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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2001
Commission file numbers 333-33540
333-33540-1
______________________
INSIGHT MIDWEST, L.P.
INSIGHT CAPITAL, INC.
(Exact name of registrants as specified in their charters)
Delaware 13-4079232
Delaware 13-4079679
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Nos.)
810 7/th/ Avenue
New York, New York 10019
(Address of principal executive offices) (Zip code)
Registrants' telephone number, including area code: 917-286-2300
______________________
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports) and (2) have been subject to
such filing requirements for the past 90 days. Yes X No ___
-----
Indicate the number of shares outstanding of each of the registrants'
classes of common stock, as of the latest practicable date.
Insight Midwest, L.P. - Not Applicable
Insight Capital, Inc. - Not Applicable
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the requirements of Form 10-Q and, therefore, do not include
all information and footnotes required by accounting principles generally
accepted in the United States. However, in our opinion, all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the results of operations for the relevant periods have been made. Results for
the interim periods are not necessarily indicative of the results to be expected
for the year. These financial statements should be read in conjunction with the
summary of significant accounting policies and the notes to the consolidated
financial statements included in our Annual Report on Form 10-K as amended for
the year ended December 31, 2000.
1
INSIGHT MIDWEST, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2001 2000
---------------------------
(unaudited) (Note 2)
Assets
Cash and cash equivalents $ 27,857 $ 5,735
Trade accounts receivable, net of allowance for doubtful accounts of
$1,013 and $979 as of September 30, 2001 and December 31, 2000 26,960 13,686
Launch funds receivable 7,574 13,077
Prepaid expenses and other assets 17,948 8,922
---------------------------
Total current assets 80,339 41,420
Fixed assets, net 1,094,200 681,490
Intangible assets, net 2,356,858 950,299
Deferred financing costs, net of accumulated amortization of $3,276
and $2,962 as of September 30, 2001 and December 31, 2000 25,406 26,338
---------------------------
Total assets $3,556,803 $1,699,547
===========================
Liabilities and partners' capital
Accounts payable $ 48,921 $ 38,575
Accrued expenses and other liabilities 18,678 3,320
Accrued property taxes 13,612 11,699
Accrued programming costs 29,404 23,208
Deferred revenue 2,253 3,284
Interest payable 26,590 19,919
Debt 1,875 -
Preferred interest distribution payable 1,750 -
Due to affiliates 25,233 4,047
---------------------------
Total current liabilities 168,316 104,052
Deferred revenue 14,677 11,535
Debt 2,243,302 1,347,523
Other non-current liabilities 31,802 -
---------------------------
Total liabilities 2,458,097 1,463,110
Commitments and contingencies
Preferred interests 184,201 -
Partners' capital 914,505 236,437
---------------------------
Total liabilities and partners' capital $3,556,803 $1,699,547
===========================
See accompanying notes
2
INSIGHT MIDWEST, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands)
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Revenue $ 176,794 $ 94,939 $ 519,847 $ 282,176
Operating costs and expenses:
Programming and other operating costs 65,309 32,974 192,337 99,430
Selling, general and administrative 27,342 14,475 83,022 44,968
Management fees 5,291 2,767 15,382 8,182
Depreciation and amortization 91,669 49,901 266,739 144,081
--------- --------- --------- ---------
Total operating costs and expenses 189,611 100,117 557,480 296,661
Operating loss (12,817) (5,178) (37,633) (14,485)
Other income (expense):
Interest expense (45,666) (27,872) (140,310) (81,015)
Interest income 182 231 736 776
Other (52) 22 (588) 95
--------- --------- --------- ---------
Total other expense, net (45,536) (27,619) (140,162) (80,144)
Net loss before extraordinary item (58,353) (32,797) (177,795) (94,629)
Extraordinary loss from early
extinguishment of debt (Note 6) - - (10,315) -
--------- --------- --------- ---------
Net loss (58,353) (32,797) (188,110) (94,629)
Accrual of preferred interests (4,848) - (14,421) -
--------- --------- --------- ---------
Net loss attributable to common interests $ (63,201) $ (32,797) $(202,531) $ (94,629)
========= ========= ========= =========
See accompanying notes
3
INSIGHT MIDWEST, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine months ended September 30,
2001 2000
----------- -----------
Operating activities:
Net loss $ (188,110) $ (94,629)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 266,739 144,081
Extraordinary loss from early extinguishments of debt 10,315 -
Provision for losses on trade accounts receivable 8,827 5,337
Non-cash interest expense on capital leases 114 -
Amortization of note discount 554 -
Changes in operating assets and liabilities, net of the
effects of acquisitions:
Trade accounts receivable (14,168) (6,054)
Launch funds receivable 8,519 (583)
Prepaid expenses and other assets (7,805) 1,218
Accounts payable 4,030 (11,964)
Accrued expenses and other liabilities 35,984 (7,590)
----------- -----------
Net cash provided by operating activities 124,999 29,816
----------- -----------
Investing activities:
Purchase of fixed assets (228,582) (142,455)
Purchase of intangible assets - (1,378)
Purchase of cable television systems, net of cash acquired (61,982) -
----------- -----------
Net cash used in investing activities (290,564) (143,833)
