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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
 
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
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
 
     
810 7th Avenue
    
New York, New York
  
10019
(Address of principal executive offices)
  
(Zip code)
 
Registrant’s telephone number, including area code: 917-286-2300
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes  X  No       
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
  
Outstanding at July 26, 2002
Class A Common Stock, $.01 Par Value
  
50,209,006
Class B Common Stock, $.01 Par Value
  
10,067,537
 
 

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, 2001.
 

1

 
INSIGHT COMMUNICATIONS COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
    
June 30,
2002
     
December 31, 2001
  
Assets
   
(unaudited)
         
Cash and cash equivalents
   
$
88,216
 
   
$
198,548
 
Investments
   
 
9,876
 
   
 
18,080
 
Trade accounts receivable, net of allowance for doubtful accounts of $2,543 and $2,818 as of June 30, 2002 and December 31, 2001
   
 
21,772
 
   
 
22,918
 
Launch funds receivable
   
 
7,263
 
   
 
12,980
 
Prepaid expenses and other assets
   
 
18,259
 
   
 
18,363
 
    
  
Total current assets
   
 
145,386
 
   
 
270,889
 
Fixed assets, net
   
 
1,181,416
 
   
 
1,151,709
 
Goodwill
   
 
72,965
 
   
 
72,675
 
Franchise costs
   
 
2,290,258
 
   
 
2,283,155
 
Other intangible assets, net of accumulated amortization of $3,403 and $2,260 as of June 30, 2002 and December 31, 2001
   
 
40,525
 
   
 
41,223
 
Deferred financing costs, net of accumulated amortization of $7,161 and $5,259 as of June 30, 2002 and December 31, 2001
   
 
32,279
 
   
 
32,294
 
Other non-current assets
   
 
14,657
 
   
 
15,447
 
    
  
Total assets
   
$
3,777,486
 
   
$
3,867,392
 
    
  
Liabilities and stockholders’ equity
                  
Accounts payable
   
$
28,755
 
   
$
67,095
 
Accrued expenses and other liabilities
   
 
21,087
 
   
 
23,793
 
Accrued property taxes
   
 
17,573
 
   
 
11,030
 
Accrued programming costs
   
 
25,532
 
   
 
24,287
 
Deferred revenue
   
 
6,023
 
   
 
8,673
 
Interest payable
   
 
21,279
 
   
 
21,940
 
Debt—current portion
   
 
2,500
 
   
 
—  
 
Preferred interest distribution payable
   
 
5,250
 
   
 
5,250
 
    
  
Total current liabilities
   
 
127,999
 
   
 
162,068
 
Deferred revenue
   
 
9,330
 
   
 
12,262
 
Debt
   
 
2,536,232
 
   
 
2,542,476
 
Other non-current liabilities
   
 
58,122
 
   
 
62,964
 
Minority interest
   
 
241,790
 
   
 
255,879
 
Preferred interests
   
 
188,670
 
   
 
185,713
 
Stockholders’ equity:
                  
Preferred stock; $.01 par value; 100,000,000 shares authorized; no shares issued and outstanding as of June 30, 2002 and December 31, 2001
   
 
—  
 
   
 
—  
 
Common stock; $.01 par value:
                  
Class A – 300,000,000 shares authorized; 50,299,006 and 50,266,162 shares issued and outstanding as of June 30, 2002 and December 31, 2001
   
 
502
 
   
 
502
 
Class B – 100,000,000 shares authorized; 9,977,537 shares issued and outstanding as of June 30, 2002 and December 31, 2001
   
 
101
 
   
 
100
 
Additional paid-in-capital
   
 
842,998
 
   
 
851,936
 
Accumulated deficit
   
 
(208,774
)
   
 
(189,964
)
Accumulated other comprehensive loss
   
 
(19,484
)
   
 
(16,544
)
    
  
Total stockholders’ equity
   
 
615,343
 
   
 
646,030
 
    
  
Total liabilities and stockholders’ equity
   
$
3,777,486
 
   
$
3,867,392
 
    
  
 

See accompanying notes

2

INSIGHT COMMUNICATIONS COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share amounts)
 
    
Three months ended June 30,
     
Six months ended June 30,
  
    
2002
     
2001
     
2002
     
2001
  
Revenue
   
$
200,033
 
   
$
181,247
 
   
$
392,211
 
   
$
355,473
 
 
Operating costs and expenses:
                                    
Programming and other operating costs
   
 
69,194
 
   
 
65,552
 
   
 
138,747
 
   
 
128,140
 
Selling, general and administrative
   
 
41,534
 
   
 
38,595
 
   
 
82,414
 
   
 
75,197
 
Non-recurring high-speed data charges
   
 
—
 
   
 
—
 
   
 
4,116
 
   
 
—
 
Depreciation and amortization
   
 
49,481
 
   
 
92,076
 
   
 
97,925
 
   
 
180,342
 
    
  
  
  
Total operating costs and expenses
   
 
160,209
 
   
 
196,223
 
   
 
323,202
 
   
 
383,679
 
    
  
  
  
Operating income (loss)
   
 
39,824
 
   
 
(14,976
)
   
 
69,009
 
   
 
(28,206
)
Other income (expense):
                                    
Gain on cable systems exchange
   
 
—
 
   
 
—
 
   
 
—
 
   
 
34,178
 
Interest expense
   
 
(50,831
)
   
 
(53,610
)
   
 
(102,766
)
   
 
(105,018
)
Interest income
   
 
441
 
   
 
2,315
 
   
 
1,338
 
   
 
4,366
 
Other
   
 
(28
)
   
 
(290
)
   
 
(25
)
   
 
(517
)
    
  
  
  
Total other expense, net
   
 
(50,418
)
   
 
(51,585
)
   
 
(101,453
)
   
 
(66,991
)
Loss before minority interest, investment activity, income taxes and extraordinary item
   
 
(10,594
)
   
 
(66,561
)
   
 
(32,444
)
   
 
(95,197
)
Minority interest
   
 
4,163
 
   
 
35,227
 
   
 
14,089
 
   
 
69,665
 
Equity in losses of investees
   
 
—
 
   
 
(657
)
   
 
—
 
   
 
(1,369
)
Impairment write-down of investments
   
 
—
 
   
 
(2,069
)
   
 
(205
)
   
 
(2,069
)
    
  
  
  
Loss before income taxes and extraordinary item
   
 
(6,431
)
   
 
(34,060
)
   
 
(18,560
)
   
 
(28,970
)
Benefit (provision) for income taxes
   
 
(125
)
   
 
12,186
 
   
 
(250
)
   
 
11,205
 
    
  
  
  
