10-Q 1 a06-23482_110q.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 September 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 November 3, 2006:

Cablevision NY Group Class A Common Stock —

 

228,391,624

 

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

 

 

 

 

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

 

4

 

 

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

 

6

 

 

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

 

7

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

8

 

 

Financial Statements of CSC Holdings and Subsidiaries

 

 

 

 

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

 

45

 

 

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

 

47

 

 

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

 

48

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

49

Item 2.

 

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

 

78

Item 3.

 

Quantitative And Qualitative Disclosures About Market Risk

 

111

Item 4.

 

Controls and Procedures

 

113

PART II. OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

114

Item 1A.

 

Risk Factors

 

114

Item 6.

 

Exhibits

 

117

SIGNATURES

 

118

 

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 presenting restated consolidated financial statements as of and for the three and nine months ended September 30, 2005 as previously reported in the Company’s Form 10-K/A for the year ended December 31, 2005 filed on September 21, 2006 (the “2005 Form 10-K/A”).  These restatements were 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 previously reported 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 and our 2005 Form 10-K/A, our Form 10-Q/A for the quarter ended March 31, 2006 (the “March 31, 2006 Form 10-Q/A”) and our Form 10-Q for the quarter ended June 30, 2006 (the “June 30, 2006 Form 10-Q”) (all of which were filed with the SEC on September 21, 2006) for further information regarding this previously reported restatement.

 

PART I.  FINANCIAL INFORMATION

This Quarterly Report on Form 10-Q for the period ended September 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 disclosures relating to the Dolan Family Group Proposal, restructuring charges, availability under credit facilities, levels of capital expenditures, sources of funds and funding requirements, and the Company’s estimated adjustments to the Company’s financial statements that will be necessary as a result of the implementation of Staff Accounting Bulletin No. 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:

·                  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;

2




 

·                  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 outcome of the proposal from the Dolan Family Group to acquire all of the outstanding shares of the Company’s common stock, except for the shares held by the Dolan Family Group;

·                  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.

 

3




Item 1.   Financial Statements

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

 

 

September 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

522,475

 

$

397,496

 

Restricted cash

 

5,840

 

8,454

 

Accounts receivable, trade (less allowance for doubtful accounts of $18,593 and $18,807)

 

410,988

 

421,950

 

Notes and other receivables

 

36,812

 

74,141

 

Investment securities

 

9,985

 

10,408

 

Prepaid expenses and other current assets

 

130,521

 

98,921

 

Feature film inventory, net

 

110,299

 

108,607

 

Deferred tax asset

 

238,223

 

10,788

 

Advances to affiliates

 

62

 

70

 

Investment securities pledged as collateral

 

105,575

 

723,476

 

Derivative contracts

 

102,861

 

268,539

 

Assets held for sale

 

 

7,557

 

Total current assets

 

1,673,641

 

2,130,407

 

 

 

 

 

 

 

Property, plant and equipment, net of accumulated depreciation of $6,197,702 and $5,494,994

 

3,793,937

 

3,868,077

 

Investments in affiliates

 

46,127

 

39,463

 

Investment securities pledged as collateral

 

912,489

 

199,430

 

Notes and other receivables

 

43,476

 

42,987

 

Derivative contracts

 

 

109,207

 

Other assets

 

80,127

 

83,801

 

Deferred tax asset

 

 

25,662

 

Long-term feature film inventory, net

 

371,060

 

378,502

 

Deferred carriage fees, net

 

170,777

 

188,135

 

Franchises

 

731,848

 

731,848

 

Affiliation, broadcast and other agreements, net of accumulated amortization of $400,586 and $349,752

 

468,529

 

519,363

 

Other intangible assets, net of accumulated amortization of $88,544 and $68,192

 

362,438

 

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 $63,504 and $85,450

 

134,859

 

120,965

 

 

 

$

9,776,714

 

$

9,819,895

 

 

See accompanying notes to
condensed consolidated financial statements.

4




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

 

 

September 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

(unaudited)

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

398,036

 

$

373,362

 

Accrued liabilities

 

1,092,247

 

944,956

 

Accounts payable to affiliates

 

1,307

 

1,467

 

Deferred revenue

 

162,304

 

140,723

 

Feature film and other contract obligations

 

108,223

 

112,817

 

Liabilities under derivative contracts

 

1,604

 

101,580

 

Current portion of bank debt

 

81,250

 

8,560

 

Current portion of collateralized indebtedness

 

209,736

 

857,774

 

Current portion of capital lease obligations

 

7,450

 

8,586

 

Notes payable

 

11,209

 

8,438

 

Total current liabilities

 

2,073,366

 

2,558,263

 

 

 

 

 

 

 

Feature film and other contract obligations

 

326,135

 

351,673

 

Deferred revenue

 

14,818

 

16,219

 

Deferred tax liability

 

91,341

 

 

Liabilities under derivative contracts

 

144,713

 

17,571

 

Other long-term liabilities

 

283,111

 

361,018

 

Bank debt

 

4,948,000

 

1,842,940

 

Collateralized indebtedness

 

747,554

 

312,352

 

Senior notes and debentures

 

5,993,657

 

5,992,760

 

Senior subordinated notes and debentures

 

496,913

 

746,621

 

Notes payable

 

1,017

 

7,467

 

Capital lease obligations

 

56,092

 

51,201

 

Minority interests

 

48,565

 

55,190

 

Total liabilities

 

15,225,282

 

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, 250,581,381 and 247,430,685 shares issued and 228,322,381 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

 

40,613

 

1,307,786

 

Accumulated deficit

 

(5,128,704

)

(3,440,967

)

 

 

(5,084,948

)

(2,130,065

)

Treasury stock, at cost (22,259,000 and 22,161,971 shares)

 

(360,058

)

(359,753

)

Accumulated other comprehensive loss

 

(3,562

)

(3,562

)

Total stockholders’ deficiency

 

(5,448,568

)

(2,493,380

)

 

 

$

9,776,714

 

$

9,819,895

 

 

See accompanying notes to
condensed consolidated financial statements.

