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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1993
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to .
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Commission File Number: 1-9046
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Cablevision Systems Corporation
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(Exact name of registrant as specified in its charter)
Delaware 11-2776686
- ----------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Media Crossways, Woodbury, New York 11797
- --------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 364-8450
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Securities registered pursuant to Section 12(b)
of the Act:
Title of each class: Class A Common Stock
Name of each exchange on which registered: American Stock Exchange
Securities registered pursuant to Section 12(g)
of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
-------
Aggregate market value of voting stock held by nonaffiliates of the registrant
based on the closing price at which such stock was sold on the American Stock
Exchange on March 28, 1994: $554,603,787
Number of shares of common stock outstanding as of March 28, 1994:
Class A Common Stock - 10,892,922
Class B Common Stock - 12,411,532
Documents incorporated by reference - The Company intends to file with the
Securities and Exchange Commission, not later than 120 days after the close of
its fiscal year, a definitive proxy statement or an amendment on Form 8 to this
report containing the information required to be disclosed under Part III of
Form 10-K.
Exhibits 3.1B, 3.1C, 10.44C, 10.56 and 10.57 have been omitted.
TABLE OF CONTENTS
Page
----
Part I
- ------
Item 1. Business. 3
2. Properties. 31
3. Legal Proceedings. 31
4. Submission of Matters to a Vote of
Security Holders. 31
Part II
- --------
5. Market for the Registrant's Common Equity
and Related Stockholder Matters. 32
6. Selected Financial Data. 33
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 35
8. Consolidated Financial Statements. 50
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. 87
Part III
- ---------
10. Directors and Executive Officers of the *
Registrant.
11. Executive Compensation. *
12. Security Ownership of Certain Beneficial
Owners and Management. *
13. Certain Relationships and Related
Transactions. *
Part IV
- --------
14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K. 87
* These items are omitted because the registrant intends to file
with the Securities and Exchange Commission, not later than 120
days after the close of its fiscal year, a definitive proxy
statement or an amendment on Form 8 to this report containing the
information required to be disclosed under Part III of Form 10-K.
(2)
PART I
ITEM 1. BUSINESS
THE COMPANY
Cablevision Systems Corporation, a Delaware corporation and its majority owned
subsidiaries (the "Company") own and operate cable television systems in six
states with approximately 1,379,000 subscribers at December 31, 1993. The
Company also has ownership interests in and/or manages other cable television
systems which served an aggregate of approximately 853,000 subscribers at
December 31, 1993 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.
Cable television is a service that delivers multiple channels of television
programming to subscribers who pay a monthly fee for the services they receive.
Television and radio signals are received over-the-air or via satellite delivery
by antennas, microwave relay stations and satellite earth stations and are
modulated, amplified and distributed over a network of coaxial and fiber optic
cable to the subscribers' television sets. Cable television systems typically
are constructed and operated pursuant to non-exclusive franchises awarded by
local governmental authorities for specified periods of time.
The Company's cable television systems offer varying levels of service which may
include, among other programming, local broadcast network affiliates and
independent television stations, satellite-delivered "superstations" such as
WTBS (Atlanta), certain other news, information and entertainment channels such
as Cable News Network ("CNN"), CNBC, ESPN and MTV: Music Television and certain
premium services such as HBO, Showtime, The Movie Channel and Cinemax.
The Company's cable television revenues are derived principally from monthly
fees paid by subscribers. In addition to recurring subscriber revenues, the
Company derives revenues from installation charges, from the sales of
pay-per-view movies and events, and from the sale of advertising time on
advertiser supported programming. Certain services and equipment provided by
substantially all of the Company's cable television systems are subject to
regulation. See "Business - Cable Television Operations - Regulation - 1992
Cable Act."
For financing purposes, the Company is structured as a restricted group,
consisting of Cablevision Systems Corporation and certain of its subsidiaries
(the "Restricted Group"), and an unrestricted group of subsidiaries, consisting
primarily of V Cable, Inc. ("V Cable"), Cablevision of New York City ("CNYC"),
Rainbow Programming Holdings, Inc. ("Rainbow Programming") and Rainbow
Advertising Sales Corporation ("Rainbow Advertising"). In addition, the Company
has an unrestricted group of investments, consisting of investments in A-R Cable
Services, Inc. ("A-R Cable"), U.S. Cable Television Group, L.P. ("U.S. Cable"),
Cablevision of Boston Limited
(3)
Partnership ("Cablevision of Boston"), Cablevision of Chicago and Cablevision
of Newark.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" for a discussion of the financing
of the Company including a discussion of restrictions on investments by the
Restricted Group.
The Company's consolidated cable television systems are concentrated in the New
York City greater metropolitan area (80.9% of the Company's total subscribers)
and the greater Cleveland metropolitan area (14.3% of total subscribers). The
Company believes that its cable systems on Long Island comprise the largest
group of contiguous cable television systems under common ownership in the
United States (measured by number of subscribers).
RECENT DEVELOPMENTS
On March 11, 1994, Cablevision of Cleveland, L.P. ("Cablevision Cleveland"), a
partnership comprised of subsidiaries of the Company, purchased substantially
all of the assets and assumed certain liabilities of North Coast Cable Limited
Partnership, which operated a cable television system in Cleveland, Ohio. The
purchase price aggregated $133.0 million which amount includes: (i)
approximately $98.8 million paid in cash; (ii) $4.0 million paid in a short-term
promissory note secured by a letter of credit; (iii) approximately $13.2 million
paid by the surrender of the Company's 19% interest in North Coast and the
satisfaction of certain management fees owed to the Company; and (iv)
approximately $17.0 million paid by the assumption of certain capitalized lease
obligations and certain other liabilities. The net cash purchase price of the
acquisition was financed by borrowings under the Company's Credit Agreement (as
hereinafter defined) and Cablevision Cleveland is part of the Restricted Group.
At December 31, 1993 North Coast Cable served approximately 82,900 basic
subscribers.
The partnership agreement relating to one of Rainbow Programming's businesses,
American Movie Classics Company ("AMCC"), contains a provision allowing any
partner to commence a buy-sell procedure by establishing a stated value for the
AMCC partnership interests. On August 2, 1993, Rainbow Programming received a
notice from the AMCC partner affiliated with Liberty Media Corporation
initiating the buy-sell procedure and setting a stated value of $390 million for
all the partnership interests in AMCC. The partnership agreement provides that
the non-initiating partner has a period of 45 days from receipt of the buy-sell
notice to elect to purchase the initiating partner's interest at the stated
value or sell its interest at the stated value. On September 16, 1993, Rainbow
Programming notified its partners in AMCC that it had elected to purchase
Liberty Media's 50% interest in AMCC at the stated value. The Company
anticipates that the transaction will be consummated in the second quarter of
1994.
On October 26, 1993, Cablevision MFR, Inc. ("Cablevision MFR"), a wholly-owned
subsidiary of the Company, entered into agreements to purchase substantially all
of the assets of Monmouth Cablevision Associates, L.P. ("Monmouth Cablevision"),
(4)
Riverview Cablevision Associates, L.P. ("Riverview Cablevision") and Framingham
Cablevision Associates, L.P. ("Framingham Cablevision"), each a limited
partnership operated by Sutton Capital Associates. Each of Monmouth Cablevision
and Riverview Cablevision own and operate cable television systems in New
Jersey. Framingham Cablevision owns and operates a cable television system in
Massachusetts. It is anticipated that Cablevision MFR will be an unrestricted
subsidiary of the Company.
On January 12, 1994 Cablevision MFR assigned its rights and obligations under
its agreement to purchase the assets of Framingham Cablevision to Cablevision of
Framingham Holdings, Inc. ("CFHI"), currently a wholly-owned subsidiary of the
Company. The Company has entered into an agreement with Warburg, Pincus
Investors, L.P. ("Warburg Pincus"), pursuant to which Warburg Pincus will (i)
purchase 60% of the common stock of CFHI for cash and (ii) purchase preferred
stock of CFHI, from time to time, for a purchase price sufficient to pay 70% of
the interest and principal payments on the Framingham Cablevision promissory
note described below. The Company agreed to purchase preferred stock of CFHI,
from time to time, for a purchase price sufficient to pay 30% of the interest
and principal payments on the Framingham Cablevision promissory note.
Agreements between the Company and Warburg Pincus with respect to management of
Framingham Cablevision and purchase and sale rights are substantially similar to
those reached with respect to Warburg Pincus' investment in A-R Cable, which
arrangements are described under "Cable Television Operations - Other Cable
Affiliates" below.
The aggregate purchase price for the two New Jersey systems is expected to be
$422.3 million. The Company expects that $244.6 million of such purchase price
will be financed by senior credit facilities in newly formed unrestricted
subsidiaries of the Company secured by the assets of the systems. The remaining
$177.7 million of such purchase price will be paid by the issuance, by
Cablevision MFR, of promissory notes due in 1998 and bearing interest at 6%
until the third anniversary and 8% thereafter (increasing to 8% and 10%,
respectively, if interest is paid in shares of the Company's Class A Common
Stock). The purchase price for the Framingham Cablevision assets is expected
to be $41.1. The Company expects that approximately $22.8 million of such
purchase price will be financed by a senior credit facility of a wholly-owned
subsidiary of CFHI secured by the assets of such system. Approximately $13.3
million of such purchase price will be paid by the issuance by CFHI of a
promissory note issued on the same terms as the promissory note of Cablevision
MFR described above. The remaining approximately $5.0 million will consist
of a $1.0 million loan to CFHI from its stockholders and an approximate $4.0
million capital contribution to CFHI from its stockholders. Principal and
interest on the notes, which may be paid, at the maker's election, in cash or
in shares of the Company's Class A common stock, will be guaranteed by the
Company. The Company's obligations under the guarantee will rank pari passu
with the Company's public subordinated debt. Under the Company's senior
credit facility, the Company is only permitted to pay such amount in common
stock. In certain circumstances, Cablevision MFR or CFHI (as the case may be)
may extend the maturity date of the promissory notes until 2003 for certain
additional consideration.
(5)
Consummation of the transaction is subject to the receipt of necessary
regulatory approvals and other customary closing conditions. There can be no
assurance that this transaction will be successfully consummated. As of
December 31, 1993, the two New Jersey systems served approximately 155,400
subscribers, in the aggregate, and Framingham Cablevision served approximately
16,200 subscribers.
On November 5, 1993, A-R Cable Partners, a partnership comprised of subsidiaries
of the Company and E.M. Warburg, Pincus & Co., Inc., entered into an agreement
to purchase certain assets of Nashoba Communications ("Nashoba"), a group of
three limited partnerships which operate three cable television systems in
Massachusetts. A-R Cable Partners is controlled in a manner substantially
similar to the way A-R Cable Services, Inc. is controlled. The purchase price
is $90.0 million, subject to certain adjustments, of which up to $55.0 million
is expected to be provided by a senior credit facility provided to A-R Cable
Partners secured by the assets of such system. The remainder will be provided
by equity contributions from the partners in A-R Cable Partners. The Company
will provide 30% of such equity through drawings under its senior credit
facility. Consummation of the transaction is subject to regulatory approval, as
well as other customary closing conditions. As of December 31, 1993, Nashoba
served approximately 34,800 basic subscribers.
On March 31, 1994, the Company issued and sold 100,000 shares of a new series of
preferred stock (the "Preferred Shares") to Toronto-Dominion Investments, Inc.
in a private transaction. The Preferred Shares were sold for a purchase price
of $1,000 per share and carry a liquidation preference of a like amount plus
accrued and unpaid dividends. Dividends accrue at a floating rate of LIBOR plus
2.5 percent and are payable, at the Company's option, either in cash or in
registered shares of Class A common stock with a value equalling 105 percent of
the required dividend. Additional dividend payments may be required with
respect to the availability of the dividend received deduction. The Preferred
Shares are redeemable at any time at the option of the Company at par plus
accrued and unpaid dividends to the redemption date and are convertible after
March 31, 1995 into Class A common stock, at the option of the holder, at a
conversion rate based on 95 percent of the average closing price of the Class A
Common Stock for the twenty business days prior to conversion. Additionally,
the holders of the Preferred Shares have the right to convert their shares in
connection with certain change in control transactions (regardless of when they
occur) into a number of shares of Class A Common Stock which would yield
$100,000,000 based upon an auction process involving the Class A Common Stock
issuable on such conversion or, at the holder's election, at a conversion rate
based on 95 percent of the average closing price of the Class A Common Stock for
the twenty business days prior to conversion. The Company has the right to
suspend the conversion of the Preferred Shares from March 31, 1995 through
March 31, 1997 as long as it is in compliance with its Restricted Group
financial covenants and is current in dividend payments on the Preferred Shares.
The Preferred Shares are not transferrable except with the Company's consent,
not to be unreasonably withheld. The Preferred Shares are exchangeable, at the
option of the holder, into a separate series of preferred stock with terms
substantially identical to the
(6)
Preferred Shares, except that such series (i) are not convertible into common
stock or exchangeable for any other class of securities, and (ii) are freely
transferable. The Company has granted registration rights with respect to the
common stock issuable upon a conversion of the Preferred Shares and with respect
to the series of preferred stock into which the Preferred Shares are
exchangeable. Also, if the Company completes an offering on non-convertible,
non-exchangeable shares of preferred stock, Preferred Shares, if not previously
exchanged or converted, also may be converted into a new series of preferred
stock having terms identical to or based upon the other series issued by the
Company.
The Preferred Shares do not have voting rights, other than as required by law,
except that (i) the vote of 60% of such shares is necessary to authorize the
issuance of capital stock ranking senior to the Preferred Shares, or certain
mergers or consolidations, in each case unless provision is made to redeem the
Preferred Stock; (ii) if the Company misses four consecutive quarterly dividends
in the Preferred Stock or in the event that certain covenants are breached, the
holders of the Preferred Stock have the right to cause an increase in the size
of the Company's Board of Directors and to elect one director during the
continuation of such default in dividend payments or covenant breach. The
Company also has the right to require conversion by the holders of the Preferred
Shares in certain circumstances.
On February 22, 1994 the Federal Communications Commission ("FCC") ordered a
further reduction in rates for the basic service tier in effect on September 30,
1992. See "Cablevision Television Operations -- Regulation", below.
(7)
CABLE TELEVISION OPERATIONS
GENERAL.
As of December 31, 1993, the Company's consolidated cable television systems
served approximately 1,379,000 subscribers in New York, Ohio, Connecticut, New
Jersey, Michigan, and Massachusetts.
The following table sets forth certain statistical data regarding the Company's
consolidated cable television operations (1):
AS OF DECEMBER 31,
------------------------
1993 1992 1991
---- ---- ----
Homes passed (2):
Restricted Group . . . . . . . . . . . 1,086,000 1,079,000 1,072,000
V Cable. . . . . . . . . . . . . . . . 509,000 504,000 499,000
CNYC . . . . . . . . . . . . . . . . . 645,000 436,000 -
A-R Cable. . . . . . . . . . . . . . . - - 434,000
--------- --------- ---------
Company consolidated. . . . . . . . 2,240,000 2,019,000 2,005,000
--------- --------- ---------
--------- --------- ---------
Basic service subscribers:
Restricted Group . . . . . . . . . . . 815,000 790,000 762,000
V Cable. . . . . . . . . . . . . . . . 350,000 338,000 327,000
CNYC . . . . . . . . . . . . . . . . . 214,000 134,000 -
A-R Cable. . . . . . . . . . . . . . . - - 283,000
--------- --------- ---------
Company consolidated. . . . . . . . 1,379,000 1,262,000 1,372,000
--------- --------- ---------
--------- --------- ---------
Average number of premium units per
basic subscriber:
Restricted Group . . . . . . . . . . . 1.8 2.0 2.2
V Cable. . . . . . . . . . . . . . . . 1.3 1.4 1.1
CNYC . . . . . . . . . . . . . . . . . 4.9 5.4 -
A-R Cable. . . . . . . . . . . . . . . - - 1.0
--------- --------- ---------
Company consolidated. . . . . . . . 2.2 2.2 1.7
Average revenue per basic subscriber (3):
Restricted Group . . . . . . . . . . . $38.01 $38.85 $38.20
V Cable. . . . . . . . . . . . . . . . 30.56 31.30 30.17
CNYC . . . . . . . . . . . . . . . . . 41.12 46.62 -
A-R Cable. . . . . . . . . . . . . . . - - 29.20
--------- --------- ---------
Company consolidated. . . . . . . . $36.59 $37.64 $34.43
- ---------------------------
(1) No information is provided in this table for any period in which an entity
was not a consolidated subsidiary of the Company.
(2) Homes passed is based upon homes actually marketed and does not include
multiple dwelling units passed by the cable plant that are not connected to
it.
(3) Based on recurring service revenues for the last month of the period,
excluding installation charges and certain other non-recurring revenues
such as pay-per-view, advertising and home shopping revenues. See
"Business -- Cable Television Operations -- Subscriber Rates and Services;
Marketing and Sales".
(8)
The following table sets forth certain statistical data regarding the
Company's managed, unconsolidated cable television operations (1):
AS OF DECEMBER 31,
-------------------------
1993 1992 1991
---- ---- ----
Homes passed (2):
Cablevision of Boston . . . . . . 252,000 249,000 244,000
Cablevision of Chicago. . . . . . 193,000 193,000 191,000
A-R Cable . . . . . . . . . . . . 442,000 438,000 -
CNYC. . . . . . . . . . . . . . . - - 270,000
U.S. Cable. . . . . . . . . . . . 317,000 305,000 -
North Coast Cable . . . . . . . . 214,000 213,000 204,000
Newark. . . . . . . . . . . . . . 118,000 117,000 -
-------- -------- --------
1,536,000 1,515,000 909,000
-------- -------- --------
-------- -------- --------
Basic service subscribers:
Cablevision of Boston . . . . . . 129,000 122,000 115,000
Cablevision of Chicago. . . . . . 83,000 79,000 76,000
A-R Cable . . . . . . . . . . . . 299,000 292,000 -
CNYC. . . . . . . . . . . . . . . - - 83,000
U.S. Cable. . . . . . . . . . . . 213,000 202,000 -
North Coast Cable . . . . . . . . 83,000 79,000 75,000
Newark. . . . . . . . . . . . . . 46,000 45,000 -
-------- -------- --------
853,000 819,000 349,000
-------- -------- --------
-------- -------- --------
Average number of premium units per
basic subscriber:
Cablevision of Boston . . . . . . 2.1 2.1 2.3
Cablevision of Chicago. . . . . . 1.6 1.7 1.8
A-R Cable . . . . . . . . . . . . 0.9 0.9 -
CNYC. . . . . . . . . . . . . . . - - 6.0
U.S. Cable. . . . . . . . . . . . 0.8 0.4 -
North Coast Cable . . . . . . . . 1.4 1.5 1.6
Newark. . . . . . . . . . . . . . 2.0 1.6 -
Average revenue per basic subscriber (3):
Cablevision of Boston . . . . . . $36.81 $35.89 $35.93
Cablevision of Chicago. . . . . . $32.21 $34.80 $34.07
A-R Cable . . . . . . . . . . . . $28.42 $29.70 -
CNYC. . . . . . . . . . . . . . . - - $49.03
U.S. Cable. . . . . . . . . . . . $25.72 $26.10 -
North Coast Cable . . . . . . . . $33.95 $34.47 $32.07
Newark. . . . . . . . . . . . . . $37.12 $36.85 -
- -----------------------------
(1) No information is provided in this table for any period in which an entity
was not a managed and unconsolidated affiliate of the Company.
(2) Homes passed is based upon homes actually marketed and does not include
multiple dwelling units passed by the cable plant that are not connected to
it.
(3) Based on recurring service revenues for the last month of the period,
excluding installation charges and certain other non-recurring revenues
such as pay-per-view, advertising and home shopping revenues. See
"Business -- Cable Television Operations -- Subscriber Rates and Services;
Marketing and Sales".
(9)
SUBSCRIBER RATES AND SERVICES; MARKETING AND SALES.
The Company's cable television systems offer a package of services, generally
marketed as "Family Cable", which includes, among other programming, broadcast
network local affiliates and independent television stations,
satellite-delivered "superstations" and certain other news, information and
entertainment channels such as CNN, CNBC, ESPN and MTV: Music Television. For
additional charges, the Company's cable television systems provide certain
premium services such as HBO, Showtime, The Movie Channel and Cinemax, which may
be purchased either individually (in conjunction with Family Cable) or in
combinations or in tiers.
In addition, the Company's cable television systems recently introduced a basic
package which includes broadcast network local affiliates and public,
educational or governmental channels and certain public leased access channels.
The Company offers premium services on an individual basis and as components of
different "tiers". Successive tiers include additional premium services for
additional charges that reflect discounts from the charges for such services if
purchased individually. For example, in most of the Company's cable systems,
subscribers may elect to purchase Family Cable plus one, two or three premium
services with declining incremental costs for each successive tier. In
addition, most systems offer a "Rainbow" package consisting of between five and
seven premium services, and a "Rainbow Gold" package consisting of between eight
and ten premium services.
Since its existing cable television systems, other than the CNYC system, are
substantially fully built, the Company's sales efforts are primarily directed
toward increasing penetration and revenues in its franchise areas. The Company
sells its cable television services through door-to-door selling supported by
telemarketing, direct mail advertising, promotional campaigns and local media
and newspaper advertising.
Certain services and equipment provided by substantially all of the Company's
cable television systems are subject to regulation. See "Business -- Cable
Television Operations -- Regulation -- 1992 Cable Act."
SYSTEM CAPACITY.
The Company is engaged in an ongoing effort to upgrade the technical
capabilities of its cable plant and to increase channel capacity for the
delivery of additional programming and new services. The Company's cable
television systems have a minimum capacity of 35 channels and 70% of its
subscribers are currently served by systems having a capacity of at least 52
channels. As a result of currently ongoing upgrades, the Company expects that
by December 1995 virtually all of its subscribers will be served by systems
having a capacity of at least 52 channels and 66% by systems having a capacity
of at least 77 channels. A substantial portion of the system upgrades either
completed or underway will utilize fiber optic cable.
(10)
PROGRAMMING.
Adequate programming is available to the Company from a variety of sources.
Program suppliers' compensation is typically a fixed per subscriber monthly fee
based, in most cases, either on the number of total subscribers of the cable
systems of the Company and certain of its affiliates, or on the number of
subscribers subscribing to the particular service. The Company's programming
contracts are generally for a fixed period of time and are subject to negotiated
renewal. The Company's cable programming costs have increased in recent years
and are expected to continue to increase due to additional programming being
provided to most subscribers, increased costs to produce or purchase cable
programming and other factors. Management believes that the Company will
continue to have access to programming services at reasonable price levels.
FRANCHISES.
The Company's cable television systems are operated primarily under nonexclusive
franchise agreements with local governmental franchising authorities, in some
cases with the approval of state cable television authorities. Franchising
authorities generally charge a fee of up to 5% based on a percentage of certain
revenues of the franchisee. In 1993 franchise fee payments made by the Company
aggregated approximately 3.9% of total revenues.
The Company's franchise agreements are generally for a term of ten to fifteen
years from the date of grant, although recently renewals have often been for
five to ten year terms. Some of the franchises grant the Company an option to
renew. Except for the Company's franchise for the Town of Brookhaven, New York
which expired in 1991, the expiration dates for the Company's ten largest
franchises range from 1995 to 2001. In certain cases, including the Town of
Brookhaven, the Company is operating under temporary licenses while negotiating
renewal terms with the franchising authorities. Franchises usually require the
consent of the franchising authority prior to the sale, assignment, transfer or
change in ownership or operating control of the franchisee.
The Cable Communications Policy Act of 1984 (the "1984 Cable Act") and the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act") provide significant procedural protections for cable operators seeking
renewal of their franchises. See "Business -- Cable Television Operations --
Regulation". In connection with a renewal, a franchising authority may impose
different and more stringent terms. The Company has never lost a franchise as a
result of a failure to obtain a renewal.
(11)
COMPETITION.
The Company's cable television systems generally compete with the direct
reception of broadcast television signals by antenna and with other methods of
delivering television signals to the home for a fee. The extent of such
competition depends upon the number and quality of the signals available by
direct antenna reception as compared to the number and quality of signals
distributed by the cable system. The Company's cable television systems also
compete to varying degrees with other communications and entertainment media,
including movies, theater and other entertainment activities.
The 1984 Cable Act, Federal Communications Commission ("FCC") regulations and
the 1982 federal court consent decree (the "Modified Final Judgment") that
settled the 1974 antitrust suit against American Telephone & Telegraph Company
regulate the provision of video programming and other information services by
telephone companies. A federal district court in 1991 issued an opinion, upheld
on appeal, lifting the Modified Final Judgment prohibition on the provision of
information services by the seven Bell Operating Companies ("BOCs"), allowing
the BOCs to acquire or construct cable television systems outside of their own
service areas. Several BOCs have purchased or made investments in cable systems
outside their service areas in reliance on this decision. The 1984 Cable Act
codified FCC cross-ownership regulations which, in part, prohibit local exchange
telephone companies, including the BOCs, from providing video programming
directly to subscribers within their local exchange service areas, except in
rural areas or by specific waiver of FCC rules. The statutory provision and
corresponding FCC regulations are of particular competitive importance because
these telephone companies already own much of the plant necessary for cable
television operations, such as poles, underground conduit, associated
rights-of-way and connections to the home.
One telephone company has been successful in a lawsuit in a Virginia federal
court challenging the constitutionality of the existing statutory ban on
unrestricted telephone company ownership of cable systems. The federal
government has appealed this decision. The ruling applies to telephone company
ownership of cable systems in one state in which the Company owns systems.
Similar lawsuits have been filed in several other states in which the Company
owns systems. Legislation to repeal this ban, subject to certain regulatory
requirements, has been introduced in the U.S. Senate and House of
Representatives; repeal has also been endorsed by the Clinton Administration.
The bills would also, inter alia, preempt state and locally-imposed barriers to
the provision of intrastate and interstate telecommunications services by the
Company and other cable system operators in competition with local telephone
companies.
In July 1992, the FCC voted to authorize additional competition to cable
television by video programmers using broadband common carrier facilities
constructed by telephone companies. The FCC allowed telephone companies to take
ownership interests of up to 5% in such programmers. The FCC also reaffirmed an
earlier holding, currently on appeal to a federal court, that programmers using
such a telephone company-provided "video dial tone" system would not need to
obtain a state or municipal franchise. Several telephone companies have sought
approval from the FCC to build such "video
(12)
dial tone" systems. Such a system has been proposed in several communities in
Connecticut in which the Company currently holds a cable franchise and approval
of one such system has been granted in a franchise area adjoining a cable
television system of the Company.
Cable television also competes with the home video industry. Owners of
videocassette recorders are able to rent many of the same movies, special events
and music videos that are available on certain premium services. The
availability of videocassettes has affected the degree to which the Company is
able to sell premium service units and pay-per-view offerings to some of its
subscribers.
Multipoint distribution services ("MDS"), which deliver premium television
programming over microwave superhigh frequency channels received by subscribers
with a special antenna, and multichannel multipoint distribution service
("MMDS"), which is capable of carrying four channels of television programming,
also compete with certain services provided by the Company's cable television
systems. By acquiring several MMDS licenses or subleasing from several MMDS
operators and holders of other types of microwave licenses, a single entity can
increase channel capacity to a level more competitive with cable systems. MDS
and MMDS systems are not required to obtain a municipal franchise, are less
capital intensive, require lower up-front capital expenditures and are subject
to fewer local and FCC regulatory requirements than cable systems. The ability
of MDS and MMDS systems to serve homes and to appeal to consumers is affected by
their less extensive channel capacity and the need for unobstructed line of
sight over-the-air transmission.
Satellite master antenna systems ("SMATV") generally serve large multiple
dwelling units. The FCC has preempted all state and local regulation of SMATV
operations. SMATV is limited to the buildings within which the operator has
received permission from the building owner to provide service. The FCC has
recently streamlined its MDS regulations and opened substantially more microwave
channels to MDS and SMATV operators, which could increase the strength of their
competition with cable television systems.
In January 1993, the FCC proposed establishing a new local multipoint
distribution service ("LMDS", sometimes referred to as "cellular cable") in the
virtually unused 28 GHz band of the electromagnetic spectrum that could be used
to offer multichannel video in competition with cable systems, as well as
two-way communications services. The FCC has proposed issuing two LMDS licenses
per market, using auctions or lotteries to select licensees. Suite 12 Group,
the originator of this service, currently holds an experimental license and has
constructed a video transmission service using the 28 GHz band in a portion of
the Company's New York City service area.
The 1984 Cable Act specifically legalized, under certain circumstances,
reception by private home earth stations of satellite-delivered cable
programming services. By law, dish owners have the right to receive broadcast
superstations and network affiliate
(13)
transmissions in return for a compulsory copyright fee. Cable programmers have
developed new marketing efforts to reach these viewers. Direct broadcast
satellite ("DBS") systems currently permit satellite transmissions from the
low-power C-Band to be received by antennae approximately 60 to 72 inches in
diameter at the viewer's home. New higher power DBS systems providing
transmissions over the Ku-Band will permit the use of smaller receiver antennae
and thus may be more appealing to customers. A consortium of cable operators
(other than the Company), formed PrimeStar, a joint venture to operate a medium
power Ku-Band DBS system which began operations in 1990. In addition, other
mid- and high-power DBS ventures have announced their intentions to begin
operations during 1994. Both C-Band and Ku-Band DBS delivery of television
signals are competitive alternatives to cable television.
Other technologies supply services that may compete with certain services
provided by cable television. These technologies include translator stations
(which rebroadcast signals at different frequencies at lower power to improve
reception) and low-power television stations (which operate on a single channel
at power levels substantially below those of most conventional broadcasters and,
therefore, reach a smaller service area).
The full extent to which developing media will compete with cable television
systems may not be known for several years. There can be no assurance that
existing, proposed or as yet undeveloped technologies will not become dominant
in the future and render cable television systems less profitable or even
obsolete. In particular, certain major telephone companies have demonstrated an
interest in acquiring cable television systems or providing video services to
the home through fiber optic technology. Changes in the laws and regulations
mentioned above governing telephone companies could allow these companies in the
future to provide information and entertainment services to the home.
Although substantially all the Company's cable television franchises are
non-exclusive, most franchising authorities have granted only one franchise in
an area. Other cable television operators could receive franchises for areas in
which the Company operates or a municipality could build a competing cable
system. One company has applied for a franchise to build and operate a
competing cable television system in several communities in Connecticut in which
the Company currently holds a cable franchise. The state regulatory authority
is currently conducting hearings on this application and a decision is expected
during the second or third fiscal quarters of this year. The 1992 Cable Act
described below prohibits municipalities from unreasonably refusing to grant
competitive franchises and facilitates the franchising of second cable systems
or municipally-owned cable systems. See "Regulation -- 1992 Cable Act," below.
(14)
REGULATION.
1984 CABLE ACT. In 1984, Congress enacted the 1984 Cable Act, which set uniform
national guidelines for cable regulation under the Communications Act of 1934.
While several of the provisions of the 1984 Cable Act have been amended or
superseded by the 1992 Cable Act, described below, other provisions of the 1984
Act, including the principal provisions relating to the franchising of cable
television systems, remain in place. The 1984 Cable Act authorizes states or
localities to franchise cable television systems but sets limits on their
franchising powers. It sets a ceiling on cable franchise fees of 5% of gross
revenues and prohibits localities from requiring cable operators to carry
specific programming services. The 1984 Cable Act protects cable operators
seeking franchise renewals by limiting the factors a locality may consider and
requiring a due process hearing before denial. The 1984 Cable Act does not,
however, prevent another cable operator from being authorized to build a
competing system. The 1992 Cable Act prohibits franchising authorities from
granting exclusive cable franchises and from unreasonably refusing to award an
additional competitive franchise.
The 1984 Cable Act allows localities to require free access to public,
educational or governmental channels, but sets limits on the number of
commercial leased access channels cable television operators must make available
for potentially competitive services. The 1984 Cable Act prohibits obscene
programming and requires the sale or lease of devices to block programming
considered offensive.
1992 CABLE ACT. On October 5, 1992, Congress enacted the 1992 Cable Act. The
1992 Cable Act represents a significant change in the regulatory framework under
which cable television systems operate.
After the effective date of the 1984 Cable Act, and prior to the enactment of
the 1992 Cable Act, rates for cable services were unregulated for substantially
all of the Company's systems. The 1992 Cable Act reintroduced rate regulation
for certain services and equipment provided by most cable systems in the United
States, including substantially all of the Company's systems. On April 1, 1993,
the FCC adopted rules implementing the rate regulation provisions of the 1992
Cable Act.
The 1992 Cable Act requires each cable system to establish a basic service
package consisting, at a minimum, of all local broadcast signals and all
non-satellite delivered distant broadcast signals that the system wishes to
carry, and all public, educational and governmental access programming. The
rates for the basic service package are subject to regulation by local
franchising authorities. Under the FCC's April 1, 1993 rate regulation rules, a
cable operator whose per channel rates as of September 30, 1992 exceeded an FCC
established benchmark was required to reduce its per channel rates for the basic
service package by up to 10% unless it could justify higher rates on the basis
of its costs. On February 22, 1994, after reconsideration, the FCC ordered a
further reduction of 7% in rates for the basic service tier in effect on
September 30, 1992, for an overall reduction of 17% from those rates. The
amount of this 17% decrease that is below a new per channel benchmark need not
be implemented pending
(15)
completion of FCC studies of the costs of below-benchmark cable systems. In the
interim, however, the amount of the 17% decrease that is below this benchmark
must be computed by the cable system and must be offset against otherwise
allowable rate increases by these systems. Franchise authorities (local
municipalities or state cable television regulators) are also empowered to
regulate the rates charged for the installation and lease of the equipment used
by subscribers to receive the basic service package (including a converter box,
a remote control unit and, if requested by a subscriber, an addressable
converter box or other equipment required to access programming offered on a per
channel or per program basis), including equipment that may also be used to
receive other packages of programming, and the installation and monthly use of
connections for additional television sets. The FCC's rules require franchise
authorities to regulate rates for equipment and connections for additional
television sets on the basis of an actual cost formula developed by the FCC,
plus a return of 11.25%. No additional charge is permitted for the delivery of
service to additional sets unless the operator incurs additional programming
costs in connection with the delivery of the regulated service to multiple sets.
The FCC may, in response to complaints by a subscriber, municipality or other
governmental entity, reduce the rates for service packages other than the basic
service package if it finds that such rates are unreasonable. Under the FCC's
April 1, 1993 rules, a cable operator whose per channel rates for such service
packages as of September 30, 1992, exceeded an FCC established benchmark was
required to reduce its per channel rates for such packages by up to 10% unless
it could justify higher rates on the basis of its costs. On February 22, 1994,
the FCC also determined on reconsideration to authorize a further rate reduction
of 7% applicable to FCC-regulated tiers, subject to the same interim constraints
on further decreases in the basic tier rates below new benchmarks discussed
above. The FCC will in response to complaints also regulate, on the basis of
actual cost, the rates for equipment used only to receive these higher packages.
Services offered on a per channel or per program basis or packages comprised
only of services that are also available on a per channel or per program basis
are not subject to rate regulation by either municipalities or the FCC. The FCC
on February 22, 1994 adopted criteria to assess whether certain discounted
packages of "a la carte" or per channel offerings should be regulated as a tier
of services by the FCC, or treated as unregulated per channel offerings.
The regulations adopted by the FCC on April 1, 1993, including the original rate
benchmarks, became effective on September 1, 1993. The new rate regulations
adopted by the FCC on February 22, 1994, including the new benchmarks, are
expected to become effective in May, 1994.
The FCC's rules provide that, unless a cable operator can justify higher rates
on the basis of its costs, increases in the rates charged by the operator for
the basic service package or any other regulated package of service may not
exceed an inflation indexed amount, plus increases in certain costs beyond the
cable operator's control, such as taxes, franchise fees and increased
programming costs that exceed the inflation index. A cable operator may not
pass through to subscribers any amounts paid by the operator on or before
October 6, 1994, to broadcast stations for the retransmission of their
(16)
signals. Increases in retransmission fees above those in effect on that day may
be passed through to subscribers. As part of the implementation of its rate
regulations, the FCC has frozen all cable service rates in effect on April 5,
1993 until May 15, 1994. Challenges to rates then in effect were required to be
filed within six months from September 1, 1993.
On February 22, 1994, the FCC adopted guidelines for cost-of-service showings
that establish a regulatory framework pursuant to which a cable television
operator may attempt to justify rates in excess of the benchmarks. Such
justification would be based upon (i) the operator's costs in operating a cable
television system (including certain operating expenses, depreciation and taxes)
and (ii) a return on the investment the operator has made to provide regulated
cable television services in such system (such investment being referred to as
its "ratebase", which includes working capital and certain costs associated with
the construction of such system). The guidelines (1) create a rebuttable
presumption that excludes from a cable television operator's ratebase any
"excess acquisition costs" (equal to the excess of the purchase price for a
cable television system over the original construction cost of such system, or
its book value at the time of acquisition), (2) include in the rate base the
costs associated with certain intangibles such as franchise rights and customer
lists, (3) set a uniform rate of return for regulated cable television service
of 11.25% after taxes, and (4) include a "productivity offset feature" that
could reduce otherwise justifiable rate increases based on a claimed increase in
a cable television system's operational efficiencies.
Under the 1992 Cable Act, systems may not require subscribers to purchase any
service package other than the basic service package as a condition of access to
video programming offered on a per channel or per program basis. Cable systems
are allowed up to ten years to the extent necessary to implement the necessary
technology to facilitate this access.
In addition, the 1992 Cable Act (i) requires cable programmers under certain
circumstances to offer their programming to present and future competitors of
cable television such as MMDS, SMATV and DBS, and prohibits new exclusive
contracts with program suppliers without FCC approval, (ii) directs the FCC to
set standards for limiting the number of channels that a cable television system
operator could program with programming services controlled by such operator,
(iii) bars municipalities from unreasonably refusing to grant additional
competitive franchises, (iv) requires cable television operators to carry ("Must
Carry") all local broadcast stations (including home shopping broadcast
stations), or, at the option of a local broadcaster, to obtain the broadcaster's
prior consent for retransmission of its signal ("Retransmission Consent"), (v)
requires cable television operators to obtain the consent of any non-local
broadcast station prior to retransmitting its signal, and (vi) regulates the
ownership by cable operators of other media such as MMDS and SMATV. In
connection with clause (ii) above concerning limitations on affiliated
programming, the FCC has established a 40% limit on the number of channels of a
cable television system that can be occupied by programming services in which
the system operator has an attributable interest and a national limit of 30% on
the number of households that any cable company can serve. In connection with
clause (iv) above concerning
(17)
retransmission of a local broadcaster's signals, a substantial number of local
broadcast stations are currently carried by the Company's systems and have
elected to negotiate with the Company for Retransmission Consent. Although the
Company has obtained Retransmission Consent agreements with all broadcast
stations it currently carries, a number of these agreements are temporary in
nature and the potential remains for discontinuation of carriage if an agreement
is not ultimately reached.
The FCC has imposed new regulations under the 1992 Cable Act in the areas of
customer service, technical standards, equal employment opportunity, privacy,
rates for leased access channels, obscenity and indecency, and disposition of a
customer's home wiring. The FCC has also issued a report to Congress on
proposals for compatibility with other consumer electronic equipment such as
"cable ready" television sets and videocassette recorders and has issued a
notice of proposed rulemaking seeking comments on proposed equipment
compatibility regulations.
A number of lawsuits have been filed in federal court challenging the
constitutionality of various provisions of the 1992 Cable Act. A challenge to
the constitutionality of the 1992 Cable Act's Must Carry rules was denied by a
federal court in April 1993. A stay of the rules pending an appeal to the
United States Supreme Court was denied. Argument on those rules was heard by
the United States Supreme Court in January 1994. Other lawsuits filed
challenging the application of the Must Carry rules to particular cable
television systems have been unsuccessful. Most other challenged provisions of
the 1992 Cable Act have been upheld at the federal district court level,
including provisions governing rate regulation and retransmission consent, but
an appeal to the District of Columbia Court of Appeals of that decision has been
filed. Other challenges to the FCC rate freeze and other provisions of the
FCC's rate regulation scheme have been separately brought directly to the D.C.
Circuit. The Company cannot predict the outcome of any of the foregoing
litigation affecting the 1992 Cable Act.
OTHER FCC REGULATION. In addition to the rules and regulations promulgated by
the FCC under the 1984 Cable Act and the 1992 Cable Act, the FCC has promulgated
other rules affecting the Company. FCC rules require that cable systems black
out certain network and sports programming on imported distant broadcast signals
upon request. The FCC also requires that cable systems delete syndicated
programming carried on distant signals upon the request of any local station
holding the exclusive right to broadcast the same program within the local
television market and, in certain cases, upon the request of the copyright owner
of such programs. These rules affect the diversity and cost of the Company's
programming options for their cable systems.
The FCC has the authority to regulate utility company rates for cable rental of
pole and conduit space. States can establish preemptive regulations in this
area, and the states in which the Company's cable television systems operate
have done so. The FCC's technical guidelines for signal leakage became
substantially more stringent in 1990, requiring upgrading expenditures by the
Company. Two-way radio stations, microwave-relay stations and satellite earth
stations used by the Company's cable television systems are licensed by the FCC.
(18)
FEDERAL COPYRIGHT REGULATION. There are no restrictions on the number of
distant broadcast television signals that cable television systems can import,
but cable systems are required to pay copyright royalty fees to receive a
compulsory license to carry them. The United States Copyright Office has
increased the royalty fee from time to time. The FCC has recommended to
Congress the abolition of the compulsory licenses for cable television carriage
of broadcast signals. Any such action by Congress could adversely affect the
Company's ability to obtain such programming and could increase the cost of such
programming.
CABLE TELEVISION CROSS-MEDIA OWNERSHIP LIMITATIONS. The 1984 Cable Act
prohibits any person or entity from owning broadcast television and cable
properties in the same market. The 1984 Cable Act also bars co-ownership of
telephone companies and cable television systems operating in the same service
areas, with limited exceptions for rural areas. The FCC may also expand the
rural exemption for telephone companies offering cable service within their
service areas. The FCC has modified its rule that formerly barred the
commercial broadcasting networks (NBC, CBS and ABC) from owning cable television
systems. The FCC rule does not allow the networks to acquire cable systems in
markets in which they already own a broadcast station, and sets limitations on
the percentage of homes that can be passed, both nationally and locally, by
network-owned cable systems. There is no federal bar to newspaper ownership of
cable television systems. The 1992 Cable Act imposed limits on new acquisitions
of SMATV or MMDS systems by cable operators in their franchise areas. The
Company does not have any prohibited cross-ownership interests.
STATE AND LOCAL REGULATION. Regulatory responsibility for essentially local
aspects of the cable business such as franchisee selection, system design and
construction, safety, and consumer services remains with either state or local
officials and, in some jurisdictions, with both. The 1992 Cable Act expands the
factors that a franchising authority can consider in deciding whether to renew a
franchise and limits the damages for certain constitutional claims against
franchising authorities for their franchising activities. New York law provides
for comprehensive state-wide regulation, including approval of transfers of
cable franchises and consumer protection legislation. State and local
franchising jurisdiction is not unlimited, however, and must be exercised
consistently with the provisions of the 1984 Cable Act and the 1992 Cable Act.
Among the more significant restrictions that the Cable Act imposes on the
regulatory jurisdiction of local franchising authorities is a 5% ceiling on
franchise fees and mandatory renegotiation of certain franchise requirements if
warranted by changed circumstances.
(19)
CONSOLIDATED CABLE AFFILIATES
V CABLE. On December 31, 1992, the Company consummated a significant
restructuring and reorganization involving its unrestricted subsidiary V Cable,
U.S. Cable and General Electric Capital Corporation ("GECC"), V Cable's
principal creditor (the "V Cable Reorganization"). In the V Cable
Reorganization, V Cable acquired, for $20.0 million, a 20% partnership interest
in U.S. Cable, and U.S. Cable acquired, for $3.0 million, a 19% non-voting
interest in a newly incorporated subsidiary of V Cable ("VC Holding") that was
formed to hold substantially all of V Cable's assets. As a result, V Cable now
owns an effective 84.8% interest in VC Holding. GECC then provided new
long-term credit facilities to each of V Cable, VC Holding and U.S. Cable. The
debt of V Cable and VC Holding is guaranteed by, and secured by a pledge of all
of the assets of, V Cable, VC Holding and each of their subsidiaries, including
a pledge of all direct and indirect ownership interests in such subsidiaries.
The debt of U.S. Cable is guaranteed by all subsidiaries of U.S. Cable, and
secured by all the assets of each subsidiary of U.S. Cable; U.S. Cable's debt is
also guaranteed (and cross-collateralized in most cases) by each of V Cable, VC
Holding and each of their subsidiaries. All of the V Cable, VC Holding and U.S.
Cable credit facilities are non-recourse to the Company other than with respect
to the common stock of V Cable owned by the Company. The Company manages the
U.S. Cable properties and the V Cable systems under management agreements that
provide for cost reimbursement, including an allocation of overhead charges.
In connection with the V Cable Reorganization, V Cable will assume, on
December 31, 1997, approximately $121.0 million face value of debt of U.S. Cable
($78.3 million present value as of December 31, 1993), which amount is subject
to adjustment, upward or downward, depending on U.S. Cable's ratio of debt to
cash flow (as defined) in 1997. Each year thereafter, until the final
adjustment upon occurrence of an exchange described below, the amount of U.S.
Cable debt assumed by V Cable may be similarly adjusted, upward or downward.
V Cable has the option to exchange its interest in U.S. Cable for all of U.S.
Cable's interest in VC Holding and thus recover full ownership of the V Cable
systems from and after January 1, 1998. Upon such an exchange, the guarantee
and cross collateralization by V Cable and VC Holding of any portion of the
U.S. Cable senior credit facilities not assumed by V Cable would terminate.
Such option may not be exercised prior to November 30, 2001 unless the U.S.
Cable systems have been sold for a net purchase price sufficient to repay to
GECC certain of the U.S. Cable loans not assumed by V Cable, as well as a fixed
additional amount. In addition, V Cable may exercise the option prior to
January 1, 1998 if the U.S. Cable systems have been sold, all outstanding
indebtedness of V Cable, VC Holding and U.S. Cable to GECC (other than junior
subordinated debt and certain other excluded indebtedness) is repaid, and an
additional fixed amount is paid to GECC.
The Company accounts for its investment in U.S. Cable using the equity method of
accounting.
(20)
CABLEVISION OF NEW YORK CITY. In July 1992, the Company acquired (the "CNYC
Acquisition") substantially all of the remaining interests in Cablevision of New
York City -- Phase I through Phase V ("CNYC"), the operator of a cable
television system that is under development in The Bronx and parts of Brooklyn,
New York. Prior to the CNYC Acquisition, the Company had a 15% interest in CNYC
and Charles F. Dolan, the chief executive officer and principal shareholder of
the Company, owned the remaining interests. Mr. Dolan remains a partner in
CNYC, with a 1% interest and the right to certain preferential payments.
CNYC holds franchises that permit construction of the franchised areas in
specified phases. Construction of the systems in the Brooklyn and The Bronx
franchises will take place in five and four phases, respectively. Construction
of Phases I, II, III and IV in Brooklyn and Phases I, II and III in The Bronx
has been substantially completed. Construction of Phase IV in The Bronx and
Phase V in Brooklyn is scheduled to be substantially fully built by the end of
1995.
Under the agreement between the Company and Mr. Dolan, a new limited partnership
("CNYC LP") was formed and holds 99% of the partnership interests in CNYC. The
remaining 1% interest in CNYC is owned by the existing corporate general
partner, which is a wholly-owned subsidiary of the Company. The Company owns
99% of the partnership interests in CNYC LP and Mr. Dolan retains a 1%
partnership interest in CNYC LP plus certain preferential rights. Mr. Dolan's
preferential rights entitle him to an annual cash payment (the "Annual Payment")
of 14% multiplied by the outstanding balance of his "Minimum Payment". The
Minimum Payment is $40.0 million and is to be paid to Mr. Dolan prior to any
distributions from CNYC LP to partners other than Mr. Dolan. In addition, Mr.
Dolan has the right, exercisable on December 31, 1997, and as of the earlier of
(1) December 31, 2000 and (2) December 31 of the first year after 1997 during
which CNYC achieves an aggregate of 400,000 subscribers, to require the Company
to purchase (Mr. Dolan's "put") his interest in CNYC LP. The Company has the
right to require Mr. Dolan to sell his interest in CNYC LP to the Company (the
Company's "call") during the three-year period commencing one year after the
expiration of Mr. Dolan's second put. In the event of a put, Mr. Dolan will be
entitled to receive from the Company the Minimum Payment, any accrued but unpaid
Annual Payments, a guaranteed return on certain of his investments in CNYC LP
and a Preferred Payment defined as a payment (not exceeding $150.0 million)
equal to 40% of the Appraised Equity Value (as defined) of CNYC LP after making
certain deductions including a deduction of a 25% compound annual return on
approximately 85% of the Company's investments with respect to the construction
of Phases III, IV and V of CNYC and 100% of certain of the Company's other
investments in CNYC, including Mr. Dolan's Annual Payment. In the event the
Company exercises its call, the purchase price will be computed on the same
basis as for a put except that there will be no payment in respect of the
Appraised Equity Value amount.
The Company has the right to make payment of the put or call exercise price in
the form of shares of the Company's Class B Common Stock or, if Mr. Dolan so
elects, Class A Common Stock, except that all Annual Payments must be paid in
cash to the
(21)
extent permitted under the Company's Credit Agreement (as defined below). Under
the Credit Agreement, the Company is currently prohibited from paying the put or
call exercise price in cash and, accordingly, without the consent of the bank
lenders, would be required to pay it in shares of the Company's Common Stock.
The Company has agreed to invest in CNYC LP sufficient funds to permit CNYC LP
to make the required Annual Payments to Mr. Dolan and to make certain equity
contributions to CNYC. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources --
Restricted Group."
The subsidiaries of the Company that own all of the Company's interests in CNYC
have succeeded to the rights and obligations of Mr. Dolan under a security
agreement relating to CNYC's credit agreement and in connection therewith have
pledged all of the Company's interests in CNYC and CNYC LP to secure the
obligations to the bank lenders under the CNYC credit agreement. Recourse
against these subsidiaries, which are members of the Restricted Group, is
limited solely to the pledged interests in CNYC and CNYC LP.
OTHER CABLE AFFILIATES
A-R CABLE. On May 11, 1992, A-R Cable purchased approximately $237 million
principal amount of its Senior Subordinated Deferred Interest Notes due December
30, 1997 (the "A-R Cable Notes") representing approximately 86.9% of the
principal amount of A-R Cable Notes outstanding. Concurrent with the purchase
of the A-R Cable Notes, Warburg, Pincus Investors, L.P. ("Warburg Pincus")
purchased a new Series A Preferred Stock of A-R Cable for a cash investment of
$105.0 million, and the Company purchased a new Series B Preferred Stock of A-R
Cable for a cash investment of $45.0 million. The Company acquired the funds
for its investment in A-R Cable through borrowings under the Company's credit
agreement. In addition, GECC provided A-R Cable with an additional $70.0
million under a secured revolving credit line. The proceeds from the sale of
the Series A and Series B Preferred Stock and the additional GECC loans were
used to purchase the A-R Cable Notes.
In connection with Warburg Pincus' investment in A-R Cable, upon the receipt of
certain franchise approvals, Warburg Pincus will be permitted to elect three of
the six members of the A-R Cable board of directors, will have approval rights
over certain major corporate decisions of A-R Cable and will be entitled to 60%
of the vote on all matters on which holders of capital stock are entitled to
vote (other than the election of directors). A wholly-owned subsidiary of the
Company continues to own the common stock, as well as the Series B Preferred
Stock, of A-R Cable and the Company continues to manage A-R Cable under a
management agreement that provides for cost reimbursement, an allocation of
overhead charges and a management fee of 3-1/2% of gross receipts, as defined,
with interest on unpaid annual amounts thereon at a rate of 10% per annum. The
3-1/2% fee and interest thereon is payable by A-R Cable only after repayment in
full of its senior debt and certain other obligations. Under certain
circumstances, the fee is subject to reduction to 2-1/2% of gross receipts.
(22)
After May 11, 1997, either Warburg Pincus or the Company may irrevocably cause
the sale of A-R Cable, subject to certain conditions. In certain circumstances,
Warburg Pincus may cause the sale of A-R Cable prior to that date. If Warburg
Pincus initiates the sale, the Company will have the right to purchase A-R Cable
through an appraisal procedure. The Company's purchase right may be forfeited
in certain circumstances. Upon the sale of A-R Cable, the net sales proceeds,
after repayment of all outstanding indebtedness and other liabilities, will be
used as follows: first, to repay Warburg Pincus' original $105.0 million
investment in the Series A Preferred Stock; second, to repay the Company's
original investment of $45.0 million in the Series B Preferred Stock; third, to
repay the accumulated unpaid dividends on the Series A Preferred Stock (19%
annual rate); fourth, to repay the accumulated unpaid dividends on the Series B
Preferred Stock (12% annual rate); fifth, to pay the Company for all accrued and
unpaid management fees together with accrued but unpaid interest thereon; sixth,
pro rata 60% to the Series A Preferred Stockholders, 4% to the Series B
Preferred Stockholders and 36% to the common stockholder(s).
Also in connection with the purchase of the A-R Cable Notes, A-R Cable retired
its previously outstanding preferred stock (undesignated as to series) which it
had purchased from an affiliate for nominal consideration. In connection with
the purchase of the preferred stock, a transaction fee agreement between A-R
Cable and GECC was terminated and A-R Cable's obligations thereunder were
extinguished.
As a result of the rights to which Warburg Pincus is entitled discussed above,
the Company no longer has financial or voting control over A-R Cable's
operations. Accordingly, the Company no longer consolidates the financial
position or results of operations of A-R Cable. For reporting purposes, the
deconsolidation of A-R Cable became effective on January 1, 1992 and the Company
is accounting for its investment using the equity method of accounting.
The Company continues to guarantee the debt of A-R Cable to GECC under a limited
recourse guarantee wherein recourse to the Company is limited solely to the
common stock and Series B Preferred Stock of A-R Cable owned by a wholly-owned
subsidiary of the Company.
In October and November 1992, A-R Cable repurchased approximately an aggregate
$6.9 million principal amount of the A-R Cable Notes at an average price of
$98.60 per $100 principal amount. The funds for such repurchase were obtained
by additional borrowings under A-R Cable's secured revolving credit line. In
February 1993, A-R Cable redeemed the remaining principal amount of A-R Cable
Notes and accrued interest thereon in the aggregate amount of $29.3 million.
The funds for such redemption were obtained from an additional revolving credit
line provided by GECC.
CABLEVISION OF BOSTON. Cablevision of Boston, a Massachusetts limited
partnership, is engaged in the construction, ownership and operation of cable
television systems in Boston and Brookline, Massachusetts. The Company had
advanced net funds to Cablevision of Boston as of December 31, 1993 amounting to
approximately $52.0 million. Due to uncertainties existing during 1985 (which
subsequently were resolved),
(23)
the Company wrote off for accounting purposes its entire investment in and
advances to Cablevision of Boston of $34.5 million as of September 30, 1985.
Subsequent to 1985, a subsidiary of the Company exchanged $45.7 million of
advances, consisting of amounts previously written off of $34.5 million,
interest of $3.2 million that had not been recognized for accounting purposes,
and $8.0 million of subsequent advances, for $45.7 million of preferred equity
in Cablevision of Boston. After this exchange, the Company advanced an
additional $9.5 million to Cablevision of Boston; in addition, at December 31,
1993, $81.2 million of unpaid distributions had accrued on the Company's
preferred equity. At December 31, 1993, as a result of the write-off referred
to above and non-recognition for accounting purposes of the unpaid
distributions, the Company's consolidated financial statements reflected $17.5
million due from Cablevision of Boston. The Company's preferred equity is
subordinated to the indebtedness of Cablevision of Boston (including the
Company's $9.5 million of advances not converted to preferred equity) and
accrued but unpaid management fees due to a corporation owned by the managing
general partner, which indebtedness and management fees aggregated approximately
$92.2 million at December 31, 1993, and any working capital deficit incurred in
the ordinary course of business.
In addition to the Company's preferred equity interest in Cablevision of Boston,
the Company is a limited partner in Cablevision of Boston and currently holds a
7% prepayout interest and a 20.7% postpayout interest. Mr. Dolan holds directly
or indirectly a 1% prepayout general partnership interest and a 23.5% postpayout
general partnership interest in Cablevision of Boston. With respect to
Cablevision of Boston, "payout" means the date on which the limited partners
are distributed the amount of their original investment.
CABLEVISION OF CHICAGO. Cablevision of Chicago owns cable television systems
operating in the suburban Chicago area. The Company does not have a material
ownership interest in Cablevision of Chicago but had loans and advances
outstanding to Cablevision of Chicago in the amount of $12.4 million (plus $10.1
million in accrued interest which the Company has fully reserved) as of December
31, 1993, which loans and advances are subordinated to Cablevision of Chicago's
senior credit facility. Mr. Dolan currently holds directly or indirectly an
approximate 1% prepayout and a 32.7% postpayout general partnership interest in
the cable television systems owned and operated by Cablevision of Chicago. With
respect to Cablevision of Chicago, "payout" means the date on which the limited
partners in Cablevision of Chicago are distributed the amount of their original
investment, plus interest thereon, if applicable. In February, 1993 Cablevision
of Chicago amended its credit facility, increasing the maximum amount available
under such facility to $85.0 million and obtaining the ability to pay certain
subordinated debt.
CABLEVISION OF NEWARK. In April 1992, Cablevision of Newark, a partnership 25%
owned and managed by the Company and 75% owned by an affiliate of Warburg
Pincus, acquired cable television systems located in Newark and South Orange,
New Jersey ("Gateway Cable") from Gilbert Media Associates, L.P. for a cash
purchase price of approximately $76.5 million. The Company's total capital
contributions to Cablevision of Newark were approximately $6.0 million. The
Company manages the
(24)
operations of Cablevision of Newark for a fee equal to 3-1/2% of gross receipts,
as defined, plus reimbursement of certain costs and an allocation of certain
selling, general and administrative expenses.
U.S. CABLE. In connection with the V Cable Reorganization (see Note 2 of Notes
to Consolidated Financial Statements), V Cable acquired for $20.0 million a 20%
interest in U.S. Cable. The Company has managed the properties of U.S. Cable
since June 1992 under management agreements that provide for cost reimbursement,
including an allocation of overhead charges.
(25)
PROGRAMMING OPERATIONS
GENERAL.
The Company conducts its programming activities through Rainbow Programming, its
wholly owned subsidiary, and through subsidiaries of Rainbow Programming in
partnership with certain unaffiliated entities, including National Broadcasting
Company, Inc. ("NBC") and Liberty Media Corporation ("Liberty"). Rainbow
Programming's businesses include eight regional SportsChannel services, two
national entertainment services (American Movie Classics Company ("AMCC") and
Bravo Network ("Bravo")), News 12 Long Island (a regional news service serving
Long Island, New York) and the national backdrop sports services of Prime
SportsChannel Networks ("Prime SportsChannel"). Rainbow Programming also owns
an interest in Courtroom Television Network. Rainbow Programming's
SportsChannel services provide regional sports programming to the New York,
Philadelphia, New England, Chicago, Cincinnati, Cleveland, San Francisco and
Florida areas. AMCC is a national program service featuring classic, unedited
and non-colorized films from the 1930s through the 1970s. Bravo is a national
program service offering international films and performing arts programs,
including jazz, dance, classical music, opera and theatrical programs.
Rainbow Programming acts as managing partner for each of these programming
businesses, other than Courtroom Television Network (which is managed by Time
Warner), and reflects its share of the profits or losses in these businesses
using the equity method of accounting. Rainbow Programming may from time to
time sell equity interests in certain of these businesses, which sale(s) would
reduce Rainbow Programming's ownership interests therein. Certain of Rainbow
Programming's programming interests are held through Rainbow Program Enterprises
("RPE"), which is substantially wholly owned by Rainbow Programming.
In December 1992, Rainbow Programming, NBC and Liberty entered into an agreement
to form Prime SportsChannel, a partnership to supply national sports
programming, including live and taped sports events and sports news, to regional
sports markets in the United States. The partnership, which is owned 50% by an
affiliate of Liberty and 25% each by affiliates of Rainbow and NBC, delivers two
national sports program services: Prime Network, consisting primarily of live
and taped events, and SportsChannel America, featuring sports news and
occasional events. In addition, an affiliate of Liberty concurrently acquired a
one-third partnership interest in SportsChannel Prism Associates ("Prism"),
which operates two regional sports and entertainment programming services in
Philadelphia. Following this transaction, affiliates of Liberty, Rainbow
Programming and NBC are equal one-third partners in Prism.
In January 1993, Liberty exercised the remainder of its option to purchase an
additional 0.1% interest in SportsChannel Chicago Associates equally from both
Rainbow Programming and NBC. Accordingly, Liberty now has a 50% ownership
interest while Rainbow and NBC each have a 25% interest in the company.
(26)
As previously announced, the Company is considering possible transactions that
could result in Rainbow Programming, or another entity holding the Company's
programming interests, becoming a publicly-held company, including a spin-off of
all or a portion of Rainbow Programming or such entity to the Company's common
stockholders.
Rainbow Programming and NBC formed a venture to exploit the pay-per-view
television rights to the 1992 Summer Olympics. Rainbow Programming's share of
the losses of the venture amounted to its maximum obligation of $50 million and
this payment was made to NBC in January 1993.
On August 2, 1993, Rainbow Programming received a notice from the AMCC partner
affiliated with Liberty Media Corporation initiating the buy-sell procedure and
setting a stated value of $390 million for all the partnership interests in
AMCC. The partnership agreement provides that the non-initiating partner has a
period of 45 days from receipt of the buy-sell notice to elect to purchase the
initiating partner's interest at the stated value or sell its interest at the
stated value. On September 16, 1993, Rainbow Programming notified its partners
in AMCC that it had elected to purchase Liberty Media's 50% interest in AMCC at
the stated value. The Company anticipates that the transaction will be
consummated in the second quarter of 1994.
Rainbow Programming's financing needs have been funded by the Restricted Group's
investments in and advances to Rainbow Programming, by sales of equity interests
in various programming businesses and, to a limited extent, through separate,
external debt financing. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources".
COMPETITION.
There are numerous programming services with which Rainbow Programming competes
for cable television system distribution and for subscribers, including network
television, other national and regional cable services, independent broadcast
television stations, television superstations, the home videocassette industry,
and developing pay-per-view services. Rainbow Programming and the other
programming services are competing for limited channel capacity and for
inclusion in the basic service tier of the systems offering their programming
services. Many of these program distributors are large, publicly-held companies
which have greater financial resources than Rainbow Programming.
Rainbow Programming also competes for the availability of programming, through
competition for telecast rights to films and competition for rights agreements
with sports teams. The Company anticipates that such competition will increase
as the number of programming distributors increases.
(27)
In general, the programming services offered by Rainbow Programming compete with
other forms of television-related services and entertainment media on the basis
of the price of services, the variety and quality of programming offered and the
effectiveness of Rainbow Programming's marketing efforts.
REGULATION.
Cable television program distributors such as Rainbow Programming are not
regulated by the FCC under the Communications Act of 1934. To the extent that
regulations and laws, either presently in force or proposed, hinder or stimulate
the growth of the cable television and satellite industries, the business of
Rainbow Programming will be directly affected. As discussed above under
"Business - Cable Television Operations - Regulation", the 1992 Cable Act limits
in certain ways the Company's ability to freely manage the Rainbow Programming
services or carry the Rainbow Programming services on their affiliates' systems
or could impose other regulations on the Rainbow Programming companies.
The 1984 Cable Act prohibits localities from requiring carriage of specific
programming services, providing a more open market for Rainbow Programming and
other cable program distributors. The 1984 Cable Act limits the number of
commercial leased access channels that a cable television operator must make
available for potentially competitive services but the 1992 Cable Act empowers
the FCC to set the rates and conditions for such leased access channels. The
reimposition of the FCC's rules requiring blackout of syndicated programming on
distant broadcast signals for which a local broadcasting station has an
exclusive contract opened new channels for Rainbow Programming's services.
Satellite common carriers, from whom Rainbow Programming and its affiliates
obtain transponder channel time to distribute their programming, are directly
regulated by the FCC. All common carriers must obtain from the FCC a
certificate for the construction and operation of their interstate
communications facilities. Satellite common carriers must also obtain FCC
authorization to utilize satellite orbital slots assigned to the United States
by the World Administrative Radio Conference. Such slots are finite in number,
thus limiting the number of carriers that can provide satellite service and the
number of channels available for program producers and distributors such as
Rainbow Programming and its affiliates. Nevertheless, there are at present
numerous competing satellite services that provide transponders for video
services to the cable industry.
All common carriers must offer their communications service to Rainbow
Programming and others on a nondiscriminatory basis (including by means of a
lottery). A satellite carrier cannot unreasonably discriminate against any
customer in its charges or conditions of carriage.
(28)
ADVERTISING SERVICES
Rainbow Advertising represents certain of the Company's cable television systems
in the sales of advertising time to regional and local advertisers. Rainbow
Advertising also represents each of the SportsChannel regional programming
services and the News 12 Long Island programming service in the sales of
advertising time to national and regional advertisers. Rainbow Advertising
represents cable television systems unaffiliated with the Company in the sales
of spot advertising to national and regional advertisers. Rainbow Advertising
also has contracted with certain unaffiliated cable television operators to act
as their exclusive representative for the sales of advertising time to local
advertisers.
OTHER AFFILIATES
ATLANTIC PUBLISHING. Atlantic Cable Television Publishing Corporation
("Atlantic Publishing") holds a minority equity interest and a debt interest in
a company that publishes a weekly cable television guide which is offered to the
Company's subscribers and to other unaffiliated cable television operators. As
of December 31, 1993, the Company had advanced an aggregate of approximately
$18.3 million to Atlantic Publishing, of which approximately $0.7 million was
advanced during 1992 and approximately $0.5 million was paid back during 1993.
The Company has written off all of its advances to Atlantic Publishing other
than $4.0 million. Atlantic Publishing is owned by a trust for certain Dolan
family members; however, the Company has the option to purchase Atlantic
Publishing for an amount equal to the owner's net investment therein plus
interest. The current owner has made only a nominal investment in Atlantic
Publishing to date.
RADIO STATION WKNR. In 1990, the Company and a partner purchased Cleveland
Radio Associates ("WKNR"), an AM radio station serving the Cleveland
metropolitan area. The Company purchased its partner's interest and its total
purchase price for its 100% interest in the radio station was $2.5 million. The
Company has implemented a change for WKNR to an all-sports format. The Company
purchased WKNR in order to explore possible synergies that may exist between
radio and its cable television systems and regional sports channel service in
the Cleveland market.
EMPLOYEES AND LABOR RELATIONS
As of December 31, 1993, the Company had 3,197 full-time, 370 part-time and 69
temporary employees. During 1991, the International Brotherhood of Electrical
Workers ("IBEW") conducted an organizing campaign among employees involved in
the operation of News 12 Long Island. In connection with that campaign, the
IBEW claimed that various unfair labor practices were committed. An NLRB
administrative law judge found that News 12's downsizing of its work force in
1991 was based upon valid economic factors and was not an unfair labor practice.
The IBEW intends to appeal this determination. The administrative law judge has
also found that News 12 offered improper promises to certain employees and
improper threats of retaliation to
(29)
others. News 12 intends to appeal this determination. As of December 31, 1993,
News 12 Long Island had 40 full-time, 7 part-time and 102 temporary employees.
In January 1993, IBEW Local 3 filed a Petition seeking to organize certain
employees in CNYC's engineering department. At an election held on March 23,
1994, the employees voted not to be represented by the union. CNYC currently
employs 642 employees of whom approximately 145 comprise the proposed bargaining
unit.
There are no collective bargaining agreements with employees in effect, and the
Company believes that its relations with its employees are satisfactory.
(30)
ITEM 2. PROPERTIES
The Company generally leases the real estate where its business offices,
microwave receiving antennae, earth stations, transponders, microwave towers,
warehouses, headend equipment, hub sites, program production studios and access
studios are located. Significant leasehold properties include eleven business
offices, comprising the Company's headquarters located in Woodbury, New York
with approximately 248,000 square feet of space, and the headend sites. The
Company believes its properties are adequate for its use.
The Company generally owns all assets (other than real property) related to the
cable television operations of the Restricted Group, including its program
production equipment, headend equipment (towers, antennae, electronic equipment
and satellite earth stations), cable system plant (distribution equipment,
amplifiers, subscriber drops and hardware), converters, test equipment, tools
and maintenance equipment. Similarly, the unconsolidated entities managed by
the Company generally own such assets related to their cable television
operations. The Company generally leases its service and other vehicles.
Substantially all of the assets of the Restricted Group, CNYC, V Cable and
VC Holding are pledged to secure borrowings under their respective credit
agreements.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to various lawsuits, some involving substantial amounts.
Management does not believe that the resolution of such lawsuits will have a
material adverse impact on the financial position of the Company. See Note 12
of Notes to Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
(31)
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Class A Common Stock, par value $.01 per share ("Class A Common
Stock"), is traded on the American Stock Exchange under the symbol "CVC". The
following table sets forth the high and low sales prices for the last two years
of Class A Common Stock as reported by the American Stock Exchange for the
periods indicated.
1993 1992
------------- -------------
Quarter High Low High Low
------- ---- --- ---- ---
First 44 34-3/8 36 29
Second 38-7/8 29-3/8 32-1/2 27
Third 49-5/8 37-1/2 35 25-3/4
Fourth 72 48-1/4 35 24-7/8
As of March 15, 1994, there were 719 holders of record of Class A Common Stock.
There is no public trading market for the Company's Class B Common Stock, par
value $.01 per share ("Class B Common Stock"). As of March 15, 1994, there were
23 holders of record of Class B Common Stock.
DIVIDENDS. The Company has not paid any dividends on shares of Class A or Class
B Common Stock. The Company intends to retain earnings to fund the growth of
its business and does not anticipate paying any cash dividends on shares of
Class A or Class B Common Stock in the foreseeable future.
The Company may pay cash dividends on its capital stock only from surplus as
determined under Delaware law. Holders of Class A and Class B Common Stock are
entitled to receive dividends equally on a per share basis if and when such
dividends are declared by the Board of Directors of the Company from funds
legally available therefor. No dividend may be declared or paid in cash or
property on shares of either Class A or Class B Common Stock unless the same
dividend is paid simultaneously on each share of the other class of common
stock. In the case of any stock dividend, holders of Class A Common Stock are
entitled to receive the same percentage dividend (payable in shares of Class A
Common Stock) as the holders of Class B Common Stock receive (payable in shares
of Class B Common Stock). In addition, the Company is restricted from paying
dividends on its capital stock, other than the Company's 8% Series C Cumulative
Preferred Stock, under the provisions of its debt agreements.
Under the most restrictive of these provisions, cash dividends could not be paid
on Class A or Class B Common Stock at December 31, 1993. Dividends may not be
paid in respect of shares of Class A or Class B Common Stock unless all
dividends due and payable in respect of the preferred stock of the Company have
been paid or provided for.
(32)
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL AND STATISTICAL DATA
The operating and balance sheet data included in the following selected
financial data have been derived from the consolidated financial statements of
the Company. Acquisitions made by the Company were accounted for under the
purchase method of accounting and, accordingly, the acquisition costs were
allocated to the net assets acquired based on their fair value, except for
assets owned by Mr. Dolan or affiliates of Mr. Dolan which were recorded at
historical cost. Acquisitions are reflected in operating, balance sheet and
statistical data from the time of acquisition. The operating data for 1992
reflects the deconsolidation of the Company's A-R Cable subsidiary for reporting
purposes, effective January 1, 1992. The selected financial data presented
below should be read in conjunction with the financial statements of the Company
and notes thereto included in Item 8 of this Report.
CABLEVISION SYSTEMS CORPORATION
---------------------------------------------------------------------
DECEMBER 31,
---------------------------------------------------------------------
1993 1992 1991 1990 1989
--------- --------- --------- --------- ---------
(Dollars in thousands, except per share data)
Operating Data:
- ---------------
Net revenues . . . . . . . . . . . . . . . . . . . . . . . $ 666,724 $ 572,487 $ 603,272 $ 562,989 $ 492,688
Operating expenses
Technical . . . . . . . . . . . . . . . . . . . . . . 241,877 204,449 213,059 202,850 181,513
Selling, general and administrative . . . . . . . . . 172,687 120,356 121,527 118,825 105,940
Depreciation and amortization . . . . . . . . . . . . 194,904 168,538 215,326 216,288 191,310
------- ------- ------- ------- -------
Operating profit . . . . . . . . . . . . . . . . . . . . . 57,256 79,144 53,360 25,026 13,925
Other income (expense):
Interest expense, net . . . . . . . . . . . . . . . . (230,327) (193,379) (257,189) (261,114) (226,467)
Share of affiliates' net loss . . . . . . . . . . . . (61,017) (47,278) (23,780) (39,980) (34,019)
Gain (loss) on sale of programming interests, net (330) 7,053 15,505 - 102,212
Gain on sale of securities, net . . . . . . . . . . . - 733 5,806 - 4,502
Provision for loss on Olympic venture . . . . . . . . - (50,000) - - -
Loss on sale of preferred stock . . . . . . . . . . . - (20,000) - - -
Write off of deferred financing costs . . . . . . . . (1,044) (12,284) - - -
Settlement of litigation and related matters. . . . . - (5,655) (9,677) - -
Provision for preferential payment to party . . . . . (5,600) ( 2,662) - - -
Transaction fees . . . . . . . . . . . . . . . . . . - - - 14,759 (13,029)
Minority interest . . . . . . . . . . . . . . . . . . 3,000 - - - -
Miscellaneous, net. . . . . . . . . . . . . . . . . . (8,720) (6,175) (11,224) (10,066) (746)
------- ------- ------- ------- -------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . (246,782) (250,503) (227,199) (271,375) (153,622)
Preferred dividend requirement . . . . . . . . . . . . . . (885) (885) (4,464) (4,065) (3,710)
------- ------- ------- ------- -------
Net loss applicable to common shareholders . . . . . . . . $(247,667) $(251,388) $(231,663) $(275,440) $(157,332)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net loss per common share . . . . . . . . . . . . . . . . $ (10.83) $ (11.17) $ (10.32) $ (12.36) $ (7.12)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Average number of common shares outstanding (in thousands) 22,859 22,512 22,446 22,290 22,082
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Cash dividends declared per common share . . . . . . . . . $ - $ - $ - $ - $ -
------- ------- ------- ------- -------
------- ------- ------- ------- -------
CABLEVISION SYSTEMS CORPORATION
---------------------------------------------------------------------
DECEMBER 31,
---------------------------------------------------------------------
1993 1992 1991 1990 1989
(DOLLARS IN THOUSANDS)
Balance Sheet Data:
- -------------------
Total assets . . . . . . . . . . . . . . . . . . . $1,309,444 $ 1,251,157 $1,475,672 $1,641,612 $1,756,271
Total debt . . . . . . . . . . . . . . . . . . . . 2,235,499 2,004,452 2,211,056 2,170,275 2,015,642
Deficit investment in affiliate. . . . . . . . . . 307,758 251,679 - - -
Minority interest. . . . . . . . . . . . . . . . . - 3,000 - - -
Cumulative Redeemable Preferred Stock. . . . . . . - - 32,094 28,515 25,335
Stockholders' deficiency . . . . . . . . . . . . . (1,503,244) (1,250,248) (932,428) (702,448) (427,876)
Statistical Data:
- -----------------
Homes passed by cable. . . . . . . . . . . . . . . 2,240,000 2,019,000 2,005,000 1,976,000 1,946,000
Basic service subscribers. . . . . . . . . . . . . 1,379,000 1,262,000 1,372,000 1,326,000 1,274,000
Basic service subscribers as a percentage of
homes passed. . . . . . . . . . . . . . . . . 61.5% 62.5% 68.4% 67.1% 65.5%
Number of premium television units . . . . . . . . 3,003,000 2,802,000 2,326,000 2,401,000 2,397,000
Average number of premium units per basic
subscriber at period end. . . . . . . . . . . 2.2 2.2 1.7 1.8 1.9
Average monthly revenue per basic subscriber (1) . $36.59 $37.64 $34.43 $34.09 $33.12
- ------------------------
(1) Based on recurring service revenues divided by average subscribers for the month of December.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
RECENT CABLE REGULATORY DEVELOPMENTS
As a result of the initial FCC rate regulations, significant rate reductions
were required in a number of the Company's cable television systems. The
Company estimates that rate changes and other adjustments, effective
September 1, 1993, made in compliance with the initial FCC regulations, caused
revenues and operating cash flow (operating profit before depreciation and
amortization) to decline $14.9 million and $13.4 million, respectively, for the
period from September 1, through December 31, 1993 from those that would have
existed absent such adjustments. On February 22, 1994, the FCC ordered a
further reduction in rates in effect on September 30, 1992 for the basic service
tier. For a further description see Item 1 - "Business - Cable Television
Operations - Competition and Regulation".
The Company is currently in the process of attempting to analyze the impact of
the revised rate regulations announced by the FCC in February 1994. Because the
Company has not yet had an opportunity to review the formal text of the revised
regulations, it is not possible at this time to predict the ultimate financial
impact of these rate regulations on the Company and its subsidiaries; however,
the Company expects further rate reductions will be required in a number of its
cable television systems.
In connection with the implementation of its revised rate structure resulting
from the initial FCC rate regulation, the Company introduced a number of
measures, including the provision of alternate service offerings and repackaging
of certain services in order to mitigate the negative impact of FCC regulation
on the Company's rate structure. Following the latest FCC rate regulation, the
Company intends to introduce additional marketing measures. The Company is not
able to predict fully the extent of the effect any of such measures will have in
mitigating the impact of rate regulation.
RECENT ACQUISITIONS AND RESTRUCTURINGS
The Company's high levels of interest expense and depreciation and amortization,
largely associated with acquisitions made by the Company in the past, have had
and will continue to have a negative impact on the reported results of the
Company. Consequently, the Company expects to report substantial net losses for
at least the next several years.
For a description of the Company's recent acquisitions and restructurings, see
Item 1 - "Business - Consolidated Cable Affiliates and Other Cable Affiliates"
and Note 2 of Notes to Consolidated Financial Statements. For a description of
the Company's pending acquisitions see Item 1 - "Business - Recent
Developments".
(35)
RESULTS OF OPERATIONS
The following table sets forth on a historical basis certain items related to
operations as a percentage of net revenues for the periods indicated. The
results of operations of CNYC are included in 1992 from the date of acquisition.
YEARS ENDED DECEMBER 31,
--------------------------------------------
1993 1992
------------------- -------------------- (INCREASE)
% OF NET % OF NET DECREASE
AMOUNT REVENUES AMOUNT REVENUES IN NET LOSS
------ -------- ------ -------- -----------
(Dollars in thousands)
Net revenues......................................... $ 666,724 100% $ 572,487 100% $ 94,237
Operating expenses:
Technical.......................................... 241,877 36 204,449 36 (37,428)
Selling, general & administrative.................. 172,687 26 120,356 21 (52,331)
--------- --------- --------
Operating cash flow.................................. 252,160 38 247,682 43 4,478
Depreciation and amortization........................ 194,904 29 168,538 29 (26,366)
--------- --------- --------
Operating profit..................................... 57,256 9 79,144 14 (21,888)
Other income (expense):
Interest expense, net.............................. (230,327) (35) (193,379) (34) (36,948)
Share of affiliates' net loss...................... (61,017) (9) (47,278) (8) (13,739)
Gain (loss) on sale of programming interests, net.. (330) - 7,053 1 (7,383)
Gain on sale of marketable securities, net......... - - 733 - (733)
Provision for loss on Olympics venture............. - - (50,000) (9) 50,000
Loss on sale of preferred stock.................... - - (20,000) (3) 20,000
Write off of deferred financing costs.............. (1,044) - (12,284) (2) 11,240
Settlement of litigation and related matters....... - - (5,655) (1) 5,655
Provision for preferential payment to related party (5,600) (1) (2,662) - (2,938)
Minority interest.................................. 3,000 - - - 3,000
Miscellaneous...................................... (8,720) (1) (6,175) (1) (2,545)
--------- --------- --------
Net loss............................................. $(246,782) (37)% $(250,503) (44)% $ 3,721
--------- --------- --------
--------- --------- --------
Currently payable interest expense, net.............. $ 182,225 27% $ 141,843 25%
--------- ---------
--------- ---------
COMPARISON OF YEAR ENDED DECEMBER 31, 1993 VERSUS YEAR ENDED DECEMBER 31, 1992.
NET REVENUES for the year ended December 31, 1993 increased $94.2 million (16%)
as compared to net revenues for the prior year. Approximately $45.8 million
(8%) of the increase is attributable to the CNYC Acquisition on July 10, 1992;
approximately $37.1 million (6%) to internal growth of over 112,700 (9%) in the
average number of subscribers during the year; and approximately $11.6 million
(2%) resulted from an increase in other revenue sources such as advertising.
These increases were offset slightly by a decrease of approximately $0.3 million
attributable to decreased revenue per subscriber resulting primarily from
compliance with FCC regulations. See "Recent Cable Regulatory Developments"
above.
TECHNICAL EXPENSES for 1993 increased $37.4 million (18%) over the 1992 amount.
Approximately 11% of the 18% increase is attributable to the CNYC Acquisition
(whose programming costs reflect high premium service penetration); the
remaining
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7% is attributable to increased costs directly associated with the growth in
subscribers and revenues discussed above. As a percentage of net revenues,
technical expenses increased less than 1% during 1993 as compared to 1992;
excluding the effect of the CNYC Acquisition, such expenses would have remained
relatively constant during 1993.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $52.3 million (43%) for
1993 as compared to the 1992 level. Approximately 13% of this 43% increase is
directly attributable to the CNYC Acquisition, 17% to expense adjustments
related to an incentive stock plan and 13% to general cost increases, including
higher administrative and sales and marketing costs (a portion of which was
attributable to compliance with FCC regulation during the third quarter of
1993). As a percentage of net revenues, selling, general and administrative
expenses increased 5%; excluding the effects of the CNYC Acquisition and the
incentive stock plan expense adjustments, such expenses, as a percent of net
revenues, would have decreased 1% during 1993.
OPERATING CASH FLOW (operating profit before depreciation and amortization)
increased $4.5 million (2%) to $252.2 million for 1993 from $247.7 million for
1992. A $7.8 million (3%) increase, attributable to the CNYC Acquisition, was
partially offset by the combined effect of the revenue and expense changes,
primarily the impact of the higher selling, general and administrative expenses,
noted above.
DEPRECIATION AND AMORTIZATION EXPENSE increased $26.4 million (16%) during 1993
as compared to the 1992 amount. The acquisition of CNYC contributed $8.6
million (5%) of this increase. The components of the remaining increase in
depreciation and amortization of $17.8 million (11%) are as follows:
Depreciation expense for the Company, excluding CNYC, increased $10.7 million
during 1993 resulting primarily from depreciation charges on capital
expenditures made during 1993 and 1992. Amortization expense, excluding CNYC,
increased $7.1 million, reflecting an increase
of $10.1 million due to the implementation of SFAS 109 during 1993 offset to
some extent by a decrease of $3.0 million primarily due to certain intangible
assets becoming fully amortized.
NET INTEREST EXPENSE increased $36.9 million (19%) during 1993 compared to
1992. Approximately $3.7 million (2%) of the increase is attributable to the
CNYC Acquisition. An increase of $18.2 million (9%) is due to the net effect
of the repayment of bank debt, bearing lower average interest rates with the
issuances of a series of senior subordinated debentures as well as to an
increase in average debt levels in 1993. An additional $15.0 million (8%)
increase resulted from V Cable's debt restructuring on December 31, 1992,
primarily from amortization of deferred interest expense incurred in
connection therewith.
SHARE OF AFFILIATES' NET LOSSES of $61.0 million for 1993 and $47.3 million for
1992 consist primarily of the Company's share of A-R Cable's net losses ($56.4
million in 1993 and $30.3 million in 1992), the Company's net share of the
profits and losses in certain programming businesses in which the Company has
varying ownership interests, (amounting to an $8.8 million profit in 1993 and a
$12.4 million loss in
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1992) and the Company's share of the net losses of other entities, primarily
U.S. Cable (in 1993) and Cablevision of Newark (in 1993 and 1992), which
amounted to $13.4 million and $4.6 in 1993 and 1992, respectively.
MINORITY INTEREST in 1993 represents U.S. Cable's share of the losses of VC
Holding, limited to its $3.0 million investment. At December 31, 1992, as part
of a restructuring and reorganization involving the Company's unrestricted
subsidiary V Cable, V Cable acquired a 20% interest in U.S. Cable for $20
million, and U.S. Cable acquired a 19% interest in VC Holding (a subsidiary of V
Cable formed to hold substantially all of V Cable's assets) for $3.0 million.
OTHER ITEMS
During 1993, net deferred financing charges of approximately $1.0 million
associated with the reduction of the Company's credit facility with proceeds
from the issuance of the Company's $150 million debentures in April, were
written off.
In connection with the acquisition of CNYC, for the year ended December 31,
1993, the Company expensed $5.6 million representing the proportionate amount
due with respect to the Annual Payment. For the year ended December 31, 1993,
the Company has provided for an additional $22.7 million due Mr. Dolan in
respect of the Preferred Payment that would be due him in the event he exercises
his "put" as further described under "Business - Cable Television Operations -
Consolidated Cable Affiliates - Cablevision of New York City". the additional
provision is based on management's estimate of the Appraised Equity Value of the
system at December 31, 1993 and has been charged to par value in excess of
capital contributed in the accompanying consolidated financial statements. The
total amount due Mr. Dolan as of December 31, 1993 in respect of the Preferred
Payment amounted to $91.6 million, reflecting a reduction of $3.7 million in
1993 representing Mr. Dolan's obligation to reimburse the Company in connection
with certain claims paid or owing by CNYC. See Note 2 of Notes to Consolidated
Financial Statements.
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS 115
"Accounting for Certain Investments in Debt and Equity Securities". SFAS 115
addresses the accounting and reporting for investments in equity securities that
have readily determinable fair values, other than those accounted for under the
equity method or as investments in consolidated subsidiaries, and all
investments in debt securities. SFAS 115 is effective for fiscal years
beginning after December 15, 1993. The effect of initially adopting SFAS 115
will be reported in a manner similar to a cumulative effect of a change in
accounting principle. Management of the Company believes that the
implementation of SFAS 115 will not have a material effect on the financial
position and results of operations of the Company.
In November 1992, the FASB issued SFAS No. 112 "Employers Accounting for
Postemployment Benefits". This statement is effective for fiscal years
beginning after December 15, 1993 and management of the Company believes that
the implementation
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of this statement will not have a significant impact on the results of
operations or financial posit