Item 1. "Business-Tracking Stock" for a description of the tracking stock distributed to Cablevision's stockholders on March 29, 2001 and the subsequent exchange of the Rainbow Media Group tracking stock for Cablevision NY Group common stock on August 20, 2002.
There is no public trading market for the Cablevision NY Group Class B common stock, par value $.01 per share. As of March 1, 2004, there were 29 holders of record of Cablevision NY Group Class B common stock.
All outstanding shares of common stock of CSC Holdings are held by Cablevision.
Dividends. Neither CSC Holdings nor Cablevision have paid any cash dividends on shares of Class A or Class B common stock. Cablevision does not anticipate paying any cash dividends on shares of Cablevision NY Group Class A or Class B common stock in the foreseeable future.
Cablevision and CSC Holdings may pay dividends on their capital stock only from surplus as determined under Delaware law. If dividends are paid on the Cablevision NY Group common stock, holders of the Cablevision NY Group Class A common stock and Cablevision NY Group Class B common stock are entitled to receive dividends, and other distributions in cash, stock or property, equally on a per share basis, except that stock dividends with respect to Cablevision NY Group Class A common stock may be paid only with shares of Cablevision NY Group Class A common stock and stock dividends with respect to Cablevision NY Group Class B common stock may be paid only with shares of Cablevision NY Group Class B common stock.
CSC Holdings paid $174.5 million of cash dividends on the Series H and M Preferred Stock in each of 2003 and 2002. In 2003, CSC Holdings paid $5.0 million of dividends on its 10% Series A Exchangeable Participating Preferred Stock in the form of additional shares of Preferred Stock. CSC Holdings is restricted from paying dividends on its preferred stock under the provisions of its senior credit agreement if a default has occurred and is continuing under such agreement. Additionally, CSC Holdings' senior credit agreement, senior debentures and 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 Cablevision's common stock unless all dividends due and payable in respect of the preferred stock of CSC Holdings have been paid or provided for. See Item 7.-"Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources."
Recent Sales and Use of Proceeds
In July 2003, CSC Holdings issued 258,056 shares of common stock, $0.01 par value, to Cablevision in satisfaction of $304.4 million in intercompany payables from CSC Holdings to Cablevision. This transaction was exempt under Section 4(2) of the Securities Act of 1933, as amended, as an issuance not involving a public offering.
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 Cablevision and CSC Holdings. Acquisitions made by these companies 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 Charles F. 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. CSC Holdings' operating, balance sheet and statistical data prior to April 5, 1999 has been restated to include the financial position, results of operations and statistical information of the systems acquired from Tele-Communications, Inc. from March 4, 1998, the date of acquisition by the Company. See Note 2 of the consolidated financial statements of Cablevision and CSC Holdings for a discussion regarding the restatements of our financial statements. The selected financial data
presented below should be read in conjunction with the consolidated financial statements of Cablevision and CSC Holdings and the notes thereto included in Item 8 of this Report.
See Notes on page 37.
Notes:
(a)See Note 2 to Consolidated Financial Statements for information on the restatement of the financial statements for this period.
(b)The Operating Data and Balance Sheet Data for 2000 have been derived from unaudited consolidated financial statements of Cablevision and CSC Holdings that have been restated to account for improperly recorded expenses as discussed in Note 2 to the Consolidated Financial Statements and certain other errors. The adjusting amounts include expenses recorded in 2000 that should have been recorded in later periods and the correction of certain errors relating primarily to a correction of an error made in recording minority interests and launch and marketing support payments that should have been recognized in different periods.
(c)The Operating Data and Balance Sheet Data for 1999 have been derived from unaudited consolidated financial statements of Cablevision and CSC Holdings that have been restated to reflect the correction of certain errors relating primarily to a correction of an error made in recording minority interests and launch and marketing support payments that should have been recognized in different periods. The investigation into improper expense recognition, described in Note 2 to Consolidated Financial Statements, identified $16.8 million of operating expenses that were improperly recognized in 1999 and should have been recognized in 2000 and later periods. As part of the restatement of our financial statements for 2000 and later periods, we recorded those expenses in the appropriate period. However, we did not restate the 1999 financial statements to remove those expenses because the investigation into the improper expense accruals did not extend to periods prior to 1999. We did not have sufficient data to appropriately adjust the 1999 results to include in that year expenses that may have been improperly accelerated in earlier periods.
(1)Average monthly revenue per basic subscriber is calculated by dividing the GAAP revenues attributable to monthly service charges for the last month in the period, excluding pay-per-view, video-on-demand, installation, advertising and home shopping revenues, by the average number of basic subscribers connected to the cable television system for that month.
(2)Homes released are homes in areas that can be serviced by our high-speed data service. Homes released do not include multiple dwelling units passed by the cable plant that are not connected to it. See Notes on page 37.
See Notes on page 37.
(1)Average monthly revenue per basic subscriber is calculated by dividing the GAAP revenues attributable to monthly service charges for the last month in the period, excluding pay-per-view, video-on-demand, installation, advertising and home shopping revenues, by the average number of basic subscribers connected to the cable television system for that month.
(2)Homes released are homes in areas that can be serviced by our high-speed data service. Homes released do not include multiple dwelling units passed by the cable plant that are not connected to it. See Notes on page 37.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Annual Report contains statements that constitute forward looking information within the meaning of the Private Securities Litigation Reform Act of 1995, including restructuring charges, availability under credit facilities, levels of capital expenditures, sources of funds and funding requirements, among others. Investors are cautioned that such forward looking statements are not guarantees of future performance or results and involve risks and uncertainties and that actual results or developments may differ materially from the forward looking statements as a result of various factors. Factors that may cause such differences to occur include but are not limited to:
•the level of our revenues;
•video subscriber demand and growth;
•demand for and growth of our digital cable service, which are impacted by competition from other services, such as DBS, and the other factors set forth below;
•the cost of programming and industry conditions;
•the regulatory environment in which we operate;
•developments in the government investigations relating to improper expense accruals;
•the outcome of litigation and other proceedings, including the matters described under "Legal Proceedings";
•general economic conditions in the areas in which we operate;
•demand for advertising time and space;
•our ability to obtain programming for our programming business and maintain and renew affiliation agreements for those businesses;
•the level of capital expenditures;
•the level of our expenses, including costs of our new services, such as expenses related to the introduction of our digital and the development of our Internet telephone services;
•pending and future acquisitions and dispositions of assets;
•market demand for new services;
•whether any pending uncompleted transactions, are completed on the terms and at the times set forth (if at all);
•competition from existing competitors and new competitors entering our franchise areas;
•other risks and uncertainties inherent in the cable television business, the programming and entertainment businesses and our other businesses;
•financial community and rating agency perceptions of our business, operations, financial condition and the industry in which we operate;
•the health and performance of our Rainbow 1 DBS satellite;
•the ability of Rainbow DBS to acquire and retain large numbers of subscribers to its VOOMSM service at a reasonable subscriber acquisition cost;
•our ability to obtain adequate financing at reasonable cost to cover the funding needs of our Rainbow DBS business;
•our ability to successfully and timely complete our planned spin off of an entity owning our Rainbow DBS business and three of Rainbow Media Holdings' national entertainment services; and
•the factors described in our filings with the Securities and Exchange Commission, including the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained therein.
We disclaim any obligation to update or revise the forward-looking statements contained herein, except as otherwise required by applicable federal securities laws.
CABLEVISION SYSTEMS CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of Operations
Summary
Our future performance is dependent, to a large extent, on general economic conditions including capital market characteristics, the effectiveness of direct competition, our ability to manage our businesses effectively, and our relative strength and leverage in the marketplace, both with suppliers and customers.
Telecommunications
In our Telecommunications segment we derive revenues principally through monthly payments by subscribers to our cable television systems. These monthly payments include charges for cable television, as well as, in many cases, equipment rental, pay-per-view charges, high-speed Internet access and charges for telephone service. Revenue increases are derived from increases in the number of subscribers to our cable television systems, increases in the number and changes in the type of programming and services sold to our existing subscribers, and price increases. We also derive revenues from the sale of advertising time available to cable television systems. Revenues from advertising vary based upon the number and demographics of our subscribers who view the programming carried on our cable television systems.
By far the most serious challenge we face in our provision of cable television services, which accounted for 50% of our revenues in 2003, comes from competition from the direct broadcast satellite business. There are two major providers of DBS service in the United States, each with significantly higher numbers of subscribers than we have. This size allows the DBS providers certain advantages, especially in the pricing they pay for programming. In addition, the cable television operators like the Company must pay local franchises up to 5% of our revenues as a fee for operating in the municipalities we serve. Direct broadcast satellite providers do not pay these fees. The combination of these two factors may lead to retail pricing advantages for the DBS providers. Recent subscriber decreases in the cable business, reversing the historical trend of consistent annual increases in penetration, most likely reflect these pricing advantages, as well as the fact that our penetration rate is now averaging approximately 73% in most areas, which limits our ability to add new subscribers. We intend to counter these advantages by "bundling" our service offerings with products that the DBS companies cannot efficiently provide at this time, such as high-speed Internet access and Internet protocol telephone service carried over the cable distribution plant, as well as by providing "on demand" services that are currently unavailable to a DBS subscriber.
Our high-speed Internet access business, which accounted for 10% of our revenues in 2003, faces competition from DSL providers. These providers have become increasingly aggressive in their pricing strategies in recent years, and customers may decide that a reduced price is more important to them than the superior speed that cable modems provide. Also, the telephone companies may find technological or other solutions to upgrade their service offering, providing additional competition for our service offering. In addition, with 36% of our basic subscribers now subscribing to our high-speed Internet service, opportunities to expand that base at the current pace may be limited. The recent gains in cable modem penetration may therefore not be indicative of the results we achieve in the future.
Our consumer Voice over Internet Protocol telephone offering, which is in its initial rollout stage, is competitive with incumbent offerings primarily on the basis of pricing, where unlimited continental long distance, regional and local calling, together with certain features for which the incumbent providers charge extra, are offered at one low price. To the extent the incumbents, who have financial resources that exceed those of the Company, decide to meet our pricing or reduce their pricing and features, strategies, future growth and success of this business may be impaired.
Lightpath, our commercial telephone and broadband business, operates in the most competitive business telecommunication market in the country and competes against the very largest telecommunication companies-both incumbent local exchange companies, other competitive local
exchange companies and long distance companies. To the extent that dominant market leaders decide to reduce their prices, future success of the Company may be impaired. Business communications has been shifting from a wired voice medium to a wireless, data medium. Should the pace of this shift accelerate dramatically, future growth of the Company may be impaired.
Rainbow
In our Rainbow segment, which accounted for 18% of our 2003 revenues, we earn revenues in two principal ways. First, we receive payments from operators of cable television systems and satellite services. These revenues are earned under multi-year affiliation agreements with those companies. The specific affiliate fees we earn vary from operator to operator and also vary among our networks. The second principal source of revenues in this segment is from advertising. Under our agreements with cable and satellite operators we have the right to sell a specific amount of advertising time on our programs. Our advertising revenues are more variable than affiliate fees. This is because most of our advertising is sold on a short-term basis, not under long-term contracts. Also our advertising revenues vary based upon the popularity of our programming which is tracked by rating services.
We seek to grow our revenues in the Rainbow segment by increasing the number of cable systems and satellite providers that carry our services and the number of subscribers to cable systems and satellite services that receive our programming. We refer to this as our "penetration." AMC, which is widely distributed, has less ability to increase its penetration than newer, less penetrated services. Cable operators and satellite providers are increasingly interested in obtaining financial payments in return for carrying new services. These payments take the form of marketing support or direct payments for carriage. We seek to increase our advertising revenues through intensified marketing but, ultimately, the level of our advertising revenues are directly related to the penetration of our services and the popularity (including within desirable demographic groups) of our services.
The principal goals for us in this segment are to increase the penetration of our national services and our advertising revenues. To do this we must continue to contract for and produce high-quality, attractive programming. Our greatest challenge arises from the increasing concentration of subscribers in the hands of a few cable television operators and satellite providers. This increased concentration increases the power of those operators and providers and could adversely affect our ability to increase the penetration of our services or even result in decreased penetration. In addition, this concentration gives those operators and providers greater leverage in negotiating the pricing and other terms of affiliation agreements. Moreover, as a result of this concentration the impact from a loss of any one of our major affiliate relationships becomes more severe.
In December 2003, Regional Programming Partners completed the acquisition of the 50% interests in Fox Sports Net Bay Area and Fox Sports Net Chicago that it did not already own in a transaction that was accounted for as a purchase. As a result, as of December 18, 2003, we have begun to consolidate the results of Fox Sports Net Bay Area and Fox Sports Net Chicago. The consolidation will increase the revenues and expenses in our Rainbow segment, although the amount of revenues that the Rainbow segment will receive from Fox Sports Net Chicago are likely to decline in later periods as a result of the loss of the professional sports team rights in the Chicago area.
Madison Square Garden
Madison Square Garden, which accounted for 18% of our 2003 revenues, consists of professional sports teams (principally the New York Knicks of the NBA and the New York Rangers of the NHL), the MSG Network sports programming business, and an entertainment business, which operates the Madison Square Garden arena, Radio City Music Hall, the Hartford Civic Center and Rentschler Field, faces competitive challenges unique to these activities. We derive revenues in this segment primarily from the sale of tickets, including luxury box rentals, to sporting and entertainment events and from rental rights fees paid to this segment by promoters that present events at Madison Square Garden and Radio City Music Hall. We also derive revenue from the sale of advertising at the entertainment venues, from food, beverage and merchandise sales at the venues and from the licensing of our
trademarks. MSG Network derives its revenues from affiliate fees paid by cable television and satellite providers, sales of advertising, and from rights fees paid to this segment by broadcasters (TV and radio) and programming services that telecast events of sports teams which are under contract with MSG Network. MSG Network carries Knicks and Ranger games, so that, like the rest of this segment, its performance is related to the performance of the teams. All of these revenues are ultimately dependent upon the quality of our sporting and entertainment events.
Our sports teams' financial success is dependent on their ability to generate advertising sales, paid attendance, luxury box rentals, and food and merchandise sales. To a large extent, the ability of the team to build excitement among fans and therefore produce higher revenue streams, depends on the teams' winning performance, which generates regular season and playoff attendance, and which supports increases in prices charged for tickets, luxury box rentals, and advertising placement. Each of the team's success is dependent on the Company's ability to acquire highly competitive players. Although players are most often highly compensated, future successful performance is not certain. The governing bodies of the National Basketball Association (NBA) and the National Hockey League (NHL) have the power and authority to take certain actions that they deem to be in the best interest of their respective sports, which may not necessarily be consistent with maximizing MSG's results of operations.
Our sports programming business' success is affected by our ability to secure desired programming of a variety of professional sports teams in addition to our proprietary programs. The success of the teams that are telecast by us will impact our revenues from distribution and from the rates charged for affiliation and advertising.
Our entertainment business is largely dependent on the continued success of our Radio City Christmas Spectacular and our touring Christmas shows, as well as availability of, and our venues' ability to attract, concerts, family shows and events.
Rainbow DBS
Rainbow DBS launched its VOOMSM service on October 15, 2003. It has not yet produced any revenues. As described under "Rainbow DBS" under "Item 1. Business," through February 29, 2004 this business had 1,627 activated customers. All of these accounts are part of a free preview service period which, in most cases, is scheduled to end on March 31, 2004. The principal challenge for this business is to attract a sufficient subscriber base to reach and exceed a break-even point and to do so with subscriber acquisition and other costs that are within its funding capabilities. There can be no assurance that it will be able to do so.
Critical Accounting Policies
In preparing its financial statements, the Company is required to make certain estimates, judgments and assumptions that it believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
Restructuring Charges:
In 2001, the Company recorded a charge to income representing the cost of restructuring its operations. The costs included in the charge principally consisted of employee termination costs, such as severance pay and outplacement services, and provisions for lease termination costs, including an estimate of costs incurred during a projected vacancy period, estimated brokerage commissions and tenant allowances.
In 2002, the Company announced a new operating plan and restructuring which included the closing of 26 retail electronics store locations, the elimination of certain staff positions, the reduction of capital expenditures and the disposition of its motion picture theater business. Additionally, in
connection with the new operating plan, the Company reached an agreement with its supplier of set top boxes which reduced the Company's purchase commitments for set top boxes from $378.5 million in 2002, $378.5 million in 2003, and $567.8 million in 2004 to a total remaining commitment of $87.5 million in 2002 and nothing thereafter and required the Company to make certain other cash payments aggregating $50.0 million plus interest on a portion of such amount with respect to, among other things, a license for certain software (valued at $17.5 million based on an independent appraisal). In connection with this plan, the Company recorded restructuring charges, which included employee termination costs, such as severance pay and outplacement services costs, and provisions for lease termination costs including an estimate of costs incurred during a projected vacancy period, estimated brokerage commissions and tenant allowances and other related costs and the cost associated with the reduction in required digital set top box commitments.
In 2003, the Company eliminated certain staff positions primarily at Madison Square Garden and in the Telecommunications segment and incurred severance costs aggregating approximately $6.1 million.
Costs related to employee terminations are estimated on an individual by individual basis, giving effect to the announced severance plan. Costs for lease terminations are projected in consultation with real estate professionals. Actual lease termination costs may differ from these estimates as a result of changes in market conditions. Because these costs are based on estimates and projections, they can prove to be inaccurate.
Changes in estimates, as the plan is implemented and additional facts are gathered, are reflected in current operations as adjustments to the restructuring charges, separately reported and identified.
Impairment of Long-Lived and Indefinite-Lived Assets:
The Company's long-lived assets at December 31, 2003 include excess costs over fair value of net assets acquired ("goodwill") of approximately $1.5 billion, approximately $1.5 billion of other intangible assets and approximately $4.6 billion of property, plant and equipment. Such assets accounted for approximately 68% of the Company's consolidated total assets.
On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, and was required to analyze its goodwill for impairment issues during the first six months of fiscal 2002, and then on a periodic basis thereafter. Statement 142 requires that goodwill impairment be determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination.
The impairment test for other intangible assets not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. For other long-lived assets, including intangibles that are amortized, the Company evaluates assets for recoverability when there is an indicator of potential impairment. If the undiscounted cash flows from a group of assets being evaluated is less than the carrying value of that group of assets, the fair value of the asset group is determined and the carrying value of the asset group is written down to fair value.
In assessing the recoverability of the Company's goodwill and other intangibles the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. If these estimates or material related assumptions change in the future, the Company may be required to record impairment charges for these assets not previously recorded. During the year ended December 31, 2001, the Company recorded an impairment loss of $99.9 million representing the balance of goodwill related to certain theaters of Clearview Cinemas. In 2002, the Company recorded an impairment loss of $43.2 million representing the write down of software and leasehold improvements relating to the Company's retail electronics business reported in discontinued operations.
In December 2003, the Company recorded an impairment loss of $17.9 million, included in technical and operating expense, representing the write-off of certain film and programming contracts of the Company's Rainbow segment.
Valuation of Deferred Tax Assets:
Deferred tax assets have resulted primarily from the Company's historical net operating losses. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will be realized. The Company's ability to realize its deferred tax assets depends upon the generation of sufficient future taxable income to allow for the utilization of its net operating loss carry forwards and deductible temporary differences. If such estimates and related assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets resulting in additional income tax expense in the Company's consolidated statement of operations. Management evaluates the realizability of the deferred tax assets and the need for additional valuation allowances quarterly. In 2001, the Company's income tax expense reflected a reduction in the valuation allowance related to its net deferred tax assets of $399.1 million. In 2002, the income tax benefit of the Company reflects an increase in the valuation allowance of $58.6 million. At the end of the second quarter of 2002, NBC exchanged part of its interest in Rainbow Media Holdings for shares of the Company's common stock. As a result of this exchange, Rainbow Media Holdings became a member of the consolidated federal income tax return of the Company. The exchange was accounted for under the purchase method of accounting. Accordingly, the valuation allowance was reduced to zero, resulting in a reduction to the recorded goodwill, without any income statement benefit. In 2003, the Company recorded a valuation allowance of $28.0 million relating to certain state net operating loss carry forwards.
Plant and Equipment:
Costs incurred in the construction of the Company's cable television system, including line extensions to, and rebuild of, the Company's hybrid fiber-coaxial infrastructure and costs incurred in the construction of the Company's head end facilities are capitalized. These costs consist of materials, sub-contractor labor, direct consulting fees, and internal labor and related costs associated with the construction activities. The internal costs that are capitalized consist of salaries and benefits of Company employees and the portion of facility costs, including rent, taxes, insurance and utilities, that supports the construction activities. Infrastructure costs are depreciated over the 12-year estimated life of the plant, and head end facilities are depreciated over the estimated life of the specific component, ranging from 4 years for certain electronics to 15 years for tower sites. Costs of operating the plant and the technical facilities, including repairs and maintenance and call completion fees, are expensed as incurred.
In addition, the costs of connecting businesses or residences that have never before been connected to the service offering are capitalized. These costs include material, subcontractor and internal labor and related costs as discussed above. In addition, on-site and remote technical assistance
during the provisioning process for new digital product offerings are capitalized. The departmental activities supporting the connection process are tracked through specific metrics, and the portion of departmental costs that is capitalized is determined through a time weighted activity allocation of costs incurred based on time studies used to estimate the average time spent on each activity. New connections are amortized over 5 years or 12 years for residence wiring and feeder cable to the home, respectively. The portion of departmental costs related to reconnection, programming service up- and down- grade, repair and maintenance, and disconnection activities are expensed as incurred.
Certain of these capitalized costs are based on estimates of activity levels and other historical statistics. These estimates are evaluated at least semi-annually, and any changes that result, which may be significant, are reflected in the results of operations in the period in which the evaluations are performed.
Certain Transactions
The following transactions occurred during the periods covered by this Management's Discussion and Analysis of Financial Condition and Results of Operations.
2003 Transactions. In March 2003, the Company transferred the stock of its wholly-owned subsidiary, Cablevision Electronics Investments, Inc. to GBO Electronics Acquisition, LLC.
In May 2003, Northcoast Communications, an unconsolidated subsidiary of CSC Holdings, completed its sale of PCS licenses to Verizon Wireless for approximately $763.0 million in cash. Of the proceeds, approximately $51.0 million was used by Northcoast Communications to retire debt. The remaining proceeds, after payment of expenses, were distributed to the partners of Northcoast Communications, including the Company.
In July 2003, the Company repurchased MGM's 20% interest in each of AMC, The Independent Film Channel and WE: Women's Entertainment.
In December 2003, Regional Programming Partners acquired Fox Sports Networks' 50% interest in each of Fox Sports Net Chicago and Fox Sports Net Bay Area pursuant to Fox Sports Networks' exercise of its contractual put right.
2002 Transactions. In December 2002, the Company completed the sale of Rainbow Media Holdings' interest in the Bravo programming service to NBC in exchange for NBC's minority interest in Rainbow Media Holdings, Cablevision common stock held by NBC and General Electric common stock.
In March 2002, Rainbow Media Holdings acquired Loral Space and Communications' 50% interest in Rainbow DBS (formerly R/L DBS Company LLC), increasing Rainbow Media Holdings' ownership of Rainbow DBS to 100%.
2001 Transactions. In April 2001, MGM acquired a 20% interest in certain national programming businesses of Rainbow Media Holdings.
In January 2001, CSC Holdings completed the sale of its cable systems in Boston and eastern Massachusetts to AT&T in exchange for AT&T's cable television systems in certain northern New York suburbs and for AT&T common stock and cash.
Results of Operations-Cablevision Systems Corporation
The following table sets forth on a historical basis certain items related to operations as a percentage of net revenues for the periods indicated. See Note 2 of the consolidated financial statements for a discussion regarding the restatement of the 2002 and 2001 financial statements.
STATEMENT OF OPERATIONS DATA
Comparison of Year Ended December 31, 2003 Versus Year Ended December 31, 2002
Revenues, net for the year ended December 31, 2003 increased $375.3 million (10%) as compared to revenues for the prior year. The net increase is attributable to the following:
*Amounts exclude the effects of the decrease in bad debt expense related to Adelphia Communications. Technical and operating expenses include primarily:
•cable programming costs which are costs paid to programmers, net of amortization of any launch support received, for cable content and are generally paid on a per-subscriber basis,
•network management and field service costs which represent costs associated with the maintenance of our broadband network, including costs of certain customer connections,
•contractual rights payments to broadcast certain live sporting events and contractual payments pursuant to employment agreements with professional sports teams personnel,
•programming and production costs of our Rainbow businesses, and
•interconnection, call completion and circuit fees relating to our telephony business.
Technical and operating expenses for 2003 increased $202.7 million (12%) compared to 2002. The net increase is attributable to the following:
As a percentage of revenues, technical and operating expenses increased 1% during 2003 as compared to 2002
Selling, general and administrative expenses include primarily sales, marketing and advertising expenses, administrative costs, costs of facilities and costs of customer call centers. Selling, general and
administrative expenses increased $217.3 million (23%) for 2003 as compared to 2002. The net increase is attributable to the following:
As a percentage of revenues, selling, general and administrative expenses increased 3% in 2003 compared to 2002. Excluding the effects of the stock plan, as a percentage of revenues such costs increased 1% during 2003 as compared to 2002.
Other operating income of $9.0 million for the year ended December 31, 2003 resulted from the sale of trade accounts receivable from Adelphia Communications for which a reserve had previously been recorded.
Restructuring charges amounted to $10.7 million in 2003 and $74.1 million in 2002. The 2003 amount is comprised of $4.6 million in facility realignment costs relating to the 2001 restructuring, and $6.1 million of new provisions associated with the elimination of positions, including severance, outplacement costs and other related costs relating to the 2003 restructuring. The 2002 amount is comprised of a $1.1 million increase relating to the 2001 restructuring and $73.0 million of new provisions relating to the 2002 restructuring. Such charges include expenses associated with the elimination of positions, including severance, outplacement costs and other related costs, and facility realignment. The 2002 restructuring also includes the $32.5 million portion of a settlement with a vendor attributed to a reduction in required digital set top box commitments.
Depreciation and amortization expense increased $187.0 million (21%) for 2003 as compared to 2002. The increases resulted primarily from depreciation of new subscriber devices, headend upgrades and new plant assets, the write-off of certain fixed assets, costs of disposal of certain fixed assets and amortization of acquired intangibles.
Net interest expense increased $119.1 million (25%) during 2003 compared to 2002. Approximately $87.3 million of the increase for the year ended December 31, 2003 resulted from the classification of dividends on CSC Holdings' Series H and Series M Redeemable Preferred Stock as interest expense in connection with the implementation of Statement of Financial Accounting Standards No. 150 as of July 1, 2003 and the inclusion of such dividends for the six months ended December 31, 2003 in interest expense. The remaining increase of $31.8 million was primarily attributable to higher overall average debt balances, partly offset by lower average interest rates (weighted average of 6.3% in 2003 as compared to 6.6% in 2002) and lower interest income ($12.5 million in 2003 as compared to $22.4 million in 2002.)
Equity in net income of affiliates amounted to $429.7 million in 2003 compared to equity in net loss of affiliates of $42.4 million in 2002. Such amounts consist of the Company's share of the net income or loss of certain businesses in which the Company has varying minority ownership interests. The
amount for the year ended December 31, 2003 includes $434.6 million representing our equity in the net income of Northcoast Communications, LLC, which resulted primarily from the gain related to Northcoast Communications' sale of its personal communication service licenses to Verizon Wireless.
Loss on sale of cable assets of $13.6 million for the year ended December 31, 2003 resulted from the contemplated settlement of working capital adjustments associated with the Company's sale of cable systems to AT&T in 2001.
Gain (loss) on investments, net for the years ended December 31, 2003 and 2002 consists of the following:
The effects of these gains and losses are largely offset by the losses and gains on related derivative contracts described below.
Write-off of deferred financing costs of $0.4 million in 2003 and $6.9 million in 2002 consist principally of costs written off in connection with amendments to, or termination of, the Company's credit agreements and the redemption of the Company's senior subordinated notes.
Gain (loss) on derivative contracts, net for the years ended December 31, 2003 and 2002 consists of the following:
Loss on extinguishment of debt amounted to $17.2 million in 2002. The 2002 loss resulted from the settlement of the Company's collateralized indebtedness relating to the monetization of its shares of Adelphia Communications common stock under prepaid forward contracts.
Minority interests represent other parties' shares of the net income (losses) of entities which are not entirely owned by us but which are consolidated in our financial statements. For the years ended December 31, 2003 and 2002 minority interests consists of the following:
*Beginning July 1, 2003, these dividend requirements are recorded as interest expense. Net miscellaneous income of $3.6 million for 2003 resulted primarily from dividends received on certain of the Company's investment securities. The 2002 expense of $5.7 million includes various miscellaneous expenses, partially offset by dividends on certain of the Company's investment securities.
Income tax expense attributable to continuing operations of $20.4 million in 2003 resulted primarily from the pretax loss, offset by an increase in the valuation allowance (see Note 11 to the Consolidated Financial Statements) of $28.0 million, non-deductible preferred stock dividends, a non-deductible adjustment related to the exchange right and put option related to the Series A Preferred Stock of CSC Holdings, state taxes, and an adjustment to the deferred tax rate. The income tax benefit of $74.4 million in 2002 resulted from a pretax loss, partially offset by an increase in the valuation allowance of $58.6 million, non-deductible preferred stock dividends and state taxes.
Income (loss) from discontinued operations, net of taxes for the years ended December 31, 2003 and 2002 reflects the following items associated with assets held for sale:
Business Segments Results-Cablevision Systems Corporation
The Company classifies its business interests into three segments:
•Telecommunications Services, consisting principally of its cable television, telephone and high-speed data services operations;
•Rainbow, consisting principally of interests in national and regional cable television programming networks; and
•Madison Square Garden, which owns and operates professional sports teams, regional cable television networks, live productions and entertainment venues.
The Company allocates certain costs to each segment based upon their proportionate estimated usage of services. The financial information for the segments does not include inter-segment eliminations.
Telecommunications Services
The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to revenue for the Company's telecommunications services segment. See Note 2 of the consolidated financial statements for a discussion regarding the restatement of the 2002 and 2001 financial statements.
Revenues for the year ended December 31, 2003 increased $295.8 million (12%) as compared to revenues for the prior year. The net increase is attributable to the following:
Technical and operating expenses for 2003 increased $106.2 million (11%) compared to 2002. The net increase is attributable to the following:
As a percentage of revenues, technical and operating expenses decreased 1% during 2003 as compared to 2002.
Selling, general and administrative expenses increased $141.4 million (28%) for 2003 as compared to 2002. The net increase is attributable to the following:
As a percentage of revenues, selling, general and administrative expenses increased 3% for 2003 as compared to 2002. Excluding the effects of the stock plan, as a percentage of revenues such costs increased 1% during 2003 as compared to 2002.
Restructuring charges amounted to $2.9 million in 2003 and $47.4 million in 2002. The 2003 amount is comprised of $3.4 million of new provisions associated with the elimination of positions, including severance, outplacement costs and other related costs relating to the 2003 and 2002 restructurings, partially offset by a credit of $0.5 million in facility realignment costs relating to the 2001 restructuring.
The 2002 amount is comprised of a $2.2 million increase relating to the 2001 restructuring and $45.2 million of new provisions relating to the 2002 restructuring. Such charges include expenses associated with the elimination of positions, including severance, outplacement costs and other related costs, and facility realignment and for the 2002 restructuring includes the $32.5 million portion of a settlement with a vendor attributed to a reduction in required digital set top box commitments.