----------- -----------
Financing activities:
Distributions of preferred interests (14,000) -
Proceeds from borrowings under credit facilities 1,527,000 81,000
Repayments of credit facilities (654,900) -
Repayment of debt in connection with cable system transactions (659,165) -
Principle payments on capital lease (46) -
Debt issuance costs (11,202) -
----------- -----------
Net cash provided by financing activities 187,687 81,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 22,122 (33,017)
Cash and cash equivalents, beginning of period 5,735 35,996
----------- -----------
Cash and cash equivalents, end of period $ 27,857 $ 2,979
=========== ===========
See accompanying notes
4
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
We were formed in September 1999 to serve as the holding company and a financing
vehicle for Insight Communications Company, Inc.'s ("Insight Inc.") cable
television system joint venture with AT&T Broadband, LLC ("AT&T Broadband"). We
are owned 50% by Insight Communications Company, L.P. ("Insight LP"), which is
wholly-owned by Insight Inc., and 50% by AT&T Broadband, through its indirect
subsidiary TCI of Indiana Holdings, LLC ("TCI").
The accompanying consolidated financial statements include the accounts of our
subsidiaries that own and operate cable television systems in Illinois, Indiana,
Kentucky, Ohio and Georgia.
2. Responsibility for Interim Financial Statements
Our accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnote disclosures required by accounting principles generally
accepted in the United States for complete financial statements.
In our opinion, the consolidated financial statements reflect all adjustments
considered necessary for a fair statement of the consolidated results of
operations and financial position for the interim periods presented. All such
adjustments are of a normal recurring nature. These unaudited interim
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes to consolidated financial statements
contained in our Annual Report on Form 10-K as amended for the year ended
December 31, 2000.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The results
of operations for the three months and nine months ended September 30, 2001 are
not necessarily indicative of the results to be expected for the year ending
December 31, 2001 or any other interim period.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
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
5
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Cable System Transactions (continued)
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 September 30, 2001.
As a result of the AT&T transactions, the financial results of Insight
Communications of Central Ohio LLC ("Insight Ohio"), previously wholly-owned by
Insight LP, 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 nine months ended
September 30, 2001 and 2000 and three months ended September 30, 2000 (with 2001
results as reported), 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 Nine months ended
September 30, September 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Revenue $ 176,794 $ 167,730 $ 520,055 $ 493,715
Net loss before extraordinary item and
accrual of preferred interests (58,353) (55,719) (177,947) (170,995)
Net loss attributable to common interests (63,201) (60,418) (202,683) (184,983)
6
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Long-Lived Assets
Fixed assets consist of:
September 30, December 31,
2001 2000
---------------------------
(in thousands)
Land, buildings and improvements $ 43,905 $ 15,809
Cable television equipment 1,447,701 857,674
Furniture, fixtures and office equipment 11,619 6,844
--------------------------
1,503,225 880,327
Less accumulated depreciation and amortization (409,025) (198,837)
--------------------------
Total fixed assets $ 1,094,200 $ 681,490
==========================
Intangible assets consist of:
September 30, December 31,
2001 2000
---------------------------
(in thousands)
Franchise rights $ 2,674,151 $ 1,086,647
Goodwill 3,237 1,190
--------------------------
2,677,388 1,087,837
Less accumulated amortization (320,530) (137,538)
--------------------------
Total intangible assets $ 2,356,858 $ 950,299
==========================
6. Debt
Debt consists of:
September 30, December 31,
2001 2000
---------------------------
(in thousands)
Insight Ohio Credit Facility $ 25,000 $ --
Insight Midwest Holdings Credit Facility 1,527,000 --
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
--------------------------
2,252,000 1,354,900
Less unamortized discount on notes (6,823) (7,377)
--------------------------
Total debt $ 2,245,177 $ 1,347,523
==========================
7
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Debt (continued)
Insight Ohio Credit Facility
On January 5, 2001, in connection with the AT&T transactions, we acquired
Insight Ohio and the existing debt of Insight Ohio. Insight Ohio's credit
facility (the "Ohio Credit Facility") provides for revolving credit loans of up
to $25.0 million. The Ohio Credit Facility has a six-year maturity from the date
of borrowings, with reductions to the amount of the commitment commencing after
three years. Our obligations under the Ohio Credit Facility are secured by
substantially all the assets of Insight Ohio. The Ohio Credit Facility requires
Insight Ohio to meet certain financial and other debt covenants. Loans under the
Ohio Credit Facility bear interest, at our option, at the prime rate or at a
Eurodollar rate. In addition to the index rates, we pay an additional margin
percentage tied to Insight Ohio's ratio of total debt to adjusted annualized
operating cash flow.
