10-Q 1 a06-19794_310q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

 

UNITED STATES 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, 2006

 

OR

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to              

 

Commission File
Number

 

Registrant; State of Incorporation;
Address and Telephone Number

 

IRS Employer
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

 

o

 

No

 

x

CSC Holdings, Inc.

 

Yes

 

o

 

No

 

x

 

Indicate by check mark whether the Registrants are large accelerated filers, accelerated filers or non-accelerated filers.  (See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).

 

 

Large accelerated
filer

 

Accelerated
filer

 

Non-accelerated
filer

 

 

 

 

 

 

 

 

 

 

 

 

 

Cablevision Systems Corporation

 

Yes

x

 

No

o

 

Yes

o

 

No

o

 

Yes

o

 

No

o

CSC Holdings, Inc.

 

Yes

o

 

No

o

 

Yes

o

 

No

o

 

Yes

x

 

No

o

 

Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).

 

Cablevision Systems Corporation

 

Yes

 

o

 

No

 

x

CSC Holdings, Inc.

 

Yes

 

o

 

No

 

x

 

Number of shares of common stock outstanding as of September 12, 2006:

 

Cablevision NY Group Class A Common Stock -

 

228,333,948

 

Cablevision NY Group Class B Common Stock -

 

63,736,814

 

CSC Holdings, Inc. Common Stock -

 

11,595,635

 

 

CSC Holdings, Inc. meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format applicable to CSC Holdings, Inc.

 




CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements of Cablevision Systems Corporation and Subsidiaries

 

6

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets - June 30, 2006 (unaudited) and December 31, 2005

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations - Three and Six Months Ended June 30, 2006 and 2005 (unaudited)

 

8

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2006 and 2005 (unaudited)

 

9

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

10

 

 

 

 

 

 

 

Financial Statements of CSC Holdings and Subsidiaries

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets - June 30, 2006 (unaudited) and December 31, 2005

 

44

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations - Three and Six Months Ended June 30, 2006 and 2005 (unaudited)

 

46

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2006 and 2005 (unaudited)

 

47

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

48

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations of Cablevision Systems Corporation and Subsidiaries

 

76

 

 

 

 

 

Item 3.

 

Quantitative And Qualitative Disclosures About Market Risk

 

109

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

111

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

112

 

 

 

 

 

Item 1A.

 

Risk Factors

 

116

 

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

117

 

 

 

 

 

Item 5.

 

Other Information

 

118

 

 

 

 

 

Item 6.

 

Exhibits

 

118

 

 

 

 

 

SIGNATURES

 

119

 

See Explanatory Note on page 2.

1




 

EXPLANATORY NOTE

In this Form 10-Q, Cablevision Systems Corporation (“Cablevision”) and CSC Holdings, Inc. (“CSC Holdings” and collectively with Cablevision, the “Company” or the “Registrants”) are restating their consolidated financial statements as of and for the three and six months ended June 30, 2005.  These restatements are being made to reflect additional non-cash stock based compensation (expense) benefit, and related income tax effects, relating to a number of stock option grants, including modifications, during the period 1997 through 2002, as well as certain other impacts associated with other forms of stock based compensation.

The effects of these restatements are reflected in the financial statements and other financial data included in this Form 10-Q.  See Note 3 of our condensed consolidated financial statements included in this Form 10-Q.  As previously disclosed in our Current Report on Form 8-K filed on August 8, 2006, the consolidated financial statements and related financial information contained in our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q for all fiscal periods and all interim periods ending on or before March 31, 2006 should no longer be relied upon and should be read only in conjunction with the information contained in our Form 10-K/A as of and for the year ended December 31, 2005.  See Note 3 of our condensed consolidated financial statements included in this Form 10-Q.

The Company announced on August 8, 2006, that in light of published reports concerning the pricing of stock options and the timing of stock option grants at numerous other companies, the Company had undertaken a voluntary review of its past practices in connection with grants of stock options and stock appreciation rights (“SARs”). As a result of the review which was conducted with a law firm that was not previously involved with the Company’s stock option plans, the Company determined that the grant date and exercise price assigned to a number of its stock option and SAR grants during the 1997-2002 period did not correspond to the actual grant date and the closing price of Cablevision’s common stock on the actual grant date.  In such cases, the date assigned to the grant corresponded to the date of a unanimous written consent executed by the members of the compensation committee of the Company’s Board of Directors, but the date of that consent did not correspond to the actual date of the grant.  In nearly all such cases, the stock price on the assigned date was lower, sometimes substantially lower, than the price on the date the award was actually granted.  At all relevant times, the Company’s stock plan required that the exercise price of options be not less than the fair market value per share of the Company’s common stock on the date of grant.  The former officers of the Company and the Company’s former compensation consultant who were identified in the stock options review as having directly participated in the options dating process have either retired or had their relationship with the Company otherwise terminated (in every case more than one year prior to the commencement of the stock options review).

In addition to grant dating issues, the Company’s review identified certain modifications made to outstanding stock option award grants, principally extensions of expiration dates that were not accounted for properly.  In addition, two awards of options and one option modification were also incorrectly accounted for as having been granted to employees or modified for employees.  One of these two awards was to the Company’s former compensation consultant (which was subsequently cancelled in 2003) and the other award related to an executive officer whose death occurred after the stated grant date of the award and before the actual grant date.  The option modification that was incorrectly accounted for related to the options issued to this executive officer.  Management of the Company has concluded that the Company’s consolidated financial statements for the years ended December 31, 2005, 2004 and 2003, all quarterly periods in 2005 and 2004 and the quarter ended March 31, 2006 should be restated to adjust previously recognized amounts of non-cash stock based compensation (expense) benefit resulting from the Company’s stock option review.

2




The restatement of the Company’s previously issued financial statements reflects the following:

(a)                                  the recognition of compensation (expense) benefit related to stock options affected by the grant dating issues;

(b)                                 the recognition of compensation (expense) benefit related to certain stock options that were incorrectly accounted for as if the stock options were granted to employees and compensation expense related to a modification of certain of those stock options;

(c)                                  the recognition of compensation (expense) benefit related to modifications of certain employee stock options subsequent to the date of grant to extend the expiration date;

(d)                                 adjustments to previously recognized income tax benefit as a result of certain stock options and SARs that were granted to certain of the Company’s executive officers with exercise prices that were  less than fair market value of Cablevision’s common stock on the actual date of grant and, therefore, did not qualify as deductible performance-based compensation in accordance with Internal Revenue Code section 162(m) (“IRC 162(m)”); and

(e)                                  adjustments to income tax (expense) benefit related to items (a) through (c) above giving consideration to whether income tax benefit has been or is anticipated to be disallowed pursuant to IRC 162(m).

In addition, and not resulting from the review described above, the Company has also restated its previously issued financial statements to reflect the following stock based compensation related items which were identified by the Company prior to the initiation of the stock option review but were not previously reflected in the Company’s financial statements.  Although the Company concluded that such adjustments were not material to prior periods at the time the related accounting impacts were initially identified, the Company has concluded it is appropriate to include these adjustments in this restatement since such items relate to stock based compensation related matters.

1)                                      the recognition of compensation (expense) benefit related to certain stock option awards granted after July 1, 2000 and the associated income tax impacts that were originally accounted for as fixed awards with no compensation (expense) benefit recognized that should have been accounted for as variable awards through December 31, 2005 due to a dividend participation feature included in the Company’s stock option plans.  The accounting impacts associated with the dividend participation feature were initially identified by the Company’s management during the Company’s review of the impact of Cablevision’s proposed special cash dividend (which was paid in April 2006); and

2)                                      adjustments to previously recognized income tax benefits regarding the approach used to determine the tax benefit recognized with regard to compensation expense associated with restricted share awards for certain executive officers as limited by IRC 162(m).

The Company has restated its consolidated financial statements for the years ended December 31, 2005, 2004 and 2003, all quarterly periods in 2005 and 2004 and the quarter ended March 31, 2006.  The impact of the restatement adjustments extended to periods back to the year ended December 31, 1997 through the period ended March 31, 2006.

The Company has notified the Internal Revenue Service of the stock option review.  Under Section 162(m) of the Internal Revenue Code (“IRC 162(m)”) stock options and SARs that are in-the-money at the time of grant do not qualify as performance-based compensation and the Company is not entitled to a deduction for the compensation expense related to the exercise of those options or SARs held by officers who are covered by IRC 162(m).  The Company has provided to the Internal Revenue Service an adjustment to reduce the Company’s net operating loss carry forward by $86.2 million for all tax years through December 31, 2004 and in connection with the Company’s filing of its 2005 tax return, the net operating loss carry forward was further reduced by $2.2 million.  As so reduced, the Company had a net operating loss carry forward at December 31, 2005 of $3.1 billion.  The estimated amount of potential future compensation costs that would not be deductible for tax purposes pursuant to IRC 162(m) relating to stock options and SARs that were granted with exercise prices that were less than fair market value of Cablevision’s common stock on the actual date of grant that are currently outstanding and held by current executive officers would be less than $1 million if exercised at Cablevision’s common stock price on September 15, 2006.

On September 20, 2006, Richard Hochman delivered to the Company a letter resigning from the Compensation Committee and the Audit Committee of the Board of Directors, and Victor Oristano delivered a letter resigning from the Audit Committee.  Messrs. Hochman and Oristano stated in their respective letters that, in light of the public attention generated by the Company's decision to restate its financial statements as a result of the stock option review, as well as the numerous shareholder lawsuits filed in the wake of that decision naming them, among others, as defendants, they believe it is in the best interest of the Company for them to step down from these positions.

