-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VW+0HuQ2YhM0V/jEhxXq/GW1npz2rc01s3KgInJA+CBD2Fy2zcDKtEMpdyWG9sjM ycx21UJYeplSA500pEeWqQ== 0001104659-06-052925.txt : 20060809 0001104659-06-052925.hdr.sgml : 20060809 20060809121435 ACCESSION NUMBER: 0001104659-06-052925 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060809 DATE AS OF CHANGE: 20060809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSIGHT COMMUNICATIONS CO INC CENTRAL INDEX KEY: 0001084421 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 134053502 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26677 FILM NUMBER: 061016131 BUSINESS ADDRESS: STREET 1: 126 EAST 56TH STREET CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2123712266 MAIL ADDRESS: STREET 1: INSIGHT COMMUNICATIONS CO INC STREET 2: 126 EAST 56TH STREET CITY: NEW YORK STATE: NY ZIP: 10022 10-Q 1 a06-15652_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

 

UNITED STATES

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, 2006

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 was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes x   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): 

Large accelerated filer   o   Accelerated filer   x   Non-accelerated filer    o

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).   Yes o   No. x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.    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, 2005.

1




INSIGHT COMMUNICATIONS COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share amounts)

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

unaudited

 

 

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,586

 

 

$

29,782

 

 

Investments

 

6,419

 

 

5,901

 

 

Trade accounts receivable, net of allowance for doubtful accounts of $813 and $1,079 as of June 30, 2006 and December 31, 2005

 

24,839

 

 

27,261

 

 

Launch funds receivable

 

470

 

 

974

 

 

Prepaid expenses and other current assets

 

12,252

 

 

9,645

 

 

Total current assets

 

48,566

 

 

73,563

 

 

Fixed assets, net

 

1,143,174

 

 

1,130,705

 

 

Goodwill

 

72,430

 

 

72,430

 

 

Franchise costs

 

2,361,959

 

 

2,361,959

 

 

Deferred financing costs, net of accumulated amortization of $27,119 and $24,302 as of June 30, 2006 and December 31, 2005

 

21,406

 

 

24,220

 

 

Other non-current assets

 

2,836

 

 

2,287

 

 

Total assets

 

$

3,650,371

 

 

$

3,665,164

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Accounts payable

 

$

42,370

 

 

$

42,333

 

 

Accrued expenses and other current liabilities

 

47,132

 

 

45,413

 

 

Accrued property taxes

 

13,428

 

 

12,921

 

 

Accrued programming costs (inclusive of $30,245 and $29,878 due to related parties as of June 30, 2006 and December 31, 2005)

 

46,654

 

 

43,705

 

 

Deferred revenue

 

2,804

 

 

4,978

 

 

Interest payable

 

36,679

 

 

20,459

 

 

Debt—current portion

 

83,500

 

 

83,500

 

 

Total current liabilities

 

272,567

 

 

253,309

 

 

Deferred revenue

 

1,067

 

 

1,499

 

 

Debt

 

2,663,414

 

 

2,676,418

 

 

Other non-current liabilities

 

5,207

 

 

2,382

 

 

Minority interest

 

246,396

 

 

251,011

 

 

 

See accompanying notes

2




INSIGHT COMMUNICATIONS COMPANY, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(dollars in thousands, except share and per share amounts)

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

unaudited

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Voting preferred stock, $.01 par value:

 

 

 

 

 

 

 

Series A—1,000,000 shares authorized; 848,945 shares issued and outstanding as of June 30, 2006 and December 31, 2005

 

8

 

 

8

 

 

Series B—1,000,000 shares authorized; 517,836 shares issued and outstanding as of June 30, 2006 and December 31, 2005

 

5

 

 

5

 

 

Non-voting preferred stock, $.01 par value:

 

 

 

 

 

 

 

Series C—15,000,000 shares authorized; 13,364,693 shares issued and outstanding as of June 30, 2006 and December 31, 2005

 

134

 

 

134

 

 

Series D—50,000,000 shares authorized; 47,015,659 shares issued and outstanding as of June 30, 2006 and December 31, 2005

 

470

 

 

470

 

 

Non-voting common stock, $.01 par value:

 

 

 

 

 

 

 

Series E—5,000,000 shares authorized; 3,665,747 and 0 shares issued and outstanding as of June 30, 2006 and December 31, 2005

 

37

 

 

 

 

Series F—100,000 shares authorized; 92,470 and 0 shares issued and outstanding as of June 30, 2006 and December 31, 2005

 

1

 

 

 

 

Voting common stock, $.01 par value:

 

 

 

 

 

 

 

Series G—10,000,000 shares authorized; 0 shares issued and outstanding as of June 30, 2006 and December 31, 2005

 

 

 

 

 

Additional paid-in-capital

 

829,342

 

 

829,337

 

 

Accumulated deficit

 

(364,913

)

 

(345,199

)

 

Deferred stock compensation

 

(3,364

)

 

(4,210

)

 

Total stockholders’ equity

 

461,720

 

 

480,545

 

 

Total liabilities and stockholders’ equity

 

$

3,650,371

 

 

$

3,665,164

 

 

 

See accompanying notes

3




INSIGHT COMMUNICATIONS COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands)

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Revenue

 

 

$

311,717

 

 

 

$

279,311

 

 

$

612,998

 

$

548,638

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Programming and other operating costs (exclusive of depreciation and amortization) (inclusive of $44,257 and $87,338, and $39,176 and $80,675 of programming expense incurred through related parties for the three and six months ended June 30, 2006 and 2005)

 

 

112,660

 

 

 

92,172

 

 

222,245

 

190,755

 

Selling, general and administrative (inclusive of $334 and $884, and $1,543 and $3,450 of stock-based compensation for the three and six months ended June 30, 2006 and 2005)

 

 

81,820

 

 

 

66,262

 

 

161,815

 

131,343

 

Depreciation and amortization

 

 

67,343

 

 

 

61,266

 

 

131,655

 

122,219

 

Total operating costs and expenses

 

 

261,823

 

 

 

219,700

 

 

515,715

 

444,317

 

Operating income

 

 

49,894

 

 

 

59,611

 

 

97,283

 

104,321

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(61,208

)

 

 

(56,291

)

 

(122,283

)

(111,008

)

Interest income

 

 

369

 

 

 

761

 

 

881

 

1,023

 

Other income (expense)

 

 

20

 

 

 

543

 

 

(50

)