Depreciation and amortization expense increased $165.1 million (27%) for 2003 as compared to 2002. The net increases resulted primarily from depreciation of new subscriber devices, headend upgrades and new plant assets, the write-off of certain fixed assets and costs of disposal of certain fixed assets.
Rainbow
The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to revenues for the Company's Rainbow segment. See Note 2 of
the consolidated financial statements for a discussion regarding the restatement of the 2002 and 2001 financial statements.
Revenues for the year ended December 31, 2003 increased $111.6 million (17%) as compared to revenues for the prior year. Approximately $45.0 million of the increase was attributed to growth in programming network subscribers and rate increases, approximately $51.3 million of the increase was due primarily to higher advertising revenue and a $15.3 million positive variance resulting from a decrease in bad debt expense recognized in 2002 in connection with the bankruptcy of Adelphia Communications.
Technical and operating expenses for the year ended December 31, 2003 increased $24.4 million (8%) compared to 2002. An increase of $17.9 million resulted from the write-down of certain film and programming contracts. The remaining net increase resulted from higher programming and production costs directly associated with the net increases in revenue discussed above. As a percentage of revenues, such costs decreased 3% during 2003 as compared to 2002.
Selling, general and administrative expenses increased $45.2 million (18%) for 2003 compared to 2002. The net increase was comprised of an increase of $22.2 million in charges related to an employee stock plan, $14.7 million resulting from higher sales, marketing, advertising and other general and administrative cost increases and a $12.4 million increase resulting from costs associated with the investigation, partially offset by a decrease of $4.1 million in charges related to a long-term incentive plan. As a percentage of revenues, selling, general and administrative expenses remained constant in 2003 as compared to 2002. Excluding the effects of the stock plan, such expenses decreased 3% as a percentage of revenue during 2003 as compared to 2002.
Other operating income of $8.5 million for the year ended December 31, 2003 resulted from the sale of trade accounts receivable from Adelphia Communications for which a reserve had previously been recorded.
Restructuring credits of $4.5 million in 2002 is comprised of a reduction of $6.1 million in a facility lease obligation as a result of the Bravo transaction and a $1.6 million charge relating to the 2002 restructuring plan. Such charges include expenses associated with the elimination of positions, including severance, outplacement costs and other related costs, and facility realignment.
Depreciation and amortization expense increased $31.8 million (45%) for the year ended December 31, 2003 when compared to 2002. An increase of approximately $28.9 million resulted from amortization of acquired intangibles and approximately $2.9 million resulted from depreciation of new fixed assets.
Madison Square Garden
The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to revenue for Madison Square Garden. See Note 2 of the consolidated financial statements for a discussion regarding the restatement of the 2002 and 2001 financial statements.
Revenues, net for the year ended December 31, 2003 declined $17.7 million (2%), as compared to revenues for the prior year. This net decrease is attributable to the following:
Technical and operating expenses for the year ended December 31, 2003 increased $37.1 million (7%) as compared to the prior year. These expenses were unfavorably impacted by an increase of $15.6 million due to adjustments made to luxury tax accruals payable to the National Basketball Association ("NBA"). In 2002, MSG recorded a credit reflecting the reversal of provisions recorded in prior periods for luxury tax expense as the NBA announced that there would be no luxury tax assessment for the 2001/2002 season. In 2003, MSG recorded a credit reflecting the reversal of a luxury tax provision attributable to a certain player who was previously waived due to a career ending injury. The remaining net increase is attributable to an increase in costs associated with events held outside the Company's venues of $9.8 million, higher provisions for luxury tax relating to the Knicks active roster of $9.4 million, higher team compensation of $8.8 million, an increase in costs associated with
the award show which took place in the Arena at Madison Square Garden in 2003 of $5.3 million. These increases were partially offset by $11.8 million primarily due to the absence of the costs for the corporate event discussed above and fewer events at MSG and Radio City Music Hall, as well as lower provisions for certain player transactions, including luxury tax associated with season or career ending Knicks player injuries.
Selling, general and administrative expenses for the year ended December 31, 2003 increased $2.6 million (2%) as compared to the prior year primarily due to a $12.2 million increase in charges related to an employee stock plan and a $7.7 million provision recorded for severance in 2003. These increases were substantially offset by a decrease in Madison Square Garden's proportionate share of expense related to Cablevision's long-term incentive plan, lower provisions for bonuses and sales commissions, as well as other cost savings across Madison Square Garden, aggregating $17.3 million.
Other operating income of $0.5 million in 2003 resulted from the sale of trade accounts receivable from Adelphia Communications for which a reserve had been previously recorded.
Restructuring charges of $3.7 million in 2003 primarily represent severance costs associated with the elimination of certain staff positions. Restructuring charges of $0.5 million in 2002 represent an additional charge recorded as a result of the final cost determination for benefits associated with the elimination of certain staff positions in 2001.
Depreciation and amortization expense for the year ended December 31, 2003 decreased $7.9 million (13%) as compared to the prior year due primarily to lower amortization expense resulting from certain intangible assets becoming fully amortized.
Comparison of Year Ended December 31, 2002 Versus Year Ended December 31, 2001.
Revenues, net for the year ended December 31, 2002 increased $206.8 million (6%) as compared to revenues for the prior year. The net increase is attributable to the following:
*Amounts exclude the effects of the increase in bad debt expense related to Adelphia Communications. Technical and operating expenses for 2002 increased $22.0 million (1%) compared to 2001. The increase is attributable to the following:
As a percentage of revenues, technical and operating expenses decreased 1% during 2002 as compared to 2001.
Selling, general and administrative expenses decreased $7.6 million (1%) for 2002 as compared to 2001. The net decrease for 2002 was comprised of approximately $30.1 million due to reductions in management bonuses and a decrease of $18.0 million primarily in lower marketing costs. These decreases were partially offset by a $19.9 million net increase primarily from higher customer service costs, a $17.2 million increase related to a long term incentive plan, and a $3.4 million increase in expenses related to the Company's employee stock plan. As a percentage of revenues, selling, general and administrative expenses decreased 2% in 2002 compared to 2001.
Restructuring charges amounted to $74.1 million in 2002 and $42.7 million in 2001. The 2002 amount is comprised of a $1.1 million increase relating to the 2001 restructuring and $73.0 million of new provisions relating to the 2002 restructuring. Such charges include expenses associated with the elimination of positions, including severance, outplacement costs and other related costs, and facility realignment, and the 2002 restructuring also includes the $32.5 million portion of a settlement with a vendor attributed to a reduction in required digital set top box commitments.
Depreciation and amortization expense decreased $241.8 million (22%) for 2002 as compared to 2001. The decrease was comprised of a decrease of approximately $277.7 million resulting from the Company's adoption of Statement 142 as of January 1, 2002 where certain intangible assets are no longer amortized and a $99.9 million decrease due to the write-off, in 2001, of excess costs over the fair value of net assets acquired related to Clearview Cinemas. Partially offsetting these decreases was a net increase of approximately $135.8 million due primarily to depreciation of new plant assets and amortization of acquired intangibles and higher losses on disposal of fixed assets.
Net interest expense decreased $33.8 million (7%) during 2002 compared to 2001. The net decrease was primarily attributable to lower interest rates (weighted average of 6.6% in 2002 as compared to 7.8% in 2001) and an increase in interest income ($22.4 million in 2002 as compared to $17.5 million in 2001), partly offset by higher overall average debt balances.
Equity in net loss of affiliates decreased to $42.4 million in 2002 from $68.2 million in 2001. Such amounts consist of the Company's share of the net income or loss of certain businesses in which the Company has varying minority ownership interests. The decrease was primarily due to the consolidation of Rainbow DBS in March 2002 and decreased losses of Northcoast Communications.
Gain on sale of cable assets and programming interests, net for the year ended December 31, 2001 consists primarily of a gain of $1,441.7 million recognized on the disposition of the Company's cable television systems in Massachusetts and a gain of $745.1 million from the sale of a 20% minority interest in certain of the Company's programming businesses, partly offset by a $12.1 million adjustment to the gain on the disposition of the Company's cable television systems in Ohio.
Impairment charges on At Home investment of $108.5 million for the year ended December 31, 2001 reflects an other-than-temporary decline in the fair value of the Company's At Home warrants which reduced the carrying value to zero at December 31, 2001.
Gain (loss) on investments, net for the years ended December 31, 2002 and 2001 consists of the following:
The effects of these gains and losses are largely offset by the losses and gains on related derivative contracts described below.
Write-off of deferred financing costs of $6.9 million in 2002 and $18.8 million in 2001 consist principally of costs written off in connection with amendments to, or termination of, the Company's credit agreements and the redemption of the Company's senior subordinated notes.
Gain on derivative contracts, net for the years ended December 31, 2002 and 2001 consists of the following:
Loss on extinguishment of debt amounted to $17.2 million in 2002 and $15.3 million in 2001. The 2002 loss resulted from the settlement of the Company's collateralized indebtedness relating to the monetization of its shares of Adelphia Communications common stock under prepaid forward contracts. The 2001 loss consists principally of the premium paid to redeem the Company's $300 million face value 91/4% senior subordinated notes due 2005 and its $150 million face value 97/8% senior subordinated notes due 2006.
Gain on termination of At Home agreement of $25.2 million in 2001 consists primarily of the recognition of the remaining unamortized deferred revenue at December 31, 2001 relating to warrants previously received from At Home.
Minority interests represent other parties' shares of the net income (losses) of entities which are not entirely owned by us but which are consolidated in our financial statements. For the years ended December 31, 2002 and 2001 minority interests consists of the following:
Net miscellaneous expense decreased to $5.7 million for 2002 compared to $8.9 million for 2001. The decrease was due primarily to a decrease in certain taxes.
Income tax benefit attributable to continuing operations of $74.4 million in 2002 resulted primarily from the pretax loss, partially offset by an increase in the valuation allowance of $58.6 million. Income tax expense attributable to continuing operations of $225.6 million in 2001 resulted primarily from the pretax income, including the gains on the sale of the Company's cable television systems in
Massachusetts and of a 20% interest in certain of the national programming businesses of Rainbow Media Holdings, partially offset by a decrease in the valuation allowance of $399.1 million.
Income (loss) from discontinued operations, net of taxes for the years ended December 31, 2002 and 2001 reflects the following items associated with assets held for sale:
Business Segments Results-Cablevision Systems Corporation
Telecommunications Services
The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to revenue for the Company's telecommunications services segment. See Note 2 of the consolidated financial statements for a discussion regarding the restatement of the 2002 and 2001 financial statements.
Revenues for the year ended December 31, 2002 increased $144.0 million (6%) as compared to revenues for the prior year. The net increase is attributable to the following:
Technical and operating expenses for 2002 increased $72.1 million (8%) compared to 2001. The net increase is attributable to the following:
As a percentage of revenues, technical and operating expenses increased 1% during 2002 as compared to 2001.
Selling, general and administrative expenses decreased $10.7 million (2%) for 2002 as compared to 2001. The net decrease for 2002 was comprised of a reduction in management bonuses of $17.2 million and a decrease of $0.7 million attributable to lower expenses relating to an employee stock plan. Partially offsetting these decreases was an increase of approximately $6.2 million attributable to higher expenses relating to a long-term incentive plan and a net increase of $1.0 million primarily attributable to increased administrative, sales and marketing and customer service costs. As a percentage of revenues, selling, general and administrative expenses decreased 2% in 2002 as compared to 2001. Excluding the effects of the stock plan, as a percentage of revenues such costs also decreased 2% in 2002 as compared to 2001.
Restructuring charges amounted to $47.4 million in 2002 and $7.9 million in 2001. The 2002 amount is comprised of a $2.2 million increase relating to the 2001 restructuring and $45.2 million of new provisions relating to the 2002 restructuring. Such charges include expenses associated with the elimination of positions, including severance, outplacement costs and other related costs, and facility realignment and for the 2002 restructuring includes the $32.5 million portion of a settlement with a vendor attributed to a reduction in required digital set top box commitments.
Depreciation and amortization expense decreased $97.5 million (14%) for 2002 as compared to 2001. A decrease of approximately $234.9 million resulted from the Company's adoption of Statement 142 as of January 1, 2002 where certain intangible assets are no longer amortized. Partially offsetting this decrease were net increases of approximately $137.4 million due primarily to depreciation of new plant assets and higher costs of disposal of certain fixed assets.
Rainbow
The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to revenues for the Company's Rainbow segment. See Note 2 of the consolidated financial statements for a discussion regarding the restatement of the 2002 and 2001 financial statements.
Revenues for the year ended December 31, 2002 increased $98.4 million (18%) as compared to revenues for the prior year. Approximately $83.0 million of the increase was attributed to growth in programming network subscribers and rate increases and approximately $30.7 million of the increase was due primarily to higher advertising revenue. These increases were partially offset by a decrease of $15.3 million resulting from bad debt expense recognized in connection with the bankruptcy of Adelphia Communications.
Technical and operating expenses for the year ended December 31, 2002 increased $23.5 million (8%) compared to 2001. These increased costs resulted from higher contractual rights and programming costs. As a percentage of revenues, such costs decreased 5% during 2002 as compared to 2001.
Selling, general and administrative expenses increased $22.5 million (10%) for 2002 compared to 2001. The net increase was comprised of an increase of $12.2 million resulting from higher sales, marketing, advertising and other general cost increases, an increase of $5.2 million in charges related to an employee stock plan and an increase of $5.1 million in charges related to a long-term incentive plan. As a percentage of revenues, selling, general and administrative expenses decreased 3% in 2002 compared to 2001. Excluding the effects of the stock plan, such expenses decreased 4% as a percentage of revenue during 2002 as compared to 2001.
Restructuring credit amounted to $4.5 million in 2002 as compared to a restructuring charge of $11.7 million in 2001. The 2002 credit is comprised of a reduction of $6.1 million in a facility lease obligation as a result of the Bravo transaction and a $1.6 million charge relating to the 2002 restructuring plan. Such charges include expenses associated with the elimination of positions, including severance, outplacement costs and other related costs, and facility realignment. The 2001 restructuring charges represent the expenses associated with facility realignment.
Depreciation and amortization expense increased $15.3 million (28%) for the year ended December 31, 2002 when compared to 2001. An increase of approximately $21.1 million resulted from depreciation of new fixed assets and amortization of acquired intangibles. Partially offsetting these increases was a net decrease of $5.8 million, which resulted from the Company's adoption of Statement 142 as of January 1, 2002 where certain intangible assets are no longer amortized.
Madison Square Garden
The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to revenue for Madison Square Garden. See Note 2 of the consolidated financial statements for a discussion regarding the restatement of the 2002 and 2001 financial statements.
Revenues, net for the year ended December 31, 2002 declined $52.2 million (6%) as compared to revenues for the prior year. The net decrease is attributable to the following:
Technical and operating expenses for the year ended December 31, 2002 decreased $82.1 million (13%) as compared to 2001. This decline is primarily attributable to lower operating costs at MSG Networks of $57.4 million, mostly due to the absence of the costs to telecast the New York Yankee games, and lower provisions for certain player transactions of $41.1 million (which includes the anticipated luxury tax associated with Knicks players who had season or career ending injuries). In addition, luxury tax declined by $26.7 million, primarily due to adjustments made to luxury tax accruals payable to the National Basketball Association (NBA). In 2002, a credit was recorded reflecting the reversal of provisions recorded in prior periods as the NBA announced that there would be no luxury tax assessment for the 2001/2002 season following the audit of all NBA clubs.
These declines were partially offset by the absence of a $30.0 million credit recorded in 2001 as a result of the settlement of certain litigation with the Yankees, LP. Other items partially offsetting the declines were higher team compensation of $4.3 million, a net increase in costs associated with certain revenue items discussed above of $3.2 million, higher theatrical development costs of $1.4 million and other net cost increases aggregating $4.2 million.
Selling, general and administrative expenses for the year ended December 31, 2002 decreased $1.7 million (1%) as compared to the 2001 level. This decrease is due primarily to the absence of a provision of $8.8 million recorded in 2001 for severance, a decline in legal fees associated with the Yankees, LP litigation of $3.0 million, as well as an increase in Madison Square Garden's proportionate share of a credit related to Cablevision's stock plan of $1.3 million. These items were partially offset by an increase in Madison Square Garden's proportionate share of the expense related to Cablevision's long-term incentive plan of $3.4 million, higher professional, marketing and business development fees of $3.5 million, as well as other net cost increases of $4.5 million.
Restructuring charges of $2.8 million in 2001 represent the expenses associated with the elimination of positions, including severance and outplacement costs. The charges of $0.5 million in 2002 represent employee severance payments made in excess of accrued balances.
Depreciation and amortization expense for the year ended December 31, 2002 decreased $36.1 million (37%) as compared to 2001 due primarily to lower amortization expense relating to the implementation of Statement 142.
Operating Activities
Net cash provided by operating activities amounted to $453.9 million for the year ended December 31, 2003 compared to $405.9 million for the year ended December 31, 2002. The 2003 cash provided by operating activities resulted from $451.5 million of income before depreciation and amortization and non-cash items and a net increase in cash resulting from changes in assets and liabilities of $2.4 million.
Net cash provided by operating activities amounted to $405.9 million for the year ended December 31, 2002 compared to net cash used in operating activities of $217.1 million for the year ended December 31, 2001. The 2002 cash provided by operating activities resulted primarily from $568.1 million of income before depreciation and amortization and non-cash items, partially offset by a net decrease in cash resulting from changes in assets and liabilities of $162.5 million.
Net cash used in operating activities amounted to $217.1 million for the year ended December 31, 2001. The 2001 cash used in operating activities resulted primarily from a net decrease in cash resulting from changes in assets and liabilities of $325.6 million, partially offset by $108.5 million of income before depreciation and amortization and non-cash items.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2003 was $618.0 million compared to $1,339.5 million for the year ended December 31, 2002. The 2003 investing activities consisted of $888.4 million of capital expenditures and $179.7 million of payments for acquisitions, partially offset by net cash distributions from equity investees of $443.4 million and other net cash proceeds of $6.7 million.
Net cash used in investing activities for the year ended December 31, 2002 was $1,339.5 million compared to $295.1 million for the year ended December 31, 2001. The 2002 investing activities consisted of $1,320.7 million of capital expenditures and other net cash payments of $18.8 million.
Net cash used in investing activities for the year ended December 31, 2001 was $295.1 million and consisted of $1,349.1 million of capital expenditures and other net cash payments of $64.2 million, partially offset by net proceeds from the sale of cable assets and programming interests of $1,118.2 million.
Financing Activities
Net cash provided by financing activities amounted to $398.1 million for the year ended December 31, 2003 compared to $983.6 million for the year ended December 31, 2002. In 2003, the Company's financing activities consisted primarily of proceeds from collateralized indebtedness of $330.7 million, net bank debt proceeds of $271.3 million and proceeds from the issuance of preferred stock of $75.0 million, partially offset by repayment of a note to MGM of $250.0 million and other net cash payments of $28.9 million.
Net cash provided by financing activities amounted to $983.6 million for the year ended December 31, 2002 compared to $651.4 million for the year ended December 31, 2001. In 2002, the Company's financing activities consisted primarily of $1,079.1 million of net bank debt proceeds, partially offset by other net cash payments of $95.5 million.
Net cash provided by financing activities amounted to $651.4 million for the year ended December 31, 2001. In 2001, the Company's financing activities consisted primarily of $1,549.4 million of proceeds from collateralized indebtedness, $996.8 million from the issuance of senior notes and $239.3 million of proceeds from prepaid interest rate derivative contracts, partially offset by net bank debt repayments of $1,609.8 million, payments for the redemption of senior subordinated notes of $466.7 million and other net cash payments of $57.6 million.
Discontinued Operations
The net effect of discontinued operations on cash was $33.0 million, $32.1 million and $69.1 million for the years ended December 31, 2003, 2002 and 2001, respectively.
CSC HOLDINGS, INC.
The operations of CSC Holdings are identical to the operations of Cablevision, except for interest income of $3.8 million and related income tax expense of $1.6 million for the year ended December 31, 2003 included in CSC Holdings' consolidated statement of operations which is eliminated in Cablevision's consolidated statement of operations. In addition, prior to the implementation of Statement 150 on July 1, 2003, dividends attributable to the Series H and Series M Redeemable Exchangeable Preferred Stock of CSC Holdings were reported in minority interests in the consolidated financial statements of Cablevision. Dividends attributable to the Series A Exchangeable Participating Preferred Stock of CSC Holdings have been reported in minority interests in the consolidated financial statements of Cablevision. Refer to Cablevision's Management's Discussion and Analysis of Financial Condition and Results of Operations above.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Cablevision has no operations independent of its subsidiaries, no borrowings and no public securities outstanding other than our Cablevision NY Group Class A and Cablevision NY Group Class B common stock. Funding for our subsidiaries is generally obtained through separate financial arrangements made available to the Restricted Group (as later defined) and to our Rainbow and Madison Square Garden business segments.
The Restricted Group, which includes CSC Holdings and its subsidiaries which conduct our cable television and high-speed Internet access operations, as well as our commercial telephone and modem operations throughout the New York metropolitan area, is our principal borrower. We have historically raised funds through the issuance of public securities, including senior and subordinated debt and preferred stock issuances of CSC Holdings, as well as through borrowings under a bank credit facility. During 2003, the Restricted Group funded the requirements of the Telecommunications Services segment, Rainbow DBS, and certain other general corporate requirements. Effective January 1, 2004, we reorganized the funding of certain of our businesses in light of the announcement of our intention to spin off Rainbow DBS, three of Rainbow's national programming networks and certain other businesses (see "Recent Events" below). As a result, in 2004, the Restricted Group is expected to fund (i) requirements of the Telecommunications Services segment, (ii) requirements, if any, of certain Rainbow Media Holdings' programming businesses that are expected to remain with Cablevision upon completion of the spin off (primarily our fuse subsidiary, our regional news operations, and the Regional Programming Partners subsidiaries), and (iii) certain other general corporate requirements. The Restricted Group is also expected to fund certain Rainbow DBS expenditures planned for, but not funded, during 2003. The Restricted Group may also from time to time, make other investments as permitted under its credit facility.
Rainbow Media Holdings, which comprises the Company's programming operations, is currently funded through cash from operations and borrowings under an $823 million credit facility made available to Rainbow Media Holdings. Madison Square Garden's funding requirements are primarily provided through cash from operations and were provided as well by borrowings under a $500 million credit facility. In March 2004, borrowings under the MSG credit facility were repaid in full and the credit facility was terminated with proceeds from an intercompany loan from Regional Programming Partners.
The following table summarizes our outstanding debt, present value of capital leases, redeemable preferred stock and exchangeable preferred stock as well as interest expense and capital expenditures as of and for the year ended December 31, 2003:
Total amounts payable by the Company and its subsidiaries in connection with its outstanding obligations during the five years subsequent to December 31, 2003 and thereafter, including capital leases and the value deliverable at maturity under monetization contracts, are as follows:
Recent Events
Purchase of Fox Sports Networks' 50% Interest in Fox Sports Chicago and Fox Sports Bay Area
In December 2003, Regional Programming Partners purchased the 50% interests in Fox Sports Net Chicago and Fox Sports Net Bay Area that had been held by Fox Sports Networks pursuant to the exercise of Fox Sports Networks' put right. Consideration for the purchase, which totaled $110 million for the 50% interest in Fox Sports Bay Area and $40 million for the 50% interest in Fox Sports Chicago, was paid by the issuance of $110 million and $40 million promissory notes to Fox Sports Networks. The notes were issued by subsidiaries of Regional Programming Partners and secured solely by Regional Programming Partners' 100% interest in Fox Sports Net Bay Area. Both of the notes bear interest at the prime rate plus 1% and mature in December 2006. The results of operations of Fox Sports Bay Area and Fox Sports Chicago have been consolidated with our results of operations as of the acquisition date and the full amount of both promissory notes are reflected on our consolidated balance sheet.
Planned Spin off of Satellite Service and Three Rainbow Media National Entertainment Services
In October 2003, we announced that our board of directors had approved an amended plan to spin off our recently launched satellite service, Rainbow DBS, along with three of Rainbow Media Holdings' national entertainment services-AMC, The Independent Film Channel and WE: Women's Entertainment, their subsidiaries, and certain other Rainbow businesses. Completion of the spin off is subject to a number of conditions, including the refinancing of the existing Rainbow Media Holdings credit facility (which is expected to provide funding for the DBS business as well as refinance all then-existing Rainbow Media Holdings indebtedness), receipt of a tax ruling from the Internal Revenue Service ("IRS"), and the filing and effectiveness of a Form 10 with the Securities and Exchange Commission. We have received a tax ruling from the IRS and expect to file the Form 10 in the second quarter of 2004. We expect to complete the spin off after the Form 10 is declared effective. In anticipation of the spin off, on December 31, 2003, we distributed $100 million in cash on hand from AMC and The Independent Film Channel to CSC Holdings, and beginning January 1, 2004, we reorganized the funding of certain businesses to reflect the proposed spin off structure.
Quadrangle Exercise of Put Option
In October 2003, Quadrangle Capital Partners LP exercised its right to require CSC Holdings to purchase all of its Series A Exchangeable Participating Preferred Stock. Terms of the agreement provide for the delivery of cash or registered equity securities of Cablevision in settlement of the put right. We are currently in discussions with Quadrangle as to the process for determining the put price, which is expected to exceed $115 million, and following that determination will determine the form and timing of the payment of the put price.
Repurchase of MGM's 20% Interest in Rainbow Media National Services
In July 2003, we repurchased MGM's 20% interest in each of AMC, The Independent Film Channel and WE: Women's Entertainment for an aggregate purchase price of $500 million, comprised of $250 million in cash paid at closing and a $250 million promissory note issued by Cablevision Systems Corporation that matured in December 2003 and was repaid with proceeds from a new term loan at Rainbow Media Holdings. The purchase was initially effected by certain unrestricted subsidiaries of CSC Holdings with advances from AMC and Rainbow Media Holdings from cash and available bank borrowings; however, in December 2003, the 20% interests were contributed by the CSC Holdings subsidiaries to Rainbow Media Holdings in connection with the closing of the new term loan and repayment of the promissory note (see "Rainbow Media Holdings" section for a discussion of the new term loan and related activity).
Northcoast Communications
In May 2003, Northcoast Communications completed its sale of PCS licenses to Verizon Wireless for approximately $763.0 million in cash. Of the proceeds, approximately $51.0 million was used by Northcoast Communications to retire debt. The remaining proceeds, after payment of expenses, were distributed to the partners of Northcoast Communications, including the Company, which owns a 49.9% interest in Northcoast Communications. The Company's share of the proceeds was approximately $651.0 million, of which $30.0 million is being held in an escrow fund to provide for any post-closing adjustments and any potential indemnification claims. All of the funds the Company received were used to repay bank debt under the Restricted Group credit facility.
Monetization of General Electric Common Stock
In January 2003, Rainbow Media Holdings monetized the value of the General Electric common stock received in connection with the sale of the Bravo programming service through the execution of
prepaid forward contracts, collateralized by an equivalent amount of the underlying General Electric stock. These contracts set a floor and cap on the Company's participation in the changes in the underlying stock price and at maturity are expected to offset declines in the fair value of the General Electric stock below the hedge price per share, while allowing us to retain upside appreciation from the hedge price per share to the cap price. At maturity, the contracts provide for the option to deliver cash or shares of General Electric stock, with a value determined by reference to the stock price at maturity. Cash proceeds of $314 million received in the transactions were distributed to CSC Holdings and were utilized to repay outstanding borrowings under the Restricted Group's credit facility. These contracts are obligations of certain unrestricted subsidiaries of Rainbow Media Holdings; however, CSC Holdings provided a guarantee of the subsidiaries' ongoing interest expense obligations and any early termination obligations. The amount of the guarantees is capped at $36.1 million in the aggregate.
Monetization of Leapfrog Common Stock
In April 2003, we monetized 800,000 shares of Leapfrog common stock, acquired through an investment in convertible preferred stock of Leapfrog made in March 2001, through a prepaid forward contract, collateralized by an equivalent amount of the underlying stock. The contract sets a floor and cap on our participation in the changes in the underlying stock price and at maturity is expected to offset declines in the fair value of Leapfrog stock below the hedge price per share, while allowing us to retain upside appreciation from the hedge price per share to the cap price. At maturity, the contract provides for the option to deliver cash or shares of Leapfrog stock, with a value determined by reference to the stock price at maturity. Cash proceeds, net of prepaid interest, of $16.7 million were utilized to repay outstanding borrowings under the Restricted Group's credit facility. The monetization contract is an obligation of an unrestricted subsidiary of CSC Holdings.
Restricted Group
As of December 31, 2003, our Restricted Group consisted of: CSC Holdings and all of its subsidiaries holding our cable and digital cable operations, which encompassed approximately 2.9 million and 0.9 million subscribers, respectively; our consumer high-speed Internet access operations, which encompassed approximately 1.1 million subscribers; and the commercial telephone and high-speed Internet access operations of Lightpath throughout the New York metropolitan area.
The Restricted Group's primary sources of liquidity have been cash flow from operations, its bank credit facility and its access to the capital markets as evidenced by CSC Holdings' outstanding senior and senior subordinated debt and preferred stock issuances and proceeds from asset sales. In addition, during 2003, the Restricted Group received cash distributions of $550.0 million from Rainbow Media Holdings ($250.0 million of which was used to repay the $250.0 million promissory note issued to MGM) comprised of $50.0 million received in March, $100.0 million received in December in connection with the spin off plan, $150.0 million of which was distributed temporarily from proceeds of the new Rainbow Media Holdings term loan in December and is expected to be contributed to Rainbow DBS during 2004 to fund a portion of its cash requirements.
Currently, the Restricted Group has a $2.4 billion revolving credit facility in place with a group of banks. Borrowings under the facility are guaranteed by certain of the Restricted Group subsidiaries. The facility matures on June 30, 2006, requires no interim commitment reductions, and permits maximum leverage of 6.75 times cash flow (as defined in the credit agreement) through March 31, 2004 and 6.25 times cash flow through March 31, 2005. The leverage ratio (as defined) was 5.8 times as of December 31, 2003. As of March 1, 2004, the Restricted Group had outstanding borrowings under its credit facility of $1,565.0 million and outstanding letters of credit of $50.9 million, resulting in undrawn revolver commitments of $784.1 million. The revolver contains several financial covenants, including debt to cash flow, cash flow to interest expense, and cash flow to debt service expense (all as defined in the credit agreement), as well as restrictions on the permitted use of borrowed funds, that may limit
our ability to utilize all of the undrawn funds available thereunder. The Restricted Group has also issued senior public and senior subordinated public indentures, which also contain financial and other covenants, though they are generally less restrictive than the covenants contained in the Restricted Group's credit facility. There are no covenants, events of default, borrowing conditions or other terms in the Restricted Group's credit facility or in any of CSC Holdings' other debt or preferred stock securities that are based on downgrades to our credit ratings by any rating agency.
The Restricted Group's capital requirements associated with the roll-out of its new services such as digital video and Voice Over Internet Protocol, as well as the start-up losses associated with the new Voice Over Internet Protocol product, and certain other corporate expenses, create a net funding requirement. In addition, the Restricted Group is expected to fund the balance of the 2003 approved, unspent investment of $262 million in Rainbow DBS in 2004, totaling approximately $87 million. We currently expect that the net funding and investment requirements of the Restricted Group, including the investment in Rainbow DBS, as well as an estimated amount for the Series A Exchangeable Participating Preferred Stock redemption, to the extent we elect to settle in cash, will be met with borrowings under the Restricted Group's existing bank credit facility and that the Restricted Group's available borrowing capacity under that facility will be sufficient to meet these requirements for the next twelve months. Any significant additional investments of the Restricted Group may require additional funding.
