, Ms. Poole spent 13 years at Cablevision
Systems, most recently as Corporate Director of Employee Relations.
Colleen Quinn joined Insight Communications as Senior Vice
President, Corporate Relations in 1999. Prior to joining Insight Communications,
Ms. Quinn was the Senior Vice President, Government Affairs, of the New York
City Partnership and Chamber of Commerce from 1997 to April 1999. She has also
held positions at MacAndrews & Forbes Holdings, Inc. and the Revlon Foundation
as Vice President from 1996 to 1997 and at Pacific Telesis Group as Executive
Director and Director of Government Relations from 1993 to 1996.
Mary Rhodes joined Insight Communications in 1986 and became Vice
President, Customer Service Administration in 1996 and Senior Vice President,
Customer Service Administration in 2000. Ms. Rhodes previously served as general
manager of our Jeffersonville, Indiana and Sandy, Utah cable systems.
David Servies joined Insight Communications in 1990 and became
Senior Vice President, Operations, Indiana Region in October 2000. From 1998 to
2000, Mr. Servies served as District Vice President for Insight Communications'
Northeast Indiana District. Mr. Servies has worked in the cable industry for the
past 21 years. Mr. Servies is a member of the Indiana Cable Telecommunications
Association and the National Cable Television Association.
James A. Stewart joined Insight Communications in 1987 as a Vice
President, and now serves as Senior Vice President, Operations, Eastern Kentucky
and national regions. Formerly, Mr. Stewart was Operations Manager for National
Guardian Security Services. He was also employed by Viacom International, Inc.'s
cable television division for eight years, where he ultimately became Vice
President and General Manager of Viacom Cablevision's Nashville, Tennessee
system.
Except as described in this prospectus, there are no arrangements or
understandings between any Member of the Advisory Committee or executive officer
and any other person pursuant to which that person was elected or appointed to
his or her position.
Advisory Committee
The Partnership Agreement of Insight Midwest provides for a five
member Advisory Committee. Insight Communications, through Insight LP, is
entitled to designate three of the members of the Advisory Committee. The
remaining members are designated by AT&T Broadband, through TCI of Indiana
Holdings, LLC. Insight Communications' designees are Sidney R. Knafel, Michael
S. Willner and Kim D. Kelly. AT&T Broadband's designees are Daniel E. Somers and
David Jefferson. The Advisory Committee serves in an advisory capacity only.
Insight LP is our general partner and has the exclusive authority to manage our
business, operations and affairs, subject to certain approval rights of AT&T
Broadband.
Executive and Advisory Committee Compensation
None of the executive officers of Insight Capital are compensated
for their services as such officers. Rather, executive management of Insight
Capital receive compensation from Insight Communications. None of the
- 69 -
members of the Advisory Committee of Insight Midwest are compensated for their
services as such members, but are entitled to reimbursement for travel expenses.
CERTAIN TRANSACTIONS
On November 17, 1999, our manager formed a joint venture with Source
Media, Inc., known as SourceSuite, LLC, to conduct all lines of business of
Source Media relating to its VirtualModem and Interactive Channel products and
businesses. Our manager capitalized the joint venture with $13.0 million in
exchange for its 50% equity interest. As part of the transaction, our manager's
subsidiary acquired 842,105 shares of Source Media's common stock for $12.0
million and warrants to purchase up to an additional 4,596,786 shares at an
exercise price of $20 per share.
Our manager is entitled to designate three members of the board of
directors of Source Media. Our manager's designees are Sidney R. Knafel,
Chairman of the Board and a director of our manager, Michael S. Willner, the
President, Chief Executive Officer and a director of our manager, and Kim D.
Kelly, Executive Vice President, Chief Operating and Financial Officer and a
director of our manager.
Our manager is currently providing the joint venture's interactive
services to customers of its systems under a letter of intent entered into on
July 29, 1998. Pursuant to the letter of intent, we pay Interactive Channel a
monthly license fee for the right to distribute LocalSource in an amount that is
based on the number of digital customers as adjusted for penetration. We share
50% of all revenues, other than advertising revenues, generated by LocalSource.
On March 3, 2000, our manager and Source Media sold all of the joint
venture's Virtual Modem business to Liberate Technologies in exchange for the
issuance to each of our manager's subsidiary and Source Media of 886,000 shares
of Liberate common stock. The joint venture continues to own and operate its
programming assets, LocalSource and SourceGuide, and has entered into preferred
content and programming services agreements with Liberate.
Our manager, Insight LP, receives a management fee for each
twelve-month period equal to 3% of substantially all revenue arising out of or
in connection with the operations of our systems. For the years ended December
31, 1998, 1999 and 2000, Insight LP received management fees of $685,000, $5.9
million, and $11.0 million. Our manager owns 50% of the partnership interests of
Insight Midwest and Insight Midwest owns 100% of the common stock of Insight
Capital. In addition, Sidney Knafel, Michael Willner and Kim Kelly, who are each
executive officers of our manager, are members of and collectively constitute a
majority of Insight Midwest's advisory committee.
On August 8, 2000, Insight Ohio purchased its non-voting common
equity interest held by Coaxial Communications of Central Ohio, Inc. for 800,000
shares of the Class A common stock of Insight Communications plus $2.6 million
in cash. In connection with the purchase, Insight Ohio's operating agreement was
amended to, among other things, (i) remove certain special rights of the
principals of Coaxial Communications' shareholders (the "Coaxial Entities"),
(ii) vest in the common equity interests of Insight Ohio 70% of its total voting
power and in the preferred equity interests of Insight Ohio 30% of its total
voting power and (iii) make Insight LP the manager. Coaxial Communications
retained its preferred interests in Insight Ohio and Insight Holdings became the
sole owner of the common equity interests of Insight Ohio.
Insight Communications also agreed that if the 10% senior notes
issued by Coaxial Communications or the 12 7/8% senior discount notes issued by
Coaxial LLC are repaid or modified, or at any time after August 15, 2008, the
principals of the Coaxial Entities may require Insight Communications to
purchase their interests in the Coaxial Entities for $32.6 million, with credit
given toward that amount for the value at such time of the 800,000 shares
described above. The amount due to the principals of the Coaxial Entities will
be payable, at the option of Insight Communications, in cash or in additional
shares of Class A common stock of Insight Communications.
- 70 -
PRINCIPAL STOCKHOLDERS
Insight Capital is a wholly-owned subsidiary of Insight Midwest.
The following table sets forth information with respect to the
beneficial ownership of Insight Midwest's partnership interests:
Percent of
Name and Address of Beneficial Owner Type of Interest Partnership Interests
- ------------------------------------ ---------------- ---------------------
Insight Communications Company, L.P. (1) ... General Partner 50%
810 Seventh Avenue
New York, New York 10019
TCI of Indiana Holdings, LLC (2) ........... Limited Partner 50%
Terrace Tower II, 5619 DTC Parkway
Englewood, Colorado 80111
(1) Insight LP is a wholly-owned subsidiary of Insight Communications. The
Class A common stock of Insight Communications is quoted on The Nasdaq
National Market. Sidney R. Knafel and trusts for the benefit of his
children, Michael S. Willner and Kim D. Kelly, through their ownership of
Insight Communications' Class B common stock have approximately 63% of
Insight Communications' voting power.
(2) TCI of Indiana Holdings is an indirect wholly-owned subsidiary of AT&T
Corp., a publicly held company.
- 71 -
DESCRIPTION OF GOVERNING DOCUMENTS
Partnership Agreement
Organization and Duration
We were formed as a Delaware limited partnership in September 1999
in order to consolidate the Indiana systems and the Kentucky systems under one
holding company. Unless sooner terminated in accordance with the terms of our
partnership agreement, we will continue until October 2011.
General Partner and Limited Partner
Insight LP is our general partner and TCI of Indiana Holdings, a
subsidiary of AT&T Broadband, is our limited partner. Other than with respect to
certain partnership matters that require the approval of AT&T Broadband, Insight
Communications, through Insight LP, has the exclusive authority to manage our
business, operations and affairs, and the exclusive right to exercise all rights
incident to the ownership of all partnership or corporate interests held by us,
including the Indiana, Kentucky, Illinois, Ohio and Georgia systems subject to
certain approval rights of AT&T Broadband. Insight Communications, through
Insight LP, manages the Indiana and Kentucky systems pursuant to separate
management agreements between Insight LP and each of Insight Communications
Midwest and Insight Kentucky. Insight Communications, through Insight LP manages
the Illinois and Georgia systems pursuant to the management agreement between
Insight LP and Insight Communications Midwest and manages the Ohio system
pursuant to the Insight Ohio operating agreement.
Advisory Committee
Our partnership agreement provides for an advisory committee
consisting of five representatives of the partners, three of whom are appointed
by Insight Communications, through Insight LP, and two of whom are appointed by
AT&T Broadband, through TCI of Indiana Holdings. Insight Communications has
appointed Sidney Knafel, Michael Willner and Kim Kelly as its representatives;
and AT&T Broadband has appointed Daniel E. Somers and David Jefferson as its
representatives. The advisory committee serves in an advisory capacity only.
Approval Rights of AT&T Broadband
Our partnership agreement prohibits Insight LP and Insight
Communications from causing us or our subsidiaries from taking certain actions
without the approval of AT&T Broadband. The following is a summary of certain
material actions or events that require AT&T Broadband's approval:
o selling or disposing of assets that would result in the
allocation of income or gain to AT&T Broadband pursuant to
Internal Revenue Code (the "Code") Section 704(c) with certain
permitted exceptions;
o incurring any indebtedness or consummating any asset
acquisition, such that immediately after the incurrence of
such indebtedness or consummation of such asset acquisition,
our operating cash flow ratio would exceed 7.0 to 1.0;
o entering into any agreement evidencing indebtedness or any
amendment to an agreement governing indebtedness that includes
any borrower other than us or our subsidiaries or that
provides that we may be deemed in default thereunder as a
result of a default by Insight LP or its affiliates;
o entering into any amendment to, or refinancing of, any
indebtedness that would affect any keepwell or guarantee
issued by AT&T Broadband;
o consummating one or more asset dispositions in any consecutive
twelve-month period having an aggregate value in excess of
$25.0 million with certain permitted exceptions;
o engaging in any merger, consolidation, recapitalization or
other reorganization, with certain permitted exceptions;
- 72 -
o entering into any transaction with Insight LP or AT&T
Broadband or their affiliates, with certain permitted
exceptions;
o selecting a new general partner for us;
o liquidating or dissolving except in accordance with the
provisions of our partnership agreement;
o issuing or redeeming any partnership interest or convertible
interest, with certain permitted exceptions;
o admitting any additional partners;
o converting us to corporate form or changing our partnership
tax classification;
o commencing any bankruptcy or insolvency proceedings;
o commencing, instituting or settling any lawsuit on behalf of
us for any amount in excess of $3,000,000, subject to certain
permitted exceptions;
o engaging in new lines of business not described in our
partnership agreement or acquiring cable television systems
other than in Kentucky and specific parts of Indiana and
Illinois;
o calling for additional capital contributions;
o making any distribution to the partners other than
distributions permitted pursuant to our partnership agreement;
o amending our management incentive plan or any of the
management agreements with Insight Communications;
o entering into, conducting or participating in the business of
providing or engaging in any Internet backbone service;
o changing our public accountants; or
o transferring, issuing or redeeming any subsidiary equity
interest, with certain permitted exceptions.
Capital Contributions and Distributions
Other than the contribution of the Indiana and Kentucky systems
formerly owned by affiliates of Insight Communications and AT&T Broadband, which
contribution occurred in October 1999, and other than the contribution of
systems in connection with the AT&T transactions, neither partner will be
required to make any capital contributions to us.
All distributions by us will be made in proportion to the partners'
percentage interests. Distributions prior to our liquidation must be approved by
AT&T Broadband and Insight LP, except that we will be required to make quarterly
distributions of cash, subject to contractual restrictions on distributions by
us, to Insight LP to the extent of the estimated tax liabilities of Insight LP
as a result of the allocation to Insight LP of our income and gain and pro rata
distributions to AT&T Broadband.
Partnership Split-Up
At any time after December 31, 2005 (other than at certain times
specified in our partnership agreement), either AT&T Broadband or Insight LP
(the "Initiating Partner") will have the right to commence the split-up process
described below by delivering a notice to the other partner (the "Non-Initiating
Partner"). The Non-Initiating Partner will have the right to postpone the
split-up process one time only for a period of six months, subject to certain
restrictions in our partnership agreement.
- 73 -
The Initiating Partner will be required to divide our assets and
liabilities into two groups of as nearly equal gross fair market values as
possible such that certain specified systems cannot be divided between the two
groups and the net fair market values (i.e., taking into account liabilities) of
the two groups are equal. The Non-Initiating Partner will have the right to
select which of the two asset groups it desires to acquire from us in redemption
of its ownership interest, provided that if the Non-Initiating Partner does not
agree that the Initiating Partner's division of our assets and liabilities
complies with the requirements of our partnership agreement, it will have the
right to propose its own division of our assets and liabilities. If the
Non-Initiating Partner proposes its own division of asset groups and the
partners cannot agree on two asset groups within ninety days, the partners will
engage a mutually satisfactory investment banking firm or appraisal firm to
select which partner's division of our assets and liabilities most closely
complies with the requirements of our partnership agreement. The partner whose
asset group division is not selected by the firm will have the right to select
which of the two asset groups designated by the other partner it desires to
acquire from us in redemption of its ownership interest.
If the partners become obligated to consummate the split-up process
in accordance with our partnership agreement and either partner defaults in its
obligation, then the non-defaulting partner will have the right to cause us to
be liquidated and dissolved in accordance with the liquidation provisions of our
partnership agreement or to terminate the split-up process and continue our
partnership.
Limitations on Our Activities
Our partnership agreement prohibits us and our subsidiaries from
engaging in any business involving the provision of multipoint distribution
systems, multichannel multipoint distribution systems, direct-to-home satellite
systems or Internet backbone services without the consent of both partners.
Admission of Additional Partners and Amendments
We may issue additional equity interests in our partnership, and
admit new persons as additional partners of our partnership, only with the
approval of Insight LP and AT&T Broadband. Our partnership agreement may be
amended only with the approval of Insight LP and AT&T Broadband.
Removal of Insight LP as General Partner
Under certain limited circumstances specified in our partnership
agreement where Insight LP's conduct has resulted in material harm to us or AT&T
Broadband, AT&T Broadband will have the right to replace Insight LP as general
partner or purchase all of Insight LP's partnership interest in us at fair
market value and, upon consummation of such purchase, remove Insight LP as a
partner.
Withdrawal of Partners and Assignment of Partnership Interests
Without AT&T Broadband's consent, our partnership agreement
prohibits Insight LP from withdrawing as our general partner. Subject to certain
permitted exceptions, our partnership agreement also prohibits Insight LP from
assigning its partnership interest without the approval of AT&T Broadband and
will prohibit AT&T Broadband from assigning its partnership interest without the
approval of Insight LP.
Dissolution and Liquidation
The principal events upon which we will dissolve are:
o the withdrawal of Insight LP as general partner unless AT&T
Broadband continues the partnership;
o the expiration of our term;
o an election to liquidate and dissolve us made by the
non-defaulting partner pursuant to the terms of the split-up
provisions of our partnership agreement, see "--Partnership
Split-Up;"
o the sale or disposition of all or substantially all our
assets; or
- 74 -
o the agreement of Insight LP and AT&T Broadband.
Management of the Systems
Insight LP currently manages the Indiana and Kentucky systems
pursuant to respective management agreements with Insight Communications Midwest
and Insight Kentucky. Insight LP manages the Illinois and Georgia systems
pursuant to the management agreement with Insight Communications Midwest and
manages the Ohio system pursuant to the Insight Ohio operating agreement.
Insight LP has full and exclusive authority to manage the day to day operations
and conduct the business of our systems. Our systems remain responsible for all
expenses and liabilities relating to the construction, development, operation,
maintenance, repair and ownership of the systems.
Management Fee
As compensation for the performance of its services, Insight
Communications Midwest, Insight Kentucky and Insight Ohio each pay Insight LP a
management fee for each twelve-month period equal to 3% of all revenue arising
out of or in connection with the operation of the business of the systems,
excluding proceeds from the sale of assets or from extraordinary or
non-recurring items and all interest, dividend and royalties and other types of
investment income that do not arise from the operation of the business of the
systems in the ordinary course. Insight LP is also entitled to the reimbursement
of all expenses necessarily incurred in its capacity as manager.
Termination
The management agreements will terminate automatically upon the
termination of the applicable entity, and will also be terminable as follows:
o with respect to the Insight Communications Midwest management
agreement, by either Insight Communications Midwest or Insight
LP upon a sale or distribution of all the assets of Insight
Communications Midwest;
o with respect to the Insight Kentucky management agreement, by
either Insight Kentucky or Insight LP upon a sale or
distribution of all the assets of Insight Kentucky;
o with respect to either of the management agreements, upon the
removal of Insight LP as our general partner pursuant to the
terms of our partnership agreement, other than in connection
with the transfer by Insight LP of its partnership interest to
an affiliate;
o with respect to the Insight Communications Midwest management
agreement, by either Insight Communications Midwest or Insight
LP should the other party breach any agreement or covenant
contained in the management agreement and that breach
continues for a period of ninety days; and
o with respect to the Insight Kentucky management agreement, by
either Insight Kentucky or Insight LP should the other party
breach any agreement or covenant contained in the management
agreement and that breach continues for a period of ninety
days.
The Insight Ohio operating agreement allows Insight LP to resign as
manager and allows Insight Holdings, as owner of all of the common interests in
Insight Ohio, to remove Insight LP as manager.
- 75 -
DESCRIPTION OF CERTAIN INDEBTEDNESS
Insight Midwest Holdings Credit Facility
On January 5, 2001, Insight Midwest Holdings, LLC, our wholly-owned
subsidiary which owns all of our systems other than the Columbus, Ohio system,
entered into a senior credit facility with a group of banks and other financial
institutions led by The Bank of New York. The Midwest Holdings credit facility
provides for term loans of $1,325 million and for revolving credit loans of up
to $425 million, including a letter of credit subfacility of up to $50 million.
Loans under the Midwest Holdings facility were used to refinance the previous
credit facilities of our Indiana and Kentucky systems (i.e., the Indiana and
Kentucky credit facilities) and to finance the AT&T transactions, and may be
used for working capital and general corporate purposes. The term loans will
mature in June and December 2009, and the revolving credit loans will mature in
June 2009, with quarterly reductions in the amount of outstanding term loans,
revolving credit loans and commitments commencing March 2004. Obligations under
the Midwest Holdings credit facility are secured by a pledge of the outstanding
equity interests of Midwest Holdings and its subsidiaries and any amounts
payable by Midwest Holdings and its subsidiaries to Insight LP have been
subordinated to the loans under the credit facility. Loans under the Midwest
Holdings credit facility bear interest, at Midwest Holdings' option, at an
alternate base rate or Eurodollar rate, plus an additional margin, tied to
Midwest Holdings' ratio of total debt to adjusted annualized operating cash
flow, of between 0.50% and 2.75%.
The Midwest Holdings credit agreement contains a number of covenants
that, among other things, restrict the ability of Midwest Holdings and its
subsidiaries to make capital expenditures, acquire or dispose of assets, enter
into mergers, incur additional indebtedness, pay dividends or other
distributions, create liens on assets, make investments, and engage in
transactions with related parties. The Midwest Holdings credit facility permits
the distribution to us of amounts equal to the interest then due and owing on
our 10 1/2% senior notes due 2010 and the interest and principal then due and
owing on our 9 3/4% senior notes due 2009, assuming that the maturity of the 10
1/2% senior notes and the 9 3/4% senior notes has not been accelerated and,
before and after giving effect to such payment, no default exists under the
facility. In addition, the Midwest Holdings credit facility requires compliance
with certain financial ratios and also contains customary events of default. As
of March 31, 2001, there was $1.38 billion outstanding under the Midwest
Holdings credit facility.
Insight Midwest 10 1/2% Senior Notes Due 2010
See "Description of Notes."
Insight Midwest 9 3/4% Senior Notes Due 2009
We have outstanding $200.0 million in aggregate principal amount of
9 3/4% senior notes due 2009. Interest on the 9 3/4% senior notes is payable
semiannually on April 1 and October 1 of each year.
The 9 3/4% senior notes constitute senior debt. The 9 3/4% senior
notes rank pari passu with our 10 1/2% senior notes and effectively rank behind
all existing and future indebtedness and other liabilities of our subsidiaries.
The 9 3/4% senior notes will rank equally with all of our future unsubordinated,
unsecured debt that does not expressly provide that it is subordinated to the
notes and will rank ahead of all our future debts that expressly provide that
they are subordinated to the notes.
On or after October 1, 2004, we may redeem some or all of the 9 3/4%
senior notes, plus accrued and unpaid interest. Prior to October 1, 2002, we may
redeem up to 35% of the 9 3/4% senior notes with the proceeds of certain
offerings of our equity at the price listed in the indenture governing the 9
3/4% senior notes.
If we or our subsidiaries sell certain assets or experience specific
kinds of changes of control, we must offer to repurchase the 9 3/4% senior notes
at a purchase price equal to 101% of the principal amount, plus accrued and
unpaid interest.
The indenture governing the 9 3/4% senior notes contains certain
covenants that limit, among other things, our ability and the ability of our
subsidiaries to:
o incur additional debt;
- 76 -
o pay dividends on capital stock or repurchase capital stock;
o make investments;
o use assets as security in other transactions; and
o sell certain assets or merge with or into other companies.
Ohio Credit Facility
Insight Ohio entered into the Ohio credit facility on October 7,
1998 with a group of banks and other financial institutions led by Canadian
Imperial Bank of Commerce. The Ohio credit facility provides for revolving
credit loans of $25 million to finance capital expenditures and for working
capital and general corporate purposes, including the upgrade of the Ohio
system's network and for the introduction of new video services. The Ohio credit
facility has a six-year maturity, with reductions to the amount of the
commitment commencing after March 31, 2002. The amount available for borrowing
is reduced by any outstanding letter of credit obligations.
Insight Ohio's obligations under the Ohio credit facility are
secured by substantially all the tangible and intangible assets of Insight Ohio.
Loans under the Ohio credit facility bear interest, at Insight Ohio's option, at
Canadian Imperial Bank of Commerce's prime rate or at a Eurodollar rate. In
addition to the index rates, Insight Ohio pays an additional margin percentage
tied to its ratio of total debt to adjusted annualized operating cash flow, in
the case of prime rate loans, 0.75% or, if under a 5:1 ratio, 0.25%; and in the
case of Eurodollar loans, 2.0% or, if under a 5:1 ratio, 1.5%.
The Ohio credit facility contains a number of covenants that, among
other things, restricts the ability of Insight Ohio and its subsidiaries to make
capital expenditures, dispose of assets, incur additional indebtedness, incur
guarantee obligations, pay dividends or make capital distributions, including
distributions on the preferred interests that are required to pay the Coaxial
10% senior notes and the Coaxial 12 7/8% senior discount notes in the event of a
payment default under the Ohio credit facility, create liens on assets, make
investments, make acquisitions, engage in mergers or consolidations, engage in
certain transactions with subsidiaries and affiliates and otherwise restrict
certain activities. In addition, the Ohio credit facility requires compliance
with certain financial ratios, including with respect to total leverage,
interest coverage and pro forma debt service coverage.
The Ohio credit facility contains customary events of default,
including the failure to pay principal when due or any interest or other amount
that becomes due within a period of time after the due date thereof, any
representation or warranty being made by Insight Ohio that is incorrect in any
material respect on or as of the date made, a default in the performance of any
negative covenants or a default in the performance of certain other covenants or
agreements for a specified period, default in certain other indebtedness,
certain insolvency events, certain change of control events and a default under
the indentures governing the Coaxial 10% senior notes and the Coaxial 12 7/8%
senior discount notes.
As of March 31, 2001, there was $25.0 million outstanding under the
Ohio credit facility.
Insight Ohio will become an unrestricted subsidiary under the
indenture governing the notes, and will be prohibited by the terms of its
indebtedness from making distributions to us.
Coaxial 10% Senior Notes Due 2006
Coaxial Communications of Central Ohio, Inc. and Phoenix Associates,
an affiliated general partnership, have outstanding $140.0 million aggregate
principal amount of 10% senior notes due 2006. Interest on the Coaxial 10%
senior notes is payable semiannually on each February 15 and August 15 of each
year. The Coaxial 10% senior notes are joint and several non-recourse
obligations of Coaxial Communications and Phoenix.
As part of the financing plan that resulted in Insight Ohio
acquiring the Ohio system, Insight Ohio issued Series A preferred interests and
Series B preferred interests to Coaxial Communications. The 10% senior notes are
secured by a first priority pledge of all of the issued and outstanding Series A
preferred interests of Insight Ohio.
- 77 -
The Series A preferred interests have a liquidation preference of
$140.0 million and will pay distributions in an amount equal to the interest
payments on the Coaxial 10% senior notes. All Series A preferred interests were
issued to Coaxial Communications and pledged to the trustee of the Coaxial 10%
senior notes for the benefit of the holders of the Coaxial 10% senior notes.
Coaxial Communications utilizes cash distributions on the Series A preferred
interests to make payments on the Coaxial 10% senior notes.
The Coaxial 10% senior notes are conditionally guaranteed on a
senior unsecured basis, by Insight Ohio and any future restricted subsidiaries
of Coaxial Communications and Phoenix. The Coaxial 10% senior notes guarantees
are only effective to the extent and at the time the holders of the Coaxial 10%
senior notes are unable to realize proceeds from the enforcement of the
mandatory redemption provisions of the Series A preferred interests. Insight
Ohio is the only guarantor of the Coaxial 10% senior notes currently in
existence.
The indenture governing the Coaxial 10% senior notes contains
covenants that, among other things, generally restrict the ability of Coaxial
Communications, Phoenix, Insight Ohio and any of their restricted subsidiaries
to:
o incur additional debt;
o pay dividends and make distributions;
o issue stock of subsidiaries to third parties;
o make certain investments;
o repurchase stock;
o create liens;
o enter into transactions with affiliates;
o enter into sale and leaseback transactions;
o create dividend or other payment restrictions affecting
restricted subsidiaries;
o merge or consolidate in a transaction involving all or
substantially all of the assets of Coaxial Communications and
Phoenix and their restricted subsidiaries, taken as a whole;
o transfer or sell assets; and
o use distributions on the Series A preferred interests or
Series B preferred interests for any purpose other than
required payments of interest and principal on the Coaxial 10%
senior notes or the Coaxial 12 7/8% senior discount notes.
Coaxial 12 7/8% Senior Discount Notes Due 2008
Coaxial LLC (a 67.5% shareholder of Coaxial Communications) and
Coaxial Financing Corp. (an affiliate of Coaxial LLC) have outstanding
$55,869,000 aggregate principal amount at maturity of 12 7/8% senior discount
notes due 2008, which were issued for $30.0 million gross proceeds. Cash
interest on the Coaxial 12 7/8% senior discount notes does not accrue and is not
payable prior to August 15, 2003. Thereafter, cash interest will be payable
semiannually on each February 15 and August 15, commencing February 15, 2004.
As part of the financing plan that resulted in Insight Ohio
acquiring the Ohio system, Insight Ohio issued Series A preferred interests and
Series B preferred interests to Coaxial Communications. The Series B preferred
have an initial liquidation preference of $30.0 million. Insight Ohio will pay
distributions to Coaxial Communications in an amount equal to the interest
payments on the Coaxial 12 7/8% senior discount notes. Coaxial Communications
uses the distributions received by it in respect of the Series B preferred
interests to pay dividends
- 78 -
on its common stock. Pursuant to certain promissory notes, Coaxial DJM LLC and
Coaxial DSM LLC (each a shareholder of Coaxial Communications) pay dividends
received by them to Coaxial LLC. Coaxial LLC utilizes cash dividends from the
Coaxial Communications common stock and cash interest payments from the
promissory notes to make payments on the Coaxial 12 7/8% senior discount notes.
Though the Series B preferred interests make distributions in amounts equal to
the interest payments on the Coaxial 12 7/8% senior discount notes, the Series B
preferred interests do not serve as collateral for the Coaxial 12 7/8% senior
discount notes and the holders of the Coaxial 12 7/8% senior discount notes will
not have any direct claim with respect to the Series B preferred interests. The
Insight Ohio Series A preferred interests have a priority over the Series B
preferred interests with respect to both distributions and redemption.
The Coaxial 12 7/8% senior discount notes are conditionally
guaranteed on a senior unsecured basis, by Insight Ohio and any future
restricted subsidiaries of Coaxial LLC, other than Coaxial Communications, and
Coaxial Financing. The Coaxial 12 7/8% senior discount notes guarantees are only
effective to the extent and at the time the holders of the Coaxial 12 7/8%
senior discount notes are unable to realize proceeds from the enforcement of the
mandatory redemption provisions of the Insight Ohio Series B preferred
interests. Insight Ohio is the only guarantor of the Coaxial 12 7/8% senior
discount notes currently in existence. The Coaxial 12 7/8% senior discount notes
guarantees are subordinated to the prior payment in full of all obligations of
the guarantors.
The indenture governing the Coaxial 12 7/8% senior discount notes
contains covenants that, among other things, generally restrict the ability of
Coaxial LLC, Coaxial Financing, Insight Ohio and any of their restricted
subsidiaries to:
o incur additional debt;
o pay dividends and make distributions;
o issue stock of subsidiaries to third parties;
o make certain investments;
o repurchase stock;
o create liens;
o enter into transactions with affiliates;
o enter into sale and leaseback transactions;
o create dividend or other payment restrictions affecting
restricted subsidiaries;
o merge or consolidate in a transaction involving all or
substantially all of the assets of Coaxial LLC, Coaxial
Financing and their restricted subsidiaries, taken as a whole;
o transfer or sell assets; and
o use dividends received on the Coaxial Communications common
stock and payments received in respect of the promissory notes
for any purpose other than required payments of interest and
principal on the Coaxial 12 7/8% senior discount notes.
- 79 -
DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this
description under the subheading "--Certain Definitions." In this description,
the "Issuers" refers only to Insight Midwest, L.P. and Insight Capital, Inc. and
not to any of their subsidiaries.
The initial notes were issued and the exchange notes will be issued
under an indenture among the Issuers and The Bank of New York, as trustee. The
terms of the notes include those stated in the indenture and those made part of
the indenture by reference to the Trust Indenture Act of 1939.
The form and terms of the exchange notes are the same in all
material respects as the form and terms of the initial notes, except that the
exchange notes will have been registered under the Securities Act and therefore
will not bear legends restricting their transfer. The initial notes have not
been registered under the Securities Act and are subject to transfer
restrictions.
The following description is a summary of the material provisions of
the indenture. We urge you to read the indenture because it, and not this
description, define your rights as holders of the notes. Copies of the indenture
are available as set forth below under "--Additional Information." Certain
defined terms used in this description but not defined below under "--Certain
Definitions" have the meanings assigned to them in the indenture.
The registered holder of a note will be treated as the owner of it
for all purposes. Only registered holders will have rights under the indenture.
Brief Description of the Notes
The notes:
o are our general unsecured obligations;
o are senior in right of payment to any of our existing and
future subordinated Indebtedness;
o are equal in right of payment to all of our existing and
future unsubordinated, unsecured Indebtedness; and
o are effectively subordinated in right of payment to all of our
future secured Indebtedness to the extent of the value of the
assets securing such Indebtedness.
Substantially all of our operations are conducted through our
subsidiaries and therefore, we are dependent upon the cash flow of our
subsidiaries to meet our obligations, including our obligations under the notes.
Our right to receive assets of any of our subsidiaries will be effectively
subordinated to the claims of that subsidiary's creditors (including trade
creditors). As of March 31, 2001, the aggregate amount of Indebtedness and other
obligations of our Subsidiaries (including Capital Lease Obligations and trade
payables) that would effectively rank senior in right of payment to our
obligations under the notes would have been approximately $1.73 billion,
excluding Insight Ohio. See "Risk Factors--We have substantial debt and have
significant interest payment requirements, which may adversely affect our
ability to obtain financing in the future to finance our operations and our
ability to react to changes in our business" "Risk Factors--We depend on our
operating subsidiaries for cash to fund our obligations," "Risk Factors--Our
ability to access the cash flow of our subsidiaries may be contingent upon our
ability to refinance the debt of our subsidiaries and we may be required to
refinance certain indebtedness prior to maturity," "Risk Factors--Since the
exchange notes will be effectively subordinated to the debt of our subsidiaries,
our subsidiaries' lenders will have the right to be paid before you" and "Risk
Factors--We may not be able to generate enough cash to service our debt,
including the exchange notes."
