10-Q 1 d10q.txt FORM 10-Q ================================================================================ 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, 2001 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 (I.R.S. Employer incorporation or organization) Identification Nos.) 810 7/th/ Avenue New York, New York 10019 (Address of principal executive offices) (Zip code) Registrants' telephone number, including area code: 917-286-2300 ______________________ Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports) and (2) have been subject to such filing requirements for the past 90 days. Yes X No ___ ----- Indicate the number of shares outstanding of each of the registrants' classes of common stock, as of the latest practicable date. Insight Midwest, L.P. - Not Applicable Insight Capital, Inc. - Not Applicable ================================================================================ 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 as amended for the year ended December 31, 2000. 1 INSIGHT MIDWEST, L.P. CONSOLIDATED BALANCE SHEETS (in thousands)

See accompanying notes 2 INSIGHT MIDWEST, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (in thousands)

See accompanying notes 3 INSIGHT MIDWEST, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)

See accompanying notes 4 INSIGHT MIDWEST, L.P. 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 ("AT&T Broadband"). We are owned 50% by Insight Communications Company, L.P. ("Insight LP"), which is wholly-owned by Insight Inc., and 50% by AT&T Broadband, through its indirect subsidiary TCI of Indiana Holdings, LLC ("TCI"). The accompanying consolidated financial statements include the accounts of our subsidiaries that own and operate cable television systems in Illinois, Indiana, Kentucky, Ohio and Georgia. 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 statement 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 as amended for the year ended December 31, 2000. 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 and nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the year ending December 31, 2001 or any other interim period. Certain prior period amounts have been reclassified to conform to the current period presentation. 3. Cable System Transactions On January 5, 2001, we completed a series of transactions with Insight LP and certain subsidiaries of AT&T Corp. (the "AT&T cable subsidiaries") for the acquisition of additional cable television systems, primarily located in the state of Illinois, valued at approximately $2.2 billion (the "AT&T transactions"), inclusive of systems valued at approximately $775.8 million, contributed by Insight LP. The AT&T transactions were financed through a credit facility established on January 5, 2001, the Midwest Holdings Credit Facility (Note 6). As a result of the AT&T transactions, we acquired all of 5 INSIGHT MIDWEST, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. Cable System Transactions (continued) Insight LP's wholly-owned systems serving approximately 280,000 customers, including systems which Insight LP purchased from the AT&T cable subsidiaries. At the same time, we acquired from the AT&T cable subsidiaries systems serving approximately 250,000 customers. The purchase price was preliminarily allocated to the cable television assets acquired in relation to their estimated fair values as increases to franchise rights. The purchase price allocation will be finalized upon completion and receipt of appraisal reports. Both Insight LP and the AT&T cable subsidiaries contributed their respective systems to us subject to an amount of indebtedness such that we remain equally owned by Insight LP and AT&T Broadband. Insight LP continues to serve as our general partner and manages and operates our systems. As a result of the AT&T transactions, we currently own and operate cable television systems in Indiana, Kentucky, Illinois, Ohio and Georgia which passed approximately 2.2 million homes and served approximately 1.3 million customers as of September 30, 2001. As a result of the AT&T transactions, the financial results of Insight Communications of Central Ohio LLC ("Insight Ohio"), previously wholly-owned by Insight LP, are consolidated into our financial statements effective January 1, 2001. For financing purposes, Insight Ohio is an unrestricted subsidiary under our indentures and is prohibited by the terms of its indebtedness from making distributions to us. On January 11, 2001, we acquired Cable One, Inc.'s, Greenwood, Indiana cable television system serving approximately 14,800 customers for $62.0 million. The purchase price was allocated to the cable television assets acquired in relation to their fair values as increases in property and equipment and franchise rights. 4. Pro Forma Results of Operations Our unaudited pro forma results of operations for the nine months ended September 30, 2001 and 2000 and three months ended September 30, 2000 (with 2001 results as reported), assuming each of the acquisitions and exchanges described in Note 3 occurred as of January 1, 2000 are as follows (in thousands):

