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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 March 31, 2002
Commission file numbers 333-33540
333-33540-1
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INSIGHT MIDWEST, L.P.
INSIGHT CAPITAL, INC.
(Exact name of registrants as specified in their charters)
Delaware 13-4079232
Delaware 13-4079679
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Nos.)
810 7th Avenue
New York, New York 10019
(Address of principal executive offices) (Zip code)
Registrants' telephone number, including area code: 917-286-2300
-----------------------
Indicate by check mark whether the registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports) and (2) have been subject to
such filing requirements for the past 90 days. Yes X No ___
---
Indicate the number of shares outstanding of each of the registrants'
classes of common stock, as of the latest practicable date.
Insight Midwest, L.P. - Not Applicable
Insight Capital, Inc. - Not Applicable
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the requirements of Form 10-Q and, therefore, do not include
all information and footnotes required by accounting principles generally
accepted in the United States. However, in our opinion, all adjustments,
consisting 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 for the year
ended December 31, 2001.
1
INSIGHT MIDWEST, LP
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2002 2001
---------------------- ----------------------
(unaudited)
Assets
Cash and cash equivalents $ 118,339 $ 12,146
Trade accounts receivable, net of allowance for doubtful accounts of $2,633 and
$2,818 as of March 31, 2002 and December 31, 2001 17,618 22,918
Launch funds receivable 9,443 12,980
Prepaid expenses and other assets 13,049 20,647
---------------------- ----------------------
Total current assets 158,449 68,691
Fixed assets, net 1,135,261 1,133,627
Goodwill 15,198 15,198
Franchise costs 2,284,992 2,278465
Other intangible assets, net of accumulated amortization of $2,829 and $2,260
as of March 31, 2002 and December 31, 2001 40,654 41,223
Deferred financing costs, net of accumulated amortization of $4,578 and $3,885
as of March 31, 2002 and December 31, 2001 23,183 23,876
---------------------- ----------------------
Total assets $ 3,657,737 $ 3,561,080
====================== ======================
Liabilities and partners' capital
Accounts payable $ 44,879 $ 66,712
Accrued expenses and other liabilities 19,093 21,225
Accrued property taxes 14,986 11,030
Accrued programming costs 27,885 24,287
Deferred revenue 8,212 8,673
Interest payable 38,698 21,940
Debt - current portion 1,250 -
Preferred interest distribution payable 1,750 5,250
Due to affiliates 13,134 22,040
---------------------- ----------------------
Total current liabilities 169,887 181,157
Deferred revenue 9,330 12,262
Debt 2,427,297 2,298,362
Other non-current liabilities 57,265 62,964
---------------------- ----------------------
Total liabilities 2,663,779 2,554,745
Commitments and contingencies
Preferred interests 187,168 185,713
Partners' capital:
Partners' accumulated capital 823,517 843,377
Accumulated other comprehensive loss (16,727) (22,755)
---------------------- ----------------------
Total partners' capital 806,790 820,622
---------------------- ----------------------
Total liabilities and partners' capital $ 3,657,737 $ 3,561,080
====================== ======================
See accompanying notes
2
INSIGHT MIDWEST, LP
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands)
Three months ended March 31,
2002 2001
---------------------- ----------------------
Revenue $ 191,119 $ 173,839
Operating costs and expenses:
Programming and other operating costs 68,548 61,992
Selling, general and administrative 36,106 32,525
Management fees 5,420 4,939
Non-recurring high-speed data service charges 4,116 -
Depreciation and amortization 47,301 85,770
---------------------- ----------------------
Total operating costs and expenses 161,491 185,226
---------------------- ----------------------
Operating income (loss) 29,628 (11,387)
Other income (expense):
Interest expense (44,586) (47,755)
Interest income 50 418
Other 3 (230)
---------------------- ----------------------
Total other expense, net (44,533) (47,567)
Net loss before extraordinary item (14,905) (58,954)
Extraordinary loss from early extinguishment of debt - (10,315)
---------------------- ----------------------
Net loss (14,905) (69,269)
Accrual of preferred interests (4,955) (4,766)
---------------------- ----------------------
Net loss attributable to common interests $ (19,860) $ (74,035)