As of the date of the indenture, all of our subsidiaries, other than
Insight Ohio, will be "Restricted Subsidiaries." However, under the
circumstances described below under the subheading "--Certain
Covenants--Designation of Restricted and Unrestricted Subsidiaries," we will be
permitted to designate certain other of our subsidiaries as "Unrestricted
Subsidiaries." Our Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants in the indenture.
- 80 -
Principal, Maturity and Interest
The indenture provides for the issuance by us of notes with a
maximum aggregate principal amount of $1.0 billion, of which $500.0 million will
be issued in this offering. We may issue additional notes (the "Additional
Notes") from time to time after this offering. Any offering of Additional Notes
is subject to the covenant described below under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock." The
notes and any Additional Notes subsequently issued under the indenture would be
treated as a single class for all purposes under the indenture, including,
without limitation, waivers, amendments, redemptions and offers to purchase. We
will issue notes in denominations of $1,000 and integral multiples of $1,000.
The notes will mature on November 1, 2010.
Interest on the notes will accrue at the rate of 10 1/2% per annum
and will be payable semi-annually in arrears on May 1 and November 1, commencing
on May 1, 2001. The Issuers will make each interest payment to the holders of
record on the immediately preceding April 15 and October 15.
Interest on the notes will accrue from the date of original issuance
or, if interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
Methods of Receiving Payments on the Notes
If a holder has given wire transfer instructions to the Issuers, we
will pay all principal, interest and premium and Liquidated Damages, if any, on
that holder's notes in accordance with those instructions. All other payments on
notes will be made at the office or agency of the paying agent and registrar for
the notes within the City and State of New York unless we elect to make interest
payments by check mailed to the holders at their addresses set forth in the
register of holders.
Paying Agent and Registrar for the Notes
The trustee will initially act as paying agent and registrar. We may
change the paying agent or registrar without prior notice to the holders, and we
or any of our Subsidiaries may act as paying agent or registrar.
Transfer and Exchange
A holder may transfer or exchange notes in accordance with the
indenture. The registrar and the trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and we may
require a holder to pay any taxes and fees required by law or permitted by the
indenture. We are not required to transfer or exchange any note selected for
redemption. Also, we are not required to transfer or exchange any note for a
period of 15 days before the mailing of a notice of redemption.
Optional Redemption
At any time prior to November 1, 2003, we may on any one or more
occasions redeem up to 35% of the aggregate principal amount of notes issued
under the indenture at a redemption price of 110.5% of the principal amount of
the notes redeemed, plus accrued and unpaid interest and Liquidated Damages, if
any, to the redemption date, with the net cash proceeds of one or more Equity
Offerings; provided that:
o at least 65% of the notes issued under the indenture remains
outstanding immediately after the occurrence of any such
redemption, excluding notes held by us and our Subsidiaries;
and
o the redemption occurs within 90 days of the date of the
closing of any such Equity Offering.
Except pursuant to the preceding paragraph, the notes will not be
redeemable at the Issuers' option prior to November 1, 2005.
On or after November 1, 2005, we may redeem all or a part of the
notes upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below plus
- 81 -
accrued and unpaid interest and Liquidated Damages, if any, thereon, to the
applicable redemption date, if redeemed during the twelve-month period beginning
on November 1, of the years indicated below:
Year Percentage
---- ----------
2005 .................................. 105.250%
2006 .................................. 103.500%
2007 .................................. 101.750%
2008 and thereafter ................... 100.000%
Mandatory Redemption
We are not required to make mandatory redemption or sinking fund
payments with respect to the notes.
Repurchase at the Option of holders
Change of Control
If a Change of Control occurs, each holder of notes will have the
right to require us to repurchase all or any part (equal to $1,000 or an
integral multiple of $1,000) of that holder's notes pursuant to a Change of
Control Offer on the terms set forth in the indenture. In the Change of Control
Offer, we will offer a Change of Control Payment in cash equal to 101% of the
aggregate principal amount of notes repurchased plus accrued and unpaid interest
and Liquidated Damages, if any, on the notes repurchased, to the date of
purchase. Within 30 days following any Change of Control, we will mail a notice
to the trustee and each holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase notes on the Change
of Control Payment Date specified in the notice, which date shall be no earlier
than 30 days and no later than 60 days from the date such notice is mailed,
pursuant to the procedures required by the indenture and described in such
notice. We will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent those
laws and regulations are applicable in connection with the repurchase of the
notes as a result of a Change of Control. To the extent that the provisions of
any securities laws or regulations conflict with the Change of Control
provisions of the indenture, we will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations under
the Change of Control provisions of the indenture by virtue of such conflict.
On the Change of Control Payment Date, we will, to the extent
lawful:
o accept for payment all notes or portions of notes properly
tendered pursuant to the Change of Control Offer;
o deposit with the paying agent an amount equal to the Change of
Control Payment in respect of all notes or portions of notes
properly tendered; and
o deliver or cause to be delivered to the trustee the notes so
accepted together with an Officers' Certificate stating the
aggregate principal amount of notes or portions of notes being
purchased by the Issuers.
The paying agent will promptly mail to each holder of notes properly
tendered the Change of Control Payment for such notes, and we will execute and
issue and the trustee will promptly authenticate and mail (or cause to be
transferred by book entry) to each holder a new note equal in principal amount
to any unpurchased portion of the notes surrendered, if any; provided that each
such new note will be in a principal amount of $1,000 or an integral multiple of
$1,000.
- 82 -
The provisions described above that require us to make a Change of
Control Offer following a Change of Control will be applicable regardless of
whether any other provisions of the indenture are applicable. Except as
described above with respect to a Change of Control, the indenture does not
contain provisions that permit the holders of the notes to require that we
repurchase or redeem the notes in the event of a takeover, recapitalization or
similar transaction.
We will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the indenture applicable to a Change of Control Offer made by us and
purchases all notes or portions of notes properly tendered and not withdrawn
under such Change of Control Offer.
The definition of Change of Control includes a phrase relating to
the direct or indirect sale, lease, transfer, conveyance or other disposition of
"all or substantially all" of the properties or assets of the Issuers and its
Subsidiaries taken as a whole. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of notes to require the Issuers to repurchase such notes as a result of a
sale, lease, transfer, conveyance or other disposition of less than all of the
assets of the Issuers and its Subsidiaries taken as a whole to another Person or
group may be uncertain.
The Kentucky Credit Facility and the Indiana Credit Facility
currently limit our subsidiaries ability to pay dividends or make other
distributions to us, and prohibit such payments in the case of a default or
event of default thereunder. A Change of Control may constitute a default under
the Kentucky Credit Facility and the Indiana Credit Facility. In the event a
Change of Control occurs, we could seek the consent of our subsidiaries' lenders
to provide sufficient funds to us for the purchase of the notes or could attempt
to refinance the borrowings that contain such restrictions. If we do not obtain
such consent or repay such borrowings, we will likely not have the financial
resources to purchase the notes and such subsidiaries would be prohibited from
paying dividends to us for the purpose of such purchase. In any event, there can
be no assurance that our subsidiaries will have the resources available to make
any such dividend or distribution. In addition, any future credit agreements or
other agreements relating to Indebtedness to which we become a party may
prohibit or otherwise limit us from purchasing any notes prior to their
maturity, and may also provide that certain change of control events with
respect to us would constitute a default thereunder. In the event a Change of
Control occurs at a time when we are prohibited from purchasing notes, we could
seek the consent of our lenders to the purchase of notes or could attempt to
refinance the borrowings that contain such prohibition. If we do not obtain such
a consent or repay such borrowings, we will remain prohibited from purchasing
notes. In such case, our failure to purchase tendered notes would constitute an
Event of Default under the indenture. A Change of Control under the indenture
will also constitute a change of control under the indenture governing our 9
3/4% Notes pursuant to which we would be required to offer to repurchase our
outstanding 9 3/4% Notes. See "Risk Factors--We may not be able to finance a
change of control offer required by the indenture."
Asset Sales
We will not, and will not permit any of our Restricted Subsidiaries
to, consummate an Asset Sale unless:
(1) We, or our Restricted Subsidiary, as the case may be, receive
consideration at the time of such Asset Sale at least equal to
the fair market value of the assets or Equity Interests issued
or sold or otherwise disposed of;
(2) such fair market value is determined by our Boards of
Directors and evidenced by a resolution of the Boards of
Directors set forth in an Officers' Certificate delivered to
the trustee; and
(3) at least 75% of the consideration received in such Asset Sale
by us or any such Restricted Subsidiary is in the form of cash
or Cash Equivalents. For purposes of this provision, each of
the following shall be deemed to be cash:
o any Indebtedness or other liabilities, as shown on our
or such Restricted Subsidiary's most recent balance
sheet, of us or any Restricted Subsidiary, other than
contingent liabilities and Indebtedness that is by its
terms subordinated to the notes, that are assumed by the
transferee
- 83 -
of any such assets pursuant to an agreement that
releases us or such Restricted Subsidiary from further
liability; and
o any securities, notes or other obligations received by
us or any such Restricted Subsidiary from such
transferee that are converted within 45 days of the
applicable Asset Sale by us or such Restricted
Subsidiary into cash, to the extent of the cash received
in that conversion.
Notwithstanding the foregoing, we and our Restricted Subsidiaries
may engage in Asset Swaps; provided that, (1) immediately after giving effect to
such Asset Swap, we would be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Debt to Cash Flow Ratio test set forth in the first
paragraph of the covenant described below under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock" and (2)
our or the Restricted Subsidiary's Board of Directors, as the case may be,
determines that such Asset Swap is fair to us or such Restricted Subsidiary, as
the case may be, from a financial point of view and such determination is
evidenced by a resolution of such Board of Directors set forth in an Officers'
Certificate delivered to the Trustee.
Within 365 days after the receipt of any Net Proceeds from an Asset
Sale, we may apply those Net Proceeds at our option:
(1) to a permanent repayment or reduction of Indebtedness, other
than subordinated Indebtedness of us or a Restricted
Subsidiary and, if the Indebtedness repaid is revolving credit
Indebtedness, to correspondingly reduce commitments with
respect thereto;
(2) to acquire all or substantially all of the assets of a
Permitted Business;
(3) to acquire Voting Stock of a Permitted Business from a Person
that is not our Subsidiary; provided, that (a) after giving
effect thereto, we and our Restricted Subsidiaries
collectively own a majority of such Voting Stock and (b) such
acquisition is otherwise made in accordance with the
indenture, including, without limitation, the "Restricted
Payments" covenant;
(4) to make capital expenditures; or
(5) to acquire other long-term tangible assets that are used or
useful in a Permitted Business.
Pending the final application of any Net Proceeds, we may
temporarily reduce revolving credit borrowings or otherwise invest the Net
Proceeds in any manner that is not prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not applied or invested
as provided in the preceding paragraph will constitute "Excess Proceeds." When
the aggregate amount of Excess Proceeds exceeds $20.0 million, we will make an
Asset Sale Offer to all holders of notes and all holders of other Indebtedness
that is pari passu with the notes including, without limitation, the holders of
our 9 3/4% Notes containing provisions similar to those set forth in the
indenture relating to the notes with respect to offers to purchase or redeem
with the proceeds of sales of assets to purchase the maximum principal amount of
notes and such other pari passu Indebtedness that may be purchased out of the
Excess Proceeds. The offer price in any Asset Sale Offer will be equal to 100%
of principal amount plus accrued and unpaid interest and Liquidated Damages, if
any, to the date of purchase, and will be payable in cash. If any Excess
Proceeds remain after consummation of an Asset Sale Offer, we may use such
Excess Proceeds for any purpose not otherwise prohibited by the indenture. If
the aggregate principal amount of notes and such other pari passu Indebtedness
tendered into such Asset Sale Offer exceeds the amount of Excess Proceeds, the
trustee will select the notes and such other pari passu Indebtedness to be
purchased on a pro rata basis based on the principal amount of notes and such
other pari passu Indebtedness tendered. Upon completion of each Asset Sale
Offer, the amount of Excess Proceeds will be reset at zero.
We will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with each
repurchase of notes pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with the Asset Sales
provisions of the indenture, we will comply with the applicable securities laws
and
- 84 -
regulations and will not be deemed to have breached its obligations under the
Asset Sale provisions of the indenture by virtue of such conflict.
Selection and Notice
If less than all of the notes are to be redeemed at any time, the
trustee will select notes for redemption as follows:
(1) if the notes are listed on any national securities exchange,
in compliance with the requirements of the principal national
securities exchange on which the notes are listed; or
(2) if the notes are not listed on any national securities
exchange, on a pro rata basis, by lot or by such method as the
trustee shall deem fair and appropriate.
No notes of $1,000 or less will be redeemed in part. Notices of
redemption will be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each holder of notes to be redeemed at its
registered address. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption
that relates to that note will state the portion of the principal amount of that
note that is to be redeemed. A new note in principal amount equal to the
unredeemed portion of the original note will be issued in the name of the holder
thereof upon cancellation of the original note. Notes called for redemption
become due on the date fixed for redemption. On and after the redemption date,
interest ceases to accrue on notes or portions of them called for redemption.
Certain Covenants
Restricted Payments
We will not, and will not permit any of our Restricted Subsidiaries
to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of our or any of our Restricted
Subsidiaries' Equity Interests, including, without limitation,
any payment in connection with any merger or consolidation
involving us or any of our Restricted Subsidiaries or to the
direct or indirect holders of our or any of our Restricted
Subsidiaries' Equity Interests in their capacity as such other
than dividends or distributions payable in our Equity
Interests (other than Disqualified Stock) or to us or one of
our Restricted Subsidiaries;
(2) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger
or consolidation involving the Issuers) any of our Equity
Interests or any direct or indirect parent of us;
(3) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to the notes, except a
payment of interest or principal at the Stated Maturity
thereof; or
(4) make any Restricted Investment (all such payments and other
actions set forth in clauses (1) through (4) being
collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default has occurred and be continuing
or would occur as a consequence thereof; and
(2) we would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment
had been made at the beginning of the applicable fiscal
quarter, have been permitted to incur at least $1.00 of
additional Indebtedness, other than Permitted Debt pursuant to
the Debt to Cash Flow Ratio test set forth in the first
paragraph of the covenant
- 85 -
described below under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock;" and
(3) such Restricted Payment, together with the aggregate amount of
all other Restricted Payments declared or made after the date
of the indenture excluding Restricted Payments made pursuant
to the second, third and fourth clauses of the next succeeding
paragraph, shall not exceed, at the date of determination, the
sum, without duplication, of: (a) an amount equal to our
Consolidated Cash Flow from the date of the indenture to the
end of the Issuers' most recently ended full fiscal quarter
for which internal financial statements are available, taken
as a single accounting period, less the product of 1.2 times
our Consolidated Interest Expense from the date of the
indenture to the end of the Issuers' most recently ended full
fiscal quarter for which internal financial statements are
available, taken as a single accounting period; plus
(b) an amount equal to 100% of Capital Stock Sale Proceeds
less any such Capital Stock Sale Proceeds used in
connection with:
o an Investment made pursuant to clause (6) of the
definition of "Permitted Investments;" or
o an incurrence of Indebtedness pursuant to clause
(8) of the covenant described under the caption
"--Incurrence of Indebtedness and Issuance of
Preferred Stock;" plus
(c) to the extent that any Restricted Investment that was
made after the date of the indenture is sold for cash or
otherwise liquidated or repaid for cash, the lesser of:
(i) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if
any) and (ii) the initial amount of such Restricted
Investment; plus
(d) to the extent that the Board of Directors designates any
Unrestricted Subsidiary that was designated as such
after the date of the Indenture as a Restricted
Subsidiary, the lesser of (i) the aggregate fair market
value of all Investments owned by us and our Restricted
Subsidiaries in such Subsidiary at the time such
Subsidiary was designated as an Unrestricted Subsidiary
and (ii) the then aggregate fair market value of all
Investments owned by us and our Restricted Subsidiaries
in such Unrestricted Subsidiary.
So long as no Default has occurred and is continuing or would be
caused thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such
payment would have complied with the provisions of the
indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness of the Issuers or
of any of our Equity Interests in exchange for, or out of the
net cash proceeds of the substantially concurrent sale (other
than to one of our Subsidiaries or an employee stock ownership
plan or to a trust established by us or any of our
Subsidiaries for the benefit of its employees) of, our Equity
Interests (other than Disqualified Stock); provided that the
amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement, defeasance or other
acquisition will be excluded from clause (3)(b) of the
preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of us or any Restricted Subsidiary
with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness;
(4) regardless of whether any Default then exists, the payment of
any dividend by one of our Restricted Subsidiaries of an
Issuer to the holders of its Equity Interests on a pro rata
basis;
- 86 -
(5) the payment of any dividend or distribution to Insight
Communications for the repurchase, redemption or other
acquisition or retirement for value by Insight Communications
of any Equity Interests of Insight Communications held by any
member of Insight Communications' (or any of its
Subsidiaries') management pursuant to any management equity
subscription agreement or stock option agreement in effect as
of the date of the indenture; provided that the aggregate
price paid for all such repurchased, redeemed, acquired or
retired Equity Interests shall not exceed $1.0 million in any
twelve-month period;
(6) regardless of whether any Default then exists, the payment of
any dividend or distribution to the extent necessary to permit
direct or indirect beneficial owners of Capital Stock of
Insight Midwest to pay federal, state or local income tax
liabilities that would arise solely from income of Insight
Midwest or any of its Restricted Subsidiaries, as the case may
be, for the relevant taxable period and attributable to them
solely as a result of Insight Midwest (and any intermediate
entity through which the holder owns such Capital Stock) or
any of its Restricted Subsidiaries being a limited liability
company, partnership or similar entity for federal income tax
purposes;
(7) the retirement, redemption or repurchase of our Equity
Interests pursuant to clauses (ii) or (iii) of Section 10.1(b)
of the Partnership Agreement as a result of the occurrence of
a Formal Determination (as defined in the Partnership
Agreement) and which relates to Federal Communications
Commission or other regulatory violations described in the
Partnership Agreement; and
(8) other Restricted Payments in an aggregate amount not to exceed
$25.0 million.
The amount of all Restricted Payments (other than cash) shall be the
fair market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued to or by us or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any assets or securities that are required to be valued by this
covenant will be determined by the Board of Directors whose resolution with
respect thereto shall be delivered to the trustee. The Board of Directors'
determination must be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if the
fair market value exceeds $20.0 million. Not later than the date of making any
Restricted Payment, we will deliver to the trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by this "Restricted Payments" covenant were
computed, together with a copy of any fairness opinion or appraisal required by
the indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
We will not, and will not permit any of our Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt), and the
Issuers will not issue any Disqualified Stock and will not permit any of their
Subsidiaries to issue any shares of preferred stock; provided, however, that the
Issuers may incur Indebtedness (including Acquired Debt) or issue Disqualified
Stock, and Restricted Subsidiaries of the Issuers may incur Indebtedness or
issue preferred stock, if the Issuers' Debt to Cash Flow Ratio at the time of
incurrence of such Indebtedness or the issuance of such Disqualified Stock or
preferred stock, after giving pro forma effect to such incurrence or issuance as
of such date and to the use of proceeds therefrom as if the same had occurred at
the beginning of the most recently ended fiscal quarter of the Issuers for which
internal financial statements are available, would have been no greater than 8.0
to 1.
The first paragraph of this covenant will not prohibit the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(1) the incurrence by us and our Restricted Subsidiaries of
additional Indebtedness and letters of credit under Credit
Facilities in an aggregate principal amount at any one time
outstanding under this clause (1) (with letters of credit
being deemed to have a principal amount equal to the maximum
potential liability of the Issuers and their Restricted
Subsidiaries thereunder) not to exceed $1.75 billion;
- 87 -
(2) the incurrence by us and our Restricted Subsidiaries of the
Existing Indebtedness;
(3) the incurrence by us of Indebtedness represented by the notes
to be issued on the date of the indenture and the Exchange
Notes to be issued pursuant to the registration rights
agreement;
(4) the incurrence by us or any of our Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each
case, incurred for the purpose of financing all or any part of
the purchase price or cost of construction or improvement of
property, plant or equipment used in the business of the
Issuers or such Restricted Subsidiary, in an aggregate
principal amount, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause (4), not to
exceed $25.0 million at any time outstanding;
(5) the incurrence by us or any of our Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net
proceeds of which are used to refund, refinance or replace
Indebtedness (other than intercompany Indebtedness) that was
permitted by the indenture to be incurred under the first
paragraph of this covenant or clauses (2), (3) or (4) of this
paragraph;
(6) the incurrence by us or any of our Restricted Subsidiaries of
intercompany Indebtedness between or among us and any of our
Restricted Subsidiaries; provided, however, that:
(a) if any of us is the obligor on such Indebtedness, such
Indebtedness must be expressly subordinated to the prior
payment in full in cash of all Obligations with respect
to the notes, and
(b) (i) any subsequent issuance or transfer of Equity
Interests that results in any such Indebtedness being
held by a Person other than us or one of our Restricted
Subsidiaries thereof and (ii) any sale or other transfer
of any such Indebtedness to a Person that is not either
us or one of our Restricted Subsidiaries of the Issuers
will be deemed, in each case, to constitute an
incurrence of such Indebtedness by us or such Restricted
Subsidiary, as the case may be, that was not permitted
by this clause (6);
(7) the incurrence by us or any of our Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of
fixing or hedging interest rate risk with respect to any
floating rate Indebtedness that is permitted by the terms of
the indenture to be outstanding;
(8) the incurrence by us or any Restricted Subsidiary of
additional Indebtedness in an aggregate principal amount at
any time outstanding not to exceed 200% of the net cash
proceeds received by Insight Midwest from the sale of its
Equity Interests, (other than Disqualified Stock), after the
date of the indenture to the extent such net cash proceeds
have not been applied to make Restricted Payments or to effect
other transactions pursuant to the covenant described above
under the caption "--Restricted Payments" or to make Permitted
Investments pursuant to clause (6) of the definition thereof;
(9) the guarantee by us of Indebtedness of us or one of our
Restricted Subsidiaries that was permitted to be incurred by
another provision of this covenant;
(10) the accrual of interest, the accretion or amortization of
original issue discount, the payment of interest on any
Indebtedness in the form of additional Indebtedness with the
same terms, and the payment of dividends on Disqualified Stock
in the form of additional shares of the same class of
Disqualified Stock will not be deemed to be an incurrence of
Indebtedness or an issuance of Disqualified Stock for purposes
of this covenant;
(11) the incurrence by us or any of our Restricted Subsidiaries of
additional Indebtedness in an aggregate principal amount (or
accreted value, as applicable) at any time outstanding,
including all Permitted Refinancing Indebtedness incurred to
refund, refinance or replace any Indebtedness incurred
pursuant to this clause (11), not to exceed $50.0 million;
- 88 -
(12) the incurrence by us or any Restricted Subsidiary of
Indebtedness represented by notes issued to Affiliates in
respect of, and amounts equal to, advances made by such
Affiliates to enable us or any Restricted Subsidiary to make
payments in connection with the notes, the 9 3/4% Notes or the
Credit Facilities; and
(13) the incurrence by our Unrestricted Subsidiaries of
Non-Recourse Debt, provided, however, that if any such
Indebtedness ceases to be Non-Recourse Debt of an Unrestricted
Subsidiary, that event will be deemed to constitute an
incurrence of Indebtedness by one of our Restricted
Subsidiaries that was not permitted by this clause (13).
We will not, and will not permit any of our Restricted Subsidiaries
to, incur any Indebtedness (including Permitted Debt) that is contractually
subordinated in right of payment to any other Indebtedness of us or such
Restricted Subsidiary, as applicable, unless such Indebtedness is also
contractually subordinated in right of payment to the notes on substantially
identical terms; provided, however, that no Indebtedness of us or a Restricted
Subsidiary shall be deemed to be contractually subordinated in right of payment
to any other Indebtedness of us or such Restricted Subsidiary solely by virtue
of being unsecured.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (13) above, or is
entitled to be incurred pursuant to the first paragraph of this covenant, we
will be permitted to classify such item of Indebtedness on the date of its
incurrence or later reclassify all or a portion of such item of Indebtedness, in
any manner that complies with this covenant. Indebtedness under Credit
Facilities outstanding on the date on which notes are first issued and
authenticated under the indenture shall be deemed to have been incurred on such
date in reliance on the exception provided by clause (1) of the definition of
Permitted Debt.
Sale and Leaseback Transactions
We will not, and will not permit any of our Restricted Subsidiaries
to, enter into any sale and leaseback transaction; provided that we or any
Restricted Subsidiary may enter into a sale and leaseback transaction if:
(1) we or that Restricted Subsidiary, as applicable, could have
(a) incurred Indebtedness in an amount equal to the
Attributable Debt relating to such sale and leaseback
transaction under the Debt to Cash Flow Ratio test in the
first paragraph of the covenant described above under the
caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock" and (b) created a Lien on such property
securing Attributable Debt pursuant to the covenant described
below under the caption "--Liens;"
(2) the net cash proceeds of that sale and leaseback transaction
are at least equal to the fair market value, as determined in
good faith by the Board of Directors and set forth in an
Officers' Certificate delivered to the trustee, of the
property that is the subject of that sale and leaseback
transaction; and
(3) the transfer of assets in that sale and leaseback transaction
is permitted by, and the Issuers or that Restricted Subsidiary
applies the proceeds of such transaction in compliance with,
the covenant described above under the caption "--Repurchase
at the Option of holders--Asset Sales."
Liens
We will not, and will not permit any of our Restricted Subsidiaries
to, directly or indirectly, create, incur, assume or suffer to exist any Lien of
any kind on any asset now owned or hereafter acquired, except Permitted Liens.
- 89 -
Dividend and Other Payment Restrictions Affecting Subsidiaries
We will not, and will not permit any of our Restricted Subsidiaries
to, directly or indirectly, create or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Equity
Interests to us or any of our Restricted Subsidiaries, or with
respect to any other interest or participation in, or measured
by, its profits, or pay any indebtedness owed to us or any of
our Restricted Subsidiaries;
(2) make loans or advances or guarantee any such loans or advances
to us or any of our Restricted Subsidiaries; or
(3) transfer any of its properties or assets to us or any of our
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances
or restrictions existing under or by reason of:
(1) Existing Indebtedness as in effect on the date of the
indenture and any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or
refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacement or refinancings are no more
restrictive, taken as a whole, with respect to such dividend
and other payment restrictions than those contained in such
Existing Indebtedness, as in effect on the date of the
indenture;
(2) the indenture, the notes, the 9 3/4% Notes and the indenture
governing the 9 3/4% Notes;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a
Person acquired by us or any of our Restricted Subsidiaries as
in effect at the time of such acquisition (except to the
extent such Indebtedness or Capital Stock was incurred in
connection with or in contemplation of such acquisition),
which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the indenture to be
incurred;
(5) customary non-assignment provisions in leases entered into in
the ordinary course of business and consistent with past
practices;
(6) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions on the
property so acquired of the nature described in clause (3) of
the preceding paragraph;
(7) any agreement for the sale or other disposition of a
Restricted Subsidiary that restricts distributions by that
Restricted Subsidiary pending its sale or other disposition;
(8) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such
Permitted Refinancing Indebtedness are no more restrictive,
taken as a whole, than those contained in the agreements
governing the Indebtedness being refinanced;
(9) Liens securing Indebtedness that limit the right of the debtor
to dispose of the assets subject to such Lien;
(10) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements, asset sale
agreements, stock sale agreements and other similar agreements
entered into in the ordinary course of business;
- 90 -
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course
of business;
(12) restrictions contained in the terms of Indebtedness permitted
to be incurred under the covenant described under the caption
"--Incurrence of Indebtedness and Issuance of Preferred
Stock;" provided that such restrictions are no more
restrictive than the terms contained in the Kentucky Credit
Facility and the Indiana Credit Facility; and
(13) restrictions that are not materially more restrictive than
customary provisions in comparable financings and our
management determines that such restrictions will not
materially impair our ability to make payments as required
under the notes and the indenture governing the notes.
Merger, Consolidation or Sale of Assets
Neither of us may directly or indirectly: (1) consolidate or merge
with or into another Person (whether or not such Issuer is the surviving
corporation); or (2) sell, assign, transfer, convey or otherwise dispose of all
or substantially all of the properties or assets of us and our Restricted
Subsidiaries taken as a whole, in one or more related transactions, to another
Person; unless:
(1) either: (a) we are the surviving corporation; or (b) the
Person formed by or surviving any such consolidation or
merger, if other than us, or to which such sale, assignment,
transfer, conveyance or other disposition shall have been made
is a corporation, limited liability company or limited
partnership organized or existing under the laws of the United
States, any state thereof or the District of Columbia;
(2) the Person formed by or surviving any such consolidation or
merger, if other than us, or the Person to which such sale,
assignment, transfer, conveyance or other disposition shall
have been made assumes all of our obligations under the notes,
the indenture and the registration rights agreement pursuant
to agreements reasonably satisfactory to the trustee;
(3) immediately after such transaction no Default or Event of
Default exists; and
(4) we or the Person formed by or surviving any such consolidation
or merger, if other than us, or to which such sale,
assignment, transfer, conveyance or other disposition shall
have been made will, on the date of such transaction after
giving pro forma effect thereto and any related financing
transactions as if the same had occurred at the beginning of
the applicable fiscal quarter, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Debt to Cash
Flow Ratio test set forth in the first paragraph of the
covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock."
In addition, we may not, directly or indirectly, lease all or
substantially all of their properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation or Sale of
Assets" covenant will not apply to a sale, assignment, transfer, conveyance or
other disposition of assets between or among the Issuers and any of the
Restricted Subsidiaries.
Transactions with Affiliates
We will not, and will not permit any of our Restricted Subsidiaries
to, directly or indirectly, make any payment to, or sell, lease, transfer,
exchange or otherwise dispose of any of their properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction or series of transactions, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any of our Affiliates,
officers or directors (each, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less
favorable to us or the relevant Restricted Subsidiary than
those that would have been obtained in a comparable
transaction by us or such Restricted Subsidiary with an
unrelated Person (as determined by the Board of Directors and
evidenced by a resolution of the Board of Directors); and
- 91 -
(2) we deliver to the trustee:
(a) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate
consideration in excess of $10.0 million, a resolution
of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction
complies with this covenant and that such Affiliate
Transaction has been approved by a majority of the
disinterested members of the Board of Directors; and
(b) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate
consideration in excess of $20.0 million, an opinion as
to the fairness to the holders of such Affiliate
Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of
national standing; provided, however, that this clause
(b) shall not apply to any transaction between or among
Insight Midwest, Insight Communications, AT&T Broadband,
LLC and their respective Subsidiaries.
The following items shall not be deemed to be Affiliate Transactions
and, therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreement entered into by us or any of our
Restricted Subsidiaries in the ordinary course of business and
consistent with our past practice or that of such Restricted
Subsidiary;
(2) transactions between or among us and/or our Restricted
Subsidiaries;
(3) transactions with a Person that is our Affiliate solely
because we own an Equity Interest in such Person;
(4) payment of reasonable directors fees to Persons who are not
otherwise our Affiliates;
(5) sales of Equity Interests (other than Disqualified Stock) to
our Affiliates;
(6) Restricted Payments that are permitted by the provisions of
the indenture described above under the caption "--Restricted
Payments;"
(7) payment of management fees to Insight LP pursuant to the
Management Agreements;
(8) any transactions or arrangements entered into, or payments
made, pursuant to the terms of the Kentucky Credit Facility or
the Indiana Credit Facility;
(9) Permitted Investments;
(10) any transactions or arrangements in existence on the date of
the Indenture, including, without limitation, the Asset
Contribution Agreement, dated August 15, 2000 among us,
certain AT&T cable subsidiaries and TCI of Indiana Holdings,
LLC and all such other agreements, amendments and documents as
may be necessary or desirable to perform and carry out the
transactions contemplated by the Asset Contribution Agreement;
and
(11) any arrangement with affiliates of Source Media, Inc. for the
distribution of cable television services or programming.
Designation of Restricted and Unrestricted Subsidiaries
The Board of Directors may designate any Restricted Subsidiary to be
an Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, the aggregate
fair market value of all outstanding Investments owned by us and our Restricted
Subsidiaries in the Subsidiary so designated will be deemed to be an Investment
made as of the time of such designation and will either reduce the amount
available for Restricted Payments under the first paragraph of the covenant
described above
- 92 -
under the caption "--Restricted Payments" or reduce the amount available for
future Investments under one or more clauses of the definition of Permitted
Investments, as the Issuers shall determine. That designation will only be
permitted if such Investment would be permitted at that time and if such
Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary. The Board of Directors may redesignate any Unrestricted Subsidiary
to be a Restricted Subsidiary if the redesignation would not cause a Default.