Loss before extraordinary item
   
 
(6,556
)
   
 
(21,874
)
   
 
(18,810
)
   
 
(17,765
)
Extraordinary loss from early extinguishment of debt, net of tax
   
 
—
 
   
 
—
 
   
 
—
 
   
 
(6,086
)
    
  
  
  
Net loss
   
 
(6,556
)
   
 
(21,874
)
   
 
(18,810
)
   
 
(23,851
)
Accrual of preferred interests
   
 
(5,002
)
   
 
(4,807
)
   
 
(9,957
)
   
 
(9,573
)
    
  
  
  
Net loss applicable to common stockholders
   
$
(11,558
)
   
$
(26,681
)
   
$
(28,767
)
   
$
(33,424
)
    
  
  
  
Basic and diluted loss per share before extraordinary item
   
$
(.19
)
   
$
(.44
)
   
$
(.48
)
   
$
(.46
)
Basic and diluted loss per share related to extraordinary item
   
$
—
 
   
$
—
 
   
$
—
 
   
$
(.10
)
Basic and diluted loss per share attributable to common stockholders
   
$
(.19
)
   
$
(.44
)
   
$
(.48
)
   
$
(.56
)
Basic and diluted weighted-average shares outstanding
   
 
60,272,053
 
   
 
60,186,834
 
   
 
60,259,170
 
   
 
60,185,042
 
 

See accompanying notes

3

INSIGHT COMMUNICATIONS COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
    
Six months ended June 30,
  
    
2002
     
2001
  
Operating activities:
                  
Net loss
   
$
(18,810
)
   
$
(23,851
)
Adjustments to reconcile net loss to net cash provided by operating activities:
                  
Depreciation and amortization
   
 
97,925
 
   
 
180,342
 
Equity in losses of investees
   
 
—  
 
   
 
1,369
 
Impairment of investments
   
 
205
 
   
 
2,069
 
Gain on cable systems exchange
   
 
—  
 
   
 
(34,178
)
Extraordinary loss from early extinguishment of debt, net of tax
   
 
—  
 
   
 
6,086
 
Minority interest
   
 
(14,089
)
   
 
(69,665
)
Provision for losses on trade accounts receivable
   
 
6,120
 
   
 
5,146
 
Amortization of note discount
   
 
15,256
 
   
 
10,375
 
Deferred income taxes
   
 
—  
 
   
 
(11,508
)
Changes in operating assets and liabilities, net of the effect of acquisitions:
                  
Trade accounts receivable
   
 
(4,652
)
   
 
(6,069
)
Launch fund receivable
   
 
5,717
 
   
 
7,218
 
Prepaid expenses and other assets
   
 
355
 
   
 
2,236
 
Accounts payable
   
 
(38,468
)
   
 
(15,671
)
Accrued expenses and other liabilities
   
 
(918
)
   
 
11,861
 
    
  
Net cash provided by operating activities
   
 
49,440
 
   
 
65,760
 
    
  
Investing activities:
                  
Purchase of fixed assets
   
 
(121,619
)
   
 
(145,806
)
Purchase of intangible assets
   
 
(1,017
)
   
 
—  
 
Investments in equity securities
   
 
—  
 
   
 
(2,625
)
Purchase of cable television systems, net of cash acquired
   
 
(8,798
)
   
 
(436,760
)
    
  
Net cash used in investing activities
   
 
(131,434
)
   
 
(585,191
)
    
  
Financing activities:
                  
Distributions of preferred interests
   
 
(7,000
)
   
 
(7,000
)
Proceeds from borrowings under credit facilities
   
 
76,000
 
   
 
1,467,000
 
Proceeds from issuance of notes
   
 
—  
 
   
 
220,084
 
Repayment of credit facilities
   
 
(95,000
)
   
 
(654,900
)
Repayment of debt associated with cable system transaction
   
 
—  
 
   
 
(323,547
)
Principal payment on capital leases and other non-current liabilities
   
 
(450
)
   
 
—  
 
Debt issuance costs
   
 
(1,888
)
   
 
(18,310
)
    
  
Net cash provided by (used in) financing activities
   
 
(28,338
)
   
 
683,327
 
    
  
Net increase (decrease) in cash and cash equivalents
   
 
(110,332
)
   
 
163,896
 
Cash and cash equivalents, beginning of period
   
 
198,548
 
   
 
33,733
 
    
  
Cash and cash equivalents, end of period
   
$
88,216
 
   
$
197,629
 
    
  
 

See accompanying notes.

4

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 subsidiaries, Insight Communications Midwest, LLC (“Insight Communications Midwest”), Insight Communications of Kentucky, L.P. (“Insight Kentucky”) and Insight Communications of Central Ohio, LLC (“Insight Ohio”), owns and operates cable television systems in Indiana, Kentucky, Ohio, Illinois and Georgia which passed approximately 2.2 million homes and served approximately 1.3 million customers as of June 30, 2002.
 
Insight LP is the general partner of Insight Midwest and effectively controls all operating and financial decisions and therefore consolidates Insight Midwest. Through Insight LP, we manage all of Insight Midwest’s systems and also manage systems owned by an affiliate of AT&T Broadband, LLC, the owner of the remaining 50% interest in Insight Midwest.
 
Our other wholly owned subsidiary, Insight Interactive LLC (“Insight Interactive”), owns a 100% equity interest in SourceSuite LLC (“SourceSuite”) the results of which have been consolidated as of January 1, 2002 as a result of Insight Interactive’s acquisition of the remaining 50% equity interest from Source Media, Inc. (“Source Media”) in March 2002.
 
The accompanying consolidated financial statements include our accounts and those of our wholly owned subsidiaries, Insight LP and Insight Interactive.
 
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 Sates 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, except as described in Note 9. 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, 2001.

5

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

 
2.    Responsibility for Interim Financial Statements (continued)
 
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, 2002 are not necessarily indicative of the results to be expected for the year ending December 31, 2002 or any other interim period.
 
3.    Recent Accounting Pronouncements
 
In May 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS No. 145 eliminates the requirement under SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, to report gains and losses from extinguishments of debt as extraordinary items in the income statement. Accordingly, gains or losses from extinguishments of debt for fiscal years beginning after May 15, 2002 shall not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the provisions of APB Opinion No. 30, “Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. Upon adoption of this pronouncement, any gain or loss on extinguishment of debt previously classified as an extraordinary item in prior periods presented that does not meet the criteria of Opinion 30 for such classification should be reclassified to conform with the provisions of SFAS No. 145. Accordingly, upon adoption of this pronouncement, we expect to reclassify a loss from early extinguishment of debt of $6.1 million, net of tax, recorded during the three months ended March 31, 2001, to results from continuing operations.
 