671

 

Total other expense, net

 

 

(60,819

)

 

 

(54,987

)

 

(121,452

)

(109,314

)

Income (loss) before minority interest and income taxes

 

 

(10,925

)

 

 

4,624

 

 

(24,169

)

(4,993

)

Minority interest income (expense)

 

 

2,110

 

 

 

(5,227

)

 

4,615

 

(3,827

)

Loss before income taxes

 

 

(8,815

)

 

 

(603

)

 

(19,554

)

(8,820

)

Provision for income taxes

 

 

(80

)

 

 

(125

)

 

(160

)

(250

)

Net loss

 

 

$

(8,895

)

 

 

$

(728

)

 

$

(19,714

)

$

(9,070

)

 

See accompanying notes

4




INSIGHT COMMUNICATIONS COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

 

 

Six months ended June 30,

 

 

 

2006

 

2005

 

Operating activities:

 

 

 

 

 

Net loss

 

$

(19,714

)

$

(9,070

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

131,655

 

122,219

 

Stock-based compensation

 

884

 

3,450

 

Non-cash consulting expense

 

 

30

 

Gain on interest rate swaps

 

 

(812

)

Minority interest

 

(4,615

)

3,827

 

Provision for losses on trade accounts receivable

 

7,026

 

8,221

 

Contribution of stock to 401(k) Plan

 

 

1,434

 

Amortization of note discount

 

6,571

 

18,801

 

Changes in operating assets and liabilities:

 

 

 

 

 

Trade accounts receivable

 

(4,604

)

(1,065

)

Launch funds receivable

 

504

 

2,194

 

Prepaid expenses and other assets

 

(3,201

)

(8,206

)

Accounts payable

 

37

 

7,889

 

Interest payable

 

16,220

 

42

 

Accrued expenses and other liabilities

 

2,569

 

(5,727

)

Net cash provided by operating activities

 

133,332

 

143,227

 

Investing activities:

 

 

 

 

 

Purchase of fixed assets

 

(141,765

)

(93,513

)

Sale of fixed assets

 

504

 

957

 

Purchase of investments

 

(518

)

(1,307

)

Sale of investments

 

 

926

 

Net cash used in investing activities

 

(141,779

)

(92,937

)

Financing activities:

 

 

 

 

 

Repayment of credit facilities

 

(41,750

)

(41,750

)

Net proceeds from borrowings under credit facility

 

25,000

 

 

Other

 

1

 

 

Net cash used in financing activities

 

(16,749

)

(41,750

)

Net increase (decrease) in cash and cash equivalents

 

(25,196

)

8,540

 

Cash and cash equivalents, beginning of period

 

29,782

 

100,144

 

Cash and cash equivalents, end of period

 

$

4,586

 

$

108,684

 

 

 

See accompanying notes

5




INSIGHT COMMUNICATIONS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Basis of Presentation

Through our wholly owned subsidiary, Insight Communications Company, L.P. (“Insight LP”), we own a 50% interest in Insight Midwest, L.P. (“Insight Midwest”), which through its operating subsidiaries, Insight Communications Midwest, LLC (“Insight Communications Midwest”), Insight Kentucky Partners II, L.P. (“Insight Kentucky”) and Insight Communications of Central Ohio, LLC (“Insight Ohio”), owns and operates cable television systems in Indiana, Kentucky, Ohio, and Illinois which passed approximately 2.4 million homes and served approximately 1.3 million customers as of June 30, 2006.

Insight LP is the general partner of Insight Midwest. Through Insight LP, we manage all of Insight Midwest’s systems.

The accompanying consolidated financial statements include our accounts and those of our wholly owned subsidiaries, Insight LP and Insight Cable Services, LLC. Reclassifications have been made to the prior year’s financial statements to conform to those classifications used in 2006.

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, 2005.

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 and six months ended June 30, 2006 are not necessarily indicative of the results to be expected for the year ending December 31, 2006 or any other interim period.

3. Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (“SFAS 123R”). SFAS 123R establishes the accounting for transactions in which an entity pays for employee services in share-based payment transactions. SFAS 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. The Company adopted SFAS 123R effective January 1, 2006 using the modified-prospective transition method. Under this method stock-based compensation is recognized for

6




INSIGHT COMMUNICATIONS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Recent Accounting Pronouncements (Continued)

awards granted in the period after adoption. Prior year financial statements are not restated. The adoption of this standard did not have a material impact on our consolidated financial statements.

In May 2005, FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements and changes the requirements for the accounting for and reporting of a change in accounting principles. SFAS No. 154 applies to all voluntary changes in an accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific provisions, those provisions should be followed. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning in 2006.

In July 2006, FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company is required to adopt the provisions of FIN 48 during the first fiscal year beginning after December 15, 2006. The Company is currently evaluating the impact of FIN 48 on our consolidated financial statements.

4. Stock-Based Compensation

For the three months ended June 30, 2006, the Company recorded $334,000 of stock-based compensation expense for the vesting of deferred shares.  For the six months ended June 30, 2006, the Company recorded $884,000 of stock-based compensation expense for the vesting of deferred shares and the issuance of Series E and F non-voting common stock. These expenses are included in selling, general and administrative expense on our consolidated statements of operations.

For the three and six months ended June 30, 2005, the Company accounted for stock-based compensation under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. Compensation cost related to stock awards issued to employees was recorded only if the grant-date market price of the underlying stock exceeded the exercise price. The following table summarizes relevant information as to our reported results under the intrinsic value method of accounting for stock awards, with supplemental information, as if a fair value method had been applied to all awards.

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2005

 

2005

 

 

 

(in thousands)

 

Net loss

 

 

$

(728

)

 

 

$

(9,070

)

 

Stock-based compensation as reported

 

 

1,543

 

 

 

3,450

 

 

Stock-based compensation determined under fair value based method for all awards, net of tax

 

 

(3,434

)

 

 

(7,210

)

 

Adjusted net loss

 

 

$

(2,619

)

 

 

$

(12,830

)

 

 

7




INSIGHT COMMUNICATIONS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Investments

Promptu

Promptu (formerly AgileTV Corporation) is a privately owned company that develops voice navigation services for television and mobile devices. On May 11, 2005, we made an additional investment in Promptu by purchasing shares of Promptu’s Series B1 preferred stock and common stock for an aggregate purchase price of (i) approximately $900,000 in cash and (ii) approximately $300,000 in the form of conversion of an outstanding promissory note. We are accounting for our investment in Promptu under the cost method. As of June 30, 2006 and December 31, 2005, our carrying value in this investment was $1.2 million.

