<PAGE>
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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, 2000
Commission file number 0-26677
_______________________
INSIGHT COMMUNICATIONS COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-4053502
(State or other jurisdiction of (I.R.S. Employer
or organization) Identification No.)
810 7/th/ Avenue
New York, New York 10019
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 917-286-2300
_______________________
Indicate by check mark whether the registrant (1) has 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
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X__ No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 8, 2000
------------------------------------ -------------------------------
Class A Common Stock, $.01 Par Value 49,957,180
Class B Common Stock, $.01 Par Value 10,226,050
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited condensed 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 generally accepted
accounting principles. However, in the opinion of management, 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 the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
1
<PAGE>
INSIGHT COMMUNICATIONS COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------------ --------------------
ASSETS (Note A) (unaudited)
<S> <C> <C>
Cash and cash equivalents $ 113,511 $ 43,367
Investment in debt and equity securities 21,650 39,473
Trade accounts receivable, net of allowance for doubtful accounts
of $764 in 1999 and $1,199 in 2000 12,104 14,551
Due from affiliated companies 308 4,884
Prepaid expenses and other current assets 18,383 20,302
------------------ --------------------
Total current assets 165,956 122,577
Fixed assets, net of accumulated depreciation of $104,857 in 1999
and $257,019 in 2000 643,138 792,768
Intangible assets, net of accumulated amortization of $94,164 in 1999 1,282,437
and $175,302 in 2000 1,140,117
Deferred financing costs, net of amortization of $1,055 in 1999
and $2,653 in 2000 20,368 19,973
Investment in unconsolidated affiliates 12,501 2,971
Officer and employee loans receivable 13,900 14,663
------------------ --------------------
$1,995,980 $2,235,389
================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 67,996 $ 66,866
Accrued expenses and other current liabilities 9,431 9,969
Accrued property taxes 12,620 9,061
Deferred revenue 7,287 8,404
Interest payable 19,415 17,041
Preferred interest distribution payable -- 1,750
------------------ --------------------
Total current liabilities 116,749 113,091
Investment in unconsolidated affiliates 6,510 --
Deferred income taxes 33,529 77,161
Debt 1,233,000 1,338,000
Preferred interests -- 179,044
------------------ --------------------
1,389,788 1,707,296
Minority interest 18,132 (29,183)
Stockholders' equity:
Preferred stock, $.01 par value, 100,000,000 shares authorized, no shares issued or
outstanding as of December 31, 1999 and September 30, 2000 -- --
Common stock, $0.01 par value:
Class A - 300,000,000 shares authorized, 49,157,180 shares and 49,957,180 shares
issued and outstanding as of December 31, 1999 and September 30, 2000,
respectively 492 500
Class B - 100,000,000 shares authorized, 10,226,050 shares issued
and outstanding as of December 31, 1999 and September 30, 2000 102 102
Additional paid in capital 656,486 666,678
Accumulated deficit (72,188) (68,784)
Accumulated other comprehensive income (loss) 3,168 (41,220)
------------------ --------------------
588,060 557,276
------------------ --------------------
$1,995,980 $2,235,389
================== ====================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
INSIGHT COMMUNICATIONS COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------- -----------------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 46,581 $119,275 $138,364 $353,013
Costs and expenses:
Programming and other operating costs 13,028 40,488 38,889 123,343
Selling, general and administrative 11,302 24,569 32,154 72,241
Non-cash compensation and related charges 19,285 -- 19,285 --
Depreciation and amortization 27,915 62,253 79,855 175,993
-------- -------- -------- --------
71,530 127,310 170,183 371,577
-------- -------- -------- --------
Operating loss (24,949) (8,035) (31,819) (18,564)
Other income (expense):
Gain on cable system exchanges -- -- 15,799 --
Interest expense, net (4,845) (27,092) (26,419) (77,508)
Other income (expense) 5 (122) (68) 15
-------- -------- -------- --------
(4,840) (27,214) (10,688) (77,493)
-------- -------- -------- --------
Loss before minority interest, gain on sale of
equity investment and equity in losses of investees (29,789) (35,249) (42,507) (96,057)
Minority interest -- 16,682 6,676 49,032
Gain on sale of equity investment -- -- - 80,937
Equity in losses of investees (1,180) (709) (6,749) (3,030)
-------- -------- -------- --------
Income (loss) before income taxes (30,969) (19,276) (42,580) 30,882
Provision (benefit) for income taxes 36,700 (7,394) 36,700 13,490
-------- -------- -------- --------
Net income (loss) (67,669) (11,882) (79,280) 17,392
Accrual of preferred interests --- (4,699) -- (13,988)
Accretion of redeemable Class B units (868) -- (7,118) --
-------- -------- -------- --------
Net income (loss) applicable to common stockholders $(68,537) $(16,581) $(86,398) $ 3,404
======== ======== ======== ========
Basic income (loss) per share $ (1.43) $ (0.28) $ (3.16) $ 0.06
Diluted income (loss) per share $ (1.43) $ (0.28) $ (3.16) $ 0.06
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
INSIGHT COMMUNICATIONS COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------------
1999 2000
------------------ ------------------
<S> <C> <C>
Operating activities:
Net income (loss) $ (79,280) $ 17,392
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 79,855 175,993
Gain on sale of equity investment -- (80,937)
Gain on cable systems exchanges (15,799) --
Deferred income taxes 36,700 12,978
Non-cash compensation and related charges 19,285 --
Equity in losses of investees 6,749 3,030
Minority interest (6,676) (49,032)
Provision for losses on trade accounts receivable (2,818) 6,628
Amortization of bond discount -- (620)
Change in operating assets and liabilities, net of the effects of
acquisitions and dispositions:
Trade accounts receivable 2,293 (8,285)
Due from and to affiliates (2,808) (4,418)
Prepaid expenses and other assets (17,558) 609
Accounts payable 7,660 (7,983)
Accrued expenses and other liabilities (2,050) (9,488)
Interest payable (4,318) (2,586)
-------------- -------------
Net cash provided by operating activities 21,235 53,281
-------------- -------------
Investing activities:
Purchases of fixed assets (72,921) (195,328)
Investment in equity securities -- (5,000)
Purchase of cable television systems, net of cash acquired (2,955) (1,718)
(Increase) decrease in intangible assets (13,520) 24
-------------- -------------
Net cash used in investing activities (89,396) (202,022)
-------------- -------------
Financing activities:
Proceeds from borrowings under bank credit facilities -- 95,000
Repayment of borrowings (117,098) (1,000)
Net proceeds from initial public offering 609,792 --
Distributions of preferred interests -- (14,000)
Deferred financing costs -- (1,203)
Other -- (200)
-------------- -------------
Net cash provided by financing activities 492,694 78,597
-------------- -------------
Net increase (decrease) in cash and cash equivalents 424,533 (70,144)
Cash and cash equivalents at beginning of period 19,902 113,511
-------------- -------------
Cash and cash equivalents at end of period $ 444,435 $ 43,367
============== =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
INSIGHT COMMUNICATIONS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Organization and Basis of Presentation
On July 26, 1999, Insight Communications Company, Inc. (the "Company")
completed an initial public offering ("IPO") of Class A common stock in which
the Company sold approximately 26,450,000 shares of its common stock. Offering
proceeds, net of underwriting discounts and other offering expenses, totaled
approximately $607.0 million and were applied primarily toward the repayment of
senior indebtedness and to finance the October 1, 1999 acquisition of Kentucky
cable television systems (Note D). Prior to the IPO, the Company operated as a
limited partnership. The Company was reconstituted as a corporation upon the
completion of the IPO, at which time all of the limited partnership's units were
exchanged for shares of common stock.
