Item 1. Business. 3
2. Properties. 31
3. Legal Proceedings. 31
4. Submission of Matters to a Vote of Security Holders. 31
PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters. 32
6. Selected Financial Data. 34
7. Management's Discussion and Analysis of Financial Condition and Results of Operations.36
8. Consolidated Financial Statements. 53
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 93
PART III 10.Directors and Executive Officers of the * Registrant.
11.Executive Compensation. *
12.Security Ownership of Certain Beneficial Owners and Management. *
13.Certain Relationships and Related Transactions. *
PART IV 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 93
* These items are omitted because the registrant intends to file with the Securities and Exchange Commission, not later than 120 days after the close of its fiscal year, a definitive proxy statement or an amendment on Form 8 to this report containing the information required to be disclosed under Part III of Form 10-K405.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Cablevision Systems Corporation, a Delaware corporation and its majority owned subsidiaries (the "Company") own and operate cable television systems in six states with approximately 1,768,000 subscribers at December 31, 1994. The Company also has ownership interests in and/or manages other cable television systems which served an aggregate of approximately 861,000 subscribers at December 31, 1994 and has interests in companies that produce and distribute national and regional programming services and that provide advertising sales services for the cable television industry. The Company was formed in 1985 to effect a reorganization of its predecessors.
Cable television is a service that delivers multiple channels of television programming to subscribers who pay a monthly fee for the services they receive. Television and radio signals are received over-the-air or via satellite delivery by antennas, microwave relay stations and satellite earth stations and are modulated, amplified and distributed over a network of coaxial and fiber optic cable to the subscribers' television sets. Cable television systems typically are constructed and operated pursuant to non-exclusive franchises awarded by local governmental authorities for specified periods of time.
The Company's cable television systems offer varying levels of service which may include, among other programming, local broadcast network affiliates and independent television stations, satellite-delivered "superstations" such as WTBS (Atlanta), certain other news, information and entertainment channels such as CNN, CNBC, ESPN, MTV and certain premium services such as HBO, Showtime, The Movie Channel and Cinemax.
The Company's cable television revenues are derived principally from monthly fees paid by subscribers. In addition to recurring subscriber revenues, the Company derives revenues from installation charges, from the sales of pay-per-view movies and events, and from the sale of advertising time on advertiser supported programming. Certain services and equipment provided by substantially all of the Company's cable television systems are subject to regulation. See "Business - Cable Television Operations - Regulation - 1992 Cable Act."
For financing purposes, the Company is structured as a restricted group, consisting of Cablevision Systems Corporation and certain of its subsidiaries, including Cablevision of New York City ("CNYC") (the "Restricted Group"), and an unrestricted group of subsidiaries, consisting primarily of V Cable, Inc. ("V Cable"), Cablevision MFR, Inc. ("Cablevision MFR"), and Rainbow Programming Holdings, Inc. (including Rainbow Advertising Sales Corporation ("Rainbow Advertising")) ("Rainbow Programming"). In addition, the Company has an unrestricted group of investments, consisting of investments in A-R Cable Services, Inc. ("A-R Cable"), U.S. Cable Television Group, L.P. ("U.S.
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Cable"), Cablevision of Framingham Holdings, Inc. ("CFHI"), A-R Cable Partners, Cablevision of Boston Limited Partnership ("Cablevision of Boston"), Cablevision of Chicago and Cablevision of Newark.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for a discussion of the financing of the Company including a discussion of restrictions on investments by the Restricted Group.
The Company's consolidated cable television systems are concentrated in the New York City greater metropolitan area (79.6% of the Company's total subscribers) and the greater Cleveland metropolitan area (16.5% of total subscribers). The Company believes that its cable systems on Long Island comprise the largest group of contiguous cable television systems under common ownership in the United States (measured by number of subscribers).
RECENT DEVELOPMENTS
On March 10, 1995, MSG Holdings, L.P. ("Holdings"), a partnership between a subsidiary of Rainbow Programming and a subsidiary of ITT Corporation, a Delaware corporation ("ITT"), acquired Madison Square Garden Corporation ("MSG") in a transaction in which MSG merged with and into Holdings. The purchase price paid by Holdings for MSG was $1,009.1 million.
Holdings funded the purchase price of the acquisition through (i) borrowings of $289.1 million under a $450 million credit agreement among Holdings, various lending institutions and Chemical Bank as administrative agent, (ii) an equity contribution from Rainbow Programming of $110 million, and (iii) an equity contribution from ITT of $610 million. ITT, Rainbow Programming and the Company are parties to an agreement made as of August 15, 1994 (the "Bid Agreement") pursuant to which it has been agreed that within 12 months following the MSG closing, Rainbow Programming may elect to acquire interests in Holdings from ITT sufficient to equalize the equity ownership of ITT and Rainbow Programming in Holdings (the "Equalization Interest"). Rainbow Programming has the option during the 12 months following the MSG acquisition closing to (i) acquire all or a portion of the Equalization Interest for cash (including interest on such Equalization Interest at the rate of 11 1/2% per year calculated from the MSG acquisition closing date), (ii) maintain its investment at the initial level, or (iii) require ITT to purchase one half of Rainbow Programming's initial interest in Holdings at the price paid by Rainbow Programming plus an adjustment for Rainbow Programming's share of Holdings' operating income after interest expense following the MSG acquisition closing. Rainbow Programming has until one year from the time of the MSG acquisition closing to make its election and has not yet decided which alternative it will pursue.
Initially Holdings will be managed on a 50-50 basis by Rainbow Programming and ITT. If, as discussed above, Rainbow Programming does not equalize its ownership interest in Holdings by the first anniversary of the closing, its management role will be effectively
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eliminated. Rainbow Programming also has the right to voluntarily relinquish any power to direct the management and policies of Holdings.
Pursuant to an agreement between Rainbow Programming and National Broadcasting Company, Inc. ("NBC"), NBC may require Rainbow Programming, by notice given on or before April 13, 1995, to purchase its interests in SportsChannel (New York) Associates ("SCNY") and Rainbow News 12 Company (the "NBC Put") for an aggregate purchase price which, as of February 28, 1995, would amount to approximately $93 million. In the event that NBC elects to require Rainbow Programming to purchase such interest, Rainbow Programming will have 120 days to consummate the acquisition. On January 27, 1995, Rainbow Programming entered into an amended and restated credit agreement with Toronto Dominion (Texas), Inc. and the Canadian Imperial Bank of Commerce, as co-agents, and a group of banks increasing Rainbow Programming's credit facility from $105 million to $202 million to provide funds in the event the NBC Put is exercised. The facility will reduce to $108 million if the NBC Put is not exercised.
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CABLE TELEVISION OPERATIONS
GENERAL.
As of December 31, 1994, the Company's consolidated cable television systems served approximately 1,768,000 subscribers in New York, Ohio, Connecticut, New Jersey, Michigan, and Massachusetts.
The following table sets forth certain statistical data regarding the Company's consolidated cable television operations (1). During 1994 CNYC became part of the Restricted Group and for comparative purposes CNYC is included in the Restricted Group for 1993 and 1992.
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The following table sets forth certain statistical data regarding the Company's managed, unconsolidated cable television operations (1):
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SUBSCRIBER RATES AND SERVICES; MARKETING AND SALES.
The Company's cable television systems offer a package of services, generally marketed as "Family Cable", which includes, among other programming, broadcast network local affiliates and independent television stations, satellite-delivered "superstations" and certain other news, information and entertainment channels such as CNN, CNBC, ESPN and MTV. For additional charges, the Company's cable television systems provide certain premium services such as HBO, Showtime, The Movie Channel and Cinemax, which may be purchased either individually (in conjunction with Family Cable) or in combinations or in tiers.
In addition, the Company's cable television systems offer a basic package which includes broadcast network local affiliates and public, educational or governmental channels and certain public leased access channels.
The Company offers premium services on an individual basis and as components of different "tiers". Successive tiers include additional premium services for additional charges that reflect discounts from the charges for such services if purchased individually. For example, in most of the Company's cable systems, subscribers may elect to purchase Family Cable plus one, two or three premium services with declining incremental costs for each successive tier. In addition, most systems offer a "Rainbow" package consisting of between five and seven premium services, and a "Rainbow Gold" package consisting of between eight and ten premium services.
Since its existing cable television systems are substantially fully built, the Company's sales efforts are primarily directed toward increasing penetration and revenues in its franchise areas. The Company sells its cable television services through door-to-door selling supported by telemarketing, direct mail advertising, promotional campaigns and local media and newspaper advertising.
Certain services and equipment (converters which are leased to subscribers) provided by substantially all of the Company's cable television systems are subject to regulation. See "Business - Cable Television Operations - Regulation - 1992 Cable Act."
SYSTEM CAPACITY.
The Company is engaged in an ongoing effort to upgrade the technical capabilities of its cable plant and to increase channel capacity for the delivery of additional programming and new services. The Company's cable television systems have a minimum capacity of 35 channels and 80% of its subscribers are currently served by systems having a capacity of at least 52 channels. As a result of currently ongoing upgrades, the Company expects that by December 1995 approximately 44% of its subscribers will be served by systems having a capacity of at least 77 channels. A substantial portion of the system upgrades either completed or underway will utilize fiber optic cable.
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PROGRAMMING.
Adequate programming is available to the Company from a variety of sources. Program suppliers' compensation is typically a fixed, per subscriber monthly fee based, in most cases, either on the total number of subscribers of the cable systems of the Company and certain of its affiliates, or on the number of subscribers subscribing to the particular service. The Company's programming contracts are generally for a fixed period of time and are subject to negotiated renewal. The Company's cable programming costs have increased in recent years and are expected to continue to increase due to additional programming being provided to most subscribers, increased costs to produce or purchase cable programming and other factors. Management believes that the Company will continue to have access to programming services at reasonable price levels.
FRANCHISES.
The Company's cable television systems are operated primarily under nonexclusive franchise agreements with local governmental franchising authorities, in some cases with the approval of state cable television authorities. Franchising authorities generally charge a fee of up to 5% based on a percentage of certain revenues of the franchisee. In 1994 franchise fee payments made by the Company aggregated approximately 4% of total revenues.
The Company's franchise agreements are generally for a term of ten to fifteen years from the date of grant, although recently renewals have often been for five to ten year terms. Some of the franchises grant the Company an option to renew. Except for the Company's franchise for the Town of Brookhaven, New York which expired in 1991, the expiration dates for the Company's ten largest franchises range from 1995 to 2001. In certain cases, including the Town of Brookhaven, the Company is operating under temporary licenses while negotiating renewal terms with the franchising authorities. Franchises usually require the consent of the franchising authority prior to the sale, assignment, transfer or change in ownership or operating control of the franchisee.
The Cable Communications Policy Act of 1984 (the "1984 Cable Act") and the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") provide significant procedural protections for cable operators seeking renewal of their franchises. See "Business - Cable Television Operations - Regulation". In connection with a renewal, a franchising authority may impose different and more stringent terms. The Company has never lost a franchise as a result of a failure to obtain a renewal.
COMPETITION.
The Company's cable television systems generally compete with the direct reception of broadcast television signals by antenna and with other methods of delivering television signals to the home for a fee. The extent of such competition depends upon the number and quality of the signals available by direct antenna reception as compared to the number and quality of signals distributed by the cable system. The Company's cable television
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systems also compete to varying degrees with other communications and entertainment media, including movies, theater and other entertainment activities.
The 1984 Cable Act, Federal Communications Commission ("FCC") regulations and the 1982 federal court consent decree (the "Modified Final Judgment") that settled the 1974 antitrust suit against American Telephone & Telegraph Company regulate the provision of video programming and other information services by telephone companies. A federal district court in 1991 issued an opinion, upheld on appeal, lifting the Modified Final Judgment prohibition on the provision of information services by the seven Bell Operating Companies ("BOCs"), allowing the BOCs to acquire or construct cable television systems outside of their own service areas. Several BOCs have purchased or made investments in cable systems outside their service areas in reliance on this decision. The 1984 Cable Act codified FCC cross-ownership regulations which, in part, prohibit local exchange telephone companies, including the BOCs, from providing video programming directly to subscribers within their local exchange service areas, except in rural areas or by specific waiver of FCC rules. The statutory provision and corresponding FCC regulations are of particular competitive importance because these telephone companies already own much of the plant necessary for cable television operations, such as poles, underground conduit, associated rights-of-way and connections to the home.
Numerous federal court decisions, including two at the appeals court level, have agreed with challenges to the constitutionality of the statutory ban on telephone company ownership of cable systems. These rulings apply to telephone company ownership of cable systems in several states in which the Company owns systems. Similar lawsuits have been filed in other states in which the Company owns systems. Legislation to repeal this ban, subject to certain regulatory requirements, was introduced in the U.S. Senate and House of Representatives in the last Congress; repeal has also been endorsed by the Clinton Administration. Under the terms of these bills, a telephone company could build and operate a cable system within the region or acquire an in-region cable operator, under certain circumstances. The bills would also, INTER ALIA, preempt state and locally-imposed barriers to the provision of intrastate and interstate telecommunications services by the Company and other cable systems operators, in competition with local telephone companies. Similar legislation has been introduced in the current Congress, and one version of such a bill has been approved by the Senate Commerce, Service and Transportation Committee.
In July 1992, the FCC voted to authorize additional competition to cable television by video programmers using broadband common carrier facilities constructed by telephone companies. The FCC allowed telephone companies to take ownership interests of up to 5% in such programmers. The FCC also reaffirmed an earlier holding, recently upheld on appeal by a federal court, that the programmers using such a telephone company-provided "video dialtone" system would not need to obtain a state or municipal franchise. Several telephone companies have sought approval from the FCC to build such "video dialtone" systems. Such a system has been proposed in several communities in which the Company currently holds a cable franchise and several of such systems have been approved by the FCC.
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Cable television also competes with the home video industry. Owners of videocassette recorders are able to rent many of the same movies, special events and music videos that are available on certain premium services. The availability of videocassettes has affected the degree to which the Company is able to sell premium service units and pay-per-view offerings to some of its subscribers.
Multipoint distribution services ("MDS"), which deliver premium television programming over microwave superhigh frequency channels received by subscribers with a special antenna, and multichannel multipoint distribution service ("MMDS"), which is capable of carrying four channels of television programming, also compete with certain services provided by the Company's cable television systems. By acquiring several MMDS licenses or subleasing from several MMDS operators and holders of other types of microwave licenses, a single entity can increase channel capacity to a level more competitive with cable systems. MDS and MMDS systems are not required to obtain a municipal franchise, are less capital intensive, require lower up-front capital expenditures and are subject to fewer local and FCC regulatory requirements than cable systems. The ability of MDS and MMDS systems to serve homes and to appeal to consumers is affected by their less extensive channel capacity and the need for unobstructed line of sight over-the-air transmission. The Company competes with MDS and MMDS operators generally in its metropolitan service areas.
Satellite master antenna systems ("SMATV") generally serve large multiple dwelling units. The FCC has preempted all state and local regulation of SMATV operations. SMATV is limited to the buildings within which the operator has received permission from the building owner to provide service. The FCC has recently streamlined its MDS regulations and opened substantially more microwave channels to MDS and SMATV operators, which could increase the strength of their competition with cable television systems. The Company competes with SMATV operators primarily in the New York City metropolitan service area.
In January 1993, the FCC proposed establishing a new local multipoint distribution service ("LMDS", sometimes referred to as "cellular cable") in the virtually unused 28 GHz band of the electromagnetic spectrum that could be used to offer multichannel video in competition with cable systems, as well as two-way communications services. The FCC has proposed issuing two LMDS licenses per market, using auctions or lotteries to select licensees. Suite 12 Group, the originator of this service, currently holds an experimental license and has constructed a video transmission service using the 28 Ghz band in a portion of the Company's New York City service area.
The 1984 Cable Act specifically legalized, under certain circumstances, reception by private home earth stations of satellite-delivered cable programming services. By law, dish owners have the right to receive broadcast superstations and network affiliate transmissions in return for a compulsory copyright fee. Cable programmers have developed new marketing efforts to reach these viewers. Direct broadcast satellite ("DBS") systems currently permit satellite transmissions from the low-power C-Band to be received by antennae approximately 60 to 72 inches in diameter at the viewer's home.
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New higher power DBS systems providing transmissions over the Ku-Band permit the use of smaller receiver antennae and thus may be more appealing to customers. Three DBS systems are now operational in the United States. Both C-Band and Ku-Band DBS delivery of television signals are competitive alternatives to cable television.
Other technologies supply services that may compete with certain services provided by cable television. These technologies include translator stations (which rebroadcast signals at different frequencies at lower power to improve reception) and low-power television stations (which operate on a single channel at power levels substantially below those of most conventional broadcasters and, therefore, reach a smaller service area).
The full extent to which developing media will compete with cable television systems may not be known for several years. There can be no assurance that existing, proposed or as yet undeveloped technologies will not become dominant in the future and render cable television systems less profitable or even obsolete. In particular, certain major telephone companies have demonstrated an interest in acquiring cable television systems or providing video services to the home through fiber optic technology. Changes in the laws and regulations mentioned above governing telephone companies could allow these companies in the future to provide information and entertainment services to the home.
Although substantially all the Company's cable television franchises are non-exclusive, most franchising authorities have granted only one franchise in an area. Other cable television operators could receive franchises for areas in which the Company operates or a municipality could build a competing cable system. One company has applied for a franchise to build and operate a competing cable television system in several communities in Connecticut in which the Company currently holds a cable franchise. The state regulatory authority is currently conducting hearings on this application and a decision is expected during the second or third fiscal quarters of this year. The 1992 Cable Act described below prohibits municipalities from unreasonably refusing to grant competitive franchises and facilitates the franchising of second cable systems or municipally-owned cable systems. See "Regulation - 1992 Cable Act," below.
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REGULATION.
1984 CABLE ACT. In 1984, Congress enacted the 1984 Cable Act, which set uniform national guidelines for cable regulation under the Communications Act of 1934. While several of the provisions of the 1984 Cable Act have been amended or superseded by the 1992 Cable Act, described below, other provisions of the 1984 Act, including the principal provisions relating to the franchising of cable television systems, remain in place. The 1984 Cable Act authorizes states or localities to franchise cable television systems but sets limits on their franchising powers. It sets a ceiling on cable franchise fees of 5% of gross revenues and prohibits localities from requiring cable operators to carry specific programming services. The 1984 Cable Act protects cable operators seeking franchise renewals by limiting the factors a locality may consider and requiring a due process hearing before denial. The 1984 Cable Act does not, however, prevent another cable operator from being authorized to build a competing system. The 1992 Cable Act prohibits franchising authorities from granting exclusive cable franchises and from unreasonably refusing to award an additional competitive franchise.
The 1984 Cable Act allows localities to require free access to public, educational or governmental channels, but sets limits on the number of commercial leased access channels cable television operators must make available for potentially competitive services. The 1984 Cable Act prohibits obscene programming and requires the sale or lease of devices to block programming considered offensive.
1992 CABLE ACT. On October 5, 1992, Congress enacted the 1992 Cable Act which represents a significant change in the regulatory framework under which cable television systems operate.
After the effective date of the 1984 Cable Act, and prior to the enactment of the 1992 Cable Act, rates for cable services were unregulated for substantially all of the Company's systems. The 1992 Cable Act reintroduced rate regulation for certain services and equipment provided by most cable systems in the United States, including substantially all of the Company's systems. On April 1, 1993, the FCC adopted rules implementing the rate regulation provisions of the 1992 Cable Act.
The 1992 Cable Act requires each cable system to establish a basic service package consisting, at a minimum, of all local broadcast signals and all non-satellite delivered distant broadcast signals that the cable system wishes to carry, and all public, educational and governmental access programming. The rates for the basic service package are subject to regulation by local franchising authorities. Under the FCC's April 1, 1993 rate regulation rules, a cable operator whose per channel rates as of September 30, 1992 exceeded an FCC established benchmark was required to reduce its per channel rates for the basic service package by up to 10% unless it could justify higher rates on the basis of its costs. On February 22, 1994, after reconsideration, the FCC ordered a further reduction of 7% in rates for the basic service tier in effect on September 30, 1992, for an overall reduction of 17% from those rates. The amount of this 17% decrease that is below a new per channel benchmark need not be implemented pending completion of FCC
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studies of the costs of below-benchmark cable systems. In the interim, however, the amount of the 17% decrease that is below this benchmark must be computed by the cable system and must be offset against otherwise allowable rate increases by these systems. Franchise authorities (local municipalities or state cable television regulators) are also empowered to regulate the rates charged for the installation and lease of the equipment used by subscribers to receive the basic service package (including a converter box, a remote control unit and, if requested by a subscriber, an addressable converter box or other equipment required to access programming offered on a per channel or per program basis), including equipment that may also be used to receive other packages of programming, and the installation and monthly use of connections for additional television sets. The FCC's rules require franchise authorities to regulate rates for equipment and connections for additional television sets on the basis of an actual cost formula developed by the FCC, plus a return of 11.25%. No additional charge is permitted for the delivery of regulated services to additional sets unless the operator incurs additional programming costs in connection with the delivery of such services to multiple sets.
The FCC may, in response to complaints by a subscriber, municipality or other governmental entity, reduce the rates for service packages other than the basic service package if it finds that such rates are unreasonable. The FCC will in response to complaints also regulate, on the basis of actual cost, the rates for equipment used only to receive these higher packages. Services offered on a per channel or per program basis or packages comprised only of services that are also available on a per channel or per program basis are not subject to rate regulation by either municipalities or the FCC. The FCC on February 22, 1994 adopted criteria to assess whether certain discounted packages of "a la carte" or per channel offerings should be regulated as a tier of services by the FCC or should be treated as unregulated per channel offerings.
The regulations adopted by the FCC on April 1, 1993, including the original rate benchmarks, became effective on September 1, 1993. The new rate regulations adopted by the FCC on February 22, 1994, including the new benchmarks, became effective in May, 1994.