5




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

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

(As restated)

 

 

 

(As restated)

 

Revenues, net

 

$

1,408,736

 

$

1,241,745

 

$

4,242,017

 

$

3,686,730

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

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

 

638,906

 

548,526

 

1,911,643

 

1,621,677

 

Selling, general and administrative

 

348,661

 

317,388

 

1,081,671

 

987,450

 

Restructuring charges (credits)

 

(1,729

)

1,438

 

(4,483

)

2,093

 

Depreciation and amortization (including impairments)

 

287,463

 

266,536

 

847,521

 

804,915

 

 

 

1,273,301

 

1,133,888

 

3,836,352

 

3,416,135

 

Operating income

 

135,435

 

107,857

 

405,665

 

270,595

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

(243,387

)

(189,614

)

(686,100

)

(572,164

)

Interest income

 

4,661

 

2,727

 

27,556

 

12,530

 

Equity in net income of affiliates

 

2,677

 

2,277

 

5,872

 

1,600

 

Write-off of deferred financing costs

 

(6,084

)

 

(14,083

)

 

Gain (loss) on sale of affiliate interests

 

 

(16

)

 

65,467

 

Gain (loss) on investments, net

 

100,922

 

(20,207

)

179,113

 

(97,354

)

Gain (loss) on derivative contracts, net

 

(130,019

)

10,915

 

(172,634

)

75,450

 

Loss on extinguishment of debt

 

 

 

(13,125

)

 

Minority interests

 

(3,061

)

(2,822

)

(6,833

)

(3,067

)

Miscellaneous, net

 

2,231

 

232

 

2,239

 

119

 

 

 

(272,060

)

(196,508

)

(677,995

)

(517,419

)

Loss from continuing operations before income taxes

 

(136,625

)

(88,651

)

(272,330

)

(246,824

)

Income tax benefit

 

77,889

 

24,829

 

132,756

 

60,341

 

Loss from continuing operations

 

(58,736

)

(63,822

)

(139,574

)

(186,483

)

Income (loss) from discontinued operations, net of taxes

 

(421

)

870

 

37,895

 

211,192

 

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

 

(59,157

)

(62,952

)

(101,679

)

24,709

 

Cumulative effect of a change in accounting principle

 

 

 

(862

)

 

Net income (loss)

 

$

(59,157

)

$

(62,952

)

$

(102,541

)

$

24,709

 

Basic and diluted net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.21

)

$

(0.22

)

$

(0.49

)

$

(0.65

)

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

$

 

$

 

$

0.13

 

$

0.73

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of a change in accounting principle

 

$

 

$

 

$

 

$

 

Net income (loss)

 

$

(0.21

)

$

(0.22

)

$

(0.36

)

$

0.09

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares (in thousands)

 

283,901

 

288,507

 

283,484

 

288,171

 

 

See accompanying notes to
condensed consolidated financial statements.

6




 

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

 

 

2006

 

2005

 

 

 

 

 

(As restated)

 

Cash flows from operating activities:

 

 

 

 

 

Loss from continuing operations

 

$

(139,574

)

$

(186,483

)

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

 

 

 

 

 

Depreciation and amortization (including impairments)

 

847,521

 

804,915

 

Equity in net income of affiliates

 

(5,872

)

(1,600

)

Minority interests

 

6,833

 

3,067

 

Gain on sale of affiliate interests

 

 

(65,467

)

Unrealized loss (gain) on investments, net

 

(173,701

)

97,354

 

Write-off of deferred financing costs

 

14,083

 

 

Unrealized loss (gain) on derivative contracts

 

143,159

 

(102,298

)

Loss on extinguishment of debt

 

13,125

 

 

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

 

57,716

 

63,594

 

Share-based compensation expense related to equity classified awards

 

46,922

 

42,975

 

Deferred income tax benefit

 

(139,696

)

(67,217

)

Amortization and write-off of feature film inventory

 

91,598

 

82,757

 

Provision for doubtful accounts

 

38,171

 

36,423

 

Changes in other assets and liabilities

 

(91,405

)

(61,453

)

Net cash provided by operating activities

 

708,880

 

646,567

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(700,331

)

(540,058

)

Payment for acquisitions

 

 

(4,231

)

Proceeds from sale of equipment, net of costs of disposal

 

9,425

 

3,647

 

Decrease (increase) in investment securities and other investments

 

1,120

 

(12,671

)

Decrease in restricted cash

 

2,614

 

27,187

 

Additions to other intangible assets

 

(1,414

)

(11,611

)

Increase in investments in affiliates, net

 

 

(180

)

Net cash used in investing activities

 

(688,586

)

(537,917

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from bank debt

 

5,438,000

 

434,527

 

Repayment of bank debt

 

(2,260,250

)

(866,750

)

Redemption of senior subordinated debentures

 

(263,125

)

 

Proceeds from exercise of stock options

 

11,103

 

12,585

 

Proceeds from collateralized indebtedness

 

529,520

 

169,376

 

Repayment of collateralized indebtedness

 

(480,419

)

(174,838

)

Dividend distribution to common stockholders

 