Reports
Whether or not required by the Commission, so long as any notes are
outstanding, we will furnish to the holders of notes, within the time periods
specified in the Commission's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on
Forms 10-Q and 10-K if we were required to file such Forms,
including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the
annual information only, a report on the annual financial
statements by our certified independent accountants; and
(2) all current reports that would be required to be filed with
the Commission on Form 8-K if we were required to file such
reports.
In addition, following the consummation of the exchange offer
contemplated by the registration rights agreement, whether or not required by
the Commission, we will file a copy of all of the information and reports
referred to in clauses (1) and (2) above with the Commission for public
availability within the time periods specified in the Commission's rules and
regulations (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, we have agreed that, for so long as any notes remain
outstanding, we will furnish to the holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
If we have designated any of our Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph shall include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the financial condition and results of our operations and those
of our Restricted Subsidiaries separate from the financial condition and results
of operations of our Unrestricted Subsidiaries.
Restrictions on Activities of Insight Capital
Insight Capital will not hold any material assets, become liable for
any material obligations, other than the notes and the 9 3/4% Notes, or engage
in any significant business activities; provided that Insight Capital may be a
co-obligor with respect to Indebtedness if Insight Midwest is a primary obligor
of such Indebtedness and the net proceeds of such Indebtedness are received by
Insight Midwest or one or more of Insight Midwest's Restricted Subsidiaries
other than Insight Capital.
Payments for Consent
We will not, and will not permit any of our Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration to or for the
benefit of any holder of notes for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the Indenture or the notes unless
such consideration is offered to be paid and is paid to all holders of the notes
that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
- 93 -
Events of Default and Remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the notes;
(2) default in payment when due of the principal of, or premium,
if any, on the notes;
(3) failure by us or any of our Restricted Subsidiaries to comply
with the provisions described under the captions "--Repurchase
at the Option of holders" or "--Certain Covenants--Merger,
Consolidation or Sale of Assets;"
(4) failure by us or any of our Restricted Subsidiaries for 30
days after written notice thereof has been given to us by the
trustee or to us and the trustee by the holders of at least
25% of the aggregate principal amount of the notes outstanding
to comply with any of their other covenants or agreements in
the indenture;
(5) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by us or any of
our Restricted Subsidiaries or the payment of which is
guaranteed by us or any of our Restricted Subsidiaries,
whether such Indebtedness or guarantee now exists, or is
created after the date of the indenture, if that default:
(a) Indebtedness prior to the expiration of the grace period
provided in such Indebtedness on the date of such
default (a "Payment Default"); or
(b) results in the acceleration of such Indebtedness prior
to its express maturity, and, in each case, the
principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness
under which there has been a Payment Default or the
maturity of which has been so accelerated, aggregates
$25.0 million or more;
(6) failure by us or any of our Restricted Subsidiaries to pay
final judgments which are non-appealable aggregating in excess
of $25.0 million, (net of applicable insurance which has not
been denied in writing by the insurer), which judgments are
not paid, discharged or stayed for a period of 60 days; and
(7) certain events of bankruptcy or insolvency described in the
indenture with respect to us or any of our Restricted
Subsidiaries.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to us, any Subsidiary that is a
Significant Subsidiary or any group of Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding notes will become due and
payable immediately without further action or notice. If any other Event of
Default occurs and is continuing, the trustee or the holders of at least 25% in
principal amount of the then outstanding notes may declare all the notes to be
due and payable immediately.
Holders of the notes may not enforce the indenture or the notes
except as provided in the indenture. Subject to certain limitations, holders of
a majority in principal amount of the then outstanding notes may direct the
trustee in its exercise of any trust or power. The trustee may withhold from
holders of the notes notice of any continuing Default or Event of Default if it
determines that withholding notice is in their interest, except a Default or
Event of Default relating to the payment of principal or interest.
The holders of a majority in aggregate principal amount of the notes
then outstanding by notice to the trustee may on behalf of the holders of all of
the notes waive any existing Default or Event of Default and its consequences
under the indenture except (1) a continuing Default or Event of Default in the
payment of interest or Liquidated Damages on, or the principal of, the notes (2)
in respect of a covenant or provision which under the
- 94 -
indenture cannot be modified or amended without the consent of the holder of
each note affected by such modification or amendment.
In the case of any Event of Default occurring by reason of any
willful action or inaction taken or not taken by or on behalf of us with the
intention of avoiding payment of the premium that we would have had to pay if we
then had elected to redeem the notes pursuant to the optional redemption
provisions of the indenture, an equivalent premium will also become and be
immediately due and payable to the extent permitted by law upon the acceleration
of the notes. If an Event of Default occurs prior to November 1, 2005, by reason
of any willful action (or inaction) taken (or not taken) by or on behalf of us
with the intention of avoiding the prohibition on redemption of the notes prior
to November 1, 2005, then the premium specified in the indenture will also
become immediately due and payable to the extent permitted by law upon the
acceleration of the notes.
We are required to deliver to the trustee within 90 days after the
end of each fiscal year a statement regarding compliance with the indenture.
Upon becoming aware of any Default or Event of Default, we are required to
deliver to the trustee a statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees, Partners and
Stockholders
No director, officer, employee, partner, incorporator or stockholder
of us, as such, shall have any liability for any obligations of the Issuers
under the notes, the indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each holder of notes by accepting
a note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the notes. The waiver may not be effective
to waive liabilities under the federal securities laws.
Legal Defeasance and Covenant Defeasance
We may, at our option and at any time, elect to have all of our
obligations discharged with respect to the outstanding notes ("Legal
Defeasance") except for:
(1) the rights of holders of outstanding notes to receive payments
in respect of the principal of, or interest or premium and
Liquidated Damages, if any, on such notes when such payments
are due from the trust referred to below;
(2) our obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed,
lost or stolen notes and the maintenance of an office or
agency for payment and money for security payments held in
trust;
(3) the rights, powers, trusts, duties and immunities of the
trustee, and our obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, we may, at our option and at any time, elect to have
our obligations released with respect to certain covenants that are described in
the indenture ("Covenant Defeasance") and thereafter any omission to comply with
those covenants shall not constitute a Default or Event of Default with respect
to the notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) we must irrevocably deposit with the trustee, in trust, for
the benefit of the holders of the notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof,
in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants,
to pay the principal of, or interest and premium and
Liquidated Damages, if any, on the outstanding notes on the
stated maturity or on the applicable redemption date, as the
case may
- 95 -
be, and the Issuers must specify whether the notes are being
defeased to maturity or to a particular redemption date;
(2) in the case of Legal Defeasance, we shall have delivered to
the trustee an Opinion of Counsel reasonably acceptable to the
trustee confirming that (a) we have received from, or there
has been published by, the Internal Revenue Service a ruling
or (b) since the date of the indenture, there has been a
change in the applicable federal income tax law, in either
case to the effect that, and based thereon such Opinion of
Counsel shall confirm that, the holders of the outstanding
notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and
will be subject to federal income tax on the same amounts, the
same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, we shall have delivered to
the trustee an Opinion of Counsel reasonably acceptable to the
trustee confirming that the holders of the outstanding notes
will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be
continuing either: (a) on the date of such deposit (other than
a Default or Event of Default resulting from the borrowing of
funds to be applied to such deposit); or (b) or insofar as
Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day
after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result
in a breach or violation of, or constitute a default under any
material agreement or instrument (other than the indenture) to
which we or any of our Subsidiaries is a party or by which we
or any of our Subsidiaries are bound;
(6) we must have delivered to the trustee an Opinion of Counsel to
the effect that, assuming no intervening bankruptcy of us
between the date of deposit and the 91st day following the
deposit and assuming that no holder is an "insider" of us
under applicable bankruptcy law, after the 91st day following
the deposit, the trust funds will not be subject to the effect
of any applicable bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally;
(7) we must deliver to the trustee an Officers' Certificate
stating that the deposit was not made by us with the intent of
preferring the holders of notes over our other creditors with
the intent of defeating, hindering, delaying or defrauding
creditors of the Issuers or others; and
(8) we must deliver to the trustee an Officers' Certificate and an
Opinion of Counsel, each stating that all conditions precedent
relating to the Legal Defeasance or the Covenant Defeasance
have been complied with.
Amendment, Supplement and Waiver
Except as provided in the next three succeeding paragraphs, the
indenture or the notes may be amended or supplemented with the consent of the
holders of at least a majority in principal amount of the notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, notes), and any existing default or
compliance with any provision of the indenture or the notes may be waived with
the consent of the holders of a majority in principal amount of the then
outstanding notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, notes).
Without the consent of each holder affected, an amendment or waiver
may not (with respect to any notes held by a non-consenting holder):
(1) reduce the principal amount of notes whose holders must
consent to an amendment, supplement or waiver;
- 96 -
(2) reduce the principal of or change the fixed maturity of any
note or alter the provisions with respect to the redemption of
the notes (other than provisions relating to the covenants
described above under the caption "--Repurchase at the Option
of holders");
(3) reduce the rate of or change the time for payment of interest
on any note;
(4) waive a Default or Event of Default in the payment of
principal of, or interest or premium, or Liquidated Damages,
if any, on the notes (except a rescission of acceleration of
the notes by the holders of at least a majority in aggregate
principal amount of the notes and a waiver of the payment
default that resulted from such acceleration);
(5) make any note payable in money other than that stated in the
notes;
(6) make any change in the provisions of the indenture relating to
waivers of past Defaults or the rights of holders of notes to
receive payments of principal of, or interest or premium or
Liquidated Damages, if any, on the notes;
(7) waive a redemption payment with respect to any note (other
than a payment required by one of the covenants described
above under the caption "--Repurchase at the Option of
holders"); or
(8) make any change in the preceding amendment and waiver
provisions.
Notwithstanding the preceding, without the consent of any holder of
notes, the trustee and we may amend or supplement the indenture or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place
of certificated notes;
(3) to provide for the assumption of our obligations to holders of
notes in the case of a merger or consolidation or sale of all
or substantially all of our assets;
(4) to make any change that would provide any additional rights or
benefits to the holders of notes or that does not adversely
affect the legal rights under the indenture of any such
holder; or
(5) to comply with requirements of the Commission in order to
effect or maintain the qualification of the indenture under
the Trust Indenture Act.
Satisfaction and Discharge
The indenture will be discharged and will cease to be of further
effect as to all notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated, except lost,
stolen or destroyed notes that have been replaced or
paid and notes for whose payment money has theretofore
been deposited in trust and thereafter repaid to us,
have been delivered to the trustee for cancellation; or
(b) all notes that have not been delivered to the trustee
for cancellation have become due and payable by reason
of the making of a notice of redemption or otherwise or
will become due and payable within one year and we have
irrevocably deposited or caused to be deposited with the
trustee as trust funds in trust solely for the benefit
of the holders, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such
amounts as will be sufficient without consideration of
any reinvestment of interest, to pay and discharge the
entire indebtedness on the notes not delivered to the
trustee for
- 97 -
cancellation for principal, premium and Liquidated
Damages, if any, and accrued interest to the date of
maturity or redemption;
(2) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or shall occur as a
result of such deposit and such deposit will not result in a
breach or violation of, or constitute a default under, any
other instrument to which either of us is a party or by which
either of us is bound;
(3) we have paid or caused to be paid all sums payable by them
under the indenture; and
(4) we have delivered irrevocable instructions to the trustee
under the indenture to apply the deposited money toward the
payment of the notes at maturity or the redemption date, as
the case may be.
In addition, we must deliver an Officers' Certificate and an Opinion
of Counsel to the trustee stating that all conditions precedent to satisfaction
and discharge have been satisfied.
Concerning the Trustee
If the trustee becomes our creditor, the indenture limits its right
to obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise. The trustee will
be permitted to engage in other transactions; however, if it acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the Commission for permission to continue or resign.
The holders of a majority in principal amount of the then
outstanding notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the trustee,
subject to certain exceptions. The indenture provides that in case an Event of
Default shall occur and be continuing, the trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the trustee will be under no
obligation to exercise any of its rights or powers under the indenture at the
request of any holder of notes, unless such holder shall have offered to the
trustee security and indemnity satisfactory to it against any loss, liability or
expense.
Additional Information
Anyone who receives this prospectus may obtain a copy of the
indenture and registration rights agreement without charge by writing to Insight
Midwest, L.P., c/o Insight Communications Company, Inc., 810 Seventh Avenue, New
York, New York 10019, Attention: Ms. Colleen Quinn.
Certain Definitions
Set forth below are certain defined terms used in the indenture.
Reference is made to the indenture for a full disclosure of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such
other Person is merged with or into or became a Subsidiary of
such specified Person, whether or not such Indebtedness is
incurred in connection with, or in contemplation of, such
other Person merging with or into, or becoming a Subsidiary
of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired
by such specified Person.
"Affiliate" of any specified Person means any other Person directly
or indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of more than 10% of
the Voting Stock of a Person shall
- 98 -
be deemed to be control. For purposes of this definition, the terms
"controlling," "controlled by" and "under common control with" shall have
correlative meanings.
"Asset Acquisition" means (a) an Investment by the Issuers or any
Restricted Subsidiary in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be consolidated or merged with or into
the Issuers or any Restricted Subsidiary, or (b) any acquisition by the Issuers
or any Restricted Subsidiary of the assets of any Person that constitute
substantially all of an operating unit, a division or line of business of such
Person or that is otherwise outside of the ordinary course of business.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets
or rights, other than sales of inventory in the ordinary
course of business; provided that the sale, conveyance or
other disposition of all or substantially all of the assets of
the Issuers and their Subsidiaries taken as a whole will be
governed by the provisions of the indenture described above
under the caption "--Repurchase at the Option of
holders--Change of Control" and/or the provisions described
above under the caption "--Certain Covenants--Merger,
Consolidation or Sale of Assets" and not by the provisions of
the Asset Sale covenant; and
(2) the issuance of Equity Interests in any of the Issuers'
Restricted Subsidiaries or the sale of Equity Interests in any
of its Subsidiaries.
Notwithstanding the preceding, the following items shall not be
deemed to be Asset Sales:
(1) any single transaction or series of related transactions that
involves assets having a fair market value (as determined by
the Board of Directors and evidenced by a resolution of the
Board of Directors) of less than $5.0 million;
(2) a transfer of assets between or among the Issuers and their
Wholly Owned Restricted Subsidiaries;
(3) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary to the Issuers or to another Wholly Owned
Restricted Subsidiary;
(4) the sale or lease of equipment, inventory, accounts receivable
or other assets in the ordinary course of business;
(5) the sale or other disposition of cash or Cash Equivalents;
(6) a Restricted Payment or Permitted Investment that is permitted
by the covenant described above under the caption "--Certain
Covenants--Restricted Payments;" and
(7) the incurrence of Permitted Liens and the disposition of
assets related to such Permitted Liens by the secured party
pursuant to a foreclosure.
"Asset Swap" means an exchange of assets by the Issuers or a
Restricted Subsidiary of the Issuers for:
(1) one or more Permitted Businesses;
(2) a controlling equity interest in any Person whose assets
consist primarily of one or more Permitted Businesses; and/or
(3) long-term assets that are used in a Permitted Business in a
like-kind exchange pursuant to Section 1031 of the Internal
Revenue Code or any similar or successor provision of the
Internal Revenue Code.
"Attributable Debt" in respect of a sale and leaseback transaction
means, at the time of determination, the present value of the obligation of the
lessee for net rental payments during the remaining term of the lease included
- 99 -
in such sale and leaseback transaction including any period for which such lease
has been extended or may, at the option of the lessor, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
"Beneficial Owner" has the meaning assigned to such term in Rule
13d-3 and Rule 13d-5 under the Exchange Act, except that in calculating the
beneficial ownership of any particular "person" (as that term is used in Section
13(d)(3) of the Exchange Act), such "person" shall be deemed to have beneficial
ownership of all securities that such "person" has the right to acquire by
conversion or exercise of other securities, whether such right is currently
exercisable or is exercisable only upon the occurrence of a subsequent
condition. The terms "Beneficially Owns" and "Beneficially Owned" shall have a
corresponding meaning.
"Board of Directors" means:
(1) with respect to a corporation, the board of directors of the
corporation;
(2) with respect to a partnership, the board of directors of the
general partner of the partnership;
(3) with respect to Insight Midwest at the option of the Issuers,
the board of directors of Insight Communications or the
Advisory Committee of Insight Midwest; and
(4) with respect to any other Person, the board or committee of
such Person serving a similar function.
"Capital Lease Obligation" means, at the time any determination
thereof is to be made, the amount of the liability in respect of a capital lease
that would at that time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents
(however designated) of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or
limited); and
(4) any other interest or participation that confers on a Person
the right to receive a share of the profits and losses of, or
distributions of assets of, the issuing Person.
"Capital Stock Sale Proceeds" means the aggregate net cash proceeds,
(including the fair market value of the non-cash proceeds, as determined by an
independent appraisal firm), received by Insight Midwest after the date of the
indenture:
(x) as a contribution to the common equity capital or from the issue
or sale of Equity Interests of Insight Midwest (other than Disqualified Stock);
or
(y) from the issue or sale of convertible or exchangeable
Disqualified Stock or convertible or exchangeable debt securities of Insight
Midwest that have been converted into or exchanged for such Equity Interests,
other than Equity Interests (or Disqualified Stock or debt securities) sold to a
Subsidiary of Insight Midwest.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured
by the United States government or any agency or
instrumentality thereof (provided that the full faith and
credit of the United States is
- 100 -
pledged in support thereof) having maturities of not more than
one year from the date of acquisition;
(3) certificates of deposit and eurodollar time deposits with
maturities of one year or less from the date of acquisition,
bankers' acceptances with maturities not exceeding one year
and overnight bank deposits, in each case, with any lender
party to the Credit Agreement or with any domestic commercial
bank having capital and surplus in excess of $500.0 million
and a Thomson Bank Watch Rating of "B" or better;
(4) repurchase obligations with a term of not more than seven days
for underlying securities of the types described in clauses
(2) and (3) above entered into with any financial institution
meeting the qualifications specified in clause (3) above;
(5) commercial paper having the highest rating obtainable from
Moody's Investors Service, Inc. or Standard & Poor's Rating
Services and in each case maturing within one year after the
date of acquisition; and
(6) money market funds having assets in excess of $100.0 million,
at least 90% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (1) through (5)
of this definition.
"Change of Control" means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in
one or a series of related transactions, of all or
substantially all of the properties or assets of the Issuers
and their Restricted Subsidiaries, taken as a whole, to any
"person" (as that term is used in Section 13(d)(3) of the
Exchange Act) other than a Principal or a Permitted Holder and
its Related Parties;
(2) the adoption of a plan relating to the liquidation or
dissolution of Insight Midwest;
(3) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which
is that any "person" (as defined above), other than the
Principals and/or one or more of the Permitted Holders and
their Related Parties, becomes the Beneficial Owner, directly
or indirectly, of more than 50% of the Voting Stock of Insight
Midwest, measured by voting power rather than number of
shares;
(4) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which
is that any "person" (as defined above) other than a Permitted
Holder and its Related Parties, becomes the Beneficial Owner,
directly or indirectly, of more than 50% of the Voting Stock
of Insight Communications, measured by voting power rather
than number of shares;
(5) during any consecutive two-year period, the first day on which
individuals who constituted the Board of Directors of Insight
Communications as of the beginning of such two-year period
(together with any new directors who were nominated for
election or elected to such Board of Directors with the
approval of a majority of the individuals who were members of
such Board of Directors, or whose nomination or election was
previously so approved at the beginning of such two-year
period) cease to constitute a majority of the Board of
Directors of Insight Communications; or
(6) Insight Communications consolidates with, or merges with or
into, any Person, or any Person consolidates with, or merges
with or into, Insight Communications, in any such event
pursuant to a transaction in which any of the outstanding
Voting Stock of Insight Communications or such other Person is
converted into or exchanged for cash, securities or other
property, other than any such transaction where the Voting
Stock of Insight Communications outstanding immediately prior
to such transaction is converted into or exchanged for Voting
Stock (other than Disqualified Stock) of the surviving or
transferee Person constituting a majority of the outstanding
shares of
- 101 -
such Voting Stock of such surviving or transferee Person
(immediately after giving effect to such issuance).
"Common Stock" of any Person means all Capital Stock of such Person
that is generally: entitled to (1) vote in the election of directors of such
Person or (2) if such Person is not a corporation, vote or otherwise participate
in the selection of the governing body, partners, managers or others that will
control the management and policies of such Person.
"Consolidated Cash Flow" means, with respect to any specified Person
for any period, the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss plus any net loss
realized by such Person or any of its Restricted Subsidiaries
in connection with an Asset Sale, to the extent such losses
were deducted in computing such Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such Person
and its Restricted Subsidiaries for such period, to the extent
that such provision for taxes was deducted in computing such
Consolidated Net Income; plus
(3) consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or
accrued and whether or not capitalized (including, without
limitation, amortization of debt issuance costs and original
issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease
Obligations, imputed interest with respect to Attributable
Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance
financings, and net of the effect of all payments made or
received pursuant to Hedging Obligations), to the extent that
any such expense was deducted in computing such Consolidated
Net Income; plus
(4) depreciation, amortization (including amortization of goodwill
and other intangibles) and other non-cash expenses (excluding
any such non-cash expense to the extent that it represents an
accrual of or reserve for cash expenses in any future period)
of such Person and its Restricted Subsidiaries for such period
to the extent that such depreciation, amortization and other
non-cash expenses were deducted in computing such Consolidated
Net Income; minus
(5) non-cash items increasing such Consolidated Net Income
(including the partial or entire reversal of reserves taken in
prior periods) for such period, other than the accrual of
revenue in the ordinary course of business, in each case, on a
consolidated basis and determined in accordance with GAAP.
Notwithstanding the preceding, the provision for taxes based on the
income or profits of, and the depreciation and amortization and other non-cash
charges of, a Restricted Subsidiary of the Issuers shall be added to
Consolidated Net Income to compute Consolidated Cash Flow of the Issuers only to
the extent that a corresponding amount would be permitted at the date of
determination to be dividend to the Issuers by such Restricted Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Subsidiary or
its stockholders.
"Consolidated Indebtedness" means, with respect to any Person as of
any date of determination, the sum, without duplication, of (i) the total amount
of Indebtedness of such Person and its Restricted Subsidiaries, plus (ii) the
total amount of Indebtedness of any other Person, to the extent that such
Indebtedness has been Guaranteed by the referent Person or one or more of its
Restricted Subsidiaries, plus (iii) the aggregate liquidation value of all
Disqualified Stock of such Person and all preferred stock of Restricted
Subsidiaries of such Person, in each case, determined on a consolidated basis in
accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any Person
for any period, without duplication, the sum of (i) the consolidated interest
expense of such Person and its Restricted Subsidiaries for such period, whether
- 102 -
paid or accrued (including, without limitation, amortization of original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings), all calculated after taking into
account the effect of all Hedging Obligations, and (ii) the consolidated
interest expense of such Person and its Restricted Subsidiaries that was
capitalized during such period, and (iii) any interest expense on Indebtedness
of another Person that is guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or one of its
Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon)
and (iv) the product of (a) all dividend payments on any series of preferred
stock of such Person or any of its Restricted Subsidiaries, times (b) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate of
such Person, expressed as a decimal, in each case, on a consolidated basis and
in accordance with GAAP.
"Consolidated Net Income" means, with respect to any specified
Person for any period, the aggregate of the Net Income of such Person and its
Restricted Subsidiaries for such period, on a consolidated basis, determined in
accordance with GAAP; provided that:
(1) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity
method of accounting shall be included only to the extent of
the amount of dividends or distributions paid in cash to the
specified Person or a Wholly Owned Restricted Subsidiary
thereof;
(2) the Net Income of any Restricted Subsidiary shall be excluded
to the extent that the declaration or payment of dividends or
similar distributions by that Restricted Subsidiary of that
Net Income is not at the date of determination permitted
without any prior governmental approval (that has not been
obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation
applicable to that Subsidiary or its stockholders;
(3) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such
acquisition shall be excluded;
(4) the cumulative effect of a change in accounting principles
shall be excluded; and
(5) the Net Income (but not loss) of any Unrestricted Subsidiary
shall be excluded, whether or not distributed to the specified
Person or one of its Subsidiaries, except for purposes of the
covenants described under the caption "--Certain
Covenants--Restricted Payments" and "--Incurrence of
Indebtedness and Issuance of Preferred Stock" in which case
the Net Income of any Unrestricted Subsidiary will be included
to the extent it would otherwise be included under clause (1)
of this definition above.
"Continuing Directors" means, as of any date of determination, any
member of the Board of Directors of the Issuers who:
(1) was a member of such Board of Directors on the date of the
indenture; or
(2) was nominated for election or elected to such Board of
Directors with the approval of a majority of the Continuing
Directors who were members of such Board at the time of such
nomination or election.
"Credit Facilities" means, one or more debt facilities (including,
without limitation, the Kentucky Credit Facility and the Indiana Credit
Facility) or commercial paper facilities, in each case with banks or other
institutional lenders providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such lenders
or to special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time.
- 103 -
"Debt to Cash Flow Ratio" means, as of any date of determination
(the "Determination Date"), the ratio of (a) the Consolidated Indebtedness of
the Issuers as of such Determination Date to (b) four times the Consolidated
Cash Flow of the Issuers for the most recent full fiscal quarter ending
immediately prior to such Determination Date for which internal financial
statements are available (the "Measurement Period"), determined on a pro forma
basis after giving effect to all acquisitions or dispositions of assets made by
the Issuers and their Subsidiaries from the beginning of such quarter through
and including such Determination Date (including any related financing
transactions) as if such acquisitions and dispositions had occurred at the
beginning of such quarter. For purposes of calculating Consolidated Cash Flow
for the Measurement Period immediately prior to the relevant Determination Date,
(i) any Person that is a Restricted Subsidiary on the Determination Date (or
would become a Restricted Subsidiary on such Determination Date in connection
with the transaction that requires the determination of such Consolidated Cash
Flow) will be deemed to have been a Restricted Subsidiary at all times during
the Measurement Period; (ii) any Person that is not a Restricted Subsidiary on
such Determination Date (or would cease to be a Restricted Subsidiary on such
Determination Date in connection with the transaction that requires the
determination of such Consolidated Cash Flow) will be deemed not to have been a
Restricted Subsidiary at any time during such Measurement Period; and (iii) if
the Issuers or any Restricted Subsidiary shall have in any manner (x) acquired
(including through an Asset Acquisition or the commencement of activities
constituting such operating business) or (y) disposed of (including by way of an
Asset Sale or the termination or discontinuance of activities constituting such
operating business) any operating business during such Measurement Period or
after the end of such period and on or prior to such Determination Date, such
calculation will be made on a pro forma basis in accordance with generally
accepted accounting principles consistently applied, as if, in the case of an
Asset Acquisition or the commencement of activities constituting such operating
business, all such transactions had been consummated on the first day of such
Measurement Period, and, in the case of an Asset Sale or termination or
discontinuance of activities constituting such operating business, all such
transactions had been consummated prior to the first day of such Measurement
Period.
"Default" means any event that is, or with the passage of time or
the giving of notice or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or
by the terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the holder
thereof, in whole or in part, on or prior to the date that is 91 days after the
date on which the notes mature. Notwithstanding the preceding sentence, any
Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require the Issuers to repurchase such Capital
Stock upon the occurrence of a change of control or an asset sale shall not
constitute Disqualified Stock if the terms of such Capital Stock provide that
the Issuers may not repurchase or redeem any such Capital Stock pursuant to such
provisions unless such repurchase or redemption complies with the covenant
described above under the caption "--Certain Covenants--Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means an offering by a Person of its shares of
Equity Interests (other than Disqualified Stock) however designated and whether
voting or non-voting, and any and all rights, warrants or options to acquire
such Equity Interests (other than Disqualified Stock).
"Existing Indebtedness" means up to $200.0 million in aggregate
principal amount of Indebtedness of the Issuers and their Subsidiaries in
existence on the date of the indenture, until such amounts are repaid.
"GAAP" means generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant segment
of the accounting profession, which are in effect on the date of the indenture.
"Guarantee" means a guarantee other than by endorsement of
negotiable instruments for collection in the ordinary course of business, direct
or indirect, in any manner including, without limitation, by way of a pledge of
- 104 -
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any specified Person,
the obligations of such Person under:
(1) interest rate swap agreements, interest rate cap agreements
and interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such
Person against fluctuations in interest rates.
"Indebtedness" means, with respect to any specified Person, any
indebtedness of such Person, whether or not contingent, in respect of:
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments
or letters of credit (or reimbursement agreements in respect
thereof);
(3) banker's acceptances;
(4) representing Capital Lease Obligations of such Person and all
Attributable Debt in respect of sale and leaseback
transactions entered into by such Person;
(5) the balance deferred and unpaid of the purchase price of any
property, except any such balance that constitutes an accrued
expense or trade payable; or
(6) representing any Hedging Obligations,
if and to the extent any of the preceding items (other than letters
of credit and Hedging Obligations) would appear as a liability upon a balance
sheet of the specified Person prepared in accordance with GAAP. In addition, the
term "Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness is assumed by
the specified Person) and, to the extent not otherwise included, the Guarantee
by the specified Person of any indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness
issued with original issue discount; and
(2) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any
other Indebtedness.
"Indiana Credit Facility" means that certain credit agreement, dated
as of October 31, 1998, by and among Insight Communications of Indiana, LLC, The
Bank of New York, as administrative agent, and the other lenders party thereto,
as amended by Amendment No. 1 dated as of September 24, 1999, as further amended
by Amendment No. 2 dated as of April 26, 2000, as further amended by Amendment
No. 3 dated as of October 12, 2000, and as the same may hereafter be further
amended, modified, supplemented or renewed in accordance with its terms and all
other loan documents, including the security agreement, delivered pursuant
thereto.
"Insight Communications" means Insight Communications Company, Inc.
"Insight Midwest" means Insight Midwest, L.P.
"Investments" means, with respect to any Person, all direct or
indirect investments by such Person in other Persons (including Affiliates) in
the forms of loans (including Guarantees or other obligations), advances or
capital contributions (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in
- 105 -
accordance with GAAP and include the designation of a Restricted Subsidiary as
an Unrestricted Subsidiary. If the Issuers or any Restricted Subsidiary of the
Issuers sells or otherwise disposes of any Equity Interests of any direct or
indirect Restricted Subsidiary of the Issuers such that, after giving effect to
any such sale or disposition, such Person is no longer a Subsidiary of the
Issuers, the Issuers shall be deemed to have made an Investment on the date of
any such sale or disposition equal to the fair market value of the Equity
Interests of such Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "--Certain Covenants--Restricted Payments." The acquisition by the
Issuers or any Restricted Subsidiary of the Issuers of a Person that holds an
Investment in a third Person shall be deemed to be an Investment by the Issuers
or such Restricted Subsidiary in such third Person in an amount equal to the
fair market value of the Investment held by the acquired Person in such third
Person in an amount determined as provided in the final paragraph of the
covenant described above under the caption "--Certain Covenants--Restricted
Payments."
"Kentucky Credit Facility" means the Amended and Restated Revolving
Credit and Term Loan Agreement dated as of October 1, 1999 among Insight
Kentucky Partners I, L.P. (f/k/a InterMedia Partners VI, L.P.), Toronto Dominion
(Texas), Inc., as administrative agent, and the other lenders party thereto as
amended by Amendment No. 1 dated as of October 19, 2000, and as the same may
hereafter be further amended, modified, supplemented or renewed in accordance
with its terms.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest, hypothecation, assignment for security or encumbrance
of any kind in respect of such asset, whether or not filed, recorded or
otherwise perfected under applicable law, including any conditional sale or
capital lease or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction.
"Management Agreements" means the management agreements between
Insight LP and each of Insight Indiana and Insight Kentucky as each is in effect
on the date of the indenture.
"Net Income" means, with respect to any specified Person, the net
income (loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:
(1) any gain (but not loss), together with any related provision
for taxes on such gain (but not loss), realized in connection
with: (a) any Asset Sale; or (b) the disposition of any
securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such
Person or any of its Restricted Subsidiaries; and
(2) any extraordinary gain (but not loss), together with any
related provision for taxes on such extraordinary gain (but
not loss).