Oxygen Cable, LLC

Oxygen Cable, LLC (“Oxygen”) is an independent cable television network with programming tailored to the interests of women. On July 9, 2002 we entered into a carriage agreement with Oxygen, whereby we agreed to carry programming content from Oxygen. The term of the carriage agreement expires on December 31, 2006.

Concurrently with the carriage agreement, we entered into an equity issuance agreement with Oxygen. The agreement calls for Oxygen to deliver to us shares having an aggregate fair market value as of December 31, 2005 of $3.8 million, and by December 1, 2006 deliver to us additional shares having an aggregate fair market value as of the December 31, 2005 valuation of $2.0 million. Pursuant to the equity issuance agreement, a portion of the monthly programming fees represent our equity investment in Oxygen. As of June 30, 2006 and December 31, 2005, our carrying value in this investment was $5.2 million and $4.7 million. We and Oxygen are currently in the process of negotiating the fair market value of Oxygen which will be used to determine the number of shares we will receive. As of June 30, 2006, no shares have been delivered to us.

6. Fixed Assets

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

(in thousands)

 

Land, buildings and improvements

 

$

42,674

 

$

41,042

 

Cable system equipment

 

2,536,449

 

2,398,364

 

Furniture, fixtures and office equipment

 

22,698

 

21,352

 

 

 

2,601,821

 

2,460,758

 

Less: accumulated depreciation and amortization

 

(1,458,647

)

(1,330,053

)

Total fixed assets, net

 

$

1,143,174

 

$

1,130,705

 

 

We recorded depreciation expense of $65.9 million and $128.8 million for the three and six months ended June 30, 2006 and $59.9 million and $119.6 million for the three and six months ended June 30, 2005.

8




INSIGHT COMMUNICATIONS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Debt

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

(in thousands)

 

Insight Midwest Holdings Credit Facility

 

$

1,387,500

 

 

$

1,404,250

 

 

Insight Midwest 9¾% Senior Notes

 

385,000

 

 

385,000

 

 

Insight Midwest 10½% Senior Notes

 

630,000

 

 

630,000

 

 

Insight Inc. 12¼% Senior Discount Notes

 

350,000

 

 

350,000

 

 

 

 

2,752,500

 

 

2,769,250

 

 

Net unamortized discount/premium on notes

 

(379

)

 

(6,950

)

 

Market value of interest rate swaps

 

(5,207

)

 

(2,382

)

 

Total debt

 

$

2,746,914

 

 

$

2,759,918

 

 

 

Insight Midwest Holdings Credit Facility

Insight Midwest Holdings, LLC, a wholly owned subsidiary of Insight Midwest, holds all of the outstanding equity of each of our operating subsidiaries and serves as borrower under a credit facility. On March 28, 2002, we loaned $100.0 million to Insight Midwest. The loan to Insight Midwest bears annual interest of 9%, compounded semi-annually, has a scheduled maturity date of January 31, 2011 and permits prepayments.  Insight Midwest Holdings is permitted under the credit facility to make distributions to Insight Midwest for the purpose of repaying our loan, including accrued interest, provided that there are no defaults existing under the credit facility. As of June 30, 2006 and December 31, 2005, the balance of the $100.0 million loan, including accrued interest, was $145.4 million and $139.1 million.

Insight Inc. 121¤4 % Senior Discount Notes

No cash interest on the discount notes accrued prior to February 15, 2006. Thereafter, cash interest on the discount notes began to accrue and is payable on February 15 and August 15 of each year, commencing August 15, 2006. The initial accreted value of the discount notes increased until February 15, 2006 such that the accreted value equaled the revised outstanding principal amount of $350.0 million on February 15, 2006.

Debt Principal Payments

As of June 30, 2006, the remaining principal payments required on our debt were as follows (in thousands):

2006

 

$

41,750

 

2007

 

83,500

 

2008

 

104,750

 

2009

 

1,542,500

 

2010

 

630,000

 

Thereafter

 

350,000

 

Total

 

$

2,752,500

 

 

9




INSIGHT COMMUNICATIONS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. 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 non-current liabilities or assets.

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.

Fair Value Hedges

In July 2003, we entered into three interest rate swap agreements whereby we swapped fixed rates under a tranche of our 10½% senior notes due in December 2010 for variable rates equal to six-month LIBOR, plus the applicable margin of approximately 8.3%, on $185.0 million notional value of debt. These agreements expired on November 1, 2005. We recorded a gain on these swaps of $1.1 million and $812,000 for the three and six months ended June 30, 2005, which is included in other income (expense).

In December 2003, we entered into an interest rate swap agreement whereby we swapped fixed rates under a different tranche of our 10½% senior notes due in December 2010 for variable rates equal to six-month LIBOR, plus the applicable margin of approximately 5.9%, on $130.0 million notional value of debt. This agreement expires November 1, 2010. This swap has been determined to be perfectly effective in hedging against fluctuations in the fair value of the underlying debt. As such, changes in the fair value of the underlying debt equally offset changes in the value of the interest rate swap in our consolidated balance sheets. The cost, if terminated, of this swap as of June 30, 2006 and December 31, 2005 was $5.2 million and $2.4 million and has been recorded in other non-current liabilities and as an adjustment to the carrying value of debt.

9. Minority Interest

As of June 30, 2006 and December 31, 2005 we had $246.4 million and $251.0 million of minority interest recorded in our consolidated balance sheets as temporary equity related to Insight Midwest.

The Insight Midwest partnership was formed in September 1999 to serve as the holding company and a financing vehicle for our cable television system 50/50 joint venture with an indirect subsidiary of AT&T Broadband (now known as Comcast Cable). The results of the partnership are included in our consolidated financial statements since we as general partner effectively control Insight Midwest’s operating and financial decisions. The partnership will continue until October 1, 2011 unless extended or terminated earlier in accordance with the provisions of the Insight Midwest partnership agreement.

Depending on the nature of a dissolution of the partnership, Insight Midwest will be required, in accordance with the partnership agreement, to either distribute to Comcast Cable some of its cable systems and liabilities equal to 50% of the net market value of the partnership or, in the event of a liquidation, an amount in cash equal to 50% of the net proceeds received.