Cablevision's and CSC Holdings' future access to the public debt markets and the cost of any future debt issuances are also influenced by its credit ratings, which are provided by Moody's Investors Service and Standard & Poor's. In July 2003, Moody's placed CSC Holdings' credit ratings on negative outlook and Standard & Poor's placed CSC Holdings' credit ratings on credit watch with negative implications. In October 2003, both agencies reaffirmed the ratings and the outlooks for CSC Holdings. Any downgrade to the CSC Holdings credit ratings by either rating agency could increase the interest rate on future debt issuances and could adversely impact its ability to raise additional funds.
Rainbow Media Holdings
Financing for Rainbow Media Holdings has historically been provided by a combination of cash flow from operations, bank credit facilities, intercompany borrowings, sales of interests in programming entities, and, from time to time, by equity contributions from partners.
In December 2003, we combined the $299.7 million Rainbow Media Holdings and the $74.9 million AMC/The Independent Film Channel/WE credit facilities into one facility at Rainbow Media Holdings and refinanced and increased the term loan component of the credit facility by $450 million. $250 million of the proceeds of the new facility were distributed to Cablevision and used to repay the outstanding promissory note issued to MGM as consideration for the 20% interest in AMC, The Independent Film Channel, and WE acquired in July 2003. Upon receipt of the distribution, the 20% interests in such channels held outside of Rainbow Media Holdings were contributed to Rainbow Media Holdings. $150 million of the proceeds were temporarily distributed to CSC Holdings; however, the full balance is expected to be contributed to Rainbow DBS during 2004 to cover its funding requirements. The balance of the loan proceeds were used to reduce outstanding bank debt under Rainbow Media Holdings' revolver.
The amended Rainbow Media Holdings credit facility is an $823 million credit facility consisting of a $200 million revolving credit facility and a $623 million term loan maturing March 31, 2008 and March 31, 2009, respectively. The facility is secured primarily by the assets of and guaranteed by AMC, the Independent Film Channel, and WE. Rainbow Media Holdings' 100% interest in the stock of these entities is also pledged as collateral. The term loan requires quarterly amortization beginning December 31, 2003 through 2008 and revolver commitment reductions begin in June 2005. Principal covenants include maximum senior leverage of 4.50 times cash flow (as defined, based on the combined
cash flows of AMC, The Independent Film Channel and WE) through June 30, 2004, reducing to 4.25 times cash flow through September 30, 2004 and 4.00 times cash flow through March 31, 2005 and maximum total leverage of 5.50 times cash flow through September 30, 2004, reducing to 5.25 times thereafter through March 31, 2005. As of December 31, 2003, the senior and total leverage ratios were 4.1 times cash flow. As of March 1, 2004, Rainbow Media Holdings had outstanding borrowings under its credit facility of $732.5 million and outstanding letters of credit of $3.2 million, resulting in undrawn commitments of $87.3 million. Rainbow Media Holdings' credit facility contains several financial covenants, including debt to cash flow, cash flow to interest expense, and cash flow to debt service expense (all as defined in the credit agreement), as well as restrictions on the permitted use of borrowed funds, that may limit our ability to utilize all of the undrawn funds available thereunder. The facility also limits the amount of investment in Rainbow DBS, CSC Holdings and Cablevision. There are no covenants, events of default, borrowing conditions or other terms based upon downgrades to our credit ratings by any rating agency in Rainbow Media Holdings' credit facility.
On November 11, 2003, the Company announced it would restate its previously reported financial statements for the first and second quarters of 2003 and that as a result of such restatement it would seek a waiver of any potential default or event of default under its Rainbow Media Holdings and previously existing AMC/The Independent Film Channel/WE credit facilities. That waiver was obtained from bank lenders in November 2003.
Currently the AMC, The Independent Film Channel and WE partnerships generate net free cash flow; however, certain developmental activities undertaken by Rainbow Media Holdings, such as the Mag Rack service and other video on demand programming and content services being developed, require funding. Such funding may be obtained through cash generated from other Rainbow Media Holdings operations or through borrowings under the Rainbow Media Holdings credit facility. We believe we have sufficient availability from cash from operations and committed credit facilities to fund Rainbow Media Holdings' cash requirements for the next twelve months. In addition, as discussed under "Recent Events," as of January 1, 2004, we reorganized the funding of certain businesses in anticipation of our announced spin off plan and, as a result, Rainbow Media Holdings is also expected to fund a portion of the requirements of Rainbow DBS (see "Rainbow DBS" discussion below).
Rainbow Media Holdings' future access to the debt markets and the cost of any future debt issuances are also influenced by its credit ratings, which are provided by Moody's Investors Service and Standard & Poor's. In December 2003, Moody's eliminated the credit watch for potential downgrade status for the Rainbow Media Holdings bank credit facility that it had initiated in October 2003; however, both Moody's and Standard & Poor's maintain a negative outlook on the rating. Any downgrade to the Rainbow Media Holdings credit ratings by either rating agency could increase Rainbow Media Holdings' interest rate on future debt issuances and could adversely impact its ability to raise additional funds.
Madison Square Garden
Madison Square Garden's primary source of liquidity has been cash flow from operations and its $500 million revolving credit facility. This facility was due to mature on December 31, 2004. In March 2004, borrowings under the MSG credit facility were repaid in full and the credit facility was terminated with proceeds from a $146 million intercompany loan from Regional Programming Partners.
Madision Square Garden's funding requirements for the next twelve months will be met by its cash on hand and internally generated funds, intercompany loans from Regional Programming Partners, and/or new bank borrowings or loans from the partners of Regional Programming Partners.
Rainbow DBS
Rainbow DBS business is a start-up venture with significant cash requirements and it has limited access to funding, given its early stage of operations. Funding needs for Rainbow DBS operations in 2004, which include capital investment (except as noted below with respect to MVDDS), start-up losses, and funds required to develop its proprietary VOOMsm HD programming channels, are expected to total $399 million. Of this amount, $237 million is being provided by Cablevision as an equity investment on or prior to the date of the spin off. In addition, Rainbow Media Holdings has the ability to borrow up to $100 million under its credit agreement (subject to covenant compliance and availability) and use proceeds of those borrowings to make equity investments in Rainbow DBS. We believe that these investments will be sufficient to fund the cash requirements of Rainbow DBS through the date of the spin off, assuming that it occurs on or prior to the end of the third quarter of 2004.
Rainbow Media Holdings has an $823 million credit facility (with $87.3 million of undrawn commitments as of March 1, 2004). Of that amount, up to $100 million may be drawn to fund the investments referred to above. All of the borrowings under the Rainbow Media Holdings credit facility will be required to be repaid prior to the date of the spin off. We expect the funds necessary for that repayment to come from new debt issued by AMC, IFC and WE. All of the then outstanding borrowings under the Rainbow Media Holdings credit agreement referred to above would be required to be repaid from the new borrowings. We anticipate that the remaining proceeds of the financings could, subject to certain limitations and financial covenants, be used by the borrowers to make investments in Rainbow DBS. The ability of AMC, IFC and WE to invest in Rainbow DBS will be primarily subject to (i) compliance with a total debt to cash flow covenant, based on the cash flow of AMC, IFC and WE, and (ii) annual and cumulative investment basket limitations on the amounts available for distribution and investment. The need to finance the development of the Rainbow DBS business will limit the funding available to support the Rainbow Media national services businesses included in the spin off.
There can be no assurances as to the ability of the Company, Rainbow Media Holdings, AMC, IFC or WE to secure any of this new financing. If sufficient financing cannot be raised prior to the spin off, the spin off will not occur.
The funding described above, if available to the full extent we currently expect, would provide funding to cover the anticipated cash requirements of Rainbow DBS for the next twelve months.
Rainbow DBS also has not identified a source of funding for the construction and launch of the five Ka-band satellites for which Rainbow DBS has FCC authorization. Nor has Rainbow DBS identified financing sources to replace funds used for the acquisition of the MVDDS licenses, though Rainbow DBS might seek such funding from the Restricted Group or other sources. Additionally, Rainbow DBS has not identified financing sources for the build-out of the infrastructure to exploit the MVDDS licenses.
Commitments and Contingencies
Commitments and contingent obligations not reflected on the Company's consolidated balance sheet as of December 31, 2003 are summarized in the following table:
(1)Approximately $30,128 and $1,048 of operating lease commitments for the Restricted Group and other entities, respectively, have been accrued at December 31, 2003 in connection with the 2001 and 2002 restructuring plans.
(2)Represents primarily professional sports teams' broadcast rights payments and sports teams' personnel contracts of MSG. Approximately $60,084 of commitments relating to certain sports teams' and broadcast personnel have been accrued at December 31, 2003. Restricted Group
The Restricted Group's outstanding guarantees of $32.6 million consist primarily of guarantees by CSC Holdings in favor of certain financial institutions in respect of ongoing interest expense obligations and potential early termination events in connection with the monetization, by certain of its subsidiaries that are not included in the Restricted Group, of the Company's holdings of Charter Communications, General Electric, and Adelphia Communications common stock. Amounts payable under such monetization guarantees are estimated as of a particular point in time by the financial institution counterparty and are based upon the current price of the underlying common stock and various other assumptions, including stock market volatility and prevailing interest rates. Such guaranteed amounts approximate the fair value of the monetization indebtedness less the sum of the fair values of the underlying stock and the equity collar as reflected in the Company's accompanying balance sheet.
The Restricted Group's letters of credit outstanding consist primarily of letters of credit obtained by CSC Holdings in favor of insurance providers and certain governmental authorities for the Telecommunications Services segment.
Contractual commitments attributable to the Restricted Group in the table above represent primarily minimum purchase requirements incurred in the normal course of its operations. The Restricted Group's minimum operating lease payments represent primarily future payment commitments resulting from the Company's non-cancelable leases of certain office space and, through 2006, rental space on utility poles, used in its distribution of services.
Other Entities
The dollar amounts reflected under the heading "Contractual Commitments" for our subsidiaries that are not included in the Restricted Group consist primarily of the following: (i) long-term rights agreements which provide Madison Square Garden with exclusive broadcast rights to certain live sporting events in exchange for minimum contractual payments, and (ii) commitments under employment agreements with professional sports teams personnel and players of Madison Square Garden, which provide for payments that are guaranteed regardless of employee injury or termination (certain of these payments are covered by disability insurance if certain conditions are met).
In addition to the above amounts, Madison Square Garden may also be obligated to pay the National Basketball Association ("NBA") a luxury tax each year pursuant to the NBA/NBPA Collective Bargaining Agreement (the "Agreement"), which is in effect through June 30, 2005. The ultimate calculation of any amount due would be based on a formula established by the Agreement. If the luxury tax is in effect for a given season, to the extent the Knicks' salary (as defined) exceeds the luxury tax "trigger," a tax will be due to the NBA. The Company anticipates that a luxury tax will be payable in mid-2004 to the NBA for the 2003/2004 season and the Company has made the appropriate provision for the luxury tax for the year ended December 31, 2003.
Operating lease commitments represent primarily future minimum payment obligations on various long-term, noncancelable leases for office and storage space and lease commitments of Radio City Music Hall and Clearview Cinemas.
Obligations Under Derivative Contracts
To manage interest rate risk, we have entered into interest rate swap contracts to adjust the proportion of total debt that is subject to variable and fixed interest rates. Such contracts fix the borrowing rates on floating rate debt to provide an economic hedge against the risk of rising rates and/or convert fixed rate borrowings to variable rates to provide an economic hedge against the risk of higher borrowing costs in a declining interest rate environment. We do not enter into interest rate swap contracts for speculative or trading purposes and have only entered into transactions with counterparties that are rated investment grade. All of our interest rate derivative contracts are entered into by CSC Holdings and are thus attributable to the Restricted Group; all such contracts are carried at their current fair market values on our consolidated balance sheet, with changes in value reflected in the consolidated statement of operations.
As of December 31, 2003, the notional value of all such contracts was $600 million and the fair value of these derivative contracts was $0.3 million, a net liability position. For the year ended December 31, 2003, we recorded a net loss on interest swap contracts of $6.5 million, as detailed in the table below:
We have also entered into derivative contracts to hedge our equity price risk and monetize the value of our shares of AT&T, Comcast, AT&T Wireless, Charter Communications, General Electric, Adelphia Communications and Leapfrog common stock. These contracts, at maturity, are expected to offset declines in the fair value of these securities below the hedge price per share, while allowing us to retain upside appreciation from the hedge price per share to the relevant cap price. In the event of an
early termination of any of these contracts, we would be obligated to repay the fair value of the collateralized indebtedness less the sum of the fair values of the underlying stock and equity collar, calculated at the termination date. The following table details our estimated early termination exposure as of December 31, 2003:
*Excludes Leapfrog monetization contract which is not expected to generate a shortfall due to the prepayment of interest. The underlying stock and the equity collars are carried at fair market value on our consolidated balance sheet and the collateralized indebtedness is carried at its accreted value. At maturity, the contracts provide for the option to deliver cash or shares of General Electric, Charter Communications, Adelphia Communications, AT&T Wireless or Leapfrog stock (as the case may be), with a value determined by reference to the applicable stock price at maturity. The terms of certain of the AT&T and Comcast transactions require cash settlement in an amount determined by reference to the AT&T and Comcast stock price at maturity. We currently intend to generate the cash settlement amount through proceeds from the equity collar and/or a sale of the underlying common shares at maturity.
See "Item 7A Quantitative and Qualitative Disclosures About Market Risk" for information on how we participate in changes in the market price of the stocks underlying these derivative contracts.
All of our monetization transactions are obligations of our wholly-owned subsidiaries that are not part of the Restricted Group; however, in the General Electric, Adelphia Communications and Charter Communications transactions, CSC Holdings provided guarantees of the subsidiaries' ongoing interest expense obligations and potential payments that could be due as a result of an early termination event (as defined in the agreements). The guarantee exposure approximates the net sum of the fair value of the collateralized indebtedness less the sum of the fair values of the underlying stock and the equity collar. All of our equity derivative contracts are carried at their current fair market value on our consolidated balance sheet with changes in value reflected in the consolidated statement of operations, and all of the counterparties to such transactions currently carry investment grade credit ratings. As of December 31, 2003, the fair value of our equity derivative contracts was $524.9 million, a net receivable position. For the year ended December 31, 2003, we recorded a net unrealized loss on all outstanding equity derivative contracts of $180.1 million attributable to changes in market conditions during the period, primarily driven by higher stock prices of the underlying securities. We also recorded an
unrealized gain on our holdings of the underlying stocks of $231.8 million for the year ended December 31, 2003, as shown in the following table:
In 2001, in connection with the AT&T and AT&T Wireless monetization contracts, CSC Holdings entered into prepaid interest rate swaps with a notional contract value of $1,115.0 million. These contracts require CSC Holdings to pay floating rates of interest in exchange for receipt of fixed rate payments, the net present value of which was paid to CSC Holdings at the inception of the transaction in a total cash amount of $239.3 million. These swaps have maturities in 2005 and 2006 that coincide with the related prepaid equity forward maturities. Certain contracts provide for early termination of the prepaid interest rate swap in the event of an early termination of the related prepaid equity forward.
All of our prepaid interest rate swaps are carried at their current fair market values on our consolidated balance sheet with changes in value reflected in the consolidated statement of operations, and all of the counterparties to such transactions currently carry investment grade credit ratings. As of December 31, 2003, the fair value of our prepaid interest rate derivative contracts was $65.8 million, a net liability position. For the year ended December 31, 2003, we recorded a net gain on such derivative contracts of $16.9 million as detailed below:
In connection with the issuance of the Series A Exchangeable Participating Preferred Stock of CSC Holdings, we entered into an agreement with Quadrangle Capital Partners LP which grants Quadrangle the right to require us to purchase the preferred stock beginning in the third quarter of 2003 ("put option") for cash or through the issuance of our registered equity securities at our option. The exchange right and the put option have been accounted for as a derivative. Accordingly, the fair value of the exchange right and the put option has been reflected as a liability under derivative contracts in the accompanying consolidated balance sheet. The change in the fair value of $38.6 million for the year ended December 31, 2003 has been included in loss on derivative contracts in the accompanying consolidated statement of operations.
Related Party Transactions
We hold a 49.9% voting interest and certain preferential distribution rights in Northcoast Communications. Northcoast Communications is controlled by John Dolan, a nephew of Charles F. Dolan and a cousin of James L. Dolan, the Company's Chairman and Chief Executive Officer,
respectively. The operations of Northcoast Communications were not consolidated with those of the Company at December 31, 2003.
In May 2003, Northcoast Communications completed its sale of PCS licenses to Verizon Wireless for approximately $763.0 million in cash. Of the proceeds, approximately $51.0 million was used by Northcoast Communications to retire debt. The remaining proceeds, after payment of expenses, were distributed to the partners of Northcoast Communications, including the Company. Our share of the proceeds was approximately $651.0 million, of which $30.0 million is being held in an escrow fund to provide for any post-closing adjustments and any potential indemnification claims. All of the funds we received were used to repay bank debt under our Restricted Group credit facility.
Northcoast Communications has the right to replace the escrow account with a letter of credit in the same amount. As a result of an agreement with Northcoast PCS, LLC (the other member in Northcoast Communications, an entity wholly-owned by John Dolan), payment of indemnification claims, if any, under the Northcoast Communications/Verizon agreement for which Northcoast Communications is responsible will be made by us.
Vendor financing for Northcoast Communications' Cleveland operation consists of a $75 million credit facility at Cleveland PCS, LLC. This facility has no recourse to us or to Northcoast Communications, other than pursuant to a pledge by Northcoast Communications of the stock of Cleveland PCS and a guarantee of the payment by Northcoast Communications and Cablevision of the FCC indebtedness of the Cleveland PCS subsidiary which holds the Cleveland license which, as of December 31, 2003, had an outstanding balance of $2.2 million. As of December 31, 2003, Cleveland PCS was in default of the terms of this credit facility and had received notice of commitment termination and acceleration from the lender.
Fox Sports Net Ohio and Cleveland Indians Baseball Club Limited Partnership (the "Indians") are parties to a multi-year rights agreement under which Fox Sports Net Ohio pays license fees to the Indians in exchange for telecast rights to substantially all regular season Indians games. The Indians are owned by (i) Lawrence Dolan, a brother of Charles F. Dolan, the Company's Chairman, (ii) a trust, the beneficiaries of which are Lawrence Dolan and certain descendants of Lawrence Dolan, and (iii) certain other trusts, the beneficiaries of which are certain descendants of Charles F. Dolan, including James L. Dolan, the Company's Chief Executive Officer, and Thomas C. Dolan and Patrick F. Dolan, officers of the Company and brothers of James L. Dolan. Management control of the Indians is held by Lawrence Dolan.
Recently Issued Accounting Standards
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46, as revised in December 2003, addresses consolidation by business enterprises of variable interest entities, which are entities that either (a) do not have equity investors with voting rights or (b) have equity investors that do not provide sufficient financial resources for the entity to support its activities. For all variable interest entities created prior to February 1, 2003, the Company will be required to apply the provisions of FIN 46 by March 31, 2004. For variable interest entities created subsequent to January 31, 2003, FIN 46 was effective in 2003. The adoption of FIN 46 had no impact on the Company's financial condition or results of operations for entities created after January 31, 2003. The Company is still evaluating the impact of adopting FIN 46 for entities created prior to February 1, 2003. It is reasonably possible that the Company will be required to consolidate its investment in Northcoast Communications, LLC. See Note 14 of Consolidated Financial Statements for a detailed description of this investment.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risks from changes in certain equity security prices and interest rates. Our exposure to changes in equity security prices stems primarily from the Comcast, AT&T,
Charter Communications, AT&T Wireless, General Electric, Leapfrog Enterprises and Adelphia Communications common stock held by us. We have entered into prepaid forward contracts consisting of a collateralized loan and an equity collar to hedge our equity price risk and to monetize the value of these securities. These contracts, at maturity, are expected to offset declines in the fair value of these securities below the hedge price per share, while allowing us to retain upside appreciation from the hedge price per share to the relevant cap price. The contracts' actual hedge prices per share vary depending on average stock prices in effect at the time the contracts were executed. The contracts' actual cap prices vary depending on the maturity and terms of each contract, among other factors. In the event of an early termination of any of these contracts, we would be obligated to repay the collateralized indebtedness less the sum of the fair value of the underlying stock and the fair value of the equity collar, calculated at the termination date. The underlying stock and equity collars are carried at fair value on our consolidated balance sheet and the collateralized indebtedness is carried at its accreted value.
As of December 31, 2003, the fair value and the carrying value of our holdings of Comcast, AT&T, Charter Communications, AT&T Wireless, General Electric, Leapfrog and Adelphia Communications common stock aggregated $1,224.5 million. Assuming a 10% change in price, the potential change in the fair value of these investments would be approximately $122.4 million. As of December 31, 2003, the net fair value and the carrying value of the equity collar component of the prepaid forward contracts entered into to hedge the equity price risk of these securities aggregated $524.9 million, a net receivable position.
The maturity, number of shares deliverable at the relevant maturity, hedge price per share, and the lowest and highest cap prices received for each security monetized via a prepaid forward contract are summarized in the following table:
*Represents the price below which we are provided with downside protection and above which we retain upside appreciation. Also represents the price used in determining the cash proceeds payable to us at inception of the contracts.
**Represents the price up to which we receive the benefit of stock price appreciation. Our exposure to interest rate movements results from our use of floating and fixed rate debt to fund our working capital, capital expenditures, and other operational and investment requirements. To manage interest rate risk, from time to time we have entered into interest rate swap contracts to adjust the proportion of total debt that is subject to variable and fixed interest rates. Such contracts fix the borrowing rates on floating rate debt to provide an economic hedge against the risk of rising rates and/or convert fixed rate borrowings to variable rates to provide an economic hedge against the risk of
higher borrowing costs in a declining interest rate environment. In addition, from time to time we may utilize short-term interest rate lock agreements to hedge the risk that the cost of a future issuance of fixed rate debt may be adversely affected by changes in interest rates. We do not enter into interest rate swap contracts for speculative or trading purposes.
Fair Value of Debt: Based on the level of interest rates prevailing at December 31, 2003, the fair value of our fixed rate debt and redeemable preferred stock liabilities of $7,714.7 million exceeded their carrying value of $7,328.5 million by approximately $386.2 million. The fair value of these financial instruments is estimated based on reference to quoted market prices for these or comparable securities. Our floating rate borrowings bear interest in reference to current LIBOR-based market rates and thus approximate fair value. The effect of a hypothetical 100 basis point decrease in interest rates prevailing at December 31, 2003 would increase the estimated fair value of our fixed rate debt and redeemable preferred stock liabilities by approximately $268.6 million to $7,983.3 million. This estimate is based on the assumption of an immediate and parallel shift in interest rates across all maturities.
Interest Rate Derivative Contracts: As of December 31, 2003, we had outstanding interest rate swap contracts to convert floating rate debt to fixed rate debt covering a total notional principal amount of $600 million. As of December 31, 2003, the fair market value and carrying value of these interest rate swap contracts was approximately $0.3 million, a net liability position, as reflected under derivative contracts in our consolidated balance sheet. Assuming an immediate and parallel shift in interest rates across the yield curve, a 100 basis point decrease in interest rates from December 31, 2003 prevailing levels would not change the fair value of these contracts as they are nearing maturity.
In addition, we had outstanding prepaid interest rate swap contracts with a notional value of $1,115.0 million entered into in connection with our monetization transactions. As of December 31, 2003, such contracts had a fair market value and carrying value of $65.8 million, a net liability position, reflected as liabilities under derivative contracts in our consolidated balance sheet. Assuming an immediate and parallel shift in interest rates across the yield curve, a 100 basis point increase in interest rates from December 31, 2003 prevailing levels would increase the fair market value of our liabilities under derivative contracts by approximately $20.0 million to a liability of $85.8 million.
Item 8. Financial Statements and Supplementary Data.
For information required by Item 8, refer to the Index to Financial Statements on page 92.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
An evaluation was carried out under the supervision and with the participation of Cablevision's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Securities and Exchange Commission rules). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this report.
Wilmer Cutler Pickering LLP has completed its investigation of improper expense recognition and has made recommendations with respect to improvements in internal controls. Certain of these recommendations for both new policies and procedures (including vendor payment guidelines, signature and password protection and communication of information to those responsible for the preparation of financial statements) and enhancement and reinforcement of existing policies and procedures (including those related to expense recognition and accruals and required support for payments and accruals) have already been implemented by the Company and other recommendations (including those for reassessment and improvement of the structure and accountability of employees of the operating units
responsible for accumulating information for and preparation of financial statements, additional training and education of the employees within those areas and implementation of additional internal audit procedures) will be implemented by the Company over the next few months.
PART III
The information called for by Item 401 of Regulation S-K under Item 10, Directors and Executive Officers of the Registrant, Item 11, Executive Compensation, Item 12, Security Ownership of Certain Beneficial Owners and Management, Item 13, Certain Relationships and Related Transactions and Item 14, Principal Accountant Fees and Services, is hereby incorporated by reference to Cablevision's definitive proxy statement for its Annual Meeting of Shareholders anticipated to be held in May 2004 or if such definitive proxy statement is not filed with the Commission prior to April 30, 2004, to an amendment to this report on Form 10-K filed under cover of Form 10-K/A.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Pursuant to regulations promulgated by the Securities and Exchange Commission, the Company is required to identify, based solely on a review of reports filed under Section 16(a) of the Securities Exchange Act of 1934, each person who, at any time during its fiscal year ended December 31, 2003, was a director, officer or beneficial owner of more than ten percent of the Company's Class A Common Stock that failed to file on a timely basis any such reports. Based on such review, the Company is aware of no such failure.
PART IV
Item 15. 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 set forth on page 92.
2.Financial statement schedule:
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.The Index to Exhibits is on page 86.
(b)Reports on Form 8-K: Cablevision Systems Corporation filed current reports on Form 8-K with the Commission on October 23, 2003 and November 12, 2003.
CSC Holdings, Inc. filed current reports on Form 8-K with the Commission on October 23, 2003 and November 12, 2003.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Cablevision Systems Corporation
CSC Holdings, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized on the 15th day of March, 2004.
Cablevision Systems Corporation
CSC Holdings, Inc.
By:
/s/ WILLIAM J. BELL
Name:
William J. Bell
Title:
Vice Chairman and Principal Financial Officer of Cablevision Systems Corporation and CSC Holdings, Inc.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James L. Dolan and William J. Bell, 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 on behalf of each of the Registrants.
Name
Title
Date
/s/ JAMES L. DOLAN James L. Dolan
Chief Executive Officer, President and Director (Principal Executive Officer)
March 15, 2004
/s/ WILLIAM J. BELL William J. Bell
Vice Chairman and Director (Principal Financial Officer)
March 15, 2004
/s/ ANDREW B. ROSENGARD Andrew B. Rosengard
Executive Vice President, Finance (Principal Accounting Officer)
March 15, 2004
/s/ CHARLES F. DOLAN Charles F. Dolan
Chairman of the Board of Directors
March 15, 2004
/s/ SHEILA A. MAHONY Sheila A. Mahony
Executive Vice President and Director
March 15, 2004
/s/ THOMAS C. DOLAN Thomas C. Dolan
Executive Vice President and Director
March 15, 2004
/s/ JOHN TATTA John Tatta
Director
March 15, 2004
/s/ PATRICK F. DOLAN Patrick F. Dolan
Director
March 15, 2004
/s/ CHARLES D. FERRIS Charles D. Ferris
Director
March 15, 2004
/s/ RICHARD H. HOCHMAN Richard H. Hochman
Director
March 15, 2004
/s/ VICTOR ORISTANO Victor Oristano
Director
March 15, 2004
/s/ STEVEN RATTNER Steven Rattner
Director
March 15, 2004
/s/ THOMAS V. REIFENHEISER Thomas V. Reifenheiser
Director
March 15, 2004
/s/ JOHN R. RYAN John R. Ryan
Director
March 15, 2004
/s/ VINCENT TESE Vincent Tese
Director
March 15, 2004
INDEX TO EXHIBITS
EXHIBIT
NO.
DESCRIPTION
3.1
Amended and Restated Certificate of Incorporation of Cablevision Systems Corporation (incorporated herein by reference to Annex II to Cablevision Systems Corporation's Proxy Statement, dated October 10, 2000, as supplemented, (the "2000 Proxy Statement")).
3.2
Bylaws of Cablevision Systems Corporation (incorporated herein by reference to Exhibit 3.4 of the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001).
3.3
Certificate of Incorporation of CSC Holdings, Inc. (incorporated herein by reference to Exhibits 3.1A(i) and 3.1A(ii) to CSC Holdings' Annual Report on Form 10-K for the fiscal year ended December 31, 1989).
3.4
Bylaws of CSC Holdings, Inc. (incorporated herein by reference to Exhibit 3.2 of the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001).
3.5
Certificate of Amendment of Certificate of Incorporation of CSC Holdings, Inc., dated April 1, 1999 (incorporated herein by reference to Exhibit 3.1 of CSC Holdings' Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1999).
3.6
Certificate of Amendment of Certificate of Incorporation of CSC Holdings, Inc., dated April 1, 1999 (incorporated herein by reference to Exhibit 3.2 of CSC Holdings' Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1999).
4.1
Certificate of Designations for CSC Holdings' Series H Redeemable Exchangeable Preferred Stock (incorporated by reference to Exhibit 4.1E to CSC Holdings' Registration Statement on Form S-4, Registration No. 33-63691).
4.2
Certificate of Designations for CSC Holdings' Series M Redeemable Exchangeable Preferred Stock (incorporated by reference to Exhibit 4.1(f) to CSC Holdings' Registration Statement on Form S-4, Registration No. 333-00527).
4.3
Indenture dated as of December 1, 1997 relating to CSC Holdings' $500,000,000 77/8% Senior Notes due 2007 (incorporated by reference to Exhibit 4.4 to Cablevision Systems Corporation's Registration Statement on Form S-4, dated January 20, 1998, File No. 333-44547 (the "S-4")).
4.4
Indenture dated as of February 15, 1993 relating to CSC Holdings' $200,000,000 97/8% Senior Subordinated Debentures due 2013 (incorporated herein by reference to Exhibit 4.3 to Cablevision Systems Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (the "1992 10-K")).
4.5
Indenture dated as of April 1, 1993 relating to CSC Holdings' $150,000,000 97/8% Senior Subordinated Debentures due 2023 (incorporated by reference to CSC Holdings' Registration Statement on Form S-4, Registration No. 33-61814).
4.6
Supplemental Indenture dated as of November 1, 1995 between CSC Holdings and the Bank of New York, Trustee to the Indenture dated November 1, 1995 (incorporated by reference to Exhibit 99.6 to CSC Holdings' Current Report on Form 8-K, filed November 1, 1995).
4.7
Indenture dated as of November 1, 1995 relating to CSC Holdings' $250,000,000 101/2% Senior Subordinated Debentures due 2016 (incorporated by reference to Exhibit 99.6 to CSC Holdings' Current Report on Form 8-K filed November 1, 1995).
4.8
Indenture dated August 15, 1997 relating to CSC Holdings' $400,000,000 81/8% Senior Debentures due 2009 (incorporated herein by reference to CSC Holdings' Registration Statement on Form S-4, Registration No. 333-38013).
4.9
Senior Indenture, dated as of July 1, 1998 (incorporated by reference to Exhibit 4.1 to CSC Holdings' Registration Statement on Form S-3, Registration No. 333-57407).