The FCC's rules provide that, unless a cable operator can justify higher rates on the basis of its costs, increases in the rates charged by the operator for the basic service package or any other regulated package of service may not exceed an inflation indexed amount, plus increases in certain costs beyond the cable operator's control, such as taxes, franchise fees and increased programming costs that exceed the inflation index. A cable operator may not pass through to subscribers any amounts paid by the operator on or before October 6, 1994, to broadcast stations for the retransmission of their signals. Increases in retransmission fees above those in effect on that day may be passed through to subscribers. As part of the implementation of its rate regulations, the FCC froze all cable service rates until May 15, 1994 and provided cable operators with the option to defer refund liabilities by continuing rates in effect until July 15, 1994. The Company elected to defer its refund liabilities.
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On February 22, 1994, the FCC adopted guidelines for cost-of-service showings that establish a regulatory framework pursuant to which a cable television operator may attempt to justify rates in excess of the benchmarks. Such justification would be based upon (i) the operator's costs in operating a cable television system (including certain operating expenses, depreciation and taxes) and (ii) a return on the investment the operator has made to provide regulated cable television services in such system (such investment being referred to as its "ratebase", which includes working capital and certain costs associated with the construction of such system). The guidelines (1) create a rebuttable presumption that excludes from a cable television operator's ratebase any "excess acquisition costs" (equal to the excess of the purchase price for a cable television system over the original construction cost of such system, or its book value at the time of acquisition), (2) include in the rate base the costs associated with certain intangibles such as franchise rights and customer lists, and (3) set a uniform rate of return for regulated cable television service of 11.25% after taxes. The interim guidelines originally included a "productivity offset feature" that could reduce otherwise justifiable rate increases based on a claimed increase in a cable television system's operational efficiencies. The FCC dropped this proposal in September, 1994.
On November 10, 1994, the FCC reversed its policy regarding rate regulation of packages of a la carte services. A la carte services that are offered in a package will now be subject to rate regulation by the FCC. In light of the uncertainty created by the various criteria that the FCC previously applied to a la carte packages, the FCC, in those cases in which it was not clear how the FCC's previous criteria should have been applied to the package at issue, and where only a "small number" of channels were moved from a previously regulated tier to the package, will allow cable operators to treat existing packages as new product tiers ("NPT") as discussed below.
The FCC, in addition to revising its rules governing a la carte channels, also on November 10, 1994 revised its regulations governing the manner in which cable operators may charge subscribers for new cable programming services. The FCC instituted a three-year flat fee mark-up plan for charges relating to new channels of cable programming services in addition to the present formula for calculating the permissible rate for new services. Commencing on January 1, 1995, operators may charge for new channels of cable programming services added after May 14, 1994 at a markup of up to 20 cents per channel over actual programming costs, but may not make adjustments to monthly rates for these new services totaling more than $1.20, plus an additional 30 cents solely for programming license fees, per subscriber over the first two years of the three- year period. Cable operators may charge an additional 20 cents in the third year only for channels added in that year. Cable operators electing to use the 20 cent per channel adjustment may not take a 7.5% mark-up on programming cost increases, which is permitted under the FCC's current rate regulations. The FCC requested further comment on whether cable operators should continue to receive the 7.5% mark-up on increases in license fees on existing programming services.
Additionally, the FCC will permit cable operators to offer NPTs at rates which they elect so long as, among other conditions, other service tiers that are subject to rate regulation
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are priced in conformity with applicable FCC regulations and cable operators do not remove programming services from existing service tiers and offer them on the NPT.
Under the 1992 Cable Act, systems may not require subscribers to purchase any service package other than the basic service package as a condition of access to video programming offered on a per channel or per program basis. Cable systems are allowed up to ten years to the extent necessary to implement the necessary technology to facilitate this access. Substantially all of the Company's systems are currently capable of implementing the technology mandated by the 1992 Cable Act.
In addition, the 1992 Cable Act (i) requires cable programmers under certain circumstances to offer their programming to present and future competitors of cable television such as MMDS, SMATV and DBS, and prohibits new exclusive contracts with program suppliers without FCC approval, (ii) directs the FCC to set standards for limiting the number of channels that a cable television system operator could program with programming services controlled by such operator, (iii) bars municipalities from unreasonably refusing to grant additional competitive franchises, (iv) requires cable television operators to carry ("Must Carry") all local broadcast stations (including home shopping broadcast stations), or, at the option of a local broadcaster, to obtain the broadcaster's prior consent for retransmission of its signal ("Retransmission Consent"), (v) requires cable television operators to obtain the consent of any non-local broadcast station prior to retransmitting its signal, and (vi) regulates the ownership by cable operators of other media such as MMDS and SMATV. In connection with clause (ii) above concerning limitations on affiliated programming, the FCC has established a 40% limit on the number of channels of a cable television system that can be occupied by programming services in which the system operator has an attributable interest and a national limit of 30% on the number of households that any cable company can serve. In connection with clause (iv) above concerning retransmission of a local broadcaster's signals, a substantial number of local broadcast stations are currently carried by the Company's cable television systems and have elected to negotiate with the Company for Retransmission Consent. Although the Company has obtained Retransmission Consent agreements with all broadcast stations it currently carries, a number of these agreements are temporary in nature and the potential remains for discontinuation of carriage if an agreement is not ultimately reached.
The FCC has imposed new regulations under the 1992 Cable Act in the areas of customer service, technical standards, equal employment opportunity, privacy, rates for leased access channels, obscenity and indecency, disposition of a customer's home wiring and compatibility between cable systems and other consumer electronic equipment such as "cable ready" television sets and videocassette recorders.
A number of lawsuits have been filed in federal court challenging the constitutionality of various provisions of the 1992 Cable Act. A challenge to the constitutionality of the 1992 Cable Act's Must Carry rules was denied by a federal court in April 1993. On appeal, the United States Supreme Court returned this decision to the lower court for further proceedings. Most other challenged provisions of the 1992 Cable Act have been upheld
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at the federal district court level, including provisions governing rate regulation and retransmission consent, but an appeal to the U.S. Court of Appeals for the District of Columbia Circuit of that decision has been filed. Other challenges to the FCC's rate regulation scheme have been separately brought directly to the District of Columbia Circuit. The Company cannot predict the outcome of any of the foregoing litigation affecting the 1992 Cable Act. The material provisions of the 1992 Cable Act remain in effect during the pendency of the litigation.
Legislation recently approved by the Senate Commerce, Service and Transportation Committee would significantly modify the rate regulation provisions of the 1992 Cable Act. The Company cannot predict the likelihood of passage of this or other legislation that would reduce the regulatory restrictions on the Company's ability to market and price its services.
OTHER FCC REGULATION. In addition to the rules and regulations promulgated by the FCC under the 1984 Cable Act and the 1992 Cable Act, the FCC has promulgated other rules affecting the Company. FCC rules require that cable systems black out certain network and sports programming on imported distant broadcast signals upon request. The FCC also requires that cable systems delete syndicated programming carried on distant signals upon the request of any local station holding the exclusive right to broadcast the same program within the local television market and, in certain cases, upon the request of the copyright owner of such programs. These rules affect the diversity and cost of the Company's programming options for its cable systems.
FCC regulation also includes matters regarding restrictions on origination and cablecasting by cable system operators; application of the rules governing political broadcasts; customer service; home wiring and limitations on advertising contained in nonbroadcast children's programming.
Implementing provisions of the 1993 Budget Act, the FCC has adopted requirements for payment of annual "regulatory fees". For 1994, cable television systems are required to pay regulatory fees of $0.37 per subscriber, which may be passed on to subscribers as "external cost" adjustments to basic cable service. This fee is proposed to be increased to $0.51 per subscriber for 1995. Fees are also assessed for other licenses, including licenses for business radio, cable television relay systems (CARS) and earth stations, which, however, may not be collected directly from subscribers.
The FCC has the authority to regulate utility company rates for cable rental of pole and conduit space. States can establish preemptive regulations in this area, and the states in which the Company's cable television systems operate have done so. The FCC's technical guidelines for signal leakage became substantially more stringent in 1990, requiring upgrading expenditures by the Company. Two-way radio stations, microwave-relay stations and satellite earth stations used by the Company's cable television systems are licensed by the FCC.
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FEDERAL COPYRIGHT REGULATION. There are no restrictions on the number of distant broadcast television signals that cable television systems can import, but cable systems are required to pay copyright royalty fees to receive a compulsory license to carry them. The United States Copyright Office has increased the royalty fee from time to time. The FCC has recommended to Congress the abolition of the compulsory licenses for cable television carriage of broadcast signals. Any such action by Congress could adversely affect the Company's ability to obtain such programming and could increase the cost of such programming.
CABLE TELEVISION CROSS-MEDIA OWNERSHIP LIMITATIONS. The 1984 Cable Act prohibits any person or entity from owning broadcast television and cable properties in the same market. The 1984 Cable Act also bars co-ownership of telephone companies and cable television systems operating in the same service areas, with limited exceptions for rural areas. The FCC may also expand the rural exemption for telephone companies offering cable service within their service areas. The FCC has modified its rule that formerly barred the commercial broadcasting networks (NBC, CBS and ABC) from owning cable television systems. The FCC rule does not allow the networks to acquire cable systems in markets in which they already own a broadcast station, and sets limitations on the percentage of homes that can be passed, both nationally and locally, by network-owned cable systems. The 1992 Cable Act imposed limits on new acquisitions of SMATV or MMDS systems by cable operators in their franchise areas. There is no federal bar to newspaper ownership of cable television systems. The Company does not have any prohibited cross-ownership interests. A bill recently approved by the Senate Commerce, Service and Transportation Committee would eliminate or modify these cross-ownership limitations.
STATE AND MUNICIPAL REGULATION OF CABLE TELEVISION. Regulatory responsibility for essentially local aspects of the cable business such as franchisee selection, system design and construction, safety, and consumer services remains with either state or local officials and, in some jurisdictions, with both. The 1992 Cable Act expands the factors that a franchising authority can consider in deciding whether to renew a franchise and limits the damages for certain constitutional claims against franchising authorities for their franchising activities. New York law provides for comprehensive state-wide regulation, including approval of transfers of cable franchises and consumer protection legislation. State and local franchising jurisdiction is not unlimited, however, and must be exercised consistently with the provisions of the 1984 Cable Act and the 1992 Cable Act. Among the more significant restrictions that the Cable Act imposes on the regulatory jurisdiction of local franchising authorities is a 5% ceiling on franchise fees and mandatory renegotiation of certain franchise requirements if warranted by changed circumstances.
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CONSOLIDATED CABLE AFFILIATES
V CABLE. On December 31, 1992, the Company consummated a significant restructuring and reorganization involving its unrestricted subsidiary V Cable, U.S. Cable and General Electric Capital Corporation ("GECC"), V Cable's principal creditor (the "V Cable Reorganization"). In the V Cable Reorganization, V Cable acquired, for $20.0 million, a 20% partnership interest in U.S. Cable, and U.S. Cable acquired, for $3.0 million, a 19% non-voting interest in a newly incorporated subsidiary of V Cable ("VC Holding") that was formed to hold substantially all of V Cable's assets. As a result, V Cable now owns an effective 84.8% interest in VC Holding. GECC then provided new long-term credit facilities to each of V Cable, VC Holding and U.S. Cable. The debt of V Cable and VC Holding is guaranteed by, and secured by a pledge of all of the assets of, V Cable, VC Holding and each of their subsidiaries, including a pledge of all direct and indirect ownership interests in such subsidiaries. The debt of U.S. Cable is guaranteed by all subsidiaries of U.S. Cable, and secured by all the assets of each subsidiary of U.S. Cable; U.S. Cable's debt is also guaranteed (and cross-collateralized in most cases) by each of V Cable, VC Holding and each of their subsidiaries. All of the V Cable, VC Holding and U.S. Cable credit facilities are non-recourse to the Company other than with respect to the common stock of V Cable owned by the Company. The Company manages the U.S. Cable properties and the V Cable systems under management agreements that provide for cost reimbursement, including an allocation of overhead charges.
In connection with the V Cable Reorganization, on December 31, 1997 V Cable will assume approximately $121.0 million face value ($87.3 million present value as of December 31, 1994) of debt of U.S. Cable (all of which is owed to GECC), which amount is subject to adjustment, upward or downward, depending on U.S. Cable's ratio of debt to cash flow (as defined) in 1997. Each year thereafter, until the final adjustment upon occurrence of an exchange described below, the amount of U.S. Cable debt assumed by V Cable may be similarly adjusted, upward or downward. V Cable's agreement to assume the U.S. Cable debt was made in connection with, and in consideration for, the restructuring of V Cable's credit facilities with GECC.
V Cable has the option to exchange its interest in U.S. Cable for all of U.S. Cable's interest in VC Holding and thus recover full ownership of the V Cable systems from and after January 1, 1998. Upon such an exchange, the guarantee and cross collateralization by V Cable and VC Holding of any portion of the U.S. Cable senior credit facilities not assumed by V Cable would terminate. Such option may not be exercised prior to November 30, 2001 unless the U.S. Cable systems have been sold for a net purchase price sufficient to repay to GECC certain of the U.S. Cable loans not assumed by V Cable, as well as a fixed additional amount. In addition, V Cable may exercise the option prior to January 1, 1998 if the U.S. Cable systems have been sold, all outstanding indebtedness of V Cable, VC Holding and U.S. Cable to GECC (other than junior subordinated debt and certain other excluded indebtedness) is repaid, and an additional fixed amount is paid to GECC.
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The Company accounts for its investment in U.S. Cable using the equity method of accounting.
CABLEVISION OF NEW YORK CITY. In July 1992, the Company acquired (the "CNYC Acquisition") substantially all of the remaining interests in Cablevision of New York City - Phase I through Phase V ("CNYC"), the operator of a cable television system that is under development in The Bronx and parts of Brooklyn, New York. Prior to the CNYC Acquisition, the Company had a 15% interest in CNYC and Charles F. Dolan, the chief executive officer and principal shareholder of the Company, owned the remaining interests. Mr. Dolan remains a partner in CNYC, with a 1% interest and the right to certain preferential payments.
CNYC holds franchises that permit construction of the franchised areas in specified phases. Construction of the systems in the Brooklyn and The Bronx franchises has been substantially completed.
Under the agreement between the Company and Mr. Dolan, a new limited partnership ("CNYC LP") was formed and holds 99% of the partnership interests in CNYC. The remaining 1% interest in CNYC is owned by the existing corporate general partner, Cablevision Systems New York City Corporation, which is a wholly-owned subsidiary of the Company. Subsidiaries of the Company own a 1% general partnership interest and a 98% limited partnership interest in CNYC LP and Mr. Dolan retains a 1% limited partnership interest in CNYC LP plus certain preferential rights. Mr. Dolan's preferential rights entitle him to an annual cash payment (the "Annual Payment") of 14% multiplied by the outstanding balance of his "Minimum Payment". The Minimum Payment is $40.0 million and is to be paid to Mr. Dolan prior to any distributions from CNYC LP to partners other than Mr. Dolan. In addition, Mr. Dolan has the right, exercisable on December 31, 1997, and as of the earlier of (1) December 31, 2000 and (2) December 31 of the first year after 1997 during which CNYC achieves an aggregate of 400,000 subscribers, to require the Company to purchase (Mr. Dolan's "put") his interest in CNYC LP. The Company has the right to require Mr. Dolan to sell his interest in CNYC LP to the Company (the Company's "call") during the three-year period commencing one year after the expiration of Mr. Dolan's second put. In the event of a put, Mr. Dolan will be entitled to receive from the Company the Minimum Payment, any accrued but unpaid Annual Payments, a guaranteed return on certain of his investments in CNYC LP and a Preferred Payment defined as a payment (not exceeding $150.0 million) equal to 40% of the Appraised Equity Value (as defined) of CNYC LP after making certain deductions including a deduction of a 25% compound annual return on approximately 85% of the Company's investments with respect to the construction of Phases III, IV and V of CNYC and 100% of certain of the Company's other investments in CNYC, including Mr. Dolan's Annual Payment. In the event the Company exercises its call, the purchase price will be computed on the same basis as for a put except that there will be no payment in respect of the Appraised Equity Value amount.
The Company has the right to make payment of the put or call exercise price in the form of shares of the Company's Class B Common Stock or, if Mr. Dolan so elects, Class A
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Common Stock, except that all Annual Payments must be paid in cash to the extent permitted under the Company's Credit Agreement (as defined below). Under the Credit Agreement, the Company is currently prohibited from paying the Preferred Payment in cash and, accordingly, without the consent of the bank lenders, would be required to pay it in shares of the Company's Common Stock.
The Company has agreed to invest in CNYC LP sufficient funds to permit CNYC LP to make the required Annual Payments to Mr. Dolan and to make certain equity contributions to CNYC. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Restricted Group."
The subsidiaries of the Company that own all of the Company's interests in CNYC have succeeded to the rights and obligations of Mr. Dolan under a security agreement relating to CNYC's credit agreement and in connection therewith have pledged all of the Company's interests in CNYC and CNYC LP to secure the obligations to the bank lenders under the CNYC credit agreement. Recourse against these subsidiaries, which are members of the Restricted Group, is limited solely to the pledged interests in CNYC and CNYC LP.
CABLEVISION MFR. In August 1994, Cablevision MFR, Inc. ("Cablevision MFR"), a wholly-owned subsidiary of the Company, acquired substantially all of the assets of Monmouth Cablevision Associates, L.P. ("Monmouth Cablevision") and Riverview Cablevision Associates, L.P. ("Riverview Cablevision") consisting of cable television systems in New Jersey. The operations of Monmouth Cablevision and Riverview Cablevision are consolidated with those of the Company as of the date of acquisition. The aggregate purchase price for the two New Jersey systems was $391.2 million. Approximately $237.8 million of such purchase price was financed by a senior credit facility of newly formed subsidiaries of Cablevision MFR secured solely by the assets of the systems. The remaining $153.4 million of such purchase price was paid with cash of approximately $12.1 million and the issuance, by Cablevision MFR, of subordinated promissory notes (the "MFR Notes") totalling $141.3 million due in 1998 and bearing interest at 6% until the third anniversary and 8% thereafter increasing to 8% and 10%, respectively, if the Company exercises its option to pay interest in shares of the Company's Class A common stock.
Principal and interest on the Cablevision MFR promissory notes, which may be paid in cash or, under certain circumstances at the Company's option, in shares of the Company's Class A common stock, are guaranteed by the Company. The Company's obligations under the guarantees rank pari passu with the Company's public subordinated debt. In certain circumstances, Cablevision MFR may extend the maturity date of the promissory notes until 2003 for certain additional consideration. In the event the maturity is so extended, the interest and principal of such notes may thereafter be paid only in cash.
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CABLEVISION CLEVELAND. In March, 1994, Cablevision of Cleveland, L.P. ("Cablevision Cleveland"), a partnership comprised of subsidiaries of the Company, purchased substantially all of the assets and assumed certain liabilities of North Coast Cable Limited Partnership, which operates a cable television system in Cleveland, Ohio (the "North Coast Cable Acquisition"). The net cash purchase price for interests not previously owned by the Company (and excluding excess liabilities assumed by the Company) aggregated approximately $103.4 million including expenses. The cost of the acquisition was financed principally by borrowings under the Company's Credit Agreement. Cablevision Cleveland is part of the Restricted Group.
OTHER CABLE AFFILIATES
A-R CABLE. In May 1992, the Company and A-R Cable consummated a restructuring and refinancing transaction that had the effect of retiring a substantial portion of A-R Cable's subordinated debt and reducing the Company's economic and voting interest in A-R Cable. Among other things, Warburg, Pincus Investors, L.P. ("Warburg Pincus") purchased a new Series A Preferred Stock of A-R Cable for a cash investment of $105.0 million, and the Company purchased a new Series B Preferred Stock of A-R Cable for a cash investment of $45.0 million. The Company acquired the funds for its investment in A-R Cable through borrowings under the Company's credit agreement. In addition, GECC provided A-R Cable with an additional $70.0 million under a secured revolving credit line.
In connection with Warburg Pincus' investment in A-R Cable, upon the receipt of certain regulatory approvals, Warburg Pincus will be permitted to elect three of the six members of the A-R Cable board of directors, will have approval rights over certain major corporate decisions of A-R Cable and will be entitled to 60% of the vote on all matters on which holders of capital stock are entitled to vote (other than the election of directors). A-R Cable Investments, Inc., a wholly-owned subsidiary of the Company owns all of the common stock, as well as the Series B Preferred Stock, of A-R Cable and the Company continues to manage A-R Cable under a management agreement that provides for cost reimbursement, an allocation of overhead charges and a management fee of 3-1/2% of gross receipts, as defined, with interest on unpaid annual amounts thereon at a rate of 10% per annum. The 3-1/2% fee and interest thereon is payable by A-R Cable only after repayment in full of its senior debt and certain other obligations. Under certain circumstances, the fee is subject to reduction to 2-1/2% of gross receipts.
During 1994, Warburg Pincus purchased additional shares of Series A Preferred Stock for a cash investment of approximately $1.0 million and CSC purchased additional shares of Series B Preferred Stock for a cash investment of approximately $0.4 million.
After May 11, 1997, either Warburg Pincus or the Company may irrevocably cause the sale of A-R Cable, subject to certain conditions. In certain circumstances, Warburg Pincus may cause the sale of A-R Cable prior to that date. If Warburg Pincus initiates the sale, the Company will have the right to purchase A-R Cable through an appraisal procedure. The Company's purchase right may be forfeited in certain circumstances. Upon the sale
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of A-R Cable, the net sales proceeds, after repayment of all outstanding indebtedness and other liabilities, will be used as follows: first, to repay Warburg Pincus' investment in the Series A Preferred Stock; second, to repay the Company's investment in the Series B Preferred Stock; third, to repay the accumulated unpaid dividends on the Series A Preferred Stock (19% annual rate); fourth, to repay the accumulated unpaid dividends on the Series B Preferred Stock (12% annual rate); fifth, to pay the Company for all accrued and unpaid management fees together with accrued but unpaid interest thereon; sixth, pro rata 60% to the Series A Preferred Stockholders, 4% to the Series B Preferred Stockholders and 36% to the common stockholder(s).
Also in connection with the purchase of the A-R Cable Notes, A-R Cable retired its previously outstanding preferred stock (undesignated as to series) which it had purchased from an affiliate, a wholly-owned subsidiary of V Cable, Inc., for nominal consideration. In connection with the purchase of the preferred stock, a transaction fee agreement between A-R Cable and GECC was terminated and A-R Cable's obligations thereunder were extinguished.
As a result of the rights to which Warburg Pincus is entitled discussed above, the Company no longer has financial or voting control over A-R Cable's operations. Accordingly, the Company no longer consolidates the financial position or results of operations of A-R Cable. For reporting purposes, the Company is accounting for its investment using the equity method of accounting.
The Company continues to guarantee the debt of A-R Cable to GECC under a limited recourse guarantee wherein recourse to the Company is limited solely to the common stock and Series B Preferred Stock of A-R Cable owned by a wholly-owned subsidiary of the Company.
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CABLEVISION OF BOSTON. Cablevision of Boston, a Massachusetts limited partnership, is engaged in the construction, ownership and operation of cable television systems in Boston and Brookline, Massachusetts. The Company had advanced net funds to Cablevision of Boston as of December 31, 1994 amounting to approximately $52.2 million. Due to uncertainties existing during 1985 (which subsequently were resolved), the Company wrote off for accounting purposes its entire investment in and advances to Cablevision of Boston of $34.5 million as of September 30, 1985. Subsequent to 1985, a subsidiary of the Company exchanged $45.7 million of advances, consisting of amounts previously written off of $34.5 million, interest of $3.2 million that had not been recognized for accounting purposes, and $8.0 million of subsequent advances, for $45.7 million of preferred equity in Cablevision of Boston. After this exchange, the Company advanced an additional $9.7 million to Cablevision of Boston; in addition, at December 31, 1994, $101.0 million of unpaid distributions had accrued on the Company's preferred equity. At December 31, 1994, as a result of the write-off referred to above and non-recognition for accounting purposes of the unpaid distributions, the Company's consolidated financial statements reflects $17.7 million due from Cablevision of Boston. The contractual terms of the preferred equity provide that the Company is to receive (i) cumulative distributions equal to an annual rate of 15% (compounded semi-annually) on its investment, (ii) the right to a priority return of the equity investment and any amounts of unpaid cumulative distributions when permitted to be paid and (iii) the right to receive 20% of all amounts available for postpayout distribution. Certain questions exist as to whether the preferred equity is entitled to its full contractual rights. In connection with the proposed acquisition of Cablevision of Boston by the Company discussed below, the Company has agreed to substantial reductions in the amounts that it would otherwise be entitled to receive in that transaction in respect of its preferred equity interests in order to induce the Limited Partners of Cablevision of Boston to approve the transaction. The Company's preferred equity is subordinated to the indebtedness of Cablevision of Boston (including the Company's $9.7 million of advances accruing interest at an annual rate of 10.5% (with no set maturity date) not converted to preferred equity) and accrued but unpaid management fees due to a corporation owned by Charles F. Dolan, the managing general partner, which indebtedness and management fees aggregated approximately $90.8 million at December 31, 1994, and any working capital deficit incurred in the ordinary course of business.
In addition to the Company's preferred equity interest in Cablevision of Boston, the Company is a limited partner in Cablevision of Boston and currently holds a 7% prepayout interest and a 20.7% postpayout interest. Mr. Dolan holds directly or indirectly a 1% prepayout general partnership interest and a 23.5% postpayout general partnership interest in Cablevision of Boston. With respect to Cablevision of Boston, "payout" means the date on which the limited partners are distributed the amount of their original investment.
In June 1994, the Company and Cablevision of Boston entered into an agreement which is designed to give the Company full ownership of Cablevision Boston. The agreement provides for the acquisition by the Company of the interests of Cablevision Boston which it does not already own in a series of transactions. The Company and Cablevision Boston
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have filed with the Securities and Exchange Commission a Consent Solicitation Statement/Prospectus with respect to the proposed transactions. Each of the transactions is subject to a number of conditions, including the approval by the limited partners of Cablevision Boston who are unaffiliated with the general partners of Cablevision Boston. Consummation of the transactions would result in the limited partners in Cablevision Boston receiving Class A Common Stock of the Company with an expected aggregate market value of approximately $40 million.
CABLEVISION OF CHICAGO. Cablevision of Chicago owns cable television systems operating in the suburban Chicago area. The Company does not have a material ownership interest in Cablevision of Chicago but had loans and advances outstanding to Cablevision of Chicago in the amount of $12.3 million (plus $13.4 million in accrued interest which the Company has fully reserved) as of December 31, 1994, which loans and advances are subordinated to Cablevision of Chicago's senior credit facility, accrue interest at an annual rate of 14% and have no set maturity date. Mr. Dolan currently holds directly or indirectly an approximate 1% prepayout and a 32.7% postpayout general partnership interest in the cable television systems owned and operated by Cablevision of Chicago. With respect to Cablevision of Chicago, "payout" means the date on which the limited partners in Cablevision of Chicago are distributed the amount of their original investment, plus interest thereon, if applicable.
In January, 1995, Cablevision of Chicago signed a definitive agreement to sell its cable systems to Continental Cablevision, Inc. The transfer is subject to franchise approvals and is expected to close later in 1995.
CABLEVISION OF NEWARK. In April 1992, Cablevision of Newark, a partnership 25% owned and managed by the Company and 75% owned by an affiliate of Warburg Pincus, acquired cable television systems located in Newark and South Orange, New Jersey ("Gateway Cable") from Gilbert Media Associates, L.P. for a cash purchase price of approximately $76.5 million. Gateway Cable served approximately 43,600 subscribers as of the date of acquisition. The Company's total capital contributions to Cablevision of Newark were approximately $6.0 million. The Company manages the operations of Cablevision of Newark for a fee equal to 3-1/2% of gross receipts, as defined, plus reimbursement of certain costs and an allocation of certain selling, general and administrative expenses.
U.S. CABLE. In connection with the V Cable Reorganization (see Note 2 of Notes to Consolidated Financial Statements), V Cable acquired for $20.0 million a 20% interest in U.S. Cable. The Company has managed the properties of U.S. Cable since June 1992 under management agreements that provide for cost reimbursement, including an allocation of overhead charges.
A-R CABLE PARTNERS. In June 1994, A-R Cable Partners, a partnership comprised of subsidiaries of the Company and E.M. Warburg, Pincus & Co., Inc. completed the purchase of certain assets of Nashoba Communications, a group of three limited partnerships, for a purchase price of approximately $90.5 million of which $46.7 million
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was provided by a senior credit facility secured by the assets of such systems. The remainder of the purchase price was provided by equity contributions and subordinated loans from the partners in A-R Cable Partners. The Company provided $11.9 million for its 30% interest in A-R Cable Partners and $1.5 million in loans. The Company manages the operations of A-R Cable Partners pursuant to a management agreement which provides for a fee equal to 3-1/2% of gross receipts, as defined, plus reimbursement of certain costs and an allocation of certain selling, general and administrative expenses.
CABLEVISION OF FRAMINGHAM. On August 8, 1994, Cablevision of Framingham Holdings, Inc. ("CFHI"), a corporation owned by the Company and E.M. Warburg, Pincus Investors, L.P., acquired substantially all of the assets of Framingham Cablevision Associates, L.P. ("Framingham Cablevision") consisting of cable television systems in Massachusetts. The aggregate purchase price, including fees and expenses, for Framingham Cablevision's assets was $37.5 million. Approximately $22.7 million of such purchase price was financed by a senior credit facility of a wholly-owned subsidiary of CFHI secured by the assets of such system. Approximately $9.7 million of such purchase price was paid by the issuance by CFHI of a promissory note, guaranteed by the Company, (the "CFHI Note") due in 1998 and bearing interest at 6% until the third anniversary and 8% thereafter (increasing to 8% and 10%, respectively, if interest is paid in shares of the Company's Class A Common Stock). The remaining amount was financed by loans and capital contributions from its stockholders, of which the Company provided approximately $1.3 million as a capital contribution and $0.3 million as a loan for its 30% interest in CFHI. The Company manages the operations of CFHI pursuant to a management agreement which provides for a fee equal to 3-1/2% of gross receipts, as defined, plus reimbursement of certain costs and an allocation of certain selling, general and administrative expenses.
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PROGRAMMING OPERATIONS
GENERAL.
The Company conducts its programming activities through Rainbow Programming, its wholly owned subsidiary, and through subsidiaries of Rainbow Programming in partnership with certain unaffiliated entities, including National Broadcasting Company, Inc. ("NBC") and Tele-Communications, Inc. ("TCI"). Rainbow Programming's businesses include eight regional SportsChannel services, four national entertainment services (American Movie Classics Company ("AMCC"), Bravo Network ("Bravo") Much Music ("MM") and the Independent Film Channel ("IFC")), News 12 Long Island (a regional news service serving Long Island, New York) and the national backdrop sports services of Prime SportsChannel Networks ("Prime SportsChannel"). Rainbow Programming also owns an interest in Courtroom Television Network and in Madison Square Garden (discussed below). Rainbow Programming's SportsChannel services provide regional sports programming to the New York, Philadelphia, New England, Chicago, Cincinnati, Cleveland, San Francisco and Florida areas. AMCC is a national program service featuring classic, unedited and non-colorized films from the 1930's through the 1970's. Bravo is a national program service offering international films and performing arts programs, including jazz, dance, classical music, opera and theatrical programs. MM is a Canadian music service featuring music primarily from Canadian artists. IFC is a national program service that airs independent films made outside the Hollywood system.
Rainbow Programming acts as managing partner for each of these programming businesses, other than Courtroom Television Network (which is managed by Time Warner) and Madison Square Garden (which is managed jointly with ITT), and reflects its share of the profits or losses in these businesses using the equity method of accounting except for AMCC, whose operations are now consolidated with those of the Company. Certain of Rainbow Programming's programming interests are held through Rainbow Program Enterprises ("RPE"), which is substantially wholly owned by Rainbow Programming.
In March 1995, subsidiaries of Rainbow Programming and ITT completed a transaction to purchase Madison Square Garden. For a complete description, see "Recent Developments", above.
Rainbow Programming and NBC formed a venture to exploit the pay-per-view television rights to the 1992 Summer Olympics. Rainbow Programming's share of the losses of the venture amounted to its maximum obligation of $50 million and this payment was made to NBC in January 1993.
In July 1994, Rainbow Programming completed the purchase of a 50% interest held by Liberty Media Corporation ("Liberty") in AMCC for a purchase price of approximately $181.0 million, increasing Rainbow Programming's interest in AMCC to approximately 75%. The results of AMCC's operations are consolidated with those of the Company as
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of the date of acquisition. The acquisition was financed with a separate $105 million credit facility entered into by Rainbow Programming and by an equity infusion of $76.0 million by the Company into Rainbow Programming.
Rainbow Programming's financing needs have been funded by the Restricted Group's investments in and advances to Rainbow Programming, by sales of equity interests in the programming businesses and, through separate, external debt financing. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources".
The Company is considering possible transactions that could result in Rainbow Programming, or another entity holding the Company's programming interests, becoming a publicly-held company, including a spin-off of all or a portion of Rainbow Programming or such entity to the Company's common stockholders.
COMPETITION.
There are numerous programming services with which Rainbow Programming competes for cable television system distribution and for subscribers, including network television, other national and regional cable services, independent broadcast television stations, television superstations, the home videocassette industry, and developing pay-per-view services. Rainbow Programming and the other programming services are competing for limited channel capacity and for inclusion in the basic service tier of the systems offering their programming services. Many of these program distributors are large, publicly-held companies which have greater financial resources than Rainbow Programming.
Rainbow Programming also competes for the availability of programming, through competition for telecast rights to films and competition for rights agreements with sports teams. The Company anticipates that such competition will increase as the number of programming distributors increases.
In general, the programming services offered by Rainbow Programming compete with other forms of television-related services and entertainment media on the basis of the price of services, the variety and quality of programming offered and the effectiveness of Rainbow Programming's marketing efforts.
REGULATION.
Cable television program distributors such as Rainbow Programming are not regulated by the FCC under the Communications Act of 1934. To the extent that regulations and laws, either presently in force or proposed, hinder or stimulate the growth of the cable television and satellite industries, the business of Rainbow Programming will be directly affected. As discussed above under "Business - Cable Television Operations - Regulation", the 1992 Cable Act limits in certain ways the Company's ability to freely manage the Rainbow Programming services or carry the Rainbow Programming services on their affiliates' systems and imposes or could impose other regulations on the Rainbow Programming companies.
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The 1984 Cable Act prohibits localities from requiring carriage of specific programming services, providing a more open market for Rainbow Programming and other cable program distributors. The 1984 Cable Act limits the number of commercial leased access channels that a cable television operator must make available for potentially competitive services but the 1992 Cable Act empowers the FCC to set the rates and conditions for such leased access channels. The reimposition of the FCC's rules requiring blackout of syndicated programming on distant broadcast signals for which a local broadcasting station has an exclusive contract opened new channels for Rainbow Programming's services.
Satellite common carriers, from whom Rainbow Programming and its affiliates obtain transponder channel time to distribute their programming, are directly regulated by the FCC. All common carriers must obtain from the FCC a certificate for the construction and operation of their interstate communications facilities. Satellite common carriers must also obtain FCC authorization to utilize satellite orbital slots assigned to the United States by the World Administrative Radio Conference. Such slots are finite in number, thus limiting the number of carriers that can provide satellite service and the number of channels available for program producers and distributors such as Rainbow Programming and its affiliates. Nevertheless, there are at present numerous competing satellite services that provide transponders for video services to the cable industry.
All common carriers must offer their communications service to Rainbow Programming and others on a nondiscriminatory basis (including by means of a lottery). A satellite carrier cannot unreasonably discriminate against any customer in its charges or conditions of carriage.
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ADVERTISING SERVICES
Rainbow Advertising represents certain of the Company's cable television systems in the sales of advertising time to regional and local advertisers. Rainbow Advertising also represents each of the SportsChannel regional programming services and the News 12 Long Island programming service in the sales of advertising time to national and regional advertisers. Rainbow Advertising represents cable television systems unaffiliated with the Company in the sales of spot advertising to national and regional advertisers. Rainbow Advertising also has contracted with certain unaffiliated cable television operators to act as their exclusive representative for the sales of advertising time to local advertisers.
OTHER AFFILIATES
ATLANTIC PUBLISHING. Atlantic Cable Television Publishing Corporation ("Atlantic Publishing") holds a minority equity interest and a debt interest in a company that publishes a weekly cable television guide which is offered to the Company's subscribers and to other unaffiliated cable television operators. As of December 31, 1994, the Company had advanced an aggregate of approximately $17.7 million to Atlantic Publishing, reflecting approximately $0.6 million and $0.5 million paid back during 1994 and 1993, respectively. The Company has written off all of its advances to Atlantic Publishing other than $3.4 million. Atlantic Publishing is owned by a trust for certain Dolan family members; however, the Company has the option to purchase Atlantic Publishing for an amount equal to the owner's net investment therein plus interest. The current owner has made only a nominal investment in Atlantic Publishing to date.
RADIO STATION WKNR. The Company is the owner of Cleveland Radio Associates ("WKNR"), an AM radio station serving the Cleveland metropolitan area with an all-sports format.
EMPLOYEES AND LABOR RELATIONS
As of December 31, 1994, the Company had 4,096 full-time, 453 part-time and 149 temporary employees. During 1991, the International Brotherhood of Electrical Workers ("IBEW") conducted an organizing campaign among employees involved in the operation of News 12 Long Island. In connection with that campaign, the IBEW claimed that various unfair labor practices were committed. An NLRB administrative law judge found that News 12's downsizing of its work force in 1991 was based upon valid economic factors and was not an unfair labor practice. The administrative law judge has also found that News 12 offered improper promises to certain employees and improper threats of retaliation to others. These decisions have been upheld upon appeal to the NLRB. Each of News 12 and the IBEW may appeal these decisions to Federal Court. As of December 31, 1994, News 12 Long Island had 99 full-time, 11 part-time and 79 temporary employees.
There are no collective bargaining agreements with employees of the Company. The Company believes that its relations with its employees are satisfactory.
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ITEM 2.
ITEM 2. PROPERTIES
The Company generally leases the real estate where its business offices, microwave receiving antennae, earth stations, transponders, microwave towers, warehouses, headend equipment, hub sites, program production studios and access studios are located. Significant leasehold properties include eleven business offices, comprising the Company's headquarters located in Woodbury, New York with approximately 264,000 square feet of space, and the headend sites. The Company believes its properties are adequate for its use.
The Company generally owns all assets (other than real property) related to the cable television operations of the Restricted Group, including its program production equipment, headend equipment (towers, antennae, electronic equipment and satellite earth stations), cable system plant (distribution equipment, amplifiers, subscriber drops and hardware), converters, test equipment, tools and maintenance equipment. Similarly, the unconsolidated entities managed by the Company generally own such assets related to their cable television operations. The Company generally leases its service and other vehicles.
Substantially all of the assets of the Restricted Group, V Cable, VC Holding and Cablevision MFR are pledged to secure borrowings under their respective credit agreements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to various lawsuits, some involving substantial amounts. Management does not believe that such lawsuits will have a material adverse impact on the financial position of the Company. See Note 12 of Notes to Consolidated Financial Statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock, par value $.01 per share ("Class A Common Stock"), is traded on the American Stock Exchange under the symbol "CVC". The following table sets forth the high and low sales prices for the last two years of Class A Common Stock as reported by the American Stock Exchange for the periods indicated.
As of March 16, 1995, there were 653 holders of record of Class A Common Stock.
There is no public trading market for the Company's Class B Common Stock, par value $.01 per share ("Class B Common Stock"). As of March 16, 1995, there were 25 holders of record of Class B Common Stock.
DIVIDENDS. The Company has not paid any dividends on shares of Class A or Class B Common Stock. The Company intends to retain earnings to fund the growth of its business and does not anticipate paying any cash dividends on shares of Class A or Class B Common Stock in the foreseeable future.
The Company may pay cash dividends on its capital stock only from surplus as determined under Delaware law. Holders of Class A and Class B Common Stock are entitled to receive dividends equally on a per share basis if and when such dividends are declared by the Board of Directors of the Company from funds legally available therefor. No dividend may be declared or paid in cash or property on shares of either Class A or Class B Common Stock unless the same dividend is paid simultaneously on each share of the other class of common stock. In the case of any stock dividend, holders of Class A Common Stock are entitled to receive the same percentage dividend (payable in shares of Class A Common Stock) as the holders of Class B Common Stock receive (payable in shares of Class B Common Stock). The Company is restricted from paying dividends on its preferred stock (other than on the Company's 8% Series C Cumulative Preferred Stock and on the Company's Series E Redeemable Exchangeable Convertible Preferred Stock) under the provisions of its senior credit agreement if a default has occurred and is continuing under such agreement. Additionally, the Company's senior subordinated debt instruments may restrict the payment of dividends in respect of any shares of capital stock in certain circumstances.
Dividends may not be paid in respect of shares of Class A or Class B Common Stock unless all dividends due and payable in respect of the preferred stock of the Company have been paid or provided for. Further, dividends may not be paid in respect of shares
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of Class A or Class B Common Stock under the Company's senior credit agreement. See Item 7.-"Management's Discussion and Analysis - Liquidity and Capital Resources-Restricted Group."
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL AND STATISTICAL DATA
The operating and balance sheet data included in the following selected financial data have been derived from the consolidated financial statements of the Company. Acquisitions made by the Company were accounted for under the purchase method of accounting and, accordingly, the acquisition costs were allocated to the net assets acquired based on their fair value, except for assets previously owned by Mr. Dolan or affiliates of Mr. Dolan which were recorded at historical cost. Acquisitions are reflected in operating, balance sheet and statistical data from the time of acquisition. The operating data for 1992 reflects the deconsolidation of the Company's A-R Cable subsidiary for reporting purposes, effective January 1, 1992. The selected financial data presented below should be read in conjunction with the financial statements of the Company and notes thereto included in Item 8 of this Report.
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ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION RECENT CABLE REGULATORY DEVELOPMENTS
The most recent round of FCC rate regulations (which was implemented in July, 1994) resulted in a regulated revenue decrease of approximately 4% on an annualized basis, or less than 2% of total revenues. For a further description see Item 1 - "Business - Cable Television Operations - Competition and Regulation".
Following the latest FCC rate regulation, the Company introduced certain marketing measures, including offering additional services and discounting the pricing of certain services and certain service packages. The Company is not able to predict fully the extent of the effect these measures will have in mitigating the impact of the rate regulation referred to above.
RECENT ACQUISITIONS AND RESTRUCTURINGS
The Company's high levels of interest expense and depreciation and amortization, largely associated with acquisitions made by the Company in the past, have had and will continue to have a negative impact on the reported results of the Company. Consequently, the Company expects to report substantial net losses for at least the next several years.
1994 ACQUISITIONS In March 1994, the Company completed the North Coast Cable Acquisition. In July 1994, the Company through its wholly-owned subsidiary Rainbow Programming, purchased an additional 50% interest in AMCC giving Rainbow Programming a 75% ownership interest in AMCC and in August 1994, the Company consummated the acquisition of Monmouth Cablevision and Riverview Cablevision. The foregoing acquisitions will collectively be referred to as the "1994 Acquisitions".
For a description of the Company's recent acquisitions and restructurings, see Item 1 - "Business - Recent Developments, Consolidated Cable Affiliates and Other Cable Affiliates" and Note 2 of Notes to Consolidated Financial Statements.
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RESULTS OF OPERATIONS
The following table sets forth on a historical basis certain items related to operations as a percentage of net revenues for the periods indicated.
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COMPARISON OF YEAR ENDED DECEMBER 31, 1994 VERSUS YEAR ENDED DECEMBER 31, 1993.
REVENUES for the year ended December 31, 1994 increased $170.4 million (26%) as compared to net revenues for the prior year. Approximately $105.0 million (16%) of the increase was attributable to the 1994 Acquisitions; approximately $58.4 million (9%) to internal growth of 129,200 (10%) in the average number of subscribers during the year; and approximately $23.6 million (4%) resulted from an increase in other revenue sources such as advertising. These increases were partially offset by a decrease of approximately $16.6 million (3%) attributable to lower revenue per subscriber resulting primarily from rate reductions effected in compliance with FCC regulations and to subscribers purchasing, on average, lower levels of service.
TECHNICAL EXPENSES for 1994 increased $61.0 million (25%) over 1993. Approximately 16% was attributable to 1994 Acquisitions; the remaining 9% was attributable to increased costs directly associated with the growth in subscribers and revenues discussed above. As a percentage of net revenues, technical expenses remained relatively constant during 1994 as compared to 1993.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $23.3 million (13%) in 1994 as compared to the 1993 level. Increases of $27.3 million (15%) directly attributable to the 1994 Acquisitions, $11.8 million (7%) relating to the Company's growing New York City operations and $5.6 million (3%) resulting from other general cost increases were partially offset by a $21.4 million (12%) decrease in net expenses incurred in connection with incentive stock plans, primarily due to a decrease in the market price of the Company's Class A Common stock at December 31, 1994 compared to its market price at December 31, 1993. The net decrease in such stock plan expenses reflects a charge of $13.2 million made in the fourth quarter of 1994 attributable to the Company's cash settlement of executive stock options granted under the Company's Amended and Restated Employee Stock Plan. See Note 10 of Notes to Consolidated Financial Statements.
RESTRUCTURING CHARGE The Company recorded a one time charge in the first quarter of 1994 to provide for employee severance and related costs, resulting from a restructuring of its operations. This restructuring was undertaken in response to recent FCC mandated rate reductions in substantially all of the Company's cable television systems.
OPERATING PROFIT BEFORE DEPRECIATION AND AMORTIZATION increased $81.9 million (32%) to $334.0 million in 1994 from $252.2 million in 1993. The increase was comprised of $39.8 million (16%) attributable to the 1994 Acquisitions, with the remaining increase resulting from the combined effect of the revenue and expense changes discussed above. Operating profit before depreciation and amortization is presented here to provide additional information about the Company's ability to meet future debt service, capital expenditures and working capital requirements. Operating profit before depreciation and amortization should be considered in addition to and not as a substitute for net income and cash flows as indicators of financial performance and liquidity as reported in accordance with generally accepted accounting principles.
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DEPRECIATION AND AMORTIZATION EXPENSE increased $76.4 million (39%) during 1994 as compared to 1993. Approximately $53.3 million (27%) of this increase was a direct result of the 1994 Acquisitions. The remaining $23.1 million (12%) increase consisted of increased depreciation charges (including $12.6 million (6%) for CNYC) relating to capital expenditures made throughout 1994 and 1993 offset partially by a decrease in amortization expense due to certain intangible assets becoming fully amortized.
NET INTEREST EXPENSE increased $31.5 million (14%) during 1994 compared to 1993. Approximately $26.0 million (11%) of the increase is attributable to the 1994 Acquisitions. The remaining increase of $5.5 million was the combined result of the increasing accretion of interest on certain components of V Cable's debt and the net effect of the Company's issuances of senior subordinated debentures during 1993, the proceeds of which bore generally higher average interest rates than the bank debt they replaced.
SHARE OF AFFILIATES' NET LOSSES increased $21.8 million (36%) in 1994 compared to 1993. Such amounts consist primarily of the Company's share in the net losses of certain cable affiliates which, for the years ended December 31, 1994 and 1993, amounted to $81.9 million and $69.8 million, respectively, and in the net (income) or losses of certain programming businesses (in which the Company has varying ownership interests) which aggregated $1.0 million and $(8.8) million for the respective 1994 and 1993 years.
MINORITY INTEREST in 1994 represents NBC's 25% share in the net income of AMCC from the date that the Company purchased its additional 50% interest in AMCC and therefore began consolidating AMCC's results of operations. See Note 4 of Notes to Consolidated Financial Statements. In 1993 minority interest represents U.S. Cable's share of losses in a subsidiary of V Cable, limited to its $3.0 million investment.
OTHER ITEMS
During 1994, the Company wrote off net deferred financing charges of approximately $9.9 million associated with the Company's former credit facility. The Company entered into a new $1.5 billion Restricted Group Credit facility on October 14, 1994. See "Liquidity and Capital Resources", below, and Note 4 of Notes to Consolidated Financial Statements.
In November 1994, the Company incurred a loss of $7.1 million related to the redemption of its $200 million Senior Subordinated Reset Debentures (the "Reset Debentures"). The loss reflects the payment of a $2.0 million premium over the face amount; the write off of $4.5 million in unamortized deferred finance costs incurred in connection with their issuance in November, 1988; and $0.6 million representing the unamortized portion of their original issue discount.
In connection with the acquisition of CNYC, the Company expensed $5.6 million in 1994 representing the amount due with respect to the Annual Payment. For the year ended December 31, 1994, the Company has provided for an additional $100.3 million due Mr. Dolan in respect of the Preferred Payment that would be due him as further described under "Business - Cable Television Operations - Consolidated Cable Affiliates -
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Cablevision of New York City". The additional provision is based on management's estimate of the Appraised Equity Value of the system at December 31, 1994 and has been charged to par value in excess of capital contributed in the accompanying consolidated financial statements. The total amount due Mr. Dolan as of December 31, 1994 in respect of the Preferred Payment amounted to $150 million. See Note 2 of Notes to Consolidated Financial Statements.
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities". SFAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values, other than those accounted for under the equity method or as investments in consolidated subsidiaries, and all investments in debt securities. SFAS 115 is effective for fiscal years beginning after December 15, 1993. The effect of initially adopting SFAS 115 is reported in a manner similar to a cumulative effect of a change in accounting principle. The implementation of SFAS 115 did not have a material effect on the financial position and results of operations of the Company.
In November 1992, the FASB issued SFAS No. 112 "Employers Accounting for Post- employment Benefits". This statement is effective for fiscal years beginning after December 15, 1993. The implementation of this statement did not have a significant impact on the results of operations or financial position of the Company.
INFLATION. The effects of inflation on the Company's costs have generally been offset by increases in subscriber rates.
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RESULTS OF OPERATIONS
The following table sets forth on a historical basis certain items related to operations as a percentage of net revenues for the periods indicated. The results of operations of CNYC are included in 1992 from the date of acquisition.
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COMPARISON OF YEAR ENDED DECEMBER 31, 1993 VERSUS YEAR ENDED DECEMBER 31, 1992.
REVENUES for the year ended December 31, 1993 increased $94.2 million (16%) as compared to net revenues for the prior year. Approximately $45.8 million (8%) of the increase is attributable to the CNYC Acquisition on July 10, 1992; approximately $37.1 million (6%) to internal growth of over 112,700 (9%) in the average number of subscribers during the year; and approximately $11.6 million (2%) resulted from an increase in other revenue sources such as advertising. These increases were offset slightly by a decrease of approximately $0.3 million attributable to decreased revenue per subscriber resulting primarily from compliance with FCC regulations. See "Recent Cable Regulatory Developments" above.
TECHNICAL EXPENSES for 1993 increased $37.4 million (18%) over the 1992 amount. Approximately 11% is attributable to the CNYC acquisition (whose programming costs reflect high premium service penetration); the remaining 7% is attributable to increased costs directly associated with the growth in subscribers and revenues discussed above. As a percentage of net revenues, technical expenses increased less than 1% during 1993 as compared to 1992; excluding the effect of the CNYC Acquisition, such expenses would have remained relatively constant during 1993.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $52.3 million (43%) for 1993 as compared to the 1992 level. Approximately 13% of this 43% increase is directly attributable to the CNYC Acquisition, 17% to expense adjustments related to an incentive stock plan and 13% to general cost increases, including higher administrative and sales and marketing costs (a portion of which was attributable to compliance with FCC regulation during the third quarter of 1993). As a percentage of net revenues, selling, general and administrative expenses increased 5%; excluding the effects of the CNYC Acquisition and the incentive stock plan expense adjustments, such expenses, as a percent of net revenues, would have decreased 1% during 1993.
OPERATING PROFIT BEFORE DEPRECIATION AND AMORTIZATION increased $4.5 million (2%) to $252.2 million for 1993 from $247.7 million for 1992. A $7.8 million (3%) increase, attributable to the CNYC Acquisition, was partially offset by the combined effect of the revenue and expense changes, primarily the impact of the higher selling, general and administrative expenses, noted above. Operating profit before depreciation and amortization is presented here to provide additional information about the Company's ability to meet future debt service, capital expenditures and working capital requirements. Operating profit before depreciation and amortization should be considered in addition to and not as a substitute for net income and cash flows as indicators of financial performance and liquidity as reported in accordance with generally accepted accounting principles.
DEPRECIATION AND AMORTIZATION EXPENSE increased $26.4 million (16%) during 1993 as compared to the 1992 amount. The acquisition of CNYC contributed $8.6 million (5%) of this increase. The components of the remaining increase in depreciation and
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amortization of $17.8 million (11%) are as follows: Depreciation expense for the Company, excluding CNYC, increased $10.7 million during 1993 resulting primarily from depreciation charges on capital expenditures made during 1993 and 1992. Amortization expense, excluding CNYC, increased $7.1 million, reflecting an increase of $10.1 million due to the implementation of SFAS 109 during 1993 offset to some extent by a decrease of $3.0 million primarily due to certain intangible assets becoming fully amortized.
NET INTEREST EXPENSE increased $36.9 million (19%) during 1993 compared to 1992. Approximately $3.7 million (2%) of the increase is attributable to the CNYC Acquisition. An increase of $18.2 million (9%) is due to the net effect of the repayment of bank debt, bearing lower average interest rates with the issuances of a series of senior subordinated debentures as well as to an increase in average debt levels in 1993. An additional $15.0 million (8%) increase resulted from V Cable's debt restructuring on December 31, 1992, primarily from amortization of deferred interest expense incurred in connection therewith.
SHARE OF AFFILIATES' NET LOSSES of $61.0 million for 1993 and $47.3 million for 1992 consist primarily of the Company's share of A-R Cable's net losses ($56.4 million in 1993 and $30.3 million in 1992), the Company's net share of the profits and losses in certain programming businesses in which the Company has varying ownership interests, (amounting to an $8.8 million profit in 1993 and a $12.4 million loss in 1992) and the Company's share of the net losses of other entities, primarily U.S. Cable (in 1993) and Cablevision of Newark (in 1993 and 1992), which amounted to $13.4 million and $4.6 in 1993 and 1992, respectively.
MINORITY INTEREST in 1993 represents U.S. Cable's share of the losses of VC Holding, limited to its $3.0 million investment. At December 31, 1992, as part of a restructuring and reorganization involving the Company's unrestricted subsidiary V Cable, V Cable acquired a 20% interest in U.S. Cable for $20 million, and U.S. Cable acquired a 19% interest in VC Holding (a subsidiary of V Cable formed to hold substantially all of V Cable's assets) for $3.0 million.
OTHER ITEMS
During 1993, net deferred financing charges of approximately $1.0 million, associated with the reduction of the Company's credit facility with proceeds from the issuance of the Company's $150 million debentures in April, were written off.
In connection with the acquisition of CNYC, the Company expensed $5.6 million for the year ended December 31, 1993, representing the proportionate amount due with respect to the Annual Payment. For the year ended December 31, 1993, the Company has provided for an additional $22.7 million due Mr. Dolan in respect of the Preferred Payment that would be due him in the event he exercises his "put" as further described under "Business - Cable Television Operations - Consolidated Cable Affiliates - Cablevision of New York City". The additional provision was based on management's estimate of the Appraised Equity Value of the system as of December 31, 1993 and has been charged to par value in excess of capital contributed in the accompanying
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consolidated financial statements. The total amount due Mr. Dolan as of December 31, 1993 in respect of the Preferred Payment amounted to $91.6 million, reflecting a reduction of $3.7 million in 1993 representing Mr. Dolan's obligation to reimburse the Company in connection with certain claims paid or owing by CNYC. See Note 2 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
For financing purposes, the Company is structured as the Restricted Group, consisting of Cablevision Systems Corporation and certain of its subsidiaries and an unrestricted group of certain subsidiaries which includes V Cable (including VC Holding), Rainbow Programming and Cablevision MFR. On October 14, 1994, CNYC, formerly an unrestricted subsidiary, became a member of the Restricted Group.
The Restricted Group has executed limited recourse guarantees with respect to A-R Cable and V Cable, as described below, and has guaranteed the MFR Notes and the CFHI Note. Otherwise, the Restricted Group does not guarantee the indebtedness of any unrestricted subsidiary nor does any unrestricted subsidiary guarantee the indebtedness of the Restricted Group.
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The following table presents selected historical results of operations and other financial information related to the captioned groups or entities for the year ended December 31, 1994. (Rainbow Programming, Rainbow Advertising, WKNR and AMCC are included in "Other Unrestricted Subsidiaries").
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RESTRUCTURING
The Company recorded a one time charge of $4.3 million in the three month period ended March 31, 1994 to provide for severance and related costs, attributable entirely to terminated employees, resulting from a restructuring of its operations. The restructuring was undertaken in response to recent FCC-mandated rate reductions in substantially all of the Company's cable television systems.
RESTRICTED GROUP
On March 10, 1995 the Company invested $110 million in the MSG acquisition. The funds were provided by borrowings under the Credit Agreement. See Item 1 - "Business - Recent Developments".
On November 15, 1994 the Company redeemed all of its Reset Debentures at 101% of principal plus accrued interest aggregating $216 million. Funds for the redemption were provided by borrowings under the Credit Agreement.
On March 31, 1994, the Company issued and sold 100,000 shares of a new series of preferred stock to Toronto-Dominion Investments, Inc. in a private transaction. The proceeds of $100 million were used to repay bank debt. See Note 5 of Notes to Consolidated Financial Statements.
On October 14, 1994, the Company entered into new $1.5 billion Restricted Group credit facilities with a group of banks led by Toronto-Dominion (Texas) as agent. The Credit Agreement consists of a $750 million Term Loan and Reducing Revolver facilities aggregating $750 million. The Term Loan has a final maturity of June 30, 2003 and begins amortizing on a scheduled quarterly basis on June 30, 1997 with 24% being amortized by December 31, 1998. The Reducing Revolver facilities have final maturities on June 30, 2003 and the facilities begin to reduce on December 31, 1996.
CNYC, which became a restricted subsidiary on October 14, 1994, continues to have a separate bank credit agreement which is guaranteed by the Company. The CNYC facility converted to a term loan on December 31, 1994 with amortization beginning on March 31, 1995 and has a final maturity of June 30, 2000. Reductions in the CNYC facility are funded by borrowings under the Company's Revolver. At March 20, 1995 CNYC had $140 million outstanding on its term loan and outstanding Letters of Credit of $7 million.
On March 20, 1995 the Restricted Group, including CNYC, had total usage under the Credit Agreement of $1,098 million and Letters of Credit of $22.7 million issued on behalf of the Company and CNYC. Unrestricted and undrawn funds available to the Restricted Group under the Credit Agreement amounted to approximately $379 million at March 20, 1995. The Credit Agreement contains certain financial covenants that may limit the Restricted Group's ability to utilize all of the undrawn funds available thereunder, including covenants requiring the Restricted Group to maintain certain financial ratios and restricting the permitted uses of borrowed funds.
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As of March 20, 1995 the Company and CNYC had entered into interest exchange (swap and interest rate cap) agreements with several of their banks on a notional amount of $285 million, on which the Company pays a fixed rate of interest and receives a variable rate of interest for specified periods, with an average maturity of two years. The average effective annual interest rate on all bank debt outstanding as of February 28, 1995 was approximately 8.4%.
The Restricted Group, excluding CNYC, made capital expenditures of approximately $147.5 million in 1994 and $106.4 million in 1993, primarily in connection with system rebuilds and upgrades, the expansion of existing cable plant to pass additional homes and other general capital needs. On October 31, 1994 CNYC gave notice that it had completed construction of the last phase of each franchise in accordance with the franchise agreements. CNYC made capital expenditures of $103.5 million in 1994 and $86.7 million in 1993.
The cable systems located in New York State that are owned by the Restricted Group and VC Holding are subject to agreements (the "New York Upgrade Agreements") with the New York State Commission on Cable Television (the "New York Cable Commission"). The New York Upgrade Agreements applicable to the Restricted Group requires the substantial upgrade of its systems, ultimately to a 77 channel capacity by 1995-1996, subject to certain minor exceptions. As part of this planned upgrade of the Restricted Group's New York systems, the Company expects to use fiber optic cable extensively in its trunk and distribution networks. The upgrade of portions of the Restricted Group's cable television systems in Westchester, Putnam and Dutchess counties, which were required to have been completed by year-end 1994 under the New York Upgrade Agreements, were not completed at that time. Additionally, the Company anticipates that the upgrade of portions of certain other cable television systems that are required to be completed by year-end 1995, will not be completed at that time. The Company has requested an amendment to the New York Upgrade Agreements to provide additional time to complete the upgrades, and is confident that such amendment will be obtained, although there can be no assurance that such amendment will be so obtained. The Company believes that the remaining portion of the upgrade, as of December 31, 1994, will cost up to an additional $68 million. In addition, the Company anticipates upgrading certain of its New York systems beyond the level required by the New York Upgrade Agreements along with upgrading certain other of its Restricted Group systems. The Company anticipates that the capital costs of these additional upgrades may be substantial.
Under the CNYC purchase agreement, the Restricted Group has guaranteed certain payments to Charles F. Dolan, the Chairman and Chief Executive Officer of the Company consisting of an annual payment of $5.6 million (the "Annual Payment") a $40 million minimum payment (the "Minimum Payment") and a preferred payment (not to exceed $150 million) based upon an appraised value of CNYC (the "Preferred Payment"). The Minimum Payment and the Preferred Payment are each payable in cash or common stock at the Company's election. Under the Credit Agreement, the Company is currently prohibited from paying amounts in respect of the Preferred Payment in cash.
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The Company believes that, for the Restricted Group, internally generated funds together with funds available under its existing Credit Agreement will be sufficient through December 31, 1996 (i) to meet its debt service requirements including its amortization requirements under the Credit Agreement, (ii) to fund its ongoing capital expenditures, including CNYC and the required upgrades under the New York Upgrade Agreement, (iii) to fund its anticipated investments including the $5.6 million Annual Payment to Charles Dolan in connection with the CNYC acquisition, (iv) to fund payments with respect to the proposed Cablevision of Boston transactions and (v) to fund any anticipated equity requirements through 1996 in A-R Cable, V Cable and/or Monmouth/Riverview.
Further acquisitions and other investments by the Company, if any, will be funded by undrawn borrowing capacity and by possible increases in the amount available under the Credit Agreement, additional borrowings from other sources, and/or possible future sales of debt, equity or equity related securities.
The senior secured indebtedness incurred by A-R Cable and V Cable is guaranteed by the Restricted Group, but recourse against the Restricted Group is limited solely to the common stock of A-R Cable and of V Cable pledged to A-R Cable's and V Cable's senior secured lenders, respectively. The Cablevision MFR and CFHI promissory notes are guaranteed by the Company and the obligations under the guarantees rank pari passu with the Company's public subordinated debt. The promissory notes are payable in cash or, at the Company's option through the first anniversary of the notes, in shares of the Company's Class A common stock.
Under the terms of its Credit Agreement, as amended, the Company is permitted to make unspecified investments of up to $250 million, which include any future investment in Rainbow Programming (including the $110 million investment for the MSG acquisition) and in any other unrestricted subsidiaries or affiliates.
The terms of the instruments governing A-R Cable's, V Cable's, Cablevision MFR's and CFHI's indebtedness prohibit transfer of funds (except for certain payments, related to corporate overhead allocations, by A-R Cable, V Cable, Cablevision MFR and CFHI and payments pursuant to income tax allocation agreements with respect to V Cable and Cablevision MFR) from A-R Cable, V Cable, Cablevision MFR and CFHI to the Restricted Group and are expected to prohibit such transfer of funds for the foreseeable future. Payments to the Restricted Group in respect of its investments in and advances to Cablevision of Chicago and Cablevision of Boston are also presently prohibited by the terms of those companies' applicable debt instruments and are expected to be prohibited for the foreseeable future, although upon consummation of the proposed sale of Cablevision of Chicago, the Company expects it will be repaid its unpaid advances and accrued interest thereon aggregating $25.7 million as of December 31, 1994. The Restricted Group does not expect that such limitations on transfer of funds or payments will have an adverse effect on the ability of the Company to meet its obligations.
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V CABLE
The existing long-term credit facilities extended by General Electric Capital Corporation ("GECC") to V Cable and VC Holding on December 31, 1992, refinanced all of V Cable's pre-existing debt. Under the credit agreement between V Cable and GECC (the "V Cable Credit Agreement"), GECC has provided a term loan (the "V Cable Term Loan") in the amount of $24.6 million, as of December 31, 1994, which loan accretes interest at a rate of 10.62% compounded semi-annually until December 31, 1997 (the reset date) and is payable in full on December 31, 2001. Under the credit agreement between VC Holding and GECC, GECC has extended to VC Holding a $505 million term loan (the "Series A Term Loan"), a $245.5 million term loan (the "Series B Term Loan") and a $25 million revolving line of credit (the "Revolving Line"). The Series A Term Loan and any amounts drawn under the Revolving Line pay current cash interest and mature on December 31, 2001. The Series B Term Loan does not pay cash interest but rather accretes interest at a rate of 10.62% compounded semi-annually until December 31, 1997 (the reset date) and is payable in full on December 31, 2001. On March 6, 1995 VC Holding had no amounts outstanding under the Revolving Line and had letters of credit issued approximating $1.8 million. Accordingly, unrestricted and undrawn funds under the VC Holding Revolving Line amounted to approximately $23.2 million on March 6, 1995.
The VC Holding Credit Agreement also provides for the assumption by VC Holding of certain loans of U.S. Cable, the present value of which amounted to $87.3 million at December 31, 1994.
The outstanding principal amount of the V Cable Term Loan is payable in full, with accreted interest, at maturity on December 31, 2001. VC Holding is obligated to make principal payments on a portion of the Series A Term Loan beginning on June 30, 1997 totalling $18 million, $20 million, $30 million, $40 million and $56 million for the years ending December 31, 1997, 1998, 1999, 2000 and 2001, respectively. The remaining balance of the Series A Term Loan, as well as any amounts borrowed under the VC Holding Revolving Line, is due December 31, 2001. In addition, VC Holding and V Cable are required to apply all consolidated available cash flow (as defined), as well as the net proceeds of any disposition of assets, to the reduction of the VC Holding Term Loans and the V Cable Term Loan.
V Cable made capital expenditures of approximately $20.0 million during 1994 and $20.3 million during 1993, primarily in connection with the expansion of existing cable plant to pass additional homes and for system upgrades and other general capital needs. The New York Upgrade Agreement applicable to V Cable requires the substantial upgrade of its systems in New York State, ultimately to a 77 channel capacity in 1995.
In 1992 V Cable completed the first phase of this required upgrade, under which it expanded all of its New York cable systems to a 52 channel capacity. The Company believes that the upgrade of V Cable's New York systems from 52 to 77 channels will
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cost up to an additional $4.5 million, as of December 31, 1994, which would be spent during 1995.
After taking into account the reductions to regulated revenue arising from the latest round of FCC regulation, V Cable believes that it is likely that it will be unable to meet certain of its financial covenants during 1995. To remedy the anticipated covenant defaults, V Cable may request waivers and/or amendments to its credit agreement and/or seek equity contributions from the Restricted Group. There can be no assurance as to V Cable's ability to accomplish any of these alternatives in the future or the terms or timing of such alternatives. Assuming any covenant defaults are waived or cured, V Cable anticipates that its cash flow from operations and amounts available under the VC Holding Revolving Line will be sufficient to service its debt, to fund its capital expenditures and to meet its working capital requirements through 1996.
MONMOUTH AND RIVERVIEW
On August 8, 1994, Cablevision MFR acquired substantially all of the assets of Monmouth Cablevision and Riverview Cablevision. Simultaneously with the acquisition, Cablevision MFR contributed all of the acquired assets and assumed liabilities along with the new credit facility, discussed below, to its subsidiaries Cablevision of Monmouth Inc. and Cablevision of Riverview Inc. (collectively "Monmouth/Riverview") and was released from any obligations under the credit facility.
Monmouth/Riverview are party to a credit facility with a group of banks led by Nations Bank of Texas, N.A., as agent (the "Monmouth/Riverview Credit Facility"). The maximum amount available to Monmouth/Riverview under the Monmouth/Riverview Credit Facility is $285 million with a final maturity at June 30, 2003. The facility is a reducing revolving loan, with scheduled facility reductions beginning on March 31, 1996 resulting in a 15% reduction by December 31, 1998. As of March 20, 1995, Monmouth/Riverview had outstanding bank borrowings of $230 million. Unrestricted and undrawn funds available to Monmouth/Riverview under the Monmouth/Riverview Credit Facility amounted to approximately $55 million at March 20, 1995. The Monmouth/Riverview Credit Facility contains certain financial covenants that may limit Monmouth/Riverview's ability to utilize all of the undrawn funds available thereunder, including covenants requiring Monmouth/Riverview to maintain certain financial ratios. Under the terms of the Monmouth/Riverview Credit Facility, Monmouth/Riverview is prohibited from transferring funds to Cablevision MFR.
As of March 20, 1995, Monmouth Cablevision and Riverview Cablevision have entered into interest rate swap and cap agreements with several banks on a notional amount of $130 million. The weighted average interest rate on all bank indebtedness as of February 28, 1995 was approximately 8.9%.
On February 24, 1995 Monmouth/Riverview obtained a waiver from the banks party to the Monmouth/Riverview Credit facility of a default under a financial covenant and an amendment to other covenants through April 30, 1995. Monmouth/Riverview anticipates
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that it will be in default of certain of its financial covenants in 1995. Monmouth/Riverview intends to seek an amendment of its credit agreement which may require equity contributions by the Restricted Group. There can be no assurance that such amendment can be obtained or that the Restricted Group will provide an equity contribution. The Company believes that for Monmouth/Riverview, internally generated funds together with funds available under its existing credit agreement, assuming such amendment is obtained, will be sufficient to meet its debt service requirements including its amortization requirements and to fund its capital expenditures through 1996.
On August 8, 1994, Cablevision MFR issued promissory notes totalling $141.3 million, due in 1998 and bearing interest at 6% until the third anniversary and 8% thereafter (increasing to 8% and 10% respectively, if interest is paid in shares of the Company's Class A Common Stock). Principal and interest on the notes is payable at Cablevision MFR's election, in cash or in shares of the Company's Class A Common Stock. The promissory notes are guaranteed by the Company and the obligations under the guarantee rank pari passu with the Company's public subordinated debt. In certain circumstances, Cablevision MFR may extend the maturity date of the promissory notes until 2003 for certain additional consideration.
RAINBOW PROGRAMMING
Rainbow Programming's financing needs have been funded by the Restricted Group's investments in and advances to Rainbow Programming, by sales of equity interests in the programming businesses and, in the case of one of the programming businesses, through separate external debt financing. The Company expects that the future cash needs of Rainbow Programming's current programming partnerships will increasingly be met by internally generated funds, although certain of such partnerships will at least in the near future rely to some extent upon their partners (including Rainbow Programming) for certain cash needs. The partners' contributions may be supplemented through the sale of additional equity interests in, or through the incurrence of indebtedness by, such programming businesses.
On July 11, 1994, Rainbow Programming entered into a $105 million credit facility with a group of banks. On January 27, 1995 Rainbow entered into an amended and restated credit facility with Toronto-Dominion (Texas), Inc., and Canadian Imperial Bank of Commerce, as co-agents and a group of banks for $202 million of which $108 million was drawn on such date to refinance the original facility. The balance of the funds are available only to purchase NBC's 50% interest in SportsChannel (New York) Associates if NBC decides to exercise its option to sell such interests. The proceeds of the initial $105 million loan plus $76 million of equity from the Company were used to purchase Liberty Media's 50% interest in AMCC giving Rainbow Programming a 75% ownership interest in AMCC. The credit facility is payable in full at maturity on December 31, 1996 and bears interest at varying rates based upon the banks' Base Rate or Eurodollar Rate, as defined in the credit agreement. Repayment of the loan is anticipated to be made by Rainbow Programming from one or a combination of the following: (i) internally generated funds; (ii) refinancing the existing Rainbow Programming $202 million credit
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facility; (iii) refinancing the existing $59 million credit agreement of AMCC; (iv) the sale of equity interests in, or assets of, the programming businesses; and (v) advances from the Restricted Group. The loan is secured by a pledge of the Company's stock in Rainbow Programming and is guaranteed by the subsidiaries of Rainbow Programming as permitted.
On March 10, 1995, MSG Holdings, L.P. ("Holdings"), a partnership between a subsidiary of Rainbow Programming and a subsidiary of ITT Corporation, a Delaware corporation ("ITT"), acquired Madison Square Garden Corporation ("MSG") in a transaction in which MSG merged with and into Holdings. The purchase price paid by Holdings for MSG was $1,009.1 million. See Item 1.-"Business - Recent Developments".
In connection with obtaining the consent of the National Hockey League (the "NHL") and the National Basketball Association ("NBA") to the indirect transfers of the New York Rangers and the New York Knickerbockers, respectively, resulting from the merger, the Company and Rainbow Programming entered into agreements with the NHL and the NBA, agreeing, among other things, to conduct themselves in accordance with the relevant rules of each league.
Pursuant to an agreement between Rainbow Programming and National Broadcasting Company, Inc. ("NBC"), NBC may require Rainbow Programming, by notice given on or before April 13, 1995, to purchase its interests in SportsChannel (New York) Associates ("SCNY") and Rainbow News 12 Company (the "NBC Put") for an aggregate purchase price which, as of February 28, 1995, would amount to approximately $93 million. In the event that NBC elects to require Rainbow Programming to purchase such interest, Rainbow Programming will have 120 days to consummate the acquisition. On January 27, 1995, Rainbow Programming entered into an amended and restated credit agreement with Toronto Dominion (Texas), Inc. and the Canadian Imperial Bank of Commerce, as co-agents, and a group of banks increasing Rainbow Programming's credit facility from $105 million to $202 million to provide funds in the event the NBC Put is exercised. The facility will reduce to $108 million if the NBC Put is not exercised.
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ITEM 8.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS.
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ----
Independent Auditors' Report . . . . . . . . . . . . . . . . . 54
Consolidated Balance Sheets - December 31, 1994 and 1993 . . . 55
Consolidated Statements of Operations - years ended December 31, 1994, 1993 and 1992. . . . . . . . . . . 57
Consolidated Statements of Stockholders' Deficiency - years ended December 31, 1994, 1993 and 1992. . . . . . . . . . . 58
Consolidated Statements of Cash Flows - years ended December 31, 1994, 1993 and 1992. . . . . . . . . . . . . . 59
Notes to Consolidated Financial Statements . . . . . . . . . . 61
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INDEPENDENT AUDITORS' REPORT
The Board of Directors Cablevision Systems Corporation
We have audited the accompanying consolidated balance sheets of Cablevision Systems Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' deficiency and cash flows for each of the years in the three-year period ended December 31, 1994. In connection with our audits of the consolidated financial statements, we also audited the financial statement schedule as listed in Item 14(a)(2). These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cablevision Systems Corporation and subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP -------------------------- KPMG Peat Marwick LLP Jericho, New York March 10, 1995
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1994 and 1993 (Dollars in thousands)
See accompanying notes to consolidated financial statements.
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1994 and 1993 (Dollars in thousands)
See accompanying notes to consolidated financial statements.
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (Dollars in thousands except per share data)
See accompanying notes to consolidated financial statements.
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY Years Ended December 31, 1994, 1993 and 1992 (Dollars in thousands)
See accompanying notes to consolidated financial statements.
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1993 and 1992 (Dollars in thousands)
See accompanying notes to consolidated financial statements.
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1993 and 1992 (Dollars in thousands) (continued)
See accompanying notes to consolidated financial statements.
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Cablevision Systems Corporation and its majority owned subsidiaries (the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation.
REVENUE RECOGNITION
The Company recognizes revenues as cable television services are provided to subscribers.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including construction materials, are carried at cost, which includes all direct costs and certain indirect costs associated with the construction of cable television transmission and distribution systems, and the costs of new subscriber installations.
FEATURE FILM INVENTORY
Rights to feature film inventory acquired under license agreements along with the related obligations are recorded at the contract value. Costs are amortized on the straight-line method over either the contract period or the intended number of days to be aired.
DEFERRED FINANCING COSTS
Costs incurred to obtain debt are deferred and amortized, on the straight-line basis, over the life of the related debt.
SUBSCRIBER LISTS, FRANCHISES, AND OTHER INTANGIBLE ASSETS
Subscriber lists are amortized on the straight-line basis over varying periods (4 to 8 years) during which subscribers are expected to remain connected to the systems. Franchises are amortized on the straight-line basis over the average remaining terms (7 to 11 years) of the franchises at the time of acquisition. Other intangible assets are amortized on the straight-line basis over the periods benefited (2 to 10 years). Excess costs over fair value of net assets acquired are being amortized over periods ranging from 5 to 20 years on the straight line basis. The Company assesses the recoverability of such excess costs based upon undiscounted anticipated future cash flows of the businesses acquired.
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
INCOME TAXES
Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires the liability method of accounting for deferred income taxes and permits the recognition of deferred tax assets, subject to an ongoing assessment of realizability. Adoption of SFAS 109 had no material impact on the operations of the Company.
LOSS PER SHARE
Net loss per common share is computed based on the average number of common shares outstanding after giving effect to dividend requirements on the Company's preferred stock. Common stock equivalents were not included in the computation as their effect would be to decrease net loss per share.
CASH FLOWS
For purposes of the consolidated statements of cash flows, the Company considers short-term investments with a maturity at date of purchase of three months or less to be cash equivalents. The Company paid cash interest expense of approximately $198,535, $173,073 and $142,807 during 1994, 1993 and 1992, respectively. During 1994, 1993 and 1992, the Company's noncash investing and financing activities included obligations to related party of $101,460, $19,019 and $67,000, respectively, and capital lease obligations of $4,020, $2,695 and $5,953, respectively, incurred when the Company entered into leases for new equipment, the issuance in 1993 of 164,051 shares of the Company's Class A Common Stock (fair value of $10,725) for the remaining interests in Cablevision of Connecticut (see Note 2) and the $70,238 present value of debt to be assumed by V Cable in 1997, recorded in 1992 (see Note 4).
INVESTMENTS IN AND ADVANCES TO AFFILIATES
The Company accounts for its investments in affiliates using the equity method of accounting whereby the Company records its appropriate share of the net income or loss of the affiliate. The Company's advances to affiliates are carried at cost adjusted for any known diminution in value (see Note 8).
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
NOTE 2. ACQUISITIONS, RESTRUCTURINGS AND DISPOSITIONS
1994 ACQUISITIONS:
In March 1994, Cablevision of Cleveland, L.P. ("Cablevision Cleveland"), a partnership whose partners are subsidiaries of the Company, purchased substantially all of the assets and assumed certain liabilities of North Coast Cable Limited Partnership, which operates a cable television system in Cleveland, Ohio (the "North Coast Cable Acquisition"). The operations of North Coast Cable are consolidated with those of the Company as of the date of acquisition. The net cash purchase price for interests not previously owned by the Company (and excluding excess liabilities assumed by the Company) aggregated approximately $103,359 including expenses. The cost of the acquisition was financed principally by borrowings under the Company's credit agreement.
In June 1994, A-R Cable Partners, a partnership comprised of subsidiaries of the Company and E.M. Warburg, Pincus & Co., Inc. completed the purchase of certain assets of Nashoba Communications, a group of three limited partnerships, for a purchase price of approximately $90,500, of which approximately $47,000 was provided by a senior credit facility secured by the assets of such systems. The remainder of the purchase price was provided by equity contributions and subordinated loans from the partners in A-R Cable Partners. The Company provided approximately $12,000 for its 30% interest in A-R Cable Partners and $1,500 in loans.
In July 1994, Rainbow Programming Holdings, Inc. ("Rainbow Programming"), a wholly-owned subsidiary of the Company, purchased an additional 50% interest in American Movie Classics Company ("AMCC") for a purchase price of approximately $181,000, increasing Rainbow Programming's interest in AMCC to approximately 75%. The results of AMCC's operations are consolidated with those of the Company as of the date of acquisition. The acquisition was financed with a separate $105,000 credit facility entered into by Rainbow Programming and by borrowings under the Company's credit agreement of approximately $76,000 which was contributed to Rainbow Programming.
In August 1994, Cablevision MFR, Inc. ("Cablevision MFR"), a wholly-owned subsidiary of the Company, acquired substantially all of the assets of Monmouth Cablevision Associates, L.P. ("Monmouth Cablevision") and Riverview Cablevision Associates, L.P. ("Riverview Cablevision") consisting of cable television systems in New Jersey. The operations of Monmouth Cablevision and Riverview Cablevision are consolidated with those of the Company as of the date of acquisition. The aggregate purchase price for the two New Jersey systems was $391,215. Approximately $237,800 of such purchase price was financed by a senior credit facility of newly formed subsidiaries of Cablevision MFR secured solely by the assets of the systems. The remaining $153,415 of such purchase
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
price was paid with cash of approximately $12,147 and the issuance, by Cablevision MFR, of subordinated promissory notes (the "MFR Notes") totalling $141,268 due in 1998.
Also in August 1994, Cablevision of Framingham Holdings, Inc. ("CFHI"), a corporation owned 30% by the Company and 70% by E.M. Warburg, Pincus Investors, L.P., acquired substantially all of the assets of Framingham Cablevision Associates, L.P. ("Framingham Cablevision") consisting of cable television systems in Massachusetts. The aggregate purchase price, including fees and expenses, for Framingham Cablevision's assets was $37,517. Approximately $22,700 of the purchase price was financed by a senior credit facility of a wholly-owned subsidiary of CFHI secured by the assets of Framingham Cablevision; approximately $9,732 was paid by the issuance by CFHI of a promissory note, guaranteed by the Company, due in 1998 and the remaining amount was financed by capital contributions and loans to CFHI from its stockholders. The Company provided a capital contribution of approximately $1,320 and $300 as a loan for its 30% interest in CFHI.
The acquisitions of North Coast Cable, AMCC, Monmouth Cablevision and Riverview Cablevision were accounted for as purchases whereby the acquisition costs were allocated to the various assets acquired and liabilities assumed based upon their respective fair values. The excess of the purchase price over the book value of net assets acquired of these entities, aggregating $625,946, has been allocated to the specific assets acquired as follows:
With the exception of AMCC, for which an appraisal is being prepared, the allocations of fair value have been based on independent appraisals.
1993 ACQUISITIONS:
In December 1986, the Company had purchased substantially all the limited partnership interests in Cablevision of Connecticut. In November 1993, the Company purchased the remaining interests in exchange for 164,051 shares of the Company's Class A Common Stock which had a fair market value of approximately $10,725. Such amount was charged to excess cost over fair value of net assets acquired and is being amortized over the remaining original amortization period.
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
In November 1993, the Company purchased the business of CATV Enterprises, Inc. ("CATV") in Riverdale, The Bronx, New York following the expiration of CATV's temporary permit to operate its cable television system in Riverdale. The cost of $8,500 is included in excess cost over fair value of net assets acquired.
1992 ACQUISITION:
In July 1992, the Company acquired (the "CNYC Acquisition") substantially all of the remaining interests in Cablevision of New York City - Phase I through Phase V (collectively, "CNYC" or "Phase Partnerships"), the operator of a cable television system in The Bronx and parts of Brooklyn, New York. Prior to the CNYC Acquisition, the Company had a 15% interest in CNYC and Charles F. Dolan, the chief executive officer and principal shareholder of the Company, owned the remaining interests. Mr. Dolan remains a partner in CNYC with a 1% interest and the right to certain preferential payments.
Mr. Dolan's preferential rights entitle him to an annual cash payment (the "Annual Payment") of 14% multiplied by the outstanding balance of his "Minimum Payment". The Minimum Payment is $40,000 and is to be paid to Mr. Dolan prior to any distributions to partners other than Mr. Dolan. In addition, Mr. Dolan has the right, exercisable beginning on December 31, 1997, to require the Company to purchase his interest. Mr. Dolan would be entitled to receive from the Company the Minimum Payment, any accrued but unpaid Annual Payments, a guaranteed return on certain of his investments in CNYC and a Preferred Payment defined as a payment (not exceeding $150,000) equal to 40% of the Appraised Equity Value (as defined) of CNYC after making certain deductions.
The Company accounted for the purchase of CNYC in 1992 in a manner similar to a pooling of interests whereby the assets and liabilities of CNYC were recorded at historical values and the excess of the purchase price over the book value of the net assets acquired, amounting to approximately $44,000, was charged to par value in excess of capital contributed. Based upon estimates for accounting purposes of the Appraised Equity Value of CNYC made by the Company at December 31, 1994, 1993 and 1992, approximately $101,600, $22,700 and $27,000, respectively, was accrued as additional obligations to Mr. Dolan relating to the Company's purchase of CNYC, which have also been charged to par value in excess of capital contributed. The total amount owed to Mr. Dolan at December 31, 1994 of approximately $193,100 in respect of the Preferred Payment, the Minimum Payment and the Annual Payment reflects a reduction of approximately $3,800 at December 31, 1994 representing Mr. Dolan's obligation to reimburse the Company in connection with certain claims paid or owed by CNYC.
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
1992 RESTRUCTURINGS:
V CABLE, INC.
On December 31, 1992, the Company consummated a significant restructuring and reorganization (the "V Cable Reorganization") involving its subsidiary, V Cable, Inc. ("V Cable"), U.S. Cable Television Group, L.P. ("U.S. Cable") and General Electric Capital Corporation ("GECC"), V Cable's principal creditor. In the V Cable Reorganization, V Cable acquired a 20% interest in U.S. Cable for $20,000 and U.S. Cable acquired a 19% non-voting interest in a newly incorporated subsidiary of V Cable that holds substantially all of V Cable's assets ("VC Holding") for $3,000. As a result, V Cable now owns an effective 84.8% interest in VC Holding. GECC has provided long-term credit facilities to each of V Cable, VC Holding and U.S. Cable, secured in each case by the assets of the borrower and in most cases cross-collateralized by the assets of the other two entities. The credit facilities are non-recourse to the Company other than with respect to the common stock of V Cable owned by the Company (see Note 4). The Company has management responsibility for the U.S. Cable properties and for the V Cable systems. The Company accounts for its investment in U.S. Cable using the equity method of accounting and accordingly its share of losses in U.S. Cable for 1994 and 1993 amounted to $8,594 and $8,566, respectively. Also in 1993, included in the accompanying consolidated statements of operations is U.S. Cable's share of losses in VC Holding, limited to its $3,000 investment described above.
In contemplation of the V Cable Reorganization, in May, 1992 GECC provided a $20,000 loan to V Cable, which lent the proceeds to one of its operating subsidiaries which, in turn, paid GECC an aggregate of $20,000 in order to acquire all of the then outstanding shares of A-R Cable Services, Inc. ("A-R Cable") preferred stock from GECC and to obtain the termination of certain transaction fee agreements pursuant to which GECC was entitled under certain circumstances to receive payments from V Cable and A-R Cable. On May 11, 1992, A-R Cable purchased, for a nominal amount, the shares of A-R Cable preferred stock held by the operating subsidiary of V Cable. For the purposes of these consolidated financial statements, the Company recognized a net loss of $20,000 on the purchase and retirement of the shares of A-R Cable's preferred stock.
In consideration of V Cable's assumption of U.S. Cable debt in 1997 (see Note 4) and the cross-collateralization of U.S. Cable debt by V Cable and VC Holding, V Cable has the option to exchange its interest in U.S. Cable for all of U.S. Cable's interest in VC Holding and thus recover full ownership of the V Cable systems from and after January 1, 1998, subject to certain limitations. Upon such an exchange, the guarantee by V Cable and VC Holding of any portion of the U.S. Cable senior credit facilities not
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
assumed by V Cable, as well as the guarantee and cross-collateralization by U.S. Cable of the V Cable and VC Holding credit facilities, would terminate.
A-R CABLE. In May 1992 the Company and A-R Cable consummated a restructuring and refinancing transaction (the "A-R Cable Restructuring") that had the effect of retiring a substantial portion of A-R Cable's subordinated debt and reducing the Company's economic and voting interest in A-R Cable. Among other things, this transaction involved an additional $45,000 investment in A-R Cable by the Company to purchase a new Series B Preferred Stock and the purchase of a new Series A Preferred Stock in A-R Cable by Warburg Pincus Investors, L.P. ("Warburg Pincus") for $105,000. After the receipt of certain regulatory approvals, the Company will have a 40% economic and voting interest in A-R Cable. As a result of the A-R Cable Restructuring, the Company no longer has financial or voting control over A-R Cable's operations. For reporting purposes, the Company accounts for its investment in A-R Cable using the equity method of accounting whereby the Company records 100% of the net losses of A-R Cable since it continues to own 100% of A-R Cable's outstanding common stock.
Included in share of affiliates' net loss in the accompanying consolidated statements of operations for the years ended December 31, 1994, 1993 and 1992 is $67,092, $56,420 and $30,326, respectively, representing A-R Cable's net loss plus dividend requirements for the Series A Preferred Stock of A-R Cable, which is not owned by the Company. Included in deficit investment in affiliates is $374,423 and $307,758 at December 31, 1994 and 1993, respectively, representing A-R Cable losses and external dividend requirements recorded by the Company in excess of amounts invested by the Company therein. At December 31, 1994 and 1993 and for the years then ended, A-R Cable's total assets, liabilities (including preferred stock) and net revenues amounted to $246,125 and $288,348; $681,717 and $650,099; $107,026 and $108,711, respectively.
The Company continues to guarantee the debt of A-R Cable to GECC under a limited recourse guarantee wherein recourse to the Company is limited solely to the common and Series B Preferred Stock of A-R Cable owned by the Company.
The Company continues to manage A-R Cable under a management agreement that provides for cost reimbursement, an allocation of overhead charges and a management fee of 3-1/2% of gross receipts, as defined, with interest on unpaid amounts thereon at a rate of 10% per annum. The 3-1/2% fee and interest thereon is payable by A-R Cable only after repayment in full of its senior debt and certain other obligations. Under certain circumstances, the fee is subject to reduction to 2-1/2% of gross receipts.
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
During 1994, Warburg Pincus purchased additional shares of Series A Preferred Stock for a cash investment of $998 and CSC purchased additional shares of Series B Preferred Stock for a cash investment of $427.
After May 11, 1997, either Warburg Pincus or the Company may irrevocably cause the sale of A-R Cable, subject to certain conditions. In certain circumstances, Warburg Pincus may cause the sale of A-R Cable prior to that date. Upon the sale of A-R Cable, the net sales proceeds, after repayment of all outstanding indebtedness and other liabilities, will be used as follows: first, to repay Warburg Pincus' investment in the Series A Preferred Stock; second, to repay the Company's investment in the Series B Preferred Stock; third, to repay the accumulated unpaid dividends on the Series A Preferred Stock (19% annual rate); fourth, to repay the accumulated unpaid dividends on the Series B Preferred Stock (12% annual rate); fifth, to pay the Company for all accrued and unpaid management fees together with accrued but unpaid interest thereon; sixth, pro rata 60% to the Series A Preferred Stockholders, 4% to the Series B Preferred Stockholders and 36% to the common stockholder(s).
SALE OF PROGRAMMING INTERESTS:
In October 1992 and January 1993, Tele-Communications, Inc. ("TCI") exercised its option to purchase from each of a subsidiary of National Broadcasting Co. ("NBC") and Rainbow Programming an additional 12.5% of SportsChannel Chicago Associates for an aggregate purchase price of approximately $15,000 plus approximately $1,600 in interest. In connection with this transaction, the Company recorded a net gain of approximately $7,100.
PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma condensed results of operations are presented for the years ended December 31, 1994 and 1993 as if the acquisitions of Monmouth Cablevision and Riverview Cablevision; the purchase of the 50% interest in AMCC; and the North Coast Cable Acquisition had occurred on January 1, 1994 and 1993, respectively.
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following items, which are depreciated or amortized primarily on a straight-line basis over the estimated useful lives shown below:
NOTE 4. DEBT
BANK DEBT
RESTRICTED GROUP
For financing purposes, Cablevision Systems Corporation and certain of its subsidiaries are collectively referred to as the "Restricted Group". On October 14, 1994, the Restricted Group entered into new $1.5 billion credit facilities (the "Credit Agreement") with a group of banks led by Toronto-Dominion (Texas), as agent.
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
The Credit Agreement consists of a $750,000 Term Loan and Reducing Revolver facilities aggregating $750,000. The Term Loan has a final maturity of June 30, 2003 and begins amortizing on a scheduled quarterly basis on June 30, 1997. The Reducing Revolver facilities begin to reduce on December 31, 1996 and have a final maturity of June 30, 2003. The total amount of bank debt outstanding (including CNYC) at December 31, 1994 and 1993 was $956,419 and $480,079, respectively. As of December 31, 1994, approximately $24,700 was restricted for certain letters of credit issued for the Company and CNYC.
Unrestricted and undrawn funds available to the Restricted Group under the Credit Agreement amounted to approximately $523,300 at December 31, 1994. The Credit Agreement contains certain financial covenants that may limit the Restricted Group's ability to utilize all of the undrawn funds available thereunder. The Credit Agreement contains various restrictive covenants, among which are limitations on the amount of investments that may be made in affiliated entities and certain other subsidiaries, the maintenance of various financial ratios and tests, and limitations on various payments, including preferred dividends. The Company is restricted from paying any dividends on its common stock. The Company was in compliance with the covenants of its Credit Agreements at December 31, 1994.
Interest on outstanding amounts may be paid, at the option of the Company, based on various formulas which relate to the prime rate, rates for certificates of deposit or other prescribed rates. In addition, the Company has entered into interest rate swap agreements with several banks on a notional amount of $235,000 as of December 31, 1994 whereby the Company pays a fixed rate of interest and receives a variable rate. Interest rates and terms vary in accordance with each of the agreements. The Company enters into interest rate swap agreements to hedge against interest rate risk, as required by its credit agreements, and therefore accounts for these agreements as hedges of floating rate debt, whereby interest expense is recorded using the revised rate, with any fees or other payments amortized as yield adjustments. As of December 31, 1994, the interest rate agreements expire at various times through the year 2000 and have a weighted average life of approximately two years. The Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreements; however, the Company does not anticipate nonperformance by the counterparties. The weighted average interest rate on all indebtedness was 8.2% and 8.9% on December 31, 1994 and 1993, respectively. The Company is also obligated to pay fees of 3/8 of 1% per annum on the unused loan commitment and from 1-3/8% to 1-5/8% per annum on letters of credit issued under the Credit Agreement.
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
Substantially all of the assets of the Restricted Group (excluding the assets of CNYC), amounting to approximately $929,400 at December 31, 1994, have been pledged to secure the borrowings under the Credit Agreement.
CNYC, which became part of the Restricted Group in October 1994, continues to have a separate bank credit agreement which is guaranteed by the Company. The amount outstanding under the CNYC facility is restricted under the Reducing Revolver facilities. Reductions in the CNYC facility increase availability in the Reducing Revolver facilities. At December 31, 1994 and 1993, CNYC had outstanding bank borrowings of $140,000 and $129,023, respectively, and outstanding letters of credit totalling $7,000 at December 31, 1994. The CNYC facility converted to a term loan on December 31, 1994 with amortization beginning on March 31, 1995 with a final maturity of June 30, 2000.
Substantially all of the assets of CNYC, amounting to approximately $279,529 at December 31, 1994, have been pledged to secure the borrowings under the CNYC credit agreement. The CNYC credit agreement contains various restrictive covenants, among which are the maintenance of various financial ratios and tests and limitations on various payments. CNYC was in compliance with all the covenants of the CNYC credit agreement at December 31, 1994.
CABLEVISION MFR
Cablevision MFR and its subsidiaries, Monmouth Cablevision and Riverview Cablevision, are party to a credit facility with a group of banks led by Nations Bank of Texas, N.A., as agent (the "MFR Credit Facility"). The maximum amount available to Cablevision MFR under the MFR Credit Facility is $285,000 with a final maturity at June 30, 2003. The facility is a reducing revolving loan, with scheduled facility reductions beginning on March 31, 1996 resulting in a 15% reduction by December 31, 1998. As of December 31, 1994, Cablevision MFR had outstanding bank borrowings of $230,000. Unrestricted and undrawn funds available to Cablevision MFR under the MFR Credit Facility amounted to approximately $55,000 at December 31, 1994. The MFR Credit Facility contains certain financial covenants that may limit Cablevision MFR's ability to utilize all of the undrawn funds available thereunder, including covenants requiring Cablevision MFR to maintain certain financial ratios. Under the terms of the MFR Credit Facility, Monmouth Cablevision and Riverview Cablevision are prohibited from transferring funds to the Company. The loan is secured by a pledge of the Company's stock in Cablevision MFR and substantially all of Cablevision MFR's assets which amounted to approximately $376,000 at December 31, 1994. Monmouth Cablevision and Riverview Cablevision have entered into interest rate swap and cap agreements with several banks on a notional amount of $130,000 as of December 31, 1994, whereby Monmouth Cablevision and
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
Riverview Cablevision pay a fixed rate of interest and receive a variable rate. Monmouth Cablevision and Riverview Cablevision account for their interest rate swap and cap agreements as hedging of floating rate debt, as may be required under the MFR Credit Facility whereby interest expense is recorded using the revised rate, with any fees or other payments amortized as yield adjustments. Cablevision MFR is exposed to credit loss in the event of nonperformance by the other parties to the agreements; however, Cablevision MFR does not anticipate nonperformance by the counterparties. The interest rate agreements expire in 1997. The weighted average interest rate on all bank indebtedness was approximately 8.3% on December 31, 1994. The MFR Credit Facility contains various restrictive covenants with which Cablevision MFR was in compliance or had obtained waivers of compliance at December 31, 1994.
RAINBOW PROGRAMMING
On July 11, 1994, Rainbow Programming entered into a $105,000 credit facility with a group of banks. At December 31, 1994, $105,000 was outstanding under this facility. On January 27, 1995 Rainbow Programming entered into an amended and restated credit facility for $202,000. The credit facility is payable on December 31, 1996 and bears interest at varying rates based upon the banks' Base Rate or LIBOR Rate, as defined in the credit agreement. The loan is secured by a pledge of the Company's stock in Rainbow Programming and is guaranteed by the subsidiaries of Rainbow Programming as permitted. The weighted average interest rate during 1994 was 7.8%. The credit agreement contains various restrictive covenants with which Rainbow Programming was in compliance at December 31, 1994.
AMERICAN MOVIE CLASSICS COMPANY
AMCC is party to a loan agreement (The "AMCC Loan Agreement") with a group of banks (with the Toronto Dominion Bank as Lead Bank). The AMCC Loan Agreement, which permits maximum borrowings of $59,000 and matures on June 30, 1998, is comprised of a $44,000 term loan and a $15,000 revolver. At December 31, 1994, there were no borrowings under the revolver and an outstanding balance of $44,000 under the term loan. Borrowings under the AMCC Loan Agreement bear interest at varying rates above the Lead Bank's Base, CD or LIBOR rate depending on the ratio of debt to cash flow, as defined in the Loan Agreement. AMCC has entered into an interest rate swap agreement on a notional amount of $20,000 under which AMCC pays a fixed rate and receives a variable rate. The interest rate swap agreement expires on October 6, 1997. AMCC is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreement; however, it does not anticipate nonperformance by the counterparties. At December 31, 1994 the weighted average interest rate on bank indebtedness approximated 7.3%. Substantially all of the assets of AMCC, amounting to
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
$148,270 at December 31, 1994, have been pledged to secure the borrowings under the AMCC Loan Agreement. The AMCC Loan Agreement contains various restrictive covenants with which AMCC was in compliance at December 31, 1994.
SUBORDINATED DEBENTURES
In February 1993, the Company issued $200,000 face amount $(198,867 amortized amount at December 31, 1994) of its 9-7/8% Senior Subordinated Debentures due 2013 (the "2013 Debentures"). Interest is payable on the 2013 Debentures semi- annually on February 15 and August 15. The 2013 Debentures are redeemable, at the Company's option, on February 15, 2003, February 15, 2004, February 15, 2005 and February 15, 2006 at the redemption price of 104.80%, 103.60%, 102.40% and 101.20%, respectively, of the principal amount and thereafter at the redemption price of 100% of the principal amount, in each case together with accrued interest to the redemption date. The indenture under which the 2013 Debentures were issued contains various covenants, which are generally less restrictive than those contained in the Company's Credit Agreement, with which the Company was in compliance at December 31, 1994. The 2013 Debentures are not entitled to the benefits of a sinking fund. The net proceeds of approximately $193,150 were used to reduce bank borrowings.
Also in 1993, the Company issued $150,000 face amount ($149,667 amortized amount at December 31, 1994) of its 9-7/8% Senior Subordinated Debentures due 2023 (the "2023 Debentures"). Interest is payable on the 2023 Debentures semi-annually on April 1 and October 1. The 2023 Debentures are redeemable, at the Company's option, on and after April 1, 2003 at the redemption price of 104.938% reducing ratably to 100% of the principal amount on and after April 1, 2010, in each case together with accrued interest to the redemption date. The indenture under which the 2023 Debentures were issued contains various covenants, which are generally less restrictive than those contained in the Company's Credit Agreement, with which the Company was in compliance at December 31, 1994. The 2023 Debentures are not entitled to the benefits of a sinking fund. Approximately $105,000 of the net proceeds of $145,896 were used to reduce bank and commercial paper borrowings. In connection with such repayment, the Company wrote off approximately $1,044 of deferred financing costs.
In April 1992, the Company issued $275,000 of its 10-3/4% Senior Subordinated Debentures due 2004 (the "2004 Debentures"). Interest is payable on the 2004 Debentures semi-annually on April 1 and October 1. The 2004 Debentures are redeemable, at the Company's option, on April 1, 1997 and April 1, 1998 at the redemption price of 103.071% and 101.536%, respectively, of the principal amount, and on April 1, 1999 and thereafter at the redemption price of 100% of the principal amount, in each case together with accrued interest to the redemption date. The Indenture under which the 2004
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
Debentures were issued contains various covenants, which are generally less restrictive than those contained in the Company's Credit Agreement, with which the Company was in compliance at December 31, 1994. The Indenture requires a sinking fund providing for the redemption on April 1, 2002 and April 1, 2003 of $68,750 principal amount of the 2004 Debentures, at a redemption price equal to 100% of the principal amount, plus accrued interest to the redemption date. The net proceeds of approximately $267,000 from the offering were used to repay borrowings under the Company's Credit Agreement. In connection with such repayment, the Company wrote off approximately $4,783 of deferred financing costs.
In October 1994, the Company redeemed its $200,000 face amount 12-1/4% Senior Subordinated Reset Debentures due November 15, 2003, (the "Reset Debentures"). In connection with the redemption, the Company paid a premium over face amounting to $2,000, incurred a loss of $605 representing the unamortized portion of the original issue discount and wrote off $4,483 of deferred finance costs. The total loss incurred related to the redemption of the Reset Debentures amounted to $7,088.
SENIOR DEBT
Under the credit agreement between V Cable and GECC (the "V Cable Credit Agreement"), GECC has provided a term loan (the "V Cable Term Loan") in the amount of $20,000 to V Cable, which accretes interest at a rate of 10.62% compounded semi-annually until December 31, 1997 (the reset date). In addition, GECC has extended to VC Holding a $505,000 term loan (the "Series A Term Loan), a $25,000 revolving line of credit (the "Revolving Line") and a $202,554 term loan (the "Series B Term Loan"), all of which comprise the VC Holding Credit Agreement. Interest on the Series A Term Loan and on any amounts drawn under the Revolving Line of credit is payable currently. Interest on the Series B Term Loan accretes at a rate of 10.62% compounded semi-annually until December 31, 1997 (the reset date) and is payable in full on December 31, 2001. At December 31, 1994 and 1993, amounts outstanding under the V Cable Term Loan, the Series A Term Loan, the Series B Term Loan and the Revolving Line were $24,606 and $22,187; $505,000 and $505,000; $245,507 and $221,373; and $-0- and $6,000, respectively. Unrestricted and undrawn funds available to VC Holding at December 31, 1994 amounted to $23,200.
In 1992, approximately $7,501 of deferred financing costs related to V Cable's debt prior to its restructuring with GECC was written off.
Interest rates on $254,000 of the Series A Term Loan are fixed at 10.12% through December 31, 1997. The remaining $251,000 bears interest at rates based on either GECC's Index Rate (as defined) or LIBOR plus applicable percentages. Interest on any
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
borrowings under the Revolving Line is paid based on either GECC's Index Rate (as defined) or LIBOR plus applicable percentages which vary depending upon certain prescribed financial ratios. Scheduled quarterly principal payments on the Series A Term Loan commence June 30, 1997 and continue through December 31, 2001.
Also in connection with the V Cable Reorganization, V Cable agreed to assume, on December 31, 1997, approximately $121,000 of debt of U.S. Cable, which amount is subject to adjustment, upward or downward, depending on U.S. Cable's ratio of debt to cash flow (as defined) in 1997 and thereafter. Included in Senior Debt at December 31,1994 and 1993 is $87,327 and $78,306, respectively, representing the present value of debt of U.S. Cable to be assumed in 1997. The difference at December 31, 1994 of approximately $33,673 will be charged to interest expense during the period from January 1, 1995 to December 31, 1997. The effective interest rate on this debt is approximately 11%. This debt matures on December 31, 2001. Amortization of deferred interest expense in connection with the assumption of U.S. Cable's debt, which is being amortized on a straight line basis through December 31, 1997, amounted to $14,048 and $14,047 for 1994 and 1993, respectively.
The debt of V Cable and VC Holding is guaranteed by, and secured by a pledge of all of the assets of, V Cable, VC Holding and each of their subsidiaries, including a pledge of all direct and indirect ownership interests in such subsidiaries. U.S. Cable's debt is also guaranteed and cross-collateralized by each of V Cable, VC Holding and each of their subsidiaries. All of the V Cable, VC Holding and U.S. Cable credit facilities are non-recourse to the Company other than with respect to the common stock of V Cable owned by the Company. Substantially all of the assets of V Cable, amounting to approximately $447,400 at December 31, 1994, have been pledged to secure borrowings under the V Cable and VC Holding Credit Agreements. At December 31, 1994 V Cable's liabilities exceeded its assets by approximately $451,900.
The V Cable and VC Holding Credit Agreements contain various restrictive covenants, among which are the maintenance of certain financial ratios, limitations regarding certain transactions, prohibitions against the transfer of funds to the parent company (except for reimbursement of certain expenses), and limitations on levels of permitted capital expenditures. V Cable and VC Holding were in compliance or had obtained waivers of compliance with all of the covenants of their loan agreements at December 31, 1994.
Due to reductions to regulated revenue arising from the latest round of FCC regulation, V Cable believes that it is likely that it will be unable to meet several of its financial covenants during 1995. To remedy the anticipated covenant defaults, V Cable may request waivers and/or amendments to its credit agreement and/or seek equity contributions from the Company. In January 1995, the Company contributed $700 to
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
V Cable, thereby enabling it to remain in compliance with its financial covenants at December 31, 1994.
SUBORDINATED NOTES PAYABLE
In connection with the acquisition of Monmouth Cablevision and Riverview Cablevision, in August 1994, Cablevision MFR issued promissory notes totalling $141,268, due in 1998 and bearing interest at 6% until the third anniversary and 8% thereafter (increasing to 8%and 10% respectively, if interest is paid in shares of the Company's Class A Common Stock). Principal and interest on the notes is payable, at Cablevision MFR's election, in cash or in shares of the Company's Class A Common Stock. The promissory notes are guaranteed by the Company and the obligations under the guarantee rank pari passu with the Company's subordinated debentures. In certain circumstances, Cablevision MFR may extend the maturity date of the promissory notes until 2003 for certain additional consideration.
SUMMARY OF FIVE YEAR DEBT MATURITIES
Total amounts payable by the Company and its subsidiaries under its various debt obligations, including capital leases, during the five years subsequent to December 31, 1994 are as follows:
NOTE 5. PREFERRED STOCK
On March 31, 1994, the Company issued and sold 100,000 shares of its Series E Redeemable Exchangeable Convertible Preferred Stock (the "Series E Preferred Stock") to Toronto-Dominion Investments, Inc. in a private transaction. The Series E Preferred Stock was sold for a purchase price of $1,000 per share and carries a liquidation
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
preference of a like amount plus accrued and unpaid dividends. Dividends accrue at a floating rate of LIBOR plus 2.5 percent and are payable, at the Company's option, either in cash or in registered shares of Class A common stock with a value equalling 105 percent of the required dividend. Additional dividend payments may be required with respect to the availability of the dividend received deduction. The Series E Preferred Stock is redeemable at any time at the option of the Company at par plus accrued and unpaid dividends to the redemption date and are convertible after March 31, 1995 into Class A common stock, at the option of the holder, at a conversion rate based on 95 percent of the average closing price of the Class A Common Stock for the twenty business days prior to conversion. Additionally, the holders of the Series E Preferred Stock have the right to convert their shares in connection with certain change in control transactions (regardless of when they occur) into a number of shares of Class A Common Stock which would yield $100,000 based upon an auction process involving the Class A Common Stock issuable on such conversion or, at the holder's election, at a conversion rate based on 95 percent of the average closing price of the Class A Common Stock for the twenty business days prior to conversion. The Company has the right to suspend the conversion of the Series E Preferred Stock from March 31, 1995 through March 31, 1997 as long as it is in compliance with its Restricted Group Credit Agreement financial covenants and is current in dividend payments on the Series E Preferred Stock.