10




INSIGHT COMMUNICATIONS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Related Party Transactions

We purchase the majority of our programming through affiliates of Comcast Cable. Charges for such programming, including a 1½% administrative fee, were $44.3 million and $87.3 million for the three and six months ended June 30, 2006 and $39.2 million and $80.7 for the three and six months ended June 30, 2005. As of June 30, 2006 and December 31, 2005, $30.2 million and $29.9 million of accrued programming costs were due to affiliates of Comcast Cable. We believe that the programming rates charged through these affiliates are lower than those available from independent parties.

11. Commitments and Contingencies

Programming Contracts

We enter into long-term contracts with third parties who provide us with programming for distribution over our cable television systems. These programming contracts are a significant part of our business and represent a substantial portion of our operating costs. Since future fees under such contracts are based on numerous variables, including number and type of customers, we have not recorded any liabilities with respect to such contracts.

Litigation

Between March 7 and March 15, 2005, five purported class action lawsuits were filed in the Delaware Court of Chancery naming Insight Communications Company, Inc. and each of its directors as defendants. Three of the lawsuits also named The Carlyle Group as a defendant. The cases were subsequently consolidated under the caption In Re Insight Communications Company, Inc. Shareholders Litigation (Civil Action No. 1154-N), and, on April 11, 2005, a Consolidated Amended Complaint (“Complaint”) was filed against each director and The Carlyle Group. The Complaint alleges, among other things, that the defendant directors breached their fiduciary duties to our stockholders in connection with a proposal from Sidney R. Knafel, Michael Willner, together with certain related and other parties, and The Carlyle Group to acquire all of our outstanding, publicly-held Class A common stock. The Complaint also alleges that the proposed transaction violated our Charter and that The Carlyle Group aided and abetted the alleged fiduciary duty breaches. The Complaint seeks the certification of a class of our stockholders; a declaration that the proposed transaction violates our Charter; an injunction prohibiting the defendants from proceeding with the proposed transaction; rescission or other damages in the event the proposed transaction is consummated; an award of costs and disbursements including attorneys’ fees; and other relief.

On July 28, 2005, the parties to the action entered into a memorandum of understanding setting forth the terms of a proposed settlement of the litigation which, among other things, provides that the buyers shall proceed with the merger, subject to the terms and conditions of the merger agreement including the “majority of the minority” stockholder voting condition, and under which the defendants admit to no wrongdoing or fault. The memorandum of understanding contemplates certification of a plaintiff class consisting of all record and beneficial owners of our Class A common stock, other than the buyers, during the period beginning on and including March 6, 2005, through and including the date of the consummation of the merger, a dismissal of all claims with prejudice, and a release in favor of all defendants of any and all claims related to the merger. The proposed settlement is subject to a number of conditions, including consummation of the merger which closed on December 16, 2005, the plaintiffs’ approval of a definitive settlement agreement and final court approval of the settlement.

11




INSIGHT COMMUNICATIONS COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Commitments and Contingencies (Continued)

On May 11, 2006, the parties to the action filed a stipulation of settlement with the court. On May 19, 2006, the court entered a scheduling order setting a hearing on the proposed settlement for July 13, 2006. On or before June 6, 2006, the Notice of Pendency of Class Action, Proposed Settlement of Class Action and Settlement Hearing was mailed to our stockholders. On June 28, 2006, Kim D. Kelly, a former employee and officer, filed an objection to the proposed settlement. On July 13, 2006, the court convened the settlement hearing, and with the agreement of all of the parties to the action, the court adjourned the settlement hearing until September 25, 2006 to permit Ms. Kelly to review the existing discovery materials and conduct additional analysis.

In April 2005, Acacia Media Technologies Corporation filed a lawsuit against us and others in the United States District Court for the Southern District of New York. The complaint alleges, among other things, infringement of certain United States patents that allegedly relate to systems and methods for transmitting and/or receiving digital audio and video content. The complaint seeks injunctive relief and damages in an unspecified amount. In the event that a court ultimately determines that we infringe on any of the patents, we may be subject to substantial damages, which may include treble damages and/or an injunction that could require us to materially modify certain products and services that we currently offer to subscribers. We believe that the claims are without merit and intend to defend the action vigorously. The final disposition of this claim is not expected to have a material adverse effect on our consolidated financial position but could possibly be material to our consolidated results of operations of any one period. Further, at this time the outcome of the litigation is impossible to predict, and no assurance can be given that any adverse outcome would not be material to our consolidated financial position.

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.

12




Item 2.                        Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Information

This quarterly report on Form 10-Q contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of our company, including, without limitation, statements preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “estimates” or similar expressions. We believe it is important to communicate management’s 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 for the year ended December 31, 2005, as well as any other 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. Examples of these risks include:

·       All of the services offered by our company face a wide range of competition that could adversely affect our future results of operations;

·       We have substantial debt and have significant interest payment requirements, which may adversely affect our ability to obtain financing in the future to finance our operations and our ability to react to changes in our business;

·       There is uncertainty surrounding the potential dissolution of our joint venture with a subsidiary of Comcast Corporation;

·       The terms of Insight Midwest’s indebtedness limits our ability to access the cash flow of Insight Midwest’s subsidiaries for debt service and any other purpose;

·       We have a history of net losses and may not be profitable in the future;

·       Our programming costs are substantial, and they are expected to increase; and

·       General business conditions, economic uncertainty or slowdown, and the effects of governmental regulation could adversely affect our future results of operations.

We do not undertake any obligation to publicly update or release any revisions to these forward-looking statements to reflect events or circumstances after the date that this quarterly report is filed with the SEC or to reflect the occurrence of unanticipated events, except as required by law.

Overview

Our revenues are earned from customer fees for cable television video services including basic, premium, digital and pay-per-view services and ancillary services, such as rental of converters and remote control devices and installations. In addition, we earn revenues from providing high-speed Internet services, selling advertising, providing telephone services and commissions for products sold through home shopping networks.

Some of the principal reasons for our net losses through June 30, 2006 include i) depreciation and amortization associated with capital expenditures for the construction, expansion and maintenance of our systems, and, ii) interest costs on borrowed money. We expect to continue to report net losses for the foreseeable future. We cannot predict what impact, if any, continued losses will have on our ability to finance our operations in the future.