====================== ======================
See accompanying notes
3
INSIGHT MIDWEST, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three months ended March 31,
2002 2001
---------------------- ----------------------
Operating activities:
Net loss $ (14,905) $ (69,269)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 47,301 85,770
Extraordinary loss from early extinguishment of debt - 10,315
Provision for losses on trade accounts receivable 2,594 2,449
Amortization of note discount 185 185
Changes in operating assets and liabilities, net of the
effect of acquisitions:
Trade accounts receivable 2,815 (1,995)
Launch fund receivable 3,537 4,969
Prepaid expenses and other assets 7,627 4,350
Accounts payable (21,833) (10,723)
Accrued expenses and other liabilities 10,512 48,726
---------------------- ----------------------
Net cash provided by operating activities 37,833 74,777
---------------------- ----------------------
Investing activities:
Purchase of fixed assets (45,443) (62,223)
Purchase of intangible assets (40) -
Purchase of cable television systems, net of cash acquired (8,822) (61,982)
---------------------- ----------------------
Net cash used in investing activities (54,305) (124,205)
---------------------- ----------------------
Financing activities:
Distributions of preferred interests (7,000) (7,000)
Proceeds from borrowings under credit facilities 30,000 1,379,000
Repayment of credit facilities - (654,900)
Borrowings from parent under inter-company loan 100,000 -
Repayment of debt associated with cable system transactions - (659,165)
Principal payments on capital lease and other non-current
liabilities (335) -
Debt issuance costs - (11,202)
---------------------- ----------------------
Net cash provided by financing activities 122,665 46,733
---------------------- ----------------------
Net increase (decrease) in cash and cash equivalents 106,193 (2,695)
Cash and cash equivalents, beginning of period 12,146 5,735
---------------------- ----------------------
Cash and cash equivalents, end of period $ 118,339 $ 3,040
====================== ======================
See accompanying notes
4
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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").
Through our wholly owned subsidiaries Insight Communications of Central Ohio,
LLC ("Insight Ohio") and Insight Midwest Holdings, LLC ("Insight Midwest
Holdings"), which wholly owns Insight Communications Midwest, LLC ("Insight
Communications Midwest") and Insight Communications of Kentucky, L.P. ("Insight
Kentucky"), we own and operate cable television systems in Indiana, Kentucky,
Ohio, Illinois and Georgia which passed approximately 2.2 million homes and
served approximately 1.3 million customers as of March 31, 2002. Insight LP is
our general partner and effectively controls all our operating and financial
decisions.
The accompanying consolidated financial statements include the accounts of
Insight Ohio and Insight Midwest Holdings.
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 Sates 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, except as described in Note 8.
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
for the year ended December 31, 2001.
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, 2002 are not necessarily
indicative of the results to be expected for the year ending December 31, 2002
or any other interim period.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
5
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACCOUNTING FOR FRANCHISE FEES
We have historically recorded reimbursements of franchise fees from customers as
an offset to franchise fee expense included as a component of selling, general
and administrative expense. In November 2001, the Financial Accounting Standards
Board concluded that reimbursements received from a customer should be reflected
as revenues and not as a reduction of expenses. On March 12, 2002, the
Securities Exchange Commission staff concluded that as a result of this
guidance, it expected all cable television companies to present franchise fees
in their statements of operations. Consequently, beginning January 1, 2002, we
have presented reimbursements of franchise fees as revenues and franchise fee
payments as expenses in the accompanying consolidated statements of operations.
Additionally, we have adjusted the prior period amounts to reflect such
presentation. The effect on the prior period statement of operations was to
increase both revenue and selling, general and administrative costs by $5.7
million.