Insight Midwest Holdings Credit Facility
On January 5, 2001, through a wholly-owned subsidiary ("Insight Midwest
Holdings") which holds all of our cable television systems other than the Ohio
System, we entered into a credit facility (the "Midwest Holdings Credit
Facility") to finance the AT&T transactions and to repay the outstanding
indebtedness under the Indiana and Kentucky Credit Facilities. The Midwest
Holdings Credit Facility expires in 2009 and provides for maximum borrowings of
$1.75 billion. Obligations under this credit facility are secured by a pledge of
the outstanding equity interests of Insight 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.
Insight Midwest 10 1/2% Senior Notes
In September 2001, together with Insight Capital, Inc., we completed an exchange
offer pursuant to which the 10 1/2% Senior Notes, issued in November 2000, were
exchanged for identical notes registered under the Securities Act of 1933.
8
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Debt (continued)
Debt Facility Principal Payments
As of September 30, 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 2,085,750
-------------
Total $ 2,252,000
=============
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 and No. 138, 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 loss 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 loss. For the three months
and nine months ended September 30, 2001, the decrease in the fair value was
$12.4 million and $25.0 million.
7. Comprehensive Loss
Comprehensive loss totaled $70.8 million and $215.0 million for the three and
nine months ended September 30, 2001. We record the effective portion of certain
derivatives' gains or losses as accumulated other comprehensive income or loss
in the accompanying consolidated balance sheets. There were no components of
comprehensive income or loss for the three and nine months ended September 30,
2000.
9
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Related Party Transactions
We purchase substantially all of our pay television and other programming from
affiliates of AT&T Broadband. Charges for such programming were $26.5 million
and $81.6 million for the three and nine months ended September 30, 2001 and
$14.8 million and $42.1 million for the three and nine months ended September
30, 2000. As of September 30, 2001 and December 31, 2000, $10.9 million and $9.8
million of accrued programming costs were due to affiliates of AT&T Broadband.
We believe that the programming rates charged by the affiliates of AT&T
Broadband are lower than those available from independent parties.
9. Commitments and Contingencies
Litigation
Insight Kentucky and certain prior owners of the Kentucky Systems have been
named in class actions regarding the pass-through of state and local property
tax charges to customers by the prior owners of the Kentucky Systems. The
plaintiffs seek monetary damages and the enjoinment of the collection of such
taxes. We believe that the Kentucky Systems have substantial and meritorious
defenses to these claims.
We are subject to various legal proceedings that arise in the ordinary course of
business. While it is impossible to determine with certainty the ultimate
outcome of these matters, it is our opinion that the resolution of these matters
will not have a material adverse affect on our consolidated financial condition.
10. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests. Other intangible assets will continue to be
amortized over their useful lives. We are currently reviewing the impact of
these standards and will be performing a fair value analysis at a later date in
connection with the adoption of SFAS No. 142 on January 1, 2002.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
effective for fiscal years beginning after December 15, 2001. SFAS No. 144
supersedes SFAS No. 121 and identifies the methods to be used in determining
fair value. We are currently reviewing the impact of this standard and will be
performing an analysis at a later date in connection with the adoption of SFAS
No. 144 on January 1, 2002.