"Net Proceeds" means the aggregate cash proceeds received by the
Issuers or any of their Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net of:
(1) all legal, title and recording tax expenses, commissions and
other fees and expenses incurred, and all Federal, state,
provincial, foreign and local taxes required to be paid or
accrued as a liability under GAAP, as a consequence of such
Asset Sale;
(2) all payments made on any indebtedness which is secured by any
assets subject to such Asset Sale, in accordance with the
terms of any Lien upon or other security arrangement of any
kind with respect to such assets, or which must by its terms,
or in order to obtain a necessary consent to such Asset Sale,
or by applicable law, be repaid out of the proceeds from such
Asset Sale;
(3) all distributions and other payments required to be made to
minority interest holders in Restricted Subsidiaries or joint
ventures as a result of such Asset Sale; and
- 106 -
(4) the deduction of appropriate amounts to be provided by the
seller as a reserve, in accordance with GAAP, against any
liabilities associated with the assets disposed of in such
Asset Sale and retained by the Issuers or any Restricted
Subsidiary after such Asset Sale.
"9 3/4% Notes" means our 9 3/4% senior notes due 2009 issued under
an indenture dated as of October 1, 1999, by and between us and The Bank of New
York (as successor to Harris Trust Company of New York), as trustee.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither the Issuers nor any of their Restricted
Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would
constitute Indebtedness), (b) is directly or indirectly liable
as a guarantor or otherwise, or (c) constitutes the lender;
(2) no default with respect to which (including any rights that
the holders thereof may have to take enforcement action
against an Unrestricted Subsidiary) would permit upon notice,
lapse of time or both any holder of any other Indebtedness
(other than the notes) of the Issuers or any of their
Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity; and
(3) as to which the lenders have been notified in writing that
they will not have any recourse to the stock or assets of the
Issuers or any of their Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Partnership Agreement" means the limited partnership agreement of
Insight Midwest, L.P., dated October 1, 1999, as amended by Amendment No. 1
dated as of September 15, 2000, and as the same may be further amended,
supplemented or revised in accordance with its terms.
"Permitted Business" means a cable television, media and
communications, entertainment, telecommunications or data transmission business,
businesses ancillary, complementary or reasonably related thereto and reasonable
extensions thereof.
"Permitted Holders" means Sidney R. Knafel, Michael S. Willner and
Kim D. Kelly.
"Permitted Investments" means:
(1) any Investment in the Issuers or in a Restricted Subsidiary of
an Issuer;
(2) any Investment in Cash Equivalents;
(3) any Investment by the Issuers or any Subsidiary of an Issuer
in a Person, if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of an
Issuer; or
(b) such Person is merged, consolidated or amalgamated with
or into, or transfers or conveys substantially all of
its assets to, or is liquidated into, an Issuer or a
Restricted Subsidiary of an Issuer; provided that such
Person's primary business is a Permitted Business;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and
in compliance with the covenant described above under the
caption "--Repurchase at the Option of holders--Asset Sales;"
- 107 -
(5) any Investment in prepaid expenses, negotiable instruments
held for collection and lease, utility and workers'
compensation, performance and other similar deposits;
(6) Investments made out of the net cash proceeds of the issue and
sale (other than to a Subsidiary of Insight Midwest) of Equity
Interests (other than Disqualified Stock) of Insight Midwest,
to the extent that:
(a) such net cash proceeds have not been applied to make a
Restricted Payment or to effect other transactions
pursuant to the covenant described above under the
caption "--Restricted Payments," or
(b) such net cash proceeds have not been used to incur
Indebtedness pursuant to clause (8) of the covenant
described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock;"
(7) the extension of credit to vendors, suppliers and customers in
the ordinary course of business;
(8) any Investment existing as of the date of the indenture, and
any amendment, modification, extension or renewal thereof to
the extent such amendment, modification, extension or renewal
does not require the Issuers or any Restricted Subsidiary to
make any additional cash or non-cash payments or provide
additional services in connection therewith;
(9) any acquisition of assets solely in exchange for the issuance
of Equity Interests (other than Disqualified Stock) of an
Issuer;
(10) Hedging Obligations;
(11) loans and advances to officers, directors and employees of the
Issuers and the Restricted Subsidiaries for business-related
travel expenses, moving expenses and other similar expenses in
each case incurred in the ordinary course of business not to
exceed $1.0 million outstanding at any time; and
(12) other Investments in any Person, other than Insight
Communications or an Affiliate of Insight Communications that
is not also a Subsidiary of an Issuer, having an aggregate
fair market value (measured on the date each such Investment
was made and without giving effect to subsequent changes in
value), when taken together with all other Investments made
pursuant to this clause (12) since the date of the indenture
not to exceed $50.0 million.
"Permitted Liens" means:
(1) Liens securing Indebtedness and other Obligations under Credit
Facilities that was permitted by the terms of the indenture to
be incurred;
(2) Liens in favor of the Issuers or a Restricted Subsidiary;
(3) Liens on property or assets, or any shares of Capital Stock or
secured indebtedness of a Person existing at the time such
Person is merged with or into or consolidated with an Issuer
or any Restricted Subsidiary of an Issuer; provided that such
Liens were in existence prior to the contemplation of such
merger or consolidation and do not extend to any assets other
than those of the Person merged into or consolidated with the
Issuer or the Restricted Subsidiary;
(4) Liens on property existing at the time of acquisition thereof
by the Issuers or any Restricted Subsidiary of an Issuer,
provided that such Liens were in existence prior to the
contemplation of such acquisition;
(5) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations
of a like nature incurred in the ordinary course of business;
- 108 -
(6) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (4) of the second paragraph
of the covenant entitled "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock" covering only
the assets acquired with such Indebtedness;
(7) Liens existing on the date of the indenture;
(8) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in
good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other
appropriate provision as shall be required in conformity with
GAAP shall have been made therefor;
(9) Liens securing Permitted Refinancing Indebtedness; provided
that any such Lien does not extend to or cover any property,
Capital Stock or Indebtedness other than the property, shares
or debt securing the Indebtedness so refunded, refinanced or
extended;
(10) Statutory liens or landlords', carriers', warehouseman's,
mechanics', suppliers', materialmen's, repairmen's or other
like Liens arising in the ordinary course of business which do
not secure any Indebtedness and with respect to amounts not
yet delinquent or being contested in good faith by appropriate
proceedings, if a reserve or other appropriate provision, if
any, as shall be required in conformity with GAAP shall have
been made therefor;
(11) Easements, rights-of-way, zoning restrictions and other
similar charges or encumbrances in respect of real property
not interfering in any material respect with the ordinary
conduct of the business of the Issuers or any of their
Restricted Subsidiaries;
(12) Attachment or judgment Liens not giving rise to a Default or
an Event of Default;
(13) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation,
unemployment insurance and other types of social security;
(14) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations,
bankers' acceptance, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other
obligations of a similar nature incurred in the ordinary
course of business, exclusive of obligations for the payment
of borrowed money;
(15) Liens of franchisors or other regulatory bodies arising in the
ordinary course of business;
(16) Liens arising from filing Uniform Commercial Code financing
statements regarding leases or other Uniform Commercial Code
financing statements for precautionary purposes relating to
arrangements not constituting Indebtedness;
(17) Liens securing reimbursement obligations with respect to
letters of credit that encumber documents and other property
relating to such letters of credit and the products and
proceeds thereof;
(18) Liens encumbering customary initial deposits and margin
deposits, and other Liens that are within the general
parameters customary in the industry and incurred in the
ordinary course of business, in each case, securing
Indebtedness under Hedging Obligations and forward contracts,
options, future contracts, future options or similar
agreements or arrangements designed solely to protect the
Issuers or any of their Restricted Subsidiaries from
fluctuations in interest rates, currencies or the price of
commodities;
(19) Liens consisting of any interest or title of a licensor in the
property subject to a license;
(20) Liens on the Capital Stock of Unrestricted Subsidiaries;
- 109 -
(21) Liens arising from sales or other transfers of accounts
receivable which are past due or otherwise doubtful of
collection in the ordinary course of business;
(22) Any extensions, substitutions, replacements or renewals of the
foregoing; and
(23) Liens incurred in the ordinary course of business of the
Issuers or any Restricted Subsidiary of the Issuers with
respect to obligations that do not exceed $20.0 million at any
one time outstanding.
"Permitted Refinancing Indebtedness" means any Indebtedness of the
Issuers or any of their Subsidiaries issued in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Issuers or any of its Subsidiaries (other than intercompany
Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the
principal amount (or accreted value, if applicable) of the
Indebtedness so extended, refinanced, renewed, replaced,
defeased or refunded (plus all accrued interest thereon and
the amount of all expenses and premiums incurred in connection
therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded;
(3) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of
payment to the notes, such Permitted Refinancing Indebtedness
has a final maturity date later than the final maturity date
of, and is subordinated in right of payment to, the notes on
terms at least as favorable to the holders of notes as those
contained in the documentation governing the Indebtedness
being extended, refinanced, renewed, replaced, defeased or
refunded; and
(4) such Indebtedness is incurred either by the Issuers or by the
Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization,
limited liability company or government or other entity.
"Principals" means AT&T Broadband, LLC and Insight Communications.
"Related Party" means, with respect to any Person:
(1) any controlling stockholder, 80% (or more) owned Subsidiary,
or immediate family member (in the case of an individual) of
such Person; or
(2) partners, owners or Persons beneficially holding an 80% or
more controlling interest of which consist of any one or more
such Persons and/or such other Persons referred to in the
immediately preceding clause (1).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the
referent Person that is not an Unrestricted Subsidiary.
"Significant Subsidiary" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof.
"Stated Maturity" means, with respect to any installment of interest
or principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original
- 110 -
documentation governing such Indebtedness, and shall not include any contingent
obligations to repay, redeem or repurchase any such interest or principal prior
to the date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which
more than 50% of the total voting power of shares of Capital
Stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly
or indirectly, by such Person or one or more of the other
Subsidiaries of that Person (or a combination thereof); and
(2) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of
such Person or (b) the only general partners of which are such
Person or one or more Subsidiaries of such Person (or any
combination thereof).
"Unrestricted Subsidiary" means any Subsidiary of an Issuer (or any
successor to any of them) that is designated by the Board of Directors as an
Unrestricted Subsidiary pursuant to a Board Resolution, but only to the extent
that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with an Issuer or any Restricted Subsidiary of
an Issuer unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to such
Issuer or such Restricted Subsidiary than those that might be
obtained at the time from Persons who are not Affiliates of
the Issuers; and
(3) is a Person with respect to which neither the Issuers nor any
of its Restricted Subsidiaries has any direct or indirect
obligation (a) to subscribe for additional Equity Interests or
(b) to maintain or preserve such Person's financial condition
or to cause such Person to achieve any specified levels of
operating results.
Any designation of a Subsidiary of an Issuer as an Unrestricted
Subsidiary shall be evidenced to the trustee by filing with the trustee a
certified copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
preceding conditions and was permitted by the covenant described above under the
caption "--Certain Covenants--Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the preceding requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the indenture and any Indebtedness of such Subsidiary
shall be deemed to be incurred by a Restricted Subsidiary of an Issuer as of
such date and, if such Indebtedness is not permitted to be incurred as of such
date under the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," the
Issuers shall be in default of such covenant. The Boards of Directors of the
Issuers may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation shall be deemed to be an incurrence
of Indebtedness by a Restricted Subsidiary of an Issuer of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (1) such Indebtedness is permitted under the covenant described
under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock," calculated on a pro forma basis as if such designation had
occurred at the beginning of the four-quarter reference period; and (2) no
Default or Event of Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock
of such Person that is at the time entitled to vote in the election of the Board
of Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount
of each then remaining installment, sinking fund, serial
maturity or other required payments of principal, including
- 111 -
payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that
will elapse between such date and the making of such payment;
by
(2) the then outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any specified Person means a
Restricted Subsidiary of such Person all of the outstanding Capital Stock or
other ownership interests of which (other than directors' qualifying shares)
shall at the time be owned by such Person or by one or more Wholly Owned
Restricted Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
- 112 -
U.S. FEDERAL TAX CONSIDERATIONS
In the opinion of Sonnenschein Nath & Rosenthal, the following
general discussion summarizes the material U.S. federal tax aspects of the
exchange offer. This discussion is a summary for general information only and
does not consider all aspects of U.S. federal tax that may be relevant to the
purchase, ownership and disposition of exchange notes by a prospective investor
in light of such investor's personal circumstances. This discussion also does
not address the U.S. federal tax consequences of ownership of notes not held as
capital assets within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended (the "Code"), or the U.S. federal tax consequences to
investors subject to special treatment under the U.S. federal income tax laws,
such as dealers in securities, tax-exempt entities, banks, thrifts, insurance
companies, persons that hold the notes as part of a "straddle," a "hedge"
against currency risk or a "conversion transaction," persons that have a
"functional currency" other than the U.S. dollar, and investors in partnerships
or other pass-through entities. In addition, except as otherwise provided, this
discussion addresses only certain U.S. federal income tax consequences and does
not describe U.S. federal estate or gift tax consequences or the tax
consequences arising out of the tax laws of any state, local, or foreign
jurisdiction.
As used herein, a "U.S. Holder" is a beneficial owner of a note that
is (1) a citizen or resident of the United States; (2) a corporation or other
entity treated as a corporation for U.S. federal tax purposes that is created or
organized in or under the laws of the United States or any political subdivision
thereof; (3) an estate the income of which is subject to U.S. federal income
taxation regardless of its source; or (4) a trust which is either subject to the
supervision of a court within the United States and the control of one or more
U.S. persons, or has a valid election in effect under applicable U.S. Treasury
regulations to be treated as a U.S. person. As used herein, a "Non-U.S. Holder"
is a beneficial owner of a note that is not a U.S. Holder.
This discussion is based on the Code, existing and proposed U.S.
Treasury regulations thereunder, Internal Revenue Service ("IRS") rulings and
pronouncements and judicial decisions now in effect, all of which are subject to
change, possibly on a retroactive basis. We have not and will not seek any
opinions of counsel or rulings from the IRS with respect to the matters
discussed below. There can be no assurance that the IRS will not take positions
concerning the tax consequences of the purchase, ownership, or disposition of
the notes which are different from those discussed herein.
Investors in notes should consult their tax advisors with regard to
the application of the tax consequences discussed below to their particular
situations, as well as the application of any state, local, foreign or other tax
laws, or subsequent revisions thereof.
Exchange of Notes
The exchange of notes pursuant to the exchange offer will not be
treated as a taxable sale, exchange or other disposition of the corresponding
initial notes because the terms of the exchange notes are not materially
different from the terms of the initial notes. Accordingly,
(1) a holder will not recognize gain or loss upon receipt of an
exchange note;
(2) the holding period of an exchange note will include the
holding period of the initial note exchanged therefor; and
(3) the adjusted tax basis of an exchange note will be the same as
the adjusted tax basis of the initial note exchanged.
The filing of a shelf registration statement will not result in a
taxable exchange to us or to any holder of a note.
- 113 -
U.S. Federal Income Taxation of U.S. Holders
Payments of Interest
A U.S. Holder of an exchange note generally will be required to
report as ordinary income for U.S. federal income tax purposes interest received
or accrued on the exchange note in accordance with the U.S. Holder's regular
method of accounting.
Bond Premium and Market Discount
A U.S. Holder who purchases an exchange note for an amount in excess
of its stated principal amount will be considered to have purchased the exchange
note at a premium equal to the amount of such excess. A U.S. Holder generally
may elect to amortize the premium on the constant yield method. The amount
amortized in any year under such method will be treated as a reduction of the
holder's interest income from the exchange note during such year and will reduce
the holder's adjusted tax basis in the exchange note by such amount. A holder of
an exchange note that does not make the election to amortize the premium will
not reduce its tax basis in the exchange note and, thus, effectively will
realize a smaller gain or a larger loss on a taxable disposition of the exchange
note than it would have realized had the election been made. The election to
amortize the premium on a constant yield method, once made, applies to all debt
obligations held or acquired by the electing holder on or after the first day of
the first taxable year to which the election applies and may not be revoked
without the consent of the IRS.
If a U.S. Holder purchases an exchange note for an amount that is
less than its stated principal amount, the amount of the difference will be
treated as "market discount" for U.S. federal income tax purposes unless such
difference is less than a specified de minimis amount. Under the de minimis
exception, an exchange note is considered to have no market discount if the
excess of the stated redemption price at maturity of the exchange note over the
holder's tax basis in such note immediately after its acquisition is less than
0.25% of the stated redemption price at maturity of the exchange note multiplied
by the number of complete years to the maturity date of the exchange note after
the acquisition date.
Under the market discount rules, a U.S. Holder is required to treat
any principal payment on, or any gain from the sale, exchange, redemption or
other disposition of, an exchange note as ordinary income to the extent of the
accrued market discount not previously included in income at the time of such
payment or disposition. In addition, such a holder may be required to defer
until maturity of the exchange note, or its earlier disposition in a taxable
transaction, the deduction of all or a portion of the interest on any
indebtedness incurred or continued to purchase or carry such exchange note.
In general, market discount will be considered to accrue ratably
during the period from the date of acquisition to the maturity date of the
exchange note, unless the U.S. Holder elects to accrue the market discount on a
constant interest method. A U.S. Holder of an exchange note may elect to include
market discount in income currently as it accrues (on either a ratable or
constant interest method), in which case the rule described above regarding
deferral of interest deductions will not apply. This election to include market
discount in income currently, once made, applies to all market discount
obligations acquired on or after the first taxable year to which the election
applies and may not be revoked without the consent of the IRS.
Sale, Exchange, or Redemption of the Exchange Notes
Upon the sale, exchange, redemption, or other disposition of an
exchange note, a U.S. Holder generally will recognize taxable gain or loss equal
to the difference between the amount realized on the disposition (not including
amounts attributable to accrued but unpaid interest which is taxable as ordinary
income) and the U.S. Holder's adjusted tax basis in the exchange note. A U.S.
Holder's adjusted tax basis in an exchange note generally will equal the cost of
the exchange note (or the cost of the initial note exchanged for the exchange
note) to the U.S. Holder, increased by any market discount previously included
in income through the date of disposition and decreased by any amortized bond
premium applied to reduce interest and by any principal payments on the exchange
note. Such gain or loss generally will be capital gain or loss, except to the
extent of any accrued market discount not previously included in income, which
will be taxed as ordinary income.
- 114 -
U.S. Federal Income Taxation of Non-U.S. Holders
Payments of Interest
The payment to a Non-U.S. Holder of interest on an exchange note
generally will not be subject to a 30% U.S. federal withholding tax provided
that the Non-U.S. Holder (1) does not actually or constructively own 10% or more
of our capital or profits interest within the meaning of the Code and U.S.
Treasury regulations; (2) is not a controlled foreign corporation that is
related to us through stock ownership as provided in the Code and U.S. Treasury
regulations; (3) is not a bank whose receipt of interest on the exchange notes
is in connection with an extension of credit made pursuant to a loan agreement
entered into in the ordinary course of its trade or business; and (4)(a)
provides its name and address on an IRS Form W-8BEN (or a successor form) and
certifies under penalties of perjury that it is not a U.S. person or (b) a bank,
brokerage house or other financial institution that holds the notes on behalf of
the Non-U.S. Holder in the ordinary course of its trade or business (a
"financial institution") certifies to us, under penalty of perjury, that it has
received an IRS Form W-8BEN (or a successor form) from the beneficial owner and
furnishes us with a copy thereof. In the case of financial institutions that
have entered into a withholding agreement with the IRS to become qualified
intermediaries, an alternative method may be applicable for satisfying the
certification requirement described in (4)(b) above.
If a Non-U.S. Holder cannot satisfy the requirements described in
the immediately preceding paragraph, payments of interest made to the Non-U.S.
Holder will be subject to a 30% U.S. federal withholding tax, unless the
Non-U.S. Holder provides us with a properly executed (1) IRS Form W-8BEN (or a
successor form) claiming an exemption from or reduction in the rate of
withholding under the benefit of an applicable income tax treaty or (2) IRS Form
W-8ECI (or a successor form) stating that the interest paid on the exchange note
is not subject to withholding tax because it is effectively connected with the
Non-U.S. Holder's conduct of a trade or business in the United States. In
addition, the Non-U.S. Holder may, under certain circumstances, be required to
obtain a U.S. taxpayer identification number ("TIN").
If a Non-U.S. Holder of an exchange note is engaged in a trade or
business in the United States and interest on the exchange note is effectively
connected with the conduct of such trade or business, the Non-U.S. Holder will
be subject to U.S. federal income tax on such interest in the same manner as if
it were a U.S. Holder, unless the Non-U.S. Holder can claim an exemption under
the benefit of an applicable income tax treaty. In addition, if such Non-U.S.
Holder is a foreign corporation, it may be subject to a branch profits tax equal
to 30% (or lower applicable treaty rate) of its earnings and profits for the
taxable year, subject to adjustments, that are effectively connected with its
conduct of a trade or business in the United States.
Generally, the payments of interest to a Non-U.S. Holder would be
subject to reporting requirements, even though such payments are not subject to
a 30% U.S. federal withholding tax.
Sale, Exchange, or Redemption of the Exchange Notes
Generally, a Non-U.S. Holder will not be subject to U.S. federal
income tax with respect to gain realized on the sale, exchange, redemption or
other disposition of an exchange note unless (1) the gain is effectively
connected with the conduct by the Non-U.S. Holder of a trade or business in the
United States; (2) in the case of a Non-U.S. Holder who is a nonresident alien
individual, such individual is present in the United States for 183 days or more
in the taxable year of disposition and certain other conditions are met; or (3)
the Non-U.S. Holder is subject to tax pursuant to the provisions of the Code
applicable to certain U.S. expatriates. Notwithstanding (1) and (2), a Non-U.S.
Holder will not be subject to U.S. federal income tax if a treaty exemption
applies and the appropriate documentation is provided.
U.S. Federal Estate Taxation of Non-U.S. Holders
An exchange note that is held by an individual who, at the time of
death, is not a citizen or resident of the United States will generally not be
subject to U.S. federal estate tax if, at the time of the individual's death,
interest on the exchange note would have qualified for the portfolio interest
exception.
- 115 -
Information Reporting and Backup Withholding
U.S. Holders may be subject, under certain circumstances, to
information reporting and backup withholding at a rate equal to the fourth
lowest rate of tax under Section 1(c) of the Code (which is 30.5% for amounts
paid before 2002 and after August 6, 2001) with respect to payments of
principal, interest and the gross proceeds from the sale, exchange, redemption
or other disposition of an exchange note. Backup withholding may apply if the
U.S. Holder (1) fails to furnish its TIN on an IRS Form W-9 (or a suitable
substitute form) within a reasonable time after a request therefor; (2)
furnishes an incorrect TIN; (3) fails to report properly any interest or
dividends; or (4) fails, under certain circumstances, to provide a certified
statement signed under penalty of perjury that the TIN provided is its correct
number and that it is not subject to backup withholding. Certain persons are
exempt from backup withholding, including corporations and financial
institutions. U.S. Holders of the exchange notes should consult their tax
advisors as to their qualification for exemption from backup withholding and the
procedure for obtaining such exemption.
Non-U.S. Holders will generally not be subject to backup withholding
at the rate described in the immediately preceding paragraph (which is 30.5% for
amounts paid before 2002 and after August 6, 2001) with respect to payments of
interest on the exchange notes if we do not have actual knowledge that the
Non-U.S. Holder is a U.S. person and such holder provides the requisite
certification on IRS Form W-8BEN (or a successor form) or otherwise establishes
an exemption from backup withholding. Such payments of interest, however, would
generally be subject to reporting requirements, see "U.S. Federal Income
Taxation of Non-U.S. Holders--Payments of Interest" above.
Payments of the gross proceeds from the sale, exchange, redemption
or other disposition of an exchange note effected by or through a U.S. office of
a broker generally will be subject to backup withholding and information
reporting unless the Non-U.S. Holder certifies as to its non-U.S. status on IRS
Form W-8BEN (or a successor form) or otherwise establishes an exemption.
Generally, information reporting and backup withholding will not apply to a
payment of disposition proceeds where the sale is effected outside the United
States through a non-U.S. office of a non-U.S. broker and payment is not
received in the United States.
However, information reporting will generally apply to a payment of
disposition proceeds where the sale is effected outside the United States by or
through an office outside the United States of a broker which fails to maintain
documentary evidence that the holder is a Non-U.S. Holder or that the holder
otherwise is entitled to an exemption, and the broker is (1) a U.S. person; (2)
a foreign person which derives 50% or more of its gross income for defined
periods from the conduct of a trade or business in the United States; (3) a
controlled foreign corporation for U.S. federal income tax purposes; or (4) a
foreign partnership (a) more than 50% of the capital or profits interest of
which is owned by U.S. persons or (b) which is engaged in a U.S. trade or
business. Backup withholding will apply to a payment of those disposition
proceeds if the broker has actual knowledge that the holder is a U.S. person.
Backup withholding is not an additional tax. The amount of any
backup withholding imposed on a payment to a U.S. or Non-U.S. Holder of the
exchange notes will be allowed as a refund or a credit against such holder's
U.S. federal income tax liability, provided that the required information is
furnished to the IRS.
- 116 -
EXCHANGE OFFER
Registration Rights Agreement
The initial notes were originally issued on November 6, 2000 to
Donaldson, Lufkin & Jenrette Securities Corporation, Goldman, Sachs & Co.,
Merrill Lynch Pierce, Fenner & Smith Incorporated, BNY Capital Markets, Inc.,
Bank of America Securities LLC, Chase Securities Inc., Fleet Securities, Inc.,
TD Securities (USA) Inc. and UBS Warburg LLC, pursuant to a purchase agreement
dated November 1, 2000. The initial purchasers subsequently resold the notes to
qualified institutional buyers in reliance on Rule 144A under the Securities
Act, and outside the United States in accordance with Regulation S under the
Securities Act. We are parties to a registration rights agreement with the
initial purchasers entered into as a condition to the closing under the purchase
agreement. Pursuant to the registration rights agreement, we agreed, for the
benefit of the holders of the initial notes, at our cost to:
o file an exchange offer registration statement on or before May
5, 2001 with the Securities and Exchange Commission with
respect to the exchange offer for the notes; and
o use our reasonable best efforts to have the registration
statement declared effective under the Securities Act by
November 6, 2001.
Upon the registration statement being declared effective, we will
offer the exchange notes in exchange for surrender of the initial notes. We will
keep the exchange offer open for not less than 20 business days, or longer if
required by applicable federal and state securities laws, after the date on
which notice of the exchange offer is mailed to the holders of the initial
notes. For any initial notes surrendered to us pursuant to the exchange offer,
the holder of such initial notes will receive exchange notes having an aggregate
principal amount equal to that of the surrendered initial notes.
Under existing interpretations of the staff of the Securities and
Exchange Commission contained in several no-action letters to third parties, we
believe that the exchange notes will in general be freely tradeable after the
exchange offer without further registration under the Securities Act. However,
any initial purchaser holding an unsold allotment from the initial distribution
of the initial notes or any purchaser of initial notes who is an "affiliate" of
ours or who intends to participate in the exchange offer for the purpose of
distributing the exchange notes:
o will not be able to rely on these interpretations of the staff
of the Securities and Exchange Commission;
o will not be able to tender its initial notes in the exchange
offer; and
o must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale
or transfer of the initial notes, unless such sale or transfer
is made pursuant to an exemption from such requirements.
As contemplated by these no-action letters and the registration
rights agreement, each holder accepting the exchange offer is required to
represent to us in the letter of transmittal that at the time of the
consummation of the exchange offer:
o the holder is not an "affiliate" of ours within the meaning of
Rule 405 under the Securities Act;
o the holder is not engaged in, does not intend to engage in,
and has no arrangement or understanding with any person to
participate in, a distribution of the exchange notes; and
o the holder is acquiring the exchange notes in the ordinary
course of its business.
Each holder participating in the exchange offer for the purpose of
distributing the exchange notes must acknowledge and agree that it will comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale of the exchange notes and cannot rely on those
no-action letters.
- 117 -
For a description of the procedures for resales by broker-dealers,
see "Plan of Distribution."
Shelf Registration Statement
If:
o we are not permitted to consummate this exchange offer because
the exchange offer is not permitted by applicable law (after
we have unsuccessfully sought a no-action letter from the
Commission allowing us to consummate the exchange offer); or
o any holder of transfer restricted securities notifies us prior
to the 20th business day following the effective date of the
registration statement that:
o it is prohibited by law or Commission policy from
participating in the exchange offer; or
o it may not resell the exchange notes acquired by it in
the exchange offer to the public without delivering a
prospectus and the prospectus contained in the
registration statement is not appropriate or available
for such resales; or
o that it is a broker-dealer and owns notes acquired
directly from us or one of our affiliates;
then we will file with the Commission a shelf registration statement relating to
all such transfer restricted securities. We will use our reasonable best efforts
to file the shelf registration statement within 30 days of the earlier of the
date we determine that we cannot consummate this exchange offer because the
exchange offer is not permitted by applicable law, or the date we receive notice
from a holder as described in the previous sentence. We will use our reasonable
best efforts to cause the shelf registration statement to be declared effective
by the Commission within 90 days after we are required to file the shelf
registration statement. However, the deadlines for filing and effectiveness of
the shelf registration statement shall not be earlier than such deadlines for
the registration statement relating to the exchange offer.
As used in this prospectus, "transfer restricted securities" means
o each initial note until
o the date on which such initial note has been exchanged
in the exchange offer for an exchange note which may be
resold to the public by the holder thereof without
complying with the prospectus delivery requirements of
the Securities Act;
o the date on which such initial note has been effectively
registered under the Securities Act and disposed of in
accordance with a shelf registration statement; or
o the date on which such initial note is distributed to
the public pursuant to Rule 144 under the Securities
Act; and
o each exchange note held by a broker-dealer until the date on
which such exchange note is disposed of by a broker-dealer
pursuant to the "Plan of Distribution" contained herein
(including the delivery of this prospectus).
The registration rights agreement provides that if:
o we fail to file the registration statement or shelf
registration statement required by the registration rights
agreement on or before the date specified for such filing;
o the registration statement or the shelf registration statement
is not declared effective by the Securities and Exchange
Commission on or prior to the date specified in the
registration rights agreement for such effectiveness;
- 118 -
o we fail to complete the exchange offer within 30 business days
of the effectiveness of the registration statement or such
later date that may be required by federal securities laws; or
o the shelf registration statement or the registration statement
is filed and declared effective but thereafter ceases to be
effective or usable in connection with resales of transfer
restricted securities during the period specified in the
registration rights agreement (each such event referred to in
this clause and the three preceding clauses are referred to as
a "registration default");
then we will pay liquidated damages to each holder of such transfer restricted
securities, with respect to the first 90-day period immediately following the
occurrence of the first registration default in an amount equal to $.05 per week
per $1,000 principal amount of such transfer restricted securities held by such
holder.
The amount of the liquidated damages will increase by an additional
$.05 per week per $1,000 principal amount of transfer restricted securities with
respect to each subsequent 90-day period until all registration defaults have
been cured, up to a maximum amount of liquidated damages for all registration
defaults of $.50 per week per $1,000 principal amount of transfer restricted
securities.
All accrued liquidated damages will be payable to holders of the
transfer restricted securities in cash on the semi-annual interest payment dates
on the transfer restricted securities, commencing with the first such date
occurring after any such registration default, until such registration default
is cured.
Following the cure of all registration defaults, the accrual of
liquidated damages will cease.
Holders of notes will be required to make certain representations to
us (as described in the registration rights agreement) in order to participate
in this exchange offer and will be required to deliver certain information to be
used in connection with any shelf registration statement and to provide comments
on the shelf registration statement within the time periods set forth in the
registration rights agreement in order to have their notes included in the shelf
registration statement and benefit from the provisions regarding liquidated
damages set forth above. By acquiring transfer restricted securities, a holder
will be deemed to have agreed to indemnify us against certain losses arising out
of information furnished by such holder in writing for inclusion in any shelf
registration statement. Holders of notes will also be required to suspend their
use of the prospectus included in the shelf registration statement under certain
circumstances upon receipt of written notice to that effect from us.
Expiration Date; Extensions; Amendments; Termination
This exchange offer will expire at 5:00 p.m., New York City time, on
September 6, 2001, unless we extend it in our reasonable discretion. The
expiration date of this exchange offer will be at least 20 business days after
we mail notice of the exchange offer to holders as provided in Rule 14e-1(a)
under the Securities Exchange Act of 1934 and the registration rights agreement.
To extend the expiration date, we will need to notify the exchange
agent of any extension by oral, promptly confirmed in writing, or written notice
before 9:00 a.m., New York City time, on the next business day after the
previously scheduled expiration date. We will also need to notify the holders of
the initial notes by mailing an announcement to such holder or by means of a
press release or other public announcement, unless otherwise required by
applicable law or regulation.
We expressly reserve the right:
o to delay acceptance of any initial notes, to extend the
exchange offer or to terminate the exchange offer and not
permit acceptance of initial notes not previously accepted if
any of the conditions described below under "--Conditions to
the Exchange Offer" have occurred and have not been waived by
us, if permitted to be waived, by giving oral or written
notice of the delay, extension or termination to the exchange
agent; or
o to amend the terms of the exchange offer in any manner.