4.10
Subordinated Indenture, dated as of July 1, 1998 (incorporated by reference to Exhibit 4.2 to CSC Holdings' Registration Statement on Form S-3, Registration No. 333-57407).
4.11
Indenture dated as of March 22, 2001 relating to CSC Holdings $1,000,000,000 75/8% Senior Notes due 2011 (incorporated herein by reference to Exhibit 4.11 to Cablevision Systems Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
4.12
Indenture dated as of July 1, 1999 relating to CSC Holdings $500,000,000 81/8% Senior Notes due 2009 and 81/8% Series B Senior Notes due 2009 (incorporated by reference to Exhibit 4.2 to Registration Statement on Form S-4 (Registration No. 333-84449)).
4.13
Certificate of Designations for CSC Holdings, Inc. 10% Series A Exchangeable Participating Preferred Stock. (incorporated herein by reference to Exhibit 10.13 to the 2002 10-K).
10.1
Registration Rights Agreement between CSC Systems Company and CSC Holdings (incorporated herein by reference to Exhibit 10.1 of CSC Holdings' Registration Statement on Form S-1, Registration No. 033-01936 ("CSC Holdings' Form S-1")).
10.2
Registration Rights Agreement between Cablevision Company and CSC Holdings (incorporated herein by reference to Exhibit 10.2 to CSC Holdings' Form S-1).
10.3
Form of Right of First Refusal Agreement between Dolan and CSC Holdings (incorporated herein by reference to Exhibit 10.4 to CSC Holdings' Form S-1).
10.4
Supplemental Benefit Plan of CSC Holdings (incorporated herein by reference to Exhibit 10.7 to CSC Holdings' Form S-1).
10.5
Employment Agreement between Charles F. Dolan and CSC Holdings dated January 27, 1986 (incorporated herein by reference to Exhibit 10.9 to CSC Holdings' Form S-1).
10.6
Employment Agreement, dated as of November 7, 2002, between CSC Holdings and William J. Bell (incorporated herein by reference to Exhibit (d)(3) to Cablevision Systems Corporation's Schedule TO Tender Offer Statement dated January 23, 2002 ("Schedule TO")).
10.7
Employment Agreement, dated as of April 29, 2003, between Cablevision Systems Corporation and James L. Dolan (incorporated herein by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2003).
10.8
Employment Agreement, dated as of June 11, 2003, between Cablevision Systems Corporation and Hank Ratner (incorporated herein by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2003).
10.9
1985 Employee Stock Plan (incorporated herein by reference to Exhibit 10.5 to CSC Holdings' Form S-1).
10.10
Cablevision Systems Corporation Employee Stock Plan (incorporated herein by reference to Exhibit A to Cablevision Systems Corporation's June 3, 2003 Proxy Statement).
10.11
Cablevision Systems Corporation Executive Performance Incentive Plan (incorporated herein by reference to Exhibit C to Cablevision Systems Corporation's June 3, 2003 Proxy Statement).
10.12
Cablevision Systems Corporation Long-Term Incentive Plan (incorporated herein by reference to Exhibit B to Cablevision Systems Corporation's June 3, 2003 Proxy Statement).
10.13
Cablevision Systems Corporation Amended and Restated Stock Plan for Non-Employee Directors (incorporated herein by reference to Exhibit D to Cablevision Systems Corporation's June 3, 2003 Proxy Statement).
10.14
First Amended and Restated Credit Agreement, dated as of May 28, 1998, among Cablevision MFR, Inc., CSC Holdings, Inc., the Guarantors which are parties thereto, the lenders which are parties thereto, Toronto Dominion (Texas), Inc., as Arranging Agent and as Administrative Agent, The Bank of New York, The Bank of Nova Scotia, The Canadian Imperial Bank of Commerce, NationsBank, N.A., and The Chase Manhattan Bank, as Managing Agents, Bank of Montreal, Chicago Branch, Barclays Bank, PLC, Fleet Bank, N.A., and Royal Bank of Canada, as Agents, Banque Paribas, Credit Lyonnais, BankBoston, N.A., The First National Bank of Chicago, Mellon Bank, N.A. and Société Générale, New York Branch, as Co-Agents, and The Bank of New York and The Bank of Nova Scotia as Co Syndication Agents (incorporated herein by reference to Exhibit 10.48 to the 1998 10-K).
10.15
Formation Agreement, dated as of June 22, 1997, among Rainbow Media Sports Holdings, Inc. and Fox Sports Net, LLC, attaching Partners) and Annex B (Partnership Agreement of National Sports Partners) (incorporated by reference to Exhibit 99.1 of the April 1997 8-K).
10.16
Lease Agreement between Nassau Cable Business Trust, as Landlord and CSC Holdings, as Tenant, dated as of November 1, 1997 (incorporated by reference to Exhibit 10.56 to the S-4).
10.17
Credit Agreement, dated as of June 6, 1997, among Madison Square Garden, L.P., the several lenders from time to time parties thereto, the Chase Manhattan Bank, as Administrative Agent, Toronto Dominion (New York), Inc., as Documentation Agent, and The Bank of Nova Scotia, as Syndication Agent (incorporated by reference to Exhibit 10.63 to the S-4).
10.18
First Amendment, dated November 5, 1997 to the Credit Agreement, dated as of June 6, 1997, among Madison Square Garden, L.P., the several lenders from time to time parties thereto, the Chase Manhattan Bank, as Administrative Agent, Toronto Dominion (New York), Inc., as Documentation Agent, and The Bank of Nova Scotia, as Syndication Agent (incorporated by reference to Exhibit 10.66 to the S-4).
10.19
Second Amendment, dated December 10, 1997, to the Credit Agreement, dated as of June 6, 1997, among Madison Square Garden, L.P., the several lenders from time to time parties thereto, the Chase Manhattan Bank, as Administrative Agent, Toronto Dominion (New York), Inc., as Documentation Agent, and The Bank of Nova Scotia, as Syndication Agent (incorporated by reference to Exhibit 10.67 to the Form S-4).
10.20
Third Amendment, dated July 28, 1999, to the Credit Agreement, dated as of June 6, 1997, among Madison Square Garden, L.P., the several lenders from time to time parties thereto, the Chase Manhattan Bank, as Administrative Agent, Toronto Dominion (New York), Inc., as Documentation Agent, and The Bank of Nova Scotia, as Syndication Agent (incorporated by reference to Exhibit 10.27 to Cablevision Systems Corporation's Annual Report on Form 10-K for the year ended December 31, 2001 ("2001 Form 10-K")).
10.21
Fourth Amendment, dated September 4, 2001, to the Credit Agreement, dated as of June 6, 1997, among Madison Square Garden, L.P., the several lenders from time to time parties thereto, the Chase Manhattan Bank, as Administrative Agent, Toronto Dominion (New York), Inc., as Documentation Agent, and The Bank of Nova Scotia, as Syndication Agent (incorporated by reference to Exhibit 10.28 to the 2001 Form 10-K).
10.22
Fifth Amendment, dated November 13, 2001, to the Credit Agreement, dated as of June 6, 1997, among Madison Square Garden, L.P., the several lenders from time to time parties thereto, the Chase Manhattan Bank, as Administrative Agent, Toronto Dominion (New York), Inc., as Documentation Agent, and The Bank of Nova Scotia, as Syndication Agent (incorporated by reference to Exhibit 10.29 to the 2001 Form 10-K).
10.23
Amended and Restated Contribution and Merger Agreement, dated as of June 6, 1997, among Cablevision Systems Corporation, CSC Holdings, CSC Merger Corporation and TCI Communications, Inc. (incorporated herein by reference to Exhibit 2.1 to the S-4).
10.24
Stockholders Agreement, dated as of March 4, 1998, by and among CSC Holdings, Tele-Communications, Inc., a Delaware corporation, the Class B Entities and the Investors (incorporated herein by reference to Exhibit 4.1 to CSC Holdings' Current Report on Form 8-K dated March 4, 1998).
10.25
Seventh Amended and Restated Credit Agreement dated as of June 26, 2001, among CSC Holdings, Inc., the Restricted Subsidiaries which are parties thereto, the lenders that are parties thereto (the "Banks"), Toronto Dominion (Texas), Inc., as Administrative Agent, TD Securities (USA) Inc. and Banc of America Securities LLC, as Co-Lead Arrangers and Co-Book Managers, Bank of America, N.A., as Syndication Agent, The Bank of New York and The Bank of Nova Scotia, as Co-Documentation Agents and Arrangers, The Chase Manhattan Bank, as Co-Documentation Agent, Fleet National Bank, J.P. Morgan Securities Inc., Mizuho Financial Group and Salomon Smith Barney Inc., as Arrangers, Bank of Montreal, Barclays Bank PLC, BNP Paribas, Credit Lyonnais New York Branch, Dresdner Bank AG, New York and Grand Cayman branches, First Union National Bank and Royal Bank of Canada, as Managing Agents and Société Générale and Suntrust Bank, as Co-Agents (incorporated by reference to Exhibit 1
10.26
Amendment No. 1, dated July 20, 2001, to Seventh Amended and Restated Credit Agreement dated as of June 26, 2001, among CSC Holdings, Inc., the Restricted Subsidiaries which are parties thereto, the banks that are parties thereto and Toronto Dominion (Texas), Inc., as Administrative Agent (incorporated by reference to Exhibit 10.34 to the 2001 Form 10-K).
10.27
Amendment No. 2, dated November 19, 2001, to Seventh Amended and Restated Credit Agreement dated as of June 26, 2001, among CSC Holdings, Inc., the Restricted Subsidiaries which are parties thereto, the banks that are parties thereto and Toronto Dominion (Texas), Inc., as Administrative Agent (incorporated by reference to Exhibit 10.35 to the 2001 Form 10-K).
10.28
Amendment No. 3 and Waiver, dated August 14, 2002, to Seventh Amended and Restated Credit Agreement dated as of June 26, 2001, among CSC Holdings, Inc., the Restricted Subsidiaries which are parties thereto, the banks that are parties thereto and Toronto Dominion (Texas), Inc., as Administrative Agent.
10.29
Asset Purchase Agreement, dated as of December 8, 1999, by and among Telerama, Inc., Cablevision of Cleveland, L.P., and Adelphia Communications Corporation (incorporated herein by reference to Exhibit 99.1 of Cablevision Systems Corporation's Current Report on Form 8-K filed on December 17, 1999 (the "December 1999 8-K")).
10.30
Agreement and Plan of Reorganization, dated as of December 8, 1999, by and among Cablevision of the Midwest, Inc., Cablevision of the Midwest Holding Co., Inc., Adelphia General Holdings II, Inc. and Adelphia Communications Corporation (incorporated herein by reference to Exhibit 99.2 of the December 1999 8-K).
10.31
Agreement and Plan of Merger, dated as of April 18, 2000, by and among CSC Holdings, Inc., Cablevision of Massachusetts, Inc., AT&T Corp. and AT&T CSC, Inc. (incorporated herein by reference to Exhibit 99.1 of Cablevision Systems Corporation's Current Report on Form 8-K filed on May 5, 2000 (the "May 2000 8-K")).
10.32
Asset Exchange Agreement, dated as of April 18, 2000, by and among CSC Holdings, Inc., Cablevision of Brookline, L.P., Cablevision of Boston, Inc. and AT&T Corp. (incorporated herein by reference to Exhibit 99.2 of the May 2000 8-K).
10.33
Letter Agreement dated January 31, 2001, among Cablevision Systems Corporation, Rainbow Media Holdings, Inc., Metro-Goldwyn-Mayer Inc., American Movie Classics Holding Corporation, AMC II Holding Corporation, Bravo Holding Corporation, and Bravo II Holding Corporation (incorporated herein by reference to Exhibit 99.1 of Cablevision Systems Corporation's Current Report on Form 8-K filed on February 5, 2001).
10.34
Amended and Restated Loan Agreement, dated as of December 19, 2003, among Rainbow Media Holdings LLC, as Borrower; the Guarantors party hereto, as Guarantors; Banc Of America Securities LLC, TD Securities (USA) Inc. and The Bank of Nova Scotia, as Co-Lead Arrangers and Co-Book Runners; Bank of America, N.A. and The Bank of Nova Scotia, as Co-Syndication Agents; Wachovia Bank, National Association and General Electric Capital Corporation, as Co-Documentation Agents; Toronto Dominion (Texas), Inc., as Administrative Agent.
10.35
Agreement and Plan of Merger and Exchange, dated as of November 4, 2002, by and between Cablevision Systems Corporation, Bravo Holding Corporation, Bravo II Holding Corporation, Rainbow Media Group, LLC, National Broadcasting Company, Inc., NBC- Rainbow Holding, Inc. and Applause Acquisition Corporation (incorporated herein by reference to Exhibit 99.1 of Cablevision System Corporation's Current Report on Form 8-K dated November 6, 2002).
10.36
Asset Purchase Agreement, dated as of December 19, 2002, by and among Northcoast Communications, L.L.C., Boston Holding, LLC, New York PCS Holding, LLC and Cellco Partnership d/b/a Verizon Wireless (incorporated herein by reference to Exhibit 99.1 of Cablevision System Corporation's Current Report on Form 8-K dated December 23, 2002).
10.37
Registration Rights Agreement, dated as of February 5, 2003, between Cablevision Systems Corporation and Quadrangle Capital Partners LP. (incorporated herein by reference to Exhibit 10.39 to the 2002 10-K).
10.38
Purchase Agreement, dated as of June 27, 2003, by and among Rainbow Media Holdings, Inc., American Movie Classics III Holding Corporation, American Movie Classics IV Holding Corporation, IFC II Holding Corporation, IFC III Holding Corporation, Metro- Goldwyn-Mayer Inc., MGM Networks U.S. Inc and, solely for purposes of Sections 2.02(b), 2.02(c), 5.01, 10.05, 10.08 and 10.11, Cablevision Systems Corporation.
10.39
Registration Rights Agreement, dated as of July 18, 2003, between Cablevision Systems Corporation, and MGM Networks U.S. Inc.
10.40
Purchase Agreement, dated as of December 12, 2003, by and among Fox Sports Net Bay Area Holdings, LLC, Fox Sports Net Chicago Holdings, LLC and Fox Sports Net, LLC and Regional Pacific Holdings II, L.L.C. and Regional Chicago Holdings II, L.L.C.
10.41
Agreement and Plan of Merger, dated as of March 6, 2000 by and between Cablevision of Michigan, Inc., CSC Holdings, Inc. and Charter Communications, Inc.
10.42
1985 Employee Stock Plan (incorporated herein by reference to Exhibit 10.5 to CSC Holdings' Form S-1).
10.43
Letter Agreement, dated as of January 12, 2004, between DTV Norwich, LLC, wholly-owned by George S. Blumenthal and Company, LLC and Rainbow MVDDS Company, LLC.
10.44
Retirement Agreement, dated as of June 23, 2003, between Cablevision Systems Corporation, CSC Holdings, Inc. and Sheila Mahony (incorporated herein by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2003).
10.45
Amendment to Retirement Agreement, dated as of January 2, 2004, between Cablevision Systems Corporation, CSC Holdings, Inc. and Sheila Mahony.
10.46
Extension to Employment Agreement, dated as of March 12, 2004, between CSC Holdings and William J. Bell.
10.47
Consulting Agreement, dated as of January 27, 2001, by and between Cablevision Systems Corporation and John Tatta.
10.48
Extension to Consulting Agreement, dated March 12, 2004, by and between Cablevision Systems Corporation and John Tatta.
10.49
Cablevision CHOICE Severance Pay Plan.
10.50
Cablevision 401(k) Savings Plan (incorporated herein by reference to Exhibit 10.47 to the 1992 10-K).
Subsidiaries of the Registrants.
23.1
Consent of Independent Auditors.
23.2
Consent of Independent Auditors.
31.1
Section 302 Certification of the CEO
31.2
Section 302 Certification of the CFO
Section 906 Certification of the CEO and CFO
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Cablevision Systems Corporation
We have audited the accompanying consolidated balance sheets of Cablevision Systems Corporation and subsidiaries as of December 31, 2003 and 2002, 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, 2003. In connection with our audits of the consolidated financial statements, we also audited the financial statement schedule listed in Item 15(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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. 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.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, in the year ended December 31, 2003 and adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, in the year ended December 31, 2002.
As discussed in Note 2, the accompanying consolidated financial statements as of December 31, 2002 and for the years ended December 31, 2002 and 2001 have been restated.
/s/ KPMG LLP
Melville, New York
March 15, 2004
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
(Dollars in thousands)
I-2
See accompanying notes to consolidated financial statements.
I-3
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
I-4
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
Years ended December 31, 2003, 2002 and 2001
(Dollars in thousands)
*Represents the Company's Class A Common Stock and Class B Common Stock, respectively, for periods prior to March 29, 2001.
See accompanying notes to consolidated financial statements.
I-5
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2002 and 2001
(Dollars in thousands)
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CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company and Related Matters
Cablevision Systems Corporation and its majority-owned subsidiaries ("Cablevision" or the "Company") owns and operates cable television systems and through its subsidiary, Rainbow Media Holdings LLC, has ownership interests in companies that produce and distribute national and regional entertainment and sports programming services, including Madison Square Garden, L.P. ("MSG"). The Company also owns companies that provide advertising sales services for the cable television industry, provide switched telephone service, operate motion picture theaters and provide direct broadcast satellite service. The Company classifies its business interests into three segments: Telecommunications Services, consisting principally of its cable television, telephone and high-speed data services operations; Rainbow, consisting principally of interests in national and regional cable television programming networks; and MSG, which owns and operates professional sports teams, regional cable television networks, live productions and entertainment venues.
Principles of Consolidation and Investments in Affiliates
The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. The Company's interests in less than majority-owned entities are carried on the equity method. The Company would recognize a loss where there existed an other than temporary decline in the value of the investment. All significant intercompany transactions and balances are eliminated in consolidation.
Revenue Recognition
The Company recognizes cable television, high-speed data, telephony and programming revenues as services are provided to subscribers. Advertising revenues are recognized when commercials are telecast. Revenues derived from other sources are recognized when services are provided or events occur.
Costs of Revenue
Costs of revenue related to sales of services and the cost of direct broadcast satellite equipment sold are classified as "technical and operating" expenses in the accompanying statements of operations.
Investments in Marketable Securities
The Company accounts for its investments in marketable securities in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Investment securities and investment securities pledged as collateral are classified as trading securities and are stated at fair value with unrealized holding gains and losses included in net income (loss).
Long-Lived and Indefinite-Lived Assets
Property, plant and equipment, including construction materials, are carried at cost, and include all direct costs and certain indirect costs associated with the construction of cable television transmission and distribution systems, and the costs of new product and subscriber installations. Franchise renewal costs are amortized on the straight-line basis over the average terms (3 to 20 years) of the franchises.
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Affiliation, broadcast and other agreements (primarily cable television system programming agreements) are amortized on a straight-line basis over periods ranging from 3 to 40 years. Other intangible assets are amortized on the straight-line basis over the periods benefited (2 to 20 years). Excess costs over fair value of net assets acquired ("goodwill") and the value of franchises acquired in purchase business combinations which have indefinite useful lives are no longer amortized in connection with the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and other Intangible Assets, on January 1, 2002. Prior to the adoption of Statement 142, goodwill was amortized on the straight-line basis over periods ranging from 3 to 40 years and franchises acquired in purchase business combinations were amortized on the straight-line basis over the average terms (3 to 20 years).
The Company reviews its long-lived assets (property, plant and equipment, and intangible assets subject to amortization that arose from business combinations accounted for under the purchase method) for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.
The Company evaluates the recoverability of its goodwill and indefinite lived intangible assets annually or more frequently whenever events or circumstances indicate that the asset may be impaired. Statement 142 requires that goodwill impairment be determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination.
The impairment test for other intangible assets not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
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 to technical and operating expense
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on a straight-line basis over the respective license periods. Amounts payable subsequent to December 31, 2003 related to feature film telecast rights are as follows:
Deferred Carriage Fees
Deferred carriage fees represent primarily payments to cable system operators to guarantee carriage of certain programming services and are recorded as a reduction to revenue over the period of guarantee (1 to 11 years).
Deferred Financing Costs
Costs incurred to obtain debt are deferred and amortized, on a straight-line basis, over the life of the related debt.
Income Taxes
Income taxes are provided based upon the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires the asset/liability method of accounting for deferred income taxes and permits the recognition of deferred tax assets, subject to an ongoing assessment of realizability.
Income (Loss) Per Common Share
Basic and diluted net loss per common share are computed by dividing net loss by the weighted average number of common shares outstanding. Potential dilutive common shares are not included in the computation as their effect would be antidilutive.
Basic net income per share is computed by dividing net income by the weighted average common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average common stock and common stock equivalents outstanding during the period.
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A reconciliation of the numerator and denominator of the basic and diluted net income per share calculation for the years ended December 31, 2002 and 2001 follows:
All per share amounts have been adjusted, for all years presented, to reflect the tracking stock distribution in March 2001 and the subsequent exchange of each share of Rainbow Media Group ("RMG") tracking stock for 1.19093 shares of Cablevision NY Group ("CNYG") common stock on August 20, 2002, as if each occurred on January 1, 2001. (See Note 3.)
Reclassifications
Certain reclassifications have been made in the 2002 and 2001 financial statements to conform to the 2003 presentation.
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.
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During 2003, 2002 and 2001, the Company's non-cash investing and financing activities and other supplemental data were as follows:
Stock Option Plan
The Company applies the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations, to account for its stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, established accounting and disclosure requirements using a fair value based method of accounting for stock based employee compensation plans. As allowed by Statement 123, the Company has elected to continue to apply the intrinsic value method of accounting described above.
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The table below sets forth the pro forma net income (loss) as if compensation cost was determined in accordance with Statement 123 for options granted in 1995 through 2003:
The Company estimated the fair value of each option grant using the Black-Scholes option pricing model. The following assumptions were used in calculating these fair values:
Derivative Financial Instruments
The Company accounts for derivative financial instruments in accordance with Statement 133, Accounting for Derivative Instruments and Hedging Activities, as amended. Statement 133 requires that an entity recognize all derivatives, as defined, as either assets or liabilities measured at fair value. The Company does not hold or issue derivative instruments for trading purposes. However, the Company uses derivative instruments to manage its exposure to market risks from changes in certain equity prices and interest rates. These derivative instruments are not designated as hedges, and changes in the fair values of these derivatives are recognized in earnings.
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Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
Recently Issued Accounting Standards
The FASB issued Statement 143, Accounting for Asset Retirement Obligations, in June 2001. Statement 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company's adoption of Statement 143 in 2003 had an insignificant impact on the Company's financial condition or results of operations.
In June 2002, Statement 146, Accounting for Costs Associated with Exit or Disposal Activities, was issued. This Statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan. The provisions of this Statement have been adopted for all exit and disposal activities initiated after December 31, 2002.
In April 2003, the FASB issued Statement 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts. Statement 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying to conform it to language used in FASB Interpretation ("FIN") No. 45, and amends certain other existing pronouncements. Statement 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of Statement 149 had no impact on the Company's financial condition or results of operations.
In May 2003, the FASB issued Statement 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This Statement requires that certain instruments that were previously classified as equity on a company's statement of financial position now be classified as liabilities. As a result of adopting the Statement on July 1, 2003, liabilities increased $1,544,294 reflecting the reclassification of CSC Holdings' Series H and Series M Redeemable Preferred Stock and dividends of $87,258 were classified as interest expense for the year ended December 31, 2003. In addition, the Company currently consolidates a 60% majority-owned interest in a limited-life partnership. The estimated liquidation value of the 40% minority interest is approximately $1,128,900 as of December 31, 2003.
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In November 2002, the FASB issued FIN 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. The disclosure requirements of FIN 45 were effective for the Company as of December 31, 2002 and had no impact on the consolidated financial statements. The recognition requirements of FIN 45 have been applied prospectively to guarantees issued or modified after December 31, 2002 and did not have a material effect on the consolidated financial statements.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46, as revised in December 2003, addresses consolidation by business enterprises of variable interest entities, which are entities that either (a) do not have equity investors with voting rights or (b) have equity investors that do not provide sufficient financial resources for the entity to support its activities. For all variable interest entities created prior to February 1, 2003, the Company will be required to apply the provisions of FIN 46 by March 31, 2004. For variable interest entities created subsequent to January 31, 2003, FIN 46 was effective in 2003. The adoption of FIN 46 had no impact on the Company's financial condition or results of operations for entities created after January 31, 2003. The Company is still evaluating the impact of adopting FIN 46 for entities created prior to February 1, 2003. It is reasonably possible that the Company will be required to consolidate its investment in Northcoast Communications, LLC. See Note 14 for a detailed description of this investment.
NOTE 2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
As a result of information obtained in connection with the Wilmer Cutler Pickering LLP investigation into improperly recognized expenses resulting from inappropriately accelerating the recognition of certain costs (see discussion below), the Company has restated its previously reported financial statements to reflect the expenses in the appropriate period. In addition, the Company has also corrected certain errors with respect to launch and marketing support payments and the recognition of a gain on marketable securities.
The effect of adjusting for the acceleration of expenses and for the correction of errors, described above, on the Company's consolidated statement of operations for the years ended December 31, 2002 and 2001 is as follows:
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The following table sets forth the consolidated balance sheet for the Company, giving effect to the restatement to reflect the expenses in the appropriate period, showing previously reported amounts and restated amounts as of December 31, 2002:
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The following table sets forth consolidated statements of operations for the Company, giving effect to the restatement to reflect the expenses in the appropriate period, showing previously reported amounts and restated amounts for the years ended December 31, 2002 and 2001:
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The effects of these restatements have been reflected as reclassifications between cash flows from operating activities and investing activities and net effect of discontinued operations on cash in the Company's statements of cash flows for the years ended December 31, 2002 and 2001. Such reclassifications amount to less than $1,000 in any of the respective years.
Investigation of Improper Expense Accruals and Other Adjustments
On June 18, 2003, Cablevision announced that an internal review initiated by the Company identified improperly recorded expenses at the national services division of Cablevision's Rainbow Media Holdings subsidiary. At the time of the June 18 announcement, the review had found that $6,200 of expenses for 2003 were accelerated and improperly accrued or expensed in 2002, rather than 2003. All but $1,700 of that pretax amount was identified and reversed prior to the release of the Company's 2002 results.
The Company also announced on June 18, 2003 that its Audit Committee had retained Wilmer Cutler Pickering LLP to conduct an investigation of the matter. Wilmer Cutler Pickering LLP subsequently retained PricewaterhouseCoopers LLP as forensic accountants.
In August 2003, the Company announced that Wilmer Cutler Pickering LLP reported to the Audit Committee and management of the Company that its investigation to that date had identified, in addition to the amounts announced by the Company on June 18, 2003, improperly recognized expenses at the original productions units within the American Movie Classics Company ("AMC") and WE: Women's Entertainment business units of the national services division of Rainbow Media Holdings and that pretax amounts that should have been expensed in 2003 that were expensed in earlier years equaled approximately $3,400.
In November 2003, Wilmer Cutler Pickering LLP reported that it had substantially completed its detailed review of year-end expenses that may have been improperly accelerated. With respect to Rainbow Media Holdings, Wilmer Cutler Pickering LLP had reported that it had identified, in addition to the amounts reported in June and August 2003, additional improperly accelerated expenses at AMC and WE: Women's Entertainment and at most other business units within Rainbow Media Holdings. For AMC and WE: Women's Entertainment, the additional pretax amounts that should have been expensed in 2003 and later periods that were expensed in earlier years equaled approximately $3,900, and for the other Rainbow business units equaled approximately $5,200, including $650 in non-consolidated businesses. The improperly recognized expenses in the Rainbow business units related primarily to sales and marketing, original production and event production activities. With respect to the non-Rainbow Media Holdings' units of the Company, Wilmer Cutler Pickering LLP further reported that it had identified approximately $1,700 in accelerated expenses that should have been recorded in 2003 and later periods, the majority of which consisted of sales and marketing, maintenance and consulting expenses. In late November, the Company provided restated results for the first and second quarters of 2003 and 2002 to reflect the impact of the improper expense accelerations identified by the Company and the Wilmer Cutler Pickering LLP investigation; these restatements were reflected in the Company's Form 10-Q filing for the third quarter of 2003.
Wilmer Cutler Pickering LLP has now reported that its investigation of improper expense recognition is complete. The investigation covered all significant operating units within Rainbow Media Holdings, as well as the Telecommunications, Madison Square Garden and Corporate segments and included a thorough evaluation of the facts (including a review of employee activities) relating to improper expense recognition. The amounts identified are reflected in the table above. Wilmer Cutler
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Pickering LLP has made recommendations to the Audit Committee with respect to improvements in internal controls. Certain of these recommendations for both new policies and procedures (including vendor payment guidelines, signature and password protection and communication of information to those responsible for the preparation of financial statements) and enhancement and reinforcement of existing policies and procedures (including those related to expense recognition and accruals and required support for payments and accruals) have already been implemented by the Company and other recommendations (including those for reassessment and improvement of the structure and accountability of employees of the operating units responsible for accumulating information for and preparation of financial statements, additional training and education of the employees within those areas and implementation of additional internal audit procedures) will be implemented by the Company over the next few months. The investigations into these matters by the Securities and Exchange Commission and the U.S. Attorney's Office for the Eastern District of New York are continuing.
KPMG has completed its audits of the Company's consolidated financial statements included in this Form 10-K, and issued its unqualified report dated March 15, 2004, included herein.
The Company has also corrected certain other errors primarily with respect to launch and marketing support payments received from programming suppliers and the recognition of a gain in 2003 on marketable securities. It was determined that certain of these items should have been recorded in different periods. These adjustments have been reflected in the tables above.
NOTE 3. TRACKING STOCK
In March 2001, the Company amended and restated its Certificate of Incorporation to increase the number of authorized shares of preferred stock from 10 million to 50 million and to increase the number of authorized shares of common stock from 560 million to 1.88 billion of which:
•800 million are designated Cablevision NY Group Class A common stock,
•320 million are designated Cablevision NY Group Class B common stock,
•600 million are designated Rainbow Media Group Class A common stock, and
•160 million are designated Rainbow Media Group Class B common stock.
On March 29, 2001, the Company distributed a new series of common stock called Rainbow Media Group tracking stock. The new series was intended to track the economic performance of certain of the businesses and interests of Rainbow Media Holdings, including its national and selected regional programming assets. The tracking stock was distributed to holders of the Company's common stock at a ratio of one share of Rainbow Media Group for every two shares of the Company's common stock held. The Company's existing common stock was redesignated as Cablevision NY Group common stock.
In March 2001, the Company amended the employee stock plan to reflect the redesignation of the Company's Class A common stock as Cablevision NY Group Class A common stock, and reflect the distribution of Rainbow Media Group Class A common stock. In addition, the number of shares available for issuance under the employee stock plan was increased by 19,200,000, any or all of which were allowed to be Cablevision NY Group common stock or Rainbow Media Group common stock.
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In August 2002, Cablevision's board of directors approved the exchange of Rainbow Media Group common stock for shares of Cablevision NY Group common stock pursuant to the terms of Cablevision's Certificate of Incorporation. Each share of Rainbow Media Group common stock was exchanged for 1.19093 shares of Cablevision NY Group common stock on August 20, 2002. Fractional shares were paid in cash. From and after the date of the exchange, all rights of holders of shares of Rainbow Media Group common stock ceased except for the right, upon surrender of the certificates representing their shares of Rainbow Media Group common stock, to receive the shares of Cablevision NY Group common stock for which their shares of Rainbow Media Group common stock were exchanged, together with any fractional payment as provided above, without interest.
