With Rainbow Media Probe Finished, Cablevision Considers a DBS Offering

3/21/2004 7:00 PM Eastern

Cablevision Systems Corp. said the independent investigation of accounting practices at its Rainbow Media Holdings Inc. units has been completed, clearing the way for the MSO to refinance its debt and initiate the planned spin-off of its satellite unit, Rainbow DBS.

Cablevision, in its 10-K annual report filed March 15, said that independent investigators Wilmer, Cutler & Pickering have completed their probe into the accounting practices of Rainbow Media’s AMC and WE: Women’s Entertainment cable networks. Cablevision said last year that it had discovered improper expense accruals at the networks, which led to the firing of 14 Rainbow Media executives, including AMC president Kate McEnroe.

As a result of the Wilmer, Cutler investigation, Cablevision reduced its operating income figures for 2001 by $21.8 million to a loss of $211 million. Operating income for 2002 was reduced by $8.5 million to $191 million.

The Securities and Exchange Commission is continuing its own investigation into the accounting irregularities, but the completion of the investigation by Wilmer Cutler — and the favorable report issued by Cablevision’s independent auditors, KPMG LLC — diminishes the likelihood that any major problems will be uncovered, several analysts said.

Investors appeared to be pleased, driving Cablevision stock up 3% (73 cents per share) in afternoon trading Tuesday to $23.47 each.

“The company’s financials are now clean and audited, lifting a major accounting overhang that has been weighing on the company for the past year,” UBS Warburg cable debt and equity analyst Aryeh Bourkoff said in a report. “This filing clears the way for Cablevision to refinance its debt and preferreds, and sets the stage for a spin-off of the DBS business and a return to a focus on fundamental growth.”

Cablevision said it plans to file the necessary documents with the Securities and Exchange Commission for the DBS spin-off in the second quarter. It usually takes about 60 days for SEC approval.

Also in the 10-K document, Cablevision offered more detail on funding requirements for the Rainbow DBS unit.

In the document, Cablevision said Rainbow DBS would require about $399 million in 2004 to fund capital investment and start-up losses, as well as to develop its proprietary HD channels. Of that $399 million, $237 million will be provided by Cablevision in the form of an equity investment on or prior to the date of the spin-off, the 10-K stated.

In addition, Rainbow Media Holdings has the ability to borrow up to $100 million to make equity investments in Rainbow DBS.

Cablevision Restatements
(in thousands)
Source: Cablevision 10-K
Operating Income$199,489$190,999($190,079)($211,853)
Operating Expenses$3,602,465$3,610,836$3,784,886$3,806,900

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