- 119 -
If we amend the exchange offer in a manner determined by us to
constitute a material change, we will promptly disclose the amendment in a
manner reasonably calculated to inform the holders of the initial notes of the
amendment including providing public announcement, or giving oral or written
notice to the holders of the initial notes. A material change in the terms of
the exchange offer could include a change in the timing of the exchange offer, a
change in the exchange agent and other similar changes in the terms of the
exchange offer. If any material change is made to the terms of the exchange
offer, we will disclose the change by means of a post-effective amendment to the
registration statement of which this prospectus is a part and will distribute an
amended or supplemented prospectus to each registered holder of initial notes.
In addition, we will also extend the exchange offer for an additional five to
ten business days as required by the Securities Exchange Act, depending on the
significance of the amendment, if the exchange offer would otherwise expire
during that period. Any delay in acceptance, extension, termination or amendment
will be followed as promptly as practicable by oral, promptly confirmed in
writing, or written notice to the exchange agent.
Procedures for Tendering Initial Notes
To tender your initial notes in this exchange offer, you must use
one of the three alternative procedures described below:
Regular Delivery Procedure: Complete, sign and date the letter of
transmittal, or a facsimile of the letter of
transmittal. Have the signatures on the letter
of transmittal guaranteed if required by the
letter of transmittal. Mail or otherwise deliver
the properly completed and duly executed letter
of transmittal or the facsimile, together with
the certificates representing your initial notes
being tendered and any other required documents,
to the exchange agent so that the exchange agent
receives such documents and initial notes on or
before 5:00 p.m., New York City time, on the
expiration date.
Book-Entry Delivery Procedure: Send a timely confirmation of a book-entry
transfer of your initial notes, if this
procedure is available, into the exchange
agent's account at The Depository Trust Company
("DTC") as contemplated by the procedures for
book-entry transfer described below under
"--Book-Entry Delivery Procedure" for receipt in
such account on or before 5:00 p.m., New York
City time, on the expiration date.
Guaranteed Delivery Procedure: If time will not permit you to complete your
tender by using the procedures described above
before the expiration date, comply with the
guaranteed delivery procedures described below
under "--Guaranteed Delivery Procedure."
The method of delivery of initial notes, the letter of transmittal
and all other required documents is at your election and risk. Instead of
delivery by mail, we recommend that you use an overnight or hand-delivery
service. If you choose the mail, we recommend that you use registered mail,
properly insured, with return receipt requested. In all cases, you should allow
sufficient time to assure timely delivery. You should not send any letters of
transmittal or initial notes to us. You must deliver all documents to the
exchange agent at its address provided below. You may also request your
respective brokers, dealers, commercial banks, trust companies or nominees to
tender your initial notes on your behalf.
Only a holder of initial notes may tender initial notes in this
exchange offer. For purposes of this exchange offer, a holder is any person in
whose name initial notes are registered on our books or any other person who has
obtained a properly completed bond power from the registered holder.
If you are the beneficial owner of initial notes that are registered
in the name of a broker, dealer, commercial bank, trust company or other nominee
and you wish to tender your notes, you must contact this registered holder
promptly and instruct this registered holder to tender these notes on your
behalf. If you wish to tender these initial notes on your own behalf, you must,
before completing and executing the letter of transmittal and delivering your
initial notes, either make appropriate arrangements to register the ownership of
these notes in your
- 120 -
name or obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time.
You must have any signatures on a letter of transmittal or a notice
of withdrawal guaranteed by an eligible institution. An eligible institution is
an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Securities Exchange Act including:
o a bank;
o a broker, dealer, municipal securities broker or dealer or
government securities broker or dealer;
o a national securities exchange, registered securities
association or clearing agency;
o a credit union; or
o certain savings association.
However, signatures on a letter of transmittal do not have to be
guaranteed if initial notes are tendered:
o by a registered holder, or by a participant in DTC in the case
of book-entry transfers, whose name appears on a security
position listing as the owner, who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the letter of transmittal and only if the
exchange notes are being issued directly to this registered
holder, or deposited into this participant's account at DTC in
the case of book-entry transfers; or
o for the account of an eligible institution.
If the letter of transmittal or any bond powers are signed by:
o the recordholder(s) of the initial notes tendered: The
signature must correspond with the name(s) written on the face
of the initial notes without alteration, enlargement or any
change whatsoever;
o a participant in DTC: The signature must correspond with the
name as it appears on the security position listing as the
holder of the initial notes;
o a person other than the registered holder of any initial
notes: These initial notes must be endorsed or accompanied by
bond powers and a proxy that authorize this person to tender
the initial notes on behalf of the registered holder, in
satisfactory form to us as determined in our sole discretion,
in each case, as the name of the registered holder or holders
appears on the initial notes;
o trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting
in a fiduciary or representative capacity: These persons
should so indicate such capacities when signing. Unless waived
by us, evidence satisfactory to us of their authority to so
act must also be submitted with the letter of transmittal.
Book-Entry Delivery Procedure
Any financial institution that is a participant in DTC's system may
make book-entry deliveries of initial notes by causing DTC to transfer these
initial notes into the exchange agent's account at DTC according to DTC's
procedures for transfer. To effectively tender notes through DTC, the financial
institution that is a participant in DTC will electronically transmit its
acceptance through the Automatic Tender Offer Program. DTC will then edit and
verify the acceptance and send an agent's message to the exchange agent for its
acceptance. An agent's message is a message transmitted by DTC to the exchange
agent stating that DTC has received an express acknowledgment from the
participant in DTC tendering the initial notes that the participant has received
and agrees to be bound by the terms of the letter of transmittal, and that we
may enforce this agreement against the participant. The exchange
- 121 -
agent will make a request to establish an account for the initial notes at DTC
for purposes of the exchange offer within two business days after the date of
this prospectus.
A delivery of initial notes through a book-entry transfer into the
exchange agent's account at DTC will only be effective if an agent's message or
the letter of transmittal or a facsimile of the letter of transmittal with any
required signature guarantees and any other required documents are transmitted
to and received by the exchange agent at the address indicated below under
"--Exchange Agent" on or before the expiration date unless the guaranteed
delivery procedures described below are complied with. Delivery of documents to
DTC does not constitute delivery to the exchange agent.
Guaranteed Delivery Procedure
If you are a registered holder of initial notes and desire to tender
your notes, and (1) these notes are not immediately available, (2) time will not
permit your notes, the letter of transmittal or other required documents to
reach the exchange agent before the expiration date, or (3) the procedures for
book-entry transfer cannot be completed and an agent's message or a letter of
transmittal (or facsimile thereof) cannot be delivered on or prior to the
expiration date, you may still tender in this exchange offer if:
o you tender through an eligible institution;
o on or before the expiration date, the exchange agent receives
a properly completed and executed notice of guaranteed
delivery, substantially in the form provided by us, with your
name and address as holder of the initial notes, the
certificate numbers of the initial notes and the principal
amount of notes tendered, stating that the tender is being
made pursuant to this notice of guaranteed delivery and
guaranteeing that within three New York Stock Exchange trading
days after the expiration date a properly completed and duly
executed letter of transmittal (or facsimile thereof) and the
certificates for all the initial notes tendered, in proper
form for transfer, or a book-entry confirmation with an
agent's message or letter of transmittal (or facsimile
thereof), as the case may be, and any other documents required
by the letter of transmittal will be deposited by the eligible
institution with the exchange agent; and
o the properly completed and duly executed letter of transmittal
(or facsimile thereof) and the certificates for all your
tendered initial notes in proper form for transfer, or a
book-entry confirmation, with an agent's message or letter of
transmittal (or facsimile thereof), as the case may be, and
all other documents required by the letter of transmittal are
received by the exchange agent within three New York Stock
Exchange trading days after the expiration date.
Acceptance of Initial Notes for Exchange; Delivery of Exchange Notes
Your tender of initial notes will constitute an agreement between
you and us governed by the terms and conditions provided in this prospectus and
in the letter of transmittal.
We will be deemed to have received your tender as of the date when
your duly signed letter of transmittal accompanied by your initial notes
tendered, or a timely confirmation of a book-entry transfer of these notes into
the exchange agent's account at DTC with an agent's message or letter of
transmittal (or facsimile thereof), or a notice of guaranteed delivery from an
eligible institution is received by the exchange agent.
All questions as to the validity, form, eligibility, including time
of receipt, acceptance and withdrawal of tenders will be determined by us in our
sole discretion. Our determination will be final and binding.
We reserve the absolute right to reject any and all initial notes
not properly tendered or any initial notes which, if accepted, would, in our
opinion or our counsel's opinion, be unlawful. We also reserve the absolute
right to waive any conditions of this exchange offer or irregularities or
defects in tender as to particular notes. Our interpretation of the terms and
conditions of this exchange offer, including the instructions in the letter of
transmittal, will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of initial notes must be
cured within the time that we shall determine. Neither the exchange agent, any
other person or we will be under any duty to give notification of defects or
irregularities with respect to tenders of initial
- 122 -
notes. Neither the exchange agent nor we will incur any liability for any
failure to give notification of these defects or irregularities. Tenders of
initial notes will not be deemed to have been made until the irregularities have
been cured or waived. The exchange agent will return without cost to their
holders any initial notes that are not properly tendered and as to which the
defects or irregularities have not been cured or waived as promptly as
practicable following the expiration date.
If all the conditions to the exchange offer are satisfied or waived
on the expiration date, we will accept all initial notes properly tendered and
will issue the exchange notes promptly thereafter. Please refer below to the
section of this prospectus entitled "--Conditions to the Exchange Offer." For
purposes of this exchange offer, initial notes will be deemed to have been
accepted as validly tendered for exchange when, as and if, we give oral or
written notice of acceptance to the exchange agent.
We will issue the exchange notes in exchange for the initial notes
tendered by a notice of guaranteed delivery by an eligible institution only
against delivery to the exchange agent of the letter of transmittal, the
tendered initial notes and any other required documents, or the receipt by the
exchange agent of a timely confirmation of a book-entry transfer of initial
notes into the exchange agent's account at DTC with an agent's message or letter
of transmittal (or facsimile thereof), in each case, in form satisfactory to us
and the exchange agent.
If any tendered initial notes are not accepted for any reason or if
initial notes are submitted for a greater principal amount than the holder
desires to exchange, the unaccepted or non-exchanged initial notes will be
returned without expense to the tendering holder, or, in the case of initial
notes tendered by book-entry transfer procedures described above, will be
credited to an account maintained with the book-entry transfer facility, as
promptly as practicable after withdrawal, rejection of tender or the expiration
or termination of the exchange offer.
In addition, we reserve the right in our sole discretion, but in
compliance with the provisions of the indenture, to:
o purchase or make offers for any initial notes that remain
outstanding after the expiration date, or, as described above
under "--Expiration Date; Extensions; Amendments;
Termination," to terminate the exchange offer as provided by
the terms of our registration rights agreement; and
o purchase initial notes in the open market, in privately
negotiated transactions or otherwise, to the extent permitted
by applicable law.
The terms of any of the purchases or offers described above could
differ from the terms of the exchange offer.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, you may withdraw
tenders of initial notes at any time before 5:00 p.m., New York City time, on
the expiration date.
For a withdrawal to be effective, you must send a written or
facsimile transmission notice of withdrawal to the exchange agent before 5:00
p.m., New York City time, on the expiration date at the address provided below
under "--Exchange Agent" and before acceptance of your tendered initial notes
for exchange by us.
Any notice of withdrawal must:
o specify the name of the person having tendered the initial
notes to be withdrawn;
o identify the initial notes to be withdrawn, including, if
applicable, the registration number or numbers and the total
principal amount of these notes;
o be signed by the person having tendered the initial notes to
be withdrawn in the same manner as the original signature on
the letter of transmittal by which these initial notes were
tendered, including any required signature guarantees, or be
accompanied by documents of transfer sufficient to permit the
- 123 -
trustee for the initial notes to register the transfer of
these notes into the name of the person having made the
original tender and withdrawing the tender; and
o state that you are withdrawing your tender of initial notes.
We will determine all questions as to the validity, form and
eligibility, including time of receipt, of all notices of withdrawal and our
determination will be final and binding on all parties. Initial notes that are
withdrawn will be deemed not to have been validly tendered for exchange in this
exchange offer.
You may retender properly withdrawn initial notes in this exchange
offer by following one of the procedures described above under "--Procedures for
Tendering Initial Notes" at any time before the expiration date.
Conditions to the Exchange Offer
With exceptions, we will not be required to accept initial notes for
exchange, or issue exchange notes in exchange for any initial notes, and we may
terminate or amend the exchange offer as provided in this prospectus before the
acceptance of the initial notes, if:
o the exchange offer violates applicable law or any
interpretation of the staff of the Securities and Exchange
Commission;
o any required governmental approval has not been obtained; or
o a court or any governmental authority has issued an
injunction, order or decree that would prevent or impair our
ability to proceed with the exchange offer.
These conditions are for our sole benefit. We may assert any of
these conditions regardless of the circumstances giving rise to any of them. We
may also waive these conditions, in whole or in part, at any time and from time
to time, if we determine in our reasonable discretion, but within the limits of
applicable law, that any of the foregoing events or conditions have occurred or
exists or have not been satisfied. Our failure at any time to exercise any of
our rights will not be deemed a waiver of these rights and these rights will be
deemed ongoing rights which we may assert at any time and from time to time.
If we determine that we may terminate the exchange offer, as
provided above, we may:
o refuse to accept any initial notes and return any initial
notes that have been tendered to their holders;
o extend the exchange offer and retain all initial notes
tendered before the expiration date, allowing, however, the
holders of tendered initial notes to exercise their rights to
withdraw their tendered initial notes; or
o waive any termination event with respect to the exchange offer
and accept all properly tendered initial notes that have not
been withdrawn or otherwise amend the terms of the exchange
offer in any respect as provided above under "--Expiration
Date; Extensions; Amendments; Termination."
If we determine that we may terminate the exchange offer, we may be
required to file a shelf registration statement with the Securities and Exchange
Commission as described under "--Shelf Registration Statement." The exchange
offer is not dependent upon any minimum principal amount of initial notes being
tendered for exchange.
Accounting Treatment
We will record the exchange notes at the same carrying value as the
initial notes, as reflected in our accounting records on the date of the
exchange. Accordingly, we will not recognize any gain or loss for accounting
purposes. We will amortize the costs of the exchange offer and the unamortized
expenses related to the issuance of the exchange notes over the term of the
exchange notes.
- 124 -
Exchange Agent
We have appointed The Bank of New York as exchange agent for the
exchange offer. You should direct all questions and requests for assistance or
additional copies of this prospectus or the letter of transmittal to the
exchange agent as follows:
The Bank of New York
101 Barclay Street, 7 East
New York, New York 10286
Attention: Reorganization Section
Fax number: (212) 815-6339
Fees and Expenses
We will bear the expenses of soliciting tenders under the exchange
offer. The principal solicitation for tenders under the exchange offer is being
made by mail; however, our officers and other employees may make additional
solicitations by telegraph, telephone, telecopy or in person.
We will not make any payments to brokers, dealers or other persons
soliciting acceptances of the exchange offer. However, we will pay the exchange
agent reasonable and customary fees for its services and will reimburse the
exchange agent for its reasonable out-of-pocket expenses in connection with the
exchange offer. We may also pay brokerage houses and other custodians, nominees
and fiduciaries the reasonable out-of-pocket expenses incurred by them in
forwarding copies of the prospectus, letters of transmittal and related
documents to the beneficial owners of the initial notes, and in handling or
forwarding tenders for exchange.
We will pay the expenses incurred in connection with the exchange
offer, including fees and expenses of the exchange agent and trustee and
accounting, legal, printing and related fees and expenses.
We will generally pay all transfer taxes, if any, applicable to the
exchange of initial notes under the exchange offer. However, tendering holders
will pay the amount of any transfer taxes, whether imposed on the registered
holder or any other person, if:
o certificates representing exchange notes or initial notes for
principal amounts not tendered or accepted for exchange are to
be delivered to, or are to be registered or issued in the name
of, any person other than the registered holder of the initial
notes tendered; or
o tendered initial notes are registered in the name of any
person other than the person signing the letter of
transmittal; or
o a transfer tax is imposed for any reason other than the
exchange of initial notes under the exchange offer.
If satisfactory evidence of payment of these taxes or exemption
therefrom is not submitted with the letter of transmittal, the amount of the
transfer taxes will be billed directly to the tendering holder.
Your Failure to Participate in the Exchange Offer Will Have Adverse Consequences
If you do not properly tender your initial notes in the exchange
offer, your initial notes will remain outstanding and continue to accrue
interest. However, you will not be able to resell, offer to resell or otherwise
transfer the initial notes unless they are registered under the Securities Act
or unless you resell them, offer to resell or otherwise transfer them under an
exemption from the registration requirements of, or in a transaction not
governed by, the Securities Act. In addition, you will no longer be able to
obligate us to register the initial notes under the Securities Act, except in
the limited circumstances provided under our registration rights agreement. To
the extent the initial notes are tendered and accepted in the exchange offer,
the trading market, if any, for the initial notes would be adversely affected.
You should refer to "Risk Factors--Your failure to participate in the exchange
offer will have adverse consequences."
- 125 -
BOOK-ENTRY; DELIVERY AND FORM
Principal and interest payments on global securities registered in
the name of DTC's nominee will be made in immediate available funds to DTC's
nominee as the registered owner of the global securities. We and the trustee
will treat DTC's nominee as the owner of the global securities for all other
purposes as well. Accordingly, we, the trustee, any paying agent and any of the
initial purchasers will have no direct responsibility or liability for any
aspect of the records relating to payments made on account of beneficial
interests in the global securities or for maintaining, supervising or reviewing
any records relating to these beneficial interests. It is DTC's current
practice, upon receipt of any payment of principal or interest, to credit direct
participants' accounts on the payment date according to their respective
holdings of beneficial interests in the global securities. These payments will
be the responsibility of the direct and indirect participants and not of DTC,
the trustee or us.
So long as DTC or its nominee is the registered owner or holder of
the global security, DTC or its nominee, as the case may be, will be considered
the sole owner or holder of the notes represented by the global security for the
purposes of:
o receiving payment on the notes;
o receiving notices; and
o for all other purposes under the Indenture and the notes.
Beneficial interests in the notes will be evidenced only by, and
transfers of the notes will be effected only through, records maintained by DTC
and its participants.
Except as described below, owners of beneficial interests in a
global security will not be entitled to receive physical delivery of
certificated notes in definitive form and will not be considered the holders of
the global security for any purposes under the Indenture. Accordingly, each
person owning a beneficial interest in a global security must rely on the
procedures of DTC. And, if that person is not a participant in DTC, the person
must rely on the procedures of the participant in DTC through which that person
owns its interest, to exercise any rights of a holder under the Indenture. Under
existing industry practices, if we request any action of holders or an owner of
a beneficial interest in a global security desires to take any action under the
Indenture, DTC would authorize the participants holding the relevant beneficial
interest to take that action. The participants then would authorize beneficial
owners owning through the participants to take the action or would otherwise act
upon the instructions of beneficial owners owning through them.
DTC has advised us that it will take any action permitted to be
taken by a holder of notes only at the direction of one or more participants to
whose account with DTC interests in the global security are credited. Further,
DTC will take action only as to the portion of the aggregate principal amount at
maturity of the notes as to which the participant or participants has or have
given the direction.
Although DTC, the Euroclear System ("Euroclear") and Clearstream
Banking, S.A. of Luxembourg ("Clearstream") have agreed to the procedures
described above in order to facilitate transfers of interests in global
securities among participants in DTC, Euroclear and Clearstream, they are under
no obligation to perform these procedures, and the procedures may be
discontinued at any time. None of us, the trustee, any agent of an initial
purchaser or ours will have any responsibility for the performance by DTC,
Euroclear and Clearstream or their respective participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
DTC has provided the following information to us. DTC is a:
o limited-purpose trust company organized under the New York
Banking Law;
o a banking organization within the meaning of the New York
Banking Law;
o a member of the U.S. Federal Reserve System;
- 126 -
o a clearing corporation within the meaning of the New York
Uniform Commercial Code; and
o a clearing agency registered under the provisions of Section
17A of the Securities Exchange Act.
Certificated Notes
Notes represented by a global security are exchangeable for
certificated notes only if:
o DTC notifies us that it is unwilling or unable to continue as
depository or if DTC ceases to be a registered clearing
agency, and a successor depository is not appointed by us
within 90 days;
o we determine not to require all of the notes to be represented
by a global security and notifies the trustee of their
decision; or
o an event of default or an event which, with the giving of
notice or lapse of time, or both, would constitute an Event of
Default relating to the notes represented by the global
security has occurred and is continuing.
Any global security that is exchangeable for certificated notes in
accordance with the preceding sentence will be transferred to, and registered
and exchanged for, certificated notes in authorized denominations and registered
in the names as DTC or its nominee may direct. However, a global security is
only exchangeable for a global security of like denomination to be registered in
the name of DTC or its nominee. If a global security becomes exchangeable for
certificated notes:
o certificated notes will be issued only in fully registered
form in denominations of $1,000 or integral multiples of
$1,000;
o payment of principal, premium, if any, and interest on the
certificated notes will be payable, and the transfer of the
certificated notes will be registrable, at the office or
agency we maintain for these purposes; and
o no service charge will be made for any issuance of the
certificated notes, although the issuers may require payment
of a sum sufficient to cover any tax or governmental charge
imposed in connection with the issuance.
Transfers between participants in DTC will be effected in accordance
with DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear or Clearstream will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to
the notes, cross-market transfers between the participants in DTC, on the one
hand, and Euroclear or Clearstream participants, on the other hand, will be
effected through DTC in accordance with DTC's rules on behalf of Euroclear or
Clearstream, as the case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Clearstream, as the case may be, by the counterparts in such system in
accordance with the rules and procedures and within the established deadlines,
Brussels time, of such system. Euroclear or Clearstream, as the case may be,
will, if the transaction meets its settlement requirements, deliver instructions
to its respective depositary to take action to effect final settlement on its
behalf by delivering or receiving interests in the relevant global securities in
DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Euroclear participants and
Clearstream participants may not deliver instructions directly to the
depositories for Euroclear or Clearstream.
Because of time zone differences, the securities account of a
Euroclear or Clearstream participant purchasing an interest in a global security
from a participant in DTC will be credited, and any such crediting will be
reported to the relevant Euroclear or Clearstream participant, during the
securities settlement processing day, which must be a business day for Euroclear
and Clearstream, immediately following the settlement date of DTC. Cash received
in Euroclear or Clearstream as a result of sales of an interest in a global
security by or through a Euroclear
- 127 -
or Clearstream participant to a participant in DTC will be received with value
on the settlement date of DTC but will be available in the relevant Euroclear or
Clearstream cash account only as of the business day for Euroclear or
Clearstream following DTC's settlement date.
PLAN OF DISTRIBUTION
A broker-dealer that is the holder of initial notes that were
acquired for the account of such broker-dealer as a result of market-making or
other trading activities, other than initial notes acquired directly from us or
any of our affiliates, may exchange such initial notes for exchange notes
pursuant to the exchange offer; provided, that each broker-dealer that receives
exchange notes for its own account in exchange for initial notes, where such
initial notes were acquired by such broker-dealer as a result of market-making
or other trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of such exchange notes. This prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of exchange notes received in exchange for initial notes
where such initial notes were acquired as a result of market-making activities
or other trading activities. We have agreed that for a period of 180 days after
consummation of the exchange offer as described in the registration rights
agreement or, if earlier, such time as any broker-dealer no longer owns any
exchange notes, we will make this prospectus, as it may be amended or
supplemented from time to time, available to any broker-dealer for use in
connection with any such resale. All dealers effecting transactions in the
exchange notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers or any other holder of exchange notes. Exchange notes received by
broker-dealers for their own account pursuant to the exchange offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the exchange notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
exchange notes. Any broker-dealer that resells exchange notes that were received
by it for its own account pursuant to the exchange offer and any broker or
dealer that participates in a distribution of such exchange notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of exchange notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The letter of transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after consummation of the exchange offer as
described in the registration rights agreement or, if earlier, such time as any
broker-dealer no longer owns any exchange notes, we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any broker-dealer that requests such documents in the letter of
transmittal. We have agreed to pay all expenses incident to the exchange offer
and to our performance of, or compliance with, the registration rights
agreement, other than commissions or concessions of any brokers or dealers, and
will indemnify the holders of the notes, including any broker-dealers, against
certain liabilities, including liabilities under the Securities Act.
- 128 -
LEGAL MATTERS
The validity of the exchange notes offered hereby will be passed
upon for us by Sonnenschein Nath & Rosenthal, New York, New York.
EXPERTS
The consolidated financial statements of Insight Midwest, L.P. as of
December 31, 2000 and 1999 and for the years then ended, and the consolidated
financial statements of Insight Communications of Indiana, LLC at December 31,
1998 and for the two month period ended December 31, 1998; and the combined
financial statements of Noblesville, Indiana, Jeffersonville, Indiana and
Lafayette, Indiana Cable Television Systems at October 31, 1998 and December 31,
1997 and the period from January 1, 1998 to October 31, 1998 and for the year
ended December 31, 1997; and the combined financial statements of Griffin,
Georgia, Rockford, Illinois, Portland, Indiana and Scottsburg, Indiana Cable
Television Systems as of December 31, 2000 and 1999 and for the years then
ended; and the financial statements of Insight Communications of Central Ohio
LLC as of December 31, 2000 and 1999 and for the three years in the period ended
December 31, 2000, and the financial statements of Insight Capital, Inc. as of
December 31, 2000 and 1999 and for the years then ended, appearing in this
prospectus and registration statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing elsewhere
herein and are included in reliance upon such reports given on the authority of
such firm as experts in accounting and auditing.
The combined financial statements of the AT&T Insight Midwest
Systems as of December 31, 2000 and December 31, 1999, for the year ended
December 31, 2000 and for the period from March 1, 1999 to December 31, 1999
("New Insight") and for the period January 1, 1999 to February 28, 1999 ("Old
Insight"), have been included in this prospectus in reliance upon the reports of
KPMG LLP, independent certified public accountants, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing.
The KPMG LLP report dated October 11, 2000 contains an explanatory
paragraph that states that effective March 9, 1999, AT&T Corp., the owner of the
assets comprising New Insight, acquired Tele-Communications, Inc., the owner of
the assets comprising 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 basis than that
for the period before the acquisition and, therefore, is not comparable.
The financial statements of InterMedia Capital Partners VI, L.P. as
of September 30, 1999 and December 31, 1998 and for the nine months ended
September 30, 1999 and the period from April 30, 1998 (commencement of
operations) to December 31, 1998 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form S-4, including all amendments, exhibits,
schedules and supplements, to register the exchange notes. Although this
prospectus, which forms a part of the registration statement, contain all
material information included in the registration statement, parts of the
registration statement have been omitted as permitted by the rules of the
Commission. For further information about us and the exchange notes offered in
this prospectus, you should refer to the registration statement and its
exhibits. You may read and copy any document we file with the Commission at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at 7 World Trade Center, Suite 1300, New York, New York 10048 and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, NW, Washington, D.C. 20549, at prescribed rates. You can also review
such material by accessing the Commission's Internet web site at
http://www.sec.gov. This site contains reports, proxy and information statements
and other information regarding issuers that file electronically with the
Commission.
We are currently subject to the periodic reporting and other
informational requirements of the Securities Exchange Act. So long as we are
subject to these periodic reporting requirements, we will continue to furnish
the
- 129 -
information required thereby to the Commission. We are required to file periodic
reports with the Commission pursuant to the Securities Exchange Act during our
current fiscal year and thereafter so long as the exchange notes are held by at
least 300 registered holders. We do not anticipate that, for periods following
December 31, 2001, the exchange notes will be held of record by more than 300
registered holders. Therefore, we do not expect to be required to comply with
the periodic reporting requirements imposed under the Securities Exchange Act
after that date. However, we have agreed that, whether or not we are required to
do so by the rules and regulations of the Commission, for so long as any of the
notes remain outstanding, we will furnish to the holders of the notes and file
with the Commission, unless the Commission will not accept such a filing:
o all quarterly and annual financial information that would be
required to be contained in such a filing with the Commission
on Forms 10-Q and 10-K if we were required to file such forms,
including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, regarding a
discussion of the annual information only, a report thereon by
our certified independent public accountants; and
o all reports that would be required to be filed with the
Commission on Form 8-K if we were required to file such
reports.
In addition, for so long as any of the notes remain outstanding, we
have agreed to make available to any prospective purchaser of the notes or
beneficial owner of the notes in connection with any sale thereof, the
information required by Rule 144A(d)(4) under the Securities Act.
- 130 -
GLOSSARY
The following is a description of certain terms used in this prospectus:
Amplifier cascades............................. The operation of two or more amplifiers in series so that the
output of one device feeds the input of the next device.
Bandwidth...................................... Bandwidth measures the information-carrying capacity of a
communication channel and indicates the range of usable
frequencies that can be carried by a cable television system.
Basic customer................................. A customer to a cable television system who receives the Basic
Service Tier and who is usually charged a flat monthly rate for a
number of channels.
Basic penetration.............................. Basic customers as a percentage of total number of homes passed.
Basic service tier............................. A package of over-the-air broadcast stations, local access
channels and certain satellite-delivered cable television
services (other than premium services).
Broadband...................................... The ability to deliver multiple channels and/or services to
customers.
Cable modem.................................... A device similar to a telephone modem that sends and receives
signals over a cable television network at speeds up to 100 times
the capacity of a typical telephone modem.
Channel capacity............................... The number of traditional video programming channels that can be
carried over a communications system.
Clustering..................................... A general term used to describe the strategy of operating cable
television systems in a specific geographic region, thus allowing
for the achievement of economies of scale and operating
efficiencies in such areas as system management, marketing and
technical functions.
Converter...................................... An electronic device that permits tuning of a cable television
signal to permit reception by customer television sets and VCRs
and provides a means of access control for cable television
programming.
Density........................................ A general term used to describe the number of homes passed per
mile of network.
Digital video.................................. A distribution technology where video content is delivered in
digital format.
Direct broadcast satellite television system... A service by which packages of television programming are
transmitted via high-powered satellites to individual homes, each
served by a small satellite dish.
Fiber optic cable.............................. A cable made of glass fibers through which signals are transmitted
as pulses of light to the distribution portion of the cable
television system which in turn goes to the customer's home.
Capacity for a very large number of channels can be more easily
provided.
G - 1
Fiber optic trunk system....................... The use of fiber optic cable from the headend to the distribution
portion of the cable television system.
Headend........................................ A collection of hardware, typically including earth stations,
satellite receivers, towers, off-air antennae, modulators,
amplifiers, and video cassette playback machines within which
signals are processed and then combined for distribution within
the cable television network. Equipment to process signals from
the customer's home also are contained at the headend.
Homes passed................................... The number of single residence homes, apartments and condominium
units passed by the cable distribution network in a cable system's
service area.
Multiplexing................................... Additional screens of premium channels, such as HBO and ShowTime,
which cable operators provide for no additional fees, provided the
customer subscribes to the primary premium channel.
Multipoint multichannel distribution........... A one-way radio transmission of television channels over microwave
system frequencies from a fixed station transmitting to multiple
receiving facilities located at fixed points.
Must carry..................................... The provisions of the 1992 Cable Act that require cable television
operators to carry local commercial and noncommercial television
broadcast stations on their systems.
Near video-on-demand........................... A pay-per-view service that allows customers to select and order a
movie of their choice from a selection of movies being broadcast
on several dedicated channels. Each movie is broadcast on multiple
channels to offer the customer several start times for the same
movie and the customer joins the movie in progress when it is
purchased.
Network........................................ The distribution network element of a cable television system
consisting of coaxial and fiber optic cable leaving the headend on
power or telephone company poles or buried underground.
Node........................................... The interface between the fiber optic and coaxial distribution
network.
Outage......................................... The loss of service due to a failure in the distribution network.
Overbuild...................................... The construction of a second cable television system in a
franchise area in which such a system had previously been
constructed.
Pay-per-view................................... Programming offered by a cable television operator on a
per-program basis which a customer selects and for which a
customer pays a separate fee.
Premium penetration............................ Premium service units as a percentage of the total number of basic
service subscribers. A customer may purchase more than one premium
service, each of which is counted as a separate premium service
unit. This ratio may be greater than 100% if the average customer
subscribes to more than one premium service unit.
G - 2
Premium service................................ Individual cable programming service available only for monthly
subscriptions on a per-channel basis.