(2,838,591

)

 

Proceeds from derivative contracts

 

6,496

 

6,462

 

Settlement of derivative contracts

 

(50,864

)

 

Payments on capital lease obligations and other debt

 

(6,655

)

(10,019

)

Deemed contribution from stockholder

 

 

6,337

 

Additions to deferred financing and other costs

 

(47,374

)

(70

)

Distributions to minority partners

 

(13,458

)

(9,108

)

Net cash provided by (used in) financing activities

 

24,383

 

(431,498

)

Net effect of exchange rate changes on cash and cash equivalents

 

 

191

 

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

 

44,677

 

(322,657

)

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

 

 

 

 

 

Net cash provided by (used in) operating activities

 

75,835

 

(72,313

)

Net cash provided by (used in) investing activities

 

4,467

 

(120,445

)

Net change in cash classified in assets held for sale

 

 

95,337

 

Net effect of discontinued operations on cash and cash equivalents

 

80,302

 

(97,421

)

Cash and cash equivalents at beginning of year

 

397,496

 

771,479

 

Cash and cash equivalents at end of period

 

$

522,475

 

$

351,401

 

 

See accompanying notes to
condensed consolidated financial statements.

7




 

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 Optimum Lightpath; Rainbow, consisting principally of interests in national and regional cable television programming networks, including AMC, IFC, WE tv (formerly WE: Women’s Entertainment), fuse and VOOM HD; 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 September 30, 2006 and for the three and nine months ended September 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.

8




 

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 nine months ended September 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 nine months ended September 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 nine months ended September 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 and cash flows for all periods presented.

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 fair market value 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

9




 

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 (defined in the plan as the closing price).  The former officers of the Company and the Company’s former compensation consultant who were identified in the stock option 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 option 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 former executive officer.  Management of the Company 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.  These restatements were reflected in the Company’s Form 10-K/A for the year ended December 31, 2005 (the “2005 Form 10-K/A”), the Form 10-Q/A for the quarter ended March 31, 2006 (the “March 31, 2006 Form 10-Q/A”) and the Form 10-Q for the quarter ended June 30, 2006 (the “June 30, 2006 Form 10-Q”), all of which were filed with the SEC on September 21, 2006.

The restatement of the Company’s previously issued financial statements, which was previously reported in the Company’s 2005 Form 10-K/A, March 31, 2006 Form 10-Q/A and June 30, 2006 Form 10-Q, reflected 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 also restated its previously issued financial statements to reflect the following stock-based compensation related items which were

10




 

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 concluded it was appropriate to include these adjustments in those restatements 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 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 as reflected in the Company’s 2005 Form 10-K/A and the March 31, 2006 Form 10-Q/A which were filed with the SEC on September 21, 2006.  This Form 10-Q includes restated financial information for the three and nine months ended September 30, 2005.  The impact of the restatement adjustments extended to periods back to the year ended December 31, 1997 through the period ended March 31, 2006.

11




 

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)

 

 

 

 

 

 

 

Cumulative

 

 

 

Three Months

 

Nine Months

 

(January 1,

 

 

 

Ended

 

Ended

 

1997 through

 

 

 

September 30,

 

September 30,

 

March 31,

 

 

 

2005

 

2005

 

2006)

 

Stock option grant date changes

 

$

1,600

 

$

(6,369

)

$

(67,609

)

Stock option grants and modifications of options to non-employees

 

110

 

329

 

(11,051

)

Modifications to employee stock option awards

 

143

 

429

 

(8,021

)

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

 

(411

)

(13,555

)

(6,034

)

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

 

1,442

 

(19,166

)

(92,715

)

Income tax impact of restatement adjustments above

 

(590

)

7,846

 

36,730

 

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

 

81

 

(972

)

(23,749

)

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

 

(1,005

)

(3,205

)

(9,507

)

Total tax adjustments

 

(1,514

)

3,669

 

3,474

 

Total adjustments to net income (loss)

 

$

(72

)

$

(15,497

)

$

(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) income of $10 and $(292) recorded as adjustments to equity in net income or loss of affiliates for the three and nine months ended September 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 nine months ended September 30, 2005 or net cash provided by operating activities, net cash used in investing activities or net cash used in financing activities for the nine months ended September 30, 2005 as a result of these adjustments.  However, loss from continuing operations, equity in net income 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 condensed consolidated statements of cash flows for the nine months ended September 30, 2005 to reflect the restatement adjustments above.

12




 

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 nine months ended September 30, 2005:

 

 

Three Months Ended
September 30, 2005

 

Nine Months Ended
September 30, 2005

 

 

 

(As previously
reported)

 

(As restated)

 

(As previously
reported)

 

(As restated)

 

Revenues, net

 

$

1,241,745

 

$

1,241,745

 

$

3,686,730

 

$

3,686,730

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Technical and operating

 

548,526

 

548,526

 

1,621,677

 

1,621,677

 

Selling, general and administrative

 

318,820

 

317,388

 

968,576

 

987,450

 

Restructuring charges

 

1,438

 

1,438

 

2,093

 

2,093

 

Depreciation and amortization

 

266,536

 

266,536

 

804,915

 

804,915

 

 

 

1,135,320

 

1,133,888

 

3,397,261

 

3,416,135

 

Operating income

 

106,425

 

107,857

 

289,469

 

270,595

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense

 

(189,614

)

(189,614

)

(572,164

)

(572,164

)

Interest income

 

2,727

 

2,727

 

12,530

 

12,530

 

Equity in net income of affiliates

 

2,267

 

2,277

 

1,892

 

1,600

 