10
INSIGHT MIDWEST, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Subsequent Event
In September 2001, At Home Corporation ("@Home"), the provider of high-speed
data services for all of our upgraded systems except for those located in Ohio,
filed for protection under Chapter 11 of the Bankruptcy Code. In October 2001,
for the purpose of continuing service to existing customers and to resume the
provisioning of service to new customers, we agreed to modify certain terms of
our agreement with @Home. We are continuing to monitor the bankruptcy
proceeding. We believe that our upgraded infrastructure provides us with the
capability of entering into arrangements with other high-speed data providers in
the event that this situation is not resolved to our satisfaction. We are
currently in the process of evaluating alternative solutions. We are unable to
predict the outcome of the bankruptcy proceeding, whether it would result in a
sale of @Home's assets to a third party or in liquidation, and the ultimate
affect any such outcome would have on our existing agreement and ultimately our
ability to continue to provide high-speed data services.
11
INSIGHT CAPITAL, INC.
BALANCE SHEETS
(in thousands)
September 30, December 31,
2001 2000
-------------------------------
(unaudited) (Note 2)
Assets
Cash $ 1 $ 1
Deferred financing costs, net 12,370 13,468
--------------------------
Total assets $ 12,371 $ 13,469
==========================
Liabilities and shareholders' deficit
Accrued interest $ 21,875 $ 13,625
--------------------------
Total current liabilities 21,875 13,625
Senior notes 693,178 692,623
--------------------------
Total liabilities 715,053 706,248
Shareholders' deficit:
Common stock; $.01 par value; 1,000 shares authorized, issued
and outstanding - -
Paid-in-capital 1 1
In-substance distribution of proceeds related to senior notes to be
paid by Insight Midwest (612,680) (658,430)
Accumulated deficit (90,003) (34,350)
--------------------------
Total shareholders' deficit (702,682) (692,779)
--------------------------
Total liabilities and shareholders' deficit $ 12,371 $ 13,469
==========================
See accompanying notes
12
INSIGHT CAPITAL, INC.
STATEMENTS OF OPERATIONS
(unaudited)
(in thousands)
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
Expenses:
Amortization $ (366) $ (203) $ (1,098) $ (595)
Interest expense (18,185) (4,875) (54,555) (14,625)
-------- -------- -------- --------
Net loss $(18,551) $ (5,078) $(55,653) $(15,220)
======== ======== ======== ========
See accompanying notes
13
INSIGHT CAPITAL, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine months ended September 30,
2001 2000
--------------------------------
Cash flows from operating activities:
Net loss $(55,653) $(15,220)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization of deferred financing costs 1,098 595
Interest expense paid by affiliate 54,555 14,625
----------------------------
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
14
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 3, 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. 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.
3. 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.
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 April 2000 and September 2001, the Company and Insight Midwest completed an
exchange offer pursuant to which the 9 3/4% Senior Notes and 10 1/2% Senior
Notes were exchanged for identical notes registered under the Securities Act of
1933.
15
INSIGHT CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Notes Payable (continued)
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 $1.94 billion and
$770.5 million as of September 30, 2001 and December 31, 2000. The Senior Notes
contain certain financial and other debt covenants.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Some of the information in this quarterly report contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You should
read statements that contain these words carefully because they:
. discuss our future expectations;
. contain projections of our future results of operations or of our
financial condition; or
. state other "forward-looking" information.
We believe it is important to communicate our expectations to our investors.
However, there may be events in the future that we are not able to accurately
predict or over which we have no control. The risk factors listed in our Annual
Report on Form 10-K as amended for the year ended December 31, 2000, as well as
any cautionary language in this quarterly report, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. Examples of
these risks include our history and expectation of future net losses, our
substantial debt, increasing programming costs and competition. You should be
aware that the occurrence of the events described in these risk factors and
elsewhere in this quarterly report could have a material adverse effect on our
business, operating results and financial condition.
Overview
Consistent with our strategy of pursuing value-enhancing transactions that fit
our geographic and clustering strategy, on January 5, 2001, we completed a
series of transactions with certain cable subsidiaries of AT&T Corp. that
increased by approximately 530,000 the number of customers we serve. We refer in
this report to all of the preceding transactions, including related bank
financing, as the "AT&T transactions." Specifically, we acquired:
. all of Insight LP's systems not already owned by us as well as systems
which Insight LP acquired from the AT&T cable subsidiaries (comprising
in total approximately 280,000 customers); and
. systems from the AT&T cable subsidiaries located in Illinois serving
approximately 250,000 customers.
We acquired the systems from Insight LP and the AT&T cable subsidiaries subject
to indebtedness in the amount of $685.0 million. We remain equally owned by
Insight LP and AT&T Broadband. Insight LP continues to serve as our general
partner and manage and operate our systems.