Premium units.................................. The number of subscriptions to premium services, which are paid
for on an individual basis.
Satellite master antenna television system..... A video programming delivery system to multiple dwelling units.
Telephone modem................................ A device either inserted in a computer or attached externally that
encodes (modulates) or decodes (demodulates) an analog telephone
signal to a data format that the computer can process.
Tiers.......................................... Varying levels of cable services consisting of differing
combinations of several over-the-air broadcast and satellite
delivered cable television programming services.
Upgrade........................................ The replacement or upgrade of an existing cable system, usually
undertaken to improve its technological performance and/or to
expand the system's channel capacity in order to provide more
services.
Video-on-demand................................ A pay-per-view service that allows customers to select and order a
movie of their choice from a large film library. The movie will
play in its entirety as soon as it is ordered.
G - 3
Index to Financial Statements
Page
----
Insight Midwest, L.P.
Report of Independent Auditors--Ernst & Young LLP .................................... F-3
Consolidated Balance Sheets at December 31, 2000 and 1999 ............................ F-4
Consolidated Statements of Operations and Partners' Capital for the years ended
December 31, 2000 and 1999 ......................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2000 and
1999 ............................................................................... F-6
Notes to Consolidated Financial Statements ........................................... F-7
Consolidated Balance Sheets as of March 31, 2001 (unaudited) and December 31,
2000 ............................................................................... F-19
Consolidated Statements of Operations for the Three Months Ended March 31, 2001
and 2000 (unaudited) ............................................................... F-20
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001
and 2000 (unaudited) ............................................................... F-21
Notes to Unaudited Consolidated Financial Statements ................................. F-22
Insight Communications of Indiana, LLC
Report of Independent Auditors--Ernst & Young LLP .................................... F-28
Balance Sheet at December 31, 1998 ................................................... F-29
Statement of Operations and Members' Equity for the period
November 1, 1998 to December 31, 1998 .............................................. F-30
Statement of Cash Flows for the period November 1, 1998 to December 31, 1998 ......... F-31
Notes to Financial Statements ........................................................ F-32
Noblesville, Indiana, Jeffersonville, Indiana, and Lafayette, Indiana Cable
Television Systems
Report of Independent Auditors--Ernst & Young LLP .................................... F-37
Combined Balance Sheets at October 31, 1998 .......................................... F-38
Combined Statements of Operations for the year ended
December 31, 1997 and for the period January 1, 1998 to October 31, 1998 ........... F-39
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 ........... F-40
Combined Statements of Cash Flows for the year ended
December 31, 1997 and for the period January 1, 1998 to October 31, 1998 ........... F-41
Notes to Combined Financial Statements ............................................... F-42
AT&T Insight Midwest Systems
Independent Auditors' Report--KPMG LLP ............................................... F-46
Combined Balance Sheet as of December 31, 2000 ....................................... F-47
Combined Statement of Operations and Parent's Investment for the year ended
December 31, 2000 .................................................................. F-48
Combined Statement of Cash Flows for the year ended December 31, 2000 ................ F-49
Notes to Combined Financial Statements ............................................... F-50
Independent Auditors' Report--KPMG LLP ............................................... F-57
Combined Balance Sheets as of December 31, 1999 ...................................... F-58
Combined Statements of Operations and Parent's Investment for the period from
March 1, 1999 to December 31, 1999 and for the period from January 1, 1999 to
February 28, 1999 .................................................................. F-59
Combined Statements of Cash Flows for the period from March 1, 1999 to
December 31, 1999 and for the period from January 1, 1999 to February 28, 1999 ..... F-60
Notes to Combined Financial Statements ............................................... F-61
F - 1
Griffin, Georgia, Rockford, Illinois, Portland, Indiana and Scottsburg, Indiana
Cable Television Systems
Report of Independent Auditors--Ernst & Young LLP .................................... F-69
Combined Balance Sheets as of December 31, 2000 and 1999 ............................. F-70
Combined Statements of Operations and Changes in Net Assets
for the years ended December 31, 2000 and 1999 ..................................... F-71
Combined Statements of Cash Flows for the years ended December 31, 2000 and
1999 ............................................................................... F-72
Notes to Combined Financial Statements ............................................... F-73
InterMedia Capital Partners VI, L.P.
Report of Independent Accountants--PricewaterhouseCoopers LLP ........................ F-79
Consolidated Balance Sheets at September 30, 1999 and December 31, 1998 .............. F-80
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 .................................................................. F-81
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 ................................................... F-82
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 ................................................... F-83
Notes to Consolidated Financial Statements ........................................... F-84
Insight Communications of Central Ohio, LLC
Report of Independent Auditors--Ernst & Young LLP .................................... F-99
Balance Sheets at December 31, 2000 and 1999 ......................................... F-100
Statements of Operations and Changes in Members' Deficit for the years
ended December 31, 2000, 1999 and 1998 ............................................. F-101
Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 ........ F-102
Notes to Financial Statements ........................................................ F-103
Insight Capital, Inc.
Report of Independent Auditors--Ernst & Young LLP .................................... F-111
Balance Sheets at December 31, 2000 and December 31, 1999 ............................ F-112
Statements of Operations for the years ended December 31, 2000 and December 31,
1999 ............................................................................... F-113
Statements of Changes in Shareholders' Deficit for the years ended
December 31, 2000 and December 31, 1999 ............................................ F-114
Statements of Cash Flows for the years ended December 31, 2000 and December 31,
1999 ............................................................................... F-115
Notes to Financial Statements ........................................................ F-116
Balance Sheets as of March 31, 2001 and 2000 (unaudited) ............................. F-118
Statements of Operations for the three months ended March 31, 2001 and 2001
(unaudited) ........................................................................ F-119
Statements of Cash Flows for the three months ended March 31, 2001 and 2001
(unaudited) ........................................................................ F-120
Notes to Unaudited Financial Statements .............................................. F-121
F - 2
REPORT OF INDEPENDENT AUDITORS
The Partners
Insight Midwest, LP
We have audited the accompanying consolidated balance sheets of Insight Midwest,
LP as of December 31, 2000 and 1999, and the related consolidated statements of
operations and partners' capital, and cash flows for each of the two years ended
December 31, 2000 and 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 consolidated financial position of Insight Midwest,
LP, at December 31, 2000 and 1999, and the consolidated results of their
operations and their cash flows for each of the two years ended December 31,
2000 and 1999, in conformity with accounting principles generally accepted in
the United States.
/s/ ERNST & YOUNG LLP
New York, New York
March 12, 2001
F-3
INSIGHT MIDWEST, LP
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
2000 1999
-----------------------------------
Assets
Cash and cash equivalents $ 5,735 $ 35,996
Trade accounts receivable, net of allowance for doubtful accounts of $979 and $735
as of December 31, 2000 and 1999 13,686 10,778
Launch funds receivable 13,077 -
Prepaid expenses and other assets 8,922 10,980
-----------------------------------
Total current assets 41,420 57,754
Fixed assets, net 681,490 596,246
Intangible assets, net 950,299 1,033,399
Deferred financing costs, net of accumulated amortization of $2,962 and $857
as of December 31, 2000 and 1999 26,338 18,339
Launch funds receivable - 861
-----------------------------------
Total assets $ 1,699,547 $ 1,706,599
===================================
Liabilities and partners' capital
Accounts payable $ 38,575 $ 42,071
Accrued expenses and other liabilities 38,227 37,552
Deferred revenue 3,284 1,562
Interest payable 19,919 19,397
Due to affiliates 4,047 1,220
-----------------------------------
Total current liabilities 104,052 101,802
Deferred revenue 11,535 4,250
Debt 1,347,523 1,232,000
-----------------------------------
Total liabilities 1,463,110 1,338,052
Partners' capital 236,437 368,547
-----------------------------------
Total liabilities and partners' capital $ 1,699,547 $ 1,706,599
===================================
See accompanying notes
F-4
INSIGHT MIDWEST, LP
CONSOLIDATED STATEMENTS OF OPERATIONS AND PARTNERS' CAPITAL
(in thousands)
Year ended December 31,
2000 1999
------------------------------------------
Revenue $ 379,720 $ 201,286
Operating costs and expenses:
Programming and other operating costs 130,306 59,587
Selling, general and administrative 62,414 38,267
Management fees 10,964 5,932
Depreciation and amortization 195,669 109,110
------------------------------------------
Total operating costs and expenses 399,353 212,896
Operating loss (19,633) (11,610)
Other income (expense):
Interest expense (113,054) (51,235)
Interest income 919 335
Other (342) (167)
------------------------------------------
Net loss (132,110) (62,677)
Partners' capital, beginning of period 368,547 44,195
Partners' contributions - 387,029
------------------------------------------
Partners' capital, end of period $ 236,437 $ 368,547
==========================================
See accompanying notes
F-5
INSIGHT MIDWEST, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
2000 1999
-----------------------------------
Operating activities:
Net loss $ (132,110) $ (62,677)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 195,669 109,110
Provision for losses on trade accounts receivable 6,717 1,239
Amortization of bond discount 123 -
Changes in operating assets and liabilities:
Trade accounts receivable (9,625) (6,272)
Launch funds receivable (12,216) (861)
Prepaid expenses and other assets 2,058 3,746
Accounts payable and accrued expenses (2,821) 35,772
Deferred revenue 9,007 5,812
Interest payable 522 13,573
Due to affiliates 2,827 3,475
-----------------------------------
Net cash provided by operating activities 60,151 102,917
-----------------------------------
Investing activities:
Purchase of fixed assets (196,103) (107,901)
Purchase of intangible assets (3,709) (2,539)
-----------------------------------
Net cash used in investing activities (199,812) (110,440)
-----------------------------------
Financing activities:
Proceeds from borrowings under credit facilities 110,400 21,000
Repayments of credit facilities (487,500) (191,661)
Net proceeds from issuance of senior notes 492,500 200,000
Debt issuance costs (6,000) (7,712)
-----------------------------------
Net cash provided by financing activities 109,400 21,627
-----------------------------------
Net increase (decrease) in cash and cash equivalents (30,261) 14,104
Cash and cash equivalents, beginning of year 35,996 21,892
-----------------------------------
Cash and cash equivalents, end of year $ 5,735 $ 35,996
===================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 116,726 $ 37,904
Cash paid for income taxes 61 57
Supplemental disclosure of significant non-cash financing activities:
Contribution of cable system assets by partner $ - $ 387,029
See accompanying notes
F-6
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Organization and Basis of Presentation
We were formed in September 1999 to serve as the holding company and a financing
vehicle for our cable television system joint venture with AT&T Broadband, LLC
(formerly Tele-Communications, Inc.) ("AT&T Broadband"). We are owned 50% by
Insight Communications Company L.P. ("Insight LP"), which is wholly-owned by
Insight Communications Company, Inc., and 50% by AT&T Broadband, through its
indirect subsidiary TCI of Indiana Holdings, LLC ("TCI"). On October 1, 1999,
certain Indiana and Kentucky systems and operations were contributed to us, as
described below. Through two of our operating subsidiaries, Insight Indiana and
Insight Kentucky, we own and operate cable television systems in Indiana and
Kentucky, which passed approximately 1.2 million and 1.2 million homes and
served approximately 737,000 and 749,000 customers as of December 31, 2000 and
1999.
On January 5, 2001, we 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 (the
"AT&T Transactions"). 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 Subsidiaries. At the
same time, we acquired from the AT&T Subsidiaries systems serving approximately
250,000 customers. The purchase price will be allocated to the cable television
assets acquired in relation to their fair values as increases in property and
equipment and franchise costs. The AT&T Transactions were financed through a
credit facility established on January 5, 2001, the Midwest Holdings Credit
Facility (Note G).
Both Insight LP and the AT&T Subsidiaries contributed their respective systems
to us 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
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 pass approximately 2.1
million homes and serve approximately 1.3 million customers.
As a result of the AT&T Transactions, the financial results of Insight Ohio will
be 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.
Indiana Systems
On October 31, 1998, Insight LP and TCI contributed certain of their cable
television systems located in Indiana and Northern Kentucky (the "Indiana
Systems" or "Insight Indiana") to form Insight Indiana in exchange for a 50%
equity interest. The cable television systems contributed to Insight Indiana by
Insight LP included the Jasper and Evansville systems that were acquired by
Insight LP from TCI on October 31, 1998
F-7
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. Organization and Basis of Presentation (continued)
and the Noblesville, Jeffersonville and Lafayette systems already owned by
Insight LP (the "Insight Contributed Systems").
On October 1, 1999, as part of a joint venture restructuring, Insight Indiana
became our wholly-owned subsidiary. In addition to managing the day-to-day
operations of the Indiana Systems, Insight LP is the general partner and
therefore effectively controls us and is responsible for all of the operating
and financial decisions pertaining to the Indiana Systems. Pursuant to the terms
of their respective operating agreements, we and Insight Indiana will continue
for a twelve-year term through October 1, 2011, unless extended by Insight LP
and TCI.
The historical carrying values of the Indiana Systems contributed by TCI were
increased by an amount equivalent to 50% of the difference between the fair
value of such systems and their respective carrying values ($89.1 million) as of
October 31, 1998. In addition, the historical values of the Insight Contributed
Systems were increased by $44.3 million, an amount equivalent to 50% of the
difference between the fair value of such systems and their respective carrying
values as of October 31, 1998. The aggregate step-up to fair value (including
the step-up recorded in connection with the acquisition of the Jasper and
Evansville systems) was allocated to the cable television assets contributed by
TCI in relation to their fair values as increases in property and equipment of
$58.0 million and franchise costs of $181.6 million. Neither Insight LP nor TCI
is contractually required to contribute additional capital to us and, because we
are a limited partnership, neither Insight LP nor TCI is liable for the
obligations of Insight Indiana or the Indiana Systems.
Kentucky Systems
On October 1, 1999, Insight LP acquired a combined 50% interest in InterMedia
Capital Partners VI, LP (the "IPVI Partnership") from related parties of
Blackstone Cable Acquisition Company, LLC, InterMedia Capital Management VI, LLC
and a subsidiary and related party of AT&T Broadband, for $341.5 million,
(inclusive of expenses). We assumed debt of $742.1 million (the total debt of
the IPVI Partnership) in connection with this transaction. The IPVI Partnership,
through several intermediary partnerships, owned and operated cable television
systems in four major markets in Kentucky: Louisville, Lexington, Bowling Green
and Covington (the "Kentucky Systems" or "Insight Kentucky"). On October 1,
1999, concurrently with this acquisition, the Kentucky Systems were contributed
to us. As a result of the IPVI Partnership's historical ownership structure, the
Kentucky Systems are owned and operated by Insight Kentucky Partners II, L.P., a
subsidiary partnership of ours.
Similar to Insight Indiana, in addition to managing the day-to-day operations of
the Kentucky Systems, Insight LP controls all of the operating and financial
decisions pertaining to the Kentucky Systems. The Kentucky Systems and each of
the other Kentucky partnerships also have twelve-year terms through October 1,
2011, unless extended by Insight and TCI.
F-8
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A. Organization and Basis of Presentation (continued)
The assets of the Kentucky Systems have been valued based on the purchase price
and have been allocated between fixed and intangible assets based on our
evaluation of each individual operating system including such factors as the age
of the cable plant, the progress of rebuilds and franchise relations. This
resulted in a step-up in the carrying values of fixed assets of $160.3 million
and intangible assets of $272.1 million. Franchise costs arising from this
transaction are being amortized over 15 years.
B. Significant Accounting Policies
Revenue Recognition
Revenue includes 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. Launch fees are deferred and amortized over
the period of the underlying contract.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Cash Equivalents
We consider all highly liquid investments with a maturity of three months or
less when purchased to be cash equivalents.
Fixed Assets
Fixed assets include costs capitalized for labor and overhead incurred in
connection with the installation of cable television systems and are stated at
cost (Note D). Depreciation for cable plant, furniture, fixtures, office
equipment and buildings is calculated using the straight-line method over
estimated useful lives ranging from 3 to 30 years. Leasehold improvements are
being amortized using the straight-line method over the remaining terms of the
leases or the estimated lives of the improvements, whichever period is shorter.
The carrying value of fixed assets is reviewed if facts and circumstances
suggest that they may be impaired. If this review indicates that the carrying
value of the fixed assets will not be recovered from our undiscounted future
cash flows, an impairment loss would be recognized for the amount that the
asset's carrying value
F-9
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. Significant Accounting Policies (continued)
exceeds its fair value. We believe that no material impairment of fixed assets
existed at December 31, 2000 or 1999.
Effective January 1, 2000, we changed the estimated useful lives of fixed assets
which related to our recent rebuild program. The changes in estimated useful
lives were made to reflect our evaluation of the economic lives of the newly
rebuilt plant in conjunction with industry practice. The weighted average useful
lives of such fixed assets changed from approximately 5 years to approximately
11 years. This change was made on a prospective basis and resulted in a
reduction of our net loss for the year ended December 31, 2000 of $19.4 million.
Depreciation expense for the years ended December 31, 2000 and 1999 was $110.9
million and $61.2 million.
Intangible Assets
Intangible assets consist of franchise costs and goodwill (Note E). Costs
incurred in negotiating and renewing franchise agreements are capitalized and
amortized over the life of the franchise. Franchise rights and goodwill acquired
through the purchase of cable television systems are amortized using the
straight-line method over a period of up to 15 years.
The carrying value of intangible assets is reviewed if facts and circumstances
suggest that they may be impaired. If this review indicates that the carrying
value of the intangible assets will not be recovered from our undiscounted
future cash flows, an impairment loss would be recognized for the amount that
the asset's carrying value exceeds its fair value. We believe that no material
impairment of intangible assets existed at December 31, 2000 or 1999.
Deferred Financing Costs
Deferred financing costs relate to costs, primarily legal and bank facility
fees, incurred to negotiate and secure bank loans and other sources of
financing. These costs are amortized over the life of the applicable debt.
Income Taxes
No provision has been made in the accompanying financial statements for federal,
state or local income taxes since our income or loss is reportable by the
individual partners in their respective tax returns.
F-10
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. Significant Accounting Policies (continued)
Marketing and Promotional Costs
Marketing and promotional costs are expensed as incurred. For the years ended
December 31, 2000 and 1999, marketing and promotional expense was $9.9 million
and $3.0 million.
Recent Accounting Pronouncements
In June 1998, 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, is effective for us beginning 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 will require us to recognize
all derivatives on the balance sheet at fair value. We do not anticipate that
adoption of this standard will have a material impact on our results of
operations or statement of position.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
C. Pro Forma Results of Operations
The pro forma unaudited results of operations for the year ended December 31,
1999, assuming the acquisition of the Kentucky Systems had been consummated on
January 1, 1999, is as follows:
Revenue $ 360,483
Net loss 142,436
F-11
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. Fixed Assets
Fixed assets consist of:
December 31,
2000 1999
-----------------------------------
(in thousands)
Land, buildings and improvements $ 15,809 $ 12,887
Cable television equipment 857,674 662,175
Furniture, fixtures and office equipment 6,844 9,162
-----------------------------------
880,327 684,224
Less accumulated depreciation and amortization (198,837) (87,978)
-----------------------------------
Total fixed assets $ 681,490 $ 596,246
===================================
E. Intangible Assets
Intangible assets consist of:
December 31,
2000 1999
-----------------------------------
(in thousands)
Franchise rights $1,086,647 $1,087,042
Goodwill 1,190 1,190
-----------------------------------
1,087,837 1,088,232
Less accumulated amortization (137,538) (54,833)
-----------------------------------
Total intangible assets $950,299 $1,033,399
===================================
F. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of:
December 31,
2000 1999
-----------------------------------
(in thousands)
Accrued programming costs $ 17,649 $ 17,335
Accrued property taxes 11,564 12,629
Other 9,014 7,588
-----------------------------------
Total accrued expenses and other liabilities $ 38,227 $ 37,552
===================================
F-12
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. Debt
Debt consists of:
December 31,
2000 1999
------------------------------------------
(in thousands)
Insight Indiana Credit Facility $ 298,600 $ 470,000
Insight Kentucky Credit Facility 356,300 562,000
Insight Midwest 9 3/4% Senior Notes 200,000 200,000
Insight Midwest 10 1/2% Senior Notes 500,000 -
------------------------------------------
1,354,900 1,232,000
Unamortized discount on Senior Notes (7,377) -
------------------------------------------
Total debt $ 1,347,523 $ 1,232,000
==========================================
Insight Indiana Credit Facility
Insight Indiana's credit facility (the "Insight Indiana Credit Facility")
provides for term loans of up to $300.0 million and for revolving credit loans
of up to $250.0 million. Obligations under this credit facility are secured by
all of the membership interests of Insight Indiana and any amounts payable to
its members. The Insight Indiana Credit Facility requires Insight Indiana to
meet certain financial and other debt covenants. Loans under the Insight Indiana
Credit Facility bear interest at an ABR or LIBOR plus an additional margin tied
to certain debt ratios of Insight Indiana. The interest rates in effect as of
December 31, 2000 and 1999 were 8.8% and 8.1%.
On January 5, 2001, the Insight Indiana Credit Facility was repaid in full and
replaced by the Midwest Holdings Credit Facility. This will result in a first
quarter 2001 extraordinary loss of approximately $4.8 million related to the
write-off of unamortized deferred financing costs.
Insight Kentucky Credit Facility
The Kentucky credit facility (the "Insight Kentucky Credit Facility") provides
for two term loans of up to $100.0 million and $250.0 million and for revolving
credit loans of up to $325.0 million. Obligations under the Insight Kentucky
Credit Facility are guaranteed by Insight Kentucky and its subsidiaries and any
intercompany notes made in favor of Insight Kentucky and its subsidiaries. The
Insight Kentucky Credit Facility requires Insight Kentucky to meet certain
financial and other debt covenants. In addition, the Insight Kentucky Credit
Facility requires compliance with certain financial ratios, requiring Insight
Kentucky to enter into interest rate protection agreements covering at least
50%, subject to increase to 60% under certain circumstances, of its total
indebtedness and also contains customary events of default. Loans under the
Insight Kentucky Credit Facility bear interest at Insight Midwest's option at an
ABR or Eurodollar rate, plus an additional margin tied to Insight Kentucky's
ratio of total debt to
F-13
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. Debt (continued)
annualized cash flow. The term loans under the Insight Kentucky Credit Facility
also bear interest, at our option, at an ABR or Eurodollar rate, plus an
additional margin. The interest rates in effect as of December 31, 2000 and 1999
were 8.7% and 8.3%.
On January 5, 2001, the Insight Kentucky Credit Facility was repaid in full and
replaced by the Midwest Holdings Credit Facility. This will result in a first
quarter 2001 extraordinary loss of approximately $4.1 million related to the
write-off of unamortized deferred financing costs.
Insight Midwest Senior Notes
On October 1, 1999 simultaneously with the closing of the purchase of Insight
Kentucky, we 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
the IPVI Partnership. 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, we 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. Insight Capital, Inc., a wholly-owned subsidiary of us, was a
co-issuer of the Senior Notes. Insight Capital, Inc. has only nominal assets and
does not conduct any operations.
On November 6, 2000, we completed a $500.0 million offering of 10 1/2% senior
notes due in November 2010. We received proceeds of $487.5 million, net of an
underwriting fee of $5.0 million and a bond discount of $7.5 million which is
being amortized through November 2010. The proceeds of the offering were used to
repay a portion of the outstanding debt under the Insight Indiana Credit
Facility and Insight Kentucky Credit Facility. Interest payments on these Senior
Notes, which commence on May 1, 2001, are payable semi-annually on May 1 and
November 1.
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, we 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 our equity. Each holder of these Senior Notes may require us to redeem
all or part of that holder's notes upon certain changes of control. These Senior
Notes are general unsecured obligations and are subordinate to all our
liabilities, the amounts of which were $770.5 million and $1.1 billion as of
December 31, 2000 and 1999. The Senior Notes contain certain financial and other
debt covenants.
Midwest Holdings Credit Facility
On January 5, 2001, through an affiliate, we entered into a credit facility (the
"Midwest Holdings Credit Facility") in connection with the AT&T Transactions and
to repay the outstanding indebtedness under the Insight Indiana Credit Facility
and Insight Kentucky Credit Facility. 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 us to meet certain financial and other
debt covenants. Borrowings under this credit facility bear interest at either an
alternative base
F-14
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
G. Debt (continued)
rate or Eurodollar rate, plus an additional margin yield to Midwest Holdings'
leverage ratio, of between 0.5% and 2.8%.
Debt Facility Principal Payments
As of December 31, 2000, annual principal payments required on our
debt are as follows (in thousands):
2001 $ 19,695
2002 50,816
2003 92,554
2004 112,468
2005 124,820
Thereafter 947,170
-------------------
$ 1,347,523
===================
As a result of the AT&T Transactions, as of January 5, 2001, principal payments
required on our debt have changed to (in thousands):
2001 $ -
2002 2,500
2003 3,750
2004 78,750
2005 81,250
Thereafter 1,901,250
-------------------
$ 2,067,500
===================
Interest Rate Swap and Collar Agreements
We enter into interest-rate swap agreements to modify the interest
characteristics of our outstanding debt from a floating rate to a fixed rate
basis. These agreements involve the payment of fixed rate amounts in exchange
for floating rate interest receipts over the life of the agreement without an
exchange of the underlying principal amount. The differential to be paid or
received is accrued as interest rates change and is recognized as an adjustment
to interest expense related to the debt. The related amount payable or
receivable is included in other liabilities or assets.
As of December 31, 2000 and 1999 we had entered into various interest rate swap
and collar agreements effectively fixing interest rates between 4.5% and 7.0%,
plus the applicable margin, on $701.0 million and $766.0 million notional value
of debt. These agreements expire between December 2001 and July 2003.
F-15
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. @Home Warrants
Under distribution agreements with At Home Corporation, a high-speed internet
access service provider ("@Home"), we provide high-speed Internet access to
subscribers over our network in certain of our cable television systems. In
connection with the acquisition of the Kentucky systems, Insight Kentucky
obtained agreements whereby @Home issued warrants, effective January 1, 1999, to
Insight Kentucky to purchase shares of @Home Series A Common Stock ("@Home
Stock") at an exercise price of $5.25 per share as adjusted for a two-for-one
stock split which occurred on June 17, 1999. The warrants become vested and
exercisable, subject to certain forfeiture and other conditions, based on
obtaining specified numbers of @Home subscribers through December 31, 2001. If
Insight Kentucky were to meet the target number of @Home subscribers through
December 31, 2001, as set forth in the agreement, 180,267 warrants would become
vested and exercisable. We have not recognized any income related to the
warrants for the years ended December 31, 2000 or 1999.
I. Financial Instruments
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit
risk consist principally of cash and cash equivalents and accounts receivable.
We maintain cash and cash equivalents with various financial institutions. These
financial institutions are located throughout the country and our policy is
designed to limit exposure to any one institution. Concentrations of credit risk
with respect to accounts receivable are limited due to the large number of
customers comprising our customer base.
Fair Value
We used the following methods and assumptions in estimating our fair value
disclosures for financial instruments:
Cash equivalents and accounts receivable: The carrying amount reported in the
balance sheet for cash equivalents and accounts receivable approximates fair
value.
Debt: The carrying amounts of our borrowings under our credit arrangements
approximate fair value as they bear interest at floating rates. The fair value
of Insight Midwest's 9 3/4% Senior Notes as of December 31, 2000 was $198.5
million. The fair value of Insight Midwest's 10 1/2% Senior Notes as of December
31, 2000 was $515.0 million.
Interest rate swap agreements: The fair value of swap agreements are not
recognized in the financial statements. The fair value (cost) to us if we would
have disposed of such swap agreements would have been $(1.9) million and $7.2
million as of December 31, 2000 and 1999.
F-16
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J. Related Party Transactions
Through November 1999, we had an agreement with Media One that enabled us to
obtain certain services (principally pay and basic cable programming services)
and equipment at rates lower than those that would be available from independent
parties. In each of the years ended December 31, 1999 and 1998, programming and
other operating costs include $200,000 of expenses for programming services paid
directly to Media One.
In addition, we purchase substantially all of our pay television and other
programming for the Indiana and Kentucky Systems from affiliates of AT&T
Broadband. Charges for such programming were $56.7 million and $29.6 million for
the years ended December 31, 2000 and 1999. As of December 31, 2000 and 1999,
$9.8 million and $10.4 million of accrued programming costs were due to
affiliates of AT&T Broadband. We believe that the programming rates charged by
affiliates of AT&T Broadband are lower than those available for independent
parties.
Telephony Agreements
On July 17, 2000, we entered into definitive agreements with AT&T Broadband, LLC
for the provision by AT&T Broadband of all-distance telephone service utilizing
our cable infrastructures under the AT&T brand name. Telephony revenues are to
be attributed to AT&T Broadband who, in turn, will pay us a monthly per line
access fee. AT&T Broadband will also pay us for marketing, installation and
billing support. AT&T Broadband would be required to install and maintain the
necessary switching equipment and would be the local exchange carrier of
record. It is expected that we will market the telephone services both
independently and as part of a bundle of services.
K. 401(k) Plan
Through our subsidiaries, Insight Indiana and Insight Kentucky, we sponsor a
savings and investment 401(k) Plan (the "Plan") for the benefit of our
employees. All employees who have completed six months of employment and have
attained age 18 are eligible to participate in the Plan. We make matching
contributions equal to a portion of the employee's contribution up to 5% of the
employee's wages. During 2000 and 1999, we matched contributions of $661,000 and
$302,000.
F-17
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. Commitments and Contingencies
Operating Lease Agreements
We lease and sublease equipment and office space under various operating lease
arrangements expiring through December 31, 2015. Future minimum rental payments
required under operating leases as of December 31, 2000 are as follows (in
thousands):
2001 $ 1,730
2002 1,315
2003 1,156
2004 772
2005 501
Thereafter 264
-----------------
Total $ 5,738
=================
Rental expense for the years ended December 31, 2000 and 1999 was $2.1 million
and $1.2 million.
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. The classes have not been certified. We believe that the Kentucky systems
have substantial and meritorious defenses to these claims.
We are subject to other various legal proceedings that arise in the ordinary
course of business. While it is impossible to determine with certainty the
ultimate outcome of these matters, it is our opinion that the resolution of
these matters will not have a material adverse affect on our consolidated
financial condition.
M. Subsequent Events
Cable System Acquisitions
On January 11, 2001, we acquired Cable One, Inc.'s, Greenwood, Indiana cable
system serving approximately 14,800 customers for $62.0 million. The purchase
price will be allocated to the cable television assets acquired in relation to
their fair values as increases in property and equipment and franchise costs.
Debt Offering
On February 6, 2001, Insight Communications Company, Inc. ("Insight Inc.")
completed a $400.0 million offering of 12 1/4% Senior Discount Notes due in
February 2011. These notes were issued at a discount to their principal amount
at maturity resulting in gross proceeds to Insight Inc. of $220.1 million.
Insight Inc. utilized $20.2 million of the proceeds to repay an outstanding
inter-company loan from us, which Insight Inc. incurred in connection with the
AT&T Transactions.
F-18
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
F-19
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
F-20
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
F-21
INSIGHT MIDWEST, L.P.
NOTES TO UNAUDITED 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.
F-22
INSIGHT MIDWEST, L.P.
NOTES TO UNAUDITED 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)
F-23
INSIGHT MIDWEST, L.P.
NOTES TO UNAUDITED 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
============================================
F-24
INSIGHT MIDWEST, L.P.
NOTES TO UNAUDITED 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.
F-25
INSIGHT MIDWEST, L.P.
NOTES TO UNAUDITED 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.
F-26
INSIGHT MIDWEST, L.P.
NOTES TO UNAUDITED 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.
F-27
REPORT OF INDEPENDENT AUDITORS
The Members
Insight Communications of Indiana, LLC
We have audited the accompanying balance sheet of Insight Communications
of Indiana, LLC as of December 31, 1998 and the related statements of
operations and members' equity, and cash flows for the period from November 1,
1998 (date of inception) through December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Insight
Communications of Indiana, LLC, at December 31, 1998 and the results of its
operations and its cash flows for the period from November 1, 1998 (date of
inception) through December 31, 1998, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
March 31, 1999
F-28
INSIGHT COMMUNICATIONS OF INDIANA, LLC
BALANCE SHEET
December 31, 1998
(in thousands)
Assets
Cash and cash equivalents............................................ $ 19,493
Trade accounts receivable, net of allowance for doubtful accounts of
$339.............................................................. 6,701
Prepaid expenses and other........................................... 651
Fixed assets, net.................................................... 129,776
Intangible assets, net............................................... 367,029
Deferred financing costs, net of amortization........................ 3,682
--------
$527,332
========
Liabilities and Members' Equity
Accounts payable..................................................... $ 12,467
Accrued expenses and other liabilities............................... 4,324
Interest payable..................................................... 5,824
Due to Tele-Communications, Inc...................................... 522
Debt................................................................. 460,000
--------
Total liabilities.................................................. 483,137
Members' equity...................................................... 44,195
--------
$527,332
========
See accompanying notes.