NOTE 4. TRANSACTIONS
2003 Transactions
In July 2003, the Company repurchased Metro-Goldwyn-Mayer, Inc.'s ("MGM") 20% interest in each of AMC, The Independent Film Channel and WE: Women's Entertainment for $500,000 and entered into a film rights agreement relating to the MGM film library. The $500,000 purchase price consisted of $250,000 in cash and a $250,000 note issued by Cablevision and maturing five months after closing in cash or, at Cablevision's election, shares of Cablevision NY Group Class A common stock. The $250,000 note required monthly principal payments of $2,500 in cash prior to maturity. The acquisition was accounted for as a purchase. The excess of the purchase price over the net book value of the assets acquired of approximately $415,662 was allocated to the specific assets acquired based upon a preliminary appraisal as follows:
In June 2003, Cablevision announced a plan to pursue the spin off of all of its ownership interest in the Company's satellite service, Rainbow DBS Company, LLC, together with its Clearview Cinemas theater chain. In October 2003, Cablevision announced an amended spin off plan which includes Rainbow DBS and three of Rainbow Media Holdings' national entertainment services (AMC, The Independent Film Channel and WE: Women's Entertainment) and certain other Rainbow Media Holdings businesses. The transaction would be structured as a tax-free pro rata spin off to Cablevision's stockholders and is expected to be completed in 2004. The Company will retain the Clearview Cinemas business and therefore the results of operations of Clearview Cinemas have been included in continuing operations for all periods presented.
In May 2003, Northcoast Communications completed its sale of spectrum licenses covering 50 U.S. markets to Verizon Wireless for approximately $763,000 in cash. Of the proceeds, approximately $51,000 was used by Northcoast Communications to retire debt. The remaining proceeds, after payment of expenses, were distributed to the partners of Northcoast Communications, including the Company.
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The Company's share of the proceeds was approximately $651,000, of which $30,000 is being held in an escrow fund to provide for any post-closing adjustments and claims. All of the available funds were used by the Company to repay bank debt under the Restricted Group credit facility.
In March 2003, the Company transferred the stock of its wholly-owned subsidiary, Cablevision Electronics Investments, Inc. to GBO Electronics Acquisition, LLC. As of December 31, 2003, the Company recorded losses aggregating $8,382, net of taxes, in connection with this transaction.
In January 2003, Fox Sports Networks, LLC exercised its put option relating to its interests in Fox Sports Net Chicago and Fox Sports Net Bay Area that Fox Sports Networks held outside of Regional Programming Partners. Regional Programming Partners, which held a 50% interest in each of these businesses, is a 60% owned subsidiary of Rainbow Media Holdings. In March 2003, Rainbow Media Holdings and Fox Sports Networks agreed on a $110,000 purchase price for Fox Sports Networks' 50% interest in Fox Sports Net Bay Area and a $40,000 purchase price for Fox Sports Networks' 50% interest in Fox Sports Net Chicago, payable in each case in the form of three-year promissory notes of a subsidiary of Regional Programming Partners, bearing interest at the prime rate plus 1% and secured by Regional Programming Partners' 100% interest in Fox Sports Net Bay Area. The transaction closed in December 2003 and the operating results of the acquired businesses have been consolidated with those of the Company as of the acquisition date. The acquisition was accounted for as a purchase. The excess of the purchase price over the net book value of the assets acquired of approximately $77,259 was allocated to the specific assets acquired based upon a preliminary appraisal as follows:
2002 Transactions
During the six months ended June 30, 2002, NBC-Rainbow Holding, Inc., a subsidiary of National Broadcasting Company ("NBC"), had exchanged a 5.0% interest in Rainbow Media Holdings equity securities for 9,968,988 shares of Rainbow Media Group Class A common stock of Cablevision (valued at $98,514). The Rainbow Media Group common stock was exchanged for 11,872,367 shares of Cablevision NY Group Class A common stock on August 20, 2002. In September 2002, NBC exchanged a 0.7% interest in Rainbow Media Holdings equity securities for 1,647,266 shares of Cablevision NY Group Class A common stock of Cablevision (valued at $16,374). In connection with the sale of the Bravo programming service to NBC in December 2002 discussed below, the Company acquired NBC's remaining 17.2% minority interest in Rainbow Media Holdings, increasing the Company's interest in Rainbow Media Holdings to 100%.
The acquisitions of the 22.9% and the 3.1% minority interests in 2002 and 2001, respectively, were accounted for as purchases. The excess of the purchase prices over the net book value of assets
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acquired of approximately $293,353 was allocated to the specific assets acquired, in 2002, based upon an independent appraisal as follows:
In December 2002, the Company completed the sale of Rainbow Media Holdings' 80% interest in the Bravo programming service to NBC for $1.0 billion payable in General Electric Company common stock and 53.2 million shares of Cablevision NY Group Class A common stock (21.8 million shares of Cablevision NY Group Class A common stock held by NBC and 31.4 million shares of Cablevision NY Group Class A common stock issuable upon the conversion of shares of Rainbow Media Holdings common stock held by NBC). The 21.8 million shares of Cablevision NY Group Class A common stock, valued at $359,750, have been recorded as treasury stock in the Company's consolidated balance sheet. The Company recorded a gain of $663,352, net of taxes, in connection with this transaction. The operating results of the Bravo programming service, including the gain on sale, have been classified as discontinued operations for all periods presented. The net operating results of the Bravo programming service were previously reported in the Rainbow segment.
In March 2002, Rainbow Media Holdings acquired Loral Space and Communications, Ltd.'s 50% interest in Rainbow DBS (formerly R/L DBS Company, LLC) for a purchase price of up to a present value of $33,000 payable only from a percentage of future revenues of Rainbow DBS' business, if any, or from any future sale of all or part of the interests in or assets of Rainbow DBS. This purchase increased Rainbow Media Holdings' ownership of Rainbow DBS to 100%. Rainbow DBS's operating results are consolidated with those of the Company as of the date of acquisition.
2001 Transactions
Through December 31, 2001, NBC-Rainbow Holding had exchanged a 3.1% interest in Rainbow Media Holdings equity securities for 6,966,484 shares of Rainbow Media Group Class A common stock of Cablevision (valued at $138,597). The Rainbow Media Group common stock was exchanged for 8,296,594 shares of Cablevision NY Group Class A common stock as of August 20, 2002.
In April 2001, MGM acquired a 20% interest in certain programming businesses of Rainbow Media Holdings for $825,000 in cash. The Company recorded a gain of approximately $745,047 in connection with this transaction.
In January 2001, the Company completed the sale of its cable systems in Boston and eastern Massachusetts to AT&T Corp. in exchange for AT&T's cable systems in certain northern New York suburbs, 44,260,932 shares of AT&T stock, valued at approximately $893,500 at closing based on the
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quoted market price, and approximately $293,200 in cash. The Company recognized a net gain of approximately $1,441,699. In July 2001, AT&T distributed to AT&T common shareholders 0.3218 share of AT&T Wireless Services, Inc. common stock for each share of AT&T common stock held. In connection with such distribution, Cablevision received 14,243,166 shares of AT&T Wireless common stock as a result of its ownership of 44,260,932 shares of AT&T stock. In connection with AT&T's spin off of AT&T Broadband and the merger of AT&T Broadband with Comcast Corporation in November 2002, the Company received 14,318,411 shares of Comcast common stock. Additionally, in November 2002, AT&T completed a 1-for-5 reverse stock split which reduced the 44,260,932 shares of AT&T common stock held by the Company to 8,852,186 shares.
The sales agreements with AT&T provided both parties with certain post closing adjustments to the purchase price following agreement on those adjustments between the parties, or, in the event no agreement was reached, that the post closing adjustment issues would be resolved by third party experts whose determination would be binding. The Company recorded a loss of $13,644 for the year ended December 31, 2003 from the contemplated settlement of working capital adjustments associated with this sale.
The acquisition of the cable systems from AT&T was accounted for as a purchase with the operations of the acquired systems being consolidated with those of the Company as of the acquisition date. The purchase price was allocated to the specific assets acquired based on an independent appraisal as follows:
NOTE 5. RESTRUCTURING AND IMPAIRMENT CHARGES
Restructuring
In December 2001, the Company recorded restructuring charges of $56,442 (including $13,720 for discontinued operations) which included expenses of approximately $21,018 associated with the elimination of approximately 600 positions, primarily in corporate, administrative and infrastructure functions across various business units of the Company, and estimated expenses of approximately
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$35,424 associated with facility realignment and other related costs. The following table summarizes the accrued restructuring liability related to the 2001 restructuring plan for continuing operations.
In 2002, the Company announced a new operating plan and restructuring which included the closing of 26 retail electronics store locations, the consolidation of customer service call centers, the elimination of certain staff positions and the disposition of its motion picture theater business. Additionally, the Company reached an agreement with its supplier of set top boxes which reduced the Company's purchase commitments for set top boxes from $378,500 in 2002, $378,500 in 2003, and $567,750 in 2004 to a total remaining commitment of $87,500 in 2002 and nothing thereafter and required the Company to make certain other cash payments aggregating $50,000 plus interest on a portion of such amount with respect to, among other things, a license for certain software (valued at $17,500 based on an independent appraisal). In connection with this plan, the Company recorded restructuring charges of $84,626 (including $11,553 for discontinued operations) which included $21,725 (including $3,642 for discontinued operations) associated with the elimination of approximately 3,000 positions, $30,364 (including $7,911 for discontinued operations) associated with facility realignment and other related costs and $32,500 associated with the reduction in required digital set top box commitments. The following table summarizes the accrued restructuring liability related to the 2002 restructuring plan for continuing operations:
In 2003, the Company eliminated certain staff positions and incurred severance costs aggregating $6,111, of which approximately $3,853 was paid as of December 31, 2003. In connection with the acquisition of Fox Sports Net Chicago in December 2003, the Company acquired a restructuring liability of $380 relating to facility realignment costs.
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At December 31, 2003, approximately $27,581 of the total restructuring liability was classified as a current liability in the consolidated balance sheet.
Impairment Charges
In December 2003, as part of its periodic review of expected programming usefulness, the Company recorded an impairment loss of $17,900, included in technical and operating expense, representing the write off of the carrying value of certain film and programming contracts of the Company's Rainbow segment.
In December 2002, the Company recorded an impairment loss of approximately $43,222, included in discontinued operations, representing the write down of software and leasehold improvements relating to the Company's retail electronics business. The retail electronics business' projected future operating losses caused the Company to reassess the recoverability of the retail electronics business' fixed assets. The carrying value of these fixed assets exceeded the estimated fair value based on discounted cash flows.
In 2001, the Company recorded a loss on investments of approximately $108,452 reflecting other-than-temporary declines in the fair value of the Company's At Home Corporation warrants. The carrying value of the warrants was reduced to zero at December 31, 2001.
In December 2001, the Company recorded an impairment loss of approximately $99,900 included in depreciation and amortization, representing the balance of unamortized goodwill related to certain theaters in which the carrying value of the asset exceeded the estimated fair value based on discounted estimated future cash flows. Current losses and projected future operating losses caused the Company to reassess the recoverability of the goodwill.
NOTE 6. NET ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
The assets and liabilities attributable to the retail electronics business transferred in March 2003 have been classified in the consolidated balance sheets as assets and liabilities held for sale and consist of the following:
The operations of the retail electronics business transferred in March 2003 and the Bravo programming business sold in December 2002, including restructuring charges (credits), have been classified as discontinued operations, net of taxes, in the consolidated statements of operations for all periods presented.
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Operating results of discontinued operations, including the loss on the transfer of the retail electronics business in March 2003 of $8,382 and the gain on the sale of the Bravo programming service of $663,352 in 2002, are summarized as follows:
NOTE 7. PROPERTY, PLANT AND EQUIPMENT
Costs incurred in the construction of the Company's cable television system, including line extensions to, and rebuild of, the Company's hybrid fiber-coaxial infrastructure and costs incurred in the construction of the Company's head end facilities are capitalized and included in "headends" and "infrastructure," below. These costs consist of materials, sub-contractor labor, direct consulting fees, and internal labor and related costs associated with the construction activities. The internal costs that are capitalized consist of salaries and benefits of Company employees and the portion of facility costs, including rent, taxes, insurance and utilities, that supports the construction activities. Infrastructure costs are depreciated over the 12-year estimated life of the plant, and head end facilities are depreciated over the estimated life of the specific component, ranging from 4 years for certain electronics to 15 years for tower sites. Costs of operating the plant and the technical facilities, including repairs and maintenance and call completion fees, are expensed as incurred.
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In addition, the costs of connecting businesses or residences that have never before been connected to the service offering are capitalized. These costs include material, subcontractor and internal labor and related costs as discussed above. In addition, on-site and remote technical assistance during the provisioning process for new digital product offerings are capitalized. The departmental activities supporting the connection process are tracked through specific metrics, and the portion of departmental costs that is capitalized is determined through a time weighted activity allocation of costs incurred based on time studies used to estimate the average time spent on each activity. New connections are amortized over 5 years or 12 years for residence wiring and feeder cable to the home, respectively. The portion of departmental costs related to reconnection, programming service up- and down- grade, repair and maintenance, and disconnection activities are expensed.
Property, plant and equipment consist of the following assets, which are depreciated or amortized primarily on a straight-line basis over the estimated useful lives shown below:
At December 31, 2003 and 2002, the gross amount of equipment and related accumulated amortization recorded under capital leases were as follows:
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NOTE 8. INTANGIBLE ASSETS
The following table summarizes information relating to the Company's acquired intangible assets at December 31, 2003 and 2002:
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The changes in the carrying amount of excess costs over the fair value of net assets acquired for the years ended December 31, 2003 and 2002 are as follows:
Summarized below is pro forma net income and basic and diluted earnings per share for the year ended December 31, 2001 as adjusted for amortization expense that is no longer recorded in accordance with Statement 142.
NOTE 9. DEBT
Bank Debt
Restricted Group
For financing purposes, CSC Holdings, Inc. (a wholly-owned subsidiary of Cablevision) and certain of its subsidiaries are collectively referred to as the "Restricted Group." The Restricted Group has a $2.4 billion revolving credit facility (the "Credit Agreement") with a group of banks which matures on
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June 30, 2006. The total amount of bank debt outstanding under the Restricted Group credit facility at December 31, 2003 and 2002 was $1,513,039 and $1,930,768 (including $1,039 and $5,768, respectively, outstanding under a separate overdraft facility), respectively. As of December 31, 2003, approximately $50,838 was restricted for certain letters of credit issued on behalf of CSC Holdings. Interest on outstanding amounts may be paid, at the option of the Company, based on the prime rate or a Eurodollar rate plus a margin which varies based on the Restricted Group's leverage ratio (as defined in the Credit Agreement).
Undrawn funds available to the Restricted Group under the Credit Agreement amounted to approximately $837,162 at December 31, 2003. 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 the maintenance of various financial ratios and tests, and limitations on various payments, including preferred dividends and dividends on its common stock. The Company was in compliance with the covenants of its Credit Agreement at December 31, 2003.
The weighted average interest rate on all bank borrowings under the Credit Agreement was 3.19% and 3.64% on December 31, 2003 and 2002, respectively. The Company is also obligated to pay fees ranging from 0.375% to 0.75% per annum on the unused loan commitment and from 0.875% to 1.75% per annum on letters of credit issued under the Credit Agreement.
Rainbow Media Holdings
In December 2003, Rainbow Media Holdings, a wholly-owned subsidiary of CSC Holdings entered into an $823,000 credit facility consisting of a $200,000 revolving credit facility and a $623,000 term loan, maturing on March 31, 2008 and March 31, 2009, respectively. This facility amended and combined the previously existing Rainbow Media Holdings $300,000 credit facility and the AMC, The Independent Film Channel and WE: Women's Entertainment $75,000 credit facility entered into in March 2003. The amended facility is secured primarily by the assets of and guaranteed by AMC, the Independent Film Channel, and WE. Rainbow Media Holdings' 100% interest in the stock of these entities is also pledged as collateral. The amended facility requires commitment reductions beginning in June 2005 and quarterly amortization payments beginning December 31, 2003 through 2008. The amended facility contains certain covenants that may limit Rainbow Media Holdings' ability to utilize all of the undrawn funds available thereunder, including covenants requiring the maintenance of financial ratios and restricting the permitted use of borrowed funds.
Loans under the Rainbow Media Holdings credit facility bear interest at the Eurodollar rate plus a margin based upon Rainbow Media Holdings' leverage ratio. At December 31, 2003, $734,000 was outstanding under this credit facility and bore interest at a weighted average rate of 3.57%. As of December 31, 2003, approximately $2,000 was restricted for certain letters of credit issued on behalf of Rainbow Media Holdings. Undrawn funds available under the Rainbow Media Holdings credit facility amounted to approximately $87,000 at December 31, 2003. Rainbow Media Holdings is required to pay a fee of 0.5% based on the unused portion of the commitment. The credit facility contains certain financial covenants with which Rainbow Media Holdings was in compliance at December 31, 2003.
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Rainbow Media Group
In March 2002, Rainbow Media Group, LLC, a wholly-owned subsidiary of Rainbow Media Holdings, entered into a $400,000 revolving credit facility with a group of banks. This facility terminated upon the sale of the Bravo programming service in December 2002.
AMC and Bravo Company
In March 2002, AMC and Bravo Company, subsidiaries of Rainbow Media Holdings, entered into a $200,000 revolving credit facility with a group of banks. This facility amended and restated the previously existing AMC $200,000 revolving credit facility. This facility terminated upon the sale of the Bravo programming service in December 2002.
Madison Square Garden
MSG, a subsidiary of Rainbow Media Holdings, has a $500,000 revolving credit facility with a group of banks which expires on December 31, 2004. Loans under the MSG credit facility bear interest at either prime rate or a Eurodollar rate plus a margin based upon MSG's consolidated leverage ratio. At December 31, 2003 and 2002, loans outstanding amounted to $110,000 and $155,000, respectively, and bore interest at a weighted average rate of 1.93% and 2.36% respectively. As of December 31, 2003, approximately $10,803 was restricted for certain letters of credit issued on behalf of MSG. The MSG credit facility contains certain covenants that may limit MSG's ability to utilize all of the undrawn funds available thereunder. Undrawn funds available under the MSG credit facility amounted to approximately $379,197 at December 31, 2003. MSG is required to pay a fee of 0.25% based on the unused portion of the commitment. The MSG credit facility contains certain financial covenants with which MSG was in compliance at December 31, 2003. MSG has pledged substantially all of its assets as collateral under the credit facility. See Note 22.
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Senior Notes and Debentures
The following table summarizes CSC Holdings' senior notes and debentures:
In March 2001, CSC Holdings issued $1,000,000 face amount of 75/8% senior notes due 2011. The notes were issued at a discount of $3,210. The net proceeds were used to reduce bank debt outstanding.
The senior notes and debentures are not redeemable by CSC Holdings prior to maturity. The indentures under which the senior notes and debentures were issued contain 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, 2003.
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Subordinated Notes and Debentures
The following table summarizes CSC Holdings' senior subordinated debentures:
*The notes/debentures are redeemable, at CSC Holdings' option, in whole or in part, on the redemption dates listed at the respective percentage of the principal amount and thereafter at 100% of the aggregate principal amount, in each case together with accrued interest to the redemption date.
**The debentures are redeemable, at CSC Holdings' 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. On November 1, 2001, CSC Holdings redeemed its $300,000 face value 91/4% senior subordinated notes due 2005 at a redemption price of 103.1%, plus accrued interest and its $150,000 face value 97/8% senior subordinated notes due 2006 at a redemption price of 104.938%, plus accrued interest. In connection with the redemption, the Company recognized a loss of $15,348.
The indentures under which the subordinated debentures were issued contain 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, 2003.
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Summary of Five Year Debt Maturities
Total amounts payable by the Company and its subsidiaries under its various debt obligations outstanding as of December 31, 2003, including collateralized indebtedness (see Note 12) and capital leases, during the five years subsequent to December 31, 2003 are as follows:
NOTE 10. PREFERRED STOCK OF CSC HOLDINGS, INC.
The following summarizes each series of CSC Holdings' preferred stock:
In February 2003, Quadrangle Capital Partners LP, a private investment firm, invested $75,000 in CSC Holdings, in the form of 10% Series A Exchangeable Participating Preferred Stock convertible into Cablevision NY Group Class A common stock.
In connection with the issuance of the Series A preferred stock to Quadrangle, the Company entered into an agreement with Quadrangle which grants Quadrangle the right to require the Company to purchase the preferred stock ("put option") for cash or through the issuance of registered equity securities of the Company, at the Company's option. The exchange right and the put option have been accounted for as a derivative. Accordingly, the fair value of the exchange right and the put option has been reflected as a liability under derivative contracts in the accompanying consolidated balance sheet. The change in the fair value of $38,618 has been included in loss on derivative contracts in the accompanying consolidated statement of operations.
In October 2003, Quadrangle exercised its "put option" to require CSC Holdings to purchase all of its Series A Exchangeable Participating Preferred Stock. The terms of the agreement provide for the delivery of cash or registered equity securities of Cablevision in settlement of the put price. The Company is in discussions with Quadrangle as to the process for determining the put price.
In February 1996, CSC Holdings issued 6,500,000 depositary shares, representing 65,000 shares of 111/8% Series L Redeemable Exchangeable Preferred Stock (the "Series L Preferred Stock"), which were subsequently exchanged for Series M Redeemable Exchangeable Preferred Stock (the "Series M Preferred Stock") in August 1996 with terms identical to the Series L Preferred Stock. The depositary shares are exchangeable, in whole but not in part, at the option of CSC Holdings, for CSC Holdings' 111/8% Senior Subordinated Debentures due 2008. CSC Holdings is required to redeem the Series M
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Preferred Stock on April 1, 2008 at a redemption price equal to the liquidation preference of $10,000 per share plus accumulated and unpaid dividends. The Series M Preferred Stock is redeemable at various redemption prices beginning at 105.563% at any time on or after April 1, 2003, at the option of CSC Holdings, with accumulated and unpaid dividends thereon to the date of redemption. Before April 1, 2001, dividends could, at the option of CSC Holdings, be paid in cash or by issuing fully paid and nonassessable shares of Series M Preferred Stock with an aggregate liquidation preference equal to the amount of such dividends. On and after April 1, 2001, dividends must be paid in cash. CSC Holdings paid cash dividends on the Series M Preferred Stock of approximately $123,500 in each of 2003, 2002 and 2001.
In September 1995, CSC Holdings issued 2,500,000 shares of its $.01 par value 113/4% Series H Redeemable Exchangeable Preferred Stock (the "Series H Preferred Stock") with an aggregate liquidation preference of $100 per share. CSC Holdings is required to redeem the Series H Preferred Stock on October 1, 2007 at a redemption price per share equal to the liquidation preference of $100 per share, plus accrued and unpaid dividends thereon. The Series H Preferred Stock is redeemable at various redemption prices beginning at 105.875% at any time on or after October 1, 2002, at the option of CSC Holdings, with accumulated and unpaid dividends thereon to the date of redemption. Before October 1, 2000, dividends could, at the option of CSC Holdings, be paid in cash or by issuing fully paid and nonassessable shares of Series H Preferred Stock with an aggregate liquidation preference equal to the amount of such dividends. On and after October 1, 2000, dividends must be paid in cash. The terms of the Series H Preferred Stock permit CSC Holdings, at its option, to exchange the Series H Preferred Stock for CSC Holdings' 113/4% Senior Subordinated Debentures due 2007 in an aggregate principal amount equal to the aggregate liquidation preference of the shares of Series H Preferred Stock. CSC Holdings paid cash dividends on the Series H Preferred Stock of approximately $51,016 in each of 2003, 2002 and 2001, respectively.
In connection with the implementation of Statement 150 on July 1, 2003, the carrying value of CSC Holdings' Series H and Series M Redeemable Preferred Stock of $434,181 and $1,110,113, respectively, was classified as a liability. In addition, beginning July 1, 2003, dividends have been classified as interest expense, increasing interest expense by $87,258 for the year ended December 31, 2003. Prior to July 1, 2003, preferred stock dividend requirements of CSC Holdings are included in minority interests in the accompanying consolidated statements of operations.
NOTE 11. INCOME TAXES
The Company files a consolidated federal income tax return with its 80% or more owned subsidiaries. Prior to June 29, 2002, the Company filed two consolidated federal income tax returns; one consolidated return included the telecommunications and retail operations, and the other consolidated return included Rainbow Media Holdings and all companies 80% or more owned by Rainbow Media Holdings.
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Income tax expense (benefit) attributable to continuing operations consists of the following components:
The income tax expense (benefit) attributable to continuing operations for 2003, 2002 and 2001 exclude deferred federal and state tax benefits of $1,165, $10,983 and $82,861, respectively, resulting from the exercise of stock options, which were credited directly to paid-in capital.
The income tax expense (benefit) attributable to continuing operations differs from the amount derived by applying the statutory federal rate to pretax income principally due to the effect of the following items:
At December 31, 2003, the Company had consolidated net operating loss carry forwards of approximately $2,617,900 expiring on various dates through 2023.
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The Company's net operating loss carry forwards expire as follows:
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, 2003 and 2002 are as follows:
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In 2001, the Company's income tax expense reflected a reduction in the valuation allowance related to its net deferred tax assets of $399.1 million. In 2002, the income tax benefit of the Company reflects an increase in the valuation allowance of $58.6 million. At the end of the second quarter of 2002, NBC exchanged part of its interest in Rainbow Media Holdings for shares of the Company's common stock. As a result of this exchange, Rainbow Media Holdings became a member of the consolidated federal income tax return of the Company. The exchange was accounted for under the purchase method of accounting. Accordingly, the valuation allowance was reduced to zero, resulting in a reduction to the recorded goodwill, without any income statement benefit. In 2003, the Company recorded a valuation allowance of $28.0 million relating to certain state net operating loss carry forwards.
The Company recorded a valuation allowance against certain state tax attribute carry forwards because it is more likely than not that these deferred tax benefits will not be realized. Management evaluates the realizability of deferred tax assets and the need for a valuation allowance on a quarterly basis.
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NOTE 12. COLLATERALIZED INDEBTEDNESS AND DERIVATIVES
Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. The statement requires that all derivative financial instruments be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized as a component of comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings.
To manage interest rate risk, the Company has from time to time entered into interest rate swap contracts to adjust the proportion of total debt that is subject to variable and fixed interest rates. Such contracts fix the borrowing rates on floating rate debt to provide an economic hedge against the risk of rising rates and/or convert fixed rate borrowings to variable rates to provide an economic hedge against the risk of higher borrowing costs in a declining interest rate environment. At December 31, 2003 and 2002, the Company was a party to interest rate swap agreements to pay fixed rates of interest with a total notional value of $600,000 and $1,000,000, respectively, and a fair value of approximately $349 and $3,525, respectively, a net liability position. These agreements have not been designated as hedges for accounting purposes.
In addition, the Company has entered into prepaid interest rate swap agreements in connection with its monetization of certain of its stock holdings, discussed below. These contracts require the Company to pay a floating rate of interest in exchange for fixed rate interest payments, the net present value of which was paid to the Company at the contract's inception in a total amount of $239,270. As of December 31, 2003 and 2002, the total notional value of such contracts was $1,115,045 and the fair values of such contracts were $65,753 and $102,819, respectively, in a net liability position. These agreements have not been designated as hedges for accounting purposes.
The increases in the fair value of the Company's swap agreements and the net realized gains (losses) as a result of net cash interest income (expense) for the years ended December 31, 2003, 2002 and 2001 aggregating approximately $10,420, $115,943 and $31,376, respectively, are reflected in gain on derivative contracts in the accompanying consolidated statements of operations.
The Company has also entered into various transactions to provide an economic hedge against equity price risk on certain of its stock holdings. The Company has monetized all of its stock holdings in Charter Communications, Inc., Adelphia Communications Corporation, AT&T, AT&T Wireless, Comcast Corporation, General Electric Company and Leapfrog Enterprises, Inc. through the execution of prepaid forward contracts, collateralized by an equivalent amount of the respective underlying stock. The contracts set a floor and cap on the Company's participation in the changes in the underlying stock prices and at maturity are expected to offset declines in the fair values of the underlying stock below the hedge price per share, while allowing the Company to retain upside appreciation from the hedge price per share to the cap price. At maturity, the contracts provide for the option to deliver cash or shares of Charter Communications, Adelphia Communications, AT&T Wireless, General Electric or Leapfrog stock (as the case may be) with a value determined by reference to the applicable stock price at maturity. The terms of certain of the AT&T and Comcast transactions require cash settlement in an amount determined by reference to the AT&T and Comcast stock price at maturity.
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The Company received cash proceeds of $330,728 in 2003 and $1,549,411 in 2001, upon execution of the prepaid forward contracts discussed above. Such contracts have not been designated as hedges for accounting purposes. Therefore, the fair values of the equity forward contracts of $524,895 and $705,020, at December 31, 2003 and 2002, respectively, have been reflected in the accompanying consolidated balance sheets and the net increases (decreases) in the fair value of the equity derivative component of the prepaid forward contracts of $(180,125), $808,094 and $250,376 as of December 31, 2003, 2002 and 2001, respectively, are included in gain (loss) on derivative contracts in the accompanying consolidated statements of operations. With the adoption of Statement 133 on January 1, 2001, the shares of Charter Communications and Adelphia Communications were reclassified from securities available-for-sale to trading securities. As a result, the Company recorded a gain on investments of $286,440 representing the accumulated unrealized gains as of January 1, 2001. For the years ended December 31, 2003, 2002 and 2001, the Company recorded a gain (loss) on investments of $231,836, $(865,616) and $(176,673), respectively, representing the net increases or decreases in the fair values of all investment securities pledged as collateral for the period.
In May 2002, due to certain events relating to Adelphia Communications, the Company received early termination notices from its bank counterparties pursuant to certain monetization contracts covering 9.79 million shares of Adelphia Communications common stock. As a result, the Company was required to repay the related collateralized indebtedness prior to maturity, net of the benefit of the related prepaid equity forward contracts in a significant gain position. The Company made cash payments aggregating $54,813, representing the difference between the redemption value of the collateralized indebtedness and the fair market value of the prepaid equity forward contracts as of the early termination date, and 9.79 million shares of Adelphia Communications common stock that were held as collateral were returned to the Company. In connection with the early termination, the Company recognized a loss of $17,237, representing the difference between the carrying value and the redemption value of the collateralized indebtedness, which is reflected as a loss on the extinguishment of debt in the accompanying consolidated statement of operations.
In connection with the issuance of the Series A preferred stock to Quadrangle, the Company entered into an agreement with Quadrangle which grants Quadrangle the right to require the Company to purchase the preferred stock ("put option") for cash or through the issuance of registered equity securities of the Company, at the Company's option. The exchange right and the put option have been accounted for as a derivative. Accordingly, the fair value of the exchange right and the put option has been reflected as a liability under derivative contracts in the accompanying consolidated balance sheet. The change in the fair value of $38,618 has been included in loss on derivative contracts in the accompanying consolidated statement of operations.
NOTE 13. OPERATING LEASES
The Company leases certain office, production, transmission, theater and event facilities under terms of leases expiring at various dates through 2027. The leases generally provide for fixed annual rentals plus certain real estate taxes and other costs. Rent expense for the years ended December 31, 2003, 2002 and 2001 amounted to $85,988, $80,039 and $64,238, 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, 2003, 2002 and 2001 amounted to approximately $13,225, $12,515 and $12,419, respectively.
