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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, 1995
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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 _________________.
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Media Crossways, Woodbury, New York 11797
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(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.
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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 15, 1996: $745,341,699
Number of shares of common stock outstanding as of March 15, 1996:
Class A Common Stock - 14,340,782
Class B Common Stock - 11,572,709
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.
TABLE OF CONTENTS
Page
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PART I
Item 1. Business. 3
2. Properties. 28
3. Legal Proceedings. 28
4. Submission of Matters to a Vote of
Security Holders. 28
PART II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters. 29
6. Selected Financial Data. 31
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 33
8. Consolidated Financial Statements. 48
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. 89
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. 89
* 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 2,061,000 subscribers at December 31, 1995.
The Company also has ownership interests in and/or manages other cable
television systems which served an aggregate of approximately 662,000
subscribers at December 31, 1995 and has interests in companies that produce
and distribute national and regional programming services and that provide
advertising sales services for the cable television industry. The Company
was formed in 1985 to effect a reorganization of its predecessors.
Cable television is a service that delivers multiple channels of television
programming to subscribers who pay a monthly fee for the services they
receive. Television and radio signals are received over-the-air or via
satellite delivery by antennas, microwave relay stations and satellite earth
stations and are modulated, amplified and distributed over a network of
coaxial and fiber optic cable to the subscribers' television sets. Cable
television systems typically are constructed and operated pursuant to
non-exclusive franchises awarded by local governmental authorities for
specified periods of time.
The Company's cable television systems offer varying levels of service which
may include, among other programming, local broadcast network affiliates and
independent television stations, satellite-delivered "superstations" such as
WTBS (Atlanta), certain other news, information and entertainment channels
such as CNN, CNBC, ESPN, MTV, and certain premium services such as HBO,
Showtime, The Movie Channel and Cinemax.
The Company's cable television revenues are derived principally from monthly
fees paid by subscribers. In addition to recurring subscriber revenues, the
Company derives revenues from installation charges, from the sales of
pay-per-view movies and events, and from the sale of advertising time on
advertiser supported programming. Certain services and equipment provided by
substantially all of the Company's cable television systems are subject to
regulation. See "Business - Cable Television Operations - Regulation - 1992
Cable Act."
For financing purposes, the Company is structured as a restricted group and
an unrestricted group of subsidiaries. The restricted group consists of
Cablevision Systems Corporation and certain of its subsidiaries, including
Cablevision of New York City ("CNYC") and, as of December 15, 1995, a
subsidiary holding the cable television assets previously a part of
Cablevision of Boston Limited Partnership ("Cablevision of Boston") (the
"Restricted Group"). The unrestricted group of subsidiaries consists
primarily of V Cable, Inc. ("V Cable"), Cablevision MFR, Inc. ("Cablevision
MFR"), and Rainbow Programming Holdings, Inc. (including Rainbow Advertising
Sales Corporation ("Rainbow
(3)
Advertising"), American Movie Classics Company ("AMCC") and SportsChannel
Associates (New York) ("SportsChannel New York")) (collectively, "Rainbow
Programming"). In addition, the Company has an unrestricted group of
investments, consisting of investments in A-R Cable Services, Inc. ("A-R
Cable"), U.S. Cable Television Group, L.P. ("U.S. Cable"), Cablevision of
Framingham Holdings, Inc. ("CFHI"), A-R Cable Partners 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 (74.6% of the Company's total
subscribers) and the greater Cleveland metropolitan area (14.8% 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
V CABLE TRANSACTIONS
On February 2, 1996, the Company entered into an agreement, as amended, (the
"GECC Agreement") with General Electric Capital Corporation ("GECC"),
pursuant to which the Company plans to effect a reorganization and
recapitalization relating to its V Cable subsidiary. As of December 31,
1995, V Cable served approximately 378,000 subscribers, principally in the
suburbs of Cleveland, Ohio and on Long Island. As part of this
reorganization and recapitalization, (i) On March 18, 1996 the Company paid
$500 million of V Cable debt and $70 million of U.S. Cable debt, together
with accrued interest, with proceeds from the Company's issuance in February
1996 of $650 million aggregate liquidation preference of 11-1/8% Series L
Redeemable Exchangeable Preferred Stock (the "Series L Preferred Stock");
(ii) all remaining indebtedness of V Cable (which would have amounted to $399
million at December 31, 1995 after giving effect to the March 18, 1996
repayment of $500 million) will be paid with the remainder of the proceeds of
the Series L Preferred Stock, additional borrowings under the Restricted
Group's credit agreement and from funds available under a new Cablevision of
Ohio credit facility, referred to below; (iii) the Company will contribute
its North Coast Cable television system (which served approximately 88,000
subscribers in the Cleveland metropolitan area as of December 31, 1995),
which is currently part of the Company's Restricted Group, to a new
unrestricted subsidiary, Cablevision of Ohio which will also hold V Cable's
Ohio cable television systems and Cablevision of Ohio will enter into a new
$450 million credit facility with a group of banks; (iv) the Long Island
cable television systems of V Cable (161,000 subscribers as of December 31,
1995) will be designated as part of the Company's Restricted Group and the
balance of the debt owed to GECC associated with those systems will be repaid
with the proceeds of Restricted Group borrowings under the Company's credit
agreement; and (v) the 80% interest in U.S. Cable (which served
(4)
approximately 242,000 subscribers as of December 31, 1995), including U.S.
Cable's 19% interest in VC Holdings, will be acquired for an aggregate
additional cost of $151 million which will be raised through a separate bank
facility (U.S. Cable will be part of the Company's Unrestricted Group).
NEW CABLEVISION OF OHIO CREDIT FACILITY
As part of the V Cable reorganization and recapitalization, the Company will
combine its existing North Coast Cable television system and the Ohio cable
television systems of V Cable into Cablevision of Ohio, which will be a
wholly-owned subsidiary of the Company and a member of the Unrestricted
Group. A group of banks has committed to provide a $450 million credit
facility to Cablevision of Ohio, consisting of a $375 million nine-year
reducing revolving credit facility and a $75 million 9-1/2 year term loan.
In connection with the consummation of the reorganization and
recapitalization of V Cable, Cablevision of Ohio expects to draw
approximately $289 million under the $450 million credit facility which will
be used to repay outstanding V Cable debt to GECC and to repay Restricted
Group debt assumed by Cablevision of Ohio in connection with the contribution
of North Coast Cable.
U.S. CABLE ACQUISITION
On March 18, 1996, the Company contributed $70 million of proceeds of the
Series L Preferred Stock mentioned above to U.S. Cable. U.S. Cable applied
the $70 million to the prepayment to GECC of a portion of the indebtedness
under its credit facility.
The GECC Agreement contemplates that following the receipt of any required
franchise and regulatory approvals, the U.S. Cable partnership will (i)
redeem the 80% of U.S. Cable's partnership interests not already owned by V
Cable for approximately $4 million, (ii) refinance the remaining $151 million
of U.S. Cable indebtedness payable to GECC. The funds to redeem the
partnership interest and to repay indebtedness owed to GECC will be provided
by a drawdown under a $175 million credit facility arranged with a new group
of banks. As part of the acquisition of the 80% interest in U.S. Cable which
the Company does not already own, the Company will acquire the 19% interest
in VC Holdings currently held by U.S. Cable.
There can be no assurance that the V Cable reorganization, including the
acquisition of U.S. Cable partners' interests, will be consummated or will be
consummated in the form presently contemplated.
OFFERINGS AND ACQUISITION
In February 1996, the Company issued 6,500,000 depositary shares,
representing 65,000 shares of 11-1/8% Series L Preferred Stock with an
aggregate liquidation preference of $650 million. The depository shares are
exchangeable, in whole but not in part, at the option of the Company, on or
after April 1, 1996, for the Company's 11-1/8% Senior Subordinated Debentures
due 2008. The Company is required to redeem the Series L
(5)
Preferred Stock on April 1, 2008 at a redemption price equal to the
liquidation preference of $10,000 per share plus accumulated and unpaid
dividends. The Series L Preferred Stock is redeemable at various redemption
prices beginning at 105.563% at any time on or after April 1, 2003, at the
option of the Company, with accumulated and unpaid dividends thereon to the
date of redemption. The net proceeds of approximately $626 million was used
to repay $570 million of V Cable and U.S. Cable indebtedness in connection
with the V Cable Transactions, as discussed above, with the balance of
approximately $56 million initially used to repay borrowings under the
Company's Credit Agreement. Such amount is expected to be reborrowed at the
time of consummation of the V Cable Transactions, which is expected to occur
during the third quarter of 1996.
On December 15, 1995, the Company acquired the interests in Cablevision of
Boston that it did not previously own. Cablevision of Boston served
approximately 146,300 subscribers on the date of acquisition. In connection
with the acquisition, Cablevision of Boston became a member of the Restricted
Group, all outstanding subordinated advances made by the Company to
Cablevision of Boston became intercompany indebtedness and, effective
December 15, 1995, the results of operations of Cablevision of Boston are
consolidated with those of the Company. See "Consolidated Cable Affiliates -
Cablevision of Boston".
In November 1995, the Company issued 13,800,000 depositary shares
representing 1,380,000 shares of 8-1/2% Series I Cumulative Convertible
Exchangeable Preferred Stock with an aggregate liquidation preference of $345
million (the "Series I Preferred Stock"). The depositary shares are
convertible into shares of the Company's Class A Common Stock at an initial
conversion price of $67.44 per share of Class A Common Stock. The Company
applied the net proceeds of approximately $334 million to the repayment of
Restricted Group bank indebtedness.
Also in November 1995, the Company issued $300 million aggregate principal
amount of 9-1/4% Senior Subordinated Notes due 2005 (the "2005 Notes"). The
Company applied the net proceeds of approximately $292 million of the 2005
Notes to the repayment of Restricted Group bank indebtedness.
In September 1995, the Company issued 2,500,000 shares of its 11-3/4% Series
G Redeemable Exchangeable Preferred Stock with an aggregate liquidation
preference of $250 million (the "Series G Preferred Stock"). The net
proceeds of approximately $239 million were initially used to repay bank
borrowings.
(6)
CABLE TELEVISION OPERATIONS
GENERAL.
As of December 31, 1995, the Company's consolidated cable television systems
served approximately 2,061,000 subscribers in New York, Ohio, Connecticut,
New Jersey, Michigan, and Massachusetts.
The following table sets forth certain statistical data regarding the
Company's cable television operations (1). During 1995 Cablevision of
Boston, formerly an unconsolidated affiliate, became part of the Restricted
Group and Cablevision of Chicago was sold. During 1994 CNYC and North Coast
Cable became part of the Restricted Group.
As of December 31,
------------------------------
1995 1994 1993
---- ---- ----
Homes passed (2):
Restricted group. . . . . . . . 2,549,000 2,139,000 1,086,000
Unrestricted group. . . . . . . 779,000 760,000 509,000
--------- --------- ---------
Company consolidated. . . . . . 3,328,000 2,899,000 1,595,000
--------- --------- ---------
--------- --------- ---------
Managed unconsolidated cable
affiliates. . . . . . . . . . 988,000 1,427,000 2,181,000
--------- --------- ---------
--------- --------- ---------
Basic service subscribers: . . . . . . . .
Restricted group. . . . . . . . 1,512,000 1,243,000 815,000
Unrestricted group. . . . . . . 549,000 525,000 350,000
--------- --------- ---------
Company consolidated. . . . . . 2,061,000 1,768,000 1,165,000
--------- --------- ---------
--------- --------- ---------
Managed unconsolidated cable
affiliates. . . . . . . . . . 662,000 861,000 1,067,000
--------- --------- ---------
--------- --------- ---------
Average number of premium units per. . . .
basic subscriber:. . . . . . . . . . . .
Restricted group. . . . . . . . 2.2 2.2 1.8
Unrestricted group. . . . . . . 1.1 1.0 1.3
Company consolidated. . . . . . 1.9 1.8 2.2
Managed unconsolidated cable
affiliates . . . . . . . . . . 1.1 1.2 2.0
Average revenue per basic subscriber (3):.
Restricted group. . . . . . . . $38.82 $38.29 $38.01
Unrestricted group. . . . . . . $32.45 $31.72 $30.56
Company consolidated. . . . . . $37.07 $36.33 $36.59
Managed unconsolidated cable
affiliates. . . . . . . . . . $28.68 $29.71 $32.50
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(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".
(7)
SUBSCRIBER RATES AND SERVICES; MARKETING AND SALES.
The Company's cable television systems offer a package of services, generally
marketed as "Family Cable", which includes, among other programming,
broadcast network local affiliates and independent television stations,
satellite-delivered "superstations" and certain other news, information and
entertainment channels such as CNN, CNBC, ESPN and MTV. For additional
charges, the Company's cable television systems provide certain premium
services such as HBO, Showtime, The Movie Channel and Cinemax, which may be
purchased either individually (in conjunction with Family Cable) or in
combinations or in tiers.
In addition, the Company's cable television systems offer a basic package
which includes broadcast network local affiliates and public, educational or
governmental channels and certain public leased access channels.
The Company offers premium services on an individual basis and as components
of different "tiers". Successive tiers include additional premium services
for additional charges that reflect discounts from the charges for such
services if purchased individually. For example, in most of the Company's
cable systems, subscribers may elect to purchase Family Cable plus one, two
or three premium services with declining incremental costs for each
successive tier. In addition, most systems offer a "Rainbow" package
consisting of between five and seven premium services, and a "Rainbow Gold"
package consisting of between eight and ten premium services.
In certain areas with sufficient system capacity, the Company has branded a
new product offering called OptimumTV. OptimumTV, which includes a minimum
of 77 analog channels, offers the Basic and Family packages noted above, as
well as premium services, and a group of three new packages containing
premium networks and ad-supported news, information and entertainment
channels. Depending upon the market, OptimumTV offers customers anywhere
from 20 to 30 new cable channels, including additional pay-per-view channels
that offer new films and sporting events on a transactional basis.
Since its existing cable television systems are substantially fully built,
the Company's sales efforts are primarily directed toward increasing
penetration and revenues in its franchise areas. The Company sells its cable
television services through door-to-door selling supported by telemarketing,
direct mail advertising, promotional campaigns and local media and newspaper
advertising.
Certain services and equipment (converters which are leased to subscribers)
provided by substantially all of the Company's cable television systems are
subject to regulation. See "Business - Cable Television Operations -
Regulation - 1992 Cable Act."
SYSTEM CAPACITY.
The Company is engaged in an ongoing effort to upgrade the technical
capabilities of its cable plant and to increase channel capacity for the
delivery of additional programming
(8)
and new services. The Company's cable television systems have a minimum
capacity of 35 channels and 85% 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 1996 approximately 70%
of its subscribers will be served by systems having a capacity of at least 77
channels. A substantial portion of the system upgrades either completed or
underway will utilize fiber optic cable.
PROGRAMMING.
Adequate programming is available to the Company from a variety of sources.
Program suppliers' compensation is typically a fixed, per subscriber monthly
fee based, in most cases, either on the total number of subscribers of the
cable systems of the Company and certain of its affiliates, or on the number
of subscribers subscribing to the particular service. The Company's
programming contracts are generally for a fixed period of time and are
subject to negotiated renewal. The Company's cable programming costs have
increased in recent years and are expected to continue to increase due to
additional programming being provided to most subscribers, increased costs to
produce or purchase cable programming and other factors. Management believes
that the Company will continue to have access to programming services at
reasonable price levels.
FRANCHISES.
The Company's cable television systems are operated primarily under
nonexclusive franchise agreements with local governmental franchising
authorities, in some cases with the approval of state cable television
authorities. Franchising authorities generally charge a fee of up to 5%
based on a percentage of certain revenues of the franchisee. In 1995
franchise fee payments made by the Company aggregated approximately 4% of
total revenues.
The Company's franchise agreements are generally for a term of ten to fifteen
years from the date of grant, although recently renewals have often been for
five to ten year terms. Some of the franchises grant the Company an option
to renew. Except for the Company's franchise for the Town of Brookhaven, New
York which expired in 1991, the expiration dates for the Company's ten
largest franchises range from 1995 to 2001. In certain cases, including the
Town of Brookhaven, the Company is operating under temporary licenses while
negotiating renewal terms with the franchising authorities. Franchises
usually require the consent of the franchising authority prior to the sale,
assignment, transfer or change in ownership or operating control of the
franchisee.
The Cable Communications Policy Act of 1984 (the "1984 Cable Act") and the
Cable Television Consumer Protection and Competition Act of 1992 (the "1992
Cable Act") provide significant procedural protections for cable operators
seeking renewal of their franchises. See "Business - Cable Television
Operations -Regulation". In connection with a renewal, a franchising
authority may impose different and more stringent terms. The Company has
never lost a franchise as a result of a failure to obtain a renewal.
(9)
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 recently adopted Telecommunications Act of 1996 ("1996 Telecom Act")
signed into law on February 8, 1996, repeals the 1984 Act prohibition against
telco-cable cross-ownership and provides that a local exchange telephone
company may provide video programming directly to subscribers through a
variety of means, including (1) as a radio-based (MMDS or DBS) multichannel
video programming distributor; (2) as a cable operator, fully subject to the
franchising, rate regulation and other provisions of the 1984 and 1992 Cable
Acts; and (3) through an "open video system" that is certified by the FCC to
be offering nondiscriminatory access to a portion of its channel capacity for
unaffiliated program distributors, subject only to selected portions of the
regulations applicable to cable operators. A local telephone company also
may provide the "transmission of video programming" on a common carrier
basis. Telephone companies in several of the Company's franchise areas have
applied for franchises to offer cable service fully subject to the 1984 and
1992 Cable Acts.
The 1996 Telecom Act also prohibits a telephone company or a cable system
operator in the same market from acquiring each other, except in limited
circumstances, such as areas of smaller population.
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
(10)
over-the-air transmission. The Company competes with MDS and MMDS operators
generally in its metropolitan service areas.
Satellite master antenna systems ("SMATV") generally serve large multiple
dwelling units. The FCC has preempted all state and local regulation of
SMATV operations. SMATV is limited to the buildings within which the
operator has received permission from the building owner to provide service.
The FCC has recently streamlined its MDS regulations and opened substantially
more microwave channels to MDS and SMATV operators, which could increase the
strength of their competition with cable television systems. The Company
competes with SMATV operators primarily in the New York City metropolitan
service area. The 1996 Telecom Act amends the definition of cable system to
exclude facilities that do not use public rights-of-way (e.g., SMATV
operators serving multiple buildings not under common ownership or control),
thus exempting such facilities from franchise and other requirements
applicable to cable operators.
In January 1993, the FCC proposed establishing a new local multipoint
distribution service ("LMDS", sometimes referred to as "cellular cable") in
the virtually unused 28 GHz band of the electromagnetic spectrum that could
be used to offer multichannel video in competition with cable systems, as
well as two-way communications services. The FCC has proposed issuing two
LMDS licenses per market, using auctions or lotteries to select licensees.
Suite 12 Group, the originator of this service, currently holds an
experimental license and has constructed a video transmission service using
the 28 Ghz band in a portion of the Company's New York City service area.
The 1984 Cable Act specifically legalized, under certain circumstances,
reception by private home earth stations of satellite-delivered cable
programming services. By law, dish owners have the right to receive
broadcast superstations and network affiliate transmissions in return for a
compulsory copyright fee. Cable programmers have developed new marketing
efforts to reach these viewers. Direct broadcast satellite ("DBS") systems
currently permit satellite transmissions from the low-power C-Band to be
received by antennae approximately 60 to 72 inches in diameter at the
viewer's home. New higher power DBS systems providing transmissions over the
Ku-Band permit the use of smaller receiver antennae and thus may be more
appealing to customers. Four DBS systems are now operational in the United
States. Both C-Band and Ku-Band DBS delivery of television signals are
competitive alternatives to cable television.
Other technologies supply services that may compete with certain services
provided by cable television. These technologies include translator stations
(which rebroadcast signals at different frequencies at lower power to improve
reception) and low-power television stations (which operate on a single
channel at power levels substantially below those of most conventional
broadcasters and, therefore, reach a smaller service area).
The full extent to which developing media will compete with cable television
systems may not be known for several years. There can be no assurance that
existing, proposed or as yet undeveloped technologies will not become
dominant in the future and render cable television systems less profitable or
even obsolete. In particular, certain major telephone
(11)
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 and obtained 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. This
franchise is subject to cancellation if the holders do not provide by August
1996, evidence of their ability to finance the construction of the cable
system. The Company has challenged the grant of this franchise in state
court. As mentioned above, telephone companies in several of the Company's
franchise areas have applied for franchises to offer cable service. 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.
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 and/or the 1996 Telecom Act, each
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.
(12)
1992 CABLE ACT. On October 5, 1992, Congress enacted the 1992 Cable Act
which represents a significant change in the regulatory framework under which
cable television systems operate.
After the effective date of the 1984 Cable Act, and prior to the enactment of
the 1992 Cable Act, rates for cable services were unregulated for
substantially all of the Company's systems. The 1992 Cable Act reintroduced
rate regulation for certain services and equipment provided by most cable
systems in the United States, including substantially all of the Company's
systems. On April 1, 1993, the FCC adopted rules implementing the rate
regulation provisions of the 1992 Cable Act. While several of the provisions
of the 1992 Cable Act have been amended or superseded by the 1996 Telecom
Act, other provisions remain in place.
The 1992 Cable Act requires each cable system to establish a basic service
package consisting, at a minimum, of all local broadcast signals and all
non-satellite delivered distant broadcast signals that the cable system
wishes to carry, and all public, educational and governmental access
programming. The rates for the basic service package are subject to
regulation by local franchising authorities. Under the FCC's April 1, 1993
rate regulation rules, a cable operator whose per channel rates as of
September 30, 1992 exceeded an FCC established benchmark was required to
reduce its per channel rates for the basic service package by up to 10%
unless it could justify higher rates on the basis of its costs. On February
22, 1994, after reconsideration, the FCC ordered a further reduction of 7% in
rates for the basic service tier in effect on September 30, 1992, for an
overall reduction of 17% from those rates. The amount of this 17% decrease
that is below a new per channel benchmark need not be implemented pending
completion of FCC studies of the costs of below-benchmark cable systems. In
the interim, however, the amount of the 17% decrease that is below this
benchmark must be computed by the cable system and must be offset against
otherwise allowable rate increases by these systems. Franchise authorities
(local municipalities or state cable television regulators) are also
empowered to regulate the rates charged for the installation and lease of the
equipment used by subscribers to receive the basic service package (including
a converter box, a remote control unit and, if requested by a subscriber, an
addressable converter box or other equipment required to access programming
offered on a per channel or per program basis), including equipment that may
also be used to receive other packages of programming, and the installation
and monthly use of connections for additional television sets. The FCC's
rules require franchise authorities to regulate rates for equipment and
connections for additional television sets on the basis of an actual cost
formula developed by the FCC, plus a return of 11.25%. No additional charge
is permitted for the delivery of regulated services to additional sets unless
the operator incurs additional programming costs in connection with the
delivery of such services to multiple sets.
The FCC may, in response to complaints by a subscriber, municipality or other
governmental entity, reduce the rates for service packages other than the
basic service package if it finds that such rates are unreasonable. The FCC
will in response to complaints also regulate, on the basis of actual cost,
the rates for equipment used only to receive these higher packages. Services
offered on a per channel or per program basis or
(13)
packages comprised only of services that are also available on a per channel
or per program basis are not subject to rate regulation by either
municipalities or the FCC. The FCC on February 22, 1994 adopted criteria to
assess whether certain discounted packages of "a la carte" or per channel
offerings should be regulated as a tier of services by the FCC or should be
treated as unregulated per channel offerings.
The regulations adopted by the FCC on April 1, 1993, including the original
rate benchmarks, became effective on September 1, 1993. The new rate
regulations adopted by the FCC on February 22, 1994, including the new
benchmarks, became effective in May, 1994.
The FCC's rules provide that, unless a cable operator can justify higher
rates on the basis of its costs, increases in the rates charged by the
operator for the basic service package or any other regulated package of
service may not exceed an inflation indexed amount, plus increases in certain
costs beyond the cable operator's control, such as taxes, franchise fees and
increased programming costs that exceed the inflation index. A cable
operator may not pass through to subscribers any amounts paid by the operator
on or before October 6, 1994, to broadcast stations for the retransmission of
their signals. Increases in retransmission fees above those in effect on that
day may be passed through to subscribers. As part of the implementation of
its rate regulations, the FCC froze all cable service rates until May 15,
1994 and provided cable operators with the option to defer refund liabilities
by continuing rates in effect until July 15, 1994. The Company elected to
defer its refund liabilities.
On February 22, 1994, the FCC adopted guidelines for cost-of-service showings
that establish a regulatory framework pursuant to which a cable television
operator may attempt to justify rates in excess of the benchmarks. Such
justification would be based upon (i) the operator's costs in operating a
cable television system (including certain operating expenses, depreciation
and taxes) and (ii) a return on the investment the operator has made to
provide regulated cable television services in such system (such investment
being referred to as its "ratebase", which includes working capital and
certain costs associated with the construction of such system). The
guidelines (1) create a rebuttable presumption that excludes from a cable
television operator's ratebase any "excess acquisition costs" (equal to the
excess of the purchase price for a cable television system over the original
construction cost of such system, or its book value at the time of
acquisition), (2) include in the rate base the costs associated with certain
intangibles such as franchise rights and customer lists, and (3) set a
uniform rate of return for regulated cable television service of 11.25% after
taxes. The interim guidelines originally included a "productivity offset
feature" that could reduce otherwise justifiable rate increases based on a
claimed increase in a cable television system's operational efficiencies.
The FCC dropped this proposal in September, 1994.
On November 10, 1994, the FCC reversed its policy regarding rate regulation
of packages of a la carte services. A la carte services that are offered in
a package will now be subject to rate regulation by the FCC. In light of the
uncertainty created by the various criteria that the FCC previously applied
to a la carte packages, the FCC, in those cases in which
(14)
it was not clear how the FCC's previous criteria should have been applied to
the package at issue, and where only a "small number" of channels were moved
from a previously regulated tier to the package, will allow cable operators
to treat existing packages as new product tiers ("NPT") as discussed below.
The FCC, in addition to revising its rules governing a la carte channels,
also on November 10, 1994 revised its regulations governing the manner in
which cable operators may charge subscribers for new cable programming
services. The FCC instituted a three-year flat fee mark-up plan for charges
relating to new channels of cable programming services in addition to the
present formula for calculating the permissible rate for new services.
Commencing on January 1, 1995, operators may charge for new channels of cable
programming services added after May 14, 1994 at a markup of up to 20 cents
per channel over actual programming costs, but may not make adjustments to
monthly rates for these new services totaling more than $1.20, plus an
additional 30 cents solely for programming license fees, per subscriber over
the first two years of the three-year period. Cable operators may charge an
additional 20 cents in the third year only for channels added in that year.
Cable operators electing to use the 20 cent per channel adjustment may not
take a 7.5% mark-up on programming cost increases, which is permitted under
the FCC's current rate regulations. The FCC requested further comment on
whether cable operators should continue to receive the 7.5% mark-up on
increases in license fees on existing programming services.
Additionally, the FCC will permit cable operators to offer NPTs at rates
which they elect so long as, among other conditions, other service tiers that
are subject to rate regulation are priced in conformity with applicable FCC
regulations and cable operators do not remove programming services from
existing service tiers and offer them on the NPT.
Under the 1992 Cable Act, systems may not require subscribers to purchase any
service package other than the basic service package as a condition of access
to video programming offered on a per channel or per program basis. Cable
systems are allowed up to ten years to the extent necessary to implement the
necessary technology to facilitate this access. Substantially all of the
Company's systems are currently capable of implementing the technology
mandated by the 1992 Cable Act.
In addition, the 1992 Cable Act (i) requires cable programmers under certain
circumstances to offer their programming to present and future competitors of
cable television such as MMDS, SMATV and DBS, and prohibits new exclusive
contracts with program suppliers without FCC approval, (ii) directs the FCC
to set standards for limiting the number of channels that a cable television
system operator could program with programming services controlled by such
operator, (iii) bars municipalities from unreasonably refusing to grant
additional competitive franchises, (iv) requires cable television operators
to carry ("Must Carry") all local broadcast stations (including home shopping
broadcast stations), or, at the option of a local broadcaster, to obtain the
broadcaster's prior consent for retransmission of its signal ("Retransmission
Consent"), (v) requires cable television operators to obtain the consent of
any non-local broadcast station prior to retransmitting its signal, and (vi)
regulates the ownership by cable operators of
(15)
other media such as MMDS and SMATV. In connection with clause (ii) above
concerning limitations on affiliated programming, the FCC has established a
40% limit on the number of channels of a cable television system that can be
occupied by programming services in which the system operator has an
attributable interest and a national limit of 30% on the number of households
that any cable company can serve. In connection with clause (iv) above
concerning retransmission of a local broadcaster's signals, a substantial
number of local broadcast stations are currently carried by the Company's
cable television systems and have elected to negotiate with the Company for
Retransmission Consent. Although the Company has obtained Retransmission
Consent agreements with all broadcast stations it currently carries, a number
of these agreements are temporary in nature and the potential remains for
discontinuation of carriage if an agreement is not renewed following their
expiration. Renewal periods for several of these agreements expire in
October 1996.
The FCC has imposed new regulations under the 1992 Cable Act in the areas of
customer service, technical standards, equal employment opportunity, privacy,
rates for leased access channels, obscenity and indecency, disposition of a
customer's home wiring and compatibility between cable systems and other
consumer electronic equipment such as "cable ready" television sets and
videocassette recorders.
A number of lawsuits have been filed in federal court challenging the
constitutionality of various provisions of the 1992 Cable Act. A challenge
to the constitutionality of the 1992 Cable Act's Must Carry rules was denied
by a federal court in April 1993. On appeal, the United States Supreme Court
returned this decision to the lower court for further proceedings. The lower
court again upheld the Must Carry rules, but this decision is on appeal to
the Supreme Court. 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, and appeal of the rate
regulation decision was unsuccessful. The Company cannot predict the outcome
of any of the foregoing litigation affecting the 1992 Cable Act.
1996 TELECOM ACT. The 1996 Telecom Act deregulates the rates for non-basic
tiers of service provided by all cable operators after March 31, 1999 and
immediately deregulates the upper tier rates of entities that operate small
cable systems as defined under the statute. It permits regulated equipment
rates to be computed by aggregating costs of broad categories of equipment at
the franchise, system, regional or company level. The 1996 Telecom act
eliminates the right of individual subscribers to file rate complaints with
the FCC concerning certain nonbasic cable programming service tiers.
The 1992 Cable Act provided that all rate regulation, for both the upper
tiers and for basic service, is eliminated when a cable system is subject to
"effective competition" from another multichannel video programming provider
such as MMDS, DBS, a telephone company, or a combination of all of these.
The 1996 Telecom Act expanded the definition of "effective competition" to
include instances in which a local telephone company or its affiliate (or a
multichannel video programming distributor using the facilities of a
telephone company or its affiliates) offers comparable video programming
(16)
directly to subscribers by any means (other than DBS) in the cable operator's
franchise area. Since telephone companies are providing or planning to
provide video services in several of the Company's franchise areas, this
provision will allow the Company greater flexibility in packaging and pricing
its product in those markets.
The 1996 Telecom Act also eliminates the uniform rate structure requirements
of the 1992 Cable Act for cable operators in areas subject to effective
competition or to video programming offered on a per channel or per program
basis, and allows non-uniform bulk discount rates to be offered to multiple
dwelling units.
OTHER FCC REGULATION. In addition to the rules and regulations promulgated
by the FCC under the 1984 Cable Act, the 1992 Cable Act and the 1996 Telecom
Act, the FCC has promulgated other rules affecting the Company. FCC rules
require that cable systems black out certain network and sports programming
on imported distant broadcast signals upon request. The FCC also requires
that cable systems delete syndicated programming carried on distant signals
upon the request of any local station holding the exclusive right to
broadcast the same program within the local television market and, in certain
cases, upon the request of the copyright owner of such programs. These rules
affect the diversity and cost of the Company's programming options for its
cable systems.
FCC regulation also includes matters regarding restrictions on origination
and cablecasting by cable system operators; application of the rules
governing political broadcasts; customer service; home wiring and limitations
on advertising contained in nonbroadcast children's programming.
Implementing provisions of the 1993 Budget Act, the FCC has adopted
requirements for payment of annual "regulatory fees". For 1994, cable
television systems were required to pay regulatory fees of $0.37 per
subscriber, which may be passed on to subscribers as "external cost"
adjustments to basic cable service. This fee was increased to $0.51 per
subscriber for 1995, and may be further increased in 1996. Fees are also
assessed for other licenses, including licenses for business radio, cable
television relay systems (CARS) and earth stations, which, however, may not
be collected directly from subscribers.
The FCC has the authority to regulate utility company rates for cable rental
of pole and conduit space. States can establish preemptive regulations in
this area, and the states in which the Company's cable television systems
operate have done so. The 1996 Telecom Act modifies the current pole
attachment provisions of the Communications Act by requiring that utilities
provide cable systems and telecommunications carriers with nondiscriminatory
access to any pole, conduit or right-of-way controlled by the utility. The
FCC is required to adopt new regulations to govern the charges for pole
attachments used by companies providing telecommunications services,
including cable operators. These regulations are likely to increase the rates
charged to cable companies providing voice and data, in addition to video
services. These new pole attachment regulations will not become effective,
however, until five years after enactment of the 1996 Telecom Act, and any
increase in attachment rates resulting from the FCC's new regulations will be
phased in equal annual increments over a period of five years.
(17)
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.
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. In addition to the
prohibition on telephone company-cable cross-ownership, now removed by the
1996 Telecom Act, the 1984 Cable Act prohibited any person or entity from
owning broadcast television and cable properties in the same market. The
1992 Cable Act imposed limits on new acquisitions of SMATV or MMDS systems by
cable operators in their franchise areas. The 1996 Telecom Act repeals the
statutory ban on cable-broadcast station cross-ownership to permit common
ownership or control of a television station and a cable system with
overlapping service areas. The 1996 Telecom Act leaves in place, however,
the cable system-television station cross-ownership restriction contained in
the FCC's rules and does not prejudge the Commission's review of the
regulation, which will occur this year. The 1996 Telecom Act also directs
the FCC to revise its existing regulations concerning broadcast network-cable
cross-ownership to permit common control of both a television network and a
cable system. The 1996 Telecom Act removes the statutory ban on cable-MMDS
cross-ownership on any cable operator in a franchise area where one cable
operator is subject to effective competition.
STATE AND MUNICIPAL REGULATION OF CABLE TELEVISION. Regulatory
responsibility for essentially local aspects of the cable business such as
franchisee selection, system design and construction, safety, and consumer
services remains with either state or local officials and, in some
jurisdictions, with both. The 1992 Cable Act expanded 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.
TELECOMMUNICATIONS REGULATION. The 1996 Telecom Act removes barriers to
entry in the local telephone market that is now monopolized by the BOCs and
other local exchange
(18)
carriers by preempting state and local laws that restrict competition and by
requiring incumbent local exchange telephone companies to provide
nondiscriminatory access and interconnection to potential competitors, such
as cable operators and long distance companies. At the same time, the new
law eliminates the Modified Final Judgment and permits the BOCs to enter the
market for long distance service (through a separate subsidiary) after they
satisfy a "competitive checklist." The 1996 Telecom Act also permits
interstate utility companies to enter the telecommunications market for the
first time.
The 1996 Telecom Act also eliminates or streamlines many of the requirements
applicable to local exchange carriers, and requires the FCC and states to
review universal service programs and encourage access to advanced
telecommunications services provided by all entities, including cable
companies, by schools, libraries and other public institutions. The FCC and,
in some cases, states are required to conduct numerous rulemaking proceedings
to implement these provisions.
CONSOLIDATED CABLE AFFILIATES
V CABLE. In February 1996, the Company entered into the GECC Agreement
pursuant to which the Company plans to effect a reorganization and
recapitalization relating to V Cable and U.S. Cable. For a description see
"Recent Developments - V Cable Transactions" above and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources". For a description of V Cable's debt at
December 31, 1995 see Note 4 of Notes to Financial Statements.
CABLEVISION OF BOSTON. On December 15, 1995, the Company acquired the
interests in Cablevision of Boston that it did not previously own pursuant to
an agreement entered into by the Company and Cablevision of Boston. In
connection with the acquisition, the limited partners (other than the
Company) of Cablevision of Boston received 682,454 shares (of which 680,266
shares were issued by December 31, 1995) of the Company's Class A Common
Stock and the Company paid approximately $83 million, (including fees and
expenses) primarily with funds borrowed under the Company's Credit Agreement,
to repay existing Cablevision of Boston indebtedness and to make certain
payments to Charles F. Dolan, ("Mr. Dolan") referred to below. Upon
consummation of the acquisition, Cablevision of Boston became a member of the
Restricted Group and all outstanding subordinated advances made by the
Company to Cablevision of Boston became intercompany indebtedness. Mr.
Dolan, a former general partner of Cablevision of Boston and the Chairman of
the Board of the Company, received 7,357 shares of the Company's Class A
Common Stock and approximately $20.8 million in cash to repay a portion of
Cablevision of Boston's indebtedness to him in connection with the
acquisition. The Company and its affiliates (other than Cablevision of
Boston's former general partners and their affiliates) received 1,041,553
shares of the Company's Class A Common Stock (such shares are reflected as
treasury shares at December 31, 1995) and assumed approximately $42.9 million
of intercompany indebtedness referred to above. As part of the acquisition
of Cablevision of Boston, the Company entered into an agreement with Mr.
Dolan with respect to his 0.5% general partnership interest in Cablevision of
Brookline
(19)
Limited Partnership ("Cablevision of Brookline"), a partnership
affiliated with Cablevision of Boston. The Company acquired the remaining
99.5% of the partnership interests in Cablevision of Brookline in the
acquisition of Cablevision of Boston. Under the agreement, the Company has a
right of first refusal to acquire Mr. Dolan's general partnership interest
and a right to acquire such interest on the earlier to occur of Mr. Dolan's
death or January 1, 2002 at the greater of $10,000 or the book value of such
interest. Mr. Dolan's estate has the right to put the interest to the
Company at the same price. Additionally, in the event of a change of control
of the Company or Cablevision of Brookline, Mr. Dolan will have the right to
put his general partnership interest in Cablevision of Brookline to the
Company at the greater of (i) prices declining from $3.9 million for the year
ended December 15, 1996 to $10,000 for the year ended December 15, 2002 and
(ii) the book value of such interest.
CABLEVISION MFR. In August 1994, Cablevision MFR, Inc. ("Cablevision MFR"),
a wholly-owned subsidiary of the Company, acquired substantially all of the
assets of Monmouth Cablevision Associates, L.P. ("Monmouth Cablevision") and
Riverview Cablevision Associates, L.P. ("Riverview Cablevision")
(collectively, "Monmouth/Riverview") consisting of cable television systems
in New Jersey. The operations of Monmouth Cablevision and Riverview
Cablevision are consolidated with those of the Company as of the date of
acquisition. The aggregate purchase price for the two New Jersey systems was
$391.2 million. Approximately $237.8 million of such purchase price was
financed by a senior credit facility of newly formed subsidiaries of
Cablevision MFR secured solely by the assets of the systems. The remaining
$153.4 million of such purchase price was paid with cash of approximately
$12.1 million and the issuance, by Cablevision MFR, of subordinated
promissory notes (the "MFR Notes") totalling $141.3 million due in 1998 and
bearing interest at 6% until the third anniversary and 8% thereafter
increasing to 8% and 10%, respectively, if the Company exercises its option
to pay interest in shares of the Company's Class A common stock.
Principal and interest on the Cablevision MFR promissory notes, which may be
paid in cash or, under certain circumstances at the Company's option, in
shares of the Company's Class A common stock, are guaranteed by the Company.
The Company's obligations under the guarantees rank pari passu with the
Company's public subordinated debt. In certain circumstances, Cablevision
MFR may extend the maturity date of the promissory notes until 2003 for
certain additional consideration. In the event the maturity is so extended,
the interest and principal of such notes may thereafter be paid only in cash.
CABLEVISION CLEVELAND. In March, 1994, Cablevision of Cleveland, L.P.
("Cablevision Cleveland"), a partnership comprised of subsidiaries of the
Company, purchased substantially all of the assets and assumed certain
liabilities of North Coast Cable Limited Partnership, which operates a cable
television system in Cleveland, Ohio (the "North Coast Cable Acquisition").
The net cash purchase price for interests not previously owned by the Company
(and excluding excess liabilities assumed by the Company) aggregated
approximately $103.4 million including expenses. The cost of the acquisition
was financed principally by borrowings under the Company's Credit Agreement.
Cablevision Cleveland was part of the Restricted Group at December 31, 1995.
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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 Mr. Dolan owned the remaining interests. Mr. Dolan
remains a partner in CNYC, with a 1% interest and the right to certain
preferential payments.
CNYC holds franchises that permit construction of the franchised areas in
specified phases. Construction of the systems in the Brooklyn and The Bronx
franchises has been substantially completed.
Under the agreement between the Company and Mr. Dolan, a new limited
partnership ("CNYC LP") was formed and holds 99% of the partnership interests
in CNYC. The remaining 1% interest in CNYC is owned by the existing
corporate general partner, Cablevision Systems New York City Corporation,
which is a wholly-owned subsidiary of the Company. Subsidiaries of the
Company own a 1% general partnership interest and a 98% limited partnership
interest in CNYC LP and Mr. Dolan retains a 1% limited partnership interest
in CNYC LP plus certain preferential rights. Mr. Dolan's preferential rights
entitle him to an annual cash payment (the "Annual Payment") of 14%
multiplied by the outstanding balance of his "Minimum Payment". The Minimum
Payment is $40.0 million and is to be paid to Mr. Dolan prior to any
distributions from CNYC LP to partners other than Mr. Dolan. In addition,
Mr. Dolan has the right, exercisable on December 31, 1997, and as of the
earlier of (1) December 31, 2000 and (2) December 31 of the first year after
1997 during which CNYC achieves an aggregate of 400,000 subscribers, to
require the Company to purchase (Mr. Dolan's "put") his interest in CNYC LP.
The Company has the right to require Mr. Dolan to sell his interest in CNYC
LP to the Company (the Company's "call") during the three-year period
commencing one year after the expiration of Mr. Dolan's second put. In the
event of a put, Mr. Dolan will be entitled to receive from the Company the
Minimum Payment, any accrued but unpaid Annual Payments, a guaranteed return
on certain of his investments in CNYC LP and a Preferred Payment defined as a
payment (not exceeding $150.0 million) equal to 40% of the Appraised Equity
Value (as defined) of CNYC LP after making certain deductions including a
deduction of a 25% compound annual return on approximately 85% of the
Company's investments with respect to the construction of Phases III, IV and
V of CNYC and 100% of certain of the Company's other investments in CNYC,
including Mr. Dolan's Annual Payment. In the event the Company exercises its
call, the purchase price will be computed on the same basis as for a put
except that there will be no payment in respect of the Appraised Equity Value
amount.
The Company has the right to make payment of the put or call exercise price
in the form of shares of the Company's Class B Common Stock or, if Mr. Dolan
so elects, Class A Common Stock, except that all Annual Payments must be paid
in cash to the extent permitted under the Company's Credit Agreement (as
defined below). Under the Credit Agreement, the Company is currently
prohibited from paying the Preferred Payment in
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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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Restricted Group."
OTHER CABLE AFFILIATES
A-R CABLE. In May 1992, the Company and A-R Cable consummated a
restructuring and refinancing transaction that had the effect of retiring a
substantial portion of A-R Cable's subordinated debt and reducing the
Company's economic and voting interest in A-R Cable. See Note 2 of Notes to
Consolidated Financial Statements.
CABLEVISION OF NEWARK. Cablevision of Newark is a partnership 25% owned and
managed by the Company and 75% owned by an affiliate of Warburg Pincus,
operating cable television systems located in Newark and South Orange, New
Jersey. The Company manages the operations of Cablevision of Newark for a
fee equal to 3-1/2% of gross receipts, as defined, plus reimbursement of
certain costs and an allocation of certain selling, general and
administrative expenses.
U.S. CABLE. In connection with the V Cable Reorganization, V Cable acquired
for $20.0 million a 20% interest in U.S. Cable. See Note 2 of Notes to
Financial Statements. The Company manages the properties of U.S. Cable under
management agreements that provide for cost reimbursement, including an
allocation of overhead charges.
In February 1996, the Company entered into the GECC Agreement, as amended,
pursuant to which the Company plans to effect a reorganization and
recapitalization relating to V Cable and U.S. Cable. For a further
description see "Business - Recent Developments - V Cable Transactions".
A-R CABLE PARTNERS. In June 1994, A-R Cable Partners, a partnership
comprised of subsidiaries of the Company and E.M. Warburg, Pincus & Co., Inc.
completed the purchase of certain assets of Nashoba Communications, a group
of three limited partnerships, for a purchase price of approximately $90.5
million of which $46.7 million was provided by a senior credit facility
secured by the assets of such systems. The remainder of the purchase price
was provided by equity contributions and subordinated loans from the partners
in A-R Cable Partners. The Company provided $11.9 million for its 30%
interest in A-R Cable Partners and $1.5 million in loans. The Company
manages the operations of A-R Cable Partners pursuant to a management
agreement which provides for a fee equal to 3-1/2% of gross receipts, as
defined, plus reimbursement of certain costs and an allocation of certain
selling, general and administrative expenses.
CABLEVISION OF FRAMINGHAM. In August 1994, Cablevision of Framingham
Holdings, Inc. ("CFHI"), a corporation owned by the Company and E.M. Warburg,
Pincus Investors,
(22)
L.P., acquired substantially all of the assets of Framingham Cablevision
Associates, L.P. ("Framingham Cablevision") consisting of cable television
systems in Massachusetts. The aggregate purchase price, including fees and
expenses, for Framingham Cablevision's assets was $37.5 million.
Approximately $22.7 million of such purchase price was financed by a senior
credit facility of a wholly-owned subsidiary of CFHI secured by the assets of
such system. Approximately $9.7 million of such purchase price was paid by
the issuance by CFHI of a promissory note, guaranteed by the Company, (the
"CFHI Note") due in 1998 and bearing interest at 6% until the third
anniversary and 8% thereafter (increasing to 8% and 10%, respectively, if
interest is paid in shares of the Company's Class A Common Stock). The
remaining amount was financed by loans and capital contributions from its
stockholders, of which the Company provided approximately $1.3 million as a
capital contribution and $0.3 million as a loan for its 30% interest in CFHI.
The Company manages the operations of CFHI pursuant to a management
agreement which provides for a fee equal to 3-1/2% of gross receipts, as
defined, plus reimbursement of certain costs and an allocation of certain
selling, general and administrative expenses.
CABLEVISION OF CHICAGO. Cablevision of Chicago owned cable television
systems operating in the suburban Chicago area. The Company did not have a
material ownership interest in Cablevision of Chicago but had loans and
advances outstanding to Cablevision of Chicago in the amount of $12.3 million
(plus accrued interest which the Company had fully reserved). In August
1995, Cablevision of Chicago sold its cable television systems to Continental
Cablevision, Inc. and the loans from the Company to Cablevision of Chicago,
together with accrued interest reserved by the Company, were repaid in full.
Accordingly, the Company recognized a net gain of approximately $15.3 million
representing the accrued interest which the Company had reserved.
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. Rainbow
Programming's businesses include eight regional SportsChannel services, four
national entertainment services (American Movie Classics Company ("AMCC"),
Bravo Network ("Bravo") Much Music ("MM") and the Independent Film Channel
("IFC")), Rainbow News 12 (regional news services serving the suburban areas
surrounding New York City) and the sports services of Prime SportsChannel
Networks (Prime Network and NewSport). Rainbow Programming also owns an
interest in Madison Square Garden Corporation ("MSG") (discussed below).
Rainbow Programming acts as managing partner for each of these programming
businesses, other than MSG (which is managed jointly with ITT) and
SportsChannel Florida Associates (which is managed by Front Row
Communications, Inc.), and reflects its share of the profits or losses in
these businesses using the equity method of accounting
(23)
except for AMCC, SportsChannel New York and News 12 Long Island, whose
operations are consolidated with those of the Company. Certain of Rainbow
Programming's programming interests are held through Rainbow Program
Enterprises ("RPE"), which is substantially wholly owned by Rainbow
Programming.
In March 1995, MSG Holdings, L.P. ("MSG Holdings"), a partnership among
subsidiaries of Rainbow Programming and subsidiaries of ITT Corporation, a
Delaware corporation ("ITT"), acquired the business and assets of MSG in a
transaction in which MSG merged with and into MSG Holdings. MSG owns the
Madison Square Garden Arena and the adjoining Paramount Theater, the New York
Rangers professional hockey team, the New York Knicks professional basketball
team and the Madison Square Garden Network, a sports programming network with
over five million subscribers. The purchase price paid by MSG Holdings for
MSG was $1,009.1 million. The name of MSG Holdings has been changed to
Madison Square Garden, L.P.
MSG Holdings funded the purchase price of the acquisition through (i)
borrowings of $289.1 million under a $450 million credit agreement among MSG
Holdings, various lending institutions and Chemical Bank as administrative
agent, (ii) an equity contribution from Rainbow Programming of $110 million,
and (iii) an equity contribution from ITT of $610 million. ITT, Rainbow
Programming and the Company are parties to an agreement made as of August 15,
1994 as amended, (the "Bid Agreement") that, as amended, provides Rainbow
Programming the right to acquire interests in MSG Holdings from ITT
sufficient to equalize the interests of ITT and Rainbow Programming in MSG
Holdings by making certain scheduled payments totalling $250 million (plus
interest on any unpaid portion thereof) on specified dates up to and
including March 17, 1997. Rainbow Programming may acquire all or part of
such interests in MSG Holdings through (i) the payment of cash to ITT, (ii)
the delivery to ITT, at the option of the Company, of common or preferred
stock of the Company (together with the commitment of a nationally recognized
underwriter to promptly purchase such common or preferred stock for cash), or
a combination of cash and common or preferred stock (with such a commitment),
or (iii) the delivery to ITT, at the option of ITT, subject to certain
conditions and in lieu of payment of a limited amount of the required cash or
common or preferred stock for the purchase of a portion of such interests, of
certain designated programming interests of Rainbow Programming. If any
scheduled payment is not made on the applicable due date, then Rainbow
Programming will forfeit (a) its right to equalize the interests in MSG
Holdings and (b) certain minority rights. The Company and Rainbow
Programming may fund the interest payments on the unpaid portion of the $250
million amount required to equalize the interests of ITT and Rainbow
Programming in MSG Holdings from available cash balances or from funds
available from the Restricted Group's principal bank credit agreement.
Accordingly, the Company funded an approximate $29 million interest payment
on March 11, 1996 from funds available under the Restricted Group's principal
bank credit agreement. If certain conditions are met and Rainbow Programming
has forfeited its right to equalize the interests in MSG Holdings, then
Rainbow Programming will also have the right to require ITT to purchase all
of Rainbow Programming's interest in MSG Holdings for an amount equal to (i)
the price paid by Rainbow Programming for
(24)
such interest plus (ii) all interest paid by Rainbow Programming on the
unpaid portion of the $250 million of scheduled payments (as described above).
Initially MSG Holdings will be managed on a 50-50 basis by Rainbow
Programming and ITT. If, as discussed above, Rainbow Programming does not
equalize its ownership interest in MSG Holdings, its management role will be
effectively eliminated. Rainbow Programming also has the right to
voluntarily relinquish any power to direct the management and policies of MSG
Holdings.
In connection with obtaining the consent of the National Hockey League (the
"NHL") and the National Basketball Association ("NBA") to the indirect
transfers of the New York Rangers and the New York Knickerbockers,
respectively, resulting from the merger, the Company and Rainbow Programming
entered into agreements with the NHL and the NBA, agreeing, among other
things, to conduct themselves in accordance with the relevant rules of each
league.
In July 1995 Rainbow Programming consummated the purchase of NBC's interests
in SportsChannel New York and Rainbow News 12 Company for approximately $95.5
million, giving Rainbow Programming a 100% interest in SportsChannel New York
and Rainbow News 12 Company. The purchase was financed by an additional
drawdown of $94 million under Rainbow Programming's $202 million amended and
restated credit facility and by a $2.5 million equity contribution from the
Company for the balance of the purchase price and related fees.
In July 1994, the proceeds of the initial $105 million loan under the
original Rainbow Programming facility plus $76 million of equity from the
Company were used to purchase Liberty Media Corporation's 50% interest in
AMCC giving Rainbow Programming a 75% ownership interest in AMCC.
Rainbow Programming's financing needs have been funded by the Restricted
Group's investments in and advances to Rainbow Programming, by sales of
equity interests in the programming businesses and, through separate,
external debt financing. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources".
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
(25)
services. Rainbow Programming and the other programming services are
competing for limited channel capacity and for inclusion in the basic service
tier of the systems offering their programming services. Many of these
program distributors are large, publicly-held companies which have greater
financial resources than Rainbow Programming.
Rainbow Programming also competes for the availability of programming,
through competition for telecast rights to films and competition for rights
agreements with sports teams. The Company anticipates that such competition
will increase as the number of programming distributors increases.
In general, the programming services offered by Rainbow Programming compete
with other forms of television-related services and entertainment media on
the basis of the price of services, the variety and quality of programming
offered and the effectiveness of Rainbow Programming's marketing efforts.
REGULATION.
Cable television program distributors such as Rainbow Programming are not
regulated by the FCC under the Communications Act of 1934. To the extent
that regulations and laws, either presently in force or proposed, hinder or
stimulate the growth of the cable television and satellite industries, the
business of Rainbow Programming will be directly affected. As discussed
above under "Business - Cable Television Operations - Regulation", the 1992
Cable Act limits in certain ways the Company's ability to freely manage the
Rainbow Programming services or carry the Rainbow Programming services on
their affiliates' systems and imposes or could impose other regulations on
the Rainbow Programming companies. The "program access" provisions of the
1992 Cable Act require that Rainbow Programming services be sold, under
certain circumstances, to multichannel video programming providers that
compete with the Company's local cable systems. The 1996 Telecom Act extends
the program access requirements of the 1992 Cable Act to a telephone company
that provides video programming by any means directly to subscribers, and to
programming in which such a company holds an attributable ownership interest,
thus allowing the Company's cable systems similar access to programming
developed by their telephone company competitors.
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
(26)
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.
ADVERTISING SERVICES
Rainbow Advertising sells advertising time to national, regional and local
advertisers on behalf of the Company's cable television systems and
SportsChannel and Rainbow News 12 programming services, as well as on behalf
of unaffiliated cable television systems.
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, 1995, the Company had advanced an aggregate of
approximately $16.7 million to Atlantic Publishing, reflecting approximately
$1.0 million, $0.6 million and $0.5 million, net, paid back during 1995, 1994
and 1993, respectively. The Company has written off all of its advances to
Atlantic Publishing other than $2.4 million. Atlantic Publishing is owned by
a trust for certain Dolan family members; however, the Company has the option
to purchase Atlantic Publishing for an amount equal to the owner's net
investment therein plus interest. The current owner has made only a nominal
investment in Atlantic Publishing to date.
RADIO STATION WKNR. The Company is the owner of Cleveland Radio Associates
("WKNR"), an AM radio station serving the Cleveland metropolitan area with an
all-sports format.
EMPLOYEES AND LABOR RELATIONS
As of December 31, 1995, the Company had 4,934 full-time, 567 part-time and
300 temporary employees. There are no collective bargaining agreements with
employees of the Company. The Company believes that its relations with its
employees are satisfactory.
(27)
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
fourteen business offices, comprising the Company's headquarters located in
Woodbury, New York with approximately 291,000 square feet of space, and the
headend sites. The Company believes its properties are adequate for its use.
The Company generally owns all assets (other than real property) related to
the cable television operations of the Restricted Group, including its
program production equipment, headend equipment (towers, antennae, electronic
equipment and satellite earth stations), cable system plant (distribution
equipment, amplifiers, subscriber drops and hardware), converters, test
equipment, tools and maintenance equipment. Similarly, the unconsolidated
entities managed by the Company generally own such assets related to their
cable television operations. The Company generally leases its service and
other vehicles.
Substantially all of the assets of the Restricted Group, V Cable, VC Holding
and Cablevision MFR are pledged to secure borrowings under their respective
credit agreements.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to various lawsuits, some involving substantial amounts.
Management does not believe that such lawsuits will have a material adverse
impact on the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
(28)
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.
1995 1994
------------- -------------
Quarter High Low High Low
------- ---- --- ---- ---
First 58-3/4 48-7/8 67-7/8 52-3/8
Second 63-3/4 52-1/4 52-7/8 39
Third 69-3/4 58 61-3/8 45-7/8
Fourth 61 49-3/4 59-7/8 45-7/8
As of March 15, 1996, there were 915 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, 1996, there were
25 holders of record of Class B Common Stock.
DIVIDENDS. The Company has not paid any dividends on shares of Class A or Class
B Common Stock. The Company intends to retain earnings to fund the growth of
its business and does not anticipate paying any cash dividends on shares of
Class A or Class B Common Stock in the foreseeable future.
The Company may pay cash dividends on its capital stock only from surplus as
determined under Delaware law. Holders of Class A and Class B Common Stock are
entitled to receive dividends equally on a per share basis if and when such
dividends are declared by the Board of Directors of the Company from funds
legally available therefor. No dividend may be declared or paid in cash or
property on shares of either Class A or Class B Common Stock unless the same
dividend is paid simultaneously on each share of the other class of common
stock. In the case of any stock dividend, holders of Class A Common Stock are
entitled to receive the same percentage dividend (payable in shares of Class A
Common Stock) as the holders of Class B Common Stock receive (payable in shares
of Class B Common Stock). The Company paid $4.4 million of cash dividends on
the Series I Preferred Stock and $7.8 million of dividends in additional shares
of Series G Preferred Stock. The Company is restricted from paying dividends on
its preferred stock (other than on the Company's 8% Series C Cumulative
Preferred Stock) under the provisions of its senior credit agreement if a
default has occurred and is continuing under such agreement. Additionally, the
Company's senior subordinated debt instruments may restrict the payment of
dividends in respect of any shares of capital stock in certain circumstances.
(29)
Dividends may not be paid in respect of shares of Class A or Class B Common
Stock unless all dividends due and payable in respect of the preferred stock of
the Company have been paid or provided for. Further, dividends may not be paid
in respect of shares of Class A or Class B Common Stock under the Company's
senior credit agreement. See Item 7.-"Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources-
Restricted Group."
(30)
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL AND STATISTICAL DATA
The operating and balance sheet data included in the following selected
financial data have been derived from the consolidated financial statements of
the Company. Acquisitions made by the Company were accounted for under the
purchase method of accounting and, accordingly, the acquisition costs were
allocated to the net assets acquired based on their fair value, except for
assets previously owned by Mr. Dolan or affiliates of Mr. Dolan which were
recorded at historical cost. Acquisitions are reflected in operating, balance
sheet and statistical data from the time of acquisition. The operating data for
1992 reflects the deconsolidation of the Company's A-R Cable subsidiary for
reporting purposes, effective January 1, 1992. The selected financial data
presented below should be read in conjunction with the financial statements of
the Company and notes thereto included in Item 8 of this Report.
Cablevision Systems Corporation
-------------------------------------------------------------
December 31,
-------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
OPERATING DATA:
Revenues....................................... $1,078,060 $ 837,169 $ 666,724 $ 572,487 $ 603,272
Operating expenses
Technical.................................... 412,479 302,885 241,877 204,449 213,059
Selling, general and administrative.......... 266,209 195,942 172,687 120,356 121,527
Restructuring charge......................... - 4,306 - - -
Depreciation and amortization................ 319,929 271,343 194,904 168,538 215,326
---------- --------- --------- --------- --------
Operating profit............................... 79,443 62,693 57,256 79,144 53,360
Other income (expense):
Interest expense, net........................ (311,887) (261,781) (230,327) (193,379) (257,189)
Share of affiliates' net loss................ (93,024) (82,864) (61,017) (47,278) (23,780)
Gain (loss) on sale of programming and
affiliate interests, net.................... 35,989 - (330) 7,053 15,505
Gain on sale of marketable securities, net... - - - 733 5,806
Provision for loss on Olympics venture....... - - - (50,000) -
Loss on sale of preferred stock.............. - - - (20,000) -
Write off of deferred financing costs........ (5,517) (9,884) (1,044) (12,284) -
Loss on redemption of debentures............. - (7,088) - - -
Settlement of litigation and
related matters............................. - - - (5,655) (9,677)
Provision for preferential payment
to related party............................ (5,600) (5,600) (5,600) (2,662) -
Minority interest.....................,,,.... (8,637) (3,429) 3,000 - -
Miscellaneous, net........................... (8,225) (7,198) (8,720) (6,175) (11,224)
---------- --------- --------- --------- --------
Net loss....................................... (317,458) (315,151) (246,782) (250,503) (227,199)
Preferred dividend requirement................. (20,249) (6,385) (885) (885) (4,464)
---------- --------- --------- --------- --------
Net loss applicable to common shareholders..... $ (337,707) $(321,536) $(247,667) $(251,388) $(231,663)
---------- --------- --------- --------- --------
---------- --------- --------- --------- --------
Net loss per common share...................... $ (14.17) $ (13.72) $ (10.83) $ (11.17) $ (10.32)
---------- --------- --------- --------- --------
---------- --------- --------- --------- --------
Average number of common shares outstanding
(in thousands)................................ 23,826 23,444 22,859 22,512 22,446
---------- --------- --------- --------- --------
---------- --------- --------- --------- --------
Cash dividends declared per common share....... $ - $ - $ - $ - $ -
---------- --------- --------- --------- --------
---------- --------- --------- --------- --------
(31)
Cablevision Systems Corporation
-------------------------------------------------------------
December 31,
-------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
BALANCE SHEET DATA:
Total assets................................ $2,502,305 $2,176,413 $1,327,418 $1,251,157 $1,475,672
Total debt.................................. 3,157,107 3,169,236 2,235,499 2,004,452 2,211,056
Deficit investment in affiliates............ 453,935 393,637 325,732 251,679 -
Redeemable preferred stock.................. 257,751 - - - 32,094
Stockholders' deficiency.................... (1,891,676) (1,818,535) (1,503,244) (1,250,248) (932,428)
STATISTICAL DATA:
Homes passed by cable....................... 3,328,000 2,899,000 2,240,000 2,019,000 2,005,000
Basic service subscribers................... 2,061,000 1,768,000 1,379,000 1,262,000 1,372,000
Basic service subscribers as a percentage of
homes passed............................... 61.9% 61.0% 61.6% 62.5% 68.4%
Number of premium television units.......... 3,990,000 3,208,000 3,003,000 2,802,000 2,326,000
Average number of premium units per basic
subscriber at period end................... 1.9 1.8 2.2 2.2 1.7
Average monthly revenue per basic
subscriber (1).............................. $37.07 $36.33 $36.59 $37.64 $34.43
- ------------------------
(1) Based on recurring service revenues divided by average subscribers for
the month of December.
(32)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
1995 ACQUISITIONS In July 1995, the Company, through its wholly-owned
subsidiary Rainbow Programming, purchased NBC's interests in SportsChannel New
York and Rainbow News 12 Company, giving Rainbow Programming a 100% interest in
these companies. In December 1995, the Company acquired the interests in
Cablevision of Boston that it did not previously own and upon consummation of
the acquisition, Cablevision of Boston became a member of the Restricted Group.
The foregoing acquisitions will be referred to as the "1995 Acquisitions".
1994 ACQUISITIONS In March 1994, the Company completed the North Coast Cable
Acquisition. In July 1994, the Company through Rainbow Programming, purchased
an additional 50% interest in AMCC giving Rainbow Programming a 75% ownership
interest in AMCC and in August 1994, the Company consummated the acquisition of
Monmouth Cablevision and Riverview Cablevision. The foregoing acquisitions will
collectively be referred to as the "1994 Acquisitions".
The 1995 Acquisitions and the 1994 Acquisitions will collectively be referred to
as the "Acquisitions".
For a description of the Company's recent acquisitions and restructurings, see
Item 1 - "Business - Recent Developments, - Consolidated Cable Affiliates" and -
"Other Cable Affiliates" and Note 2 of Notes to Consolidated Financial
Statements.
(33)
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.
STATEMENT OF OPERATIONS DATA
Years Ended December 31,
-------------------------------------
1995 1994
------------------ ------------------ (Increase)
% of Net % of Net Decrease
Amount Revenues Amount Revenues in Net loss
------ -------- ------ -------- -----------
(Dollars in thousands)
Revenues................................................ $1,078,060 100% $ 837,169 100% $ 240,891
Operating expenses:
Technical.............................................. 412,479 38 302,885 36 (109,594)
Selling, general & administrative...................... 266,209 25 195,942 23 (70,267)
Restructuring charge................................... - - 4,306 1 4,306
Depreciation and amortization.......................... 319,929 30 271,343 32 (48,586)
--------- --------- --------
Operating profit........................................ 79,443 7 62,693 8 16,750
Other income (expense):
Interest expense, net.................................. (311,887) (29) (261,781) (31) (50,106)
Share of affiliates' net loss.......................... (93,024) (9) (82,864) (10) (10,160)
Gain on sale of affiliate interests, net............... 35,98 3 - - 35,989
Write off of deferred financing costs.................. (5,517) - (9,884) (1) 4,367
Loss on redemption of debt............................. - - (7,088) (1) 7,088
Provision for preferential payment to related party.... (5,600) - (5,600) (1) -
Minority interest...................................... (8,637) (1) (3,429) - (5,208)
Miscellaneous.......................................... (8,225) (1) (7,198) (1) (1,027)
--------- --------- --------
Net loss................................................ $(317,458) (29)% $(315,151) (38)% $ (2,307)
--------- --------- --------
--------- --------- --------
OTHER OPERATING DATA:
Operating profit before depreciation
and amortization (1)................................... $399,372 $334,036
Currently payable interest expense, net................. 254,930 208,685
Net cash provided by operating activities (2)........... 154,715 126,625
Net cash used in investing activities (2)............... 551,234 953,870
Net cash provided by financing activities (2)........... 400,501 825,651
(1) Operating profit before depreciation and amortization is presented
here to provide additional information about the Company's ability
to meet future debt service, capital expenditures and working
capital requirements. Operating profit before depreciation and
amortization should be considered in addition to and not as a
substitute for net income and cash flows as indicators of financial
performance and liquidity as reported in accordance with generally
accepted accounting principles.
(2) See Item 8. - "Consolidated Statements of Cash Flows".
(34)
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 VERSUS YEAR ENDED DECEMBER 31, 1994.
REVENUES for the year ended December 31, 1995 increased $240.9 million (29%) as
compared to net revenues for the prior year. Approximately $148.0 million (18%)
of the increase was attributable to the Acquisitions; approximately $64.3
million (8%) to internal growth of over 145,800 in the average number of
subscribers during the year; and approximately $28.6 million (3%) resulted from
higher revenue per subscriber as a result of rate increases and to increases in
other revenue sources such as advertising and pay per view.
TECHNICAL EXPENSES for 1995 increased $109.6 million (36%) over the 1994
amount. Approximately 19% was attributable to the Acquisitions with the
remaining 17% attributable to increased costs directly associated with the
growth in subscribers and revenues discussed above, as well as to increases
in programming rates for certain of the Company's cable television services.
As a percentage of revenues, technical expenses increased 2% during 1995 as
compared to 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $70.3 million (36%)
for 1995 as compared to the 1994 level. Approximately 18% was directly
attributable to the Acquisitions. The remaining 18% increase resulted from
higher customer service, administrative and sales and marketing costs. As a
percentage of revenues, selling, general and administrative expenses
increased 1% in 1995 compared to 1994.
OPERATING PROFIT BEFORE DEPRECIATION AND AMORTIZATION increased $65.3 million
(20%) to $399.4 million for 1995 from $334.0 million (including a $4.3
million restructuring charge) for 1994. The 1995 increases were primarily
the result of the Acquisitions. Operating profit before depreciation and
amortization is presented here to provide additional information about the
Company's ability to meet future debt service, capital expenditures and
working capital requirements. Operating profit before depreciation and
amortization should be considered in addition to and not as a substitute for
net income and cash flows as indicators of financial performance and
liquidity as reported in accordance with generally accepted accounting
principles.
DEPRECIATION AND AMORTIZATION EXPENSE increased $48.6 million (18%) during
1995 as compared to 1994 primarily as a result of the Acquisitions.
Increased depreciation charges on capital expenditures made during 1995 and
1994 were completely offset by decreased amortization expense, primarily the
result of certain intangible assets which became fully amortized during the
periods.
NET INTEREST EXPENSE increased $50.1 million (19%) during 1995 compared to
1994. Approximately $29.8 million (11%) of the increase was attributable to
the Acquisitions. The remaining increase of 8% was due to higher average
debt balances (including borrowings of $110 million in March 1995 to acquire
an interest in MSG) and higher interest rates in 1995 compared to 1994, and
to the increasing accretion of interest on certain components of V Cable's
debt which require no current cash outlays.
(35)
SHARE OF AFFILIATES' NET LOSSES of $93.0 million for 1995 and $82.9 million
for 1994 consist primarily of the Company's share of net losses in certain
cable affiliates, primarily A-R Cable ($83.1 million in 1995 and $81.9
million in 1994), and the Company's net share of the profits and losses in
certain programming businesses in which the Company has varying ownership
interests, whose net losses amounted to $9.9 million in 1995 and $1.0 million
in 1994.
GAIN ON SALE OF AFFILIATE INTERESTS in 1995 resulted from the collection of
previously reserved interest, net of certain expenses, of $15.3 million on
advances to Cablevision of Chicago, a cable television affiliate which was
sold during 1995, and to a gain of $20.7 million on the sale of the Company's
interests in a programming partnership.
WRITE OFF OF DEFERRED FINANCING COSTS in 1995 relates primarily to costs
associated with former credit facilities of subsidiaries of the Company which
are now members of the Restricted Group's Credit Agreement and to costs
associated with Rainbow Programming's original $105 million credit facility
which was replaced in January 1995 with a new $202 million facility.
PROVISION FOR PREFERENTIAL PAYMENT TO RELATED PARTY in 1995 consists of the
expensing of $5.6 million representing the amount due with respect to an
annual payment made in connection with the CNYC Acquisition in 1992.
MINORITY INTEREST in 1995 represents NBC's share of the net income of AMCC.
(36)
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.
STATEMENT OF OPERATIONS DATA
Years Ended December 31,
-------------------------------------
1994 1993
------------------ ------------------ (Increase)
% of Net % of Net Decrease
Amount Revenues Amount Revenues in Net loss
------ -------- ------ -------- -----------
(Dollars in thousands)
Revenues.............................................. $ 837,169 100% $ 666,724 100% $ 170,445
Operating expenses:
Technical............................................ 302,885 36 241,877 36 (61,008)
Selling, general & administrative.................... 195,942 23 172,687 26 (23,255)
Restructuring charge................................. 4,306 1 - - (4,306)
Depreciation and amortization........................ 271,343 32 194,904 29 (76,439)
--------- --------- --------
Operating profit...................................... 62,693 8 57,256 9 5,437
Other income (expense):
Interest expense, net................................ (261,781) (31) (230,327) (35) (31,454)
Share of affiliates' net loss........................ (82,864) (10) (61,017) (9) (21,847)
Gain (loss) on sale of programming interests, net.... - - (330) - 330
Write off of deferred financing costs................ (9,884) (1) (1,044) - (8,840)
Loss on redemption of debt........................... (7,088) (1) - - (7,088)
Provision for preferential payment to
related party....................................... (5,600) (1) (5,600) (1) -
Minority interest.................................... (3,429) - 3,000 - (6,429)
Miscellaneous........................................ (7,198) (1) (8,720) (1) 1,522
--------- --------- --------
Net loss.............................................. $(315,151) (38)% $(246,782) (37)% $(68,369)
--------- --------- --------
--------- --------- --------
OTHER OPERATING DATA:
Operating profit before depreciation
and amortization (1)................................. $334,036 $252,160
Currently payable interest expense, net............... 208,685 182,225
Net cash provided by operating activities (2)......... 126,625 85,822
Net cash used in investing activities (2)............. 953,870 243,022
Net cash provided by financing activities (2)......... 825,651 167,423
(1) Operating profit before depreciation and amortization is presented
here to provide additional information about the Company's ability
to meet future debt service, capital expenditures and working
capital requirements. Operating profit before depreciation and
amortization should be considered in addition to and not as a
substitute for net income and cash flows as indicators of financial
performance and liquidity as reported in accordance with generally
accepted accounting principles.
(2) See Item 8. - "Consolidated Statements of Cash Flows".
(37)
COMPARISON OF YEAR ENDED DECEMBER 31, 1994 VERSUS YEAR ENDED DECEMBER 31, 1993.
REVENUES for the year ended December 31, 1994 increased $170.4 million (26%) as
compared to net revenues for the prior year. Approximately $105.0 million (16%)
of the increase was attributable to the 1994 Acquisitions; approximately $58.4
million (9%) to internal growth of 129,200 in the average number of subscribers
during the year; and approximately $23.6 million (4%) resulted from an increase
in other revenue sources such as advertising. These increases were partially
offset by a decrease of approximately $16.6 million (3%) attributable to lower
revenue per subscriber resulting primarily from rate reductions effected in
compliance with FCC regulations and to subscribers purchasing, on average, lower
levels of service.
TECHNICAL EXPENSES for 1994 increased $61.0 million (25%) over 1993.
Approximately 16% was attributable to 1994 Acquisitions; the remaining 9% was
attributable to increased costs directly associated with the growth in
subscribers and revenues discussed above. As a percentage of net revenues,
technical expenses remained relatively constant during 1994 as compared to 1993.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased $23.3 million (13%) in
1994 as compared to the 1993 level. Increases of $27.3 million (15%) directly
attributable to the 1994 Acquisitions, $11.8 million (7%) relating to the
Company's growing New York City operations and $5.6 million (3%) resulting from
other general cost increases were partia