SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

 

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  ý	No  o
CSC Holdings, Inc.	Yes  ý	No  o

 

Number of shares of common stock outstanding as of May 1, 2004:

 

Cablevision NY Group Class A Common Stock -	219,885,315
Cablevision NY Group Class B Common Stock -	67,052,781
CSC Holdings, Inc. Common Stock -	6,429,987

 

 

PART I.  FINANCIAL INFORMATION

 

For information required by Item 1 and Item 2, refer to Index to Financial Statements on page 9.

 

Item 3.                                                             Quantitative And Qualitative Disclosures About Market Risk

 

The Company is exposed to market risks from changes in certain equity security prices and interest rates.  Our exposure to changes in equity security prices stems primarily from the Comcast Corporation, AT&T Corp., Charter Communications, Inc., AT&T Wireless Services, Inc., General Electric Company, Leapfrog Enterprises, Inc., and Adelphia Communications Corporation common stock held by us.  We have entered into prepaid forward contracts consisting of a collateralized loan and an equity collar to hedge our equity price risk and to monetize the value of these securities.  These contracts, at maturity, are expected to offset declines in the fair value of these securities below the hedge price per share, while allowing us to retain upside appreciation from the hedge price per share to the relevant cap price.  The contracts’ actual hedge prices per share vary depending on average stock prices in effect at the time the contracts were executed.  The contracts’ actual cap prices vary depending on the maturity and terms of each contract, among other factors.  In the event of an early termination of any of these contracts, we would be obligated to repay the fair value of the collateralized indebtedness less the sum of the fair value of the underlying stock and the fair value of the equity collar, calculated at the termination date.  The underlying stock and equity collars are carried at fair value on our consolidated balance sheet and the collateralized indebtedness is carried at its accreted value.

 

As of March 31, 2004, the fair value and the carrying value of our holdings of Comcast, AT&T, Charter Communications, AT&T Wireless, General Electric, Leapfrog and Adelphia Communications common stock aggregated $1,245.0 million.  Assuming a 10% change in price, the potential change in the fair value of these investments would be approximately $124.5 million.  As of March 31, 2004, the net fair value and the carrying value of the equity collar component of the prepaid forward contracts entered into to hedge the equity price risk of certain of these securities aggregated $509.4 million, a net receivable position.

 

The maturity, number of shares deliverable at the relevant maturity, hedge price per share, and the lowest and highest cap prices received for each security monetized via a prepaid forward contract are summarized in the following table:

 

2

 

Security		# of Shares Deliverable		Maturity		Hedge Price per Share*		Cap Price **
								Low			High
Comcast		7,159,205		2005		$35.90 - $38.47		$	46.62		$	63.91
		7,159,206		2006
AT&T		4,426,093		2005		$34.39 - $42.08		$	44.71		$	61.21
		4,426,093		2006
Charter Communications		1,862,229		2005		$22.35 - $22.92		$	32.24		$	38.33
		5,586,687		2006
		3,724,460		2007
AT&T Wireless		7,121,583		2005		$16.84 - $18.65		$	27.62		$	33.15
		7,121,583		2006
General Electric		12,742,033		2006		$23.14 - $25.67		$	27.76		$	30.81
Adelphia Communications		1,010,000		2005		$39.04 - $40.04		$	62.57		$	63.57
Leapfrog		800,000		2007		$23.55 - $24.55		$	29.87		$	30.87

 

*                             Represents the price below which we are provided with downside protection and above which we retain upside appreciation.  Also represents the price used in determining the cash proceeds payable to us at inception of the contracts.

**                      Represents the price up to which we receive the benefit of stock price appreciation.

 

Our exposure to interest rate movements results from our use of floating and fixed rate debt to fund our working capital, capital expenditures, and other operational and investment requirements.  To manage interest rate risk, from time to time we have entered into interest rate swap contracts to adjust the proportion of total debt that is subject to variable and fixed interest rates.  Such contracts fix the borrowing rates on floating rate debt to provide an economic hedge against the risk of rising rates and/or convert fixed rate borrowings to variable rates to provide an economic hedge against the risk of higher borrowing costs in a declining interest rate environment.  In addition, from time to time we may utilize short-term interest rate lock agreements to hedge the risk that the cost of a future issuance of fixed rate debt may be adversely affected by changes in interest rates.  We do not enter into interest rate swap contracts for speculative or trading purposes.

 

Fair Value of Debt:  Based on the level of interest rates prevailing at March 31, 2004, the fair value of our fixed rate debt and redeemable preferred stock liabilities of $7,794.1 million exceeded their carrying value of $7,328.8 million by approximately $465.3 million.  The fair value of these financial instruments is estimated based on reference to quoted market prices for these or comparable securities.  Our floating rate borrowings bear interest in reference to current LIBOR-based market rates and thus approximate fair value.  The effect of a hypothetical 100 basis point decrease in interest rates prevailing at March 31, 2004 would increase the estimated fair value of our fixed rate debt and redeemable preferred stock liabilities by approximately $261.2 million to $8,055.3 million.  This estimate is based on the assumption of an immediate and parallel shift in interest rates across all maturities. 

 

3

 

Interest Rate Derivative Contracts:  As of March 31, 2004, we had outstanding interest rate swap contracts to convert fixed rate debt to floating rate debt covering a total notional principal amount of $450 million.  As of March 31, 2004, the fair market value and carrying value of these interest rate swap contracts was approximately $7.4 million, a net receivable position, as reflected under derivative contracts in our consolidated balance sheet.  Assuming an immediate and parallel shift in interest rates across the yield curve, a 100 basis point increase in interest rates from March 31, 2004 prevailing levels would decrease the fair value of these contracts to a net liability of $6.7 million.

 

In addition, we had outstanding prepaid interest rate swap contracts with a notional value of $1,115.0 million entered into in connection with our monetization transactions.  As of March 31, 2004, such contracts had a fair market value and carrying value of $50.2 million, a net liability position, reflected as liabilities under derivative contracts in our consolidated balance sheet.  Assuming an immediate and parallel shift in interest rates across the yield curve, a 100 basis point increase in interest rates from March 31, 2004 prevailing levels would increase the fair market value of our liabilities under derivative contracts by approximately $17.8 million to a liability of $68.0 million.

 

Item 4.                    Controls and Procedures

 

An evaluation was carried out under the supervision and with the participation of Cablevision’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Securities and Exchange Commission rules).  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this report.

 

In March 2004, the Company reported that Wilmer Cutler Pickering LLP had completed its investigation of improper expense recognition and made recommendations with respect to improvements in internal controls.  Certain of these recommendations for both new policies and procedures (including vendor payment guidelines, signature and password protection and communication of information to those responsible for the preparation of financial statements) and enhancement and reinforcement of existing policies and procedures (including those related to expense recognition and accruals and required support for payments and accruals) have already been implemented by the Company and other recommendations (including those for reassessment and improvement of the structure and accountability of employees of the operating units responsible for accumulating information for and preparation of financial statements, additional training and education of the employees within those areas and implementation of additional internal audit procedures) will be implemented by the Company over the next few months.

 

4

 

PART II.  OTHER INFORMATION

 

Item 1.    Legal Proceedings

 

The Company is party to various lawsuits, some involving substantial amounts.  Although the outcome of these matters cannot be predicted with certainty, management does not believe that the resolution of these lawsuits will have a material adverse effect on the financial position, results of operations or liquidity of the Company.