The Company owns and operates cable television systems in Kentucky, Indiana,
Illinois, Ohio, California and Georgia, as described below. The accompanying
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, Insight Communications Company, L.P. ("Insight L.P.")
and Insight Interactive LLC ("Insight Interactive"). Insight L.P. owns and
operates cable television systems in Illinois, Indiana, Ohio, California and
Georgia. In addition, Insight L.P. owns a 50% interest in Insight Midwest, L.P.
("Insight Midwest"), which through its wholly-owned subsidiaries, Insight
Communications of Indiana, LLC ("Insight Indiana") and Insight Communications of
Kentucky, L.P. ("Insight Kentucky") owns and operates cable television systems
in Indiana and Kentucky (Note D). Insight L.P. is the general partner of Insight
Midwest and effectively controls all operating and financial decisions.
Therefore, the accompanying consolidated financial statements include the
accounts of Insight Midwest.
Through its wholly-owned subsidiary, Insight Holdings of Ohio, LLC, Insight
L.P. owns all of the common equity interests in Insight Communications of
Central Ohio, LLC ("Insight Ohio"), which operates cable television systems in
the Columbus, Ohio area. The accompanying consolidated financial statements
include the accounts of Insight Ohio (Note E).
The Company's other wholly-owned subsidiary, Insight Interactive, owns a 50%
equity interest in SourceSuite LLC (Note F), which is accounted for under the
equity method of accounting.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles 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 footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation have been
included. Operating results for the three month and nine month periods ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
For further information, refer to the Company's consolidated financial
statements and footnotes thereto for the year ended December 31, 1999, included
in the Company's Annual Report on Form 10-K.
5
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B. Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. As described above, the results of Insight
Midwest, which is 50% owned but effectively controlled by Insight L.P., are
included in the consolidated financial statements. The minority interest
liability represents AT&T Broadband's 50% ownership interest in Insight Midwest.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Earnings Per Share
As a result of the IPO, earnings per share is presented in the accompanying
statements of operations as if a conversion of securities from partnership units
to common shares occurred at the beginning of all periods presented. Basic
earnings per share is computed using average shares outstanding during the
period which includes the effect of the new shares issued in connection with the
IPO. For 1999, diluted earnings per share equals basic earnings per share since
the effect of an assumed conversion of certain partnership units and certain
warrants to common shares was anti-dilutive. For 2000, diluted earnings per
share equals basic earnings per share as there was no effect on weighted average
shares outstanding from the assumed exercise of stock options calculated using
the treasury stock method. The weighted average shares outstanding for the three
months and nine months ended September 30, 1999 was 47.8 million shares and 27.3
million shares, respectively and the weighted average shares outstanding for the
three months and nine months ended September 30, 2000 was 59.9 million shares
and 59.6 million shares, respectively.
Income Taxes
Income taxes are provided for using the liability method. Under this approach,
differences between the financial statements and tax bases of assets and
liabilities are determined annually, and deferred income tax assets and
liabilities are recorded for those differences that have future tax
consequences. Valuation allowances are established, if necessary, to reduce
deferred tax assets to an amount that will more likely than not be realized in
future periods. Income tax expense is comprised of the current tax payable or
refundable for the period plus or minus the net change in deferred tax assets
and liabilities.
Change in Estimate
Effective January 1, 2000, the Company changed the estimated useful lives of
fixed assets which related to the Company's current rebuild program. The
changes in estimated useful lives were made to reflect management's evaluation
of the economic lives of the newly rebuilt plant. This change was made on a
prospective basis and resulted in an increase in net income for the three months
and nine months ended September 30, 2000 of approximately $2.7 million, or $0.04
per share and $5.1 million, or $0.09 per share, respectively.
6
<PAGE>
B. Significant Accounting Policies (continued)
Recently Issued Accounting Standards
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which as amended by SFAS No. 137 is
effective for all quarters of fiscal years beginning after June 15, 2000. The
statement requires the Company to recognize all derivatives on the balance sheet
at fair value. Although the Company has not yet completed its assessment of the
impact of FASB No. 133 on the Company's results of operations and financial
position, the Company does not anticipate that the adoption of this statement
will be material.
C. Acquisitions and Gain on Cable System Exchanges
On March 22, 1999 Insight L.P. exchanged its Franklin, Virginia cable system
("Franklin") servicing approximately 9,100 subscribers for Falcon Cable's
Scottsburg ("Scottsburg") Indiana system servicing approximately 4,100
subscribers. In connection with the exchange, Insight L.P. received $8.0 million
in cash. Furthermore, on February 1, 1999, Insight L.P. exchanged its Oldham
Kentucky cable system ("Oldham") servicing approximately 8,500 subscribers for
Intermedia Partners of Kentucky L.P.'s Henderson, Kentucky cable system
("Henderson") servicing approximately 10,600 subscribers. These transactions
have been accounted for by Insight L.P. as sales of the Franklin and Oldham
systems and purchases of the Scottsburg and Henderson systems. Accordingly, the
Scottsburg and Henderson systems have been included in the accompanying
condensed consolidated balance sheets at their fair values (approximately $31.3
million) and Insight L.P. recognized a gain on the sale of the Franklin and
Oldham systems of approximately $16.0 million, which amount represents the
difference between the carrying value of the Franklin and Oldham systems and
their fair value. The Scottsburg and Henderson Systems purchase price was
allocated to the cable television assets acquired in relation to their fair
values as increases in property and equipment of $5.7 million and franchise
costs of $25.6 million. Franchise costs arising from the acquisition of the
Scottsburg and Henderson systems are being amortized over a period of 15 years.