4.    Accounting for Franchise Fees
 
Under our franchise agreements, we are obligated to pay to local franchising authorities up to 5% of our gross revenue derived from providing cable and other services the majority of which are passed through to customers. We have historically recorded revenue net of franchise fees charged to our customers. Staff announcement D-103, issued by the Financial Accounting Standards Board staff in November 2001, specifies that reimbursements received from a customer should be reflected as revenues and not as a reduction of expenses. This staff announcement applies to financial reporting periods beginning after December 15, 2001. Upon application of this staff announcement, comparative financial statements for prior periods are required to be reclassified to comply with the guidance in this staff announcement. Consequently, we have reclassified the amounts in the accompanying consolidated statements of operations to reflect franchise fees on a gross basis for all periods presented with reimbursements as revenue and payments as expense. The effect on the prior period statement of operations for the three and six months ended June 30, 2001 was to increase both revenue and selling, general and administrative costs by $5.9 million and $11.6 million.

6

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

 
4.    Accounting for Franchise Fees (continued)
 
In addition, certain other prior period amounts have been reclassified to conform to the current period presentation.
 
5.    Long-Lived Assets
 
Fixed assets consisted of:
 
    
June 30, 2002
     
December 31, 2001
  
    
(in thousands)
  
Land, buildings and improvements
   
$
37,207
 
   
$
36,501
 
Cable system equipment
   
 
1,697,183
 
   
 
1,573,733
 
Furniture, fixtures and office equipment
   
 
16,381
 
   
 
16,019
 
    
  
    
 
1,750,771
 
   
 
1,626,253
 
Less accumulated depreciation and amortization
   
 
(569,355
)
   
 
(474,544
)
    
  
Total fixed assets, net
   
$
1,181,416
 
   
$
1,151,709
 
    
  
 
In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which became effective for us beginning January 1, 2002 and changes the accounting for goodwill and franchise costs from an amortization method to an impairment only approach. In addition, the standard includes provisions, upon adoption, for the reclassification of certain existing recognized intangibles as goodwill and franchise costs, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and franchise costs and the testing for impairment of existing goodwill and franchise costs.
 
SFAS No. 142 requires that goodwill and franchise costs be tested annually for impairment using a two-step process. The first step is to identify a potential impairment and, in transition, this step must be measured as of the beginning of the fiscal year. The second step of the impairment test measures the amount of the impairment loss, if any, measured as of the beginning of the year of adoption, and must be completed by the end of our fiscal year. Based on our analysis, there was no impairment of goodwill or franchise costs upon the adoption of SFAS No. 142 on January 1, 2002.

7

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

 
5.    Long-Lived Assets (continued)
 
Applying the effects of the adoption of SFAS No. 142 to the three and six month period ended June 30, 2001, would have resulted in income (loss) before extraordinary items of $(6.1) million and $13.7 million, net income (loss) of $(6.1) million and $7.6 million, basic and diluted income (loss) per share before extraordinary item of $(.18) and $.07 and basic and diluted income (loss) per share applicable to common stockholders of $(.18) and $(.03). The reconciliation of reported net loss to pro forma net income as adjusted for the effects of SFAS No. 142 for the three and six months ended June 30, 2001 is as follows (in thousands):
 
      
Three Months Ended June 30, 2001
       
Six Months Ended June 30, 2001
  
Net loss as reported
     
$
(21,874
)
     
$
(23,851
)
Exclude amortization, net of minority interest and taxes for:
                      
Franchise costs
     
 
12,577
 
     
 
25,154
 
Goodwill
     
 
3,172
 
     
 
6,344
 
      
    
Pro forma net income (loss)
     
$
(6,125
)
     
$
7,647
 
      
    
 
We recorded amortization expense of $1.5 million and $3.0 million for the three and six months ended June 30, 2002 and $50.3 million and $100.5 million for the three and six months ended June 30, 2001. We estimate aggregate amortization expense to be approximately $6.0 million for each of the five succeeding fiscal years.
 
6.    Debt
 
Debt consisted of:
 
    
June 30, 2002
     
December 31, 2001
  
    
(in thousands)
  
Insight Ohio Credit Facility
   
$
25,000
 
   
$
25,000
 
Insight Midwest Holdings Credit Facility
   
 
1,561,000
 
   
 
1,580,000
 
Insight Midwest 9¾% Senior Notes
   
 
200,000
 
   
 
200,000
 
Insight Midwest 10½% Senior Notes
   
 
500,000
 
   
 
500,000
 
Insight Inc. 12¼% Senior Discount Notes
   
 
400,000
 
   
 
400,000
 
    
  
    
 
2,686,000
 
   
 
2,705,000
 
Less unamortized discount on notes
   
 
(147,268
)
   
 
(162,524
)
    
  
Total debt
   
$
2,538,732
 
   
$
2,542,476
 
    
  

8

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

 
6.    Debt (continued)
 
Insight Midwest Holdings Credit Facility
 
Insight Midwest Holdings, LLC (“Insight Midwest Holdings”), a wholly owned subsidiary of Insight Midwest which owns all of our cable television systems other than those located in Ohio, is party to a $1.75 billion credit facility. On March 25, 2002, we formally requested approval from the lenders of amendments to the leverage ratio covenant to allow Insight Midwest Holdings more flexibility and to increase the aggregate amount that can be distributed to Insight Midwest for the purpose of making investments in Insight Ohio. In addition, on March 28, 2002, we loaned $100.0 million to Insight Midwest to lower our effective interest rates, $97.0 million of which was contributed to Insight Midwest Holdings in April 2002 for use in paying down the credit facility balance and in funding financing costs associated with the amendments, and $3.0 million of which was contributed to Insight Ohio as of March 28, 2002. Pursuant to the credit facility amendments, Insight Midwest Holdings is permitted to make distributions to Insight Midwest for the purpose of repaying our loan provided that the leverage ratio is less than 4.25 to 1.0 and there are no defaults existing under the credit facility. The loan to Insight Midwest bears annual interest of 9%, has a scheduled maturity date of January 31, 2011 and permits prepayments. On April 18, 2002, the lenders approved these amendments to the credit facility.
 
On June 6, 2002, a further amendment to the credit facility was entered into which permits distributions by Insight Midwest Holdings to Insight Midwest for the purpose of repaying our $100.0 million loan, without regard to the minimum leverage ratio requirement. This amendment will become effective upon the completion of a debt offering by Insight Midwest of at least $175.0 million and the contribution of the proceeds to Insight Midwest Holdings.
 