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The minimum future annual rentals for all operating leases during the next five years, including pole rentals from January 1, 2004 through December 31, 2008, and thereafter, at rates now in force are as follows:
At December 31, 2003 and 2002, approximately $31,176 and $39,886 of these commitments has been accrued, respectively, in connection with the restructuring plan described in Note 5.
NOTE 14. AFFILIATE AND RELATED PARTY TRANSACTIONS
Equity Method Investments
The following table reflects Cablevision's effective ownership percentages and balances of equity method investments as of December 31, 2003 and 2002:
*The results of operations of Fox Sports Net Bay Area and Fox Sports Net Chicago have been consolidated with those of the Company as of the date of acquisition. (See Note 4.) I-41
The following table includes certain unaudited financial information for equity method investments:
*Includes long-term indebtedness and amounts due to the Company referred to below. Aggregate amounts due from and due to these affiliates at December 31, 2003 and 2002 are summarized below:
*Advances at December 31, 2002 include $171,911 due from Northcoast Communications and Northcoast PCS. The Company's share of the net income (loss) of these affiliates for the years ended December 31, 2003, 2002 and 2001 amounted to $429,732, $(42,375) and $(68,206), respectively (including net income (losses) of $434,550, $(36,029) and $(42,957), respectively, related to Northcoast Communications). The Company provides certain transmission and production services to certain of these affiliates. For the years ended December 31, 2003, 2002 and 2001, approximately $3,633, $3,671 and $3,686, respectively, of revenues were earned from services provided to these entities. Costs incurred by the Company for programming and entertainment services provided by these affiliates and included in operating expenses for the years ended December 31, 2003, 2002 and 2001 amounted to $5,492, $5,172 and $5,420, respectively.
Northcoast Communications
In August 1996, the Company entered into an agreement with Northcoast PCS, LLC and certain of its affiliates, to form a limited liability company, Northcoast Communications, LLC, to participate in the auctions conducted by the Federal Communications Commission ("FCC") for certain licenses to conduct a personal communications service ("PCS") business. The Company holds a 49.9% interest in Northcoast Communications and certain preferential distribution rights.
As of December 31, 2002, Northcoast Communications, an unconsolidated subsidiary of the Company, had $58,236 in notes payable to the FCC for the PCS licenses acquired during 1997. In addition, a wholly-owned subsidiary of Northcoast Communications, Cleveland PCS, LLC, had $68,392 and $68,412, respectively, in vendor financing outstanding at December 31, 2003 and 2002 under a stand-alone $75,000 facility obtained in connection with the launch of commercial service in Cleveland.
Vendor financing for Northcoast Communications' Cleveland operation consists of the $75,000 credit facility at Cleveland PCS, LLC. This facility has no recourse to Cablevision or to Northcoast
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Communications, other than pursuant to a pledge by Northcoast Communications of the stock of Cleveland PCS and a guarantee of the payment by Northcoast Communications and Cablevision of the FCC indebtedness of the Cleveland PCS subsidiary which holds the Cleveland license which, as of December 31, 2003 and 2002, had an outstanding balance of $2,218 and $2,730, respectively. As of December 31, 2003 and 2002, Cleveland PCS was in default of the terms of this credit facility and had received notice of commitment termination and acceleration from the lender.
Under a contractual agreement, the Company provides Northcoast Communications certain management services. Pursuant to this agreement, the Company recorded management fees of $1,783 and $13,584 in 2002 and 2001, respectively. Northcoast Communications is a Delaware corporation controlled by John Dolan, who is a nephew of Charles F. Dolan and a cousin of James L. Dolan, the Company's Chairman and Chief Executive Officer, respectively.
In May 2003, Northcoast Communications completed its sale of spectrum licenses covering 50 U.S. markets to Verizon Wireless for approximately $763,000 in cash. Of the proceeds, approximately $51,000 was used by Northcoast Communications to retire debt. The remaining proceeds, after payment of expenses, were distributed to the partners of Northcoast Communications, including the Company. The Company's share of the proceeds was approximately $651,000, of which $30,000 is being held in an escrow fund to provide for any post-closing adjustments and claims. All of the available funds were used by the Company to repay bank debt under the Restricted Group credit facility.
At December 31, 2003, the Company's investment in Northcoast Communications was zero and the Company's exposure to any loss relates to its guarantee of the FCC indebtedness of Cleveland PCS of $2,218. The Company is still evaluating whether Northcoast Communications is a variable interest entity requiring consolidation pursuant to FIN 46.
Rainbow DBS
In 1996, Rainbow Media Holdings invested in a joint venture, Rainbow DBS, formed with a subsidiary of Loral Space and Communications, Ltd. for the purpose of exploiting certain direct broadcast satellite ("DBS") frequencies. Rainbow Media Holdings also contributed to the joint venture its interest in certain agreements with the licensee of such frequencies. In March 2002, Rainbow Media Holdings acquired Loral Space and Communications' 50% interest in Rainbow DBS. (See Note 4.) The FCC's construction permit relating to the DBS frequencies was originally scheduled to expire in August 1999.
In December 2000, the FCC granted an extension to Rainbow DBS' construction permit relating to the DBS frequencies held by Rainbow DBS. The extension required the launch of a satellite by March 29, 2003 and commencement of service offerings by not later than December 29, 2003, with specified six month interim construction milestones, non-compliance with which would result in the forfeiture of the construction permit. In March 2003, Rainbow DBS requested an extension of the launch date of a direct broadcast satellite to August 31, 2003 due to the satellite manufacturer's need for additional time for scheduling and testing of the launch vehicle for the satellite. On July 17, 2003, Rainbow DBS successfully launched a direct broadcast satellite into space and on October 15, 2003, Rainbow DBS introduced VOOMsm, the Company's direct broadcast satellite service.
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At Home
In October 1997, the Company entered into an agreement with At Home and certain of its shareholders, pursuant to which the Company agreed to enter into agreements for the distribution of the At Home service over certain of the Company's cable television systems on the same terms and conditions as At Home's founding partners, Tele-Communications, Inc., Comcast and Cox Communications, Inc. The Company received a warrant to purchase 15,751,568 shares of At Home's Series A common stock at an exercise price of $0.25 per share. Additionally, in 1998 a warrant to purchase 4,711,028 shares of At Home's Series A common stock at $0.25 per share was received in connection with the acquisition of certain cable television systems from TCI Communications, Inc. The At Home network distributed high-speed interactive services to residences and businesses using its own network architecture and a variety of transport options, including the cable industry's hybrid fiber coaxial infrastructure.
The original aggregate fair market value of the warrants received of $248,134, as determined by independent appraisals, was recorded in other investments and was accounted for under the cost method. The fair market value of the warrants was recorded as deferred revenue and was being amortized to income over the period in which the Company was obligated to provide the necessary services to At Home.
In 2001, the Company recorded $66,872 of revenue relating to this transaction. In 2001, the Company recorded an impairment loss of approximately $108,452, reflecting the decline in the fair value of the warrants which reduced the carrying value of the warrants to zero at December 31, 2001. In 2001, the Company recorded a gain of $25,190, representing primarily the recognition of the remaining unamortized portion of deferred revenue at December 31, 2001.
Other Affiliates and Related Parties
During 2003, 2002 and 2001, the Company provided programming services to or incurred costs on behalf of other affiliates engaged in providing cable television, cable television programming, and related services. Aggregate amounts due from and due to these affiliates at December 31, 2003 and 2002 are summarized below:
Fox Sports Net Ohio and Cleveland Indians Baseball Club Limited Partnership (the "Indians") are parties to a multi-year rights agreement under which Fox Sports Net Ohio pays license fees to the Indians in exchange for telecast rights to substantially all regular season Indians games. The Indians are owned by (i) Lawrence Dolan, a brother of Charles F. Dolan, the Company's Chairman, (ii) a trust, the beneficiaries of which are Lawrence Dolan and certain descendants of Lawrence Dolan, and (iii) certain other trusts, the beneficiaries of which are certain descendants of Charles F. Dolan, including James L. Dolan, the Company's Chief Executive Officer, and Thomas C. Dolan and Patrick F. Dolan, officers of the Company and brothers of James L. Dolan. Management control of the Indians is held by Lawrence Dolan.
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NOTE 15. BENEFIT PLANS
The Company has a Cash Balance Retirement Plan (the "Retirement Plan") for the benefit of employees other than those of the theater business. Under the Retirement Plan, the Company will credit a certain percentage of eligible base pay into an account established for each participant which will earn a market based rate of return annually.
Components of the net periodic pension cost for the Retirement Plan for the years ended December 31, 2003, 2002 and 2001, are as follows:
The funded status and the amounts recorded on the Company's balance sheet for the Retirement Plan at December 31, 2003 and 2002, were as follows:
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Assumptions used in accounting for the Retirement Plan are as follows:
The Retirement Plan's expected rate of return on plan assets is 8.0%. The rate of return is based on the portfolio of assets as a whole and not on the sum of the returns on individual asset investments.
The weighted average asset allocation of the Company's Retirement Plan at December 31, 2003 and 2002 were as follows:
For 2003, the Retirement Plan's investment objective was to invest in portfolios that would obtain a market rate of return throughout economic cycles, commensurate with the investment risk and cash flow needs of the Retirement Plan. This allows the Retirement Plan to subject a portion of its assets to increased risk to generate a greater rate of return. The Retirement Plan addresses diversification by the use of investment portfolios whose underlying investments are in domestic and international equity securities and domestic fixed income securities. The investments in each portfolio are readily marketable and can be sold to fund benefit payment obligations of the Retirement Plan as they become payable. Prior to 2003, the Retirement Plan invested all of its assets in a fund whose underlying investments were primarily in securities, such as commercial paper and repurchase agreements with little or no risk that generated a lower rate of return.
The Company expects to contribute $26,900 to the Retirement Plan in 2004.
The Company also maintains 401(k) savings plans, pursuant to which an employee can contribute a percentage of eligible annual compensation, as defined. The Company also makes matching cash contributions for a portion of employee contributions to the 401(k) savings plans. The cost associated with the 401(k) savings plans was approximately $13,066, $13,502 and $12,391 for the years ended December 31, 2003, 2002 and 2001, respectively.
The Company maintains the CSSC Supplemental Benefit Plan (the "Supplemental Plan") for the benefit of certain officers and employees of the Company. As part of the Supplemental 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. All participants are 100% vested in the Supplemental Plan. Net periodic pension cost was $671, $453 and $200 for the years ended December 31, 2003, 2002 and 2001, respectively. At December 31, 2003 and 2002, the projected benefit obligation exceeded the fair value of Supplemental Plan assets by approximately $1,090 and $1,660, respectively.
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MSG sponsors non-contributory pension plans covering certain MSG employees. Benefits payable to retirees under these plans are based upon years of service and participants' compensation and are funded through trusts established under the plans. Plan assets are invested primarily in common stocks, bonds, United States government securities and cash. At December 31, 2003 and 2002, the accrued benefit cost amounted to $16,150 and $13,538, respectively, and for the years ended December 31, 2003, 2002 and 2001, net periodic pension cost amounted to $4,124, $3,245 and $2,445, respectively.
In addition, MSG contributes to various multiemployer defined benefit pension plans. Pension expense recognized for these multiemployer plans for the years ended December 31, 2003, 2002 and 2001 amounted to $3,178, $3,052 and $3,307, respectively.
MSG also sponsors a welfare plan which provides certain postretirement health care benefits to certain MSG employees and their dependents. The welfare plan is insured through a managed care provider and MSG funds these benefits with premium payments. For the years ended December 31, 2003, 2002 and 2001, the periodic postretirement benefit cost amounted to $429, $430, and $169, respectively, and as of December 31, 2003 and 2002, the accrued benefit cost amounted to $6,802 and $6,547, respectively.
NOTE 16. STOCK BENEFIT AND LONG-TERM INCENTIVE PLANS
Stock Benefit Plans
The Company has an Employee Stock Plan (the "1985 Stock Plan") under which the Company is authorized to issue a maximum of 14,000,000 shares. Pursuant to its terms, no awards could be granted under the 1985 Stock Plan after December 5, 1995. Under the 1985 Stock Plan, the Company granted incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights, stock grants and stock bonus awards. The exercise price of stock options could not be less than the fair market value per share of Class A common stock on the date the option was granted and the options could expire no longer than ten years from date of grant. Stock appreciation rights provide for the employee to receive a cash payment in an amount equal to the difference between the fair market value of the stock as of the date the right is exercised, and the exercise price.
The Company also has an Employee Stock Plan (the "Employee Stock Plan"), under which the Company is authorized to issue a maximum of 39,941,045 shares of CNYG common stock. As of December 31, 2003, 21,552,802 shares of CNYG common stock were available for future grant under the Employee Stock Plan. Under the Employee Stock Plan, the Company is able to grant incentive stock options, nonqualified stock options, restricted stock, conjunctive and alternative stock appreciation rights, stock grants and stock bonus awards. The other terms of the Employee Stock Plan are substantially identical to those of the 1985 Stock Plan, except that under the Employee Stock Plan, the Compensation Committee has the authority, in its discretion, to add performance criteria as a condition to any employee's exercise of an award granted under the Employee Stock Plan. Options and stock appreciation rights granted in 2003, 2002 and 2001 vest in 331/3 annual increments beginning one year from the date of grant.
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In January 2003, the Company offered employees the right to exchange stock options and stock appreciation rights outstanding under the Employee Stock Plan, which had an exercise price of more than $20.00, for restricted shares. Employees who accepted the offer received one restricted share for every two common shares issuable upon exercise of his or her options and one restricted share for every three common shares subject to his or her stock appreciation rights. Compensation expense is recognized over the four year vesting period, equal to the excess of the restricted shares' value on the grant date of $17.54 per share over the par value amount paid for the shares of $0.01 per share. Pursuant to the offer, a total of 8,722,278 options and 6,236,850 stock appreciation rights were exchanged for a total of 6,440,831 shares of restricted stock. Options not exchanged pursuant to the offer are subject to variable accounting until exercised or forfeited.
The Company also has a Non-Employee Director Plan (the "Non-Employee Director Plan"), under which the Company is authorized to issue a maximum of 757,912 shares of common stock. Under the Non-Employee Director Plan, the Company is able to grant stock options at an exercise price equal to the fair value of the shares on the date of the option grant. As of December 31, 2003, 205,112 shares of common stock were available for future grant under the Non-Employee Director Plan.
As a result of stock awards, bonus awards, and stock appreciation rights, the Company recorded expense (income), reflecting vesting schedules for applicable grants as well as fluctuations in the market price of the underlying stock in the amount of $42,806, $(41,538) and $(44,973) for the years ended December 31, 2003, 2002 and 2001, respectively.
Stock transactions under the 1985 Stock Plan, the Employee Stock Plan and the Non-Employee Director Plan are as follows:
Cablevision Common Stock Options
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CNYG Common Stock Options
RMG Common Stock Options
In connection with the August 20, 2002 exchange of Rainbow Media Group common stock for Cablevision NY Group common stock, each option to purchase a share of Rainbow Media Group common stock was exchanged for an option to purchase 1.19093 shares of Cablevision NY Group common stock.
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The following table summarizes significant ranges of outstanding and exercisable options at December 31, 2003:
CNYG Common Stock Options
Long-Term Incentive Plan
Pursuant to the Company's Long-Term Incentive Plan, the Company has granted cash awards to senior executives that vest over varying periods, some of which are performance based. Certain senior executives have also received performance retention awards under the plan, vesting over 7 years, aggregating $123,000. The terms of the award provided that the executive could have requested a loan from the Company in the amount of the award prior to its vesting, subject to certain limitations, provided that such loan was secured by a lien in favor of the Company on property owned by the executive. Effective July 30, 2002, such requests for advances on amounts of awards are no longer permitted. As of December 31, 2003 and 2002, $43,045 and $43,725, respectively, had been advanced in respect of this plan. In connection with the Long-Term Incentive Plan, the Company has recorded expense of $19,541, $23,501 and $6,344 for the years ended December 31, 2003, 2002 and 2001, respectively.
In addition, in 2003, the Company granted certain management employees cash awards aggregating $44,315 that vest when the Company reaches certain performance goals. Such awards are being amortized ratably over the period in which the Company is expected to achieve these goals, and accordingly recorded expense of $16,492 in respect of this award in 2003.
NOTE 17. COMMITMENTS AND CONTINGENCIES
The Company, through Rainbow Media Holdings, has entered into several contracts, including rights agreements with professional sports teams and others relating to cable television programming. In addition, Rainbow Media Holdings, through MSG, has employment agreements with players, general managers and coaches of its professional sports teams. The contracts provide for payments which are guaranteed regardless of injury or termination. Certain of these contracts are covered by disability insurance if certain conditions are met. The future cash payments reflected below do not include the impact of potential insurance recoveries or amounts which may be due to the National Basketball Association ("NBA") for luxury tax payments.
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In addition, the table below includes certain other unconditional purchase obligations pursuant to contracts entered into in the normal course of business. Future cash payments required under these contracts as of December 31, 2003 are as follows:
At December 31, 2003, approximately $60,084 of commitments, included in the table above, relating to sports teams' and broadcast personnel contracts have been accrued and are reflected in the accompanying consolidated balance sheets.
During 2001, subsidiaries of Rainbow Media Holdings secured carriage commitments with certain multiple system operators under long-term affiliation agreements, in exchange for which such businesses agreed to make payments when evidence is obtained that certain launch thresholds are met conditioned upon continued carriage. These businesses are contingently liable for additional payments of up to $9,852. This commitment has been reflected in the table above.
In addition to the above amounts, MSG may also be obligated to pay the NBA a luxury tax in each year pursuant to the NBA/NBPA collective bargaining agreement, which is in effect through June 30, 2005. The ultimate calculation of any amount due would be based on a formula established by the agreement. The tax is based on the amount by which the team's salary, as defined in the agreement, exceeds a luxury tax "trigger."
Many of the Company's franchise agreements and utility pole leases require the Company to remove its cable wires and other equipment upon termination of the respective agreements. The Company has concluded that the fair value of these asset retirement obligations cannot be reasonably estimated since the range of potential settlement dates is not determinable.
NOTE 18. LEGAL MATTERS
The Company is party to various lawsuits, some involving substantial amounts. Although the outcome of these matters cannot be predicted with certainty, management does not believe that the resolution of these lawsuits will have a material adverse effect on the financial position, results of operations or liquidity of the Company.
At Home
On April 25, 2001, At Home Corporation commenced a lawsuit in the Court of Chancery of the State of Delaware alleging that Cablevision had breached its obligations under certain agreements with At Home. The suit sought a variety of remedies including: rescission of the agreements between At Home and Cablevision and cancellation of all warrants held by Cablevision, damages, and/or an order prohibiting Cablevision from continuing to offer its Optimum Online service and requiring it to convert its Optimum Online customers to the Optimum@Home service and to roll out the Optimum@Home
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service. On September 28, 2001, At Home filed a petition for reorganization in federal bankruptcy court. In connection with the liquidation of At Home, the claims in this lawsuit, among others, were assigned to the General Unsecured Creditors Liquidated Trust ("GUCLT").
On June 26, 2003, the GUCLT initiated a separate action against Cablevision in the United States District Court for the Northern District of California. The California action stems from a May 1997 agreement between Cablevision and At Home that is no longer in effect. The GUCLT seeks monetary damages of "at least $12.5 million" due to the claimed failure by Cablevision to make alleged required payments to At Home during the 2001 calendar year.
On July 29, 2003, based on an agreed Stipulation filed jointly by Cablevision and the GUCLT, the Court dismissed the Delaware action with prejudice, other than solely with respect to the specific claims brought by the GUCLT in the California action.
YES Network
On April 29, 2002, Yankees Entertainment & Sports Network, LLC (the "YES Network") filed a complaint and, on September 24, 2002, an amended complaint against the Company in the United States District Court, Southern District of New York. The lawsuit arises from the failure of the YES Network and the Company to reach agreement on the carriage of programming of the YES Network (primarily New York Yankees baseball games and New Jersey Nets basketball games) on the Company's cable television systems. The amended complaint alleges a variety of anticompetitive acts and seeks declaratory judgments as to violations of laws, treble damages and injunctive relief, including an injunction requiring the Company to carry the YES Network on its cable television systems. The Company believes that the claims set forth in the complaint are without merit. As a result of the March 2003 agreement discussed below, the litigation with the YES Network has been stayed and, under the terms of the agreement, will ultimately be dismissed.
On March 31, 2003, YES Network and Cablevision reached an agreement pursuant to which Cablevision began carrying programming of the YES Network. Under this agreement, Cablevision agreed to carry the YES Network programming for one year under interim arrangements while the parties sought to finalize the terms of a definitive long-term affiliation agreement. If the parties do not reach agreement on the terms of the long-term arrangement, those terms will be established by arbitration. The final terms established will be retroactively applied to March 31, 2003. The parties were unable to reach an agreement on a long-term arrangement and the matter was submitted to arbitration. The hearing before the arbitration panel ended in March 2004 and the parties expect that a decision will be issued prior to the start of the major league baseball season in April 2004. As part of the March 31, 2003 agreement, Cablevision agreed to pay YES Network for certain revenue reductions and expenses that YES Network experiences, during the term of the one-year interim agreement, under the "most favored nations" provisions of YES Network's affiliation agreements with certain other distributors.
Tracking Stock Litigation
In August 2002, purported class actions naming as defendants the Company and each of its directors were filed in the Delaware Chancery Court. The actions, which allege breach of fiduciary duties and breach of contract with respect to the exchange of the Rainbow Media Group tracking stock for Cablevision NY Group common stock, were purportedly brought on behalf of all holders of publicly traded shares of Rainbow Media Group tracking stock. The actions sought to (i) enjoin the exchange
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of Rainbow Media Group tracking stock for Cablevision NY Group common stock, (ii) enjoin any sales of "Rainbow Media Group assets," or, in the alternative, award rescissory damages, (iii) if the exchange is completed, rescind it or award rescissory damages, (iv) award compensatory damages, and (v) award costs and disbursements. The actions were consolidated into one action on September 17, 2002, and on October 3, 2002, the Company filed a motion to dismiss the consolidated action. The action is currently stayed by agreement of the parties pending resolution of a related action brought by one of the plaintiffs to compel the inspection of certain books and records of the Company. The Company believes the claims are without merit and intends to contest the lawsuits vigorously.
In August 2003, a purported class action naming as defendants the Company, directors and officers of the Company and certain current and former officers and employees of the Company's Rainbow Media Holdings and American Movie Classics subsidiaries was filed in New York Supreme Court by the Teachers Retirement System of Louisiana. The actions relate to the August 2002 Rainbow Media Group tracking stock exchange and allege, among other things, that the exchange ratio was based upon a price of the Rainbow Media Group tracking stock that was artificially deflated as a result of the improper recognition of certain expenses at the national services division of Rainbow Media Holdings. The complaint alleges breaches by the individual defendants of fiduciary duties. The complaint also alleges breaches of contract and unjust enrichment by the Company. The complaint seeks monetary damages and such other relief as the court deems just and proper. The Company intends to contest the lawsuit vigorously. On October 31, 2003, the Company and other defendants moved to stay the action in favor of the previously filed actions pending in Delaware or, in the alternative, to dismiss for failure to state a claim. The parties are awaiting a decision from the court on this motion.
Time Warner Litigation
On November 14, 2003, American Movie Classics Company filed an action against Time Warner Entertainment, L.P. in New York State Supreme Court for declaratory relief and damages caused by Time Warner's anticipatory repudiation of its cable television affiliation agreement with American Movie Classics. American Movie Classics Company filed that action as a result of Time Warner's notice purporting to terminate the contract based upon their allegation that American Movie Classics had changed its programming. The Company believes the notice was improper. American Movie Classics Company is seeking a declaratory judgment that it is entitled to full performance of the agreement, and, at its option, is entitled to rescind the agreement and recover damages. Time Warner filed an answer and counterclaims in December 2003 that, among other things, seeks a declaratory judgment as to its right to terminate the affiliation agreement, an injunction requiring American Movie Classics to deliver a classic films channel and damages for an alleged breach of contract.
Accounting Related Investigations
The Securities and Exchange Commission and the U.S. Attorney's Office for the Eastern District of New York are conducting investigations into matters related to the improper expense recognition discussed in Note 2.
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NOTE 19. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents, Accounts Receivable Trade, Notes and Other Receivables, Prepaid Expenses and Other Assets, Advances to Affiliates, Accounts Payable, Accounts Payable-Affiliates and Accrued Liabilities.
The carrying amount approximates fair value due to the short maturity of these instruments.
Derivative Contracts and Liabilities Under Derivative Contracts
Derivative contracts are carried at fair value based on dealer quotes.
Investment Securities and Investment Securities Pledged as Collateral
Marketable securities are carried at their fair value based upon quoted market prices.
Bank Debt, Collateralized Indebtedness, Senior Notes and Debentures, Subordinated Notes and Debentures and Redeemable Exchangeable Preferred Stock of CSC Holdings
The fair values of each of the Company's debt instruments and redeemable preferred stock of CSC Holdings are based on quoted market prices for the same or similar issues or on the current rates offered to the Company for instruments of the same remaining maturities.
Interest Rate Swap Agreements
Interest rate swap agreements are carried at fair value based on 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.
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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 20. SEGMENT INFORMATION
The Company classifies its business interests into three segments: Telecommunications Services, consisting principally of its cable television, telephone and high-speed data services operations; Rainbow, consisting principally of interests in national and regional cable television programming networks; and MSG, which owns and operates professional sports teams, regional cable television networks, live productions and entertainment venues.
The Company's reportable segments are strategic business units that are managed separately. The Company evaluates segment performance based on several factors, of which the primary financial measure is business segment adjusted operating cash flow (defined as operating income (loss) before depreciation and amortization, stock plan income or expense and restructuring charges or credits). The accounting policies of the segments are the same as those described in the summary of significant
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accounting policies. Information as to the operations of the Company's business segments is set forth below.
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A reconciliation of reportable segment amounts to the Company's consolidated balances is as follows:
Substantially all revenues and assets of the Company's reportable segments are attributed to or located in the United States.
The Company does not have a single external customer which represents 10 percent or more of its consolidated revenues.
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NOTE 21. INTERIM FINANCIAL INFORMATION (Unaudited)
The following is a summary of selected quarterly financial data for the years ended December 31, 2003 and 2002. See Note 2. "Restatement of Consolidated Financial Statements".
2003:
2002:
NOTE 22. SUBSEQUENT EVENTS
In March 2004, borrowings under the MSG credit facility were repaid in full and the credit facility was terminated with proceeds from an intercompany loan from Regional Programming Partners.
In January and February 2004, Rainbow DBS invested $85,000, and owns a substantial interest in an entity that recently acquired licenses from the FCC to provide multichannel video distribution and data service in 45 metropolitan areas in the United States.
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
CSC Holdings, Inc.
We have audited the accompanying consolidated balance sheets of CSC Holdings, Inc. and subsidiaries as of December 31, 2003 and 2002, 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, 2003. In connection with our audits of the consolidated financial statements, we also audited the financial statement schedule listed in Item 15(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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 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 CSC Holdings, Inc. and subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. 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.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, in the year ended December 31, 2003 and adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, in the year ended December 31, 2002.
As discussed in Note 2, the accompanying consolidated financial statements as of December 31, 2002 and for the years ended December 31, 2002 and 2001 have been restated.
/s/ KPMG LLP
Melville, New York
March 15, 2004
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CSC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
(Dollars in thousands)
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See accompanying notes to
consolidated financial statements.
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CSC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share amounts)
See accompanying notes
to consolidated financial statements.
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CSC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIENCY
Years ended December 31, 2003, 2002 and 2001
(Dollars in thousands)
See accompanying notes
to consolidated financial statements.
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CSC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2002 and 2001
(Dollars in thousands)
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See accompanying notes
to consolidated financial statements.
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CSC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company and Related Matters
CSC Holdings, Inc. (the "Company"), is a wholly-owned subsidiary of Cablevision Systems Corporation ("Cablevision"). The Company and its majority-owned subsidiaries own and operate cable television systems and through its subsidiary, Rainbow Media Holdings LLC, have ownership interests in companies that produce and distribute national and regional entertainment and sports programming services, including Madison Square Garden, L.P. ("MSG"). The Company also owns companies that provide advertising sales services for the cable television industry, provide switched telephone service, operate motion picture theaters and provide direct broadcast satellite service. The Company classifies its business interests into three segments: Telecommunications Services, consisting principally of its cable television, telephone and high-speed data services operations; Rainbow, consisting principally of interests in national and regional cable television programming networks; and MSG, which owns and operates professional sports teams, regional cable television networks, live productions and entertainment venues.
Principles of Consolidation and Investments in Affiliates
The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. The Company's interests in less than majority-owned entities are carried on the equity method. The Company would recognize a loss where there existed an other than temporary decline in the value of the investment. All significant intercompany transactions and balances are eliminated in consolidation.
Revenue Recognition
The Company recognizes cable television, high-speed data, telephony and programming revenues as services are provided to subscribers. Advertising revenues are recognized when commercials are telecast. Revenues derived from other sources are recognized when services are provided or events occur.
Costs of Revenue
Costs of revenue related to sales of services and the cost of direct broadcast satellite equipment sold are classified as "technical and operating" expenses in the accompanying statements of operations.
Investments in Marketable Securities
The Company accounts for its investments in marketable securities in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Investment securities and investment securities pledged as collateral are classified as trading securities and are stated at fair value with unrealized holding gains and losses included in net income (loss).
Long-Lived and Indefinite-Lived Assets
Property, plant and equipment, including construction materials, are carried at cost, and include all direct costs and certain indirect costs associated with the construction of cable television transmission and distribution systems, and the costs of new product and subscriber installations. Franchise renewal
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costs are amortized on the straight-line basis over the average terms (3 to 20 years) of the franchises. Affiliation, broadcast and other agreements (primarily cable television system programming agreements) are amortized on a straight-line basis over periods ranging from 3 to 40 years. Other intangible assets are amortized on the straight-line basis over the periods benefited (2 to 20 years). Excess costs over fair value of net assets acquired ("goodwill") and the value of franchises acquired in purchase business combinations which have indefinite useful lives are no longer amortized in connection with the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002. Prior to the adoption of Statement 142, goodwill was amortized on the straight-line basis over periods ranging from 3 to 40 years and franchises acquired in purchase business combinations were amortized on the straight-line basis over the average terms (3 to 20 years).
The Company reviews its long-lived assets (property, plant and equipment, and intangible assets subject to amortization that arose from business combinations accounted for under the purchase method) for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.
The Company evaluates the recoverability of its goodwill and indefinite lived intangible assets annually or more frequently whenever events or circumstances indicate that the asset may be impaired. Statement 142 requires that goodwill impairment be determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination.
The impairment test for other intangible assets not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
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 to technical and operating expense
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on a straight-line basis over the respective license periods. Amounts payable subsequent to December 31, 2003 related to feature film telecast rights are as follows:
Deferred Carriage Fees
Deferred carriage fees represent primarily payments to cable systems operators to guarantee carriage of certain programming services and are recorded as a reduction to revenue over the period of guarantee (1 to 11 years).
Deferred Financing Costs
Costs incurred to obtain debt are deferred and amortized, on a straight-line basis, over the life of the related debt.
Income Taxes
Income taxes are provided based upon the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires the asset/liability method of accounting for deferred income taxes and permits the recognition of deferred tax assets, subject to an ongoing assessment of realizability.
Income (Loss) Per Common Share
Basic and diluted net income (loss) per common share are not presented since the Company is a wholly-owned subsidiary of Cablevision.