6 INSIGHT MIDWEST, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. Long-Lived Assets Fixed assets consist of:

7 INSIGHT MIDWEST, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. Debt (continued) Insight Ohio Credit Facility On January 5, 2001, in connection with the AT&T transactions, we acquired Insight Ohio and the existing debt of Insight Ohio. Insight Ohio's credit facility (the "Ohio Credit Facility") provides for revolving credit loans of up to $25.0 million. The Ohio Credit Facility has a six-year maturity from the date of borrowings, with reductions to the amount of the commitment commencing after three years. Our obligations under the Ohio Credit Facility are secured by substantially all the assets of Insight Ohio. The Ohio Credit Facility requires Insight Ohio to meet certain financial and other debt covenants. Loans under the Ohio Credit Facility bear interest, at our option, at the prime rate or at a Eurodollar rate. In addition to the index rates, we pay an additional margin percentage tied to Insight Ohio's ratio of total debt to adjusted annualized operating cash flow. Insight Midwest Holdings Credit Facility On January 5, 2001, through a wholly-owned subsidiary ("Insight Midwest Holdings") which holds all of our cable television systems other than the Ohio System, we entered into a credit facility (the "Midwest Holdings Credit Facility") to finance the AT&T transactions and to repay the outstanding indebtedness under the Indiana and Kentucky Credit Facilities. The Midwest Holdings Credit Facility expires in 2009 and provides for maximum borrowings of $1.75 billion. Obligations under this credit facility are secured by a pledge of the outstanding equity interests of Insight Midwest Holdings and its subsidiaries. The Midwest Holdings Credit Facility requires Insight Midwest Holdings to meet certain financial and other debt covenants. Borrowings under this credit facility bear interest at either an alternative base rate or Eurodollar rate, plus an additional margin yield to Insight Midwest Holdings' leverage ratio, of between 0.5% and 2.75%. As a result of the repayment of the Indiana and Kentucky Credit Facilities on January 5, 2001, we recorded an extraordinary charge of $10.3 million related to the write-off of unamortized deferred financing costs related to these credit facilities. Insight Midwest 10 1/2% Senior Notes In September 2001, together with Insight Capital, Inc., we completed an exchange offer pursuant to which the 10 1/2% Senior Notes, issued in November 2000, were exchanged for identical notes registered under the Securities Act of 1933. 8 INSIGHT MIDWEST, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. Debt (continued) Debt Facility Principal Payments As of September 30, 2001, annual principal payments required on our debt are as follows (in thousands): 2001 $ - 2002 2,500 2003 3,750 2004 78,750 2005 81,250 Thereafter 2,085,750 ------------- Total $ 2,252,000 ============= Interest Rate Swap and Collar Agreements In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133, as amended by SFAS No. 137 and No. 138, was adopted as of January 1, 2001. SFAS No. 133 establishes accounting and reporting standards for derivative instruments embedded in other contracts and for hedging activities. SFAS No. 133 requires us to recognize all derivatives on the balance sheet at fair value. On January 1, 2001, our derivative financial instruments, which were obtained to manage our exposure to interest rate risk, included interest rate swap and collar agreements, which qualified as cash flow hedges. On January 1, 2001, we recorded as a component of other comprehensive loss a $1.9 million transition adjustment loss representing the cumulative effect of adopting SFAS No. 133. Changes in the fair value of such cash flow hedges are recognized in stockholders' equity as a component of comprehensive loss. For the three months and nine months ended September 30, 2001, the decrease in the fair value was $12.4 million and $25.0 million. 7. Comprehensive Loss Comprehensive loss totaled $70.8 million and $215.0 million for the three and nine months ended September 30, 2001. We record the effective portion of certain derivatives' gains or losses as accumulated other comprehensive income or loss in the accompanying consolidated balance sheets. There were no components of comprehensive income or loss for the three and nine months ended September 30, 2000. 