Debt Principal Payments
 
As of June 30, 2002, principal payments required on our debt were as follows (in thousands):
 
2002
   
$
—  
2003
   
 
5,000
2004
   
 
80,000
2005
   
 
81,250
2006
   
 
87,750
Thereafter
   
 
2,432,000
    
Total
   
$
2,686,000
    
 
Interest Rate Swap and Collar Agreements
 
We enter into interest-rate swap agreements to modify the interest characteristics of our outstanding debt from a floating rate to a fixed rate basis. These agreements involve the payment of fixed rate amounts in exchange for floating rate interest receipts 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

9

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

 
6.    Debt (continued)
 
and is recognized as an adjustment to interest expense related to the debt. The related amount payable or receivable is included in other liabilities or assets.
 
As of June 30, 2002 and December 31, 2001, we had entered into various interest rate swap and collar agreements included in other liabilities of $17.9 million and $22.8 million, effectively fixing interest rates between 4.7% and 5.9%, plus the applicable margin, on $435.0 million and $500.0 million notional value of debt. The agreements outstanding as of June 30, 2002 expire in July 2003. As of June 30, 2002, we had $2.6 million of accrued interest related to these agreements.
 
7.    Comprehensive Loss
 
Comprehensive loss totaled $10.7 million and $21.8 million for the three and six months ended June 30, 2002 and $20.6 million and $36.0 million for the three and six months ended June 30, 2001. Comprehensive loss for the six months ended June 30, 2001 included a $1.1 million transition adjustment loss (net of $776,000 tax benefit) representing the cumulative effect of adopting Statement of Financial Accounting Standards No. 133. We own equity securities that are classified as available-for-sale and reported at market value, with unrealized gains and losses recorded as accumulated other comprehensive income or loss in the accompanying consolidated balance sheets. In addition, we record the effective portion of certain derivatives’ gains or losses as accumulated other comprehensive income or loss in the accompanying consolidated balance sheets.
 
8.    Related Party Transactions
 
Managed Systems
 
On March 17, 2000, we entered into a two-year management agreement with InterMedia Partners Southeast (“IPSE”), an affiliate of AT&T Broadband, to provide management services to cable television systems acquired by AT&T Broadband. The management agreement has been extended and expires on August 31, 2002. As of June 30, 2002, these systems served approximately 118,000 customers in the states of Indiana and Kentucky. Through March 31, 2001, we earned a monthly fee of 3% of gross revenues for providing such management services. In September 2001, the management agreement was amended to provide for a monthly fee of 5% of gross revenues retroactive to April 1, 2001. We recognized management fees in connection with this agreement of $711,000 and $1.3 million for the three and six months ended June 30, 2002 and $407,000 and $793,000 for the three and six months ended June 30, 2001.

10

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

 
8.    Related Party Transactions (continued)
 
Programming
 
We purchase substantially all of our pay television and other programming from affiliates of AT&T Broadband. Charges for such programming, including a 1½% administrative fee, were $33.2 million and $64.2 million for the three and six months ended June 30, 2002 and $28.1 million and $55.1 million for the three and six months ended June 30, 2001. As of June 30, 2002 and December 31, 2001, $10.6 million and $10.3 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.
 
Telephony Agreements
 
In July 2000, to facilitate delivery of telephone services, we entered into a ten-year agreement with AT&T Broadband that allows Insight Midwest to deliver to our customers local telephone service under the AT&T Digital Phone brand. Under the terms of the agreement, Insight Midwest leases for a fee certain capacity on our network to AT&T Broadband. Insight Midwest provides certain services and support for which it receives additional payments. We began providing telephony services to a limited number of our customers in 2001. Revenue related to telephony services was $339,000 and $581,000 for the three and six months ended June 30, 2002 and $4,000 and $5,000 for the three and six months ended June 30, 2001. The capital required to deploy telephone services over our networks is shared, with AT&T Broadband responsible for switching and transport facilities. AT&T also pays us for installations, marketing and billing support that amounted to $1.6 million and $2.8 million for the three and six months ended June 30, 2002 and $173,000 for the three and six months ended June 30, 2001.
 
Advertising Services
 
In October 1999, to facilitate the administration of our advertising services in our Kentucky Systems, we entered into an agreement expiring on January 1, 2004 with TCI Media Services LLC (“TCI Media Services”), a subsidiary of AT&T Corp., which provides for TCI Media Services to perform all of our Kentucky advertising sale and related administrative services. We recorded advertising revenues from TCI Media Services derived from our Kentucky Systems of $3.8 million and $7.1 million for the three and six months ended June 30, 2002 and $3.2 million and $5.5 million for the three and six months ended June 30, 2001. As of June 30, 2002 and December 31, 2001, we had $6.4 million and $6.9 million recorded as a receivable due from TCI Media Services included in other current assets. We pay TCI Media Services a fixed and variable fee based on advertising sales cash flow growth for providing this service. As of June 30, 2002 and December 31, 2001, we had $245,000 and $666,000 recorded as payables to TCI Media Services related to such services.

11

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

 
8.    Related Party Transactions (continued)
 
SourceSuite
 
On March 14, 2002, Insight Interactive purchased the remaining 50% equity interest in SourceSuite that it did not already own from Source Media by tendering $10.2 million face amount of Source Media’s 12% bonds. The fair market value of such tendered bonds on March 14, 2002 was $205,000. The excess of the fair value of SourceSuite’s acquired assets and liabilities over the purchase price of $205,000, totaling $571,000 of negative goodwill, was allocated as a reduction to long-lived assets based on their respective fair values. The operating results of SourceSuite have been consolidated in the accompanying financial statements effective January 1, 2002. SourceSuite recorded $438,000 and $862,000 of revenue and $252,000 and $860,000 of net loss for the three and six months ended June 30, 2002. During 2001, we accounted for our 50% interest in SourceSuite under the equity method.
 
9.    At Home Corporation
 
Non-recurring high-speed data service charges were incurred through February 28, 2002 as a result of payments made to At Home Corporation (“@Home”), the former provider of high-speed data services for all of our systems, except for those located in Ohio. On September 28, 2001, @Home filed for protection under Chapter 11 of the Bankruptcy Code. For the purpose of continuing service to existing customers and to resume the provisioning of service to new customers, we entered into an interim service arrangement that required that we pay $10.0 million to @Home to extend service for three months through February 28, 2002. As a result of this arrangement we incurred approximately $4.1 million in excess of our original agreed-to cost for such services rendered from January 1, 2002 through February 28, 2002.
 
