10-Q 1 a2056943z10-q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 ----------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 Delaware 1111 Stewart Avenue Bethpage, New York 11714 (516) 803-2300 1-9046 CSC Holdings, Inc. 11-2776686 Delaware 1111 Stewart Avenue Bethpage, New York 11714 (516) 803-2300
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Cablevision Systems Corporation Yes /X/ No / / CSC Holdings, Inc. Yes /X/ No / / Number of shares of common stock outstanding as of August 3, 2001: Cablevision NY Group Class A Common Stock - 133,136,883 Cablevision NY Group Class B Common Stock - 42,145,986 Rainbow Media Group Class A Common Stock - 68,730,166 Rainbow Media Group Class B Common Stock - 21,072,993 CSC Holdings, Inc. Common Stock - 1,000 ================================================================================ Part I. FINANCIAL INFORMATION For information required by Item 1 and Item 2, refer to Index to Financial Statements on page 7. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risks from changes in interest rates and certain equity security prices. The Company's exposure to interest rate movements results from its use of floating and fixed rate debt to fund its working capital, capital expenditures, and other operational and investment requirements. To manage interest rate risk, the Company has from time to time entered into interest rate swap contracts to adjust the proportion of total debt that is subject to variable and fixed interest rates. Such contracts fix the borrowing rates on floating rate debt to provide an economic hedge against the risk of rising rates and/or convert fixed rate borrowings to variable rates to provide an economic hedge against the risk of higher borrowing costs in a declining interest rate environment. In addition, the Company may from time to time utilize short-term interest rate lock agreements to hedge the risk that the cost of a future issuance of fixed-rate debt may be adversely affected by changes in interest rates. The Company does not enter into interest rate swap contracts for speculative or trading purposes. The Company's exposure to changes in equity security prices stems primarily from its investments in At Home Corporation common stock warrants (the value of which fluctuates based on changes in the stock price of the underlying security) and the AT&T Corp., Adelphia Communications Corporation and Charter Communications Inc. common stock held by the Company. Historically, the Company has not hedged its equity price risk in At Home Corporation common stock warrants; however, as of June 30, 2001, the Company had hedged its equity price risk on all of its shares of Charter Communications and Adelphia Communications stock through the execution of prepaid forward contracts. Such contracts set a floor and ceiling on the Company's participation in changes in the underlying stock price, thereby eliminating downside exposure and providing for upside appreciation potential to the contract's ceiling price. FAIR VALUE OF DEBT: Based on the level of interest rates prevailing at June 30, 2001, the fair value of the Company's fixed-rate debt and redeemable preferred stock of $6,733.7 million exceeded its carrying cost by approximately $24.9 million. The fair value of these financial instruments is estimated based on reference to quoted market prices for these or comparable securities. The Company's floating rate borrowings bear interest at current market rates and thus approximate fair value. The effect of a hypothetical 100 basis point decrease in interest rates prevailing at June 30, 2001 would increase the estimated fair value of fixed-rate debt and redeemable preferred stock instruments by approximately $313.8 million. This estimate is based on the assumption of an immediate and parallel shift in interest rates across all maturities. -2- INTEREST RATE HEDGE CONTRACTS: As of June 30, 2001, the Company had outstanding interest rate swap contracts to pay variable rates of interest (based upon LIBOR with the latest maturity in 2004) covering a total notional principal amount of $775 million. As of June 30, 2001, the fair market value of all interest rate hedge contracts was approximately $6.3 million. Assuming an immediate and parallel shift in interest rates across the yield curve, a 100 basis point increase in interest rates from June 30, 2001 prevailing levels would decrease the fair market value of all hedge contracts by approximately $18.2 million to a liability of $11.9 million. EQUITY PRICE RISK: As of June 30, 2001, the fair market value and carrying value of the Company's warrants to acquire At Home's common stock was $38.9 million. The potential change in the fair value of this investment, assuming a 10% change in price, would be approximately $4.3 million. As of June 30, 2001, the fair market value and the carrying value of the Company's holdings of Charter Communications, Adelphia Communications and AT&T common stock aggregated $1,677.4 million. Assuming a 10% change in price, the potential change in the fair value of these investments would be approximately $167.7 million. As of June 30, 2001, the net fair value and the carrying value of the equity collar component of the prepaid forward contracts entered into to hedge the equity price risk of Charter Communications and Adelphia Communications aggregated $17.3 million, a net liability position. The maturities of the Company's prepaid forward contracts to hedge the equity price risk of Charter Communications and Adelphia Communications are as follows:
CHARTER COMMUNICATIONS INCEPTION DATE # OF SHARES MATURITY -------------- ----------- -------- 1/29/01 1,862,229 01/19/05 1/29/01 1,862,229 01/19/06 3/19/01 3,724,458 09/19/06 3/19/01 3,724,460 09/19/07 ADELPHIA COMMUNICATIONS INCEPTION DATE # OF SHARES MATURITY -------------- ----------- -------- 2/12/01 3,600,000 02/13/06 3/07/01 1,200,000 03/08/04 3/07/01 1,200,000 03/07/05 3/07/01 1,200,000 04/07/06 3/30/01 1,800,000 09/30/04 3/30/01 1,800,000 09/30/05
As of June 30, 2001, the fair market value and the carrying value of the Company's investment in certain other marketable equity securities aggregated $10.4 million. Assuming a 10% change in price, the potential change in the fair value of these securities would be approximately $1.0 million. -3- Part II. OTHER INFORMATION Item 1. 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. On April 25, 2001, At Home commenced a lawsuit in the Court of Chancery of the State of Delaware alleging that Cablevision had breached its obligations under certain agreements with At Home. The suit seeks a variety of remedies including: recision of the agreements between At Home and Cablevision and cancellation of all warrants currently held by Cablevision, damages, and/or an order prohibiting Cablevision from continuing to offer its Optimum Online service and requiring it to convert its Optimum Online customers to the Optimum@Home service and to roll out the Optimum@Home service. Cablevision is vigorously contesting this lawsuit. Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Stockholders was held on June 5, 2001. The following matters were voted upon at the Company's Annual Meeting of Stockholders: ELECTION OF DIRECTORS: Class A Directors: Charles D. Ferris: For: 150,938,279 Votes withheld: 1,795,354 Richard H. Hochman: For: 151,061,347 Votes withheld: 1,672,286 Victor Oristano: For: 151,051,193 Votes withheld: 1,682,440 Vincent Tese: For: 149,031,477 Votes withheld: 3,702,156 Class B Directors: William J. Bell Michael P. Huseby For: 526,824,825 Charles F. Dolan Robert S. Lemle Against: 0 James L. Dolan Sheila A. Mahony Patrick F. Dolan Daniel E. Somers Thomas C. Dolan John Tatta
Each nominee for election by the Class B common stockholders received the same vote as indicated above. -4- RATIFICATION AND APPROVAL OF KPMG LLP Class A Common Stock: For: 150,152,452 Against: 2,509,985 Abstain: 71,197 Class B Common Stock: For: 556,824,825 Against: 0 Abstain: 0 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. None. (b) Reports on Form 8-K. Cablevision Systems Corporation has not filed any Current Reports on Form 8-K with the Commission during the quarter for which this report is filed. CSC Holdings, Inc. has not filed any Current Reports on Form 8-K with the Commission during the quarter for which this report is filed. -5- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. CABLEVISION SYSTEMS CORPORATION CSC HOLDINGS, INC. Date: August 14, 2001 /s/ William J. Bell --------------------- -------------------------------------- By: William J. Bell, as Vice Chairman, Director and Principal Financial Officer of Cablevision Systems Corporation and CSC Holdings, Inc. Date: August 14, 2001 /s/ Andrew B. Rosengard --------------------- -------------------------------------- By: Andrew B. Rosengard, as Executive Vice President, Finance and Principal Accounting Officer of Cablevision Systems Corporation and CSC Holdings, Inc. -6- INDEX TO FINANCIAL STATEMENTS
PAGE CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets - June 30, 2001 (unaudited) and December 31, 2000...........................................I-1 Condensed Consolidated Statements of Operations - Three and Six Months Ended June 30, 2001 and 2000 (unaudited).............................I-3 Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000 (unaudited).......................................I-4 Notes to Condensed Consolidated Financial Statements (unaudited)..........................I-5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................................................I-18 CSC HOLDINGS, INC. AND SUBSIDIARIES FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets - June 30, 2001 (unaudited) and December 31, 2000..........................................II-1 Condensed Consolidated Statements of Operations - Three and Six Months Ended June 30, 2001 and 2000 (unaudited)............................II-3 Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000 (unaudited)......................................II-4 Notes to Condensed Consolidated Financial Statements (unaudited).........................II-5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................................................II-13
-7- INDEX TO FINANCIAL STATEMENTS (continued)
PAGE RAINBOW MEDIA GROUP FINANCIAL STATEMENTS Condensed Combined Balance Sheets - June 30, 2001 (unaudited) and December 31, 2000.........................................III-1 Condensed Combined Statements of Operations - Three and Six Months Ended June 30, 2001 and 2000 (unaudited)...........................III-3 Condensed Combined Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000 (unaudited).....................................III-4 Notes to Condensed Combined Financial Statements (unaudited)............................III-5 CABLEVISION NY GROUP FINANCIAL STATEMENTS Condensed Combined Balance Sheets - June 30, 2001 (unaudited) and December 31, 2000..........................................IV-1 Condensed Combined Statements of Operations - Three and Six Months Ended June 30, 2001 and 2000 (unaudited)............................IV-2 Condensed Combined Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000 (unaudited)......................................IV-3 Notes to Condensed Combined Financial Statements (unaudited).............................IV-4
Rainbow Media Group and Cablevision NY Group are integral businesses of Cablevision. They are not separate legal entities and, as such, do not own any assets. However, Cablevision NY Group common stock and Rainbow Media Group tracking stock are intended to reflect the separate economic performance of the businesses they track. Consequently, we have included separate financial statements for each Group to provide you with additional financial disclosure relating to each Group separately. Each of the Rainbow Media Group and Cablevision NY Group combined financial statements is intended to reflect the assets, liabilities, revenues and expenses that Cablevision has attributed to Rainbow Media Group and Cablevision NY Group, as well as certain allocations deemed reasonable by management, to present the combined financial position and results of operations of each of Rainbow Media Group and Cablevision NY Group as if they were separate entities for all periods presented. However, primarily as a result of allocations and inter-group related party transactions, these separate financial statements may not necessarily reflect the combined financial position and results of operations of Rainbow Media Group and Cablevision NY Group had they operated as separate stand-alone entities during the periods presented. Even though Cablevision has attributed certain assets, liabilities, revenue and cash flows to Rainbow Media Group and Cablevision NY Group, holders of Cablevision NY Group common stock and Rainbow Media Group tracking stock have no direct financial or ownership interest in the businesses and interests attributed to each Group and therefore will continue to be subject to risks associated with an investment in a single corporation and in all of Cablevision's businesses, assets and liabilities. -8- CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
June 30, December 31, 2001 2000 ---------- ------------ (Unaudited) ASSETS Cash and cash equivalents $ 243,274 $ 37,940 Accounts receivable, trade (less allowance for doubtful accounts of $37,477 and $38,878) 335,870 304,413 Notes and other receivables 137,360 149,366 Inventory, prepaid expenses and other assets 354,768 296,388 Property, plant and equipment, net 3,672,773 3,285,674 Investments in affiliates 104,730 97,224 Investment securities 984,142 811,618 Investment securities pledged as collateral 703,698 -- Other investments 57,370 116,940 Derivative contracts 13,959 -- Advances to affiliates 84,198 96,519 Feature film inventory 397,289 347,208 Net assets held for sale -- 309,423 Franchises, net of accumulated amortization of $847,974 and $777,526 352,755 422,900 Affiliation and other agreements, net of accumulated amortization of $328,453 and $307,028 175,867 199,352 Excess costs over fair value of net assets acquired and other intangible assets, net of accumulated amortization of $919,724 and $853,493 2,189,483 1,665,318 Deferred financing, acquisition and other costs, net of accumulated amortization of $76,518 and $72,962 162,861 133,007 ---------- ---------- $9,970,397 $8,273,290 ========== ==========
See accompanying notes to condensed consolidated financial statements. I-1 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (continued)
June 30, December 31, 2001 2000 ----------- ----------- (Unaudited) LIABILITIES AND STOCKHOLDERS' DEFICIENCY Accounts payable $ 439,414 $ 484,611 Accrued liabilities 1,001,831 1,086,009 Feature film and contract obligations 369,689 331,483 Deferred revenue 166,777 229,326 Deferred tax liability 247,588 -- Liabilities under derivative contracts 25,000 -- Bank debt 1,089,500 2,683,432 Collateralized indebtedness 676,164 -- Senior notes and debentures 3,690,382 2,693,208 Subordinated notes and debentures 1,050,491 1,048,648 Capital lease obligations and other debt 95,614 114,173 ----------- ----------- Total liabilities 8,852,450 8,670,890 ----------- ----------- Minority interests 895,598 587,985 ----------- ----------- Preferred Stock of CSC Holdings, Inc. 1,544,294 1,544,294 ----------- ----------- Commitments and contingencies Stockholders' deficiency: Preferred Stock, $.01 par value, 50,000,000 shares authorized, none issued -- -- CNYG Class A Common Stock, $.01 par value, 800,000,000 shares authorized, 133,092,891 and 132,775,988 shares issued and outstanding 1,331 1,328 CNYG Class B Common Stock, $.01 par value, 320,000,000 shares authorized, 42,145,986 shares issued and outstanding 421 421 RMG Class A Common Stock, $.01 par value, 600,000,000 shares authorized, 68,702,223 and -0- shares issued and outstanding 687 -- RMG Class B Common Stock, $.01 par value, 160,000,000 shares authorized, 21,072,993 and -0- shares issued and outstanding 211 -- Paid-in capital 874,969 752,981 Accumulated deficit (2,204,684) (3,571,049) ----------- ----------- (1,327,065) (2,816,319) Accumulated other comprehensive income 5,120 286,440 ----------- ----------- Total stockholders' deficiency (1,321,945) (2,529,879) ----------- ----------- $ 9,970,397 $ 8,273,290 =========== ===========
See accompanying notes to condensed consolidated financial statements. I-2 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data) (Unaudited)
Six Months Ended June 30, Three Months Ended June 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Revenues, net (including retail electronics sales of $307,070, $295,758, $156,207 and $159,102) $ 2,111,524 $ 2,129,801 $ 1,061,988 $ 1,081,577 ----------- ----------- ----------- ----------- Operating expenses: Technical and operating 832,377 833,945 383,457 393,917 Retail electronics cost of sales 245,439 241,852 124,310 129,399 Selling, general and administrative 558,870 508,145 271,072 305,485 Depreciation and amortization 488,104 470,830 240,158 237,478 ----------- ----------- ----------- ----------- 2,124,790 2,054,772 1,018,997 1,066,279 ----------- ----------- ----------- ----------- Operating income (loss) (13,266) 75,029 42,991 15,298 ----------- ----------- ----------- ----------- Other income (expense): Interest expense (269,991) (271,547) (132,607) (139,468) Interest income 9,115 2,704 6,181 1,403 Equity in net income (loss) of affiliates (11,343) (2,269) (6,342) 47 Gain on sale of cable assets and programming interests, net 2,178,080 -- 744,588 -- Write-off of deferred financing costs (12,990) -- (6,610) -- Gain (loss) on investments, net 189,432 -- (25,147) -- Minority interests (306,402) (86,855) (278,655) (45,460) Miscellaneous, net (20,059) (4,305) (15,943) (3,568) ----------- ----------- ----------- ----------- 1,755,842 (362,272) 285,465 (187,046) ----------- ----------- ----------- ----------- Income (loss) before income taxes 1,742,576 (287,243) 328,456 (171,748) Income tax expense (376,211) -- (89,966) -- ----------- ----------- ----------- ----------- Net income (loss) $ 1,366,365 $ (287,243) $ 238,490 $ (171,748) =========== =========== =========== =========== EARNINGS (LOSS) PER SHARE: CNYG COMMON STOCK Earnings (losses) attributable to common stock $ 1,015,086 $ (300,069) $ (121,740) $ (178,420) =========== =========== =========== =========== BASIC Basic net income (loss) per common share $ 5.80 $ (1.73) $ (.69) $ (1.03) =========== =========== =========== =========== Basic weighted average common shares (in thousands) 175,119 173,418 175,194 173,485 =========== =========== =========== =========== DILUTED Diluted net income (loss) per common share $ 5.70 $ (1.73) $ (.69) $ (1.03) =========== =========== =========== =========== Diluted weighted average common shares (in thousands) 178,150 173,418 175,194 173,485 =========== =========== =========== =========== RMG COMMON STOCK Earnings attributable to common stock $ 351,279 $ 12,826 $ 360,230 $ 6,672 =========== =========== =========== =========== BASIC Basic net income per common share $ 4.01 $ .15 $ 4.11 $ .08 =========== =========== =========== =========== Basic weighted average common shares (in thousands) 87,571 86,709 87,620 86,743 =========== =========== =========== =========== DILUTED Diluted net income per common share $ 3.96 $ .15 $ 4.04 $ .08 =========== =========== =========== =========== Diluted weighted average common shares (in thousands) 89,203 86,709 89,125 86,743 =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements. I-3 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2001 and 2000 (Dollars in thousands) (Unaudited)
2001 2000 ----------- ----------- Cash flows from operating activities: Net income (loss) $ 1,366,365 $ (287,243) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 488,104 470,830 Equity in net loss of affiliates 11,343 2,269 Minority interests 219,144 86,848 Gain on sale of cable assets and programming interests, net (2,178,080) -- Gain on investments, net (189,432) -- Write-off of deferred financing costs 12,990 -- Amortization of deferred financing and debenture discount 5,268 16,039 Loss (gain) on sale of equipment 1,783 (1,246) Tax benefit from exercise of stock options 92,529 -- Changes in assets and liabilities, net of effects of acquisitions and dispositions (68,488) (230,939) ----------- ----------- Net cash provided by (used in) operating activities (238,474) 56,558 ----------- ----------- Cash flows from investing activities: Payments for acquisitions, net of cash acquired -- (116,183) Net proceeds from sale of cable assets and programming interests 1,118,153 -- Capital expenditures (660,280) (554,406) Proceeds from sale of equipment 1,919 68 Increase in investment securities and other investments (15,022) -- Additions to intangible assets (303) (120) Increase in investments in affiliates, net (18,849) (28,669) ----------- ----------- Net cash provided by (used in) investing activities 425,618 (699,310) ----------- ----------- Cash flows from financing activities: Proceeds from bank debt 2,159,554 1,867,784 Repayment of bank debt (3,753,486) (1,229,829) Issuance of senior notes 996,790 -- Issuance of common stock 7,084 10,079 Net proceeds from collateralized indebtedness 673,635 -- Payments on capital lease obligations and other debt (20,084) (16,844) Additions to deferred financing and other costs (45,303) (17,172) ----------- ----------- Net cash provided by financing activities 18,190 614,018 ----------- ----------- Net increase (decrease) in cash and cash equivalents 205,334 (28,734) Cash and cash equivalents at beginning of year 37,940 62,665 ----------- ----------- Cash and cash equivalents at end of period $ 243,274 $ 33,931 =========== ===========