Results of Operations
Substantially all of our revenues were earned from customer fees for cable
television programming services including premium and pay-per-view services and
ancillary services, such as rental of converters and remote control devices,
installations and from selling advertising. In addition, we earn revenues from
commissions for products sold through home shopping networks.
17
We have had a history of net losses and expect to continue to report net losses
for the foreseeable future. The principal reasons for our prior and anticipated
net losses include depreciation and amortization expenses associated with our
acquisitions and capital expenditures related to construction and upgrading of
our systems, and interest costs on borrowed money. We cannot predict what
impact, if any, continued losses will have on our ability to finance our
operations in the future.
The following table is derived for the periods presented from our consolidated
financial statements that are included in this report and sets forth certain
statement of operations data for our consolidated operations:
Three Months Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
--------- --------- --------- ---------
(in thousands) (in thousands)
Revenue $ 176,794 $ 94,939 $ 519,847 $ 282,176
Operating costs and expenses:
Programming and other operating costs 65,309 32,974 192,337 99,430
Selling, general and administrative 27,342 14,475 83,022 44,968
Management fees 5,291 2,767 15,382 8,182
Depreciation and amortization 91,669 49,901 266,739 144,081
--------- --------- --------- ---------
Total operating costs and expenses 189,611 100,117 557,480 296,661
--------- --------- --------- ---------
Operating loss (12,817) (5,178) (37,633) (14,485)
EBITDA 78,800 44,745 218,203 129,691
Interest expense (45,666) (27,872) (140,310) (81,015)
Net loss before extraordinary item (58,353) (32,797) (177,795) (94,629)
Extraordinary loss on early extinguishment
of debt - - (10,315) -
Net loss (58,353) (32,797) (188,110) (94,629)
Net cash provided by operating activities 46,707 8,847 124,999 29,816
Net cash used in investing activities 83,120 56,030 290,564 143,833
Net cash provided by financing activities 52,954 32,000 187,687 81,000
EBITDA represents earnings before interest, taxes, depreciation and
amortization. Our management believes that EBITDA is commonly used in the cable
television industry to analyze and compare cable television companies on the
basis of operating performance, leverage and liquidity. However, EBITDA is not
intended to be a performance measure that should be regarded as an alternative
to, or more meaningful than, either operating income or net income as an
indicator of operating performance or cash flows as a measure of liquidity, as
determined in accordance with accounting principles generally accepted in the
United States. EBITDA, as computed by management, is not necessarily comparable
to similarly titled amounts of other companies. Refer to our financial
statements, including our statements of cash flows, which appear elsewhere in
this quarterly report.
18
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
Revenue increased $81.9 million or 86.2% to $176.8 million for the three months
ended September 30, 2001 compared to $94.9 million for the three months ended
September 30, 2000. The increase in revenue was primarily the result of the
cable television systems acquired in the AT&T transactions, including the Ohio
System. The incremental revenue generated by the cable television systems
acquired approximated $70.6 million, which represents 86.2% of the increase in
consolidated revenue. Excluding the systems acquired in the AT&T transactions,
revenue increased 11.9% largely due to the sale of new services. Revenue for
digital and high-speed data in the existing systems increased by $7.5 million, a
combined 146.5% growth rate. Revenue by service offering were as follows for the
three months ended September 30 (in thousands):
2001 Revenue % of 2000 Revenue % of
by Service Total by Service Total
Offering Revenue Offering Revenue
------------ ------- ----------- -------
Basic $ 119,341 67.5% $ 68,039 71.7%
Premium 14,178 8.0% 8,447 8.9%
Pay-Per-View 873 .5% 961 1.0%
Digital 12,085 6.8% 2,731 2.9%
Advertising Sales 11,742 6.6% 6,464 6.8%
Data Services 9,863 5.6% 2,376 2.5%
Other 8,712 5.0% 5,921 6.2%
---------- ------- --------- -------
Total $ 176,794 100.0% $ 94,939 100.0%
========== ======= ========= =======
On a pro forma basis including the systems acquired in the AT&T transactions,
RGUs (Revenue Generating Units) were approximately 1,590,000 as of September 30,
2001 compared to approximately 1,436,200 as of September 30, 2000. This
represents an annualized growth rate of 10.7%. RGUs represent the sum of basic
and digital video, high-speed data and telephone customers.