13




The following table is derived from our consolidated financial statements that are included in this report and sets forth certain statement of operations data for our consolidated operations:

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(in thousands)

 

Revenue

 

$

311,717

 

$

279,311

 

$

612,998

 

$

548,638

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Programming and other operating costs

 

112,660

 

92,172

 

222,245

 

190,755

 

Selling, general and administrative

 

81,820

 

66,262

 

161,815

 

131,343

 

Depreciation and amortization

 

67,343

 

61,266

 

131,655

 

122,219

 

Total operating costs and expenses

 

261,823

 

219,700

 

515,715

 

444,317

 

Operating income

 

49,894

 

59,611

 

97,283

 

104,321

 

Interest expense

 

61,208

 

56,291

 

122,283

 

111,008

 

Minority interest income (expense)

 

2,110

 

(5,227

)

4,615

 

(3,827

)

Net loss

 

(8,895

)

(728

)

(19,714

)

(9,070

)

Net cash provided by operating activities

 

46,807

 

67,148

 

133,332

 

143,227

 

Net cash used in investing activities

 

84,229

 

54,049

 

141,779

 

92,937

 

Net cash used in (provided by) financing activities

 

(4,125

)

20,875

 

16,749

 

41,750

 

Capital expenditures

 

84,136

 

54,788

 

141,765

 

93,513

 

 

Use of Adjusted Operating Income before Depreciation and Amortization and Free Cash Flow

We utilize Adjusted Operating Income before Depreciation and Amortization, (defined as operating income before depreciation, amortization and non-cash stock-based compensation) among other measures, to evaluate the performance of our businesses. Adjusted Operating Income before Depreciation and Amortization is considered an important indicator of the operational strength of our businesses and is a component of our annual compensation programs. In addition, our debt agreements use Adjusted Operating Income before Depreciation and Amortization, adjusted for certain non-recurring items, in our leverage and other covenant calculations. We also use this measure to determine how we will allocate resources and capital. Our management finds this measure helpful because it captures all of the revenue and ongoing operating expenses of our businesses and therefore provides a means to directly evaluate the ability of our business operations to generate returns and to compare operating capabilities across our businesses. This measure is also used by equity and fixed income research analysts in their reports to investors evaluating our businesses and other companies in the cable television industry. We believe Adjusted Operating Income before Depreciation and Amortization is useful to investors because it enables them to assess our performance in a manner similar to the methods used by our management and provides a measure that can be used to analyze, value and compare companies in the cable television industry, which may have different depreciation, amortization and stock-based compensation policies.

A limitation of Adjusted Operating Income before Depreciation and Amortization, however, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses. Management evaluates the costs of such tangible and intangible assets through other financial measures such as capital expenditures, investment spending and Free Cash Flow. Management also evaluates the costs of capitalized tangible and intangible assets by analyzing returns provided on the capital dollars deployed. Another limitation of Adjusted Operating Income before Depreciation and Amortization is that it does not reflect income net of interest expense, which is a significant expense for us because of the substantial debt we incurred to acquire cable television systems and finance capital expenditures to upgrade our cable network. Management evaluates the impact of interest expense through measures including interest expense, Free Cash Flow, the returns analysis discussed above and debt service covenant ratios under our credit facility.

14




Free Cash Flow is net cash provided by operating activities (as defined by accounting principles generally accepted in the United States) less capital expenditures. Free Cash Flow is considered to be an important indicator of our liquidity, including our ability to repay indebtedness. We believe Free Cash Flow is useful for investors because it enables them to assess our ability to service our debt and to fund continued growth with internally generated funds in a manner similar to the methods used by our management, and provides a measure that can be used to analyze, value and compare companies in the cable television industry.

Both Adjusted Operating Income before Depreciation and Amortization and Free Cash Flow should be considered in addition to, not as a substitute for, Operating Income, Net Income and various cash flow measures (e.g., Net Cash Provided by Operating Activities), as well as other measures of financial performance and liquidity reported in accordance with accounting principles generally accepted in the United States.

Reconciliation of Net Loss to Adjusted Operating Income before Depreciation and Amortization

The following table reconciles Net Loss to Adjusted Operating Income before Depreciation and Amortization. In addition, the table provides the components from Net Loss to Operating Income.

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(in thousands)

 

Net loss

 

$

(8,895

)

$

(728

)

$

(19,714

)

$

(9,070

)

Provision for income taxes

 

80

 

125

 

160

 

250

 

Loss before income taxes

 

(8,815

)

(603

)

(19,554

)

(8,820

)

Minority interest income (expense)

 

(2,110

)

5,227

 

(4,615

)

3,827

 

Income (loss) before minority interest and income taxes

 

(10,925

)

4,624

 

(24,169

)

(4,993

)

Other (income) expense:

 

 

 

 

 

 

 

 

 

Other

 

(20

)

(543

)

50

 

(671

)

Interest income

 

(369

)

(761

)

(881

)

(1,023

)

Interest expense

 

61,208

 

56,291

 

122,283

 

111,008

 

Total other expense, net

 

60,819

 

54,987

 

121,452

 

109,314

 

Operating income

 

49,894

 

59,611

 

97,283

 

104,321

 

Depreciation and amortization

 

67,343

 

61,266

 

131,655

 

122,219

 

Stock-based compensation

 

334

 

1,543

 

884

 

3,450

 

Adjusted Operating Income before Depreciation and Amortization

 

$

117,571

 

$

122,420

 

$

229,822

 

$

229,990

 

 

15




Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow

The following table provides a reconciliation from net cash provided by operating activities to Free Cash Flow. In addition, the table provides the components from net cash provided by operating activities to operating income.

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(in thousands)

 

Operating income

 

 

$

49,894

 

 

$

59,611

 

$

97,283

 

$

104,321

 

Depreciation and amortization

 

 

67,343

 

 

61,266

 

131,655

 

122,219

 

Stock-based compensation

 

 

334

 

 

1,543

 

884

 

3,450

 

Adjusted Operating Income before Depreciation and Amortization

 

 

117,571

 

 

122,420

 

229,822

 

229,990

 

Changes in working capital accounts(1)

 

 

5,758

 

 

(1,151

)

3,672

 

5,577

 

Cash paid for interest

 

 

(76,384

)

 

(54,036

)(2)

(99,471

)

(92,118

)

Cash paid for taxes

 

 

(138

)

 

(85

)

(691

)

(222

)

Net cash provided by operating activities

 

 

46,807

 

 

67,148

 

133,332

 

143,227

 

Capital expenditures

 

 

(84,136

)

 

(54,788

)

(141,765

)

(93,513

)

Free Cash Flow

 

 

$

(37,329

)

 

$

12,360

 

$

(8,433

)

$

49,714

 


(1)          Changes in working capital accounts are based on the net cash changes in current assets and current liabilities, excluding charges related to interest and taxes and other non-cash expenses.