Gain (loss) on sale of affiliate interests

 

(16

)

(16

)

65,467

 

65,467

 

Loss on investments, net

 

(20,207

)

(20,207

)

(97,354

)

(97,354

)

Gain on derivative contracts, net

 

10,915

 

10,915

 

75,450

 

75,450

 

Minority interests

 

(2,822

)

(2,822

)

(3,067

)

(3,067

)

Miscellaneous, net

 

232

 

232

 

119

 

119

 

 

 

(196,518

)

(196,508

)

(517,127

)

(517,419

)

Loss from continuing operations before income taxes

 

(90,093

)

(88,651

)

(227,658

)

(246,824

)

Income tax benefit

 

26,343

 

24,829

 

56,672

 

60,341

 

Loss from continuing operations

 

(63,750

)

(63,822

)

(170,986

)

(186,483

)

Income from discontinued operations, net of taxes

 

870

 

870

 

211,192

 

211,192

 

Net income (loss)

 

$

(62,880

)

$

(62,952

)

$40,206

 

$24,709

 

Basic and diluted net income (loss) per share:

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.22

)

$

(0.22

)

$

(0.59

)

$

(0.65

)

Income from discontinued operations

 

$

 

$

 

$

0.73

 

$

0.73

 

Net income (loss)

 

$

(0.22

)

$

(0.22

)

$

0.14

 

$

0.09

 

 

13




 

NOTE 4.                COMPREHENSIVE INCOME (LOSS)

The comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2006 equals the net income (loss) for the respective periods.  The comprehensive income (loss), net of tax, as restated, for the three and nine months ended September 30, 2005 amounted to $(62,952) and $26,440, 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 nine months ended September 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.

14




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.

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

 

 

Nine Months Ended September 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

 

Dividends payable on equity classified share-based awards

 

67,760

 

 

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

 

250,412

 

167,181

 

Redemption of collateralized indebtedness with related prepaid forward contracts

 

31,385

 

22,943

 

Rights payments offset with repayment of a note receivable

 

 

36,689

 

Supplemental Data:

 

 

 

 

 

Cash interest paid - continuing operations

 

604,877

 

509,304

 

Cash interest paid - discontinued operations

 

12

 

81

 

Income taxes paid (refunded), net

 

10,015

 

(5,158

)

 

In addition, the Company has revised its condensed consolidated statement of cash flows for the nine months ended September 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.

15




 

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.  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 $50,400 as of September 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.

 

16




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 nine months ended September 30, 2006 and 2005 are summarized below:

 

 

Three Months Ended September 30, 2006

 

 

 

Fox Sports Net 
Chicago

 

Rainbow DBS
Distribution 
Business

 

Total

 

Revenues, net

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

$

311

 

$

(1,025

)

$

(714

)

Income tax (expense) benefit

 

(127

)

420

 

293

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

184

 

$

(605

)

$

(421

)

 

 

 

Nine Months Ended September 30, 2006

 

 

 

Fox Sports Net
Chicago

 

Rainbow DBS
Distribution
Business

 

Total

 

Revenues, net*

 

$

78,974

 

$

 

$

78,974

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

$

72,601

 

$

(4,875

)

$

67,726

 

Income tax (expense) benefit

 

(31,827

)

1,996

 

(29,831

)

 

 

 

 

 

 

 

 

Net income (loss)

 

$

40,774

 

$

(2,879

)

$

37,895

 


*                    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.

 

 

Three Months Ended September 30, 2005

 

 

 

Fox Sports Net
Chicago

 

Fox Sports
Net Ohio and
Fox Sports
Net Florida

 

Rainbow
DBS
Distribution
Business

 

Total

 

Revenues, net

 

$

1,456

 

$

 

$

 

$

1,456

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

$

752

 

$

(32

)

$

756

 

$

1,476

 

Income tax benefit (expense)

 

(309

)

14

 

(311

)

(606

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

443

 

$

(18

)

$

445

 

$

870

 

 

17




 

 

 

Nine Months Ended September 30, 2005

 

 

 

Fox Sports Net
Chicago

 

Fox Sports
Net Ohio and
Fox Sports
Net Florida

 

Rainbow DBS
Distribution
Business

 

Other

 

Total

 

Revenues, net

 

$

1,636

 

$

40,018

 

$

8,771

 

$

 

$

50,425

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

$

1,192

 

$

465,778

 

$

(109,029

)

$

4,256

 

$

362,197

 

Income tax benefit (expense)

 

(490

)

(193,618

)

44,854

 

(1,751

)

(151,005

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) including gain on restructuring of RPP of $265,531, and other gain of $2,520, net of taxes

 

$

702

 

$

272,160

 

$

(64,175

)

$

2,505

 

$

211,192

 

 

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 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 of the Board of Directors and may be based upon performance criteria.  In 2006, subsequent to stockholder approval, the Company granted options to purchase 1,407,000 shares of the Company’s common stock, which will vest over three years in 331¤3% annual increments and will expire 10 years from the grant date.  In addition, in 2006, subsequent to stockholder approval, 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

18




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.  In 2006, on the date of the annual meeting of the Company’s stockholders, subsequent to stockholder approval, 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 was granted and the options expired 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 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 331¤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 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 nine months ended September 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

19




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 nine months ended September 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 three and nine months ended September 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 nine months ended September 30, 2006 amounted to $17,640 and $56,929 (of which $16,798 and $46,922 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 nine months ended September 30, 2006.

