UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended    March 31, 2008

 

OR

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to               

 

Commission File
Number

 

Registrant; State of Incorporation;
Address and Telephone Number

 

IRS Employer
Identification No.

 

 

 

 

 

1-14764

 

Cablevision Systems Corporation

 

11-3415180

 

 

Delaware

 

 

 

 

1111 Stewart Avenue

 

 

 

 

Bethpage, New York 11714

 

 

 

 

(516) 803-2300

 

 

 

 

 

 

 

1-9046

 

CSC Holdings, Inc.

 

11-2776686

 

 

Delaware

 

 

 

 

1111 Stewart Avenue

 

 

 

 

Bethpage, New York 11714

 

 

 

 

(516) 803-2300

 

 

 

Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.

 

Cablevision Systems Corporation

Yes  x

No  o

CSC Holdings, Inc.

Yes  x

No  o

 

Indicate by check mark whether each Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Exchange Act Rule 12b-2).

 

 

 

Large accelerated
filer

 

Accelerated
filer

 

Non-accelerated
filer

 

Smaller
Reporting
Company

Cablevision Systems Corporation

 

Yes x

 

No o

 

Yes o

 

No o

 

Yes o

 

No o

 

Yes o

 

No x

CSC Holdings, Inc.

 

Yes o

 

No o

 

Yes o

 

No o

 

Yes x

 

No o

 

Yes o

 

No x

 

Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).

 

Cablevision Systems Corporation

 

Yes o

 

No x

CSC Holdings, Inc.

 

Yes o

 

No x

 

Number of shares of common stock outstanding as of May 2, 2008:

 

Cablevision NY Group Class A Common Stock -

 

233,479,892

 

Cablevision NY Group Class B Common Stock -

 

63,265,676

 

CSC Holdings, Inc. Common Stock -

 

11,595,635

 

 

CSC Holdings, Inc. meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format applicable to CSC Holdings, Inc.

 

 



 

CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES

 

FORM 10-Q

 

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements of Cablevision Systems Corporation and Subsidiaries

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets - March 31, 2008 (unaudited) and December 31, 2007

3

 

 

 

 

 

 

Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2008 and 2007 (unaudited)

5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2008 and 2007 (unaudited)

6

 

 

 

 

 

 

 

 

 

 

Financial Statements of CSC Holdings, Inc. and Subsidiaries

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets - March 31, 2008 (unaudited) and December 31, 2007

7

 

 

 

 

 

 

Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2008 and 2007 (unaudited)

9

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2008 and 2007 (unaudited)

10

 

 

 

 

 

 

Combined Notes to Condensed Consolidated Financial Statements (unaudited)

11

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

50

 

 

 

 

Item 4.

 

Controls and Procedures

52

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

53

 

 

 

 

Item 6.

 

Exhibits

58

 

 

 

 

  SIGNATURES

59

 



 

PART I.            FINANCIAL INFORMATION

 

This Quarterly Report on Form 10-Q for the period ended March 31, 2008 is separately filed by Cablevision Systems Corporation (“Cablevision”) and CSC Holdings, Inc. (“CSC Holdings” and collectively with Cablevision and their subsidiaries, the “Company”, “we”, “us” or “our”).

 

This Quarterly Report contains statements that constitute forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995.  In this Quarterly Report there are statements concerning our future operating and future financial performance.  Words such as “expects”, “anticipates”, “believes”, “estimates”, “may”, “will”, “should”, “could”, “potential”, “continue”, “intends”, “plans” and similar words and terms used in the discussion of future operating and future financial performance identify forward-looking statements.  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;

·                 competition from existing competitors (such as direct broadcast satellite (“DBS”) operators and telephone companies) and new competitors (such as high-speed wireless providers) entering our franchise areas;

·                 demand for our basic video, digital video, high-speed data and voice services, which are impacted by competition from other services and the other factors discussed herein;

·                 the cost of programming and industry conditions;

·                 changes in the laws or regulations under which we operate;

·                 developments in the government investigations and litigation related to past practices of the Company in connection with grants of stock options and stock appreciation rights (“SARs”);

·                 developments in the government investigations relating to improper expense recognition and the timing of recognition of launch support, marketing and other payments under affiliation agreements;

·                 the outcome of litigation and other proceedings, including the matters described under Item 3. Legal Proceedings;

·                 general economic conditions in the areas in which we operate;

·                 the state of the market for debt securities and bank loans;

·                 demand for advertising inventory;

·                 our ability to obtain or produce content for our programming businesses;

·                 the level of our capital expenditures;

·                 the level of our expenses;

·                 future acquisitions and dispositions of assets;

·                 the demand for our programming among cable television system and DBS operators and telephone companies and our ability to maintain and renew affiliation agreements with cable television system and DBS operators and telephone companies;

·                 market demand for new services;

·                 whether pending uncompleted transactions, if any, are completed on the terms and at the times set forth (if at all);

·                 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; and

 

1



 

·                 the factors described in our filings with the Securities and Exchange Commission, including under 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.

 

2



 

Item 1.    Financial Statements

 

CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

 

 

 

March 31,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

399,106

 

$

360,662

 

Restricted cash

 

59,015

 

58,416

 

Accounts receivable, trade (less allowance for doubtful accounts of $13,909 and $12,683)

 

507,322

 

543,151

 

Prepaid expenses and other current assets

 

196,230

 

189,306

 

Program rights, net

 

136,142

 

133,146

 

Deferred tax asset

 

327,121

 

232,984

 

Investment securities pledged as collateral

 

207,689

 

196,090

 

Derivative contracts

 

23,126

 

30,532

 

Total current assets

 

1,855,751

 

1,744,287

 

 

 

 

 

 

 

Property, plant and equipment, net of accumulated depreciation of $7,158,381 and $6,956,699

 

3,412,582

 

3,472,203

 

Notes and other receivables

 

37,012

 

40,874

 

Investment securities pledged as collateral

 

679,271

 

668,438

 

Derivative contracts

 

39,045

 

43,020

 

Other assets

 

80,143

 

79,740

 

Program rights, net

 

424,961

 

420,923

 

Deferred carriage fees, net

 

145,394

 

151,507

 

Franchises

 

731,848

 

731,848

 

Affiliation, broadcast and other agreements, net of accumulated amortization of $462,799 and $448,392

 

325,207

 

339,614

 

Other intangible assets, net of accumulated amortization of $109,338 and $102,487

 

322,962

 

316,830

 

Excess costs over fair value of net assets acquired

 

1,023,480

 

1,023,480

 

Deferred financing and other costs, net of accumulated amortization of $84,912 and $88,011

 

101,852

 

107,813

 

 

 

$

9,179,508

 

$

9,140,577

 

 

See accompanying combined notes to condensed consolidated financial statements.

 

3



 

 

 

March 31,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(unaudited)

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

414,709

 

$

370,044

 

Accrued liabilities

 

773,895

 

834,374

 

Deferred revenue

 

154,381

 

198,658

 

Program rights obligations

 

108,993

 

110,128

 

Liabilities under derivative contracts

 

3,299

 

2,893

 

Bank debt

 

160,000

 

110,000

 

Collateralized indebtedness

 

211,839

 

219,073

 

Capital lease obligations

 

4,754

 

5,351

 

Notes payable

 

 

1,017

 

Senior notes and debentures

 

500,000

 

500,000

 

Total current liabilities

 

2,331,870

 

2,351,538

 

 

 

 

 

 

 

Deferred revenue

 

12,010

 

12,691

 

Program rights obligations

 

301,593

 

307,185

 

Liabilities under derivative contracts

 

223,964

 

132,647

 

Other liabilities

 

301,276

 

322,042

 

Deferred tax liability

 

401,774

 

326,736

 

Bank debt

 

4,701,250

 

4,778,750

 

Collateralized indebtedness

 

642,443

 

628,081

 

Capital lease obligations

 

58,873

 

60,056

 

Senior notes and debentures

 

4,995,434

 

4,995,148

 

Senior subordinated notes

 

323,374

 

323,311

 

Minority interests

 

3,971

 

1,182

 

Total liabilities

 

14,297,832

 

14,239,367

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Deficiency:

 

 

 

 

 

Preferred Stock, $.01 par value, 50,000,000 shares authorized, none issued

 

 

 

CNYG Class A Common Stock, $.01 par value, 800,000,000 shares authorized, 258,209,256 and 255,648,391 shares issued and 233,507,414 and 231,007,266 shares outstanding

 

2,582

 

2,556

 

CNYG Class B Common Stock, $.01 par value, 320,000,000 shares authorized, 63,265,676 shares issued and outstanding

 

633

 

633

 

RMG Class A Common Stock, $.01 par value, 600,000,000 shares authorized, none issued

 

 

 

RMG Class B Common Stock, $.01 par value, 160,000,000 shares authorized, none issued

 

 

 

Paid-in capital

 

143,084

 

130,791

 

Accumulated deficit

 

(4,838,149

)

(4,806,543

)

 

 

(4,691,850

)

(4,672,563

)

Treasury stock, at cost (24,701,842 and 24,641,125 shares)

 

(429,085

)

(429,084

)

Accumulated other comprehensive income

 

2,611

 

2,857

 

Total stockholders’ deficiency

 

(5,118,324

)

(5,098,790

)

 

 

$

9,179,508

 

$

9,140,577

 

 

See accompanying combined notes to condensed consolidated financial statements.

 

4



 

CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended March 31, 2008 and 2007

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

2008

 

2007

 

Revenues, net

 

$

1,720,692

 

$

1,562,633

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Technical and operating (excluding depreciation, amortization and impairments shown below)

 

792,439

 

734,570

 

Selling, general and administrative

 

421,330

 

371,968

 

Restructuring charges

 

390

 

1,329

 

Depreciation and amortization (including impairments)

 

260,992

 

284,448

 

 

 

1,475,151

 

1,392,315

 

 

 

 

 

 

 

Operating income

 

245,541

 

170,318

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest expense

 

(211,653

)

(238,648

)

Interest income

 

4,649

 

8,439

 

Equity in net income of affiliates

 

 

1,776

 

Gain (loss) on investments, net

 

21,616

 

(72,985

)

Gain (loss) on derivative contracts, net

 

(104,910

)

65,119

 

Minority interests

 

(2,905

)

714

 

Miscellaneous, net

 

1,166

 

659

 

 

 

(292,037

)

(234,926

)

Loss from continuing operations before income taxes

 

(46,496

)

(64,608

)

Income tax benefit

 

15,363

 

31,178

 

 

 

 

 

 

 

Loss from continuing operations

 

(31,133

)

(33,430

)

Income (loss) from discontinued operations, net of taxes

 

(473

)

7,597

 

 

 

 

 

 

 

Loss before cumulative effect of a change in accounting principle

 

(31,606

)

(25,833

)

Cumulative effect of a change in accounting principle, net of taxes

 

 

(443

)

 

 

 

 

 

 

Net loss

 

$

(31,606

)

$

(26,276

)

 

 

 

 

 

 

Basic and diluted net loss per share:

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.11

)

$

(0.12

)

 

 

 

 

 

 

Income (loss) from discontinued operations

 

$

 

$

0.03

 

 

 

 

 

 

 

Cumulative effect of a change in accounting principle

 

$

 

$

 

 

 

 

 

 

 

Net loss

 

$

(0.11

)

$

(0.09

)

 

 

 

 

 

 

Weighted average common shares (in thousands)

 

289,950

 

284,971

 

 

See accompanying combined notes to condensed consolidated financial statements.

 

5



 

CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2008 and 2007

(Dollars in thousands)

(Unaudited)

 

 

 

2008

 

2007

 

Cash flows from operating activities:

 

 

 

 

 

Loss from continuing operations

 

$

(31,133

)

$

(33,430

)

Adjustments to reconcile loss from continuing operations to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization (including impairments)

 

260,992

 

284,448

 

Equity in net income of affiliates

 

 

(1,776

)

Minority interests

 

2,905

 

(714

)

Investment securities received from a customer bankruptcy settlement

 

 

(456

)

Loss (gain) on investments, net

 

(21,616

)

72,985

 

Unrealized loss (gain) on derivative contracts

 

103,104

 

(65,975

)

Amortization of deferred financing costs and discounts on indebtedness

 

12,363

 

12,640

 

Amortization of other deferred costs

 

7,448

 

7,012

 

Share-based compensation expense related to equity classified awards

 

11,638

 

15,134

 

Deferred income tax

 

(18,591

)

(33,303

)

Amortization and write-off of program rights

 

36,185

 

32,170

 

Provision for doubtful accounts

 

9,610

 

8,844

 

Changes in other assets and liabilities

 

(111,561

)

(75,606

)

Net cash provided by operating activities

 

261,344

 

221,973

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(193,460

)

(156,294

)

Proceeds from sale of equipment, net of costs of disposal

 

820

 

(83

)

Decrease in investment securities and other investments

 

 

51

 

Increase in restricted cash

 

(1,278

)

(4,463

)

Additions to other intangible assets

 

(766

)

(1,228

)

Net cash used in investing activities

 

(194,684

)

(162,017

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from bank debt

 

 

18,000

 

Repayment of bank debt

 

(27,500

)

(13,750

)

Proceeds from stock option exercises

 

1,234

 

5,506

 

Dividend distribution to common stockholders

 

(580

)

(43,820

)

Payments on capital lease obligations

 

(1,780

)

(2,029

)

Deemed repurchase of restricted stock

 

(1

)

(49,693

)

Distributions to minority partners

 

(116

)

(5,933

)

Net cash used in financing activities

 

(28,743

)

(91,719

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents from continuing operations

 

37,917

 

(31,763

)

 

 

 

 

 

 

Cash flows of discontinued operations:

 

 

 

 

 

Net cash provided by (used in) operating activities

 

(152

)

13,977

 

Net cash provided by investing activities

 

679

 

 

Net change in cash classified in assets held for sale

 

 

(1,230

)

Net effect of discontinued operations on cash and cash equivalents

 

527

 

12,747

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of year

 

360,662

 

524,401

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

399,106

 

$

505,385

 

 

See accompanying combined notes to condensed consolidated financial statements.

 

6



 

CSC HOLDINGS, INC. AND SUBSIDIARIES

(a wholly-owned subsidiary of Cablevision Systems Corporation)

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

 

 

 

March 31,
2008

 

December 31,
2007

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

369,909

 

$

331,901

 

Restricted cash

 

59,015

 

58,416

 

Accounts receivable, trade (less allowance for doubtful accounts of $13,909 and $12,683)

 

507,322

 

543,151

 

Prepaid expenses and other current assets

 

196,212

 

189,281

 

Program rights, net

 

136,142

 

133,146

 

Deferred tax asset

 

374,266

 

283,483

 

Advances to affiliates

 

361,471

 

361,770

 

Investment securities pledged as collateral

 

207,689

 

196,090

 

Derivative contracts

 

23,126

 

30,532

 

Total current assets

 

2,235,152

 

2,127,770

 

 

 

 

 

 

 

Property, plant and equipment, net of accumulated depreciation of $7,158,381 and $6,956,699

 

3,412,582

 

3,472,203

 

Notes and other receivables

 

37,012

 

40,874

 

Investment securities pledged as collateral

 

679,271

 

668,438

 

Derivative contracts

 

39,045

 

43,020

 

Other assets

 

80,143

 

79,740

 

Program rights, net

 

424,961

 

420,923

 

Deferred carriage fees, net

 

145,394

 

151,507

 

Franchises

 

731,848

 

731,848

 

Affiliation, broadcast and other agreements, net of accumulated amortization of $462,799 and $448,392

 

325,207

 

339,614

 

Other intangible assets, net of accumulated amortization of $109,338 and $102,487

 

322,962

 

316,830

 

Excess costs over fair value of net assets acquired

 

1,023,480

 

1,023,480

 

Deferred financing and other costs, net of accumulated amortization of $65,621 and $69,926

 

89,027

 

93,782

 

 

 

$

9,546,084

 

$

9,510,029

 

 

See accompanying combined notes to condensed consolidated financial statements.

 

7



 

 

 

March 31,
2008

 

December 31,
2007

 

 

 

(unaudited)

 

 

 

LIABILITIES AND STOCKHOLDER’S DEFICIENCY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

414,709

 

$

370,044

 

Accrued liabilities

 

706,029

 

800,616

 

Deferred revenue

 

154,381

 

198,658

 

Program rights obligations

 

108,993

 

110,128

 

Liabilities under derivative contracts

 

3,299

 

2,893

 

Bank debt

 

160,000

 

110,000

 

Collateralized indebtedness

 

211,839

 

219,073

 

Capital lease obligations

 

4,754

 

5,351

 

Notes payable

 

 

1,017

 

Senior notes and debentures

 

500,000

 

500,000

 

Total current liabilities

 

2,264,004

 

2,317,780

 

 

 

 

 

 

 

Deferred revenue

 

12,010

 

12,691

 

Program rights and other contract obligations

 

301,593

 

307,185

 

Liabilities under derivative contracts

 

223,964

 

132,647

 

Other liabilities

 

297,726

 

315,842

 

Deferred tax liability

 

654,900

 

569,613

 

Bank debt

 

4,701,250

 

4,778,750

 

Collateralized indebtedness

 

642,443

 

628,081

 

Capital lease obligations

 

58,873

 

60,056

 

Senior notes and debentures

 

3,495,434

 

3,495,148

 

Senior subordinated notes

 

323,374

 

323,311

 

Minority interests

 

3,971

 

1,182

 

Total liabilities

 

12,979,542

 

12,942,286

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholder’s deficiency:

 

 

 

 

 

Series A Cumulative Convertible Preferred Stock, 200,000 shares authorized, none issued

 

 

 

Series B Cumulative Convertible Preferred Stock, 200,000 shares authorized, none issued

 

 

 

8% Series D Cumulative Preferred Stock, $.01 par value, 112,500 shares authorized, none issued ($100 per share liquidation preference)

 

 

 

Preferred Stock, $.01 par value, 9,487,500 shares authorized, none issued

 

 

 

Common Stock, $.01 par value, 20,000,000 shares authorized, 11,595,635 shares issued and outstanding

 

116

 

116

 

Paid-in capital

 

194,486

 

182,721

 

Accumulated deficit

 

(3,630,671

)

(3,617,951

)

 

 

(3,436,069

)

(3,435,114

)

Accumulated other comprehensive income

 

2,611

 

2,857

 

 

 

 

 

 

 

Total stockholder’s deficiency

 

(3,433,458

)

(3,432,257

)

 

 

$

9,546,084

 

$

9,510,029

 

 

See accompanying combined notes to condensed consolidated financial statements.

 

8



 

CSC HOLDINGS, INC. AND SUBSIDIARIES

(a wholly-owned subsidiary of Cablevision Systems Corporation)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended March 31, 2008 and 2007

(Dollars in thousands)

(Unaudited)

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Revenues, net

 

$

1,720,692

 

$

1,562,633

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Technical and operating (excluding depreciation, amortization and impairments shown below)

 

792,439

 

734,570

 

Selling, general and administrative

 

421,330

 

371,968

 

Restructuring charges

 

390

 

1,329

 

Depreciation and amortization (including impairments)

 

260,992

 

284,448

 

 

 

1,475,151

 

1,392,315

 

 

 

 

 

 

 

Operating income

 

245,541

 

170,318

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest expense

 

(178,258

)

(205,105

)

Interest income

 

4,418

 

6,722

 

Equity in net income of affiliates

 

 

1,776

 

Gain (loss) on investments, net

 

21,616

 

(72,985

)

Gain (loss) on derivative contracts, net

 

(104,910

)

65,119

 

Minority interests

 

(2,905

)

714

 

Miscellaneous, net

 

1,166

 

659

 

 

 

(258,873

)

(203,100

)

 

 

 

 

 

 

Loss from continuing operations before income taxes

 

(13,332

)

(32,782

)

 

 

 

 

 

 

Income tax benefit

 

1,085

 

18,126

 

 

 

 

 

 

 

Loss from continuing operations

 

(12,247

)

(14,656

)

Income (loss) from discontinued operations, net of taxes

 

(473

)

7,597

 

 

 

 

 

 

 

Loss before cumulative effect of a change in accounting principle

 

(12,720

)

(7,059

)

Cumulative effect of a change in accounting principle, net of taxes

 

 

(443

)

 

 

 

 

 

 

Net loss

 

$

(12,720

)

$

(7,502

)

 

See accompanying combined notes to condensed consolidated financial statements.

 

9



 

CSC HOLDINGS, INC. AND SUBSIDIARIES

(a wholly-owned subsidiary of Cablevision Systems Corporation)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2008 and 2007

(Dollars in thousands)

(Unaudited)

 

 

 

2008

 

2007

 

Cash flows from operating activities:

 

 

 

 

 

Loss from continuing operations

 

$

(12,247

)

$

(14,656

)

Adjustments to reconcile loss from continuing operations to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization (including impairments)

 

260,992

 

284,448

 

Equity in net income of affiliates

 

 

(1,776

)

Minority interests

 

2,905

 

(714

)

Investment securities received from a customer bankruptcy settlement

 

 

(456

)

Loss (gain) on investments, net

 

(21,616

)

72,985

 

Unrealized loss (gain) on derivative contracts

 

103,104

 

(65,975

)

Amortization of deferred financing costs and discounts on indebtedness

 

11,157

 

11,435

 

Amortization of other deferred costs

 

7,448

 

7,012

 

Share-based compensation expense related to equity classified awards

 

11,638

 

15,134

 

Deferred income tax

 

(4,988

)

(20,251

)

Amortization and write-off of program rights

 

36,185

 

32,170

 

Provision for doubtful accounts

 

9,610

 

8,844

 

Changes in other assets and liabilities

 

(142,754

)

(107,995

)

Net cash provided by operating activities

 

261,434

 

220,205

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(193,460

)

(156,294

)

Proceeds from sale of equipment, net of costs of disposal

 

820

 

(83

)

Decrease in investment securities and other investments

 

 

51

 

Increase in restricted cash

 

(1,278

)

(4,463

)

Additions to other intangible assets

 

(766

)

(1,228

)

Net cash used in investing activities

 

(194,684

)

(162,017

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from bank debt

 

 

18,000

 

Repayment of bank debt

 

(27,500

)

(13,750

)

Capital contribution from Cablevision

 

127

 

881

 

Payments on capital lease obligations

 

(1,780

)

(2,029

)

Distributions to minority partners

 

(116

)

(5,933

)

Net cash used in financing activities

 

(29,269

)

(2,831

)

 

 

 

 

 

 

Net increase in cash and cash equivalents from continuing operations

 

37,481

 

55,357

 

 

 

 

 

 

 

Cash flows of discontinued operations:

 

 

 

 

 

Net cash provided by (used in) operating activities

 

(152

)

13,977

 

Net cash provided by investing activities

 

679

 

 

Net change in cash classified in assets held for sale

 

 

(1,230

)

Net effect of discontinued operations on cash and cash equivalents

 

527

 

12,747

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of year

 

331,901

 

390,143

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

369,909

 

$

458,247

 

 

See accompanying combined notes to condensed consolidated financial statements.

 

10



 

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

NOTE 1.       BUSINESS

 

Cablevision Systems Corporation (“Cablevision”) and its wholly-owned subsidiary CSC Holdings, Inc. (“CSC Holdings,” and collectively with Cablevision, the “Company”) own and operate cable television systems and through Rainbow Media Holdings LLC, a wholly-owned subsidiary of CSC Holdings, have ownership interests in companies that produce and distribute national entertainment and regional news programming services, including Madison Square Garden, L.P.  The Company also owns companies that provide advertising sales services for the cable television industry, provide telephone service, and operate motion picture theaters.  The Company classifies its business interests into three reportable segments:  Telecommunications Services, consisting principally of its video, high-speed data, Voice over Internet Protocol and its commercial data and voice services operations; Rainbow, consisting principally of interests in national and regional television programming networks, including AMC, IFC, WE tv, News 12 and the VOOM HD Networks; and Madison Square Garden, consisting principally of its professional sports teams, a regional sports programming business and an entertainment business, as well as the operations of Fuse, a national programming network effective January 1, 2008, which prior to January 1, 2008 was included in the Rainbow segment.

 

NOTE 2.       BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements of Cablevision and CSC Holdings have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information.  Accordingly, these financial statements do not include all the information and notes required for complete annual financial statements.

 

The financial statements as of March 31, 2008 and for the three months ended March 31, 2008 and 2007 presented in this Form 10-Q are unaudited; however, in the opinion of management, such financial statements include all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented.

 

The accompanying condensed consolidated financial statements of Cablevision include the accounts of Cablevision and its majority-owned subsidiaries and the accompanying condensed consolidated financial statements of CSC Holdings include the accounts of CSC Holdings and its majority-owned subsidiaries.  Cablevision has no operations independent of its CSC Holdings subsidiary, whose operating results and financial position are consolidated into Cablevision.  The condensed consolidated balance sheets and condensed statements of operations for Cablevision are essentially identical to the condensed consolidated balance sheets and condensed consolidated statements of operations for CSC Holdings, with the following significant exceptions:  Cablevision has $1.5 billion of senior notes issued in April 2004, cash, deferred financing costs and accrued interest related to its senior notes, certain intercompany payables to CSC Holdings and other subsidiaries, deferred taxes and accrued dividends on its balance sheet.   Differences between Cablevision’s results of operations from those of CSC Holdings primarily include incremental interest expense, interest income and income tax expense or benefit.  The combined notes to the condensed consolidated financial statements relate to the Company, which, except as noted, are identical for Cablevision and CSC Holdings.  All significant intercompany transactions and balances are eliminated in both sets of condensed consolidated financial statements.

 

The results of operations for the interim periods are not necessarily indicative of the results that might be expected for future interim periods or for the full year ending December 31, 2008.

 

11



 

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

The interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

 

The preparation of financial statements in conformity with GAAP 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.

 

NOTE 3.

 

RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

 

Recently Adopted Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“Statement No. 157”).  Statement No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  Under Statement No. 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts.  It also clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability.  This Statement applies under other accounting pronouncements that require or permit fair value measurements.  Accordingly, this Statement does not require any new fair value measurements.  Statement No. 157 became effective for the Company on January 1, 2008 with respect to financial assets and liabilities.  The FASB has deferred the adoption of Statement No. 157 for nonfinancial assets and nonfinancial liabilities to be effective for the Company on January 1, 2009.  See Note 11 for a discussion of the impact of the adoption of Statement No. 157 for certain financial assets and liabilities. The Company has not yet determined the impact of Statement No. 157 as it relates to nonfinancial assets and nonfinancial liabilities on its consolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115 (“Statement No. 159”).  Statement No. 159 permits entities to elect, at specified election dates, to measure eligible financial instruments and certain other items at fair value.  An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in earnings as incurred.  Statement No. 159 became effective as of January 1, 2008 for the Company.  The adoption of Statement No. 159 did not have any impact on the Company’s financial position or results of operations as of and for the three months ended March 31, 2008 as the Company did not elect to measure any eligible financial instruments or certain other items at fair value.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“Statement No. 161”).  Statement No. 161 requires specific disclosures regarding the location and amounts of derivative instruments in the Company’s financial statements; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect the Company’s financial position, financial performance, and cash flows.  Statement No. 161 is

 

12



 

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

effective for the Company on January 1, 2009.  The impact from this standard will be to expand disclosures regarding the Company’s derivative instruments.

 

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, Determination of the Useful Life of Intangible Assets. FSP No.  FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets.  FSP No. FAS 142-3 is effective for the Company on January 1, 2009.  The Company has not yet determined the impact FSP No. FAS 142-3 will have on its consolidated financial statements.

 

NOTE 4.       LOSS PER COMMON SHARE

 

Cablevision

 

Basic and diluted net loss per common share are computed by dividing net loss by the weighted average number of common shares outstanding during the period.  Potential dilutive common shares are not included in the diluted computation as their effect would be anti-dilutive.

 

Since Cablevision generated a loss from continuing operations for the three months ended March 31, 2008 and 2007, potential dilutive common shares during the period were excluded from the computation of diluted net loss per share as the impact would have been anti-dilutive.

 

CSC Holdings

 

Net loss per common share for CSC Holdings is not presented since it is a wholly-owned subsidiary of Cablevision.

 

NOTE 5.       COMPREHENSIVE LOSS

 

The following table is a reconciliation of Cablevision’s and CSC Holdings’ net loss to comprehensive loss for the three months ended March 31, 2008:

 

 

 

Cablevision

 

CSC Holdings

 

 

 

 

 

 

 

Net loss

 

$

(31,606

)

$

(12,720

)

Other comprehensive income:

 

 

 

 

 

Amortization of prior service cost and gains included in net periodic benefit cost, net of taxes

 

(246

)

(246

)

Comprehensive loss

 

$

(31,852

)

$

(12,966

)

 

The comprehensive loss, net of tax, for the three months ended March 31, 2007 equals the net loss for the period for Cablevision and CSC Holdings.

 

NOTE 6.       GROSS VERSUS NET REVENUE RECOGNITION

 

In the normal course of business, the Company is assessed non-income related taxes by governmental authorities, including franchising authorities, and collects such taxes from its customers. The Company’s policy is that, in instances where the tax is being assessed directly on the Company, amounts paid to the governmental authorities and amounts received from the customers are recorded on a gross basis.  That is, amounts paid to the governmental authorities are recorded as technical and operating expenses and amounts received from the customer are recorded as revenues. For the three months ended March 31, 2008 and 2007, the amount of franchise fees included as a component of net revenue aggregated $29,940 and $27,066, respectively.  Taxes and fees assessed directly on the customer, but collected and remitted to governmental authorities by the Company, are recorded on a net basis.

 

13



 

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

NOTE 7.       CASH FLOWS

 

For purposes of the condensed 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.

 

During the three months ended March 31, 2008 and 2007, the Company’s non-cash investing and financing activities and other supplemental data were as follows:

 

 

 

Three Months Ended
March 31,

 

 

 

2008

 

2007

 

Non-Cash Investing and Financing Activities of Cablevision and CSC Holdings:

 

 

 

 

 

Continuing Operations:

 

 

 

 

 

Redemption of collateralized indebtedness with related prepaid forward contracts and stock

 

$

 

$

27,744

 

 

 

 

 

 

 

Discontinued Operations:

 

 

 

 

 

Restricted cash and gain resulting from the FCC bond requirement waiver

 

 

11,250

 

 

 

 

 

 

 

Supplemental Data:

 

 

 

 

 

Cash interest paid - continuing operations (Cablevision and CSC Holdings)

 

204,897

 

221,645

 

Income taxes paid, net (Cablevision and CSC Holdings)

 

3,090

 

1,830

 

 

NOTE 8.       DISCONTINUED OPERATIONS

 

In June 2007, the Company completed the sale of its 60% interest in Fox Sports Net Bay Area, to Comcast Corporation (“Comcast”).  In addition, in April 2005, the operations of the Rainbow DBS satellite distribution business were shut down.  As a result, the operating results of these businesses, net of taxes, have been classified in the condensed consolidated statements of operations as discontinued operations for all periods presented.  Operating results of discontinued operations for the three months ended March 31, 2008 and 2007 are summarized below:

 

 

 

Three Months Ended March 31, 2008

 

 

 

Fox Sports
Net Bay
Area

 

Rainbow
DBS satellite
distribution
business

 

Total

 

 

 

 

 

 

 

 

 

Revenues, net

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

$

(81

)

$

(727

)

$

(808

)

Income tax benefit

 

34

 

301

 

335

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of taxes

 

$

(47

)

$

(426

)

$

(473

)

 

14



 

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended March 31, 2007

 

 

 

Fox Sports
Net Bay
Area

 

Rainbow
DBS satellite
distribution
business

 

Total

 

 

 

 

 

 

 

 

 

Revenues, net

 

$

23,583

 

$

 

$

23,583

 

 

 

 

 

 

 

 

 

Income before income taxes

 

$

3,584

 

$

9,296

 

$

12,880

 

Income tax expense

 

(1,471

)

(3,812

)

(5,283

)

 

 

 

 

 

 

 

 

Income from discontinued operations, net of taxes

 

$

2,113

 

$

5,484

 

$

7,597

 

 

In March 2007, the Federal Communications Commission (“FCC”) waived the bond requirement previously submitted by Rainbow DBS Company LLC with respect to five Ka-band licenses.  These bonds were originally cash collateralized by the Company.  In connection with the shut down of the Rainbow DBS satellite distribution business in 2005, the Company recorded a loss related to the outstanding bonds since the Company believed it was not probable that Rainbow DBS would meet the required FCC milestones.  As a result of the waiver from the FCC, the Company recorded a gain of $6,638, net of taxes, in the quarter ended March 31, 2007.

 

NOTE 9.       INTANGIBLE ASSETS

 

The following table summarizes information relating to the Company’s acquired intangible assets at March 31, 2008 and December 31, 2007:

 

 

 

March 31,
2008

 

December 31,
2007

 

Gross carrying amount of affiliation, broadcast and other agreements

 

 

 

 

 

Affiliation relationships and affiliate agreements

 

$

742,416

 

$

742,416

 

Broadcast rights and other agreements

 

45,590

 

45,590

 

 

 

788,006

 

788,006

 

Accumulated amortization

 

 

 

 

 

Affiliation relationships and affiliate agreements

 

(423,897

)

(409,870

)

Broadcast rights and other agreements

 

(38,902

)

(38,522

)

 

 

(462,799

)

(448,392

)

Affiliation, broadcast and other agreements, net of accumulated amortization

 

$

325,207

 

$

339,614

 

 

 

 

 

 

 

Gross carrying amount of other intangible assets

 

 

 

 

 

Season ticket holder relationships

 

$

75,005

 

$

75,005

 

Suite holder contracts and relationships

 

21,167

 

21,167

 

Advertiser relationships

 

103,524

 

103,524

 

Other intangibles (a)

 

62,573

 

57,590

 

 

 

262,269

 

257,286

 

Accumulated amortization

 

 

 

 

 

Season ticket holder relationships

 

(16,839

)

(15,476

)

Suite holder contracts and relationships

 

(9,968

)

(9,136

)

Advertiser relationships

 

(56,606

)

(53,745

)

Other intangibles

 

(25,925

)

(24,130

)

 

 

(109,338

)

(102,487

)

 

15



 

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

Indefinite-lived intangible assets

 

 

 

 

 

Sports franchises

 

96,215

 

96,215

 

FCC licenses and other intangibles

 

11,936

 

11,936

 

Trademarks (a)

 

61,880

 

53,880

 

Other intangible assets, net of accumulated amortization

 

$

322,962

 

$

316,830

 

 

 

 

 

 

 

Affiliation, broadcast and other agreements, net of accumulated amortization

 

$

325,207

 

$

339,614

 

Other intangible assets, net of accumulated amortization

 

322,962

 

316,830

 

Cable television franchises (indefinite-lived intangible)

 

731,848

 

731,848

 

Excess costs over the fair value of net assets acquired (indefinite-lived intangible)

 

1,023,480

 

1,023,480

 

 

 

 

 

 

 

Total intangible assets, net

 

$

2,403,497

 

$

2,411,772

 

 

 

 

 

 

 

Aggregate amortization expense

 

 

 

 

 

Three months ended March 31, 2008

 

$

21,224

 

 

 

 

 

 

 

 

 

Estimated amortization expense

 

 

 

 

 

Year ending December 31, 2008

 

$

83,257

 

 

 

Year ending December 31, 2009

 

76,620

 

 

 

Year ending December 31, 2010

 

73,494

 

 

 

Year ending December 31, 2011

 

72,631

 

 

 

Year ending December 31, 2012

 

64,306

 

 

 

 


(a)         The aggregate increase in the gross carrying amount of intangible assets for the three months ended March 31, 2008 of $12,983 includes a reclassification of $12,217 of acquired assets from property, plant and equipment related to the finalization of certain purchase price allocations.

 

NOTE 10.       DERIVATIVE CONTRACTS

 

In March 2008, the Company entered into several interest rate swap contracts that amended the terms of contracts (specifically maturity date and fixed rate paid by the Company) originally entered into in April 2006 with a notional amount of $3,700,000 to effectively fix borrowing rates on floating rate debt.  These contracts are not designated as hedges for accounting purposes.  As a result of these transactions, the interest rate paid on approximately 84% of the Company’s debt (excluding capital leases and collateralized indebtedness) as of March 31, 2008 is fixed (50% is fixed based on the terms of certain of the Company’s senior and senior subordinated notes and debentures agreements and 34% is effectively fixed through utilization of these interest rate swap contracts).  The table below summarizes certain terms of these interest rate swap contracts as of March 31, 2008:

 

Maturity Date

 

Notional Amount

 

Weighted Average Fixed
Rate Paid by the Company

 

Weighted Average
Effective Floating Rate
Received by the Company
as of March 31, 2008

 

 

 

 

 

 

 

 

 

March 2010

 

$

1,100,000

 

3.65

%

2.94

%

 

 

 

 

 

 

 

 

June 2012

 

$

2,600,000

 

4.86

%

2.94

%

 

16



 

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

NOTE 11.      FAIR VALUE MEASUREMENT

 

As discussed in Note 3, the Company adopted Statement No. 157 on January 1, 2008 for certain financial assets and liabilities, which among other things, requires enhanced disclosures about assets and liabilities measured at fair value.  The Company’s adoption of Statement No. 157 was limited to certain financial assets and liabilities within the scope of Statement No. 157, which primarily relate to the Company’s investment securities and derivative contracts.

 

The Company determines fair value of investment securities and investment securities pledged as collateral based upon available quoted prices.  The fair value of the Company’s interest rate swap contracts is determined by discounting expected cash flows using market interest rates commensurate with the credit quality and duration of the contracts.  In determining the fair value of the Company’s equity collars related to its prepaid forward contracts, it uses a model-derived valuation approach that considers closing exchange market price quotations, time value and volatility factors underlying the derivative instruments.

 

The fair value hierarchy as outlined in Statement No. 157 is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable.  Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions.  The fair value hierarchy consists of the following three levels:

 

·                  Level I – Quoted prices for identical instruments in active markets.

·                  Level II – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

·                  Level III – Instruments whose significant value drivers are unobservable.

 

The following table presents for each of these hierarchy levels, the Company’s financial assets and liabilities that are measured at fair value on a recurring basis at March 31, 2008:

 

 

 

Level I

 

Level II

 

Level III

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

$

9,780

 

$

 

$

 

$

9,780

 

Investment securities pledged as collateral

 

886,960

 

 

 

886,960

 

Derivative contracts

 

 

62,171

 

 

62,171

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities under derivatives contracts

 

 

227,263

 

 

227,263

 

 

The Company’s investment securities and investment securities pledged as collateral are classified within Level I of the fair value hierarchy because they are valued using quoted market prices from a listed exchange.  The Company’s derivative contracts and liabilities under derivative contracts are valued using market-based inputs to valuation models.  These valuation models require a variety of inputs, including contractual terms, market prices, yield curves, and measures of volatility.  When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations.  Such adjustments are generally based on available market evidence.  Since model inputs can generally be

 

17



 

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

verified and do not involve significant management judgment, the Company has concluded that these instruments should be classified within Level II of the fair value hierarchy.

 

As a result of the Company’s adoption of Statement No. 157, the Company began to consider the impact of credit risk when measuring the fair value of its derivative liability positions, as applicable.  The effect of making this valuation adjustment was a gain of approximately $2,919, which is included in gain (loss) on derivative contracts, net for the three months ended March 31, 2008.

 

NOTE 12.              INCOME TAXES

 

Cablevision

 

The income tax benefit attributable to continuing operations for the three months ended March 31, 2008 of $15,363 differs from the income tax benefit derived from applying the statutory federal rate to the pretax loss due principally to state taxes, partially offset by an increase to the valuation allowance of $1,933 relating to certain state net operating loss carryforwards, tax expense of $259 relating to unrecognized tax benefits and accrued interest recorded pursuant to FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), and the tax impact of non-deductible officers’ compensation and other non-deductible expenses of $1,367 and $1,542, respectively.

 

The income tax benefit attributable to continuing operations for the three months ended March 31, 2007 of $31,178 differs from the income tax benefit derived from applying the statutory federal rate to the pretax loss due principally to state taxes, a decrease in the valuation allowance of $2,518 relating to certain state net operating loss carryforwards, partially offset by tax expense of $2,122 relating to unrecognized tax benefits and accrued interest recorded pursuant to FIN 48, and the tax impact of non-deductible officers’ compensation and other non-deductible expenses of $1,592 and $1,988, respectively.

 

CSC Holdings

 

The income tax benefit attributable to continuing operations for the three months ended March 31, 2008 of $1,085 differs from the income tax benefit derived from applying the statutory federal rate to the pretax loss due principally to state taxes, offset by an increase to the valuation allowance of $1,933 relating to certain state net operating loss carryforwards, tax expense of $259 relating to unrecognized tax benefits and accrued interest recorded pursuant to FIN 48, and the tax impact of non-deductible officers’ compensation and other non-deductible expenses of $1,367 and $1,542, respectively.

 

The income tax benefit attributable to continuing operations for the three months ended March 31, 2007 of $18,126 differs from the income tax benefit derived from applying the statutory federal rate to the pretax loss due principally to state taxes, a decrease in the valuation allowance of $2,518 relating to certain state net operating loss carryforwards, partially offset by tax expense of $2,122 relating to unrecognized tax benefits and accrued interest recorded pursuant to FIN 48, and the tax impact of non-deductible officers’ compensation and other non-deductible expenses of $1,592 and $1,988, respectively.

 

In connection with the tax allocation policy between Cablevision and CSC Holdings, CSC Holdings has recorded a payable due to Cablevision and Cablevision has recorded a receivable due from CSC Holdings, both in the amount of $2,467, representing the estimated federal income tax liability of CSC Holdings for the three months ended March 31, 2008 as determined on a stand-alone basis as if CSC Holdings filed a separate federal consolidated income tax return.

 

18



COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

The Company

 

In general, the Company is required to use an estimated annual effective tax rate to measure the tax benefit or tax expense recognized in an interim period.  The estimated annual effective tax rate is revised on a quarterly basis and therefore may be different from the rate used for a prior interim period.  In addition, certain items included in the loss from continuing operations before income taxes must be treated as discrete items.  The income tax expense or benefit associated with these discrete items is fully recognized in the interim period in which the items occur.

 

NOTE 13.       EQUITY PLANS

 

Cablevision’s Equity Plans

 

The following table summarizes activity for Cablevision’s restricted shares for the three months ended March 31, 2008:

 

 

 

Number of
Restricted
Shares

 

Weighted Average
Fair Value Per Share
at Date of Grant

 

Unvested award balance, December 31, 2007

 

4,446,289

 

$

24.97

 

Granted

 

2,484,790

 

25.51

 

Awards vested

 

 

 

Forfeited

 

(60,717

)

25.48

 

 

 

 

 

 

 

Unvested award balance, March 31, 2008

 

6,870,362

 

25.16

 

 

Cablevision recognizes compensation expense for restricted shares and restricted stock units using a straight-line amortization method, based on the grant date price of Cablevision NY Group Class A common stock over the vesting period, except for restricted stock units granted to non-employee directors which vest 100% and are expensed at the date of grant.

 

Share-based compensation, including compensation relating to restricted shares, for the three months ended March 31, 2008 and 2007 was $9,023 and $17,637, of which $11,638 and $15,134 related to equity classified awards, respectively.  There were no grants of stock options or stock appreciation rights in the three months ended March 31, 2008.

 

NOTE 14.              LEGAL MATTERS

 

Tracking Stock Litigation

 

In August 2002, purported class actions naming as defendants Cablevision 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 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, Cablevision filed a motion to dismiss the consolidated action.  The action was stayed by agreement

 

19



 

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

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 Cablevision.  On October 26, 2004, the parties entered into a stipulation dismissing the related action, and providing for Cablevision’s production of certain documents. On December 13, 2004, plaintiffs filed a consolidated amended complaint.  Cablevision filed a motion to dismiss the amended complaint.  On April 19, 2005, the court granted that motion in part, dismissing the breach of contract claim but declining to dismiss the breach of fiduciary duty claim on the pleadings.

 

In August 2003, a purported class action naming as defendants Cablevision, directors and officers of Cablevision 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 (“TRSL”).  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 Cablevision.  The complaint seeks monetary damages and such other relief as the court deems just and proper.  On October 31, 2003, Cablevision 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.  On June 10, 2004, the court stayed the action on the basis of the previously filed action in Delaware.  TRSL subsequently filed a motion to vacate the stay in the New York action, and simultaneously filed a motion to intervene in the Delaware action and to stay that action.  Cablevision opposed both motions.  On April 19, 2005, the court in the Delaware action denied the motion to stay the Delaware action and granted TRSL’s motion to intervene in that action.  On June 22, 2005, the court in the New York action denied TRSL’s motion to vacate the stay in that action.

 

Cablevision reached an agreement in principle with respect to the settlement of the Delaware action in the quarter ended June 30, 2007.  In connection with the anticipated settlement, Cablevision expects to seek dismissal of the New York action as well as the Delaware action.  A hearing on the proposed settlement took place in April 2008.  At that hearing, the court ordered that certain discovery may take place and deferred ruling on approval of the settlement.

 

The Wiz Bankruptcy

 

TW, Inc. (“TW”), a former subsidiary of the Company and operator of The Wiz consumer retail electronics business, is the subject of a Chapter 11 bankruptcy proceeding in the U.S. Bankruptcy Court for the District of Delaware.  In February 2005, TW filed a complaint in the bankruptcy proceeding against Cablevision and certain of its affiliates seeking recovery of alleged preferential transfers in the aggregate amount of $193,457.  Also in February 2005, the Official Committee of Unsecured Creditors of TW (the “Committee”) filed a motion seeking authority to assume the prosecution of TW’s alleged preference claims and to prosecute certain other causes of action.  The bankruptcy court granted the Committee’s motion on or about March 10, 2005, thereby authorizing the Committee, on behalf of TW, to continue the preference suit and to assert other claims.  On March 12, 2005, the Committee filed a complaint in the bankruptcy court against Cablevision, certain of its affiliates, and certain present and former officers and directors of Cablevision and of its former subsidiary Cablevision Electronics Investments, Inc. (“CEI”).  The Committee’s complaint, as amended, asserts preferential transfer claims allegedly totaling $193,858, breach of contract, promissory estoppel, and misrepresentation claims allegedly totaling $310,000, and fraudulent conveyance, breach of fiduciary duty, and other claims seeking unspecified damages.  On June 30, 2005, Cablevision filed a motion to dismiss several of the claims in the amended complaint.  On October 31, 2005, the bankruptcy court denied the motion to

 

20



 

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

dismiss.  The bankruptcy court’s ruling on the motion to dismiss allowed the Committee to proceed with its claims against Cablevision and the other defendants.  A hearing on solvency issues was held November 29 and 30, 2007.  At that hearing, the court ruled that the Committee had failed to prove that CEI was insolvent at any point before 2003, a ruling that the Company believes will have the effect of significantly limiting many of the Committee’s claims. The Committee has filed a notice of appeal of that ruling.  Cablevision believes that the claims asserted by the Committee are without merit and is contesting them vigorously.

 

Dolan Family Group 2006 Proposal

 

In October 2006, a number of shareholder class action lawsuits (the “Transactions Lawsuits”) were filed against Cablevision and its individual directors in New York Supreme Court, Nassau County, relating to the October 8, 2006 offer by the Dolan Family Group to acquire all of the outstanding shares of Cablevision’s common stock, except for the shares held by the Dolan Family Group.  These lawsuits allege breaches of fiduciary duty and seek injunctive relief to prevent consummation of the proposed transaction and compensatory damages.  (In addition, a similar claim was added to a shareholder derivative action involving claims for alleged options backdating that was pending in the District Court for the Eastern District of New York, which is described below under “Stock Option Related Matters.”)  The New York Supreme Court ordered expedited discovery, which began in November 2006.  On January 12, 2007, the Special Transaction Committee of the Board (“Special Transaction Committee”) received a revised proposal from the Dolan Family Group to acquire all of the outstanding shares of common stock of Cablevision, except for the shares held by the Dolan Family Group.  On January 16, 2007, the Special Transaction Committee delivered a letter to Charles F. Dolan and James L. Dolan, rejecting as inadequate the revised proposal.  On May 2, 2007, Cablevision entered into a merger agreement pursuant to which, if the merger contemplated thereby was consummated, the Dolan Family Group would obtain ownership of all of the common stock equity of Cablevision (the “Proposed Merger”).  Lawyers representing shareholders in certain of the Transactions Lawsuits, in consultation with lead counsel for the plaintiffs in the Nassau County Supreme Court options backdating litigations, participated in the negotiations to improve the financial terms of the Proposed Merger as well as to add certain contractual provisions designed to protect the rights of shareholders. Based upon the above events and circumstances, and the role that the lead counsel for the plaintiffs in the Transactions Lawsuits played in connection with the Proposed Merger, the parties subsequently reached a memorandum of understanding for the dismissal of the Transactions Lawsuits (and of the going-private claim in the cases pending in the U.S. District Court for the Eastern District of New York), subject to approval of a settlement by the Nassau County Supreme Court, and for the transfer to Cablevision, if the Proposed Merger were to be consummated, of the options-related derivative claims pending in the Nassau County Supreme Court and in the U.S. District Court for the Eastern District of New York.  Pursuant to the memorandum of understanding, the parties executed a stipulation of settlement as of September 18, 2007.  The stipulation of settlement was conditioned on, among other things, consummation of the Proposed Merger, and provided that the stipulation would become null and void and of no further force and effect in the event that this condition was not satisfied.  This condition was not satisfied.

 

Director Litigation

 

Cablevision was named as a nominal defendant in a purported shareholder derivative complaint filed in the Court of Chancery of the State of Delaware.  The action was brought derivatively on behalf of Cablevision and named as additional defendants Charles F. Dolan, the Chairman of Cablevision, and Rand Araskog, Frank Biondi, John Malone and Leonard Tow, each of whom was appointed as a director on March 2, 2005 by Mr. Dolan and certain other holders of the Company’s NY Group Class B common

 

21



 

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

stock.  The complaint alleged that Charles F. Dolan, as the controlling Class B shareholder of Cablevision, by purporting to remove three Cablevision Board members (William J. Bell, Sheila Mahony and Steven Rattner) and replace them with the four new directors, wrongfully interfered with the Board’s role in managing the affairs of Cablevision and sought to substitute his judgment of how to proceed with the VOOM service of Cablevision’s Rainbow DBS subsidiary above that of the Board.  The action sought, among other things, to preliminarily and permanently enjoin Charles F. Dolan from interfering with the managerial prerogatives of Cablevision’s Board; rescinding the purported appointment of the new directors; rescinding the removal of Mr. Bell, Ms. Mahony and Mr. Rattner as directors and restoring them to their positions as directors and directing Charles F. Dolan to account to Cablevision for its damages.  This action has been voluntarily dismissed by the plaintiff.

 

Patent Litigation

 

Cablevision is named as a defendant in certain lawsuits claiming infringement of various patents relating to various aspects of the Company’s businesses.  In certain of these cases other industry participants are also defendants.  In certain of these cases the Company expects that any potential liability would be the responsibility of the Company’s equipment vendors pursuant to applicable contractual indemnification provisions.  To the extent that the allegations in these lawsuits have been analyzed by the Company at the current stage of their proceedings, the Company believes that the claims are without merit and intend to defend the actions vigorously.  The final disposition of these actions is not expected to have a material adverse effect on the Company’s consolidated financial position.

 

Loral Contract Dispute

 

In September 2005, Loral filed an action against Cablevision and Rainbow DBS for breach of contract based on a letter agreement dated March 23, 2001 (“the Letter Agreement”) between Loral and Rainbow DBS.  Loral alleged that the sale of the Rainbow-1 satellite and related assets to a subsidiary of EchoStar Communications Corporation (“EchoStar”) constituted a sale of “substantially all of the assets of Rainbow DBS” triggering a “Make Whole Payment” under the Letter Agreement of $33,000 plus interest.  A trial in this matter took place in January 2007 in New York Supreme Court for New York County.  On January 24, 2007, the jury returned a verdict finding that the EchoStar sale had triggered a Make Whole Payment under the Letter Agreement, requiring a payment to Loral of $50,898, including interest, which was accrued for in 2006 and reflected as an expense in discontinued operations.  On March 12, 2007, judgment was entered against Cablevision and Rainbow DBS in the amount of $52,159.  Cablevision and Rainbow DBS filed a motion for judgment as a matter of law, or in the alternative for a new trial, which was denied by the court on March 30, 2007.  The Company has posted a cash collateralized bond in the amount of $52,159, which is reflected as restricted cash in the Company’s consolidated balance sheets at March 31, 2008 and December 31, 2007.  Cablevision and Rainbow DBS filed an appeal with the New York Supreme Court Appellate Division, First Department, which affirmed the judgment on February 19, 2008.  Cablevision and Rainbow DBS have sought leave to appeal the judgment to the New York Court of Appeals.

 

EchoStar Contract Dispute

 

In 2005, subsidiaries of the Company entered into agreements with EchoStar and its affiliates by which EchoStar Media Holdings Corporation acquired a 20% interest in VOOM HD Holdings LLC (“VOOM HD”) and EchoStar Satellite LLC (“EchoStar Satellite”) agreed to distribute VOOM on its DISH Network for a 15-year term.  The affiliation agreement with EchoStar Satellite for such distribution provides that if VOOM HD fails to spend $100,000 per year (subject to reduction to the extent that the number of offered channels is reduced to fewer than 21), up to a maximum of $500,000 in the aggregate, on VOOM, EchoStar Satellite may

 

22



 

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

seek to terminate the agreement under certain circumstances.  On January 30, 2008, EchoStar Satellite purported to terminate the affiliation agreement, effective February 1, 2008, based on its assertion that VOOM HD had failed to comply with this spending provision in 2006.  On January 31, 2008, VOOM HD sought and obtained a temporary restraining order from New York Supreme Court for New York County prohibiting EchoStar Satellite from terminating the affiliation agreement.  In conjunction with its request for a temporary restraining order, VOOM HD also requested a preliminary injunction and filed a lawsuit against EchoStar Satellite asserting that EchoStar Satellite did not have the right to terminate the affiliation agreement.  Separately, on February 1, 2008, EchoStar Satellite began to distribute VOOM in a manner that the Company believes violates EchoStar Satellite’s obligations under the affiliation agreement.  On February 4, 2008, VOOM HD notified EchoStar Satellite of its position that this new distribution constitutes a material breach of the affiliation agreement and reserved all its rights and remedies.  On March 10, 2008, EchoStar Satellite answered VOOM HD’s complaint and asserted certain counterclaims.  On April 21, 2008, VOOM HD replied to EchoStar Satellite’s counterclaims.  The Company believes that the counterclaims asserted by EchoStar Satellite are without merit.  In a decision filed on May 5, 2008, the court denied VOOM HD’s motion for a preliminary injunction.  The lawsuit remains pending.

 

Accounting Related Investigations

 

In June 2003, the Company reported that it had discovered certain improper expense accruals primarily at the national programming services of the Company’s Rainbow segment.  The improper expense recognition matter has been the subject of investigations by the SEC and the U.S. Attorney’s Office for the Eastern District of New York.  The SEC is continuing to investigate the improper expense recognition matter and the Company’s timing of recognition of launch support, marketing and other payments under affiliation agreements.  The Company continues to fully cooperate with such investigations.

 

Stock Option Related Matters

 

The Company announced on August 8, 2006 that, based on a voluntary review of its past practices in connection with grants of stock options and stock appreciation rights (“SARs”), it had determined that the grant date and exercise price assigned to a number of its stock option and SAR grants during the 1997-2002 period did not correspond to the actual grant date and the fair market value of Cablevision’s common stock on the actual grant date.  The review was conducted with a law firm that was not previously involved with the Company’s stock option plans.  The Company has advised the SEC and the U.S. Attorney’s Office for the Eastern District of New York of these matters and each has commenced an investigation.  The Company received a grand jury subpoena from the U.S. Attorney’s Office for the Eastern District of New York seeking documents related to the stock options issues.  The Company received a document request from the SEC relating to its informal investigation into these matters.  The Company continues to fully cooperate with such investigations.

 

In addition, in August, September and October 2006, purported derivative lawsuits (including one purported combined derivative and class action lawsuit) relating to the Company’s past stock option and SAR grants were filed in New York State Supreme Court for Nassau County, the United States District Court for the Eastern District of New York, and Delaware Chancery Court for New Castle County, by parties identifying themselves as shareholders of Cablevision purporting to act on behalf of Cablevision.  These lawsuits named as defendants certain present and former members of Cablevision’s Board of Directors and certain present and former executive officers, alleging breaches of fiduciary duty and unjust enrichment relating to practices with respect to the dating of stock options, recordation and accounting for stock options, financial statements and SEC filings, and alleged violation of IRC 162(m).  In addition, certain of these lawsuits asserted claims under Sections 10(b), 14(a), and 20(a) of the Securities Exchange

 

23



 

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

Act of 1934 and Section 304 of the Sarbanes-Oxley Act.  The lawsuits sought damages from all defendants, disgorgement from the officer defendants, declaratory relief, and equitable relief, including rescission of the 2006 Employee Stock Plan and voiding of the election of the director defendants.  On October 27, 2006, the Board of Directors of Cablevision appointed Grover C. Brown and Zachary W. Carter as directors and, on the same date, appointed Messrs. Brown and Carter to a newly formed Special Litigation Committee (“SLC”) of the Board.  The SLC was directed by the Board to review and analyze the facts and circumstances surrounding these claims, which purport to have been brought derivatively on behalf of the Company, and to consider and determine whether or not prosecution of such claims is in the best interests of the Company and its shareholders, and what actions the Company should take with respect to the cases.  The SLC, through its counsel, filed motions in all three courts to intervene and to stay all proceedings until completion of the SLC’s independent investigation of the claims raised in these actions.  The Delaware action subsequently was voluntarily dismissed without prejudice by the plaintiff.  The actions pending in Nassau County have been consolidated and a single amended complaint has been filed in that jurisdiction. Similarly, the actions pending in the Eastern District of New York have been consolidated and a single amended complaint has been filed in that jurisdiction.  Both the Nassau County action and the Eastern District of New York action assert derivative claims on behalf of the Company as well as direct claims on behalf of Cablevision shareholders relating to the Company’s past stock option and SAR grants.  On November 14, 2006, the trial court in the Nassau County action denied the SLC’s motion for a stay of proceedings and ordered expedited discovery.  The Appellate Division of the New York State Supreme Court subsequently stayed all proceedings in the Nassau County action (including all discovery) pending the SLC’s appeal of the denial of its stay motion.  On October 9, 2007, the Appellate Division affirmed the trial court’s denial of the SLC’s motion to stay proceedings. The U.S. District Court for the Eastern District of New York granted the SLC’s motion for a stay and stayed the cases pending in that court.  That stay expired following the determination that the transaction contemplated by the Dolan Family Group 2006 Proposal would not close.  There have been a series of extensions and/or stays in the Nassau County and Eastern District actions, and both actions are currently stayed.

 

The Company has continued to incur substantial expenses for legal services in connection with the Company’s stock option related litigation and the investigations by the SEC and the U.S. Attorney’s Office for the Eastern District of New York.

 

Antitrust Lawsuit

 

On September 20, 2007, an antitrust lawsuit was filed in the U.S. District Court for the Central District of California against Cablevision and several other defendants, including other cable and satellite providers and programming content providers.  The complaint alleges that the defendants have violated Section 1 of the Sherman Antitrust Act by agreeing to the sale and licensing of programming on a “bundled” basis and by offering programming in packaged tiers rather than on an “a la carte” basis.  The plaintiffs, purportedly on behalf of a nationwide class of cable and satellite subscribers, seek unspecified treble monetary damages and injunctive relief to compel the offering of channels to subscribers on an “a la carte” basis.  The Company intends to defend against this lawsuit vigorously.

 

Other Matters

 

In addition to the matters discussed above, the Company is party to various lawsuits, some involving claims for substantial damages.  Although the outcome of these other matters cannot be predicted with certainty and the impact of the final resolution of these other matters on the Company’s results of operations in a particular subsequent reporting period is not known, management does not believe that the

 

24



 

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

resolution of these other lawsuits will have a material adverse effect on the financial position of the Company or the ability of the Company to meet its financial obligations as they become due.

 

NOTE 15.       SEGMENT INFORMATION

 

The Company classifies its business interests into three reportable segments: Telecommunications Services, consisting principally of its video, high-speed data, Voice over Internet Protocol and its commercial data and voice services operations; Rainbow, consisting principally of interests in national and regional cable television programming networks, including AMC, IFC, WE tv, News 12 and the VOOM HD Networks; and Madison Square Garden, consisting principally of its professional sports teams, a regional sports programming business and an entertainment business, as well as the operations of Fuse, a national programming network effective January 1, 2008.  Prior to 2008, Fuse was included in the Rainbow segment.  Prior period segment information has been reported on a comparable basis.

 

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 (including impairments), share-based compensation expense or benefit and restructuring charges or credits), a non-GAAP measure.  The Company has presented the components that reconcile adjusted operating cash flow to operating income (loss), an accepted GAAP measure.  Information as to the operations of the Company’s reportable business segments is set forth below.

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

Revenues, net from continuing operations

 

 

 

 

 

Telecommunications Services

 

$

1,261,880

 

$

1,141,306

 

Rainbow

 

225,150

 

194,505

 

Madison Square Garden

 

265,079

 

247,824

 

All other (a)

 

17,009

 

16,497

 

Intersegment eliminations

 

(48,426

)

(37,499

)

 

 

$

1,720,692

 

$

1,562,633

 

 

Intersegment eliminations are primarily affiliate revenues recognized by our Rainbow and Madison Square Garden segments from the sale of cable network programming to our Telecommunication Services segment.

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

Intersegment revenues

 

 

 

 

 

Telecommunications Services

 

$

479

 

$

288

 

Rainbow

 

17,499

 

10,830

 

Madison Square Garden

 

30,448

 

26,381

 

 

 

$

48,426

 

$

37,499

 

 

25



 

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

Reconciliation (by Segment and in Total) of Adjusted Operating Cash Flow to Operating Income (Loss) from Continuing Operations

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

Adjusted operating cash flow from continuing operations

 

 

 

 

 

Telecommunications Services

 

$

485,926

 

$

428,597

 

Rainbow

 

50,709

 

43,132

 

Madison Square Garden

 

(2,526

)

15,559

 

All other (b)

 

(18,163

)

(13,556

)

 

 

$

515,946

 

$

473,732

 

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

Depreciation and amortization (including impairments) included in continuing operations

 

 

 

 

 

Telecommunications Services

 

$

(224,548

)

$

(234,981

)

Rainbow

 

(20,253

)

(22,498

)

Madison Square Garden

 

(14,957

)

(16,457

)

All other (c)

 

(1,234

)

(10,512

)

 

 

$

(260,992

)

$

(284,448

)

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

Share-based compensation expense included in continuing operations

 

 

 

 

 

Telecommunications Services

 

$

(4,128

)

$

(8,127

)

Rainbow

 

(2,399

)

(5,467

)

Madison Square Garden

 

(2,250

)

(3,657

)

All other (c)

 

(246

)

(386

)

 

 

$

(9,023

)

$

(17,637

)

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

Restructuring credits (charges) included in continuing operations

 

 

 

 

 

Telecommunications Services

 

$

 

$

 

Rainbow

 

(361

)

(1,555

)

Madison Square Garden

 

 

(11

)

All other (c)

 

(29

)

237

 

 

 

$

(390

)

$

(1,329

)

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

Operating income (loss) from continuing operations

 

 

 

 

 

Telecommunications Services

 

$

257,250

 

$

185,489

 

Rainbow

 

27,696

 

13,612

 

Madison Square Garden

 

(19,733

)

(4,566

)

All other (b)

 

(19,672

)

(24,217

)

 

 

$

245,541

 

$

170,318

 

 

26



 

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

A reconciliation of reportable segment amounts to Cablevision’s and CSC Holdings’ consolidated balances is as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

Operating income (loss) from continuing operations before income taxes

 

 

 

 

 

Total operating income for reportable segments

 

$

265,213

 

$

194,535

 

Other operating loss (b)

 

(19,672

)

(24,217

)

Operating income

 

245,541

 

170,318

 

 

 

 

 

 

 

Items excluded from operating income:

 

 

 

 

 

Interest expense

 

(178,258

)

(205,105

)

Interest income

 

4,418

 

6,722

 

Equity in net income of affiliates

 

 

1,776

 

Gain (loss) on investments, net

 

21,616

 

(72,985

)

Gain (loss) on derivative contracts, net

 

(104,910

)

65,119

 

Minority interests

 

(2,905

)

714

 

Miscellaneous, net

 

1,166

 

659

 

CSC Holdings loss from continuing operations before income taxes

 

(13,332

)

(32,782

)

Cablevision interest expense

 

(33,395

)

(33,543

)

Cablevision interest income

 

231

 

1,717

 

Cablevision loss from continuing operations before income taxes

 

$

(46,496

)

$

(64,608

)

 


(a)         Represents net revenues of Clearview Cinemas and PVI Virtual Media.

(b)        Principally includes unallocated corporate general and administrative costs, in addition to the operating results of Clearview Cinemas and PVI Virtual Media.  It also includes costs allocated to Fox Sports Net Bay Area that were not eliminated as a result of the sale of that business.

(c)         Includes expenses and/or credits relating to Clearview Cinemas, PVI Virtual Media, certain corporate expenses/credits and certain costs allocated to Fox Sports Net Bay Area that were not eliminated as a result of the sale of that business.

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

Capital Expenditures

 

 

 

 

 

Telecommunications Services

 

$

175,576

 

$

151,922

 

Rainbow

 

5,429

 

1,992

 

Madison Square Garden

 

8,282

 

857

 

Corporate and other

 

4,173

 

1,523

 

 

 

$

193,460

 

$

156,294

 

 

Substantially all revenues and assets of the Company’s reportable segments are attributed to or located in the United States primarily concentrated in the New York metropolitan area.

 

Concentrations of Credit Risk

 

Financial instruments that may potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents and trade receivables.  Cash is invested in money market funds and bank time deposits.  The Company’s cash investments are placed with money market funds or financial institutions that have received the highest rating awarded by Standard & Poor’s and Moody’s Investors Service.  The Company selects money market funds that predominantly invest in marketable, direct obligations issued or guaranteed by the United States government or its agencies, commercial paper, fully collateralized repurchase agreements, certificates of deposit, banker’s acceptances and time deposits.  The Company did not have any customers that accounted for 10% or more of the Company’s consolidated net

 

27



 

COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Dollars in thousands, except per share amounts)

(Unaudited)

 

trade receivable balances at March 31, 2008 and December 31, 2007, or 10% or more of the Company’s consolidated net revenues for the three months ended March 31, 2008 and 2007.

 

NOTE 16.       SUBSEQUENT EVENT

 

On May 6, 2008, Rainbow Media Holdings entered into an agreement to acquire Sundance Channel L.L.C. (“Sundance”) from General Electric Company’s NBC Universal, CBS Corporation’s Showtime Networks, and entities controlled by Robert Redford.  The purchase price of $496,000 (subject to customary working capital adjustments) will be paid through an exchange of approximately 12.7 million shares of common stock of General Electric Company held by Rainbow Media Holdings, with a cash adjustment at closing based upon the value of the General Electric Company shares in relation to the total purchase price.  Under the transaction structure, General Electric Company will receive all of the General Electric Company common stock and the CBS and Redford entities will receive cash in exchange for their interest in Sundance.  The transaction is expected to be an exchange of the General Electric Company shares that is tax free to the Company.  The Company also expects to receive a full step up in the tax basis of Sundance.  In connection with the exchange of the General Electric Company shares, the Company will repay the fair value of the monetization debt and settle the related equity derivative contracts associated with those shares.  The cash portion of the purchase price and the repayment of the monetization indebtedness and the settlement of the associated equity derivative contracts are expected to be satisfied with cash on hand and/or borrowings under either the Rainbow National Services LLC or CSC Holdings revolving credit agreements.

 

Consummation of the transaction is subject to customary closing conditions, including receipt of regulatory approvals.

 

28



 

CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES

 

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

 

All dollar amounts, except per subscriber, per unit and per share data, included in the following discussion under this Item 2 are presented in thousands.

 

Summary

 

Our future performance is dependent, to a large extent, on general economic conditions including capital market conditions, the impact 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 Services

 

Our Telecommunications Services segment derives revenues principally through monthly charges to subscribers of our video, high-speed data and voice services.  These monthly charges include fees for cable television programming, as well as, in many cases, equipment rental, pay-per-view and video-on-demand, high-speed data and voice services.  Revenue increases are derived from rate increases, increases in the number of subscribers to these services, including additional services sold to our existing subscribers, and upgrades by video customers in the level of programming package to which they subscribe.  We also derive revenues from the sale of advertising time available on the programming carried on our 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.  Programming costs are the most significant part of our operating expenses and are expected to increase as a result of subscriber growth, additional service offerings and contractual rate increases.

 

Our cable television video services, which accounted for 45% of our consolidated revenues for the three months ended March 31, 2008, face competition from the direct broadcast satellite business and the delivery systems of incumbent telephone companies.  There are two major providers of DBS service in the United States, each with significantly higher numbers of subscribers than we have.  We compete with these DBS competitors by “bundling” our service offerings with products that the DBS companies cannot efficiently provide at this time, such as high-speed data service and voice service carried over the cable distribution plant, as well as by providing interactive services that are currently unavailable to a DBS subscriber.  As discussed in greater detail below, we face intense competition from incumbent telephone companies, Verizon and AT&T, which offer video programming in addition to their voice and high-speed Internet access services, evidencing their commitment to compete across all of the Company’s telecommunications products.  Their competitive position has been improved by recent operational, regulatory and legislative advances that they have made.  Historically, we have made substantial investments in the development of new and innovative programming options for our customers as a way of differentiating ourselves from our competitors.  We likely will continue to do so in order to be a more effective competitor.

 

Verizon and AT&T offer video programming as well as voice and high-speed Internet access services to residential customers in our service area.  AT&T has obtained authorization to provide such service throughout its Connecticut footprint.  Verizon has constructed fiber to the home network plant that passes a significant number of households in our service area (currently about a quarter of the households according to our estimates).  Verizon has obtained authority to provide video service (it already has or needs no authority to provide phone and data services) for a majority of these homes passed, on a statewide basis in New Jersey and in numerous local franchises in New York.  Verizon has announced that it reached preliminary agreement for a franchise agreement, subject to further state and local approvals, to provide video service in New York City.  Verizon has so far not sought to obtain authority for video service in Connecticut.

 

29



 

Our high-speed data services business, which accounted for 16% of our consolidated revenues for the three months ended March 31, 2008, faces competition from other providers of high-speed Internet access, including DSL and fiber-based services offered by local telephone companies such as Verizon and AT&T.  In addition, DBS providers have tested the use of certain spectrum to offer satellite-based high-speed data services and are offering broadband data services via partnerships and marketing arrangements with other providers such as Verizon, AT&T, Earthlink, Wildblue, and Clearwire.  This competition, together with our already high penetration, is expected to slow our growth in cable modem penetration from the growth rates we have experienced in the past.  The Company had slower growth during the first three months of 2008 than experienced in prior years in Optimum Online customers (61,000 during the first quarter of 2008 compared with 79,000 during the first quarter of 2007).

 

Our Voice over Internet Protocol (“VoIP”) offering, which accounted for approximately 8% of our consolidated revenues for the three months ended March 31, 2008, is competitive with incumbent offerings primarily on the basis of pricing, where unlimited United States, Canada and Puerto Rico 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 and/or features or reduce their pricing, future growth and success of this business may be impaired.  The regulatory framework for cable modem service and voice service is being developed and changes in how we, and our competitors, are regulated, including increased regulation, may affect our competitive position.  The Company had slower growth during the first three months of 2008 than experienced in prior years in VoIP customers (93,000 during the first quarter of 2008 compared with 109,000 during the first quarter of 2007).

 

Optimum Lightpath, which accounted for approximately 3% of our consolidated revenues for the three months ended March 31, 2008, operates in the most competitive business telecommunications market in the country and competes against the very largest telecommunications companies - incumbent local exchange companies such as Verizon and AT&T, other competitive local exchange companies and long distance companies.  To the extent that dominant market leaders decide to reduce their prices, future success of our Optimum Lightpath business may be impaired.  The trend in business communications has been shifting from a wired voice medium to a wireless data medium.  Should this trend accelerate dramatically, future growth of Optimum Lightpath may be negatively impacted.

 

Rainbow

 

In our Rainbow segment, which accounted for 13% of our consolidated revenues for the three months ended March 31, 2008, we earn revenues in two principal ways.  First, we receive affiliate fee payments from cable television system operators, DBS operators and telephone companies (collectively referred to as “operators”).  These revenues are generally on a per subscriber basis and earned under multi-year contracts with those operators referred to as “affiliation agreements”.  The specific affiliate fee revenues we earn vary from operator to operator and also vary among our networks, but are generally based upon the number of each operator’s subscribers who receive our programming, referred to as “viewing subscribers.”  The second principal source of revenues in this segment is from advertising.  Under our affiliation agreements, we have the right to sell a specific amount of national advertising time on our programming networks.  Our advertising revenues are more variable than affiliate fee revenues 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 as measured by rating services.

 

We seek to grow our revenues in the Rainbow segment by increasing the number of operators that carry our services and the number of viewing subscribers.  We refer to this as our “penetration.”  AMC, which is widely distributed, has less ability to increase its penetration than our newer, less penetrated services.  Our revenues may also increase over time through contractual rate increases stipulated in certain of our

 

30



 

affiliation agreements.  In negotiating for increased or extended carriage, we may be subject to requests by operators to make upfront payments in exchange for additional subscribers or extended carriage, which we record as deferred carriage fees and which are amortized as a reduction to revenue over the period of the related affiliation agreements, or to waive for a specified period or accept lower per subscriber fees if certain additional subscribers are provided.  We also may help fund the operators’ efforts to market our channels or we may permit operators to offer limited promotional periods without payment of subscriber fees.  As we continue our efforts to add subscribers, our subscriber revenue may be negatively affected by subscriber acquisition fees (deferred carriage), discounted subscriber fees and other payments; however, we believe that these transactions generate a positive return on investment over the contract period.  We seek to increase our advertising revenues by increasing the number of minutes of national advertising sold per hour and by increasing rates for such advertising, but, ultimately, the level of our advertising revenues is directly related to the overall distribution of our programming, penetration of our services, and the popularity (including within desirable demographic groups) of our services as measured by rating services.

 

The principal goals in this segment are to increase our affiliate fee revenues and our advertising revenues by increasing distribution and penetration of our national services.  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 operators, creating disparate bargaining power between us and the largest operators.  This increased concentration 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 greater leverage in negotiating the pricing and other terms of affiliation agreements.  Moreover, as a result of this concentration, the potential impact of a loss of any one of our major affiliate relationships would have a significant adverse impact on this segment.

 

Madison Square Garden

 

Madison Square Garden, which accounted for 15% of our consolidated revenues for the three months ended March 31, 2008, consists of our owned professional sports teams (principally the New York Knicks of the National Basketball Association (“NBA”) and the New York Rangers of the National Hockey League (“NHL”), along with the Hartford Wolf Pack of the American Hockey League and the New York Liberty of the Women’s National Basketball Association), a regional sports programming business and an entertainment business, as well as the operations of Fuse, a national programming network effective January 1, 2008.  It also operates the Madison Square Garden Arena and Radio City Music Hall, the WaMu Theater, the Beacon Theatre in New York City and the Chicago Theatre in Chicago, Illinois, which was acquired in October 2007.  Fuse is a music television network featuring music videos, artist interviews, live concerts, and series and specials.

 

Madison Square Garden faces competitive challenges unique to its business activities.  We derive revenues in this segment primarily from our network businesses (see below), the sale of tickets, including luxury box rentals, to sporting and entertainment events, from rental rights fees paid to this segment by promoters that present events at our entertainment venues and the sports teams’ share of league-wide distributions of national television rights fees and royalties.  We also derive revenue from the sale of advertising at our owned and operated venues, from food, beverage and merchandise sales at these venues and from the licensing of our trademarks.  Madison Square Garden’s regional sports programming business and Fuse derive their revenues from affiliate fees paid by cable television operators (including our cable television systems), satellite operators that provide video service and sales of advertising.  This segment’s financial performance is effected by the performance of all the teams presented and the attractiveness of its entertainment events and programming content.

 

31



 

Our sports teams’ financial success is dependent on their ability to generate advertising sales, paid attendance, luxury box rentals, and food, beverage and merchandise sales.  To a large extent, the ability of the teams 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 luxury box rentals, and which also supports increases in prices charged for tickets, luxury box rentals, and advertising placement.  Each team’s success is dependent on its ability to acquire highly competitive personnel.  The governing bodies of the NBA and the NHL have the power and authority to take certain actions that they deem to be in the best interest of their respective leagues, which may not necessarily be consistent with maximizing our professional sports teams’ results of operations.

 

Madison Square Garden’s regional sports programming business is affected by our ability to secure desired programming of professional sports teams, in addition to our proprietary programming.  The continued carriage and success of the teams that are telecast by us will impact our revenues from distribution and from the rates charged for affiliation and advertising, as well as the ability to attract advertisers.  Fuse’s business is affected by its ability to acquire or develop desired music related content for the network.  While Madison Square Garden’s regional sports programming business is widely distributed in the New York metropolitan area, it, along with Fuse, faces the same challenges in increasing affiliate fee and advertising revenues as the Rainbow segment’s programming businesses discussed above.

 

Madison Square Garden’s entertainment business is largely dependent on the continued success of our Radio City Christmas Spectacular and our touring Christmas shows, as well as the availability of, and our venues’ ability to attract, concerts, family shows and events.

 

The dependence of this segment’s revenues on its sports teams and Christmas shows generally make it seasonal with a disproportionate share of its revenues and operating income being derived in the fourth quarter of each year.

 

Stock Option Related Matters

 

We have continued to incur substantial expenses for legal services in connection with the Company’s stock option related litigation, and the investigations by the Securities and Exchange Commission and the U.S. Attorney’s Office for the Eastern District of New York.  We expect to continue to incur substantial expenses in connection with these matters.  See Part II, Item 1. Legal Proceedings.

 

32



 

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.

 

STATEMENT OF OPERATIONS DATA

 

 

 

Three Months Ended March 31,

 

 

 

 

 

2008

 

2007

 

(Increase)

 

 

 

 

 

% of Net

 

 

 

% of Net

 

Decrease

 

 

 

Amount

 

Revenues

 

Amount

 

Revenues

 

in Net Loss

 

Revenues, net

 

$

1,720,692

 

100

%

$

1,562,633

 

100

%

$

158,059

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Technical and operating (excluding depreciation, amortization and impairments shown below)

 

792,439

 

46

 

734,570

 

47

 

(57,869

)

Selling, general and administrative

 

421,330

 

24

 

371,968

 

24

 

(49,362

)

Restructuring charges

 

390

 

 

1,329

 

 

939

 

Depreciation and amortization (including impairments)

 

260,992

 

15

 

284,448

 

18

 

23,456

 

Operating income

 

245,541

 

14

 

170,318

 

11

 

75,223

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(207,004

)

(12

)

(230,209

)

(15

)

23,205

 

Equity in net income of affiliates

 

 

 

1,776

 

 

(1,776

)

Gain (loss) on investments, net

 

21,616

 

1

 

(72,985

)

(5

)

94,601

 

Gain (loss) on derivative contracts, net

 

(104,910

)

(6

)

65,119

 

4

 

(170,029

)

Minority interests

 

(2,905

)

 

714

 

 

(3,619

)

Miscellaneous, net

 

1,166

 

 

659

 

 

507

 

Loss from continuing operations before income taxes

 

(46,496

)

(3

)

(64,608

)

(4

)

18,112

 

Income tax benefit

 

15,363

 

1

 

31,178

 

2

 

(15,815

)

Loss from continuing operations

 

(31,133

)

(2

)

(33,430

)

(2

)

2,297

 

Income (loss) from discontinued operations, net of taxes

 

(473

)

 

7,597

 

 

(8,070

)

Loss before cumulative effect of a change in accounting principle

 

(31,606

)

(2

)

(25,833

)

(2

)

(5,773

)

Cumulative effect of a change in accounting principle

 

 

 

(443

)

 

443

 

Net loss

 

$

(31,606

)

(2

)%

$

(26,276

)

(2

)%

$

(5,330

)

 

33



 

Comparison of Three Months Ended March 31, 2008 Versus Three Months Ended March 31, 2007

 

Consolidated Results – Cablevision Systems Corporation

 

The Company classifies its business interests into three reportable segments:

 

·                 Telecommunications Services, consisting principally of our video, high-speed data, VoIP services and the commercial data and voice services operations of Optimum Lightpath;

 

·                 Rainbow, consisting principally of interests in national and regional television programming networks, including AMC, IFC, WE tv, News 12 and VOOM HD Networks; and

 

·                 Madison Square Garden, consisting principally of its professional sports teams, a regional sports programming business and an entertainment business, as well as the operations of Fuse, a national programming network effective January 1, 2008.

 

The Company allocates certain costs to each segment based upon their proportionate estimated usage of services.  The segment financial information set forth below, including the discussion related to individual line items, does not reflect inter-segment eliminations unless specifically indicated.

 

See “Business Segments Results” for a more detailed discussion relating to the operating results of our segments.

 

Revenues, net for the three months ended March 31, 2008 increased $158,059 (10%) as compared to revenues for the three months ended March 31, 2007.  The net increase is attributable to the following:

 

Increase in revenues of the Telecommunication Services segment

 

$

120,574

 

Increase in revenues of the Rainbow segment

 

30,645

 

Increase in revenues of the Madison Square Garden segment

 

17,255

 

Other net increases

 

512

 

Intersegment eliminations

 

(10,927

)

 

 

$

158,059

 

 

Technical and operating expenses (excluding depreciation, amortization and impairments) 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 expense to broadcast certain live sporting events and contractual compensation expense pursuant to employment agreements with professional sports teams’ personnel;

 

·                 amortization of costs to license programming, including program rights and production costs of our Rainbow and Madison Square Garden businesses; and

 

·                 interconnection, call completion and circuit fees relating to our telephone and VoIP businesses which represent the transport and termination of calls with other telecommunications carriers.

 

34



 

Technical and operating expenses (excluding depreciation and amortization and impairments) for the three months ended March 31, 2008 increased $57,869 (8%) as compared to the three months ended March 31, 2007.  The net increase is attributable to the following:

 

Increase in expenses of the Telecommunications Services segment

 

$

38,474

 

Increase in expenses of the Rainbow segment

 

382

 

Increase in expenses of the Madison Square Garden segment

 

31,174

 

Other net decreases

 

(1,864

)

Inter-segment eliminations

 

(10,297

)

 

 

$

57,869

 

 

As a percentage of revenues, technical and operating expenses decreased 1% for the three months ended March 31, 2008 as compared to the same period in 2007.

 

Selling, general and administrative expenses include primarily sales, marketing and advertising expenses, administrative costs, and costs of customer call centers.  Selling, general and administrative expenses increased $49,362 (13%) for the three months ended March 31, 2008 as compared to the same period in 2007.  The net increase is attributable to the following:

 

Increase in expenses of the Telecommunications Services segment

 

$

20,772

 

Increase in expenses of the Rainbow segment

 

19,618

 

Increase in expenses of the Madison Square Garden segment

 

2,759

 

Other net increases

 

6,843

 

Intersegment eliminations

 

(630

)

 

 

$

49,362

 

 

As a percentage of revenues, selling, general and administrative expenses remained constant for the three months ended March 31, 2008 as compared to the same period in 2007.

 

Restructuring charges amounted to $390 for the three months ended March 31, 2008 and $1,329 for the three months ended March 31, 2007.  The 2008 amount consisted of a charge of $440 relating to severance costs at certain programming businesses within the Rainbow segment, partially offset by net adjustments of $50 to severance and facility realignment provisions recorded in connection with prior restructuring plans.  The 2007 amount related primarily to a severance charge of $1,566 associated with the elimination of 32 positions at certain programming businesses within the Rainbow segment.  This charge was partially offset by net adjustments of $237 to facility realignment provisions recorded in connection with the 2006, 2002 and 2001 restructuring plans.

 

Depreciation and amortization (including impairments) decreased $23,456 (8%) for the three months ended March 31, 2008 as compared to the same period in 2007.  The net decrease resulted primarily from a decrease in depreciation expense resulting from certain asset retirements in the first quarter of 2007 and certain assets becoming fully depreciated.

 

35



 

Net interest expense decreased $23,205 (10%) for the three months ended March 31, 2008 as compared to the same period in 2007.  The net decrease is attributable to the following:

 

Decrease due to lower average debt balances related primarily to the redemption of certain senior subordinated and senior notes in August 2007 and December 2007 and to lower outstanding collateralized indebtedness

 

$

(16,884

)

Decrease due to lower average interest rates

 

(8,986

)

Lower interest income

 

3,790

 

Other net decreases

 

(1,125

)

 

 

$

(23,205

)

 

Equity in net income of affiliates amounted to $1,776 for the three months ended March 31, 2007.  This amount consisted of the Company’s share of the net income of certain businesses in which the Company did not have a majority ownership interest.  Certain of these investments were disposed of in 2007.

 

Gain (loss) on investments, net for the three months ended March 31, 2008 and 2007 of $21,616 and $(72,985), respectively, consists primarily of the net increase or decrease in the fair value of Comcast, General Electric, Charter Communications, and Leapfrog common stock owned by the Company during the respective period.  The effects of these gains and losses are partially offset by the losses and gains on related derivative contracts described below.

 

Gain (loss) on derivative contracts, net for the three months ended March 31, 2008 and 2007 consisted of the following:

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

Unrealized gains due to the change in fair value of the Company’s prepaid forward contracts relating to the Comcast, Charter Communications, General Electric and Leapfrog shares owned by the Company during the respective period

 

$

1,420

 

$

75,086

 

Unrealized losses on interest rate swap contracts

 

(104,524

)

(9,111

)

Realized losses on interest rate swap contracts

 

(1,806

)

(856

)

 

 

$

(104,910

)

$

65,119

 

 

The effects of these gains and losses are partially offset by the losses and gains on investment securities pledged as collateral which are included in gain (loss) on investments, net discussed above.

 

Minority interests for the three months ended March 31, 2008 and 2007 of $(2,905) and $714, respectively, represent other parties’ share of the net income or losses of entities which are not entirely owned by us but which are consolidated in our financial statements.

 

Net miscellaneous income of $1,166 and $659 for the three months ended March 31, 2008 and 2007, respectively, resulted primarily from dividends received on certain of the Company’s investment securities, partially offset by other miscellaneous expenses.

 

Income tax benefit attributable to continuing operations for the three months ended March 31, 2008 of $15,363 differs from the income tax benefit derived from applying the statutory federal rate to the pretax loss due principally to state taxes, partially offset by an increase to the valuation allowance of $1,933 relating to certain state net operating loss carryforwards, tax expense of $259 relating to unrecognized tax benefits and accrued interest recorded pursuant to Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), and the tax impact of non-deductible officers’ compensation and other non-deductible expenses of $1,367 and $1,542, respectively.

 

36



 

The income tax benefit attributable to continuing operations for the three months ended March 31, 2007 of $31,178 differs from the income tax benefit derived from applying the statutory federal rate to the pretax loss due principally to state taxes, a decrease in the valuation allowance of $2,518 relating to certain state net operating loss carryforwards, partially offset by tax expense of $2,122 relating to unrecognized tax benefits and accrued interest recorded pursuant to FIN 48, and the tax impact of non-deductible officers’ compensation and other non-deductible expenses of $1,592 and $1,988, respectively.

 

In general, the Company is required to use an estimated annual effective tax rate to measure the tax benefit or tax expense recognized in an interim period.  The estimated annual effective tax rate is revised on a quarterly basis and, therefore, may be different from the rate used for a prior interim period.  In addition, certain items included in the loss from continuing operations before income taxes must be treated as discrete items.  The income tax expense or benefit associated with these discrete items is fully recognized in the interim period in which the items occur.

 

Income (loss) from discontinued operations

 

In April 2005, the operations of the Rainbow DBS satellite distribution business were shut down.  In connection with the shut down, certain assets of the business, including the Rainbow 1 direct broadcast satellite and certain other related assets were sold to a subsidiary of EchoStar for $200,000 in cash.  This transaction closed in November 2005.

 

In June 2007, the Company completed the sale of its 60% interest in Fox Sports Net Bay Area to Comcast.  The net operating results of Fox Sports Net Bay Area and those of the Rainbow DBS Distribution business have been reported in discontinued operations in the Company’s consolidated statements of operations for all periods presented.

 

Income (loss) from discontinued operations, net of taxes, for the three months ended March 31, 2008 and 2007 reflects the following items, net of related income taxes and minority interests:

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Net operating results of the Rainbow DBS distribution business, net of taxes

 

$

(426

)

$

5,484

 

Net operating results of Fox Sports Net Bay Area, net of taxes

 

(47

)

2,113

 

 

 

$

(473

)

$

7,597

 

 

In March 2007, the Federal Communications Commission (“FCC”) waived the bond requirement previously submitted by Rainbow DBS Company LLC with respect to five Ka-band licenses.  These bonds were originally cash collateralized by the Company.  In connection with the shut down of the Rainbow DBS satellite distribution business in 2005, the Company recorded a loss related to the outstanding bonds since the Company believed it was not probable that Rainbow DBS would meet the required FCC milestones.  As a result of the waiver from the FCC, the Company recorded a gain of $6,638, net of taxes, for the three months ended March 31, 2007.  The Company received the cash collateral of $11,250 in the second quarter of 2007.

 

37



 

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:

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

Increase
(Decrease) in

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Operating
Income

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues, net

 

$

1,261,880

 

100

%

$

1,141,306

 

100

%

$

120,574

 

Technical and operating expenses (excluding depreciation and amortization)

 

533,027

 

42

 

494,553

 

43

 

(38,474

)

Selling, general and administrative expenses

 

247,055

 

20

 

226,283

 

20

 

(20,772

)

Depreciation and amortization

 

224,548

 

18

 

234,981

 

21

 

10,433

 

Operating income

 

$

257,250

 

20

%

$

185,489

 

16

%

$

71,761

 

 

Revenues, net for the three months ended March 31, 2008 increased $120,574 (11%) as compared to revenues for the three months ended March 31, 2007.  The following table presents the increases by major components of revenues for the three months ended March 31, 2008 and 2007 for the Company’s Telecommunications Services segment:

 

 

 

 

 

 

 

 

 

Percent

 

 

 

Three Months Ended March 31,

 

Increase

 

Increase

 

 

 

2008

 

2007

 

(Decrease)

 

(Decrease)

 

Video (including analog, digital, pay-per-view, video-on-demand and digital video recorder)

 

$

735,468

 

$

681,661

 

$

53,807

 

8

%

High-speed data

 

269,605

 

244,348

 

25,257

 

10

%

Voice

 

159,840

 

121,276

 

38,564

 

32

%

Advertising

 

24,497

 

25,564

 

(1,067

)

(4

)%

Other (including installation, home shopping, advertising sales commissions, and other products)

 

24,968

 

26,432

 

(1,464

)

(6

)%

Total cable television

 

1,214,378

 

1,099,281

 

115,097

 

10

%

Optimum Lightpath

 

59,445

 

52,967

 

6,478

 

12

%

Intra-segment eliminations

 

(11,943

)

(10,942

)

(1,001

)

(9

)%

Total Telecommunications Services

 

$

1,261,880

 

$

1,141,306

 

$

120,574

 

11

%

 

Revenue increases reflected above are primarily derived from increases in the number of subscribers to our high-speed data and voice services, including additional services sold to our existing video subscribers (set forth in the table below), higher rates, and upgrades by video customers from the level of the programming package to which they subscribe, offset in part by offer discounts and other rate changes.  As a result, our average monthly revenue per basic video subscriber for the three months ended March 31, 2008 was $129.56 as compared with $116.95 for the three months ended March 31, 2007, a 10.8% increase.  Our average monthly revenue per basic video subscriber for the three months ended

 

38



 

December 31, 2007 was $125.10.  The increase in Optimum Lightpath net revenues is primarily attributable to growth in Ethernet data services, partially offset by reduced traditional data services.

 

The following table presents certain subscriber information as of March 31, 2008 and 2007 for the Company’s cable television systems (excluding Optimum Lightpath):

 

 

 

As of March 31,

 

Increase

 

Percent
Increase

 

 

 

2008

 

2007

 

(Decrease)

 

(Decrease)

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic video customers

 

3,125

 

3,139

 

(14

)

 

iO digital video customers

 

2,669

 

2,511

 

158

 

6

%

Optimum Online high-speed data customers

 

2,343

 

2,118

 

225

 

11

%

Optimum voice customers

 

1,685

 

1,318

 

367

 

28

%

Residential telephone customers

 

 

2

 

(2

)

(100

)%

Total revenue generating units

 

9,822

 

9,088

 

734

 

8

%

 

The Company added basic video customers of 2,000 in the three month period ended March 31, 2008 compared with 12,000 in the comparable period in 2007 and added revenue generating units (“RGUs”) of 197,000 in the three month period ended March 31, 2008 compared with 261,000 in the comparable period in 2007.  The Company had slower growth during the three months ended March 31, 2008 than experienced in the same period in 2007 in iO digital video customers (41,000 in 2008 compared with 64,000 in 2007), Optimum Online customers (61,000 in 2008 compared with 79,000 in 2007) and Optimum voice customers (93,000 in 2008 compared with 109,000 in 2007).  The slowing growth in subscribers for these service offerings reflects the impact of the Company’s relatively high penetration rates and, to a lesser extent, the effects of intensifying competition, particularly from Verizon.

 

Technical and operating expenses (excluding depreciation and amortization) for the three months ended March 31, 2008 increased $38,474 (8%) compared to the same period in 2007.  The net increase is attributable to the following:

 

Increase in programming costs (including costs of on-demand services) due primarily to increases in the video services purchased by our subscribers, expanded service offerings, and programming rate increases

 

$

28,041

 

Increase in field service and network related costs primarily due to growth in revenue generating units

 

6,578

 

Increase in franchise fees

 

2,948

 

Increase in call completion and interconnection costs, taxes, and fees (net of related intra-segment eliminations) due to a reversal of estimated VoIP fees of $4,122 in March 2007 attributable to prior periods and subscriber growth, partially offset by lower rates

 

2,648

 

Net decrease in expense primarily due to presentation of certain customer related taxes as a reduction of revenue in 2008*

 

(1,907

)

Other net increases

 

188

 

Intra-segment eliminations

 

(22

)

 

 

$

38,474

 

 


*                Beginning in the second half of 2007, these taxes and fees are now being collected from customers by the Company as agent and, accordingly, are reported as a reduction of revenue.

 

As a percentage of revenues, technical and operating expenses decreased 1% during the three months ended March 31, 2008 as compared to the same period in 2007.

 

39



 

Selling, general and administrative expenses increased $20,772 (9%) for the three months ended March 31, 2008 as compared to the same period in 2007.  The net increase is attributable to the following:

 

Increase in sales and marketing costs

 

$

15,391

 

Increase in customer related costs (principally call center related costs) primarily due to increased revenue generating units

 

5,317

 

Increase in other general and administrative costs

 

4,812

 

Decrease in share-based compensation expense and expenses relating to Cablevision’s long-term incentive plans

 

(4,726

)

Intra-segment eliminations

 

(22

)

 

 

$

20,772

 

 

As a percentage of revenues, selling, general and administrative expenses remained constant for the three months ended March 31, 2008 as compared to the same period in 2007.

 

Depreciation and amortization decreased $10,433 (4%) for the three months ended March 31, 2008 as compared to the same period in 2007.  The net decrease resulted primarily from lower depreciation due to certain asset retirements in the first quarter of 2007 and certain assets becoming fully depreciated, partly offset by the depreciation of new assets, primarily subscriber devices and VoIP equipment.

 

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.  Beginning in the first quarter of 2008, Fuse has been included in the Madison Square Garden segment.  Prior to 2008, Fuse was included in the Rainbow segment.  Prior period segment information has been reported on a comparable basis.

 

 

 

Three Months Ended March 31,

 

Increase

 

 

 

2008

 

2007

 

(Decrease) in

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Operating
Income

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues, net

 

$

225,150

 

100

%

$

194,505

 

100

%

$

30,645

 

Technical and operating expenses (excluding depreciation, amortization and impairments)

 

80,430

 

36

 

80,048

 

41

 

(382

)

Selling, general and administrative expenses

 

96,410

 

43

 

76,792

 

39

 

(19,618

)

Restructuring charges

 

361

 

 

1,555

 

1

 

1,194

 

Depreciation and amortization (including impairments)

 

20,253

 

9

 

22,498

 

12

 

2,245

 

Operating income

 

$

27,696

 

12

%

$

13,612

 

7

%

$

14,084

 

 

40



 

The Rainbow segment’s operating income is comprised of the following:

 

 

 

Three Months Ended March 31,

 

 

 

2008

 

2007

 

Operating income (loss):

 

 

 

 

 

AMC, WE tv and IFC

 

$

57,853

 

$

57,640

 

Other services

 

(30,157

)

(44,028

)

 

 

$

27,696

 

$

13,612

 

 

Other services primarily consist of VOOM, News 12 Networks, IFC Entertainment, Rainbow Advertising Sales Corporation (“RASCO”), Lifeskool, sportskool and Rainbow Network Communications.  The operating losses from Rainbow’s other services were attributable primarily to VOOM and the News 12 Networks as well as IFC Entertainment and RASCO.

 

Revenues, net for the three months ended March 31, 2008 increased $30,645 (16%) as compared to revenues for the same period in 2007.  The net increase is attributable to the following:

 

Increase in affiliate fee revenues and other revenue at Rainbow’s other programming businesses, primarily at VOOM HD Networks due to increased distribution by EchoStar, and the launch of VOOM by Cablevision during the third quarter of 2007

 

$

11,674

 

Increase in advertising revenues at the AMC, WE tv and IFC businesses

 

12,678

 

Increase in affiliate fee revenues and other revenue at the AMC, WE tv and IFC businesses resulting primarily from increases in viewing subscribers and rates

 

7,545

 

Decrease in advertising revenues at Rainbow’s other programming businesses

 

(1,252

)

 

 

$

30,645

 

 

Revenue increases discussed above are primarily derived from increases in the number of viewing subscribers, increases in affiliate fees rates charged for our services and increases in the level of advertising on our networks.  The following table presents certain viewing subscriber information as of March 31, 2008 and 2007:

 

 

 

As of March 31,

 

 

 

Percent

 

 

 

2008

 

2007

 

Increase

 

Increase

 

 

 

 

 

(in thousands)

 

 

 

 

 

Viewing Subscribers:

 

 

 

 

 

 

 

 

 

AMC

 

84,600

 

83,100

 

1,500

 

1.8

%

WE tv

 

56,900

 

53,800

 

3,100

 

5.8

%

IFC

 

45,500

 

40,900

 

4,600

 

11.2

%

VOOM

 

2,500

 

600

 

1,900

 

*

 

 


*                The increase in VOOM viewing subscribers is primarily due to growth in distribution by EchoStar and the launch of VOOM during the third quarter of 2007 by Cablevision.

 

Technical and operating expenses (excluding depreciation, amortization and impairments) for the three months ended March 31, 2008 increased $382 compared to the same period in 2007.  The net increase is attributable to the following:

 

Net increase resulting from higher programming and contractual costs at the other Rainbow businesses primarily at VOOM HD Networks

 

$

596

 

Net decrease in programming costs at the AMC, WE tv and IFC businesses which resulted primarily from decreased series development/original programming costs

 

(214

)

 

 

$

382

 

 

41



 

As a percentage of revenues, technical and operating expenses decreased 5% during the three months ended March 31, 2008 as compared to the same period in 2007.

 

Selling, general and administrative expenses increased $19,618 (26%) for the three months ended March 31, 2008 compared to the same period in 2007.  The net increase is attributable to the following:

 

Net increase in selling, marketing and advertising costs at the AMC, WE tv and IFC businesses primarily related to an increase in marketing and promotion of original programming

 

$

18,787

 

Increase in administrative costs primarily related to an increase in legal expenses

 

5,959

 

Decrease in share-based compensation expense and expenses relating to Cablevision’s long-term incentive plans

 

(4,017

)

Net decrease in selling, marketing and advertising costs at Rainbow’s other programming services primarily related to marketing and promotional activities

 

(1,111

)

 

 

$

19,618

 

 

As a percentage of revenues, selling, general and administrative expenses increased 4% for the three months ended March 31, 2008 as compared to the same period in 2007.

 

Restructuring charges of $361 and $1,555 for the three months ended March 31, 2008 and 2007, respectively represent primarily severance charges resulting from the elimination of certain staff positions due to the consolidation and reorganization of certain departments.

 

Depreciation and amortization (including impairments) decreased $2,245 (10%) for the three months ended March 31, 2008 as compared to the same period in 2007.  Depreciation expense decreased $1,727 for the three months ended March 31, 2008 compared to the same period in 2007 primarily attributable to certain fixed assets becoming fully depreciated in 2007.  Amortization of intangible assets decreased $518 for the three months ended March 31, 2008 compared to the same period in 2007 primarily due to certain intangible assets becoming fully amortized in the first quarter of 2007.

 

42



 

Madison Square Garden

 

The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to net revenues for Madison Square Garden.  Beginning in the first quarter of 2008, Fuse has been included in the Madison Square Garden segment.  Prior to 2008, Fuse was included in the Rainbow segment.  Prior period segment information has been reported on a comparable basis.

 

 

 

Three Months Ended March 31,

 

(Increase)

 

 

 

2008

 

2007

 

Decrease in

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Operating
Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues, net

 

$

265,079

 

100

%

$

247,824

 

100

%

$

17,255

 

Technical and operating expenses (excluding depreciation and amortization)

 

209,992

 

79

 

178,818

 

72

 

(31,174

)

Selling, general and administrative expenses

 

59,863

 

23

 

57,104

 

23

 

(2,759

)

Restructuring

 

 

 

11

 

 

11

 

Depreciation and amortization

 

14,957

 

6

 

16,457

 

7

 

1,500

 

Operating loss

 

$

(19,733

)

(7

)%

$

(4,566

)

(2

)%

$

(15,167

)

 

Revenues, net for the three months ended March 31, 2008 increased $17,255 (7%) as compared to revenues for the same period in 2007.  This net increase is attributable to the following:

 

Net higher network (MSG, MSG Plus & Fuse) affiliate fees

 

$

10,490

 

Net higher revenues from entertainment events including the impact of a new Chicago venue in 2008 and the termination of the operating agreements for two Connecticut venues effective July 1, 2007

 

9,277

 

Lower network other revenue, primarily from decreased advertising sales

 

(2,647

)

Other net increases

 

135

 

 

 

$

17,255

 

 

Technical and operating expenses (excluding depreciation and amortization) for the three months ended March 31, 2008 increased $31,174 (17%) as compared to the same period in 2007.  This increase is attributable to the following:

 

Higher variable costs associated with the higher net revenues from entertainment events discussed above

 

$

13,673

 

Higher net provisions for certain team personnel transactions (including the impact of luxury tax)

 

4,016

 

Higher other team operating expenses, primarily team personnel compensation

 

6,702

 

Higher networks operating costs

 

5,884

 

Other net increases (primarily fixed operating costs related to the new Chicago venue)

 

899

 

 

 

$

31,174

 

 

As a percentage of revenues, technical and operating expenses increased 7% during the three months ended March 31, 2008 as compared to the same period in 2007.

 

43



 

Selling, general, and administrative expenses for the three months ended March 31, 2008 increased $2,759 (5%) as compared to the same period in 2007.  This increase is attributable to the following:

 

Higher legal and other professional fees

 

$

4,679

 

Decrease in share-based compensation expense

 

(1,407

)

Other net decreases

 

(513

)

 

 

$

2,759

 

 

As a percentage of revenues, selling, general and administrative expenses remained constant during the three months ended March 31, 2008 as compared to the same period in 2007.

 

Depreciation and amortization for the three months ended March 31, 2008 decreased $1,500 (9%) as compared to the same period in 2007 resulting primarily from lower depreciation expense of $1,613 due to certain assets becoming fully depreciated.

 

CSC HOLDINGS, INC.

 

The statements of operations of CSC Holdings are essentially identical to the statements of operations of Cablevision, except for the following:

 

·                 Interest expense of $33,395 and $33,543 for the three months ended March 31, 2008 and 2007, respectively, relating to $1,500,000 of Cablevision senior notes issued in April 2004 included in Cablevision’s consolidated statements of operations,

·                 Interest income of $231 and $1,717 for the three months ended March 31, 2008 and 2007, respectively, related to cash held at Cablevision, and

·                 Income tax benefit of $14,278 and $13,052 for the three months ended March 31, 2008 and 2007, respectively, included in Cablevision’s consolidated statements of operations related to the items listed above.

 

Refer to Cablevision’s Management’s Discussion and Analysis of Financial Condition and Results of Operations herein.

 

44



 

CASH FLOW DISCUSSION

 

Operating Activities

 

Net cash provided by operating activities amounted to $261,344 for the three months ended March 31, 2008 compared to $221,973 for the three months ended March 31, 2007.  The 2008 cash provided by operating activities resulted from $229,859 of income before depreciation and amortization, $143,046 of non-cash items, $44,665 from an increase in accounts payable and $21,678 from a decrease in current and other assets.  Partially offsetting these increases, were decreases in cash resulting from a $83,000 decrease in accrued and other liabilities, a $43,219 increase in program rights resulting primarily from new film licensing and original programming agreements, $44,958 from a decrease in deferred revenue and a $6,727 decrease in program rights obligations.

 

The 2007 cash provided by operating activities resulted from $251,018 of income before depreciation and amortization, $46,561 of non-cash items, a $26,619 decrease in current and other assets and $4,756 from an increase in accounts payable.  Partially offsetting these increases, were decreases in cash resulting from a $66,120 decrease in accrued and other liabilities, a $25,277 increase in program rights resulting primarily from new film licensing and original programming agreements, and a $15,584 decrease in program rights obligations.

 

Investing Activities

 

Net cash used in investing activities for the three months ended March 31, 2008 was $194,684 compared to $162,017 for the three months ended March 31, 2007.  The 2008 investing activities consisted primarily of $193,460 of capital expenditures ($175,576 of which related to our Telecommunications Services segment) and other net cash payments aggregating $1,224.

 

Net cash used in investing activities for the three months ended March 31, 2007 consisted primarily of $156,294 of capital expenditures ($151,922 of which related to our Telecommunications Services segment), an increase in restricted cash of $4,463 and other net cash payments aggregating $1,260.

 

Financing Activities

 

Net cash used in financing activities amounted to $28,743 for the three months ended March 31, 2008 compared to $91,719 for the three months ended March 31, 2007.  In 2008, the Company’s financing activities consisted primarily of repayments of bank debt of $27,500 and other net cash payments of $1,243.

 

In 2007, the Company’s financing activities consisted primarily of a payment of $49,693 representing the deemed purchase of treasury stock related to restricted stock awards that vested on March 10, 2007, dividend distributions relating to the exercise or vesting of equity based awards of $43,820 and other net cash payments of $2,456, partially offset by net proceeds from bank debt of $4,250.

 

Discontinued Operations

 

The net effect of discontinued operations on cash and cash equivalents amounted to a $527 inflow for the three months ended March 31, 2008 compared to a $12,747 inflow for the three months ended March 31, 2007.

 

45



 

Operating Activities

 

Net cash used in operating activities of discontinued operations amounted to $152 for the three months ended March 31, 2008 compared to net cash provided by operating activities of $13,977 for the three months ended March 31, 2007.

 

The 2007 period includes operating results of Fox Sports Net Bay Area for the three months ended March 31, 2007.  The 2007 cash provided by operating activities resulted primarily from net income of $7,005 before depreciation and amortization and non-cash items, and a net change in assets and liabilities of $6,972.

 

Liquidity and Capital Resources

 

Overview

 

Cablevision has no operations independent of its subsidiaries.  Cablevision’s outstanding securities consist of Cablevision NY Group Class A and Cablevision NY Group Class B common stock and $1,500,000 of debt securities.  Funding for the debt service requirements of our debt securities is provided by our subsidiaries’ operations, principally CSC Holdings, as permitted by the covenants governing CSC Holdings’ credit agreements and public debt securities.  Funding for our subsidiaries is generally provided by cash flow from operations, cash on hand, and borrowings under bank credit facilities made available to the Restricted Group (as later defined) and to Rainbow National Services LLC (“RNS”) and the proceeds from the issuance of notes and debentures in the capital markets.  The Company has accessed the debt markets for significant amounts of capital in the past and may do so in the future.

 

The following table summarizes our outstanding debt and present value of capital leases as well as interest expense and capital expenditures as of and for the three months ended March 31, 2008:

 

 

 

Cablevision

 

Restricted
Group

 

Rainbow
National
Services

 

Other
Entities

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank debt

 

$

 

$

4,367,500

 

$

493,750

 

$

 

$

4,861,250

 

Capital leases

 

 

 

16,011

 

47,616

 

63,627

 

Senior notes and debentures

 

1,500,000

 

3,696,622

 

298,812

 

 

5,495,434

 

Senior subordinated notes

 

 

 

323,374

 

 

323,374

 

Collateralized indebtedness relating to stock monetizations

 

 

 

 

854,282

 

854,282

 

Total debt

 

$

1,500,000

 

$

8,064,122

 

$

1,131,947

 

$

901,898

 

$

11,597,967

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

33,395

 

$

144,707

 

$

23,685

 

$

9,866

 

$

211,653

 

Capital expenditures

 

$

 

$

174,733

 

$

1,777

 

$

16,950

 

$

193,460

 

 

Restricted Group

 

As of March 31, 2008, CSC Holdings and those of its subsidiaries which conduct our cable television video operations (including approximately 3.1 million basic video customers and 2.7 million digital video customers) and high-speed data service (which encompasses approximately 2.3 million customers) and our VoIP services operations (which encompasses approximately 1.7 million customers), as well as

 

46



 

Optimum Lightpath, our commercial data and voice service business comprise the “Restricted Group” as they are subject to the covenants and restrictions of the credit facility.  In addition, the Restricted Group is also subject to the covenants of the senior notes and debentures issued by CSC Holdings and Cablevision, which are generally less restrictive than those contained in the credit facility.

 

Sources of cash for the Restricted Group include primarily cash flow from the operations of the businesses in the Restricted Group, borrowings under its bank credit agreement and issuance of notes and debentures in the capital markets and, from time to time, distributions or loans from its subsidiaries.  The Restricted Group’s principal uses of cash include capital spending, in particular the capital requirements associated with the growth of its services such as digital video, high-speed data and voice (including enhancements to its service offerings such as a broadband wireless network (WiFi)); debt service, including distributions made to Cablevision to service interest expense on its debt securities; other corporate expenses and changes in working capital; and investments that it may fund from time to time.  We currently expect that the net funding and investment requirements of the Restricted Group for the next 12 months, including the repayment of notes aggregating $500,000 which mature in July 2008, will be met with one or more of the following: cash on hand, cash generated by operating activities, borrowings under the Restricted Group’s bank credit facility, or raising capital in the financial markets, subject to satisfactory terms and conditions.

 

The Restricted Group’s credit facility consists of three components: a $1,000,000 revolver, a $1,000,000 term A-1 loan facility and a $3,500,000 term B loan facility.  The three components of the Restricted Group credit facility are direct obligations of CSC Holdings, guaranteed by most Restricted Group subsidiaries and secured by the pledge of the stock of most Restricted Group subsidiaries.  As of March 31, 2008, $52,994 of the $1,000,000 revolving credit facility was restricted for certain letters of credit issued on behalf of CSC Holdings and $947,006 of the revolver was undrawn.  Outstanding borrowings under the term A-1 loan facility and term B loan facility was $937,500 and $3,430,000, respectively, at March 31, 2008.  The weighted average interest rates as of March 31, 2008 on borrowings under the term A-1 loan facility and term B loan facility were 4.00% and 4.75%, respectively.  The Restricted Group was in compliance with all of its financial covenants under its various credit agreements as of March 31, 2008.

 

Cablevision’s and CSC Holdings’ future access to the debt markets and the cost of any future debt issuances are also influenced by their credit ratings, which are provided by Moody’s Investors Service and Standard & Poor’s.  Key factors in the assessment of Cablevision’s and CSC Holdings’ credit ratings include Cablevision and CSC Holdings’ financial strength and flexibility, operating capabilities, management risk tolerance and ability to respond to changes in the competitive landscape.  The corporate credit rating for Cablevision and CSC Holdings is Ba3 by Moody’s with a stable outlook and BB by Standard & Poor’s with a negative outlook.  Any future downgrade to the Cablevision and/or CSC Holdings credit ratings by either rating agency could increase the interest rate on future debt issuances and could adversely impact our ability to raise additional funds.

 

Rainbow and Rainbow National Services

 

RNS, our wholly-owned subsidiary which owns the Company’s AMC, WE tv and IFC programming operations, generated positive cash from operating activities for 2007 and the quarter ended March 31, 2008.  Its cash flow from operations and proceeds from borrowings available to it, provides the capital required for net funding and investment requirements of other Rainbow programming entities including the VOOM HD Networks and News 12 Networks subject to the applicable covenants and limitations contained in RNS’ financing agreements.  We currently expect that the net funding and investment requirements of RNS for the next 12 months will be met with one or more of the following: cash on hand, cash generated by operating activities and available borrowings under RNS’ bank credit facility.

 

47



 

Outstanding borrowings under the term loan at March 31, 2008 were $493,750.  There were no borrowings outstanding under the $300,000 revolving credit facility at March 31, 2008.  At March 31, 2008, the interest rate on the term A loan facility was 4.00%.  RNS was in compliance with all of its financial covenants under its credit agreement as of March 31, 2008.  In addition, RNS is also subject to covenants of the senior and senior subordinated notes it has issued, which are generally less restrictive than those contained in the credit agreement.

 

VOOM HD Holdings LLC (“VOOM HD”) offers a suite of 15 channels, produced exclusively in high definition and marketed for distribution to DBS and cable operators (“VOOM”).  Currently, VOOM is available in the United States only on the Company’s cable television systems and EchoStar Communications Corporation’s (“EchoStar”) DISH Network.  In 2005, subsidiaries of the Company entered into agreements with EchoStar and its affiliates by which EchoStar Media Holdings Corporation acquired a 20% interest in VOOM HD and EchoStar Satellite LLC (“EchoStar Satellite”) agreed to distribute VOOM on its DISH Network for a 15-year term.  The affiliation agreement with EchoStar Satellite for such distribution provides that if VOOM HD fails to spend $100,000 per year (subject to reduction to the extent that the number of offered channels is reduced to fewer than 21), up to a maximum of $500,000 in the aggregate, on VOOM, EchoStar Satellite may seek to terminate the agreement under certain circumstances.  In January 2008, Echostar Satellite sought to terminate the affiliation agreement.  See Part II, Item 1. Legal Proceedings.

 

RNS’ 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.  Key factors in the assessment of RNS’ credit ratings include its free cash flow generating capacity, fiscal strategy, enterprise value and industry risk.  The corporate credit rating for RNS is Ba3 by Moody’s with a stable outlook and BB by Standard & Poor’s with a negative outlook.  Any future downgrade to the RNS 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.

 

Madison Square Garden

 

Madison Square Garden does not have a credit facility at this time.  Effective January 1, 2008, Madison Square Garden began providing the capital required for net funding and investment requirements of Fuse.  Prior to January 1, 2008, funding for Fuse was provided by RNS.  We currently expect Madison Square Garden’s funding requirements for the next 12 months to be met by its cash on hand and cash from operations.

 

During the fourth quarter of 2004, the Company announced its intent to renovate the Madison Square Garden Arena.  In April 2008, the Company announced its intent to move forward with a major renovation plan (the details of which have not been finalized) and expects to spend up to $500,000 to renovate the facility.

 

Monetization Contract Maturities

 

In April 2008, monetization contracts covering 2,732,184 shares of our Comcast stock matured.  We settled our obligations under the related Comcast collateralized indebtedness by delivering cash from the net proceeds of a new monetization transaction maturing in April 2010.

 

During the next twelve months, monetization contracts covering 13,470,993 shares (including the shares discussed above) of Comcast Corporation mature.  The Company intends to either settle such transactions by delivering shares of the applicable stock and the related equity derivative contracts or by delivering cash from the net proceeds of new monetization transactions.

 

Recent Event

 

On May 6, 2008, Rainbow Media Holdings entered into an agreement to acquire Sundance Channel L.L.C. (“Sundance”) from General Electric Company’s NBC Universal, CBS Corporation’s Showtime Networks, and entities controlled by Robert Redford.  The purchase price of $496,000 (subject to customary working capital adjustments) will be paid through an exchange of approximately 12.7 million shares of common stock of General Electric Company held by Rainbow Media Holdings, with a cash adjustment at closing based upon the value of the General Electric Company shares in relation to the total purchase price.  Under the transaction structure, General Electric Company will receive all of the General Electric Company common stock and the CBS and Redford entities will receive cash in exchange for their interest in Sundance.  The transaction is expected to be an exchange of the General Electric Company shares that is tax free to the Company.  The Company also expects to receive a full step up in the tax basis of Sundance.  In connection with the exchange of the General Electric Company shares, the Company will repay the fair value of the monetization debt and settle the related equity derivative contracts associated with those shares.  The cash portion of the purchase price and the repayment of the monetization indebtedness and the settlement of the associated equity derivative contracts are expected to be satisfied with cash on hand and/or borrowings under either the RNS or CSC Holdings revolving credit agreements.

 

Consummation of the transaction is subject to customary closing conditions, including receipt of regulatory approvals.

 

48



 

Managing our Interest Rate and Equity Price Risk

 

Interest Rate Risk

 

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 effectively fix the borrowing rates on floating rate debt to provide an economic hedge against the risk of rising rates and/or effectively convert fixed rate borrowings to variable rates to permit the Company to realize lower interest expense 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 fair market values on our consolidated balance sheets, with changes in value reflected in the consolidated statements of operations.

 

Equity Price Risk

 

We have entered into derivative contracts to hedge our equity price risk and monetize the value of our shares of Comcast Corporation and General Electric Company.  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.  If any one of these contracts is terminated prior to its scheduled maturity date due to the occurrence of an event specified in the contract, 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.  As of March 31, 2008, the early termination shortfall relating to these contracts amounted to $680.  The underlying stock and the equity collars are carried at fair market value on our consolidated balance sheets and the collateralized indebtedness is carried at its accreted value.

 

See “Item 3 - 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 certain of the Comcast transactions, CSC Holdings provided guarantees of the subsidiaries’ ongoing contract payment 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 sheets with changes in value reflected in the consolidated statements of operations, and all of the counterparties to such transactions currently carry investment grade credit ratings.

 

Commitments and Contingencies

 

As of March 31, 2008, the Company’s commitments and contingencies for continuing operations not reflected on the Company’s consolidated balance sheet decreased $262,000 to approximately $5,255,000 as compared to $5,517,000 at December 31, 2007.  The decrease relates primarily to (i) the decrease of programming commitment obligations relating to the expiration of certain programming agreements, and (ii) payments made during the three months ended March 31, 2008 on commitments.

 

49



 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In March 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“Statement No. 161”). Statement No. 161 requires specific disclosures regarding the location and amounts of derivative instruments in the Company’s financial statements; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect the Company’s financial position, financial performance, and cash flows. Statement No. 161 is effective for the Company on January 1, 2009. Early application is permitted. Because the provisions of Statement No. 161 will impact the way the Company discloses its derivative instruments in its financial statements and not the accounting treatment for these instruments, the Company does not believe the adoption of Statement No. 161 will have an impact on the Company’s financial position or results of operations.

 

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, Determination of the Useful Life of Intangible Assets. FSP No.  FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets.  FSP No. FAS 142-3 is effective for the Company on January 1, 2009.  The Company has not yet determined the impact FSP No. FAS 142-3 will have on its consolidated financial statements.

 

Item 3.      Quantitative and Qualitative Disclosures About Market Risk

 

All dollar amounts, except per subscriber, per unit and per share data, included in the following discussion under this Item 3 are presented in thousands.

 

Valuation of Financial Instruments

 

The Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“Statement No. 157”) effective January 1, 2008.  Statement No. 157 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and enhances disclosure requirement for fair value measurements.  For a discussion regarding the measurement of the fair value of the Company’s financial instruments, see Note 11 to the combined notes to the condensed consolidated financial statements.

 

Equity Price Risk

 

The Company is exposed to market risks from changes in certain equity security prices.  Our exposure to changes in equity security prices stems primarily from the shares of Comcast Corporation and General Electric Company 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.  If any one of these contracts is terminated prior to its scheduled maturity date due to the occurrence of an event specified in the contract, 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.  As of March 31, 2008, the early termination shortfall relating to these contracts amounted to $680.

 

The underlying stock and the equity collars are carried at fair market value on our consolidated balance sheets and the collateralized indebtedness is carried at its accreted value.  The carrying value of our collateralized indebtedness amounted to $854,282 at March 31, 2008.  At maturity, the contracts provide for the option to deliver cash or shares of Comcast or General Electric common stock (as the case may be), with a value determined by reference to the applicable stock price at maturity.

 

50



 

As of March 31, 2008, the fair value and the carrying value of our holdings of Comcast and General Electric common stock aggregated $886,960.  Assuming a 10% change in price, the potential change in the fair value of these investments would be approximately $88,696.  As of March 31, 2008, 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 certain of these securities aggregated $52,582, a net receivable position.  For the quarter ended March 31, 2008, we recorded a net gain on all outstanding equity derivative contracts of $1,420.  We also recorded an unrealized and realized gain on our holdings of the underlying stocks of $22,432 for the three months ended March 31, 2008.

 

Fair Market Value of Equity Derivative Contracts

 

Fair market value as of December 31, 2007, net

 

$

51,162

 

Change in fair market value, net

 

1,420

 

Fair market value as of March 31, 2008, net

 

$

52,582

 

 

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:

 

 

 

# of Shares

 

 

 

Hedge Price

 

Cap Price (b)

 

Security

 

Deliverable

 

Maturity

 

per Share (a)

 

Low

 

High

 

Comcast

 

10,738,809

 

2008

 

$17.80 - $27.49

 

$

22.38

 

$

32.99

 

 

 

10,738,809

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Electric

 

12,742,033

 

2009

 

$32.52 - $34.14

 

$

39.03

 

$

40.96

 

 


(a)         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.

(b)        Represents the price up to which we receive the benefit of stock price appreciation.

 

In addition, at March 31, 2008, the Company had other investment securities with a carrying value of approximately $9,780.  Assuming a 10% change in the price of the securities, the potential change in the fair value of these investments would be approximately $978.

 

Fair Value of Debt:  Based on the level of interest rates prevailing at March 31, 2008, the fair value of our fixed rate debt of $6,032,559 was less than its carrying value of $6,054,692 by $22,133.  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 March 31, 2008 would increase the estimated fair value of our fixed rate debt by $156,442 to $6,189,001.  This estimate is based on the assumption of an immediate and parallel shift in interest rates across all maturities.

 

Interest Rate Derivative Contracts:  Our exposure to interest rate movements results from our use of floating and fixed rate debt to fund the approximately $3 billion special dividend paid in 2006, 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 effectively fix the borrowing rates on floating rate debt to provide an economic hedge against the risk of rising rates and/or effectively convert fixed rate borrowings to variable rates to permit the Company to realize lower interest expense 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

 

51



 

contracts for speculative or trading purposes.  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 fair market values on our consolidated balance sheets, with changes in fair market value reflected in the consolidated statements of operations.

 

In March 2008, the Company entered into several interest rate swap contracts that amended the terms of contracts (specifically maturity date and fixed rate paid by the Company) originally entered into in April 2006 in the notional amount of $3,700,000 to effectively fix borrowing rates on floating rate debt.  As of March 31, 2008, these interest rate swap contracts had a fair market value and carrying value of $214,375, 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 prevailing at March 31, 2008 would increase our liability under these derivative contracts by approximately $121,371 to a liability of $335,746.

 

For the quarter ended March 31, 2008, we recorded a net loss on interest swap contracts of $106,678, as detailed in the table below:

 

Fair Market Value of Interest Rate Derivative Contracts

 

Fair market value as of March 31, 2008, a net payable position

 

$

(214,375

)

Less: fair market value as of December 31, 2007

 

(108,141

)

Change in fair market value, net

 

(106,234

)

Plus: realized loss from cash interest payments

 

(444

)

Net loss on interest rate swap contracts

 

$

(106,678

)

 

At March 31, 2008, the Company had outstanding prepaid interest rate swaps with a notional contract value of approximately $105,061 entered into in connection with our monetization transactions.  These swaps have maturities in 2008 and 2009 that coincide with the related prepaid equity forward contract maturities.  As of March 31, 2008, the fair value of our prepaid interest rate derivative contracts was $3,299, a net payable position.  Assuming an immediate and parallel shift in interest rates across the yield curve, a 100 basis point increase in interest rates from March 31, 2008 prevailing levels would increase our liability under these derivative contracts by $126 to a liability of $3,425.

 

For the three months ended March 31, 2008, we recorded a net gain on such derivative contracts of $348 as detailed below:

 

Fair Market Value of Prepaid Interest Rate Derivative Contracts

 

Fair market value as of December 31, 2007

 

$

(5,009

)

Change in fair market value, net

 

1,710

 

Fair market value as of March 31, 2008

 

$

(3,299

)

 

 

 

 

Change in fair market value, net

 

$

1,710

 

Realized loss resulting from net cash payments

 

(1,362

)

Net gain on prepaid interest rate swap contracts

 

$

348

 

 

Item 4.                    Controls and Procedures

 

Evaluation of Disclosure 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 our disclosure controls and procedures (as defined under Securities and Exchange Commission rules). 

 

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Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2008.

 

Changes in Internal Control

 

During the quarter ended March 31, 2008, there were no changes in the Company’s internal control over financial reporting that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

PART II.

OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

 

Tracking Stock Litigation

 

In August 2002, purported class actions naming as defendants Cablevision 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 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, Cablevision filed a motion to dismiss the consolidated action.  The action was 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 Cablevision.  On October 26, 2004, the parties entered into a stipulation dismissing the related action, and providing for Cablevision’s production of certain documents. On December 13, 2004, plaintiffs filed a consolidated amended complaint.  Cablevision filed a motion to dismiss the amended complaint.  On April 19, 2005, the court granted that motion in part, dismissing the breach of contract claim but declining to dismiss the breach of fiduciary duty claim on the pleadings.

 

In August 2003, a purported class action naming as defendants Cablevision, directors and officers of Cablevision 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 (“TRSL”).  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 Cablevision.  The complaint seeks monetary damages and such other relief as the court deems just and proper.  On October 31, 2003, Cablevision 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.  On June 10, 2004, the court stayed the action on the basis of the previously filed action in Delaware.  TRSL subsequently filed a motion to vacate the stay in the New York action, and simultaneously filed a motion to intervene in the Delaware action and to stay that action.  Cablevision opposed both motions.  On April 19, 2005, the court in the Delaware action denied the motion to stay the Delaware action and granted TRSL’s motion to intervene in that action.  On June 22, 2005, the court in the New York action denied TRSL’s motion to vacate the stay in that action.

 

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Cablevision reached an agreement in principle with respect to the settlement of the Delaware action in the quarter ended June 30, 2007.  In connection with the anticipated settlement, Cablevision expects to seek dismissal of the New York action as well as the Delaware action.  A hearing on the proposed settlement took place in April 2008.  At that hearing, the court ordered that certain discovery may take place and deferred ruling on approval of the settlement.

 

The Wiz Bankruptcy

 

TW, Inc. (“TW”), a former subsidiary of the Company and operator of The Wiz consumer retail electronics business, is the subject of a Chapter 11 bankruptcy proceeding in the U.S. Bankruptcy Court for the District of Delaware.  In February 2005, TW filed a complaint in the bankruptcy proceeding against Cablevision and certain of its affiliates seeking recovery of alleged preferential transfers in the aggregate amount of $193.5 million.  Also in February 2005, the Official Committee of Unsecured Creditors of TW (the “Committee”) filed a motion seeking authority to assume the prosecution of TW’s alleged preference claims and to prosecute certain other causes of action.  The bankruptcy court granted the Committee’s motion on or about March 10, 2005, thereby authorizing the Committee, on behalf of TW, to continue the preference suit and to assert other claims.  On March 12, 2005, the Committee filed a complaint in the bankruptcy court against Cablevision, certain of its affiliates, and certain present and former officers and directors of Cablevision and of its former subsidiary Cablevision Electronics Investments, Inc. (“CEI”).  The Committee’s complaint, as amended, asserts preferential transfer claims allegedly totaling $193.9 million, breach of contract, promissory estoppel, and misrepresentation claims allegedly totaling $310.0 million and fraudulent conveyance, breach of fiduciary duty, and other claims seeking unspecified damages.  On June 30, 2005, Cablevision filed a motion to dismiss several of the claims in the amended complaint.  On October 31, 2005, the bankruptcy court denied the motion to dismiss.  The bankruptcy court’s ruling on the motion to dismiss allowed the Committee to proceed with its claims against Cablevision and the other defendants.  A hearing on solvency issues was held November 29 and 30, 2007.  At that hearing, the court ruled that the Committee had failed to prove that CEI was insolvent at any point before 2003, a ruling that the Company believes will have the effect of significantly limiting many of the Committee’s claims. The Committee has filed a notice of appeal of that ruling.  Cablevision believes that the claims asserted by the Committee are without merit and is contesting them vigorously.

 

Dolan Family Group 2006 Proposal

 

In October 2006, a number of shareholder class action lawsuits (the “Transactions Lawsuits”) were filed against Cablevision and its individual directors in New York Supreme Court, Nassau County, relating to the October 8, 2006 offer by the Dolan Family Group to acquire all of the outstanding shares of Cablevision’s common stock, except for the shares held by the Dolan Family Group.  These lawsuits allege breaches of fiduciary duty and seek injunctive relief to prevent consummation of the proposed transaction and compensatory damages.  (In addition, a similar claim was added to a shareholder derivative action involving claims for alleged options backdating that was pending in the District Court for the Eastern District of New York, which is described below under “Stock Option Related Matters.”)  The New York Supreme Court ordered expedited discovery, which began in November 2006.  On January 12, 2007, the Special Transaction Committee of the Board (“Special Transaction Committee”) received a revised proposal from the Dolan Family Group to acquire all of the outstanding shares of common stock of Cablevision, except for the shares held by the Dolan Family Group.  On January 16, 2007, the Special Transaction Committee delivered a letter to Charles F. Dolan and James L. Dolan, rejecting as inadequate the revised proposal.  On May 2, 2007, Cablevision entered into a merger agreement pursuant to which, if the merger contemplated thereby was consummated, the Dolan Family Group would obtain ownership of all of the common stock equity of Cablevision (the “Proposed Merger”).  Lawyers representing shareholders in certain of the Transactions Lawsuits, in consultation

 

54



 

with lead counsel for the plaintiffs in the Nassau County Supreme Court options backdating litigations, participated in the negotiations to improve the financial terms of the Proposed Merger as well as to add certain contractual provisions designed to protect the rights of shareholders. Based upon the above events and circumstances, and the role that the lead counsel for the plaintiffs in the Transactions Lawsuits played in connection with the Proposed Merger, the parties subsequently reached a memorandum of understanding for the dismissal of the Transactions Lawsuits (and of the going-private claim in the cases pending in the U.S. District Court for the Eastern District of New York), subject to approval of a settlement by the Nassau County Supreme Court, and for the transfer to Cablevision, if the Proposed Merger were to be consummated, of the options-related derivative claims pending in the Nassau County Supreme Court and in the U.S. District Court for the Eastern District of New York.  Pursuant to the memorandum of understanding, the parties executed a stipulation of settlement as of September 18, 2007.  The stipulation of settlement was conditioned on, among other things, consummation of the Proposed Merger, and provided that the stipulation would become null and void and of no further force and effect in the event that this condition was not satisfied.  This condition was not satisfied.

 

Director Litigation

 

Cablevision was named as a nominal defendant in a purported shareholder derivative complaint filed in the Court of Chancery of the State of Delaware.  The action was brought derivatively on behalf of Cablevision and named as additional defendants Charles F. Dolan, the Chairman of Cablevision, and Rand Araskog, Frank Biondi, John Malone and Leonard Tow, each of whom was appointed as a director on March 2, 2005 by Mr. Dolan and certain other holders of the Company’s NY Group Class B common stock.  The complaint alleged that Charles F. Dolan, as the controlling Class B shareholder of Cablevision, by purporting to remove three Cablevision Board members (William J. Bell, Sheila Mahony and Steven Rattner) and replace them with the four new directors, wrongfully interfered with the Board’s role in managing the affairs of Cablevision and sought to substitute his judgment of how to proceed with the VOOM service of Cablevision’s Rainbow DBS subsidiary above that of the Board.  The action sought, among other things, to preliminarily and permanently enjoin Charles F. Dolan from interfering with the managerial prerogatives of Cablevision’s Board; rescinding the purported appointment of the new directors; rescinding the removal of Mr. Bell, Ms. Mahony and Mr. Rattner as directors and restoring them to their positions as directors and directing Charles F. Dolan to account to Cablevision for its damages.  This action has been voluntarily dismissed by the plaintiff.

 

Patent Litigation

 

Cablevision is named as a defendant in certain lawsuits claiming infringement of various patents relating to various aspects of the Company’s businesses.  In certain of these cases other industry participants are also defendants.  In certain of these cases the Company expects that any potential liability would be the responsibility of the Company’s equipment vendors pursuant to applicable contractual indemnification provisions.  To the extent that the allegations in these lawsuits have been analyzed by the Company at the current stage of their proceedings, the Company believes that the claims are without merit and intend to defend the actions vigorously.  The final disposition of these actions is not expected to have a material adverse effect on the Company’s consolidated financial position.

 

Loral Contract Dispute

 

In September 2005, Loral Space and Communications Holding Corporation (“Loral”) filed an action against Cablevision and Rainbow DBS for breach of contract based on a letter agreement dated March 23, 2001 (“the Letter Agreement”) between Loral and Rainbow DBS.  Loral alleged that the sale of the Rainbow-1 satellite and related assets to a subsidiary of EchoStar Communications Corporation (“EchoStar”) constituted a sale of “substantially all of the assets of Rainbow DBS” triggering a “Make Whole Payment” under the Letter Agreement of $33.0 million plus

 

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interest.  A trial in this matter took place in January 2007 in New York Supreme Court for New York County.  On January 24, 2007, the jury returned a verdict finding that the EchoStar sale had triggered a Make Whole Payment under the Letter Agreement, requiring a payment to Loral of $50.9 million, including interest, which was accrued for in 2006 and reflected as an expense in discontinued operations.  On March 12, 2007, judgment was entered against Cablevision and Rainbow DBS in the amount of $52.2 million.  Cablevision and Rainbow DBS filed a motion for judgment as a matter of law, or in the alternative for a new trial, which was denied by the court on March 30, 2007.  The Company has posted a cash collateralized bond in the amount of $52.2 million, which is reflected as restricted cash in the Company’s consolidated balance sheets at March 31, 2008 and December 31, 2007.  Cablevision and Rainbow DBS filed an appeal with the New York Supreme Court Appellate Division, First Department, which affirmed the judgment on February 19, 2008.  Cablevision and Rainbow DBS have sought leave to appeal the judgment to the New York Court of Appeals.

 

EchoStar Contract Dispute

 

In 2005, subsidiaries of the Company entered into agreements with EchoStar and its affiliates by which EchoStar Media Holdings Corporation acquired a 20% interest in VOOM HD Holdings LLC (“VOOM HD”) and EchoStar Satellite LLC (“EchoStar Satellite”) agreed to distribute VOOM on its DISH Network for a 15-year term.  The affiliation agreement with EchoStar Satellite for such distribution provides that if VOOM HD fails to spend $100,000 per year (subject to reduction to the extent that the number of offered channels is reduced to fewer than 21), up to a maximum of $500,000 in the aggregate, on VOOM, EchoStar Satellite may seek to terminate the agreement under certain circumstances.  On January 30, 2008, EchoStar Satellite purported to terminate the affiliation agreement, effective February 1, 2008, based on its assertion that VOOM HD had failed to comply with this spending provision in 2006.  On January 31, 2008, VOOM HD sought and obtained a temporary restraining order from New York Supreme Court for New York County prohibiting EchoStar Satellite from terminating the affiliation agreement.  In conjunction with its request for a temporary restraining order, VOOM HD also requested a preliminary injuction and filed a lawsuit against EchoStar Satellite asserting that EchoStar Satellite did not have the right to terminate the affiliation agreement.  Separately, on February 1, 2008, EchoStar Satellite began to distribute VOOM in a manner that the Company believes violates EchoStar Satellite’s obligations under the affiliation agreement.  On February 4, 2008, VOOM HD notified EchoStar Satellite of its position that this new distribution constitutes a material breach of the affiliation agreement and reserved all its rights and remedies.  On March 10, 2008, EchoStar Satellite answered VOOM HD’s complaint and asserted certain counterclaims.  On April 21, 2008, VOOM HD replied to EchoStar Satellite’s counterclaims.  The Company believes that the counterclaims asserted by EchoStar Satellite are without merit.  In a decision filed on May 5, 2008, the court denied VOOM HD’s motion for a preliminary injunction.  The lawsuit remains pending.

 

Accounting Related Investigations

 

In June 2003, the Company reported that it had discovered certain improper expense accruals primarily at the national programming services of the Company’s Rainbow segment.  The improper expense recognition matter has been the subject of investigations by the SEC and the U.S. Attorney’s Office for the Eastern District of New York.  The SEC is continuing to investigate the improper expense recognition matter and the Company’s timing of recognition of launch support, marketing and other payments under affiliation agreements.  The Company continues to fully cooperate with such investigations.

 

Stock Option Related Matters

 

The Company announced on August 8, 2006 that, based on a voluntary review of its past practices in connection with grants of stock options and stock appreciation rights (“SARs”), it had determined that the grant date and exercise price assigned to a number of its stock option and SAR grants during the

 

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1997-2002 period did not correspond to the actual grant date and the fair market value of Cablevision’s common stock on the actual grant date.  The review was conducted with a law firm that was not previously involved with the Company’s stock option plans.  The Company has advised the SEC and the U.S. Attorney’s Office for the Eastern District of New York of these matters and each has commenced an investigation.  The Company received a grand jury subpoena from the U.S. Attorney’s Office for the Eastern District of New York seeking documents related to the stock options issues.  The Company received a document request from the SEC relating to its informal investigation into these matters.  The Company continues to fully cooperate with such investigations.

 

In addition, in August, September and October 2006, purported derivative lawsuits (including one purported combined derivative and class action lawsuit) relating to the Company’s past stock option and SAR grants were filed in New York State Supreme Court for Nassau County, the United States District Court for the Eastern District of New York, and Delaware Chancery Court for New Castle County, by parties identifying themselves as shareholders of Cablevision purporting to act on behalf of Cablevision.  These lawsuits named as defendants certain present and former members of Cablevision’s Board of Directors and certain present and former executive officers, alleging breaches of fiduciary duty and unjust enrichment relating to practices with respect to the dating of stock options, recordation and accounting for stock options, financial statements and SEC filings, and alleged violation of IRC 162(m).  In addition, certain of these lawsuits asserted claims under Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934 and Section 304 of the Sarbanes-Oxley Act.  The lawsuits sought damages from all defendants, disgorgement from the officer defendants, declaratory relief, and equitable relief, including rescission of the 2006 Employee Stock Plan and voiding of the election of the director defendants.  On October 27, 2006, the Board of Directors of Cablevision appointed Grover C. Brown and Zachary W. Carter as directors and, on the same date, appointed Messrs. Brown and Carter to a newly formed Special Litigation Committee (“SLC”) of the Board.  The SLC was directed by the Board to review and analyze the facts and circumstances surrounding these claims, which purport to have been brought derivatively on behalf of the Company, and to consider and determine whether or not prosecution of such claims is in the best interests of the Company and its shareholders, and what actions the Company should take with respect to the cases.  The SLC, through its counsel, filed motions in all three courts to intervene and to stay all proceedings until completion of the SLC’s independent investigation of the claims raised in these actions.  The Delaware action subsequently was voluntarily dismissed without prejudice by the plaintiff.  The actions pending in Nassau County have been consolidated and a single amended complaint has been filed in that jurisdiction. Similarly, the actions pending in the Eastern District of New York have been consolidated and a single amended complaint has been filed in that jurisdiction.  Both the Nassau County action and the Eastern District of New York action assert derivative claims on behalf of the Company as well as direct claims on behalf of Cablevision shareholders relating to the Company’s past stock option and SAR grants.  On November 14, 2006, the trial court in the Nassau County action denied the SLC’s motion for a stay of proceedings and ordered expedited discovery.  The Appellate Division of the New York State Supreme Court subsequently stayed all proceedings in the Nassau County action (including all discovery) pending the SLC’s appeal of the denial of its stay motion.  On October 9, 2007, the Appellate Division affirmed the trial court’s denial of the SLC’s motion to stay proceedings. The U.S. District Court for the Eastern District of New York granted the SLC’s motion for a stay and stayed the cases pending in that court.  That stay expired following the determination that the transaction contemplated by the Dolan Family Group 2006 Proposal would not close.  There have been a series of extensions and/or stays in the Nassau County and Eastern District actions, and both actions are currently stayed.

 

The Company has continued to incur substantial expenses for legal services in connection with the Company’s stock option related litigation and the investigations by the SEC and the U.S. Attorney’s Office for the Eastern District of New York.

 

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Antitrust Lawsuit

 

On September 20, 2007, an antitrust lawsuit was filed in the U.S. District Court for the Central District of California against Cablevision and several other defendants, including other cable and satellite providers and programming content providers.  The complaint alleges that the defendants have violated Section 1 of the Sherman Antitrust Act by agreeing to the sale and licensing of programming on a “bundled” basis and by offering programming in packaged tiers rather than on an “a la carte” basis.  The plaintiffs, purportedly on behalf of a nationwide class of cable and satellite subscribers, seek unspecified treble monetary damages and injunctive relief to compel the offering of channels to subscribers on an “a la carte” basis.  The Company intends to defend against this lawsuit vigorously.

 

Other Matters

 

In addition to the matters discussed above, the Company is party to various lawsuits, some involving claims for substantial damages.  Although the outcome of these other matters cannot be predicted with certainty and the impact of the final resolution of these other matters on the Company’s results of operations in a particular subsequent reporting period is not known, management does not believe that the resolution of these other lawsuits will have a material adverse effect on the financial position of the Company or the ability of the Company to meet its financial obligations as they become due.

 

Item 6.                                                           Exhibits

 

(a)                                  Index to Exhibits.

 

31.1

 

Section 302 Certification of the CEO

 

 

 

31.2

 

Section 302 Certification of the CFO

 

 

 

32

 

Section 906 Certification of the CEO and CFO

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

CABLEVISION SYSTEMS CORPORATION

 

 

 

CSC HOLDINGS, INC.

 

 

 

 

 

 

 

 

 

 

Date:

May 8, 2008

 

 

/s/ Michael P. Huseby

 

 

 

By:

Michael P. Huseby as Executive Vice
President and Chief Financial Officer
of Cablevision Systems Corporation
and CSC Holdings, Inc.

 

 

 

 

 

 

 

 

 

 

Date:

May 8, 2008

 

By:

/s/ Wm. Keith Harper

 

 

 

 

Wm. Keith Harper as Senior Vice
President and Controller and
Principal Accounting Officer

of Cablevision Systems Corporation
and CSC Holdings, Inc.

 

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