Average monthly revenue per basic customer was $46.30 for the three months ended
September 30, 2001 compared to $43.12 for the three months ended September 30,
2000 primarily reflecting the continued successful rollout of new product
offerings in the Indiana, Kentucky and Ohio markets. Average monthly revenue per
basic customer for high-speed data and interactive digital video increased to
$5.75 for the three months ended September 30, 2001 from $1.86 for the three
months ended September 30, 2000. Excluding the systems acquired in the AT&T
transactions, the number of high-speed data service customers increased to
approximately 46,000 as of September 30, 2001 from approximately 19,100 as of
September 30, 2000, while digital customers increased to approximately 144,400
as of September 30, 2001 from approximately 50,100 as of September 30, 2000.
Programming and other operating costs increased $32.3 million or 98.1% to $65.3
million for the three months ended September 30, 2001 from $33.0 million for the
three months ended September 30, 2000. The increase in programming and other
operating costs was primarily the result of the cable television systems
acquired in the AT&T transactions. The incremental expense generated by the
acquisition of these systems approximated $26.2 million, which represents 80.9%
of the increase in programming and other operating costs. Excluding these
systems, programming and other operating costs increased by approximately $6.2
million or 18.8%, primarily as a result of increased programming rates and
additional programming carried by our existing systems.
19
Selling, general and administrative expenses increased $12.9 million or 88.9% to
$27.3 million for the three months ended September 30, 2001 from $14.5 million
for the three months ended September 30, 2000. The increase in selling, general
and administrative expenses was primarily the result of the acquisition of the
cable television systems acquired in the AT&T transactions. The incremental
selling, general and administrative expenses generated by the acquisition of the
Illinois systems approximated $11.2 million, which represents 77.4% of the
increase in selling, general and administrative expenses. Excluding these
systems, selling, general and administrative costs increased by approximately
$1.7 million or 11.5%, primarily reflecting increased marketing activity and
corporate expenses associated with new service introductions.
Management fees are directly related to revenue as these fees are calculated as
approximately 3.0% of gross revenues.
Depreciation and amortization expense increased $41.8 million or 83.7% to $91.7
million for the three months ended September 30, 2001 from $49.9 million for the
three months ended September 30, 2000. The increase in depreciation and
amortization expense was primarily the result of the cable television systems
acquired in the AT&T transactions. The incremental depreciation and amortization
expense generated by these systems approximated $33.1 million, which represents
79.2% of the increase. Excluding these systems, depreciation and amortization
increased by approximately $8.7 million or 17.4%, primarily due to capital
expenditures made to rebuild the existing cable equipment during previous
quarters.
EBITDA increased 76.1% to $78.8 million for the three months ended September 30,
2001 from $44.7 million for the three months ended September 30, 2000 primarily
due to the results generated by the systems acquired in the AT&T transactions.
Interest expense increased $17.8 million or 63.8% to $45.7 million for the three
months ended September 30, 2001 from $27.9 million for the three months ended
September 30, 2000. The increase in interest expense was 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 September 30, 2001, the net loss was $58.4 million
primarily for the reasons set forth above.
20
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
2000
Revenue increased $237.7 million or 84.2% to $519.8 million for the nine months
ended September 30, 2001 from $282.2 million for the nine months ended September
30, 2000. The increase in revenue was primarily the result of the cable
television systems acquired in the AT&T transactions, including the Ohio
Systems. The incremental revenue generated by the cable television systems
acquired approximated $211.1 million, which represents 88.8% of the increase in
consolidated revenue. Excluding the systems acquired in the AT&T transactions,
revenue increased 9.4% largely due to the sale of new services. Revenue for
digital and high-speed data in the existing systems increased by $17.9 million,
a combined 128.5% growth rate. Revenue by service offering were as follows for
the nine months ended September 30 (in thousands):
2001 Revenue % of 2000 Revenue % of
by Service Total by Service Total
Offering Revenue Offering Revenue
---------- ------- ---------- -------
Basic $ 354,277 68.1% $ 202,120 71.6%
Premium 43,591 8.4% 25,941 9.2%
Pay-Per-View 3,405 .7% 3,522 1.2%
Digital 33,152 6.4% 8,090 2.9%
Advertising Sales 33,472 6.4% 19,128 6.8%
Data Services 24,810 4.8% 5,850 2.1%
Other 27,140 5.2% 17,525 6.2%
--------- ------ ---------- -------
Total $ 519,847 100.0% $ 282,176 100.0%
========= ====== ========== =======
Average monthly revenue per basic customer was $45.25 for the nine months ended
September 30, 2001 compared to $42.28 for the nine months ended September 30,
2000 primarily reflecting the continued successful rollout of new product
offerings in the Indiana, Kentucky and Ohio markets. Average monthly revenue per
basic customer for high-speed data and interactive digital video increased to
$5.04 for the nine months ended September 30, 2001 from $1.68 for the nine
months ended September 30, 2000. Excluding the systems acquired in the AT&T
transactions, the number of high-speed data service customers increased to
approximately 46,000 as of September 30, 2001 from approximately 19,100 as of
September 30, 2000, while digital customers increased to approximately 144,400
as of September 30, 2001 from approximately 50,100 as of September 30, 2000.