10.    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
 
The prior owners of the Kentucky systems have named Insight Kentucky and certain prior owners of the Kentucky Systems in class actions regarding the pass-through of state and local property tax charges to approximately 320,000 customers. The plaintiffs seek monetary damages and the enjoinment of the collection of such taxes. We have entered into agreements with the plaintiffs to settle these lawsuits. Such settlement agreements have been preliminarily approved by the courts and are subject to a

12

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

 
10.    Commitments and Contingencies (continued)
 
determination of fairness and final court approval. The settlements will not have a material effect on our results of operations or cash flows.
 
We have filed a state court action against the City of Louisville for its grant of a more favorable franchise to Knology, Inc. (“Knology”). Our commencement of this action automatically suspended this franchise pending a court determination. In November 2000, Knology filed a federal court action against us seeking monetary damages and other relief for alleged violations of federal laws arising out of our having filed, pursuant to the provisions of our own franchise from the City, the state court action. In March 2001, the federal court preliminarily set aside the state court suspension of Knology’s franchise. We believe we have substantial and meritorious defenses to the asserted federal claims and intend to defend it vigorously. Consequently, we have not recorded any loss reserves in the accompanying financial statements.
 
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.
 

13

 
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 for the year ended December 31, 2001, 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.
 
Results of Operations
 
A substantial portion of our revenues are earned from customer fees for cable television programming services including premium, digital 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 providing high-speed data and telephone services as well as from commissions for products sold through home shopping networks.
 
Under our franchise agreements, we are obligated to pay to local franchising authorities up to 5% of our gross revenue derived from providing cable and other services the majority of which are passed through to our customers. We have historically recorded revenue net of franchise fees charged to our customers. Staff announcement D-103, issued by the Financial Accounting Standards Board staff in November 2001, specifies that reimbursements received from a customer should be reflected as revenues and not as a reduction of expenses. This staff announcement applies to financial reporting periods beginning after December 15, 2001. Upon application of this staff announcement, comparative financial statements for prior periods are required to be reclassified to comply with the guidance in this staff announcement. Consequently, we have reclassified the amounts in the accompanying consolidated statements of operations to reflect franchise fees on a gross basis for all periods presented with reimbursements as revenue and payments as expense. The effect on the prior period statement of operations for the three and six months ended June 30, 2001 was to increase both revenue and selling, general and administrative costs by $5.9 million and $11.6 million.

14

 
As a result of its March 14, 2002 purchase of the remaining 50% equity interest in SourceSuite, LLC, Insight Interactive now owns 100% of SourceSuite’s equity interests. As such, the operating results of SourceSuite have been consolidated in the accompanying financial statements effective January 1, 2002. During 2001, we accounted for our 50% interest in SourceSuite under the equity method.
 
One of the principal reasons for our net loss through December 31, 2001 include depreciation and amortization associated with our acquisitions and capital expenditures related to construction and upgrading of our systems, and interest costs on borrowed money. Beginning January 1, 2002, we no longer record amortization expense associated with goodwill and indefinite lived intangible assets; however, 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.
 
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 (in thousands):
 
    
Three Months Ended June 30,
     
Six Months Ended June 30,
  
    
2002
     
2001
     
2002
     
2001
  
Revenue
   
$
200,033
 
   
$
181,247
 
   
$
392,211
 
   
$
355,473
 
Operating costs and expenses:
                                    
Programming and other operating costs
   
 
69,194
 
   
 
65,554
 
   
 
138,747
 
   
 
128,140
 
Selling, general and administrative
   
 
41,534
 
   
 
38,595
 
   
 
82,414
 
   
 
75,197
 
Non-recurring high-speed data charges
   
 
—  
 
   
 
—  
 
   
 
4,116
 
   
 
—  
 
Depreciation and amortization
   
 
49,481
 
   
 
92,076
 
   
 
97,925
 
   
 
180,342
 
    
  
  
  
Total operating costs and expenses
   
 
160,209
 
   
 
196,225
 
   
 
323,202
 
   
 
383,679
 
    
  
  
  
Operating income (loss)
   
 
39,824
 
   
 
(14,976
)
   
 
69,009
 
   
 
(28,206
)
Operating cash flow
   
 
89,305
 
   
 
77,100
 
   
 
171,050
 
   
 
152,136
 
Interest expense
   
 
(50,831
)
   
 
(53,610
)
   
 
(102,766
)
   
 
(105,018
)
Minority interest
   
 
4,163
 
   
 
35,227
 
   
 
14,089
 
   
 
69,665
 
Net loss
   
 
(6,556
)
   
 
(21,874
)
   
 
(18,810
)
   
 
(23,851
)
Net cash provided by (used in) operating activities
   
 
5,740
 
   
 
(1,110
)
   
 
49,440
 
   
 
65,760
 
Net cash used in investing activities
   
 
72,248
 
   
 
84,763
 
   
 
131,434
 
   
 
585,191
 
Net cash provided by (used in) financing activities
   
 
5,673
 
   
 
88,000
 
   
 
(28,338
)
   
 
683,327
 
 
Operating Cash Flow (“OCF”) represents earnings before interest, taxes, depreciation and amortization, minority interest, gain on cable system exchanges, impairment write-down of investments, equity in losses of investees, other income and expense, non-recurring high-speed data costs and extraordinary items. We believe that OCF 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, OCF 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. Refer to our consolidated financial statements, including our consolidated statements of cash flows, which appear elsewhere in this report.
 

15

 
The following calculations of OCF (in thousands) are not necessarily comparable to similarly titled amounts of other companies:
 
    
Three Months
Ended June 30,
     
Six Months
Ended June 30,
  
    
2002
     
2001
     
2002
     
2001
  
Net loss
   
$
(6,556
)
   
$
(21,874
)
   
$
(18,810
)
   
$
(23,851
)
Adjustments:
                                    
Interest expense
   
 
50,831
 
   
 
53,610
 
   
 
102,766
 
   
 
105,018
 
Interest income
   
 
(441
)
   
 
(2,315
)
   
 
(1,338
)
   
 
(4,366
)
Tax provision (benefit)
   
 
125
 
   
 
(12,186
)
   
 
250
 
   
 
(11,205
)
Depreciation and amortization
   
 
49,481
 
   
 
92,076
 
   
 
97,925
 
   
 
180,342
 
Minority interest
   
 
(4,163
)
   
 
(35,227
)
   
 
(14,089
)
   
 
(69,665
)
Gain on cable system exchange
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
(34,178
)
Impairment write-down of investments
   
 
—  
 
   
 
2,069
 
   
 
205
 
   
 
2,069
 
Equity in losses of investees
   
 
—  
 
   
 
657
 
   
 
—  
 
   
 
1,369
 
Other expense
   
 
28
 
   
 
290
 
   
 
25
 
   
 
517
 
Non-recurring high-speed data costs
   
 
—  
 
   
 
—  
 
   
 
4,116
 
   
 
—  
 
Extraordinary loss from early extinguishment of debt, net of tax
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
6,086
 
    
  
  
  
Operating cash flow
   
$
89,305
 
   
$
77,100
 
   
$
171,050
 
   
$
152,136
 
    
  
  
  
 
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
 
Revenue increased $18.8 million or 10.4% to $200.0 million for the three months ended June 30, 2002 from $181.2 million for the three months ended June 30, 2001. Excluding the increase in revenue derived from SourceSuite, the increase in revenue was primarily the result of gains in our high-speed data and digital services with revenue increases over the prior year quarter of 66.2% and 43.2%. In addition, our basic cable service revenue increased primarily due to basic cable rate increases.
 