Reclassifications
Certain reclassifications have been made in the 2002 and 2001 financial statements to conform to the 2003 presentation.
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.
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During 2003, 2002 and 2001, the Company's non-cash investing and financing activities and other supplemental data were as follows:
Derivative Financial Instruments
The Company accounts for derivative financial instruments in accordance with Statement 133, Accounting for Derivative Instruments and Hedging Activities, as amended. Statement 133 requires that an entity recognize all derivatives, as defined, as either assets or liabilities measured at fair value. The Company does not hold or issue derivative instruments for trading purposes. However, the Company uses derivative instruments to manage its exposure to market risks from changes in certain equity prices and interest rates. These derivative instruments are not designated as hedges, and changes in the fair values of these derivatives are recognized in earnings.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
Recently Issued Accounting Standards
The FASB issued Statement 143, Accounting for Asset Retirement Obligations, in June 2001. Statement 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company's adoption of Statement 143 in 2003 had an insignificant impact on the Company's financial condition or results of operations.
In June 2002, Statement 146, Accounting for Costs Associated with Exit or Disposal Activities, was issued. This Statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan. The provisions of this Statement have been adopted for all exit and disposal activities initiated after December 31, 2002.
In April 2003, the FASB issued Statement 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts. Statement 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying to conform it to language used in FASB Interpretation ("FIN") No. 45, and amends certain other existing pronouncements. Statement 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of Statement 149 had no impact on the Company's financial condition or results of operations.
In May 2003, the FASB issued Statement 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This Statement requires that certain instruments that were previously classified as equity on a company's statement of financial position now be classified as liabilities. As a result of adopting the Statement on July 1, 2003, liabilities increased $1,544,294 reflecting the reclassification of the Company's Series H and Series M Redeemable Preferred Stock and dividends of $87,258 were classified as interest expense for the year ended December 31, 2003. In addition, the Company currently consolidates a 60% majority-owned interest in a limited-life partnership. The estimated liquidation value of the 40% minority interest is approximately $1,128,900 as of December 31, 2003.
In November 2002, the FASB issued FIN 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. The disclosure requirements of FIN 45 were effective for the Company as of December 31, 2002 and had no impact on the consolidated financial statements. The recognition requirements of FIN 45 have been applied prospectively to guarantees issued or modified after December 31, 2002 and did not have a material effect on the consolidated financial statements.
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In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46, as revised in December 2003, addresses consolidation by business enterprises of variable interest entities, which are entities that either (a) do not have equity investors with voting rights or (b) have equity investors that do not provide sufficient financial resources for the entity to support its activities. For all variable interest entities created prior to February 1, 2003, the Company will be required to apply the provisions of FIN 46 by March 31, 2004. For variable interest entities created subsequent to January 31, 2003, FIN 46 was effective in 2003. The adoption of FIN 46 had no impact on the Company's financial condition or results of operations for entities created after January 31, 2003. The Company is still evaluating the impact of adopting FIN 46 for entities created prior to February 1, 2003. It is reasonably possible that the Company will be required to consolidate its investment in Northcoast Communications, LLC. See Note 13 for a detailed description of this investment.
NOTE 2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
As a result of information obtained in connection with the Wilmer Cutler Pickering LLP investigation into improperly recognized expenses resulting from inappropriately accelerating the recognition of certain costs (see discussion below), the Company has restated its previously reported financial statements to reflect the expenses in the appropriate period. In addition, the Company has also corrected certain errors with respect to launch and marketing support payments and the recognition of a gain on marketable securities.
The effect of adjusting for the acceleration of expenses and for the correction of errors, described above, on the Company's consolidated statement of operations for the years ended December 31, 2002 and 2001 is as follows:
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The following table sets forth the consolidated balance sheet for the Company, giving effect to the restatement to reflect the expenses in the appropriate period, showing previously reported amounts and restated amounts as of December 31, 2002:
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The following table sets forth consolidated statements of operations for the Company, giving effect to the restatement to reflect the expenses in the appropriate period, showing previously reported amounts and restated amounts for the years ended December 31, 2002 and 2001:
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The effects of these restatements have been reflected as reclassifications between cash flows from operating activities and investing activities and net effect of discontinued operations on cash in the Company's statements of cash flows for the years ended December 31, 2002 and 2001. Such reclassifications amount to less than $1,000 in any of the respective years.
Investigation of Improper Expense Accruals and Other Adjustments
On June 18, 2003, Cablevision announced that an internal review initiated by the Company identified improperly recorded expenses at the national services division of Cablevision's Rainbow Media Holdings subsidiary. At the time of the June 18 announcement, the review had found that $6,200 of expenses for 2003 were accelerated and improperly accrued or expensed in 2002, rather than 2003. All but $1,700 of that pretax amount was identified and reversed prior to the release of the Company's 2002 results.
The Company also announced on June 18, 2003 that its Audit Committee had retained Wilmer Cutler Pickering LLP to conduct an investigation of the matter. Wilmer Cutler Pickering LLP subsequently retained PricewaterhouseCoopers LLP as forensic accountants.
In August 2003, the Company announced that Wilmer Cutler Pickering LLP reported to the Audit Committee and management of the Company that its investigation to that date had identified, in addition to the amounts announced by the Company on June 18, 2003, improperly recognized expenses at the original productions units within the American Movie Classics Company ("AMC") and WE: Women's Entertainment business units of the national services division of Rainbow Media Holdings and that pretax amounts that should have been expensed in 2003 that were expensed in earlier years equaled approximately $3,400.
In November 2003, Wilmer Cutler Pickering LLP reported that it had substantially completed its detailed review of year-end expenses that may have been improperly accelerated. With respect to Rainbow Media Holdings, Wilmer Cutler Pickering LLP had reported that it had identified, in addition to the amounts reported in June and August 2003, additional improperly accelerated expenses at AMC and WE: Women's Entertainment and at most other business units within Rainbow Media Holdings. For AMC and WE: Women's Entertainment, the additional pretax amounts that should have been expensed in 2003 and later periods that were expensed in earlier years equaled approximately $3,900, and for the other Rainbow business units equaled approximately $5,200, including $650 in non-consolidated businesses. The improperly recognized expenses in the Rainbow business units related primarily to sales and marketing, original production and event production activities. With respect to the non-Rainbow Media Holdings' units of the Company, Wilmer Cutler Pickering LLP further reported that it had identified approximately $1,700 in accelerated expenses that should have been recorded in 2003 and later periods, the majority of which consisted of sales and marketing, maintenance and consulting expenses. In late November, the Company provided restated results for the first and second quarters of 2003 and 2002 to reflect the impact of the improper expense accelerations identified by the Company and the Wilmer Cutler Pickering LLP investigation; these restatements were reflected in the Company's Form 10-Q filing for the third quarter of 2003.
Wilmer Cutler Pickering LLP has now reported that its investigation of improper expense recognition is complete. The investigation covered all significant operating units within Rainbow Media Holdings, as well as the Telecommunications, Madison Square Garden and Corporate segments and included a thorough evaluation of the facts (including a review of employee activities) relating to improper expense recognition. The amounts identified are reflected in the table above. Wilmer Cutler
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Pickering LLP has made recommendations to the Audit Committee with respect to improvements in internal controls. Certain of these recommendations for both new policies and procedures (including vendor payment guidelines, signature and password protection and communication of information to those responsible for the preparation of financial statements) and enhancement and reinforcement of existing policies and procedures (including those related to expense recognition and accruals and required support for payments and accruals) have already been implemented by the Company and other recommendations (including those for reassessment and improvement of the structure and accountability of employees of the operating units responsible for accumulating information for and preparation of financial statements, additional training and education of the employees within those areas and implementation of additional internal audit procedures) will be implemented by the Company over the next few months. The investigations into these matters by the Securities and Exchange Commission and the U.S. Attorney's Office for the Eastern District of New York are continuing.
KPMG has completed its audits of the Company's consolidated financial statements included in this Form 10-K, and issued its unqualified report dated March 15, 2004, included herein.
The Company has also corrected certain other errors primarily with respect to launch and marketing support payments received from programming suppliers and the recognition of a gain in 2002 on marketable securities. It was determined that certain of these items should have been recorded in different periods. These adjustments have been reflected in the table above.
NOTE 3. TRANSACTIONS
2003 Transactions
In July 2003, the Company repurchased Metro-Goldwyn-Mayer, Inc.'s ("MGM") 20% interest in each of AMC, The Independent Film Channel and WE: Women's Entertainment for $500,000 and entered into a film rights agreement relating to the MGM film library. The $500,000 purchase price consisted of $250,000 in cash and a $250,000 note issued by Cablevision and maturing five months after closing in cash or, at Cablevision's election, shares of Cablevision NY Group Class A common stock. The $250,000 note required monthly principal payments of $2,500 in cash prior to maturity. The acquisition was accounted for as a purchase. The excess of the purchase price over the net book value of the assets acquired of approximately $415,662 was allocated to the specific assets acquired based upon a preliminary appraisal as follows:
In June 2003, Cablevision announced a plan to pursue the spin off of all of its ownership interest in the Company's satellite service, Rainbow DBS Company LLC, together with its Clearview Cinemas
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theater chain. In October 2003, Cablevision announced an amended spin off plan which includes Rainbow DBS and three of Rainbow Media Holdings' national entertainment services (AMC, The Independent Film Channel and WE: Women's Entertainment) and certain other Rainbow Media Holdings businesses. The transaction would be structured as a tax-free pro rata spin off to Cablevision's stockholders and is expected to be completed in 2004. The Company will retain the Clearview Cinemas business and therefore the results of operations of Clearview Cinemas have been included in continuing operations for all periods presented.
In March 2003, the Company transferred the stock of its wholly-owned subsidiary, Cablevision Electronics Investments, Inc. to GBO Electronics Acquisition, LLC. As of September 30, 2003, the Company recorded losses aggregating $8,382, net of taxes, in connection with this transaction.
In January 2003, Fox Sports Networks, LLC exercised its put option relating to its interests in Fox Sports Net Chicago and Fox Sports Net Bay Area that Fox Sports Networks held outside of Regional Programming Partners. Regional Programming Partners, which held a 50% interest in each of these businesses, is a 60% owned subsidiary of Rainbow Media Holdings. In March 2003, Rainbow Media Holdings and Fox Sports Networks agreed on a $110,000 purchase price for Fox Sports Networks' 50% interest in Fox Sports Net Bay Area and a $40,000 purchase price for Fox Sports Networks' 50% interest in Fox Sports Net Chicago, payable in each case in the form of three-year promissory notes of a subsidiary of Regional Programming Partners, bearing interest at the prime rate plus 1% and secured by Regional Programming Partners' 100% interest in Fox Sports Net Bay Area. The transaction closed in December 2003 and the operating results of the acquired businesses have been consolidated with those of the Company as of the acquisition date. The acquisition was accounted for as a purchase. The excess of the purchase price over the net book value of the assets acquired of approximately $77,259 was allocated to the specific assets acquired based upon a preliminary appraisal as follows:
2002 Transactions
During the six months ended June 30, 2002, NBC-Rainbow Holding, Inc., a subsidiary of National Broadcasting Company ("NBC"), had exchanged a 5.0% interest in Rainbow Media Holdings equity securities for 9,968,988 shares of Rainbow Media Group Class A common stock of Cablevision (valued at $98,514). The Rainbow Media Group common stock was exchanged for 11,872,367 shares of Cablevision NY Group Class A common stock on August 20, 2002. In September 2002, NBC exchanged a 0.7% interest in Rainbow Media Holdings equity securities for 1,647,266 shares of Cablevision NY Group Class A common stock of Cablevision (valued at $16,374). In connection with the sale of the Bravo programming service to NBC in December 2002 discussed below, the Company acquired NBC's remaining 17.2% minority interest in Rainbow Media Holdings, increasing the Company's interest in Rainbow Media Holdings to 100%.
The acquisitions of the 22.9% and the 3.1% minority interests in 2002 and 2001, respectively, were accounted for as purchases. The excess of the purchase prices over the net book value of assets
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acquired of approximately $293,353 was allocated to the specific assets acquired, in 2002, based upon an independent appraisal as follows:
In December 2002, the Company completed the sale of Rainbow Media Holdings' 80% interest in the Bravo programming service to NBC for $1.0 billion payable in General Electric Company common stock and 53.2 million shares of Cablevision NY Group Class A common stock (21.8 million shares of Cablevision NY Group Class A common stock held by NBC and 31.4 million shares of Cablevision NY Group Class A common stock issuable upon the conversion of shares of Rainbow Media Holdings common stock held by NBC). The Company recorded a gain of $663,352, net of taxes, in connection with this transaction. The operating results of the Bravo programming service, including the gain on sale, have been classified as discontinued operations for all periods presented. The net operating results of the Bravo programming service were previously reported in the Rainbow segment.
In March 2002, Rainbow Media Holdings acquired Loral Space and Communications, Ltd.'s 50% interest in Rainbow DBS (formerly R/L DBS Company, LLC) for a purchase price of up to a present value of $33,000 payable only from a percentage of future revenues of Rainbow DBS' business, if any, or from any future sale of all or part of the interests in or assets of Rainbow DBS. This purchase increased Rainbow Media Holdings' ownership of Rainbow DBS to 100%. Rainbow DBS's operating results are consolidated with those of the Company as of the date of acquisition.
2001 Transactions
Through December 31, 2001, NBC-Rainbow Holding had exchanged a 3.1% interest in Rainbow Media Holdings equity securities for 6,966,484 shares of Rainbow Media Group Class A common stock of Cablevision (valued at $138,597). The Rainbow Media Group common stock was exchanged for 8,296,594 shares of Cablevision NY group Class A common stock as of August 20, 2002.
In April 2001, MGM acquired a 20% interest in certain programming businesses of Rainbow Media Holdings for $825,000 in cash. The Company recorded a gain of approximately $745,047 in connection with this transaction.
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In January 2001, the Company completed the sale of its cable systems in Boston and eastern Massachusetts to AT&T Corp. in exchange for AT&T's cable systems in certain northern New York suburbs, 44,260,932 shares of AT&T stock, valued at approximately $893,500 at closing based on the quoted market price, and approximately $293,200 in cash. The Company recognized a net gain of approximately $1,441,699. In July 2001, AT&T distributed to AT&T common shareholders 0.3218 share of AT&T Wireless Services, Inc. common stock for each share of AT&T common stock held. In connection with such distribution, the Company received 14,243,166 shares of AT&T Wireless common stock as a result of its ownership of 44,260,932 shares of AT&T stock. In connection with AT&T's spin off of AT&T Broadband and the merger of AT&T Broadband with Comcast Corporation in November 2002, the Company received 14,318,411 shares of Comcast common stock. Additionally, in November 2002, AT&T completed a 1-for-5 reverse stock split which reduced the 44,260,932 shares of AT&T common stock held by the Company to 8,852,186 shares.
The sales agreements with AT&T provided both parties with certain post closing adjustments to the purchase price following agreement on those adjustments between the parties, or, in the event no agreement was reached, that the post closing adjustment issues would be resolved by third party experts whose determination would be binding. The Company recorded a loss of $13,644 for the year ended December 31, 2003 from the contemplated settlement of working capital adjustments associated with this sale.
The acquisition of the cable systems from AT&T was accounted for as a purchase with the operations of the acquired systems being consolidated with those of the Company as of the acquisition date. The purchase price was allocated to the specific assets acquired based on an independent appraisal as follows:
NOTE 4. RESTRUCTURING AND IMPAIRMENT CHARGES
Restructuring
In December 2001, the Company recorded restructuring charges of $56,442 (including $13,720 for discontinued operations) which included expenses of approximately $21,018 associated with the elimination of approximately 600 positions, primarily in corporate, administrative and infrastructure functions across various business units of the Company, and estimated expenses of approximately
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$35,424 associated with facility realignment and other related costs. The following table summarizes the accrued restructuring liability related to the 2001 restructuring plan for continuing operations.
In 2002, the Company announced a new operating plan and restructuring which included the closing of 26 retail electronics store locations, the consolidation of customer service call centers, the elimination of certain staff positions and the disposition of its motion picture theater business. Additionally, the Company reached an agreement with its supplier of set top boxes which reduced the Company's purchase commitments for set top boxes from $378,500 in 2002, $378,500 in 2003, and $567,750 in 2004 to a total remaining commitment of $87,500 in 2002 and nothing thereafter and required the Company to make certain other cash payments aggregating $50,000 plus interest on a portion of such amount with respect to, among other things, a license for certain software (valued at $17,500 based on an independent appraisal). In connection with this plan, the Company recorded restructuring charges of $84,626 (including $11,553 for discontinued operations) which included $21,725 (including $3,642 for discontinued operations) associated with the elimination of approximately 3,000 positions, $30,364 (including $7,911 for discontinued operations) associated with facility realignment and other related costs and $32,500 associated with the reduction in required digital set top box commitments. The following table summarizes the accrued restructuring liability related to the 2002 restructuring plan for continuing operations:
In 2003, the Company eliminated certain staff positions and incurred severance costs aggregating $6,111, of which approximately $3,853 was paid as of December 31, 2003. In connection with the acquisition of Fox Sports Net Chicago in December 2003, the Company acquired a restructuring liability of $380 relating to facility realignment costs.
At December 31, 2003, approximately $27,581 of the total restructuring liability was classified as a current liability in the consolidated balance sheet.
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Impairment Charges
In December 2003, as part of its periodic review of expected programming usefulness, the Company recorded an impairment loss of $17,900, included in technical and operating expense, representing the write-off of the carrying value of certain film and programming contracts of the Company's Rainbow segment.
In December 2002, the Company recorded an impairment loss of approximately $43,222, included in discontinued operations, representing the write down of software and leasehold improvements relating to the Company's retail electronics business. The retail electronics business' projected future operating losses caused the Company to reassess the recoverability of the retail electronics business' fixed assets. The carrying value of these fixed assets exceeded the estimated fair value based on discounted cash flows.
In 2001, the Company recorded a loss on investments of approximately $108,452 reflecting other-than-temporary declines in the fair value of the Company's At Home Corporation warrants. The carrying value of the warrants was reduced to zero at December 31, 2001.
In December 2001, the Company recorded an impairment loss of approximately $99,900 included in depreciation and amortization, representing the balance of unamortized goodwill related to certain theaters in which the carrying value of the asset exceeded the estimated fair value based on discounted estimated future cash flows. Current losses and projected future operating losses caused the Company to reassess the recoverability of the goodwill.
NOTE 5. NET ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
The assets and liabilities attributable to the retail electronics business transferred in March 2003 have been classified in the consolidated balance sheets as assets and liabilities held for sale and consist of the following:
The operations of the retail electronics business transferred in March 2003 and the Bravo programming business sold in December 2002, including restructuring charges (credits), have been classified as discontinued operations, net of taxes, in the consolidated statements of operations for all periods presented.
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Operating results of discontinued operations, including the loss on the transfer of the retail electronics business in March 2003 of $8,382 and the gain on the sale of the Bravo programming service of $663,352 in 2002, are summarized as follows:
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
Costs incurred in the construction of the Company's cable television system, including line extensions to, and rebuild of, the Company's hybrid fiber-coaxial infrastructure and costs incurred in the construction of the Company's head end facilities are capitalized and included in "headends" and "infrastructure," below. These costs consist of materials, sub-contractor labor, direct consulting fees, and internal labor and related costs associated with the construction activities. The internal costs that are capitalized consist of salaries and benefits of Company employees and the portion of facility costs, including rent, taxes, insurance and utilities, that supports the construction activities. Infrastructure costs are depreciated over the 12-year estimated life of the plant, and head end facilities are depreciated over the estimated life of the specific component, ranging from 4 years for certain electronics to 15 years for tower sites. Costs of operating the plant and the technical facilities, including repairs and maintenance and call completion fees, are expensed as incurred.
In addition, the costs of connecting businesses or residences that have never before been connected to the service offering are capitalized. These costs include material, subcontractor and internal labor and related costs as discussed above. In addition, on-site and remote technical assistance during the provisioning process for new digital product offerings are capitalized. The departmental activities supporting the connection process are tracked through specific metrics, and the portion of
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departmental costs that is capitalized is determined through a time weighted activity allocation of costs incurred based on time studies used to estimate the average time spent on each activity. New connections are amortized over 5 years or 12 years for residence wiring and feeder cable to the home, respectively. The portion of departmental costs related to reconnection, programming service up- and down- grade, repair and maintenance, and disconnection activities are expensed.
Property, plant and equipment consist of the following assets, which are depreciated or amortized primarily on a straight-line basis over the estimated useful lives shown below:
At December 31, 2003 and 2002, the gross amount of equipment and related accumulated amortization recorded under capital leases were as follows:
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NOTE 7. INTANGIBLE ASSETS
The following table summarizes information relating to the Company's acquired intangible assets at December 31, 2003 and 2002:
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The changes in the carrying amount of excess costs over the fair value of net assets acquired for the years ended December 31, 2003 and 2002 are as follows:
Summarized below is pro forma net income for the year ended December 31, 2001 as adjusted for amortization expense that is no longer recorded in accordance with Statement 142.
NOTE 8. DEBT
Bank Debt
Restricted Group
For financing purposes, the Company and certain of its subsidiaries are collectively referred to as the "Restricted Group." The Restricted Group has a $2.4 billion revolving credit facility (the "Credit Agreement") with a group of banks which matures on June 30, 2006. The total amount of bank debt outstanding under the Restricted Group credit facility at December 31, 2003 and 2002 was $1,513,039 and $1,930,768 (including $1,039 and $5,768, respectively, outstanding under a separate overdraft facility), respectively. As of December 31, 2003, approximately $50,838 was restricted for certain letters of credit issued on behalf of the Company. Interest on outstanding amounts may be paid, at the option of the Company, based on the prime rate or a Eurodollar rate plus a margin which varies based on the Restricted Group's leverage ratio (as defined in the Credit Agreement).
Undrawn funds available to the Restricted Group under the Credit Agreement amounted to approximately $837,162 at December 31, 2003. 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 the maintenance of various financial ratios and tests, and limitations on various payments, including preferred dividends and dividends on its common stock. The Company was in compliance with the covenants of its Credit Agreement at December 31, 2003.
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The weighted average interest rate on all bank borrowings under the Credit Agreement was 3.19% and 3.64% on December 31, 2003 and 2002, respectively. The Company is also obligated to pay fees ranging from 0.375% to 0.75% per annum on the unused loan commitment and from 0.875% to 1.75% per annum on letters of credit issued under the Credit Agreement.
Rainbow Media Holdings
In December 2003, Rainbow Media Holdings, a wholly-owned subsidiary of the Company entered into an $823,000 credit facility consisting of a $200,000 revolving credit facility and a $623,000 term loan, maturing on March 31, 2008 and March 31, 2009, respectively. This facility amended and combined the previously existing Rainbow Media Holdings $300,000 credit facility and the AMC, The Independent Film Channel and WE: Women's Entertainment $75,000 credit facility entered into in March 2003. The amended facility is secured primarily by the assets of and guaranteed by AMC, the Independent Film Channel, and WE. Rainbow Media Holdings' 100% interest in the stock of these entities is also pledged as collateral. The amended facility requires commitment reductions beginning in June 2005 and quarterly amortization payments beginning December 31, 2003 through 2008. The amended facility contains certain covenants that may limit Rainbow Media Holdings' ability to utilize all of the undrawn funds available thereunder, including covenants requiring the maintenance of financial ratios and restricting the permitted use of borrowed funds.
Loans under the Rainbow Media Holdings credit facility bear interest at the Eurodollar rate plus a margin based upon Rainbow Media Holdings' leverage ratio. At December 31, 2003, $734,000 was outstanding under this credit facility and bore interest at a weighted average rate of 3.57%. As of December 31, 2003, approximately $2,000 was restricted for certain letters of credit issued on behalf of Rainbow Media Holdings. Undrawn funds available under the Rainbow Media Holdings credit facility amounted to approximately $87,000 at December 31, 2003. Rainbow Media Holdings is required to pay a fee of 0.5% based on the unused portion of the commitment. The credit facility contains certain financial covenants with which Rainbow Media Holdings was in compliance at December 31, 2003.
Rainbow Media Group
In March 2002, Rainbow Media Group, LLC, a wholly-owned subsidiary of Rainbow Media Holdings, entered into a $400,000 revolving credit facility with a group of banks. This facility terminated upon the sale of the Bravo programming service in December 2002.
AMC and Bravo Company
In March 2002, AMC and Bravo Company, subsidiaries of Rainbow Media Holdings, entered into a $200,000 revolving credit facility with a group of banks. This facility amended and restated the previously existing AMC $200,000 revolving credit facility. This facility terminated upon the sale of the Bravo programming service in December 2002.
Madison Square Garden
MSG, a subsidiary of Rainbow Media Holdings, has a $500,000 revolving credit facility with a group of banks which expires on December 31, 2004. Loans under the MSG credit facility bear interest at either prime rate or Eurodollar rate plus a margin based upon MSG's consolidated leverage ratio. At December 31, 2003 and 2002, loans outstanding amounted to $110,000 and $155,000, respectively, and bore interest at a weighted average rate of 1.93% and 2.36%, respectively. As of December 31, 2003, approximately $10,803 was restricted for certain letters of credit issued on behalf of MSG. The MSG credit facility contains certain covenants that may limit MSG's ability to utilize all of the undrawn funds available thereunder. Undrawn funds available under the MSG credit facility amounted to approximately $379,197 at December 31, 2003. MSG is required to pay a fee of 0.25% based on the
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unused portion of the commitment. The MSG credit facility contains certain financial covenants with which MSG was in compliance at December 31, 2003. MSG has pledged substantially all of its assets as collateral under the credit facility. See Note 21.
Senior Notes and Debentures
The following table summarizes the Company's senior debentures:
In March 2001, the Company issued $1,000,000 face amount of 75/8% senior notes due 2011. The notes were issued at a discount of $3,210. The net proceeds were used to reduce bank debt outstanding.
The senior notes and debentures are not redeemable by the Company prior to maturity. The indentures under which the senior notes and debentures were issued contain 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, 2003.
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Subordinated Notes and Debentures
The following table summarizes the Company's senior subordinated debentures:
*The notes/debentures are redeemable, at the Company's option, in whole or in part, on the redemption dates listed at the respective percentage of the principal amount and thereafter at 100% of the aggregate principal amount, in each case together with accrued interest to the redemption date.
**The 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. On November 1, 2001, the Company redeemed its $300,000 face value 91/4% senior subordinated notes due 2005 at a redemption price of 103.1%, plus accrued interest and its $150,000 face value 97/8% senior subordinated notes due 2006 at a redemption price of 104.938%, plus accrued interest. In connection with the redemption, the Company recognized a loss of $15,348.
The indentures under which the subordinated debentures were issued contain 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, 2003.
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Summary of Five Year Debt Maturities
Total amounts payable by the Company and its subsidiaries under its various debt obligations outstanding as of December 31, 2003, including collateralized indebtedness (see Note 11) and capital leases, during the five years subsequent to December 31, 2003 are as follows:
NOTE 9. PREFERRED STOCK
The following summarizes each series of the Company's preferred stock:
In February 2003, Quadrangle Capital Partners LP, a private investment firm, invested $75,000 in the Company, in the form of 10% Series A Exchangeable Participating Preferred Stock convertible into Cablevision NY Group Class A common stock.
In connection with the issuance of the Series A preferred stock to Quadrangle, the Company entered into an agreement with Quadrangle which grants Quadrangle the right to require the Company to purchase the preferred stock ("put option") for cash or through the issuance of registered equity securities of Cablevision, at the Company's option. The exchange right and the put option have been accounted for as a derivative. Accordingly, the fair value of the exchange right and the put option has been reflected as a liability under derivative contracts in the accompanying consolidated balance sheet. The change in the fair value of $38,618 has been included in loss on derivative contracts in the accompanying consolidated statement of operations.
In October 2003, Quadrangle exercised its "put option" to require CSC Holdings to purchase all of its Series A Exchangeable Participating Preferred Stock. The terms of the agreement provide for the delivery of cash or registered equity securities of Cablevision in settlement of the put price. The Company is in discussions with Quadrangle as to the process for determining the put price.
In February 1996, the Company issued 6,500,000 depositary shares, representing 65,000 shares of 111/8% Series L Redeemable Exchangeable Preferred Stock (the "Series L Preferred Stock"), which were subsequently exchanged for Series M Redeemable Exchangeable Preferred Stock (the "Series M Preferred Stock") in August 1996 with terms identical to the Series L Preferred Stock. The depositary shares are exchangeable, in whole but not in part, at the option of the Company, for the Company's 111/8% Senior Subordinated Debentures due 2008. The Company is required to redeem the Series M Preferred Stock on April 1, 2008 at a redemption price equal to the liquidation preference of $10,000 per share plus accumulated and unpaid dividends. The Series M Preferred Stock is redeemable at various redemption prices beginning at 105.563% at any time on or after April 1, 2003, at the option of the Company, with accumulated and unpaid dividends thereon to the date of redemption. Before April 1, 2001, dividends could, at the option of the Company, be paid in cash or by issuing fully paid
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and nonassessable shares of Series M Preferred Stock with an aggregate liquidation preference equal to the amount of such dividends. On and after April 1, 2001, dividends must be paid in cash. The Company paid cash dividends on the Series M Preferred Stock of approximately $123,500 in each of 2003, 2002 and 2001.
In September 1995, the Company issued 2,500,000 shares of its $.01 par value 113/4% Series H Redeemable Exchangeable Preferred Stock (the "Series H Preferred Stock") with an aggregate liquidation preference of $100 per share. The Company is required to redeem the Series H Preferred Stock on October 1, 2007 at a redemption price per share equal to the liquidation preference of $100 per share, plus accrued and unpaid dividends thereon. The Series H Preferred Stock is redeemable at various redemption prices beginning at 105.875% at any time on or after October 1, 2002, at the option of the Company, with accumulated and unpaid dividends thereon to the date of redemption. Before October 1, 2000, dividends could, at the option of the Company, be paid in cash or by issuing fully paid and nonassessable shares of Series H Preferred Stock with an aggregate liquidation preference equal to the amount of such dividends. On and after October 1, 2000, dividends must be paid in cash. The terms of the Series H Preferred Stock permit the Company, at its option, to exchange the Series H Preferred Stock for the Company's 113/4% Senior Subordinated Debentures due 2007 in an aggregate principal amount equal to the aggregate liquidation preference of the shares of Series H Preferred Stock. The Company paid cash dividends on the Series H Preferred Stock of approximately $51,016 in each of 2003, 2002 and 2001, respectively.
In connection with the implementation of Statement 150 on July 1, 2003, the carrying value of the Company's Series H and Series M Redeemable Preferred Stock of $434,181 and $1,110,113, respectively, was classified as a liability. In addition, beginning July 1, 2003, dividends have been classified as interest expense, increasing interest expense by $87,258 for the year ended December 31, 2003.
NOTE 10. INCOME TAXES
The Company files a consolidated federal income tax return with its 80% or more owned subsidiaries. Prior to June 29, 2002, the Company filed two consolidated federal income tax returns; one consolidated return included the telecommunications and retail operations and the other consolidated return included Rainbow Media Holdings and all companies 80% or more owned by Rainbow Media Holdings.
Income tax expense (benefit) attributable to continuing operations consists of the following components:
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The income tax expense (benefit) attributable to continuing operations for 2003, 2002 and 2001 exclude deferred federal and state tax benefits of $1,165, $10,983 and $82,861, respectively, resulting from the exercise of stock options, which were credited directly to paid-in capital.