Programming and other operating costs increased $92.9 million or 93.4% to $192.3
million for the nine months ended September 30, 2001 from $99.4 million for the
nine months ended September 30, 2000. The increase in programming and other
operating costs was primarily the result of the cable television systems
acquired in the AT&T transactions. The incremental expense generated by the
acquisition of these systems approximated $77.2 million, which represents 83.1%
of the increase in programming and other operating costs. Excluding these
systems, programming and other operating costs increased by approximately $15.7
million or 15.8%, primarily as a result of increased programming rates and
additional programming carried by our existing systems.
21
Selling, general and administrative expenses increased $38.0 million or 84.6% to
$83.0 million for the nine months ended September 30, 2001 from $45.0 million
for the nine months ended September 30, 2000. The increase in selling, general
and administrative expenses was 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 $35.1 million, which represents 92.2% of the
increase in selling, general and administrative expenses. Excluding these
systems, selling, general and administrative costs increased by approximately
$3.0 million or 6.6%, primarily reflecting increased marketing activity and
corporate expenses associated with new service introductions.
Management fees are directly related to revenue as these fees are calculated as
approximately 3.0% of gross revenues.
Depreciation and amortization expense increased $122.7 million or 85.1% to
$266.7 million for the nine months ended September 30, 2001 from $144.1 million
for the nine months ended September 30, 2000. The increase in depreciation and
amortization expense was primarily the result of the cable television systems
acquired in the AT&T transactions. The incremental depreciation and amortization
expense generated by these systems approximated $94.2 million, which represents
76.8% of the increase. Excluding these systems, depreciation and amortization
increased by approximately $28.5 million or 19.8%, primarily due to capital
expenditures made to rebuild the existing cable equipment during previous
quarters.
EBITDA increased 68.2% to $218.2 million for the nine months ended September 30,
2001 from $129.7 million for the nine months ended September 30, 2000 primarily
due to the results generated by the systems acquired in the AT&T transactions
offset by a $10.3 million extraordinary loss recorded during the nine months
ended September 30, 2001 due to early extinguishments of debt.
Interest expense increased $59.3 million or 73.2% to $140.3 million for the nine
months ended September 30, 2001 from $81.0 million for the nine months ended
September 30, 2000. The increase in interest expense was 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 nine months ended September 30, 2001, the net loss was $188.1 million
primarily for the reasons set forth above.
Liquidity and Capital Resources
Our business requires cash for operations, debt service, capital expenditures
and acquisitions. The cable television business has substantial on-going capital
requirements for the construction, expansion and maintenance of its broadband
networks. Expenditures have primarily been used to upgrade our existing cable
network, and in the future will be used for network extensions, new services,
converters and network upgrades. Historically, we have been able to meet our
cash requirements with cash flow from operations, borrowings under our credit
facilities, issuances of private equity and accessing other public sources.
22
For the nine months ended September 30, 2001 and September 30, 2000, we spent
$228.6 million and $142.5 million in capital expenditures largely to support our
plant rebuild including interactive technology and telephone services, digital
converter and modem purchases and, to a lesser extent, network extensions. We
will continue to incur capital expenditures particularly for success-based
deployment of new services, including telephony and for the upgrade of the
Illinois cable television systems, which involve the use of fiber optics and
other capital projects associated with implementing our clustering strategy.
On January 5, 2001, in connection with the AT&T transactions, Insight Midwest
Holdings entered into the $1.75 billion Midwest Holdings Credit Facility from
which it borrowed $663.0 million to repay the Indiana and Kentucky credit
facilities and $685.0 million to finance the AT&T transactions.
On January 5, 2001, we acquired all of the common equity interests of Insight
Ohio as part of the AT&T transactions. Insight Ohio is an unrestricted
subsidiary under the indentures governing our notes, and is prohibited by the
terms of its indebtedness from making distributions to us.