F-29
INSIGHT COMMUNICATIONS OF INDIANA, LLC
STATEMENT OF OPERATIONS AND MEMBERS' EQUITY
For the period from November 1, 1998
(date of inception) through December 31, 1998
(in thousands)
Revenue................................................................ $23,925
Costs and expenses:
Programming and other operating costs................................ 6,206
Selling, general and administrative.................................. 4,653
Depreciation and amortization........................................ 13,998
-------
24,857
Loss from operations................................................... (932)
Other income (expense):
Interest expense..................................................... (5,824)
Other................................................................ (64)
-------
Net loss............................................................... (6,820)
Members' equity at November 1, 1998 (date of inception)................ 51,015
-------
Members' equity at December 31, 1998................................... $44,195
=======
See accompanying notes.
F-30
INSIGHT COMMUNICATIONS OF INDIANA, LLC
STATEMENT OF CASH FLOWS
For the period from November 1, 1998 (date of inception)
through December 31, 1998
(in thousands)
Operating activities
Net loss........................................................... $ (6,820)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization.................................... 13,998
Provision for losses on trade accounts receivable................ 226
Changes in operating assets and liabilities:
Trade accounts receivable....................................... (552)
Prepaid expenses and other...................................... (651)
Accounts payable and accrued expenses........................... 7,223
Due to Tele-Communications, Inc................................. 522
Interest payable................................................ 5,824
---------
Net cash provided by operating activities.......................... 19,770
---------
Investing activities:
Purchases of fixed assets........................................ (4,022)
Increase in intangible assets.................................... (573)
---------
Net cash used in investing activities.............................. (4,595)
---------
Financing activities:
Proceeds from bank credit facility............................... 460,000
Repayment of amounts due to Tele-Communications, Inc............. (214,552)
Repayment of amounts due to Insight Communications Company, LP... (237,448)
Debt issuance costs.............................................. (3,682)
---------
Net cash provided by financing activities........................ 4,318
---------
Cash and cash equivalents, December 31, 1998..................... $ 19,493
---------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest......................... $ --
=========
Supplemental disclosures of significant non cash financing
activities:
Contribution of cable system assets by partner................... $ 44,195
=========
See accompanying notes.
F-31
INSIGHT COMMUNICATIONS OF INDIANA, LLC
NOTES TO FINANCIAL STATEMENTS
A. Organization and Basis of Presentation
Pursuant to the terms of a Contribution Agreement dated October 31, 1998,
Insight Communications Company, L.P. ("Insight") and Tele-Communications, Inc.
("TCI") contributed certain of their cable television systems located in
Indiana and Northern Kentucky to Insight Communications of Indiana, LLC
("Insight Indiana"), a newly formed limited liability corporation, in exchange
for 50% equity interests therein. The cable television systems contributed to
Insight Indiana by Insight included the Jasper and Evansville systems that were
acquired by Insight from TCI on October 31, 1998 and the Noblesville,
Jeffersonville and Lafayette systems. Pursuant to the terms of the Insight
Indiana operating agreement (the "Operating Agreement"), Insight Indiana has a
twelve year life, unless extended by TCI and Insight. In addition, the
Operating Agreement states that Insight is the manager of Insight Indiana and
effectively controls its board, including all of the operating and financial
decisions pertaining to Insight Indiana. Accordingly, the historical carrying
values of the TCI contributed systems have been increased by an amount
equivalent to 50% of the difference between the fair value of the systems and
their respective carrying values ($89.1 million). In addition, the historical
values of the Noblesville, Jeffersonville and Lafayette systems have been
increased by $44.3 million, an amount equivalent to 50% of the difference
between the fair value of such systems and their respective carrying values.
Furthermore, in connection with Insight's acquisition of the Jasper and
Evansville systems, the historical values of such systems were increased by
$112 million, an amount equivalent to the difference between the fair value of
such systems and their carrying values. The aggregate step-up to fair value was
allocated to the cable television assets contributed by TCI in relation to
their fair values as increases in property and equipment of $58 million and
franchise costs of $181.6 million. The accompanying financial statements
include the results of operations of Insight Indiana from November 1, 1998
(date of inception) through December 31, 1998.
Because Insight Indiana is a limited liability company, the liability of
its members is limited to their respective investments.
B. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Revenues include service fees, connection fees, and launch fees. Service
fees are recorded in the month the cable television and pay television services
are provided to subscribers. Connection fees are charged for the hook-up of new
customers and are recognized as current revenues to the extent of direct selling
costs incurred. Launch fees are deferred and amortized over the period of the
underlying contract.
F-32
INSIGHT COMMUNICATIONS OF INDIANA, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Cash Equivalents
Insight Indiana considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Fixed Assets
Fixed assets are stated at cost, which includes amounts capitalized for
labor and overhead expended in connection with the installation of cable
television systems. Depreciation for furniture, fixtures, office equipment,
buildings and equipment is computed using the straight-line method over
estimated useful lives ranging from 3 to 10 years. Leasehold improvements are
being amortized using the straight-line method over the remaining terms of the
leases or the estimated lives of the improvements, whichever period is shorter.
Management does not believe that any events or changes in circumstances
indicate that the carrying amount of these long-lived assets may not be
recovered.
Intangible Assets
Intangible assets consist of franchise costs and goodwill. Costs incurred
in negotiating and renewing franchise agreements are capitalized and amortized
over the life of the franchise. Franchise rights acquired through the purchase
of cable television systems represent the excess of the cost of the properties
acquired over the amounts assigned to the tangible assets at the date of
acquisition and are amortized using the straight line method over a period of
up to fifteen years. Goodwill is amortized using the straight-line method over
a period of 40 years. The carrying value of intangible assets will be reviewed
if facts and circumstances suggest that they may be impaired. If this review
indicates that the intangible assets will not be recovered from the
undiscounted future cash flows of the individual system comprising Insight
Indiana, the carrying value of such intangible assets would be considered
impaired and will be reduced by a charge to operations in the amount of the
impairment. Based on its most recent analysis, management believes that no
material impairment of intangible assets exists as of December 31, 1998.
Deferred Financing Costs
Deferred financing costs relate to costs, primarily legal fees and bank
facility fees, incurred to negotiate and secure bank loans. These costs are
being amortized on a straight line basis over the life of the applicable loan.
Marketing and Promotional Costs
Marketing and promotional costs are expensed as incurred. For the period
from November 1, 1998 (date of inception) through December 31, 1998, marketing
and promotional expense approximated $205,000.
Income Taxes
No provision has been made in the accompanying financial statements for
federal, state, or local income taxes since the income or loss of Insight
Indiana is reportable by the individual partners in their respective tax
returns.
F-33
INSIGHT COMMUNICATIONS OF INDIANA, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). Insight Indiana expects to adopt the Statement effective January 1,
2000. The Statement will require Insight Indiana to recognize all derivatives
on the balance sheet at fair value. Although management has not completed its
assessment of the impact of SFAS No. 133 on its results of operations, and
financial position, management does not anticipate that the adoption of this
Statement will be material.
C. Fixed Assets
Fixed assets consist of:
December 31,
1998
--------------
(in thousands)
Land, buildings and improvements........................... $ 4,010
Cable television equipment................................. 149,194
Furniture, fixtures and office equipment................... 6,681
--------
159,885
Less accumulated depreciation and amortization............. (30,109)
--------
$129,776
========
D. Intangible Assets
Intangible assets consist of:
December 31,
1998
--------------
(in thousands)
Franchise rights........................................... $378,631
Goodwill................................................... 930
--------
379,561
Less accumulated amortization.............................. (12,532)
--------
$367,029
========
E. Debt
Debt consists of:
December 31,
1998
--------------
(in thousands)
Revolving credit facility.................................. $160,000
Term loan.................................................. 300,000
--------
$460,000
========
F-34
INSIGHT COMMUNICATIONS OF INDIANA, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
At December 31, 1998, Insight Indiana had a credit facility (the "Credit
Facility") that provides for term loans of $300 million and for revolving
credit loans of up to $250 million. The Credit Facility matures in December
2006, and contains quarterly reductions in the amount of outstanding loans and
commitments commencing in March 2001. Obligations under this Credit Facility
are secured by substantially all of Insight Indiana's assets. Loans under the
Credit Facility bear interest at an alternate base or Eurodollar rate plus an
additional margin tied to certain debt ratios of Insight Indiana. The Credit
Facility requires Insight Indiana to meet certain debt financial covenants. For
the two months ended December 31, 1998, average interest rates approximated
7.60%.
At December 31, 1998 required annual principal payments under the
aforementioned Credit Facility are as follows (in thousands):
2001............................................................. $ 55,000
2002............................................................. 74,250
2003............................................................. 90,750
Thereafter....................................................... 240,000
--------
$460,000
========
F. Financial Instruments
Concentrations of Credit Risk
Financial instruments that potentially subject Insight Indiana to
significant concentrations of credit risk consist principally of cash
investments and accounts receivable. Insight Indiana maintains cash and cash
equivalents, with various financial institutions. Insight Indiana's policy is
designed to limit exposure to any one institution. Concentrations of credit
risk with respect to accounts receivable are limited due to the large number of
customers comprising Insight Indiana's customer base.
The following methods and assumptions were used by Insight Indiana in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Debt: The carrying amounts of Insight Indiana's borrowings under its
credit facility approximate its fair value as it bears interest at floating
rates.
The carrying amounts and fair values of Insight Indiana's financial
instruments at December 31 approximate fair value.
Insight Indiana enters into interest-rate swap agreements to modify the
interest characteristics of its outstanding debt from a floating rate to a
fixed rate basis. These agreements involve the payment of fixed rate amounts in
exchange for floating rate interest receipts over the life of the agreement
without an exchange of the underlying principal amount. The differential to be
paid or received is accrued as interest rates change and recognized as an
adjustment to interest expense
F-35
INSIGHT COMMUNICATIONS OF INDIANA, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
related to the debt. The related amount payable to or receivable from
counterparties is included in other liabilities or assets. At December 31,
1998 Insight Indiana has entered into various interest rate swap and collar
agreements effectively fixing interest rates at 4.4% to 5.1% on $75 million
notional value of debt. The fair values of the swap agreements are not
recognized in the financial statements and approximated $.1 million at
December 31, 1998.
G. 401(k) Plan
Insight Indiana sponsors a savings and investment 401(k) Plan (the
"Plan") for the benefit of its employees. All employees who have completed six
months of employment and have attained age 21 are eligible to participate in
the Plan. Insight Indiana makes matching contributions equal to a percentage
of the employee's contribution. For the two months ended December 31, 1998,
the matching contribution approximated $71,000.
H. Commitments and Contingencies
Insight Indiana leases and subleases equipment and office space under
operating lease arrangements expiring through December 31, 2015. Future
minimum rental payments required under operating leases are as follows (in
thousands):
1999............................................................... $ 477
2000............................................................... 191
2001............................................................... 143
2002............................................................... 130
2003............................................................... 119
Thereafter......................................................... 378
------
$1,438
======
Rental expense for the two month period ended December 31, 1998
approximated $.1 million.
I. Related Party Transactions
In addition, in connection with the Contribution Agreement (see note D),
Insight Indiana purchases substantially all of its pay television and other
programming from affiliates of TCI. Charges for such programming were $1.4
million for the period from November 1, 1998 through December 31, 1998.
Management believes that the programming rates charged by TCI affiliates are
lower than those which would be available for independent parties.
In connection with the formation of Insight Indiana, $214.6 million and
$237.5 million of intercompany debt due to TCI and Insight was assumed. During
November 1998, such amounts were repaid. Insight Indiana pays Insight a
management fee equivalent to 3% of its revenue. For the two month period ended
December 31, 1998, such management fee approximated $.7 million.
F-36
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Insight Communications Company, Inc.
We have audited the accompanying combined balance sheets of the
Noblesville IN, Jeffersonville IN and Lafayette IN cable television systems
(collectively the "Combined Systems") included in Insight Communications
Company, L.P., as of October 31, 1998, and the related combined statements of
operations, changes in net assets, and cash flows for the year ended December
31, 1997 and the period from January 1, 1998 to October 31, 1998. These
combined financial statements are the responsibility of the Combined Systems'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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, included in Insight Communications Company, L.P., October 31, 1998,
and the combined results of their operations and their cash flows for the year
ended December 31, 1997 and the period from January 1, 1998 to October 31,
1998, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
New York, New York
September 13, 1999
F-37
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
COMBINED BALANCE SHEETS
(in thousands)
October 31,
1998
-----------
Assets
Cash and cash equivalents......................................... $ 291
Trade accounts receivable, net of allowance for doubtful accounts
of $40......................................................... 1,456
Prepaid expenses.................................................. 141
Fixed assets, net................................................. 59,304
Intangible assets, net............................................ 55,194
--------
Total assets...................................................... $116,386
========
Liabilities and Net Assets
Accounts payable.................................................. $ 3,085
Accrued expenses and other liabilities............................ 2,729
--------
Total liabilities................................................. 5,814
Net assets........................................................ 110,572
--------
Total Liabilities and Net Assets.................................. $116,386
========
See accompanying notes.
F-38
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
COMBINED STATEMENTS OF OPERATIONS
(in thousands)
Ten months
Year ended ended
December 31, October 31
1997 1998
------------ ----------
Revenue................................................. $22,055 $33,486
Costs and expenses:
Programming and other operating costs................. 5,852 9,028
Selling, general and administrative................... 3,296 5,203
Depreciation and amortization......................... 5,498 10,790
------- -------
14,646 25,021
Operating income...................................... 7,409 8,465
Other expense......................................... (26) (27)
------- -------
Net income............................................ $ 7,383 $ 8,438
======= =======
See accompanying notes.
F-39
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
COMBINED STATEMENTS OF CHANGES IN NET ASSETS
(in thousands)
Balance at January 1, 1997............................................ $ 14,751
Effect of cable system exchange (see Note A).......................... 80,000
Net income............................................................ 7,383
--------
Balance at December 31, 1997.......................................... 102,134
Net income............................................................ 8,438
--------
Balance at October 31, 1998........................................... $110,572
========
See accompanying notes.
F-40
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
Ten months
Year ended ended
December 31, October 31,
1997 1998
------------ -----------
Operating activities
Net income........................................... $ 7,383 $ 8,438
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 5,497 10,790
Provision for losses on trade accounts receivable.. 192 281
Changes in operating assets and liabilities:
Trade accounts receivable......................... (686) (939)
Prepaid expenses and other assets................. (349) 376
Accounts payable.................................. 846 1665
Accrued expenses and other liabilities............ 456 994
-------- --------
Net cash provided by operating activities............ 13,339 21,605
-------- --------
Investing activities
Purchases of fixed assets............................ (17,246) (21,432)
Increase in intangible assets........................ (8,645) (25)
-------- --------
Net cash used in investing activities................ (25,891) (21,457)
-------- --------
Financing activities
Net proceeds from system exchange.................... 12,588 --
-------- --------
Net cash provided by financing activities............ 12,588 --
-------- --------
Net increase in cash and cash equivalents............ 36 148
Cash and cash equivalents, beginning of period....... 107 143
-------- --------
Cash and cash equivalents, end of period............. $ 143 $ 291
======== ========
See accompanying notes.
F-41
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS
A. Description of Business and Basis of Presentation
Description of Business
The cable television systems operating in the metropolitan areas of
Noblesville, IN; Jeffersonville, IN; and Lafayette, IN (the "Combined Systems")
are principally engaged in the cable television business under non-exclusive
franchise agreements, which expire at various times beginning in 1999. Through
October 31, 1998 the Combined Systems were owned by Insight Communications
Company, L.P. (the "Partnership").
Basis of Presentation
The accompanying combined financial statements of the Combined Systems
reflect the "carved out" historical financial position, results of operations,
changes in net assets and cash flows of the operations of the Combined Systems
as if they had been operating as a separate company. Significant intercompany
accounts and transactions between the Combined Systems have been eliminated.
Significant accounts and transactions with the Partnership and its affiliates
are disclosed as related party transactions (See Note C). Effective December
16, 1997 the Partnership exchanged its Phoenix, Arizona system ("Phoenix")
servicing 36,250 subscribers for Cox Communications, Inc.'s Lafayette, Indiana
system ("Lafayette") servicing approximately 38,100 subscribers. In addition to
the Lafayette system received, the Partnership received $12.6 million in cash.
The Lafayette purchase price ($80 million) was allocated to the cable
television assets acquired in relation to their fair values as increases in
property and equipment of $22.4 million and franchise costs of $56.6 million.
Purchase price adjustments for differences in working capital between the
Phoenix and Lafayette systems were not significant.
Accordingly, the results of operations of the Layafette system are
included in the accompanying financial statements from the date of acquisition.
The pro forma unaudited results of operations of the Combined Systems for
the year ended December 31, 1997 assuming the acquisition of the Lafayette
system occurred on January 1, 1997 is as follows (in thousands):
Revenues......................................................... $40,203
Income before extraordinary item................................. 10,932
Net income....................................................... 10,932
Effective as of October 31, 1998, the Combined Systems' financial
statements reflect the new basis of accounting arising from their contribution
into Insight Communications of Indiana LLC ("Insight Indiana") (See Note E).
The combined financial statements have been adjusted to include the
allocation of certain expenses incurred by the Partnership on the Combined
Systems' behalf, based upon the ratio of
F-42
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Combined System subscribers to total Partnership subscribers. These allocations
reflect all costs of doing business that the Combined Systems would have
incurred on a stand alone basis as disclosed in Note C. Management believes
that these allocations are reasonable.
B. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Concentration of Credit Risk
A significant portion of the customer base is concentrated within the
local geographical area of each of the individual cable television systems. The
Combined Systems generally extend credit to customers and the ultimate
collection of accounts receivable could be affected by the local economy.
Management performs continuous credit evaluations of its customers and may
require cash in advance or other special arrangements from certain customers.
Management does not believe that there is a significant credit risk which could
have a significant effect on the financial condition of the Combined Systems.
Revenue Recognition
Revenues include service fees, connection fees and launch fees. Service
fees are recorded in the month the cable television and pay television services
are provided to subscribers. Connection fees are charged for the hook-up of new
customers and are recognized as current revenues to the extent of direct selling
costs incurred. Launch fees are deferred and amortized over the period of the
underlying contract.
Statement of Cash Flows
The Combined Systems participate in a cash management system with
affiliates whereby cash receipts are transferred to a centralized bank account
from which centralized payments to various suppliers and creditors are made on
behalf of the Combined Systems. The excess of such cash receipts over payments
is included in net assets. Amounts shown as cash represent the Combined
Systems' net cash receipts not transferred to the centralized account as of
December 31, 1997 and October 31, 1998. For purposes of this statement, cash
and cash equivalents includes all highly liquid investments purchased with
original maturities of three months or less.
F-43
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Fixed Assets
Fixed assets are stated at cost, which includes amounts capitalized for
labor and overhead expanded in connection with the installation of cable
television systems. Depreciation is computed using the straight-line method
over estimated useful lives ranging from 5 to 10 years. Management does not
believe that any events or changes in circumstances indicate that the carrying
value of these long-lived assets may not be recovered. Fixed assets consist of
the following:
December 31, October 31,
1997 1998
------------ -----------
(in thousands)
Land, buildings and
improvements......... $ 2,243 $ 2,024
Cable television
equipment............ 53,431 75,446
Furniture, fixtures and
office equipment..... 1,420 894
Less accumulated
depreciation and
amortization......... (11,311) (19,060)
-------- --------
$45,783 $ 59,304
======== ========
Intangible Assets
Intangible assets consist of franchise costs and goodwill. Costs incurred
negotiating and renewing franchise agreements are capitalized and amortized
over the life of the franchise. Franchise rights acquired through the purchase
of cable television systems represent the excess cost of the properties
acquired over the amounts assigned to the tangible assets at the date of
acquisition. During 1997 and 1998, the Combined Systems amortized cable
television franchises over periods up to 15 years using the straight-line
method. The carrying value of intangible assets, will be reviewed if facts and
circumstances suggest that that they may be impaired. Upon a determination that
the carrying value of intangible assets will not be recovered from the
undiscounted future cash flows of the acquired business, the carrying value of
such intangible assets would be considered impaired and would be reduced by a
charge to operations in the amount of the impairment. Based on its recent
analysis, management believes that no material impairment of long-lived assets
exists at October 31, 1998.
Income Taxes
As a U.S. partnership, the Partnership is not subject to federal and most
state income taxes and, therefore, no income taxes are recorded in the
accompanying financial statements.
C. Related Parties
In the normal course of business, the Combined Systems had various
transactions with the Partnership and its affiliates, generally on terms
resulting from a negotiation between the affected units that in management's
view resulted in reasonable allocations.
F-44
NOBLESVILLE IN, JEFFERSONVILLE IN, AND LAFAYETTE IN
CABLE TELEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The assets of the Combined Systems serve as security under the
Partnership's lending agreements. No amount of interest charged under these
agreements has been allocated to the Combined Systems' operations. Interest
expense on a consolidated basis for the Partnership was approximately $16.0
million and $28.1 million for the years ended December 31, 1997 and 1998,
respectively.
Included in the Combined Systems' operating expenses are charges for
programming and promotional services provided by the Partnership. These charges
are based on customary rates and are in the ordinary course of business. For
the year ended December 31, 1997 and the ten months ended October 31, 1998
these charges totaled $4.3 million and $7.2 million, respectively.
D. Commitment and Contingencies
The Combined Systems had rental expense of approximately $83,000 and
$112,000 for the year ended December 31, 1997 and the ten months ended October
31, 1998, respectively, under various lease agreements for offices, utility
poles, warehouses and computer equipment. Future minimum rental payments
required under operating leases over the next five years are as follows:
(in thousands)
--------------
1999....................................................... $40,831
2000....................................................... 1,150
2001....................................................... 500
2002....................................................... 500
2003....................................................... 500
Thereafter................................................. 1,208
-------
$44,689
=======
E. Subsequent Event (Unaudited)
Effective October 31, 1998, the Partnership and Tele-Communications, Inc.
("TCI") entered into a contribution agreement ("Contribution Agreement").
Pursuant to the terms of the Contribution Agreement, the Partnership and TCI
contributed certain of their cable television systems located in Indiana and
Northern Kentucky to Insight Communications of Indiana, LLC ("Insight Indiana")
in exchange for 50% equity interests therein. All three of the Combined Systems
were contributed into Insight Indiana effective October 31, 1998. The
Partnership recognized a gain of $44.3 million on the contribution of the
Combined Systems to Insight Indiana, equivalent to 50% of the difference
between the carrying value of such systems and their fair value.
F-45
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.
/s/ KPMG LLP
Denver, Colorado
March 9, 2001
F-46
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-47
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-48
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-49
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-50
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-51
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-52
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-53
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-54
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-55
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-56
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.
/s/ KPMG LLP
Denver, Colorado
October 11, 2000
F-57
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-58
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-59
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-60
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-61
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-62
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-63
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-64
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-65
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-66
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-67
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-68
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.
/s/ Ernst & Young LLP
New York, New York
March 12, 2001
F-69
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-70
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-71
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-72
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-73
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-74
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-75
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-76
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-77
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-78
Report of Independent Accountants
To the Partners of InterMedia Capital Partners VI, L.P.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of partners' capital and of cash flows
present fairly, in all material respects, the financial position of InterMedia
Capital Partners VI, L.P. (the Partnership) and its subsidiaries at September
30, 1999 and December 31, 1998, and the results of their operations and their
cash flows for the nine months ended September 30, 1999 and the period from
April 30, 1998 (commencement of operations) to December 31, 1998 in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
January 5, 2000
F-79
InterMedia Capital Partners VI, L.P.
Consolidated Balance Sheets
(dollars in thousands)
- --------------------------------------------------------------------------------
September 30, December 31,
1999 1998
Assets
Cash and cash equivalents $ 443 $ 2,602
Accounts receivable, net of allowance for
doubtful accounts of $1,070 and $2,692, respectively 17,984 15,160
Receivable from affiliates 6,613 7,532
Prepaids and other current assets 1,105 1,049
-------- --------
Total current assets 26,145 26,343
Intangible assets, net 579,929 632,002
Property and equipment, net 259,892 243,100
Other non-current assets 1,383 3,045
-------- --------
Total assets $867,349 $904,490
======== ========
Liabilities and Partners' Capital
Current poriton long term debt $ 55,141 $ --
Accounts payable and accrued liabilities 23,168 23,541
Payable to affiliates -- 2,913
Deferred revenue 12,892 11,429
Accrued interest 520 5,529
-------- --------
Total current liabilities 91,721 43,412
Deferred channel launch revenue 6,576 7,767
Long-term debt 687,000 726,000
Other long-term liabilities 8,453 411
-------- --------
Total liabilities 793,750 777,590
-------- --------
Commitments and contingencies
Partners' Capital
Total partners' capital 73,599 126,900
-------- --------
Total liabilities and partners' capital $867,349 $904,490
======== ========
See accompanying notes to the consolidated financial statements
F-80
InterMedia Capital Partners VI, L.P.
Consolidated Statements of Operations
(dollars in thousands)
- --------------------------------------------------------------------------------
For the period
April 30, 1998
For the nine (commencement
months ended of operations) to
September 30, December 31,
1999 1998
Revenues
Basic and cable services $ 113,564 $ 91,970
Pay service 22,883 18,500
Other service 22,750 20,995
--------- ---------
159,197 131,465
--------- ---------
Costs and expenses
Program fees 37,481 30,106
Other direct expenses 14,443 11,794
Selling, general and administrative expenses 39,647 27,884
Management and consulting fees 1,515 1,350
Depreciation and amortization expenses 91,707 88,135
--------- ---------
184,793 159,269
--------- ---------
Loss from operations (25,596) (27,804)
--------- ---------
Other income (expense)
Interest and other income 264 323
Interest expense (41,979) (38,561)
Gain on exchange of cable systems 15,822 --
Other expense (1,812) (640)
--------- ---------
(27,705) (38,878)
--------- ---------
Net loss $ (53,301) $ (66,682)
========= =========
See accompanying notes to the consolidated financial statements
F-81
InterMedia Capital Partners VI, L.P.
Consolidated Statements of Changes in Partners' Capital
(dollars in thousands)
- --------------------------------------------------------------------------------
General Limited
Partner Partners Total
Cash contributions $ 2 $ 102,032 $ 102,034
In-kind contributions -- 100,000 100,000
Syndication costs -- (8,452) (8,452)
Net loss -- (66,682) (66,682)
--------- --------- ---------
Balance at December 31, 1998 2 126,898 126,900
Net loss -- (53,301) (53,301)
--------- --------- ---------
Balance at September 30, 1999 $ 2 $ 73,597 $ 73,599
========= ========= =========
See accompanying notes to the consolidated financial statements
F-82
InterMedia Capital Partners VI, L.P.
Consolidated Statements of Cash Flows
(dollars in thousands)
- --------------------------------------------------------------------------------
For the period
April 30, 1998
For the nine (commencement
months ended of operations) to
September 30, December 31,
1999 1998
Cash flows from operating activities
Net loss $ (53,301) $ (66,682)
Loss on disposal of fixed assets 2,442 --
Depreciation and amortization 92,132 88,528
Gain on exchange of cable systems (15,822) --
Changes in assets and liabilities:
Accounts receivable (2,636) (3,455)
Receivable from affiliates 919 (7,532)
Prepaids and other current assets 288 (739)
Other non-current assets 1,663 (3,035)
Accounts payable and accrued liabilities 2,519 10,557
Payable to affiliates (2,913) 2,913
Deferred revenue 1,120 2,962
Deferred channel launch revenue (971) 5,314
Other long-term liabilities (883) 226
Accrued interest (5,016) 5,529
--------- ---------
Cash flows from operating activities 19,541 34,586
--------- ---------
Cash flows from investing activities
Costs incurred in connection with contributed systems -- (3,629)
Proceeds from exchange of cable systems 16,737 --
Property and equipment (62,488) (36,745)
Intangible assets (1,022) (66)
--------- ---------
Cash flows from investing activities (46,773) (40,440)
--------- ---------
Cash flows from financing activities
Debt issue costs -- (7,395)
Proceeds from long-term debt 16,141 726,000
Proceeds from interest rate swap termination option
agreements 8,932 --
Repayment of debt assumed, net of cash acquired -- (803,731)
Contributed capital -- 102,034
Partner draw -- (8,452)
--------- ---------
Cash flows from financing activities 25,073 8,456
--------- ---------
Net change in cash and cash equivalents (2,159) 2,602
Cash and cash equivalents, beginning of period 2,602 --
--------- ---------
Cash and cash equivalents, end of period $ 443 $ 2,602
========= =========
See accompanying notes to the consolidated financial statements
F-83
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
1. The Partnership and Basis of Presentation
InterMedia Capital Partners VI, L.P. ("ICP-VI"), a Delaware limited
partnership, was formed in October 1997 for the purpose of acquiring and
operating cable television systems located in the state of Kentucky.
ICP-VI and its directly and indirectly majority-owned subsidiaries,
InterMedia Partners Group VI, L.P. ("IPG-VI"), InterMedia Partners VI,
L.P. ("IP-VI"), and InterMedia Partners of Kentucky, L.P. ("IP-KY") are
collectively referred to as the "Partnership." The Partnership commenced
business on April 30, 1998 upon contribution of cable television systems
serving subscribers throughout western and central Kentucky (the
"Systems") with significant concentrations in the state's four largest
cities: Lexington, Louisville, Covington and Bowling Green. Prior to April
30, 1998, the Partnership had no operations.
On April 30, 1998, the Partnership obtained capital contributions from its
limited and general partners of $202,034, including an in-kind
contribution of the Systems. InterMedia Capital Management VI, LLC
("ICM-VI LLC"), a Delaware limited liability company, is the 0.001%
general partner of ICP-VI. The Systems were contributed by affiliates of
AT&T Broadband Internet Services ("AT&TBIS"), formerly
Tele-Communications, Inc., a 49.5% limited partner of ICP-VI. AT&TBIS's
49.5% interest consists of a 49.005% direct ownership interest issued in
exchange for its in-kind contribution (see Note 3 - Contribution of Cable
Properties) and an indirect ownership of 0.495% through its 49.55% limited
partner interest in InterMedia Capital Management VI, L.P. ("ICM-VI LP"),
a California limited partnership, which owns a 0.999% limited partner
interest in ICP-VI. Blackstone Cable Acquisition Company, LLC
("Blackstone"), a 49.5% limited partner of ICP-VI, contributed $100,000 in
cash.
On April 18, 1999, the Partnership's general and limited partners, other
than AT&TBIS entered into an agreement with Insight Communications
Company, L.P. ("Insight") to sell their partner interest in ICP-VI. The
sale closed on October 1, 1999, and Insight began managing the
Partnership.
As of September 30, 1999, the Partnership served approximately 427,700
subscribers (unaudited) and encompassed approximately 673,900 homes passed
(unaudited).
The Partnership's contributed cable television systems were structured as
leveraged transactions and a significant portion of the assets contributed
are intangible assets which are being amortized over one to fourteen
years. Therefore, as was planned, the Partnership has incurred substantial
book losses. Of the total net losses of $119,983, non-cash charges have
aggregated $167,280. These charges consist of $73,972 of depreciation of
property and equipment, $106,688 of amortization of intangible assets
predominately related to franchise rights and $2,442 of loss on disposal
of fixed assets, offset by a $15,822 gain on exchange of cable systems.
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of ICP-VI and
its directly and indirectly majority-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
F-84
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Cash equivalents
The Partnership considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Revenue recognition
Cable television service revenue is recognized in the period in which the
services are provided to customers. Deferred revenue represents revenue
billed in advance and deferred until cable service is provided.
Installation fees are recognized immediately into revenue to the extent of
direct selling costs incurred. Any fees in excess of such costs are
deferred and amortized into income over the period that customers are
expected to remain connected to the cable television system.
Property and equipment
Additions to property and equipment, including new customer installations,
are recorded at cost. Self-constructed fixed assets include materials,
labor and overhead. Costs of disconnecting and reconnecting cable service
are expensed. Expenditures for maintenance and repairs are charged to
expense as incurred. Expenditures for major renewals and improvements are
capitalized. Capitalized plant is written down to recoverable values
whenever recoverability through operations or sale of the systems becomes
doubtful.
Depreciation is computed using the double-declining balance method over
the following estimated useful lives:
Years
Cable television plant 5-10
Buildings and improvements 10
Furniture and fixtures 3-7
Equipment and other 3-10
Intangible assets
The Partnership has franchise rights to operate cable television systems
in various towns and political subdivisions. Franchise rights are being
amortized over the lesser of the remaining lives of the franchises or the
base fourteen year term of ICP-VI which expires on April 30, 2012.