4. LONG-LIVED ASSETS
Fixed assets consisted of:
March 31, December 31,
2002 2001
--------------------------------------------
(in thousands)
Land, buildings and improvements $ 31,722 $ 31,233
Cable system equipment 1,602,316 1,555,244
Furniture, fixtures and office equipment 14,007 13,893
--------------------------------------------
1,648,045 1,600,370
Less accumulated depreciation and amortization (512,784) (466,743)
--------------------------------------------
Total fixed assets, net $ 1,135,261 $ 1,133,627
============================================
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which became effective for us beginning January
1, 2002. SFAS No. 144 supersedes FASB Statement No. 121, "Accounting for the
Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," and the accounting and reporting provisions relating to the
disposal of a segment of a business of Accounting Principles Board Opinion No.
30. The adoption of SFAS No. 144 had no impact on our consolidated financial
position or results of operations.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which became effective for us beginning January 1, 2002 and changes the
accounting for goodwill from an amortization method to an impairment only
approach. In addition, the standard includes provisions, upon adoption, for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles.
6
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-LIVED ASSETS (CONTINUED)
SFAS No. 142 requires that goodwill be tested annually for impairment using a
two-step process. The first step is to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
The second step of the goodwill impairment test measures the amount of the
impairment loss, if any, measured as of the beginning of the year of adoption,
and must be completed by the end of our fiscal year. Based on our analysis,
there was no impairment of goodwill upon the adoption of SFAS No. 142 on January
1, 2002.
Applying the effects of the adoption of SFAS No. 142 to the three-month period
ended March 31, 2001, would have resulted in loss before extraordinary items of
$11.2 million and net loss of $21.5 million. The reconciliation of reported net
loss to pro forma net loss as adjusted for the effects of SFAS No. 142 for the
three months ended March 31, 2001 is as follows (in thousands):
Three Months Ended
March 31, 2001
------------------------------
Net loss as reported $ (69,269)
Less amortization for:
Franchise costs 42,111
Goodwill 5,664
------------------------------
Pro forma net loss $ (21,494)
==============================
We recorded amortization expense of $1.3 million and $48.1 million for the three
months ended March 31, 2002 and 2001. We estimate aggregate amortization expense
to be approximately $5.2 million for each of the five succeeding fiscal years.
5. DEBT
Debt consisted of:
March 31, December 31,
2002 2001
--------------------------------------------
(in thousands)
Insight Ohio Credit Facility $ 25,000 $ 25,000
Note Payable to Insight LP 100,000 -
Insight Midwest Holdings Credit Facility 1,610,000 1,580,000
Insight Midwest 9 3/4% Senior Notes 200,000 200,000
Insight Midwest 10 1/2% Senior Notes 500,000 500,000
--------------------------------------------
2,435,000 2,305,000
Less unamortized discount on notes (6,453) (6,638)
--------------------------------------------
Total debt $ 2,428,547 $ 2,298,362
============================================
7
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT (CONTINUED)
Insight Midwest Holdings Credit Facility
Insight Midwest Holdings is party to a $1.75 billion credit facility. On March
25, 2002, we formally requested approval from the lenders of amendments to the
leverage ratio covenant to allow Insight Midwest Holdings more flexibility and
to increase the aggregate amount that can be distributed to us for the purpose
of making investments in Insight Ohio. In addition, on March 28, 2002, we
borrowed $100.0 million from Insight LP to address our future funding needs,
$97.0 million of which was contributed to Insight Midwest Holdings in April 2002
for use in paying down the credit facility balance and $3.0 million of which was
contributed to Insight Ohio on March 28, 2002. Pursuant to the credit facility
amendments, Insight Midwest Holdings will be permitted to make distributions to
us for the purpose of repaying this loan, subject to the satisfaction of certain
financial debt covenants. This loan bears annual interest of 9%, has a scheduled
maturity date of January 31, 2011 and permits prepayments. On April 18, 2002,
the lenders approved these amendments to the credit facility.
Debt Principal Payments
As of March 31, 2002, principal payments required on our debt were as follows
(in thousands):
2002 $ -
2003 5,000
2004 80,000
2005 81,250
2006 106,750
Thereafter 2,162,000
-------------------
Total $ 2,435,000
===================
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 March 31, 2002 and December 31, 2001, we had entered into various interest
rate swap and collar agreements effectively fixing interest rates between 4.7%
and 5.9%, plus the applicable margin, on $435.0 million and $500.0 million
notional value of debt. The agreements outstanding as of March 31, 2002 expire
July 2003. As of March 31, 2002, we had $2.3 million of accrued interest related
to these agreements.
8
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMPREHENSIVE LOSS
Comprehensive loss totaled $8.9 million and $80.9 million for the three months
ended March 31, 2002 and 2001. Comprehensive loss for the three months ended
March 31, 2001 included a $1.9 million transition adjustment loss representing
the cumulative effect of adopting Statement of Financial Accounting Standards
No. 133. We record the effective portion of interest rate swaps' gains or losses
as accumulated other comprehensive income or loss in the accompanying
consolidated balance sheets.
7. RELATED PARTY TRANSACTIONS
Programming
We purchase substantially all of our pay television and other programming from
affiliates of AT&T Broadband. Charges for such programming were $31.0 million
and $30.2 million for the three months ended March 31, 2002 and 2001. As of
March 31, 2002 and December 31, 2001, $20.4 million and $10.3 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.
Telephony Agreements
In July 2000, to facilitate delivery of telephone services, we entered into a
ten-year agreement with AT&T Broadband that allows us to deliver to our
customers local telephone service under the AT&T Digital Phone brand. Under the
terms of the agreement, we lease for a fee certain capacity on our network to
AT&T Broadband. We provide certain services and support for which we receive
additional payments. We began providing telephony services to a limited number
of our customers in 2001. For the three months ended March 31, 2002 and 2001,
revenue related to telephony services was $242,000 and $2,000. The capital
required to deploy telephone services over our networks is shared, with AT&T
Broadband responsible for switching and transport facilities. AT&T also pays us
for installations, marketing and billing support that amounted to $1.2 million
for the three months ended March 31, 2002.
Advertising Services
In October 1999, to facilitate the administration of our advertising services in
our Kentucky Systems, we entered into an agreement expiring on January 1, 2004
with TCI Media Services LLC ("TCI Media Services"), a subsidiary of AT&T Corp.,
which provides for TCI Media Services to perform all of our Kentucky advertising
sale and related administrative services. For the three months ended March 31,
2002 and 2001, we received advertising revenues from TCI Media Services derived
from our Kentucky Systems of $3.3 million and $2.3 million. As of March 31, 2002
and December 31, 2001, we had $6.9 million recorded as a receivable due from TCI
Media Services included in prepaid and other current assets. We pay TCI Media
Services a fixed and variable fee based on advertising sales cash flow growth or
providing this service. As of March 31, 2002 and December 31, 2001, we had
$249,000 and $666,000 recorded as payables to TCI Media Services related to such
services.
9
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. AT HOME CORPORATION
Non-recurring high-speed data service charges were incurred through February 28,
2002 as a result of payments made to At Home Corporation ("@Home"), the former
provider of high-speed data services for all of our systems, except for those
located in Ohio. On September 28, 2001, @Home filed for protection under Chapter
11 of the Bankruptcy Code. For the purpose of continuing service to existing
customers and to resume the provisioning of service to new customers, we entered
into an interim service arrangement that required that we pay $10.0 million to
@Home to extend service for three months through February 28, 2002. As a result
of this arrangement we incurred approximately $4.1 million in excess of our
original agreed-to cost for such services rendered during the three months ended
March 31, 2002.
9. COMMITMENTS AND CONTINGENCIES
Programming Contracts
We enter into long-term contracts with third parties who provide us with
programming for distribution over our cable television systems. These
programming contracts are a significant part of our business and represent a
substantial portion of our operating costs. Since future fees under such
contracts are based on numerous variables, including number and type of
customers, we have not recorded any liabilities with respect to such contracts.