 

At Home

 

On April 25, 2001, At Home Corporation commenced a lawsuit in the Court of Chancery of the State of Delaware alleging that Cablevision had breached its obligations under certain agreements with At Home.  The suit sought a variety of remedies including:  rescission of the agreements between At Home and Cablevision and cancellation of all warrants held by Cablevision, damages, and/or an order prohibiting Cablevision from continuing to offer its Optimum Online service and requiring it to convert its Optimum Online customers to the Optimum@Home service and to roll out the Optimum@Home service.  On September 28, 2001, At Home filed a petition for reorganization in federal bankruptcy court.  In connection with the liquidation of At Home, the claims in this lawsuit, among others, were assigned to the General Unsecured Creditors Liquidated Trust (“GUCLT”).

 

On June 26, 2003, the GUCLT initiated a separate action against Cablevision in the United States District Court for the Northern District of California. The California action stems from a May 1997 agreement between Cablevision and At Home that is no longer in effect.  The GUCLT seeks monetary damages of “at least $12.5 million” due to the claimed failure by Cablevision to make alleged required payments to At Home during the 2001 calendar year.

 

On July 29, 2003, based on an agreed Stipulation filed jointly by Cablevision and the GUCLT, the Court dismissed the Delaware action with prejudice, other than solely with respect to the specific claims brought by the GUCLT in the California action.

 

YES Network

 

On April 29, 2002, Yankees Entertainment & Sports Network, LLC (the “YES Network”) filed a complaint and, on September 24, 2002, an amended complaint against the Company in the United States District Court, Southern District of New York.  The lawsuit arises from the failure of the YES Network and the Company to reach agreement on the carriage of programming of the YES Network (primarily New York Yankees baseball games and New Jersey Nets basketball games) on the Company’s cable television systems.  The amended complaint alleges a variety of anticompetitive acts and seeks declaratory judgments as to violations of laws, treble damages and injunctive relief, including an injunction requiring the Company to carry the YES Network on its cable television systems.  The Company believes that the claims set forth in the complaint are without merit.  As a result of the March 2003 agreement discussed below, the litigation with the YES Network has been stayed and, under the terms of the agreement, will ultimately be dismissed.

 

5

 

On March 31, 2003, YES Network and Cablevision reached an agreement pursuant to which Cablevision began carrying programming of the YES Network.  Under this agreement, Cablevision agreed to carry the YES Network programming for one year under interim arrangements while the parties sought to finalize the terms of a definitive long-term affiliation agreement and/or submitted the matter to arbitration.  The matter was ultimately submitted to arbitration.  The hearing before the arbitration panel ended in March 2004 and, through the arbitrators’ decision and a new written agreement by the parties, established the terms for a definitive long-term affiliation agreement that is effective retroactively to March 31, 2003.

 

As part of the original March 31, 2003 agreement, Cablevision agreed to pay YES Network for certain revenue reductions and expenses that YES Network experienced while the interim agreement was in place, under the “most favored nations” provisions of YES Network’s affiliation agreements with certain other distributors.  In light of the recent arbitration decision, no further indemnification payments are being made and appropriate refunds as to amounts already paid are expected.

 

Tracking Stock Litigation

 

In August 2002, purported class actions naming as defendants the Company and each of its directors were filed in the Delaware Chancery Court.  The actions, which allege breach of fiduciary duties and breach of contract with respect to the exchange of the Rainbow Media Group tracking stock for Cablevision NY Group common stock, were purportedly brought on behalf of all holders of publicly traded shares of Rainbow Media Group tracking stock.  The actions sought to (i) enjoin the exchange of Rainbow Media Group tracking stock for Cablevision NY Group common stock, (ii) enjoin any sales of “Rainbow Media Group assets,” or, in the alternative, award rescissory damages, (iii) if the exchange is completed, rescind it or award rescissory damages, (iv) award compensatory damages, and (v) award costs and disbursements.  The actions were consolidated into one action on September 17, 2002, and on October 3, 2002, the Company filed a motion to dismiss the consolidated action.  The action is currently stayed by agreement of the parties pending resolution of a related action brought by one of the plaintiffs to compel the inspection of certain books and records of the Company.  The Company believes the claims are without merit and intends to contest the lawsuits vigorously.

 

In August 2003, a purported class action naming as defendants the Company, directors and officers of the Company and certain current and former officers and employees of the Company’s Rainbow Media Holdings and American Movie Classics subsidiaries was filed in New York Supreme Court by the Teachers Retirement System of Louisiana.  The actions relate to the August 2002 Rainbow Media Group tracking stock exchange and allege, among other things, that the exchange ratio was based upon a price of the Rainbow Media Group tracking stock that was artificially deflated as a result of the improper recognition of certain expenses at the national services division of Rainbow Media Holdings.  The complaint alleges breaches by the individual defendants of fiduciary duties.  The complaint also alleges breaches of contract and unjust enrichment by the Company.  The complaint seeks monetary damages and such other relief as the court deems just and proper.  The Company intends to contest the lawsuit vigorously.  On October 31, 2003, the Company and other defendants moved to stay the action in favor of the previously filed actions pending in Delaware or, in the alternative, to dismiss for failure to state a claim.  The parties are awaiting a decision from the court on this motion.

 

6

 

Time Warner Litigation

 

On November 14, 2003, American Movie Classics Company filed an action against Time Warner Entertainment, L.P. in New York State Supreme Court for declaratory relief and damages caused by Time Warner’s anticipatory repudiation of its cable television affiliation agreement with American Movie Classics.  American Movie Classics filed that action as a result of Time Warner’s notice purporting to terminate the contract based upon their allegation that American Movie Classics had changed its programming.  The Company believes the notice was improper.  American Movie Classics is seeking a declaratory judgment that it is entitled to full performance of the agreement, and, at its option, is entitled to rescind the agreement and recover damages.  Time Warner filed an answer and counterclaims in December 2003 that, among other things, seeks a declaratory judgment as to its right to terminate the affiliation agreement, an injunction requiring American Movie Classics to deliver a classic films channel and damages for an alleged breach of contract.

 

Accounting Related Investigations

 

The Securities and Exchange Commission and the U.S. Attorney’s Office for the Eastern District of New York continue to conduct investigations into matters related to the improper expense recognition previously reported by the Company.

 

Item 6.                    Exhibits and Reports on Form 8-K

 

(a)           Exhibits.

 

4.1		Indenture dated as of April 6, 2004 relating to Cablevision’s $1,000,000,000 8% Senior Notes due 2012.
4.2		Indenture dated as of April 6, 2004 relating to Cablevision’s $500,000,000 floating rate Senior Notes due 2009.
4.3		Indenture dated as of April 6, 2004 relating to CSC Holdings’ $500,000,000 6-3/4% Senior Notes due 2012.
10.1		Employment Agreement, dated as of June 23, 2003, between Cablevision Systems Corporation and Thomas Rutledge.
31.1		Section 302 Certification of the CEO
31.2		Section 302 Certification of the CFO
32		Section 906 Certification of the CEO and CFO

 

(b)           Reports on Form 8-K.

 

Cablevision Systems Corporation filed current reports on Form 8-K with the Commission on March 3, 2004, March 29, 2004 and April 3, 2004.

 

CSC Holdings, Inc. filed current reports on Form 8-K with the Commission on March 3, 2004, March 29, 2004 and April 3, 2004.

 

7

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.

