<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: March 6, 1998
Date of Earliest Event Reported: March 4, 1998
TELE-COMMUNICATIONS, INC.
-------------------------------------------------------------
(Exact name of Registrant as specified in its charters)
State of Delaware
---------------------------------------
(State or other jurisdiction of incorporation)
0-20421 84-1260157
- ------------------------- -------------------------------------
(Commission File Number) (I.R.S. Employer Identification No.)
5619 DTC Parkway
Englewood, Colorado 80111
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 267-5500
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS
Unaudited Interim Consolidated Financial
Statements of Cablevision Systems Corporation:
Consolidated Statements of Operations for the three and nine
months ended September 30, 1997 and 1996
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996
Notes to Consolidated Financial Statements
Audited Consolidated Financial Statements of
Cablevision Systems Corporation:
Independent Auditor's Report
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Deficiency for the
years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(b) PRO FORMA FINANCIAL INFORMATION
Tele-Communications, Inc. and Subsidiaries:
Condensed Pro Forma Balance Sheet,
September 30, 1997 (unaudited)
Condensed Pro Forma Statement of Operations,
Nine months ended September 30, 1997 (unaudited)
Condensed Pro Forma Statement of Operations,
Year ended December 31, 1996 (unaudited)
Notes to Condensed Pro Forma Financial Statements,
September 30, 1997 (unaudited)
(c) EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
2.1 Amended and Restated Contribution and Merger
Agreement, dated as of June 6, 1997, among TCI
Communications, Inc., Cablevision Systems Corporation, CSC
Parent Corporation and CSC Merger Corporation.*
99.1 Stockholders Agreement dated as of March 4, 1998, by
and among Cablevision Systems Corporation, Tele-
Communications, Inc. and the Class B Entities (as defined
therein)*
</TABLE>
- ---------------
* Previously filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: June 23, 1998
TELE-COMMUNICATIONS, INC.
(Registrant)
By: /s/ Bernard W. Schotters
--------------------------------
Bernard W. Schotters
Senior Vice President
and Treasurer
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 AND
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
1
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------- -----------------------
1997 1996 1997 1996
------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues..................................................... $1,314,995 $ 955,618 $ 517,930 $ 331,122
------------ ----------- ---------- -----------
Operating expenses:
Technical................................................... 568,259 392,076 227,829 134,496
Selling, general and administrative......................... 347,405 226,940 132,786 80,501
Depreciation and amortization............................... 363,023 262,741 140,442 87,573
------------ ----------- ---------- -----------
1,278,687 881,757 501,057 302,570
------------ ----------- ---------- -----------
Operating profit.......................................... 36,308 73,861 16,873 28,552
------------ ----------- ---------- -----------
Other income (expense):
Interest expense............................................ (261,533) (196,750) (107,748) (64,651)
Interest income............................................. 2,635 2,678 1,807 438
Share of affiliates' net losses............................. (32,243) (59,403) (762) (19,342)
Write off of deferred interest and financing costs.......... (13,710) (34,341) (13,710) (10,329)
Gain on redemption of subsidiary preferred stock............ 181,738 -- 181,738 --
Provision for preferential payment to related party......... (4,200) (4,200) (1,400) (1,400)
Minority interest........................................... 14,145 (7,385) 10,317 (2,575)
Miscellaneous............................................... (7,059) (7,444) (3,068) (3,201)
------------ ----------- ---------- -----------
(120,227) (306,845) 67,174 (101,060)
------------ ----------- ---------- -----------
Net income (loss)............................................ (83,919) (232,984) 84,047 (72,508)
Dividend requirements applicable to preferred stocks......... (110,324) (92,596) (37,593) (34,423)
------------ ----------- ---------- -----------
Net income (loss) applicable to common shareholders.......... $ (194,243) $(325,580) $ 46,454 $(106,931)
------------ ----------- ---------- -----------
------------ ----------- ---------- -----------
Net income (loss) per common share........................... $ (7.81) $ (13.12) $ 1.87 $ (4.31)
------------ ----------- ---------- -----------
------------ ----------- ---------- -----------
Average number of common shares outstanding (in thousands)... 24,858 24,823 24,892 24,828
------------ ----------- ---------- -----------
------------ ----------- ---------- -----------
</TABLE>
See accompanying notes to
consolidated financial statements.
2
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................... $ 32,135 $ 11,612
Accounts receivable trade (less allowance for doubtful
accounts of $29,830 and $12,955)........................... 181,994 105,406
Notes and other receivables (including affiliate amount of
$10,235 in 1997)........................................... 85,080 19,368
Prepaid expenses and other assets............................ 64,424 23,053
Property, plant and equipment, net........................... 1,720,053 1,390,971
Investments in affiliates.................................... 60,424 311,865
Advances to affiliates....................................... 4,923 7,855
Feature film inventory....................................... 149,630 134,258
Net assets held for sale..................................... 264,344 --
Franchises, net of accumulated amortization of
$453,157 and $389,791...................................... 366,588 379,466
Affiliation agreements, net of accumulated amortization of
$125,483 and $44,385....................................... 234,289 162,388
Excess costs over fair value of net assets acquired and other
intangible assets, net of accumulated amortization of
$677,953 and $549,256...................................... 1,615,156 436,606
Deferred financing, acquisition and other costs, net of
accumulated amortization of $38,168 and $29,755............ 93,723 51,877
-------------- --------------
$4,872,763 $3,034,725
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to
consolidated financial statements.
3
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Accounts payable.......................... $227,578 $186,409
Accrued liabilities:
Interest................................ 69,178 45,774
Payroll and related benefits............ 85,467 63,987
Franchise fees.......................... 26,518 26,453
Other................................... 283,660 104,172
Accounts payable to affiliates............ 915 14,012
Feature film and contract rights
payable................................. 283,318 115,437
Deferred revenue.......................... 114,770 --
Bank debt................................. 2,875,891 1,670,245
Senior debt............................... 397,617 --
Senior debentures......................... 398,518 --
Subordinated debentures................... 1,048,207 1,323,105
Subordinated notes payable................ 151,000 141,268
Obligation to related party............... 191,328 192,819
Capital lease obligations and other debt.. 48,951 7,264
Minority interest......................... 124,737 --
----------- ----------
Total liabilities..................... 6,327,653 3,890,945
----------- ----------
Deficit investment in affiliates.......... 18,225 512,800
----------- ----------
Series H Redeemable Exchangeable
Preferred Stock......................... 315,772 289,506
----------- ----------
Series M Redeemable Exchangeable
Preferred Stock......................... 777,149 715,759
----------- ----------
Commitments and contingencies
Stockholders' deficiency:
8% Series C Cumulative Preferred
Stock, $.01 par value, 112,500 shares
authorized, 110,622 shares issued
($100 per share liquidation
preference)........................... 1 1
8% Series D Cumulative Preferred
Stock, $.01 par value, 112,500 shares
authorized, none issued ($100 per
share liquidation preference)......... -- --
8-1/2% Series I Cumulative Convertible
Exchangeable Preferred Stock, $.01 par
value, 1,380,000 shares authorized and
issued ($250 per share liquidation
preference).......................... 14 14
Class A Common Stock, $.01 par value,
50,000,000 shares authorized,
13,823,172 and 13,583,676 shares
issued................................ 138 136
Class B Common Stock, $.01 par value,
20,000,000 shares authorized,
11,109,709 and 11,254,709 shares
issued................................ 111 113
Paid-in capital......................... 167,251 164,538
Accumulated deficit..................... (2,733,551) (2,539,087)
----------- ----------
Total stockholders' deficiency.......... (2,566,036) (2,374,285)
----------- ----------
$4,872,763 $3,034,725
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to
consolidated financial statements.
4
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................................. $(83,919) $(232,984)
-------- ---------
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization...................................................... 363,023 262,741
Share of affiliates' net losses.................................................... 32,243 59,403
Minority interest.................................................................. (14,145) 7,385
Amortization of deferred financing................................................. 5,565 5,359
Amortization of deferred interest.................................................. -- 4,684
Amortization of debenture discount................................................. 112 78
Accretion of interest on debt...................................................... -- 6,828
Write off of deferred interest and financing costs................................. 13,710 34,341
Loss on sale of equipment.......................................................... 4,034 3,165
Gain on redemption of subsidiary preferred stock................................... (181,738) --
Changes in assets and liabilities net of effects
of acquisitions:
Accounts receivable trade.......................................................... (10,771) 6,109
Notes receivable, affiliates....................................................... (10,235) --
Notes and other receivables........................................................ (43,965) (882)
Prepaid expenses and other assets.................................................. (10,982) (7,898)
Advances to affiliates............................................................. 14,372 (3,064)
Feature film inventory............................................................. 22,677 16,067
Accounts payable................................................................... 22,643 1,867
Accrued interest................................................................... 17,364 22,852
Accrued payroll and related benefits............................................... 16,694 9,707
Accrued franchise fees............................................................. (274) (2,422)
Accrued liabilities, other......................................................... 32,800 (10,663)
Accounts payable to affiliates..................................................... (19,552) 2,869
Feature film rights payable........................................................ (9,660) (16,464)
Deferred revenue................................................................... 79,025 --
-------- ---------
Total adjustments............................................................. 322,940 402,062
-------- ---------
Net cash provided by operating activities.............................................. $239,021 $169,078
-------- ---------
</TABLE>
See accompanying notes
to consolidated financial statements.
5
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Dollars in thousands)
(Unaudited)
(continued)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from investing activities:
Capital expenditures............................................................ $(316,217) $(294,183)
Proceeds from sale of plant and equipment....................................... 1,959 525
Additions to intangible assets.................................................. (922) (1,681)
Increase in investments in affiliates, net...................................... (174,817) (85,948)
Payments for acquisitions, net of cash acquired................................. (533,853) (107,062)
---------- ----------
Net cash used in investing activities......................................... (1,023,850) (488,349)
---------- ----------
Cash flows from financing activities:
Proceeds from bank debt......................................................... 2,271,614 1,186,328
Repayment of bank debt.......................................................... (1,397,543) (924,987)
Proceeds from senior debt....................................................... 19,000 12,500
Repayment of senior debt........................................................ (19,750) (918,131)
Preferred stock dividends....................................................... (22,889) (22,905)
Net proceeds from issuance of redeemable exchangeable preferred stock........... -- 624,021
Proceeds from issuance of senior subordinated debt............................... 398,508 399,385
Redemption of senior subordinated debt........................................... (283,445) --
Redemption of subsidiary preferred stock......................................... (112,306) --
Issuance of common stock......................................................... 2,718 3,212
Decrease in obligation to related party.......................................... (1,491) (1,495)
Payments of capital lease obligations and other debt............................. (5,302) (2,462)
Additions to deferred financing and other costs.................................. (43,762) (25,348)
---------- ----------
Net cash provided by financing activities........................................ 805,352 330,118
---------- ----------
Net increase in cash and cash equivalents......................................... 20,523 10,847
Cash and cash equivalents at beginning of year.................................... 11,612 15,332
----------- -----------
Cash and cash equivalents at end of period........................................ $ 32,135 $ 26,179
----------- -----------
----------- -----------
</TABLE>
See accompanying notes
to consolidated financial statements.
6
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Cablevision
Systems Corporation and its majority owned subsidiaries (the "Company") have
been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
Note 2. Responsibility for Interim Financial Statements
The financial statements as of and for the three and nine months ended
September 30, 1997 and 1996 presented in this Form 10-Q are unaudited;
however, in the opinion of management, such statements include all
adjustments, consisting solely of normal recurring adjustments, necessary for
a fair presentation of the results for the periods presented.
The interim financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
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, 1997.
Note 3. Net Income (Loss) per Common Share
Net income (loss) per common share is computed by dividing net income (loss)
after deduction of preferred stock dividends by the weighted average number
of common shares outstanding. Common stock equivalents were not included in
the computation as their effect would be antidilutive or insignificant. In
February 1997, the Financial Accounting Standards Board issued its Statement
No. 128, "Earnings per Share." Among other provisions, SFAS No. 128
simplifies the standards for computing earnings per share. The Company does
not expect the adoption of SFAS No. 128 to have a material impact on its
per share determinations.
Note 4. Cash Flows
For purposes of the consolidated statements of cash flows, the Company
considers short-term investments with a maturity at date of purchase of three
months or less to be cash equivalents.
7
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
(continued)
The Company paid cash interest expense of approximately $232,451 and $162,676
for the nine months ended September 30, 1997 and 1996, respectively. The
Company's noncash financing activities for the nine months ended September
30, 1997 and 1996 included capital lease obligations of $24,820 and $2,403,
respectively, incurred when the Company entered into leases for new equipment
and preferred stock dividend requirements of $87,656 and $69,912,
respectively.
Note 5. Acquisitions
On April 1, 1997, Rainbow Media Holdings, Inc. ("Rainbow Media") consummated
a transaction in which Rainbow Programming Holdings, Inc. merged with and
into Rainbow Media, a newly formed subsidiary of the Company. In addition,
NBC received a 25% equity interest (which interest may be increased up to 27%
under certain circumstances) in non-voting Class C common stock of Rainbow
Media. The Company owns the remaining 75% equity interest in Rainbow Media.
The partnership interests in certain of Rainbow Media's programming services
formerly owned by NBC are now owned by subsidiaries of Rainbow Media. As a
result of the exchange of 25% of the Company's interest in Rainbow Media for
NBC's interests in certain entities, the Company recorded goodwill of $54,108
which will be amortized over a 10 year period.
On April 16, 1997, the Company and certain of its affiliates and ITT
Corporation ("ITT") and certain of its affiliates, entered into definitive
agreements ("MSG Agreement") relating to the acquisition by subsidiaries of
Cablevision of ITT's 50 percent interest in Madison Square Garden L.P.
("MSG"). The transaction closed on June 17, 1997 when MSG borrowed $799,000
under its credit facility which was used to redeem a portion of ITT's
interest in MSG for $500,000 and to repay its existing indebtedness. Rainbow
Media contributed its SportsChannel Associates programming company to MSG,
which, together with the redemption, increased the Company's interest in MSG
to 89.8% and reduced ITT's interest to 10.2%. The remaining 10.2% interest is
subject to certain puts and calls as specified in the MSG agreement. The
acquisition was accounted for using the purchase method of accounting. The
assets and liabilities and results of operations of MSG have been
consolidated with those of the Company as of June 17, 1997. Previously the
Company's investment in MSG was accounted for using the equity method of
accounting. The excess of the purchase price over the net book value of
assets acquired of approximately $299,298 will be allocated to the specific
assets acquired when independent appraisals are obtained and will be
amortized accordingly.
In June 1997, the Company acquired from Warburg Pincus Investors, L.P.
("Warburg") the interests that the Company did not already own in A-R Cable
Partners ("Nashoba") and Cablevision of Framingham ("Framingham") for a
purchase price of approximately $33,348 and
8
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
(continued)
$7,865, respectively. The acquisitions of Nashoba and Framingham were
accounted for as purchases with the operations of these companies being
consolidated with those of the Company as of the acquisition dates. The
excess of the purchase price over the net book value of assets acquired
approximates $22,815 and $11,743 for the acquisition of Nashoba and
Framingham, respectively, and is being amortized over 10 years.
On July 2, 1997 the Company redeemed from Warburg the Series A preferred
stock of A-R Cable Services, Inc. (A-R Cable) for an aggregate amount of
approximately $112,301. The assets and liabilities of A-R Cable have been
consolidated with those of the Company as of July 2, 1997. Previously, the
Company's investment in A-R Cable was accounted for using the equity method
of accounting. In connection with this transaction, the Company recognized a
gain of $181,738 principally representing the reversal of accrued preferred
dividends in excess of amounts paid.
Pro Forma Results of Operations
The following unaudited pro forma condensed results of operations are
presented for the nine months ended September 30, 1997 and 1996 as if the
acquisitions of MSG, Nashoba and Framingham, the NBC transaction and the A-R
Cable consolidation had occurred on January 1, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net revenues............................. $1,614,743 $1,418,204
------------ ------------
------------ ------------
Net loss................................. $ (377,847) $ (361,392)
------------ ------------
------------ ------------
Net loss per common share ............... $ (15.20) $ (14.56)
------------ ------------
------------ ------------
</TABLE>
The pro forma information presented above gives effect to certain
adjustments, including the amortization of acquired intangible assets and
increased interest expense on acquisition debt. The pro forma information has
been prepared for comparative purposes only and does not purport to indicate
the results of operations which would actually have occurred had the
transactions been made at the beginning of the periods indicated, or which
may occur in the future. These amounts do not reflect the gain recognized on
the redemption of A-R Cable's Series A preferred stock.
9
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
(continued)
Note 6. Net Assets Held for Sale
In February 1997, the Company announced that it was pursuing a plan to
dispose of certain nonstrategic cable television systems representing an
aggregate of up to 478,000 basic subscribers. As described below, the Company
has entered into definitive agreements covering the sale of cable television
systems representing approximately 380,000 basic subscribers.
On May 8, 1997, A-R Cable Services-ME, Inc. (A-R Maine), a subsidiary of A-R
Cable, entered into an agreement to sell the cable television systems in
Maine owned by A-R Maine for approximately $78,000 in cash. This transaction
was consummated on October 31, 1997. In addition, on August 13, 1997, A-R
Cable entered into an agreement to sell cable television systems in Rockford,
Illinois for approximately $97,000 in cash.
On August 13, 1997, Cablevision of the Midwest, Inc., a subsidiary of the
Company, entered into an agreement to sell cable television systems in Allen
and Gibsonberg Township, Ohio for approximately $10,700 in cash.
On August 19, 1997, Rainbow Media entered into an agreement for the sale of
its subsidiary, CV Radio Associates, L.P., for $8,400.
On August 29, 1997, the Company entered into an agreement to sell the cable
television properties of U.S. Cable Television Group, L.P. ("U.S. Cable"), a
subsidiary of the Company, for $315,000.
The pending transactions are subject to the receipt of regulatory and other
customary approvals. The pending transactions are currently expected to be
consummated in the fourth quarter of 1997 and/or the first quarter of 1998.
The Company expects to record gains upon the consummation of the
transactions. There can be no assurance that the pending transactions will be
consummated in a timely fashion, or at all.
For financial reporting purposes, the assets and liabilities attributable to
the above transactions have been classified in the consolidated balance sheet
as net assets held for sale and consist of the following at September 30,
1997.
<TABLE>
<S> <C>
Property, plant and equipment, net................. $124,819
Intangible assets, net............................. 164,788
Other assets....................................... 4,726
--------
Total assets....................................... 294,333
Total liabilities.................................. 29,989
--------
Net assets......................................... $264,344
--------
--------
</TABLE>
10
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
(continued)
The accompanying consolidated statement of operations for the nine months
ended September 30, 1997 includes net revenues aggregating approximately
$100,000 and net losses aggregating approximately $14,500 relating to net
assets held for sale. Assets to be disposed of are not being depreciated or
amortized while they are held for sale.
Note 7. Debt
On July 25, 1997, the Company paid $283,445 plus accrued interest of $9,361
to redeem its $275,000 10 3/4% Senior Subordinated Debentures due 2004. The
payment included a redemption premium of $8,445. In addition, the Company
wrote-off deferred financing costs of approximately $5,265 related to the
debentures.
In August 1997, the Company issued $400,000 principal amount of 8 1/8% Senior
Debentures due 2009. The Senior Debentures were issued at a discount of
$1,492. The proceeds of the offering were used to reduce borrowings under the
Company's Senior Term Loan. The Senior Debentures can not be redeemed by the
Company prior to maturity.
Note 8. Recent Developments
On June 6, 1997, the Company entered into an agreement with TCI
Communications, Inc., a subsidiary of Tele-Communications, Inc. ("TCI
Transaction") whereby the Company will issue 12,235,543 shares of Class A
common stock, subject to adjustment in certain events, in exchange for cable
television systems located in New Jersey, Long Island and New York's Rockland
and Westchester counties serving approximately 820,000 subscribers at
September 30, 1997 and having stipulated outstanding indebtedness of $669,000
at closing. The closing is conditioned, among other things, upon expiration
or termination of the waiting period under the Hart-Scott-Rodino ("HSR")
Antitrust Improvements Act of 1976, receipt of approvals from federal, state
and local governmental agencies and others, and approval of the Company's
shareholders. On August 1, 1997, the United States Federal Trade Commission
issued a second request with respect to the HSR Act filing, seeking
additional information with respect to the pending transaction.
On June 22, 1997, Rainbow Media Sports Holdings, Inc. ("Rainbow Sports"), a
wholly-owned subsidiary of Rainbow Media entered into an agreement with Fox
Sports Net, LLC ("Fox Sports"), a subsidiary of Fox/Liberty Networks, LLC, to
organize three partnerships, Regional Programming Partners, National Sports
Partners and National Advertising Partners (the "Fox Liberty Transaction").
Upon the formation of Regional Programming Partners, Rainbow Media will
contribute its partnership interests in its regional sports channels and MSG
in exchange for a 60% interest in Regional Programming Partners ("RPP"). The
Company will be the managing partner of RPP.
11
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(Unaudited)
(continued)
Fox Sports will contribute $850,000 in cash to Regional Programming Partners
in exchange for a 40% interest in Regional Programming Partners. Upon the
formation of National Sports Partners and National Advertising Partners, the
Company and Fox Sports will each contribute certain assets to the
partnerships for a 50% partnership interest. Fox Sports will be the managing
partner of these partnerships. Consummation of the transaction is subject to
regulatory approvals and third party consents. The Company expects to record
a gain upon consummation of this transaction.
On October 2, 1997, the Company entered into an agreement with At Home
Corporation ("@Home") and certain of its shareholders, pursuant to which the
Company agreed to enter into agreements for the distribution of the @Home
service over the Company's cable television syatems on the same terms and
conditions as @Home's founding partners, Telecommunications, Inc., Comcast
Corporation and Cox Communications. The Company received a warrant to
purchase 7,875,784 shares of @Home's Series A common stock at an exercise
price of $.50 per share, and, in addition, a warrant to purchase up to
3,071,152 shares of @Home's Series A common stock at $.50 per share under
certain conditions (the "Contingent Warrant"). The Contingent Warrant is not
immediately exercisable and will become exercisable as and to the extent
certain cable systems, including the TCI contributed systems, are transferred
from TCI and its controlled affiliates to the Company or its controlled
affiliates. @Home Network distributes high-speed interactive services to
residences and businesses using its own network architecture and a variety of
transport options, including the cable industry's hybrid-fiber coaxial
infrastructure.
12
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AT DECEMBER 31, 1996 AND 1995 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
13
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Cablevision Systems Corporation
We have audited the accompanying consolidated balance sheets of Cablevision
Systems Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' deficiency and cash
flows for each of the years in the three-year period ended December 31, 1996. In
connection with our audits of the consolidated financial statements, we also
audited the financial statement schedule listed in Item 14(a)(2). These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cablevision Systems
Corporation and subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule
referred to above, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
--------------------------
KPMG Peat Marwick LLP
Jericho, New York
April 1, 1997
14
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 1996 1995
---- ----
<S> <C> <C>
Cash and cash equivalents .............................. $ 11,612 $ 15,332
Accounts receivable trade (less allowance for
doubtful accounts of $12,955 and $12,678) ........... 105,406 100,506
Notes and other receivables ............................ 19,368 16,762
Prepaid expenses and other assets ...................... 23,053 19,353
Property, plant and equipment, net ..................... 1,390,971 1,026,355
Investments in affiliates .............................. 311,865 141,345
Advances to affiliates ................................. 7,855 6,909
Feature film inventory ................................. 134,258 143,916
Franchises, net of accumulated
amortization of $389,791 and $314,218 ............... 379,466 363,077
Affiliation agreements, net of accumulated
amortization of $44,385 and $20,598 ................. 162,388 124,848
Excess costs over fair value of net assets acquired
and other intangible assets, net of accumulated
amortization of $549,256 and $518,178 ............... 436,606 468,133
Deferred financing, acquisition and other costs, net
of accumulated amortization of $29,755 and $23,899 .. 51,877 47,673
Deferred interest expense, net of accumulated
amortization of $42,142 ............................. - 28,096
---------- ----------
$3,034,725 $2,502,305
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to
consolidated financial statements.
15
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Accounts payable ..................................................... $ 186,409 $ 156,470
Accrued liabilities:
Interest ......................................................... 45,774 41,908
Payroll and related benefits ..................................... 63,987 47,997
Franchise fees ................................................... 26,453 21,980
Other ............................................................ 104,172 116,125
Accounts payable to affiliates ....................................... 14,012 12,708
Feature film rights payable .......................................... 115,437 128,000
Bank debt ............................................................ 1,670,245 992,469
Senior debt .......................................................... -- 898,803
Subordinated debentures .............................................. 1,323,105 923,608
Subordinated notes payable ........................................... 141,268 141,268
Obligation to related party .......................................... 192,819 192,945
Capital lease obligations and other debt ............................. 7,264 8,014
---------- ----------
Total liabilities ................................................ 3,890,945 3,682,295
---------- ----------
Deficit investment in affiliates ..................................... 512,800 453,935
---------- ----------
Series H Redeemable Exchangeable Preferred Stock ..................... 289,506 257,751
---------- ----------
Series M Redeemable Exchangeable Preferred Stock ..................... 715,759 -
---------- ----------
Commitments and contingencies
Stockholders' deficiency:
8% Series C Cumulative Preferred Stock, $.01 par
value, 112,500 shares authorized, 110,622 shares
issued ($100 per share liquidation preference) ............... 1 1
8% Series D Cumulative Preferred Stock, $.01 par
value, 112,500 shares authorized, none issued
($100 per share liquidation preference)...................... - -
8-1/2% Series I Cumulative Convertible Exchangeable
Preferred Stock, $.01 par value, 1,380,000 shares
authorized and issued ($250 per share liquidation
preference) .................................................. 14 14
Class A Common Stock, $.01 par value, 50,000,000 shares
authorized, 13,583,676 and 14,210,599 shares issued .......... 136 142
Class B Common Stock, $.01 par value, 20,000,000 shares
authorized, 11,254,709 and 11,572,709 shares issued .......... 113 116
Paid-in capital .................................................. 164,538 247,671
Accumulated deficit .............................................. (2,539,087) (2,079,228)
---------- ----------
(2,374,285) (1,831,284)
Less treasury stock, at cost (1,091,553 shares) .................. -- (60,392)
---------- ----------
Total stockholders' deficiency ................................... (2,374,285) (1,891,676)
---------- ----------
$3,034,725 $2,502,305
---------- ----------
---------- ----------
</TABLE>
See accompanying notes
to consolidated financial statements.
16
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER
31, 1996, 1995 AND 1994
(Dollars in thousands,
except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- ------
<S> <C> <C> <C>
Revenues (including affiliate amounts of $9,487, $7,087
and $8,290) ......................................... $ 1,315,142 $ 1,078,060 $ 837,169
----------- ----------- --------
Operating expenses:
Technical (including affiliate amounts of $37,610,
$37,756, and $20,232) .............................. 538,272 412,479 302,885
Selling, general and administrative
(including affiliate amount of $(1,003) in 1994) ... 313,476 266,209 195,942
Restructuring charge ................................. -- -- 4,306
Depreciation and amortization ........................ 388,982 319,929 271,343
----------- ----------- ----------
1,240,730 998,617 774,476
----------- ----------- ----------
Operating profit ...................................... 74,412 79,443 62,693
----------- ----------- ----------
Other income (expense):
Interest expense ..................................... (268,177) (313,850) (263,299)
Interest income (including affiliate
amounts of $568, $468 and $493) ...................... 3,162 1,963 1,518
Share of affiliates' net loss ........................ (82,028) (93,024) (82,864)
Gain (loss) on sale of programming and affiliate
interests, net ....................................... -- 35,989 --
Write off of deferred interest and financing costs ... (37,784) (5,517) (9,884)
Loss on redemption of debentures ..................... -- -- (7,088)
Provision for preferential payment to related party .. (5,600) (5,600) (5,600)
Minority interest .................................... (9,417) (8,637) (3,429)
Miscellaneous, net ................................... (6,647) (8,225) (7,198)
----------- --------- ----------
(406,491) (396,901) (377,844)
----------- --------- ----------
Net loss .............................................. (332,079) (317,458) (315,151)
Dividend requirements applicable to preferred
stock ............................................... (127,780) (20,249) (6,385)
----------- ----------- ----------
Net loss applicable to common shareholders ............ $ (459,859) $ (337,707) $(321,536)
----------- ----------- ----------
----------- ----------- ----------
Net loss per common share ............................. $ (18.52) $ (14.17) $ (13.72)
----------- ----------- ----------
----------- ----------- ----------
Average number of common shares outstanding
(in thousands) ....................................... 24,827 23,826 23,444
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
See accompanying notes
to consolidated financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
Years Ended December 31, 1996, 1995 and 1994
(Dollars in thousands)
Paid-in Capital
(Par Value
Series C Series E Series I Class A Class B in Excess
Preferred Preferred Preferred Common Common of Capital Accumulated Treasury
Stock Stock Stock Stock Stock Contributed Deficit Stock Total
----- ----- ----- ----- ----- ----------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1993 .... $1 $ - $ - $ 108 $ 124 $(80,255) $(1,419,985) (3,237) $(1,503,244)
Net loss .................... - - - - - - (315,151) - (315,151)
Issuance of Series E
preferred stock ........... - 1 - - - 98,406 - - 98,407
Cost of acquisition ......... - - - - - (101,600) - - (101,600)
Employee stock transactions . - - - 5 - 9,433 - - 9,438
Conversion of Class B to
Class A ................... - - - 6 (6) - - - -
Preferred dividend
requirements .. - - - - - - (6,385) - (6,385)
--- --- --- --- --- -------- ---------- ------ -----------
Balance December 31, 1994 .... 1 1 - 119 118 (74,016) (1,741,521) (3,237) (1,818,535)
Net loss .................... - - - - - - (317,458) - (317,458)
Issuances of preferred stock. - - 14 - - 323,317 - - 323,331
Redemption of Series E
preferred stock ........... - (1) - - - (103,002) - - (103,003)
Employee stock transactions . - - - 5 - 7,715 - - 7,720
Payment for acquisition, net - - - 16 - 93,657 - (57,155) 36,518
Conversion of Class B to
Class A ................... - - - 2 (2) - - - -
Preferred dividend
requirements ............. - - - - - - (20,249) - (20,249)
--- --- --- --- --- -------- ---------- ------ -----------
Balance December 31, 1995 .... 1 - 14 142 116 247,671 (2,079,228) (60,392) (1,891,676)
Net loss .................... - - - - - - (332,079) - (332,079)
Issuances of preferred stock - - - - - (25,979) - - (25,979)
Employee stock transactions.. - - - 1 - 3,228 - - 3,229
Conversion of Class B to
Class A.................... - - - 3 (3) - - - -
Retirement of treasury stock - - - (10) - (60,382) - 60,392 -
Preferred dividend
requirements .............. - - - - - (127,780) - (127,780)
--- --- --- --- --- -------- ---------- ------ -----------
Balance December 31, 1996 .... $1 $ - $14 $ 136 $ 113 $ 164,538 $(2,539,087) $ - $(2,374,285)
--- --- --- --- --- -------- ---------- ------ -----------
--- --- --- --- --- -------- ---------- ------ -----------
</TABLE>
See accompanying notes
to consolidated financial statements.
18
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------- ----- ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ........................................................... $(332,079) $(317,458) $(315,151)
--------- --------- ---------
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization ................................... 388,982 319,929 271,343
Share of affiliates' net loss ................................... 82,028 93,024 82,864
Minority interest ............................................... 9,417 8,637 3,429
(Gain) loss on sale of programming and affiliates interests, net -- (35,989) --
Write off of deferred interest and financing costs .............. 37,784 5,517 9,884
Loss on redemption of debentures ................................ -- -- 7,088
Loss on sale of equipment, net .................................. 4,733 4,077 3,844
Amortization of deferred financing .............................. 7,395 5,320 4,844
Amortization of deferred interest expense ....................... 4,684 14,047 14,048
Amortization of debenture discount .............................. 112 74 148
Accretion of interest on debt ................................... 6,828 39,479 35,574
Change in assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable trade ....................... (2,709) (17,200) (3,923)
Decrease in notes receivable affiliates ..................... -- 357 715
Increase in notes and other receivables ..................... (1,810) (2,421) (3,076)
Increase in prepaid expenses and other assets ............... (12,428) (3,189) (8,675)
(Increase) decrease in advances to affiliates ............... (2,168) 3,994 1,326
Increase (decrease) in feature film inventory ............... 9,658 (14,420) 7,760
Increase in accounts payable ................................ 15,830 24,685 19,069
Increase (decrease) in accrued liabilities .................. (4,618) 22,412 (2,126)
Increase (decrease) in accounts payable to affiliates ....... 1,304 (2,746) 6,037
Increase (decrease) in feature film rights payable .......... (12,563) 6,586 (8,397)
--------- --------- ---------
Total adjustments .................................................. 532,459 472,173 441,776
--------- --------- ---------
Net cash provided by operating activities .......................... 200,380 154,715 126,625
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures ................................................. (449,165) (287,138) (284,858)
Payments for acquisitions, net of cash acquired ...................... (113,095) (293,902) (673,611)
Proceeds from sale of programming and affiliate interests ............ -- 32,850 --
Proceeds from sale of equipment ...................................... 814 1,873 1,515
(Increase) decrease in investments in affiliates, net ................ (179,536) (3,901) 3,457
Additions to intangible assets, net .................................. (766) (1,016) (373)
--------- --------- ---------
Net cash used in investing activities .............................. (741,748) (551,234) (953,870)
--------- --------- ---------
</TABLE>
See accompanying notes
to consolidated financial statements.
19
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
(Dollars in thousands)
(continued)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Cash flows from financing activities:
Issuance of bank debt to finance acquisitions ............ $ 113,095 $ 293,902 $ 542,608
Proceeds from bank debt .................................. 1,940,471 425,916 965,654
Repayment of bank debt ................................... (1,576,585) (1,062,768) (698,435)
Proceeds from senior debt ................................ 12,500 10,000 2,500
Repayment of senior debt ................................. (918,131) (13,116) (8,500)
Redemption of debentures ................................. -- -- (202,000)
Issuance of subordinated notes payable and other debt .... -- -- 145,268
Issuance of subordinated debentures ...................... 399,385 300,000 --
Net proceeds from issuances of redeemable exchangeable
convertible preferred stock ............................ 624,021 573,331 98,407
Redemption of redeemable exchangeable convertible
preferred stock ........................................ -- (103,003) --
Preferred stock dividends ................................ (30,266) (12,498) (6,385)
Issuance of common stock ................................. 3,229 7,720 9,438
Obligation to related party .............................. (126) (134) --
Payments on capital lease obligations and other debt ..... (3,321) (6,583) (2,678)
Additions to deferred financing and other ................ (26,624) (12,266) (20,226)
----------- ----------- ---------
Net cash provided by financing activities .............. 537,648 400,501 825,651
----------- ----------- ---------
Net increase (decrease) in cash and cash equivalents ........ (3,720) 3,982 (1,594)
Cash and cash equivalents at beginning of year .............. 15,332 11,350 12,944
----------- ----------- ---------
Cash and cash equivalents at end of year.................... $ 11,612 $ 15,332 $ 11,350
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
See accompanying notes
to consolidated financial statements.
20
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY AND RELATED MATTERS
Cablevision Systems Corporation and its majority-owned subsidiaries (the
"Company") own and operate cable television systems. The Company also has
ownership interests in and manages other cable television systems and has
interests in companies that produce and distribute national and regional
programming services and that provide advertising sales services for the cable
television industry. The Company's revenues are derived principally from the
provision of cable television and programming services, which include recurring
monthly fees paid by subscribers. For financing purposes, Cablevision Systems
Corporation and certain of its subsidiaries are structured as a restricted group
and an unrestricted group (see Note 4).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Cablevision
Systems Corporation and its majority-owned subsidiaries. The Company's interests
in less than majority-owned entities and its 100% common stock interest in A-R
Cable Services, Inc. (see Note 2) are carried on the equity method. Advances to
affiliates are recorded at cost, adjusted when recoverability is doubtful. All
significant intercompany transactions and balances are eliminated in
consolidation.
REVENUE RECOGNITION
The Company recognizes cable television and programming revenues as services are
provided to subscribers. Advertising revenues are recognized when commercials
are telecast.
LONG-LIVED ASSETS
Property, plant and equipment, including construction materials, are carried at
cost, which includes all direct costs and certain indirect costs associated with
the construction of cable television transmission and distribution systems, and
the costs of new subscriber installations.
Franchises are amortized on the straight-line basis over the average remaining
terms (7 to 11 years) of the franchises at the time of acquisition. Affiliation
agreements are amortized on a straight-line basis over an average life of
approximately 10 years. Other intangible assets are amortized on the
straight-line basis over the periods benefited (2 to 10 years), except that
excess costs over fair value of net assets acquired are being amortized on the
straight-line basis over periods ranging from 5 to 20 years.
21
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
The Company implemented the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," effective January 1, 1996. The Company
reviews its long-lived assets (property, plant and equipment, and related
intangible assets that arose from business combinations accounted for under the
purchase method) for impairment whenever events or circumstances indicate that
the carrying amount of an asset may not be recoverable. If the sum of the
expected cash flows, undiscounted and without interest, is less than the
carrying amount of the asset, an impairment loss is recognized as the amount by
which the carrying amount of the asset exceeds its fair value. The adoption of
Statement No. 121 had no impact on the Company's financial position or results
of operations.
FEATURE FILM INVENTORY
Rights to feature film inventory acquired under license agreements along with
the related obligations are recorded at the contract value. Costs are amortized
on the straight-line method over either the contract period or the intended
number of days to be aired. Amounts payable during the five years subsequent to
December 31, 1996 related to feature film telecast rights amount to $24,369 in
1997, $18,464 in 1998, $16,790 in 1999, $6,067 in 2000 and $12,395 in 2001.
DEFERRED FINANCING COSTS
Costs incurred to obtain debt are deferred and amortized, on the straight-line
basis, over the life of the related debt.
INCOME TAXES
Income taxes are provided based upon the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", which requires the
liability method of accounting for deferred income taxes and permits the
recognition of deferred tax assets, subject to an ongoing assessment of
realizability.
LOSS PER SHARE
Net loss per common share is computed based on the average number of common
shares outstanding after giving effect to dividend requirements on the Company's
preferred stock. Common stock equivalents were not included in the computation
as their effect would be to decrease net loss per share.
22
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
CASH FLOWS
For purposes of the consolidated statements of cash flows, the Company considers
short-term investments with a maturity at date of purchase of three months or
less to be cash equivalents. The Company paid cash interest expense of
approximately $252,120, $252,344 and $198,535 during 1996, 1995 and 1994,
respectively. During 1996, 1995 and 1994, the Company's noncash investing and
financing activities included capital lease obligations of $2,571, $1,086 and
$4,020, respectively, incurred when the Company entered into leases for new
equipment; obligation to related party of $101,460 in 1994 (see Note 8); Series
H preferred stock dividend requirements of $31,755 and $7,751 in 1996 and 1995,
respectively, and Series M preferred stock dividend requirements of $65,759 in
1996 (See Note 5); and the issuance in 1995 of 687,623 shares of the Company's
Class A Common Stock (fair value of $37,733) for the acquisition of Cablevision
of Boston (See Note 2).
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles 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 2. ACQUISITIONS, DISPOSITIONS AND RESTRUCTURINGS
ACQUISITIONS
1996 ACQUISITIONS:
In August, 1996, the Company acquired the remaining approximate 80% partnership
interest in U.S. Cable that it did not already own for approximately $4,010 and
repaid the debt owed by U.S. Cable to General Electric Capital Corporation
("GECC") of approximately $154,000 with proceeds from a new $175,000 credit
facility (see Note 4).
See Note 8 - "Affiliate Transactions" for a discussion of the Company's
investment in Northcoast Operating Co., Inc.
In May 1996, the Company entered into an agreement (the "Warburg Agreement")
with Warburg, Pincus Investors, L.P. ("Warburg") to acquire from Warburg the
interests that the Company does not already own in A-R Cable Services, Inc.
("A-R Cable"), A-R Cable Partners, Cablevision of Newark and Cablevision of
Framingham (each a "Warburg Company") for an aggregate purchase
23
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
price of $183,000 subject to certain adjustments and regulatory approval. In
September, 1996, the Company acquired the 75% equity interest that Warburg owned
in Cablevision of Newark for approximately $37,000, giving the Company full
ownership of Cablevision of Newark. At December 31, 1996, acquisition of the
other Warburg Companies have not been completed (see Note 14).
The acquisitions of U.S. Cable and Cablevision of Newark were accounted for as
purchases with the operations of these companies being consolidated with those
of the Company as of the acquisition dates. The excess of the purchase price
over the net book value of assets acquired approximates $211,707 ($148,439 for
the acquisition of U.S. Cable and $63,268 for the acquisition of Cablevision of
Newark) and will be allocated to the specific assets acquired when independent
appraisals are completed. For purposes of the 1996 consolidated financial
statements, the excess purchase price has been recorded as excess costs over
fair value of net assets acquired and is being amortized over 7 years.
In October, 1996, Rainbow Programming Holdings, Inc., a wholly-owned subsidiary
of the Company, ("Rainbow Programming") made a payment of $81.25 million to ITT
Corporation, a Delaware Corporation ("ITT"), increasing its partnership interest
in MSG Holdings, L.P. ("MSG Holdings") from approximately 15.2% to approximately
26.6%. See Note 14 for a description of the transaction in which Rainbow
Programming equalized its interests in MSG Holdings and a discussion of plans to
acquire a majority interest in MSG Holdings.
During 1996, Rainbow Programming invested approximately $5,756 in a joint
venture formed with a subsidiary of Loral Space and Communications, Ltd. for the
purpose of exploiting certain direct broadcast satellite ("DBS") frequencies.
Rainbow Programming also contributed to the joint venture its interest in
certain agreements with the licensee of such frequencies.
1995 ACQUISITIONS:
In March 1995, MSG Holdings, a partnership among subsidiaries of Rainbow
Programming and subsidiaries of ITT acquired the business and assets of Madison
Square Garden Corporation ("MSG") in a transaction in which MSG merged with and
into MSG Holdings. The purchase price paid by MSG Holdings for MSG was
$1,009,100. MSG Holdings funded the purchase price of the acquisition through
(i) borrowings of $289,100 under a $450,000 credit agreement among MSG Holdings,
various lending institutions and Chemical Bank as administrative agent, (ii) an
equity contribution from Rainbow Programming of $110,000, and (iii) an equity
contribution from ITT of $610,000. ITT, Rainbow Programming and the Company were
parties to an agreement made as of August 15, 1994, as amended, (the "Bid
Agreement") that provided Rainbow Programming the right to acquire interests in
MSG Holdings from ITT sufficient to equalize the interests of ITT and Rainbow
Programming in MSG Holdings by making certain scheduled payments totalling
24
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
$250,000 (plus interest on any unpaid portion thereof) on specified dates up to
and including March 17, 1997 (see Note 14).
In July 1995, Rainbow Programming consummated the purchase from National
Broadcasting Company ("NBC") of the approximate 50% interests in each of
SportsChannel Associates (New York) ("SportsChannel New York") and Rainbow News
12 Company ("Rainbow News 12") that NBC owned for approximately $95,500, giving
Rainbow Programming a 100% interest in SportsChannel New York and Rainbow News
12. The purchase was financed by an additional drawdown of $94,000 under Rainbow
Programming's $202,000 amended and restated credit facility and by a $2,500
equity contribution from the Company for the balance of the purchase price and
related fees.
In December 1995, the Company acquired the interests in Cablevision of Boston
Limited Partnership ("Cablevision of Boston") that it did not previously own
pursuant to an agreement entered into by the Company and Cablevision of Boston.
In connection with the acquisition, the limited partners (other than the
Company) of Cablevision of Boston received approximately 680,266 shares of the
Company's Class A Common Stock valued at $37,329 and the Company paid
approximately $83,456 for the repayment of bank debt, fees and expenses and to
fund payments to Charles F. Dolan ("Mr. Dolan"), as described below, primarily
with funds borrowed under the Company's Credit Agreement. Upon consummation of
the acquisition, Cablevision of Boston became a member of the Restricted Group
(see Note 4). Mr. Dolan, a former general partner of Cablevision of Boston and
the Chairman of the Board of the Company, received 7,357 shares of the Company's
Class A Common Stock valued at $404 and approximately $20,782 in cash to repay a
portion of Cablevision of Boston's indebtedness to him. In connection with the
acquisition, the Company received 1,041,553 shares of its Class A Common Stock
valued at $57,155 (such shares are reflected as treasury shares at December 31,
1995). As part of the acquisition of Cablevision of Boston, the Company acquired
99.5% of the partnership interests in Cablevision of Brookline Limited
Partnership ("Cablevision of Brookline"), a partnership affiliated with
Cablevision of Boston, and entered into an agreement with Mr. Dolan with respect
to his remaining 0.5% general partnership interest in Cablevision of Brookline,
whereby the Company has a right of first refusal to acquire such interest
through January 1, 2002.
The acquisition of Cablevision of Boston and the purchase of interests in
SportsChannel New York and Rainbow News 12 were accounted for as purchases with
the operations of these companies being consolidated with those of the Company
as of the acquisition dates. The excess of the purchase price over the book
value of assets acquired approximated $210,426 ($115,759 for the acquisition of
Cablevision of Boston and $94,667 for the acquisition of SportsChannel New York
and Rainbow News 12) and was allocated to the specific assets acquired when
independent appraisals were completed in 1996. For purposes of the 1995
consolidated financial statements, the excess purchase price was recorded as
excess costs over fair value of net assets acquired and amortization was
calculated based on an average period of approximately 10 years.
25
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
For 1996, these excess costs have been allocated based upon independent
appraisals as follows:
<TABLE>
<S> <C>
Plant and equipment $ 23,181
Affiliation agreements 61,327
Franchises 93,889
Excess cost over fair value of assets acquired 32,029
----------
$210,426
----------
----------
</TABLE>
1994 ACQUISITIONS:
In March 1994, Cablevision of Cleveland, L.P. ("Cablevision Cleveland"), a
partnership whose partners are subsidiaries of the Company, purchased
substantially all of the assets and assumed certain liabilities of North Coast
Cable Limited Partnership, which operates a cable television system in
Cleveland, Ohio (the "North Coast Cable Acquisition"). The operations of North
Coast Cable are consolidated with those of the Company as of the date of
acquisition. The net cash purchase price for interests not previously owned by
the Company (and excluding excess liabilities assumed by the Company) aggregated
approximately $103,359 including expenses. The cost of the acquisition was
financed principally by borrowings under the Company's credit agreement.
In June 1994, A-R Cable Partners, a partnership comprised of subsidiaries of the
Company and E.M. Warburg, Pincus & Co., Inc. completed the purchase of certain
assets of Nashoba Communications, a group of three limited partnerships, for a
purchase price of approximately $90,500, of which approximately $47,000 was
provided by a senior credit facility secured by the assets of such systems. The
remainder of the purchase price was provided by equity contributions and
subordinated loans from the partners in A-R Cable Partners. The Company provided
approximately $12,000 for its 30% interest in A-R Cable Partners and $1,500 in
loans.
In July 1994, Rainbow Programming purchased an additional 50% interest in
American Movie Classics Company ("AMCC") for a purchase price of approximately
$181,000, increasing Rainbow Programming's interest in AMCC to approximately
75%. The results of AMCC's operations are consolidated with those of the Company
as of the date of acquisition. The acquisition was financed with a separate
$105,000 credit facility entered into by Rainbow Programming and by borrowings
under the Company's credit agreement of approximately $76,000 which was
contributed to Rainbow Programming.
In August 1994, Cablevision MFR, Inc. ("Cablevision MFR"), a wholly-owned
subsidiary of the Company, acquired substantially all of the assets of Monmouth
Cablevision Associates, L.P. ("Monmouth Cablevision") and Riverview Cablevision
Associates, L.P. ("Riverview Cablevision") consisting of cable television
systems in New Jersey. The operations of Monmouth Cablevision and Riverview
Cablevision are consolidated with those of the Company as of the date of
acquisition. The aggregate purchase price for the two New Jersey systems was
$391,215.
26
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
Approximately $237,800 of such purchase price was financed by a senior
credit facility of newly formed subsidiaries of Cablevision MFR secured solely
by the assets of the systems. The remaining $153,415 of such purchase price was
paid with cash of approximately $12,147 and the issuance, by Cablevision MFR, of
subordinated promissory notes (the "MFR Notes") totalling $141,268 due in 1998.
Also in August 1994, Cablevision of Framingham Holdings, Inc. ("CFHI"), a
corporation owned 30% by the Company and 70% by E.M. Warburg, Pincus Investors,
L.P., acquired substantially all of the assets of Framingham Cablevision
Associates, L.P. ("Framingham Cablevision") consisting of cable television
systems in Massachusetts. The aggregate purchase price, including fees and
expenses, for Framingham Cablevision's assets was $37,517. Approximately $22,700
of the purchase price was financed by a senior credit facility of a wholly-owned
subsidiary of CFHI secured by the assets of Framingham Cablevision;
approximately $9,732 was paid by the issuance by CFHI of a promissory note,
guaranteed by the Company, due in 1998 and the remaining amount was financed by
capital contributions and loans to CFHI from its stockholders. The Company
provided a capital contribution of approximately $1,320 and $300 as a loan for
its 30% interest in CFHI.
The acquisitions of North Coast Cable, AMCC, Monmouth Cablevision and Riverview
Cablevision were accounted for as purchases whereby the acquisition costs were
allocated to the various assets acquired and liabilities assumed based upon
their respective fair values. The excess of the purchase price over the book
value of net assets acquired of these entities, aggregating $625,946, has been
allocated to the specific assets acquired based on independent appraisals as
follows:
<TABLE>
<S> <C>
Plant and equipment $ 31,200
Affiliation agreements 145,150
Franchises 362,301
Excess cost over fair value of net assets acquired 87,295
---------
$ 625,946
---------
---------
</TABLE>
27
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma condensed results of operations are presented
for the years ended December 31, 1996 and 1995 as if the acquisitions of U.S.
Cable and Cablevision of Newark had occurred on January 1, 1996 and 1995,
respectively, and as if the acquisition of Cablevision of Boston had occurred on
January 1, 1995.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1996 1995
---- ----
<S> <C> <C>
Net revenues $1,382,571 $1,236,987
---------- ----------
---------- ----------
Net loss $ (356,953) $ (365,875)
---------- ----------
---------- ----------
Net loss per common share $ (19.52) $ (15.77)
---------- ----------
---------- ----------
</TABLE>
The proforma information presented above gives effect to certain adjustments,
including the amortization of acquired intangible assets and increased interest
expense on acquisition debt. The proforma information has been prepared for
comparative purposes only and does not purport to indicate the results of
operations which would actually have occurred had the acquisitions been made at
the beginning of the periods indicated, or which may occur in the future.
DISPOSITIONS
In July 1995, Rainbow Programming sold a minority general partnership interest
in Courtroom Television Network to NBC for cash totalling $5,000. The Company
recognized a net gain of $20,662 on the sale.
In August 1995, Cablevision of Chicago ("Cablevision of Chicago"), an affiliate
of the Company, sold its cable television systems to Continental Cablevision,
Inc. The Company did not have a material ownership interest in Cablevision of
Chicago but had loans and advances outstanding to Cablevision of Chicago in the
amount of $12,346 (plus accrued interest which the Company had fully reserved).
The Company recognized a net gain of approximately $15,327 on the sale,
representing the accrued interest which the Company had reserved.
RESTRUCTURING
A-R CABLE. In 1992 the Company and A-R Cable consummated a restructuring and
refinancing transaction (the "A-R Cable Restructuring"). Among other things,
this transaction involved an
28
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
additional $45,000 investment in A-R Cable by the Company to purchase a new
Series B Preferred Stock and the purchase of a new Series A Preferred Stock in
A-R Cable by Warburg for $105,000. As a result of the A-R Cable Restructuring,
the Company no longer has financial or voting control over A-R Cable's
operations. For reporting purposes, the Company accounts for its investment in
A-R Cable using the equity method of accounting whereby the Company records 100%
of the net losses of A-R Cable since it continues to own 100% of A-R Cable's
outstanding common stock.
Included in share of affiliates' net loss in the accompanying consolidated
statements of operations for the years ended December 31, 1996, 1995 and 1994 is
$68,492, $72,257 and $67,092, respectively, representing A-R Cable's net loss
plus dividend requirements for the Series A Preferred Stock of A-R Cable, which
is not owned by the Company. Included in deficit investment in affiliates is
$504,496 and $442,940 at December 31, 1996 and 1995, respectively, representing
A-R Cable losses and external dividend requirements recorded by the Company in
excess of amounts invested by the Company therein. At December 31, 1996 and 1995
and for the years then ended, A-R Cable's total assets, liabilities (including
preferred stock) and net revenues amounted to $204,072 and $222,831; $792,564
and $738,581; $120,355 and $113,292, respectively.
The Company continues to guarantee the debt of A-R Cable to GECC under a limited
recourse guarantee wherein recourse to the Company is limited solely to the
common and Series B Preferred Stock of A-R Cable owned by the Company.
The Company manages A-R Cable under a management agreement that provides for
cost reimbursement, an allocation of overhead charges and a management fee of
3-1/2% of gross receipts, as defined, with interest on unpaid amounts thereon at
a rate of 10% per annum. The 3-1/2% fee and interest thereon is payable by A-R
Cable only after repayment in full of its senior debt and certain other
obligations. Under certain circumstances, the fee is subject to reduction to
2-1/2% of gross receipts.
During 1996 and 1995 CSC purchased additional shares of the new Series B
Preferred Stock for a cash investment of $2,025 and $3,740, respectively, and
during 1995 Warburg Pincus purchased additional shares of the new Series A
Preferred Stock for a cash investment of $210.
As described in the "Acquisitions - 1996 Acquisitions" section of this Note 2,
in May 1996, the Company entered into an agreement with Warburg to acquire from
Warburg the interests that the Company does not own in certain companies,
including A-R Cable. The A-R Cable acquisition had not been completed at
December 31, 1996 (see Note 14). After July 2, 1997, if the Company has not
completed the A-R Cable acquisition, Warburg may irrevocably cause the sale of
A-R Cable.
29
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following items, which are
depreciated or amortized primarily on a straight-line basis over the estimated
useful lives shown below:
<TABLE>
<CAPTION>
December 31,
--------------- Estimated
1996 1995 Useful Lives
---- ---- ------------
<S> <C> <C> <C>
Communication transmission
and distribution systems:
Converters ......................... $ 430,028 $ 329,091 3 to 5 years
Headends ........................... 88,386 59,320 6 to 9 years
Central office equipment ........... 35,992 26,443 10 years
Distribution systems ............... 1,416,468 1,127,836 10 to 15 years
Program, service and test
equipment ........................ 150,433 105,759 4 to 7 years
Microwave equipment ................ 6,082 5,442 7 1/2 years
Construction in progress (including
materials and supplies) .......... 124,993 74,499 --
Furniture and fixtures ................. 34,556 26,038 5 to 12 years
Transportation equipment ............... 53,854 41,352 2 to 12 years
Building and building improvements ..... 34,076 23,033 22 to 39 years
Leasehold improvements ................. 48,671 41,939 Term of lease
Land and land improvements ............. 10,458 9,118 --
---------- ---------
2,433,997 1,869,870
Less accumulated depreciation and
amortization ......................... 1,043,026 843,515
---------- ---------
$1,390,971 $1,026,355
---------- ---------
---------- ---------
</TABLE>
NOTE 4. DEBT
BANK DEBT
RESTRICTED GROUP
For financing purposes, Cablevision Systems Corporation and certain of its
subsidiaries (including Cablevision of Boston as of December 15, 1995, the Long
Island system formerly included as part of V Cable, as of April 17, 1996,
Cablevision of Newark as well as Cablevision of Monmouth, Cablevision of Hudson
and Cablevision MFR as of November 20, 1996) are collectively referred to as the
"Restricted Group". On September 5, 1996, the Restricted Group entered into a
new $1.7
30
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
billion reducing revolver credit facility (the "Credit Agreement") with
a group of banks led by Toronto-Dominion (Texas), Inc. ("Toronto-Dominion"), as
administrative and arranging agent. This Credit Agreement replaced a $1.5
billion facility that was also with a group of banks led by Toronto-Dominion.
The Credit Agreement consists of a $1.3 billion facility ("Parent Facility") and
a $400 million facility available to the Restricted Group's New Jersey systems.
Both facilities start reducing on September 30, 1999, with a final maturity of
September 30, 2005. The total amount of bank debt outstanding under the Credit
Agreement at December 31, 1996 was $977,566 ($559,244 was outstanding at
December 31, 1995 under the previous $1.5 billion credit facility). As of
December 31, 1996, approximately $16,900 was restricted for certain letters of
credit issued for the Company.
Unrestricted and undrawn funds available to the Restricted Group under the
Credit Agreement amounted to approximately $705,500 at December 31, 1996. The
Credit Agreement contains certain financial covenants that may limit the
Restricted Group's ability to utilize all of the undrawn funds available
thereunder. The Credit Agreement contains various restrictive covenants, among
which are the maintenance of various financial ratios and tests, and limitations
on various payments, including preferred dividends. The Company is restricted
from paying any dividends on its common stock. The Company was in compliance
with the covenants of its Credit Agreement at December 31, 1996.
Interest on outstanding amounts may be paid, at the option of the Company, based
on various formulas which relate to the prime rate, rates for certificates of
deposit or other prescribed rates. The Company has entered into interest rate
swap agreements with several banks on a notional amount of $160,000 as of
December 31, 1996 whereby the Company pays a fixed rate of interest and receives
a variable rate. In addition, the Company has entered into interest rate cap
agreements on a notional amount of $65,000 which limits the interest rate the
Company will pay to 8%. Interest rates and terms vary in accordance with each of
the agreements. The Company enters into interest rate swap agreements to hedge
against interest rate risk, as required by its Credit Agreement, and therefore
accounts for these agreements as hedges of floating rate debt, whereby interest
expense is recorded using the revised rate, with any fees or other payments
amortized as yield adjustments. As of December 31, 1996, the interest rate
agreements expire at various times through the year 2000 and have a weighted
average life of approximately one and one-third years. The Company is exposed to
credit loss in the event of nonperformance by the other parties to the interest
rate swap agreements; however, the Company does not anticipate nonperformance by
the counterparties. The weighted average interest rate on all bank indebtedness
was 7.2% and 8.6% on December 31, 1996 and 1995, respectively. The Company is
also obligated to pay fees of 3/8 of 1% per annum on the unused loan commitment
and from 1-3/8% to 1-5/8% per annum on letters of credit issued under the Credit
Agreement.
31
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
Substantially all of the assets of the Restricted Group, amounting to
approximately $2,278,246 at December 31, 1996, support borrowings under the
Credit Agreement.
CABLEVISION MFR
Cablevision MFR and its subsidiaries, Monmouth Cablevision and Riverview
Cablevision, were party to a credit facility with a group of banks led by
Nations Bank of Texas, N.A., as agent (the "MFR Credit Facility"). The maximum
amount available to Cablevision MFR under the MFR Credit Facility was $285,000
with a final maturity at June 30, 2003. The facility was a reducing revolving
loan, with scheduled facility reductions beginning on March 31, 1996 resulting
in a 15% reduction by December 31, 1998. As of December 31, 1995, Cablevision
MFR had outstanding bank borrowings of $195,200. On November 26, 1996, the
outstanding balance of $207,800 under the MFR credit facility was repaid from
funds borrowed under the new restricted group facility and the MFR facility was
terminated.
UNRESTRICTED CABLE
CABLEVISION OF OHIO
The Company's subsidiaries Telerama, Inc., Cablevision of the Midwest, Inc. and
Cablevision of Cleveland L.P., (collectively "Cablevision of Ohio") are party to
a credit facility entered into during 1996 with a group of banks led by
NationsBank of Texas, N.A., as agent, which consists of a nine year $425,000
reducing revolving credit facility which matures on June 30, 2005 and a nine and
one half year $75,000 term loan facility which matures on December 31, 2005. The
reducing revolving facility has scheduled facility reductions beginning in 1999.
The term loan facility requires repayments of $375 per year from 1997 through
2003 with the balance to be repaid in the final two years. As of December 31,
1996, Cablevision of Ohio had outstanding borrowings under its reducing
revolving facility of $237,189 and approximately $1,100 of outstanding letters
of credit, leaving unrestricted and undrawn funds available amounting to
approximately $186,700. Amounts outstanding under the facility bear interest at
varying rates based upon the banks base rate or LIBOR rate, as defined in the
facility. Cablevision of Ohio has entered into interest rate swap agreements
with several banks on a notional amount of $175,000 as of December 31, 1996
whereby the Company pays a fixed rate of interest and receives a variable rate.
Interest rates and terms vary in accordance with each of the agreements.
Cablevision of Ohio enters into interest rate swap agreements to hedge against
interest rate risk, and therefore accounts for these agreements as hedges of
floating rate debt, whereby interest expense is recorded using the revised rate,
with any fees or other payments amortized as yield adjustments. The interest
rate agreements expire in November 1999. Cablevision of Ohio is exposed to
credit loss in the event of nonperformance by the other parties to the interest
rate swap agreements, however, Cablevision of Ohio does not anticipate
nonperformance by the counterparties. The weighted average interest rate was
7.9% on December 31, 1996.
32
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
Substantially all of the equity interests held by the Company in Cablevision of
Ohio have been pledged to secure borrowings under the credit facility.
The Cablevision of Ohio Credit Facility contains certain financial covenants
that may limit its ability to utilize all of the undrawn funds available
thereunder, including covenants requiring Cablevision of Ohio to maintain
certain financial ratios. Cablevision of Ohio was in compliance with all
restrictive covenants of the credit facility at December 31, 1996.
U.S. CABLE
In August 1996, the Company repaid the balance of the debt owed to GECC of
approximately $154,000. The repayment of the GECC debt was financed under a new
$175,000 U.S. Cable credit facility. The credit facility is with a group of
banks led by the Bank of New York, as agent, and consists of a three year
$175,000 revolving credit facility maturing on August 13, 1999. The revolving
credit facility is payable in full upon maturity. As of December 31, 1996 U.S.
Cable had outstanding borrowings under its revolving credit facility of
approximately $159,500, leaving unrestricted and undrawn funds available
amounting to $15,500. Amounts outstanding under the facility bear interest at
varying rates based upon the banks base rate or LIBOR rate, as defined in the
loan agreement. The weighted average interest rate was 7.6 % on December 31,
1996.
Substantially all of the partnership interests held by the Company in U.S. Cable
are pledged to secure borrowings under the credit facility.
The U.S. Cable facility contains certain financial covenants that may limit its
ability to utilize all of the undrawn funds available thereunder, including
covenants requiring U.S. Cable to maintain certain financial ratios. U.S. Cable
was in compliance with all restrictive covenants of the credit facility at
December 31, 1996.
RAINBOW PROGRAMMING
In January 1995, Rainbow Programming entered into an amended and restated credit
facility for $202,000, the entire amount of which was outstanding on December
31, 1996 and 1995. The credit facility is payable in full on March 31, 1997 and
can be extended to June 30, 1997 at Rainbow Programming's option and bears
interest at varying rates based upon the banks' Base Rate or Eurodollar Rate, as
defined in the credit agreement. The loan is secured by a pledge of the
Company's stock in Rainbow Programming and is guaranteed by the subsidiaries of
Rainbow Programming as permitted. The weighted average interest rate during 1996
and 1995 was 8.9% and 8.7%, respectively. The credit agreement contains various
restrictive covenants with which Rainbow Programming was in compliance at
December 31, 1996. See Note 14.
33
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
AMERICAN MOVIE CLASSICS COMPANY
AMCC is party to a loan agreement (the "AMCC Loan Agreement") with a group of
banks (with the Toronto Dominion Bank as Lead Bank). The AMCC Loan Agreement,
which permits maximum borrowings of $34,030 and matures on June 30, 1998, is
comprised of a $19,030 term loan and a $15,000 revolver. At December 31, 1996
and 1995, there were no borrowings under the revolver and an outstanding balance
of $19,030 and $36,025, respectively under the term loan. Borrowings under the
AMCC Loan Agreement bear interest at varying rates above the Lead Bank's Base,
CD or LIBOR rate depending on the ratio of debt to cash flow, as defined in the
Loan Agreement. AMCC has entered into an interest rate swap agreement on a
notional amount of $20,000 under which AMCC pays a fixed rate and receives a
variable rate. The interest rate swap agreement expires on October 6, 1997. AMCC
is exposed to credit loss in the event of nonperformance by the other parties to
the interest rate swap agreement; however, it does not anticipate nonperformance
by the counterparties. At December 31, 1996 and 1995 the weighted average
interest rate on bank indebtedness approximated 7.0% and 6.8%, respectively.
Substantially all of the assets of AMCC, amounting to $161,931 at December 31,
1996, have been pledged to secure the borrowings under the AMCC Loan Agreement.
The AMCC Loan Agreement contains various restrictive covenants with which AMCC
was in compliance at December 31, 1996. See Note 14.
SENIOR DEBT
Under the credit agreement between V Cable, Inc. ("V Cable"), a subsidiary of
the Company, and GECC (the "V Cable Credit Agreement"), GECC had provided a term
loan (the "V Cable Term Loan") in the amount of $20,000 to V Cable. In addition,
GECC had extended to VC Holding, a subsidiary of V Cable, a $505,000 term loan
(the "Series A Term Loan), a $25,000 revolving line of credit (the "Revolving
Line") and a $202,554 term loan (the "Series B Term Loan"), all of which
comprised the VC Holding Credit Agreement. At December 31, 1995, amounts
outstanding under the V Cable Term Loan, the Series A Term Loan and the Series B
Term Loan were $801,444.
V Cable had agreed to assume, on December 31, 1997, approximately $121,000 of
debt of U.S. Cable, which amount was subject to adjustment, upward or downward,
depending on U.S. Cable's ratio of debt to cash flow (as defined) in 1997 and
thereafter. Included in Senior Debt at December 31, 1995 was $97,359,
representing the present value of debt of U.S. Cable that would have been
assumed in 1997. The effective interest rate on this debt was approximately 11%.
Amortization of deferred interest expense in connection with the assumption of
U.S. Cable's debt amounted to $4,684 in 1996, $14,047 in 1995 and $14,048 in
1994.
In February 1996, the Company entered into the GECC Agreement, as amended, which
provided for, among other things, the payment of all existing indebtedness of V
Cable and the formation of Cablevision of Ohio, which entered into a separate
$500,000 credit facility with a group of banks
34
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
(see section titled "Bank Debt - Unrestricted Cable - Cablevision of Ohio" of
this Note 4). In March 1996, approximately $500,000 of V Cable indebtedness
(which includes accrued interest) was paid with funds made available from the
proceeds of the Company's issuance of Series M Preferred Stock (see Note 5),
$209,000 was repaid from borrowings under the Cablevision of Ohio credit
facility and the remaining indebtedness of V Cable was paid from borrowings
under the Credit Agreement.
SUBORDINATED DEBENTURES
On May 16, 1996, the Company issued $150,000 principal amount ($149,422
amortized amount at December 31, 1996) of 9 7/8% Senior Subordinated Notes due
2006 (the "2006 Notes") and $250,000 principal amount of 10 1/2% Senior
Subordinated Debentures due 2016 (the "2016 Debentures"). The 2006 Notes are
redeemable at the Company's option, in whole or in part, on May 15, 2001, May
15, 2002 and May 15, 2003 at the redemption price of 104.938%, 103.292% and
101.646%, respectively, of the principal amount and thereafter at 100% of the
aggregate principal amount, in each case together with accrued interest to the
redemption date. The 2016 Debentures are redeemable at the Company's option, in
whole or in part, on May 15, 2006, May 15, 2007, May 15, 2008 and May 15, 2009,
at the redemption price of 105.25%, 103.938%, 102.625% and 101.313%,
respectively, of the principal amount and thereafter at 100% of the aggregate
principal amount, in each case together with accrued interest to the redemption
date. The indentures under which the 2006 Notes and 2016 Debentures were issued
contain various covenants, which are generally less restrictive than those
contained in the Company's Credit Agreement, with which the Company was in
compliance at December 31, 1996. The net proceeds of approximately $389,000 were
used to repay borrowings under the Company's Credit Agreement.
In November 1995, the Company issued $300,000 principal amount of 9-1/4% Senior
Subordinated Notes due 2005 (the "2005 Notes"). The 2005 Notes are redeemable at
the Company's option, in whole or in part, on November 1, 2000, November 1, 2001
and November 1, 2002 at the redemption price of 104.625%, 103.1% and 101.5%,
respectively, of the principal amount and thereafter at 100% of the principal
amount, in each case together with accrued interest to the redemption date. The
indenture under which the 2005 Notes were issued contains various covenants,
which are generally less restrictive than those contained in the Company's
Credit Agreement, with which the Company was in compliance at December 31, 1996.
The net proceeds of approximately $292,500 were used to reduce bank borrowings.
In February 1993, the Company issued $200,000 face amount ($198,993 and $198,930
amortized amounts at December 31, 1996 and 1995, respectively) of its 9-7/8%
Senior Subordinated Debentures due 2013 (the "2013 Debentures"). The 2013
Debentures are redeemable, at the Company's option, on February 15, 2003,
February 15, 2004, February 15, 2005 and February 15, 2006 at the redemption
price of 104.80%, 103.60%, 102.40% and 101.20%, respectively, of the principal
amount and thereafter at the redemption price of 100% of the principal amount,
in each
35
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
case together with accrued interest to the redemption date. The indenture under
which the 2013 Debentures were issued contains various covenants, which are
generally less restrictive than those contained in the Company's Credit
Agreement, with which the Company was in compliance at December 31, 1996.
Also in 1993, the Company issued $150,000 face amount ($149,690 and $149,678
amortized amounts at December 31, 1996 and 1995, respectively) of its 9-7/8%
Senior Subordinated Debentures due 2023 (the "2023 Debentures"). The 2023
Debentures are redeemable, at the Company's option, on and after April 1, 2003
at the redemption price of 104.938% reducing ratably to 100% of the principal
amount on and after April 1, 2010, in each case together with accrued interest
to the redemption date. The indenture under which the 2023 Debentures were
issued contains various covenants, which are generally less restrictive than
those contained in the Company's Credit Agreement, with which the Company was in
compliance at December 31, 1996.
In April 1992, the Company issued $275,000 of its 10-3/4% Senior Subordinated
Debentures due 2004 (the "2004 Debentures"). The 2004 Debentures are redeemable,
at the Company's option, on April 1, 1997 and April 1, 1998 at the redemption
price of 103.071% and 101.536%, respectively, of the principal amount, and on
April 1, 1999 and thereafter at the redemption price of 100% of the principal
amount, in each case together with accrued interest to the redemption date. The
Indenture under which the 2004 Debentures were issued contains various
covenants, which are generally less restrictive than those contained in the
Company's Credit Agreement, with which the Company was in compliance at December
31, 1996. The Indenture requires a sinking fund providing for the redemption on
April 1, 2002 and April 1, 2003 of $68,750 principal amount of the 2004
Debentures, at a redemption price equal to 100% of the principal amount, plus
accrued interest to the redemption date.
SUBORDINATED NOTES PAYABLE
In connection with the acquisition of Monmouth Cablevision and Riverview
Cablevision, in August 1994, Cablevision MFR issued promissory notes totalling
$141,268, due in 1998, which bear interest at 6% until the third anniversary and
8% thereafter (increasing to 8% and 10% respectively, if interest is paid in
shares of the Company's Class A Common Stock). Principal and interest on the
notes is payable, at Cablevision MFR's election, in cash or in shares of the
Company's Class A Common Stock. The promissory notes are guaranteed by the
Company and the obligations under the guarantee rank pari passu with the
Company's subordinated debentures. In certain circumstances, Cablevision MFR may
extend the maturity date of the promissory notes until 2003 for certain
additional consideration.
36
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
SUMMARY OF FIVE YEAR DEBT MATURITIES
Total amounts payable by the Company and its subsidiaries under its various debt
obligations, including capital leases, during the five years subsequent to
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Restricted Cablevision U.S. Rainbow
Group Ohio Cable Programming AMCC Total
---------- ----------- --------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1997 $ 3,691 $451 $ - $202,008 $12,980 $219,130
1998 143,935 451 - - 6,050 150,436
1999 996 451 159,460 - - 160,907
2000 270 400 - - - 670
2001 40,550 375 - - - 40,925
</TABLE>
NOTE 5. PREFERRED STOCK
In February 1996, the Company issued 6,500,000 depositary shares, representing
65,000 shares of 11-1/8% Series L Redeemable Exchangeable Preferred Stock (the
"Series L Preferred Stock") with a liquidation preference of $650,000, which
were subsequently exchanged for Series M Redeemable Exchangeable Preferred Stock
on August 2, 1996 with terms identical to the Series L Preferred. Net proceeds
were approximately $626,000. The depositary shares are exchangeable, in whole
but not in part, at the option of the Company, on or after April 1, 1996, for
the Company's 11-1/8% Senior Subordinated Debentures due 2008. The Company is
required to redeem the Series M Preferred Stock on April 1, 2008 at a redemption
price equal to the liquidation preference of $10,000 per share plus accumulated
and unpaid dividends. The Series M Preferred Stock is redeemable at various
redemption prices beginning at 105.563% at any time on or after April 1, 2003,
at the option of the Company, with accumulated and unpaid dividends thereon to
the date of redemption. Before April 1, 2001, dividends may, at the option of
the Company, be paid in cash or by issuing fully paid and nonassessable shares
of Series M Preferred stock with an aggregate liquidation preference equal to
the amount of such dividends. On and after April 1, 2001, dividends must be paid
in cash. The Company satisfied its dividend requirements by issuing 6,576
additional shares of Series M Preferred Stock in 1996.
In November 1995, the Company issued 13,800,000 depositary shares representing
1,380,000 shares of 8-1/2% Series I Cumulative Convertible Exchangeable
Preferred Stock (the "Series I Preferred Stock") with an aggregate liquidation
preference of $345,000. The depositary shares are convertible into shares of the
Company's Class A Common Stock, at any time after January 8, 1996 at the option
of the holder, at an initial conversion price of $67.44 per share of Class A
Common Stock subject to adjustment under certain conditions. The Series I
Preferred Stock is exchangeable into 8-1/2% Convertible Subordinated Debentures
due 2007, at the option of the Company, in whole but not in part, on or after
January 1, 1998 at a rate of $25.00 principal amount of exchange
37
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
debentures for each depositary share. The Series I Preferred Stock is redeemable
at the option of the Company, in whole or in part, on November 1, 1999, November
1, 2000, and November 1, 2001 and thereafter at 102.8%, 101.4% and 100.0%,
respectively, of the principal amount plus accrued and unpaid dividends thereon.
The net proceeds of the Series I Preferred Stock of approximately $334,200 were
used to repay bank borrowings. The Company paid a cash dividend of approximately
$29,325 in 1996 and $4,399 in 1995.
In September 1995, the Company issued 2,500,000 shares of its $.01 par value
11-3/4% Series H Redeemable Exchangeable Preferred Stock (the "Series H
Preferred Stock") with an aggregate liquidation preference of $100 per share.
The Company is required to redeem the Series H Preferred Stock on October 1,
2007 at a redemption price per share equal to the liquidation preference of $100
per share, plus accrued and unpaid dividends thereon. Before October 1, 2000,
dividends may, at the option of the Company, be paid in cash or by issuing fully
paid and nonassessable shares of Series H Preferred Stock with an aggregate
liquidation preference equal to the amount of such dividends. On and after
October 1, 2000, dividends must be paid in cash. The terms of the Series H
Preferred Stock permit the Company, at its option, after January 1, 1996, to
exchange the Series H Preferred Stock for the Company's 11-3/4% Senior
Subordinated Debentures due 2007 in an aggregate principal amount equal to the
aggregate liquidation preference of the shares of Series H Preferred Stock. The
net proceeds of approximately $239,300 were used to repay bank debt. The Company
satisfied its dividend requirements by issuing 317,549 and 77,510 additional
shares of Series H Preferred Stock in 1996 and 1995, respectively.
The holders of the Company's 8% Series C Cumulative Preferred Stock ("Series C
Preferred Stock") may require the Company to redeem for cash at any time
commencing December 31, 1997 all or a portion of the outstanding shares of the
Series C Preferred Stock. The Company has the right, upon notice to the holders
requesting redemption, to convert all or a part of such shares into shares of
Class B Common Stock. If, in the future, holders require the Company to redeem
their Series C Preferred Stock, it is the Company's intention to convert such
shares into Class B Common Stock. The Company paid cash dividends on the Series
C Preferred Stock during each of 1996 and 1995 of $885.
38
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
NOTE 6. INCOME TAXES
The Company and its majority-owned subsidiaries file consolidated federal income
tax returns. At December 31, 1996 the Company had consolidated net operating
loss carry forwards for tax purposes of approximately $1,222,876 , which expire
between 2002 and 2011.
The tax effects of temporary differences which give rise to significant portions
of deferred tax assets or liabilities and the corresponding valuation allowance
at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
DEFERRED ASSET (LIABILITY)
Depreciation and amortization $ (3,154) $ (45,358)
Receivables from affiliates (8,221) 19,179
Benefit plans 11,951 11,025
Allowance for doubtful accounts 5,228 5,202
Deficit investment in affiliate 251,639 226,662
Benefits of tax loss carry forwards 513,608 429,906
Other 2,462 2,180
--------- ---------
Net deferred tax assets 773,513 648,796
Valuation allowance (773,513) (648,796)
--------- ---------
$ - $ -
--------- ---------
--------- ---------
</TABLE>
The Company has provided a valuation allowance for the total amount of net
deferred tax assets since realization of these assets was not assured due
principally to the Company's history of operating losses.
NOTE 7. OPERATING LEASES
The Company leases certain office, production and transmission facilities under
terms of leases expiring at various dates through 2012. The leases generally
provide for fixed annual rentals plus certain real estate taxes and other costs.
Rent expense for the years ended December 31, 1996, 1995 and 1994 amounted to
$22,195, $16,823 and $12,036, respectively.
In addition, the Company rents space on utility poles for its operations. The
Company's pole rental agreements are for varying terms, and management
anticipates renewals as they expire. Pole rental expense for the years ended
December 31, 1996, 1995 and 1994 amounted to approximately $8,585, $7,790 and
$6,947, respectively. The minimum future annual rentals for all operating
39
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
leases during the next five years, including pole rentals from January 1, 1997
through December 31, 2001, and thereafter, at rates now in force are
approximately: 1997, $24,466; 1998, $20,636; 1999, $19,149; 2000, $17,709; 2001,
$14,302; thereafter, $18,871.
NOTE 8. AFFILIATE TRANSACTIONS
The Company has affiliation agreements with certain cable television programming
companies, including MSG Holdings, varying ownership interests in which were
held, directly or indirectly, by Rainbow Programming during the three years
ended December 31, 1996. Rainbow Programming's investment in these programming
companies is accounted for on the equity method of accounting. Accordingly, the
Company recorded losses of approximately $(8,018), $(9,930) and $(1,007) in
1996, 1995 and 1994, respectively, representing its percentage interests in the
results of operations of these programming companies. Such amounts include
$4,304 for 1994 of the Company's share of the net income of AMCC prior to its
consolidation with the Company in July 1994. In addition, such amounts include
$(3,293) and $(175) for 1995 and 1994, respectively, of the Company's share of
net losses in SportsChannel New York and Rainbow News 12 prior to their
consolidation with the Company in July 1995. At December 31, 1996 and 1995, the
Company's investment in these programming companies amounted to approximately
$277,241 and $134,969, respectively. Costs incurred by the Company for
programming services provided by these non-consolidated affiliates and included
in technical expense for the years ended December 31, 1996, 1995 and 1994
amounted to approximately $37,610, $37,756 and $20,232, respectively. At
December 31, 1996 and 1995, amounts due from certain of these programming
affiliates aggregated $63 and $584, respectively, and are included in advances
to affiliates. Also, at December 31, 1996 and 1995 amounts due to certain of
these affiliates, primarily for programming services provided to the Company,
aggregated $14,012 and $12,607, respectively, and are included in accounts
payable to affiliates.
Summarized combined financial information relating to these programming
companies at December 31, 1996, 1995 and 1994 and for the years then ended is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- -------
<S> <C> <C> <C>
Current assets $ 101,901 $ 73,232 $ 97,184
--------- --------- --------
--------- --------- --------
Noncurrent assets $ 54,116 $ 47,387 $ 33,815
--------- --------- --------
--------- --------- --------
Current liabilities $ 77,793 $ 59,451 $ 64,000
--------- --------- --------
--------- --------- --------
Noncurrent liabilities $ 23,984 $ 16,490 $ 6,257
--------- --------- --------
--------- --------- --------
Net revenues $ 269,542 $ 240,518 $270,676
--------- --------- --------
--------- --------- --------
Net income (loss) $ (13,943) $ (5,490) $ 3,473
--------- --------- --------
--------- --------- --------
</TABLE>
In 1992 the Company acquired from Mr. Dolan substantially all of the interests
in Cablevision of New York City ("CNYC") that it did not previously own. Mr.
Dolan remains a 1% partner in
40
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
CNYC and is entitled to certain preferential payments. Mr. Dolan's preferential
rights entitle him to an annual cash payment (the "Annual Payment") of 14%
multiplied by the outstanding balance of his "Minimum Payment". The Minimum
Payment is $40,000 and is to be paid to Mr. Dolan prior to any distributions to
partners other than Mr. Dolan. In addition, Mr. Dolan has the right, exercisable
beginning on December 31, 1997, to require the Company to purchase his interest.
Mr. Dolan would be entitled to receive from the Company the Minimum Payment, any
accrued but unpaid Annual Payments, a guaranteed return on certain of his
investments in CNYC and a Preferred Payment defined as a payment (not exceeding
$150,000) equal to 40% of the Appraised Equity Value (as defined) of CNYC after
making certain deductions. Based upon estimates for accounting purposes of the
Appraised Equity Value of CNYC made by the Company, the maximum amount of the
Preferred Payment was accrued during 1992 through 1994 as an additional
obligation to Mr. Dolan relating to the Company's purchase of CNYC, which has
also been charged to par value in excess of capital contributed. The total
amount owed to Mr. Dolan at December 31, 1996 of approximately $192,819 in
respect of the Preferred Payment, the Minimum Payment and the Annual Payment
reflects a reduction of approximately $4,081 at December 31, 1996 representing
Mr. Dolan's obligation to reimburse the Company in connection with certain
claims paid or owed by CNYC.
During 1996, 1995 and 1994, the Company made advances to or incurred costs on
behalf of other affiliates engaged in providing cable television, cable
television programming, and related services. Amounts due from these affiliates
amounted to $7,792 and $6,325 at December 31, 1996 and 1995, respectively and
are included in advances to affiliates.
In September 1996, the Company acquired the interests in Cablevision of Newark
that it did not previously own from an affiliate of Warburg. The Company's share
of the net losses of Cablevision of Newark prior to its consolidation amounted
to $844, $2,957 and $3,631 in 1996, 1995 and 1994, respectively.
In connection with its 30% interest in A-R Cable Partners (see note 2), the
Company recorded its share of the losses of A-R Cable Partners amounting to
$3,184 and $3,505 for 1996 and 1995 and $1,886 for the period from acquisition
through December 31, 1994.
Also, in connection with its 30% interest in CFHI (see note 2), the Company
recorded its share of the losses of CFHI amounting to $1,490 and $1,535 for 1996
and 1995 and $654 from the date of acquisition through December 31, 1994.
The Company manages the operations of A-R Cable, A-R Cable Partners, CFHI (and
the operations of Cablevision of Newark through September 1996) for a fee equal
to 3-1/2% of gross receipts, as defined, plus reimbursement of certain costs and
an allocation of certain selling, general and administrative expenses. In
certain cases, interest is charged on unpaid amounts. For 1996, 1995 and 1994,
such management fees, expenses and interest amounted to approximately $12,436,
41
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
$11,531 and $9,457, respectively, of which $7,724, $6,918 and $5,536,
respectively, were reserved by the Company.
The Company managed the properties of U.S. Cable, until its acquisition in
August 1996, under management agreements that provided for cost reimbursement,
including an allocation of overhead charges. For 1996, 1995 and 1994, such cost
reimbursement amounted to $2,396, $3,538 and $3,344, respectively, which
included an allocation of overhead charges of $1,829, $2,881 and $2,720,
respectively.
On August 23, 1996, the Company entered into an agreement with Northcoast
Operating Co., Inc. ("Northcoast") and certain of its affiliates, to form a
limited liability company (the "LLC") to participate in the auctions conducted
by the Federal Communications Commission ("FCC") for certain licenses to conduct
a personal communications service ("PCS") business. The Company has contributed
an aggregate of approximately $31,000 to the LLC (either directly or through a
loan to Northcoast) and holds a 49.9% interest in the LLC and certain
preferential distribution rights. Northcoast is a Delaware corporation
controlled by John Dolan. John Dolan is a nephew of Charles F. Dolan and a
cousin of James Dolan.
NOTE 9. BENEFIT PLANS
The Company maintains the CSSC Supplemental Benefit Plan (the "Benefit Plan")
for the benefit of certain officers and employees of the Company. As part of the
Benefit Plan, the Company established a nonqualified defined benefit pension
plan, which provides that, upon attaining normal retirement age, a participant
will receive a benefit equal to a specified percentage of the participant's
average compensation, as defined. All participants are 100% vested in the
Benefit Plan. Net periodic pension cost for the years ended December 31, 1996,
1995 and 1994 amounted to $(25), $(9) and $103, respectively. At December 31,
1996 and 1995, the fair value of Benefit Plan assets exceeded the projected
benefit obligation by approximately $2,537 and $2,119, respectively.
In addition, the Company accrues a liability in the amount of 7% of certain
officers' and employees' compensation, as defined. Each year the Company also
accrues for the benefit of these officers and employees interest on such
amounts. The officer or employee will receive such amounts upon termination of
employment. All participants are 100% vested in this plan. The cost associated
with this plan for the years ended December 31, 1996, 1995 and 1994 was
approximately $400, $495 and $337, respectively.
The Company also maintains a pension plan and a 401(k) savings plan
(collectively, the "Plan"), pursuant to which the Company contributes 1-1/2% of
eligible employees' annual compensation, as defined, to the defined contribution
pension portion of the Plan and an equivalent amount to the Section 401(k)
portion of the Plan. The Company also makes matching contributions for employee
42
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
voluntary contributions to the 401(k) portion of the Plan. The cost associated
with the Plan was approximately $5,565 and $4,287 and $3,125 for the years ended
December 31, 1996, 1995 and 1994, respectively.
NOTE 10. STOCK BENEFIT PLANS
On June 19, 1996 the Company's shareholders approved the First Amended and
Restated 1996 Employee Stock Plan, as amended, (the "1996 Plan"), under which
the Company is authorized to issue a maximum of 1,500,000 shares. Under the 1996
Plan, the Company is able to grant incentive stock options, nonqualified stock
options, restricted stock, conjunctive and alternative stock appreciation
rights, stock grants and stock bonus awards. The other terms of the 1996 Plan
are substantially identical to those of the Company's Employee Stock Plan
(described below) except that under the 1996 Plan the Compensation Committee has
the authority, in its discretion, to add performance criteria as a condition to
any employee's exercise of an award granted under the 1996 Plan.
Under the 1996 Plan the Company issued options to purchase 548,555 shares of
Class A Common Stock, stock appreciation rights related to 548,555 shares under
option and 92,100 bonus award shares. The options and related conjunctive stock
appreciation rights are exercisable at various prices ranging from $47.875 to
$49.50 per share and vest in either 25% or 33 1/3% annual increments beginning
from the date of the grant. The bonus awards vest primarily over a four year
period.
Previously, the Company maintained an Employee Stock Plan (the "Stock Plan")
under which the Company was authorized to issue a maximum of 3,500,000 shares.
Pursuant to its terms, no awards could be granted under the Stock Plan after
December 5, 1995. The Company granted under the Stock Plan incentive stock
options, nonqualified stock options, restricted stock, conjunctive stock
appreciation rights, stock grants and stock bonus awards. The exercise price of
stock options could not be less than the fair market value per share of class A
common stock on the date the option was granted and the options could expire no
longer than ten years from date of grant. Conjunctive stock appreciation rights
permit the employee to elect to receive payment in cash, either in lieu of the
right to exercise such option or in addition to the stock received upon the
exercise of such option, equal to the difference between the fair market value
of the stock as of the date the right is exercised, and the exercise price.
Under the Stock Plan, during 1995 the Company issued options to purchase 56,950
shares of Class A common stock, stock appreciation rights related to 56,950
shares under option and stock awards of 11,350 common shares. The options and
related conjunctive stock appreciation rights are exercisable at prices ranging
from $50.00 to $56.50 per share and vest in 25% and 33-1/3% annual increments
beginning from the date of grant. The stock awards vest 100% in May 1999.
43
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
Under the Stock Plan, during 1994 the Company issued options to purchase 525,400
shares of Class A common stock, stock appreciation rights related to 525,400
shares under option and stock awards of 68,400 common shares. Of the options and
related conjunctive stock appreciation rights, 95,400 are exercisable at $42.00
per share and vest in 25% annual increments beginning from the date of grant and
430,000 options and conjunctive rights are exercisable at $56.50 per share and
are currently vested. The stock awards vest 100% in May 1998.
In January 1996, three employees exercised stock appreciation rights on 213,750
shares. The closing market price on December 29, 1995 of $54.25 with an exercise
price of $16.625 resulted in a total cash payment of approximately $8,042,000.
Two-thirds was paid at the time of exercise and the balance in October 1996.
In November 1994, the Company entered into agreements with three employees to
pay the value, as of that date, of options exercised with respect to 405,000
shares of the Company's Class A Common Stock, and to replace those options with
a combination of stock appreciation rights and newly issued options, with the
exercise price set at the market price of such stock on that date. In accordance
with the agreement, one-third of the value of the exercised options was paid in
cash with the remaining portion paid in November, 1995. Accordingly, the Company
recorded expense related to the purchase of these options amounting to $13,215
in 1994, representing the cash payment of approximately $4,673 and a liability
for future payments.
At December 31, 1996, options for approximately 668,907 shares were exercisable.
As a result of stock awards, bonus awards, stock appreciation rights and the
expensing of the cash payment made for certain executive stock options, the
Company recorded (income)/expense of approximately $(8,558), $7,757 and $6,814
in 1996, 1995 and 1994, respectively. The yearly amounts reflect vesting
schedules for applicable grants as well as fluctuations in the market price of
the Company's Class A Common Stock.
The Company applies APB 25 and related interpretations in accounting for its
various stock option plans. Had compensation cost been recognized consistent
with Statement of Financial Accounting Standards No. 123, for options granted in
1995 and 1996, net loss would have increased by $4,191 in 1996 and by an
insignificant amount in 1995. There was no material impact on net loss per
share.
The per share weighted average value of stock options issued by the Company
during 1996 and 1995, as determined by the Black-Scholes option pricing model,
was $19.41 and $21.55, respectively, on the date of grant. In 1996 and 1995, the
assumptions of no dividends, expected volatility of 34%, and an expected life of
five years were used by the Company in determining the value of stock options
granted by the Company. In addition, the calculations assumed a risk free
interest rate of approximately 6.7% in each period.
44
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
Pro forma net loss reflects only options granted in 1996 and 1995. Therefore,
the full impact of calculating compensation cost for stock options under SFAS
123 is not reflected in the pro forma net loss amounts discussed above because
compensation cost is calculated over the options' vesting periods and
compensation costs for options granted prior to January 1, 1995 are not
considered. Stock transactions under the Stock Plan and the 1996 Plan are as
follows:
<TABLE>
<CAPTION>
Shares Stock
Under Appreciation Stock Available Option
Option Rights Awards For Grant Price Range
------ ------ ------ --------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 1,734,695 854,945 325,650 151,343 $14.50-$38.25
Granted 525,400 525,400 68,400 (593,800) $42.00-$56.50
Exercised/issued (358,528) (161,952) (48,430) -- $14.50-$36.00
Cancelled (434,390) (59,866) (109,241) 543,631 $16.63-$42.00
--------- --------- -------- -------
Balance, December 31, 1994 1,467,177 1,158,527 236,379 101,174 $14.50-$56.50
Granted 56,950 56,950 11,350 (68,300) $50.00-$56.50
Exercised/issued (418,102) (55,764) 17,302 - $14.50-$42.00
Cancelled (40,343) (32,026) (115,231) 155,574 $16.63-$42.00
--------- --------- -------- -------
Balance, December 31, 1995 1,065,682 1,127,687 149,800 - $14.50-$56.50
1996 Stock Plan 1,500,000
Granted 548,555 548,555 92,100 (640,655) $47.88-$49.50
Exercised/issued (187,141) (238,641) (147,444) - $14.50-$42.00
Cancelled-Stock Plan (44,142) (21,797) (6,206) - $24.50-$52.13
Cancelled-1996 Plan (9,800) (9,800) (300) 10,100 $49.50
--------- --------- -------- -------
Balance, December 31, 1996 1,373,154 1,406,004 87,950 869,445
--------- --------- -------- -------
--------- --------- -------- -------
</TABLE>
The following table summarizes significant ranges of outstanding and exercisable
options at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Ranges of Remaining Exercise Exercise
Exercise Prices Shares Life in Years Price Shares Price
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 21.25 - 29.875 275,660 4.4 $25.94 275,660 $25.94
32.75 - 42.00 345,889 7.5 40.46 162,939 41.11
47.875 - 52.125 536,605 9.4 49.68 15,308 51.55
56.50 215,000 7.8 56.50 215,000 56.50
</TABLE>
45
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES
The Company, through Rainbow Programming, has entered into several contracts
with professional and other sports teams relating to cable television
programming including rights agreements. Amounts payable under these contracts
during the five years subsequent to December 31, 1996 amount to $50,687 in 1997,
$50,724 in 1998, $50,476 in 1999, $53,112 in 2000 and $55,018 in 2001.
In addition, Rainbow Programming has guaranteed rights payments to several
professional sports teams relating to certain affiliated sports programming
companies. Amounts guaranteed on behalf of such affiliated sports programming
companies during the five years subsequent to December 31, 1996 amount to $9,133
in 1997, $3,681 in 1998, $2,846 in 1999, $340 in 2000 and $340 in 2001.
The Company and its cable television affiliates have an affiliation agreement
with a program supplier whereby the Company is obligated to make Base Rate
Annual Payments, as defined and subject to certain adjustments pursuant to the
agreement, through 2004. The Company would be contingently liable for its
proportionate share of Base Rate Annual Payments, based on subscriber usage, of
approximately $12,714 in 1997; $13,158 in 1998; $13,617 in 1999 and for the
years 2000 through 2004. Such payments would increase by percentage increases in
the Consumer Price Index, or five percent, whichever is less, over the prior
year's Base Rate Annual Payment.
The Company does not provide post-retirement benefits to any of its employees.
NOTE 12. OTHER MATTERS
The Company is party to various lawsuits, some involving substantial amounts.
Management does not believe that the resolution of these lawsuits will have a
material adverse impact on the financial position of the Company.
The Company recorded a one time charge of $4,306 during 1994 to provide for
severance and related costs, attributable entirely to terminated employees,
resulting from a restructuring of its operations. Substantially all of such
amounts were paid during 1994.
NOTE 13. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH AND CASH EQUIVALENTS, TRADE ACCOUNTS RECEIVABLE, NOTES AND OTHER
RECEIVABLES, PREPAID EXPENSES AND OTHER ASSETS, ACCOUNTS PAYABLE, ACCRUED
LIABILITIES, ACCOUNTS PAYABLE TO AFFILIATES, FEATURE FILM RIGHTS PAYABLE AND
OBLIGATION TO RELATED PARTY
46
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
The carrying amount approximates fair value due to the short maturity of these
instruments.
BANK DEBT, SENIOR DEBT, SUBORDINATED DEBENTURES, SUBORDINATED NOTES PAYABLE AND
REDEEMABLE EXCHANGEABLE PREFERRED STOCK
The fair values of each of the Company's long-term debt instruments and
redeemable preferred stock are based on quoted market prices for the same or
similar issues or on the current rates offered to the Company for instruments of
the same remaining maturities.
INTEREST RATE SWAP AND CAP AGREEMENTS
The fair values of interest rate swap and cap agreements are obtained from
dealer quotes. These values represent the estimated amount the Company would
receive or pay to terminate agreements, taking into consideration current
interest rates and the current creditworthiness of the counterparties.
The fair value of the Company's financial instruments are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996
----------------------------
Carrying Estimated
Amount Fair Value
-------- ----------
<S> <C> <C>
Long term debt instruments:
Bank debt $1,670,245 $1,670,245
Subordinated debentures 1,323,105 1,330,438
Subordinated notes payable 141,268 136,000
Redeemable exchangeable preferred stock 1,005,265 1,195,981
---------- ----------
$4,139,883 $4,332,664
---------- ----------
---------- ----------
Interest rate swap and cap agreements:
In a net payable position $ - $ 4,238
---------- ----------
---------- ----------
December 31, 1995
---------------------------
Carrying Estimated
Amount Fair Value
--------- ----------
Long term debt instruments:
Bank debt $ 992,469 $ 992,469
Senior debt 898,803 898,803
Subordinated debentures 923,608 972,125
Subordinated notes payable 141,268 135,400
Redeemable exchangeable preferred stock 257,751 266,772
---------- ----------
$3,213,899 $3,265,569
---------- ----------
---------- ----------
Interest rate swap and cap agreements:
In a net payable position $ - $ 11,055
---------- ----------
---------- ----------
</TABLE>
47
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
NOTE 14. SUBSEQUENT EVENTS
On February 18, 1997, Rainbow Programming made a payment to ITT of $168,750 plus
interest, fully equalizing its interest in MSG Holdings, and bringing the total
of such payments to $360,000, plus interest payments aggregating $47,700. On
March 6, 1997 Rainbow Programming entered into letter of intent (the "March 1997
Letter") with ITT to acquire a majority interest in the equity of MSG Holdings.
The March 1997 Letter is a nonbinding letter of intent and is not an agreement
to enter into a formal contract with respect to such transaction.
In February 1997, the Company made a nonrefundable deposit of $30,000 in partial
payment of the purchase price under the Warburg Agreement. Acquisition of the
remaining interests in the Warburg Companies that the Company does not already
own is expected to close in July 1997.
On April 1, 1997, Rainbow Media Holdings, Inc. ("Rainbow Media") consummated a
transaction in which Rainbow Programming Holdings, Inc. merged with and into
Rainbow Media, a newly formed subsidiary of the Company. In addition, NBC
received a 25% equity interest (which interest may be increased up to 27% under
certain circumstances) in non-voting Class C common stock of Rainbow Media. The
company owns the remaining 75% equity interest in Rainbow Media. The partnership
interests in certain of Rainbow Media's programming services formerly owned by
NBC are now owned by subsidiaries of Rainbow Media.
Rainbow Media has executed a new $300 million three year credit facility
with Canadian Imperial Bank of Commerce and Toronto-Dominion (Texas), Inc. as
co-agents, and a group of banks. The actual closing of the credit facility was
subject to several conditions having been satisfied. Those conditions have now
been satisfied and the closing of the new facility is anticipated shortly. Upon
closing, approximately $172 million is expected to be drawn to refinance, in
part, the previous $202 million credit facility. The balance of the funds
utilized to fully repay the $202 million facility and to repay $169 million to
the Restricted Group will come from a distribution by American Movie Classics
Company. This distribution will be provided by funds made available under a new
$250 million, seven year revolving credit and term loan facility maturing in
2004 and closing concurrently with the Rainbow Media credit facility. The
Rainbow Media three year revolving credit facility matures on March 31, 2000 and
is payable in full on such date. The funds available under the credit facility
will be used to finance working capital requirements and general corporate
purposes. The credit facility contains certain financial covenants that may
limit its ability to utilize all of the undrawn funds available thereunder,
including covenants requiring Rainbow Media to maintain certain financial
ratios.
48
<PAGE>
CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(continued)
NOTE 15. INTERIM FINANCIAL INFORMATION (Unaudited)
The following is a summary of selected quarterly financial data for the years
ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
-------------------- --------------------- ------------------ --------------------
1996 1995 1996 1995 1996 1995 1996 1995
-------- -------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ...............$ 304,165 $ 245,401 $ 320,331 $ 263,734 $ 331,122 $ 278,158 $ 359,524 $ 290,767
Operating expenses ..... 286,272 231,696 292,915 252,695 302,570 249,603 358,973 264,623
--------- --------- --------- --------- --------- --------- --------- ---------
Operating profit
(loss) ...............$ 17,893 $ 13,705 $ 27,416 $ 11,039 $ 28,552 $ 28,555 $ 551 $ 26,144
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Net loss applicable to
common shareholders ..$(100,680) $(100,973) $(117,969) $ (99,384) $(106,931) $ (44,033) $(134,279) $ (93,317)
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Net loss per common
share ................$ (4.06) $ (4.27) $ (4.75) $ (4.18) $ (4.31) $ (1.85) $ (5.40) $ (3.88)
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
TOTAL
---------------------
1996 1995
-------- ------
<S> <C> <C>
Revenues ...............$ 1,315,142 $ 1,078,060
Operating expenses ..... 1,240,730 998,617
----------- -----------
Operating profit
(loss) ...............$ 74,412 $ 79,443
----------- -----------
----------- -----------
Net loss applicable to
common shareholders ..$ (459,859) $ (337,707)
----------- -----------
----------- -----------
Net loss per common
share ................$ (18.52) $ (14.17)
----------- -----------
----------- -----------
</TABLE>
49