Revenue by service offering were as follows for the three months ended June 30 (in thousands):
 
    
2002
Revenue by Service Offering
   
% of Total Revenue
   
2001
Revenue by Service Offering
   
% of Total Revenue
Basic
   
$
125,034
   
62.5%
   
$
118,155
   
65.2%
Digital
   
 
16,550
   
8.3%
   
 
11,555
   
6.4%
High-speed data
   
 
14,080
   
7.0%
   
 
8,471
   
4.7%
Premium
   
 
15,215
   
7.6%
   
 
14,401
   
7.9%
Analog pay-per-view
   
 
422
   
0.2%
   
 
1,245
   
0.7%
Advertising
   
 
13,292
   
6.7%
   
 
12,130
   
6.7%
Franchise fees
   
 
6,163
   
3.1%
   
 
5,937
   
3.3%
Other
   
 
9,277
   
4.6%
   
 
9,353
   
5.1%
    
  
  
  
Total
   
$
200,033
   
100.0%
   
$
181,247
   
100.0%
    
  
  
  
 

16

RGUs (Revenue Generating Units) were approximately 1,707,000 as of June 30, 2002 compared to approximately 1,555,200 as of June 30, 2001 on a same-store basis. This represents an annualized growth rate of 9.8%. RGUs represent the sum of basic, digital, high-speed data, and telephone customers.
 
Average monthly revenue per basic customer, including management fees from IPSE and revenue from SourceSuite, was $51.42 for the three months ended June 30, 2002 compared to $47.29 for the three months ended June 30, 2001. Average monthly revenue per basic customer, excluding management fees from IPSE and revenue from SourceSuite, was $51.13 for the three months ended June 30, 2002 compared to $47.19 for the three months ended June 30, 2001 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 $7.87 for the three months ended June 30, 2002 up from $5.22 for the three months ended June 30, 2001.
 
Programming and other operating costs increased $3.6 million or 5.6% to $69.2 million for the three months ended June 30, 2002 from $65.6 million for the three months ended June 30, 2001. The increase in programming and other operating costs was primarily the result of increased programming rates for our classic and digital service as well as for additional programming added in rebuilt systems. Programming costs increased 11.9% for the three months ended June 30, 2002 from the three months ended June 30, 2001.
 
Selling, general and administrative expenses increased $2.9 million or 7.6% to $41.5 million for the three months ended June 30, 2002 from $38.6 million for the three months ended June 30, 2001. The increase in selling, general and administrative expense was primarily the result of increased employee compensation and employment levels associated with new services partially offset by a decrease in marketing costs.
 
Depreciation and amortization expense decreased $42.6 million or 46.3% to $49.5 million for the three months ended June 30, 2002 from $92.1 million for the three months ended June 30, 2001. The decrease in depreciation and amortization expense was primarily the result of ceasing the amortization of goodwill and indefinite lived intangible assets associated with the adoption of SFAS No. 142, effective January 1, 2002, partially offset by depreciation of capital expenditures purchased subsequent to June 30, 2001.
 
OCF increased $12.2 million or 15.8% to $89.3 million for the three months ended June 30, 2002 from $77.1 million for the three months ended June 30, 2001. Excluding OCF derived from SourceSuite, OCF increased $12.4 million or 16.1% to $89.5 million for the three months ended June 30, 2002 from $77.1 million for the three months ended June 30, 2001, primarily due to increased digital and high-speed data revenue partially offset by increases in programming and other operating costs and selling, general and administrative costs.
 
Interest expense decreased $2.8 million or 5.2% to $50.8 million for the three months ended June 30, 2002 from $53.6 million for the three months ended June 30, 2001. The decrease is the result of lower average interest rates of 7.9% for the three months ended June 30, 2002 from 9.1% for the three months ended June 30, 2001 partially offset by higher outstanding debt of $2.6 billion during the three months ended June 30, 2002 from $2.4 billion during the three months ended June 30, 2001, resulting from the funding of capital expenditures.

17

Minority interest decreased $31.1 million or 88.2% to $4.2 million for the three months ended June 30, 2002 from $35.2 million for the three months ended June 30, 2001 as a direct result of the decrease in Insight Midwest’s net loss applicable to common interests due primarily to the adoption of SFAS No. 142 effective January 1, 2002. The non-amortization provisions of SFAS No. 142 resulted in decreased depreciation and amortization expense for the three months ended June 30, 2002.
 
For the three months ended June 30, 2002, the net loss was $6.6 million.
 
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
 
Revenue increased $36.7 million or 10.3% to $392.2 million for the six months ended June 30, 2002 from $355.5 million for the six months ended June 30, 2001. The increase in revenue was primarily the result of gains in our high-speed data and digital services with revenue increases over the prior year period of 72.2% and 51.8%. In addition, our basic cable service revenue increased primarily due to basic cable rate increases.
 
Revenue by service offering were as follows for the six months ended June 30 (in thousands):
 
    
2002 Revenue by Service Offering
   
% of Total
Revenue
   
2001 Revenue by Service Offering
   
% of Total Revenue
Basic
   
$
247,340
   
63.1%
   
$
234,943
   
66.1%
Digital
   
 
31,982
   
8.1%
   
 
21,074
   
5.9%
High-speed data
   
 
25,732
   
6.6%
   
 
14,947
   
4.2%
Premium
   
 
30,053
   
7.7%
   
 
29,406
   
8.3%
Analog pay-per-view
   
 
961
   
0.2%
   
 
2,532
   
0.7%
Advertising
   
 
24,823
   
6.3%
   
 
21,729
   
6.1%
Franchise fees
   
 
12,551
   
3.2%
   
 
11,626
   
3.3%
Other
   
 
18,769
   
4.8%
   
 
19,216
   
5.4%
    
  
  
  
Total
   
$
392,211
   
100.0%
   
$
355,473
   
100.0%
    
  
  
  
 
Average monthly revenue per basic customer, including management fees from IPSE and revenue from SourceSuite, was $50.52 for the six months ended June 30, 2002 compared to $46.40 for the six months ended June 30, 2001. Average monthly revenue per basic customer, excluding management fees from IPSE and revenue from SourceSuite, was $50.24 for the six months ended June 30, 2002 compared to $46.29 for the six months ended June 30, 2001, 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 $7.43 for the six months ended June 30, 2002 up from $4.70 for the six months ended June 30, 2001.
 
Programming and other operating costs increased $10.6 million or 8.3% to $138.8 million for the six months ended June 30, 2002 from $128.1 million for the six months ended June 30, 2001. The increase in programming and other operating costs was primarily the result of increased programming rates for

18

 
our classic and digital service as well as for additional programming added in rebuilt systems. Programming costs increased 13.7% for the six months ended June 30, 2002 from the six months ended June 30, 2001.
 
Selling, general and administrative expenses increased $7.2 million or 9.6% to $82.4 million for the six months ended June 30, 2002 from $75.2 million for the six months ended June 30, 2001. The increase in selling, general and administrative expense was primarily the result of increased employee compensation and employment levels associated with new services partially offset by a decrease in marketing costs.
 
Non-recurring high-speed data service charges were incurred through February 28, 2002 as a result of payments made to At Home Corporation (“@Home”), the former provider of high-speed data services for all of our systems, except for those located in Ohio. On September 28, 2001, @Home filed for protection under Chapter 11 of the Bankruptcy Code. For the purpose of continuing service to existing customers and to resume the provisioning of service to new customers, we entered into an interim service arrangement that required us to pay $10.0 million to @Home to extend service for three months through February 28, 2002. As a result of this arrangement we incurred approximately $4.1 million in excess of our original agreed-to cost for such services rendered through February 28, 2002.
 
Depreciation and amortization expense decreased $82.4 million or 45.7% to $97.9 million for the six months ended June 30, 2002 from $180.3 million for the six months ended June 30, 2001. The decrease in depreciation and amortization expense was primarily the result of ceasing the amortization of goodwill and indefinite lived intangible assets associated with the adoption of SFAS No. 142, effective January 1, 2002, partially offset by capital expenditures made to rebuild the existing cable equipment.
 
OCF increased $18.9 million or 12.4% to $171.1 million for the six months ended June 30, 2002 from $152.1 million for the six months ended June 30, 2001. Excluding OCF derived from SourceSuite, OCF increased $19.7 million or 12.9% to $171.8 million for the six months ended June 30, 2002 from $152.1 million for the six months ended June 30, 2001, primarily due to increased digital and high-speed data revenue partially offset by increases in programming and other operating costs and selling, general and administrative costs.
 
Interest expense decreased $2.3 million or 2.1% to $102.8 million for the six months ended June 30, 2002 from $105.0 million for the six months ended June 30, 2001. The decrease is the result of lower average interest rates of 8.1% for the six months ended June 30, 2002 from 10.3% for the six months ended June 30, 2001 partially offset by higher outstanding debt of $2.5 billion during the six months ended June 30, 2002 from $2.0 billion during the six months ended June 30, 2001, resulting from the funding of capital expenditures during the six months ended June 30, 2002.
 
Minority interest decreased $55.6 million or 79.8% to $14.1 million for the six months ended June 30, 2002 from $69.7 million for the six months ended June 30, 2001 as a direct result of the decrease in Insight Midwest’s net loss applicable to common interests due primarily to the adoption of SFAS No. 142 effective January 1, 2002. The non-amortization provisions of SFAS No. 142 resulted in decreased depreciation and amortization expense for the six months ended June 30, 2002.
 
For the six months ended June 30, 2002, the net loss was $18.8 million.

19

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 and issuances of private and public debt and equity.
 
Cash provided by operations for the six months ended June 30, 2002 and 2001 was $49.4 million and $65.8 million. The decrease was primarily attributable to a decrease in depreciation and amortization expense partially offset by a decrease in minority interest.
 
Cash used in investing activities for the six months ended June 30, 2002 and 2001 was $131.4 million and $585.2 million. The decrease was primarily attributable to no significant acquisitions of cable television systems and reduced capital expenditures in 2002.
 
Cash provided by (used in) financing activities for the six months ended June 30, 2002 and 2001 was ($28.3) million and $683.3 million. The change was primarily attributable to lower net borrowings from credit facilities and the absence of proceeds raised through the issuance of notes in 2002.
 
For the six months ended June 30, 2002 and 2001, we spent $121.6 million and $145.8 million in capital expenditures largely to support our plant rebuild in Illinois which is estimated to be substantially completed by year-end, telephone deployment and success-based capital including interactive digital and high-speed data expansion.
 
On April 18, 2002, we entered into an amendment to the Insight Midwest Holdings credit facility which delayed by six months the scheduled reduction to the leverage ratio covenant to allow Insight Midwest Holdings more financing flexibility, and increased the aggregate amount that can be distributed to Insight Midwest for the purpose of making investments in Insight Ohio. Previously, on March 28, 2002, we loaned $100.0 million to Insight Midwest to lower our effective interest rates, $97.0 million of which was contributed to Insight Midwest Holdings on April 18, 2002 for use in paying down the credit facility balance and in funding financing costs associated with the amendments, and $3.0 million of which was contributed to Insight Ohio on March 28, 2002. Pursuant to the credit facility amendments, Insight Midwest Holdings is permitted to make distributions to Insight Midwest for the purpose of repaying our loan provided that the leverage ratio is less than 4.25 to 1.0 and there are no defaults existing under the credit facility. The loan to Insight Midwest bears annual interest of 9%, has a scheduled maturity date of January 31, 2011 and permits prepayments.
 
On June 6, 2002, a further amendment to the credit facility was entered into which permits distributions by Insight Midwest Holdings to Insight Midwest for the purpose of repaying our $100.0 million loan, without regard to the minimum leverage ratio requirement. This amendment will become effective upon the completion of a debt offering by Insight Midwest of at least $175.0 million and the contribution of the proceeds to Insight Midwest Holdings.
 
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

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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. Our ability to access the cash flow of our subsidiaries may be contingent upon our ability to refinance the debt of our subsidiaries.
 
We believe that the Midwest Holdings Credit Facility, cash on-hand and our cash flow from operations are sufficient to support our current operating plan. We have the ability to draw upon the $189.0 million of unused availability under the Midwest Holdings Credit Facility as of June 30, 2002 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 or otherwise fund its operations.
 
The following table summarizes our contractual obligations and commitments, excluding interest, preferred dividends and commitments for programming, as of June 30, 2002, including periods in which the related payments are due (in thousands):
 
    
Long-Term Debt
   
Preferred Interests
   
Operating Leases
   
Capital Leases
   
Total
2002
   
$
—
   
$
—
   
$
2,192
   
$
369
   
$
2,561
2003
   
 
5,000
   
 
—
   
 
3,918
   
 
738
   
 
9,656
2004
   
 
80,000
   
 
—
   
 
3,468
   
 
738
   
 
84,206
2005
   
 
81,250
   
 
—
   
 
2,699
   
 
738
   
 
84,687
2006
   
 
87,750
   
 
140,000
   
 
2,538
   
 
838
   
 
231,126
Thereafter
   
 
2,432,000
   
 
55,869
   
 
6,844
   
 
4,672
   
 
2,499,385
    
  
  
  
  
Total cash obligations
   
$
2,686,000
   
$
195,869
   
$
21,659
   
$
8,093
   
$
2,911,621
    
  
  
  
  
 
The following tables summarize our capital expenditures for the year ended December 31, 2001 and projected capital expenditures for the year ending December 31, 2002, both including and excluding capitalized labor allocations by category (in thousands):
 
    
2001
Actual
   
2002
Projected
Success-based (1)
   
$
112,033
   
$
90,596
Upgrades (2)
   
 
90,934
   
 
78,688
Telephone (3) 
   
 
60,484
   
 
66,922
Line extensions (4)
   
 
31,999
   
 
37,789
Maintenance (5)
   
 
30,131
   
 
26,415
    
  
Total capital expenditures
   
$
325,581
   
$
300,410
    
  

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2001
Actual
   
2002
Projected
Success-based (1)
   
$
91,990
   
$
69,083
Upgrades (2)
   
 
89,314
   
 
73,966
Telephone (3)
   
 
57,114
   
 
59,576
Line extensions (4)
   
 
8,891
   
 
18,899
Maintenance (5)
   
 
30,131
   
 
26,415
Capitalized labor and overhead (6)
   
 
48,141
   
 
52,471
    
  
Total capital expenditures
   
$
325,581
   
$
300,410
    
  
 
(1)
 
Success-based consists primarily of costs for converters, remotes, modems and other high-speed data equipment, in addition to materials and contract labor for new customer connections. Excludes success-based capital expenditures for telephone.
 
(2)
 
Upgrades consist primarily of costs to rebuild and/or upgrade distribution systems, head-end towers, antennas and related equipment, in addition to contract labor.
 
(3)
 
Telephone consists primarily of costs to construct telephone service infrastructures, as well as costs to upgrade headends with host digital terminals, plant and billing systems to accommodate telephone services and all success-based capital expenditures.
 
(4)
 
Line extensions consist primarily of costs associated with entering new service areas including costs of fiber, coaxial cable, amplifiers and electronic equipment.
 
(5)
 
Maintenance consists primarily of costs of buildings, building improvements, computer and office equipment, vehicles, tools and other equipment.
 
(6)
 
Capitalized labor and overhead consists primarily of internal payroll and overhead costs capitalized based on the percentage of time technical employees work directly on capital projects including construction, rebuilds and new customer connections. The allocation of capitalized labor to the capital expenditure categories in the above table is based on the composite percentage of time incurred on such respective categories.
 

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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 counter-parties to our swap and collar agreements are major financial institutions. As of June 30, 2002, our interest rate swap and collar agreements expire in July 2003.
 
The fair market value and carrying value of our 9¾% senior notes, 10½% senior notes and 12¼% senior discount notes was $817.6 million and $952.7 million as of June 30, 2002. 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, 2002, the estimated fair value (cost if terminated) of our interest rate swap and collar agreements was approximately $(17.9) 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 loss depending on whether the derivative financial instruments qualify for hedge accounting.
 
As of June 30, 2002, we had entered into interest rate swaps that approximated $435.0 million, or 27.4%, of our borrowings under all of our credit facilities. A hypothetical 100 basis point increase in interest rates along the entire interest rate yield curve would increase our annual interest expense by approximately $11.5 million.
 

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PART II.    OTHER INFORMATION
 
Item 2.    Changes in Securities
 
During the three months ended June 30, 2002, we issued 16,343 shares of Class A common stock in connection with our matching contributions to our 401(k) plan and granted stock options to certain of our employees, directors and external consultants to purchase an aggregate of 33,528 shares of Class A common stock. The issuances of common stock and grants of stock options were not registered under the Securities Act of 1933 because such issuances and grants either did not involve an offer or sale for purposes of Section 2(a)(3) of the Securities Act of 1933, in reliance on the fact that the matching contributions and stock options were issued and granted for no consideration, or were offered and sold in transactions not involving a public offering, exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) and in compliance with Rule 506 there under.

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Item 4.    Submission of Matters to a Vote of Security Holders
 
On May 10, 2002, we held our annual meeting of stockholders to (i) elect seven directors to serve for a term of one year and (ii) ratify the selection of our independent auditors for the year ending December 31, 2002.
 
The following individuals were elected to serve as directors for a term of one year:
 
    
Vote For
     
Vote Withheld
Sidney R. Knafel
   
130,922,290
     
7,240,668
Michael S. Willner
   
130,895,270
     
7,267,688
Kim D. Kelly
   
130,985,387
     
7,177,571
Thomas L. Kempner
   
137,680,179
     
482,779
James S. Marcus
   
137,744,474
     
418,484
Prakash A. Melwani
   
137,745,109
     
417,849
Daniel S. O’Connell
   
137,744,809
     
418,149
 
These individuals constituted our entire Board of Directors and served as our directors immediately preceding the annual meeting.
 
The stockholders ratified the selection of Ernst & Young LLP as our independent auditors for the year ending December 31, 2002. The result of the vote was as follows: 137,158,018 votes were for the selection and 1,002,269 votes were against the selection.
 

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Item 6.    Exhibits and Reports on Form 8-K
 
(a)
 
Exhibits:
 
 
10.1
 
Amendment No. 2 to Credit Agreement and Amendment No. 2 to Guarantee Agreement, dated as of June 6, 2002, among Insight Midwest Holdings, LLC, several banks and financial institutions or entities, and The Bank of New York, as Administrative Agent.
 
 
99.1
 
Certification by Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
99.2
 
Certification by Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
 
(b)
 
Reports on Form 8-K:
 
None
 

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date: August 6, 2002
INSIGHT COMMUNICATIONS COMPANY, INC.
     
By:
  
/S/    DINESH C. JAIN
   
Dinesh C. Jain
   
Senior Vice President and Chief
   
Financial Officer
   
(Principal Financial Officer)

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