 

 

				CABLEVISION SYSTEMS CORPORATION
				CSC HOLDINGS, INC
Date:	May 10, 2004				/s/ William J. Bell
				By:	William J. Bell as Vice Chairman, Director and Principal Financial Officer of Cablevision Systems Corporation and CSC Holdings, Inc.
Date:	May 10, 2004			By:	/s/ Andrew B. Rosengard
					Andrew B. Rosengard as Executive Vice President, Finance and Principal Accounting Officer of Cablevision Systems Corporation and CSC Holdings, Inc.

 

8

 

INDEX TO FINANCIAL STATEMENTS

 

CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES
Item 1.	Financial Statements	Page
	Condensed Consolidated Balance Sheets – March 31, 2004 (unaudited) and December 31, 2003	I-1
	Condensed Consolidated Statements of Operations – Three Months Ended March 31, 2004 and 2003 (unaudited)	I-3
	Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2004 and 2003 (unaudited)	I-4
	Notes to Condensed Consolidated Financial Statements (unaudited)	I-5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	I-16
CSC HOLDINGS, INC. AND SUBSIDIARIES
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets – March 31, 2004 (unaudited) and December 31, 2003	II-1
	Condensed Consolidated Statements of Operations – Three Months Ended March 31, 2004 and 2003 (unaudited)	II-3
	Condensed Consolidated Statements of Cash Flows – Three Months Ended March 31, 2004 and 2003 (unaudited)	II-4
	Notes to Condensed Consolidated Financial Statements (unaudited)	II-5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	II-16

 

9

 

CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

		March 31, 2004			December 31, 2003
		(unaudited)
ASSETS
Current Assets
Cash and cash equivalents		$	205,334		$	326,962
Accounts receivable trade (less allowance for doubtful accounts of $41,741 and $44,941)		354,770			355,835
Notes and other receivables, current		78,954			74,463
Investment securities, current		8,126			5,874
Prepaid expenses and other current assets		99,964			108,071
Feature film inventory, net		95,286			92,362
Deferred tax asset, current		50,521			66,649
Advances to affiliates		32,229			31,600
Derivative contracts		63,683			—
Assets held for sale		65,000			—
Total current assets		1,053,867			1,061,816
Property, plant and equipment, net		4,497,595			4,593,210
Investments in affiliates		26,688			25,449
Investment securities pledged as collateral		1,236,828			1,224,498
Notes and other receivables		89,656			95,815
Derivative contracts		502,725			586,894
Other assets		68,617			63,272
Long-term feature film inventory, net		373,514			303,393
Deferred carriage fees, net		124,035			119,225
Franchises, net of accumulated amortization of $2,730 and $2,552		735,201			735,362
Affiliation, broadcast and other agreements, net of accumulated amortization of $338,127 and $314,723		610,477			630,523
Other intangible assets, net of accumulated amortization of $36,125 and $32,427		244,268			159,268
Excess costs over fair value of net assets acquired		1,472,643			1,472,643
Deferred financing and other costs, net of accumulated amortization of $56,521 and $61,783		113,448			117,831
		$	11,149,562		$	11,189,199

 

See accompanying notes to
condensed consolidated financial statements.

 

I-1

 

CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

		March 31, 2004			December 31, 2003
		(unaudited)
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current Liabilities
Accounts payable		$	358,143		$	334,283
Accrued liabilities		889,588			853,026
Accounts payable to affiliates		13,355			10,231
Deferred revenue, current		73,385			117,709
Feature film and contract obligations		103,841			92,206
Liabilities under derivative contracts		40,501			38,968
Current portion of bank debt		—			111,039
Current portion of collateralized indebtedness		98,851			—
Current portion of capital lease obligations		15,140			15,636
Liabilities held for sale		65,000			—
Total current liabilities		1,657,804			1,573,098
Feature film and contract obligations, long-term		351,821			286,955
Deferred revenue		15,051			16,322
Deferred tax liability		206,544			289,055
Liabilities under derivative contracts		97,928			127,751
Other long-term liabilities		289,817			264,906
Bank debt, long-term		2,332,437			2,246,000
Collateralized indebtedness		1,532,463			1,617,620
Senior notes and debentures		3,692,931			3,692,699
Subordinated debentures		599,221			599,203
Notes payable		150,000			150,000
Capital lease obligations, long-term		65,624			69,220
Series H Redeemable Exchangeable Preferred Stock		434,181			434,181
Series M Redeemable Exchangeable Preferred Stock		1,110,113			1,110,113
Deficit investment in affiliates		45,326			41,111
Minority interests		584,892			580,766
Total liabilities		13,166,153			13,099,000
Preferred Stock of CSC Holdings, Inc.		80,001			80,001
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, 241,461,437 and 241,408,518 shares issued and 219,645,210 and 219,592,291 shares outstanding		2,415			2,414
CNYG Class B Common Stock, $.01 par value, 320,000,000 shares authorized, 67,214,237 and 67,217,427 shares issued and outstanding		672			672
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		1,149,975			1,136,786
Accumulated deficit		(2,888,952		)	(2,768,972		)
		(1,735,890		)	(1,629,100		)
Treasury stock, at cost (21,816,227 shares)		(359,750		)	(359,750		)
Accumulated other comprehensive loss		(952		)	(952		)
Total stockholders’ deficiency		(2,096,592		)	(1,989,802		)
		$	11,149,562		$	11,189,199

 

See accompanying notes
to condensed consolidated financial statements.

 

I-2

 

CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(Unaudited)

 

		Three Months Ended March 31,
		2004			2003
Revenues, net		$	1,187,137		$	1,000,951
Operating expenses:
Technical and operating		618,306			470,523
Selling, general and administrative		312,087			246,634
Restructuring expense (credits)		2,790			(4,464		)
Depreciation and amortization		263,519			256,688
		1,196,702			969,381
Operating income (loss)		(9,565		)	31,570
Other income (expense):
Interest expense		(177,125		)	(129,394		)
Interest income		938			5,564
Equity in net loss of affiliates		(2,990		)	(8,183		)
Write-off of deferred financing costs		(1,187		)	—
Gain on investments, net		14,622			7,385
Gain (loss) on derivative contracts, net		1,387			(10,708		)
Minority interests		4,335			(55,541		)
Miscellaneous, net		(549		)	(1,288		)
		(160,569		)	(192,165		)
Loss from continuing operations before income taxes		(170,134		)	(160,595		)
Income tax benefit		58,400			29,217
Loss from continuing operations		(111,734		)	(131,378		)
Loss from discontinued operations, net of taxes (including loss of $12,844 on the sale of the retail electronics business in 2003)		(810		)	(19,944		)
Loss before extraordinary item		(112,544		)	(151,322		)
Extraordinary loss on investment, net of taxes		(7,436		)	—
Net loss		$	(119,980	)	$	(151,322	)
Basic and diluted net loss per share:
Loss from continuing operations		$	(0.39	)	$	(0.47	)
Loss from discontinued operations		$	—		$	(0.07	)
Extraordinary loss		$	(0.03	)	$	—
Net loss		$	(0.42	)	$	(0.54	)
Weighted average common shares (in thousands)		286,842			281,742

 

See accompanying notes to
condensed consolidated financial statements.