3




The table below reflects the impacts of the restatement adjustments discussed above on the Company’s condensed consolidated statements of operations for the periods presented below:

 

 

Additional income (expense)

 

 

 

Three months
ended
June 30, 2005

 

Six months
ended
June 30, 2005

 

Cumulative
(January 1, 1997
through
March 31, 2006)

 

 

 

 

 

 

 

 

 

Stock option grant date changes

 

$

(4,152

)

$

(7,969

)

$

(67,609

)

Stock option grants and modifications of options to non-employees

 

110

 

219

 

(11,051

)

Modifications to employee stock option awards

 

143

 

286

 

(8,021

)

Option awards originally recorded as fixed awards that were subsequently determined to be variable awards

 

(7,976

)

(13,144

)

(6,034

)

Total pre-tax stock option related accounting adjustments (a)

 

(11,875

)

(20,608

)

(92,715

)

Income tax impact of restatement adjustments above

 

4,861

 

8,436

 

36,730

 

Income tax adjustments related to IRC 162(m) resulting from adjustments due to grant date changes

 

(219

)

(1,053

)

(23,749

)

Income tax adjustments related to IRC 162(m) for restricted shares

 

(990

)

(2,200

)

(9,507

)

Total tax adjustments

 

3,652

 

5,183

 

3,474

 

Total adjustments to net income (loss)

 

$

(8,223

)

$

(15,425

)

$

(89,241

)

 


Note:       The additional income reflected in the pre-tax adjustments in the table above relate the reversal of previously recognized compensation expense for forfeitures of stock based awards in the period prior to vesting and certain restricted stock award adjustments.

(a)                      Recorded as adjustments to selling, general and administrative expense except for expense of $171 and $302 recorded as adjustments to equity in net income or loss of affiliates for the three and six months ended June 30, 2005, respectively, due to allocations of stock based compensation expense to certain affiliates accounted for under the equity method.

*              *              *

 

The Company’s Board of Directors and senior management believe that the practices related to the granting of options during 1997-2002 discussed above are contrary to the high ethical standards they believe should apply to all of the Company’s business practices.

 

The Company has previously taken or is in the process of taking additional steps to enhance certain compensation practices, including the following:

(a)   Any regular grants of equity-based and incentive compensation awards will take place promptly following the announcement of our annual financial results.

(b)   Equity-based and other incentive compensation awards will be made only at meetings of the Board and/or the Compensation Committee and will not be approved through unanimous written consents.*

(c)   The Secretary or another appropriate member of the Company’s legal department will attend all meetings of the Compensation Committee.*

(d)   Letters documenting equity and other awards to employees will be distributed promptly following the grant of awards.*

(e)   The Compensation Committee will review the roles of senior management, compensation consultants and the committee in the compensation process.


* Items b), c) and d) above were implemented prior to December 31, 2005

 

The Board of Directors is also considering appropriate financial remedies to be sought with respect to options or SARs that were issued with exercise prices that were lower than the fair market value per share of the Company’s common stock on the actual date of grant and from whom such remedies may be sought.

PART I.  FINANCIAL INFORMATION

This Quarterly Report on Form 10-Q for the period ended June 30, 2006 is separately filed by Cablevision Systems Corporation (“Cablevision”) and CSC Holdings, Inc. (“CSC Holdings” and collectively with Cablevision and their subsidiaries, the “Company” or “we”, “us” or “our”).

This Quarterly Report contains statements that constitute forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995, including restructuring charges, availability under credit facilities, levels of capital expenditures, sources of funds and funding requirements, the Company’s estimated adjustments to the Company’s financial statements that will be necessary as a result of the implementation of SAB 108, among others.  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:

4




 

·                  the level of our revenues;

·                  competition from existing competitors (such as direct broadcast satellite (“DBS”) providers) and new competitors (such as telephone companies and high-speed wireless providers) entering our franchise areas;

·                  demand for and growth of our digital video, high-speed data and voice services, which are impacted by competition from other services and the other factors discussed herein;

·                  the cost of programming and industry conditions;

·                  the regulatory environment in which we operate;

·                  developments in the government investigations and litigation related to past practices of the Company in connection with grants of stock options and stock appreciation rights (“SARs”);

·                  developments in the government investigations relating to improper expense recognition and the timing of recognition of launch support, marketing and other payments under affiliation agreements;

·                  the outcome of litigation and other proceedings, including the matters described under “Legal Matters” and “Other Matters” in the notes to our condensed consolidated financial statements;

·                  general economic conditions in the areas in which we operate;

·                  demand for advertising inventory;

·                  our ability to obtain content for our programming businesses;

·                  the level of our capital expenditures;

·                  the level of our expenses;

·                  future acquisitions and dispositions of assets;

·                  the demand for our programming among other cable television and DBS operators and our ability to maintain and renew affiliation agreements with cable television and DBS operators;

·                  market demand for new services;

·                  whether pending uncompleted transactions, if any, are completed on the terms and at the times set forth (if at all);

·                  the level of exit costs, including the outcome of certain pending litigation, we will incur in completing the shutdown of the Rainbow DBS satellite distribution business;

·                  other risks and uncertainties inherent in the cable television business, the programming and entertainment businesses and our other businesses;

·                  financial community and rating agency perceptions of our business, operations, financial condition and the industry in which we operate; and

·                  the factors described in our filings with the Securities and Exchange Commission, including under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained therein.

We disclaim any obligation to update or revise the forward-looking statements contained herein, except as otherwise required by applicable federal securities laws.

5




 

Item 1.                                   Financial Statements

CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

535,393

 

$

397,496

 

Restricted cash

 

9,786

 

8,454

 

Accounts receivable, trade (less allowance for doubtful accounts of $17,856 and $18,807)

 

407,994

 

421,950

 

Notes and other receivables

 

35,154

 

74,141

 

Investment securities

 

10,130

 

10,408

 

Prepaid expenses and other current assets

 

95,810

 

98,921

 

Feature film inventory, net

 

107,321

 

108,607

 

Deferred tax asset

 

77,415

 

10,788

 

Advances to affiliates

 

44

 

70

 

Investment securities pledged as collateral

 

456,603

 

723,476

 

Derivative contracts

 

140,192

 

268,539

 

Assets held for sale

 

 

7,557

 

Total current assets

 

1,875,842

 

2,130,407

 

 

 

 

 

 

 

Property, plant and equipment, net of accumulated depreciation of $5,953,993 and $5,494,994

 

3,847,076

 

3,868,077

 

Investments in affiliates

 

43,219

 

39,463

 

Investment securities pledged as collateral

 

493,674

 

199,430

 

Notes and other receivables

 

45,165

 

42,987

 

Derivative contracts

 

48,814

 

109,207

 

Other assets

 

80,032

 

83,801

 

Deferred tax asset

 

 

25,662

 

Long-term feature film inventory, net

 

388,847

 

378,502

 

Deferred carriage fees, net

 

176,579

 

188,135

 

Franchises

 

731,848

 

731,848

 

Affiliation, broadcast and other agreements, net of accumulated amortization of $383,638 and $349,752

 

485,477

 

519,363

 

Other intangible assets, net of accumulated amortization of $81,782 and $68,192

 

369,032

 

388,622

 

Excess costs over fair value of net assets acquired

 

987,406

 

993,426

 

Deferred financing and other costs, net of accumulated amortization of $60,429 and $85,450

 

141,814

 

120,965

 

 

 

$

9,714,825

 

$

9,819,895

 

 

See accompanying notes to
condensed consolidated financial statements.

6




 

CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Dollars in thousands)

 

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

(unaudited)

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

389,300

 

$

373,362

 

Accrued liabilities

 

1,014,147

 

944,956

 

Accounts payable to affiliates

 

2,359

 

1,467

 

Deferred revenue

 

102,512

 

140,723

 

Feature film and other contract obligations

 

106,759

 

112,817

 

Liabilities under derivative contracts

 

41,908

 

101,580

 

Current portion of bank debt

 

66,000

 

8,560

 

Current portion of collateralized indebtedness

 

526,376

 

857,774

 

Current portion of capital lease obligations

 

8,004

 

8,586

 

Notes payable

 

13,249

 

8,438

 

Total current liabilities

 

2,270,614

 

2,558,263

 

 

 

 

 

 

 

Feature film and other contract obligations

 

346,329

 

351,673

 

Deferred revenue

 

15,272

 

16,219

 

Deferred tax liability

 

10,429

 

 

Liabilities under derivative contracts

 

51,779

 

17,571

 

Other long-term liabilities

 

350,862

 

361,018

 

Bank debt

 

5,017,750

 

1,842,940

 

Collateralized indebtedness

 

464,362

 

312,352

 

Senior notes and debentures

 

5,993,358

 

5,992,760

 

Senior subordinated notes and debentures

 

496,816

 

746,621

 

Notes payable

 

1,017

 

7,467

 

Capital lease obligations

 

57,773

 

51,201

 

Minority interests

 

45,699

 

55,190

 

Total liabilities

 

15,122,060

 

12,313,275

 

 

 

 

 

 

 

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, 250,530,197 and 247,430,685 shares issued and 228,308,962 and 225,268,714 shares outstanding

 

2,506

 

2,474

 

CNYG Class B Common Stock, $.01 par value, 320,000,000 shares authorized, 63,736,814 and 64,160,264 shares issued and outstanding

 

637

 

642

 

RMG Class A Common Stock, $.01 par value, 600,000,000 shares authorized, none issued

 

 

 

RMG Class B Common Stock, $.01 par value, 160,000,000 shares authorized, none issued

 

 

 

Paid-in capital

 

22,991

 

1,307,786

 

Accumulated deficit

 

(5,069,749

)

(3,440,967

)

 

 

(5,043,615

)

(2,130,065

)

Treasury stock, at cost (22,221,235 and 22,161,971 shares)

 

(360,058

)

(359,753

)

Accumulated other comprehensive loss

 

(3,562

)

(3,562

)

Total stockholders’ deficiency

 

(5,407,235

)

(2,493,380

)

 

 

$

9,714,825

 

$

9,819,895

 

 

See accompanying notes to
condensed consolidated financial statements

7




 

CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended June 30, 2006 and 2005
 (
Dollars in thousands, except per share data)
(Unaudited)

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

(As restated)

 

 

 

(As restated)

 

Revenues, net

 

$

1,423,923

 

$

1,231,859

 

$

2,833,281

 

$

2,444,985

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Technical and operating (excluding depreciation, amortization and impairments shown below)

 

602,530

 

518,849

 

1,272,737

 

1,073,151

 

Selling, general and administrative

 

374,306

 

342,202

 

733,010

 

670,062

 

Restructuring charges (credits)

 

(2,069

)

49

 

(2,754

)

655

 

Depreciation and amortization (including impairments)

 

282,653

 

275,690

 

560,058

 

538,379

 

 

 

1,257,420

 

1,136,790

 

2,563,051

 

2,282,247

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

166,503

 

95,069

 

270,230

 

162,738

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

(249,581

)

(191,686

)

(442,713

)

(382,550

)

Interest income

 

16,995

 

6,272

 

22,895

 

9,803

 

Equity in net income (loss) of affiliates

 

1,787

 

1,474

 

3,195

 

(677

)

Write-off of deferred financing costs

 

(3,412

)

 

(7,999

)

 

Gain on sale of affiliate interests

 

 

65,483

 

 

65,483

 

Gain (loss) on investments, net

 

70,953

 

(66,006

)

78,191

 

(77,147

)

Gain (loss) on derivative contracts, net

 

(35,835

)

66,167

 

(42,615

)

64,535

 

Loss on extinguishment of debt

 

(13,125

)

 

(13,125

)

 

Minority interests

 

(2,435

)

(1,809

)

(3,772

)

(245

)

Miscellaneous, net

 

(175

)

(250

)

8

 

(113

)

 

 

(214,828

)

(120,355

)

(405,935

)

(320,911

)

Loss from continuing operations before income taxes

 

(48,325

)

(25,286

)

(135,705

)

(158,173

)

Income tax benefit (expense)

 

22,209

 

(1,677

)

54,867

 

35,512

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

(26,116

)

(26,963

)

(80,838

)

(122,661

)

Income from discontinued operations, net of taxes

 

40,702

 

240,761

 

38,316

 

210,322

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before cumulative effect of a change in accounting principle

 

14,586

 

213,798

 

(42,522

)

87,661

 

Cumulative effect of a change in accounting principle, net of taxes

 

 

 

(862

)

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

14,586

 

$

213,798

 

$

(43,384

)

$

87,661

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.09

)

$

(0.09

)

$

(0.29

)

$

(0.43

)

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

$

0.14

 

$

0.84

 

$

0.14

 

$

0.73

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of a change in accounting principle

 

$

 

$

 

$

 

$

 

Net income (loss)

 

$

0.05

 

$

0.74

 

$

(0.15

)

$

0.30

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares (in thousands)

 

283,592

 

288,143

 

283,273

 

288,000

 

 

See accompanying notes to
condensed consolidated financial statements.

8




 

CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2006 and 2005
(Dollars in thousands)
(Unaudited)

 

 

2006

 

2005

 

 

 

 

 

(As restated)

 

Cash flows from operating activities:

 

 

 

 

 

Loss from continuing operations

 

$

(80,838

)

$

(122,661

)

Adjustments to reconcile loss from continuing operations to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization (including impairments)

 

560,058

 

538,379

 

Equity in net loss (income) of affiliates

 

(3,195

)

677

 

Minority interests

 

3,772

 

245

 

Gain on sale of affiliate interests

 

 

(65,483

)

Loss (gain) on investments, net

 

(78,191

)

77,147

 

Write-off of deferred financing costs

 

7,999

 

 

Unrealized loss (gain) on derivative contracts

 

21,102

 

(81,462

)

Loss on extinguishment of debt

 

13,125

 

 

Amortization of deferred financing, discounts on indebtedness and other deferred costs

 

38,531

 

43,630

 

Share-based compensation expense related to equity classified awards

 

30,124

 

37,654

 

Deferred income tax

 

(60,265

)

(42,025

)

Amortization and write-off of feature film inventory

 

61,853

 

52,490

 

Provision for doubtful accounts

 

20,715

 

20,734

 

Changes in other assets and liabilities

 

(78,363

)

(48,422

)

Net cash provided by operating activities

 

456,427

 

410,903

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(488,526

)

(353,518

)

Payment for acquisitions

 

 

(4,231

)

Proceeds from sale of equipment, net of costs of disposal

 

8,000

 

3,294

 

Decrease in investment securities and other investments

 

716

 

74

 

Increase in restricted cash

 

(1,332

)

(38,766

)

Additions to other intangible assets

 

(1,249

)

(11,463

)

Increase in investments in affiliates, net

 

 

(58

)

Net cash used in investing activities

 

(482,391

)

(404,668

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from bank debt

 

4,900,000

 

225,250

 

Repayment of bank debt

 

(1,667,750

)

(692,442

)

Redemption of senior subordinated debentures

 

(263,125

)

 

Issuance of common stock

 

10,580

 

10,545

 

Proceeds from collateralized indebtedness

 

223,005

 

119,396

 

Repayment of collateralized indebtedness

 

(228,862

)

(118,396

)

Dividend distribution to common stockholders

 

(2,837,967

)

 

Proceeds from derivative contracts

 

6,496

 

 

Payments on capital lease obligations and other debt

 

(4,420

)

(6,965

)

Deemed contribution from stockholder

 

 

9,822

 

Additions to deferred financing and other costs

 

(42,004

)

(70

)

Distributions to minority partners

 

(13,263

)

(8,072

)

Net cash provided by (used in) financing activities

 

82,690

 

(460,932

)

 

 

 

 

 

 

Net effect of exchange rate changes on cash and cash equivalents

 

 

191

 

Net increase (decrease) in cash and cash equivalents from continuing operations

 

56,726

 

(454,506

)

 

 

 

 

 

 

Cash flows of discontinued operations (Revised - see Note 6):

 

 

 

 

 

Net cash provided by (used in) operating activities

 

76,704

 

(74,652

)

Net cash provided by (used in) investing activities

 

4,467

 

(120,253

)

Net change in cash classified in assets held for sale

 

 

95,337

 

Net effect of discontinued operations on cash and cash equivalents

 

81,171

 

(99,568

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of year

 

397,496

 

771,479

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

535,393

 

$

217,405

 

 

See accompanying notes to
condensed consolidated financial statements.

9




CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)

NOTE 1.                         BUSINESS

Cablevision Systems Corporation and its majority-owned subsidiaries (“Cablevision” or the “Company”) own and operate cable television systems and through the Company’s subsidiary, Rainbow Media Holdings LLC, have ownership interests in companies that produce and distribute national and regional entertainment and sports programming services, including Madison Square Garden, L.P.  The Company also owns companies that provide advertising sales services for the cable television industry, provide telephone service, operate motion picture theaters, and through April 30, 2005, provided direct broadcast satellite service.  The Company classifies its business interests into three segments:  Telecommunications Services, consisting principally of its video, high-speed data, and Voice over Internet Protocol services and its commercial data and voice services operations of its Cablevision Lightpath subsidiary; Rainbow, consisting principally of interests in national and regional cable television programming networks, including AMC, The Independent Film Channel, WE tv (formerly WE: Women’s Entertainment), fuse and the VOOM HD Networks; and Madison Square Garden, which owns and operates professional sports teams, regional cable television sports programming networks and an entertainment business.

NOTE 2.                         BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information.  Accordingly, these financial statements do not include all the information and notes required for complete annual financial statements.

The financial statements as of June 30, 2006 and for the three and six months ended June 30, 2006 and 2005 presented in this Form 10-Q are unaudited; however, in the opinion of management, such financial statements include all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented.

The accompanying condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries.  All significant intercompany transactions and balances have been eliminated in consolidation.

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, 2006.

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, 2005.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period.  Actual results could differ from those estimates.

10




 

Share-based Compensation

On January 1, 2006, the Company adopted Financial Accounting Standards No. 123R, Share-Based Payment (“Statement No. 123R”), that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments.  Statement No. 123R eliminates the ability to account for share-based compensation transactions, as the Company formerly did, using the intrinsic value method as prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and generally requires that such transactions be accounted for using a fair-value-based method and recognize such fair value of share-based payments as expenses in the consolidated statement of operations.

The Company adopted Statement No. 123R using the modified prospective method as of January 1, 2006. The Company’s condensed consolidated financial statements as of and for the three and six months ended June 30, 2006 reflect the impact of adopting Statement No. 123R.  In accordance with the modified prospective method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of Statement No. 123R (See Note 8).

Share-based compensation expense recognized during the period is based on the fair value of the portion of share-based payment awards that is ultimately expected to vest.  Share-based compensation expense recognized in the condensed consolidated statement of operations during the three and six months ended June 30, 2006 included compensation expense for share-based payment awards granted prior to, but not yet vested, as of December 31, 2005 based on the grant date fair value estimated in accordance with the pro forma provisions of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“Statement No. 123”).  As share-based compensation expense recognized in the statements of operations for the three and six months ended June 30, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.  Statement No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the pro forma information required under Statement No. 123 for the periods prior to January 1, 2006, the Company accounted for forfeitures as they occurred.

Reclassifications

The operating results of Fox Sports Net Chicago have been classified as discontinued operations in the condensed consolidated statements of operations for all periods presented.

11




NOTE 3.                         RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company announced on August 8, 2006, that in light of published reports concerning the pricing of stock options and the timing of stock option grants at numerous other companies, the Company had undertaken a voluntary review of its past practices in connection with grants of stock options and stock appreciation rights (“SARs”). As a result of the review which was conducted with a law firm that was not previously involved with the Company’s stock option plans, the Company determined that the grant date and exercise price assigned to a number of its stock option and SAR grants during the 1997-2002 period did not correspond to the actual grant date and the closing price of Cablevision’s common stock on the actual grant date.  In such cases, the date assigned to the grant corresponded to the date of a unanimous written consent executed by the members of the compensation committee of the Company’s Board of Directors, but the date of that consent did not correspond to the actual date of the grant.  In nearly all such cases, the stock price on the assigned date was lower, sometimes substantially lower, than the price on the date the award was actually granted.  At all relevant times, the Company’s stock plan required that the exercise price of options be not less than the fair market value per share of the Company’s common stock on the date of grant.  The former officers of the Company and the Company’s former compensation consultant who were identified in the stock options review as having directly participated in the options dating process have either retired or had their relationship with the Company otherwise terminated (in every case more than one year prior to the commencement of the stock options review).

In addition to grant dating issues, the Company’s review identified certain modifications made to outstanding stock option award grants, principally extensions of expiration dates that were not accounted for properly.   In addition, two awards of options and one option modification were also incorrectly accounted for as having been granted to employees or modified for employees.  One of these two awards was to the Company’s former compensation consultant (which was subsequently cancelled in 2003) and the other award related to an executive officer whose death occurred after the stated grant date of the award and before the actual grant date.  The option modification that was incorrectly accounted for related to the options issued to this executive officer.  Management of the Company has concluded that the Company’s consolidated financial statements for the years ended December 31, 2005, 2004 and 2003, all quarterly periods in 2005 and 2004 and the quarter ended March 31, 2006 should be restated to adjust previously recognized amounts of non-cash stock based compensation (expense) benefit resulting from the Company’s stock option review.

The restatement of the Company’s previously issued financial statements reflects the following:

(a)                                  the recognition of compensation (expense) benefit related to stock options affected by the grant dating issues;

(b)                                 the recognition of compensation (expense) benefit related to certain stock options that were incorrectly accounted for as if the stock options were granted to employees and compensation expense related to a modification of certain of those stock options;

(c)                                  the recognition of compensation (expense) benefit related to modifications of certain employee stock options subsequent to the date of grant to extend the expiration date;

(d)                                 adjustments to previously recognized income tax benefit as a result of certain stock options and SARs that were granted to certain of the Company’s executive officers with exercise prices that were  less than fair market value of Cablevision’s common stock on the actual date of grant and, therefore, did not qualify as deductible performance-based compensation in accordance with Internal Revenue Code section 162(m) (“IRC 162(m)”); and

12




(e)                                  adjustments to income tax (expense) benefit related to items (a) through (c) above giving consideration to whether income tax benefit has been or is anticipated to be disallowed pursuant to IRC 162(m).

In addition, and not resulting from the review described above, the Company has also restated its previously issued financial statements to reflect the following stock based compensation related items which were identified by the Company prior to the initiation of the stock option review but were not previously reflected in the Company’s financial statements.  Although the Company concluded that such adjustments were not material to prior periods at the time the related accounting impacts were initially identified, the Company has concluded it is appropriate to include these adjustments in this restatement since such items relate to stock based compensation related matters.

1)                                      the recognition of compensation (expense) benefit related to certain stock option awards granted after July 1, 2000 and the associated income tax impacts that were originally accounted for as fixed awards with no compensation (expense) benefit recognized that should have been accounted for as variable awards through December 31, 2005 due to a dividend participation feature included in the Company’s stock option plans.  The accounting impacts associated with the dividend participation feature were initially identified by the Company’s management during the Company’s review of the impact of Cablevision’s proposed special cash dividend (which was paid in April 2006); and

2)                                      adjustments to previously recognized income tax benefits regarding the approach used to determine the tax benefit recognized with regard to compensation expense associated with restricted share awards for certain executive officers as limited by IRC 162(m).

The Company has restated its consolidated financial statements for the years ended December 31, 2005, 2004 and 2003, all quarterly periods in 2005 and 2004 and the quarter ended March 31, 2006.  The impact of the restatement adjustments extended to periods back to the year ended December 31, 1997 through the period ended March 31, 2006.

13




The table below reflects the impacts of the restatement adjustments discussed above on the Company’s condensed consolidated statements of operations for the periods presented below:

 

 

Additional income (expense)

 

 

 

Three months
ended
June 30, 2005

 

Six months
ended
June 30, 2005

 

Cumulative
(January 1, 1997
through
March 31, 2006)

 

 

 

 

 

 

 

 

 

Stock option grant date changes

 

$

(4,152

)

$

(7,969

)

$

(67,609

)

Stock option grants and modifications of options to non-employees

 

110

 

219

 

(11,051

)

Modifications to employee stock option awards

 

143

 

286

 

(8,021

)

Option awards originally recorded as fixed awards that were subsequently determined to be variable awards

 

(7,976

)

(13,144

)

(6,034

)

Total pre-tax stock option related accounting adjustments (a)

 

(11,875

)

(20,608

)

(92,715

)

Income tax impact of restatement adjustments above

 

4,861

 

8,436

 

36,730

 

Income tax adjustments related to IRC 162(m) resulting from adjustments due to grant date changes

 

(219

)

(1,053

)

(23,749

)

Income tax adjustments related to IRC 162(m) for restricted shares

 

(990

)

(2,200

)

(9,507

)

Total tax adjustments

 

3,652

 

5,183

 

3,474

 

Total adjustments to net income (loss)

 

$

(8,223

)

$

(15,425

)

$

(89,241

)

 


Note:       The additional income reflected in the pre-tax adjustments in the table above relate to the reversal of previously recognized compensation expense for forfeitures of stock based awards in the period prior to vesting and certain restricted stock award adjustments.

(a)                      Recorded as adjustments to selling, general and administrative expense except for expense of $171 and $302 recorded as adjustments to equity in net income or loss of affiliates for the three and six months ended June 30, 2005, respectively, due to allocations of stock based compensation expense to certain affiliates accounted for under the equity method.

There was no impact on previously reported revenue for the three and six months ended June 30, 2005 or net cash provided by operating activities, net cash used in investing activities or net cash used in financing activities for the six months ended June 30, 2005 as a result of these adjustments.  However, loss from continuing operations, equity in net loss of affiliates, share based compensation expense related to equity classified awards and deferred income tax amounts within cash flows from operating activities have been restated in the Company’s consolidated statements of cash flows for the six months ended June 30, 2005 to reflect the restatement adjustments above.

See Note 11 for the impact of the restatement adjustments on income taxes and Note 19 for the impact on the Company’s compliance with the covenants of its debt instruments.

14




 

The following table summarizes the condensed consolidated statements of operations, giving effect to the restatement adjustments described above, showing previously reported amounts and restated amounts for the three and six months ended June 30, 2005:

 

 

Three months ended
June 30, 2005

 

Six months ended
June 30, 2005

 

 

 

As Previously
Reported

 

As Restated

 

As Previously
Reported

 

As Restated

 

 

 

 

 

 

 

 

 

 

 

Revenues, net

 

$

1,231,859

 

$

1,231,859

 

$

2,444,985

 

$

2,444,985

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Technical and operating

 

518,849

 

518,849

 

1,073,151

 

1,073,151

 

Selling, general and administrative

 

330,498

 

342,202

 

649,756

 

670,062

 

Restructuring charges

 

49

 

49

 

655

 

655

 

Depreciation and amortization

 

275,690

 

275,690

 

538,379

 

538,379

 

 

 

1,125,086

 

1,136,790

 

2,261,941

 

2,282,247

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

106,773

 

95,069

 

183,044

 

162,738

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

(191,686

)

(191,686

)

(382,550

)

(382,550

)

Interest income

 

6,272

 

6,272

 

9,803

 

9,803

 

Equity in net income (loss) of affiliates

 

1,645

 

1,474

 

(375

)

(677

)

Gain on sale of affiliate interests

 

65,483

 

65,483

 

65,483

 

65,483

 

Loss on investments, net

 

(66,006

)

(66,006

)

(77,147

)

(77,147

)

Gain on derivative contracts, net

 

66,167

 

66,167

 

64,535

 

64,535

 

Minority interests

 

(1,809

)

(1,809

)

(245

)

(245

)

Miscellaneous, net

 

(250

)

(250

)

(113

)

(113

)

 

 

(120,184

)

(120,355

)

(320,609

)

(320,911

)

Loss from continuing operations before income taxes

 

(13,411

)

(25,286

)

(137,565

)

(158,173

)

Income tax benefit (expense)

 

(5,329

)

(1,677

)

30,329

 

35,512

 

Loss from continuing operations

 

(18,740

)

(26,963

)

(107,236

)

(122,661

)

Income from discontinued operations, net of taxes

 

240,761

 

240,761

 

210,322

 

210,322

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

222,021

 

$

213,798

 

$

103,086

 

$87,661

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.07

)

$

(0.09

)

$

(0.37

)

$

(0.43

)

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

$

0.84

 

$

0.84

 

$

0.73

 

$

0.73

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

0.77

 

$

0.74

 

$

0.36

 

$

0.30

 

 

15




 

NOTE 4.                         COMPREHENSIVE INCOME (LOSS)

The comprehensive income (loss), net of tax, for the three and six months ended June 30, 2006 equals the net income (loss) for the respective periods.  The comprehensive income, net of tax, as restated, for the three and six months ended June 30, 2005 amounted to $213,858 and $89,392, respectively.

NOTE 5.                         INCOME (LOSS) PER COMMON SHARE

Basic and diluted net loss per common share are computed by dividing net loss by the weighted average number of common shares outstanding during the period.  Potential dilutive common shares are not included in the diluted computation as their effect would be antidilutive.

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period.  Diluted net income per share is computed by dividing net income by the weighted average number of common shares and common stock equivalents outstanding during the period.

The Company generated a loss from continuing operations for the three and six months ended June 30, 2006 and 2005, therefore, the outstanding common stock equivalents during each respective period had no dilutive effect to the basic weighted average shares outstanding.

NOTE 6.                         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.

16




 

During the six months ended June 30, 2006 and 2005, the Company’s non-cash investing and financing activities and other supplemental data were as follows:

 

 

Six Months Ended June 30,

 

 

 

2006

 

2005

 

Non-Cash Investing and Financing Activities:

 

 

 

 

 

Acquisition of the 40% minority interest in certain Regional Programming Partners entities in exchange for the Company’s interests in Fox Sports Net Ohio, Fox Sports Net Florida, National Sports Partners and National Advertising Partners

 

$

 

$

604,080

 

Note payable, including interest, contributed by News Corporation to Regional Programming Partners

 

 

152,907

 

Capital lease obligations

 

11,751

 

180

 

Deferred financing costs

 

294

 

 

Dividends payable on equity classified share-based awards

 

68,586

 

 

Redemption of collateralized indebtedness with restricted cash and related prepaid forward contract

 

 

116,544

 

Redemption of collateralized indebtedness with related prepaid forward contracts and stock

 

176,385

 

120,897

 

Redemption of collateralized indebtedness with related prepaid forward contracts

 

9,964

 

13,713

 

Rights payments offset with repayment of a note receivable

 

 

15,161

 

 

 

 

 

 

 

Supplemental Data:

 

 

 

 

 

Cash interest paid - continuing operations

 

391,707

 

348,897

 

Cash interest paid - discontinued operations

 

10

 

74

 

Income taxes paid (refunded), net

 

9,374

 

(4,553

)

 

In addition, the Company has revised its condensed consolidated statement of cash flows for the six months ended June 30, 2005 to separately disclose the operating, investing and financing portions of the cash flows attributable to its discontinued operations, which had been previously reported on a combined basis as a single amount.

NOTE 7.                         ASSETS AND LIABILITIES HELD FOR SALE AND DISCONTINUED OPERATIONS

Fox Sports Net Chicago

In June 2006, the operations of the Fox Sports Net Chicago programming business were shut down.  In connection with the shut down, the Company recorded a goodwill impairment charge of $5,121 which has been classified in discontinued operations.

Rainbow DBS

In April 2005, the operations of the Rainbow DBS satellite distribution business were shut down.  In connection with the shut down, certain assets of the business, including the Rainbow 1 direct broadcast satellite and certain other related assets were sold to a subsidiary of EchoStar for $200,000 in cash.  This transaction closed in November 2005.  In addition, Rainbow DBS had FCC licenses to construct, launch and operate five fixed service Ka-band satellites and had entered into a contract in November 2004 for the construction by Lockheed Martin of these five Ka-band satellites at a cost of $740,000.  Rainbow DBS had the right to terminate the contract at any time, subject to certain maximum termination liabilities.

17




Rainbow DBS exercised this right on November 21, 2005, and the amount paid to Lockheed Martin in excess of the termination liability was repaid to the Company in March 2006.

In September 2005, Loral Space and Communications Holding Corporation (“Loral”) filed an action for breach of its agreement with Rainbow DBS alleging that the sale of the Rainbow 1 satellite and related assets to EchoStar would trigger a Make Whole Payment of $33,000 plus interest, or approximately $49,000 as of June 30, 2006.  The Company believes that it has substantial defenses to Loral’s claim and is contesting the lawsuit vigorously.  Accordingly, no provision has been made for such Make Whole Payment in the accompanying condensed consolidated financial statements.

Certain assets of the Rainbow DBS satellite distribution business, previously included in the Rainbow DBS segment, amounting to $7,557, had been classified as assets held for sale in the consolidated balance sheet of the Company at December 31, 2005.  These assets related to the direct broadcast satellite television business of Rainbow DBS and consisted of equipment and other assets.  In the first quarter of 2006, the Company recorded an impairment loss of $7,179 which has been classified in discontinued operations.  In the second quarter of 2006, the assets were sold.

Discontinued Operations

The operating results of Fox Sports Net Ohio and Fox Sports Net Florida (in connection with the Regional Programming Partners restructuring in April 2005), Fox Sports Net Chicago and the Rainbow DBS satellite distribution business (in connection with the Board of Directors’ authorization to shut down the business), net of taxes, have been classified in the consolidated statements of operations as discontinued operations for all periods presented.  Operating results of discontinued operations for the three and six months ended June 30, 2006 and 2005 are summarized below:

 

 

Three Months Ended
June 30, 2006

 

 

 

Fox Sports Net
Chicago

 

Rainbow DBS
Distribution
Business

 

Total

 

 

 

 

 

 

 

 

 

Revenues, net*

 

$

78,634

 

$

 

$

78,634

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

$

72,652

 

$

(173

)

$

72,479

 

Income tax (expense) benefit

 

(31,848

)

71

 

(31,777

)

 

 

 

 

 

 

 

 

Net income (loss)

 

$

40,804

 

$

(102

)

$

40,702

 

 

 

 

Six Months Ended
June 30, 2006

 

 

 

Fox Sports Net
Chicago

 

Rainbow DBS
Distribution
Business

 

Total

 

 

 

 

 

 

 

 

 

Revenues, net*

 

$

78,974

 

$

 

$

78,974

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

$

72,290

 

$

(3,850

)

$

68,440

 

Income tax (expense) benefit

 

(31,700

)

1,576

 

(30,124

)

 

 

 

 

 

 

 

 

Net income (loss)

 

$

40,590

 

$

(2,274

)

$

38,316

 


*                             This amount includes $77,996 representing the collection in June 2006 of affiliate revenue from a cable affiliate, including $74,696 relating to periods prior to the second quarter of 2006, that had not been previously recognized due to a contractual dispute.  The underlying contract was terminated in June 2006 and no further payments will be received under this contract.

18




 

 

 

Three Months Ended June 30, 2005

 

 

 

Fox Sports Net
Chicago

 

Fox Sports
Net Ohio and
Fox Sports
Net Florida

 

Rainbow DBS
Distribution
Business

 

Other

 

Total

 

Revenues, net

 

$

108

 

$

 

$

158

 

$

3,441

 

$

3,707

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

$

1,109

 

$

454,443

 

$

(47,231

)

$

4,256

 

$

412,577

 

Income tax benefit (expense)

 

(457

)

(188,938

)

19,330

 

(1,751

)

(171,816

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss), including gain on restructuring of RPP of $265,549 and other gain of $2,520, net of taxes

 

$

652

 

$

265,505

 

$

(27,901

)

$

2,505

 

$

240,761

 

 

 

 

Six Months Ended June 30, 2005

 

 

 

Fox Sports Net
Chicago

 

Fox Sports
Net Ohio and
Fox Sports
Net Florida

 

Rainbow DBS
Distribution
Business

 

Other

 

Total

 

Revenues, net

 

$

180

 

$

40,018

 

$

8,705

 

$

3,441

 

$

52,344

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

$

440

 

$

465,810

 

$

(109,785

)

$

4,256

 

$

360,721

 

Income tax benefit (expense)

 

(181

)

(193,632

)

45,165

 

(1,751

)

(150,399

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss), including gain on restructuring of RPP of $265,549 and other gain of $2,520, net of taxes

 

$

259

 

$

272,178

 

$

(64,620

)

$

2,505

 

$

210,322

 

 

NOTE 8.                         EQUITY PLANS

Equity Plans

In April 2006, the Company’s Board of Directors approved the Cablevision Systems Corporation 2006 Employee Stock Plan and the Cablevision Systems Corporation 2006 Stock Plan for Non-Employee Directors which was approved by the Company’s stockholders at its annual stockholders meeting on May 18, 2006.

Under the 2006 Employee Stock Plan, the Company is authorized to grant incentive stock options, nonqualified stock options, restricted shares, restricted stock units, stock appreciation rights and other equity-based awards.  The Company may grant awards for up to 23,000,000 shares of Cablevision NY Group Class A common stock (subject to certain adjustments).  Options and stock appreciation rights under the 2006 Employee Stock Plan must be granted with an exercise price of not less than the fair market value of a share of Cablevision NY Group Class A common stock on the date of grant and must

19




expire no later than 10 years from the date of grant (or up to one additional year in the case of the death of a holder).  The terms and conditions of awards granted under the 2006 Employee Stock Plan, including vesting and exercisability, will be determined by the compensation committee and may be based upon performance criteria.  During the three months ended June 30, 2006, the Company granted options to purchase 1,407,000 shares of the Company’s common stock which will vest over three years in 33-1/3% annual increments and will expire 10 years from the grant date.  In addition, during the three months ended June 30, 2006, the Company granted 1,777,700 restricted shares to employees which are subject to three year cliff vesting from the date of grant.

Under the 2006 Stock Plan for Non-Employee Directors, the Company is authorized to grant nonqualified stock options, restricted stock units and other equity-based awards.  The Company may grant awards for up to 1,000,000 shares of Cablevision NY Group Class A common stock (subject to certain adjustments). Options under this plan must be granted with an exercise price of not less than the fair market value of a share of Cablevision NY Group Class A common stock on the date of grant and must expire no later than 10 years from the date of grant (or up to one additional year in the case of the death of a holder).  The terms and conditions of awards granted under the 2006 Stock Plan for Non-Employee Directors, including vesting and exercisability, will be determined by the compensation committee.  Unless otherwise provided in an applicable award agreement, options granted under this plan will be fully vested and exercisable, and restricted stock units granted under this plan will be fully vested, upon the date of grant.  Until otherwise determined by the compensation committee, on the date of each annual meeting of the Company’s stockholders, each non-employee director will receive restricted stock units with a fair market value of $40,000 and a grant of 4,000 options on such date.  During the three months ended June 30, 2006, the Company granted its non-employee directors options to purchase 36,000 shares of the Company’s common stock which vested on the date of grant and 20,110 restricted stock units which also vested on the date of grant.

Previously, the Company had an employee stock plan (“1996 Employee Stock Plan”) under which it was authorized to grant incentive stock options, nonqualified stock options, restricted shares, restricted stock units, stock appreciation rights, and bonus awards and a non-employee director stock plan (“1996 Non-Employee Director Stock Plan”) under which it was authorized to grant options and restricted stock units.  The 1996 Employee Stock Plan expired in February 2006 and the 1996 Non-Employee Director Stock Plan expired in May 2006.  Under these plans, the exercise price of stock options and stock appreciation rights could not be less than the fair market value per share of Cablevision NY Group Class A common stock on the date the option is granted and the options expired no later than 10 years from date of grant (or up to one additional year in the case of the death of a holder of nonqualified options). As discussed in Note 3, a review has determined that during the 1997-2002 period there were a number of instances in which stock options and stock appreciation rights were issued with exercise prices that were lower, and in some cases substantially lower, than the fair market value per share of the Company’s common stock on the actual date of grant.   Stock appreciation rights provided for the employee to receive a cash payment in an amount equal to the difference between the fair market value of the stock as of the date the right is exercised, and the exercise price.  Options and stock appreciation rights typically vest over three years in 33-1/3% annual increments and expire 10 years from the grant date.  Restricted shares are typically subject to four year cliff vesting.  Performance based options issued under the plans are typically subject to approximately two year or three year cliff vesting, with exercisability subject to performance criteria.  Performance based options expire 10 years from the date of grant (or up to one additional year in the case of the death of the holder).  Options and restricted stock units issued to non-employee directors fully vest on the date of grant.

As a result of the special dividend (See Note 18), options or stock appreciation rights issued under the 1996 Employee Stock Plan and the 1996 Non-Employee Director Stock Plan that were not vested on or prior to December 31, 2004 were adjusted to reduce their per share exercise price by the $10.00 amount of the

20




special dividend.  The per share exercise price of options or stock appreciation rights that were vested on or prior to December 31, 2004 were not adjusted and the holder will receive the $10.00 special dividend amount upon exercise of the option or right.  Holders of restricted shares outstanding on April 24, 2006 will receive $10.00 per restricted share when and if the restrictions lapse on such shares.  Holders of restricted stock units received $10.00 per share underlying such units on the date the special dividend was paid.

Impact of the Adoption of Statement No. 123R

The Company adopted Statement No. 123R using the modified prospective transition method beginning January 1, 2006.  Accordingly, for the three and six months ended June 30, 2006, the Company recorded share-based compensation expense for awards granted prior to, but not yet vested, as of January 1, 2006, as if the fair value method required for pro forma disclosure under Statement No. 123 were in effect for expense recognition purposes, adjusted for estimated forfeitures.  For these awards, the Company has continued to recognize compensation expense using the accelerated attribution method under FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.  For options and performance based option awards granted after January 1, 2006, the Company recognizes compensation expense based on the estimated grant date fair value using the Black-Scholes valuation model using a straight-line amortization method.

For restricted shares and restricted stock units granted after January 1, 2006, the Company recognizes compensation expense using a straight-line amortization method, based on the grant date price of Cablevision NY Group Class A common stock.

For stock appreciation rights granted after January 1, 2006, the Company recognizes compensation expense on a straight-line basis based on the estimated fair value at each reporting period using the Black-Scholes valuation model.  The Company did not grant any stock appreciation rights during the six months ended June 30, 2006.

As Statement No. 123R requires that options and performance based option compensation expense be based on awards that are ultimately expected to vest, share-based compensation (which includes options, performance options, restricted stock, restricted stock units and stock appreciation rights) for the six months ended June 30, 2006 has been reduced for estimated forfeitures.  Forfeitures were estimated based on historical experience.  Share-based compensation expense recognized as selling, general and administrative expense for the three and six months ended June 30, 2006 amounted to $22,858 and $39,289 (of which $16,603 and $30,124 related to equity classified awards).  In connection with the adoption of Statement No. 123R, the Company recorded $862 as a cumulative effect of a change in accounting principle, net of taxes, in the Company’s statement of operations for the six months ended June 30, 2006.

Prior to adopting Statement No. 123R, the Company presented all tax benefits resulting from the exercise of stock options as operating cash flows in the statement of cash flows. Statement No. 123R requires cash flows resulting from excess tax benefits to be classified as a part of cash flows from financing activities.  This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date in which the excess tax deductions result in a reduction of income taxes payable.  Excess tax benefits are realized tax benefits from tax deductions for options exercised and restricted shares issued in excess of the deferred tax asset attributable to stock compensation costs for such awards.  No excess tax benefits for the six months ended June 30, 2006 were recorded as a result of adopting

21




Statement No. 123R.  Cash received from option exercises for the six months ended June 30, 2006 and 2005 was $10,580 and $10,545, respectively.  The total income tax benefit recognized pursuant to the exercise of options recorded in stockholders’ deficiency, as restated, was $812 and $1,433 for the three and six months ended June 30, 2005, respectively.

Valuation Assumptions - Stock Options

The Company calculates the fair value of each option award on the date of grant using the Black-Scholes option pricing model.  For unvested share-based awards as of January 1, 2006, granted prior to 2006, the Company’s computation of expected life was determined based on historical experience of similar awards, giving consideration to the contractual terms of the share-based awards and vesting schedules.  The interest rate for periods within the contractual life of the award is based on interest yields for U.S. Treasury instruments in effect at the time of grant.  The Company applies a dividend yield of zero since it has historically never paid an ordinary dividend.  For options granted in 2006, the Company’s computation of expected life was based on the simplified method as prescribed in SEC Staff Accounting Bulletin No. 107, Share Based Payments.  The following weighted average assumptions were used in calculating the fair value of options granted during the six months ended June 30, 2006:  Weighted average risk-free interest rate - 4.95%, Expected life (in years) - 6.0, Dividend yield - 0%, and Weighted average volatility - 53.20%.  The weighted average grant date fair value for options granted in 2006 was $11.46.

Share-Based Payment Award Activity

The following table summarizes activity for the Company’s stock options for the six months ended June 30, 2006:

 

 

Shares Under Option

 

Weighted

 

Weighted
Average

 

 

 

 

 

Time Vesting
Options

 

Performance
Vesting Options

 

Average
Exercise Price
Per Share

 

Remaining
Contractual
Term (in years)

 

Aggregate
Intrinsic Value**

 

Balance, December 31, 2005

 

9,402,430

 

809,000

 

$

21.22

 

 

 

 

 

Granted

 

1,443,000

 

 

20.49

 

 

 

 

 

Exercised

 

(973,304

)

 

11.65

 

 

 

 

 

Forfeited/Expired

 

(250,066

)

 

34.79

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2006*

 

9,622,060

 

809,000

 

$

16.55

 

7.22

 

$

97,281

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at June 30, 2006*

 

5,029,370

 

 

$

17.41

 

4.99

 

$

66,447

 


*                             As a result of the special dividend (see Note 18), options issued under the 1996 Employee Stock Plan and the 1996 Non-Employee Director Plan that were not vested on or prior to December 31, 2004 were adjusted to reduce their per share exercise price by the $10.00 amount of the special dividend.  The per share exercise price of options that were vested on or prior to December 31, 2004 was not adjusted and the holders will receive the $10.00 special dividend amount upon exercise.  The weighted average exercise price per share reflected in the table above has not been adjusted for the special dividend for periods prior to the payment of the special dividend in April 2006.

**                      The aggregate intrinsic value is calculated as the difference between (i) the exercise price of the underlying award and (ii) the quoted price of the Company’s NY Group Class A common stock plus, where applicable, the $10.00 special dividend.

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock for the 9,915,610 options outstanding (which included 4,513,920 exercisable options) that were in-the-money at June 30, 2006.  During the six months ended June 30, 2006 and 2005, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $16,089 and $8,641, respectively, determined as of the date of option

22




exercise, plus for the 2006 period, the $10.00 special dividend which each holder of options vested on or prior to December 31, 2004 received upon exercise.  When an option is exercised, the Company issues new shares of stock.

The following table summarizes activity for the Company’s stock appreciation rights and restricted shares (which includes restricted stock units) for the six months ended June 30, 2006:

 

 

Stock
Appreciation
Rights

 

Weighted
Average Fair
Value Per
Share

 

Restricted
Shares

 

Weighted
Average Fair
Value Per
Share

 

Unvested award balance, December 31, 2005

 

5,500

 

$

7.38

 

6,549,966

 

$

18.85

 

Granted

 

 

 

1,797,810

 

20.50

 

Awards vested

 

(5,500

)

11.79

 

(53,286

)

18.95

 

Forfeited

 

 

 

(48,076

)

17.54

 

 

 

 

 

 

 

 

 

 

 

Unvested award balance, June 30, 2006

 

 

$

 

8,246,414

 

$

19.22

 

 

 

 

Outstanding
Vested
Stock
Appreciation
Rights

 

Weighted
Average
Exercise Price
Per Share

 

Weighted
Average
Remaining
Contractual
Term (in years)

 

Aggregate
Intrinsic
Value*

 

Balance, June 30, 2006

 

1,841,854

 

$

11.57

 

3.76

 

$

23,180

 


*                             The aggregate intrinsic value, which will be settled in cash, is calculated as the difference between (i) the exercise price of the underlying award and (ii) the quoted price of the Company’s NY Group Class A common stock plus, where applicable, the $10.00 special dividend.

During the six months ended June 30, 2006 and 2005, the aggregate intrinsic value of stock appreciation rights exercised under the Company’s stock plans was $7,292 and $4,426, respectively, determined as of the date of exercise.  The aggregate intrinsic value, which was settled in cash, is calculated as the difference between (i) the exercise price of the underlying awards and (ii) the quoted price of the Cablevision NY Group Class A common stock as of the date of exercise, plus for the 2006 period, the $10.00 special dividend which each holder of rights vested prior to December 31, 2004 received upon exercise.

As of June 30, 2006, there was approximately $94,949 of total unrecognized compensation cost related to the Company’s unvested options, restricted shares and stock appreciation rights granted under the Company’s stock plans.  The unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.2 years.

23




 

Valuation Assumptions - Stock Appreciation Rights

 

The Company calculates the fair value of each stock appreciation right on the date of grant and at the end of each reporting period using the Black-Scholes option pricing model.  The following assumptions were used to calculate the fair value of stock appreciation rights outstanding as of June 30, 2006:  Weighted average risk-free interest rate - 5.17%, Weighted average expected life (in years) - 1.91, Dividend yield - 0%, and Weighted average volatility - 31.05%.  The weighted average grant date fair value of rights outstanding at June 30, 2006 was $13.35.

The Company’s computation of expected volatility is based on historical volatility of our common stock. The Company’s computation of expected life was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock appreciation rights and vesting schedules through June 30, 2006.  The interest rate for the period within the contractual life of the award is based on the interest yield for U.S. Treasury instruments in effect at June 30, 2006.  The Company applies a dividend yield of zero since it has historically never paid an ordinary dividend.

Pro Forma Information for Periods Prior to the Adoption of Statement No. 123R

Prior to the adoption of Statement No. 123R, the Company had applied the intrinsic value based method of accounting prescribed by APB Opinion No. 25 and related interpretations, to account for its share-based compensation awards.  Under this method, compensation expense was recorded only if on the date of grant the current market price of the underlying stock exceeded the exercise price.  The Company provided the disclosures required under Statement No. 123, as amended by Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation - Transition and Disclosures.  Employee share-based compensation expense for the six months ended June 30, 2005, including the adjustments resulting from the stock option review discussed in Note 3, is based on the accounting prescribed by APB Opinion No. 25 and related interpretations and has not been restated for the adoption of Statement No. 123R.  Forfeitures of awards were recognized as they occurred.

For the six months ended June 30, 2005, the Company had granted options to non-employee directors to purchase 44,000 shares of the Company’s common stock.  The following assumptions were used for these options: Risk-free interest rate - 3.8%, Expected life (in years) - 5.0, Dividend yield - 0%, and Volatility - 56.50%. The weighted average grant date fair value for these options was $13.44.

The pro forma information for the three and six months ended June 30, 2005 is as follows:

 

 

Three Months
Ended
June 30, 2005

 

Six Months
Ended
June 30, 2005

 

 

 

(As restated)

 

(As restated)

 

Net income

 

$

213,798

 

$

87,661

 

Add:  Share-based employee compensation cost included in reported net income, net of taxes (a)

 

17,283

 

33,522

 

Deduct:  Share-based employee compensation expense determined under fair value based method, net of taxes (a)

 

(11,276)

 

(23,219)

 

Pro forma net income

 

$

219,805

 

$

97,964

 


(a)                                  Reflects the impact of the stock option review adjustments discussed in Note 3 and certain other pro forma tax rate adjustments.

24




 

 

Three Months
Ended
June 30,
2005

 

Six Months
Ended
June 30,
2005

 

 

 

(As restated)

 

(As restated)

 

Basic and diluted net income per common share:

 

 

 

 

 

As reported

 

$

0.74

 

$

0.30

 

Pro forma

 

$

0.76

 

$

0.34

 

 

NOTE 9.        RECENTLY ADOPTED ACCOUNTING STANDARDS

In June 2005, the FASB issued Financial Accounting Standards No. 154, Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3 (“Statement No. 154”).  The Statement No. 154 applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle.  It requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable.  APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle.  Statement No. 154 requires that a change in method of calculating depreciation, amortization, or depletion for long-lived nonfinancial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle.  APB Opinion No. 20 previously required that such a change be reported as a change in accounting principle.  Statement No. 154 is effective for accounting changes and corrections of errors made by the Company beginning January 1, 2006.

 

In June 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (“EITF No. 04-5”).  EITF No. 04-5 provides guidance in assessing when a general partner should consolidate its investment in a limited partnership or similar entity.  The provisions of EITF No. 04-5 were required to be applied beginning June 30, 2005 by general partners of all newly formed limited partnerships and for existing limited partnerships for which the partnership agreements are modified subsequent to June 30, 2005 and the provisions of EITF No. 04-5 were effective for general partners in all other limited partnerships beginning January 1, 2006.  EITF No. 04-5 did not have any impact on the Company’s financial position or results of operations upon adoption.

 

NOTE 10.      BANK DEBT AND COLLATERALIZED INDEBTEDNESS

 

Restricted Group Bank Debt

 

On February 24, 2006, the Restricted Group (comprised primarily of the Company’s cable television subsidiaries and its commercial data and voice services subsidiary) entered into a new $2,400,000 credit facility with a group of banks consisting of three components:  a $1,000,000 revolver that was undrawn at June 30, 2006, a $1,000,000 term A-1 loan facility and a $400,000 term A-2 loan facility that has since been refinanced and repaid in full, as described below.  Approximately $1,300,000 of the $1,400,000 proceeds received from the term loans under the new credit facility was used to repay the outstanding borrowings and accrued interest under the prior Restricted Group credit facility that was scheduled to mature in June 2006, and fees and expenses.  On March 29, 2006, the Restricted Group entered into a new $3,500,000 term B loan facility, of which approximately $400,000 of the proceeds was used to prepay the

25




 

outstanding borrowings of the term A-2 loan facility, including accrued interest, and fees and expenses.  The balance of the outstanding term B loan facility borrowings was invested in short-term AAA rated funds until approval of the special dividend by the Company’s Board of Directors.  On April 24, 2006 the approved special dividend was paid (see Note 18).

 

The three components of the new Restricted Group credit facility, the $1,000,000 revolver, the $1,000,000 term A-1 loan facility and the $3,500,000 term B loan facility, are direct obligations of CSC Holdings, guaranteed by most Restricted Group subsidiaries and secured by the pledge of the stock of most Restricted Group subsidiaries.  As of June 30, 2006, $55,562 of the $1,000,000 revolving credit facility was restricted for certain letters of credit issued on behalf of CSC Holdings.  The revolving credit facility and the term A-1 loan facility mature in six years in February 2012 and the term B loan facility matures in seven years in March 2013.  The revolver has no required interim repayments, the $1,000,000 term A-1 loan facility requires quarterly repayments aggregating 0% in year one, 5% in each of years two and three, 25% in each of years four and five, and 40% in the final year and the $3,500,000 term B loan facility is subject to quarterly repayments totaling 1% in each of years one through six and 94% in the final year.  The interest rate on the term A-1 loan facility varies, depending on the Restricted Group’s cash flow ratio (as defined), from .75% to 1.75% over the Eurodollar Rate for Eurodollar-based borrowings and from zero to .75% over the Base Rate for Base Rate Borrowings (as defined).  The interest rate on the borrowings under the term B loan facility is the Eurodollar Rate (as defined) plus 1.75% or prime rate plus .75%, at the Company’s election.  The weighted average interest rates as of June 30, 2006 on borrowings under the term A-1 loan facility and term B loan facility were 6.62% and 6.89%, respectively.

 

The principal financial covenants, which are not identical for the revolving credit facility and the term A-1 loan facility, on the one hand, and the term B loan facility, on the other, include (i) under the revolving credit facility and the term A-1 loan facility, maximum total leverage of 7.50 to 1 with subsequent stepdowns over the life of the revolving credit facility and the term A-1 loan facility until reaching 4.50 to 1 for periods beginning on and after January 1, 2010, (ii) under the revolving credit facility and the term A-1 loan facility, maximum senior secured leverage of 4.00 times cash flow through December 31, 2006 with annual stepdowns thereafter over the life of the revolving credit facility and the term A-1 loan facility until reaching 3.00 to 1 for periods beginning on and after January 1, 2010, (iii) under the revolving credit facility and the term A-1 loan facility, minimum ratios for cash flow to interest expense of 1.75 to 1 initially, increasing to 2.00 to 1 on and after July 1, 2007, and (iv) under the revolving credit facility and the term A-1 loan facility, a minimum ratio of cash flow less cash taxes to total debt expense (defined to include interest expense, certain payments of principal and dividends paid by CSC Holdings to Cablevision to permit Cablevision to pay interest and certain principal payments on its debt) of 1.50 to 1.  These covenants and restrictions on the permitted use of borrowed funds in the revolving credit facility may limit our ability to utilize all of the undrawn revolver funds.  Additional covenants include limitations on liens and the issuance of additional debt.

 

Under the term B loan facility, the Company is limited in its ability to incur additional indebtedness based on a maximum ratio of total indebtedness to cash flow (as defined in the term B loan facility) of 7.50 to 1 with subsequent stepdowns over the life of the term B loan facility until reaching 5.00 to 1 for periods beginning on and after January 1, 2010 and a maximum senior secured leverage ratio of 4.50 times cash flow (as defined in the term B loan facility).

Under the revolving credit facility and the term A-1 loan facility, there are generally no restrictions on investments that the Restricted Group may make, provided it is not in default.  Under the term B loan facility, there also are generally no restrictions on investments that the Restricted Group may make provided it is not in default; however, CSC Holdings must also remain in compliance with the maximum

26




 

ratio of total indebtedness to cash flow and the maximum senior secured leverage ratio.  The Restricted Group can make distributions or other restricted payments so long as CSC Holdings is not in default but there is a limitation (initially $200,000, subject to increase to reflect capital contributions or issuance of equity interests) on restricted payments during any period when the cash flow leverage ratio is greater than 6.75 to 1 (6.0 to 1 after September 30, 2006).  The $200,000 limitation does not apply to restricted payments by CSC Holdings to Cablevision to be used by Cablevision to make scheduled payments of principal or interest on its indebtedness.  The Restricted Group’s ability to make restricted payments is also limited by provisions in the indentures covering the Company’s notes and debentures.

In connection with the repayment of the term A-2 loan facility and the prior Restricted Group credit facility, the Company wrote off approximately $4,587 of unamortized deferred financing costs and in connection with the new Restricted Group credit facility, related costs of $42,004 were recorded as deferred financing costs.

Rainbow National Services Bank Debt

On July 5, 2006, Rainbow National Services, LLC (“RNS”), an indirect wholly owned subsidiary of the Company entered into a replacement bank facility (“New RNS Credit Facility”), providing for an $800,000 senior secured credit facility, which consists of a $500,000 term A loan facility and a $300,000 revolving credit facility which was used primarily to refinance its existing credit agreement (see Note 19).

Total amounts payable by the Company under the new Restricted Group credit facility and the New RNS Credit Facility (pro forma effective as of June 30, 2006) are as follows:

 

Six months ended December 31, 2006

 

$

17,500

 

 

Year ended December 31,

 

 

 

 

2007

 

$

85,000

 

2008

 

110,000

 

2009

 

310,000

 

2010

 

310,000

 

Thereafter

 

4,158,750

 

 

Interest Rate Swap Contracts

In April 2006, CSC Holdings entered into several interest rate swap contracts in the notional amount of $3,700,000 to effectively fix borrowing rates on floating rate debt.  As a result of these transactions, the interest rate paid on approximately 80% of the Company’s debt is fixed.  The table below summarizes certain terms of these interest rate swap contracts as of June 30, 2006:

 

Maturity Date

 

 

Notional Amount

 

Weighted Average Fixed
Rate Paid by the Company

 

Weighted Average
Effective Floating Rate
Received by the Company
as of June 30, 2006

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

April 2008

 

 

$

500,000

 

5.24

%

5.10

%

 

 

 

 

 

 

 

 

 

April 2009

 

 

$

600,000

 

5.25

%

5.10

%

 

 

 

 

 

 

 

 

 

June 2010

 

 

$

2,600,000

 

5.34

%

5.50

%

 

27




 

As of June 30, 2006, the interest rate swap contracts noted above had a fair market value and carrying value of $22,016, a net receivable position, as reflected under derivative contracts in our condensed consolidated balance sheet.

Collateralized Indebtedness

 

The following table summarizes the settlement of the Company’s collateralized indebtedness for the six months ended June 30, 2006.  The Company’s collateralized indebtedness obligations relating to shares of Charter Communications, Inc. and AT&T Inc. common stock were settled by delivering the underlying securities and proceeds from the related equity derivative contracts.  The Company’s collateralized indebtedness obligations relating to Comcast Corporation and General Electric Company shares were settled by delivering the cash equal to the collateralized loan value, net of the value of the related equity derivative contracts.  The cash was obtained from the proceeds of new monetization contracts covering an equivalent number of Comcast and General Electric shares, proceeds from a prepaid interest rate swap executed in conjunction with the equity derivative contract related to the Comcast shares and, in certain instances, cash from CSC Holdings.  The terms of the new contracts allow the Company to retain upside participation in both Comcast and General Electric shares up to each respective contract’s upside appreciation limit with downside exposure limited below the respective hedge price.

 

 

Charter

 

AT&T

 

Comcast

 

General
Electric

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of shares

 

4,345,201

 

1,735,061

 

3,600,706

 

4,247,344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized indebtedness settled

 

$

(98,164

)

$

(78,221

)

$

(132,105

)

$

(106,721

)

$

(415,211

)

Prepaid forward contracts

 

93,260

 

32,454

 

26,882

 

(16,918

)

135,678

 

Fair value of underlying securities delivered

 

4,904

 

45,767

 

 

 

50,671

 

Net cash payment

 

$

 

$

 

$

(105,223

)

$

(123,639

)

$

(228,862

)

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from new monetization contracts

 

$

 

$

 

$

92,722

 

$

130,283

 

$

223,005

 

Proceeds from prepaid interest rate swap contract

 

 

 

6,496

 

 

6,496

 

 

 

$

 

$

 

$

99,218

 

$

130,283

 

$

229,501

 

 

At June 30, 2006, the Company had collateralized indebtedness obligations of $526,376 that mature during the next twelve months.  The Company intends to settle such obligations by either delivering shares of the applicable stock and proceeds of the equity derivative contracts or delivering cash from the proceeds of new monetization transactions.

 

NOTE 11.      INCOME TAXES

 

The income tax benefit attributable to continuing operations for the six months ended June 30, 2006 of $54,867 differs from the income tax benefit derived from applying the statutory federal rate to the pretax loss due principally to the impact of non-deductible expenses, state taxes, the favorable settlement of an issue with a taxing authority, and a decrease in the valuation allowance of $6,279 relating to certain state net operating loss carry forwards.

28




 

The income tax benefit attributable to continuing operations for the six months ended June 30, 2005 of $35,512, as restated, differs from the income tax benefit derived from applying the statutory federal rate to the pretax loss due principally to the impact of non-deductible expenses, state taxes, and an increase to the valuation allowance of $4,504 relating to certain state net operating loss carry forwards.

 

At times, the Company takes certain positions on its tax returns that may be challenged by various taxing authorities.  These tax positions arise in connection with certain transactions or operations.  Although the Company believes it has support for its tax positions, it has recorded a liability for its best estimate of the probable loss on such positions.  Management does not believe that the resolution of these matters will have a material adverse impact on the financial position of the Company.

 

In connection with the restatement of the condensed consolidated financial statements, as described in Note 3, adjustments have been made to the income tax benefit (expense) reported in the Company’s condensed consolidated statements of operations, the excess tax benefits recognized in additional paid-in capital and the corresponding deferred tax assets.  In accordance with IRC 162(m) and related Treasury Regulations, stock options and SARs that are in-the-money at the time of grant do not qualify as performance-based compensation.  Consequently, the Company’s net operating loss carry forward (“NOL”) arising from compensation deductions for certain exercised stock options and SARs has been reduced by $86,241 for all periods through December 31, 2004 and by $2,244 in 2005.  In addition, excess tax benefits recorded to additional paid-in capital were reduced by $15,331 for periods through December 31, 2004 and $918 for the six months ended June 30, 2005.

 

The Company has notified the Internal Revenue Service of the stock option review.  As a result of the review, the Company has provided to the Internal Revenue Service an adjustment to reduce the Company's net operating loss carry forward by $86,241 for all tax years through December 31, 2004 and in connection with the Company’s filing of its 2005 tax return, the net operating loss carry forward was further reduced by $2,244.  The estimated amount of potential future compensation costs that would not be deductible for tax purposes pursuant to IRC 162(m) relating to stock options and SARs that were granted with exercise prices that were less than fair market value of Cablevision's common stock on the actual date of grant that are currently outstanding would be less than $1,000 if exercised at Cablevision's common stock price on September 15, 2006.

 

The Company has recognized income tax benefit (expense) for financial reporting purposes with regard to the additional non-cash stock based compensation benefit (expense) recorded in connection with the restatement discussed in Note 3 to the extent that management does not anticipate a disallowance of tax deductions pursuant to IRC 162(m).

 

The Company has reduced previously recognized income tax benefits and corresponding deferred tax assets with respect to non-performance based restricted share awards to the extent that management can reasonably anticipate the estimated disallowance of tax benefit upon vesting due to the limitations on executive compensation included in IRC 162(m).

 

29




 

NOTE 12.      RESTRUCTURING

 

The following table summarizes the accrued restructuring liability, net of related sublease amounts, for continuing operations:

 

 

 

 

2006 Plans

 

 

 

2005 Plan

 

Facility

 

 

 

 

 

Employee
Severance

 

Realignment
Costs

 

Employee
Severance

 

 

 

 

 

 

 

 

 

Balance at December 31, 2005

 

$

23

 

$

 

$

 

Additional charges (credits)

 

(23

)

667

 

143

 

Payments

 

 

(76

)

 

 

 

 

 

 

 

 

 

Balance at June 30, 2006

 

$

 

$

591

 

$

143

 

 

In addition, for the six months ended June 30, 2006, the Company recorded restructuring credits of $3,541 relating primarily to the Company entering into certain sublease rental agreements whereby the sublease revenue exceeded previous estimates recorded in connection with the 2001 and 2002 facility realignment restructuring plans.  Based on the restructuring credits recorded and payments made by the Company, the restructuring liability relating to these plans, net of sublease amounts, as of June 30, 2006 was zero.

 

In 2006, the Company recorded restructuring charges of $810, which included expenses of approximately $143 associated with the elimination of approximately ten positions at a programming business within the Rainbow segment (of which no payments had been made as of June 30, 2006) and estimated expenses of approximately $667 associated with facility realignment costs of the Company’s corporate assets.  The payment of employee severance of $143 is expected to be completed before the end of the third quarter 2006, while the payments associated with the facilities realignment are expected to be completed by June 2009.

 

The cumulative amount of restructuring charges (net of credits) incurred by the Company for continuing operations for each of the restructuring plans are as follows:

 

 

2001
Plan

 

2002
Plan

 

2005
Plan

 

2006
Plan

 


Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee severance

 

$

15,108