Remaining franchise lives range from one to eighteen years.
The Partnership acquired a long term programming agreement (the
"Programming Agreement"), as described in Note 3 - "Contribution of Cable
Properties". The Programming Agreement is valued at $150,000 and is being
amortized on a straight line basis over the fourteen year term of ICP-VI.
Debt issue costs are included in intangible assets and are being amortized
over the terms of the related debt.
F-85
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Costs associated with potential acquisitions are initially deferred. For
acquisitions which are completed, related costs are capitalized as part of
the purchase price of assets acquired. For those acquisitions not
completed, related costs are expensed in the period the acquisition is
abandoned.
Capitalized intangibles are written down to recoverable values whenever
recoverability through operations or sale of the systems becomes doubtful.
Each year, the Partnership evaluates the recoverability of the carrying
value of its intangible assets by assessing whether the projected cash
flows, including projected cash flows from sale of the systems, is
sufficient to recover the unamortized costs of these assets.
Interest rate swaps
Under an interest rate swap, the Partnership agrees with another party to
exchange interest payments at specified intervals over a defined term.
Interest payments are calculated by reference to the notional amount based
on the difference between the fixed and variable rates pursuant to the
swap agreement. The net interest received or paid as part of the interest
rate swap is accounted for as an adjustment to interest expense.
Income taxes
No provision or benefit for income taxes is reported by the Partnership
because, as partnerships, the tax effects of ICP-VI and its majority-owned
subsidiaries' results of operations accrue to the partners.
Partners' capital
Syndication costs incurred to raise capital have been charged to partners'
capital.
Allocation of profits and losses
Profits and losses are allocated in accordance with the provisions of
ICP-VI's partnership agreement, dated October 30, 1997, generally as
follows:
Losses are allocated first to the partners to the extent of and in
accordance with relative capital contributions; second, to the partners
which loaned money to the Partnership to the extent of and in accordance
with relative loan amounts; and third, to the partners in accordance with
relative capital contributions.
Profits are allocated first to the partners which loaned money to the
Partnership and to the extent of and proportionate to previously allocated
losses relating to such loans; second, among the partners in accordance
with relative capital contributions, in an amount sufficient to yield a
pre-tax return of 10% per annum on their capital contributions; and third,
5.3% to the general partner and 14.7% to ICM-VI LP, and 80% to the limited
and general partners in accordance with relative capital contributions.
F-86
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
Disclosures about fair value of financial instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to
estimate the fair value:
Current assets and current liabilities: The carrying value of receivables,
payables, deferred revenue, and accrued liabilities approximates fair
value due to their short maturity.
Long-term debt: The fair value of the Partnership's borrowings under the
bank term loans and revolving credit facility are estimated based on the
borrowing rates currently available to the Partnership for obligations
with similar terms.
Interest rate swaps and related derivatives: The estimated fair value of
the interest rate swaps and related derivatives is based on the current
value in the market for agreements with similar terms and adjusted for the
holding period.
New accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("FAS 133"). FAS 133 was
amended in June 1999 by FAS 137. FAS 133 is currently effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000 (January
1, 2001 for the Partnership). FAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes
in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative
is designated as part of a hedge transaction and, if it is, the type of
hedge transaction. Management of the Partnership anticipates that, due to
its limited use of derivative instruments, the adoption of FAS 133 will
not have a significant effect on the Partnership's results of operations,
financial position or cash flows.
3. Contribution of Cable Properties
On April 30, 1998, the Partnership borrowed $730,000 under new bank term
loans and a revolving credit facility and received equity contributions
from its partners of $202,034, consisting of $102,034 in cash and $100,000
of in-kind contributions from AT&TBIS and another limited partner of
ICP-VI. ICP-VI assumed debt from AT&TBIS of $803,743 and issued a combined
49.5% limited partner interest to AT&TBIS and another limited partner, in
exchange for the contributed systems with a fair market value of $753,743
and a long-term programming fee discount agreement valued at $150,000. The
AT&TBIS debt assumed was repaid with proceeds from the borrowings under
the bank loans and the cash contributions received from ICP-VI's partners.
F-87
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
The total cost of the Systems contributed was as follows:
Value of AT&TBIS Debt assumed $ 803,743
Costs incurred in connection with the contributed systems 3,629
Value of IP-VI equity issued 100,000
---------
$ 907,372
=========
The Partnership's allocation of costs related to the contributed systems
is as follows:
December 31,
1998
Tangible assets $ 234,143
Intangible assets 528,033
Programming agreement 150,000
Current assets 12,037
Current liabilities (12,389)
Non-current liabilities (4,452)
---------
Net assets contributed $ 907,372
=========
4. Exchange of Cable Properties
On February 1, 1999, the Partnership exchanged with Insight Communications
of Indiana, LLC its cable television assets located in and around
Henderson, Kentucky ("Exchanged Assets"), serving approximately 10,700
(unaudited) basic subscribers, for cable television assets located in and
around Oldham County, Kentucky, serving approximately 8,300 (unaudited)
basic subscribers, plus net cash of $3,758. The cable system assets
received have been recorded at fair market value, allocated as follows:
Property and equipment $ 4,475
Franchise rights 12,665
-------
Total $ 17,140
=======
The exchange resulted in a gain of $1,255, calculated as the difference
between the fair value of the assets received and the net book value of
the Exchanged Assets, plus net proceeds received of $3,758.
On February 17, 1999 and March 11, 1999, the partnership entered into
agreements with FrontierVision Operating Partnership, L.P.
("FrontierVision") to exchange its cable television assets
F-88
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
located in central Kentucky, serving approximately 16,800 (unaudited)
basic subscribers, for cable television assets located in northern
Kentucky, serving approximately 11,000 (unaudited) basic subscribers. On
June 1, 1999 the Partnership completed the exchange with respect to
certain of the systems and entered into related management agreements.
Pursuant to the terms of the management agreements, the Partnership
managed and operated the remaining systems of FrontierVision in northern
Kentucky and FrontierVision managed and operated the Partnership's
remaining systems in central Kentucky. The management agreements, which
provided the Partnership with effective control over the remaining
systems, terminated upon completion of the exchanges of the remaining
systems on September 30, 1999.
The cable system assets received have been recorded at fair market value,
allocated as follows:
Property and equipment $ 6,328
Franchise rights 11,011
-------
Total $17,339
=======
The Partnership received cash of $12,979 from FrontierVision in connection
with the exchanged systems. The exchanges resulted in a gain of $14,567
for the nine months ended September 30, 1999, respectively.
5. Intangible Assets
Intangible assets consist of the following:
September 30, December 31,
1999 1998
Franchise rights $ 522,945 $ 528,073
Programming agreement 147,631 150,000
Debt issue costs 7,395 7,395
Other 105 26
---------- ----------
678,076 685,494
Accumulated amortization (98,147) (53,492)
---------- ----------
$ 579,929 $ 632,002
========== ==========
F-89
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
6. Property and Equipment
Property and equipment consist of the following:
September 30, December 31,
1999 1998
Land $ 5,990 $ 6,028
Cable television plant 242,943 213,826
Buildings and improvements 2,727 2,470
Furniture and fixtures 4,060 2,958
Equipment and other 26,932 20,279
Construction in progress 45,509 30,246
---------- ----------
328,161 275,807
Accumulated depreciation (68,269) (32,707)
---------- ----------
$ 259,892 $ 243,100
========== ==========
7. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
September 30, December 31,
1999 1998
Accounts payable $ 10,567 $ 1,387
Accrued program costs 1,112 2,974
Accrued franchise fees 723 2,050
Accrued copyright fees 172 346
Accrued capital expenditures 192 7,248
Accrued property and other taxes 8,604 4,523
Other accrued liabilities 1,798 5,013
--------- ---------
$ 23,168 $ 23,541
========= =========
8. Channel Launch Revenue
During the periods ended September 30, 1999 and December 31, 1998 the
Partnership received payments and recorded receivables from certain
programmers to launch and promote their new channels. As of September 30,
1999 and December 31, 1998 the Partnership had receivables from
programmers of $5,476 and $5,855, respectively. In connection with the
contribution of the Systems, the Partnership assumed deferred launch
support revenue and obligations of $4,452. The
F-90
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Partnership recognized advertising revenue for advertisements provided by
the Partnership to promote the new channels of $441 and $911, during the
nine months ended September 30, 1999 and the period from April 30, 1998
(commencement of operations) through December 31, 1998, respectively. The
remaining deferred channel launch revenue is being amortized over the
respective terms of the program agreements which range between eight and
ten years. The Partnership amortized and recorded as other service revenue
$1,880 and $1,406 of the remaining deferred channel launch revenue during
the nine months ended September 30, 1999 and the period from April 30,
1998 (commencement of operations) through December 31, 1998, respectively.
9. @Home Warrants
Under a distribution agreement with At Home Corporation ("@Home"), the
Partnership provides high-speed Internet access to subscribers over the
Partnership's distribution network in certain of its cable television
systems. In January 1999, the Partnership and certain of its affiliates
entered into related agreements whereby @Home would issue to the
Partnership and its affiliates warrants to purchase shares of @Home's
Series A Common Stock ("@Home Stock") at an exercise price of five dollars
and twenty-five cents per share, as adjusted for a two-for-one stock split
which occurred on June 17, 1999. Under the provisions of the agreements,
management estimates that the Partnership may purchase up to 459,200
shares of @Home Stock. The warrants become vested and exercisable, subject
to certain forfeiture and other conditions, based on operational targets
which include offering the @Home service by the Partnership in its service
areas and obtaining specified numbers of @Home subscribers over the
six-year term of the @Home distribution agreement. The Partnership has not
recognized any income related to the warrants for the nine months ended
September 30, 1999.
F-91
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
10. Long-term Debt
Long-term debt consists of the following:
September 30, December 31,
1999 1998
Senior Debt
Bank revolving credit facility, $325,000 commitment as of
September 30, 1999, interest currently at LIBOR plus 1.375%
(6.81%) or ABR plus .625% (8.625%) payable
quarterly, matures October 31, 2006 $ 212,000 $ 199,000
Bank Term Loan A; interest at LIBOR plus 1.750% (7.19%)
payable quarterly, matures September 30, 2007 100,000 100,000
Bank Term Loan B; interest at LIBOR plus 2.000% (7.44%)
payable quarterly, matures December 31, 2007 250,000 250,000
--------- ---------
Total senior debt 562,000 549,000
--------- ---------
Subordinated Debt
Bank Term Loan A; interest at LIBOR plus 2.750% (8.13%)
payable quarterly, matures April 30, 2008 125,000 125,000
Bank Term Loan B; $60,000 commitment as of September 30, 1999,
interest at LIBOR plus 0.500% (5.84%) or ABR (8.25%)
payable quarterly, matures January 1, 2000 55,141 52,000
--------- ---------
Total subordinated debt 180,141 177,000
--------- ---------
Total debt 742,141 726,000
Less current portion of long-term debt (55,141)
--------- ---------
Total long-term debt $ 687,000 $ 726,000
========= =========
The Partnership's bank debt is outstanding under a revolving credit
facility and term loan agreements executed by the Partnership on April 30,
1998 (the "Bank Facility"). The revolving credit facility currently
provides for $325,000 of available credit. Starting June 30, 2001,
revolving credit facility commitments will be permanently reduced
quarterly by increments ranging from $7,500 to $40,000 through maturity on
October 31, 2006. The senior Term Loan A requires quarterly principal
payments of $250 starting June 30, 2001 with final payments in two equal
installments of $47,125 on March 31 and September 30, 2007. The senior
Term Loan B requires quarterly principal payments of $625 starting June
30, 2001 with final payments in two equal installments of $117,188 on
September 30, and December 31, 2007. The subordinated Term Loan A
F-92
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
requires quarterly principal payments of $313 starting June 30, 2001 with
final payments in two equal installments of $58,281 on January 31, and
April 30, 2008. The borrowings outstanding under the subordinated Term
Loan B were initially due and payable on May 31, 1999. On May 14, 1999 the
Partnership amended the terms and conditions of the subordinated Term Loan
B. The amendment extended the maturity date of subordinated Term Loan B to
January 1, 2000 and increased the applicable margin from 0.300% to 0.500%
for the period June 1, 1999 through September 30, 1999 and 0.625%
thereafter. On October 1, 1999 under the management of Insight, the
Partnership refinanced the borrowings outstanding under the subordinated
Term Loan B.
Advances under the Bank Facility are available under interest rate options
related to the base rate of the administrative agent for the Bank Facility
("ABR") or LIBOR. Interest rates vary on borrowings under the revolving
credit facility from LIBOR plus 0.500% to LIBOR plus 1.875% or ABR to ABR
plus 0.875% based on the Partnership's ratio of senior debt to annualized
semi-annual cash flow, as defined ("Senior Leverage Ratio"). Interest
rates vary on borrowings under the senior Term Loan A from LIBOR plus
1.500% to LIBOR plus 2.125% or ABR plus 0.500% to ABR plus 1.125%, and
under the senior Term Loan B from LIBOR plus 1.750% to LIBOR plus 2.250%
or ABR plus 0.750% to ABR plus 1.250% based on the Partnership's Senior
Leverage Ratio. Interest rates on borrowings under the subordinated Term
Loan A are at LIBOR plus 2.75% or ABR plus 2.75%. The Bank Facility
requires quarterly interest payments, or more frequent interest payments
if a shorter period is selected under the LIBOR option, and quarterly
payment of fees on the unused portion of the revolving credit facility and
the subordinated Term Loan B at 0.375% per annum when the Senior Leverage
Ratio is greater than 5.0:1.0 and at 0.250% when the Senior Leverage Ratio
is less than or equal to 5.0:1.0.
The Partnership has entered into interest rate swap agreements in the
aggregate notional principal amount of $500,000 to establish long-term
fixed interest rates on its variable rate debt. Under the swap agreements,
the Partnership pays quarterly interest at fixed rates ranging from 5.850%
to 5.865% and receives quarterly interest payments equal to LIBOR. The
agreements expire July 2003. At September 30, 1999 and December 31, 1998,
the fair market value of the interest rate swaps was approximately $8,437
and $(14,493), respectively.
On July 12, 1999, the Partnership entered into early termination option
agreements ("Option Agreements") with banks which are parties to the
Partnership's interest rate swap agreements. Under the terms of the Option
Agreements, the banks may terminate the interest rate swap agreements
between May 2001 and July 2003, the expiration date of the agreements. In
exchange for the early termination option, the Partnership received a cash
payment of $8,932 which has been deferred and is being amortized over the
remaining terms of the interest rate swap agreements. $570 was amortized
and recorded against interest expense during the three and nine months
ended September 30, 1999. At September 30, 1999, the fair market value of
the Option Agreements was approximately $(10,334).
Borrowings under the Bank Facility, excluding the subordinated Term Loan
B, ("Permanent Debt") are secured by the partnership interests of IPG-VI
and IP-VI's subsidiaries and negative pledges of the stock and assets of
certain AT&TBIS subsidiaries that are parties to an agreement ("Keepwell
Agreement") to support the Permanent Debt. Under the Keepwell Agreement,
the AT&TBIS
F-93
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
subsidiaries are required to make loans to IPG-VI and IP-VI in an amount
not to exceed $489,500 if (i) IPG-VI or IP-VI fails to make payment of
principal in accordance with the respective debt agreements, or (ii)
amounts due under the respective debt agreements have been accelerated for
non-payment or bankruptcy.
The debt agreements contain certain covenants which restrict the
Partnership's ability to encumber assets, make investments or
distributions, retire partnership interests, pay management fees
currently, incur or guarantee additional indebtedness and purchase or sell
assets. The debt agreements also include financial covenants which require
minimum interest and debt coverage ratios and specify maximum debt to cash
flows ratios.
Annual maturities of long-term debt at September 30, 1999 are as follows:
2000 $ 55,141
2001 3,562
2002 4,750
2003 4,750
Thereafter 673,938
---------
$ 742,141
=========
Borrowings under the Bank Facility are at rates that would be otherwise
currently available to the Partnership. Accordingly, the carrying amounts
of bank borrowings outstanding as of September 30, 1999 approximate their
fair value.
11. Related Party Transactions
ICM-VI LP provides certain management and administrative services to the
Partnership for a per annum fee of 1% of ICP-VI's total non-preferred
partner contributions ("ICM Management Fee") offset by certain expenses of
the Partnership, as defined, up to an amount equal to $500. Prior to
September 30, 1999, 50% of the net ICM Management Fee was deferred until
the Partnership's Senior Leverage Ratio was less than five times in order
to support the Partnership's debt. Any deferred ICM Management Fee bore
interest at 10%, compounded annually, payable upon payment of the deferred
management fee. Effective September 30, 1999 such deferral was not
required pursuant to an amendment to the Partnership's debt agreements.
Based on current capital contributions, the management fee per annum is
$2,020 less partnership expenses of $500.
Pursuant to ICP-VI's partnership agreement, on April 30, 1998 the
Partnership prepaid $1,000 of the ICM Management Fee. ICM Management Fee
expenses for the nine months ended September 30, 1999 and the period from
April 30, 1998 (commencement of operations) through December 31, 1998
amounted to $1,140 and $1,013, respectively. On September 30, 1999 the
Partnership paid the total
F-94
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
outstanding deferred ICM Management Fee and related interest due to ICM-VI
LP. At December 31, 1998, the Partnership had a non-current payable to
ICM-VI LP of $13.
The Partnership pays monitoring fees of $250 per annum to each of AT&TBIS
and Blackstone. Prior to September 30, 1999, 50% of the monitoring fees
were deferred until the Partnership's Senior Leverage Ratio was less than
five times in order to support the Partnership's debt. Any deferred
monitoring fees bore interest at 10%, compounded annually, payable upon
payment of the deferred monitoring fees. Effective September 30, 1999 such
deferral was not required pursuant to an amendment to the Partnership's
debt agreements. Management and consulting fees of $1,515 and $1,350 for
the nine months ended September 30, 1999 and the period from April 30,
1998 (commencement of operations) through December 31, 1998, respectively,
include both the ICM Management Fee and monitoring fees.
Pursuant to ICP-VI's partnership agreement, on April 30, 1998, the
Partnership prepaid its monitoring fees for the period from April 30, 1999
through April 29, 2000. The Partnership had a non-current payable of $83
each to AT&TBIS and Blackstone at December 31, 1998. In contemplation of
the sale of certain of the partners' interest in ICP-VI (as described in
Note 16 - Subsequent Events) and the amendments to the partnership and
debt agreements, the Partnership received from Blackstone its prepaid
monitoring fees net of deferred monitoring fees and related interest
outstanding at September 30, 1999. At September 30, 1999 the Partnership
has a receivable of $28 from AT&TBIS representing prepaid monitoring fees,
net of deferred monitoring fees and related interest.
In connection with raising its capital, the Partnership paid aggregate
transaction fees of $4,942 to AT&TBIS and Blackstone on April 30, 1998.
The amount has been recorded as syndication costs.
InterMedia Management, Inc. ("IMI") is the sole member of ICM-VI LLC. IMI
has entered into an agreement with the Partnership to provide accounting
and administrative services at cost. IMI also provides such services to
other cable systems which are affiliates of the Partnership.
Administrative fees charged by IMI for the nine months ended September 30,
1999 and the period from April 30, 1998 (commencement of operations)
through December 31, 1998 were $3,131 and $2,495, respectively. Receivable
from affiliates includes $2,850 and $628 at September 30, 1999 and
December 31, 1998, respectively, of advances to IMI, net of administrative
fees charged by IMI and operating expenses paid by IMI on behalf of the
Partnership.
As an affiliate of AT&TBIS, the Partnership is able to purchase
programming services from a subsidiary of AT&TBIS. Management believes
that the overall programming rates made available through this
relationship are lower than those which the Partnership could obtain
separately. Such volume rates may not continue to be available in the
future should AT&TBIS's ownership in the Partnership significantly
decrease. Programming fees charged by the AT&TBIS subsidiary for the nine
months ended September 30, 1999 and the period April 30, 1998
(commencement of operations) through December 31, 1998 amounted to $28,523
and $22,183, respectively. Payable to affiliates at December 31, 1998
represents programming fees payable to the AT&TBIS subsidiary.
The Partnership entered into an agreement with an affiliate of AT&TBIS to
manage the Partnership's advertising business and related services for an
annual fixed fee per advertising sales
F-95
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
subscriber, as defined by the agreement. In addition to the annual fixed
fee, AT&TBIS is entitled to varying percentage shares of the incremental
growth in annual cash flow from advertising sales above specified targets.
Management fees charged by the AT&TBIS subsidiary for the nine months
ended September 30, 1999 and the period April 30, 1998 (commencement of
operations) through December 31, 1998 amounted to $231 and $563,
respectively. Receivables from affiliates at September 30, 1999 and
December 31, 1998 includes $3,632 and $6,904, respectively, of receivables
from AT&TBIS for advertising sales.
As part of its normal course of business the Systems are involved in
transactions with affiliates of ICP-VI which own and operate cable
television systems. Such transactions include purchases and sales, at
cost, of inventories used in construction of cable plant. Receivables from
affiliates at September 30, 1999 includes $131 of receivables from
affiliated systems.
12. Cable Television Regulation
Cable television legislation and regulatory proposals under consideration
from time to time by Congress and various federal agencies have in the
past, and may in the future, materially affect the Partnership and the
cable television industry.
The cable industry is currently regulated at the federal and local levels
under the Cable Act of 1984, the Cable Act of 1992 (the "1992 Act"), the
Telecommunications Act of 1996 (the "1996 Act") and regulations issued by
the Federal Communications Commission ("FCC") in response to the 1992 Act.
FCC regulations govern the determination of rates charged for basic,
expanded basic and certain ancillary services, and cover a number of other
areas including customer service and technical performance standards, the
required transmission of certain local broadcast stations and the
requirement to negotiate retransmission consent from major network and
certain local television stations. Among other provisions, the 1996 Act
eliminated rate regulation on the expanded basic tier effective March 31,
1999.
Current regulations issued in connection with the 1992 Act empower the FCC
and/or local franchise authorities to order reductions of existing rates
which exceed the maximum permitted levels and require refunds measured
from the date a complaint is filed in some circumstances or retroactively
for up to one year in other circumstances. Management believes it has made
a fair interpretation of the 1992 Act and related FCC regulations in
determining regulated cable television rates and other fees based on the
information currently available.
Many aspects of regulations at the federal and local levels are currently
the subject of judicial review and administrative proceedings. In
addition, the FCC continues to conduct rulemaking proceedings to implement
various provisions of the 1996 Act. It is not possible at this time to
predict the ultimate outcome of these reviews or proceedings or their
effect on the Partnership.
13. Commitments and Contingencies
The Partnership is committed to provide cable television services under
franchise agreements with
F-96
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
remaining terms of up to eighteen years. Franchise fees of up to 5% of
gross revenues are payable under these agreements.
Current FCC regulations require that cable television operators obtain
permission to retransmit major network and certain local television
station signals. The Partnership has entered into long-term retransmission
agreements with all applicable stations in exchange for in-kind and/or
other consideration.
On April 30, 1999 the Partnership was named as an additional defendant in
a purported class action which was originally filed in January 1998
against AT&TBIS and certain of its affiliates in the State of Kentucky
concerning late fee charges and practices. Certain cable systems owned by
the Partnership charge late fees to customers who do not pay their cable
bills on time. These late fee cases challenge the amount of the late fees
and practices under which they are imposed. The Plaintiffs raise claims
under state consumer protection statutes, other state statutes, and common
law. Plaintiffs generally allege that the late fees charged by the
Partnership's cable systems in the State of Kentucky are not reasonably
related to the costs incurred by the cable systems as a result of late
payment. Plaintiffs seek to require cable systems to reduce their late
fees on a prospective basis and to provide compensation for alleged
excessive late fee charges for past periods. Based on the facts available,
management believes that, although no assurances can be given as to the
outcome of these actions, the ultimate disposition of these matters should
not have a material adverse effect upon the financial position, results of
operations or cash flows of the Partnership.
In September 1999 the Partnership received a tentative property tax
assessment from the Kentucky Revenue Cabinet with a total valuation of
$1,197,571. This valuation could result in an additional property tax
liability of approximately $4,149 for the nine months ended September 30,
1999. However, based on the information currently available to the
Partnership and taking into account the advice of the Partnership's
counsel, management believes that the accrued property tax liability
included in the Partnership's financial statements is adequate.
The Partnership is subject to litigation and other claims in the ordinary
course of business. In the opinion of management, the ultimate outcome of
any existing litigation or other claims will not have a material adverse
effect on the Partnership's financial position, results of operations or
cash flows.
The Partnership has entered into pole rental agreements and leases certain
of its facilities and equipment under non-cancelable operating leases.
Minimum rental commitments at September 30, 1999 for the next five years
and thereafter under these leases are as follows:
1999 $ 154
2000 552
2001 264
2002 129
2003 100
Thereafter 162
-------
$ 1,361
=======
F-97
InterMedia Capital Partners VI, L.P.
Notes to Consolidated Financial Statements
(dollars in thousands)
- --------------------------------------------------------------------------------
Rent expense, including pole rental agreements was $1,099 and $1,003 for
the nine months ended September 30, 1999 and the period from April 30,
1998 (commencement of operations) through December 31,1998, respectively.
14. Supplemental Disclosures to Consolidated Statement of Cash Flows
During the nine months ended September 30, 1999 and the period from April
30, 1998 through December 31, 1998, the Partnership paid interest of
$46,942 and $32,465, respectively.
As described in Note 3 (Contribution of Cable Properties), on April 30,
1998 the Partnership received, from AT&TBIS and another limited partner,
in-kind contributions of cable television systems located in Kentucky. In
connection with the contribution, the Partnership repaid debt assumed of
$803,743 and incurred fees of $3,629.
15. Employee Benefit Plan
The Partnership participates in the InterMedia Partners Tax Deferred
Savings Plan, which covers all full-time employees who have completed at
least six months of employment. Such Plan provides for a base employee
contribution of 1% and a maximum of 15% of compensation. The Partnership's
matching contributions under such Plan are at the rate of 50% of the
employee's contributions, up to a maximum of 5% of compensation.
16. Subsequent Events
On October 1, 1999, the Partnership's general and limited partners, other
than AT&TBIS, sold their partner interests in ICP-VI to Insight. Upon
consummation of the sale, Insight began managing the Partnership. Also on
October 1, 1999, under Insight's management, the Partnership refinanced
its borrowings outstanding under the subordinated Term Loan B.
F-98
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-99
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-100
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-101
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-102
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-103
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-104
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-105
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-106
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-107
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-108
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-109
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-110
Report of Independent Auditors
The Shareholders
Insight Capital, Inc.
We have audited the accompanying balance sheets as of December 31, 2000 and 1999
and the related statements of operations, changes in shareholders' deficit and
cash flows of Insight Capital, Inc. (the "Company") for the year ended December
31, 2000 and the period from September 23, 1999 (date of inception) through
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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.
As described in Note 1, the Company has no operations. Its ability to satisfy
debt and other obligations is dependent upon funding from related entities,
which are under the common control of the owners of the Company.
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 their operations and their cash flows for the
year ended December 31, 2000 and the period from September 23, 1999 (date of
inception) through, December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 2 to the financial statements, the financial statements
referred to above have been restated to reflect the full amount of co-issued
debt and related interest expense.
/s/ Ernst & Young LLP
New York, New York
March 12, 2001 except for Note 2,
as to which the date is May 25, 2001
F-111
INSIGHT CAPITAL, INC.
BALANCE SHEETS - RESTATED
(in thousands)
December 31,
2000 1999
---------------------
Assets
Cash $ 1 $ 1
Deferred financing costs, net of accumulated
amortization of $1,102 and $193 as of December 31,
2000 and 1999, respectively 13,468 8,173
---------------------
Total assets $ 13,469 $ 8,174
=====================
Liabilities and shareholders' deficit
Accrued interest $ 13,625 $ 4,875
Senior notes to be paid by Insight Midwest L.P. - (Note 4) 692,623 200,000
---------------------
Total liabilities 706,248 204,875
Commitments and contingencies
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 from senior
notes to be paid by Insight Midwest L.P. (Note 3) (658,430) (191,634)
Accumulated deficit (34,350) (5,068)
---------------------
Total shareholders' deficit (692,779) (196,701)
---------------------
Total liabilities and shareholders' deficit $ 13,469 $ 8,174
=====================
See accompanying notes
F-112
INSIGHT CAPITAL, INC.
STATMENTS OF OPERATIONS - RESTATED
(in thousands)
Period from
September 23,
1999 (inception)
Year ended through
December 31, 2000 December 31, 1999
-------------------------------------------
Expenses:
Amortization $ (909) $ (193)
Interest expense (28,373) (4,875)
-------------------------------------------
Net loss $(29,282) $ (5,068)
===========================================
F-113
INSIGHT CAPITAL, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT - RESTATED
(in thousands)
In-substance
contributions
Additional (distributions) Total
paid-in- related to Accumulated shareholders'
capital senior notes deficit deficit
------------------------------------------------------------
Issuance of common stock
(at inception) $1 $ - $ - $ 1
Borrowings under senior
notes by Insight Midwest, net - (191,634) - (191,634)
Net loss - - (5,068) (5,068)
----------------------------------------------------------
Balance, December 31, 1999 1 (191,634) (5,068) (196,701)
----------------------------------------------------------
Borrowings under senior
notes by Insight Midwest, net - (486,296) - (486,296)
Interest payments made by
Insight Midwest on senior notes - 19,500 - 19,500
Net loss - - (29,282) (29,282)
----------------------------------------------------------
Balance, December 31, 2000 $1 $(658,430) $(34,350) $(692,779)
==========================================================
F-114
INSIGHT CAPITAL, INC.
STATEMENTS OF CASH FLOWS - RESTATED
(in thousands)
Period from
September 23,
1999 (inception)
Year ended through
December 31, 2000 December 31, 1999
--------------------------------------
Cash flows from operating activities:
Net loss $ (29,282) $ (5,068)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization of deferred financing costs 909 193
Interest expense paid by affiliate 28,373 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
=====================================
Supplemental disclosure of significant non-cash financing activities:
In-substance distribution of proceeds related to senior notes $(486,296) $(191,634)
In-substance contribution related to senior notes 19,500 -
F-115
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 (Note 4), deferred financing costs and related
interest expense for all periods presented. The effect of the restatement was to
increase total assets by $13.5 million and $8.2 million and increase total
liabilities by $706.2 million and $204.9 million as of December 31, 2000 and
1999, respectively, and to decrease equity, representing an in-substance
distribution of the proceeds from the Senior Notes of $486.3 million and $191.6
million, respectively which were received by Insight Midwest in 2000 and 1999,
respectively, and to record a net loss of $29.3 million and $5.1 million, for
2000 and 1999, respectively. Prior to the restatement, no statements of
operations were previously presented.
3. Summary of Significant Accounting Policies
Use of Estimates
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Deferred Financing Costs
Deferred financing costs relate to costs, primarily underwriting and
professional fees associated with the issuance of the senior notes, which are
amortized over the life of the senior notes.
Fair Value of Financial Instruments
The fair value of the 9 3/4% Senior Notes as of December 31, 2000 was $198.5
million. The fair value of the 10 1/2% Senior Notes as of December 31, 2000 was
$515.0 million.
In-substance Distributions/Contributions related to Senior Notes
Since both Insight Midwest and the Company are severally and jointly liable, the
Senior Notes, deferred financing costs and associated interest expense are
reflected in the Company's financial statements as well as a charge to the
equity section representing an in-substance distribution of the proceeds from
the Senior Notes. The Company has accrued interest on the outstanding balance.
When Insight Midwest makes interest payments, the Company reduces accrued
interest payable and records an in-substance contribution to equity.
Income Taxes
The Company has prepared its income tax provision using the liability method in
accordance with Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes". Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
reporting and tax bases of assets and liabilities and are measured using tax
rates that will be in effect when the differences are expected to reverse. As of
December 31, 2000 and 1999 the Company had no deferred tax assets or liabilities
and no tax provision to record.
F-116
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.
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, 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.
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 9 3/4% Senior
Notes and 10 1/2% Senior Notes, it has no substantial assets or any operations
and will not have access to additional sources of cash flow, in order to make
any interest or principal 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 $770.5 million and $1.1 billion as of December 31, 2000
and 1999. The Senior Notes contain certain financial and other debt covenants.
F-117
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
F-118
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
F-119
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
F-120
INSIGHT CAPITAL, INC.
NOTES TO UNAUDITED 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.
F-121
INSIGHT CAPITAL, INC.
NOTES TO UNAUDITED 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.
F-122