See accompanying notes to condensed consolidated financial statements. I-4 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) Note 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Cablevision Systems Corporation and its majority owned subsidiaries (the "Company" or "Cablevision") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Note 2. RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS The financial statements as of and for the three and six months ended June 30, 2001 and 2000 presented in this Form 10-Q are unaudited; however, in the opinion of management, such statements include all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. The interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's and CSC Holdings, Inc.'s Annual Report on Form 10-K/A for the year ended December 31, 2000. The results of operations for the interim periods are not necessarily indicative of the results that might be expected for future interim periods or for the full year ending December 31, 2001. Note 3. RECLASSIFICATIONS Certain reclassifications have been made to the 2000 financial statements to conform to the 2001 presentation. Note 4. INCOME (LOSS) PER SHARE Basic and diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding. Potential dilutive common shares were not included in the computation as their effect would be antidilutive. Basic net income per share is computed by dividing net income by the weighted average common stock outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average common stock adjusted to include potentially dilutive common shares outstanding during the period. Earnings (loss) per share was calculated as if the tracking stock distribution described under "Tracking Stock" below occurred on January 1, 2000 and is presented individually for the Rainbow Media Group common stock and Cablevision NY Group common stock. Net income (loss) of Cablevision has been attributed to each class of common stock based on the results of operations of the businesses and interests attributed to Cablevision NY Group and Rainbow Media Group excluding the net income or loss attributed to parties other than Cablevision shareholders. I-5 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (continued) Note 5. CASH FLOWS For purposes of the condensed consolidated statements of cash flows, the Company considers short-term investments with a maturity at date of purchase of three months or less to be cash equivalents. The Company paid cash interest expense of approximately $255,163 and $254,286 for the six months ended June 30, 2001 and 2000, respectively, and paid income taxes of approximately $35,321 for the six months ended June 30, 2001. The Company's noncash financing and investing activities for the six months ended June 30, 2001 and 2000 included capital lease obligations of $1,525 and $21,794, respectively, incurred when the Company entered into leases for new equipment; the receipt of marketable securities, valued at $893,500, in connection with the sale of cable assets in 2001; and the issuance of Rainbow Media Group Class A tracking stock, valued at $48,742, in exchange for a portion of NBC's interest in Rainbow Media Holdings, Inc. Note 6. TRACKING STOCK In March 2001, the Company amended and restated its Certificate of Incorporation to increase the number of authorized shares of preferred stock from 10 million to 50 million and to increase the number of authorized shares of common stock from 560 million to 1.88 billion of which: o 800 million are designated Cablevision NY Group Class A common stock, o 320 million are designated Cablevision NY Group Class B common stock, o 600 million are designated Rainbow Media Group Class A tracking stock, and o 160 million are designated Rainbow Media Group Class B tracking stock. On March 29, 2001, the Company distributed a new series of common stock called Rainbow Media Group tracking stock. The new series is intended to track the economic performance of the businesses and interests of Rainbow Media Group, which are currently part, but not all, of the Company's Rainbow Media Holdings subsidiary. The tracking stock was distributed to holders of the Company's common stock at a ratio of one share of Rainbow Media Group for every two shares of the Company's common stock held. The Company's existing common stock was redesignated as Cablevision NY Group common stock. In March 2001, the Company amended the employee stock plan to reflect the redesignation of the Company's Class A common stock as Cablevision NY Group Class A common stock, and reflect the distribution of Rainbow Media Group Class A tracking stock. In addition, the number of shares available for issuance under the employee stock plan was increased by 19,200,000, any or all of which may be Cablevision NY Group common stock or Rainbow Media Group tracking stock. I-6 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (continued) Note 7. TRANSACTIONS In connection with the distribution of the Rainbow Media Group tracking stock, NBC-Rainbow Holding, Inc. was given the right to exchange its 26% interest in Rainbow Media Holdings equity securities over a period of up to 9 years for a 34% interest in Rainbow Media Group tracking stock, based on the number of shares of Rainbow Media Group tracking stock outstanding on the date of the tracking stock distribution. On June 29, 2001, NBC-Rainbow Holdings exchanged a 0.9% interest in Rainbow Media Holdings equity securities for 2,159,104 shares of Rainbow Media Group Class A tracking stock of Cablevision (valued at $48,742). In connection with this transaction, the Company recorded goodwill of approximately $40,976. The purchase price will be allocated to the specific assets acquired when an independent appraisal is obtained. In April 2001, Metro-Goldwyn-Mayer Inc. ("MGM") acquired a 20% interest in certain programming businesses of Rainbow Media Holdings for $825,000 in cash. The Company recorded a gain of approximately $746,302 in connection with this transaction. In January 2001, CSC Holdings completed the sale of its cable systems in Boston and eastern Massachusetts to AT&T Corp. in exchange for AT&T's cable systems in certain northern New York suburbs, 44,260,932 shares of AT&T stock, valued at approximately $893,500 at closing, and approximately $293,200 in cash. The Company recognized a net gain of approximately $1,443,860. The acquisition of the cable systems from AT&T was accounted for as a purchase with the operations of the acquired systems being consolidated with those of the Company as of the acquisition date. The purchase price will be allocated to the specific assets acquired when an independent appraisal is obtained. The Company classified the shares of AT&T common stock as trading securities and for the six months ended June 30, 2001 recorded a gain on investments of $80,223 as a result of the increase in the fair value of such securities. Note 8. DEBT In June 2001, CSC Holdings and certain of its subsidiaries ("Restricted Group") repaid the outstanding balance under its $2.2 billion reducing revolving credit facilities with borrowings under a new $2.4 billion revolving credit facility which matures on June 30, 2006 with no interim commitment reductions. Interest on outstanding amounts may be paid, at CSC Holdings' option, based on the prime rate or a Eurodollar rate plus a margin. I-7 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (continued) In April 2001, American Movie Classics Company, a subsidiary of Rainbow Media Holdings, repaid the balance outstanding under its credit facility of $365,000 with the proceeds from the MGM transaction discussed above. In March 2001, CSC Holdings issued $1,000,000 face amount of 7-5/8% senior notes due 2011. The notes were issued at a discount of $3,210. The net proceeds were used to reduce bank debt outstanding. The notes are not redeemable by CSC Holdings prior to maturity. Note 9. INCOME TAXES At December 31, 2000, the Company had recorded a valuation allowance in the amount of $546,000 against its deferred tax assets. Of this amount, $305,000 was attributable to Cablevision's telecommunications operations and $241,000 was attributable to Rainbow Media Holdings. Tax rules impose restrictions on the ability of the companies to utilize each others' tax attributes. Income tax expense for the six months ended June 30, 2001 differs from the statutory rate principally due to a reduction of $416,000 in the consolidated valuation allowance. This reduction was based on several factors, including the closing of the sale of the Company's cable television systems in Massachusetts and the consummation of the MGM transaction. While a substantial portion of the gain on these sales is deferred for income tax purposes, the Company has the ability to record the taxable gains before its operating loss carry forwards expire. The amount of the deferred gain, together with the Company's ability to control the timing of its recognition for tax purposes, provided substantial positive evidence of the recoverability of the deferred tax asset. In addition, the valuation allowance was reduced by $92,500, which represents the value of tax deductions for certain stock option exercises. This amount was credited to additional paid in capital. Note 10. DERIVATIVES Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES", as amended, ("SFAS 133"). The statement requires that all derivative financial instruments, such as interest rate swap contracts, be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized as a component of comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. To manage interest rate risk, the Company has from time to time entered into interest rate swap contracts to adjust the proportion of total debt that is subject to variable and fixed interest rates. I-8 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (continued) Such contracts fix the borrowing rates on floating rate debt to provide an economic hedge against the risk of rising rates and/or convert fixed rate borrowings to variable rate to provide an economic hedge against the risk of higher borrowing costs in a declining interest rate environment. As of June 30, 2001, the Company had interest rate swap agreements to pay floating rates of interest with a total notional value of $775,000. The swap agreements had a fair value of approximately $6,254 at June 30, 2001 and are reflected in the accompanying consolidated balance sheets. These agreements have not been designated as hedges for accounting purposes. As a result, the increase in the fair value of the swap agreements for the six months ended June 30, 2001 of approximately $4,274 is reflected in other income (expense): miscellaneous in the accompanying consolidated statements of operations. The Company has also entered into various transactions to provide an economic hedge against equity price risk on certain of its stock holdings. As of June 30, 2001, the Company had monetized all of its stock holdings in Charter Communications Inc. and Adelphia Communications Corporation through the execution of prepaid forward contracts, collateralized by an equivalent amount of the respective underlying stock. Such contracts set a floor and ceiling on the Company's participation in changes in the underlying stock prices, thus eliminating downside exposure to market risk while providing for upside appreciation potential to the respective ceiling price. At maturity, the contracts provide for the option to deliver cash or shares of Charter Communications or Adelphia Communications stock (as the case may be), with a value determined by reference to the applicable stock price at maturity. The Company received proceeds of $673,635, net of prepaid interest of $32,267, upon execution of these contracts. Such contracts have not been designated as hedges for accounting purposes. Therefore, the fair values of the forward contracts have been reflected in the accompanying consolidated balance sheets and the net decrease in the fair value of the equity derivative component of the prepaid forward contracts of $17,296 is included in other income (expense): miscellaneous in the accompanying consolidated statements of operations. With the adoption of SFAS 133, the shares of Charter Communications and Adelphia Communications common stock were reclassified from securities available-for-sale to trading securities. As a result, the Company recorded a gain on investments of $286,440 representing the accumulated unrealized gains as of January 1, 2001. For the six months ended June 30, 2001, the Company recorded a loss on investments of $107,348 representing the net decrease in the fair value of such securities for the period. Note 11. AT HOME As of June 30, 2001 and 2000, deferred revenue derived from the receipt of At Home warrants, net of amortization taken, amounted to approximately $64,064 and $131,419, respectively. For the six months ended June 30, 2001 and 2000, the Company recognized approximately $35,626 and $30,000, respectively, of this deferred revenue. For the six months ended June 30, 2001, the Company recognized a loss on investments of approximately $69,573 reflecting the decline in the fair value of the warrants. In April 2001, Excite@Home announced it had decided to terminate its relationship with the Company and that it would seek to recover the At Home warrants previously issued to the Company. On April 25, 2001, At Home Corporation commenced a lawsuit in the Court of I-9 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (continued) Chancery of the State of Delaware alleging that Cablevision had breached its obligations under certain agreements with At Home. The suit seeks a variety of remedies including: recision of the agreements between At Home and Cablevision and cancellation of all warrants currently held by Cablevision, damages, and/or an order prohibiting Cablevision from continuing to offer its Optimum Online service and requiring it to convert its Optimum Online customers to the Optimum@Home service and to roll out the Optimum@Home service. Cablevision is vigorously contesting this lawsuit. Cablevision currently holds warrants to purchase 20,462,596 shares of At Home common stock, exercisable at a price of $0.25 per share. Note 12. SEGMENT INFORMATION The Company's reportable segments are strategic business units that are managed separately. The Company evaluates segment performance based on several factors, of which the primary financial measure is business segment adjusted operating cash flow (defined as operating income or loss before depreciation and amortization, incentive stock plan income or expense and the costs of Year 2000 remediation).
Six Months Ended June 30, Three Months Ended June 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- REVENUES Telecommunication Services $ 1,116,003 $ 1,163,357 $ 573,016 $ 596,289 Rainbow Media Group 283,936 232,609 147,794 122,149 MSG 398,305 418,162 181,406 193,864 Retail Electronics 307,070 295,758 156,207 159,102 All Other 90,729 96,759 46,682 50,396 Intersegment Eliminations (84,519) (76,844) (43,117) (40,223) ----------- ----------- ----------- ----------- Total $ 2,111,524 $ 2,129,801 $ 1,061,988 $ 1,081,577 =========== =========== =========== =========== Six Months Ended June 30, Three Months Ended June 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- ADJUSTED OPERATING CASH FLOW Telecommunication Services $ 438,078 $ 483,245 $ 223,517 $ 244,579 Rainbow Media Group 60,070 66,632 33,983 34,947 MSG 55,080 67,216 39,712 44,200 Retail Electronics (32,204) (31,768) (14,812) (13,880) All Other (53,063) (42,338) (28,008) (21,378) ----------- ----------- ----------- ----------- Total $ 467,961 $ 542,987 $ 254,392 $ 288,468 =========== =========== =========== ===========
I-10 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (continued) A reconciliation of reportable segment amounts to the Company's consolidated balances is as follows:
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- REVENUE Total revenue for reportable segments $ 2,105,314 $ 2,109,886 $ 1,058,423 $ 1,071,404 Other revenue and intersegment eliminations 6,210 19,915 3,565 10,173 ----------- ----------- ----------- ----------- Total consolidated revenue $ 2,111,524 $ 2,129,801 $ 1,061,988 $ 1,081,577 =========== =========== =========== =========== ADJUSTED OPERATING CASH FLOW TO NET LOSS Total adjusted operating cash flow for reportable segments 521,024 $ 585,325 282,400 $ 309,846 Other adjusted operating cash flow deficit (53,063) (42,338) (28,008) (21,378) Items excluded from adjusted operating cash flow: Depreciation and amortization (488,104) (470,830) (240,158) (237,478) Incentive stock plan income (expense) 6,877 6,345 28,757 (34,779) Year 2000 remediation costs -- (3,473) -- (913) Interest expense (269,991) (271,547) (132,607) (139,468) Interest income 9,115 2,704 6,181 1,403 Equity in net income (loss) of affiliates (11,343) (2,269) (6,342) 47 Gain on sale of cable assets and programming interests, net 2,178,080 -- 744,588 -- Write-off of deferred financing costs (12,990) -- (6,610) -- Gain (loss) on investments, net 189,432 -- (25,147) -- Minority interests (306,402) (86,855) (278,655) (45,460) Miscellaneous, net (20,059) (4,305) (15,943) (3,568) ----------- ----------- ----------- ----------- Income (loss) before income tax expense $ 1,742,576 $ (287,243) $ 328,456 $ (171,748) =========== =========== =========== ===========
Substantially all revenues and assets of the Company's reportable segments are attributed to or located in the United States. The Company does not have a single external customer which represents 10 percent or more of its consolidated revenues. Note 13. COMPREHENSIVE INCOME Other comprehensive income for the six months ended June 30, 2001 of $5,120 represents unrealized net gains on available-for-sale securities. Note 14. INVESTMENTS Rainbow Media Holdings holds a 50% interest in R/L DBS Company LLC, a joint venture with Loral Space and Communications, Ltd. R/L DBS holds certain frequencies granted by the FCC for the operation of a direct broadcast satellite business. In December 2000, the FCC granted an extension to R/L DBS' construction permit relating to the direct broadcast satellite frequencies held by R/L DBS. The extension requires the launch of a I-11 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (continued) satellite and commencement of service offerings by not later than December 29, 2003, with specified six month interim construction milestones, non-compliance with which will result in the forfeiture of the construction permit. R/L DBS has entered into an agreement with a satellite manufacturer for the construction of a satellite scheduled to be delivered in May 2003. R/L DBS plans to make payments to the manufacturer aggregating approximately $35,800 in the quarter ending September 30, 2001. Cablevision continues to evaluate the scope of its pursuit of a direct broadcast satellite business, including exploring opportunities for strategic partnerships for R/L DBS. The contract with the manufacturer permits R/L DBS to terminate at its option at any time and receive a refund of a portion of amounts paid through the date of such termination. Note 15. SUBSEQUENT EVENT On August 8, 2001, Cablevision and AT&T reached an agreement for an orderly disposition of the Cablevision NY Group Class A common stock and Rainbow Media Group Class A tracking stock held by AT&T. The agreement will enable AT&T to piggyback on Cablevision's registration statement, initially filed with the Securities and Exchange Commission on May 30, 2001. Cablevision intends to amend its pending registration statement to cover the sale by AT&T of up to $1 billion of its Cablevision NY Group Class A common stock and the sale by Cablevision of up to $1 billion of convertible preferred stock in lieu of common stock. AT&T has also agreed not to engage in any additional transactions relating to its remaining Cablevision NY Group Class A common stock for 180 days, subject to certain conditions. Following the expiration of the 180-day lock-up, Cablevision has also agreed to file a registration statement for the sale of AT&T's remaining Cablevision NY Group Class A common stock. The agreement also provides that AT&T will have registration rights for its Rainbow Media Group tracking stock and Cablevision has agreed to file a registration statement by October 1, 2001 for the sale of some or all of AT&T's Rainbow Media Group tracking stock. I-12 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (continued) Note 16. CONSOLIDATING FINANCIAL INFORMATION CONSOLIDATING BALANCE SHEET DATA June 30, 2001
Adjustments/ CNYG RMG Eliminations Cablevision ----------- ----------- ------------ ----------- ASSETS Cash and cash equivalents $ 52,394 $ 190,880 $ -- $ 243,274 Accounts receivable trade, net 251,702 84,168 -- 335,870 Notes and other receivables 130,453 -- 6,907 137,360 Inventory, prepaid expenses and other assets 330,919 19,803 4,046 354,768 Property, plant and equipment, net 3,611,854 60,919 -- 3,672,773 Investments in affiliates 54,497 50,533 (300) 104,730 Investment securities available-for-sale 983,881 261 -- 984,142 Investment securities pledged as collateral 703,698 -- -- 703,698 Other investments 57,370 -- -- 57,370 Derivative contracts 13,959 -- -- 13,959 Advances to affiliates 167,539 93,784 (177,125) 84,198 Feature film inventory -- 396,255 1,034 397,289 Other long-term assets -- 11,987 (11,987) -- Intangible assets, net 2,527,860 190,245 -- 2,718,105 Deferred financing, acquisition and other costs, net 139,789 23,072 -- 162,861 ----------- ----------- ----------- ----------- $ 9,025,915 $ 1,121,907 $ (177,425) $ 9,970,397 =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Accounts payable and accrued expenses $ 1,315,208 $ 98,828 $ 27,209 $ 1,441,245 Accounts payable to affiliates 53,198 134,092 (187,290) -- Other liabilities 359,225 466,873 (17,044) 809,054 Debt 6,574,665 27,486 -- 6,602,151 ----------- ----------- ----------- ----------- Total liabilities 8,302,296 727,279 (177,125) 8,852,450 ----------- ----------- ----------- ----------- Deficit investments -- 300 (300) -- Minority interests -- -- 895,598 895,598 Preferred Stock of CSC Holdings, Inc. 1,544,294 -- -- 1,544,294 Commitments and contingencies Total stockholders' deficiency (820,675) 394,328 (895,598) (1,321,945) ----------- ----------- ----------- ----------- $ 9,025,915 $ 1,121,907 $ (177,425) $ 9,970,397 =========== =========== =========== ===========
I-13 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (continued) CONSOLIDATING BALANCE SHEET DATA December 31, 2000
Adjustments/ CNYG RMG Eliminations Cablevision ----------- ----------- ------------ ----------- ASSETS Cash and cash equivalents $ 37,912 $ 28 $ -- $ 37,940 Accounts receivable trade, net 229,151 75,262 -- 304,413 Notes and other receivables 139,641 -- 9,725 149,366 Inventory, prepaid expenses and other assets 285,882 17,920 (7,414) 296,388 Property, plant and equipment, net 3,223,485 62,189 -- 3,285,674 Investments in affiliates 43,471 56,120 (2,367) 97,224 Investment securities available-for-sale 811,046 -- 572 811,618 Other investments 116,940 -- -- 116,940 Advances to affiliates 388,208 63,132 (354,821) 96,519 Feature film inventory, net -- 339,519 7,689 347,208 Other long-term assets -- 10,572 (10,572) -- Net assets held for sale 309,423 -- -- 309,423 Intangible assets, net 2,092,851 194,719 -- 2,287,570 Deferred financing, acquisition and other costs, net 108,679 24,328 -- 133,007 ----------- ----------- ----------- ----------- $ 7,786,689 $ 843,789 $ (357,188) $ 8,273,290 =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Accounts payable and accrued expenses $ 1,421,470 $ 138,632 $ 10,518 $ 1,570,620 Accounts payable to affiliates 50,403 314,935 (365,338) -- Other liabilities 301,317 259,492 -- 560,809 Debt 6,146,025 393,436 -- 6,539,461 ----------- ----------- ----------- ----------- Total liabilities 7,919,215 1,106,495 (354,820) 8,670,890 ----------- ----------- ----------- ----------- Deficit investments -- 2,367 (2,367) -- Minority interests -- -- 587,985 587,985 Preferred Stock of CSC Holdings, Inc. 1,544,294 -- -- 1,544,294 Commitments and contingencies Total stockholders' deficiency (1,676,820) (265,073) (587,986) (2,529,879) ----------- ----------- ----------- ----------- $ 7,786,689 $ 843,789 $ (357,188) $ 8,273,290 =========== =========== =========== ===========
I-14 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (continued) CONSOLIDATING RESULTS OF OPERATIONS DATA
Three Months Ended June 30, 2001 ----------------------------------------------------------- Adjustments/ CNYG RMG Eliminations Cablevision ----------- ----------- ------------ ----------- Revenues, net $ 917,846 $ 147,794 $ (3,652) $ 1,061,988 Operating expenses: Technical and operating 326,393 60,716 (3,652) 383,457 Retail electronics cost of sales 124,310 -- -- 124,310 Selling, general & administrative 213,771 46,615 10,686 271,072 Corporate, general and administrative allocation 8,621 2,065 (10,686) -- Depreciation and amortization 229,600 10,558 -- 240,158 ----------- ----------- ----------- ----------- Operating income (loss) 15,151 27,840 -- 42,991 Other income (expense), net (187,229) 751,349 (278,655) 285,465 ----------- ----------- ----------- ----------- Income (loss) before income taxes and dividend requirements (172,078) 779,189 (278,655) 328,456 Income tax (expense) benefit 126,613 (216,579) -- (89,966) ----------- ----------- ----------- ----------- Net income (loss) before dividend requirements (45,465) 562,610 (278,655) 238,490 Dividend requirements applicable to preferred stock (43,629) -- 43,629 -- ----------- ----------- ----------- ----------- Net income (loss) (89,094) 562,610 (235,026) 238,490 Net income or loss attributed to parties other than Cablevision Systems Corporation shareholders (32,646) (202,380) 235,026 -- ----------- ----------- ----------- ----------- Net income (loss) attributed to Cablevision Systems Corporation shareholders $ (121,740) $ 360,230 -- $ 238,490 =========== =========== =========== =========== Three Months Ended June 30, 2000 ----------------------------------------------------------- Adjustments/ CNYG RMG Eliminations Cablevision ----------- ----------- ------------ ----------- Revenues, net $ 964,465 $ 122,149 $ (5,037) $ 1,081,577 Operating expenses: Technical and operating 353,103 45,851 (5,037) 393,917 Retail electronics cost of sales 129,399 -- -- 129,399 Selling, general & administrative 206,059 34,933 64,493 305,485 Corporate, general and administrative allocation 55,395 9,098 (64,493) -- Depreciation and amortization 227,146 10,332 -- 237,478 ----------- ----------- ----------- ----------- Operating income (loss) (6,637) 21,935 -- 15,298 Other income (expense), net (130,443) (11,143) (45,460) (187,046) ----------- ----------- ----------- ----------- Income (loss) before income taxes and dividend requirements (137,080) 10,792 (45,460) (171,748) Income tax (expense) benefit -- -- -- -- ----------- ----------- ----------- ----------- Net income (loss) before dividend requirements (137,080) 10,792 (45,460) (171,748) Dividend requirements applicable to preferred stock (40,826) -- 40,826 -- ----------- ----------- ----------- ----------- Net income (loss) (177,906) 10,792 (4,634) (171,748) Net income or loss attributed to parties other than Cablevision Systems Corporation shareholders (514) (4,120) 4,634 -- ----------- ----------- ----------- ----------- Net income (loss) attributed to Cablevision Systems Corporation shareholders $ (178,420) $ 6,672 -- $ (171,748) =========== =========== =========== ===========
I-15 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (continued) CONSOLIDATING RESULTS OF OPERATIONS DATA
Six Months Ended June 30, 2001 -------------------------------------------------------------- Adjustments/ CNYG RMG Eliminations Cablevision ----------- ----------- ------------ ----------- Revenues, net $ 1,835,988 $ 283,936 $ (8,400) $ 2,111,524 Operating expenses: Technical and operating 724,394 116,383 (8,400) 832,377 Retail electronics cost of sales 245,439 -- -- 245,439 Selling, general & administrative 400,619 92,563 65,688 558,870 Corporate, general and administrative allocation 52,982 12,706 (65,688) -- Depreciation and amortization 467,550 20,554 -- 488,104 ----------- ----------- ----------- ----------- Operating income (loss) (54,996) 41,730 -- (13,266) Other income (expense), net 1,331,996 730,248 (306,402) 1,755,842 ----------- ----------- ----------- ----------- Income (loss) before income taxes and dividend requirements 1,277,000 771,978 (306,402) 1,742,576 Income tax expense (159,632) (216,579) -- (376,211) ----------- ----------- ----------- ----------- Net income (loss) before dividend requirements 1,117,368 555,399 (306,402) 1,366,365 Dividend requirements applicable to preferred stock (87,258) -- 87,258 -- ----------- ----------- ----------- ----------- Net income (loss) 1,030,110 555,399 (219,144) 1,366,365 Net income or loss attributed to parties other than Cablevision Systems Corporation shareholders (15,024) (204,120) 219,144 -- ----------- ----------- ----------- ----------- Net income (loss) attributed to Cablevision Systems Corporation shareholders $ 1,015,086 $ 351,279 -- $ 1,366,365 =========== =========== =========== =========== Six Months Ended June 30, 2000 -------------------------------------------------------------- Adjustments/ CNYG RMG Eliminations Cablevision ----------- ----------- ------------ ----------- Revenues, net $ 1,907,451 $ 232,609 $ (10,259) $ 2,129,801 Operating expenses: Technical and operating 755,578 88,626 (10,259) 833,945 Retail electronics cost of sales 241,852 -- -- 241,852 Selling, general & administrative 390,384 64,535 53,226 508,145 Corporate, general and administrative allocation 40,835 12,391 (53,226) -- Depreciation and amortization 450,778 20,052 -- 470,830 ----------- ----------- ----------- ----------- Operating income (loss) 28,024 47,005 -- 75,029 Other income (expense), net (250,698) (24,719) (86,855) (362,272) ----------- ----------- ----------- ----------- Income (loss) before income taxes and dividend requirements (222,674) 22,286 (86,855) (287,243) Income tax expense -- -- -- -- ----------- ----------- ----------- ----------- Net income (loss) before dividend requirements (222,674) 22,286 (86,855) (287,243) Dividend requirements applicable to preferred stock (80,529) -- 80,529 -- ----------- ----------- ----------- ----------- Net income (loss) (303,203) 22,286 (6,326) (287,243) Net income or loss attributed to parties other than Cablevision Systems Corporation shareholders 3,134 (9,460) 6,326 -- ----------- ----------- ----------- ----------- Net income (loss) attributed to Cablevision Systems Corporation shareholders $ (300,069) $ 12,826 -- $ (287,243) =========== =========== =========== ===========
I-16 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (continued) CONSOLIDATING CASH FLOW INFORMATION
Six Months Ended June 30, 2001 ------------------------------------------------------ Adjustments/ CNYG RMG Eliminations Cablevision --------- --------- ------------ ----------- Net cash provided by (used in) operating activities $ 129,837 $ 17,513 $(385,824) $(238,474) Net cash provided by (used in) investing activities (397,907) 820,459 3,066 425,618 Net cash provided by (used in) financing activities 282,552 (647,120) 382,758 18,190 --------- --------- --------- --------- Net increase in cash and cash equivalents 14,482 190,852 -- 205,334 Cash and cash equivalents at beginning of year 37,912 28 -- 37,940 --------- --------- --------- --------- Cash and cash equivalents at end of period $ 52,394 $ 190,880 $ -- $ 243,274 ========= ========= ========= ========= Six Months Ended June 30, 2000 ------------------------------------------------------ Adjustments/ CNYG RMG Eliminations Cablevision --------- --------- ------------ ----------- Net cash provided by operating activities $ 27,810 $ 7,431 $ 21,317 $ 56,558 Net cash used in investing activities (681,593) (7,315) (10,402) (699,310) Net cash provided by (used in) financing activities 625,140 (207) (10,915) 614,018 --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents (28,643) (91) -- (28,734) Cash and cash equivalents at beginning of year 62,560 105 -- 62,665 --------- --------- --------- --------- Cash and cash equivalents at end of period $ 33,917 $ 14 $ -- $ 33,931 ========= ========= ========= =========
I-17 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report contains or incorporates by reference statements that constitute forward looking information within the meaning of the Private Securities Litigation Reform Act of 1995 including the statements under "2001 Outlook-Cablevision NY Group" and "Liquidity and Capital Resources". Investors are cautioned that such forward looking statements are not guarantees of future performance or results and involve risks and uncertainties and that actual results or developments may differ materially from the forward looking statements as a result of various factors. Factors that may cause such differences to occur include but are not limited to: (i) the level of the Company's revenues; (ii) subscriber demand and growth, which are impacted by competition from other services, such as DBS, and the other factors set forth below; (iii) the cost of programming and industry conditions; (iv) the regulatory environment in which the Company operates; (v) general economic conditions in the areas in which we operate; (vi) demand for advertising time and space; (vii) the level of capital expenditures and whether our capital expenditures increase as expected; (viii) the level of our expenses, including costs of our new services, such as expenses related to the development of our high speed data services and the introduction of our digital services; (ix) pending and future acquisitions and dispositions of assets; (x) market demand for new services; (xi) whether any pending uncompleted transactions are completed on the terms and at the times set forth (if at all); (xii) competition from existing competitors and new competitors entering the Company's franchise areas; (xiii) other risks and uncertainties inherent in the cable television business, the programming and entertainment businesses and the Company's other businesses; (xiv) financial community and rating agency perceptions of the Company's business, operations, financial condition and the industry in which it operates; and (xv) the factors described in Cablevision Systems Corporation's Registration Statement on Form S-3 filed on August 8, 2001, as amended, including the section entitled "Risk Factors" contained therein. The Company disclaims any obligation to update or revise the forward-looking statements contained or incorporated by reference herein, except as otherwise required by applicable federal securities laws. RECENT TRANSACTIONS 2001 TRANSACTIONS. In January 2001, CSC Holdings, Inc. completed the sale of its cable television systems in Boston and eastern Massachusetts to AT&T Corp. in exchange for cable television systems of AT&T in certain northern New York suburbs and for AT&T common stock and cash. In April 2001, Metro-Goldwyn-Mayer Inc. ("MGM") acquired a 20% interest in certain national programming businesses of Rainbow Media Holdings, Inc. for $825,000 in cash. 2000 ACQUISITIONS. In August 2000, Rainbow Media Holdings, Inc. purchased the remaining interests in News 12 New Jersey LLC that it did not already own from the Newark Morning Ledger Co. In May 2000, Rainbow Media Holdings acquired the 50% interest in MuchMusic I-18 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES USA held by Chum, Ltd., increasing Rainbow Media Holdings' ownership to 100%. In January 2000, Regional Programming Partners, a company 60% owned by Rainbow Media Holdings, acquired the 70% interest in SportsChannel Florida Associates held by Front Row Communications, Inc., increasing Regional Programming Partners' ownership to 100%. 2000 DISPOSITIONS. In September 2000, CSC Holdings completed the sale of its cable television system serving Kalamazoo, Michigan and in November 2000, CSC Holdings completed the sale of cable television systems in the greater Cleveland, Ohio metropolitan area. The above transactions are collectively referred to as the "Transactions." RESULTS OF OPERATIONS The following table sets forth on an unaudited historical basis certain items related to operations as a percentage of net revenues for the periods indicated. STATEMENT OF OPERATIONS DATA - CABLEVISION SYSTEMS CORPORATION
Three Months Ended June 30, ----------------------------------------------------------------- 2001 2000 ------------------------------- ------------------------------- (Increase) % of Net % of Net Decrease Amount Revenues Amount Revenues in Net Loss ------ -------- ------ -------- ----------- (Dollars in thousands) Revenues, net $ 1,061,988 100% $ 1,081,577 100% $ (19,589) Operating expenses: Technical and operating 383,457 36 393,917 36 10,460 Retail electronics cost of sales 124,310 12 129,399 12 5,089 Selling, general & administrative 271,072 26 305,485 28 34,413 Depreciation and amortization 240,158 23 237,478 22 (2,680) ----------- ----------- ----------- Operating income: 42,991 4 15,298 1 27,693 Other income (expense): Interest expense, net (126,426) (12) (138,065) (13) 11,639 Equity in net income (loss) of affiliates (6,342) (1) 47 -- (6,389) Gain on sale of cable assets and programming interests, net 744,588 70 -- -- 744,588 Loss on investments, net (25,147) (2) -- -- (25,147) Write-off of deferred financing costs (6,610) (1) -- -- (6,610) Minority interests (278,655) (26) (45,460) (4) (233,195) Miscellaneous, net (15,943) (2) (3,568) -- (12,375) ----------- ----------- ----------- Income (loss) before income taxes 328,456 31 (171,748) (16) 500,204 Income tax expense (89,966) (9) -- -- (89,966) ----------- ----------- ----------- Net income (loss) $ 238,490 22% $ (171,748) (16)% $ 410,238 =========== =========== ===========
I-19 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
Six Months Ended June 30, ----------------------------------------------------------------- 2001 2000 ------------------------------- ------------------------------- (Increase) % of Net % of Net Decrease Amount Revenues Amount Revenues in Net Loss ------ -------- ------ -------- ----------- (Dollars in thousands) Revenues, net $ 2,111,524 100% $ 2,129,801 100% $ (18,277) Operating expenses: Technical and operating 832,377 39 833,945 39 1,568 Retail electronics cost of sales 245,439 12 241,852 11 (3,587) Selling, general & administrative 558,870 26 508,145 24 (50,725) Depreciation and amortization 488,104 23 470,830 22 (17,274) ----------- ----------- ----------- Operating income (loss): (13,266) -- 75,029 4 (88,295) Other income (expense): Interest expense, net (260,876) (12) (268,843) (13) 7,967 Equity in net loss of affiliates (11,343) -- (2,269) -- (9,074) Gain on sale of cable assets and programming interests, net 2,178,080 103 -- -- 2,178,080 Gain on investments, net 189,432 9 -- -- 189,432 Write-off of deferred financing costs (12,990) (1) -- -- (12,990) Minority interests (306,402) (14) (86,855) (4) (219,547) Miscellaneous, net (20,059) (1) (4,305) -- (15,754) ----------- ----------- ----------- Income (loss) before income taxes 1,742,576 83 (287,243) (13) 2,029,819 Income tax expense (376,211) (18) -- -- (376,211) ----------- ----------- ----------- Net income (loss) $ 1,366,365 65% $ (287,243) (13)% $ 1,653,608 =========== =========== ===========
COMPARISON OF THREE AND SIX MONTHS ENDED JUNE 30, 2001 VERSUS THREE AND SIX MONTHS ENDED JUNE 30, 2000. CONSOLIDATED RESULTS - CABLEVISION SYSTEMS CORPORATION REVENUES for the three and six months ended June 30, 2001 decreased $19.6 million (2%) and $18.3 million (1%) as compared to revenues for the same periods in the prior year. Approximately $73.3 million (7%) and $143.6 million (7%) of the decrease was attributable to the Transactions. Offsetting these decreases were increases of approximately $22.9 million (2%) and $58.7 million (2%) from other revenue sources, primarily higher revenue derived from the developing modem and telephone businesses and from higher retail electronics sales in the six month period; approximately $17.9 million (1%) and $33.0 million (2%) resulted from higher revenue per cable television subscriber; approximately $6.4 million (1%) and $19.4 million (1%) was attributable to increased revenues in Rainbow Media Holdings' programming services; and approximately $6.5 million (1%) and $14.2 million (1%) was attributable to internal growth of 49,629 in the average number of cable television subscribers during the period. TECHNICAL AND OPERATING EXPENSES for the three and six months ended June 30, 2001 decreased $10.5 million (3%) and $1.6 million compared to the same periods in 2000. A decrease of approximately $29.4 million (7%) and $58.7 million (7%), respectively, was attributable to the Transactions and a $30.0 million (8% and 3%) decrease in each period was attributable to a settlement from the New York Yankees (see discussion below). These decreases were partially offset by increases of $48.9 million (12%) and $87.1 million (10%) resulting from increased costs I-20 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES directly associated with the growth in revenues and subscribers discussed above. As a percentage of revenues, technical and operating expenses remained relatively constant during the 2001 periods as compared to the 2000 periods. RETAIL ELECTRONICS COST OF SALES for the three and six months ended June 30, 2001 amounted to approximately $124.3 million and $245.4 million (80% of retail electronics sales) compared to approximately $129.4 million and $241.9 million (81% and 82%, respectively, of retail electronics sales) for the three and six months ended June 30, 2000. Cost of sales includes the cost of merchandise sold, including freight costs incurred and certain occupancy and buying costs, for the Company's retail electronics segment. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased $34.4 million (11%) for the three months ended June 30, 2001 and increased $50.7 million (10%) for the six months ended June 30, 2001 over the comparable periods in 2000. The net decrease for the three months ended June 30, 2001 was comprised of a $60.3 million (20%) decrease in expenses related to an incentive stock plan, approximately $14.8 million (5%) was attributable to the Transactions and approximately $1.2 million was due to lower Year 2000 remediation costs. These decreases were partially offset by increases of approximately $41.9 million (14%) that resulted primarily from additional customer service, sales and marketing and administrative costs. The net increase for the six months ended June 30, 2001 was comprised of an increase of approximately $78.4 million (16%) due primarily to additional customer service, sales and marketing and administrative costs, partially offset by a decrease of $23.5 million (5%) attributable to the Transactions, a decrease of approximately $3.5 million (1%) due to lower Year 2000 remediation costs and a decrease of approximately $0.7 million due to lower expenses related to an incentive stock plan. As a percentage of revenues, selling, general and administrative expenses decreased 2% and increased 2%, respectively, in the 2001 periods compared to the same periods in 2000. Excluding the effects of the incentive stock plan and the Year 2000 remediation costs, as a percentage of revenues such costs increased 3% in each of the periods. OPERATING PROFIT BEFORE DEPRECIATION AND AMORTIZATION increased $30.3 million (12%) to $283.1 million for the three months ended June 30, 2001 and decreased $71.0 million (13%) to $474.8 million for the six months ended June 30, 2001 from $252.8 million and $545.8 million for the comparable periods in 2000. The increase for the three months ended June 30, 2001 consisted of a $60.3 million (24%) decrease in costs resulting from the adjustment related to an incentive stock plan, partially offset by a decrease of approximately $30.0 million (12%) which resulted from the combined effect of the revenue and expense changes discussed above. The decrease for the six months ended June 30, 2001 resulted from the combined effect of the revenue and expense changes discussed above. 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 (loss) and cash flows as indicators of financial performance and liquidity as reported in accordance with generally accepted accounting principles. I-21 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES DEPRECIATION AND AMORTIZATION EXPENSE increased $2.7 million (1%) and $17.3 million (4%) for the three and six months ended June 30, 2001 as compared to the same periods in 2000. Approximately $27.7 million (12%) and $51.3 million (11%), respectively, of the increase was due primarily to depreciation of new plant assets, partially offset by a decrease of $25.0 million (11%) and $34.0 million (7%), respectively, resulting from the Transactions. NET INTEREST EXPENSE decreased $11.6 million (8%) and $8.0 million (3%) for the three and six months ended June 30, 2001, respectively, compared to the same periods in 2000. The net decrease is attributable primarily to higher interest income. EQUITY IN NET LOSS OF AFFILIATES increased to $6.3 million and $11.3 million for the three and six months ended June 30, 2001, respectively. Such amounts consist of the Company's share of the net income or loss of certain businesses in which the Company has varying minority ownership interests. GAIN ON SALE OF CABLE ASSETS, NET for the three and six months ended June 30, 2001 consists primarily of the gain recognized on the disposition of the Company's cable television systems in Massachusetts and the gain from the sale of a 20% minority interest in certain of the Company's programming businesses. GAIN (LOSS) ON INVESTMENTS, NET for the three and six months ended June 30, 2001 consists primarily of a $69.6 million charge for an other-than-temporary decline in the fair value of the Company's At Home warrants, a net gain of $44.4 million and a net loss of $27.4 million, respectively, as a result of the change in the fair value of the Charter Communications, Inc., Adelphia Communications Corporation and AT&T common stock. In addition, the six month period includes a gain of $286.4 million recognized in connection with the reclassification of the Company's shares of Charter Communications and Adelphia Communications common stock from securities available-for-sale to trading securities upon the adoption of SFAS 133 on January 1, 2001. WRITE-OFF OF DEFERRED FINANCING COSTS of $6.6 million and $13.0 million for the three and six months ended June 30, 2001 consists principally of costs written off in connection with amendments to, or termination of, the Company's credit agreements. MINORITY INTERESTS for the three and six months ended June 30, 2001 include CSC Holdings' preferred stock dividend requirements, Fox Sports Networks, LLC's share of the net income (loss) of Regional Programming Partners, Metro-Goldwyn-Mayer's share of the net income or loss of American Movie Classics, Bravo, IFC and We:Women's Entertainment and NBC-Rainbow Holding, Inc.'s share of the net income of Rainbow Media Holdings. For the prior year periods, minority interests include CSC Holdings' preferred stock dividend requirements, Fox Sports Networks' share of the net income (loss) of Regional Programming Partners and NBC-Rainbow Holding's share of the net loss of Rainbow Media Holdings. INCOME TAX EXPENSE for the three and six months ended June 30, 2001 of $90.0 million and $376.2 million, respectively, is a direct result of the increase in pre-tax income. I-22 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES NET MISCELLANEOUS EXPENSE increased $12.4 million to $15.9 million for the three months ended June 30, 2001 and $15.8 million to $20.1 million for the six months ended June 30, 2001 as compared to the same periods in 2000. The net increases resulted primarily from a net loss on derivative contracts of $12.1 million and $13.1 million for the three and six months ended June 30, 2001, respectively. BUSINESS SEGMENTS RESULTS - CABLEVISION SYSTEMS CORPORATION The Company classifies its business interests into four fundamental areas: Telecommunication Services, consisting principally of its cable television, telephone and modem services operations; Rainbow Media Group, consisting principally of interests in national and regional cable television programming networks; Madison Square Garden, which owns and operates professional sports teams, regional cable television networks, live productions and entertainment venues; and Retail Electronics, which represents the operations of Cablevision Electronics Investments, Inc.'s retail electronics stores. The Company allocates certain costs to each segment based upon their proportionate estimated usage of services. The financial information for the segments does not include inter-segment eliminations. TELECOMMUNICATION SERVICES The table below sets forth, for the periods presented, certain unaudited historical financial information and the percentage that those items bear to revenues for the Company's telecommunication services segment.
Three Months Ended June 30, -------------------------------------------------------------- 2001 2000 ----------------------------- ---------------------------- % of Net % of Net Amount Revenues Amount Revenues ------ -------- ------ -------- (dollars in thousands) Revenues, net $573,016 100% $596,289 100% Technical and operating expenses 229,493 40 235,962 40 Selling, general and administrative expenses 104,781 18 131,582 22 Depreciation and amortization 158,801 28 158,858 27 --------- --------- Operating income $ 79,941 14% $ 69,887 12% ========= ========= Six Months Ended June 30, -------------------------------------------------------------- 2001 2000 ------------------------------ ---------------------------- % of Net % of Net Amount Revenues Amount Revenues ------ -------- ------ -------- (dollars in thousands) Revenues, net $1,116,003 100% $1,163,357 100% Technical and operating expenses 453,537 41 466,771 40 Selling, general and administrative expenses 220,632 20 212,830 18 Depreciation and amortization 329,453 29 317,847 27 ---------- ---------- Operating income $ 112,381 10% $ 165,909 14% ========== ==========
I-23 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES REVENUES for the three and six months ended June 30, 2001 decreased $23.3 million (4%) and $47.4 million (4%) as compared to revenues for the same period in the prior year. Approximately $76.1 million (13%) and $148.9 million (13%) of the decrease resulted from the Transactions. Partially offsetting these decreases were increases of approximately $28.0 million (5%) and $54.0 million (5%) attributable to revenues from the Company's developing modem business (averaging 233,000 increased modem customers), the developing telephone business and deferred revenue recognized in connection with warrants previously received from At Home; approximately $17.9 million (3%) and $33.0 million (3%) resulted from higher revenue per cable television subscriber and approximately $6.5 million (1%) and $14.2 million (1%) was attributable to the internal growth of 49,629 in the average number of subscribers during the period. The remaining increase of $0.4 million and $0.3 million resulted from a net increase in various other revenue sources. TECHNICAL AND OPERATING EXPENSES for the three and six months ended June 30, 2001 decreased $6.5 million (3%) and $13.2 million (3%) over the same period in 2000. Approximately $31.0 million (13%) and $61.4 million (13 %) of the decrease was attributable to the Transactions and was partially offset by increased costs of approximately $24.5 million (10%) and $48.2 million (10%) directly associated with the growth in revenues and subscribers discussed above. As a percentage of revenues, technical and operating expenses remained relatively constant during the three month period in 2001 and increased 1% in the six month period in 2001 as compared to the same periods in 2000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased $26.8 million (20%) for the three months ended June 30, 2001 and increased $7.8 million (4%) for the six months ended June 30, 2001 as compared to the same periods in 2000. The net decrease for the three months ended June 30, 2001 consisted of a decrease of approximately $29.3 million (22%) attributable to lower expenses relating to an incentive stock plan and a decrease of approximately $16.9 million (13%) which resulted from the Transactions, partially offset by increases in various other costs aggregating $19.4 million (15%) primarily attributable to the Company's developing modem business. The net increase for the six months ended June 30, 2001 consisted of increases in various costs aggregating $39.4 million (19%), primarily attributable to the Company's developing modem business, partially offset by decreases of $3.8 million (2%) attributable to lower expenses relating to an incentive stock plan and $27.8 million (13%) which resulted from the Transactions. As a percentage of revenues, selling, general and administrative expenses decreased 4% and increased 2%, respectively, in the 2001 periods compared to the same periods in 2000. Excluding the effects of the incentive stock plan and the Year 2000 remediation costs, as a percentage of revenues such costs increased 2% in each of the periods. DEPRECIATION AND AMORTIZATION EXPENSE decreased $0.1 million and increased $11.6 million (4%) for the three and six months ended June 30, 2001 as compared to the same periods in 2000. For the three months ended June 30, 2001, a decrease of approximately $25.4 million (16%) resulted from the Transactions and was partially offset by an increase of approximately $25.3 million (16%) due primarily to depreciation of new plant assets. For the six months ended June 30, 2001 an increase of approximately $46.5 million (15%) due primarily to depreciation of new plant I-24 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES assets was partially offset by a decrease of approximately $34.9 million (11%) which resulted from the Transactions. RAINBOW MEDIA GROUP Refer to "Rainbow Media Group" discussion below. MADISON SQUARE GARDEN The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to revenues for Madison Square Garden.
Three Months Ended June 30, -------------------------------------------------------------- 2001 2000 ------------------------------ ---------------------------- % of % of Amount Revenues Amount Revenues ------ -------- ------ -------- (dollars in thousands) Revenues, net $ 181,406 100% $ 193,864 100% Technical and operating expenses 97,417 54 117,592 61 Selling, general and administrative expenses 39,288 21 37,264 19 Depreciation and amortization 23,630 13 28,510 15 --------- --------- Operating income $ 21,071 12% $ 10,498 5% ========= ========= Six Months Ended June 30, -------------------------------------------------------------- 2001 2000 ------------------------------ ---------------------------- % of % of Amount Revenues Amount Revenues ------ -------- ------ -------- (dollars in thousands) Revenues, net $ 398,305 100% $ 418,162 100% Technical and operating expenses 262,243 66 289,049 69 Selling, general and administrative expenses 83,298 21 61,067 15 Depreciation and amortization 47,480 12 56,871 13 --------- --------- Operating income $ 5,284 1% $ 11,175 3% ========= =========
REVENUES for the three and six months ended June 30, 2001 decreased $12.5 million (6%) and $19.9 million (5%), respectively, as compared to revenues for the same periods in the prior year. These declines were primarily attributable to a fewer number of concerts and other special events at Madison Square Garden, Radio City Music Hall and the Hartford Civic Center, as well as lower Knicks playoff revenues as the team was eliminated in the first round of the NBA playoffs in the second quarter of 2001 as compared to advancing to the third round in the same period of the prior year. Partially offsetting these declines were higher revenues for MSG Networks as a result of increased affiliate fees, slightly offset by a decline in advertising revenues. I-25 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES TECHNICAL AND OPERATING EXPENSES for the three and six months ended June 30, 2001 decreased $20.2 million (17%) and $26.8 million (9%), respectively, over the same 2000 periods. Technical and operating expenses for the three and six months ended June 30, 2001 reflect a credit of $30.0 million as a result of the settlement of litigation with the New York Yankees Limited Partnership. As a result of the settlement, Madison Square Garden will receive $30.0 million from the New York Yankees in 2001 and Madison Square Garden's rights to telecast New York Yankee games will end at the conclusion of the 2001 baseball season. Technical and operating expenses also decreased as a result of decreased costs directly associated with the decline in the number of concerts and special events and the Knicks playoffs performance discussed above. Partially offsetting these decreases was a provision recorded in the second quarter of 2001 for certain player transactions, and higher contractual rights expense in the MSG Networks. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES for the three and six months ended June 30, 2001 increased $2.0 million (5%) and $22.2 million (36%), respectively, as compared to the 2000 level. Selling, general and administrative expenses for the three months ended June 30, 2001 increased primarily due to a higher provision for severance, increased legal and professional fees associated with the Yankee litigation and other general cost increases, partially offset by a $10.2 million decline in expense related to Madison Square Garden's proportionate share of Cablevision's incentive stock plan. For the six months ended June 30, 2001, selling, general and administrative expenses increased primarily due to a higher provision for severance, increased legal and professional fees associated with the Yankee litigation and other general cost increases, as well as a $3.1 million increase in Madison Square Garden's proportionate share of expense related to Cablevision's incentive stock plan. DEPRECIATION AND AMORTIZATION EXPENSE for the three and six months ended June 30, 2001 decreased $4.9 million (17%) and $9.4 million (17%), respectively, as compared to the comparable 2000 periods due primarily to lower amortization expense as certain intangibles assets have been fully amortized. RETAIL ELECTRONICS The table below sets forth, for the periods presented, certain historical financial information and the percentage that those items bear to revenues for the Company's retail electronics segment, Cablevision Electronics Investments, Inc. ("Cablevision Electronics").
Three Months Ended June 30, --------------------------------------------------------------- 2001 2000 ------------------------------ ------------------------------ % of Net % of Net Amount Revenues Amount Revenues ------ -------- ------ -------- (dollars in thousands) Revenues, net $ 156,207 100% $ 159,102 100% Cost of sales 124,310 80 129,399 81 Selling, general and administrative expenses 45,965 29 43,823 28 Depreciation 7,623 5 4,382 3 --------- --------- Operating loss $ (21,691) (14)% $ (18,502) (12)% ========== =========
I-26 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
Six Months Ended June 30, --------------------------------------------------------------- 2001 2000 ------------------------------ ------------------------------ % of Net % of Net Amount Revenues Amount Revenues ------ -------- ------ -------- (dollars in thousands) Revenues, net $ 307,070 100% $ 295,758 100% Cost of sales 245,439 80 241,852 82 Selling, general and administrative expenses 93,333 30 85,344 29 Depreciation 15,075 5 8,143 3 --------- --------- Operating loss $ (46,777) (15)% $ (39,581) (13)% ========= =========
REVENUES for the three and six months ended June 30, 2001 decreased $2.9 million (2%) and increased $11.3 million (4%) to approximately $156.2 million and $307.1 million, respectively, compared to revenues of approximately $159.1 million and $295.8 million for the three and six months ended June 30, 2000, respectively. The net decrease for the three months ended June 30, 2001 was comprised of a decrease of $9.7 million (6%) in cable modem sales no longer being recorded in the retail electronics segment, partially offset by an increase in comparable store sales of $2.9 million (2%) and an increase of $3.9 million (3%) in revenues from new and relocated stores. For the six months ended June 30, 2001, comparable store sales accounted for $20.6 million (7%) of the increase while new and relocated stores contributed $7.2 million (2%) to the increase. These increases were partially offset by a decrease of $16.5 million (5%) in cable modem sales no longer being recorded in the retail electronics segment. COST OF SALES for the three and six months ended June 30, 2001 amounted to approximately $124.3 million and $245.4 million (80% of revenues), respectively, compared to costs of sales of $129.4 million and $241.9 million (81% and 82% of revenues) for the three and six months ended June 30, 2000, respectively. Such costs include the cost of merchandise sold, including freight costs incurred as well as certain occupancy and buying costs. The decrease in cost of sales, as a percentage of revenues, is primarily attributable to changes in the sales mix. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES amounted to approximately $46.0 million and $93.3 million (29% and 30% of revenues) for the three and six months ended June 30, 2001, respectively, and $43.8 million and $85.3 million (28% and 29% of revenues) for the three and six months ended June 30, 2000, respectively. The increase for the three and six months ended June 30, 2001 of $2.1 million (5%) and $8.0 million (9%), respectively, was primarily attributable to increased salaries and commissions, advertising costs and other selling expenses. Selling, general and administrative expenses consist of retail store expenses (excluding certain store occupancy costs), the salaries and commissions of store personnel, the costs of advertising, operating the distribution center and corporate support functions other than buying. DEPRECIATION EXPENSE amounted to approximately $7.6 million and $15.1 million (5% of revenues) for the three and six months ended June 30, 2001, respectively, and $4.4 million and $8.1 million (3% of revenues) for the three and six months ended June 30, 2000, respectively. The increase for the three and six months ended June 30, 2001 of $3.2 million and $6.9 million, respectively, resulted primarily from depreciation of new fixed assets and increased depreciation I-27 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES of certain software costs. Depreciation expense includes the depreciation of all property and equipment in service. 2001 OUTLOOK -CABLEVISION NY GROUP At the time of the release of our results for the second quarter of 2001, we also disclosed the following information about our 2001 results: o We expect that our 2001 pro forma cash flow growth, as described below, for our cable television, high speed data and Cablevision Lightpath Long Island operations to increase between 11% and 13% when compared with 2000. o We expect that our 2001 pro forma cash flow growth, as described below, for our telecommunications segment to increase between 7%-9% when compared to 2000. o We expect our 2001 cable television subscriber growth to be 1% when compared with 2000, on the same pro forma basis described below. o We expect cash flow, for our Madison Square Garden segment to be between $115 million and $120 million, excluding certain one-time expenses related to the sports teams that could be incurred during the remainder of 2001 and excluding a $30 million settlement of certain litigation at Madison Square Garden in 2001. When we refer to cash flow in the preceding items, we are referring to operating profit before depreciation and amortization, excluding the effects of stock plan income and expense and Year 2000 remediation expense. Our pro forma cash flow increases give effect to our completed dispositions and acquisitions of cable television systems, as discussed in this Form 10-Q and in our 10-K/A, as if they occurred at the beginning of 2000, and the retroactive application of a write off of modem incentive costs taken in the fourth quarter of 2000. The expected pro forma cash flow growth related to our telecommunications segment is lower than earlier expected due to: o Our decision during the second quarter of 2001 not to proceed with a leasing option program for our high speed data service, thereby lowering forecasted cash flow by $20 million and reducing forecasted cable modem capital expenditures by $35 million; o Call center expenses being higher than anticipated due to higher staffing requirements related to our high speed data customer growth; o Advertising revenue being lower than forecasted due to the weak advertising market; and o Lower than forecasted cable television revenues due to lower subscriber growth. The expected 2001 cash flow for our Madison Square Garden segment is lower than earlier expected as a result of: o the New York Rangers not making the NHL playoffs; o the New York Knicks not advancing to the second round of the NBA playoffs; o player contract buyouts; o expenses related to the Yankees litigation; and o severance payments. CABLEVISION SYSTEMS CORPORATION OPERATING ACTIVITIES Net cash used in operating activities amounted to $238.5 million for the six months ended June 30, 2001 compared to cash provided by operating activities of $56.6 million for the six months ended June 30, 2000. The 2001 cash used in operating activities consisted primarily of a net decrease in cash of $170.0 million resulting from a net loss before depreciation, amortization and other non-cash items and a decrease in cash resulting from changes in assets and liabilities of $68.5 million. The 2000 cash provided by operating activities consisted primarily of $287.5 million of income before depreciation, amortization and other non-cash items, partially offset by a net decrease in cash resulting from changes in assets and liabilities of $230.9 million. INVESTING ACTIVITIES Net cash provided by investing activities for the six months ended June 30, 2001 was $425.6 million compared to net cash used in investing activities of $699.3 million for the six months ended June 30, 2000. The 2001 investing activities consisted of net proceeds from the sale of cable assets and programming interests of $1,118.2 million, partially offset by $660.3 million of capital expenditures and other net cash payments of $32.3 million. The 2000 investing activities consisted of $554.4 million of capital expenditures, $116.2 million of payments for acquisitions, and other net cash payments of $28.7 million. FINANCING ACTIVITIES Net cash provided by financing activities amounted to $18.2 million for the six months ended June 30, 2001 compared to $614.0 million for the six months ended June 30, 2000. In 2001, the Company's financing activities consisted primarily of $996.8 million from the issuance of senior notes, $673.6 million of proceeds from collateralized indebtedness, partially offset by net bank debt repayments of $1,593.9 million and other net cash payments of $58.3 million. In 2000, the Company's financing activities consisted primarily of additional bank borrowings of $638.0 million, partially offset by other net cash payments aggregating $24.0 million. I-28 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES RAINBOW MEDIA GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Rainbow Media Group tracking stock represents an interest in Cablevision and is not a direct interest in the businesses and interests included in Rainbow Media Group. Dividends (if any), entitlements in the event of a merger or similar transaction and rights in liquidation will not necessarily be related to the performance of Rainbow Media Group or the value of the assets in Rainbow Media Group. Instead, such determinations will be made by the Cablevision Board of Directors, subject to the provisions of Cablevision's amended certificate of incorporation. Cablevision does not expect to pay any dividends on any series of its common stock for the foreseeable future. In connection with the preparation of the financial information for the Rainbow Media Group tracking stock, certain allocations of Cablevision costs have been made based on existing policies. If those policies were altered, which Cablevision is entitled to do at any time, there could be material adverse effects on the Rainbow Media Group financial statements. RECENT TRANSACTIONS - RAINBOW MEDIA GROUP 2001 TRANSACTIONS. In April 2001, Metro-Goldwyn-Mayer acquired a 20% interest in certain national programming businesses of Rainbow Media Holdings which are included in Rainbow Media Group. 2000 TRANSACTIONS. In August 2000, Sterling Digital, LLC was acquired by CSC Holdings and attributed to Rainbow Media Group. In May 2000, Rainbow Media Holdings acquired the 50% interest in MuchMusic USA Venture held by Chum, Ltd., increasing Rainbow Media Holdings' ownership to 100%. In January 2000, Regional Programming Partners, a company 60% owned by Rainbow Media Holdings, acquired the 70% interest in SportsChannel Florida Associates held by Front Row Communications, Inc., increasing Regional Programming Partners' ownership to 100%. The above transactions are collectively referred to as the "Transactions." I-29 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES RESULTS OF OPERATIONS - RAINBOW MEDIA GROUP The following table sets forth on an unaudited historical basis certain items related to operations as a percentage of net revenues for the periods indicated. STATEMENT OF OPERATIONS DATA - RAINBOW MEDIA GROUP
Three Months Ended June 30, ------------------------------------------------- 2001 2000 ---------------------- --------------------- (Increase) % of Net % of Net Decrease Amount Revenues Amount Revenues in Net Loss ------ -------- ------ -------- ----------- (Dollars in thousands) Revenues, net $ 147,794 100% $ 122,149 100% $ 25,645 Operating expenses: Technical and operating 60,716 41 45,851 38 (14,865) Selling, general & administrative . 48,680 33 44,031 36 (4,649) Depreciation and amortization 10,558 7 10,332 8 (226) --------- --------- --------- Operating income 27,840 19 21,935 18 5,905 Other income (expense): Interest income (expense), net 599 -- (12,482) (10) 13,081 Equity in net income of affiliates 4,482 3 1,018 1 3,464 Gain on sale of programming interests 746,302 505 -- -- 746,302 Loss on investments (58) -- -- -- (58) Write-off of deferred financing costs -- -- -- -- -- Miscellaneous, net 24 -- 321 -- (297) --------- --------- --------- Income before income taxes 779,189 527 10,792 9 768,397 Income tax expense (216,579) (146) -- -- (216,579) --------- --------- --------- Net income $ 562,610 381% $ 10,792 9% $ 551,818 ========= ========= ========= Six Months Ended June 30, -------------------------------------------------- 2001 2000 --------------------- --------------------- (Increase) % of Net % of Net Decrease Amount Revenues Amount Revenues in Net Loss ------ -------- ------ -------- ----------- (Dollars in thousands) Revenues, net $ 283,936 100% $ 232,609 100% $ 51,327 Operating expenses: Technical and operating 116,383 41 88,626 38 (27,757) Selling, general & administrative . 105,269 37 76,926 33 (28,343) Depreciation and amortization 20,554 7 20,052 9 (502) --------- --------- --------- Operating income 41,730 15 47,005 20 (5,275) Other income (expense): Interest expense, net (12,377) (5) (23,683) (10) 11,306 Equity in net income (loss) of affiliates 2,997 1 (769) -- 3,766 Gain on sale of programming interests 746,302 263 -- -- 746,302 Loss on investments (311) -- -- -- (311) Write-off of deferred financing costs (6,380) (2) -- -- (6,380) Miscellaneous, net 17 -- (267) -- 284 --------- --------- --------- Income before income taxes 771,978 272 22,286 10 749,692 Income tax expense (216,579) (76) -- -- (216,579) --------- --------- --------- Net income $ 555,399 196% $ 22,286 10% $ 533,113 ========= ========= =========
I-30 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES COMPARISON OF THREE AND SIX MONTHS ENDED JUNE 30, 2001 VERSUS THREE AND SIX MONTHS ENDED JUNE 30, 2000 - RAINBOW MEDIA GROUP REVENUES for the three and six months ended June 30, 2001 increased $25.6 million (21%) and $51.3 million (22%), respectively, as compared to revenues for the same periods in the prior year. Approximately $15.3 million (13%) and $31.0 million (13%), respectively, of the increases were attributed to growth in programming network subscribers and rate increases, approximately $8.7 million (7%) and $17.2 million (8%), respectively, of the increases were due to higher advertising revenue and the remaining $1.6 million (1%) and $3.1 million (1%), respectively, of the increases were primarily due to the Transactions. TECHNICAL AND OPERATING EXPENSES for the three and six months ended June 30, 2001 increased $14.9 million (32%) and $27.8 million (31%), respectively, over the comparable 2000 periods primarily due to increased costs directly associated with the net increases in revenues discussed above. As a percentage of revenues such costs increased 3% for each of the three and six month periods. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES for the three and six months ended June 30, 2001 increased $4.6 million (11%) and $28.3 million (37%), respectively, compared to the same periods in 2000. Approximately $8.5 million (20%) and $20.8 million (27%), respectively, of the increases resulted from higher sales, marketing, advertising and other general cost increases. Approximately $3.2 million (7%) and $9.2 million (12%), respectively, of the increase for the three and six month periods was attributable to the Transactions. These increases were partially offset by a decrease of $7.1 million (16%) and $1.7 million (2%), respectively, due to a decrease in charges attributed to Rainbow Media Group related to an incentive stock plan of Cablevision. As a percentage of revenues, selling, general and administrative expenses decreased 3% and increased 4%, respectively, in the 2001 periods compared to the same periods in 2000. Excluding the effects of the incentive stock plan such costs, as a percentage of revenue, such expenses increased 2% for the three month period and 5% for the six month period. DEPRECIATION AND AMORTIZATION EXPENSE increased $0.2 million and $0.5 million for the three and six months ended June 30, 2001, respectively, when compared to the same periods in 2000. These increases are primarily due to the net effect of the Transactions. NET INTEREST EXPENSE decreased $13.1 million and $11.3 million for the three and six months ended June 30, 2001, respectively, as compared to the same periods in the prior year. The net decreases are primarily attributable to lower debt balances. GAIN ON SALE OF PROGRAMMING INTERESTS of $746.3 million for the three and six months ended June 30, 2001, resulted from the sale of a 20% minority interest in certain national programming businesses. EQUITY IN NET INCOME OF AFFILIATES increased to $4.5 million and $3.0 million for three and six months ended June 30, 2001, respectively, as compared to equity in net income of affiliates of $1.0 million and equity in net loss of affiliates of $0.8 million for the comparable periods in I-31 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES 2000. Such amounts consist of Rainbow Media Group's share of the net profits and losses of certain programming businesses, primarily regional and national sports programming companies and a national advertising company, in which Rainbow Media Holdings has varying minority ownership interests. LOSS ON INVESTMENTS primarily represents an other-than-temporary decline in the fair value of Rainbow Media Holdings investment in Salon.com. WRITE-OFF OF DEFERRED FINANCING COSTS of $6.4 million for the six months ended June 30, 2001 consists principally of costs written off in connection with the termination of a credit agreement. LIQUIDITY AND CAPITAL RESOURCES - RAINBOW MEDIA GROUP Refer to Cablevision Systems Corporation's Management's Discussion and Analysis of Financial Condition and Results of Operations below for a discussion of Rainbow Media Group's liquidity and capital resources. OPERATING ACTIVITIES Cash provided by operating activities amounted to $17.5 million for the six months ended June 30, 2001 compared to $7.4 million for the six months ended June 30, 2000. The 2001 cash provided by operating activities consisted of a net increase in cash resulting from changes in assets and liabilities of $164.4 million, partially offset by a net loss of $146.9 million before depreciation, amortization and other non-cash items. The 2000 cash provided by operating activities consisted of net income of $52.5 million before depreciation, amortization and other non-cash items, partially offset by a net decrease in cash resulting from changes in assets and liabilities of $45.1 million. INVESTING ACTIVITIES Net cash provided by investing activities for the six months ended June 30, 2001 was $820.5 million compared to net cash used in investing activities of $7.3 million for the six months ended June 30, 2000. The 2001 cash provided by investing activities consisted of proceeds from the sale of certain programming interests of $825 million and other net proceeds of $1.1 million, partially offset by capital expenditures of $5.6 million. The 2000 cash used by investing activities consisted solely of capital expenditures. FINANCING ACTIVITIES Net cash used in financing activities amounted to $647.1 million for the six months ended June 30, 2001 compared $0.2 million for the six months ended June 30, 2000. In 2001, financing activities consisted principally of net repayments of bank debt and a note aggregating I-32 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES $654.8 million and other net payments of $4.2 million, partially offset by contributions from Cablevision NY Group of $11.9 million. In 2000, financing activities consisted of net proceeds from bank debt of $42.7 million, partially offset by $40.6 million of net distributions to Cablevision NY Group and $2.2 million of payments on capital lease obligations. I-33 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES CABLEVISION NY GROUP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT TRANSACTIONS - CABLEVISION NY GROUP 2001 TRANSACTION. In January 2001, CSC Holdings completed the sale of its cable systems in Boston and eastern Massachusetts to AT&T in exchange for cable television systems of AT&T in certain northern New York suburbs and for AT&T common stock and cash. 2000 TRANSACTIONS. In September 2000, CSC Holdings completed the sale of its cable television system serving Kalamazoo, Michigan and in November 2000, CSC Holdings completed the sale of cable television systems in the greater Cleveland, Ohio metropolitan area. In August 2000, Rainbow Media Holdings purchased the remaining interests in News 12 New Jersey LLC that it did not already own from Newark Morning Ledger Co. The above transactions are collectively referred to as the "Transactions." RESULTS OF OPERATIONS - CABLEVISION NY GROUP The following table sets forth on a historical basis certain items related to operations as a percentage of net revenues for the periods indicated. I-34 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES STATEMENT OF OPERATIONS DATA - CABLEVISION NY GROUP
Three Months Ended June 30, ------------------------------------------------- 2001 2000 -------------------- --------------------- (Increase) % of Net % of Net Decrease Amount Revenues Amount Revenues in Net Loss ------ -------- ------ -------- ----------- (Dollars in thousands) Revenues, net $ 917,846 100% $ 964,465 100% $ (46,619) Operating expenses: Technical and operating 326,393 36 353,103 37 26,710 Retail electronics cost of sales 124,310 14 129,399 13 5,089 Selling, general & administrative 222,392 24 261,454 27 39,062 Depreciation and amortization 229,600 25 227,146 24 (2,454) ----------- ----------- ----------- Operating income (loss) 15,151 2 (6,637) (1) 21,788 Other income (expense): Interest expense, net (127,025) (14) (125,583) (13) (1,442) Equity in net loss of affiliates (10,824) (1) (971) -- (9,853) Loss on sale of cable assets, net (1,714) -- -- -- (1,714) Write-off of deferred financing costs (6,610) (1) -- -- (6,610) Loss on investments, net (25,089) (3) -- -- (25,089) Miscellaneous, net (15,967) (2) (3,889) -- (12,078) ----------- ----------- ----------- Income (loss) before income taxes and dividend requirements (172,078) (19) (137,080) (14) (34,998) Income tax benefit 126,613 14 -- -- 126,613 ----------- ----------- ----------- Net income (loss) before dividend requirements (45,465) (5) (137,080) (14) 91,615 Dividend requirements applicable to preferred stock (43,629) (5) (40,826) (4) (2,803) ----------- ----------- ----------- Net income (loss) $ (89,094) (10)% $ (177,906) (18)% $ 88,812 =========== =========== =========== Six Months Ended June 30, ------------------------------------------------ 2001 2000 -------------------- --------------------- (Increase) % of Net % of Net Decrease Amount Revenues Amount Revenues in Net Loss ------ -------- ------ -------- ----------- (Dollars in thousands) Revenues, net $ 1,835,988 100% $ 1,907,451 100% $ (71,463) Operating expenses: Technical and operating 724,394 40 755,578 40 31,184 Retail electronics cost of sales 245,439 13 241,852 13 (3,587) Selling, general & administrative 453,601 25 431,219 23 (22,382) Depreciation and amortization 467,550 25 450,778 24 (16,772) ----------- ----------- ----------- Operating income (loss) (54,996) (3) 28,024 2 (83,020) Other income (expense): Interest expense, net (248,499) (14) (245,160) (13) (3,339) Equity in net loss of affiliates (14,340) (1) (1,500) -- (12,840) Gain on sale of cable assets, net 1,431,778 78 -- -- 1,431,778 Write-off of deferred financing costs (6,610) -- -- -- (6,610) Gain on investments, net 189,743 10 -- -- 189,743 Miscellaneous, net (20,076) (1) (4,038) -- (16,038) ----------- ----------- ----------- Income (loss) before income taxes and dividend requirements 1,277,000 70 (222,674) (12) 1,499,674 Income tax expense (159,632) (9) -- -- (159,632) ----------- ----------- ----------- Net income (loss) before dividend requirements 1,117,368 61 (222,674) (12) 1,340,042 Dividend requirements applicable to preferred stock (87,258) (5) (80,529) (4) (6,729) ----------- ----------- ----------- Net income (loss) $ 1,030,110 56% $ (303,203) (16)% $ 1,333,313 =========== =========== ===========
I-35 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES COMPARISON OF THREE AND SIX MONTHS ENDED JUNE 30, 2001 VERSUS THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMBINED RESULTS - CABLEVISION NY GROUP REVENUES for the three and six months ended June 30, 2001 decreased $46.6 million (5%) and $71.5 million (4%) as compared to revenues for the comparable periods in the prior year. Approximately $76.1 million (8%) and $149.0 million (8%) of the decrease was attributable to the Transactions; approximately $16.5 million (2%) and $26.6 million (1%) resulted from decreases in revenue from Cablevision NY Group's programming and entertainment services, including Madison Square Garden; approximately $2.9 million resulted from a decrease in retail electronics revenues for the three month period and approximately $3.5 million (1%) and $8.4 million resulted from decreases in various other revenue sources. These decreases were partially offset by increases of approximately $28.0 million (3%) and $54.0 million (3%) due to increases in revenue derived from the developing modem business (averaging 233,000 increased modem customers), the developing telephone business and deferred revenue recognized in connection with the warrants previously received from At Home; approximately $17.9 million (2%) and $33.0 million (2%) resulted from higher revenue per cable television subscriber; approximately $11.3 million resulted from higher retail electronics revenues for the six month period; and approximately $6.5 million (1%) and $14.2 million (1%) was attributable to internal growth of 49,629 in the average number of cable television subscribers during the year. TECHNICAL AND OPERATING EXPENSES for the three months and six months ended June 30, 2001 decreased $26.7 million (8%) and $31.2 million (4%) over the 2000 amounts. The net decrease consisted of a decrease of approximately $31.0 million (9%) and $61.4 million (8%), respectively, attributable to the Transactions and a decrease of $30 million (8% and 4%) in each period attributable to a settlement from the New York Yankees, partially offset by increased costs of approximately $34.3 million (10%) and $60.2 million (8%) directly associated with the growth in revenues and subscribers discussed above. As a percentage of revenues, technical and operating expenses decreased 1% for the three month period and remained relatively constant during the six month period in 2001 as compared to the 2000 periods. RETAIL ELECTRONICS COST OF SALES for the three and six months ended June 30, 2001 amounted to approximately $124.3 million and $245.4 million (80% of retail electronics sales for each period) compared to approximately $129.4 million and $241.8 million (81% and 82%, respectively, of retail electronics sales) for the three and six months ended June 30, 2000. Cost of sales includes the cost of merchandise sold, including freight costs incurred and certain occupancy and buying costs, for the Company's retail electronics segment. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased $39.1 million (15%) for the three months ended June 30, 2001 and increased $22.4 million (5%) for the six months ended June 30, 2001 as compared to the same periods in 2000. The net decrease for the three months ended June 30, 2001 was comprised of a $53.6 million (21%) decrease in charges attributed to Cablevision NY Group related to an incentive stock plan of Cablevision, a decrease of approximately $16.9 million (6%) directly attributable to the Transactions and approximately $1.2 million due to lower Year 2000 I-36 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES remediation costs. These decreases were partially offset by increases of approximately $32.6 million (12%) that resulted from higher administrative, sales and marketing and customer service costs primarily attributable to Cablevision NY Group's developing modem business. The net increase for the six months ended June 30, 2001 was comprised of an increase of approximately $53.0 million (12%) which resulted from higher administrative, sales and marketing and customer service costs primarily attributable to Cablevision NY Group's developing modem business and an increase of $0.6 million resulting from charges attributed to Cablevision NY Group related to an incentive stock plan. These increases were partially offset by a decrease of approximately $27.8 million (6%) directly attributable to the Transactions and approximately $3.4 million (1%) due to lower Year 2000 remediation costs. As a percentage of revenues, selling, general and administrative expenses decreased 3% for the three month period in 2001 and increased 2% for the six month period in 2001 compared to the same 2000 periods. Excluding the effects of the incentive stock plan and Year 2000 remediation costs, as a percentage of revenues such costs increased 3% and 2%, respectively, during the 2001 periods as compared to 2000. OPERATING PROFIT BEFORE DEPRECIATION AND AMORTIZATION increased $24.3 million (11%) to $244.7 million for the three months ended June 30, 2001 and decreased $66.3 million (14%) to $412.6 million for the six months ended June 30, 2001 from $220.4 million and $478.9 million for the comparable periods in 2000. The increase for the three months ended June 30, 2001 consisted of a increase of approximately $53.6 million (24%) resulting from lower costs attributed to Cablevision NY Group related to an incentive stock plan, partially offset by a decrease of approximately $29.3 million (13%) resulting from the combined effect of the revenue and expense changes discussed above. The decrease for the six months ended June 30, 2001 resulted from the combined effect of the revenue and expense changes discussed above. Operating profit before depreciation and amortization is presented here to provide additional information about Cablevision NY Group'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 (loss) and cash flows as indicators of financial performance and liquidity as reported in accordance with generally accepted accounting principles. DEPRECIATION AND AMORTIZATION EXPENSE increased $2.5 million (1%) and $16.8 million (4%) for the three and six months ended June 30, 2001 as compared to the same periods in 2000. Approximately $27.9 million (12%) and $51.8 million (12%) of the increases were due primarily to depreciation of new plant assets, partially offset by decreases of $25.4 million (11%) and $35.0 million (8%) resulting from the Transactions. NET INTEREST EXPENSE increased $1.4 million (1%) and $3.3 million (1%) for the three and six months ended June 30, 2001 compared to the same period in 2000. The net increase is attributable primarily to higher debt balances, partially offset by higher interest income. EQUITY IN NET LOSS OF AFFILIATES increased to $10.8 million and $14.3 million for the three and six months ended June 30, 2001, respectively, from $1.0 million and $1.5 million in the comparable 2000 periods. Such amounts consist of Cablevision NY Group's share of the net profits and losses of certain programming businesses and a personal communications services business in which Cablevision has varying minority ownership interests. I-37 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES GAIN ON SALE OF CABLE ASSETS, NET for the three and six months ended June 30, 2001 consists primarily of the net gain recognized on the disposition of CSC Holdings' cable television systems in Massachusetts. WRITE OFF OF DEFERRED FINANCING COSTS of $6.6 million for the three and six months ended June 30, 2001 consists principally of costs written off in connection with amendments to CSC Holdings' credit agreements. GAIN (LOSS) ON INVESTMENTS, NET for the three and six months ended June 30, 2001 consists primarily of a $69.6 million charge for an other-than-temporary decline in the fair value of the At Home warrants, a net gain of $44.5 million and a net loss of $27.1 million, respectively, as a result of the change in the aggregate fair value of Charter Communications, Adelphia Communications and AT&T common stock. In addition, the six month period includes a gain of $286.4 million recognized in connection with the reclassification of the Company's shares of Charter Communications and Adelphia Communications common stock from securities available-for-sale to trading securities upon the adoption of SFAS 133 on January 1, 2001. INCOME TAX BENEFIT for the three months ended June 30, 2001 of $126.6 million reflects Cablevision NY Group's ability to utilize the current quarter loss to reduce its deferred tax liabilities, and a deferred tax benefit arising from Rainbow Media Group's use of Rainbow Media Holdings' loss carry forwards. The income tax expense for the six months ended June 30, 2001 of $159.6 million was a direct result of the pre-tax income. NET MISCELLANEOUS EXPENSE increased $12.1 million to $16.0 million for the three months ended June 30, 2001 and $16.0 million to $20.1 million for the six months ended June 30, 2001 as compared to the same periods in 2000. The net increases resulted primarily from a net loss on derivative contracts of $12.1 million and $13.1 million for the three and six months ended June 30, 2001, respectively. I-38 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES BUSINESS SEGMENTS RESULTS - CABLEVISION NY GROUP Cablevision NY Group classifies its business interests into three segments: Telecommunication Services, consisting principally of its cable television, telephone and modem services operations; Madison Square Garden, which owns and operates professional sports teams, regional cable television networks, live productions and entertainment venues; and Retail Electronics, which represents the operations of Cablevision Electronics Investments, Inc.'s retail electronics stores. CSC Holdings allocates certain costs to each segment based upon their proportionate estimated usage of services. The financial information for the segments does not include inter-segment eliminations. TELECOMMUNICATION SERVICES Refer to Cablevision Systems Corporation's Management's Discussion and Analysis of Financial Condition and Results of Operations above. MSG Refer to Cablevision Systems Corporation's Management's Discussion and Analysis of Financial Condition and Results of Operations above. RETAIL ELECTRONICS Refer to Cablevision Systems Corporation's Management's Discussion and Analysis of Financial Condition and Results of Operations above. LIQUIDITY AND CAPITAL RESOURCES - CABLEVISION NY GROUP Refer to Cablevision Systems Corporation's Management Discussion and Analysis of Financial Condition and Results of Operations below for a discussion of Cablevision NY Group's liquidity and capital resources. OPERATING ACTIVITIES Cash provided by operating activities amounted to $129.8 million for the six months ended June 30, 2001 compared to $27.8 million for the six months ended June 30, 2000. The 2001 cash provided by operating activities consisted primarily of net income before depreciation, amortization and other non-cash items of $68.1 million and a net increase in cash resulting from changes in assets and liabilities of $61.7 million. The 2000 cash provided by operating activities consisted primarily of $224.0 million of income before depreciation, amortization and other non-cash items, partially offset by a net decrease in cash resulting from changes in assets and liabilities of $196.2 million. I-39 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES INVESTING ACTIVITIES Net cash used in investing activities for the six months ended June 30, 2001 was $397.9 million compared to $681.6 million for the six months ended June 30, 2000. The 2001 investing activities consisted of $654.6 million of capital expenditures and other net cash payments of $36.4 million, partially offset by net proceeds of $293.2 million from the sale of cable assets and programming interests. The 2000 investing activities consisted of $547.1 million of capital expenditures, $116.2 million of payments for acquisitions and other net cash payments of $18.3 million. FINANCING ACTIVITIES Cash provided by financing activities amounted to $282.6 million for the six months ended June 30, 2001 compared to $625.1 million for the six months ended June 30, 2000. In 2001, financing activities consisted primarily of $996.8 million from the issuance of senior notes, $673.6 million of proceeds from collateralized indebtedness, partially offset by net repayments of bank debt of $1,234.6 million and other net cash payments aggregating $153.2 million. In 2000, financing activities consisted primarily of $595.3 million from the net proceeds from bank debt and $40.6 million of capital contributions from Rainbow Media Group, partially offset by other net cash payments aggregating $10.8 million. I-40 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES Cablevision Systems Corporation ("Cablevision" or the "Company") does not have any operations independent of its subsidiaries. In addition, Cablevision has no borrowings and does not have any securities outstanding other than its Cablevision NY Group Class A and Cablevision NY Group Class B common stock and the Rainbow Media Group Class A tracking stock and Rainbow Media Group Class B tracking stock. The Company does not intend to pay any dividends on any of its common stock in the foreseeable future. Accordingly, Cablevision does not currently have cash needs independent of the needs of its subsidiaries. Cablevision intends to maintain, wherever possible, separate financial arrangements for the Cablevision NY Group and the Rainbow Media Group. The Cablevision NY Group, which consists primarily of the Company's cable television, telephony, and cable modem operations, its retail electronics and theater operations, and the New York metropolitan area programming and entertainment assets owned by Rainbow Media Holdings but not included as part of Rainbow Media Group, including its interest in Madison Square Garden (referred to as the "Rainbow NY Group"), is currently funded primarily through separate financial arrangements made available to the Company's traditional "Restricted Group" subsidiaries (as defined below), to Madison Square Garden, and to Cablevision Electronics, as described in more detail below. Rainbow Media Group is currently funded through cash on hand and a credit facility made available to American Movie Classics, also described in more detail below. The following table presents selected historical results of operations and other financial information related to the captioned groups or entities as of and for the six months ended June 30, 2001. For purposes of this discussion, the Company's borrowing structure is segregated between those facilities attributed to Cablevision NY Group and Rainbow Media Group.
Six Months Ended June 30, 2001 ----------------------------------------------------------- Interest Capital Revenues AOCF* Expense Expenditures ---------- ---------- ---------- ------------ (dollars in thousands) (unaudited) CABLEVISION NY GROUP: Restricted Group $1,011,828 $ 468,865 $ 247,750 $ 478,757 Madison Square Garden 398,305 55,080 12,516 9,767 Retail Electronics 307,070 (32,204) 7,456 13,541 Other (including eliminations) 118,785 (83,850) (6,738) 152,572 ---------- ---------- ---------- ---------- Cablevision NY Group $1,835,988 $ 407,891 $ 260,984 $ 654,637 ========== ========== ========== ========== RAINBOW MEDIA GROUP $ 283,936 $ 60,070 $ 14,738 $ 5,643 ========== ========== ========== ==========
---------- * Defined as operating income (loss) before depreciation and amortization and excluding incentive stock plan income of $4,663 and $2,214 for Cablevision NY Group and Rainbow Media Group, respectively. I-41 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES - CABLEVISION NY GROUP Funding for Cablevision NY Group's ongoing capital investment and operational requirements is generally provided through separate financial arrangements made available to the Restricted Group, Madison Square Garden and Cablevision Electronics. Debt and redeemable preferred stock of CSC Holdings attributable to Cablevision NY Group, as of June 30, 2001, are outlined in the table below.
Restricted Other Group Entities Total ---------- ---------- ---------- (dollars in thousands) Senior Debt: Restricted Group bank debt $ 660,308 $ -- $ 660,308 MSG senior debt -- 333,900 333,900 Retail Electronics senior debt -- 103,998 103,998 Other senior debt and capital leases 40,697 694,889 735,586 Senior notes and debentures 3,690,382 -- 3,690,382 Subordinated notes and debentures 1,050,491 -- 1,050,491 ---------- ---------- ---------- Total debt 5,441,878 1,132,787 6,574,665 Redeemable preferred stock of CSC Holdings 1,544,294 -- 1,544,294 ---------- ---------- ---------- Total debt and redeemable preferred stock $6,986,172 $1,132,787 $8,118,959 ========== ========== ==========
RESTRICTED GROUP Cablevision NY Group's Restricted Group currently consists of the cable operations in and around the greater New York City metropolitan area of CSC Holdings and certain subsidiaries, as well as the commercial telephone operations of Cablevision Lightpath, Inc. on Long Island, New York. At June 30, 2001, the Restricted Group encompassed approximately 2,999,000 cable television subscribers. In January 2001, the Company began a program to monetize the value of the stock held in Charter Communications, Adelphia Communications and AT&T. All of the Company's Charter Communications and Adelphia Communications stock holdings have been monetized through the execution of prepaid forward contracts, collateralized by an equivalent amount of the respective underlying stock. Such contracts set a floor and ceiling on the Company's participation in the changes in the underlying stock prices, thus eliminating the Company's downside exposure to market risk while providing for upside appreciation potential to the respective ceiling price. At maturity, the contracts provide for the option to deliver cash or shares of Charter Communications or Adelphia Communications stock (as the case may be), with a value determined by reference to the applicable stock price at maturity. These transactions are obligations of subsidiaries that are not part of the CSC Holdings Restricted Group; however, CSC Holdings has provided guarantees of the subsidiaries' ongoing interest expense obligations and certain other contingent obligations. Approximately $673.6 million in cash has been received from financial institutions in these transactions, and such amount has been applied towards the repayment of outstanding bank debt under CSC Holdings' revolving credit facility. I-42 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES In August 2001, transactions to monetize 11 million shares of the Company's AT&T stock and 7 million shares of its AT&T Wireless Services, Inc. common stock were entered into through prepaid forward contracts (subject to definitive documentation). The terms of the prepaid forward contracts are similar to those of the Charter Communications and Adelphia Communications monetizations mentioned above; however, CSC Holdings has not guaranteed any of the unrestricted subsidiaries' obligations. The currently expected proceeds of approximately $275 million will be applied towards the repayment of outstanding bank debt under CSC Holdings' revolving credit facility. In connection with these monetization contracts, CSC Holdings also entered into prepaid interest rate swaps with a notional contract value of $354 million. Such contracts require CSC Holdings to pay floating rates of interest in exchange for receipt of fixed rate payments, with CSC Holdings receiving the present value of the fixed rate payments at the transactions inception. Expected cash proceeds of approximately $80 million will be applied towards the repayment of outstanding bank debt under CSC Holdings' revolving credit facility. The Restricted Group's plant upgrade, combined with additional amounts required for the start up and operation of new businesses such as high speed internet access, digital video services, the expansion of telephone services and the roll out of non-Long Island based commercial telephone business (collectively, "New Media"), as well as additional investments or acquisitions, including potential investments in the Rainbow NY Group programming entities, will require significant additional funding. Also, depending on the scope of the Company's pursuit of a direct broadcast satellite business, for which R/L DBS plans to make payments aggregating approximately $35.8 million to a satellite manufacturer in the third quarter ending September 30, 2001, significant additional funding may be required. The Restricted Group expects to obtain the requisite funds through internally generated cash, amounts available under existing or new credit facilities, proceeds from additional monetization activity, asset sales, and/or additional issuances of debt, preferred stock and/or equity securities. On May 30, 2001, the Company filed a registration statement with the Securities and Exchange Commission covering the sale by the Company of up to $1 billion of Cablevision NY Group Class A common stock and convertible preferred stock. On August 9, 2001, the Company agreed with AT&T to amend the registration statement to cover the sale by AT&T of up to $1 billion of its Cablevision NY Group Class A common stock and the sale by the Company of up to $1 billion of its convertible preferred stock in lieu of common stock. In June 2001, the Restricted Group repaid its $2.2 billion credit facilities with borrowings under its new $2.4 billion revolving credit facility. The new $2.4 billion credit facility is a five year revolving credit facility maturing on June 30, 2006 with no interim commitment reductions. As of August 3, 2001, the Restricted Group had outstanding borrowings under its credit facility of $873.5 million and letters of credit of $49 million. Unrestricted and undrawn funds available to the Restricted Group amounted to approximately $1,477.5 million as of the same date. The Restricted Group's credit facilities contain certain financial covenants that may limit its ability to utilize all of the undrawn funds available thereunder, including covenants requiring the I-43 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES Restricted Group to maintain certain financial ratios and restricting the permitted uses of borrowed funds. As of August 3, 2001, CSC Holdings had entered into interest exchange (swap) agreements with several of its banks covering a notional principal amount of $1,129.4 million requiring CSC Holdings to pay a floating rate of interest. These swaps have various maturities ranging from 2001 to 2006. MADISON SQUARE GARDEN Madison Square Garden has a $500 million revolving credit facility maturing on December 31, 2004. As of August 3, 2001, outstanding debt under this facility was $270 million. In addition, Madison Square Garden had outstanding letters of credit of $13.3 million, resulting in unrestricted and undrawn funds available of $216.7 million. The Madison Square Garden credit facility contains certain financial covenants that may limit Madison Square Garden's ability to utilize all of the undrawn funds available thereunder, including covenants requiring Madison Square Garden to maintain certain financial ratios. The Company believes that for Madison Square Garden, internally generated funds, together with funds available under its existing credit agreement, will be sufficient to meet its projected funding requirements for the next twelve months, including requirements of certain of Rainbow NY Group's programming entities. RETAIL ELECTRONICS Cablevision Electronics has a $130 million stand alone credit facility, which matures in April 2003, as amended. Under the terms of the credit facility, the total amount of borrowing available to Cablevision Electronics is subject to an availability calculation based on a percentage of eligible inventory. On August 3, 2001, total outstanding debt under the credit facility was $87 million with available funds of $2.7 million. CSC Holdings' cash investment, including intercompany advances, in Cablevision Electronics was approximately $387.5 million at June 30, 2001. Through August 3, 2001, Cablevision Electronics received other financial support from CSC Holdings in the form of guarantees and letters of credit of approximately $40.3 million. The Company believes that Cablevision Electronics will require additional financial support from CSC Holdings in respect of planned increases in inventory, capital expenditures and other operating requirements and that funds available under Cablevision Electronics' credit agreement, together with this additional financial support, will be sufficient to meet its projected funding requirements for the next twelve months. I-44 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES - RAINBOW MEDIA GROUP Financing for Rainbow Media Group, which consists primarily of the Company's five nationally distributed entertainment programming networks (American Movie Classics, Bravo, The Independent Film Channel ("IFC"), WE: Women's Entertainment (formerly Romance Classics), and MuchMusic), interests in certain regional sports networks, and Sterling Digital LLC, has historically been provided by a combination of bank credit facilities, intercompany borrowings, sales of interests in programming entities, and, from time to time, by equity contributions from partners. On April 2, 2001, MGM acquired a 20% interest in American Movie Classics and WE: Women's Entertainment in exchange for $495 million in cash and a 20% interest in Bravo and IFC in exchange for $330 million in cash. With a portion of the cash proceeds, AMC repaid $365 million in outstanding bank debt, and Bravo distributed $295.5 million in cash to Rainbow Media Holdings, which retired a like amount of intercompany indebtedness owed to CSC Holdings. The remaining cash proceeds will be used to fund working capital and other cash requirements of the four new partnership entities. Rainbow Media Group's potential future investments in new programming content and services, such as new digital channel programming services, including those being developed by Sterling Digital, and cash payments for carriage of Rainbow Media Group's programming services will require significant additional funding. For the next 12 months, the Company believes that cash on hand, including cash received in the MGM transaction, cash generated from operations, and amounts available under the existing American Movie Classics credit facility will be sufficient to meet the cash requirements of Rainbow Media Group. AMERICAN MOVIE CLASSICS As discussed above, upon the closing of the MGM transaction, American Movie Classics repaid $365 million in outstanding bank debt, which consisted of $218.2 million in outstanding term loans and $146.8 million in outstanding debt under the revolving portion of the credit facility. As a result, the term loan portion of American Movie Classic's credit facility was cancelled. As of August 3, 2001, American Movie Classics had a $200 million reducing revolving credit facility, maturing on March 31, 2006. The amount of the available commitment does not begin to reduce until June 2004. As of August 3, 2001, American Movie Classics had undrawn unrestricted funds available of $200 million. The American Movie Classics credit facilities contain certain financial covenants that may limit the ability to utilize all of the undrawn funds available, including covenants requiring that certain financial ratios be maintained. In November 1999, CSC Holdings entered into an interest rate cap agreement with American Movie Classics in a notional principal amount of $105 million. This agreement was terminated on April 2, 2001. I-45 CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations. Statement 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported separately from goodwill. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company adopted the provisions of Statement 141 effective July 1, 2001. The adoption of Statement 141 had no effect on the financial position or results of operations of the Company. Statement 142 is effective for the Company beginning January 1, 2002. At that time, any goodwill and intangible assets determined to have an indefinite useful life that were acquired in a purchase business combination will not be amortized, but will be evaluated for impairment in accordance with the provisions of Statement 142. Statement 141 will require upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. It is not practicable for the Company to reasonably estimate the impact of adopting these Statements on the Company's financial statements as of June 30, 2001, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. I-46 CSC HOLDINGS, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
June 30, December 31, 2001 2000 ---------- ------------ (Unaudited) ASSETS Cash and cash equivalents $ 243,274 $ 37,940 Accounts receivable, trade (less allowance for doubtful accounts of $37,477 and $38,878) 335,870 304,413 Notes and other receivables 137,360 149,366 Inventory, prepaid expenses and other assets 354,768 296,388 Property, plant and equipment, net 3,672,773 3,285,674 Investments in affiliates 104,730 97,224 Investment securities 984,142 811,618 Investment securities pledged as collateral 703,698 -- Other investments 57,370 116,940 Derivative contracts 13,959 -- Advances to affiliates 84,198 96,519 Feature film inventory 397,289 347,208 Net assets held for sale -- 309,423 Franchises, net of accumulated amortization of $847,974 and $777,526 352,755 422,900 Affiliation and other agreements, net of accumulated amortization of $328,453 and $307,028 175,867 199,352 Excess costs over fair value of net assets acquired and other intangible assets, net of accumulated amortization of $919,724 and $853,493 2,189,483 1,665,318 Deferred financing, acquisition and other costs, net of accumulated amortization of $76,518 and $72,962 162,861 133,007 ---------- ---------- $9,970,397 $8,273,290 ========== ==========
See accompanying notes to condensed consolidated financial statements. II-1 CSC HOLDINGS, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (continued)
June 30, December 31, 2001 2000 ----------- ------------ (Unaudited) LIABILITIES AND STOCKHOLDER'S DEFICIENCY Accounts payable $ 429,241 $ 474,088 Accrued liabilities 1,001,831 1,086,068 Accounts payable to affiliates 54,181 47,388 Feature film and contract obligations 369,689 331,483 Deferred revenue 166,777 229,326 Deferred tax liability 247,588 -- Liabilities under derivative contracts 25,000 -- Bank debt 1,089,500 2,683,432 Collateralized indebtedness 676,164 -- Senior notes and debentures 3,690,382 2,693,208 Subordinated notes and debentures 1,050,491 1,048,648 Capital lease obligations and other debt 95,614 114,173 ----------- ----------- Total liabilities 8,896,458 8,707,814 ----------- ----------- Minority interests 895,598 587,985 ----------- ----------- Series H Redeemable Exchangeable Preferred Stock 434,181 434,181 ----------- ----------- Series M Redeemable Exchangeable Preferred Stock 1,110,113 1,110,113 ----------- ----------- Commitments and contingencies Stockholder's deficiency: Series A Cumulative Convertible Preferred Stock, 200,000 shares authorized, none issued -- -- Series B Cumulative Convertible Preferred Stock, 200,000 shares authorized, none issued -- -- 8% Series D Cumulative Preferred Stock, $.01 par value, 112,500 shares authorized, none issued ($100 per share liquidation preference) -- -- Common Stock, $.01 par value, 10,000,000 shares authorized, 1,000 shares issued -- -- Paid-in capital 875,670 759,865 Accumulated deficit (2,246,743) (3,613,108) ----------- ----------- (1,371,073) (2,853,243) Accumulated other comprehensive income 5,120 286,440 ----------- ----------- Total stockholder's deficiency (1,365,953) (2,566,803) ----------- ----------- $ 9,970,397 $ 8,273,290 =========== ===========
See accompanying notes to condensed consolidated financial statements. II-2 CSC HOLDINGS, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands) (Unaudited)
Six Months Ended June 30, Three Months Ended June 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Revenues, net (including retail electronics sales of $307,070, $295,758, $156,207 and $159,102) $ 2,111,524 $ 2,129,801 $ 1,061,988 $ 1,081,577 ----------- ----------- ----------- ----------- Operating expenses: Technical and operating 832,377 833,945 383,457 393,917 Retail electronics cost of sales 245,439 241,852 124,310 129,399 Selling, general and administrative 558,870 508,145 271,072 305,485 Depreciation and amortization 488,104 470,830 240,158 237,478 ----------- ----------- ----------- ----------- 2,124,790 2,054,772 1,018,997 1,066,279 ----------- ----------- ----------- ----------- Operating income (loss) (13,266) 75,029 42,991 15,298 ----------- ----------- ----------- ----------- Other income (expense): Interest expense (269,991) (271,547) (132,607) (139,468) Interest income 9,115 2,704 6,181 1,403 Equity in net income (loss) of affiliates (11,343) (2,269) (6,342) 47 Gain on sale of cable assets and programming interests, net 2,178,080 -- 744,588 -- Write-off of deferred financing costs (12,990) -- (6,610) -- Gain (loss) on investments, net 189,432 -- (25,147) -- Minority interests (219,144) (6,326) (235,026) (4,634) Miscellaneous, net (20,059) (4,305) (15,943) (3,568) ----------- ----------- ----------- ----------- 1,843,100 (281,743) 329,094 (146,220) ----------- ----------- ----------- ----------- Income (loss) before income taxes 1,829,834 (206,714) 372,085 (130,922) Income tax expense (376,211) -- (89,966) -- ----------- ----------- ----------- ----------- Net income (loss) 1,453,623 (206,714) 282,119 (130,922) Dividend requirements applicable to preferred stock (87,258) (80,529) (43,629) (40,826) ----------- ----------- ----------- ----------- Net income (loss) applicable to common shareholder $ 1,366,365 $ (287,243) $ 238,490 $ (171,748) =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements. II-3 CSC HOLDINGS, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2001 and 2000 (Dollars in thousands) (Unaudited)
2001 2000 ----------- ----------- Cash flows from operating activities: Net income (loss) $ 1,453,623 $ (206,714) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 488,104 470,830 Equity in net loss of affiliates 11,343 2,269 Minority interests 219,144 6,326 Gain on sale of cable assets and programming interests, net (2,178,080) -- Gain on investments, net (189,432) -- Write off of deferred financing costs 12,990 -- Amortization of deferred financing and debenture discount 5,268 16,039 Loss (gain) on sale of equipment 1,783 (1,246) Tax benefit from exercise of stock options 92,529 -- Changes in assets and liabilities, net of effects of acquisitions and dispositions (61,404) (220,860) ----------- ----------- Net cash provided by (used in) operating activities (144,132) 66,644 ----------- ----------- Cash flows from investing activities: Payments for acquisitions, net of cash acquired -- (116,183) Net proceeds from sale of cable assets and programming interests 1,118,153 -- Capital expenditures (660,280) (554,406) Proceeds from sale of equipment 1,919 68 Increase in investment securities and other investments (15,022) -- Additions to intangible assets (303) (120) Increase in investments in affiliates, net (18,849) (28,669) ----------- ----------- Net cash provided by (used in) investing activities 425,618 (699,310) ----------- ----------- Cash flows from financing activities: Proceeds from bank debt 2,159,554 1,867,784 Repayment of bank debt (3,753,486) (1,229,829) Issuance of senior notes 996,790 -- Net proceeds from collateralized indebtedness 673,635 -- Preferred stock dividends (87,258) (7) Payments on capital lease obligations and other debt (20,084) (16,844) Additions to deferred financing and other costs (45,303) (17,172) ----------- ----------- Net cash provided by (used in) financing activities (76,152) 603,932 ----------- ----------- Net increase (decrease) in cash and cash equivalents 205,334 (28,734) Cash and cash equivalents at beginning of year 37,940 62,665 ----------- ----------- Cash and cash equivalents at end of period $ 243,274 $ 33,931 =========== ===========
See accompanying notes to condensed consolidated financial statements. II-4 CSC HOLDINGS, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) Note 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of CSC Holdings, Inc. and its majority owned subsidiaries (the "Company") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Note 2. RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS The financial statements as of and for the three and six months ended June 30, 2001 and 2000 presented in this Form 10-Q are unaudited; however, in the opinion of management, such statements include all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. The interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2000. The results of operations for the interim periods are not necessarily indicative of the results that might be expected for future interim periods or for the full year ending December 31, 2001. Note 3. RECLASSIFICATIONS Certain reclassifications have been made to the 2000 financial statements to conform to the 2001 presentation. Note 4. INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share for the three and six months ended June 30, 2001 and 2000 is not presented since the Company is a wholly owned subsidiary of Cablevision Systems Corporation ("Cablevision"). II-5 CSC HOLDINGS, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (continued) Note 5. CASH FLOWS For purposes of the condensed consolidated statements of cash flows, the Company considers short-term investments with a maturity at date of purchase of three months or less to be cash equivalents. The Company paid cash interest expense of approximately $255,163 and $254,286 for the six months ended June 30, 2001 and 2000, respectively, and paid income taxes of approximately $35,321 for the six months ended June 30, 2001. The Company's noncash financing activities for the six months ended June 30, 2001 and 2000 included capital lease obligations of $1,525 and $21,794, respectively, incurred when the Company entered into leases for new equipment; preferred stock dividend requirements of $80,522 in 2000; the receipt of marketable securities, valued at $893,500, in connection with the sale of cable assets in 2001; and the issuance of Rainbow Media Group Class A tracking stock of Cablevision, valued at $48,742, in exchange for a portion of NBC's interest in Rainbow Media Holdings, Inc. Note 6. TRANSACTIONS In connection with the distribution of the Rainbow Media Group tracking stock by Cablevision, NBC-Rainbow Holding, Inc. was given the right to exchange its 26% interest in Rainbow Media Holdings equity securities over a period of up to 9 years for a 34% interest in Rainbow Media Group tracking stock, based on the number of shares of Rainbow Media Group tracking stock outstanding on the date of the tracking stock distribution. On June 29, 2001, NBC-Rainbow Holding exchanged a 0.9% interest in Rainbow Media Holdings equity securities for 2,159,104 shares of Rainbow Media Group Class A tracking stock of Cablevision (valued at $48,742). In connection with this transaction, the Company recorded goodwill of approximately $40,976. The purchase price will be allocated to the specific assets acquired when an independent appraisal is obtained. In April 2001, Metro-Goldwyn-Mayer Inc. ("MGM") acquired a 20% interest in certain programming businesses of Rainbow Media Holdings for $825,000 in cash. The Company recorded a gain of approximately $746,302 in connection with this transaction. In January 2001, the Company completed the sale of its cable systems in Boston and eastern Massachusetts to AT&T Corp. in exchange for AT&T's cable systems in certain northern New York suburbs, 44,260,932 shares of AT&T stock, valued at approximately $893,500 at closing, and approximately $293,200 in cash. The Company recognized a net gain of approximately $1,443,860. II-6 CSC HOLDINGS, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (continued) The acquisition of the cable systems from AT&T was accounted for as a purchase with the operations of the acquired systems being consolidated with those of the Company as of the acquisition date. The purchase price will be allocated to the specific assets acquired when an independent appraisal is obtained. The Company classified the shares of AT&T common stock as trading securities and for the six months ended June 30, 2001 recorded a gain on investments of $80,223 as a result of the increase in the fair value of such securities. Note 8. DEBT In June 2001, the Company and certain of its Subsidiaries ("Restricted Group") repaid the outstanding balance under its $2.2 billion reducing revolving credit facilities with borrowings under a new $2.4 billion revolving credit facility which matures on June 30, 2006 with no interim commitment reductions. Interest on outstanding amounts may be paid, at the option of the Company, based on the prime rate or a Eurodollar rate plus a margin. In April 2001, American Movie Classics Company, a subsidiary of Rainbow Media Holdings, repaid the balance outstanding under its credit facility of $365,000 with the proceeds from the MGM transaction discussed above. In March 2001, the Company issued $1,000,000 face amount of 7-5/8% senior notes due 2011. The notes were issued at a discount of $3,210. The net proceeds were used to reduce bank debt outstanding. The notes are not redeemable by the Company prior to maturity. Note 9. INCOME TAXES At December 31, 2000, the Company had recorded a valuation allowance in the amount of $546,000 against its deferred tax assets. Of this amount, $305,000 was attributable to the Company's telecommunications operations and $241,000 was attributable to Rainbow Media Holdings. Tax rules impose restrictions on the ability of the companies to utilize each others' tax attributes. Income tax expense for the six months ended June 30, 2001 differs from the statutory rate principally due to a reduction of $416,000 in the consolidated valuation allowance. This reduction was based on several factors, including the closing of the sale of the Company's cable television systems in Massachusetts and the consummation of the MGM transaction. While a substantial portion of the gain on these sales is deferred for income tax purposes, the Company has the ability to record the taxable gains before its operating loss carry forwards expire. The amount of the deferred gain, together with the Company's ability to control the timing of its recognition for tax purposes, provided substantial positive evidence of the recoverability of the II-7 CSC HOLDINGS, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (continued) deferred tax asset. In addition, the valuation allowance was reduced by $92,500, which represents the value of tax deductions for certain stock option exercises. This amount was credited to additional paid in capital. Note 10. DERIVATIVES Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES", as amended, ("SFAS 133"). The statement requires that all derivative financial instruments, such as interest rate swap contracts, be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized as a component of comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. To manage interest rate risk, the Company has from time to time entered into interest rate swap contracts to adjust the proportion of total debt that is subject to variable and fixed interest rates. Such contracts fix the borrowing rates on floating rate debt to provide an economic hedge against the risk of rising rates and/or convert fixed rate borrowings to variable rate to provide an economic hedge against the risk of higher borrowing costs in a declining interest rate environment. As of June 30, 2001, the Company had interest rate swap agreements to pay floating rates of interest with a total notional value of $775,000. The swap agreements had a fair value of approximately $6,254 at June 30, 2001 and are reflected in the accompanying consolidated balance sheets. These agreements have not been designated as hedges for accounting purposes. As a result, the increase in the fair value of the swap agreements for the six months ended June 30, 2001 of approximately $4,274 is reflected in other income (expense): miscellaneous in the accompanying consolidated statements of operations. The Company has also entered into various transactions to provide an economic hedge against equity price risk on certain of its stock holdings. As of June 30, 2001, the Company had monetized all of its stock holdings in Charter Communications Inc. and Adelphia Communications Corporation through the execution of prepaid forward contracts, collateralized by an equivalent amount of the respective underlying stock. Such contracts set a floor and ceiling on the Company's participation in changes in the underlying stock prices, thus eliminating downside exposure to market risk while providing for upside appreciation potential to the respective ceiling price. At maturity, the contracts provide for the option to deliver cash or shares of Charter Communications or Adelphia Communications stock (as the case may be), with a value determined by reference to the applicable stock price at maturity. The Company received proceeds of $673,635, net of prepaid interest of $32,267, upon execution of these contracts. II-8 CSC HOLDINGS, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (continued) Such contracts have not been designated as hedges for accounting purposes. Therefore, the fair values of the forward contracts have been reflected in the accompanying consolidated balance sheets and the net decrease in the fair values of the equity derivative component of the prepaid forward contracts of $17,296 is included in other income (expense): miscellaneous in the accompanying consolidated statements of operations. With the adoption of SFAS 133, the shares of Charter Communications and Adelphia Communications common stock were reclassified from securities available-for-sale to trading securities. As a result, the Company recorded a gain on investments of $286,440 representing the accumulated unrealized gains as of January 1, 2001. For the six months ended June 30, 2001, the Company recorded a loss on investments of $107,348 representing the net decrease in the fair value of such securities for the period. Note 11. AT HOME As of June 30, 2001 and 2000, deferred revenue derived from the receipt of At Home warrants, net of amortization taken, amounted to approximately $64,064 and $131,419, respectively. For the six months ended June 30, 2001 and 2000, the Company recognized approximately $35,626 and $30,000, respectively, of this deferred revenue. For the six months ended June 30, 2001, the Company recognized a loss on investments of approximately $69,573 reflecting the decline in the fair value of the warrants. In April 2001, Excite@Home announced it had decided to terminate its relationship with the Company and that it would seek to recover the At Home warrants previously issued to the Company. On April 25, 2001, At Home Corporation commenced a lawsuit in the Court of Chancery of the State of Delaware alleging that Cablevision had breached its obligations under certain agreements with At Home. The suit seeks a variety of remedies including: recision of the agreements between At Home and Cablevision and cancellation of all warrants currently held by Cablevision, damages, and/or an order prohibiting Cablevision from continuing to offer its Optimum Online service and requiring it to convert its Optimum Online customers to the Optimum@Home service and to roll out the Optimum@Home service. Cablevision is vigorously contesting this lawsuit. The Company currently holds warrants to purchase 20,462,596 shares of At Home common stock, exercisable at a price of $0.25 per share. II-9 CSC HOLDINGS, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (continued) Note 12. SEGMENT INFORMATION The Company's reportable segments are strategic business units that are managed separately. The Company evaluates segment performance based on several factors, of which the primary financial measure is business segment adjusted operating cash flow (defined as operating income or loss before depreciation and amortization, incentive stock plan income or expense and the costs of Year 2000 remediation).
Six Months Ended June 30, Three Months Ended June 30, ---------------------------- ---------------------------- REVENUES 2001 2000 2001 2000 -------- ----------- ----------- ----------- ----------- Telecommunication Services $ 1,116,003 $ 1,163,357 $ 573,016 $ 596,289 Rainbow Media Group 283,936 232,609 147,794 122,149 MSG 398,305 418,162 181,406 193,864 Retail Electronics 307,070 295,758 156,207 159,102 All Other 90,729 96,759 46,682 50,396 Intersegment Elimination (84,519) (76,844) (43,117) (40,223) ----------- ----------- ----------- ----------- Total $ 2,111,524 $ 2,129,801 $ 1,061,988 $ 1,081,577 =========== =========== =========== =========== Six Months Ended June 30, Three Months Ended June 30, ---------------------------- ---------------------------- ADJUSTED OPERATING CASH FLOW 2001 2000 2001 2000 ---------------------------- ----------- ----------- ----------- ----------- Telecommunication Services $ 438,078 $ 483,245 $ 223,517 $ 244,579 Rainbow Media Group 60,070 66,632 33,983 34,947 MSG 55,080 67,216 39,712 44,200 Retail Electronics (32,204) (31,768) (14,812) (13,880) All Other (53,063) (42,338) (28,008) (21,378) ----------- ----------- ----------- ----------- Total $ 467,961 $ 542,987 $ 254,392 $ 288,468 =========== =========== =========== ===========
II-10 CSC HOLDINGS, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (continued) A reconciliation of reportable segment amounts to the Company's consolidated balances is as follows:
Six Months Ended June 30, Three Months Ended June 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- REVENUE Total revenue for reportable segments $ 2,105,314 $ 2,109,886 $ 1,058,423 $ 1,071,404 Other revenue and intersegment eliminations 6,210 19,915 3,565 10,173 ----------- ----------- ----------- ----------- Total consolidated revenue $ 2,111,524 $ 2,129,801 $ 1,061,988 $ 1,081,577 =========== =========== =========== =========== ADJUSTED OPERATING CASH FLOW TO NET LOSS Total adjusted operating cash flow for reportable segments $ 521,024 $ 585,325 $ 282,400 $ 309,846 Other adjusted operating cash flow deficit (53,063) (42,338) (28,008) (21,378) Items excluded from adjusted operating cash flow Depreciation and amortization (488,104) (470,830) (240,158) (237,478) Incentive stock plan income (expense) 6,877 6,345 28,757 (34,779) Year 2000 remediation costs -- (3,473) -- (913) Interest expense (269,991) (271,547) (132,607) (139,468) Interest income 9,115 2,704 6,181 1,403 Equity in net income (loss) of affiliates (11,343) (2,269) (6,342) 47 Gain (loss) on sale of cable assets, net 2,178,080 -- 744,588 -- Write-off of deferred financing costs (12,990) -- (6,610) -- Gain (loss) on investments, net 189,432 -- (25,147) -- Minority interests (219,144) (6,326) (235,026) (4,634) Miscellaneous, net (20,059) (4,305) (15,943) (3,568) ----------- ----------- ----------- ----------- Income (loss) before income taxes and dividend requirements $ 1,829,834 $ (206,714) $ 372,085 $ (130,922) =========== =========== =========== ===========
Substantially all revenues and assets of the Company's reportable segments are attributed to or located in the United States. The Company does not have a single external customer which represents 10 percent or more of its consolidated revenues. Note 13. COMPREHENSIVE INCOME Other comprehensive income for the six months ended June 30, 2001 of $5,120 represents unrealized net gains on available-for-sale securities. II-11 CSC HOLDINGS, INC. AND SUBSIDIARIES (a wholly-owned subsidiary of Cablevision Systems Corporation) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) (continued) Note 14. INVESTMENTS Rainbow Media Holdings holds a 50% interest in R/L DBS Company LLC, a joint venture with Loral Space and Communications, Ltd. R/L DBS holds certain frequencies granted by the FCC for the operation of a direct broadcast satellite business. In December 2000, the FCC granted an extension to R/L DBS' construction permit relating to the direct broadcast satellite frequencies held by R/L DBS. The extension requires the launch of a satellite and commencement of service offerings by not later than December 29, 2003, with specified six month interim construction milestones, non-compliance with which will result in the forfeiture of the construction permit. R/L DBS has entered into an agreement with a satellite manufacturer for the construction of a satellite scheduled to be delivered in May 2003. R/L DBS plans to make payments to the manufacturer aggregating approximately $35,800 in the quarter ending September 30, 2001. Cablevision continues to evaluate the scope of its pursuit of a direct broadcast satellite business, including exploring opportunities for strategic partnerships for R/L DBS. The contract with the manufacturer permits R/L DBS to terminate at its option at any time and receive a refund of a portion of amounts paid through the date of such termination. II-12 CSC HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The results of operations of CSC Holdings, Inc. are identical to the results of operations of Cablevision Systems Corporation, except for dividends attributable to the preferred stock of CSC Holdings which have been reported in minority interests in the consolidated financial statements of Cablevision Systems Corporation. Refer to Cablevision Systems Corporation's Management's Discussion and Analysis of Financial Condition and Results of Operations filed as part of this document. II-13 RAINBOW MEDIA GROUP (a combination of certain assets and businesses of Cablevision Systems Corporation) CONDENSED COMBINED BALANCE SHEETS (Dollars in thousands)
June 30, December 31, 2001 2000 ---------- ----------- (Unaudited) ASSETS Current assets: Cash $ 190,880 $ 28 Trade accounts receivable (less allowance for doubtful accounts of $8,875 and $11,945) 84,168 75,262 Accounts receivable-affiliates, net 93,784 63,132 Prepaid expenses and other current assets 19,803 17,920 Feature film inventory, net 64,331 61,017 ---------- ---------- Total current assets 452,966 217,359 Long-term feature film inventory, net 331,924 278,502 Property and equipment, net 60,919 62,189 Investments in affiliates 50,533 56,120 Other assets 12,248 10,572 Deferred carriage fees, net of accumulated amortization of $16,962 and $15,923 20,509 17,341 Deferred financing costs, net of accumulated amortization of $2,587 and $754 1,987 6,327 Deferred transmission costs, net of accumulated amortization of $1,424 and $1,340 576 660 Intangible assets, net of accumulated amortization of $178,833 and $164,139 190,245 194,719 ---------- ---------- $1,121,907 $ 843,789 ---------- ----------
See accompanying notes to condensed combined financial statements. III-1 RAINBOW MEDIA GROUP (a combination of certain assets and businesses of Cablevision Systems Corporation) CONDENSED COMBINED BALANCE SHEETS (Dollars in thousands) (continued)
June 30, December 31, 2001 2000 ----------- ----------- (Unaudited) LIABILITIES AND ATTRIBUTED NET ASSETS (DEFICIENCY) Current liabilities: Bank debt, current $ -- $ 35,771 Note payable - parent -- 270,475 Current portion of capital lease obligations 4,691 4,471 Accounts payable 29,714 50,597 Accrued employee related costs 45,482 61,251 Other accrued expenses 23,632 26,784 Income taxes payable 17,044 -- Accounts payable-affiliates 134,092 44,460 Feature film and contract rights payable 55,927 51,557 ----------- ----------- Total current liabilities 310,582 545,366 Bank debt, long-term -- 328,000 Feature film rights payable, long-term 238,355 197,021 Capital lease obligations, long-term 22,795 25,194 Deferred income taxes payable 144,219 -- Other long-term liabilities 11,328 10,914 ----------- ----------- Total liabilities 727,279 1,106,495 Deficit investments in affiliates 300 2,367 Commitments and contingencies Attributed net assets (deficiency) 394,328 (265,073) ----------- ----------- $ 1,121,907 $ 843,789 =========== ===========
See accompanying notes to condensed combined financial statements. III-2 RAINBOW MEDIA GROUP (a combination of certain assets and businesses of Cablevision Systems Corporation) CONDENSED COMBINED STATEMENTS OF OPERATIONS (Dollars in thousands) (Unaudited)
Six Months Ended June 30, Three Months Ended June 30, ------------------------- --------------------------- 2001 2000 2001 2000 --------- --------- --------- --------- Revenues, net $ 283,936 $ 232,609 $ 147,794 $ 122,149 --------- --------- --------- --------- Operating expenses: Technical and operating 116,383 88,626 60,716 45,851 Selling, general and administrative 105,269 76,926 48,680 44,031 Depreciation and amortization 20,554 20,052 10,558 10,332 --------- --------- --------- --------- 242,206 185,604 119,954 100,214 --------- --------- --------- --------- Operating income 41,730 47,005 27,840 21,935 --------- --------- --------- --------- Other income (expense): Interest expense (14,738) (24,127) (1,539) (12,719) Interest income 2,361 444 2,138 237 Gain on sale of programming interests 746,302 -- 746,302 -- Equity in net income (loss) of affiliates 2,997 (769) 4,482 1,018 Loss on investments (311) -- (58) -- Write-off of deferred financing costs (6,380) -- -- -- Miscellaneous, net 17 (267) 24 321 --------- --------- --------- --------- 730,248 (24,719) 751,349 (11,143) --------- --------- --------- --------- Income before income taxes 771,978 22,286 779,189 10,792 Income tax expense (216,579) -- (216,579) -- --------- --------- --------- --------- Net income 555,399 22,286 562,610 10,792 Net income attributed to parties other than Cablevision Systems Corporation shareholders (204,120) (9,460) (202,380) (4,120) --------- --------- --------- --------- Net income attributed to Cablevision Systems Corporation shareholders $ 351,279 $ 12,826 $ 360,230 $ 6,672 ========= ========= ========= =========
See accompanying notes to condensed combined financial statements. III-3 RAINBOW MEDIA GROUP (a combination of certain assets and businesses of Cablevision Systems Corporation) CONDENSED COMBINED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2001 and 2000 (Dollars in thousands) (Unaudited)
2001 2000 --------- --------- Cash flows from operating activities: Net income $ 555,399 $ 22,286 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 20,554 20,052 Amortization and write-off of deferred costs 10,669 220 Equity in net (income) loss of affiliates (2,997) 769 Loss on investments 311 -- Gain on sale of programming interests (746,302) -- Gain on sale of equipment (48) -- Tax benefit from exercise of stock options 9,949 -- Non-cash expenses attributed to RMG 5,577 9,229 Changes in assets and liabilities, net of effects of acquisitions 164,401 (45,125) --------- --------- Net cash provided by operating activities 17,513 7,431 --------- --------- Cash flows from investing activities: Capital expenditures (5,643) (7,315) Proceeds from sale of programming interests 825,000 -- Proceeds from sale of equipment 1,102 -- --------- --------- Net cash provided by (used in) investing activities 820,459 (7,315) --------- --------- Cash flows from financing activities: Net proceeds from (repayments of) bank debt (359,322) 42,652 Repayment of note (295,500) -- Contributions from (distributions to) CNYG 11,929 (40,610) Additions to deferred financing costs (2,048) -- Principal payments on capital lease obligations (2,179) (2,245) Financing costs on bank debt -- (4) --------- --------- Net cash used in financing activities (647,120) (207) --------- --------- Net increase (decrease) in cash 190,852 (91) Cash at beginning of year 28 105 --------- --------- Cash at end of period $ 190,880 $ 14 ========= =========
See accompanying notes to condensed combined financial statements. III-4 RAINBOW MEDIA GROUP (a combination of certain assets and businesses of Cablevision Systems Corporation) NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) Note 1. BASIS OF PRESENTATION The accompanying unaudited condensed combined financial statements of Rainbow Media Group have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Note 2. RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS The financial statements as of and for the three and six months ended June 30, 2001 and 2000 presented here are unaudited; however, in the opinion of management, such statements include all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. The interim financial statements should be read in conjunction with the audited combined financial statements and notes thereto included in Cablevision Systems Corporation's Annual Report on Form 10-K/A for the year ended December 31, 2000. The results of operations for the interim periods are not necessarily indicative of the results that might be expected for future interim periods or for the full year ending December 31, 2001. Note 3. CASH FLOWS For purposes of the combined statements of cash flows, Rainbow Media Group considers short-term investments with a maturity at date of purchase of three months or less to be cash equivalents. Rainbow Media Group paid cash interest expense of approximately $7,462 and $11,216 for the six months ended June 30, 2001 and 2000, respectively. Rainbow Media Group's noncash financing and investing activities and other supplemental data are presented below: III-5 RAINBOW MEDIA GROUP (a combination of certain assets and businesses of Cablevision Systems Corporation) NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited)
Six Months Ended June 30, -------------------------- 2001 2000 ---------- ---------- Capital lease obligations $ -- $ 4,476 Receipt of marketable securities -- 7,319 Contributions from CNYG to equity method investees attributed to RMG 6,517 16,004 Payments by CNYG on indebtedness attributed to RMG 20,576 64,376 Payments by CNYG of interest attributed to RMG 7,790 7,211 Payments by CNYG of stock plan obligations attributed to RMG 9,184 8,662 Payments by CNYG for acquisitions attributed to RMG, net of cash acquired -- 140,600 Attributed goodwill in connection with NBC's exchange of an interest in Rainbow Media Holdings for Cablevision's RMG Class A common stock 14,234 -- Contribution of feature film inventory from CNYG to RMG 4,332 -- Other net distributions from RMG to CNYG (1,034) --
Non-cash expenses attributed to Rainbow Media Group consisted primarily of (i) interest of $7,790 and $9,703, respectively, related to a portion of indebtedness of Rainbow Media Holdings, Inc., and (ii) income of $2,213 and $474 related to an incentive stock plan of Cablevision Systems Corporation for the six months ended June 30, 2001 and 2000, respectively. Note 4. TRANSACTIONS On June 29, 2001, NBC-Rainbow Holding, Inc. exchanged a 0.9% interest in Rainbow Media Holdings equity securities for 2,159,104 shares of Rainbow Media Group Class A common stock of Cablevision (valued at $48,742). In connection with this transaction, goodwill of approximately $14,234 was attributed to Rainbow Media Group. The goodwill will be allocated to the specific assets acquired when an independent appraisal is obtained. In April 2001, Metro-Goldwyn-Mayer Inc. ("MGM") acquired a 20% interest in certain programming businesses of Rainbow Media Holdings which are included in Rainbow Media Group for $825,000 in cash. Rainbow Media Group recorded a gain of approximately $746,302 in connection with this transaction. Note 5. BANK DEBT In April 2001, the balance outstanding under the American Movie Classics credit facility of $365,000 and the balance of the note payable to parent of $295,500 were repaid with proceeds from the MGM transaction. III-6 RAINBOW MEDIA GROUP (a combination of certain assets and businesses of Cablevision Systems Corporation) NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) Note 6. INCOME TAXES Income tax expense for the six months ended June 30, 2001 differs from the statutory rate principally due to a $106,000 reduction in the valuation allowance. This reduction was based on several factors, including the consummation of the MGM transaction. While a substantial portion of the gain on this sale is deferred for income tax purposes, the amount of the deferred gain provided substantial positive evidence of the recoverability of the deferred tax asset. In addition, the valuation allowance was reduced by $9,900 which represents the value of tax deductions for certain stock option exercises. This amount was credited to attributed net assets. Note 7. AFFILIATION AGREEMENTS Certain Rainbow Media Group programming services have secured significant new launch commitments with several MSOs under long-term affiliation agreements, in exchange for which the services have agreed to make certain per-subscriber payments upon launch. Such payments are to be used by the operators to provide various launch marketing and promotional support for such services and in the aggregate will be substantial. III-7 CABLEVISION NY GROUP (a combination of certain assets and businesses of Cablevision Systems Corporation) CONDENSED COMBINED BALANCE SHEETS (Dollars in thousands)
June 30, December 31, 2001 2000 ----------- ----------- (Unaudited) ASSETS Cash and cash equivalents $ 52,394 $ 37,912 Accounts receivable, trade (less allowance for doubtful accounts of $28,602 and $26,933) 251,702 229,151 Notes and other receivables 130,453 139,641 Inventory, prepaid expenses and other assets 330,919 285,882 Property, plant and equipment, net 3,611,854 3,223,485 Investments in affiliates 54,497 43,471 Investment securities 983,881 811,046 Investment securities pledged as collateral 703,698 -- Other investments 57,370 116,940 Derivative contracts 13,959 -- Advances to affiliates 167,539 388,208 Net assets held for sale -- 309,423 Franchises, net of accumulated amortization of $847,974 and $777,526 352,755 422,900 Affiliation and other agreements, net of accumulated amortization of $203,904 and $205,450 42,231 64,143 Excess costs over fair value of net assets acquired and other intangible assets, net of accumulated amortization of $865,440 and $790,932 2,132,874 1,605,808 Deferred financing, acquisition and other costs, net of accumulated amortization of $55,545 and $54,945 139,789 108,679 ----------- ----------- $ 9,025,915 $ 7,786,689 ----------- ----------- LIABILITIES AND ATTRIBUTED NET DEFICIENCY Accounts payable $ 399,535 $ 423,500 Accrued liabilities 915,673 997,970 Accounts payable to affiliates 53,198 50,403 Contract obligations 71,745 78,511 Deferred revenue 159,111 222,806 Deferred tax liability 103,369 -- Liabilities under derivative contracts 25,000 -- Bank debt 1,089,500 2,319,661 Collateralized indebtedness 676,164 -- Senior notes and debentures 3,690,382 2,693,208 Subordinated notes and debentures 1,050,491 1,048,648 Capital lease obligations and other debt 68,128 84,508 ----------- ----------- Total liabilities 8,302,296 7,919,215 Series H Redeemable Exchangeable Preferred Stock 434,181 434,181 Series M Redeemable Exchangeable Preferred Stock 1,110,113 1,110,113 Commitments and contingencies Attributed net deficiency (820,675) (1,676,820) ----------- ----------- $ 9,025,915 $ 7,786,689 =========== ===========
See accompanying notes to condensed combined financial statements. IV-1 CABLEVISION NY GROUP (a combination of certain assets and businesses of Cablevision Systems Corporation) CONDENSED COMBINED STATEMENTS OF OPERATIONS (Dollars in thousands) (Unaudited)
Six Months Ended June 30, Three Months Ended June 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Revenues, net (including retail electronics sales of $307,070, $295,758, $156,207 and $159,102) $ 1,835,988 $ 1,907,451 $ 917,846 $ 964,465 ----------- ----------- ----------- ----------- Operating expenses: Technical and operating 724,394 755,578 326,393 353,103 Retail electronics cost of sales 245,439 241,852 124,310 129,399 Selling, general and administrative 453,601 431,219 222,392 261,454 Depreciation and amortization 467,550 450,778 229,600 227,146 ----------- ----------- ----------- ----------- 1,890,984 1,879,427 902,695 971,102 ----------- ----------- ----------- ----------- Operating income (loss) (54,996) 28,024 15,151 (6,637) ----------- ----------- ----------- ----------- Other income (expense): Interest expense (260,984) (248,771) (131,068) (127,380) Interest income 12,485 3,611 4,043 1,797 Equity in net loss of affiliates (14,340) (1,500) (10,824) (971) Gain (loss) on sale of cable assets, net 1,431,778 -- (1,714) -- Write-off of deferred financing (6,610) -- (6,610) -- Gain (loss) on investments, net 189,743 -- (25,089) -- Miscellaneous, net (20,076) (4,038) (15,967) (3,889) ----------- ----------- ----------- ----------- 1,331,996 (250,698) (187,229) (130,443) ----------- ----------- ----------- ----------- Income (loss) before income taxes and dividend requirements 1,277,000 (222,674) (172,078) (137,080) Income tax benefit (expense) (159,632) -- 126,613 -- ----------- ----------- ----------- ----------- Net income (loss) before dividend requirements 1,117,368 (222,674) (45,465) (137,080) Dividend requirements applicable to preferred stock (87,258) (80,529) (43,629) (40,826) ----------- ----------- ----------- ----------- Net income (loss) 1,030,110 (303,203) (89,094) (177,906) Net income or loss attributed to parties other than Cablevision Systems Corporation shareholders (15,024) 3,134 (32,646) (514) ----------- ----------- ----------- ----------- Net income (loss) attributed to Cablevision Systems Corporation shareholders $ 1,015,086 $ (300,069) $ (121,740) $ (178,420) =========== =========== =========== ===========
See accompanying notes to condensed combined financial statements. IV-2 CABLEVISION NY GROUP (a combination of certain assets and businesses of Cablevision Systems Corporation) CONDENSED COMBINED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2001 and 2000 (Dollars in thousands) (Unaudited)
2001 2000 ----------- ----------- Cash flows from operating activities: Net income (loss) $ 1,117,368 $ (222,674) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 467,550 450,778 Equity in net loss of affiliates 14,340 1,500 Gain on sale of cable assets, net (1,431,778) -- Gain on investments, net (189,743) -- Write-off of deferred financing costs 6,610 -- (Gain) loss on sale of equipment, net 1,831 (1,246) Amortization of deferred financing and debenture discount 4,942 4,897 Tax benefit from exercise of stock options 82,580 -- Non-cash expenses attributed to RMG (5,577) (9,229) Change in assets and liabilities, net of effects of dispositions 61,714 (196,216) ----------- ----------- Net cash provided by operating activities 129,837 27,810 ----------- ----------- Cash flows from investing activities: Capital expenditures (654,637) (547,091) Payments for acquisitions, net of cash acquired -- (116,183) Net proceeds from sale of cable assets 293,153 -- Proceeds from sale of equipment 817 68 (Increase) decrease in investments in affiliates, net (21,915) (18,267) Increase in investment securities and other investments (15,022) -- Additions to intangible assets (303) (120) ----------- ----------- Net cash used in investing activities (397,907) (681,593) ----------- ----------- Cash flows from financing activities: Net proceeds from (repayments of) bank debt (1,234,610) 595,303 Preferred stock dividends (87,258) (7) Issuance of Cablevision common stock 7,084 10,079 Issuance of senior notes 996,790 -- Net proceeds from collateralized indebtedness 673,635 -- Payments on capital lease obligations and other debt (17,905) (14,599) Additions to deferred financing and other costs (43,255) (6,246) Net capital distributions (contributions) to RMG (11,929) 40,610 ----------- ----------- Net cash provided by financing activities 282,552 625,140 ----------- ----------- Net increase (decrease) in cash and cash equivalents 14,482 (28,643) Cash and cash equivalents at beginning of year 37,912 62,560 ----------- ----------- Cash and cash equivalents at end of period $ 52,394 $ 33,917 =========== ===========
See accompanying notes to condensed combined financial statements. IV-3 CABLEVISION NY GROUP (a combination of certain assets and businesses of Cablevision Systems Corporation) NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (Dollars in thousands) (Unaudited) Note 1. BASIS OF PRESENTATION The accompanying unaudited condensed combined financial statements of Cablevision NY Group have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Note 2. RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS The financial statements as of and for the three and six months ended June 30, 2001 and 2000 presented here are unaudited; however, in the opinion of management, such statements include all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. The interim financial statements should be read in conjunction with the audited combined financial statements and notes thereto included in Cablevision Systems Corporation's ("Cablevision") Annual Report on Form 10-K/A for the year ended December 31, 2000. The results of operations for the interim periods are not necessarily indicative of the results that might be expected for future interim periods or for the full year ending December 31, 2001. Note 3. RECLASSIFICATIONS Certain reclassifications have been made to the 2000 financial statements to conform to the 2001 presentation. Note 4. CASH FLOWS For purposes of the combined statements of cash flows, Cablevision NY Group considers short-term investments with a maturity at date of purchase of three months or less to be cash equivalents. Cablevision NY Group paid cash interest of approximately $247,701 and $243,070 during for the six months ended June 30, 2001 and 2000, respectively, and paid income taxes of approximately $35,321 for the six months ended June 30, 2001. IV-4 CABLEVISION NY GROUP (a combination of certain assets and businesses of Cablevision Systems Corporation) CONDENSED COMBINED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2001 and 2000 (Dollars in thousands) (Unaudited) (continued) Cablevision NY Group's noncash investing and financing activities and other supplemental data are presented below:
Six Months Ended June 30, --------------------------- 2001 2000 --------- --------- Capital lease obligations $ 1,525 $ 17,318 Contributions to equity method investees attributed to RMG (6,517) (16,004) Net payments on indebtedness attributed to RMG (20,576) (64,376) Payments of interest attributed to RMG (7,790) (7,211) Payments of stock plan obligations attributed to RMG (9,184) (8,662) Payments for acquisitions attributed to RMG, net of cash acquired (including the repayment of bank debt of $20,078) -- (140,600) Receipt of marketable securities in connection with the sale of cable assets 893,500 -- Attributed goodwill in connection with NBC's exchange of an interest in Rainbow Media Holdings for Cablevision's RMG Class A common stock 26,742 -- Contribution of feature film inventory from CNYG to RMG (4,332) -- Other net contributions from RMG 1,034 --
Note 5. TRANSACTIONS In January 2001, CSC Holdings, Inc. completed the sale of its cable systems in Boston and eastern Massachusetts to AT&T Corp. in exchange for AT&T's cable systems in certain northern New York suburbs, 44,260,932 shares of AT&T stock, valued at approximately $893,500 at closing, and approximately $293,200 in cash. Cablevision NY Group recognized a net gain of approximately $1,443,860. The acquisition of the cable systems from AT&T was accounted for as a purchase with the operations of the acquired systems being consolidated with those of Cablevision NY Group as of the acquisition date. The purchase price will be allocated to the specific assets acquired when an independent appraisal is obtained. Cablevision NY Group classified the shares of AT&T common stock as trading securities and for the six months ended June 30, 2001 recorded a gain on investments of $80,223 as a result of the increase in the fair value of such securities. On June 29, 2001, NBC-Rainbow Holding, Inc. exchanged a 0.9% interest in Rainbow Media Holdings, Inc. equity securities for 2,159,104 shares of Rainbow Media Group Class A tracking stock of Cablevision (valued at $48,742). In connection with this transaction, goodwill of IV-5 CABLEVISION NY GROUP (a combination of certain assets and businesses of Cablevision Systems Corporation) CONDENSED COMBINED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2001 and 2000 (Dollars in thousands) (Unaudited) (continued) approximately $26,742 was attributed to Cablevision NY Group. The goodwill will be allocated to the specific assets acquired when an independent appraisal is obtained. Note 6. INCOME TAXES Income tax expense for the six months ended June 30, 2001 differs from the statutory rate principally due to a $310,000 reduction in the valuation allowance. This reduction was based on several factors, including the closing of the sale of the cable television systems in Massachusetts. While a substantial portion of the gain on this sale is deferred for income tax purposes, Cablevision has the ability to record this taxable gain before its operating loss carry forwards expire. The amount of the deferred gain, together with Cablevision's ability to control the timing of its recognition for tax purposes, provided substantial positive evidence of the recoverability of the deferred tax asset. In addition, the valuation allowance was reduced by $82,600 which represents the value of tax deductions for certain stock option exercises. This amount was credited to attributed net deficiency. Note 7. DERIVATIVES Effective January 1, 2001, Cablevision NY Group adopted Statement of Financial Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES", as amended, ("SFAS 133"). The statement requires that all derivative financial instruments, such as interest rate swap contracts, be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized as a component of comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. To manage interest rate risk, Cablevision NY Group has from time to time entered into interest rate swap contracts to adjust the proportion of total debt that is subject to variable and fixed interest rates. Such contracts fix the borrowing rates on floating rate debt to provide an economic hedge against the risk of rising rates and/or convert fixed rate borrowings to variable rate to provide an economic hedge against the risk of higher borrowing costs in a declining interest rate environment. As of June 30, 2001, Cablevision NY Group had interest rate swap agreements to pay floating rates of interest with a total notional value of $775,000. The swap agreements had a fair value of approximately $6,254 at June 30, 2001 and are reflected in the accompanying combined balance sheets. These agreements have not been designated as hedges for accounting purposes. As a result, the increase in the fair value of the swap agreements for the six months ended June 30, 2001 of approximately $4,274 is reflected in other income (expense): miscellaneous in the accompanying combined statements of operations. IV-6 CABLEVISION NY GROUP (a combination of certain assets and businesses of Cablevision Systems Corporation) CONDENSED COMBINED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2001 and 2000 (Dollars in thousands) (Unaudited) (continued) Cablevision NY Group has also entered into various transactions to provide an economic hedge against equity price risk on certain of its stock holdings. As of June 30, 2001, Cablevision NY Group had monetized all of its stock holdings in Charter Communications Inc. and Adelphia Communications Corporation through the execution of prepaid forward contracts, collateralized by an equivalent amount of the respective underlying stock. Such contracts set a floor and ceiling on Cablevision NY Group's participation in changes in the underlying stock prices, thus eliminating downside exposure to market risk while providing for upside appreciation potential to the respective ceiling price. At maturity, the contracts provide for the option to deliver cash or shares of Charter Communications or Adelphia Communications stock (as the case may be), with a value determined by reference to the applicable stock price at maturity. Cablevision NY Group received proceeds of $673,635, net of prepaid interest of $32,267, upon execution of these contracts. Such contracts have not been designated as hedges for accounting purposes. Therefore, the fair values of the forward contracts have been reflected in the accompanying combined balance sheets and the net decrease in the fair values of the equity derivative component of the prepaid forward contracts of $17,296 is included in other income (expense): miscellaneous in the accompanying combined statements of operations. With the adoption of SFAS 133, the shares of Charter Communications and Adelphia Communications common stock were reclassified from securities available-for-sale to trading securities. As a result, Cablevision NY Group recorded a gain on investments of $286,440 representing the accumulated unrealized gains as of January 1, 2001. For the six months ended June 30, 2001, Cablevision NY Group recorded a loss on investments of $107,348 representing the net decrease in the fair value of such securities for the period. Note 8. DEBT In June 2001, CSC Holdings and certain of its subsidiaries ("Restricted Group") repaid the outstanding balance under its $2.2 billion reducing revolving credit facilities with borrowings under a new $2.4 billion revolving credit facility which matures on June 30, 2006 with no interim commitment reductions. Interest on outstanding amounts may be paid, at CSC Holdings' option, based on the prime rate or a Eurodollar rate plus a margin. In March 2001, CSC Holdings issued $1,000,000 face amount of 7-5/8% senior notes due 2011. The notes were issued at a discount of $3,210. The net proceeds were used to reduce bank debt outstanding. The notes are not redeemable by CSC Holdings prior to maturity. Note 9. AT HOME As of June 30, 2001 and 2000, deferred revenue derived from the receipt of At Home warrants, net of amortization taken, amounted to approximately $64,064 and $131,419, respectively. For IV-7 CABLEVISION NY GROUP (a combination of certain assets and businesses of Cablevision Systems Corporation) CONDENSED COMBINED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2001 and 2000 (Dollars in thousands) (Unaudited) (continued) the six months ended June 30, 2001 and 2000, Cablevision NY Group recognized approximately $35,626 and $30,000, respectively, of this deferred revenue. For the six months ended June 30, 2001, Cablevision NY Group recognized a loss on investments of approximately $69,573 reflecting the decline in the fair value of the warrants. In April 2001, Excite@Home announced it had decided to terminate its relationship with Cablevision and that it would seek to recover the At Home warrants previously issued to Cablevision. On April 25, 2001, At Home Corporation commenced a lawsuit in the Court of Chancery of the State of Delaware alleging that Cablevision had breached its obligations under certain agreements with At Home. The suit seeks a variety of remedies including: recision of the agreements between At Home and Cablevision and cancellation of all warrants currently held by Cablevision, damages, and/or an order prohibiting Cablevision from continuing to offer its Optimum Online service and requiring it to convert its Optimum Online customers to the Optimum@Home service and to roll out the Optimum@Home service. Cablevision is vigorously contesting this lawsuit. Cablevision currently holds warrants to purchase 20,462,596 shares of At Home common stock, exercisable at a price of $0.25 per share. Note 10. SEGMENT INFORMATION Cablevision NY Group's reportable segments are strategic business units that are managed separately. Cablevision NY Group evaluates segment performance based on several factors, of which the primary financial measure is business segment adjusted operating cash flow (defined as operating income or loss before depreciation and amortization, incentive stock plan income or expense and the costs of Year 2000 remediation).
Six Months Ended June 30, Three Months Ended June 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- REVENUES Telecommunication Services $ 1,116,003 $ 1,163,357 $ 573,016 $ 596,289 MSG 398,305 418,162 181,406 193,864 Retail Electronics 307,070 295,758 156,207 159,102 All Other 90,729 96,759 46,682 50,396 Intersegment Eliminations (76,119) (66,585) (39,465) (35,186) ----------- ----------- ----------- ----------- Total $ 1,835,988 $ 1,907,451 $ 917,846 $ 964,465 =========== =========== =========== =========== ADJUSTED OPERATING CASH FLOW Telecommunication Services $ 438,078 $ 483,245 $ 223,517 $ 244,579 MSG 55,080 67,216 39,712 44,200 Retail Electronics (32,204) (31,768) (14,812) (13,880) All Other (53,063) (42,338) (28,008) (21,378) ----------- ----------- ----------- ----------- Total $ 407,891 $ 476,355 $ 220,409 $ 253,521 =========== =========== =========== ===========
IV-8 CABLEVISION NY GROUP (a combination of certain assets and businesses of Cablevision Systems Corporation) CONDENSED COMBINED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2001 and 2000 (Dollars in thousands) (Unaudited) (continued) A reconciliation of reportable segment amounts to the combined balances is as follows:
Six Months Ended June 30, Three Months Ended June 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- REVENUE Total revenue for reportable segments $ 1,821,378 $ 1,877,277 $ 910,629 $ 949,255 Other revenue and intersegment eliminations 14,610 30,174 7,217 15,210 ----------- ----------- ----------- ----------- Total consolidated revenue $ 1,835,988 $ 1,907,451 $ 917,846 $ 964,465 =========== =========== =========== =========== ADJUSTED OPERATING CASH FLOW TO NET LOSS Total adjusted operating cash flow for reportable segments $ 460,954 $ 518,693 $ 248,417 $ 274,899 Other adjusted operating cash flow deficit (53,063) (42,338) (28,008) (21,378) Items excluded from adjusted operating cash flow: Depreciation and amortization (467,550) (450,778) (229,600) (227,146) Incentive stock plan income (expense) 4,663 5,871 24,342 (32,099) Year 2000 remediation -- (3,424) -- (913) Interest expense (260,984) (248,771) (131,068) (127,380) Interest income 12,485 3,611 4,043 1,797 Equity in net loss of affiliates (14,340) (1,500) (10,824) (971) Gain (loss) on sale of cable assets, net 1,431,778 -- (1,714) -- Write-off of deferred financing costs (6,610) -- (6,610) -- Gain (loss) on investments, net 189,743 -- (25,089) -- Miscellaneous, net (20,076) (4,038) (15,967) (3,889) ----------- ----------- ----------- ----------- Income (loss) before income taxes and dividend requirements $ 1,277,000 $ (222,674) $ (172,078) $ (137,080) =========== =========== =========== ===========
Substantially all revenues and assets of Cablevision NY Group's reportable segments are attributed to or located in the United States. Cablevision NY Group does not have a single external customer which represents 10 percent or more of its combined revenues. Note 11. COMPREHENSIVE INCOME Other comprehensive income for the six months ended June 30, 2001 of $5,120 represents unrealized net gains on available-for-sale securities. IV-9 CABLEVISION NY GROUP (a combination of certain assets and businesses of Cablevision Systems Corporation) CONDENSED COMBINED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2001 and 2000 (Dollars in thousands) (Unaudited) (continued) Note 12. INVESTMENTS Rainbow Media Holdings holds a 50% interest in R/L DBS Company LLC, a joint venture with Loral Space and Communications, Ltd. R/L DBS holds certain frequencies granted by the FCC for the operation of a direct broadcast satellite business. In December 2000, the FCC granted an extension to R/L DBS' construction permit relating to the direct broadcast satellite frequencies held by R/L DBS. The extension requires the launch of a satellite and commencement of service offerings by not later than December 29, 2003, with specified six month interim construction milestones, non-compliance with which will result in the forfeiture of the construction permit. R/L DBS has entered into an agreement with a satellite manufacturer for the construction of a satellite scheduled to be delivered in May 2003. R/L DBS plans to make payments to the manufacturer aggregating approximately $35,800 in the quarter ending September 30, 2001. Cablevision continues to evaluate the scope of its pursuit of a direct broadcast satellite business, including exploring opportunities for strategic partnerships for R/L DBS. The contract with the manufacturer permits R/L DBS to terminate at its option at any time and receive a refund of a portion of amounts paid through the date of such termination. IV-10