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:
MARCH 31, 2003
OR
( ) 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 000-50093
[COMCAST LOGO OMITTED]
COMCAST CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 27-0000798
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 Market Street, Philadelphia, PA 19102-2148
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (215) 665-1700
__________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days.
Yes X No ___
__________________________
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-b2 of the Exchange Act). Yes X No
As of March 31, 2003, there were 1,355,583,881 shares of Class A Common Stock,
883,855,174 shares of Class A Special Common Stock and 9,444,375 shares of Class
B Common Stock outstanding.
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
TABLE OF CONTENTS
Page Number
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheet as of March 31, 2003
and December 31, 2002 (Unaudited)......................................................3
Condensed Consolidated Statement of Operations for the Three Months
Ended March 31, 2003 and 2002 (Unaudited)..............................................4
Condensed Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 2003 and 2002 (Unaudited)..............................................5
Notes to Condensed Consolidated Financial Statements (Unaudited).......................6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................27
ITEM 4. Controls and Procedures...............................................................35
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.....................................................................35
ITEM 6. Exhibits and Reports on Form 8-K......................................................38
SIGNATURES.......................................................................................39
CERTIFICATIONS...................................................................................40
___________________________________
This Quarterly Report on Form 10-Q is for the three months ended March 31,
2003. This Quarterly Report modifies and supersedes documents filed prior to
this Quarterly Report. Information that we file with the SEC in the future will
automatically update and supersede information contained in this Quarterly
Report. In this Quarterly Report, "Comcast," "we," "us" and "our" refer to
Comcast Corporation and its subsidiaries.
You should carefully review the information contained in this Quarterly
Report and in other reports or documents that we file from time to time with the
SEC. In this Quarterly Report, we state our beliefs of future events and of our
future financial performance. In some cases, you can identify those so-called
"forward-looking statements" by words such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," or "continue" or the negative of those words and other comparable
words. You should be aware that those statements are only our predictions.
Actual events or results may differ materially. In evaluating those statements,
you should specifically consider various factors, including the risks outlined
below. Those factors may cause our actual results to differ materially from any
of our forward-looking statements.
Factors Affecting Future Operations
On November 18, 2002, we acquired AT&T Corp.'s broadband business, which we
refer to as "Broadband" and we refer to this acquisition as the "Broadband
acquisition." In this Quarterly Report, we refer to cable operations owned prior
to the Broadband acquisition as "historical," and those we acquired in the
Broadband acquisition as "newly acquired."
As a result of the Broadband acquisition, we have newly acquired cable
operations in communities in which we do not have established relationships with
the subscribers, franchising authority and community leaders. Further, a
substantial number of new employees are being and must continue to be integrated
into our business practices and operations. Our results of operations may be
significantly affected by our ability to efficiently and effectively manage
these changes.
Factors that may cause our actual results to differ materially from any of
our forward-looking statements presented in this Quarterly Report include, but
are not limited to:
o we may not successfully integrate Broadband or the integration may be more
difficult, time-consuming or costly than we expect,
o we may not realize the combination benefits we expect from the Broadband
acquisition or these benefits may take longer to achieve, and
o we may incur greater-than-expected operating costs, financing costs,
subscriber loss and business disruption, including, without limitation,
difficulties in maintaining relationships with employees, subscribers,
suppliers or franchising authorities.
In addition, our businesses may be affected by, among other things:
o changes in laws and regulations,
o changes in the competitive environment,
o changes in technology,
o industry consolidation and mergers,
o franchise related matters,
o market conditions that may adversely affect the availability of debt
and equity financing for working capital, capital expenditures or
other purposes,
o demand for the programming content we distribute or the willingness of
other video program distributors to carry our content, and
o general economic conditions.
As more fully described elsewhere in this Quarterly Report and in our
Annual Report on Form 10-K for the year ended December 31, 2002, the Broadband
acquisition substantially increased the size of our cable operations and caused
significant changes in our capital structure. As a result, direct comparisons of
our results of operations for periods prior to November 18, 2002 to subsequent
periods are not meaningful.
2
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in millions, except share data)
March 31, December 31,
2003 2002
--------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................................. $1,024 $781
Investments................................................................ 3,153 3,266
Accounts receivable, less allowance for doubtful accounts of $276 and $233. 1,323 1,383
Inventories, net........................................................... 482 479
Assets held for sale....................................................... 613
Deferred income taxes...................................................... 129 129
Other current assets....................................................... 377 425
--------- -----------
Total current assets................................................... 6,488 7,076
--------- -----------
INVESTMENTS................................................................... 13,188 15,207
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $4,737 and $4,061.. 18,961 18,866
FRANCHISE RIGHTS.............................................................. 48,290 48,222
GOODWILL...................................................................... 17,039 17,397
OTHER INTANGIBLE ASSETS, net of accumulated amortization of $1,403 and $1,022. 5,273 5,599
OTHER NONCURRENT ASSETS, net.................................................. 773 738
--------- -----------
$110,012 $113,105
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................................................... $1,631 $1,663
Accrued expenses and other current liabilities............................. 4,870 5,649
Liabilities related to assets held for sale................................ 13
Deferred income taxes...................................................... 1,093 1,105
Short-term debt............................................................ 3,750
Current portion of long-term debt.......................................... 2,652 3,203
--------- -----------
Total current liabilities.............................................. 10,246 15,383
--------- -----------
LONG-TERM DEBT, less current portion.......................................... 30,258 27,957
--------- -----------
DEFERRED INCOME TAXES......................................................... 23,125 23,110
--------- -----------
OTHER NONCURRENT LIABILITIES.................................................. 5,600 5,652
--------- -----------
MINORITY INTEREST............................................................. 2,729 2,674
--------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY
Preferred stock - authorized 20,000,000 shares; issued, zero...............
Class A common stock, $0.01 par value - authorized,
7,500,000,000 shares; issued, 1,599,224,381 and 1,599,014,148;
outstanding, 1,355,583,881 and 1,355,373,648............................. 16 16
Class A special common stock, $0.01 par value - authorized,
7,500,000,000 shares; issued 931,145,017 and 930,633,433;
outstanding, 883,855,174 and 883,343,590................................. 9 9
Class B common stock, $0.01 par value - authorized, 75,000,000 shares;
issued, 9,444,375
Additional capital......................................................... 44,643 44,620
Retained earnings.......................................................... 1,043 1,340
Treasury stock, 243,640,500 Class A common shares and 47,289,843 Class A
special common shares.................................................... (7,517) (7,517)
Accumulated other comprehensive loss....................................... (140) (139)
--------- -----------
Total stockholders' equity............................................. 38,054 38,329
--------- -----------
$110,012 $113,105
========= ===========
See notes to condensed consolidated financial statements.
3
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Dollars in millions, except per share data)
Three Months Ended March 31,
2003 2002
--------- ---------
REVENUES
Service revenues......................................................... $4,456 $1,679
Net sales from electronic retailing...................................... 1,062 988
--------- ---------
5,518 2,667
--------- ---------
COSTS AND EXPENSES
Operating (excluding depreciation)....................................... 1,930 743
Cost of goods sold from electronic retailing (excluding depreciation).... 673 629
Selling, general and administrative...................................... 1,277 487
Depreciation............................................................. 799 334
Amortization............................................................. 366 53
--------- ---------
5,045 2,246
--------- ---------
OPERATING INCOME............................................................. 473 421
OTHER INCOME (EXPENSE)
Interest expense......................................................... (525) (187)
Investment loss, net..................................................... (230) (248)
Equity in net losses of affiliates....................................... (20) (5)
Other income (expense)................................................... 18 (23)
--------- ---------
(757) (463)
--------- ---------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST............................... (284) (42)
INCOME TAX BENEFIT (EXPENSE)................................................. 68 (3)
--------- ---------
LOSS BEFORE MINORITY INTEREST ............................................... (216) (45)
MINORITY INTEREST............................................................ (81) (44)
--------- ---------
NET LOSS..................................................................... ($297) ($89)
========= =========
BASIC NET LOSS FOR COMMON STOCKHOLDERS PER COMMON SHARE...................... ($0.13) ($0.09)
========= =========
DILUTED NET LOSS FOR COMMON STOCKHOLDERS PER COMMON SHARE.................... ($0.13) ($0.09)
========= =========
See notes to condensed consolidated financial statements.
4
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in millions)
Three Months Ended March 31,
2003 2002
------------ -------------
OPERATING ACTIVITIES
Net loss............................................................. ($297) ($89)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation....................................................... 799 334
Amortization....................................................... 366 53
Non-cash interest (income) expense, net............................ (21) 12
Equity in net losses of affiliates................................. 20 5
Losses (gains) on investments and other (income) expense, net...... 247 277
Minority interest.................................................. 55 44
Deferred income taxes.............................................. (182) 17
Proceeds from sales of trading securities.......................... 32
Other.............................................................. 10 (37)
------------ -------------
1,029 616
Changes in working capital, net of effects of acquisitions
and divestitures
Decrease (increase) in accounts receivable, net.................. 61 (13)
(Increase) decrease in inventories, net.......................... (3) 28
Decrease (increase) in other current assets...................... 48 (47)
Decrease in accounts payable, accrued expenses and other
current liabilities............................................ (335) (65)
------------ -------------
(229) (97)
Net cash provided by operating activities........................ 800 519
------------ -------------
FINANCING ACTIVITIES
Proceeds from borrowings............................................. 3,900 520
Retirements and repayments of debt................................... (6,079) (451)
Other................................................................ (16) 62
------------ -------------
Net cash (used in) provided by financing activities.............. (2,195) 131
------------ -------------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired................................... (12)
Proceeds from sales of (purchases of) short-term investments, net.... (9) 1
Proceeds from restructuring of TWE investment........................ 2,100
Proceeds from sales of investments and assets held for sale.......... 668 13
Purchases of investments............................................. (72) (4)
Capital expenditures................................................. (971) (399)
Additions to intangible and other noncurrent assets.................. (78) (56)
------------ -------------
Net cash provided by (used in) investing activities.............. 1,638 (457)
------------ -------------
INCREASE IN CASH AND CASH EQUIVALENTS................................... 243 193
CASH AND CASH EQUIVALENTS, beginning of period.......................... 781 350
------------ -------------
CASH AND CASH EQUIVALENTS, end of period................................ $1,024 $543
============ =============
See notes to condensed consolidated financial statements.
5
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
Comcast Corporation and its subsidiaries ("Comcast" or the "Company") has
prepared these unaudited condensed consolidated financial statements based
upon Securities and Exchange Commission ("SEC") rules that permit reduced
disclosure for interim periods.
These financial statements include all adjustments that are necessary for a
fair presentation of the Company's results of operations and financial
condition for the interim periods shown including normal recurring accruals
and other items. The results of operations for the interim periods
presented are not necessarily indicative of results for the full year.
For a more complete discussion of the Company's accounting policies and
certain other information, refer to the financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31,
2002.
On November 18, 2002, the Company completed the acquisition (the "Broadband
acquisition") of AT&T Corp.'s ("AT&T") broadband business ("Broadband").
Accordingly, the accompanying financial statements include the results of
Broadband from the date of the Broadband acquisition (see Note 4). The
Broadband acquisition substantially increased the size of the Company's
cable operations and caused significant changes in the Company's capital
structure, including a substantially higher amount of debt. As a result,
direct comparisons of the Company's results of operations and financial
condition for periods prior to November 18, 2002 to subsequent periods are
not meaningful.
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to those classifications used in 2003. In the first
quarter of 2003, QVC, