May 18, 2005
Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Mail Stop 04-07
Washington, D.C. 20549
Attn: Larry Spirgel
Assistant Director
RE: INSIGHT MIDWEST, L.P.
INSIGHT CAPITAL, INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004
FILED MARCH 31, 2005
FILE NO. 333-33540
FILE NO. 333-33540-1
Ladies and Gentlemen:
This letter is in response to the Staff's letter dated April 22, 2005 addressed
to John Abbot, Senior Vice President and Chief Financial Officer of Insight
Midwest, L.P. and Insight Capital, Inc. The following responses are keyed to the
numbered comments contained in the Staff's letter. Each of the responses is
preceded by the full text of the Staff's comment.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
USE OF OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION AND FREE CASH FLOW,
PAGE 33
WITH REGARD TO YOUR DISCUSSION OF 'OPERATING INCOME BEFORE DEPRECIATION AND
AMORTIZATION' AS ONE OF THE MEASURES YOU USE TO EVALUATE THE PERFORMANCE OF
YOUR BUSINESSES WE HAVE THE FOLLOWING COMMENTS.
1. SINCE YOU ARE USING A NON-GAAP MEASURE AS A MEASURE OF OPERATING
PERFORMANCE, IT IS GENERALLY NOT APPROPRIATE TO EXCLUDE RECURRING CHARGES
SUCH AS DEPRECIATION AND AMORTIZATION AND INTEREST EXPENSE. IF YOU PRESENT
A NON-GAAP MEASURE THAT EXCLUDES THESE RECURRING CHARGES, YOU MUST PROVIDE
DETAILED DISCLOSURES OF WHY MANAGEMENT BELIEVES A PERFORMANCE MEASURE THAT
EXCLUDES THESE RECURRING CHARGES IS USEFUL. EXPAND YOUR CURRENT DISCLOSURE
TO INCLUDE A DISCUSSION OF:
o THE ECONOMIC SUBSTANCE BEHIND MANAGEMENT'S DECISION TO USE SUCH A
MEASURE;
o THE MANNER IN WHICH MANAGEMENT COMPENSATES FOR THESE LIMITATIONS WHEN
USING THE NON-GAAP FINANCIAL MEASURE.
FOR ADDITIONAL GUIDANCE REFER TO ITEM 10 OF REGULATION S-K AND QUESTION 8
OF OUR FREQUENTLY ASKED QUESTIONS DOCUMENT ON NON-GAAP MEASURES WHICH IS
AVAILABLE ON OUR WEBSITE AT:
HTTP://WWW.SEC.GOV/DIVISIONS/CORPFIN/FAQS/NONGAAPFAQ.HTM.
RESPONSE:
We advise the Staff that the disclosure relating to Operating Income before
Depreciation and Amortization was expanded under Management's Discussion
and Analysis of Financial Condition and Results of Operations in our
quarterly report on Form 10-Q for the quarterly period ended March 31,
2005. Please refer to page 17 in this Form 10-Q, specifically the first 2
paragraphs under the caption "Use of Operating Income before Depreciation
and Amortization and Free Cash Flow".
2. IN ADDITION, AVOID DISCLOSING AMBIGUOUS CONCLUSIONS THAT THE MEASURE IS
USEFUL TO INVESTORS FOR COMPARING YOUR OPERATING PERFORMANCE WITH OTHER
COMPANIES IN THE INDUSTRY, EVEN THOUGH THE MEASURE MAY NOT BE DIRECTLY
COMPARABLE TO SIMILAR MEASURES USED BY OTHER COMPANIES. PLEASE DELETE OR
REVISE THE DISCLOSURE.
RESPONSE:
We advise the Staff that the disclosure relating to the comparison of
operating performance with other companies in the industry was revised
under Management's Discussion and Analysis of Financial Condition and
Results of Operations in our quarterly report on Form 10-Q for the
quarterly period ended March 31, 2005. Please refer to page 17 in this Form
10-Q, specifically the first paragraph under the caption "Use of Operating
Income before Depreciation and Amortization and Free Cash Flow".
3. AS SHOWN IN THE TABLE THE CAPTION 'OPERATING CASH FLOW' IS SIMILAR TO A
GAAP TITLE AND THEREFORE YOU ARE PROHIBITED FROM USING THIS TITLE. PLEASE
REVISE ACCORDINGLY.
RESPONSE:
We will not use the title "Operating Cash Flow" in any future reports filed
pursuant to the Exchange Act.
CRITICAL ACCOUNTING POLICIES
GOODWILL AND OTHER IDENTIFIABLE INTANGIBLES, PAGE 43
4. IN LIGHT OF YOUR DISCLOSURE ON PAGE F-10 WITH REGARD TO PERFORMING THE
IMPAIRMENT TEST BASED ON GUIDANCE FROM SFAS 142 AND EITF ISSUES 02-7 AND
D-108, YOU SHOULD REVISE YOUR DISCLOSURE TO INCLUDE A DISCUSSION OF THE
ESTIMATES AND ASSUMPTIONS USED TO DETERMINE THE FAIR VALUE OF THE THREE
ASSET GROUPS IDENTIFIED ON YOUR ANNUAL IMPAIRMENT EVALUATION PERFORMED ON
OCTOBER 1, 2004. ALSO PROVIDE A SENSITIVITY ANALYSIS DEPICTING REASONABLY
LIKELY SCENARIOS HAD OTHER VARIABLES BEEN CHOSEN IN THE DETERMINATION OF
YOUR ESTIMATES. REFER TO SEC INTERPRETIVE RELEASE NO. 33-8350 COMMISSION
GUIDANCE REGARDING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
RESPONSE:
In future reports filed pursuant to the Exchange Act, we will include a
discussion of estimates and assumptions used to determine the fair value of
the three asset groups identified in our annual impairment evaluation to be
performed on October 1 of each year. In addition, we will include in such
reports a sensitivity analysis indicating the impact of varying assumptions
on our impairment evaluation.
5. WE UNDERSTAND THAT YOUR BUSINESS OPERATIONS ARE COMPRISED OF A NETWORK OF
REGIONAL SYSTEMS LOCATED IN INDIANA, KENTUCKY, ILLINOIS AND OHIO AND
MANAGED ON A GEOGRAPHIC CLUSTERING APPROACH. IN THIS REGARD, TELL US YOUR
BASIS FOR CONCLUDING THAT YOU HAVE THREE ASSET GROUPS. IN YOUR RESPONSE
PROVIDE A DETAIL ANALYSIS OF THE INDICATORS FOR COMBINING TWO OR MORE
INDEFINITE-LIVED INTANGIBLE ASSETS AS SET FORTH IN EITF 02-7.
RESPONSE:
Paragraph 30 of SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS,
indicates "A reporting unit is an operating segment or one level below an
operating segment (referred to as a component). A component of an operating
segment is a reporting unit if the component constitutes a business for
which discrete financial information is available and segment management
regularly reviews the operating results of that component." Footnotes 17
and 19 of SFAS No. 142 paragraph 30, reference SFAS No. 131 for definitions
of an operating segment and segment management and footnote 18 references
EITF 98-3 for guidance on determining whether an asset group constitutes a
business.
At December 31, 2003, the reporting units used in connection with testing
the impairment of intangible assets were our four operating cable systems
(i.e., states): Indiana, Kentucky, Illinois and Ohio. (A detailed
description of our operating systems is provided on pages 9 through 14 of
our annual report on Form 10-K for the fiscal year ended December 31,
2003.)
In accordance with SFAS No. 131, we determined the four operating cable
systems (i.e., states) to be separate operating segments that were
aggregated into a single operating segment for financial reporting
purposes. Accordingly, our components (one level below operating segment)
were the district operations. As further described in paragraph 30 of SFAS
no. 142 "..., two or more components of an operating segment shall be
aggregated and deemed a single reporting unit if the components have
similar economic characteristics". The aggregation criteria was
supplementally defined in paragraph 17 of SFAS No. 131. Based on this
guidance, we aggregated the components (i.e., district operations) into
single reporting units, resulting in the four operating cable systems
(i.e., states) as our SFAS 142 reporting units at December 31, 2003.
Effective January 1, 2004, we reorganized our operations. Instead of
operating on a state by state basis, we formed three distinct operating
regions: the East Region, the South Region, and the West Region. (A
detailed description of our operating systems is provided on pages 8
through 12 of our annual report on Form 10-K for the fiscal year ended
December 31, 2004.)
Thus, previously where we had four operating cable systems (i.e., states)
effective January 1, 2004 we had three cable operating systems (i.e.
regions). Along with this change, we implemented a number of operational
and financial changes. For example:
o Each cable operating system or region reports to a different Regional
SVP of Operations and regional teams; each Regional SVP reports
directly to our Chief Operating Officer;
o These regional teams are responsible for running the sales and
marketing, technical and customer service components for each region
on a day to day basis;
o Budgeting and reforecasting are performed on a region by region basis;
and
o Our internal monthly financial statements were reconfigured to
consolidate at regional basis and are then reviewed and analyzed on
that basis.
Our three operating cable systems were the units of accounting used to test
the impairment of our franchise agreement intangible assets as of October
1, 2004. The franchise agreement intangible assets included in these three
units of accounting were the remaining amounts of the fair value assigned
to the franchise agreement as of the initial acquisition of the respective
operating system. We did not combine any of the franchise agreement
intangible assets acquired in the three separate business combinations into
a single unit of accounting for purposes of testing impairment.
Additionally, we believed the appropriate unit of accounting for testing
impairment of the franchise agreement asset was not below the operating
cable system level for the following reasons, each of which is specifically
contemplated in the consensus of EITF Issue No. 02-7:
o The combined franchise agreements within each operating cable system
generate cash flows independent of the combined franchise agreements
of the other operating cable systems.
o Each operating cable system, along with the respective franchise
agreement intangible asset, could be sold separately and if sold,
could include all districts currently included in the respective cable
system.
o The franchise agreements are used exclusively by the SFAS 144 assets
group within the respective operating cable system.
We have reviewed the other considerations outlined in EITF 02-7 and do not
find them applicable.
Following is a table detailing Franchise Costs by cable operating system
for the years ended December 31, 2003 and 2004:
2003 2004
--------------------------- ----------------------------
FRANCHISE COSTS FRANCHISE COSTS
--------------------------- ----------------------------
Indiana $ 328,090 East Region $ 608,708
Kentucky 641,840 South Region 375,054
Illinois 1,242,042 West Region 1,373,773
Ohio 145,563
--------------------------- ----------------------------
Total $ 2,357,535 Total $ 2,357,535
=========================== ============================
6. IN ADDITION, YOU SHOULD INCLUDE WITHIN THE MD&A AND NOTES THE DISCLOSURES
REQUIRED BY PARAGRAPH 45C OF SFAS 142. FOR YOUR GUIDANCE REFER TO
ILLUSTRATION 1 IN APPENDIX C AND REVISE ACCORDINGLY.
RESPONSE:
Disclosures required by paragraph 45c of SFAS 142 will be included in the
notes to our financial statements in future reports filed pursuant to the
Exchange Act. Such disclosure will include, as appropriate, the disclosure
requirements in periods subsequent to a business combination as set forth
in Illustration 1 in Appendix C to SFAS 142.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. RELATED PARTY TRANSACTIONS, PAGE F-19
7. WE NOTE YOUR DISCUSSION OF YOUR ACQUISITION OF COMCAST CABLE'S TELEPHONE
BUSINESS IN MARKETS SERVED UNDER YOUR JOINT OPERATING AGREEMENT. TELL US
MORE ABOUT THE TERMS OF THE ACQUISITION, THE PREEXISTING JOINT OPERATING
AGREEMENT AND HOW YOU APPLIED THE GUIDANCE IN SFAS 141 AND THE CONSENSUS IN
EITF 04-1 IN ACCOUNTING FOR THIS TRANSACTION UNDER THE PURCHASE METHOD OF
ACCOUNTING WITH GAIN RECOGNITION OF $15.6 MILLION. DISCLOSE THE NATURE OF
THE PREEXISTING RELATIONSHIP AND THE MEASUREMENT OF THE AMOUNT OF THE
SETTLEMENT AND THE VALUATION USED TO DETERMINE THE SETTLEMENT AMOUNT AS
REQUIRED BY PARAGRAPH 8 OF EITF 04-1.
RESPONSE:
Pursuant to our preexisting joint operating agreement with Comcast Cable,
we delivered local telephone services to our customers in selected markets
using our local network infrastructure, and switching and transport
furnished by Comcast Cable. Comcast Cable leased certain capacity on our
local network for a monthly fee, and we also received payments from Comcast
Cable for certain services related to installations, marketing and billing
support of the telephone business.
On July 2, 2004, we entered into a Purchase Agreement with Comcast Cable
and certain other subsidiaries of Comcast Corporation to acquire the
telephone business conducted in the markets served under our joint
operating agreement and to terminate the preexisting joint operating
agreement. The Purchase Agreement provided that at closing Comcast Cable
would pay us $20 million less the cumulative negative free cash flow
incurred by Comcast Cable in operating the telephone business from June 1,
2004 through the closing date ("closing period"). The Purchase Agreement
also provided for a customary adjustment for working capital of the
telephone business as of the closing date. Additionally, pursuant to the
Purchase Agreement, Comcast Cable agreed to transfer to us upon closing
certain fixed assets related to the telephone business with a value of
approximately $5.0 million.
The acquisition closed on December 31, 2004. During the closing period, the
telephone business generated negative free cash flow of $4.4 million. This
resulted in our recognition of an extraordinary gain of $15.6 million
attributable to the $20 million agreed upon closing cash flow payment. In
addition, as of the closing date, there was a working capital adjustment of
$2.6 million in favor of Comcast Cable, reflecting current assets of $16.5
million, net of total liabilities of $13.9 million. The closing cash flow
payment to us of $15.6 million, less the working capital adjustment payment
to Comcast Cable of $2.6 million resulted in a payment from Comcast Cable
to us of $13.0 million on the closing date. The amount paid on the closing
date was an estimate and remains subject to final determination between the
parties.
Based on guidance provided by SFAS 141, the acquisition of the telephone
business resulted in negative Goodwill of $20.6 million (purchase price of
$0 less carrying value of assets acquired of $5.0 million and cash flow
payment of $15.6 million). The guidance further requires that any negative
Goodwill must first be allocated to fixed assets received, which in this
case reduces the fixed asset value to $0. The remaining balance of $15.6
million was recognized as an extraordinary gain.
We acknowledge that:
o the company is responsible for the adequacy and accuracy of the
disclosure in the filings;
o staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filings; and
o the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
Please call our General Counsel, Elliot Brecher (917-286-2230), or our outside
counsel, Robert L. Winikoff of Sonnenschein Nath & Rosenthal LLP (212-768-6700)
if you have any questions.
Sincerely,
/s/ Daniel Mannino
------------------------------------
Daniel Mannino
Senior Vice President and Controller
cc: Al Rodriguez, Staff Accountant
Ivette Leon, Assistant Chief Accountant