<PAGE>
__________________________________________________________________________
__________________________________________________________________________
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 June 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
incorporation or organization) Identification No.)
810 7th 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 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.
<TABLE>
<CAPTION>
Class Outstanding at August 10, 2000
----------------------------------------------------- ------------------------------
<S> <C>
Class A Common Stock, $.01 Par Value 49,157,180
Class B Common Stock, $.01 Par Value 10,226,050
</TABLE>
<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>
<S> <C> <C>
December 31, June 30,
1999 2000
---------- -----------
ASSETS (Note A) (unaudited)
Cash and cash equivalents $ 113,511 $ 72,425
Investment in debt and equity securities 21,650 40,446
Trade accounts receivable, net of allowance for doubtful accounts
of $764 in 1999 and $751 in 2000 12,104 9,889
Due from affiliated companies 308 616
Prepaid expenses and other current assets 18,383 22,565
---------- ----------
Total current assets 165,956 145,941
Fixed assets, net of accumulated depreciation of $104,857 in 1999
and $163,295 in 2000 643,138 685,429
Intangible assets, net of accumulated amortization of $94,164 in 1999
and $140,235 in 2000 1,140,117 1,093,790
Deferred financing costs, net of amortization of $1,055 in 1999 20,368 20,544
and $2,082 in 2000
Investment in unconsolidated affiliates 12,501 3,680
Officer and employee loans receivable 13,900 14,401
---------- ----------
$1,995,980 $1,963,785
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 67,996 $ 55,612
Accrued expenses and other liabilities 9,431 8,869
Accrued property taxes 12,620 6,210
Deferred revenue 7,287 6,634
Interest payable 19,415 20,236
---------- ----------
Total current liabilities 116,749 97,561
Investment in unconsolidated affiliates 6,510 10,120
Deferred income taxes 33,529 20,046
Debt 1,233,000 1,281,000
---------- ----------
1,389,788 1,408,727
Minority interest 18,132 (12,788)
Stockholders' equity:
Preferred stock, $.01 par value, 100,000,000 shares authorized, 0 shares issued and
outstanding as of December 31, 1999 and June 30, 2000 - -
Common stock, $0.01 par value:
Class A - 300,000,000 shares authorized, 49,157,180 shares issued
and outstanding as of December 31, 1999 and June 30, 2000 492 492
Class B - 100,000,000 shares authorized, 10,226,050 shares issued
and outstanding as of December 31, 1999 and June 30, 2000 102 102
Additional paid in capital 656,486 656,286
Accumulated deficit (72,188) (48,515)
Accumulated other comprehensive income (loss) 3,168 (40,519)
---------- ----------
588,060 567,846
---------- ----------
$1,995,980 $1,963,785
========== ==========
</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 Six months ended
------------------------------ -----------------------------
June 30, June 30,
-------- --------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 46,406 $106,898 $ 91,783 $210,521
Costs and expenses:
Programming and other operating costs 12,598 38,133 25,861 73,522
Selling, general and administrative 10,672 19,698 20,852 42,916
Depreciation and amortization 26,201 53,405 51,940 104,525
-------- -------- -------- --------
49,471 111,236 98,653 220,963
-------- -------- -------- --------
Operating loss (3,065) (4,338) (6,870) (10,442)
Other income (expense):
Gain on cable system exchanges - - 15,799 -
Interest expense, net (11,081) (25,541) (21,574) (49,712)
Other income (expense): (93) 122 - 97
-------- -------- -------- --------
(11,174) (25,419) (5,775) (49,615)
-------- -------- -------- --------
Loss before minority interest, gain on
sale of equity investment and equity in losses of
investees (14,239) (29,757) (12,645) (60,057)
Minority interest 2,183 15,466 6,676 30,920
Gain on sale of equity investment - - - 80,937
Equity in losses of investees (2,856) (5,317) (5,569) (10,931)
-------- -------- -------- --------
Income (loss) before income taxes (14,912) (19,608) (11,538) 40,869
Provision (benefit) for income taxes - (7,760) - 17,196
-------- -------- -------- --------
Net income (loss) (14,912) (11,848) (11,538) 23,673
Accretion of redeemable Class B units (3,125) - (6,250) -
-------- -------- -------- --------
Net income (loss) applicable to common stockholders $(18,037) $(11,848) $(17,788) $ 23,673
======== ======== ======== ========
Basic income (loss) per share $(1.07) $(0.20) $(1.05) $0.40
Diluted income (loss) per share $(1.07) $(0.20) $(1.05) $0.40
</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>
Six Months Ended
June 30,
------------------------------
1999 2000
-------- ---------
<S> <C> <C>
Operating activities:
Net income (loss) $(11,538) $ 23,673
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 51,940 104,525
Gain on sale of equity investment - (80,937)
Gain on cable systems exchanges (15,899) -
Deferred income taxes - 16,875
Equity in losses of investees 5,569 10,931
Minority interest (6,676) (30,920)
Provision for losses on trade accounts receivable 866 3,387
Amortization of bond discount - (404)
Change in operating assets and liabilities:
Trade accounts receivable 1,338 (1,172)
Due from and to affiliates (84) (308)
Prepaid expenses and other assets (2,315) (4,683)
Accounts payable 3,731 (12,384)
Accrued expenses and other liabilities 1,976 (7,625)
Interest payable (3,481) 821
-------- ---------
Net cash provided by operating activities 25,427 21,779
-------- ---------
Investing activities:
Purchases of fixed assets (43,811) (99,718)
Investment in unconsolidated affiliate - (5,000)
Investment in equity securities - (5,000)
Purchase of cable television system (2,900) -
(Increase) decrease in intangible assets (12,621) 256
-------- ---------
Net cash used in investing activities (59,332) (109,462)
-------- ---------
Financing activities:
Proceeds from borrowings under bank credit facility 27,500 49,000
Repayment of borrowings - (1,000)
Deferred financing costs - (1,203)
Other - (200)
-------- ---------
Net cash provided by financing activities 27,500 46,597
-------- ---------
Net decrease in cash and cash equivalents (6,405) (41,086)
-------- ---------
Cash and cash equivalents at beginning of period 19,902 113,511
-------- ---------
Cash and cash equivalents at end of period $ 13,497 $ 72,425
======== =========
</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, 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 a 75% non-voting equity interest in Insight Communications of Central
Ohio, LLC ("Insight Ohio"), which operates cable television systems in the
Columbus, Ohio area (Note E). Insight L.P. accounts for its investment in
Insight Ohio under the equity method of accounting.
The Company's other wholly-owned subsidiary, Insight Interactive, owns a 50%
equity interest in SourceSuite LLC (Note F), which is also 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 six month periods ended
June 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
<PAGE>
INSIGHT COMMUNICATIONS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 six months ended June 30, 2000 of approximately $1.5 million, or $0.02 per
share and $2.7 million, or $0.05 per share, respectively.
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. 137 on the Company's results of operations and financial
position, the Company does not anticipate that the adoption of this statement
will be material.
6
<PAGE>
INSIGHT COMMUNICATIONS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 (formerly Tele-Communications, Inc.) ("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
June 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
7
<PAGE>
INSIGHT COMMUNICATIONS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. Insight Midwest (continued)
Noblesville, Jeffersonville and Lafayette systems already owned by Insight L.P.
(the "Insight Contributed Systems"). Effective October 31, 1998, 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 $1.0
million and $1.1 million for the three months ended June 30, 2000 and 1999,
respectively, and $2.0 million and $2.2 million for the six months ended June
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 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, the Kentucky systems were
contributed 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 $3.4 million for the three
months and six months ended June 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.
8
<PAGE>
INSIGHT COMMUNICATIONS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. Insight Midwest (continued)
The unaudited pro forma results of operations of the Company for the six months
ended June 30, 1999, assuming the acquisition of the Kentucky systems, and each
of the acquisitions and exchanges described in Note C occurred as of January 1,
1999 is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Six months ended
June 30, 1999
-------------
<S> <C>
Revenue $195,557
Net loss applicable to common stockholders (57,877)
Basic and diluted loss per share (3.42)
</TABLE>
E. Insight Ohio (See also Note J)
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
(a newly formed limited liability company) 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 owns 25% of the non-voting common
equity and Insight L.P., through its subsidiary Insight Holdings of Ohio, LLC,
owns 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 "Voting Preferred Interests").
The Voting Preferred Interests provides for cash distributions to Coaxial and
certain of its affiliates as follows; Series A--10% and Series B--12-7/8%.
Insight Ohio cannot redeem the Voting 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 Senior Discount Notes are conditionally
guaranteed by Insight Ohio.
Insight Ohio was formed solely for the purpose of completing the aforementioned
transaction. 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 June 30, 1999 and 2000, Insight L.P. earned approximately $400,000 in
management fees from Insight Ohio and for the six months ended June 30, 1999 and
2000, such management fees were approximately $727,000 and $729,000,
respectively.
Although Insight L.P. manages and controls the day to day operations of Insight
Ohio, the shareholders of Coaxial have significant participating rights.
Accordingly, Insight L.P. is accounting for its investment in Insight Ohio under
the equity method of accounting. Insight L.P. is amortizing the
9
<PAGE>
INSIGHT COMMUNICATIONS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. Insight Ohio (continued)
difference between its initial $10.0 million investment and its 75% interest in
Insight Ohio's deficiency in assets over a period of 12 1/2 years. Such period
takes into account the amortization periods related to the fair value of Insight
Ohio's tangible and intangible assets. Accordingly, the accompanying statements
of operations for the three months ended June 30, 1999 and 2000 include Insight
L.P.'s share of Insight Ohio's operating loss of approximately $700,000 and $2.0
million, respectively and the amortization of the aforementioned deficiency in
assets of approximately $2.1 million. For the six months ended June 30, 1999 and
2000, Insight L.P.'s share of Insight Ohio's operating loss was $1.2 million and
$4.3 million, respectively. The Company has provided a commitment letter to
Insight Ohio to fund any operating shortfall Insight Ohio may experience during
2000 and accordingly, the Company continued to apply the equity method of
accounting for its investment. The Company contributed $5.0 million to Insight
Ohio during the six months ended June 30, 2000. The Company's investment
balance at June 30, 2000 was approximately $(10.1) million.
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, 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 six months ended June 30, 2000. In addition, as of
June 30, 2000, the Company recorded an unrealized loss of approximately $61.5
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 June 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 six months ended June 30, 2000 include
losses of approximately $1.2 million and $2.3 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
10
<PAGE>
INSIGHT COMMUNICATIONS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. SourceSuite LLC (continued)
Company purchased the shares of common stock on November 17, 1999. As of June
30, 2000, the Company recorded a cumulative unrealized loss of approximately
$8.7 million, which is reflected as a separate component of stockholders' equity
(including an unrealized loss of approximately $8.3 million for the six month
period ended June 30, 2000). The unrealized loss was calculated as the
difference between the cost of the stock and its fair value at June 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 June 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 June 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 six month period ended June
30, 2000). The unrealized gain was calculated as the difference between the
amortized cost of the bonds and their fair value at June 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 June 30, 2000 served approximately 122,000 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 six months ended June 30, 2000, such
management fee was approximately $300,000.
H. Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), sets forth
rules for the reporting and display of comprehensive income (net income plus all
other changes in net assets from non-owner sources) and its components in the
financial statements. For the three months ended June 30, 2000, total
comprehensive loss was $ 34.6 million (net loss of $11.8 million plus an
unrealized net loss of $22.8 million). For the six months ended June 30, 2000,
total comprehensive loss was $20.0 million (net income of $23.7 million less an
unrealized net loss of $43.7 million). At June 30, 2000, components of
accumulated other comprehensive income consisted of the net unrealized loss on
marketable securities of approximately $40.5 million, net of income tax of
approximately $28.2 million. For the three months and six months ended June 30,
1999 there were no items of other comprehensive income (loss).
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INSIGHT COMMUNICATIONS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Letter of Intent
On March 21, 2000, Insight Midwest entered into a letter of intent with Cable
One, Inc., a subsidiary of The Washington Post Company, for the acquisition of a
cable television system serving approximately 16,000 customers in Greenwood,
Indiana. The acquisition by Insight Midwest of the Greenwood system would occur
upon completion of a proposed trade of systems between Cable One and AT&T
Broadband. The transaction is subject to the negotiation and execution of
definitive agreements.
Purchase of Coaxial Common Interest
On August 8, 2000, Insight Ohio (Note E) purchased Coaxial's 25% non-voting
common equity interest. The purchase price was 1,000,000 shares of common stock
of the Company, 20% of which is payable by September 1, 2000 in cash or shares
of common stock, at the Company's option. 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 equity interests
30% of its total voting power. As a result of this transaction, the financial
results of Insight Ohio will be consolidated with the financial results of the
Company.
Although the financial results of Insight Ohio will be consolidated into the
Company as a result of this transaction, for financing purposes, Insight Ohio
will be an unrestricted subsidiary of the Company. Insight Ohio's conditional
guarantee of the Senior Notes and the Senior Discount Notes will remain in
place.
The purchase agreement also contains a provision stating that 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.
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 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
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INSIGHT COMMUNICATIONS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J. Recent Developments (continued)
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 March 23, 2000, Insight L.P. entered into a letter of intent with AT&T
Broadband for the contribution to Insight Midwest of additional cable television
systems serving approximately 537,000 customers. Initially, Insight L.P. will
exchange its Claremont, California system for AT&T's system in Freeport,
Illinois. Insight L.P. will also purchase from AT&T systems serving
approximately 100,000 customers in North Central Illinois. Concurrently with
this purchase, Insight L.P. will contribute to Insight Midwest such newly
purchased systems, as well as all of its other systems not already owned by
Insight Midwest, including the aforementioned Freeport, Illinois swap
(comprising in total approximately 187,000 customers). At the same time, AT&T
will contribute to Insight Midwest systems located in Central and North Central
Illinois serving approximately 250,000 customers. Both Insight L.P. and AT&T
Broadband will contribute their respective systems to Insight Midwest subject to
an agreed-upon amount of indebtedness so that Insight Midwest will remain
equally owned by Insight L.P. and AT&T. Insight L.P. will continue to serve as
the general partner of Insight Midwest and manage and operate the Insight
Midwest systems. The transactions are subject to the negotiation and execution
of definitive agreements.
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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.
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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
Insight Communications of Central Ohio, LLC and 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 Six months ended
June 30, June 30,
------------------------- -------------------------
(in thousands) (in thousands)
1999 2000 1999 2000
--------- -------- -------- ------
<S> <C> <C> <C> <C>
Revenue $ 46,406 $106,898 $ 91,783 $ 210,521
Costs and expenses:
Programming and other operating costs 12,598 38,133 25,861 73,522
Selling, general and administrative 10,672 19,698 20,852 42,916
Depreciation and amortization 26,201 53,405 51,940 104,525
--------- --------- --------- ---------
49,471 111,236 98,653 220,963
--------- --------- --------- ---------
Operating loss (3,065) (4,338) (6,870) (10,442)
EBITDA 22,370 59,338 61,976 195,106
Interest expense, net (11,081) (25,541) (21,574) (49,712)
Provision (benefit) for income taxes - (7,760) - 17,196
Net income (loss) (14,912) (11,848) (11,538) 23,673
Net cash provided by (used in) operating activities 6,974 (7,221) 25,427 21,779
Net cash used in investing activities (31,644) (61,471) (59,332) (109,462)
Net cash provided by financing activities 8,500 47,597 27,500 46,597
</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
<PAGE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Revenues increased 130.4% to $106.9 million for the three months ended June
30, 2000 compared to $46.4 million for the three months ended June 30, 1999. The
results were impacted by the Kentucky acquisition completed on October 1, 1999.
The incremental revenue generated by the Kentucky systems approximated $57.6
million, accounting for 95.2% of the consolidated revenue increase.
Revenues per customer per month averaged $42.56 for the three months ended
June 30, 2000 compared to $36.64 for the three months ended June 30, 1999
primarily reflecting an increase in average monthly basic revenue per customer
of $3.88. Average monthly basic revenue per customer averaged $29.92 during the
three months ended June 30, 2000 compared to $26.04 during the comparable period
of 1999 reflecting the completion of rebuilds in most Indiana systems and the
Rockford, Illinois system. In addition, higher basic rates in the Kentucky
systems increased the average monthly basic revenue per customer by
approximately $2.24. In addition, monthly revenue for high speed data services
averaged $.88 per basic customer for the three months ended June 30, 2000
compared to $.06 per basic customer for the comparable period in 1999.
Programming and other operating costs increased 202.7% to $38.1 million for
the three months ended June 30, 2000 compared to $12.6 million for the three
months ended June 30, 1999. The incremental expense generated by the Kentucky
systems approximated $21.1 million accounting for 82.8% of the consolidated
expense increase. Excluding these systems, these costs increased by
approximately $4.4 million accounting for approximately 17.2% 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 84.6% to $19.7
million for the three months ended June 30, 2000 compared to $10.7 million for
the three months ended June 30, 1999. The incremental expense generated by the
Kentucky systems approximated $8.0 million accounting for 88.9% of the
consolidated expense increase. Excluding these systems, these costs increased
by approximately $1.0 million accounting for approximately 11.1% of the total
increase, primarily reflecting increased marketing activity associated with new
product introductions and increased corporate expenses.
Depreciation and amortization expense increased 103.8% to $53.4 million for
the three months ended June 30, 2000 compared to $26.2 million for the three
months ended June 30, 1999. This increase was primarily due to the acquisition
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 June 30, 2000, an operating loss of $4.3 million
was incurred as compared to an operating loss of $3.1 million for the three
months ended June 30, 1999, primarily for the reasons set forth above.
EBITDA increased 165.3% to $59.3 million for the three months ended June
30, 2000 as compared to $22.4 for the three months ended June 30, 1999 primarily
due to the operating results generated by the Kentucky acquisition during the
three months ended June 30, 2000. In addition,
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minority interest income was $15.5 million for the second quarter of 2000 as
compared to $2.2 million for the comparable period in 1999 primarily due to the
Kentucky acquisition. Offsetting these increases are increased corporate
overhead expenses driven by growth and product expansion.
Interest expense, net increased 130.5% to $25.5 million for the three
months ended June 30, 2000 compared to $11.1 million for the three months ended
June 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 June 30, 2000 was $1.3 billion at an average
interest rate of 8.5%.
The benefit for income taxes was $7.8 million for the three months ended
June 30, 2000, which represents an effective tax rate of 39.9%. For the three
months ended June 30, 1999, there was no tax provision since prior to July 26,
1999, the date of the Company's initial public offering, the Company was
organized as a limited partnership. As such, each of the individual partners
included the taxable income or loss of the Company in their respective tax
returns.
For the three months ended June 30, 2000 a net loss of $11.8 million was
realized for the reasons set forth above.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenues increased 129.4% to $210.5 million for the six months ended June
30, 2000 compared to $91.8 million for the six months ended June 30, 1999 due
primarily to the Kentucky acquisition.
Revenues per customer per month averaged $41.87 for the six months ended
June 30, 2000 compared to $36.50 for the six months ended June 30, 1999
primarily reflecting an increase in average monthly basic revenue per customer
of $3.87. Average monthly basic revenue per customer averaged $29.78 during the
six months ended June 30, 2000 compared to $25.91 during the comparable period
of 1999 reflecting the completion of rebuilds in most Indiana systems and the
Rockford, Illinois system. In addition, higher basic rates in the Kentucky
systems increased the average monthly basic revenue per customer by
approximately $2.55. In addition, monthly revenue for high speed data services
averaged $.73 per basic customer for the six months ended June 30, 2000 versus
$.03 per basic customer for the comparable period in 1999.
Programming and other operating costs increased 184.3% to $73.5 million for
the six months ended June 30, 2000 compared to $25.9 million for the six months
ended June 30, 1999. The incremental expense generated by the Kentucky systems
approximated $40.7 million accounting for 85.5% of the consolidated expense
increase. Excluding these systems, these costs increased by approximately $6.9
million accounting for approximately 14.5% 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 105.8 % to $42.9
million for the six months ended June 30, 2000 compared to $20.9 million for the
six months ended June 30, 1999. The incremental expense generated by the
Kentucky systems approximated $18.5 million accounting for 84.1% of the
consolidated expense increase. Excluding these systems, these costs increased
by approximately $3.5 million accounting for approximately 15.9% of the total
increase, primarily
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<PAGE>
reflecting increased marketing activity and corporate expenses associated with
new product introductions.
Depreciation and amortization expense increased 101.2% to $104.5 million
for the six months ended June 30, 2000 compared to $51.9 million for the six
months ended June 30, 1999. This increase was primarily due to the acquisitions
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 six months ended June 30, 2000, an operating loss of $10.4 million
was incurred as compared to an operating loss of $6.9 million for the six months
ended June 30, 1999, primarily for the reasons set forth above.
EBITDA increased 214.8% to $195.1 million for the six months ended June 30,
2000 as compared to $62.0 million for the six months ended June 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 six
months ended June 30, 2000 and June 30, 1999, respectively, as well as the
results generated by the Kentucky acquisition during the first six months of
2000. In addition, minority interest income of $30.9 million increased 363.2%
for the first six months of 2000 compared to the first six months of 1999
primarily due to the Kentucky acquisition.
Interest expense, net increased 130.4% to $49.7 million for the six months
ended June 30, 2000 compared to $21.6 million for the six months ended June 30,
1999. The increase was primarily due to higher average outstanding indebtedness
related to the Kentucky acquisition. Average debt outstanding during the six
months ended June 30, 2000 was $1.2 billion at an average interest rate of 8.5%.
The provision for income taxes was $17.2 million for the six months ended
June 30, 2000, which represents an effective tax rate of 42.1%. For the six
months ended June 30, 1999, there was no tax provision since prior to July 26,
1999, the date of the Company's initial public offering, the Company was
organized as a limited partnership. As such, each of the individual partners
included the taxable income or loss of the Company in their respective tax
returns.
For the six months ended June 30, 2000 net income of $23.7 million was
realized for the reasons set forth above.
Liquidity and Capital Resources
Our business requires cash for operations, debt service, capital
expenditures and acquisitions. The cable television business has substantial on-
going capital requirements for the construction, expansion and maintenance of
its broadband networks. Expenditures have primarily been used to 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. We
believe we have adequate liquidity to operate our business plan, including
making our planned capital expenditures. The completion of our recently
announced acquisitions (discussed below under "Recent Developments") will
require additional financings.
18
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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
hhhhwith 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 six months ended June 30, 1999 and June 30, 2000, we spent $43.8
million and $99.7 million, respectively, in capital expenditures largely to
support our plant rebuild, digital converter purchases and to a lesser extent
network extensions. For the six months ended June 30, 1999 and June 30, 2000,
cash from operations totaled $25.4 million and $21.8 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 $212.4
million of capital expenditures, exclusive of capital expenditures required for
the deployment of telephone services. Included in the planned 2000 capital
expenditures is $104.3 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 by December 31, 2000. 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 June 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 $487.0
million was outstanding; and
. $675.0 million reducing revolving credit/term loan facility maturing in
October 2006, which supports our Kentucky systems, of which $594.0
million was outstanding.
Each of the senior credit facilities is stand-alone, having a separate lending
group. The credit facilities for the Indiana and Kentucky systems are non-
recourse to us, and none of the three facilities has cross-default provisions
relating to each other. Each credit facility has different revolving credit and
term periods and contains separately negotiated, specifically tailored
covenants. The weighted average interest rates for amounts outstanding under the
Indiana and Kentucky senior credit facilities at June 30, 2000 were 8.6% and
8.7%, 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.
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
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certain outstanding debt of the Kentucky systems. Interest on the notes is
payable on April 1 and October 1 of each year. The indenture relating to the
senior notes imposes certain limitations on the ability of Insight Midwest to,
among other things, incur debt, make distributions, make investments and sell
assets.
During March 2000, we determined that Insight Ohio's cash flow from
operations and amounts available under its credit facility may not be sufficient
to finance the operating, capital and debt service requirements of the system.
As such, we have provided a commitment letter to Insight Ohio to fund any
operating shortfall through the year 2000. Through August 8, 2000, we have
contributed $6.0 million to Insight Ohio.
Recent Developments
Greenwood Letter of Intent
On March 21, 2000, Insight Midwest entered into a letter of intent with
Cable One, Inc., a subsidiary of The Washington Post Company, for the
acquisition of a cable television system serving approximately 16,000 customers
in Greenwood, Indiana. The acquisition by Insight Midwest of the Greenwood
system would occur upon completion of a proposed trade of systems between Cable
One and AT&T Broadband. The transaction is subject to the negotiation and
execution of definitive agreements.
Purchase of Coaxial Common Interest
On August 8, 2000, Insight Ohio purchased Coaxial's 25% non-voting common
equity interest. The purchase price was 1,000,000 shares of common stock of the
Company, 20% of which is payable by September 1, 2000 in cash or shares of
common stock, at the Company's option. 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 equity interests 30% of
its total voting power. As a result of this transaction, the financial results
of Insight Ohio will be consolidated with the financial results of the Company.
Although the financial results of Insight Ohio will be consolidated into
the Company as a result of this transaction, for financing purposes, Insight
Ohio will be an unrestricted subsidiary of the Company. Insight Ohio's
conditional guarantee of the Senior Notes and the Senior Discount Notes will
remain in place.
The purchase agreement also contains a provision stating that 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.
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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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 March 23, 2000, Insight L.P. entered into a letter of intent with AT&T
Broadband for the contribution to Insight Midwest of additional cable television
systems serving approximately 537,000 customers. Initially, Insight L.P. will
exchange its Claremont, California system for AT&T's system in Freeport,
Illinois. Insight L.P. will also purchase from AT&T systems serving
approximately 100,000 customers in North Central Illinois. Concurrently with
this purchase, Insight L.P. will contribute to Insight Midwest such newly
purchased systems, as well as all of its other systems not already owned by
Insight Midwest, including the aforementioned Freeport, Illinois swap
(comprising in total approximately 187,000 customers). At the same time, AT&T
will contribute to Insight Midwest systems located in Central and North Central
Illinois serving approximately 250,000 customers. Both Insight L.P. and AT&T
Broadband will contribute their respective systems to Insight Midwest subject to
an agreed-upon amount of indebtedness so that Insight Midwest will remain
equally owned by Insight L.P. and AT&T. Insight L.P. will continue to serve as
the general partner of Insight Midwest and manage and operate the Insight
Midwest systems. The transactions are subject to the negotiation and execution
of definitive agreements.
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.
137 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 June 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 it bears interest at floating rates of interest. As of June 30, 2000, the
estimated fair value of our interest rate swap and collar agreements was
approximately $8.5 million, which amount represents the amount required to enter
into offsetting contracts with similar remaining maturities based on quoted
market prices.
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As of June 30, 2000, we had hedged approximately $766.0 million, or 71.0%,
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 $3.2 million.
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PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
During the second quarter of 2000, we granted stock options to certain of our
employees to purchase an aggregate of 106,000 shares of Class A common stock.
The grants were not registered under the Securities Act of 1933 because the
stock options 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.
Item 4. Submission of Matters to a Vote of Security Holders.
On May 16, 2000, we held our annual meeting of stockholders to (i) elect seven
directors to serve for a term of one year and (ii) ratify the selection of our
independent auditors for the year ending December 31, 2000.
The following individuals were elected to serve as directors for a term of one
year:
<TABLE>
<CAPTION>
<S> <C> <C>
Vote For Vote Withheld
Sidney R. Knafel 123,950,635 3,100,352
Michael S. Willner 124,113,175 2,937,812
Kim D. Kelly 123,963,075 3,087,912
Thomas L. Kempner 126,959,616 91,371
James S. Marcus 126,953,258 97,729
Prakash A. Melwani 126,834,883 216,104
Daniel S. O'Connell 126,841,241 209,746
</TABLE>
These individuals constituted our entire Board of Directors and served as our
directors immediately preceding the annual meeting.
The stockholders ratified the selection of Ernst & Young LLP as our
independent auditors for the year ending December 31, 2000. The result of the
vote was as follows: 126,706,166 votes were for the selection and 338,512 votes
were against the selection.
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
2.1 Purchase and Option Agreement, dated as of August 8, 2000, among
Coaxial Communications of Central Ohio, Inc., Insight Communications
of Central Ohio, LLC, Insight Holdings of Ohio, LLC, Insight
Communications Company, L.P., Insight Communications Company, Inc.,
Coaxial LLC, Coaxial DJM LLC, Coaxial DSM LLC, Barry Silverstein,
Dennis J. McGillicuddy and D. Stevens McVoy
3.1 Amended and Restated Operating Agreement of Insight Communications of
Central Ohio, LLC, dated as of August 8, 2000
10.1 Cable Facilities Lease Agreement, dated July 17, 2000, among AT&T
Broadband, LLC and Insight Communications Company, Inc. and certain
of its affiliates (portions of this exhibit have been omitted and
filed separately with the Commission pursuant to a request for
confidential treatment)
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the period covered by
this quarterly report.
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<PAGE>
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: August 11, 2000 By: /s/ Michael S. Willner
----------------------------
Michael S. Willner
President, Chief Executive
Officer and Director
By: /s/ Kim D. Kelly
----------------------
Kim D. Kelly
Executive VP, Chief Financial &
Operating Officer, Secretary and
Director
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