In connection with the Company’s adoption of Statement No. 123R, the Company uses the ‘with-and-without’ approach described in EITF Topic No. D-32, Intraperiod Tax Allocation of the Tax Effect of Pretax Income from Continuing Operations, to determine the recognition and measurement of excess tax benefits.  Accordingly, due to the Company’s current tax position, no income tax benefit has been recognized with regard to excess tax benefits realized during the nine months ended September 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 nine months ended September 30, 2006 were recorded as a result of adopting Statement No. 123R.  Cash received from option exercises for the nine months ended September 30, 2006 and 2005 was $11,103 and $12,585, respectively.  The total income tax expense (benefit) recognized pursuant to the exercise of options recorded in stockholders’ deficiency, as restated, was $835 and ($598) for the three and nine months ended September 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

20




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 nine months ended September 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.

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 September 30, 2006:  Weighted average risk-free interest rate - 4.75%, Weighted average expected life (in years) - 1.75, Dividend yield - 0%, and Weighted average volatility - 26.55%.  The weighted average grant date fair value of rights outstanding at September 30, 2006 was $14.59.

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 September 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 September 30, 2006.  The Company applies a dividend yield of zero since it has historically never paid an ordinary dividend.

21




Share-Based Payment Award Activity

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

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

Shares Under Option

 

Weighted

 

Average

 

 

 

 

 

 

 

Performance

 

Average

 

Remaining

 

Aggregate

 

 

 

Time Vesting
Options

 

Vesting
Options

 

Exercise Price

Per Share

 

Contractual
Term (in years)

 

Intrinsic
Value **

 

Balance, December 31, 2005

 

9,402,430

 

809,000

 

$

21.22

 

 

 

 

 

Granted

 

1,443,000

 

 

20.49

 

 

 

 

 

Exercised

 

(1,011,457

)

 

11.74

 

 

 

 

 

Forfeited/Expired

 

(305,282

)

 

32.89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2006*

 

9,528,691

 

809,000

 

$

16.52

 

6.97

 

$

108,849

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at September 30, 2006*

 

5,049,627

 

 

$

17.21

 

4.78

 

$

72,585

 


*                    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 9,838,641 options outstanding (which included 4,550,577 exercisable options) that were in-the-money at September 30, 2006.  During the nine months ended September 30, 2006 and 2005, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $16,670 and $10,498, respectively, determined as of the date of option 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.

22




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

 

 

Stock
Appreciation
Rights

 

Weighted
Average Fair
Value Per Share

 

Restricted
Shares

 

Weighted
Average Fair
Value Per
Share at Date
of Grant

 

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

 

(66,731

)

18.66

 

Forfeited

 

 

 

(84,904

)

18.64

 

 

 

 

 

 

 

 

 

 

 

Unvested award balance, September 30, 2006

 

 

$

 

8,196,141

 

$

19.22

 

 

 

 

Outstanding
Vested
Stock
Appreciation
Rights

 

Weighted
Average
Exercise Price
Per Share at
September 30,
2006

 

Weighted
Average
Remaining
Contractual
Term (in years)

 

Aggregate
Intrinsic
Value*

 

Balance, September 30, 2006

 

1,810,822

 

$

11.65

 

3.50

 

$

24,733

 


*       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 nine months ended September 30, 2006 and 2005, the aggregate intrinsic value of stock appreciation rights exercised under the Company’s stock plans was $7,512 and $5,993, 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 September 30, 2006, there was approximately $79,459 of total unrecognized compensation cost related to the Company’s unvested options and restricted shares granted under the Company’s stock plans. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.1 years.

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 nine months ended September 30, 2005, including the adjustments resulting from the stock option review discussed in Note 3, is based on the accounting

23




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 nine months ended September 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 nine months ended September 30, 2005 is as follows:

 

 

Three Months
Ended
September 30,
2005

 

Nine Months
Ended
September 30,
2005

 

 

 

(As restated)

 

(As restated)

 

Net income (loss)

 

$

(62,952

)

$

24,709

 

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

 

(674

)

32,848

 

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

 

(2,570

)

(25,789

)

Pro forma net income (loss)

 

$

(66,196

)

$

31,768

 

 

 

 

 

 

 

Basic and diluted net income (loss) per common share:

 

 

 

 

 

As reported

 

$

(0.22

)

$

0.09

 

Pro forma

 

$

(0.23

)

$

0.11

 


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

NOTE 9.                RECENTLY ADOPTED ACCOUNTING STANDARDS

In June 2005, the Financial Accounting Standards Board 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”).  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 affected 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 was effective for accounting changes and corrections of errors made by the Company beginning January 1, 2006.

In June 2005, the Emerging Issues Task Force 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

24




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.              DEBT AND COLLATERALIZED INDEBTEDNESS

Debt

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 September 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 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 September 30, 2006, $51,994 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 September 30, 2006 on borrowings under the term A-1 loan facility and term B loan facility were 6.70% and 7.18%, 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

25




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 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 $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 (the “New RNS Credit Facility”) providing for an $800,000 senior secured 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 then existing credit facility.  The term A loan facility matures June 30, 2013 and the revolving credit facility matures June 30, 2012.  The New RNS Credit Facility allows RNS to utilize up to $50,000 of the revolving credit facility for letters of credit and up to $5,000 for a swing loan.  Further, the New RNS Credit Facility provides for an incremental facility of up to $925,000, provided that it be for a minimum amount of $100,000.  If an incremental facility is established, RNS and the lenders will enter into a supplement to the New RNS Credit Facility with terms and conditions that are no more restrictive than those of the New RNS Credit Facility.  There are no commitments from the lenders to fund an incremental facility.

26




On July 5, 2006, RNS borrowed the entire $500,000 term A loan facility and $10,000 under the revolving credit facility.  RNS used the $510,000 borrowed under the New RNS Credit Facility and $88,048 of additional available cash to repay all of its outstanding borrowings, accrued interest and fees due under its August 2004 $950,000 senior secured credit facility of which $592,500 was outstanding under a term loan at July 5, 2006 (scheduled to mature March 31, 2012) and to pay certain fees and expenses incurred in connection with the New RNS Credit Facility.  RNS may use future borrowings under the credit agreement to make investments, distributions, and other payments permitted under the New RNS Credit Facility and for general corporate purposes.  The borrowings under the New RNS Credit Facility may be repaid without penalty at any time.  At September 30, 2006, $500,000 was outstanding under the term A loan and $38,000 was outstanding under the revolving credit facility. RNS had $262,000 in undrawn revolver commitments at September 30, 2006.

Borrowings under the New RNS Credit Facility are direct obligations of RNS which are guaranteed jointly and severally by substantially all of its subsidiaries and by Rainbow Programming Holdings LLC, the direct parent of RNS, and are secured by the pledge of the stock of RNS and substantially all of its subsidiaries and all of the other assets of RNS and substantially all of its subsidiaries (subject to certain limited exceptions).  Borrowings under the New RNS Credit Facility bear interest based on either the Base Rate (the greater of the Federal Funds Rate plus 0.5% and the prime rate (as defined in the New RNS Credit Facility)), or the Eurodollar Rate (as defined in the New RNS Credit Facility).  The interest rate under the New RNS Credit Facility varies, depending on RNS’ cash flow ratio (as defined in the New RNS Credit Facility) from 1.0% to 1.5% over the Eurodollar Rate for Eurodollar-based borrowings and from zero to 0.5% over the Base Rate for Base Rate borrowings.  On September 30, 2006, the interest rate on the term A loan facility and the revolving credit facility was 6.76% and 6.66%, respectively.  The term A loan is to be repaid in quarterly installments of 1.25% of the original outstanding balance ($6,250) from March 31, 2008 until December 31, 2010, 2.5% of the original outstanding balance ($12,500) from March 31, 2011 until December 31, 2012, and 32.5% of the original outstanding balance ($162,500) on March 31, 2013 and June 30, 2013, the term A loan maturity date.  Any amounts outstanding under the revolving credit facility are due at maturity on June 30, 2012.

The financial covenants consist of (i) a minimum ratio of operating cash flow to total interest expense for each quarter (all as defined in the New RNS Credit Facility) of 1.75 to 1, (ii) a maximum cash flow ratio of total indebtedness to annualized operating cash flow (as defined in the New RNS Credit Facility) of 6.75 to 1 through June 30, 2008, decreasing thereafter to 6.25 to 1, and (iii) a maximum senior secured leverage ratio of senior secured debt to annualized operating cash flow (as defined in the New RNS Credit Facility) of 5.50 to 1.  Additional covenants include restrictions on indebtedness, guarantees, liens, investments, dividends and distributions and transactions with affiliates.

RNS is obligated to pay fees of 0.375% per annum on any undrawn revolver commitment.

In connection with the New RNS Credit Facility, RNS incurred deferred financing costs of $5,369, which are being amortized to interest expense over the term of the New RNS Credit Facility.  The Company recorded $6,084 as a write-off of deferred financing costs associated with the repayment of the August 2004 credit facility in July 2006.

27




 

Total amounts payable by the Company under the new Restricted Group credit facility and the New RNS Credit Facility are as follows:

Three months ending December 31, 2006

 

$

17,500

 

 

 

 

 

Year ending December 31,

 

 

 

2007

 

$

85,000

 

2008

 

110,000

 

2009

 

310,000

 

2010

 

310,000

 

Thereafter

 

4,196,750

 

 

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 September 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 September 30, 2006

 

 

 

(in thousands)

 

 

 

 

 

April 2008

 

$

500,000

 

5.24

%

5.50

%

 

 

 

 

 

 

 

 

April 2009

 

$

600,000

 

5.25

%

5.50

%

 

 

 

 

 

 

 

 

June 2010

 

$

2,600,000

 

5.34

%

5.37

%

 

As of September 30, 2006, the interest rate swap contracts noted above had a fair market value and carrying value of $38,404, a net liability position, as reflected under derivative contracts in our condensed consolidated balance sheet.

Debt Covenants

CSC Holdings Credit Agreement:

On August 29, 2006, CSC Holdings advised the agent bank and the lenders under the new Restricted Group credit facility that due to the expected restatement of its financial statements resulting from the stock option review discussed in Note 3, it was unable to comply with its covenant to deliver financial information, due on that date, with respect to the periods ended June 30, 2005 and 2006.  Under the new Restricted Group credit facility, the covenant noncompliance would become an event of default if the noncompliance remained unremedied for 30 days after notice from the agent bank or any lender (other than a lender under the term B facility), or for 60 days after notice from the agent bank or term B lenders holding at least 25% of the term B facility.

On August 29, 2006, the lenders under the new Restricted Group credit facility, other than the term B lenders, agreed to waive until September 22, 2006 any default resulting from the covenant noncompliance under the new Restricted Group credit facility due to the expected restatement so notice of default could not be given by such a lender until September 25, 2006 at the earliest and the Restricted Group would have 30 days from the date of any such notice to cure the

28




 

default.  CSC Holdings delivered all required information under the new Restricted Group credit facility on September 21, 2006 and the information delivery covenant noncompliance was cured by that delivery.

The Restricted Group did not obtain a waiver of the default resulting from the covenant noncompliance from the lenders holding term B loans under the new Restricted Group credit facility and, on September 7, 2006, the bank serving as administrative agent under the new Restricted Group credit facility gave a notice of default to CSC Holdings with respect to such term B covenant noncompliance.  As a result, the Restricted Group had 60 days (until November 6, 2006) to cure its noncompliance with the financial information covenant.  CSC Holdings delivered all required information under the new Restricted Group credit facility on September 21, 2006 and the information delivery covenant noncompliance was cured by that delivery.

Cablevision and CSC Holdings Indentures:

As a result of not filing their Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 by September 8, 2006, Cablevision and CSC Holdings were not in compliance with the information delivery and filing requirements under the indentures relating to their notes and debentures.  Such noncompliance would become an event of default as to any series of notes or debentures if Cablevision or CSC Holdings, as the case may be, received notice of such default from the trustee or the holders of at least 25% of the securities of that series and failed to cure the covenant noncompliance within 60 days after receipt of the notice.  On September 12, 2006, Cablevision received a letter from an investment manager stating that it was acting for funds beneficially owning more than 25% of the outstanding securities of a series under one of Cablevision’s indentures.  The letter stated that it served as a notice of default under the applicable indenture and demanded that the covenant noncompliance be remedied.  Assuming the letter constituted a valid notice of default from holders of at least 25% of the securities of the relevant series, Cablevision had 60 days (until November 11, 2006) to cure its noncompliance with the information delivery and filing covenant.  Cablevision and CSC Holdings delivered all required information under the indentures on September 21, 2006, at which time the Company was in compliance with all of the covenants of its debt instruments.

Collateralized Indebtedness

The following table summarizes the settlement of the Company’s collateralized indebtedness for the nine months ended September 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.

29




 

 

 

Charter

 

AT&T

 

Comcast

 

General
Electric

 

Total

 

Number of shares

 

5,586,687

 

2,592,423

 

5,379,956

 

12,742,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized indebtedness settled

 

$

(125,907

)

$

(124,505

)

$

(197,776

)

$

(314,028

)

$

(762,216

)

Prepaid forward contracts

 

119,177

 

52,696

 

31,385

 

(50,864

)

152,394

 

Fair value of underlying securities delivered

 

6,730

 

71,809

 

 

 

78,539

 

Net cash payment

 

$

 

$

 

$

(166,391

)

$

(364,892

)

$

(531,283

)

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from new monetization contracts

 

$

 

$

 

$

147,259

 

$

382,261

 

$

529,520

 

Proceeds from prepaid interest rate swap contract

 

 

 

6,496

 

 

6,496

 

 

 

$

 

$

 

$

153,755

 

$

382,261

 

$

536,016

 

 

At September 30, 2006, the Company had collateralized indebtedness obligations of $209,736 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.

Redemption of Senior Subordinated Debentures

In June 2006, CSC Holdings redeemed all of its $250,000 10-1/2% Senior Subordinated Debentures due 2016 that were issued in May 1996 at a redemption price of 105.25% plus accrued interest.  In connection with the redemption, the Company recognized a loss on extinguishment of debt of $13,125 and wrote off the remaining deferred financing costs of $3,412.

NOTE 11.              INCOME TAXES

The income tax benefit attributable to continuing operations for the nine months ended September 30, 2006 of $132,756 differs from the income tax benefit derived from applying the statutory federal rate to the pretax loss due principally to income tax expense of $10,215 due to non-deductible expenses, state taxes, income tax benefit of $5,013 resulting from the favorable settlement of an issue with a taxing authority, income tax benefit of $16,356 resulting from the reduction of a tax contingency liability pursuant to a change in management’s judgment and a decrease in the valuation allowance of $5,414 relating to certain state net operating loss carry forwards.

State income tax benefit for the nine months ended September 30, 2006 was greater than the expected tax benefit amount derived by applying the blended state income tax rate to the pretax loss primarily due to a reduced amount of state income tax expense of $9,818 resulting from the utilization of a lower state income tax rate on realized and unrealized gains on certain stock investments.

The income tax benefit attributable to continuing operations for the nine months ended September 30, 2005 of $60,341, as restated, differs from the income tax benefit derived from applying the statutory federal rate to the pretax loss due principally to income tax expense of $15,366 due to non-deductible expenses, state taxes, and an increase in the valuation allowance of $5,422 relating to certain state net operating loss carry forwards.

30




 

State income tax benefit for the nine months ended September 30, 2005 was lower than the expected tax benefit amount derived by applying the blended state income tax rate to the pretax loss primarily due to a reduced amount of state income tax benefit of $6,413 resulting from the utilization of a lower state income tax rate on unrealized losses on certain stock investments.

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 previous 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 the first nine months of 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 nine months ended September 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.

In general, deferred tax assets and liabilities are classified as either current or noncurrent based on the balance sheet classification of the underlying asset or liability.  Current deferred tax assets and liabilities are netted and presented as either a current deferred tax asset or a current deferred tax liability.  As of December 31, 2005, a current deferred tax liability of $253,555 relating to investment securities pledged as collateral and derivative contracts was netted against current deferred tax assets and the resulting net current deferred tax asset of $10,788 was reported on the Company’s balance sheet.  Due primarily to reclassifications between the amount of current and noncurrent investment securities pledged as collateral and derivative contracts as a result of changing maturity dates, a current deferred tax liability of $18,640 relating to these items has been netted against current deferred tax assets to result in the net current deferred tax asset of $238,223 reported on the Company’s balance sheet as of September 30, 2006.