Cash provided by operations for the nine months ended September 30, 2001 and
2000 was $125.0 million and $29.8 million. The increase was primarily
attributable to the AT&T Illinois Systems and timing changes in working capital
accounts.
Cash used in investing activities for the nine months ended September 30, 2001
and 2000 was $290.6 million and $143.8 million. The increase was primarily
attributable to capital expenditures and the purchase of cable television
systems, net of cash acquired.
Cash provided by financing activities for the nine months ended September 30,
2001 and 2000 was $187.7 million and $81.0 million. The increase was primarily
attributable to net borrowings from credit facilities partially offset by
repayment of debt associated with the purchase of cable television systems.
As of September 30, 2001, we had aggregate consolidated indebtedness of $2.25
billion, including $1.55 billion outstanding under senior bank credit
facilities. The senior bank credit facilities consisted of:
. $1.75 billion Midwest Holdings Credit Facility maturing in 2009, which
is being utilized to support Insight Midwest's operations and
build-out, and on which $1.53 billion was borrowed. The remaining
availability of $223.0 million will be used to support the
aforementioned capital expenditures; and
. $25.0 million Insight Ohio Credit Facility maturing in 2004, which was
fully-borrowed.
The weighted average interest rate for amounts outstanding under our senior
credit facilities as of September 30, 2001 was 5.36%. The facilities contain
covenants restricting, among other things, our ability to make capital
expenditures, acquire or dispose of assets, make investments and engage in
transactions with related parties. The facilities also require compliance with
certain financial ratios and contain customary events of default.
We have a substantial amount of debt. We believe that the Midwest Holdings
Credit Facility and our cash flow from operations are sufficient to support our
current operating plan. We intend to continue to draw upon the $223.0 million of
unused availability under the Midwest Holdings Credit Facility as discussed
above to fund any shortfall resulting from the inability of our cash from
operations to fund our capital expenditures, meet our debt service requirements
or otherwise fund our operations.
23
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests. Other intangible assets will continue to be
amortized over their useful lives. We are currently reviewing the impact of
these standards and will be performing a fair value analysis at a later date in
connection with the adoption of SFAS No. 142 on January 1, 2002.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
effective for fiscal years beginning after December 15, 2001. SFAS No. 144
supersedes SFAS No. 121 and identifies the methods to be used in determining
fair value. We are currently reviewing the impact of this standard and will be
performing an analysis at a later date in connection with the adoption of SFAS
No. 144 on January 1, 2002.
24
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Our revolving credit and term loan agreements bear interest at floating rates.
Accordingly, we are exposed to potential losses related to changes in interest
rates. We do not enter into derivatives or other financial instruments for
trading or speculative purposes. In order to manage our exposure to interest
rate risk, we enter into derivative financial instruments, typically interest
rate swaps and collars. The counterparties to our swap and collar agreements are
major financial institutions. As of September 30, 2001, our interest rate swap
and collar agreements expire in varying amounts through July 2003.
The fair market value and carrying value of our Notes was $727.0 million and
$693.2 million as of September 30, 2001. The fair market value of our credit
facility borrowings approximates its carrying value as the credit facility
borrowings bear interest at floating rates of interest. As of September 30,
2001, the estimated fair value (cost if terminated) of our interest rate swap
and collar agreements was approximately $(26.9) million, which represents the
amount required to enter into offsetting contracts with similar remaining
maturities based on quoted market prices and is reflected in our financial
statements as other non-current liabilities. Changes in the fair value of
derivative financial instruments are either recognized in income or in
stockholders' equity as a component of other comprehensive income depending on
whether the derivative financial instruments qualify for hedge accounting.
As of September 30, 2001, we had entered into interest rate swaps that
approximated $625.0 million, or 40.3%, of our borrowings under all of our credit
facilities. Accordingly, a hypothetical 100 basis point increase in interest
rates along the entire interest rate yield curve would increase our annual
interest expense by approximately $9.3 million.
25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
Date: November 13, 2001 INSIGHT MIDWEST, L.P.
By: Insight Communications Company, L.P.,
its general partner
By: Insight Communications Company, Inc.,
its general partner
By: /s/ Kim D. Kelly
---------------------
Kim D. Kelly
Executive Vice President and Chief Financial &
Operating Officer
(Principal Financial and Accounting Officer)
INSIGHT CAPITAL, INC.
By: /s/ Kim D. Kelly
----------------------
Kim D. Kelly
Executive Vice President and Chief Financial &
Operating Officer
(Principal Financial and Accounting Officer)
27