Litigation
The prior owners of the Kentucky systems have named insight Kentucky and certain
prior owners of the Kentucky Systems in class actions regarding the pass-through
of state and local property tax charges to customers. The plaintiffs seek
monetary damages and the enjoinment of the collection of such taxes. We have
reached an agreement in principle with the plaintiffs to settle these lawsuits.
Such settlement is awaiting the execution of definitive documentation and a
determination of fairness by the respective courts where these matters were
filed.
We have filed a state court action against the City of Louisville for its grant
of more favorable franchises to Knology, Inc. ("Knology") and TotaLink of
Kentucky, LLC. Our commencement of this action automatically suspended these
franchises pending a court determination. In November 2000, Knology filed a
federal court action against us seeking unspecified monetary damages and other
relief for alleged violations of federal laws arising out of our having filed,
pursuant to the provisions of our own franchise from the City, the state court
action. In March 2001, the federal court preliminarily set aside the state court
suspension of Knology's franchise. We believe we have substantial and
meritorious defenses to the asserted federal claims and intend to defend it
vigorously. Consequently, we have not recorded any loss reserves in the
accompanying financial statements.
We are subject to various legal proceedings that arise in the ordinary course of
business. While it is impossible to determine with certainty the ultimate
outcome of these matters, it is our opinion that the resolution of these matters
will not have a material adverse affect on our consolidated financial condition.
10
INSIGHT CAPITAL, INC.
BALANCE SHEETS
(in thousands)
March 31, December 31,
2002 2001
----------------------- -----------------------
(unaudited)
Assets
Cash $ 1 $ 1
Deferred financing costs, net 11,638 12,004
----------------------- -----------------------
Total assets $ 11,639 $ 12,005
======================= =======================
Liabilities and shareholders' deficit
Accrued interest $ 31,625 $ 13,625
----------------------- -----------------------
Total current liabilities 31,625 13,625
Senior notes, to be paid by Insight Midwest, LP 693,547 693,362
----------------------- -----------------------
Total liabilities 725,172 706,987
Shareholders' deficit:
Common stock; $.01 par value; 1,000 shares authorized, issued and
outstanding - -
Paid-in-capital 1 1
In-substance allocation of proceeds related to senior notes to be
paid by Insight Midwest (586,430) (586,430)
Accumulated deficit (127,104) (108,553)
----------------------- -----------------------
Total shareholders' deficit (713,533) (694,982)
----------------------- -----------------------
Total liabilities and shareholders' deficit $ 11,639 $ 12,005
======================= =======================
See accompanying notes
11
INSIGHT CAPITAL, INC.
STATEMENTS OF OPERATIONS
(unaudited)
(in thousands)
Three months ended March 31,
2002 2001
-----------------------------------------------------
Expenses:
Amortization $ (366) $ (366)
Interest expense (18,185) (18,185)
-----------------------------------------------------
Net loss $ (18,551) $ (18,551)
=====================================================
See accompanying notes
12
INSIGHT CAPITAL, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three months ended March 31,
2002 2001
----------------------------------------------------
Cash flows from operating activities:
Net loss $ (18,551) $ (18,551)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Amortization 366 366
Interest expense assumed by affiliate 18,185 18,185
----------------------------------------------------
Net cash provided by operating activities - -
----------------------------------------------------
Net change in cash - -
Cash, beginning of period 1 1
----------------------------------------------------
Cash, end of period $ 1 $ 1
====================================================
See accompanying notes
13
INSIGHT CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Insight Capital, Inc. (the "Company"), a Delaware corporation, was formed on
September 23, 1999, for the sole purpose of being a co-issuer with Insight
Midwest, L.P. ("Insight Midwest") of senior notes 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.
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 for the year
ended December 31, 2001.
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. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the 9 3/4% Senior Notes as of March 31, 2002 and December 31,
2001 was $209.3 million and $210.0 million, respectively. The fair value of the
10 1/2% Senior Notes as of March 31, 2002 and December 31, 2001 was $541.9
million and $540.0 million, respectively.
14
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 for the year ended December 31, 2001, 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.