 

I-3

 

CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2004 and 2003

(Dollars in thousands)

(Unaudited)

 

		2004			2003
Cash flows from operating activities:
Loss from continuing operations		$	(111,734	)	$	(131,378	)
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities:
Depreciation and amortization		263,519			256,688
Equity in net loss of affiliates		2,990			8,183
Minority interests		(4,335		)	11,911
Unrealized gain on investments, net		(14,622		)	(7,385		)
Write-off of deferred financing costs		1,187			—
Unrealized gain on derivative contracts		(7,803		)	4,212
Amortization of deferred financing, discounts on indebtedness and other deferred costs		18,822			16,924
Compensation expense related to issuance of restricted stock		12,336			—
Tax benefit from exercise of stock options		297			456
Changes in assets and liabilities, net of effects of acquisitions and dispositions		(24,358		)	(245,333		)
Net cash provided by (used in) operating activities		136,299			(85,722		)
Cash flows from investing activities:
Payment for acquisition		(84,738		)	—
Capital expenditures		(141,111		)	(166,276		)
Proceeds from sale of equipment		721			9,669
Decrease in investment securities and other investments		—			3,769
Additions to intangible assets		(4,126		)	(112		)
Decrease in investments in affiliates, net		(14		)	(3,844		)
Net cash used in investing activities		(229,268		)	(156,794		)
Cash flows from financing activities:
Proceeds from bank debt		261,500			570,582
Repayment of bank debt		(286,102		)	(574,350		)
Issuance of common stock		557			928
Issuance of preferred stock		—			75,000
Net proceeds from collateralized indebtedness		—			314,029
Payments on capital lease obligations and other debt		(4,092		)	(2,806		)
Additions to deferred financing and other costs		(522		)	(4,813		)
Net cash provided by (used in) financing activities		(28,659		)	378,570
Net increase (decrease) in cash and cash equivalents from continuing operations		(121,628		)	136,054
Net effect of discontinued operations on cash and cash equivalents		—			(38,836		)
Cash and cash equivalents at beginning of year		326,962			125,940
Cash and cash equivalents at end of period		$	205,334		$	223,158

 

See accompanying notes to
condensed consolidated financial statements.

 

I-4

 

CABLEVISION SYSTEMS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

NOTE 1.                BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements of Cablevision Systems Corporation and its majority owned subsidiaries (the “Company” or “Cablevision”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.

 

NOTE 2.                RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS

 

The financial statements as of and for the three months ended March 31, 2004 and 2003 presented in this Form 10-Q are unaudited; however, in the opinion of management, such statements include all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented.

 

The interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s and CSC Holdings, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003.

 

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, 2004.

 

NOTE 3.                RECLASSIFICATIONS

 

Certain reclassifications have been made to the 2003 financial statements to conform to the 2004 presentation.

 

NOTE 4.                COMPREHENSIVE LOSS

 

Comprehensive loss for the three months ended March 31, 2004 and 2003 equals the net loss for the respective periods.

 

NOTE 5.                LOSS PER SHARE

 

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

 

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NOTE 6.                CASH FLOWS

 

For purposes of the 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.

 

Other supplemental data for the three months ended March 31, 2004 and 2003 was as follows:

 

		Three Months Ended March 31,
		2004			2003
Supplemental Data:
Cash interest paid – continuing operations		$	161,771		$	119,715
Cash interest paid – discontinued operations		—			525
Income taxes paid (refunded), net		828			(303		)
Restricted cash		17,438			4,686

 

NOTE 7.                TRANSACTIONS

 

In January 2004, Rainbow DBS, an indirect wholly-owned subsidiary of the Company, invested $100 for a 49% interest in DTV Norwich, an entity that acquired licenses at auction from the FCC to provide multichannel video distribution and data service in 46 metropolitan areas in the United States.  Concurrently with the equity investment, the Company funded DTV Norwich with an additional $84,600 loan for the acquisition of these licenses.

 

Rainbow DBS has also agreed to a put/call option with the other investor in DTV Norwich.  Once the FCC has irrevocably granted DTV Norwich its licenses, repayment of this loan is excused.  Rainbow DBS has a call option to purchase an additional 41% membership interest in DTV Norwich at an exercise price of $4,230.  If Rainbow DBS does not exercise the call option within 60 days following the grant of the licenses by the FCC, the agreement gives the other investor the right to put the 41% membership interest to Rainbow DBS at the same exercise price of $4,230.  If either party exercises its put or call option, the other investor will then have the right, for ten years, to put its remaining 10% interest to Rainbow DBS at fair value.

 

Pursuant to FIN 46, Consolidation of Variable Interest Entities, this entity is consolidated with the Company as of the date of the transaction.  The acquired licenses have been recorded in the accompanying balance sheet as other intangible assets and are deemed to have an indefinite life.  In connection with this transaction, the Company recognized an extraordinary loss of $7,436, net of taxes.

 

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NOTE 8.                STOCK OPTION PLAN

 

The Company applies APB 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock option plans. The table below sets forth the pro forma net loss as if compensation cost was determined in accordance with Statement of Financial Accounting Standards No. 123 for options granted in 1995 through 2004:

 

		Three Months Ended March 31,
		2004			2003
Net loss:
Net loss, as reported		$	(119,980	)	$	(151,322	)
Add:  Stock-based employee compensation expense included in reported net loss, net of taxes		6,381			4,050
Deduct:  Stock-based employee compensation expense determined under fair value-based method, net of taxes		(7,498		)	(9,684		)
Pro forma net loss		$	(121,097	)	$	(156,956	)
Basic and diluted net loss per common share:
As reported		$	(0.42	)	$	(0.54	)
Pro forma		$	(0.42	)	$	(0.56	)

 

The Company estimated the fair value of each option grant using the Black-Scholes option pricing model. No options were granted during the three months ended March 31, 2004.  The following assumptions were used in calculating the fair values of options granted in 2003:

 

		2003
Risk –free interest rate		2.7		%
Volatility		61.0		%
Dividend yield		0		%
Average fair value		$	9.74

 

NOTE 9.                NET ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

 

In accordance with the provisions of FIN 46, the assets and liabilities attributable to the Company’s investment in Northcoast Communications, LLC have been consolidated and classified in the consolidated balance sheet as of March 31, 2004 as assets and liabilities held for sale and consist of the following:

 

Cash, receivables, inventory, prepaid and other assets		$	7,614
Property, equipment and PCS licenses		57,386
Total assets held for sale		$	65,000
Accounts payable and accrued expenses		$	13,263
Other liabilities		51,737
Total liabilities held for sale		$	65,000

 

The operations of the retail electronics stores transferred in March 2003, including applicable restructuring charges (credits), have been classified as discontinued operations, net of taxes, in the consolidated statements of operations for all periods presented.

 

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Operating results of discontinued operations, including the loss on the disposal of the retail electronics business in March 2003 of $12,844, are summarized as follows:

 

Revenues, net		$	30,842
Loss before income taxes		(16,323		)
Income tax expense		(3,621		)
Net loss		$	(19,944	)

 

For the three months ended March 31, 2004, the Company recorded an additional loss, net of taxes, of approximately $810 that related to film asset adjustments that were finalized in connection with the sale of Bravo Company in December 2002.

 

NOTE 10.              RECENTLY ISSUED ACCOUNTING STANDARDS

 

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities.  FIN 46, as revised in December 2003, addresses consolidation by business enterprises of variable interest entities, which are entities that either (a) do not have equity investors with voting rights or (b) have equity investors that do not provide sufficient financial resources for the entity to support its activities.  For all variable interest entities created prior to February 1, 2003, the Company was required to apply the provisions of FIN 46 by March 31, 2004.  For variable interest entities created subsequent to January 31, 2003, FIN 46 was effective in 2003.  The Company has consolidated its investment in Northcoast Communications, LLC at March 31, 2004 and its investment in DTV Norwich as of the transaction date.

 

NOTE 11.              DEBT

 

In March 2004, borrowings under the Madison Square Garden (“MSG”) (a wholly-owned subsidiary of Regional Programming Partners) credit facility were repaid in full and the credit facility was terminated with proceeds from an equity contribution from Regional Programming Partners, a 60% owned subsidiary of Rainbow Media Holdings.

 

NOTE 12.              INCOME TAXES

 

The income tax benefit attributable to continuing operations for the three months ended March 31, 2004 of $58,400 differs from the income tax benefit derived from applying the statutory federal rate to pretax loss due principally to the impact of non-deductible preferred stock dividends, state taxes and an increase to the valuation allowance of $1,468 relating to certain state net operating loss carry forwards.

 

The income tax benefit attributable to continuing operations for the three months ended March 31, 2003 of $29,217 differs from the income tax benefit derived from applying the statutory federal rate to pretax loss due principally to the impact of non-deductible preferred stock dividends, a non-deductible expense related to the exchange right and put option related to the Series A Preferred Stock of CSC Holdings, state taxes and an adjustment to the deferred tax rate.

 

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NOTE 13.              RESTRUCTURING

 

The following table summarizes the accrued restructuring liability related to the 2001 restructuring plan for continuing operations:

 

		Employee Severance			Facility Realignment and Other Costs			Total
Balance at December 31, 2003		$	3		$	19,212		$	19,215
Additional credits		—			(605		)	(605		)
Payments		(3		)	(1,039		)	(1,042		)
Balance at March 31, 2004		$	—		$	17,568		$	17,568

 

The following table summarizes the accrued restructuring liability related to the 2002 restructuring plan for continuing operations:

 

		Employee Severance			Facility Realignment and Other Costs			Total
Balance at December 31, 2003		$	207		$	39,623		$	39,830
Additional charges (credits)		20			(568		)	(548		)
Payments		(132		)	(498		)	(630		)
Balance at March 31, 2004		$	95		$	38,557		$	38,652

 

The following table summarizes the accrued restructuring liability related to the 2003 restructuring plan for continuing operations:

 

		Employee Severance
Balance at December 31, 2003		$	2,258
Additional charges		26
Payments		(1,368		)
Balance at March 31, 2004		$	916

 

In connection with the acquisition of Fox Sports Net Chicago in December 2003, the Company consolidated a restructuring liability of $380 relating to facility realignment costs.  As of March 31, 2004, no payments were made against this liability.

 

In 2004, the Company eliminated certain staff positions and incurred severance costs aggregating $3,917, of which approximately $1,391 was paid as of March 31, 2004.

 

At March 31, 2004, approximately $31,870 of the total restructuring liability was classified as a current liability in the consolidated balance sheet.

 

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NOTE 14.              INTANGIBLE ASSETS

 

The following table summarizes information relating to the Company’s acquired intangible assets at March 31, 2004 and December 31, 2003:

 

		March 31, 2004			December 31, 2003
Gross carrying amount of amortizable intangible assets
Franchises		$	6,083		$	6,066
Affiliation agreements		786,903			794,186
Broadcast rights		152,943			142,302
Player contracts		8,758			8,758
Other intangibles		193,862			189,796
		1,148,549			1,141,108
Accumulated amortization
Franchises		2,730			2,552
Affiliation agreements		268,391			248,595
Broadcast rights		61,753			58,507
Player contracts		7,983			7,621
Other intangibles		36,125			32,427
		376,982			349,702
Unamortizable intangible assets
Franchises		731,848			731,848
FCC licenses		86,531			1,899
Excess costs over the fair value of net assets acquired		1,472,643			1,472,643
		2,291,022			2,206,390
Total intangibles		$	3,062,589		$	2,997,796
Aggregate amortization expense
Three Months Ended March 31, 2004 and year ended December 31, 2003		$	27,298		$	82,636
Estimated amortization expense
Year ending December 31, 2004					$	101,898
Year ending December 31, 2005					89,398
Year ending December 31, 2006					85,835
Year ending December 31, 2007					83,985
Year ending December 31, 2008					83,043

 

There were no changes in the carrying amount of excess costs over the fair value of net assets acquired for the three months ended March 31, 2004.

 

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NOTE 15.     BENEFIT PLANS

 

The Company has a Cash Balance Retirement Plan (the “Retirement Plan”) for the benefit of employees other than those of the theater 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 months ended March 31, 2004 and 2003 are as follows:

 

		2004			2003
		(estimated)
Service cost		$	6,184		$	5,762
Interest cost		1,267			1,024
Expected return on plan assets		(1,498		)	(1,051		)
Net periodic benefit cost		$	5,953		$	5,735

 

The Company previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute approximately $26,900 to its pension plan in 2004.  As of March 31, 2004, $5,160 of contributions has been made.

 

NOTE 16.              SEGMENT INFORMATION

 

The Company’s reportable segments are strategic business units that are managed separately.  The Company evaluates segment performance based on several factors, of which the primary financial measure is business segment adjusted operating cash flow (defined as operating income (loss) before depreciation and amortization, stock plan income or expense and restructuring charges or credits).

 

		Three Months Ended March 31,
		2004			2003
Revenues, net from continuing operations
Telecommunications Services		$	740,068		$	633,804
Rainbow		263,412			176,824
Madison Square Garden		204,517			208,406
Rainbow DBS		1,014			—
All other		17,479			18,587
Intersegment eliminations		(39,353		)	(36,670		)
Total		$	1,187,137		$	1,000,951
Adjusted operating cash flow from continuing operations
Telecommunications Services		$	275,047		$	242,889
Rainbow		76,176			34,704
Madison Square Garden		(19,822		)	14,153
Rainbow DBS		(44,964		)	(1,650		)
All Other		(18,692		)	681
Total		$	267,745		$	290,777

 

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A reconciliation of reportable segment amounts to the Company’s consolidated balances is as follows:

 

		Three Months Ended March 31,
		2004			2003
Revenues, net from continuing operations
Total revenue for reportable segments		$	1,209,011		$	1,019,034
Other revenue and intersegment eliminations		(21,874		)	(18,083		)
Total consolidated revenue		$	1,187,137		$	1,000,951
Adjusted operating cash flow to loss from continuing operations before income taxes
Total adjusted operating cash flow for reportable segments		$	286,437		$	290,096
All Other adjusted operating cash flow		(18,692		)	681
Items excluded from adjusted operating cash flow:
Depreciation and amortization		(263,519		)	(256,688		)
Stock plan expense		(11,001		)	(6,983		)
Restructuring (expense) credits		(2,790		)	4,464
Interest expense		(177,125		)	(129,394		)
Interest income		938			5,564
Equity in net loss of affiliates		(2,990		)	(8,183		)
Write-off of deferred financing costs		(1,187		)	—
Gain on investments, net		14,622			7,385
Gain (loss) on derivative contracts, net		1,387			(10,708		)
Minority interests		4,335			(55,541		)
Miscellaneous, net		(549		)	(1,288		)
Loss from continuing operations before income taxes		$	(170,134	)	$	(160,595	)

 

Substantially all revenues and assets of the Company’s reportable segments are attributed to or located in the United States.

 

The Company does not have a single external customer which represents 10 percent or more of its consolidated revenues.

 

NOTE 17.              LEGAL MATTERS

 

The Company is party to various lawsuits, some involving substantial amounts.  Although the outcome of these matters cannot be predicted with certainty, management does not believe that the resolution of these lawsuits will have a material adverse effect on the financial position, results of operations or liquidity of the Company.

