SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2004
| Commission file numbers | 333-33540 | |||||
| 333-33540-1 |
INSIGHT MIDWEST, L.P.
INSIGHT CAPITAL, INC.
(Exact name of registrants as specified in their charters)
| Delaware | 13-4079232 | |
| Delaware | 13-4079679 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer 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 registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports) and (2) have been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrants are accelerated filers (as defined in Exchange Act Rule 12b-2). Yes ¨ No x.
Indicate the number of shares outstanding of each of the registrants’ classes of common stock, as of the latest practicable date.
| Insight Midwest, L.P. |
- Not Applicable | |
| Insight Capital, Inc. |
- Not Applicable |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying unaudited consolidated financial statements have been prepared in accordance with the requirements of Form 10-Q and, therefore, do not include all information and footnotes required by accounting principles generally accepted in the United States. However, in our opinion, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of operations for the relevant periods have been made. Results for the interim periods are not necessarily indicative of the results to be expected for the year. These financial statements should be read in conjunction with the summary of significant accounting policies and the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2003.
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INSIGHT MIDWEST, LP
CONSOLIDATED BALANCE SHEETS
(in thousands)
| March 31, 2004 |
December 31, 2003 |
|||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Cash and cash equivalents |
$ | 58,917 | $ | 22,679 | ||||
| Trade accounts receivable, net of allowance for doubtful accounts of $1,180 and $1,123 as of March 31, 2004 and December 31, 2003 |
17,692 | 29,271 | ||||||
| Launch funds receivable |
1,879 | 9,421 | ||||||
| Prepaid expenses and other assets |
15,890 | 17,711 | ||||||
| Total current assets |
94,378 | 79,082 | ||||||
| Fixed assets, net |
1,186,899 | 1,198,830 | ||||||
| Goodwill |
14,684 | 14,684 | ||||||
| Franchise costs |
2,357,515 | 2,357,535 | ||||||
| Deferred financing costs, net of accumulated amortization of $11,825 and $10,710 as of March 31, 2004 and December 31, 2003 |
26,108 | 27,222 | ||||||
| Other non-current assets |
3,240 | — | ||||||
| Total assets |
$ | 3,682,824 | $ | 3,677,353 | ||||
| Liabilities and partners’ capital | ||||||||
| Accounts payable |
$ | 24,363 | $ | 29,427 | ||||
| Accrued expenses and other liabilities |
27,504 | 31,932 | ||||||
| Accrued property taxes |
22,870 | 22,954 | ||||||
| Accrued programming costs |
47,036 | 43,261 | ||||||
| Deferred revenue |
8,763 | 10,061 | ||||||
| Interest payable |
47,140 | 23,315 | ||||||
| Debt – current portion |
67,563 | 62,250 | ||||||
| Due to affiliates |
43,326 | 40,386 | ||||||
| Total current liabilities |
288,565 | 263,586 | ||||||
| Deferred revenue |
4,114 | 4,523 | ||||||
| Debt |
2,589,993 | 2,607,350 | ||||||
| Other non-current liabilities |
2,414 | 5,742 | ||||||
| Total liabilities |
2,885,086 | 2,881,201 | ||||||
| Partners’ capital: |
||||||||
| Partners’ accumulated capital |
799,815 | 799,574 | ||||||
| Accumulated other comprehensive loss |
(2,077 | ) | (3,422 | ) | ||||
| Total partners’ capital |
797,738 | 796,152 | ||||||
| Total liabilities and partners’ capital |
$ | 3,682,824 | $ | 3,677,353 | ||||
See accompanying notes
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INSIGHT MIDWEST, LP
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands)
| Three months ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Revenue |
$ | 238,084 | $ | 214,295 | ||||
| Operating costs and expenses: |
||||||||
| Programming and other operating costs |
87,491 | 79,533 | ||||||
| Selling, general and administrative |
44,074 | 40,005 | ||||||
| Management fees |
7,003 | 6,296 | ||||||
| Depreciation and amortization |
56,989 | 53,568 | ||||||
| Total operating costs and expenses |
195,557 | 179,402 | ||||||
| Operating income |
42,527 | 34,893 | ||||||
| Other income (expense): |
||||||||
| Gain on cable system exchange |
— | 26,992 | ||||||
| Interest expense |
(44,356 | ) | (46,292 | ) | ||||
| Interest income |
56 | 35 | ||||||
| Other |
2,014 | 25 | ||||||
| Total other expense, net |
(42,286 | ) | (19,240 | ) | ||||
| Net income |
241 | 15,653 | ||||||
| Accrual of preferred interests |
— | (5,150 | ) | |||||
| Net income attributable to common interests |
$ | 241 | $ | 10,503 | ||||
See accompanying notes
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INSIGHT MIDWEST, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
| Three months ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Operating activities: | ||||||||
| Net income |
$ | 241 | $ | 15,653 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
56,989 | 53,568 | ||||||
| Provision for losses on trade accounts receivable |
3,750 | 2,399 | ||||||
| Amortization of note discount |
73 | 493 | ||||||
| Gain on cable systems exchange |
— | (26,992 | ) | |||||
| Gain on interest rate swaps |
(1,777 | ) | — | |||||
| Changes in operating assets and liabilities, net of the effect of acquisitions: |
||||||||
| Trade accounts receivable |
7,829 | 867 | ||||||
| Launch fund receivable |
7,542 | 3,677 | ||||||
| Prepaid expenses and other assets |
961 | (3,636 | ) | |||||
| Accounts payable |
(5,064 | ) | (25,725 | ) | ||||
| Accrued expenses and other liabilities |
24,321 | 41,549 | ||||||
| Net cash provided by operating activities |
94,865 | 61,853 | ||||||
| Investing activities: | ||||||||
| Purchase of fixed assets |
(43,444 | ) | (39,747 | ) | ||||
| Purchase of intangible assets |
— | (621 | ) | |||||
| Sale of fixed assets |
380 | — | ||||||
| Purchase of cable television systems, net |
— | (26,475 | ) | |||||
| Net cash used in investing activities |
(43,064 | ) | (66,843 | ) | ||||
| Financing activities: | ||||||||
| Distributions of preferred interests |
— | (7,000 | ) | |||||
| Net borrowings (repayments) under credit facilities |
(15,563 | ) | 27,750 | |||||
| Net cash provided by (used in) financing activities |
(15,563 | ) | 20,750 | |||||
| Net increase in cash and cash equivalents |
36,238 | 15,760 | ||||||
| Cash and cash equivalents, beginning of period |
22,679 | 9,937 | ||||||
| Cash and cash equivalents, end of period |
$ | 58,917 | $ | 25,697 | ||||
See accompanying notes
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INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
We were formed in September 1999 to serve as the holding company and a financing vehicle for Insight Communications Company, Inc.’s (“Insight Inc.”) cable television system joint venture with AT&T Broadband, LLC (now known as Comcast Cable Holdings, LLC (“Comcast Cable”)). We are owned 50% by Insight Communications Company, L.P. (“Insight LP”), which is wholly owned by Insight Inc., and 50% by an indirect subsidiary of Comcast Cable. Insight LP serves as our general partner and manages and operates our systems.
Through our wholly owned operating subsidiaries, Insight Communications Midwest, LLC (“Insight Communications Midwest”), Insight Communications of Central Ohio, LLC (“Insight Ohio”) and Insight Kentucky Partners II, L.P. (“Insight Kentucky”), we own and operate cable television systems in Indiana, Kentucky, Ohio, and Illinois which passed approximately 2.3 million homes and served approximately 1.3 million customers as of March 31, 2004. In addition, we also owned and operated a cable television system in Griffin, Georgia through February 28, 2003.
The accompanying consolidated financial statements include the accounts of Insight Midwest Holdings, LLC, our wholly-owned subsidiary which owns 100% of the outstanding equity of our operating subsidiaries.
Certain prior period amounts have been reclassified to conform to the current period presentation
2. Responsibility for Interim Financial Statements
Our accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States for complete financial statements.
In our opinion, the consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the consolidated results of operations and financial position for the interim periods presented. All such adjustments are of a normal recurring nature. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2003.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the three months ended March 31,
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INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Responsibility for Interim Financial Statements (continued)
2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004 or any other interim period.
3. Fixed Assets
Fixed assets consisted of:
| March 31, 2004 |
December 31, 2003 |
|||||||
| (in thousands) | ||||||||
| Land, buildings and improvements |
$ | 35,342 | $ | 34,856 | ||||
| Cable system equipment |
2,069,361 | 2,026,641 | ||||||
| Furniture, fixtures and office equipment |
15,748 | 15,605 | ||||||
| 2,120,451 | 2,077,102 | |||||||
| Less accumulated depreciation and amortization |
(933,552 | ) | (878,272 | ) | ||||
| Total fixed assets, net |
$ | 1,186,899 | $ | 1,198,830 | ||||
We recorded depreciation expense of $55.9 million and $52.6 million for the three months ended March 31, 2004 and 2003.
4. Debt
| March 31, 2004 |
December 31, 2003 |
|||||||
| (in thousands) | ||||||||
| Note payable to Insight Inc. |
$ | 100,000 | $ | 100,000 | ||||
| Insight Midwest Holdings Credit Facility |
1,540,437 | 1,556,000 | ||||||
| Insight Midwest 9 3/4% Senior Notes |
385,000 | 385,000 | ||||||
| Insight Midwest 10 1/2% Senior Notes |
630,000 | 630,000 | ||||||
| 2,655,437 | 2,671,000 | |||||||
| Net unamortized discount/premium on notes |
(1,121 | ) | (1,194 | ) | ||||
| Market value of interest rate swaps |
3,240 | (206 | ) | |||||
| Total debt |
$ | 2,657,556 | $ | 2,669,600 | ||||
Insight Midwest Holdings $1.975 Billion Credit Facility
Our wholly owned subsidiary, Insight Midwest Holdings, LLC, serves as borrower under a $1.975 billion credit facility. On March 28, 2002, we borrowed $100.0 million from Insight Inc., $97.0 million of which was contributed to Insight Midwest Holdings in April 2002 for use in paying down the credit facility balance and in funding financing costs associated with the amendments, and $3.0 million of which was contributed to Insight Ohio as of March 28, 2002. Insight Midwest Holdings is permitted
6
INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Debt (continued)
under the credit facility to make distributions to us for the purpose of repaying this loan, including accrued interest, provided that there are no defaults existing under the credit facility. The loan bears annual interest of 9%, compounded semi-annually, has a scheduled maturity date of January 31, 2011 and permits prepayments.
On August 26, 2003 we amended the Insight Midwest Holdings Credit Facility in connection with our refinancing of all the obligations and conditionally guaranteed obligations of Insight Ohio. The amendment increased the Term B loan portion of the credit facility from $900.0 million to $1.125 billion which increased the total facility size to $1.975 billion from $1.750 billion. We recorded $2.2 million of deferred financing costs associated with this amendment that is being amortized over the remaining term of the credit facility.
On August 29, 2003, Insight Midwest Holdings distributed $22.0 million to us and, in turn, we contributed this amount to Insight Ohio for the purpose of repaying the Insight Ohio Credit Facility. Simultaneously, Insight Ohio used these proceeds plus cash on hand to repay the then outstanding balance of the Insight Ohio Credit Facility of $22.5 million plus accrued interest.
Debt Principal Payments
As of March 31, 2004, principal payments required on our debt were as follows (in thousands):
| 2004 |
$ | 46,687 | |
| 2005 |
83,500 | ||
| 2006 |
83,500 | ||
| 2007 |
83,500 | ||
| 2008 |
104,750 | ||
| Thereafter |
2,253,500 | ||
| Total |
$ | 2,655,437 | |
5. Derivative Instruments
We enter into derivative instruments, typically interest-rate swap agreements, to modify the interest characteristics of our outstanding debt to either a floating or fixed rate basis. These agreements involve fixed rate interest payments in exchange for floating rate interest receipts, known as cash flow hedges, and floating rate interest payments in exchange for fixed rate interest receipts, known as fair value hedges, over the life of the agreement without an exchange of the underlying principal amount. The differential to be paid or received is accrued as interest rates change and is recognized as an adjustment to interest expense related to the debt. The related amount payable or receivable is included in other liabilities or assets.
Gains and losses related to cash flow hedges that are determined to be effective hedges are recorded as accumulated other comprehensive income or loss in the accompanying consolidated balance sheets.
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INSIGHT MIDWEST, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Derivative Instruments (continued)
Gains and losses related to fair value hedges that are determined to be effective hedges are recorded in the consolidated statements of operations as an adjustment to the swap instrument and an offsetting adjustment to the carrying value of the underlying debt. Gains and losses related to interest rate swaps that are determined not to be effective hedges and do not qualify for hedge accounting are recorded in our consolidated statements of operations as other income or expense.
Cash Flow Hedges
As of March 31, 2004 and December 31, 2003, we had one interest rate swap agreement outstanding that effectively fixed interest rates at 5% on $150.0 million notional value of debt. This agreement expires in August 2004. We recorded $834,000 and $826,000 of accrued interest related to this agreement as of March 31, 2004 and December 31, 2003. As of March 31, 2004 and December 31, 2003, the estimated fair value (cost if terminated) of this interest rate swap agreement was approximately $(2.1) million and $(3.4) million.
Fair Value Hedges
In February 2003, we entered into two interest rate swap agreements whereby we swapped fixed rates under our 10 1/2% senior notes due in December 2010 for variable rates equal to six-month LIBOR, plus the applicable margin of approximately 7.7%, on $185.0 million notional value of debt. Six-month LIBOR ranged between 1.26% and 1.34% for February and March 2003. In May 2003, we settled these swaps and received proceeds of $1.8 million and recorded a gain in this amount, which is included in other income (expense).
In July 2003, we entered into three interest rate swap agreements whereby we swapped fixed rates under our 10&n