The income tax expense (benefit) attributable to continuing operations differs from the amount derived by applying the statutory federal rate to pretax income principally due to the effect of the following items:
At December 31, 2003, the Company had consolidated net operating loss carry forwards of approximately $2,614,110 expiring on various dates through 2023.
The Company's net operating loss carry forwards expire as follows:
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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, 2003 and 2002 are as follows:
In 2002, the income tax benefit of the Company reflects an increase in the valuation allowance of $58.6 million. At the end of the second quarter of 2002, NBC exchanged part of its interest in Rainbow Media Holdings for shares of the Company's common stock. As a result of this exchange, Rainbow Media Holdings became a member of the consolidated federal income tax return of the Company. The exchange was accounted for under the purchase method of accounting. Accordingly, the valuation allowance was reduced to zero, resulting in a reduction to the recorded goodwill, without any income statement benefit. In 2003, the Company recorded a valuation allowance of $28.0 million relating to certain state net operating loss carry forwards.
The Company recorded a valuation allowance against certain state tax attribute carry forwards because it is more likely than not that these deferred tax benefits will not be realized. Management evaluates the realizability of deferred tax assets and the need for a valuation allowance on a quarterly basis.
NOTE 11. COLLATERALIZED INDEBTEDNESS AND DERIVATIVES
Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. The statement requires that all derivative financial instruments be recognized in the financial statements and measured
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at fair value regardless of the purpose or intent for holding them. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized as a component of comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings.
To manage interest rate risk, the Company has from time to time entered into interest rate swap contracts to adjust the proportion of total debt that is subject to variable and fixed interest rates. Such contracts fix the borrowing rates on floating rate debt to provide an economic hedge against the risk of rising rates and/or convert fixed rate borrowings to variable rates to provide an economic hedge against the risk of higher borrowing costs in a declining interest rate environment. At December 31, 2003 and 2002, the Company was a party to interest rate swap agreements to pay fixed rates of interest with a total notional value of $600,000 and $1,000,000, respectively, and a fair value of approximately $349 and $3,525, respectively, a net liability position. These agreements have not been designated as hedges for accounting purposes.
In addition, the Company has entered into prepaid interest rate swap agreements in connection with its monetization of certain of its stock holdings, discussed below. These contracts require the Company to pay a floating rate of interest in exchange for fixed rate interest payments, the net present value of which was paid to the Company at the contract's inception in a total amount of $239,270. As of December 31, 2003 and 2002, the total notional value of such contracts was $1,115,045 and the fair values of such contracts were $65,753 and $102,819, respectively, in a net liability position. These agreements have not been designated as hedges for accounting purposes.
The increases in the fair value of the Company's swap agreements and the net realized gains (losses) as a result of net cash interest income (expense) for the years ended December 31, 2003, 2002 and 2001 aggregating approximately $10,420, $115,943 and $31,376, respectively, are reflected in gain on derivative contracts in the accompanying consolidated statements of operations.
The Company has also entered into various transactions to provide an economic hedge against equity price risk on certain of its stock holdings. The Company has monetized all of its stock holdings in Charter Communications, Inc., Adelphia Communications Corporation, AT&T, AT&T Wireless, Comcast Corporation, General Electric Company and Leapfrog Enterprises, Inc. through the execution of prepaid forward contracts, collateralized by an equivalent amount of the respective underlying stock. The contracts set a floor and cap on the Company's participation in the changes in the underlying stock prices and at maturity are expected to offset declines in the fair values of the underlying stock below the hedge price per share, while allowing the Company to retain upside appreciation from the hedge price per share to the cap price. At maturity, the contracts provide for the option to deliver cash or shares of Charter Communications, Adelphia Communications, AT&T Wireless, General Electric or Leapfrog stock (as the case may be) with a value determined by reference to the applicable stock price at maturity. The terms of certain of the AT&T and Comcast transactions require cash settlement in an amount determined by reference to the AT&T and Comcast stock price at maturity.
The Company received cash proceeds of $330,728 in 2003 and $1,549,411 in 2001, upon execution of the prepaid forward contracts discussed above. Such contracts have not been designated as hedges for accounting purposes. Therefore, the fair values of the equity forward contracts of $524,895 and $705,020, at December 31, 2003 and 2002, respectively, have been reflected in the accompanying consolidated balance sheets and the net increases (decreases) in the fair value of the equity derivative component of the prepaid forward contracts of $(180,125), $808,094 and $250,376 as of December 31, 2003, 2002 and 2001, respectively, are included in gain (loss) on derivative contracts in the accompanying consolidated statements of operations. With the adoption of Statement 133 on January 1, 2001, the shares of Charter Communications and Adelphia Communications were reclassified from
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securities available-for-sale to trading securities. As a result, the Company recorded a gain on investments of $286,440 representing the accumulated unrealized gains as of January 1, 2001. For the years ended December 31, 2003, 2002 and 2001, the Company recorded a gain (loss) on investments of $231,836, $(865,616) and $(176,673), respectively, representing the net increases or decreases in the fair values of all investment securities pledged as collateral for the period.
In May 2002, due to certain events relating to Adelphia Communications, the Company received early termination notices from its bank counterparties pursuant to certain monetization contracts covering 9.79 million shares of Adelphia Communications common stock. As a result, the Company was required to repay the related collateralized indebtedness prior to maturity, net of the benefit of the related prepaid equity forward contracts in a significant gain position. The Company made cash payments aggregating $54,813, representing the difference between the redemption value of the collateralized indebtedness and the fair market value of the prepaid equity forward contracts as of the early termination date, and 9.79 million shares of Adelphia Communications common stock that were held as collateral were returned to the Company. In connection with the early termination, the Company recognized a loss of $17,237, representing the difference between the carrying value and the redemption value of the collateralized indebtedness, which is reflected as a loss on the extinguishment of debt in the accompanying consolidated statement of operations.
In connection with the issuance of the Series A preferred stock to Quadrangle, the Company entered into an agreement with Quadrangle which grants Quadrangle the right to require the Company to purchase the preferred stock ("put option") for cash or through the issuance of registered equity securities of the Company, at the Company's option. The exchange right and the put option have been accounted for as a derivative. Accordingly, the fair value of the exchange right and the put option has been reflected as a liability under derivative contracts in the accompanying consolidated balance sheet. The change in the fair value of $38,618 has been included in loss on derivative contracts in the accompanying consolidated statement of operations.
NOTE 12. OPERATING LEASES
The Company leases certain office, production, transmission, theater, and event facilities under terms of leases expiring at various dates through 2027. The leases generally provide for fixed annual rentals plus certain real estate taxes and other costs. Rent expense for the years ended December 31, 2003, 2002 and 2001 amounted to $85,988, $80,039 and $64,238, 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, 2003, 2002 and 2001 amounted to approximately $13,225, $12,515 and $12,419, respectively.
The minimum future annual rentals for all operating leases during the next five years, including pole rentals from January 1, 2004 through December 31, 2008, and thereafter, at rates now in force are as follows:
At December 31, 2003 and 2002, approximately $31,176 and $39,886 of these commitments has been accrued in connection with the restructuring plan described in Note 4.
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NOTE 13. AFFILIATE AND RELATED PARTY TRANSACTIONS
Equity Method Investments
The following table reflects the Company's effective ownership percentages and balances of the Company's equity method investments as of December 31, 2003 and 2002:
*The results of operations of Fox Sports Net Bay Area and Fox Sports Net Chicago have been consolidated with those of the Company as of the date of acquisition. (See Note 3.)
The following table includes certain unaudited financial information for equity method investments:
*Includes long-term indebtedness and amounts due to the Company referred to below. Aggregate amounts due from and due to these affiliates at December 31, 2003 and 2002 are summarized below:
*Advances at December 31, 2002 include $171,911 due from Northcoast Communications and Northcoast PCS. The Company's share of the net income (loss) of these affiliates for the years ended December 31, 2003, 2002 and 2001 amounted to $429,732, $(42,375) and $(68,206), respectively (including net income (losses) of $434,550, $(36,029) and $(42,957), respectively, related to Northcoast Communications). The Company provides certain transmission and production services to certain of these affiliates. For the
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years ended December 31, 2003, 2002 and 2001, approximately $3,633, $3,671 and $3,686, respectively, of revenues were earned from services provided to these entities. Costs incurred by the Company for programming and entertainment services provided by these affiliates and included in operating expenses for the years ended December 31, 2003, 2002 and 2001 amounted to $5,492, $5,172 and $5,420, respectively.
Northcoast Communications
In August 1996, the Company entered into an agreement with Northcoast PCS, LLC and certain of its affiliates, to form a limited liability company, Northcoast Communications, LLC, to participate in the auctions conducted by the Federal Communications Commission ("FCC") for certain licenses to conduct a personal communications service ("PCS") business. The Company holds a 49.9% interest in Northcoast Communications and certain preferential distribution rights.
As of December 31, 2002, Northcoast Communications, an unconsolidated subsidiary of the Company, had $58,236 in notes payable to the FCC for the PCS licenses acquired during 1997. In addition, a wholly-owned subsidiary of Northcoast Communications, Cleveland PCS, LLC, had $68,392 and $68,412, respectively, in vendor financing outstanding at December 31, 2003 and 2002, under a stand-alone $75,000 facility obtained in connection with the launch of commercial service in Cleveland.
Vendor financing for Northcoast Communications' Cleveland operation consists of the $75,000 credit facility at Cleveland PCS, LLC. This facility has no recourse to Cablevision or to Northcoast Communications, other than pursuant to a pledge by Northcoast Communications of the stock of Cleveland PCS and a guarantee of the payment by Northcoast Communications and Cablevision of the FCC indebtedness of the Cleveland PCS subsidiary which holds the Cleveland license which, as of December 31, 2003 and 2002, had an outstanding balance of $2,218 and $2,730, respectively. As of December 31, 2003 and 2002, Cleveland PCS was in default of the terms of this credit facility and had received notice of commitment termination and acceleration from the lender.
Under a contractual agreement, the Company provides Northcoast Communications certain management services. Pursuant to this agreement, the Company recorded management fees of $1,783 and $13,584 in 2002 and 2001, respectively. Northcoast Communications is a Delaware corporation controlled by John Dolan, who is a nephew of Charles F. Dolan and a cousin of James L. Dolan, the Company's Chairman and Chief Executive Officer, respectively.
In May 2003, Northcoast Communications completed its sale of spectrum licenses covering 50 U.S. markets to Verizon Wireless for approximately $763,000 in cash. Of the proceeds, approximately $51,000 was used by Northcoast Communications to retire debt. The remaining proceeds, after payment of expenses, were distributed to the partners of Northcoast Communications, including the Company. The Company's share of the proceeds was approximately $651,000, of which $30,000 is being held in an escrow fund to provide for any post-closing adjustments and claims. All of the available funds were used by the Company to repay bank debt under the Restricted Group credit facility.
At December 31, 2003, the Company's investment in Northcoast Communications was zero and the Company's exposure to any loss relates to its guarantee of the FCC indebtedness of Cleveland PCS of $2,218. The Company is still evaluating whether Northcoast Communications is a variable interest entity requiring consolidation pursuant to FIN 46.
Rainbow DBS
In 1996, Rainbow Media Holdings invested in a joint venture, Rainbow DBS, formed with a subsidiary of Loral Space and Communications, Ltd. for the purpose of exploiting certain direct broadcast satellite ("DBS") frequencies. Rainbow Media Holdings also contributed to the joint venture its interest in certain agreements with the licensee of such frequencies. In March 2002, Rainbow Media
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Holdings acquired Loral Space and Communications' 50% interest in Rainbow DBS. (See Note 3.) The FCC's construction permit relating to the DBS frequencies was originally scheduled to expire in August 1999.
In December 2000, the FCC granted an extension to Rainbow DBS' construction permit relating to the DBS frequencies held by Rainbow DBS. The extension required the launch of a satellite by March 29, 2003 and commencement of service offerings by not later than December 29, 2003, with specified six month interim construction milestones, non-compliance with which would result in the forfeiture of the construction permit. In March 2003, Rainbow DBS requested an extension of the launch date of a direct broadcast satellite to August 31, 2003 due to the satellite manufacturer's need for additional time for scheduling and testing of the launch vehicle for the satellite. On July 17, 2003, Rainbow DBS successfully launched a direct broadcast satellite into space and on October 15, 2003, Rainbow DBS introduced VOOMsm, the Company's direct broadcast satellite service.
At Home
In October 1997, the Company entered into an agreement with At Home and certain of its shareholders, pursuant to which the Company agreed to enter into agreements for the distribution of the At Home service over certain of the Company's cable television systems on the same terms and conditions as At Home's founding partners, Tele-Communications, Inc., Comcast and Cox Communications, Inc. The Company received a warrant to purchase 15,751,568 shares of At Home's Series A common stock at an exercise price of $0.25 per share. Additionally, in 1998 a warrant to purchase 4,711,028 shares of At Home's Series A common stock at $0.25 per share was received in connection with the acquisition of certain cable television systems from TCI Communications, Inc. The At Home network distributed high-speed interactive services to residences and businesses using its own network architecture and a variety of transport options, including the cable industry's hybrid fiber coaxial infrastructure.
The original aggregate fair market value of the warrants received of $248,134, as determined by independent appraisals, was recorded in other investments and was accounted for under the cost method. The fair market value of the warrants was recorded as deferred revenue and was being amortized to income over the period in which the Company was obligated to provide the necessary services to At Home.
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In 2001, the Company recorded $66,872 of revenue relating to this transaction. In 2001, the Company recorded an impairment loss of approximately $108,452 reflecting the decline in the fair value of the warrants which reduced the carrying value of the warrants to zero at December 31, 2001. In 2001, the Company recorded a gain of $25,190, representing primarily the recognition of the remaining unamortized portion of deferred revenue at December 31, 2001.
Other Affiliates and Related Parties
During 2003, 2002 and 2001, the Company provided programming services to or incurred costs on behalf of other affiliates engaged in providing cable television, cable television programming, and related services. Aggregate amounts due from and due to these affiliates at December 31, 2003 and 2002 are summarized below:
Fox Sports Net Ohio and Cleveland Indians Baseball Club Limited Partnership (the "Indians") are parties to a multi-year rights agreement under which Fox Sports Net Ohio pays license fees to the Indians in exchange for telecast rights to substantially all regular season Indians games. The Indians are owned by (i) Lawrence Dolan, a brother of Charles F. Dolan, the Company's Chairman, (ii) a trust, the beneficiaries of which are Lawrence Dolan and certain descendants of Lawrence Dolan, and (iii) certain other trusts, the beneficiaries of which are certain descendants of Charles F. Dolan, including James L. Dolan, the Company's Chief Executive Officer, and Thomas C. Dolan and Patrick F. Dolan, officers of the Company and brothers of James L. Dolan. Management control of the Indians is held by Lawrence Dolan.
NOTE 14. BENEFIT PLANS
The Company has a Cash Balance Retirement Plan (the "Retirement Plan") for the benefit of employees other than those of the theater business. Under the Retirement Plan, the Company will credit a certain percentage of eligible base pay into an account established for each participant which will earn a market based rate of return annually.
Components of the net periodic pension cost for the Retirement Plan for the years ended December 31, 2003, 2002 and 2001, are as follows:
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The funded status and the amounts recorded on the Company's balance sheet for the Retirement Plan at December 31, 2003 and 2002, were as follows:
Assumptions used in accounting for the Retirement Plan are as follows:
The Retirement Plan's expected rate of return on plan assets is 8.0%. The rate of return is based on the portfolio of assets as a whole and not on the sum of the returns on individual asset investments.
The weighted average asset allocation of the Company's Retirement Plan at December 31, 2003 and 2002 were as follows:
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For 2003, the Retirement Plan's investment objective was to invest in portfolios that would obtain a market rate of return throughout economic cycles, commensurate with the investment risk and cash flow needs of the Retirement Plan. This allows the Retirement Plan to subject a portion of its assets to increased risk to generate a greater rate of return. The Retirement Plan addresses diversification by the use of investment portfolios whose underlying investments are in domestic and international equity securities and domestic fixed income securities. The investments in each portfolio are readily marketable and can be sold to fund benefit payment obligations of the Retirement Plan as they become payable. Prior to 2003, the Retirement Plan invested all of its assets in a fund whose underlying investments were primarily in securities, such as commercial paper and repurchase agreements with little or no risk that generated a lower rate of return.
The Company expects to contribute $26,900 to the Retirement Plan in 2004.
The Company also maintains 401(k) savings plans, pursuant to which an employee can contribute a percentage of eligible annual compensation, as defined. The Company also makes matching cash contributions for a portion of employee contributions to the 401(k) savings plans. The cost associated with the 401(k) savings plans was approximately $13,066, $13,502 and $12,391 for the years ended December 31, 2003, 2002 and 2001, respectively.
The Company maintains the CSSC Supplemental Benefit Plan (the "Supplemental Plan") for the benefit of certain officers and employees of the Company. As part of the Supplemental 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. All participants are 100% vested in the Supplemental Plan. Net periodic pension cost was $671, $453 and $200 for the years ended December 31, 2003, 2002 and 2001, respectively. At December 31, 2003 and 2002, the projected benefit obligation exceeded the fair value of Supplemental Plan assets by approximately $1,090 and $1,660, respectively.
MSG sponsors several non-contributory pension plans covering certain MSG employees. Benefits payable to retirees under these plans are based upon years of service and participants' compensation and are funded through trusts established under the plans. Plan assets are invested primarily in common stocks, bonds, United States government securities and cash. At December 31, 2003 and 2002, the accrued benefit cost amounted to $16,150 and $13,538, respectively, and for the years ended December 31, 2003, 2002 and 2001, net periodic pension cost amounted to $4,124, $3,245 and $2,445, respectively.
In addition, MSG contributes to various multiemployer defined benefit pension plans. Pension expense recognized for these multiemployer plans for the years ended December 31, 2003, 2002 and 2001 amounted to $3,178, $3,052 and $3,307, respectively.
MSG also sponsors a welfare plan which provides certain postretirement health care benefits to certain MSG employees and their dependents. The welfare plan is insured through a managed care provider and MSG funds these benefits with premium payments. For the years ended December 31, 2003, 2002 and 2001, the periodic postretirement benefit cost amounted to $429, $430 and $169, respectively, and as of December 31, 2003 and 2002, the accrued benefit cost amounted to $6,802 and $6,547, respectively.
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NOTE 15. STOCK BENEFIT AND LONG-TERM INCENTIVE PLANS
Stock Benefit Plans
Cablevision has employee stock plans under which it is authorized to issue incentive stock options, nonqualified stock options, restricted stock, stock appreciation rights, stock grants and stock bonus awards. Stock appreciation rights provide for the employee to receive a cash payment in an amount equal to the difference between the fair market value of the stock as of the date the right is exercised, and the exercise price. Under the employee stock plans, employees of the Company have received stock awards, bonus awards, stock appreciation rights and cash payments for certain executive stock options. As a result, the Company recorded expense (income) of approximately $42,806, $(41,538) and $(44,973) for 2003, 2002 and 2001, respectively. These amounts reflect vesting schedules for applicable grants as well as fluctuations in the market price of the underlying Cablevision common stock.
Long-Term Incentive Plan
Pursuant to Cablevision's Long-Term Incentive Plan, senior executives of the Company have been granted cash awards that vest over varying periods, some of which are performance based. Certain senior executives have also received performance retention awards under the plan, vesting over 7 years, aggregating $123,000. The terms of the award provided that the executive could have requested a loan from the Company in the amount of the award prior to its vesting, subject to certain limitations, provided that such loan was secured by a lien in favor of the Company on property owned by the executive. Effective July 30, 2002, such requests for advances on amounts of awards are no longer permitted. As of December 31, 2003 and 2002, $43,045 and $43,725, respectively, had been advanced in respect of this plan. In connection with the Long-Term Incentive Plan, the Company has recorded expense of $19,541, $23,501 and $6,344 for the years ended December 31, 2003, 2002 and 2001, respectively.
In addition, in 2003, the Company granted certain management employees cash awards aggregating $44,315 that vest when the Company reaches certain performance goals. Such awards are being amortized ratably over the period in which the Company is expected to achieve these goals, and accordingly recorded expense of $16,492 in respect of this award in 2003.
NOTE 16. COMMITMENTS AND CONTINGENCIES
The Company, through Rainbow Media Holdings, has entered into several contracts, including rights agreements with professional sports teams and others relating to cable television programming. In addition, Rainbow Media Holdings, through MSG, has employment agreements with players, general managers and coaches of its professional sports teams. The contracts provide for payments which are guaranteed regardless of injury or termination. Certain of these contracts are covered by disability insurance if certain conditions are met. The future cash payments reflected below do not include the impact of potential insurance recoveries or amounts which may be due to the National Basketball Association ("NBA") for luxury tax payments.
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In addition, the table below includes certain other unconditional purchase obligations pursuant to contracts entered into in the normal course of business. Future cash payments required under these contracts as of December 31, 2003 are as follows:
At December 31, 2003 approximately $60,084 of commitments, included in the table above, relating to sports teams' and broadcast personnel contracts have been accrued and are reflected in the accompanying consolidated balance sheets.
During 2001, subsidiaries of Rainbow Media Holdings secured carriage commitments with certain multiple system operators under long-term affiliation agreements, in exchange for which such businesses agreed to make payments when evidence is obtained that certain launch thresholds are met conditioned upon continued carriage. These businesses are contingently liable for additional payments of up to $9,852. This commitment has been reflected in the table above.
In addition to the above amounts, MSG may also be obligated to pay the NBA a luxury tax in each year pursuant to the NBA/NBPA collective bargaining agreement, which is in effect through June 30, 2005. The ultimate calculation of any amount due would be based on a formula established by the agreement. The tax is based on the amount by which the team's salary, as defined in the agreement, exceeds a luxury tax "trigger."
Many of the Company's franchise agreements and utility pole leases require the Company to remove its cable wires and other equipment upon termination of the respective agreements. The Company has concluded that the fair value of these asset retirement obligations cannot be reasonably estimated since the range of potential settlement dates is not determinable.
NOTE 17. LEGAL MATTERS
The Company is party to various lawsuits, some involving substantial amounts. Although the outcome of these matters cannot be predicted with certainty, management does not believe that the resolution of these lawsuits will have a material adverse effect on the financial position, results of operations or liquidity of the Company.
At Home
On April 25, 2001, At Home Corporation commenced a lawsuit in the Court of Chancery of the State of Delaware alleging that Cablevision had breached its obligations under certain agreements with At Home. The suit sought a variety of remedies including: rescission of the agreements between At Home and Cablevision and cancellation of all warrants held by Cablevision, damages, and/or an order prohibiting Cablevision from continuing to offer its Optimum Online service and requiring it to convert its Optimum Online customers to the Optimum@Home service and to roll out the Optimum@Home
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service. On September 28, 2001, At Home filed a petition for reorganization in federal bankruptcy court. In connection with the liquidation of At Home, the claims in this lawsuit, among others, were assigned to the General Unsecured Creditors Liquidated Trust ("GUCLT").
On June 26, 2003, the GUCLT initiated a separate action against Cablevision in the United States District Court for the Northern District of California. The California action stems from a May 1997 agreement between Cablevision and At Home that is no longer in effect. The GUCLT seeks monetary damages of "at least $12.5 million" due to the claimed failure by Cablevision to make alleged required payments to At Home during the 2001 calendar year.
On July 29, 2003, based on an agreed Stipulation filed jointly by Cablevision and the GUCLT, the Court dismissed the Delaware action with prejudice, other than solely with respect to the specific claims brought by the GUCLT in the California action.
YES Network
On April 29, 2002, Yankees Entertainment & Sports Network, LLC (the "YES Network") filed a complaint and, on September 24, 2002, an amended complaint against the Company in the United States District Court, Southern District of New York. The lawsuit arises from the failure of the YES Network and the Company to reach agreement on the carriage of programming of the YES Network (primarily New York Yankees baseball games and New Jersey Nets basketball games) on the Company's cable television systems. The amended complaint alleges a variety of anticompetitive acts and seeks declaratory judgments as to violations of laws, treble damages and injunctive relief, including an injunction requiring the Company to carry the YES Network on its cable television systems. The Company believes that the claims set forth in the complaint are without merit. As a result of the March 2003 agreement discussed below, the litigation with the YES Network has been stayed and, under the terms of the agreement, will ultimately be dismissed.
On March 31, 2003, YES Network and Cablevision reached an agreement pursuant to which Cablevision began carrying programming of the YES Network. Under this agreement, Cablevision agreed to carry the YES Network programming for one year under interim arrangements while the parties sought to finalize the terms of a definitive long-term affiliation agreement. If the parties do not reach agreement on the terms of the long-term arrangement, those terms will be established by arbitration. The final terms established will be retroactively applied to March 31, 2003. The parties were unable to reach an agreement on a long-term arrangement and the matter was submitted to arbitration. The hearing before the arbitration panel ended in March 2004 and the parties expect that a decision will be issued prior to the start of the major league baseball season in April 2004. As part of the March 31, 2003 agreement, Cablevision agreed to pay YES Network for certain revenue reductions and expenses that YES Network experiences, during the term of the one-year interim agreement, under the "most favored nations" provisions of YES Network's affiliation agreements with certain other distributors.
Tracking Stock Litigation
In August 2002, purported class actions naming as defendants the Company and each of its directors were filed in the Delaware Chancery Court. The actions, which allege breach of fiduciary duties and breach of contract with respect to the exchange of the Rainbow Media Group tracking stock for Cablevision NY Group common stock, were purportedly brought on behalf of all holders of publicly traded shares of Rainbow Media Group tracking stock. The actions sought to (i) enjoin the exchange
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of Rainbow Media Group tracking stock for Cablevision NY Group common stock, (ii) enjoin any sales of "Rainbow Media Group assets," or, in the alternative, award rescissory damages, (iii) if the exchange is completed, rescind it or award rescissory damages, (iv) award compensatory damages, and (v) award costs and disbursements. The actions were consolidated into one action on September 17, 2002, and on October 3, 2002, the Company filed a motion to dismiss the consolidated action. The action is currently stayed by agreement of the parties pending resolution of a related action brought by one of the plaintiffs to compel the inspection of certain books and records of the Company. The Company believes the claims are without merit and intends to contest the lawsuits vigorously.
In August 2003, a purported class action naming as defendants the Company, directors and officers of the Company and certain current and former officers and employees of the Company's Rainbow Media Holdings and American Movie Classics subsidiaries was filed in New York Supreme Court by the Teachers Retirement System of Louisiana. The actions relate to the August 2002 Rainbow Media Group tracking stock exchange and allege, among other things, that the exchange ratio was based upon a price of the Rainbow Media Group tracking stock that was artificially deflated as a result of the improper recognition of certain expenses at the national services division of Rainbow Media Holdings. The complaint alleges breaches by the individual defendants of fiduciary duties. The complaint also alleges breaches of contract and unjust enrichment by the Company. The complaint seeks monetary damages and such other relief as the court deems just and proper. The Company intends to contest the lawsuit vigorously. On October 31, 2003, the Company and other defendants moved to stay the action in favor of the previously filed actions pending in Delaware or, in the alternative, to dismiss for failure to state a claim. The parties are awaiting a decision from the court on this motion.
Time Warner Litigation
On November 14, 2003, American Movie Classics Company filed an action against Time Warner Entertainment, L.P. in New York State Supreme Court for declaratory relief and damages caused by Time Warner's anticipatory repudiation of its cable television affiliation agreement with American Movie Classics. American Movie Classics Company filed that action as a result of Time Warner's notice purporting to terminate the contract based upon their allegation that American Movie Classics had changed its programming. The Company believes the notice was improper. American Movie Classics Company is seeking a declaratory judgment that it is entitled to full performance of the agreement, and, at its option, is entitled to rescind the agreement and recover damages. Time Warner filed an answer and counterclaims in December 2003 that, among other things, seeks a declaratory judgment as to its right to terminate the affiliation agreement, an injunction requiring American Movie Classics to deliver a classic films channel and damages for an alleged breach of contract.
Accounting Related Investigations
The Securities and Exchange Commission and the U.S. Attorney's Office for the Eastern District of New York are conducting investigations into matters related to the improper expense recognition discussed in Note 2.
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NOTE 18. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents, Accounts Receivable Trade, Notes and Other Receivables, Prepaid Expenses and Other Assets, Advances to Affiliates, Accounts Payable, Accounts Payable-Affiliates and Accrued Liabilities.
The carrying amount approximates fair value due to the short maturity of these instruments.
Derivative Contracts and Liabilities Under Derivative Contracts
Derivative contracts are carried at fair value based on dealer quotes.
Investments Securities and Investment Securities Pledged as Collateral
Marketable securities are carried at their fair value based upon quoted market prices.
Bank Debt, Collateralized Indebtedness, Senior Notes and Debentures, Subordinated Notes and Debentures and Redeemable Exchangeable Preferred Stock
The fair values of each of the Company's debt instruments and redeemable preferred stock are based on quoted market prices for the same or similar issues or on the current rates offered to the Company for instruments of the same remaining maturities.
Interest Rate Swap Agreements
Interest rate swap agreements are carried at fair value based on 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:
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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 19. SEGMENT INFORMATION
The Company classifies its business interests into three segments: Telecommunications Services, consisting principally of its cable television, telephone and high-speed data services operations; Rainbow, consisting principally of interests in national and regional cable television programming networks; and MSG, which owns and operates professional sports teams, regional cable television networks, live productions and entertainment venues.
The Company's reportable segments are strategic business units that are managed separately. The Company evaluates segment performance based on several factors, of which the primary financial measure is business segment adjusted operating cash flow (defined as operating income (loss) before depreciation and amortization, stock plan income or expense and restructuring charges or credits). The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Information as to the operations of the Company's business segments is set forth below.
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A reconciliation of reportable segment amounts to the Company's consolidated balances is as follows:
Substantially all revenues and assets of the Company's reportable segments are attributed to or located in the United States.
The Company does not have a single external customer which represents 10 percent or more of its consolidated revenues.
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NOTE 20. INTERIM FINANCIAL INFORMATION (Unaudited)
The following is a summary of selected quarterly financial data for the years ended December 31, 2003 and 2002. See Note 2 "Restatement of Consolidated Financial Statements".
2003:
2002:
NOTE 21. SUBSEQUENT EVENTS
In March 2004, borrowings under the MSG credit facility were repaid in full and the credit facility was terminated with proceeds from an intercompany loan from Regional Programming Partners.
In January and February 2004, Rainbow DBS invested $85,000, and owns a substantial interest in an entity that recently acquired licenses from the FCC to provide multichannel video distribution and data service in 45 metropolitan areas in the United States.
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PART I
Item 1. Business
Item 2.
Item 2. Properties
Item 3.
Item 3. Legal Proceedings
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5.
Item 5. Market for the Registrants' Common Equity and Related Stockholder Matters
Item 6.
Item 6. Selected Financial Data
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A.
Item 9A. Controls and Procedures.
PART III
PART IV
Item 15.
Item 15. Exhibits, Financial Statements, Financial Statement Schedule, and Reports on Form 8-K.
INDEPENDENT AUDITORS' REPORT
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2003 and 2002 (Dollars in thousands)
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 2003, 2002 and 2001 (Dollars in thousands, except per share amounts)
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2003, 2002 and 2001 (Dollars in thousands)
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts)
INDEPENDENT AUDITORS' REPORT
CSC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2003 and 2002 (Dollars in thousands)
CSC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 2003, 2002 and 2001 (Dollars in thousands, except per share amounts)
CSC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIENCY Years ended December 31, 2003, 2002 and 2001 (Dollars in thousands)
CSC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2003, 2002 and 2001 (Dollars in thousands)
CSC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts)