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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, 1997
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 REGISTRANT; STATE OF INCORPORATION; IRS EMPLOYER
NUMBER ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO.
- - --------------- ----------------------------------------- ------------------
1-14764 Cablevision Systems Corporation 11-3415180
(formerly CSC Parent Corporation)
Delaware
One Media Crossways
Woodbury, NY 11797
1-9046 CSC Holdings, Inc. (formerly
Cablevision Systems Corporation) 11-2776686
Delaware One
Media Crossways
Woodbury, NY 11797
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each Exchange on which Registered
Cablevision Systems Corporation American Stock Exchange
- - -------------------------------
Class A Common Stock
CSC Holdings, Inc. American Stock Exchange
- - ------------------
8-1/2% Series I Cumulative
Convertible Exchangeable Preferred Stock
Securities registered pursuant to Section 12(g) of the Act:
Cablevision Systems Corporation None
CSC Holdings, Inc. None
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Cablevision Systems Corporation YES X NO
- - ------------------------------ --- ---
CSC Holdings, Inc. Yes X No
- - ------------------ --- ---
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 Registrants' 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.
-----
Aggregate market value of voting stock held by nonaffiliates of Cablevision
Systems Corporation based on the closing price at which such stock was sold
on the American Stock Exchange on March 24, 1998: $3,163,373,864.
Number of shares of common stock outstanding as of March 24, 1998:
Cablevision Systems Corporation Class A Common Stock--26,336,098
Cablevision Systems Corporation Class B Common Stock--11,096,709
CSC Holdings, Inc. Common Stock--1,000
Documents incorporated by reference--The Registrants intend to file with the
Securities and Exchange Commission, not later than 120 days after the close
of their fiscal year, an amendment to this report containing the information
required to be disclosed under Part III of Form 10-K under cover of
Form 10-K/A.
TABLE OF CONTENTS
PAGE
-----
Part I
Item 1. Business.......................................... 1
2. Properties........................................ 26
3. Legal Proceedings................................. 26
4. Submission of Matters to a Vote
of Security Holders............................... 27
Part II
5. Market for the Registrants'
Common Equity and Related Stockholder
Matters........................................... 28
6. Selected Financial Data........................... 30
7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................................... 32
8. Consolidated Financial Statements................. 49
9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure................................ 93
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............................ 93
* 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 to this
report containing the information required to be disclosed under Part III
of Form 10-K under cover of Form 10-K/A.
PART I
ITEM 1. BUSINESS
- - ----------------
THE HOLDING COMPANY REORGANIZATION AND TCI TRANSACTIONS
This combined Annual Report on Form 10-K is separately filed by CSC Holdings,
Inc. (the "Company) and Cablevision Systems Corporation. Until March 4, 1998,
the Company was known as Cablevision Systems Corporation. On that date, the
Company completed a reorganization whereby it formed a holding company (now
named Cablevision Systems Corporation) and the Company became a subsidiary of
Cablevision Systems Corporation ("Cablevision Parent"). This transaction is
referred to herein as the "Reorganization".
Prior to the Reorganization, the Company had two outstanding classes of
common stock. Its Class A Common Stock was publicly traded on the American
Stock Exchange (the "ASE") and its Class B Common Stock was privately held.
In the Reorganization, the Class A Common Stock and Class B Common Stock of
the Company were converted into identical securities of Cablevision Parent and
the Class A Common Stock of Cablevision Parent became listed on the ASE and
trades under the symbol "CVC". Cablevision Parent now owns all of the common
stock of the Company.
The Company's outstanding preferred stock was unaffected by the
Reorganization except that the Company's 8-1/2% Series I Cumulative
Convertible Exchangeable Preferred Stock is now convertible into Cablevision
Parent's Class A Common Stock rather than the Company's Class A Common Stock.
The Series I Preferred Stock continues to be listed on the ASE and to trade
under the symbol "CVCp". The outstanding debt of the Company was not affected
by the Reorganization.
In connection with the Reorganization, Tele-Communication, Inc. ("TCI")
caused to be contributed to Cablevision Parent, and Cablevision Parent
acquired, certain cable television systems owned and operated by TCI and
located in New Jersey, on Long Island and in New York's Rockland and
Westchester counties ("TCI Systems"). Those cable television systems served
approximately 829,000 cable subscribers as of December 31, 1997. In
consideration for those cable television systems, Cablevision Parent issued
to certain TCI entities shares of Cablevision Parent Class A Common Stock
representing approximately 33% of the outstanding common stock of Cablevision
Parent and assumed certain liabilities related to such systems. See "Cable
Television Operations--TCI Transactions" below for a discussion of these
transactions.
STOCK SPLIT
On March 4, 1998 Cablevision Parent's Board of Directors declared a
two-for-one stock split in the form of a stock dividend on the outstanding
Class A Common Stock and Class B Common Stock of Cablevision Parent. The
dividend is payable on March 30, 1998 to stockholders of record on March 19,
1998. All share amounts of Cablevision Parent and the Company in this Form
10-K have been restated to reflect the stock split.
1
CABLEVISION PARENT
Cablevision Parent is a Delaware corporation which was organized in 1997.
Cablevision Parent's only assets are all of the common stock of the Company
and all of the ownership interests in the entities that own the TCI Systems.
References herein to the "Systems" refer to the cable television systems
owned by the Company, and, from and after March 4, 1998, the TCI Systems.
THE COMPANY
The Company is a Delaware corporation which was organized in 1985 and
owns and operates cable television systems in 18 states with approximately
2,844,000 subscribers at December 31, 1997. Through Rainbow Media Holdings,
Inc. ("Rainbow Media"), a company owned 75% by the Company and 25% by NBC
Cable Holding, Inc. ("NBC Cable"), a subsidiary of National Broadcasting
Company, Inc. ("NBC"), the Company owns interests in and manages numerous
national and regional programming networks, the Madison Square Garden sports
and entertainment business and cable television advertising sales companies.
The Company, through Cablevision Lightpath, Inc. ("Lightpath"), a
wholly-owned subsidiary of the Company, provides switched telephone service.
As of February 9, 1998, the Company also owns Cablevision Electronics
Investment, Inc., doing business as Nobody Beats The Wiz, an
electronics retailer operating approximately 40 retail locations in the New
York City metropolitan area.
CABLE TELEVISION OPERATIONS
General
- - -------
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", certain
other news, information and entertainment channels such as CNN, CNBC, ESPN,
MTV, and certain premium services such as HBO, Showtime, The Movie Channel,
Starz 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.
2
As of December 31, 1997, the Company's consolidated cable television systems
served approximately 2,844,000 subscribers in 18 states, primarily in the
metropolitan areas of New York, Ohio, Massachusetts, Connecticut, New Jersey,
and Michigan. As of December 31, 1997 the TCI Systems served approximately
829,000 subscribers in New York and New Jersey.
The following table sets forth certain statistical data regarding the
Company's cable television operations.
AS OF DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
Homes passed by cable (1).................................. 4,398,414 3,858,000 3,328,000
Basic service subscribers.................................. 2,844,408 2,445,000 2,061,000
Basic service subscribers as a percentage of
homes passed........................................... 64.7% 63.4% 61.9%
Number of premium television units......................... 4,183,130 3,862,000 3,990,000
Average number of premium units per basic subscriber
at period end.......................................... 1.5 1.6 1.9
Average monthly revenue per basic subscriber (2)........... $ 38.53 $ 36.71 $ 37.07
- - ------------------------
(1) 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.
(2) 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 "Subscriber
Rates and Services; Marketing and Sales."