9 INSIGHT MIDWEST, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Related Party Transactions We purchase substantially all of our pay television and other programming from affiliates of AT&T Broadband. Charges for such programming were $26.5 million and $81.6 million for the three and nine months ended September 30, 2001 and $14.8 million and $42.1 million for the three and nine months ended September 30, 2000. As of September 30, 2001 and December 31, 2000, $10.9 million and $9.8 million of accrued programming costs were due to affiliates of AT&T Broadband. We believe that the programming rates charged by the affiliates of AT&T Broadband are lower than those available from independent parties. 9. Commitments and Contingencies Litigation Insight Kentucky and certain prior owners of the Kentucky Systems have been named in class actions regarding the pass-through of state and local property tax charges to customers by the prior owners of the Kentucky Systems. The plaintiffs seek monetary damages and the enjoinment of the collection of such taxes. We believe that the Kentucky Systems have substantial and meritorious defenses to these claims. We are subject to various legal proceedings that arise in the ordinary course of business. While it is impossible to determine with certainty the ultimate outcome of these matters, it is our opinion that the resolution of these matters will not have a material adverse affect on our consolidated financial condition. 10. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. We are currently reviewing the impact of these standards and will be performing a fair value analysis at a later date in connection with the adoption of SFAS No. 142 on January 1, 2002. In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," effective for fiscal years beginning after December 15, 2001. SFAS No. 144 supersedes SFAS No. 121 and identifies the methods to be used in determining fair value. We are currently reviewing the impact of this standard and will be performing an analysis at a later date in connection with the adoption of SFAS No. 144 on January 1, 2002. 10 INSIGHT MIDWEST, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. Subsequent Event In September 2001, At Home Corporation ("@Home"), the provider of high-speed data services for all of our upgraded systems except for those located in Ohio, filed for protection under Chapter 11 of the Bankruptcy Code. In October 2001, for the purpose of continuing service to existing customers and to resume the provisioning of service to new customers, we agreed to modify certain terms of our agreement with @Home. We are continuing to monitor the bankruptcy proceeding. We believe that our upgraded infrastructure provides us with the capability of entering into arrangements with other high-speed data providers in the event that this situation is not resolved to our satisfaction. We are currently in the process of evaluating alternative solutions. We are unable to predict the outcome of the bankruptcy proceeding, whether it would result in a sale of @Home's assets to a third party or in liquidation, and the ultimate affect any such outcome would have on our existing agreement and ultimately our ability to continue to provide high-speed data services. 11 INSIGHT CAPITAL, INC. BALANCE SHEETS (in thousands)

See accompanying notes 12 INSIGHT CAPITAL, INC. STATEMENTS OF OPERATIONS (unaudited) (in thousands) Three months ended Nine months ended September 30, September 30, 2001 2000 2001 2000 -------- -------- -------- -------- Expenses: Amortization $ (366) $ (203) $ (1,098) $ (595) Interest expense (18,185) (4,875) (54,555) (14,625) -------- -------- -------- -------- Net loss $(18,551) $ (5,078) $(55,653) $(15,220) ======== ======== ======== ======== See accompanying notes 13 INSIGHT CAPITAL, INC. STATEMENTS OF CASH FLOWS (unaudited) (in thousands) Nine months ended September 30, 2001 2000 -------------------------------- Cash flows from operating activities: Net loss $(55,653) $(15,220) Adjustments to reconcile net loss to net cash provided by operating activities: Amortization of deferred financing costs 1,098 595 Interest expense paid by affiliate 54,555 14,625 ---------------------------- Net cash provided by operating activities - - ---------------------------- Cash flows from financing activities: Proceeds from issuance of common stock - 1 ---------------------------- Net cash provided by financing activities - 1 ---------------------------- Net increase in cash - 1 Cash, beginning of period 1 - ---------------------------- Cash, end of period $ 1 $ 1 ============================ See accompanying notes 14 INSIGHT CAPITAL, INC. NOTES TO FINANCIAL STATEMENTS 1. Nature of Business Insight Capital, Inc. (the "Company"), a Delaware corporation, was formed on September 23, 1999, for the sole purpose of being a co-issuer of the senior notes described in Note 3, which allows certain investors the ability to be holders of the debt. The Company has no operations. The outstanding shares of the Company are owned by Insight Midwest, L.P. ("Insight Midwest"). 2. Responsibility for Interim Financial Statements The accompanying unaudited financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States for complete financial statements. In management's opinion, the financial statements reflect all adjustments considered necessary for a fair statement of the financial position as of the interim dates presented. These unaudited interim financial statements should be read in conjunction with the audited financial statements and notes to financial statements contained in the Company's Annual Report on Form 10-K as amended for the year ended December 31, 2000. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. 3. Notes Payable On October 1, 1999, the Company and Insight Midwest completed a $200.0 million offering of 9 3/4% senior notes due in October 2009. The proceeds of the offering were used to repay certain debt of Insight Midwest. Interest payments on these Senior Notes, which commenced on April 1, 2000, are payable semi-annually on April 1 and October 1. On November 6, 2000, the Company and Insight Midwest completed a $500.0 million offering of 10 1/2% senior notes due in November 2010. Insight Midwest received proceeds of $487.5 million, net of an underwriting fee of $5.0 million and a bond discount of $7.5 million. The proceeds of the offering were used to repay certain debt of Insight Midwest. Interest payments on these Senior Notes, which commence on May 1, 2001, are payable semi-annually on May 1 and November 1. In April 2000 and September 2001, the Company and Insight Midwest completed an exchange offer pursuant to which the 9 3/4% Senior Notes and 10 1/2% Senior Notes were exchanged for identical notes registered under the Securities Act of 1933. 15 INSIGHT CAPITAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. Notes Payable (continued) The 9 3/4% Senior Notes and 10 1/2% Senior Notes are redeemable on or after October 1, 2004 and November 1, 2005, respectively. In addition, Insight Midwest can redeem up to 35% of the 9 3/4% Senior Notes and 10 1/2% Senior Notes prior to October 1, 2002 and November 1, 2005, respectively, with the net proceeds from certain sales of Insight Midwest's equity. Each holder of the Senior Notes may require redemption of all or part of that holder's notes upon certain changes of control. Although the Company is a co-issuer of the Senior Notes, it has no substantial assets or any operations and will not have access to additional sources of cash flow to make any payments on such debt. All future funding on the Senior Notes, including principal and interest payments, are dependent upon the operating results of Insight Midwest. The Senior Notes are general unsecured obligations and are subordinate to all Insight Midwest's liabilities, the amounts of which were $1.94 billion and $770.5 million as of September 30, 2001 and December 31, 2000. The Senior Notes contain certain financial and other debt covenants. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Some of the information in this quarterly report contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue" or similar words. You should read statements that contain these words carefully because they: . discuss our future expectations; . contain projections of our future results of operations or of our financial condition; or . state other "forward-looking" information. We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to accurately predict or over which we have no control. The risk factors listed in our Annual Report on Form 10-K as amended for the year ended December 31, 2000, as well as any cautionary language in this quarterly report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Examples of these risks include our history and expectation of future net losses, our substantial debt, increasing programming costs and competition. You should be aware that the occurrence of the events described in these risk factors and elsewhere in this quarterly report could have a material adverse effect on our business, operating results and financial condition. Overview Consistent with our strategy of pursuing value-enhancing transactions that fit our geographic and clustering strategy, on January 5, 2001, we completed a series of transactions with certain cable subsidiaries of AT&T Corp. that increased by approximately 530,000 the number of customers we serve. We refer in this report to all of the preceding transactions, including related bank financing, as the "AT&T transactions." Specifically, we acquired: . all of Insight LP's systems not already owned by us as well as systems which Insight LP acquired from the AT&T cable subsidiaries (comprising in total approximately 280,000 customers); and . systems from the AT&T cable subsidiaries located in Illinois serving approximately 250,000 customers. We acquired the systems from Insight LP and the AT&T cable subsidiaries subject to indebtedness in the amount of $685.0 million. We remain equally owned by Insight LP and AT&T Broadband. Insight LP continues to serve as our general partner and manage and operate our systems. Results of Operations Substantially all of our revenues were earned from customer fees for cable television programming services including premium and pay-per-view services and ancillary services, such as rental of converters and remote control devices, installations and from selling advertising. In addition, we earn revenues from commissions for products sold through home shopping networks. 17 We have had a history of net losses and expect to continue to report net losses for the foreseeable future. The principal reasons for our prior and anticipated net losses include depreciation and amortization expenses associated with our acquisitions and capital expenditures related to construction and upgrading of our systems, and interest costs on borrowed money. We cannot predict what impact, if any, continued losses will have on our ability to finance our operations in the future. The following table is derived for the periods presented from our consolidated financial statements that are included in this report and sets forth certain statement of operations data for our consolidated operations:

EBITDA represents earnings 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 accounting principles generally accepted in the United States. EBITDA, as computed by management, is not necessarily comparable to similarly titled amounts of other companies. Refer to our financial statements, including our statements of cash flows, which appear elsewhere in this quarterly report. 18 Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2000 Revenue increased $81.9 million or 86.2% to $176.8 million for the three months ended September 30, 2001 compared to $94.9 million for the three months ended September 30, 2000. The increase in revenue was primarily the result of the cable television systems acquired in the AT&T transactions, including the Ohio System. The incremental revenue generated by the cable television systems acquired approximated $70.6 million, which represents 86.2% of the increase in consolidated revenue. Excluding the systems acquired in the AT&T transactions, revenue increased 11.9% largely due to the sale of new services. Revenue for digital and high-speed data in the existing systems increased by $7.5 million, a combined 146.5% growth rate. Revenue by service offering were as follows for the three months ended September 30 (in thousands): 2001 Revenue % of 2000 Revenue % of by Service Total by Service Total Offering Revenue Offering Revenue ------------ ------- ----------- ------- Basic $ 119,341 67.5% $ 68,039 71.7% Premium 14,178 8.0% 8,447 8.9% Pay-Per-View 873 .5% 961 1.0% Digital 12,085 6.8% 2,731 2.9% Advertising Sales 11,742 6.6% 6,464 6.8% Data Services 9,863 5.6% 2,376 2.5% Other 8,712 5.0% 5,921 6.2% ---------- ------- --------- ------- Total $ 176,794 100.0% $ 94,939 100.0% ========== ======= ========= ======= On a pro forma basis including the systems acquired in the AT&T transactions, RGUs (Revenue Generating Units) were approximately 1,590,000 as of September 30, 2001 compared to approximately 1,436,200 as of September 30, 2000. This represents an annualized growth rate of 10.7%. RGUs represent the sum of basic and digital video, high-speed data and telephone customers. Average monthly revenue per basic customer was $46.30 for the three months ended September 30, 2001 compared to $43.12 for the three months ended September 30, 2000 primarily reflecting the continued successful rollout of new product offerings in the Indiana, Kentucky and Ohio markets. Average monthly revenue per basic customer for high-speed data and interactive digital video increased to $5.75 for the three months ended September 30, 2001 from $1.86 for the three months ended September 30, 2000. Excluding the systems acquired in the AT&T transactions, the number of high-speed data service customers increased to approximately 46,000 as of September 30, 2001 from approximately 19,100 as of September 30, 2000, while digital customers increased to approximately 144,400 as of September 30, 2001 from approximately 50,100 as of September 30, 2000. Programming and other operating costs increased $32.3 million or 98.1% to $65.3 million for the three months ended September 30, 2001 from $33.0 million for the three months ended September 30, 2000. The increase in programming and other operating costs was primarily the result of the cable television systems acquired in the AT&T transactions. The incremental expense generated by the acquisition of these systems approximated $26.2 million, which represents 80.9% of the increase in programming and other operating costs. Excluding these systems, programming and other operating costs increased by approximately $6.2 million or 18.8%, primarily as a result of increased programming rates and additional programming carried by our existing systems. 19 Selling, general and administrative expenses increased $12.9 million or 88.9% to $27.3 million for the three months ended September 30, 2001 from $14.5 million for the three months ended September 30, 2000. The increase in selling, general and administrative expenses was primarily the result of the acquisition of the cable television systems acquired in the AT&T transactions. The incremental selling, general and administrative expenses generated by the acquisition of the Illinois systems approximated $11.2 million, which represents 77.4% of the increase in selling, general and administrative expenses. Excluding these systems, selling, general and administrative costs increased by approximately $1.7 million or 11.5%, primarily reflecting increased marketing activity and corporate expenses associated with new service introductions. Management fees are directly related to revenue as these fees are calculated as approximately 3.0% of gross revenues. Depreciation and amortization expense increased $41.8 million or 83.7% to $91.7 million for the three months ended September 30, 2001 from $49.9 million for the three months ended September 30, 2000. The increase in depreciation and amortization expense was primarily the result of the cable television systems acquired in the AT&T transactions. The incremental depreciation and amortization expense generated by these systems approximated $33.1 million, which represents 79.2% of the increase. Excluding these systems, depreciation and amortization increased by approximately $8.7 million or 17.4%, primarily due to capital expenditures made to rebuild the existing cable equipment during previous quarters. EBITDA increased 76.1% to $78.8 million for the three months ended September 30, 2001 from $44.7 million for the three months ended September 30, 2000 primarily due to the results generated by the systems acquired in the AT&T transactions. Interest expense increased $17.8 million or 63.8% to $45.7 million for the three months ended September 30, 2001 from $27.9 million for the three months ended September 30, 2000. The increase in interest expense was primarily the result of higher outstanding debt required by the acquisition of the cable television systems acquired in the AT&T transactions and funding of capital expenditures during the past year. For the three months ended September 30, 2001, the net loss was $58.4 million primarily for the reasons set forth above. 20 Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000 Revenue increased $237.7 million or 84.2% to $519.8 million for the nine months ended September 30, 2001 from $282.2 million for the nine months ended September 30, 2000. The increase in revenue was primarily the result of the cable television systems acquired in the AT&T transactions, including the Ohio Systems. The incremental revenue generated by the cable television systems acquired approximated $211.1 million, which represents 88.8% of the increase in consolidated revenue. Excluding the systems acquired in the AT&T transactions, revenue increased 9.4% largely due to the sale of new services. Revenue for digital and high-speed data in the existing systems increased by $17.9 million, a combined 128.5% growth rate. Revenue by service offering were as follows for the nine months ended September 30 (in thousands): 2001 Revenue % of 2000 Revenue % of by Service Total by Service Total Offering Revenue Offering Revenue ---------- ------- ---------- ------- Basic $ 354,277 68.1% $ 202,120 71.6% Premium 43,591 8.4% 25,941 9.2% Pay-Per-View 3,405 .7% 3,522 1.2% Digital 33,152 6.4% 8,090 2.9% Advertising Sales 33,472 6.4% 19,128 6.8% Data Services 24,810 4.8% 5,850 2.1% Other 27,140 5.2% 17,525 6.2% --------- ------ ---------- ------- Total $ 519,847 100.0% $ 282,176 100.0% ========= ====== ========== ======= Average monthly revenue per basic customer was $45.25 for the nine months ended September 30, 2001 compared to $42.28 for the nine months ended September 30, 2000 primarily reflecting the continued successful rollout of new product offerings in the Indiana, Kentucky and Ohio markets. Average monthly revenue per basic customer for high-speed data and interactive digital video increased to $5.04 for the nine months ended September 30, 2001 from $1.68 for the nine months ended September 30, 2000. Excluding the systems acquired in the AT&T transactions, the number of high-speed data service customers increased to approximately 46,000 as of September 30, 2001 from approximately 19,100 as of September 30, 2000, while digital customers increased to approximately 144,400 as of September 30, 2001 from approximately 50,100 as of September 30, 2000. Programming and other operating costs increased $92.9 million or 93.4% to $192.3 million for the nine months ended September 30, 2001 from $99.4 million for the nine months ended September 30, 2000. The increase in programming and other operating costs was primarily the result of the cable television systems acquired in the AT&T transactions. The incremental expense generated by the acquisition of these systems approximated $77.2 million, which represents 83.1% of the increase in programming and other operating costs. Excluding these systems, programming and other operating costs increased by approximately $15.7 million or 15.8%, primarily as a result of increased programming rates and additional programming carried by our existing systems. 21 Selling, general and administrative expenses increased $38.0 million or 84.6% to $83.0 million for the nine months ended September 30, 2001 from $45.0 million for the nine months ended September 30, 2000. The increase in selling, general and administrative expenses was primarily the result of the acquisition of the cable television systems contributed in the AT&T transactions. The incremental selling, general and administrative expenses generated by the acquisition of the Illinois systems approximated $35.1 million, which represents 92.2% of the increase in selling, general and administrative expenses. Excluding these systems, selling, general and administrative costs increased by approximately $3.0 million or 6.6%, primarily reflecting increased marketing activity and corporate expenses associated with new service introductions. Management fees are directly related to revenue as these fees are calculated as approximately 3.0% of gross revenues. Depreciation and amortization expense increased $122.7 million or 85.1% to $266.7 million for the nine months ended September 30, 2001 from $144.1 million for the nine months ended September 30, 2000. The increase in depreciation and amortization expense was primarily the result of the cable television systems acquired in the AT&T transactions. The incremental depreciation and amortization expense generated by these systems approximated $94.2 million, which represents 76.8% of the increase. Excluding these systems, depreciation and amortization increased by approximately $28.5 million or 19.8%, primarily due to capital expenditures made to rebuild the existing cable equipment during previous quarters. EBITDA increased 68.2% to $218.2 million for the nine months ended September 30, 2001 from $129.7 million for the nine months ended September 30, 2000 primarily due to the results generated by the systems acquired in the AT&T transactions offset by a $10.3 million extraordinary loss recorded during the nine months ended September 30, 2001 due to early extinguishments of debt. Interest expense increased $59.3 million or 73.2% to $140.3 million for the nine months ended September 30, 2001 from $81.0 million for the nine months ended September 30, 2000. The increase in interest expense was primarily the result of higher outstanding debt required by the acquisition of the cable television systems acquired in the AT&T transactions and funding of capital expenditures during the past year. For the nine months ended September 30, 2001, the net loss was $188.1 million primarily 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 upgrade our existing cable network, and in the future will be used for network extensions, new services, converters and network upgrades. Historically, we have been able to meet our cash requirements with cash flow from operations, borrowings under our credit facilities, issuances of private equity and accessing other public sources. 22 For the nine months ended September 30, 2001 and September 30, 2000, we spent $228.6 million and $142.5 million in capital expenditures largely to support our plant rebuild including interactive technology and telephone services, digital converter and modem purchases and, to a lesser extent, network extensions. We will continue to incur capital expenditures particularly for success-based deployment of new services, including telephony and for the upgrade of the Illinois cable television systems, which involve the use of fiber optics and other capital projects associated with implementing our clustering strategy. On January 5, 2001, in connection with the AT&T transactions, Insight Midwest Holdings entered into the $1.75 billion Midwest Holdings Credit Facility from which it borrowed $663.0 million to repay the Indiana and Kentucky credit facilities and $685.0 million to finance the AT&T transactions. On January 5, 2001, we acquired all of the common equity interests of Insight Ohio as part of the AT&T transactions. Insight Ohio is an unrestricted subsidiary under the indentures governing our notes, and is prohibited by the terms of its indebtedness from making distributions to us. Cash provided by operations for the nine months ended September 30, 2001 and 2000 was $125.0 million and $29.8 million. The increase was primarily attributable to the AT&T Illinois Systems and timing changes in working capital accounts. Cash used in investing activities for the nine months ended September 30, 2001 and 2000 was $290.6 million and $143.8 million. The increase was primarily attributable to capital expenditures and the purchase of cable television systems, net of cash acquired. Cash provided by financing activities for the nine months ended September 30, 2001 and 2000 was $187.7 million and $81.0 million. The increase was primarily attributable to net borrowings from credit facilities partially offset by repayment of debt associated with the purchase of cable television systems. As of September 30, 2001, we had aggregate consolidated indebtedness of $2.25 billion, including $1.55 billion outstanding under senior bank credit facilities. The senior bank credit facilities consisted of: . $1.75 billion Midwest Holdings Credit Facility maturing in 2009, which is being utilized to support Insight Midwest's operations and build-out, and on which $1.53 billion was borrowed. The remaining availability of $223.0 million will be used to support the aforementioned capital expenditures; and . $25.0 million Insight Ohio Credit Facility maturing in 2004, which was fully-borrowed. The weighted average interest rate for amounts outstanding under our senior credit facilities as of September 30, 2001 was 5.36%. The facilities contain covenants restricting, among other things, our ability to make capital expenditures, acquire or dispose of assets, make investments and engage in transactions with related parties. The facilities also require compliance with certain financial ratios and contain customary events of default. We have a substantial amount of debt. We believe that the Midwest Holdings Credit Facility and our cash flow from operations are sufficient to support our current operating plan. We intend to continue to draw upon the $223.0 million of unused availability under the Midwest Holdings Credit Facility as discussed above to fund any shortfall resulting from the inability of our cash from operations to fund our capital expenditures, meet our debt service requirements or otherwise fund our operations. 23 Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. We are currently reviewing the impact of these standards and will be performing a fair value analysis at a later date in connection with the adoption of SFAS No. 142 on January 1, 2002. In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," effective for fiscal years beginning after December 15, 2001. SFAS No. 144 supersedes SFAS No. 121 and identifies the methods to be used in determining fair value. We are currently reviewing the impact of this standard and will be performing an analysis at a later date in connection with the adoption of SFAS No. 144 on January 1, 2002. 24 Item 3. Quantitative and Qualitative Disclosure About Market Risk Our revolving credit and term loan agreements bear interest at floating rates. Accordingly, we are exposed to potential losses related to changes in interest rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes. In order to manage our exposure to interest rate risk, we enter into derivative financial instruments, typically interest rate swaps and collars. The counterparties to our swap and collar agreements are major financial institutions. As of September 30, 2001, our interest rate swap and collar agreements expire in varying amounts through July 2003. The fair market value and carrying value of our Notes was $727.0 million and $693.2 million as of September 30, 2001. The fair market value of our credit facility borrowings approximates its carrying value as the credit facility borrowings bear interest at floating rates of interest. As of September 30, 2001, the estimated fair value (cost if terminated) of our interest rate swap and collar agreements was approximately $(26.9) million, which represents the amount required to enter into offsetting contracts with similar remaining maturities based on quoted market prices and is reflected in our financial statements as other non-current liabilities. Changes in the fair value of derivative financial instruments are either recognized in income or in stockholders' equity as a component of other comprehensive income depending on whether the derivative financial instruments qualify for hedge accounting. As of September 30, 2001, we had entered into interest rate swaps that approximated $625.0 million, or 40.3%, 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 $9.3 million. 25 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: None 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. Date: November 13, 2001 INSIGHT MIDWEST, L.P. By: Insight Communications Company, L.P., its general partner By: Insight Communications Company, Inc., its general partner By: /s/ Kim D. Kelly --------------------- Kim D. Kelly Executive Vice President and Chief Financial & Operating Officer (Principal Financial and Accounting Officer) INSIGHT CAPITAL, INC. By: /s/ Kim D. Kelly ---------------------- Kim D. Kelly Executive Vice President and Chief Financial & Operating Officer (Principal Financial and Accounting Officer) 27

INSIGHT MIDWEST LP 10-Q