RESULTS OF OPERATIONS
A substantial portion of our revenues are earned from customer fees for cable
television programming services including premium, digital 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 providing high-speed data and telephone services as well as from
commissions for products sold through home shopping networks.
We have historically recorded reimbursements of franchise fees from customers as
an offset to franchise fee expense included as a component of selling, general
and administrative expense. In November 2001, the Financial Accounting Standards
Board concluded that reimbursements received from a customer should be reflected
as revenues and not as a reduction of expenses. On March 12, 2002, the
Securities Exchange Commission staff concluded that as a result of this
guidance, it expected all cable television companies to present franchise fees
in their statements of operations. Consequently, beginning January 1, 2002, we
have presented reimbursements of franchise fees as revenues and franchise fee
payments as expenses in the accompanying consolidated statements of operations.
Additionally, we have adjusted the prior period amounts to reflect such
presentation. The effect on the prior period statement of operations was to
increase both revenue and selling, general and administrative costs by $5.7
million.
15
One of the principal reasons for our net loss through December 31, 2001 include
depreciation and amortization associated with our acquisitions and capital
expenditures related to construction and upgrading of our systems, and interest
costs on borrowed money. Beginning January 1, 2002, we no longer record
amortization expense associated with goodwill and indefinite lived intangible
assets; however, we expect to continue to report net losses for the foreseeable
future. We cannot predict what impact, if any, continued losses will have on our
ability to finance our operations in the future.
The following table is derived for the periods presented from our consolidated
financial statements that are included in this report and sets forth certain
statement of operations data for our consolidated operations:
Three Months Ended March 31,
2002 2001
--------------------- ---------------------
(in thousands)
Revenue $ 191,119 $ 173,839
Operating costs and expenses:
Programming and other operating costs 68,548 61,992
Selling, general and administrative 36,106 32,525
Management fees 5,420 4,939
Non-recurring high-speed data service charges 4,116 -
Depreciation and amortization 47,301 85,770
--------------------- ---------------------
Total operating costs and expenses 161,491 185,226
--------------------- ---------------------
Operating income (loss) 29,628 (11,387)
EBITDA 76,932 74,153
Interest expense 44,586 47,755
Net loss (14,905) (69,269)
Net cash provided by operating activities 37,833 74,777
Net cash used in investing activities 54,305 124,205
Net cash provided by financing activities 122,665 46,733
EBITDA represents earnings before interest, taxes, depreciation and amortization
and extraordinary items. 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 accounting principles generally accepted in the
United States. Refer to our consolidated financial statements, including our
consolidated statements of cash flows, which appear elsewhere in this report.
16
The following calculations of EBITDA are not necessarily comparable to similarly
titled amounts of other companies:
Three Months Ended March 31,
2002 2001
--------------------- ---------------------
(in thousands)
Net loss $ (14,905) $ (69,269)
Adjustments:
Interest expense 44,586 47,755
Interest income (50) (418)
Depreciation and amortization 47,301 85,770
Extraordinary loss from early extinguishment of debt,
net of tax - 10,315
--------------------- ---------------------
EBITDA $ 76,932 $ 74,153
===================== =====================
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
Revenue increased $17.3 million or 10.0% to $191.1 million for the three months
ended March 31, 2002 from $173.8 million for the three months ended March 31,
2001. The increase in revenue was primarily the result of gains in our
high-speed data and digital services with revenue increases over the prior year
quarter of 79.9% and 62.1%. In addition, our basic cable service revenue
increased $5.5 million or 4.7% primarily due to basic cable rate increases that
took effect in the second quarter of 2001 and 1.0% internal basic customer
growth during the quarter.
17
Revenue by service offering were as follows for the three months ended March 31
(in thousands):
2002 2001
Revenue by % of Total Revenue by % of Total
Service Offering Revenue Service Offering Revenue
------------------- -------------- ------------------ -------------
Basic $ 122,306 64.0% $ 116,788 67.2%
Premium 14,838 7.8% 15,005 8.6%
Pay-per-view 539 .3% 1,286 .7%
Digital 15,431 8.1% 9,520 5.5%
Advertising sales 11,531 6.0% 9,599 5.5%
Data services 11,652 6.1% 6,476 3.7%
Franchise fees 6,389 3.3% 5,689 3.3%
Other 8,433 4.4% 9,476 5.5%
------------------ -------------- ----------------- -------------
Total $ 191,119 100.0% $ 173,839 100.0%
================== ============== ================= =============
RGUs (Revenue Generating Units) were approximately 1,689,900 as of March 31,
2002 compared to approximately 1,540,700 as of March 31, 2001 after giving pro
forma effect to acquisitions occurring subsequent to March 31, 2001. This
represents an annualized growth rate of 9.7%. RGUs represent the sum of basic
and digital video, high-speed data and telephone customers.
Average monthly revenue per basic customer was $49.18 for the three months ended
March 31, 2002 compared to $45.29 for the three months ended March 31, 2001
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 $6.97
for the three months ended March 31, 2002 from $4.17 for the three months ended
March 31, 2001.
Programming and other operating costs increased $6.6 million or 10.6% to $68.5
million for the three months ended March 31, 2002 from $62.0 million for the
three months ended March 31, 2001. The increase in programming and other
operating costs was primarily the result of increased programming rates for our
classic and digital service as well as for additional programming added in
rebuilt systems.
Selling, general and administrative expenses increased $3.6 million or 11.0% to
$36.1 million for the three months ended March 31, 2002 from $32.5 million for
the three months ended March 31, 2001. The increase in selling, general and
administrative expense was primarily the result of increased employee
compensation and other related expenses offset by a decrease in marketing.
Non-recurring high-speed data service charges were incurred through February 28,
2002 as a result of payments made to At Home Corporation ("@Home"), the former
provider of high-speed data services for all of our systems, except for those
located in Ohio. On September 28, 2001, @Home filed for protection under Chapter
11 of the Bankruptcy Code. For the purpose of continuing service to existing
customers and to resume the provisioning of service to new customers, we entered
into an interim service arrangement that required us to pay $10.0 million to
@Home to extend service for three months
18
through February 28, 2002. As a result of this arrangement we incurred
approximately $4.1 million in excess of our original agreed-to cost for such
services rendered during the three months ended March 31, 2002.
Management fees are directly related to revenue as these fees are calculated as
approximately 3.0% of gross revenues.
Depreciation and amortization expense decreased $38.5 million or 44.9% to $47.3
million for the three months ended March 31, 2002 from $85.8 million for the
three months ended March 31, 2001. The decrease in depreciation and amortization
expense was primarily the result of ceasing the amortization of goodwill and
indefinite lived intangible assets associated with the adoption of SFAS No. 142,
effective January 1, 2002, partially offset by capital expenditures made to
rebuild the existing cable equipment.
EBITDA increased $2.8 million or 3.7% to $76.9 million for the three months
ended March 31, 2002 from $74.2 million for the three months ended March 31,
2001 primarily due to increased digital and high-speed data revenue partially
offset by increases in programming and other operating costs and selling,
general and administrative costs.
Interest expense decreased $3.2 million or 6.6% to $44.6 million for the three
months ended March 31, 2002 from $47.8 million for the three months ended March
31, 2001. The decrease is the result of lower average interest rates partially
offset by higher average debt balances.
For the three months ended March 31, 2002, the net loss was $14.9 million
primarily for the reasons set forth above.
19
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 issuances of private and public debt.
Cash provided by operations for the three months ended March 31, 2002 and 2001
was $37.8 million and $74.8 million. The decrease was primarily attributable to
the timing of cash receipts and payments related to working capital accounts.
Cash used in investing activities for the three months ended March 31, 2002 and
2001 was $54.3 million and $124.2 million. The decrease was primarily
attributable to no significant acquisitions of cable television systems and
reduced capital expenditures in 2002.
Cash provided by financing activities for the three months ended March 31, 2002
and 2001 was $122.7 million and $46.7 million. The increase was primarily
attributable to an inter-company loan of $100.0 million from Insight Inc.
occurring on March 28, 2002.