The Company's consolidated cable television systems are concentrated in
the New York City greater metropolitan area (64% of the Company's total
subscribers as of December 31, 1997), the Boston and suburban Massachusetts
areas (12% of total subscribers as of December 31, 1997) and the greater
Cleveland metropolitan area (11% of total subscribers as of December 31,
1997). 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). In
addition, all of the TCI Systems are in the New York City greater
metropolitan area.
Cable Television System Sales
- - -----------------------------
Since early 1997, the Company has aggressively pursued a plan to dispose of
certain nonstrategic cable television systems. As described below, the
Company has completed the sale of cable television systems in Alabama,
Florida, Illinois, Kentucky, Maine, Missouri, North Carolina, Ohio and
neighboring states, representing approximately 382,000 subscribers for an
aggregate gross purchase price of $496.7 million. The Company has also
entered into definitive agreements covering the sale of individual cable
television systems in Wellsville/Penn Yan, New York; Windsor, New York; and
New Milford, Pennsylvania, representing approximately 15,600 subscribers for
an aggregate consideration of $16.3 million. The Company is actively pursuing
the sale of other nonstrategic systems. There can be no assurance that the
Company will enter into agreements covering other asset sales or that any
pending asset sale transactions will be consummated.
3
On January 23, 1998, the Company completed the sale of substantially all of
the assets of U.S. Cable Television Group, L.P. ("U.S. Cable"), including
cable television systems in Alabama, Florida, Kentucky, Missouri,
North Carolina and neighboring states (which served approximately
256,000 subscribers as of December 31, 1997) to Mediacom LLC for $311 million
in cash.
On January 22, 1998, the Company consummated the sale of cable television
systems in Rockford, Illinois owned by A-R Cable Services, Inc. ("A-R Cable"),
a wholly-owned subsidiary of the Company (which served approximately 66,000
subscribers as of December 31, 1997) to Insight Communications Company, Inc.
for $97 million in cash.
In December 1997, A-R Cable entered into an agreement with Adelphia
Communications Corporation ("Adelphia") to sell to Adelphia the cable
television systems in Wellsville/Penn Yan, New York owned by A-R Cable (which
served approximately 11,600 subscribers as of December 31, 1997) for
approximately $11.5 million in cash. The transaction is subject to the
receipt of regulatory and other customary approvals. The transaction is
currently expected to be consummated in the first half of 1998. There can be
no assurance that the transaction will be consummated in a timely fashion, or
at all.
On December 23, 1997, the Company completed the sale of the cable television
system in Allen and Gibsonberg Townships, Ohio owned by Cablevision of the
Midwest, Inc. (which served approximately 7,000 subscribers as of November
30, 1997) to TWFanch-one Co. for $10.7 million in cash.
In November 1997, A-R Cable entered into an agreement with Adams CATV, Inc.
("Adams") to sell to Adams the cable television systems in Windsor, New York
and New Milford, Pennsylvania owned by A-R Cable (which served approximately
4,000 subscribers as of December 31, 1997) for approximately $4.8 million in
cash. The transaction is subject to the receipt of regulatory and other
customary approvals. The transaction is currently expected to be consummated
in the first half of 1998. There can be no assurance that the transaction
will be consummated in a timely fashion, or at all.
On October 31, 1997, the Company completed the closing of the sale of cable
television systems in Maine (which served approximately 53,000 subscribers at
October 31, 1997) owned by a subsidiary of A-R Cable for approximately
$78 million in cash pursuant to a sale agreement executed on May 8, 1997.
TCI Transactions
- - ----------------
On March 4, 1998, Cablevision Parent completed transactions with TCI ("TCI
Transactions") pursuant to which Cablevision Parent acquired certain cable
television systems owned and operated by TCI and located in New Jersey, on
Long Island and in New York's Rockland and Westchester counties. Cablevision
Parent issued to certain TCI entities (the "TCI Transferors") an aggregate of
24,471,086 shares (adjusted for the two-for-one stock split) of Cablevision
Parent Class A Common Stock, (See "The Holding Company Reorganization and TCI
Transactions"). In addition, Cablevision Parent assumed certain related
liabilities, including an aggregate amount of indebtedness for borrowed money
equal to $669 million (the "Assumed Debt"). The Assumed Debt was refinanced
immediately following the
4
closing of the transactions with borrowings under a new $800 million bridge
revolving credit facility (the "Bridge Credit Agreement") entered into by
wholly-owned subsidiaries of Cablevision Parent acquired from TCI or that
hold assets contributed by TCI (the "Contributed Business Subsidiaries") with
a group of banks led by Toronto Dominion (Texas), Inc., as administrative and
arranging agent. The facility has a final maturity of March 4, 2000. The
Contributed Business Subsidiaries are wholly-owned (directly or indirectly)
by Cablevision Parent. The Company has no ownership interest in the
Contributed Business Subsidiaries and has not guaranteed any of their debt or
other obligations. See "Management Discussion and Analysis--Liquidity and
Capital Resources" for a discussion of the Bridge Credit Agreement.
In connection with securing certain regulatory approvals for the transaction,
the Company agreed to divest certain cable television system assets of the
Contributed Business Subsidiaries that are located in Paramus and Hillsdale,
New Jersey. Based on information delivered to the Company by TCI, the system
assets to be divested served approximately 5,300 subscribers as of December
31, 1997.
On January 27, 1998, the Company, Cablevision Parent and a subsidiary of TCI
entered into a non-binding letter of intent for Cablevision Parent to acquire
TCI's cable television systems (the "TCI Connecticut Systems") in and around
Hartford, Vernon, Branford and Lakeville, Connecticut, servicing approximately
248,000 subscribers at December 31, 1997, based on information supplied by TCI.
In consideration for the TCI Connecticut Systems, which have been valued by
the parties at $380 million, Cablevision Parent will (i) transfer to TCI cable
television systems serving Kalamazoo, Michigan (which served approximately
49,000 subscribers as of December 31, 1997 and which has been valued by the
parties at $75 million), (ii) transfer to TCI other cable television systems to
be identified by TCI and purchased with approximately $25 million of funds
provided by Cablevision Parent, (iii) issue shares of Cablevision Parent
Class A Common Stock (based on a $57.80 per share (post stock split)
valuation), and (iv) assume certain indebtedness relating to the TCI
Connecticut Systems, which is anticipated to total approximately $110
million. There can be no assurance that these transactions will be
consummated on the above terms or at all.
The agreement effecting the TCI Transactions ("Contribution Agreement")
permits Cablevision Parent to combine the cable operations of the Company and
the Contributed Business Subsidiaries on March 4, 1999 or prior thereto if
the Company receives a favorable tax ruling. Following such a combination,
Cablevision Parent would be permitted under the Contribution Agreement to
establish Rainbow Media as a separate subsidiary of Cablevision Parent. No
decision has been made as to whether such combination of the Contributed
Business Subsidiaries and the Company's cable television systems and the
Rainbow Media separation would be effected without such a favorable ruling,
and there can be no assurances that such a ruling will be obtained. If the
Company effects these transactions, Rainbow Media and its subsidiaries would
be subsidiaries of Cablevision Parent and would no longer be subsidiaries of
the Company. Combination of the Contributed Business Subsidiaries and the
Company's cable television systems and any full or partial separation of
Rainbow Media from the Company is also dependent upon compliance with the
Company's debt covenants and upon the receipt of regulatory and other
approvals.
In connection with the TCI Transactions, Cablevision Parent, TCI and certain
holders of Cablevision Parent Class B Common Stock (the "Class B
Stockholders') entered into a
5
Stockholders Agreement (the "Stockholders Agreement") providing, among other
things, for: (i) limits on TCI's ability to buy more than an additional 10%
of the Cablevision Parent Class A Common Stock beyond that issued to TCI in
the TCI Transactions, (ii) limitations on TCI's ability to transfer
Cablevision Parent Class A Common Stock to any person who after such transfer
would beneficially own 10% or more of the outstanding Cablevision Parent
Class A Common Stock or 5% or more of all outstanding Cablevision Parent
Common Stock, except for transfers of all of TCI's Cablevision Parent Class A
Common Stock to a single purchaser who agrees to become a party to the
Stockholders Agreement, transfers to certain TCI subsidiaries and transfers
in connection with a bona fide pledge to secure a borrowing, (iii)
consultation rights among Cablevision Parent, TCI and the Class B
Stockholders regarding sales of Cablevision Parent as a whole or significant
Cablevision Parent assets, sales of Cablevision Parent Class A Common Stock
owned by TCI and sales of Cablevision Parent Class B Common Stock owned by
the Class B Stockholders, (iv) certain tag-along and drag-along rights
between TCI and the Class B stockholders, (v) preemptive rights for TCI on
new issuances of Cablevision Parent common stock so that TCI may maintain
ownership of 33% of the outstanding Cablevision Parent common stock, with
certain limited exceptions, (vi) TCI's right to designate two Class B
directors to Cablevision Parent's Board of Directors, (vii) the right of TCI
director designees to membership on a Cablevision Parent board committee to
approve certain transactions with Class B Stockholders and their family
members that will give such designees a veto over such transactions, (viii)
TCI's agreement to vote in proportion with the public Cablevision Parent
Class A Common Stockholders for the election of the 25% of Cablevision Parent
directors which the Cablevision Parent Class A Common Stock is entitled to
elect, (ix) Cablevision Parent's agreement not to effect acquisition
transactions that would cause the debt to cash flow ratio of Cablevision
Parent (calculated as described in the Stockholders Agreement) to exceed a
specified ratio (initially 8.0 to 1, and declining to 7.5 to 1 after December
31, 1999), and (x) registration rights under the Securities Act for shares of
Cablevision Parent Class A Common Stock owned by TCI.
The following charts summarize the corporate organization structure of
Cablevision Parent and the Company immediately following the TCI Transactions
and after giving effect to the combination of the Contributed Business
Subsidiaries with the Company and the Rainbow Media separation, which are
permitted under the Contribution Agreement. No decision has been made as to
whether a combination of the Contributed Business subsidiaries and the
Company's cable television systems and the Rainbow Media separation will be
effected.
Chart depicting:
CABLEVISION PARENT STRUCTURE IMMEDIATELY FOLLOWING COMPLETION OF THE TCI
-----------------------------------------------------------------
TRANSACTIONS AND PRIOR TO OTHER POSSIBLE RELATED TRANSACTIONS
-------------------------------------------------------------
Chart depicting:
CABLEVISION PARENT STRUCTURE FOLLOWING COMPLETION OF OTHER POSSIBLE
------------------------------------------------------------
RELATED TRANSACTIONS
--------------------
6
Contemporaneous with the Reorganization, the Company acquired the remaining
1% interest in Cablevision of New York City, L.P. of Mr. Charles F. Dolan
("Mr. Dolan") and satisfied certain payment obligations for a cash payment of
approximately $194 million. This transaction was effected pursuant to the
provisions of agreements entered into in 1992, as amended in 1997 to delay
the exercise date to coincide with the consummation of the Reorganization and
related transactions. Mr. Dolan is the Chairman of the Board of the Company
and of Cablevision Parent and is a principal stockholder of Cablevision
Parent. He is the father of James L. Dolan, Chief Executive Officer of the
Company and of Cablevision Parent, Thomas C. Dolan, Senior Vice President of
the Company and of Cablevision Parent, and Patrick F. Dolan, a director of
the Company and of Cablevision Parent. Each of James, Thomas, and Patrick
Dolan is a member of the Board of Directors of the Company and of Cablevision
Parent. Also on March 4, 1998, Cablevision Parent acquired certain minority
interests in an entity owned by Rainbow Media in exchange for 104,000 shares
(after adjusting for the two-for-one stock split) of Cablevision Parent
Common Stock.
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, Starz 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 leased access channels.
In certain areas with sufficient system capacity, the Company has a
branded 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 movies and sporting events on a transactional basis.
In other areas 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, many systems offer a "Rainbow" package
consisting of between five and seven premium services, and a "Rainbow Gold"
package consisting of between eight and ten premium services.
Since its existing cable television systems are substantially fully built,
the Company's sales efforts are primarily directed toward increasing
penetration and revenues in its franchise areas. The
7
Company sells its cable television services through door-to-door selling as
well as 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 ("Cable Television Operations--Regulation
- - --1992 Cable Act").
System Capacity.
- - ---------------
The Company is engaged in an ongoing effort to upgrade the technical
capabilities of its cable plant and to increase channel capacity for the
delivery of additional programming and new services. The Company's cable
television systems have a minimum capacity of 42 channels and 95% of its
homes passed are currently served by systems having a capacity of at least 62
channels. Currently 82% (77% with the TCI Systems) of its homes are served by
at least 77 channels. As a result of ongoing upgrades, the Company expects
that by December 1998 approximately 90% (83% with the TCI Systems) of its
subscribers will be served by systems having a capacity of at least 77
channels. All of the system upgrades either completed or underway will
utilize fiber optic cable.
Programming.
- - -----------
Adequate programming is available to the Systems from a variety of sources
including that available from Rainbow Media and affiliates of TCI. 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 and certain of its affiliates, or on the number of subscribers
subscribing to the particular service. The programming contracts are generally
for a fixed period of time and are subject to negotiated renewal. 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 Systems will continue to have access to
programming services at reasonable price levels.
Franchises.
- - ----------
The 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.
The 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 cable television system
an option to renew. Except for franchises for the Town of Brookhaven,
New York which expired in 1991, the Town of Oyster Bay which expired
in 1997, and the Town of Hempstead which expired in 1997, the expiration
dates for the Company's ten largest franchises range from 1998 to 2007.
In certain cases, including two franchises in the
8
Town of Brookhaven, the franchise for the Town of Oyster Bay and the
franchise for the Town of Hempstead, 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.
PROGRAMMING AND ENTERTAINMENT OPERATIONS
General.
- - -------
The Company conducts its programming activities through Rainbow Media
(formerly Rainbow Programming Holdings, Inc.), a company 75% owned by the
Company and 25% by NBC Cable.
Rainbow Media's businesses include leading national and regional programming
networks and the Madison Square Garden sports and entertainment business.
Rainbow Media also owns cable television advertising businesses.
Rainbow Media's national entertainment networks include American Movie
Classics (which features American theatrically released classic films and
original programming), Bravo (which features films and performing arts
programs, including jazz, dance, classical music and theatrical and original
programming), Romance Classics (which features theatrically released films,
mini-series, made for television movies and original programming having a
romantic theme), MuchMusic (which features a diverse mix of new and
established musical artists) and The Independent Film Channel (which features
independent films made outside the traditional Hollywood system). National
Sports Partners is a national sports network featuring Fox Sports Net, which
provides national sports programming to regional sports networks. National
Sports Partners is 50% owned by Rainbow Media and is managed and 50% owned by
Fox/Liberty Networks, L.L.C. ("Fox/Liberty").
Rainbow Media owns a 60% interest in, and manages, Regional Programming
Partners, a partnership with Fox/Liberty. Regional Programming Partners owns
an approximate 92.2% interest in Madison Square Garden, a sports and
entertainment company that owns and operates the Madison Square Garden Arena
and the adjoining Theater at Madison Square Garden, the New York
Knickerbockers professional basketball team, the New York Rangers,
professional hockey team, the New York Liberty professional women's
basketball team, the New York City Hawks professional arena football team,
the Madison Square Garden Network, Fox Sports New York and Radio City
Productions (which operates Radio City Music Hall in New York City). Regional
Programming Partners also owns interests in regional sports networks that
provide regional sports programming to the New England, Chicago, Cincinnati,
Cleveland, San Francisco
9
and Florida areas, in addition to Madison Square Garden Network and Fox
Sports New York which provide regional sports programming to the New York
City metropolitan area.
Rainbow Media owns Rainbow News 12 which operates regional news networks
servicing suburban areas surrounding New York City. Rainbow Media also owns
and operates Rainbow Advertising Sales Corporation, a cable television
advertising company and owns a 50% interest in National Advertising Partners,
which sells national advertising for regional sports networks and is managed
and 50% owned by Fox/Liberty.
The following table sets forth ownership information and estimated subscriber
information as of December 31, 1997 for each of the programming businesses
whose ownership interest is held directly or indirectly by Rainbow Media.
Rainbow Media is a 75% owned subsidiary of the Company. NBC owns the
remaining 25% interest. Rainbow Programming Partners ("RPP") is a 60% owned
subsidiary of Rainbow Media, with the remaining 40% interest owned by
Fox/Liberty.
AFFILIATED
PROGRAMMING VIEWING BASIC
BUSINESSES SUBSCRIBERS SUBSCRIBERS (1) OWNERSHIP (2)
- - ----------- ------------- --------------- -----------------
(In Millions)
National Entertainment:
- - ----------------------
American Movie Classics........... 59.9 63.4 Rainbow Media--100%
Romance Classics.................. 6.6 9.9 Rainbow Media--100%
Bravo............................. 26.8 31.9 Rainbow Media--100%
Bravo Latin America............... 3.2 4.2 Rainbow Media--100%
The Independent Film Channel...... 5.2 11.3 Rainbow Media--100%
MuchMusic......................... 7.6 10.3 Rainbow Media and Chum, Ltd.-- 50% each
Sports:
- - ------
Madison Square Garden Network..... 6.6 7.9 RPP--92.2%; ITT--7.8% (3)
Fox Sports New York............... 3.6 6.1 RPP--92.2%; ITT--7.8%
Fox Sports Pacific................ 2.7 3.1 RPP and Fox/Liberty--50% each
Fox Sports Chicago................ 3.0 3.0 RPP and Fox/Liberty--50% each
Fox Sports New England............ 2.6 3.5 RPP--100% (4)
Fox Sports Ohio................... 1.9 2.1 RPP--100%
Fox Sports Cincinnati............. 2.2 2.3 RPP--100%
SportsChannel Florida............. 2.7 2.7 RPP--30%; Front Row--70%
News Services:
- - -------------
News12 Long Island................ .7 .7 Rainbow Media--100%
News12 Connecticut................ .2 .2 Rainbow Media--100%
News12 New Jersey................. 1.0 1.0 Rainbow Media and Newark Star Ledger--50% each
News12 Westchester................ .2 .2 Rainbow Media--100%
Neighborhood News L.I............. .1 .1 Rainbow Media--100%
Other:
- - -----
Extra Help........................ 1.4 1.5 Rainbow Media--100%
- - ------------------------
(1) Represents the total number of basic subscribers available in systems that
carry the service.
(2) Various of these programming businesses, other than those which are
wholly-owned by Rainbow Media, are subject to puts, calls, rights of first
refusal and restrictions on transfer.
(3) See "Madison Square Garden" for a discussion of certain puts
and calls with respect to Madison Square Garden.
(4) On January 14, 1998, Media One, Inc. exercised an option to acquire 50% of
SportsChannel New England
10
Rainbow Media's existing structure reflects three significant transactions that
were consummated in 1997.
NBC Transaction
- - ---------------
On April 1, 1997, Rainbow Media consummated a transaction in which
Rainbow Programming Holdings, Inc. merged with and into Rainbow Media, a
newly formed subsidiary of the Company. In addition, NBC Cable received a 25%
equity interest (which interest may be increased up to 27% under certain
circumstances) in non-voting Class C common stock of Rainbow Media. The
Company owns the remaining 75% equity interest in Rainbow Media. The
partnership interests in certain of Rainbow Media's programming services
formerly owned by NBC Cable are now owned by subsidiaries of Rainbow Media.
Fox/Liberty Transactions
- - ------------------------
On December 18, 1997, Rainbow Media organized three partnerships with Fox
Sports, a subsidiary of Fox/Liberty: Regional Programming Partners (the
partnership that owns the interest in Madison Square Garden and in the
regional sports programming businesses previously owned by Rainbow Media),
National Sports Partners (the partnership that owns and operates Fox Sports
Net) and National Advertising Partners (the partnership that manages and
sells national advertising for certain of the regional sports networks in
which Regional Programming Partners owns interests and certain regional
sports networks owned by Fox/Liberty) (the "Fox/Liberty Transactions").
In connection with the formation of Regional Programming Partners, affiliates
of Rainbow Media, through various indirect transfers, contributed to Regional
Programming Partners, in consideration for the issuance of a 60% general
partnership interest, their interests in SportsChannel Chicago, SportsChannel
Pacific, SportsChannel New England, SportsChannel Ohio, SportsChannel
Cincinnati, SportsChannel Florida and Metro Channel LLC. Fox/Liberty
contributed $850 million in cash to Regional Programming Partners in exchange
for a 40% general partnership interest. Regional Programming Partners used
approximately $450 million of such proceeds to make an investment in Madison
Square Garden, which in turn used such amount to repay indebtedness (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources"). A subsidiary of Rainbow Media
is the managing general partner of Regional Programming Partners.
In connection with the formation of National Sports Partners, Rainbow Media
contributed to National Sports Partners, in consideration for the issuance of
a 50% general partnership interest, its interests in American Sports Classics
LLC, Prime SportsChannel and SportsChannel Ventures, Inc. Fox/Liberty
contributed, in consideration for the issuance of a 50% general partnership
interest, certain assets, including the assets pertaining to or used in the
business of Fox Sports, interests in Prime SportsChannel and Fox Watch
Productions Inc. A subsidiary of Fox Sports is the managing partner of
National Sports Partners.
In connection with the formation of National Advertising Partners, Rainbow
Media contributed to National Advertising Partners, in consideration
for the issuance of a 50% general partnership interest, certain assets
relating to the national advertising of certain of the regional sports
programming services in
11
which Rainbow Media had an interest. Fox/Liberty contributed, in
consideration for the issuance of a 50% general partnership interest, certain
assets relating to the national advertising of the regional sports
programming services in which Fox Sports had an interest. A subsidiary of Fox
Sports is the managing general partner of National Advertising Partners.
Madison Square Garden
- - ---------------------
In March 1995, a partnership formed by Rainbow Media and ITT Corporation
("ITT") acquired the business and assets of Madison Square Garden. Madison
Square Garden owns the Madison Square Garden Arena and the adjoining Theater
at Madison Square Garden, the New York Rangers professional hockey team, the
New York Knickerbockers professional basketball team and the Madison Square
Garden Network. The purchase price was $1,009.1 million.
On June 17, 1997, Madison Square Garden redeemed a portion of ITT's interest
in Madison Square Garden for $500 million and Rainbow Media contributed its
SportsChannel Associates programming company to Madison Square Garden, which,
together with the redemption, increased Rainbow Media's interest in Madison
Square Garden to 89.8% and reduced ITT's interest to 10.2%. In connection with
the Fox/Liberty Transactions discussed above, Rainbow Media's interest in
Madison Square Garden was contributed to Regional Programming Partners. ITT's
interest in Madison Square Garden was further reduced to 7.8% as a result of
the $450 million capital contribution by Regional Programming Partners to
Madison Square Garden as of December 18, 1997, which was used by Madison
Square Garden to pay down outstanding debt. The remaining 7.8% interest held
by ITT is subject to certain puts and calls. On March 9, 1998, ITT notified
the Company of its election to exercise the first put with respect to 50% of
such interest for $94 million. The second put for the remaining 50% of such
interest will become exercisable in 1999.
The Company and Rainbow Media entered into agreements with the National Hockey
League (the "NHL") and the National Basketball Association ("NBA"), agreeing,
among other things, to conduct themselves in accordance with the relevant
rules of each league. The approval of the NHL and the NBA are required for
certain transactions involving Cablevision Parent, the Company, Rainbow Media
and Regional Programming Partners, including certain transfers of ownership
interests.
On December 5, 1997, Madison Square Garden purchased Radio City Productions
LLC, the production company that operates Radio City Music Hall in New York
City and produces The Radio City Christmas Spectacular and shows featuring the
Radio City Rockettes, and simultaneously entered into a 25-year lease for
Radio City Music Hall.
TELEPHONE AND MODEM SERVICES
The Company, through Lightpath, a Competitive Local Exchange Carrier,
provides advanced local telecommunications services to the business market.
Lightpath provides a full range of local dial tone, switched services,
private line and advanced networking features on the local and long distance
levels on its own facilities and network. As of December 31, 1997, Lightpath
serviced over 850 industrial, commercial and institutional accounts on Long
Island. In addition, the Company has begun providing residential telephone
and cable modem internet access service in portions of the greater New York
City metropolitan area.
12
AT HOME CORPORATION
- - -------------------
The Company owns warrants to acquire approximately 11 million shares of
common stock of At Home Corporation, which warrants are exercisable at $.50
per share. At Home Corporation distributes high-speed interactive services
to residences and businesses using its own network architecture and a variety
of transport options, including the cable industry's hybrid-fiber coaxial
infrastructure. These warrants were issued to the Company in exchange for
certain agreements of the Company with respect to the distribution of the
At Home internet access service to cable subscribers.
NOBODY BEATS THE WIZ
- - --------------------
On February 9, 1998, Cablevision Electronics Investments, Inc. ("Cablevision
Electronics"), a wholly-owned subsidiary of the Company, acquired
substantially all of the assets associated with approximately 40 Nobody Beats
The Wiz consumer electronics store locations from The Wiz, Inc. and certain
of its subsidiaries and affiliates (collectively, the "Wiz"). The Wiz had
filed for bankruptcy protection on December 16, 1997. Cablevision Electronics
paid approximately $92 million for the assets, primary inventory, of which
$10 million was put into escrow pending resolution of the final calculation
of the purchase price. In addition, prior to closing, Cablevision Electronics
provided approximately $8 million for the Wiz to meet certain operating costs.
PCS INVESTMENTS
- - ---------------
The Company holds a 49.9% interest, and certain preferential distribution
rights, in NorthCoast Communications, LLC ("NorthCoast"). NorthCoast holds
certain licenses to conduct a personal communications service ("PCS")
business. The Company has contributed an aggregate of approximately $29.7
million to NorthCoast (either directly or through a loan to NorthCoast
Operating Co., Inc. ("NorthCoast Operating"), the other member in
NorthCoast). NorthCoast Operating is a Delaware Corporation controlled by
John Dolan. John Dolan is a nephew of Charles F. Dolan (the Chairman of the
Board of the Company and of Cablevision Parent and a principal stockholder of
Cablevision Parent) and a cousin of James L. Dolan (the Chief Executive
Officer and director of the Company and of Cablevision Parent), Thomas C. Dolan
(a Senior Vice President and director of the Company and of Cablevision Parent)
and Patrick F. Dolan (a director of the Company and of Cablevision Parent).
DBS INVESTMENT
- - --------------
Rainbow Media holds a 50% interest in R/L DBS Company LLC, a joint venture
with Loral Space and Communications, Ltd. ("R/L DBS"). R/L DBS holds certain
frequencies granted by the FCC for the operation of a direct broadcast
satellite business. The Company has contributed an aggregate of approximately
$12.9 million to R/L DBS or its predecessor businesses.
13
Radio Station Disposition
- - -------------------------
In December 1997, Rainbow Media completed the sale of substantially all of
the assets of a subsidiary, CV Radio Associates, L.P., which operated an AM
radio station (WKNR) in Cleveland, Ohio, for approximately $8.4 million.
COMPETITION
- - -----------
CABLE TELEVISION
- - ----------------
The 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 Systems also compete to varying degrees with other communications
and entertainment media, including movies, theater and other entertainment
activities.
The Telecommunications Act of 1996 ("1996 Telecom Act") repealed 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. Non-telephone companies may also
become "open video systems" and provide video competition to cable systems
without obtaining a franchise. A local telephone company also may provide the
"transmission of video programming" on a common carrier basis. As noted below,
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.
Several companies have sought to become "open video systems" in areas in which
the Company operates cable systems in Boston, New York City and Westchester
County, New York. One, RCN Corporation ("RCN") is currently operating open video
systems in Boston and New York City and has received authorization to operate
open video systems in a number of communities in Massachusetts in which the
Company operates cable systems.
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 Systems are
able to sell premium service units and pay-per-view offerings to some of its
subscribers.
14
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 Systems. By acquiring several
MMDS licenses or subleasing from several MMDS operators and holders of other
types of microwave licenses, a single entity can increase channel capacity to a
level more competitive with cable systems. MDS and MMDS systems are not required
to obtain a municipal franchise, are less capital intensive, require lower
up-front capital expenditures and are subject to fewer local and FCC regulatory
requirements than cable systems. The ability of MDS and MMDS systems to serve
homes and to appeal to consumers is affected by their less extensive channel
capacity and the need for unobstructed line of sight over-the-air transmission.
The Systems compete 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
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 Systems compete with SMATV
operators primarily in the New York City metropolitan 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.
The FCC has established a new local multipoint distribution service ("LMDS",
sometimes referred to as "cellular cable") in the higher bands 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 held auctions to select licensees. Cellularvision, 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 New York
City service area. The FCC has barred both telephone and cable companies from
bidding for LMDS frequencies in their own service areas.
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 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. Higher power DBS systems
providing transmissions over the Ku-Band permit the use of smaller receiver
antennae and thus are more appealing to customers. Four DBS systems are now
operational in the United States, some with investment by companies with
substantial resources such as Hughes Electronics Corp. Both C-Band and Ku-Band
DBS delivery of television signals are competitive alternatives to cable
television. Legislation has been introduced in Congress to change the federal
copyright laws to permit DBS systems to retransmit local broadcast television
15
signals to DBS customers. If enacted, such legislation could enhance the
competitive position of DBS systems.
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.
Although substantially all the franchises of the Systems 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
Systems are operated or a municipality could build a competing cable system.
SNET, the dominant telephone company in Connecticut has obtained a statewide
franchise to build and operate a competing cable television system in the
communities in Connecticut in which the Systems are operating pursuant to cable
franchises. Ameritech has obtained franchises to offer cable service in certain
of the Company's franchise areas in the Midwest. RCN has obtained or applied for
cable franchises in a number of communities in Massachusetts in which the
Company operates. 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.
PROGRAMMING AND ENTERTAINMENT
- - -----------------------------
There are numerous programming services with which Rainbow Media competes
for cable television system distribution and for subscribers, including network
television, other national and regional cable services, independent broadcast
television stations, television superstations, the home videocassette industry,
and developing pay-per-view services. Rainbow Media 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 Media.
Rainbow Media 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 Media 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 Media's marketing efforts.
16
There are numerous businesses that compete with Madison Square Garden and
Radio City Productions for the entertainment expenditures of consumers.
TELEPHONE AND MODEM SERVICES
- - ----------------------------
Lightpath faces substantial competition from incumbent local exchange
carriers ("ILECs"), such as Bell Atlantic, which are the dominant providers of
local telephone services in their respective service areas. ILECs have
significant advantages over Lightpath, including greater capital resources,
an existing fully operational local network, and longstanding relationships with
customers.
While Lightpath and the ILECs are competitors, Lightpath must also enter
into interconnection agreements with each ILEC so that Lightpath's customers can
make and receive calls from customers served by the ILEC. Federal and State law
and regulations require ILECs to enter into such agreements and provide such
facilities and services, and establish the methodology for setting the price for
these facilities and services. The specific price, terms and conditions of each
agreement, however, depends on the outcome of negotiations between Lightpath
and an ILEC. Agreements are also subject to approval by the state public service
commission. Lightpath has entered into interconnection agreements with Bell
Atlantic for New York, which have been approved by the New York Public Service
Commission. In addition, it has reached an agreement with Southern New England
Telephone ("SNET") covering SNET's service area in Connecticut, which agreement
is pending signature.
Lightpath also faces competition from one or more competitive access
providers ("CAPs") and other new entrants in the local telecommunications
marketplace, such as Teleport Communications Group, Inc. ("Teleport") and MFS
Communications Company, Inc. ("MFS"). In addition to the ILECs and competitive
service providers, other potential competitors capable of offering private line
and special access services include electric utilities, long distance carriers,
microwave carriers, wireless telephone system operators (such as cellular, PCS,
and specialized mobile radio), and private networks built by large end users. A
continuing trend toward business combinations and alliances in the
telecommunications industry may create significant new competitors to Lightpath.
Many ILECs and certain of Lightpath's other potential competitors have
financial, personnel and other resources significantly greater than those of
Lightpath. Some of these competitors have existing networks or conduits that
could be adapted to provide local exchange services. There can be no
assurance that Lightpath will be able to compete effectively against these
competitors. Lightpath may also face competition from new technologies and
services introduced in the future.
17
REGULATION
- - -----------
CABLE TELEVISION
- - ----------------
1984 CABLE ACT. The 1984 Cable Act 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.
1992 CABLE ACT. The 1992 Cable Act represented 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 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. 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 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. In 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. Franchise authorities
(local municipalities or state cable television regulators) are also
18
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 franchising authority, 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 are not subject to rate regulation by either municipalities or the FCC.
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. Increases in fees paid to
broadcast stations for the retransmission of their signals above those in effect
on October 6, 1994 may be passed through to subscribers.
In 1994 the FCC also 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. In addition, the FCC has adopted guidelines for cost of
service showings that permit rate adjustments attributed to the cost of a
rebuild or substantial upgrade of a cable system to be added to the operators
benchmark rate.
In 1994 the FCC also reversed its prior policy regarding rate regulation of
packages of a la carte services. A la carte services that are offered in a
package are now 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 it was not clear how the
FCC's previous criteria
19
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, allowed 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 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
could 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 could increase rates for actual programming costs for channels added
in that year, plus, in the event channels are added, an additional 20 cents
(aggregate) in the third year, 1997. Cable operators electing to use the 20 cent
per channel adjustment could not take a 7.5% mark-up on programming cost
increases, which was permitted under the FCC's prior rate regulations.
Additionally, the FCC permitted cable operators to offer NPTs at rates that
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 cable programming service tier 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 other media such as MMDS and SMATV.
In connection with clause (ii) of the immediate proceeding paragraph
concerning limitations on affiliated programming, the FCC has established a 40%
limit on the number of channels of a cable
20
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
Systems and have elected to negotiate for Retransmission Consent. The Systems
have Retransmission Consent agreements with most broadcast stations they
currently carry, but 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. The Company has had to drop a few local
stations because of failure to reach retransmission consent agreements. In
connection with clause (i) of the immediate proceeding paragraph, the 1992
Cable Act prohibits a cable programmer that is owned by or affiliated with a
cable operator (such as Rainbow Media) from unreasonably discriminating among
or between cable operators and other multichannel video distribution systems
with respect to the price, terms and conditions of sale or distribution of
the programmer's satellite-delivered services and from unreasonably refusing
to sell any such service to any multichannel video programming distributor.
In several instances, Rainbow Media has been ordered by the FCC to provide
satellite-delivered programming to multi-channel video programmers after such
multi-channel video programmers have filed complaints pursuant to these
program-access rules. The FCC has recently sought comment on whether it can
and should extend these program-access rules to cover some
terrestrial-delivered programming by programmers such as Rainbow Media. In
addition, proposals have been made to Congress in support of such extensions.
It is not possible to predict whether such an extension will be adopted by
the FCC or considered by Congress and, if so, what effect it might have on
the Company.
The FCC adopted or 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.
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, and requires such complaints to be filed by franchising
authorities following receipt of at least two subscriber complaints.
Legislation was introduced in 1998 to postpone indefinitely the effective
date of the 1996 Telecom Act's deregulation of rates for non-basic service.
The Company cannot predict the outcome of such legislation.
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
21
distributor using the facilities of a telephone company or its affiliates)
offers comparable video programming 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 franchise areas served by the Systems, this provision will allow the
Systems greater flexibility in packaging and pricing 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 programming options for the 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; ownership and control of cable home
wiring in single family residences and multiple dwelling unit 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" which may be passed on to
subscribers as "external cost" adjustments to basic cable service. Fees are also
assessed for other licenses held by cable operators, 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 Systems operate have done so. The 1996 Telecom
Act modifies the 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 has adopted new regulations to govern the charges for pole
attachments used by companies providing telecommunications services, including
cable operators. These regulations are likely to significantly increase the
rates charged to cable companies providing voice and data, in addition to video
services. These new pole attachment regulations do not become effective,
however, until five years after enactment of the 1996 Telecom Act in 2001, and
any subsequent increases in attachment rates resulting from the FCC's new
regulations will be phased in equal annual increments over a subsequent period
of five years, until 2006.
22
The FCC's technical guidelines for signal leakage became substantially more
stringent in 1990, requiring upgrading expenditures by the Systems. Two-way
radio stations, microwave-relay stations and satellite earth stations used by
the 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 and the Copyright offices
have, at different times, recommended to Congress changes in the compulsory
licenses for cable television carriage of broadcast signals. This could
adversely affect the ability of the Systems to obtain such programming and could
increase the cost of such programming. No prediction can be made as to whether
Congress will enact any such changes to the copyright laws.
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 was initiated in 1998. The 1996
Telecom Act also directed 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, which the FCC has done. 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. Massachusetts, New Jersey and
Connecticut also have substantial cable regulatory authority at the state level.
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 1984 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 carriers by preempting state and local laws that restrict
competition and by requiring incumbent local exchange
23
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. One utility Company, Boston
Edison, has teamed with one of the Company's competitors, RCN, to provide
bundled telecommunications and video services in the Boston market.
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.
PROGRAMMING AND ENTERTAINMENT
- - -----------------------------
Cable television program distributors such as Rainbow Media 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 Media 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 Media
services or carry the Rainbow Media services on their affiliates' systems and
imposes or could impose other regulations on the Rainbow Media companies. The
"program access" provisions of the 1992 Cable Act require that Rainbow Media
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 Media 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 Media's services.
Satellite common carriers, from whom Rainbow Media and its affiliates obtain
transponder channel time to distribute their programming, are directly regulated
by the FCC. All common carriers must obtain from the FCC a certificate for the
construction and operation of their interstate communications facilities.
Satellite common carriers must also obtain FCC authorization to utilize
satellite orbital slots assigned to the United States by the World
Administrative Radio Conference.
24
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 Media 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 Media
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.
TELEPHONE AND MODEM SERVICES
- - ----------------------------
As a telecommunications carrier, Lightpath is subject to regulation by the
FCC and by the state public service commission in each state in which it
provides service. In order to provide service, moreover, Lightpath must seek
approval from each such state commission. Lightpath has obtained this approval
from the state commissions in New York, Connecticut, Massachusetts, New Jersey,
and Ohio.
Lightpath's regulatory obligations vary from state-to-state and include
some or all of the following requirements: filing tariffs (rates, terms and
conditions); filing operational, financial, and customer service reports;
seeking approval to transfer the assets or capital stock of the telephone
company; seeking approval to issue stocks, bonds, and other forms of
indebtedness of the telephone company; and filing all contracts or other
documentation involving transactions between the telephone company and its
affiliates. States may also impose requirements on competitive carriers to
contribute to the funding of discounted "universal" telecommunications
services for educational institutions, low income persons, and persons in
rural areas.
As Lightpath offers interstate long distance services, it is required to
file relevant tariffs with the FCC and comply with relevant FCC reporting
requirements, including the payment of regulatory fees, Telecommunication Relay
Services funding, and the contributions to the maintenance of "universal
service" as required by the Telecommunications Act of 1996 ("1996 Act"). Also
under the 1996 Act, Lightpath must compensate carriers that terminate calls
originating on Lightpath's network (Lightpath is entitled to compensation from
carriers when it terminates calls); interconnect directly or indirectly with
other carriers; make its telecommunications services available for resale; and
provide number portability, dialing parity, and access-to-rights-of-way.
EMPLOYEES AND LABOR RELATIONS
As of December 31, 1997, the Company had 7,969 full-time, 1,849 part-time
and 5,210 temporary employees of which 341, 921 and 3,260, respectively, were
covered under collective bargaining agreements. The Company believes that its
relations with its employees are satisfactory.
25
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 seventeen business
offices, comprising the Company's headquarters located in Woodbury, New York
with approximately 387,000 square feet of space, 106,000 square feet housing
Madison Square Garden's office operations and 569,000 square feet comprising
Radio City Music Hall. In December 1997, the Company entered into a lease for
a building located in Bethpage, New York with approximately 536,000 square feet
of space. The Company expects to relocate most of its existing business offices
in Woodbury, New York to Bethpage, New York by the end of 1998. The Company
believes its properties are adequate for its use.
The Company generally owns all assets (other than real property) related to
its cable television operations, 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. The Company, through Madison Square Garden, also owns the Madison
Square Garden arena and theater complex in New York City comprising 1,016,000
square feet. The Company generally leases its service and other vehicles.
Cablevision Electronics leases approximately 40 retail store locations and
two warehouses aggregating approximately 1,669,000 square feet.
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.
26
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of the Stockholders of the Company was held on February
18, 1998. The following matters were voted upon at the Special Meeting,
indicating the number of votes cast for and against, as well as the number of
abstentions (there were no votes withheld or broker non-votes on any matter):
1. Proposal to adopt and approve a Contribution and Merger Agreement,
dated as of June 6, 1997, as amended by an Amended and Restated Contribution
and Merger Agreement, dated as of June 6, 1997 by and among TCI
Communications, Inc., the Company, Cablevision Parent and CSC Merger
Corporation, relating to the TCI Transactions:
Class A Common Stock:
For: 9,497,563
Against: 14,634
Abstain: 10,498
Class B Common Stock:
For: 110,867,090
Against: 0
Abstain: 0
2. Proposal to adopt and approve the Cablevision Parent Employee Stock Plan
described in the Proxy Statement/Prospectus delivered to Stockholders in
connection with the Special Meeting:
Class A Common Stock:
For: 8,697,856
Against: 797,660
Abstain: 27,179
Class B Common Stock:
For: 110,867,090
Against: 0
Abstain: 0
3. Proposal to adopt and approve the Cablevision Parent Long-Term Incentive
Plan described in the Proxy Statement/Prospectus delivered to Stockholders in
connection with the Special Meeting:
Class A Common Stock:
For: 8,984,980
Against: 512,129
Abstain: 25,586
Class B Common Stock:
For: 110,867,090
Against: 0
Abstain: 0
27
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Prior to the consummation of the Holding Company Reorganization on March
4, 1998, the Company's Class A Common Stock was traded on the American Stock
Exchange under the symbol "CVC". The following table sets forth the high and
low sales prices (adjusted for the two-for-one stock split) for the last two
years of Class A Common Stock as reported by the American Stock Exchange for
the periods indicated.
1997 1996
--------------------- ---------------------
QUARTER HIGH LOW HIGH LOW
---------- --------- ---------- ---------
First 17-3/4 14-7/8 30-3/16 26-3/8
Second 27-21/32 13-9/16 29 22
Third 31-3/8 24-9/16 23-1/8 19-7/16
Fourth 47-7/8 31-3/4 21-11/16 12-1/2
As of March 24, 1998, there were 715 holders of record of Cablevision
Parent Class A Common Stock.
There is no public trading market for the Cablevision Parent Class B Common
Stock, par value $.01 per share ("Class B Common Stock"). As of March 24, 1997,
there were 23 holders of record of Class B Common Stock.
All outstanding shares of common stock of the Company are held by
Cablevision Parent.
See Item 1. --"Business--The Holding Company Reorganization and TCI
Transactions" for a description of the changes to the Company's capitalization
as a result of the Reorganization.
DIVIDENDS. Neither the Company (prior to the Reorganization) nor
Cablevision Parent (after the Reorganization) have paid any dividends on shares
of Class A or Class B Common Stock. Cablevision Parent does not anticipate
paying any cash dividends on shares of Cablevision Parent Class A or Class B
Common Stock in the foreseeable future.
Cablevision Parent and the Company may pay cash dividends on their capital
stock only from surplus as determined under Delaware law. Holders of
Cablevision Parent Class A and Cablevision Parent 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 Cablevision Parent from
funds legally available therefore. No dividend may be declared or paid in cash
or property on shares of either Cablevision Parent Class A or Cablevision Parent
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 Cablevision Parent Class A Common Stock are
28
entitled to receive the same percentage dividend (payable in shares of
Cablevision Parent Class A Common Stock) as the holders of Cablevision Parent
Class B Common Stock receive (payable in shares of Cablevision Parent Class B
Common Stock).
The Company paid $29.3 million of cash dividends on the Series I Preferred
Stock and $118.5 million of dividends in additional shares of Series H and M
Preferred Stock. The Company is restricted from paying dividends on its
preferred stock under the provisions of its senior credit agreement if a default
has occurred and is continuing under such agreement. Additionally, the Company's
senior debentures and senior subordinated debt instruments may restrict the
payment of dividends in respect of any shares of capital stock in certain
circumstances.
Dividends may not be paid in respect of shares of the Company's 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 the Company's 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."
29
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 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.
THE COMPANY
DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Operating Data:
Revenues..................................... $ 1,949,358 $ 1,315,142 $ 1,078,060 $ 837,169 $ 666,724
Operating expenses
Technical and operating...................... 853,800 538,272 412,479 302,885 241,877
Selling, general and administrative.......... 514,574 313,476 266,209 195,942 172,687
Restructuring charge......................... -- -- -- 4,306 --
Depreciation and amortization................ 499,809 388,982 319,929 271,343 194,904
------------ ------------ ------------ ----------- -----------
Operating profit............................. 81,175 74,412 79,443 62,693 57,256
Other income (expense):
Interest expense, net........................ (363,208) (265,015) (311,887) (261,781) (230,327)
Share of affiliates' net loss................ (27,165) (82,028) (93,024) (82,864) (61,017)
Gain (loss) on sale of programming and
affiliate interest, net.................... 372,053 -- 35,989 -- (330)
Gain on redemption of subsidiary preferred
stock...................................... 181,738 -- -- -- --
Write off of deferred interest and financing
costs...................................... (24,547) (37,784) (5,517) (9,884) (1,044)
Loss on redemption of debentures............. -- -- -- (7,088) --
Provision for preferential payment to related
party...................................... (10,083) (5,600) (5,600) (5,600) (5,600)
Minority interest............................ (60,694) (9,417) (8,637) (3,429) 3,000
Miscellaneous, net........................... (12,606) (6,647) (8,225) (7,198) (8,720)
------------ ------------ ------------ ----------- -----------
Net income (loss)............................ 136,663 (332,079) (317,458) (315,151) (246,782)
Preferred dividend requirement............... (148,767) (127,780) (20,249) (6,385) (885)
------------ ------------ ------------ ----------- -----------
Net loss applicable to common shareholders... $ (12,104) $ (459,859) $ (337,707) $ (321,536) $ (247,667)
------------ ------------ ------------ ----------- -----------
Net loss per common share.................... $ (.24) $ (9.26) $ (7.09) $ (6.86) $ (5.42)
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
Average number of common shares outstanding
(in thousands)............................. 49,804 49,654 47,652 46,888 45,718
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
Cash dividends declared per common share..... $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ===========
30
THE COMPANY
DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ --------------------- ----------
(DOLLARS IN THOUSANDS)
Balance Sheet Data:
Total assets.............................. 5,625,091 3,034,725 $ 2,502,305 $ 2,176,413 $1,327,418
Total debt................................ 4,694,062 3,334,701 3,157,107 3,169,236 2,235,499
Minority interest......................... 821,782 -- -- -- --
Deficit investment in affiliates.......... 10,303 512,800 453,935 393,637 325,732
Redeemable preferred stock................ 1,123,808 1,005,265 257,751 -- --
Stockholders' deficiency.................. (2,378,773) (2,374,285) (1,891,676) (1,818,535) (1,503,244)
Statistical Data:
Homes passed by cable..................... 4,398,414 3,858,000 3,328,000 2,899,000 2,240,000
Basic service subscribers................. 2,844,408 2,445,000 2,061,000 1,768,000 1,379,000
Basic service subscribers as a percentage
of homes passed......................... 64.7% 63.4% 61.9% 61.0% 61.6
Number of premium television units........ 4,183,130 3,862,000 3,990,000 3,208,000 3,003,000
Average number of premium units per basic
subscriber at period end................ 1.5 1.6 1.9 1.8 2.2
Average monthly revenue per basic
subscriber (1).......................... $ 38.53 $ 36.71 $ 37.07 $ 36.33 $ 36.59
- - ------------------------
(1) Based on recurring service revenues divided by average subscribers for the
month of December.
31
[cad 228]
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT TRANSACTIONS
As described under Item 1--"Business--The Holding Company Reorganization and
TCI Transactions," on March 4, 1998, the Company completed a significant
transaction whereby the Company became a subsidiary of Cablevision Parent and
TCI contributed to Cablevision Parent cable television systems located in New
Jersey, on Long Island and in New York's Rockland and Westchester counties,
which served approximately 829,000 cable television subscribers as of
December 31, 1997. In this transaction, TCI acquired Class A Common Stock of
Cablevision Parent representing about 33% of the outstanding common stock of
Cablevision Parent. These transactions have not been reflected in the
Company's financial statements as of and for the year ended December 31, 1997
and, except as expressly noted herein, these transactions are not covered
by this Item 7.-"Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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.
1997 ACQUISITIONS AND TRANSACTIONS. In April 1997, the Company exchanged
25% of its interest in Rainbow Media for NBC's interest in certain programming
entities. In June 1997, the Company redeemed a portion of ITT's interest in
Madison Square Garden which increased Rainbow Media's interest in Madison Square
Garden from 50% to 89.8%. In June 1997, the Company acquired from Warburg Pincus
the equity interest that Warburg Pincus had in certain cable television systems
in Massachusetts giving the Company full ownership. Also in July 1997, the
Company acquired from Warburg Pincus the Series A Preferred Stock of A-R Cable
which resulted in the consolidation of A-R Cable's operations from the date of
the transaction. In December 1997, Rainbow Media completed the Fox/Liberty
Transactions discussed in Item 1. -"Business - Programming and Entertainment
Operations." Also in December 1997 Madison Square Garden acquired all of the
membership interests in Radio City Productions.
1997 DISPOSITIONS. In 1997, the Company completed the sale of the
cable television systems in Allen and Gibsonberg Townships, Ohio owned by
Cablevision of the Midwest, Inc. and the sale of cable television systems
owned by A-R Cable in Maine. In addition, in 1997, Rainbow Media completed the
sale of the assets of a subsidiary, CV Radio Associates, L.P.
1996 ACQUISITIONS. In September 1996, the Company acquired from Warburg
Pincus the equity interests that Warburg Pincus owned in Cablevision of
Newark, giving the Company full ownership of Cablevision of Newark. In August
1996, the Company acquired the partnership interests in U.S. Cable that it did
not already own.
32
1995 ACQUISITIONS. In July 1995, the Company, through Rainbow Media,
purchased NBC's interests in SportsChannel New York and Rainbow News 12 Company,
giving Rainbow Media a 100% interest in these companies. In December 1995,
the Company acquired the interests in Cablevision of Boston that it did not
previously own.
All the above transactions completed during the 1995-1997 period are
collectively referred to as the "Net Acquisitions".
For a description of the Company's recent transactions, see Item
1.- "Business - Cable Television Operations and Programming and Entertainment
Operations."
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.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996
--------------------------- --------------------------- (INCREASE)
% OF NET % OF NET DECREASE
AMOUNT REVENUES AMOUNT REVENUES IN NET LOSS
------------ ------------- ------------ ------------- -----------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA
- - ----------------------------
Revenues........................................... $ 1,949,358 100% $ 1,315,142 100% $ 634,216
Operating expenses:
Technical and operating.......................... 853,800 44 538,272 41 (315,528)
Selling, general & administrative................ 514,574 26 313,476 24 (201,098)
Depreciation and amortization.................... 499,809 26 388,982 29 (110,827)
------------ ------------ -----------
Operating profit................................... 81,175 4 74,412 6 6,763
Other income (expense):
Interest expense, net............................ (363,208) (19) (265,015) (20) (98,193)
Share of affiliates' net loss.................... (27,165) (1) (82,028) (6) 54,863
Gain on sale of programming and affiliate
interests, net................................. 372,053 19 -- -- 372,053
Gain on redemption of subsidiary preferred
stock.......................................... 181,738 9 -- -- 181,738
Write off of deferred interest and financing
costs.......................................... (24,547) (1) (37,784) (3) 13,237
Provision for preferential payment to related
party.......................................... (10,083) -- (5,600) -- (4,483)
Minority interest................................ (60,694) (3) (9,417) (1) (51,277)
Miscellaneous, net............................... (12,606) (1) (6,647) (1) (5,959)
------------ ------------ -----------
Net income (loss).................................. $ 136,663 7% $ (332,079) (25)% $ 468,742
------------ ------------ -----------
------------ ------------ -----------
OTHER OPERATING DATA:
- - --------------------
Operating profit before depreciation and
amortization (1)................................. $ 580,984 $ 463,394
Currently payable interest expense, net............ 360,993 255,986
Net cash provided by operating activities (2)...... 271,687 200,380
Net cash used in investing activities (2).......... 248,616 741,748
Net cash provided by financing activities (2)...... 375,458 537,648
- - ------------------------
(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, 1997 VERSUS YEAR ENDED DECEMBER 31, 1996.
Revenues for the year ended December 31, 1997 increased $634.2 million (48%)
as compared to revenues for the prior year. Approximately $490.4 million (37%)
of the increase was attributable to the Net Acquisitions; approximately $60.1
million (5%) resulted from higher revenue per subscriber; and approximately
$50.9 million (4%) was from increases in other reve