On March 31, 1999 Insight L.P. acquired Americable International of Florida
Inc.'s Portland, Indiana and Fort Recovery, Ohio cable systems ("Portland")
servicing approximately 6,100 subscribers for $10.9 million. The purchase price
was allocated to the cable television assets acquired in relation to their fair
values as increases in property and equipment of $2.3 million and franchise
costs of $8.6 million. Insight L.P. has accounted for the acquisition of the
Portland systems as a purchase. Franchise costs arising from the acquisition
are being amortized over a period of 15 years. Insight L.P. paid for the
acquisition with borrowings under its credit facilities and with the $8.0
million of cash received in the Franklin/Scottsburg system exchange described
above.
The unaudited pro forma results of operations of the Company for the nine
months ended September 30, 1999 and 2000, assuming the acquisition of the
Kentucky systems (Note D), each of the acquisitions and exchanges described
above, and the acquisition of the remaining common equity of Insight Ohio (Note
E) occurred as of January 1, 1999, are as follows (in thousands, except per
share data):
7
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C. Acquisitions and Gain on Cable System Exchanges (continued)
<TABLE>
<CAPTION>
Nine months ended
September 30, 1999 September 30, 2000
------------------------- -------------------------
<S> <C> <C>
Revenue $ 333,068 $ 353,013
Net income (loss) applicable to common stockholders (126,114) 960
Basic and diluted income (loss) per share (4.48) 0.02
</TABLE>
D. Insight Midwest
Insight Midwest was formed in September 1999 to serve as the holding company
and a financing vehicle for the Company's cable television system joint venture
with AT&T Broadband, LLC ("AT&T Broadband"). Insight Midwest is owned 50% by
Insight L.P and 50% by AT&T Broadband, through its indirect subsidiary TCI of
Indiana Holdings, LLC ("TCI"). On October 1, 1999 the Company's Indiana and
Kentucky systems and operations were contributed to Insight Midwest, as
described further below. Through its operating subsidiaries Insight Indiana and
Insight Kentucky, Insight Midwest owns and operates cable television systems in
Indiana and Kentucky, which passed approximately 1.2 million homes and served
approximately 734,000 customers as of September 30, 2000.
Insight Indiana
On October 31, 1998 Insight L.P. and TCI contributed certain of their cable
television systems located in Indiana and Northern Kentucky (the "Indiana
systems") to Insight Indiana in exchange for 50% equity interests therein. The
cable television systems contributed to Insight Indiana by Insight L.P. included
the Jasper and Evansville systems that were acquired by Insight L.P. from TCI on
October 31, 1998 and the Noblesville, Jeffersonville and Lafayette systems
already owned by Insight L.P. (the "Insight Contributed Systems"). Insight L.P.
entered into a management agreement with Insight Indiana pursuant to which
Insight L.P. agreed to manage the Indiana systems for an annual fee of 3% of the
gross revenues of the Indiana systems. On October 1, 1999, as part of a joint
venture restructuring, Insight Indiana became a wholly owned subsidiary of
Insight Midwest and amended its management agreement with Insight L.P.,
confirming the 3% management fee. Such management fee was approximately $1.1
million and $1.0 million for the three months ended September 30, 2000 and 1999,
respectively, and $3.1 million and $3.2 million for the nine months ended
September 30, 2000 and 1999, respectively, and is eliminated in consolidation.
In addition to managing the day-to-day operations of the Indiana systems,
Insight L.P. is the general partner and therefore effectively controls Insight
Midwest and is responsible for all of the operating and financial decisions
pertaining to the Indiana systems. Pursuant to the terms of their respective
operating agreements, Insight Midwest and Insight Indiana will continue for a
twelve year term through October 1, 2011, unless extended by Insight L.P. and
TCI.
Insight Kentucky
On October 1, 1999, Insight L.P. acquired a combined 50% interest in InterMedia
Capital Partners VI, L.P. (the "IPVI Partnership") from related parties of
Blackstone Cable Acquisition Company, LLC, related parties of InterMedia Capital
Management VI, LLC and a subsidiary and related party of AT&T Broadband, for
approximately $341.5 million (inclusive of expenses), and Insight Midwest
assumed debt
8
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D. Insight Midwest (continued)
of approximately $742.1 million (the total debt of the IPVI Partnership). The
IPVI Partnership, through several intermediary partnerships, owned and operated
cable television systems in four major markets in Kentucky: Louisville,
Lexington, Bowling Green and Covington (the "Kentucky systems"). On October 1,
1999, concurrently with this acquisition, Insight L.P. contributed its 50%
interest in the IPVI
Partnership to Insight Midwest. As a result of the IPVI Partnership's
historical ownership structure, the Kentucky systems are owned and operated by
Insight Kentucky Partners II, L.P. ("Insight Kentucky"), a third-tier subsidiary
partnership of Insight Midwest. Also on October 1, 1999, Insight L.P. entered
into a management agreement with Insight Kentucky, pursuant to which Insight
L.P. manages the Kentucky systems in consideration for a 3% management fee. Such
management fee was approximately $1.7 million and $5.1 million for the three
months and nine months ended September 30, 2000 and is eliminated in
consolidation. Similar to Insight Indiana, in addition to managing the day-to-
day operations of the Kentucky systems, Insight L.P. is the general partner and
effectively controls Insight Midwest, including all of the operating and
financial decisions pertaining to the Kentucky systems. Insight Kentucky and
each of the other Kentucky partnerships also have twelve-year terms through
October 1, 2011, unless extended by Insight and TCI.
The assets of Insight Kentucky have been valued based on the purchase price and
have been preliminarily allocated between fixed and intangible assets based on
management's evaluation of each individual operating system including such
factors as the age of the cable plant, the progress of rebuilds and franchise
relations. This resulted in a step-up in the carrying values of fixed assets of
approximately $160.3 million and intangible assets of approximately $272.1
million. Fixed assets are being depreciated over their estimated useful lives
and intangible assets are being amortized over 15 years.
E. Insight Ohio
On August 21, 1998, Insight L.P. and Coaxial Communications of Central Ohio,
Inc. ("Coaxial") entered into a contribution agreement (the "Coaxial
Contribution Agreement") pursuant to which Coaxial contributed to Insight Ohio
substantially all of the assets and liabilities of its cable television systems
located in Columbus, Ohio and Insight L.P. contributed to Insight Ohio $10.0
million in cash. As a result of the Coaxial Contribution Agreement, Coaxial
owned 25% of the non-voting common equity and Insight L.P., through its
subsidiary Insight Holdings of Ohio, LLC, owned 75% of the non-voting common
equity of Insight Ohio. In addition, Coaxial also received two separate series
of voting preferred equity (Series A Preferred Interest--$140.0 million and
Series B Preferred Interest--$30.0 million) of Insight Ohio (collectively the
"Preferred Interests").
The Preferred Interests provide for cash distributions to Coaxial and certain
of its affiliates as follows; Series A--10% of $140.0 million and Series B--12-
7/8% of $30.0 million. Insight Ohio cannot redeem the Preferred Interests
without the permission of Coaxial; however, Insight Ohio will be required to
redeem the Series A Preferred Interest in August 2006 and the Series B Preferred
Interest on August 21, 2008. Coaxial has pledged the Series A Preferred Interest
and Series B Preferred Interest as security for $140.0 million of 10% senior
notes due in 2006 issued by Coaxial and an affiliate ("Senior Notes") and $55.9
million of aggregate principal amount at maturity of 12-7/8% senior discount
notes due in 2008 issued by Coaxial's majority shareholder ("Senior Discount
Notes"), respectively. The Senior Notes and
9
<PAGE>
E. Insight Ohio (continued)
Senior Discount Notes are conditionally guaranteed by Insight Ohio.
On August 8, 2000, Insight Ohio purchased Coaxial's 25% non-voting common
equity interest. The purchase price was 800,000 shares of common stock of the
Company and cash in the amount of $2.6 million. In connection with the
purchase, Insight Ohio's operating agreement was amended to, among other things,
remove certain participating rights of the principals of Coaxial and certain of
its affiliates (the "Coaxial Entities"), and vest in the common equity interests
of Insight Ohio 70% of its total voting power and in the Preferred Interests 30%
of its total voting power. As a result of this transaction, the financial
results of Insight Ohio have been consolidated with the financial results of the
Company for the three months and nine months ended September 30, 2000, with
minority interest recorded for the 25% common interest owned by Coaxial through
August 8, 2000. In connection with this transaction, Insight Ohio recorded a
step up in fair value of its assets of approximately $157.7 million, which
represents the difference between the purchase price and the Company's equity in
Insight Ohio's net assets in excess of Insight Ohio's net assets. This amount
has been preliminarily allocated to franchise costs and is being amortized over
a period of twelve years. Amortization expense for the three months and nine
months ended September 30, 2000 was approximately $7.2 million.
Although the financial results of Insight Ohio have been consolidated as a
result of this transaction, for financing purposes, Insight Ohio is an
unrestricted subsidiary of the Company and is prohibited by the terms of its
indebtedness from making distributions to the Company. Insight Ohio's
conditional guarantee of the Senior Notes and the Senior Discount Notes remains
in place.
If at any time the Senior Notes or Senior Discount Notes are repaid or
significantly modified, or in any case after August 15, 2008, the principals of
the Coaxial Entities may require the Company to purchase their interests in the
Coaxial Entities for a purchase price equal to the difference, if any, of $32.6
million less the then market value of the 800,000 shares of the Company's common
stock issued on August 8, 2000.
During 1999, Insight L.P. accounted for its investment in Insight Ohio under
the equity method. In addition, Insight L.P. amortized the difference between
its initial $10.0 million investment and its 75% interest in Insight Ohio's
deficiency in assets. Accordingly, the accompanying statements of operations
for the three months and nine months ended September 30, 1999 include Insight
L.P.'s share of Insight Ohio's operating loss and the aforementioned
amortization of deficiency in assets of approximAtley $1.2 million and $6.7
million, respectively.
Insight L.P., as manager of Insight Ohio, earns a management fee from Insight
Ohio equal to 3% of Insight Ohio's revenues. For the three months ended
September 30, 1999 and 2000, Insight L.P. earned approximately $365,000 and
$374,000, respectively in management fees from Insight Ohio and for each of the
nine months ended September 30, 1999 and 2000, such management fees were
approximately $1.1 million. Such management fees are eliminated in
consolidation for the three months and nine months ended September 30, 2000.
10
<PAGE>
F. SourceSuite LLC
Effective November 17, 1999, Insight Interactive entered into a Contribution
Agreement with Source Media, Inc. ("Source Media"), providing for the creation
of a joint venture, SourceSuite LLC. Under the terms of the Contribution
Agreement, Source Media contributed its Virtual Modem 2.5 software and the
Interactive Channel products and services, including SourceGuide and LocalSource
television content. Source Media manages the operations of the joint venture.
The Company contributed $13.0 million in equity financing. Source Media and the
Company each own 50% of the joint venture.
On March 3, 2000, pursuant to a merger with a subsidiary of Liberate
Technologies ("Liberate"), SourceSuite LLC sold all of its VirtualModem assets
in exchange for the issuance to each of Insight Interactive and Source Media of
886,000 shares of Liberate common stock.
SourceSuite LLC continues to own and operate its programming assets,
LocalSource and Source Guide, and has entered into preferred content and
programming services agreements with Liberate. As a result of this transaction,
the Company recorded a gain on sale of joint venture assets of approximately
$81.0 million during the nine months ended September 30, 2000. In addition, as
of September 30, 2000, the Company recorded an unrealized loss of approximately
$61.6 million, which is reflected as a separate component of stockholders'
equity. The unrealized loss was calculated as the difference between the fair
value of the Liberate shares on September 30, 2000 as compared to March 3, 2000,
the date the Company received the shares.
The Company is accounting for its investment in SourceSuite LLC under the
equity method of accounting. Accordingly, the accompanying statements of
operations for the three months and nine months ended September 30, 2000 include
losses of approximately $0.7 million and $3.0 million, respectively which
represents the Company's 50% share of SourceSuite LLC's net loss for the
periods.
In connection with the Contribution Agreement, the Company and Source Media
entered into a Common Stock and Warrants Purchase Agreement dated as of July 29,
1999, whereby the Company agreed to purchase 842,105 shares of Source Media
common stock at $14.25 per share, representing approximately 6% of Source
Media's outstanding stock, for a purchase price of $12.0 million in cash. The
Company purchased the shares of common stock on November 17, 1999. As of
September 30, 2000, the Company recorded a cumulative unrealized loss of
approximately $7.5 million, which is reflected as a separate component of
stockholders' equity (including an unrealized gain of approximately $1.2 million
for the nine month period ended September 30, 2000). The unrealized loss was
calculated as the difference between the cost of the stock and its fair value at
September 30, 2000. Fair value was determined using the quoted market price of
the stock. Source Media also issued to the Company five-year warrants to acquire
up to an additional 4,596,786 shares of its common stock at an exercise price of
$20.00 per share. The Company had not exercised any of the warrants as of
September 30, 2000.
In addition, in October 1999, the Company purchased $10.2 million face amount
of Source Media's 12% bonds for approximately $4.1 million. The bonds have a
maturity date of November 1, 2004. The bond discount of $6.1 million is being
amortized to interest income over the life of the bonds. As of September 30,
2000, the Company recorded a cumulative unrealized gain of approximately $1.5
million, which is reflected as a separate component of stockholders' equity (net
of an unrealized loss of approximately $705,000 for the nine month period ended
September 30, 2000). The unrealized gain was
11
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F. SourceSuite LLC (continued)
calculated as the difference between the amortized cost of the bonds and their
fair value at September 30, 2000. Fair value was determined using the quoted
market price of the bonds.
G. Managed Indiana Systems
On March 17, 2000, the Company expanded its agreement with InterMedia Partners
Southeast, an affiliate of AT&T Broadband, to provide consulting services
beginning May 1, 2000 to cable television systems acquired by AT&T Broadband,
which systems as of September 30, 2000 served approximately 121,000 customers in
Indiana and Kentucky. The agreement provides for a term ending April 30, 2002,
and the Company will earn an annual fee of 3% of gross revenues for providing
such consulting services. Nearly all of these systems are contiguous to the
Company's other Indiana systems. For the three months and nine months ended
September 30, 2000, such management fee was approximately $413,000 and $721,000,
respectively.
H. Comprehensive Income
For the three months ended September 30, 2000, total comprehensive loss was
$12.6 million (net loss of $11.9 million plus an unrealized net loss of $0.7
million). For the nine months ended September 30, 2000, total comprehensive
loss was $27.0 million (net income of $17.4 million less an unrealized net loss
of $44.4 million). At September 30, 2000, components of accumulated other
comprehensive income consisted of the net unrealized loss on marketable
securities of approximately $41.2 million, net of income tax of approximately
$28.7 million. For the three months and nine months ended September 30, 1999
there were no items of other comprehensive income (loss).
I. Commitments and Contingencies
The Company is a party to or may be affected by various matters under
litigation. Management believes that the ultimate outcome of these matters will
not have a significant adverse effect on either the Company's future results of
operations or financial position.
J. Recent Developments
Greenwood Agreement
On September 26, 2000, Insight Midwest entered into an agreement with Cable
One, Inc., a subsidiary of The Washington Post Company, for the acquisition of a
cable television system serving approximately 14,800 customers in Greenwood,
Indiana for the purchase price of $62.0 million. The acquisition is subject to
closing conditions, including the completion of a proposed trade of systems
between Cable One and an affiliate of AT&T Corp., and is expected to be
completed on or about January 2, 2001.
Telephony Agreements
On July 17, 2000, the Company and its affiliates entered into definitive
agreements with AT&T Broadband, LLC for the provision by AT&T Broadband of all-
distance telephone service utilizing the
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J. Recent Developments (continued)
cable systems' infrastructure under the AT&T brand name. Telephony revenues are
to be attributed to AT&T Broadband who, in turn, will pay the cable affiliate a
monthly per line access fee. AT&T Broadband will also pay the cable affiliate
for marketing, installation and billing support. AT&T Broadband would be
required to install and maintain the necessary switching equipment, and would be
the local exchange carrier of record. It is expected that the cable affiliates
will market the telephone services both independently and as part of a bundle of
services.
Expansion of Insight Midwest
On August 15, 2000, Insight Midwest entered into definitive agreements with AT&T
Broadband and the Company for the acquisition of additional cable television
systems. Through a series of transactions, Insight Midwest will acquire all of
the Company's remaining wholly-owned systems serving approximately 279,600
customers, including systems which it will purchase from AT&T Broadband. At the
same time, Insight Midwest will acquire from AT&T Broadband systems serving
approximately 248,800 customers. As a result, Insight Midwest will serve
approximately 1.3 million customers, approximately 99% of which will be
concentrated in the four contiguous states of Indiana, Kentucky, Illinois and
Ohio. Insight Ohio, which serves approximately 84,200 customers, will become an
unrestricted subsidiary under the indentures governing Insight Midwest's senior
notes, and will be prohibited by the terms of its indebtedness from making
distributions to Insight Midwest. Upon completion of the transaction, Insight
Midwest will remain equally owned by Insight L.P. and TCI and Insight L.P. will
continue to serve as the general partner and manage and operate the Insight
Midwest systems. The consummation of the definitive agreements is subject to
several conditions, including the receipt of all necessary regulatory approvals.
November 2000 Notes Offering
On November 6, 2000, Insight Midwest completed an offering of $500.0 million
principal amount of its 10 1/2% senior notes due 2010. Insight Midwest used the
net proceeds of $487.5 million to repay a portion of the outstanding debt under
the credit facilities of its subsidiaries.
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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 most recent registration statement dated July 20, 1999, as well as any
cautionary language in this quarterly report, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. You should
be aware that the occurrence of the events described in these risk factors and
elsewhere in this quarterly report could have a material adverse effect on our
business, operating results and financial condition.
Introduction
Because of corporate transactions completed over the past three years,
including the contribution agreement with AT&T Broadband LLC ("AT&T Broadband")
with respect to the Indiana systems and the acquisition of the Kentucky systems,
we do not believe the discussion and analysis of our historical financial
condition and results of operations below are indicative of our future
performance.
On July 26, 1999, we completed our initial public offering of Class A
common stock. The offering proceeds net of underwriting discounts and other
offering expenses totaled approximately $607.0 million and were applied
primarily toward the repayment of senior indebtedness and to finance our October
1, 1999 acquisition of Kentucky cable television systems, as described below.
Prior to the offering, we operated as a limited partnership. We were
reconstituted as a corporation upon completion of the offering, at which time
all of the limited partnership's units were exchanged for shares of our common
stock.
On October 1, 1999, we acquired a combined 50% interest in InterMedia
Capital Partners VI, L.P. (the "IPVI Partnership") from related parties of
Blackstone Cable Acquisition Company, LLC, related parties of InterMedia Capital
Management VI, LLC and a subsidiary and related party of AT&T Broadband, for
approximately $341.5 million (inclusive of expenses), and Insight Midwest
assumed debt of approximately $742.1 million.
As a result of its August 8, 2000 purchase of the remaining 25% common
equity interest in
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Insight Ohio, Insight L.P. now owns all of Insight Ohio's common equity
interests. As such, the results of Insight Ohio have been consolidated in our
results for the three months and nine months ended September 30, 2000. During
1999, we accounted for our 75% investment in Insight Ohio under the equity
method.
General
Substantially all of our revenues are earned from customer fees for cable
television programming services including premium, pay-per-view and digital
services as well as high-speed data services and ancillary services, such as
rental of converters and remote control devices and installations and from
selling advertising. In addition, we earn revenues from commissions for products
sold through home shopping networks and from management fees for managing
systems in Indiana and Kentucky owned by AT&T Broadband.
Results of Operations
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.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Revenue $ 46,581 $119,275 $138,364 $ 353,013
Costs and expenses:
Programming and other operating costs 13,028 40,488 38,889 123,343
Selling, general and administrative 11,302 24,569 32,154 72,241
Non-cash compensation and related charges 19,285 -- 19,285 --
Depreciation and amortization 27,915 62,253 79,855 175,993
------------ ------------ ----------- ------------
71,530 127,310 170,183 371,577
------------ ------------ ----------- ------------
Operating loss (24,949) (8,035) (31,819) (18,564)
EBITDA 1,791 70,069 63,694 284,383
Interest expense, net (4,845) (27,092) (26,419) (77,508)
Provision (benefit) for income taxes 36,700 (7,394) 36,700 13,490
Net income (loss) (67,669) (11,882) (79,280) 17,392
Net cash (used in) provided by operating activities (4,192) 31,502 21,235 53,281
Net cash used in investing activities (30,064) (92,560) (89,396) (202,022)
Net cash provided by financing activities 465,194 32,000 492,694 78,597
</TABLE>
EBITDA represents earnings (loss) before interest, taxes, depreciation and
amortization. Our management believes that EBITDA is commonly used in the cable
television industry to analyze and compare cable television companies on the
basis of operating performance, leverage and liquidity. However, EBITDA is not
intended to be a performance measure that should be regarded as an alternative
to, or more meaningful than, either operating income or net income as an
indicator of operating performance or cash flows as a measure of liquidity, as
determined in accordance with generally accepted accounting principles. EBITDA,
as computed by management, is not necessarily comparable to similarly titled
amounts of other companies.
15
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Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Revenues increased 156.1% to $119.3 million for the three months ended
September 30, 2000 compared to $46.6 million for the three months ended
September 30, 1999. The results were impacted by the Kentucky acquisition
completed on October 1, 1999 and the consolidation of the Insight Ohio system
into our results effective January 1, 2000. The incremental revenue generated by
the Kentucky systems approximated $57.6 million, accounting for 79.2% of the
consolidated revenue increase and Insight Ohio accounted for $12.4 million or
17.1% of the consolidated revenue increase.
Revenues per customer per month averaged $43.46 for the three months ended
September 30, 2000 compared to $37.12 for the three months ended September 30,
1999 primarily reflecting an increase in average monthly basic revenue per
customer of $3.93. Average monthly basic revenue per customer averaged $30.22
during the three months ended September 30, 2000 compared to $26.29 during the
comparable period of 1999 reflecting the completion of rebuilds in most Indiana
systems and the Rockford, Illinois system, as well as higher basic rates in the
Kentucky systems. In addition, monthly revenue for high speed data services
averaged $1.08 per basic customer for the three months ended September 30, 2000
compared to $.16 per basic customer for the comparable period in 1999.
Programming and other operating costs increased 210.8% to $40.5 million for
the three months ended September 30, 2000 compared to $13.0 million for the
three months ended September 30, 1999. The incremental expense generated by the
Kentucky systems approximated $20.4 million, accounting for 74.2% of the
consolidated expense increase and Insight Ohio accounted for $4.9 million or
17.7% of the consolidated expense increase. Excluding these systems, these
costs increased by approximately $2.2 million accounting for approximately 8.1%
of the total increase, primarily as a result of increased programming rates and
additional programming carried by the other systems.
Selling, general and administrative expenses increased 117.4% to $24.6
million for the three months ended September 30, 2000 compared to $11.3 million
for the three months ended September 30, 1999. The incremental expense generated
by the Kentucky systems approximated $9.5 million accounting for 71.3% of the
consolidated expense increase and Insight Ohio accounted for $2.9 million or
22.2% of the consolidated expense increase. Excluding these systems, these
costs increased by approximately $900,000 accounting for approximately 6.5% of
the total increase, primarily reflecting increased marketing activity associated
with new product introductions and increased corporate expenses.
A one-time non-cash compensation expense of $19.3 million was recorded in
the third quarter of 1999 in connection with the distribution of incentive
shares to management.
Depreciation and amortization expense increased 123.0% to $62.3 million for
the three months ended September 30, 2000 compared to $27.9 million for the
three months ended September 30, 1999. This increase was primarily due to the
acquisition and addition of the cable systems discussed above and additional
capital expenditures associated with the rebuilds of our systems, partially
offset by a decrease in depreciation expense attributable to a change in
estimate as of January 1, 2000 which resulted in assets being depreciated over
longer lives.
For the three months ended September 30, 2000, an operating loss of $8.0
million was incurred as compared to an operating loss of $24.9 million for the
three months ended September 30, 1999,
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primarily for the reasons set forth above.
EBITDA increased to $70.0 million for the three months ended September 30,
2000 as compared to $1.8 million for the three months ended September 30, 1999
primarily due to the operating results generated by the Kentucky acquisition and
the Insight Ohio consolidation during the three months ended September 30, 2000.
In addition, minority interest income was $16.7 million for the third quarter of
2000 primarily due to the Kentucky acquisition. Offsetting these increases are
increased corporate overhead expenses driven by growth and product expansion.
Interest expense, net increased to $27.1 million for the three months ended
September 30, 2000 compared to $4.8 million for the three months ended September
30, 1999. The increase was primarily due to higher average outstanding
indebtedness related to the Kentucky acquisition. Average debt outstanding
during the three months ended September 30, 2000 was $1.3 billion at an average
interest rate of 8.0%.
The benefit for income taxes was $7.4 million for the three months ended
September 30, 2000, which represents an effective tax rate of 38.4%. For the
three months ended September 30, 1999, the tax provision was $36.7 million,
which consisted primarily of a one-time, non-recurring charge recorded for
deferred taxes upon the exchange of the limited partnership interests in Insight
L.P. for our common stock at the time of our initial public offering.
For the three months ended September 30, 2000 a net loss of $11.9 million
was realized for the reasons set forth above.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Revenues increased 155.1% to $353.0 million for the nine months ended
September 30, 2000 compared to $138.4 million for the nine months ended
September 30, 1999 due primarily to the Kentucky acquisition and the
consolidation of Insight Ohio. The incremental revenue generated by the Kentucky
systems approximated $171.6 million, or 80.0% of the consolidated revenue
increase and Insight Ohio accounted for $36.4 million, or 17.0% of the
consolidated revenue increase.
Revenues per customer per month averaged $42.53 for the nine months ended
September 30, 2000 compared to $36.80 for the nine months ended September 30,
1999 primarily reflecting an increase in average monthly basic revenue per
customer of $3.56. Average monthly basic revenue per customer averaged $29.67
during the nine months ended September 30, 2000 compared to $26.11 during the
comparable period of 1999 reflecting the completion of rebuilds in most Indiana
systems and the Rockford, Illinois system, as well as higher basic rates in
the Kentucky systems. In addition, monthly revenue for high speed data services
averaged $.81 per basic customer for the nine months ended September 30, 2000
versus $.07 per basic customer for the comparable period in 1999.
Programming and other operating costs increased 217.2% to $123.3 million
for the nine months ended September 30, 2000 compared to $38.9 million for the
nine months ended September 30, 1999. The incremental expense generated by the
Kentucky systems approximated $60.3 million accounting for 71.4% of the
consolidated expense increase and the consolidation of Insight Ohio accounted
for approximately $14.2 million or 16.8% of the consolidated expense increase.
Excluding these systems, these costs increased by approximately $9.9 million
accounting for approximately 11.8% of the total increase, primarily as a result
of increased programming rates and additional programming carried by
17
<PAGE>
the other systems.
Selling, general and administrative expenses increased 124.7% to $72.2
million for the nine months ended September 30, 2000 compared to $32.2 million
for the nine months ended September 30, 1999. The incremental expense generated
by the Kentucky systems approximated $27.6 million accounting for 68.8% of the
consolidated expense increase and the consolidation of Insight Ohio accounted
for approximately $8.4 million or 21.0% of the consolidated expense increase.
Excluding these systems, these costs increased by approximately $4.0 million
accounting for approximately 10.2% of the total increase, primarily reflecting
increased marketing activity and corporate expenses associated with new product
introductions.
A one-time non-cash compensation expense of $19.3 million was recorded in
the third quarter of 1999 in connection with the distribution of incentive
shares to management.
Depreciation and amortization expense increased 120.4% to $176.0 million
for the nine months ended September 30, 2000 compared to $79.9 million for the
nine months ended September 30, 1999. This increase was primarily due to the
acquisitions and addition of the cable systems discussed above and additional
capital expenditures associated with the rebuilds of our systems, partially
offset by a decrease in depreciation expense attributable to a change in
estimate as of January 1, 2000 which resulted in assets being depreciated over
longer lives.
For the nine months ended September 30, 2000, an operating loss of $18.6
million was incurred as compared to an operating loss of $31.8 million for the
nine months ended September 30, 1999, primarily for the reasons set forth above.
EBITDA increased 346.5% to $284.4 million for the nine months ended
September 30, 2000 as compared to $63.7 million for the nine months ended
September 30, 1999 primarily resulting from a gain of $80.9 million on the sale
of joint venture assets as compared to a gain on systems exchanges of $15.8
million for the nine months ended September 30, 2000 and September 30, 1999,
respectively, as well as the results generated by the Kentucky acquisition and
the consolidation of Insight Ohio during the first nine months of 2000. In
addition, minority interest income increased to $49.0 million for the first nine
months of 2000 compared to $6.7 million for the first nine months of 1999
primarily due to the Kentucky acquisition.
Interest expense, net increased 193.3% to $77.5 million for the nine months
ended September 30, 2000 compared to $26.4 million for the nine months ended
September 30, 1999. The increase was primarily due to higher average outstanding
indebtedness related to the Kentucky acquisition and the consolidation of
Insight Ohio. Average debt outstanding during the nine months ended September
30, 2000 was $1.3 billion at an average interest rate of 8.0%.
The provision for income taxes was $13.5 million for the nine months ended
September 30, 2000, which represents an effective tax rate of 43.7%. For the
nine months ended September 30, 1999, the tax provision was $36.7 million, which
consisted primarily of a one-time, non-recurring charge recorded for deferred
taxes upon the exchange of the limited partnership interests in Insight L.P. for
our common stock at the time of our initial public offering.
For the nine months ended September 30, 2000 net income of $17.4 million
was realized for the reasons set forth above.
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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 rebuild and
upgrade our existing cable network, and in the future will be used for plant
extensions, new services, converters and system rebuilds. Historically, we have
been able to meet our cash requirements with cash flow from operations,
borrowings under our credit facilities, private equity and public sources. The
completion of our recently announced acquisitions (discussed below under "Recent
Developments") and the upgrade of our cable network to launch telephony will
require additional financings for which Insight Midwest is currently negotiating
a new credit facility.
On July 26, 1999 we completed our initial public offering of shares of
common stock, generating gross proceeds of $648.0 million. We incurred
approximately $41.0 million of underwriting discounts and expenses in connection
with the offering resulting in net proceeds of $607.0 million. The net proceeds
were applied primarily toward the repayment of senior indebtedness and to
finance our October 1, 1999 acquisition of Kentucky cable television systems.
For the nine months ended September 30, 1999 and September 30, 2000, we
spent $72.9 million and $195.3 million, respectively, in capital expenditures
largely to support our plant rebuild, digital converter purchases and to a
lesser extent network extensions. For the nine months ended September 30, 1999
and September 30, 2000, cash from operations totaled $21.2 million and $53.3
million, which together with borrowings under our credit facilities, funded the
above noted capital expenditures.
It is anticipated that during 2000, we will have approximately $251.0
million of capital expenditures, exclusive of capital expenditures required for
the deployment of telephone services. Included in the planned 2000 capital
expenditures is $127.8 million for the continued upgrade of our Indiana and
Kentucky cable television systems, which will involve the wide deployment of
fiber optics and other capital projects associated with implementing our
clustering strategy. The upgrades of all of our systems are planned to be
completed early in 2001. The amount of such capital expenditures for years
subsequent to 2000 will depend on numerous factors including the level of
success in deploying our new services which will impact the amount of capital we
will need for digital converters and other network service infrastructure to
support demand for new products and services.
At September 30, 2000, we had aggregate consolidated indebtedness of $1.3
billion, including $1.1 billion outstanding under senior bank credit facilities.
The senior bank facilities consisted of:
. $140.0 million reducing revolving credit facility maturing in
December 2005, which supports our national systems, of which
there were no borrowings;
. $550.0 million reducing revolving credit/term loan facility
maturing in December 2006, which supports our Indiana systems, of
which $510.0 million was outstanding;
. $675.0 million reducing revolving credit/term loan facility
maturing in October 2006, which supports our Kentucky systems, of
which $603.0 million was outstanding; and
. $25.0 million senior credit facility maturing in 2004, which
supports our Ohio system, which was fully-borrowed.
19
<PAGE>
On October 1, 1999, in connection with the formation of Insight Midwest and
our acquisition of a 50% interest in the Kentucky systems, Insight Midwest
completed an offering of $200.0 million principal amount of its 9 3/4% senior
notes due 2009. The net proceeds of the offering were used to repay certain
outstanding debt of the Kentucky systems. On November 6, 2000, Insight Midwest
completed an offering of $500.0 million principal amount of its 10 1/2% senior
notes due 2010. The net proceeds of the offering of $487.5 million were used to
repay outstanding borrowings under Insight Midwest's credit facilities. This is
the first step in financing the expansion of Insight Midwest, as discussed below
under "Recent Developments." Interest on the 9 3/4% notes is payable on April 1
and October 1 of each year and interest on the 10 1/2% notes is payable on May 1
and November 1 of each year. The indentures relating to the senior notes impose
certain limitations on the ability of Insight Midwest to, among other things,
incur debt, make distributions, make investments and sell assets.
The weighted average interest rates for amounts outstanding under the
Indiana and Kentucky senior credit facilities at September 30, 2000 were 8.8%
and 8.6%, respectively. The facilities contain covenants restricting, among
other things, our ability to make capital expenditures, acquire or dispose of
assets, incur additional debt, pay dividends or other distributions, create
liens on assets, make investments and engage in transactions with related
parties. The facilities also require compliance with certain financial ratios,
require us to enter into interest rate protection agreements and contain
customary events of default.
Recent Developments
Greenwood Agreement
On September 26, 2000, Insight Midwest entered into an agreement with Cable
One, Inc., a subsidiary of The Washington Post Company, for the acquisition of a
cable television system serving approximately 14,800 customers in Greenwood,
Indiana for the purchase price of $62.0 million. The Greenwood system is
located only six miles from Insight Midwest's existing systems in Indiana and,
as such, Insight Midwest intends to integrate the Greenwod systems's cable plant
with Insight Midwest's existing Indiana systems. The acquisition is subject to
closing conditions, including the completion of a proposed trade of systems
between Cable One and an affiliate of AT&T Corp., and is expected to be
completed on or about January 2, 2001.
Telephony Agreements
On July 17, 2000, we entered into definitive agreements with AT&T
Broadband, LLC for the provision by AT&T Broadband of all-distance telephone
service utilizing the cable systems' infrastructure under the AT&T brand name.
Telephony revenues are to be attributed to AT&T Broadband who, in turn, will pay
the cable affiliate a monthly per line access fee. AT&T Broadband will also pay
the cable affiliate for marketing, installation and billing support. AT&T
Broadband would be required to install and maintain the necessary switching
equipment, and would be the local exchange carrier of record. It is expected
that the cable affiliates will market the telephone services both independently
and as part of a bundle of services.
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Expansion of Insight Midwest
On August 15, 2000, Insight Midwest entered into definitive agreements with
AT&T Broadband and us for the acquisition of additional cable television
systems. Through a series of transactions, Insight Midwest will acquire all of
our remaining wholly-owned systems serving approximately 279,600 customers,
including systems which we will purchase from AT&T Broadband. At the same time,
Insight Midwest will acquire from AT&T Broadband systems serving approximately
248,800 customers. As a result, Insight Midwest will serve approximately 1.3
million customers, approximately 99% of which will be concentrated in the four
contiguous states of Indiana, Kentucky, Illinois and Ohio. Insight Ohio, which
serves approximately 84,200 customers, will become an unrestricted subsidiary
under the indentures governing Insight Midwest's senior notes, and will be
prohibited by the terms of its indebtedness from making distributions to Insight
Midwest. Upon completion of the transaction, Insight Midwest will remain
equally owned by Insight L.P. and AT&T Broadband and Insight L.P. will continue
to serve as the general partner and manage and operate the Insight Midwest
systems. The consummation of the definitive agreements is subject to several
conditions, including the receipt of all necessary regulatory approvals
Impact of Recently Issued Accounting Standards
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which as amended by SFAS No. 137 is
effective for all quarters of fiscal years beginning after June 15, 2000. The
statement requires us to recognize all derivatives on the balance sheet at fair
value. Although we have not completed our assessment of the impact of FASB No.
133 on our results of operations and financial position, we do not anticipate
that the adoption of this statement will be material.
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; however, 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, 2000, our
interest rate swap and collar agreements expire in varying amounts through 2002.
The fair market value of our long-term debt approximates its carrying value
as the credit facility borrowings bear interest at floating rates of interest
and current fair market value of the senior notes approximates par value. As of
September 30, 2000, the estimated fair value of our interest rate swap and
collar agreements was approximately $4.2 million, which amount represents the
amount required to enter into offsetting contracts with similar remaining
maturities based on quoted market prices.
As of September 30, 2000, we had entered into interest rate swaps that
approximated $766.0 million, or 67.3%, 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 $4.5 million.
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PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
During the third quarter of 2000, we granted stock options to certain of
our employees to purchase an aggregate of 15,000 shares of Class A common stock.
The grants were not registered under the Securities Act of 1933 because such
grants either did not involve an offer or sale for purposes of Section 2(a)(3)
of the Securities Act of 1933, in reliance on the fact that the stock options
were granted for no consideration, or were offered and sold in transactions not
involving a public offering, exempt from registration under the Securities Act
of 1933 pursuant to Section 4 (2) and in compliance with Rule 506 thereunder.
On August 8, 2000, we issued 800,000 shares of Class A common stock in
connection with Insight Ohio's purchase of its then outstanding 25% common
equity interest from Coaxial Communications of Central Ohio, Inc. The issuance
was not registered under the Securities Act of 1933 as it was effected in a
transaction not involving a public offering, exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) and in compliance with Rule 506
thereunder.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
We filed the following report on Form 8-K during the third quarter of the
year ending December 31, 2000:
Current Report on Form 8-K filed August 25, 2000.
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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.
INSIGHT COMMUNICATIONS COMPANY, INC.
Date: November 13, 2000 By: /s/ Michael S. Willner
----------------------------
Michael S. Willner
President and Chief Executive Officer
By: /s/ Kim D. Kelly
----------------------
Kim D. Kelly
Executive Vice President and Chief Financial
& Operating Officer
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