 

At Home

 

On April 25, 2001, At Home Corporation commenced a lawsuit in the Court of Chancery of the State of Delaware alleging that Cablevision had breached its obligations under certain agreements with At Home.  The suit sought a variety of remedies including:  rescission of the agreements between At Home and Cablevision and cancellation of all warrants held by Cablevision, damages, and/or an order prohibiting Cablevision from continuing to offer its Optimum Online service and requiring it to convert its Optimum Online customers to the

 

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Optimum@Home service and to roll out the Optimum@Home service.  On September 28, 2001, At Home filed a petition for reorganization in federal bankruptcy court.  In connection with the liquidation of At Home, the claims in this lawsuit, among others, were assigned to the General Unsecured Creditors Liquidated Trust (“GUCLT”).

 

On June 26, 2003, the GUCLT initiated a separate action against Cablevision in the United States District Court for the Northern District of California. The California action stems from a May 1997 agreement between Cablevision and At Home that is no longer in effect.  The GUCLT seeks monetary damages of “at least $12,500” due to the claimed failure by Cablevision to make alleged required payments to At Home during the 2001 calendar year.

 

On July 29, 2003, based on an agreed Stipulation filed jointly by Cablevision and the GUCLT, the Court dismissed the Delaware action with prejudice, other than solely with respect to the specific claims brought by the GUCLT in the California action.

 

YES Network

 

On April 29, 2002, Yankees Entertainment & Sports Network, LLC (the “YES Network”) filed a complaint and, on September 24, 2002, an amended complaint against the Company in the United States District Court, Southern District of New York.  The lawsuit arises from the failure of the YES Network and the Company to reach agreement on the carriage of programming of the YES Network (primarily New York Yankees baseball games and New Jersey Nets basketball games) on the Company’s cable television systems.  The amended complaint alleges a variety of anticompetitive acts and seeks declaratory judgments as to violations of laws, treble damages and injunctive relief, including an injunction requiring the Company to carry the YES Network on its cable television systems.  The Company believes that the claims set forth in the complaint are without merit.  As a result of the March 2003 agreement discussed below, the litigation with the YES Network has been stayed and, under the terms of the agreement, will ultimately be dismissed.

 

On March 31, 2003, YES Network and Cablevision reached an agreement pursuant to which Cablevision began carrying programming of the YES Network.  Under this agreement, Cablevision agreed to carry the YES Network programming for one year under interim arrangements while the parties sought to finalize the terms of a definitive long-term affiliation agreement and/or submitted the matter to arbitration.  The matter was ultimately submitted to arbitration.  The hearing before the arbitration panel ended in March 2004 and, through the arbitrators’ decision and a new written agreement by the parties, established the terms for a definitive long-term affiliation agreement that is effective retroactively to March 31, 2003.

 

As part of the original March 31, 2003 agreement, Cablevision agreed to pay YES Network for certain revenue reductions and expenses that YES Network experienced while the interim agreement was in place, under the “most favored nations” provisions of YES Network’s affiliation agreements with certain other distributors.  In light of the recent arbitration decision, no further indemnification payments are being made and appropriate refunds as to amounts already paid are expected.

 

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Tracking Stock Litigation

 

In August 2002, purported class actions naming as defendants the Company and each of its directors were filed in the Delaware Chancery Court.  The actions, which allege breach of fiduciary duties and breach of contract with respect to the exchange of the Rainbow Media Group tracking stock for Cablevision NY Group common stock, were purportedly brought on behalf of all holders of publicly traded shares of Rainbow Media Group tracking stock.  The actions sought to (i) enjoin the exchange of Rainbow Media Group tracking stock for Cablevision NY Group common stock, (ii) enjoin any sales of “Rainbow Media Group assets,” or, in the alternative, award rescissory damages, (iii) if the exchange is completed, rescind it or award rescissory damages, (iv) award compensatory damages, and (v) award costs and disbursements.  The actions were consolidated into one action on September 17, 2002, and on October 3, 2002, the Company filed a motion to dismiss the consolidated action.  The action is currently stayed by agreement of the parties pending resolution of a related action brought by one of the plaintiffs to compel the inspection of certain books and records of the Company.  The Company believes the claims are without merit and intends to contest the lawsuits vigorously.

 

In August 2003, a purported class action naming as defendants the Company, directors and officers of the Company and certain current and former officers and employees of the Company’s Rainbow Media Holdings and American Movie Classics subsidiaries was filed in New York Supreme Court by the Teachers Retirement System of Louisiana.  The actions relate to the August 2002 Rainbow Media Group tracking stock exchange and allege, among other things, that the exchange ratio was based upon a price of the Rainbow Media Group tracking stock that was artificially deflated as a result of the improper recognition of certain expenses at the national services division of Rainbow Media Holdings.  The complaint alleges breaches by the individual defendants of fiduciary duties.  The complaint also alleges breaches of contract and unjust enrichment by the Company.  The complaint seeks monetary damages and such other relief as the court deems just and proper.  The Company intends to contest the lawsuit vigorously.  On October 31, 2003, the Company and other defendants moved to stay the action in favor of the previously filed actions pending in Delaware or, in the alternative, to dismiss for failure to state a claim.  The parties are awaiting a decision from the court on this motion.

 

Time Warner Litigation

 

On November 14, 2003, American Movie Classics filed an action against Time Warner Entertainment, L.P. in New York State Supreme Court for declaratory relief and damages caused by Time Warner’s anticipatory repudiation of its cable television affiliation agreement with American Movie Classics.  American Movie Classics filed that action as a result of Time Warner’s notice purporting to terminate the contract based upon their allegation that American Movie Classics had changed its programming.  The Company believes the notice was improper.  American Movie Classics is seeking a declaratory judgment that it is entitled to full performance of the agreement, and, at its option, is entitled to rescind the agreement and recover damages.  Time Warner filed an answer and counterclaims in December 2003 that, among other things, seeks a declaratory judgment as to its right to terminate the affiliation agreement, an injunction requiring American Movie Classics to deliver a classic films channel and damages for an alleged breach of contract.

 

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Accounting Related Investigations

 

The Securities and Exchange Commission and the U.S. Attorney’s Office for the Eastern District of New York continue to conduct investigations into matters related to the improper expense recognition previously reported by the Company.

 

NOTE 18.              PREFERRED STOCK OF CSC HOLDINGS

 

In February 2003, Quadrangle Capital Partners LP, a private investment firm, invested $75,000 in CSC Holdings, in the form of 10% Series A Exchangeable Participating Preferred Stock convertible into Cablevision NY Group Class A common stock.  In connection with the issuance of the Series A preferred stock to Quadrangle, CSC Holdings entered into an agreement with Quadrangle which grants Quadrangle the right to require CSC Holdings to purchase the preferred stock (“put option”) for cash or through the issuance of registered equity securities of Cablevision, at CSC Holdings’ option.  The exchange right and the put option have been accounted for as a derivative.  Accordingly, the fair value of the exchange right and the put option of $38,618 at March 31, 2004 and December 31, 2003 has been reflected as a liability under derivative contracts in the accompanying consolidated balance sheets.

 

In October 2003, Quadrangle exercised its “put option” to require CSC Holdings to purchase all of its Series A preferred stock.  The Company is in discussions with Quadrangle as to the process for determining the put price.  Subsequent to its issuance in February 2003, on April 1, July 1 and October 1, 2003, dividends on the Series A preferred stock were paid through the issuance of additional shares of Series A preferred stock.  CSC Holdings has not declared or paid any dividends subsequent to October 1, 2003.

 

NOTE 19.              SUBSEQUENT EVENTS

 

In April 2004, Cablevision issued $1,000,000 face amount of 8% senior notes due 2012 and $500,000 face amount of floating rate senior notes due 2009.  In addition, CSC Holdings issued $500,000 face amount of 6-3/4% senior notes due 2012.

 

In May 2004, CSC Holdings redeemed all of the following securities: its 11-3/4% Series H Redeemable Exchangeable Preferred Stock; its 11-1/8% Series M Redeemable Exchangeable Preferred Stock; its 9-7/8% Senior Subordinated Debentures due 2013; and, its 9-7/8% Senior Subordinated Debentures due 2023.

 

In April 2004, Rainbow DBS entered into a ten-year lease agreement for transponder space on a satellite, commencing in October 2004.  Rainbow Media Holdings issued letters of credit for $19,800 as a security deposit.  Rainbow DBS will initially lease 13 transponders, increasing to 16 in January 2005, with the option of leasing additional transponders.

 

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Item 2.                    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Quarterly Report contains statements that constitute forward looking information within the meaning of the Private Securities Litigation Reform Act of 1995, including restructuring charges, availability under credit facilities, levels of capital expenditures, sources of funds and funding requirements, 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;

•      video subscriber demand and growth;

•      demand for and growth of our digital cable and VOOM^SM service, which are impacted by competition from other services, such as DBS, and the other factors set forth below;

•      the cost of programming and industry conditions;

•      the regulatory environment in which we operate;

•      developments in the government investigations relating to improper expense accruals;

•      the outcome of litigation and other proceedings, including the matters described under “Legal Proceedings”;

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

•      demand for advertising time and space;

•      our ability to obtain programming for our programming business and maintain and renew affiliation agreements for those businesses;

•      the level of capital expenditures;

•      the level of our expenses, including costs of our new services, such as expenses related to the introduction of our digital cable service and the development of our Voice over Internet Protocol voice and data services;

•      pending and future acquisitions and dispositions of assets;

•      market demand for new services;

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

•      competition from existing competitors and new competitors entering our franchise areas;

•      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;

•      the health and performance of our Rainbow 1 DBS satellite;

•      the ability of Rainbow DBS to acquire and retain large numbers of subscribers to its VOOM^SM service at a reasonable subscriber acquisition cost;

•      our ability to obtain adequate financing at a reasonable cost to cover the funding needs of our Rainbow DBS business;

 

I-16

 

•      our ability to successfully and timely complete our planned spin off of an entity owning our Rainbow DBS business, certain of Rainbow Media Holdings’ national entertainment services and Clearview Cinemas; and

•      the factors described in our filings with the Securities and Exchange Commission, including 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.

 

Summary

 

Our future performance is dependent, to a large extent, on general economic conditions including capital market characteristics, the effectiveness of direct competition, our ability to manage our businesses effectively, and our relative strength and leverage in the marketplace, both with suppliers and customers.

 

Telecommunications

 

In our Telecommunications segment we derive revenues principally through monthly payments by subscribers to our cable television systems.  These monthly payments include charges for cable television, as well as, in many cases, equipment rental, pay-per-view charges, high-speed Internet access and charges for voice service.  Revenue increases are derived from price increases, increases in the number of subscribers to our cable television systems, and increases in the number and changes in the type of programming and services sold to our existing subscribers.  We also derive revenues from the sale of advertising time available to cable television systems.  Revenues from advertising vary based upon the number and demographics of our subscribers who view the programming carried on our cable television systems.

 

By far the most serious challenge we face in our provision of cable television services, which accounted for 50% of our revenues in 2003, comes from competition from the direct broadcast satellite business.  There are two major providers of DBS service in the United States, each with significantly higher numbers of subscribers than we have.  This size allows the DBS providers certain advantages, especially in the pricing they pay for programming.  In addition, the cable television operators like the Company must pay local franchises up to 5% of our cable television revenues as a fee for operating in the municipalities we serve.  Direct broadcast satellite providers do not pay these fees.  The combination of these two factors may lead to retail pricing advantages for the DBS providers.  Recent subscriber decreases in the cable business, reversing the historical trend of consistent annual increases in penetration, most likely reflect these pricing advantages, as well as the fact that our penetration rate is now averaging approximately 73% in most areas, which limits our ability to add new subscribers.  We intend to counter these advantages by “bundling” our service offerings with products that the DBS companies cannot efficiently provide at this time, such as high-speed Internet access and Internet protocol voice service carried over the cable distribution plant, as well as by providing “on demand” services that are currently unavailable to a DBS subscriber.

 

Our high-speed Internet access business, which accounted for 10% of our revenues in 2003, faces competition from DSL providers.  These providers have become increasingly aggressive in

 

I-17

 

their pricing strategies in recent years, and customers may decide that a reduced price is more important to them than the superior speed that cable modems provide.  Also, the telephone companies may find technological or other solutions to upgrade their service offering, providing additional competition for our service offering.  In addition, with 38% of our basic subscribers now subscribing to our high-speed Internet service, opportunities to expand that base at the current pace may be limited.  The recent gains in cable modem penetration may therefore not be indicative of the results we achieve in the future.

 

Our consumer Voice over Internet Protocol voice and data offering, which is in its initial rollout stage, is competitive with incumbent offerings primarily on the basis of pricing, where unlimited continental long distance, regional and local calling, together with certain features for which the incumbent providers charge extra, are offered at one low price.  To the extent the incumbents, who have financial resources that exceed those of the Company, decide to meet our pricing or reduce their pricing and features, strategies, future growth and success of this business may be impaired.  The regulatory framework for cable modem service and Voice over Internet Protocol service is being developed and differing regulatory alternatives will be considered, including increased regulation.

 

Lightpath, our commercial telephone and broadband business, operates in the most competitive business telecommunication market in the country and competes against the very largest telecommunication companies — both incumbent local exchange companies, other competitive local exchange companies and long distance companies.  To the extent that dominant market leaders decide to reduce their prices, future success of the Company may be impaired.  The trend in business communications has been shifting from a wired voice medium to a wireless, data medium.  Should this trend accelerate dramatically, future growth of the Company may be impaired.

 

Rainbow

 

In our Rainbow segment, which accounted for 18% of our 2003 revenues, we earn revenues in two principal ways.  First, we receive payments from operators of cable television systems and satellite services.  These revenues are earned under multi-year affiliation agreements with those companies.  The specific affiliate fees we earn vary from operator to operator and also vary among our networks. The second principal source of revenues in this segment is from advertising.  Under our agreements with cable and satellite operators we have the right to sell a specific amount of advertising time on our programs.  Our advertising revenues are more variable than affiliate fees.  This is because most of our advertising is sold on a short-term basis, not under long-term contracts.  Also our advertising revenues vary based upon the popularity of our programming which is tracked by rating services.

 

We seek to grow our revenues in the Rainbow segment by increasing the number of cable systems and satellite providers that carry our services and the number of subscribers to cable systems and satellite services that receive our programming.  We refer to this as our “penetration.”  AMC, which is widely distributed, has less ability to increase its penetration than newer, less penetrated services.  Cable operators and satellite providers are increasingly interested in obtaining financial payments in return for carrying new services.  These payments take the form of marketing support or direct payments for carriage.  We seek to increase our advertising revenues through intensified marketing but, ultimately, the level of our advertising revenues are directly related to the penetration of our services and the popularity (including within desirable demographic groups) of our services.