The Company paid cash dividends on the Series E Preferred Stock during 1994 of approximately $5,500.
The holders of the Company's 8% Series C Cumulative Preferred Stock ("Series C Preferred Stock") may require the Company to redeem for cash at any time commencing December 31, 1997 all or a portion of the outstanding shares of the Series C Preferred Stock. The Company has the right, upon notice to the holders requesting redemption, to convert all or a part of such shares into shares of Class B Common Stock. If, in the future, holders require the Company to redeem their Series C Preferred Stock, it is the Company's intention to convert such shares into Class B Common Stock. The Company paid cash dividends on the Series C Preferred Stock during each of 1994 and 1993 of $885.
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share data) (continued)
NOTE 6. INCOME TAXES
The Company and its majority-owned subsidiaries file consolidated federal income tax returns. At December 31, 1994 the Company had consolidated net operating loss carry forwards for tax purposes of approximately $867,909, which expire between 2001 and 2009.
The tax effects of temporary differences which give rise to significant portions of deferred tax assets or liabilities and the corresponding valuation allowance at December 31, 1994 and 1993 are as follows:
The Company has provided a valuation allowance for the total amount of net deferred tax assets since realization of these assets was not assured due principally to the Company's history of operating losses.
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
NOTE 7. OPERATING LEASES
The Company leases certain office, production and transmission facilities under terms of leases expiring at various dates through 2004. The leases generally provide for fixed annual rentals plus certain real estate taxes and other costs. Rent expense for the years ended December 31, 1994, 1993 and 1992 amounted to $12,036, $10,849 and $10,071, respectively.
In addition, the Company rents space on utility poles for its operations. The Company's pole rental agreements are for varying terms, and management anticipates renewals as they expire. Pole rental expense for the years ended December 31, 1994, 1993 and 1992 amounted to approximately $6,947, $6,177 and $5,042, respectively. The minimum future annual rentals for all operating leases during the next five years, including pole rentals from January 1, 1995 through December 31, 1999, and thereafter, at rates now in force are approximately: 1995, $16,123; 1996, $14,531; 1997, $12,810; 1998, $11,684, 1999, $11,070; thereafter, $7,278.
NOTE 8. AFFILIATE TRANSACTIONS
The Company has affiliation agreements with certain cable television programming companies, varying ownership interests in which were held, directly or indirectly, by Rainbow Programming during the three years ended December 31, 1994. Rainbow Programming's investment in these programming companies is accounted for on the equity basis of accounting. Accordingly, the Company recorded income (losses) of approximately $(1,007), $8,828 and $(12,428) in 1994, 1993 and 1992, respectively, representing its percentage interests in the results of operations of these programming companies. Such amounts include $4,304, $5,656 and $3,919 for 1994, 1993 and 1992, respectively, of the Company's share of the net income of AMCC prior to its consolidation with the Company in July 1994. At December 31, 1994 and 1993, the Company's investment in these programming companies amounted to approximately $31,258 and $17,721, respectively. Costs incurred by the Company for programming services provided by these affiliates and included in technical expense for the years ended December 31, 1994, 1993 and 1992 amounted to approximately $20,232, $26,732 and $23,388, respectively. At December 31, 1994 and 1993, amounts due from certain of these programming affiliates aggregated $62 and $1,367, respectively, and are included in advances to affiliates. Also, at December 31, 1994 and 1993 amounts due to certain of these affiliates, primarily for programming services provided to the Company, aggregated $13,731 and $16,236, respectively, and are included in accounts payable to affiliates.
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
Summarized combined financial information relating to these programming companies at December 31, 1994, 1993 and 1992 and for the years then ended is as follows:
NBC and Rainbow Programming formed a partnership which distributed on a multi-channel, pay-per-view basis certain events of the 1992 Summer Olympics. Pursuant to the agreement, profits and losses from the broadcast network coverage and the pay-per-view coverage of the 1992 Summer Games were shared equally by NBC and Rainbow Programming; however, Rainbow Programming's liability under this agreement was limited to $50,000. The Company paid its share of the loss ($50,000) in January 1993 with borrowings under the Credit Agreement.
Cablevision of Boston Limited Partnership ("Cablevision Boston") is a Massachusetts limited partnership in which Mr. Dolan is the general partner and in which the Company has certain direct and indirect partnership interests. The Company is a limited partner in Cablevision Boston and currently holds a 7% prepayout (prior to repayment of capital contributions to limited partners) interest and a 20.7% postpayout interest in Cablevision Boston.
As of December 31, 1994 and 1993, the Company's consolidated financial statements reflect advances ($8,000 of which were converted to Preferred Equity in Cablevision Boston) to Cablevision Boston of approximately $17,718 and $17,540, respectively. Such amounts are fully subordinated to certain of Cablevision Boston's obligations to other lenders aggregating approximately $63,000 and $68,250 plus accrued interest at December 31, 1994 and 1993, respectively.
In June 1994, the Company and Cablevision Boston entered into an agreement which is designed to give the Company full ownership of Cablevision Boston. The agreement provides for the acquisition by the Company of the interests in Cablevision Boston which it does not already own in a series of transactions. The Company and Cablevision Boston have filed with the Securities and Exchange Commission a Consent Solicitation (80)
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
Statement/Prospectus with respect to the proposed transactions. Each of the transactions is subject to a number of conditions, including the approval by the limited partners of Cablevision Boston who are unaffiliated with the general partners of Cablevision Boston. Consummation of the transactions would result in the limited partners in Cablevision Boston receiving Class A Common Stock of the Company with an expected aggregate market value of approximately $40,000.
The Company has also advanced funds to Cablevision of Chicago ("Cablevision Chicago"), an Illinois limited partnership and an affiliate whose general partner is Mr. Dolan. At December 31, 1994 and 1993 a net of approximately $12,310 and $12,445, respectively, was owed the Company and is included in advances to affiliates in the accompanying consolidated balance sheets. Of the amount owed, approximately $12,300 principal amount is evidenced by a subordinated note bearing interest at the rate of 14% per annum, payable as to principal and interest on demand. Repayment of this subordinated note and accrued interest thereon is restricted until repayment of Cablevision Chicago's bank indebtedness. The Company has reserved all amounts in respect of accrued interest on this note.
In January, 1995, Cablevision of Chicago signed a definitive agreement to sell its cable television systems to Continental Cablevision, Inc. The sale is subject to franchise approvals and is expected to close in 1995. Upon consummation of the sale, the Company expects that it will be repaid its advances together with accrued interest thereon and would accordingly recognize a gain (which, if recognized at December 31, 1994, would amount to approximately $13,394) representing the cumulative unpaid interest reserved on the advances as of that date.
During 1994, 1993 and 1992, the Company made advances to or incurred costs on behalf of other affiliates engaged in providing cable television, cable television programming, and related services. Amounts due from these affiliates amounted to $6,591 and $6,805 at December 31, 1994 and 1993, respectively and are included in advances to affiliates.
Cablevision of Newark, a partnership 25% owned and managed by the Company and 75% owned by an affiliate of Warburg Pincus, owns cable television systems located in Newark and South Orange, New Jersey. The Company's share of the net losses of Cablevision of Newark amounted to $3,631, $4,206 and $3,070 in 1994, 1993 and 1992, respectively. The Company manages the operations of Cablevision of Newark for a fee equal to 3-1/2% of gross receipts, as defined, plus reimbursement of certain costs and an allocation of certain selling, general and administrative expenses. For 1994, 1993 and 1992, such management fees and expenses amounted to $1,822, $1,632 and $1,526, respectively, of which $904, $800 and $506, respectively, representing management fees, has been fully reserved by the Company. (81)
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
In connection with the V Cable Reorganization (see Note 2), V Cable acquired for $20,000, a 20% interest in U.S. Cable. The Company manages the properties of U.S. Cable under management agreements that provide for cost reimbursement, including an allocation of overhead charges. For 1994, 1993 and 1992, such cost reimbursement amounted to $5,803, $4,894 and $2,160, respectively, which included an allocation of overhead charges of $2,720, $2,604 and $1,200, respectively.
The Company also manages A-R Cable under a management agreement that provides for cost reimbursement, an allocation of overhead charges and a management fee of 3-1/2% of gross receipts, as defined, with interest on unpaid annual amounts thereon at a rate of 10% per annum beginning in 1993. Such management fees amounted to $3,738 and $3,801 for 1994 and 1993, respectively and interest thereon amounted to $659 and $244 for 1994 and 1993, respectively. Management fees and interest thereon have been fully reserved by the Company.
In connection with its 30% interest in A-R Cable Partners (see note 2), the Company recorded its share of the losses of A-R Cable Partners amounting to $1,886 for the period from acquisition through December 31, 1994. The Company manages the operations of A-R Cable Partners for a fee equal to 3-1/2% of gross receipts, as defined, plus reimbursement of certain costs and an allocation of certain selling, general and administrative expenses. For 1994 such management fees and expenses amounted to approximately $249 of which $137, representing management fees, was fully reserved by the Company.
Also, in connection with its 30% interest in CFHI (see note 2), the Company recorded its share of the losses of CFHI amounting to $654 from the date of acquisition through December 31, 1994. The Company manages the operations of CFHI for a fee equal to 3-1/2% of gross receipts, as defined, plus reimbursement of certain costs and an allocation of certain selling, general and administrative expenses. For 1994 such management fees and expenses amounted to approximately $108 of which $98, representing management fees, was fully reserved by the Company.
On December 14, 1993, the Company purchased 50,000 shares of Class A Common Stock from John Tatta, a director of the Company, at a price equal to the closing price of a share of Class A Common Stock on such date. These shares are being held as treasury stock. (82)
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
NOTE 9. BENEFIT PLANS
The Company maintains the CSSC Supplemental Benefit Plan (the "Benefit Plan") for the benefit of certain officers and employees of the Company. As part of the Benefit Plan, the Company established a nonqualified defined benefit pension plan, which provides that, upon attaining normal retirement age, a participant will receive a benefit equal to a specified percentage of the participant's average compensation, as defined. Participants vest in all components of the Benefit Plan 40% after four years of service and 10% for each additional year of service. Net periodic pension cost for the years indicated consisted of the following:
The following table sets forth the funded status of the Benefit Plan at December 31, 1994 and 1993:
The projected benefit obligation for the plan was determined using an assumed discount rate and assumed long range rate of return of 8% in each of 1994 and 1993. No assumed rate of salary increase was used to compute the projected benefit obligation, since substantially all participants are currently at their maximum benefit level. (83)
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share amounts) (continued)
In addition, the Company accrues a liability in the amount of 7% of certain officers' and employees' compensation, as defined. Each year the Company also accrues for the benefit of these officers and employees interest on such amounts. The officer or employee will receive such amounts upon termination of employment. Such benefits will vest 40% after four years of service and 10% each additional year of service. The cost associated with this plan for the years ended December 31, 1994, 1993 and 1992 was approximately $337, $497 and $358, respectively.
Prior to 1993, the Company, with other affiliates, maintained a defined contribution pension plan covering substantially all employees. The Company contributed 3% of eligible employees' annual compensation (as defined), and employees could voluntarily contribute up to 10% of their annual compensation.
Effective January 1, 1993, the Board of Directors of the Company approved the adoption of an amended and restated Pension and 401(K) Savings Plan (the "Plan"), in part to permit employees of the Company and its affiliates to make contributions to the Plan on a pre-tax salary reduction basis in accordance with the provisions of Section 401(K) of the Internal Revenue Code, and to introduce new investment options under the Plan. The Company contributes 1-1/2% of eligible employees' annual compensation, as defined, to the defined contribution portion of the Plan (the "Pension Plan") and an equivalent amount to the Section 401(K) portion of the Plan (the "Savings Plan"). Employees may voluntarily contribute up to 15% of eligible compensation, subject to certain restrictions, to the Savings Plan, with an additional matching contribution by the Company of 1/4 of 1% for each 1% contributed by the employee, up to a maximum contribution by the Company of 1/2 of 1% of eligible base pay. Employee contributions are fully vested as are employer base contributions to the Savings Plan. Employer contributions to the Pension Plan and matching contributions to the Savings Plan become vested in years three through seven. The cost associated with these plans was approximately $3,125, $2,905 and $2,322 for the years ended December 31, 1994, 1993 and 1992, respectively.
NOTE 10. STOCK BENEFIT PLANS
In June 1992, the Stockholders of the Company approved the Amended and Restated Employee Stock Plan (the "Amended Plan") which consolidated the Company's prior Stock Plan, Nonqualified Plan and Bonus Award Plan (the "Prior Plans"). Under the Amended Plan, the Company is authorized to issue a maximum of 3,500,000 shares. The (84)
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share amounts) (continued)
Company may grant incentive stock options, nonqualified stock options, restricted stock, conjunctive stock appreciation rights, stock grants and stock bonus awards. The exercise price of stock options may not be less than the fair market value per share of class A common stock on the date the option is granted and the options expire no longer than ten years from date of grant. Conjunctive stock appreciation rights permit the employee to elect to receive payment in cash, either in lieu of the right to exercise such option or in addition to the stock received upon the exercise of such option, equal to the difference between the fair market value of the stock as of the date the right is exercised, and the exercise price. Pursuant to its terms, no awards may be granted under the Amended Plan after December 5, 1995.
Under the Amended Plan, during 1994 the Company issued options to purchase 525,400 shares of Class A common stock, stock appreciation rights related to 525,400 shares under option and stock awards of 68,400 common shares. 95,400 of the options and related conjunctive stock appreciation rights are exercisable at $42.00 per share and vest in 25% annual increments beginning from the date of grant. 430,000 options and conjunctive rights are exercisable at $56.50 per share and are currently vested. The stock awards vest 100% in May 1998.
In November 1994, the Company entered into agreements with three employees to pay the value, as of that date, of options exercised with respect to 405,000 shares of the Company's Class A Common Stock, and to replace those options with a combination of stock appreciation rights and newly issued options, with the exercise price set at the market price of such stock on that date. In accordance with the agreement, one-third of the value of the exercised options was paid in cash with the remaining portion payable in equal installments on November 18, 1995 and November 18, 1996. Accordingly, the Company recorded expense related to the purchase of these options amounting to $13,215 in 1994, representing the cash payment of approximately $4,673 and a liability for future payments, included in accounts payable to affiliates in the accompanying financial statements, amounting to approximately $8,542.
Under the Amended Plan, during 1993 the Company issued options to purchase 15,225 shares of class A common stock, stock appreciation rights related to 15,225 shares under option and stock awards of 10,225 common shares. The options and related conjunctive stock appreciation rights are exercisable at various prices ranging from $27.625 to $38.25 per share in 25% and 33% annual increments beginning from the date of grant. The stock awards vest 100% by May 1996.
Under the Amended Plan, during 1992 the Company issued options to purchase 211,350 shares of class A common stock, stock appreciation rights related to 211,350 shares under option and stock awards of 211,350 common shares. The options and related conjunctive (84)
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share amounts) (continued)
stock appreciation rights are exercisable at $27.625 per share in 25% annual increments beginning one year from the date of grant. The stock awards vest 100% four years from date of grant. Also, during 1992 the Company granted to certain employees conjunctive stock appreciation rights with respect to 472,500 shares under options granted in prior years under the Company's 1985 Employee Stock Plan. Those options are exercisable at prices ranging from $16.625 to $36.00 and vest at various times during the period from October 1992 through October 1996.
Pursuant to a Bonus Award Plan ("Bonus Plan"), adopted in 1986, in 1990 the Company granted to fifteen employees the right to receive 118,900 shares of class A common stock or, at the election of the Stock Option Committee, cash equal to the product of such number of shares times the closing price of a share of Class A Common Stock at the time of issuance. In May 1992, in accordance with the provisions of the Bonus Plan, the Company paid in cash the value of 59,450 shares based on a market price of $28-6/8, totalling $1,709. Rights to the remaining 49,969 shares (after cancellation of 9,481 shares resulting from employee terminations) vested on May 17, 1994 and were paid in cash based on a market price of $42.00 (for 43,800 shares on that date) and $64.00 (for 6,169 shares vested on a pro rata basis on February 28, 1994), totalling $2,234.
Stock transactions under the Amended Plan and Prior Plans are as follows:
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share amounts) (continued)
At December 31, 1994, options for approximately 1,060,000 shares were exercisable. As a result of the stock awards, bonus awards, stock appreciation rights and the expensing of the cash payment made for certain executive stock options, the Company expensed approximately $6,814, $28,234 and $9,656 in 1994, 1993 and 1992, respectively. The 1994 amount reflects a credit of approximately $6,401 primarily resulting from a decline in the market price of the Company's Class A Common Stock.
NOTE 11. COMMITMENTS AND CONTINGENCIES
The Company, through Rainbow Programming, has entered into several contracts relating to feature film rights and has guaranteed rights payments to professional and other sports teams. These contracts typically require substantial payments over extended periods of time. Amounts payable by AMCC or guaranteed by the Company during the five years subsequent to December 31, 1994 relating to feature film rights and rights payments to professional and other sports teams amount to $33,313 in 1995, $28,691 in 1996, $24,280 in 1997, $11,578 in 1998, and $7,188 in 1999.
The Company has employment agreements with certain of its executive officers expiring at various dates through December 31, 1997. The agreements provide for minimum annual salaries and, in certain cases, additional amounts and acceleration of certain stock options, stock appreciation rights and stock awards in the event of a change in control of the Company, as defined in the agreements. Aggregate minimum payments under the salary portion of these agreements amount to $1,830 in 1995, $1,230 in 1996 and $2,130 in 1997.
The Company does not provide post-retirement benefits to any of its employees.
NOTE 12. OTHER MATTERS
During 1992, the Company recorded expenses of $5,655 in connection with the settlement of certain litigation pending against Mr. Dolan and the Company and other related matters. The litigation was based upon an alleged breach of fiduciary duty by Mr. Dolan, as the general partner of Cablevision Programming Investments and Rainbow Program Enterprises ("RPE"), involving the allocation of partnership profits from 1983 through 1986 and Rainbow Programming's offer to purchase limited partnership interests in 1986. The amounts provided also include an estimated value of certain untendered interests in RPE based upon the values utilized in connection with the settlements relating to Cablevision Programming Investments. (87)
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share amounts) (continued)
In addition, the Company is party to various other lawsuits, some involving substantial amounts. Management does not believe that the resolution of these lawsuits will have a material adverse impact on the financial position of the Company.
The cable systems located in New York State that are owned by the Company are subject to agreements (the "New York Upgrade Agreements") with the New York State Commission on Cable Television (the "New York Cable Commission"). The New York Upgrade Agreements require the substantial upgrade of certain cable systems by 1995-1996, subject to certain minor exceptions. The upgrade of portions of these cable television systems, which were required to have been completed by year-end 1994 under the New York Upgrade Agreements, were not completed at that time. Additionally, the Company anticipates that the upgrade of portions of certain other cable television systems that are required to be completed by year-end 1995, will not be completed at that time. The Company has requested an amendment to the New York Upgrade Agreements to provide additional time to complete the upgrades and based upon conversations with the New York Cable Commission, is confident that such amendment will be obtained, although there can be no assurance that such amendment will be so obtained. Management of the Company does not expect that the resolution of these matters will have a material adverse effect on the financial position of the Company.
The Company recorded a one time charge of $4,306 during 1994 to provide for severance and related costs, attributable entirely to terminated employees, resulting from a restructuring of its operations. Substantially all of such amounts were paid during 1994.
NOTE 13. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH AND CASH EQUIVALENTS, TRADE ACCOUNTS RECEIVABLE, NOTES AND OTHER RECEIVABLES, ACCOUNTS PAYABLE, ACCRUED LIABILITIES, ACCOUNTS PAYABLE TO AFFILIATES, FEATURE FILM RIGHTS PAYABLE AND OBLIGATION TO RELATED PARTY
The carrying amount approximates fair value due to the short maturity of these instruments.
BANK DEBT, SENIOR DEBT, SENIOR SUBORDINATED DEBENTURES, AND SUBORDINATED NOTES PAYABLE
The fair values of each of the Company's long-term debt instruments are based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. (88)
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
INTEREST RATE SWAP AGREEMENTS
The fair values of interest rate swap agreements are obtained from dealer quotes. These values represent the estimated amount the Company would receive or pay to terminate agreements, taking into consideration current interest rates and the current creditworthiness of the counterparties.
The fair value of the Company's financial instruments are summarized as follows:
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
NOTE 14. RECENT CABLE TELEVISION REGULATIONS
In October, 1992, the Congress of the United States passed the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") which among other matters, provides for the regulation of basic and certain other cable programming services. In April 1993, the Federal Communications Commission ("FCC") adopted regulations governing rates for basic and certain other cable programming services which became effective September 1, 1993. Under the provisions of these regulations, certain revenues derived from cable television are determined under either a "benchmark" or "cost of service" method. Effective September 1, 1993 the Company's systems had set their (89)
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
rates using the benchmark method which compares the Company's rates to those which are in effect at cable systems deemed to face effective competition by the FCC.
In February 1994 and November 1994, the FCC significantly modified the September 1993 rate regulations. These modifications were designed to further reduce subscriber rates and most annual basic and cable programming service rate increases (other than per-event and per-channel services), as well as to provide cable television system operators financial incentive to introduce new programming services. Management has implemented the rules in a manner it believes to be consistent with the regulations promulgated by the FCC and, accordingly, does not expect such modifications to have a material adverse effect on the future operations of the Company.
NOTE 15. SUBSEQUENT EVENTS
On March 10, 1995, MSG Holdings, L.P. ("Holdings"), a partnership between a subsidiary of Rainbow Programming and a subsidiary of ITT Corporation, a Delaware corporation ("ITT"), acquired Madison Square Garden Corporation ("MSG") in a transaction in which MSG merged with and into Holdings. The purchase price paid by Holdings for MSG was $1,009,100.
Holdings funded the purchase price of the acquisition through (i) borrowings of $289,100 under a $450,000 credit agreement among Holdings, various lending institutions and Chemical Bank as administrative agent, (ii) an equity contribution from Rainbow Programming of $110,000, and (iii) an equity contribution from ITT of $610,000. ITT, Rainbow Programming and the Company are parties to an agreement made as of August 15, 1994 (the "Bid Agreement") pursuant to which it has been agreed that within 12 months following the MSG closing, Rainbow Programming may elect to acquire interests in Holdings from ITT sufficient to equalize the equity ownership of ITT and Rainbow Programming in Holdings (the "Equalization Interest"). Rainbow Programming has the option during the 12 months following the MSG acquisition closing to (i) acquire all or a portion of the Equalization Interest for cash (including interest on such Equalization Interest at the rate of 11 1/2% per year calculated from the MSG acquisition closing date), (ii) maintain its investment at the initial level, or (iii) require ITT to purchase one half of Rainbow Programming's initial interest in Holdings at the price paid by Rainbow Programming plus an adjustment for Rainbow Programming's share of Holdings' operating income after interest expense following the MSG acquisition closing. Rainbow Programming has until one year from the time of the MSG closing to make its election and has not yet decided which alternative it will pursue. (90)
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
Initially Holdings will be managed on a 50-50 basis by Rainbow Programming and ITT. If, as discussed above, Rainbow Programming does not equalize its ownership interest in Holdings by the first anniversary of the closing, its management role will be effectively eliminated. Rainbow Programming also has the right to voluntarily relinquish any power to direct the management and policies of Holdings.
Pursuant to an agreement between Rainbow Programming and National Broadcasting Company, Inc. ("NBC"), NBC may require Rainbow Programming, by notice given on or before April 13, 1995, to purchase its interests in SportsChannel (New York) Associates ("SCNY") and Rainbow News 12 Company (the "NBC Put") for an aggregate purchase price which, as of February 28, 1995, would amount to approximately $93,000. In the event that NBC elects to require Rainbow Programming to purchase such interest, Rainbow Programming will have 120 days to consummate the acquisition. On January 27, 1995, Rainbow Programming entered into an amended and restated credit agreement with Toronto Dominion (Texas), Inc., and the Canadian Imperial Bank of Commerce, as co-agents and a group of banks increasing Rainbow Programming's credit facility from $105,000 to $202,000 to provide funds in the event the NBC Put is exercised. The facility will reduce to $108,000 if the NBC Put is not exercised.
(91)
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
NOTE 16. INTERIM FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of selected quarterly financial data for the years ended December 31, 1994 and 1993.
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ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
The information called for by Item 10, Directors and Executive Officers of the Registrant, Item 11, Executive Compensation, Item 12, Security Ownership of Certain Beneficial Owners and Management and Item 13, Certain Relationships and Related Transactions, is hereby incorporated by reference to the Company's definitive proxy statement for its Annual Meeting of Shareholders anticipated to be held in June, 1995 or if such definitive proxy statement is not filed with the Commission prior to April 30, 1995, to an amendment to this report on Form 10-K405 filed under cover of Form 8.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. The financial statements as indicated in the index is set forth on page 53. 2. Financial Statement schedule: Page No. ----
Schedule supporting consolidated financial statements: Schedule II - Valuation and Qualifying Accounts. . . . 94
Schedules other than that listed above have been omitted, since they are either not applicable, not required or the information is included elsewhere herein.
3. Independent auditors report and accompanying financial statements of A-R Cable Services, Inc. are filed as part of this report on page 95. 4. The Index to Exhibits is on page 115.
(b) Reports on Form 8-K:
There were no reports on Form 8k filed during the last quarter of the fiscal period covered by this report.
(93)
CABLEVISION SYSTEMS CORPORATION SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands)
(94)
A-R CABLE SERVICES, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation)
Consolidated Financial Statements
December 31, 1994 and 1993
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
The Board of Directors A-R Cable Services, Inc.
We have audited the accompanying consolidated balance sheets of A-R Cable Services, Inc. (a wholly-owned subsidiary of Cablevision Systems Corporation) and subsidiaries as of December 31, 1994 and 1993 and the related consolidated statements of operations, stockholder's deficiency and cash flows for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of A-R Cable Services, Inc. and subsidiaries at December 31, 1994 and 1993 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994 in conformity with generally accepted accounting principles.
As described in Note 7 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", on a prospective basis in 1993.
/s/ KPMG Peat Marwick LLP --------------------------- KPMG Peat Marwick LLP
Jericho, New York March 10, 1995 (96)
A-R CABLE SERVICES, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1994 AND 1993 (in thousands)
See accompanying notes to consolidated financial statements.
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A-R CABLE SERVICES, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1994 AND 1993 (in thousands)
See accompanying notes to consolidated financial statements.
(98)
A-R CABLE SERVICES, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (in thousands)
See accompanying notes to consolidated financial statements.
(99)
A-R CABLE SERVICES, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIENCY YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (in thousands)
See accompanying notes to consolidated financial statements.
(100)
A-R CABLE SERVICES, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (in thousands)
See accompanying notes to consolidated financial statements.
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A-R CABLE SERVICES, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (in thousands) (continued)
See accompanying notes to consolidated financial statements.
(102)
A-R CABLE SERVICES, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1994, 1993 and 1992 (Dollars in thousands)
NOTE 1. THE COMPANY
A-R Cable Services, Inc. ("A-R Cable" or the "Company") a wholly-owned subsidiary of Cablevision Systems Corporation ("CSC") or ("Parent") was organized for the purpose of constructing and operating cable television systems.
NOTE 2. 1992 RESTRUCTURING
On May 11, 1992, the Company and CSC consummated a restructuring and refinancing transaction whereby the Company repurchased approximately $236,841 principal amount of Senior Subordinated Deferred Interest Notes (the "A-R Cable Notes"), representing approximately 86.9% principal amount of the A-R Cable Notes outstanding pursuant to the terms of a tender offer. In connection with the consummation of the tender offer, Warburg, Pincus Investors, L.P. ("Warburg Pincus") purchased a new Series A Preferred Stock of the Company for a cash investment of $105,000, and CSC purchased a new Series B Preferred Stock of the Company for a cash investment of $45,000. In addition, General Electric Capital Corporation ("GECC") provided the Company with an additional $70,000 under a secured revolving credit line.
In connection with Warburg Pincus' investment in the Company, upon the receipt of certain regulatory approvals, Warburg Pincus will be permitted to elect three of the six members of the Company's board of directors, will have approval rights over certain major corporate decisions of the Company and will be entitled to 60% of the vote on all matters on which holders of capital stock are entitled to vote (other than the election of directors). CSC (through a wholly- owned subsidiary) continues to own the common stock, as well as the Series B Preferred Stock, and CSC continues to manage the Company under a management agreement that provides for cost reimbursement, an allocation of overhead charges and a management fee of 3-1/2% of gross receipts, as defined, with interest on unpaid annual amounts thereon at a rate of 10% per annum. The 3-1/2% fee is payable by the Company only after repayment in full of its senior debt and certain other obligations. Under certain circumstances, the fee is subject to reduction to 2-1/2% of gross receipts.
After May 11, 1997, either Warburg Pincus or CSC may irrevocably cause the sale of the Company, subject to certain conditions. In certain circumstances, Warburg Pincus may cause the sale of the Company prior to that date. If Warburg Pincus initiates the sale, CSC will have the right to purchase the Company through an appraisal procedure. CSC's purchase right may be forfeited in certain circumstances. Upon the sale of the
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A-R CABLE SERVICES, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
Company, the net sales proceeds, after repayment of all outstanding indebtedness and other liabilities, will be used as follows: first, to repay Warburg Pincus' investment in the Series A Preferred Stock; second, to repay CSC's investment in the Series B Preferred Stock; third, to repay the accumulated unpaid dividends on the Series A Preferred Stock (19% annual rate); fourth, to repay the accumulated unpaid dividends on the Series B Preferred Stock (12% annual rate); fifth, to pay CSC for all accrued and unpaid management fees together with accrued but unpaid interest thereon; sixth, pro rata 60% to the Series A Preferred Stockholders, 4% to the Series B Preferred Stockholders and 36% to the common stockholder(s).
Also in connection with the purchase of the A-R Cable Notes, the Company purchased from an affiliate, for nominal consideration, and retired its previously outstanding 1987 Cumulative Preferred Stock ("1987 Preferred Stock"). The affiliate had purchased the 1987 Preferred Stock from GECC. In connection with the purchase of the 1987 Preferred Stock, a transaction fee agreement between the Company and GECC was terminated and the Company's obligations thereunder were extinguished. The Company recognized a gain of $33,509 on its purchase of the 1987 Preferred Stock.
In October and November 1992, the Company repurchased approximately $6,900 principal amount of the A-R Cable Notes and in February 1993, the Company redeemed all of its remaining outstanding A-R Cable Notes in the aggregate principal amount of $28,793 (plus accrued interest of $522) in accordance with the terms of the Indenture with respect to the A-R Cable Notes. The funds for such redemptions were obtained from the proceeds of additional borrowings provided by GECC under the Company's secured revolving credit line.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany balances and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
The Company recognizes revenues as cable television services are provided to subscribers.
(104)
A-R CABLE SERVICES, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including construction materials, are recorded at cost, which includes all direct costs and certain indirect costs associated with the construction of cable television transmission and distribution systems, and the costs of new subscriber installations.
Property, plant and equipment are being depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized over the shorter of their useful lives or the term of the related leases.
DEFERRED FINANCING COSTS
Costs incurred to obtain debt are deferred and amortized on the straight-line basis over the life of the related debt.
SUBSCRIBER LISTS, FRANCHISES, AND EXCESS COSTS OVER FAIR VALUE OF NET ASSETS ACQUIRED
Subscriber lists are amortized on the straight-line basis over varying periods during which subscribers are expected to remain connected to the system (averaging approximately 8 years). Franchises are amortized on the straight-line basis over the average remaining term of the franchises (approximately 7 years). Excess costs over fair value of net assets acquired are being amortized over 20 years on the straight-line basis. The Company assesses the recoverability of such excess costs based upon undiscounted anticipated future cash flows of the businesses acquired.
INCOME TAXES
The Company is not a member of the CSC consolidated group for federal tax purposes and, accordingly, files a separate federal income tax return on behalf of itself and its consolidated subsidiaries.
Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires the liability method of accounting for deferred income taxes and permits the recognition of deferred tax assets, subject to an ongoing assessment of realizability. Prior years' financial statements have not been restated to reflect the provisions of SFAS 109.
(105)
A-R CABLE SERVICES, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
CASH FLOWS
For purposes of the consolidated statements of cash flows, the Company considers short-term investments with a maturity at date of purchase of three months or less to be cash equivalents. The Company paid cash interest expense of approximately $26,672, $25,030 and $43,008 during the years ended December 31, 1994, 1993 and 1992, respectively. The Company's noncash investing and financing activities included preferred stock dividend requirements of $34,985, $29,510 and $17,985 in 1994, 1993 and 1992, respectively.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following items which are depreciated over the estimated useful lives shown below:
NOTE 5. SENIOR TERM LOAN
The Company's outstanding borrowings under its senior term loan and revolving lines of credit (the "Senior Term Loan") with GECC amounted to $400,575 and $397,500 at December 31, 1994 and 1993, respectively. The facility consists of a $285,000 senior term loan, $95,000 in special funding advances and a $45,000 revolving line of credit. The Senior Term Loan and revolving line of credit are non-amortizing and mature on December 30, 1997. The special funding advances require amortization, amounting to $3,750 per quarter, commencing January 1, 1997. The balance is due on December 30, 1997. Aggregate undrawn funds available under the revolving line of credit at December 31, 1994 amounted to approximately $24,425 of which $191 was restricted for certain letters of credit issued on behalf of the Company.
(106)
A-R CABLE SERVICES, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
Interest rates on $400,575 of the Senior Term Loan are at floating rates based on either GECC's LIBOR (as defined in the agreement) or Index Rate plus applicable percentages, which vary depending upon certain prescribed financial ratios. The weighted average interest rate approximated 9.05% at December 31, 1994. In addition, the Company entered into an interest rate cap agreement with a bank on a notional amount of $155,000 which limits the interest rate the Company will pay on that amount to 7.25%. The cap agreement terminates in May 1995. The Company is exposed to credit loss in the event of nonperformance by the other party to the cap agreement. However, the Company does not anticipate nonperformance by the counterparty.
Substantially all of the assets of the Company have been pledged to secure the borrowings under the Senior Term Loan agreement.
The Senior Term Loan agreement contains various restrictive covenants, among which are the maintenance of certain financial ratios, limitations regarding certain transactions by the Company, prohibitions against the transfer of funds to the parent company (except for reimbursement of certain expenses) and limitations on levels of permitted capital expenditures. The Company was in compliance with all of the covenants of its Senior Term Loan agreement at December 31, 1994.
NOTE 6. PREFERRED STOCK
In January, 1988, the Company issued and GECC purchased 200,000 shares of the 1987 Preferred Stock for a purchase price of $100 per share. Dividends on or before January 4, 1993 were payable in additional shares of preferred stock at a rate of one share per $100. The 1987 Preferred Stock was mandatorily redeemable, at a redemption price of $100 per share. In connection with the purchase of the A-R Cable Notes, the Company purchased from an affiliate, (which in 1992 had purchased the 1987 Preferred Stock from GECC) for nominal consideration, and retired the 1987 Preferred Stock. The Company recognized a gain of $33,509 on its purchase of the 1987 Preferred Stock.
In connection with the consummation of the tender offer for the A-R Cable Notes, Warburg Pincus purchased a new Series A Preferred Stock of the Company for a cash investment of $105,000, and CSC purchased a new Series B Preferred Stock of the Company for a cash investment of $45,000. During 1994, Warburg Pincus purchased additional shares of the new Series A Preferred Stock for a cash investment of $998 and CSC purchased additional shares of the new Series B Preferred Stock for a cash investment of $427. The Series A Preferred Stock is entitled to a 19% annual dividend.
(107)
A-R CABLE SERVICES, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
The Series B Preferred Stock is entitled to a 12% annual dividend. Dividends on the Series A and Series B Preferred Stock are not payable until the repayment in full of all outstanding indebtedness to GECC (see Note 5).
NOTE 7. INCOME TAXES
The Company's tax returns for the years 1984 to 1989 have been examined by the Internal Revenue Service and certain issues related to the amortization of intangible assets are being appealed by the Company. Management believes that any settlement arising out of this examination will not have a material adverse effect on the financial position of the Company.
At December 31, 1994, the Company had a net operating loss carry forward of approximately $217,644, which expires in varying amounts from 2003 to 2009. Due to the 1992 transaction (Note 2), the Company underwent an ownership change within the meaning of Internal Revenue Code Section 382. This would limit the amount of net operating loss carry forward from the period prior to the transaction that could be utilized to offset any taxable income in periods subsequent to the transaction. There is a pro rata allocation in the year that the ownership change occurs. Therefore, of the $217,644 of net operating loss carry forwards for tax purposes, $201,588 is restricted and $16,056 is currently available.
Usage of the $201,588 net operating loss carry forward is limited to a fixed annual amount, calculated using the Federal long-term tax-exempt rate times the value of the Company prior to the ownership change. This amount is increased in any year in which the Company recognizes any built in gain from the sale of assets owned prior to the ownership change. Based on this formula, none of the $201,588 restricted net operating loss carry forwards would currently be available to the Company.
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A-R CABLE SERVICES, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
The tax effects of temporary differences which give rise to significant portions of deferred tax assets or liabilities and the corresponding valuation allowance at December 31, 1994 and 1993 are as follows:
The Company has provided a valuation allowance of $65,148 for deferred tax assets since realization of these assets was not assured due to the Company's history of operating losses. Also, in connection with the acquisition of the Company by CSC in January 1988, the Company recorded certain fair value adjustments net of their tax effects. In accordance with SFAS 109, these assets have been adjusted to their remaining pre tax amounts at January 1, 1993, the date the Company adopted SFAS 109. Amortization of these amounts in 1994 and 1993 resulted in the recognition of income tax benefits of $14,045 and $14,168, respectively.
NOTE 8. AFFILIATE TRANSACTIONS
The Company has an agreement with CSC whereby commencing January 1, 1993 the Company is managed by CSC in exchange for a management fee of 3-1/2% of gross receipts, as defined. Interest on unpaid amounts accumulates at a rate of 10% per annum.
Such management fees amounted to $3,738 and $3,801 in 1994 and 1993, respectively, and interest thereon amounted to $659 and $244 in 1994 and 1993, respectively.
The Company is also charged for cost reimbursement and an allocation of certain selling, general and administrative expenses by CSC. For the years ended December 31, 1994, 1993 and 1992 these cost reimbursements and expense allocations approximated $3,524, $3,373, and $2,719, respectively. In accordance with certain restrictive covenants
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A-R CABLE SERVICES, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
contained in its Senior Term Loan agreement, the Company may not pay in excess of specified amounts, subject to certain escalation provisions, of allocated corporate overhead expenses charged by CSC in any fiscal year. At December 31, 1994 and 1993, the total balance due CSC for management fees, interest, cost reimbursement and such allocated expenses amounted to $11,325 and $7,191, respectively.
CSC has interests in several companies engaged in providing cable television services and programming services to the cable television industry, including the Company. During 1994, 1993 and 1992, the Company was charged approximately $2,246, $2,787 and $2,690, respectively, by these companies for these services and the total amount due these companies as of December 31, 1994 and 1993 was $238 and $602, respectively.
NOTE 9. BENEFIT PLANS
Prior to 1993, the Company was a participant, with other affiliates, in a defined contribution pension plan covering substantially all of its employees. The Company contributed three percent of each eligible employee's annual compensation, as defined, and employees could voluntarily contribute up to ten percent of their annual compensation.
Effective January 1, 1993, the Board of Directors of CSC approved the adoption of an amended and restated Pension and 401(K) Savings Plan (the "Plan"), in part to permit employees of CSC and its affiliates to make contributions to the Plan on a pre-tax salary reduction basis in accordance with the provisions of Section 401(K) of the Internal Revenue Code, and to introduce new investment options under the Plan. The Company contributes 1-1/2% of eligible employees' annual compensation, as defined, to the defined contribution portion of the Plan (the "Pension Plan") and an equivalent amount to the section 401(K) portion of the Plan (the "Savings Plan"). Employees may voluntarily contribute up to 15% of eligible compensation, subject to certain restrictions, to the Savings Plan, with an additional matching contribution by the Company of 1/4 of 1% for each 1% contributed by the employee, up to a maximum contribution by the Company of 1/2 of 1%. Employee contributions are fully vested as are employer base contributions to the Savings Plan. Employer contributions to the Pension Plan and matching contributions to the Savings Plan become vested in years three through seven. Total expense related to these plans for the years ended December 31, 1994, 1993 and 1992 was approximately $334, $339 and $234, respectively.
The Company does not provide any postretirement benefits to its employees.
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A-R CABLE SERVICES, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
NOTE 10. OPERATING LEASES
The Company leases certain office, production, satellite transponder, and transmission facilities under terms of operating leases expiring at various dates. The leases generally provide for fixed annual rentals plus certain real estate taxes and other costs. Rent expense for the years ended December 31, 1994, 1993 and 1992 was approximately $1,240, $842 and $910, respectively.
In addition, the Company rents space on utility poles for its operations. The Company's pole rental agreements are for varying terms, and management anticipates renewals as they expire. Pole rental expense for the years ended December 31, 1994, 1993 and 1992 was approximately $1,745, $1,507 and $1,265, respectively.
The minimum future annual rentals for all operating leases, including pole rentals, from January 1, 1995 through December 31, 1999 at rates now in force are approximately: 1995, $2,621; 1996, $2,553; 1997, $2,128; 1998, $1,882; 1999, $1,757.
NOTE 11. RECENT CABLE TELEVISION REGULATIONS
In October, 1992, the Congress of the United States passed the Cable Television Consumer Protection and Competition Act of 1992 (Cable Act) which among other matters, provides for the regulation of basic and cable programming services. In April 1993, the Federal Communications Commission ("FCC") adopted regulations governing rates for basic and cable programming services which became effective September 1, 1993. Under the provisions of these regulations, certain revenues derived from cable television are determined under either a "benchmark" or "cost of service" method. Effective September 1, 1993 the Company's systems had set their rates using the benchmark method which compares the Company's rates to those which are in effect at cable systems deemed to face effective competition by the FCC.
In February 1994 and November 1994, the FCC significantly modified the September 1993 rate regulations. These modifications were designed to further reduce subscriber rates and most annual basic and cable programming service rate increases (other than per-event and per-channel services), as well as to provide cable television system operators financial incentive to introduce new programming services. Management has implemented the rules in a manner it believes to be consistent with the regulations promulgated by the FCC and, accordingly, does not expect such modifications to have a material adverse effect on the future operations of the Company.
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A-R CABLE SERVICES, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (continued)
NOTE 12. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH AND CASH EQUIVALENTS, TRADE ACCOUNTS RECEIVABLE, NOTES AND OTHER RECEIVABLES, ACCOUNTS PAYABLE, ACCRUED LIABILITIES, ACCOUNTS PAYABLE TO AFFILIATES AND DUE TO PARENT
The carrying amount approximates fair value because of the short maturity of these instruments.
SENIOR TERM LOAN
The fair values of the Company's long-term debt instruments are based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.
INTEREST RATE CAP AGREEMENT
The fair value of the interest rate cap agreement is obtained from dealer quotes. This value represents the estimated amount the Company would receive or pay to terminate agreements, taking into consideration current interest rates and the current credit worthiness of the counterparties.
The fair value of the Company's financial instruments are summarized as follows:
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 29th day of March, 1995.
Cablevision Systems Corporation
By:/s/ William J. Bell ----------------------- Name: William J. Bell Title: Vice Chairman
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Francis F. Randolph, Jr., Marc A. Lustgarten and Robert S. Lemle, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him in his name, place and stead, in any and all capacities, to sign this report, and file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons in the capacities and on the dates indicated.
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INDEX TO EXHIBITS
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