Deferred tax assets have resulted primarily from the Company’s future deductible temporary differences and net operating loss carry forwards.  In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized.  The Company’s ability to realize its deferred tax assets depends upon the generation of sufficient future taxable income and tax planning strategies to allow for the utilization of its net operating loss carry forwards and deductible temporary differences.  If such estimates and related assumptions change in the future, the Company may be required to record additional valuation allowances against certain of its deferred tax assets resulting in additional income tax expense in the Company’s consolidated statement of operations.  Management evaluates the realizability of the deferred tax assets and the need for additional valuation allowances quarterly.  At this time, based on current facts and circumstances,

31




management believes that it is more likely than not that the Company will realize benefit for its gross deferred tax assets, except for certain of its deferred tax assets against which a valuation allowance has been recorded which relate to certain state net operating loss carry forwards.

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

)

363

 

143

 

Payments

 

 

(214

)

(143

)

Balance at September 30, 2006

 

$

 

$

149

 

$

 

 

In addition, for the nine months ended September 30, 2006, the Company recorded restructuring credits of $4,966 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 September 30, 2006 was zero.

In 2006, the Company recorded restructuring charges of $506, which included expenses of approximately $143 associated with the elimination of approximately ten positions at a programming business within the Rainbow segment (which was fully paid as of September 30, 2006) and estimated expenses of approximately $363 associated with facility realignment costs of the Company’s corporate assets, which 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

 

$

19,586

 

$

1,105

 

$

143

 

$

35,942

 

Facility realignment and other costs

 

23,122

 

53,688

 

 

363

 

77,173

 

Cumulative restructuring charges recognized as of September 30, 2006

 

$

38,230

 

$

73,274

 

$

1,105

 

$

506

 

$

113,115

 

 

 

32




NOTE 13.              INTANGIBLE ASSETS

The following table summarizes information relating to the Company’s acquired intangible assets at September 30, 2006 and December 31, 2005:

 

 

September 30,
2006

 

December 31,
2005

 

Gross carrying amount of amortizable intangible assets

 

 

 

 

 

Affiliation relationships and affiliate agreements

 

$

782,367

 

$

782,367

 

Broadcast rights and other agreements

 

86,748

 

86,748

 

Season ticket holder relationships

 

75,005

 

75,005

 

Suite holder contracts and relationships

 

21,167

 

21,167

 

Advertiser relationships

 

104,071

 

104,071

 

Other intangibles

 

88,708

 

87,400

 

 

 

1,158,066

 

1,156,758

 

Accumulated amortization

 

 

 

 

 

Affiliation relationships and affiliate agreements

 

351,508

 

305,677

 

Broadcast rights and other agreements

 

49,078

 

44,075

 

Season ticket holder relationships

 

8,663

 

4,576

 

Suite holder contracts and relationships

 

4,983

 

2,491

 

Advertiser relationships

 

39,941

 

31,315

 

Other intangibles

 

34,957

 

29,810

 

 

 

489,130

 

417,944

 

Indefinite-lived intangible assets

 

 

 

 

 

Franchises

 

731,848

 

731,848

 

Sports franchises

 

96,215

 

96,215

 

FCC licenses and other intangibles

 

11,936

 

19,076

 

Trademarks

 

53,880

 

53,880

 

Excess costs over the fair value of net assets acquired

 

987,406

 

993,426

 

 

 

1,881,285

 

1,894,445

 

Total intangible assets, net

 

$   2,550,221

 

$   2,633,259

 

 

The changes in the carrying amount of excess costs over the fair value of net assets acquired (“goodwill”) for the nine months ended September 30, 2006 are as follows:

 

 

Telecommunications

 

MSG

 

Rainbow

 

Other

 

Total
Company

 

Balance as of December 31, 2005

 

$

206,971

 

$

724,033

 

$         47,965

 

$

14,457

 

$       993,426

 

Impairment loss from continuing operations

 

 

 

 

(899

)

(899

)

Impairment loss from discontinued operations (Note 7)

 

 

 

(5,121

)

 

(5,121

)

Balance as of September 30, 2006

 

$

206,971

 

$

724,033

 

$         42,844

 

$

13,558

 

$       987,406

 

 

33




NOTE 14.              BENEFIT PLANS

The Company has a Cash Balance Retirement Plan (the “Retirement Plan”) for the benefit of employees other than those of the Clearview Cinemas business.  Under the Retirement Plan, the Company will credit a certain percentage of eligible base pay into an account established for each participant, which will earn a market based rate of return annually.  Components of the net periodic pension cost for the Retirement Plan for the three and nine months ended September 30, 2006 and 2005 are as follows:

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Service cost

 

$

6,912

 

$

5,942

 

$

20,749

 

$

18,878

 

Interest cost

 

1,900

 

1,433

 

5,706

 

4,639

 

Expected return on plan assets

 

(2,684

)

(1,869

)

(7,412

)

(6,035

)

Net periodic benefit cost

 

$

6,128

 

$

5,506

 

$

19,043

 

$

17,482

 

 

The Company contributed the minimum required payment of approximately $6,788 to its Retirement Plan, as well as a discretionary payment of approximately $18,712 during the nine months ended September 30, 2006.

Madison Square Garden sponsors a non-contributory pension plan (“MSG Plan”) covering its non-union employees hired prior to January 1, 2001.  Benefits payable to retirees under this plan are based upon years of service and participants’ compensation and is funded through a trust established under the MSG Plan.  Components of the net periodic pension cost for the MSG Plan for the three and nine months ended September 30, 2006 and 2005 are as follows:

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2006

 

2005

 

2006

 

2005