 

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The principal goals for us in this segment are to increase our affiliation fees and our advertising revenues through increasing penetration of our national services.  To do this we must continue to contract for and produce high-quality, attractive programming.  Our greatest challenge arises from the increasing concentration of subscribers in the hands of a few cable television operators and satellite providers.  This concentration increases the power of those operators and providers and could adversely affect our ability to increase the penetration of our services or even result in decreased penetration.  In addition, this concentration gives those operators and providers greater leverage in negotiating the pricing and other terms of affiliation agreements.  Moreover, as a result of this concentration the impact from a loss of any one of our major affiliate relationships becomes more severe.

 

In December 2003, Regional Programming Partners completed the acquisition of the 50% interests in Fox Sports Net Bay Area and Fox Sports Net Chicago that it did not already own in a transaction that was accounted for as a purchase.  As a result, as of December 18, 2003, we have begun to consolidate the results of Fox Sports Net Bay Area and Fox Sports Net Chicago.  The consolidation will increase the revenues and expenses in our Rainbow segment, although the amount of revenues that the Rainbow segment will receive from Fox Sports Net Chicago are likely to decline in later periods as a result of the loss of the professional sports team rights in the Chicago area.

 

Madison Square Garden

 

Madison Square Garden, which accounted for 18% of our 2003 revenues, consists of professional sports teams (principally the New York Knicks of the National Basketball Association (“NBA”) and the New York Rangers of the National Hockey League (“NHL”), the MSG Network sports programming business, and an entertainment business, which operates the Madison Square Garden arena, Radio City Music Hall, the Hartford Civic Center and Rentschler Field, faces competitive challenges unique to these activities.  We derive revenues in this segment primarily from the sale of tickets, including luxury box rentals, to sporting and entertainment events and from rental rights fees paid to this segment by promoters that present events at Madison Square Garden and Radio City Music Hall.  We also derive revenue from the sale of advertising at the entertainment venues, from food, beverage and merchandise sales at the venues and from the licensing of our trademarks.  MSG Network derives its revenues from affiliate fees paid by cable television and satellite providers, sales of advertising, and from rights fees paid to this segment by broadcasters (TV and radio) and programming services that telecast events of sports teams which are under contract with MSG Network.  MSG Network carries Knicks and Ranger games, so that, like the rest of this segment, its performance is related to the performance of the teams.  All of these revenues are ultimately dependent upon the quality of our sporting and entertainment events.

 

Our sports teams’ financial success is dependent on their ability to generate advertising sales, paid attendance, luxury box rentals, and food and merchandise sales.  To a large extent, the ability of the team to build excitement among fans and therefore produce higher revenue streams, depends on the teams’ winning performance, which generates regular season and playoff attendance, and which supports increases in prices charged for tickets, luxury box rentals, and advertising placement.  Each team’s success is dependent on its ability to acquire highly competitive players.  Although players are most often highly compensated, future successful performance is not certain.  The governing bodies of the NBA and the NHL have the power and

 

I-19

 

authority to take certain actions that they deem to be in the best interest of their respective leagues, which may not necessarily be consistent with maximizing MSG’s results of operations.  The Collective Bargaining Agreement (“CBA”) between the National Hockey League and the National Hockey League Players Association expires on September 14, 2004.  Unless a successor CBA is reached by the expiration date, or the parties agree to extent the term of the CBA, it is possible that the 2004/05 season may not begin as scheduled and this in turn may result in a shortened or canceled season which could negatively impact operating results.

 

Our sports programming business’ success is affected by our ability to secure desired programming of a variety of professional sports teams in addition to our proprietary programming. The success of the teams that are telecast by us will impact our revenues from distribution and from the rates charged for affiliation and advertising.

 

Our entertainment business is largely dependent on the continued success of our Radio City Christmas Spectacular and our touring Christmas shows, as well as availability of, and our venues’ ability to attract, concerts, family shows and events.

 

Rainbow DBS

 

Rainbow DBS launched its VOOM^SM service on October 15, 2003.  It has not yet produced any meaningful revenues.  As of April 30, 2004, this business had approximately 8,000 activated customers.  The principal challenge for this business is to attract a sufficient subscriber base to reach and exceed a break-even point and to do so with subscriber acquisition and other costs that are within its funding capabilities.  There can be no assurance that it will be able to do so.

 

Recent Transactions

 

2004 Transaction.  In 2004, Rainbow DBS invested approximately $85,000 in exchange for a substantial interest in an entity that recently acquired licenses from the FCC to provide multichannel video distribution and data service in 46 metropolitan areas in the United States.

 

2003 Transactions.  In March 2003, the Company transferred the stock of its wholly-owned subsidiary, Cablevision Electronics Investments, Inc. to GBO Electronics Acquisition, LLC.

 

In May 2003, Northcoast Communications, an unconsolidated subsidiary of CSC Holdings, completed its sale of PCS licenses to Verizon Wireless for approximately $763.0 million in cash.  Of the proceeds, approximately $51.0 million was used by Northcoast Communications to retire debt.  The remaining proceeds, after payment of expenses, were distributed to the partners of Northcoast Communications, including the Company.

 

In July 2003, the Company repurchased MGM’s 20% interest in each of AMC, The Independent Film Channel (“IFC”) and WE: Women’s Entertainment.

 

In December 2003, Regional Programming Partners acquired Fox Sports Networks’ 50% interest in each of Fox Sports Net Chicago and Fox Sports Net Bay Area pursuant to Fox Sports Networks’ exercise of its contractual put right.

 

I-20

 

The above transactions completed in 2004 and 2003 are collectively referred to as the “Transactions.”

 

Results of Operations - - Cablevision Systems Corporation

 

The following table sets forth on a historical basis certain items related to operations as a percentage of net revenues for the periods indicated.

 

STATEMENT OF OPERATIONS DATA

 

		Three Months Ended March 31,
		2004					2003					(Increase) Decrease in Net Loss
		Amount			% of Net Revenues		Amount			% of Net Revenues
		(dollars in thousands)
Revenues, net		$	1,187,137		100	%	$	1,000,951		100	%	186,186
Operating expenses:
Technical and operating		618,306			52		470,523			47		(147,783		)
Selling, general and administrative		312,087			26		246,634			25		(65,453		)
Restructuring expense (credits)		2,790			—		(4,464		)	—		(7,254		)
Depreciation and amortization		263,519			22		256,688			26		(6,831		)
Operating income (loss)		(9,565		)	(1	)	31,570			3		(41,135		)
Other income (expense):
Interest expense, net		(176,187		)	(15	)	(123,830		)	(12	)	(52,357		)
Equity in net loss of affiliates		(2,990		)	—		(8,183		)	(1	)	5,193
Write-off of deferred financing costs		(1,187		)	—		—			—		(1,187		)
Gain on investments, net		14,622			1		7,385			1		7,237
Gain (loss) on derivative contracts, net		1,387			—		(10,708		)	(1	)	12,095
Minority interests		4,335			—		(55,541		)	(6	)	59,876
Miscellaneous, net		(549		)	—		(1,288		)	—		739
Loss from continuing operations before taxes		(170,134		)	(14	)	(160,595		)	(16	)	(9,539		)
Income tax benefit		58,400			5		29,217			3		29,183
Loss from continuing operations		(111,734		)	(9	)	(131,378		)	(13	)	19,644
Loss from discontinued operations, net of taxes		(810		)	—		(19,944		)	(2	)	19,134
Loss before extraordinary item		(112,544		)	(9	)	(151,322		)	(15	)	38,778
Extraordinary loss on investment, net of taxes		(7,436		)	(1	)	—			—		(7,436		)
Net loss		$	(119,980	)	(10	)%	$	(151,322	)	(15	)%	$	31,342

 

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