(2)          Excludes bond interest payments due April 1, 2005 that were made on March 31, 2005. Had the payments been made on April 1, 2005, Free Cash Flow for the three months ended June 30, 2005 would have been ($6,409).

Results of Operations

Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005

Revenue for the three months ended June 30, 2006 totaled $311.7 million, an increase of 12% over the prior year, due primarily to customer gains in all services, as well as video rate increases. High-speed Internet service revenue increased 27% over the prior year, which was attributable to an increased customer base and was partially offset by lower average revenue per customer due to promotional discounts. We added a net 19,700 high-speed Internet customers during the quarter to end at 534,500 customers.

Basic cable service revenue increased 7% due to an increased customer base and video rate increases, partially offset by promotional discounts. Historically, we have experienced a seasonal decline in basic customers during the second quarter primarily as a result of students leaving the university communities we serve. In addition, digital service revenue increased 23% over the prior year due to an increased customer base. We added a net 11,700 digital customers during the quarter to end at 572,200 customers.

We are increasing our customer growth and retention efforts by increasing spending on sales and marketing efforts, emphasizing bundling and enhancing and differentiating our video services by providing video-on-demand, high definition television and digital video recorders. We are also continuing to focus on improving customer satisfaction through higher service levels and increased education of product offerings.

16




Revenue by service offering was as follows for the three months ended June 30 (dollars in thousands):

 

 

Revenue by Service Offering

 

 

 

 

 

 

 

Three Months
Ended
June 30,
2006

 

% of Total
Revenue

 

Three Months
Ended
June 30,
2005

 

% of Total
Revenue

 

 

 

% Change
in Revenue

 

Basic

 

 

$

160,328

 

 

 

51.5

%

 

 

$

150,071

 

 

 

53.7

%

 

 

 

 

6.8

%

 

High-Speed Internet

 

 

58,616

 

 

 

18.8

%

 

 

46,318

 

 

 

16.6

%

 

 

 

 

26.6

%

 

Digital

 

 

34,307

 

 

 

11.0

%

 

 

27,838

 

 

 

10.0

%

 

 

 

 

23.2

%

 

Advertising

 

 

20,020

 

 

 

6.4

%

 

 

19,749

 

 

 

7.1

%

 

 

 

 

1.4

%

 

Premium

 

 

13,852

 

 

 

4.4

%

 

 

13,746

 

 

 

4.9

%

 

 

 

 

0.8

%

 

Telephone

 

 

12,528

 

 

 

4.0

%

 

 

8,387

 

 

 

3.0

%

 

 

 

 

49.4

%

 

Franchise fees

 

 

7,384

 

 

 

2.4

%

 

 

7,782

 

 

 

2.8

%

 

 

 

 

-5.1

%

 

Other

 

 

4,682

 

 

 

1.5

%

 

 

5,420

 

 

 

1.9

%

 

 

 

 

-13.6

%

 

Total

 

 

$

311,717

 

 

 

100.0

%

 

 

$

279,311

 

 

 

100.0

%

 

 

 

 

11.6

%

 

 

Total Customer Relationships were 1,375,100 as of June 30, 2006, an increase of 59,700 from 1,315,400 as of June 30, 2005. Total Customer Relationships represent the number of customers who receive one or more of our products (i.e., basic cable, high-speed Internet or telephone) without regard to which product they purchase. Total Revenue Generating Units (“RGUs”) which represent the sum of basic, digital, high-speed Internet and telephone customers, as of June 30, 2006 increased 15% as compared to June 30, 2005. RGUs by category were as follows (in thousands):

 

 

June 30, 2006

 

June 30, 2005

 

Basic

 

 

1,302.4

 

 

 

1,257.2

 

 

Digital

 

 

572.2

 

 

 

460.8

 

 

High-Speed Internet

 

 

534.5

 

 

 

391.3

 

 

Telephone

 

 

107.2

 

 

 

73.5

 

 

Total RGUs

 

 

2,516.3

 

 

 

2,182.8

 

 

 

Average monthly revenue per basic customer was $79.65 for the three months ended June 30, 2006 compared to $73.64 for the three months ended June 30, 2005. This primarily reflects the continued growth of high-speed Internet and digital product offerings in all markets, as well as video rate increases.

Programming and other operating costs increased $20.5 million, or 22%. Increases in customers and substantial increases in programming rates were significant drivers of the cost increase for the three months ended June 30, 2006. For the three months ended June 30, 2005 our programming costs reflected certain programming credits. These credits resulted from favorable resolution of pricing negotiations related to certain prior period programming costs that were accrued at a higher rate than the amount actually paid. Programming credits for the three months ended June 30, 2006, were significantly lower, causing our overall programming cost increases to be greater. In addition, direct operating costs increased due to an increase in our high-speed Internet service costs as we continued to transition our Internet services in-house. Other operating costs increased primarily as a result of increases in repair, maintenance and warranty costs; an increase in taxes due to a change in the tax law in Kentucky; and an increase in installation labor due to increased customer activity.

Selling, general and administrative expenses increased $15.6 million, or 23%, primarily due to increased payroll, payroll related costs and temporary help associated with an increase in the number of employees and salary increases for existing employees. Marketing expenses increased over the prior year to support the continued rollout of high-speed Internet, digital and telephone products, and to grow our core video customer base. Customer billing and collection fees increased due to the increase in our customer

17




base. Professional fees also increased due to increased legal activity for the three months ended June 30, 2006.

Depreciation and amortization expense increased $6.1 million, or 10%, primarily as a result of additional capital expenditures through June 30, 2006. These expenditures were primarily for purchases of customer premise equipment, installation materials, capitalized labor, headend equipment and network extensions, all of which we consider necessary in order to continue to maintain and grow our customer base and expand our service offerings. Partially offsetting this increase was a decrease in depreciation expense related to certain assets that have become fully depreciated since June 30, 2005.

As a result of the factors discussed above, Adjusted Operating Income before Depreciation and Amortization decreased $4.8 million to $117.6 million, a decrease of 4% over the prior year’s second quarter.

Interest expense increased $4.9 million, or 9%, due to i) higher interest rates, which averaged 8.9% for the three months ended June 30, 2006, as compared to 8.1% for the three months ended June 30, 2005, and ii) additional interest expense on the now fully accreted 12¼% Senior Discount Notes.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Revenue for the six months ended June 30, 2006 totaled $613.0 million, an increase of 12% over the prior year, due primarily to customer gains in all services, as well as video rate increases. High-speed Internet service revenue increased 30% over the prior year, which was attributable to an increased customer base and was partially offset by lower average revenue per customer due to promotional discounts. We added a net 64,100 high-speed Internet customers during the six months ended June 30, 2006 to end at 534,500 customers.

Basic cable service revenue increased 7% due to an increased customer base and video rate increases, partially offset by promotional discounts. In addition, digital service revenue increased 21% over the prior year due to an increased customer base. We added a net 53,400 digital customers during the six months ended June 30, 2006 to end at 572,200 customers.

Revenue by service offering was as follows for the six months ended June 30 (dollars in thousands):

 

 

Revenue by Service Offering

 

 

 

 

 

 

 

Six Months

 

 

 

Six Months

 

 

 

 

 

 

 

 

 

Ended

 

 

 

Ended

 

 

 

 

 

 

 

 

 

June 30,

 

% of Total

 

June 30,

 

% of Total

 

 

 

% Change

 

 

 

2006

 

Revenue

 

2005

 

Revenue

 

 

 

in Revenue

 

Basic

 

 

$

318,535

 

 

 

52.0

%

 

 

$

297,703

 

 

 

54.3

%

 

 

 

 

7.0

%

 

High-Speed Internet

 

 

115,113

 

 

 

18.8

%

 

 

88,431

 

 

 

16.1

%

 

 

 

 

30.2

%

 

Digital

 

 

66,030

 

 

 

10.8

%

 

 

54,599

 

 

 

10.0

%

 

 

 

 

20.9

%

 

Advertising

 

 

37,717

 

 

 

6.2

%

 

 

36,737

 

 

 

6.7

%

 

 

 

 

2.7

%

 

Premium

 

 

27,246

 

 

 

4.4

%

 

 

28,090

 

 

 

5.1

%

 

 

 

 

-3.0

%

 

Telephone

 

 

23,883

 

 

 

3.9

%

 

 

16,119

 

 

 

2.9

%

 

 

 

 

48.2

%

 

Franchise fees

 

 

14,738

 

 

 

2.4

%

 

 

15,202

 

 

 

2.8

%

 

 

 

 

-3.1

%

 

Other

 

 

9,736

 

 

 

1.5

%

 

 

11,757

 

 

 

2.1

%

 

 

 

 

-17.2

%

 

Total

 

 

$

612,998

 

 

 

100.0

%

 

 

$

548,638

 

 

 

100.0

%

 

 

 

 

11.7

%

 

 

Average monthly revenue per basic customer was $78.77 for the six months ended June 30, 2006 compared to $72.17 for the six months ended June 30, 2005. This primarily reflects the continued growth of high-speed Internet and digital product offerings in all markets, as well as video rate increases.

18




Programming and other operating costs increased $31.5 million, or 17%. Increases in customers and substantial increases in programming rates were significant drivers of the cost increase for the six months ended June 30, 2006. In addition, direct operating costs increased due to an increase in our high-speed Internet service costs. This increase is primarily attributable to the growth in our high-speed Internet customer base and the payment of contractually obligated and other one-time transition costs to bring Internet services in-house. Other operating costs increased primarily as a result of increases in repair, maintenance and warranty costs; an increase in taxes due to a change in the tax law in Kentucky; an increase in utility related expenses; and an increase in installation labor due to increased customer activity.

Selling, general and administrative expenses increased $30.5 million, or 23%, primarily due to increased payroll, payroll related costs, temporary help and travel and entertainment expenses associated with an increase in the number of employees and salary increases for existing employees. Marketing expenses increased over the prior year to support the continued rollout of high-speed Internet, digital and telephone products, and to grow our core video customer base. Customer billing and collection fees increased due to the increase in our customer base. Professional fees also increased due to increased legal activity for the six months ended June 30, 2006.

Depreciation and amortization expense increased $9.4 million, or 8.0%, primarily as a result of additional capital expenditures through June 30, 2006. These expenditures were primarily for purchases of customer premise equipment, installation materials, capitalized labor, headend equipment and network extensions, all of which we consider necessary in order to continue to maintain and grow our customer base and expand our service offerings. Partially offsetting this increase was a decrease in depreciation expense related to certain assets that have become fully depreciated since June 30, 2005.

As a result of the factors discussed above, Adjusted Operating Income before Depreciation and Amortization decreased $200,000 to $229.8 million.

Interest expense increased $11.3 million, or 10%, due to i) higher interest rates, which averaged 8.9% for the six months ended June 30, 2006, as compared to 7.9% for the six months ended June 30, 2005, and ii) additional interest expense on the now fully accreted 12 ¼% Senior Discount Notes.

Liquidity and Capital Resources

Our business requires cash for operations, debt service and capital expenditures. The cable television business has substantial ongoing capital requirements for the construction, expansion and maintenance of its broadband networks and provision of new services. In the past, expenditures have been made for various purposes, including the upgrade of the existing cable network, and will continue to be made for network extensions, installation of new services, customer premise equipment (e.g., set-top boxes), deployment of new product and service offerings, and, to a lesser extent, network upgrades. Historically, we have been able to meet our cash requirements with cash flow from operations, borrowings under our credit facilities and issuances of private and public debt and equity.

Cash provided by operations for the six months ended June 30, 2006 and 2005 was $133.3 million and $143.2 million. The decrease was primarily attributable to an increase in our net loss partially offset by the timing of cash receipts and payments related to our working capital accounts.

Cash used in investing activities for the six months ended June 30, 2006 and 2005 was $141.8 million and $92.9 million. The increase primarily was due to increases in capital expenditures. For the six months ended June 30, 2006 and 2005, Insight spent $141.8 million and $93.5 million in capital expenditures. These expenditures principally constituted purchases of customer premise equipment, capitalized labor, installation materials, headend equipment and system upgrades and rebuilds, all of which are necessary to maintain Insight’s existing network, grow its customer base and expand its service offerings.

19




Cash used in financing activities for the six months ended June 30, 2006 and 2005 was $16.7 million and $41.8 million. The decrease was due to $25.0 million in net proceeds from borrowings under our credit facility for the three months ended June 30, 2006.

Free Cash Flow for the six months ended June 30, 2006 totaled ($8.4) million, compared to $49.7 million for the six months ended June 30, 2005. This decrease in Free Cash Flow of $58.1 million was primarily driven by the following:

·       A $48.3 million increase in capital expenditures;

·       A $7.4 million increase in cash interest expense paid primarily driven by an increase in interest rates;

·       A $3.7 million source of Free Cash Flow for the six months ended June 30, 2006 compared to a $5.6 million source for the six months ended June 30, 2005 from changes in working capital accounts; and

·       A $500,000 increase in cash taxes paid.

We believe that the Insight Midwest Holdings credit facility, cash on-hand and our cash flow from operations are sufficient to support our current operating plan. We had the ability to draw upon $231.4 million of unused availability under the Insight Midwest Holdings credit facility as of June 30, 2006 to fund any shortfall resulting from the inability of Insight Midwest’s cash from operations to fund its capital expenditures, meet its debt service requirements, including mandatory redemptions, or otherwise fund its operations. We expect to use any available Free Cash Flow to repay our indebtedness.

We have a substantial amount of debt. Our high level of debt could have important consequences for you. Our investments in our operating subsidiaries, including Insight Midwest, constitute substantially all of our operating assets. Consequently, our subsidiaries conduct all of our consolidated operations and own substantially all of our operating assets. Our principal source of cash we need to pay our obligations and to repay the principal amount of our debt obligations is the cash that our subsidiaries generate from their operations and their borrowings. Our subsidiaries are not obligated to make funds available to us and are restricted by the terms of their indebtedness from doing so. Because of such restrictions, our ability to access the cash flow of our subsidiaries may be contingent upon our ability to refinance the debt of our subsidiaries. As of June 30, 2006 we were in compliance with all covenants under our credit agreement.

The following table summarizes our contractual obligations and commitments, excluding interest and commitments for programming, as of June 30, 2006 (in thousands):

 

 

Contractual Obligations

 

 

 

Long-Term

 

Operating

 

 

 

 

 

Debt

 

Leases

 

Total

 

2006

 

$

41,750

 

 

$

2,592

 

 

$

44,342

 

2007

 

83,500

 

 

3,976

 

 

87,476

 

2008

 

104,750

 

 

3,364

 

 

108,114

 

2009

 

1,542,500

 

 

2,407

 

 

1,544,907

 

2010

 

630,000

 

 

621

 

 

630,621

 

Thereafter

 

350,000

 

 

1,408

 

 

351,408

 

Total cash obligations

 

$

2,752,500

 

 

$

14,368

 

 

$

2,766,868

 

 

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. In order to manage our exposure to interest rate risk, we enter into derivative financial instruments, typically interest rate swaps. The counter-parties to our

20




swap agreements are major financial institutions. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

The aggregate fair market value and aggregate carrying value of our 9¾% and 10½% senior notes and 12¼% senior discount notes was $1.4 billion as of June 30, 2006. 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 June 30, 2006 and December 31, 2005, the cost, if terminated, of our interest rate swap agreement was $5.2 million and $2.4 million and is reflected in our financial statements as an other non-current liability.

Item 4.                        Controls and Procedures

Our management carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of June 30, 2006. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that (i) our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission, and (ii) our disclosure controls and procedures were designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There has not been any change in our internal control over financial reporting in connection with the evaluation required by Rule 13a-15(d) or 15d-15(d) under the Exchange Act that occurred during the quarter ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

21




PART II.    OTHER INFORMATION

Item 1.                        Legal Proceedings

See Note 11 in Item 1 of PART I, Notes to Consolidated Financial Statements.

Item 1A.                Risk Factors

There have been no material changes in our risk factors from those disclosed in our annual report on Form 10-K for the year ended December 31, 2005.

Item 4.                        Submission of Matters of a Vote of Security Holders

On May 2, 2006, the holders of all of the outstanding shares of our Series A voting preferred stock and Series B voting preferred stock took action by written consent to elect Michael S. Willner, Dinni Jain and James A. Atwood, Jr. as Class I directors to serve for a term that will expire upon the annual election of directors in 2009.

Item 6.                        Exhibits

Exhibits:

31.1

 

Rule 13a-14(a)/15d-14(a) Certifications of the Chief Executive Officer of Insight Communications Company, Inc.

31.2

 

Rule 13a-14(a)/15d-14(a) Certifications of the Chief Financial Officer of Insight Communications Company, Inc.

32

 

Section 1350 Certifications

 

22




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.

Date:    August 9, 2006

 

INSIGHT COMMUNICATIONS COMPANY, INC.

 

 

By:

/s/ JOHN ABBOT

 

 

 

John Abbot

 

 

 

Executive Vice President and Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

23



EX-31.1 2 a06-15652_1ex31d1.htm EX-31

Exhibit 31.1

Rule 13a-14(a)/15d-14(a) Certifications

I, Michael S. Willner, certify that:

1.                I have reviewed this quarterly report on Form 10-Q of Insight Communications Company, Inc. (the “Registrant”);

2.                Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.                Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.                The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a)           designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)          designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)           evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)          disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.                The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a)           all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b)          any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

/s/ MICHAEL S. WILLNER

 

 

Michael S. Willner

 

Vice Chairman and Chief Executive Officer

 

August 9, 2006

 



EX-31.2 3 a06-15652_1ex31d2.htm EX-31

Exhibit 31.2

Rule 13a-14(a)/15d-14(a) Certifications

I, John Abbot, certify that:

1.                I have reviewed this quarterly report on Form 10-Q of Insight Communications Company, Inc. (the “Registrant”);

2.                Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.                Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4.                The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a)           designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)          designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)           evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)          disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.                The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a)           all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b)          any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

/s/ JOHN ABBOT

 

John Abbot

 

Executive Vice President and Chief Financial Officer

 

August 9, 2006

 



EX-32 4 a06-15652_1ex32.htm EX-32

Exhibit 32

SECTION 1350 CERTIFICATIONS

The undersigned hereby certify that the quarterly report on Form 10-Q of Insight Communications Company, Inc. (the “Registrant”) for the quarter ended June 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

/s/ MICHAEL S. WILLNER

 

Michael S. Willner

 

Vice Chairman and Chief Executive Officer

 

August 9, 2006

 

/s/ JOHN ABBOT

 

John Abbot

 

Executive Vice President and Chief Financial Officer

 

August 9, 2006

 



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