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No Happy Ending at Rainbow

Corporate financial scandals usually center on one of two things: stealing money or overstating earnings. But Cablevision Systems' abrupt purge of its AMC Networks unit has a new twist: No one was building houses in the nearby Hamptons on the company dime; no one was artificially inflating earnings.

Quite the contrary. The 14 executives and staffers fired last week are accused of helping understate
AMC's group earnings, with the apparent goal of taking advantage of strong years to make it easier to hit budget targets set the next year by parent division Rainbow Media.

"If you're having a good year, you create a little running room for next year," said Fulcrum Group media analyst Richard Greenfield, explaining the intentions. He was briefed by Cablevision's top financial executives last week.

That duplicity might have been bad, but, to Cablevision officials, the sin greater than the roughly $18 million creative-bookkeeping scam operated over the past three years were attempts to cover up when auditors came sniffing.

"What really pushed CVC over the edge was not just what they did but the fact that they falsified records and lied," said one Wall Street executive briefed by Cablevision executives.

That included providing falsified invoices and creating a phony paper trail aimed at justifying the accounting games, which sources said involved, in part, "launch support" paid to cable operators for ad time on local systems.

The scandal ensnared the most senior executives at AMC and sister WE: Women's Entertainment. The most startling name on the list is AMC Networks President Kate McEnroe, 47, who has spent 22 years at Cablevision's Rainbow unit and also launched The Romance Channel (which eventually became WE).

She has been extremely close to Cablevision Chairman Charles Dolan; those who know them say he treats the former Mason City, Iowa, TV weathercaster like a daughter. At work, she was hardworking and competitive, and "AMC was her fiefdom," as one former executive put it.

Also getting the ax, industry executives said, are AMC Executive Vice President and General Manager Noreen O'Loughlin, WE General Manager Martin Von Ruden, AMC Senior Vice President of Marketing Isabel Miller, and Senior Vice President of Affiliate Sales and Marketing Melani Griffith.

Others fired include AMC Networks Assistant Director of Marketing Ben Lines, WE Senior Vice President of Marketing Lee Heffernan, and AMC Networks Director of Affiliate Marketing Bonnie Boyle.

Cablevision executives would not detail the exact role of any individual executive, not surprising since they wouldn't disclose who, other than McEnroe, was fired. But friends said some of those canned knew nothing about fabrication of a paper trail until recently nor that the accruals were improper.

But a big question among industry executives was also unanswered: Where was Rainbow Media President Josh Sapan? Under Cablevision's version of events, the most senior executives at a major division were cooking the books for three years. "Presumably, he didn't know, but what does that say?" asked the CEO of an MSO. Cablevision would not comment, and Sapan did not return calls.

The scandal has its roots in the much grander disgrace: the abuses by executives at fellow cable operator Adelphia Communications. Last year's unveiling of accounting games played by Chairman John Rigas and his sons rocked all cable stocks, particularly those of other closely held, family run MSOs like Cablevision.

So company President Jim Dolan ordered a special audit to review operation of the company's 2.9 million-subscriber system and five programming networks.

What the auditors discovered, Cablevision says, was an odd pattern at movie channel AMC, which had been "inappropriately accelerating" next year's marketing expenses into the current year. The auditors spotted $6.1 million in questionable accruals for 2002, catching all but $1.7 million before Cablevision reported annual earnings in March.

How significant are the numbers? Not at all, if you look at Cablevision's companywide $4 billion in 2002 revenues and $1 billion in operating cash flow. But it's rather significant if you look only at AMC.

Morgan Stanley estimates that AMC Networks generated $261 million in 2002 revenues and $109 million in cash flow. So shifting the expenses means that AMC could count on 5% in artificial earnings growth for 2003. Not a bad head start for a business that analysts expected to grow earnings only 11%-12% this year. Cablevision said auditors found advance accruals of "similar amounts" in 2000 and 2001.

The accounting trick works, of course, only if growth in the initial years is strong enough to provide a financial cushion to handle accrued expenses. "You have to be exceeding your budget goals to begin with," observed one cable company's financial executive.

The Cablevision news rattled the industry, in part because this kind of game is familiar to just about anyone responsible for managing a budget. "Everyone knows that, if you don't spend all your budget this year, they won't give it to you next year," said an executive vice president at one cable network.

McEnroe, some sympathizers said, may have been distracted lately because she is in the midst of a contentious divorce, just three years after she and her husband adopted two children from Romania. But friends say she remained a dedicated manager and the divorce ordeal helped her gain perspective on the lives of working moms.