For the three months ended March 31, 2002 and 2001, we spent $45.4 million and
$62.2 million in capital expenditures largely to support our plant rebuild in
Illinois which is estimated to be substantially completed by year-end, telephone
deployment and success-based capital including interactive digital expansion.
On April 18, 2002, we entered into an amendment to the Insight Midwest Holdings
credit facility which delayed by six months the scheduled reduction to the
leverage ratio covenant to allow Insight Midwest Holdings more financing
flexibility, and increased the aggregate amount that can be distributed to us
for the purpose of making investments in Insight Ohio. Previously, on March 28,
2002, Insight LP loaned $100.0 million to us to address our future funding
needs, $97.0 million of which was contributed to Insight Midwest Holdings on
April 18, 2002 for use in paying down the credit facility balance and $3.0
million of which was contributed to Insight Ohio on March 28, 2002. Pursuant to
the credit facility amendments, Insight Midwest Holdings will be permitted to
make distributions to us for the purpose of repaying this loan, subject to the
satisfaction of certain financial debt covenants. This loan bears annual
interest of 9%, has a scheduled maturity date of January 31, 2011 and permits
prepayments.
We have a substantial amount of debt. Our high level of debt could have
important consequences for you. Our principal source of cash we need to pay our
obligations and to repay the principal amount of our debt obligations is the
cash that our subsidiaries generate from their operations and their borrowings.
We believe that the Midwest Holdings Credit Facility, cash on-hand and our cash
flow from operations are sufficient to support our current operating plan. To
the extent our financial covenants permit, we intend to continue to draw upon
the $140.0 million of unused availability under the Midwest Holdings Credit
Facility 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.
20
The following table summarizes our contractual obligations, excluding
commitments for programming, as of March 31, 2002, including periods in which
the related payments are due (in thousands):
2003 2005
2002 to 2004 to 2006 Thereafter Total
----------------------------------------------------------------------------------------
Long-term debt $ - $ 85,000 $ 188,000 $ 2,162,000 $ 2,435,000
Capital leases 554 1,476 1,576 3,996 7,602
Operating leases 1,990 4,001 1,733 1,361 9,085
Preferred interests 7,000 35,193 175,387 66,659 284,239
-----------------------------------------------------------------------------------------
Total cash obligations $ 9,544 $ 125,670 $ 366,696 $ 2,234,016 $ 2,735,926
=========================================================================================
21
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 counter-parties to our swap and collar agreements
are major financial institutions. As of March 31, 2002, our interest rate swap
and collar agreements expire in July 2003.
The fair market value and carrying value of our 9 3/4% senior notes and 10 1/2%
senior notes was $751.1 million and $693.5 million as of March 31, 2002. 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 March 31, 2002, the estimated fair value (cost if terminated) of
our interest rate swap and collar agreements was approximately $(16.7) million,
which represents the amount required to enter into offsetting contracts with
similar remaining maturities based on quoted market prices and is reflected in
our financial statements as other non-current liabilities. Changes in the fair
value of derivative financial instruments are either recognized in income or in
partners' capital as a component of other comprehensive loss depending on
whether the derivative financial instruments qualify for hedge accounting.
As of March 31, 2002, we had entered into interest rate swaps that approximated
$435.0 million, or 26.6%, of our borrowings under all of our credit facilities.
A hypothetical 100 basis point increase in interest rates along the entire
interest rate yield curve would increase our annual interest expense by
approximately $12.0 million.
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Amendment No. 1 to Credit Agreement and Amendment No. 1 to
Guarantee Agreement, dated as of April 18, 2002, among Insight
Midwest Holdings, LLC, several banks and financial institutions
or entities, and The Bank of New York, as Administrative Agent.
(b) Reports on Form 8-K:
None
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2002 INSIGHT MIDWEST, LP
By: /s/ Dinesh C. Jain
-----------------------------------
Dinesh C. Jain
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
24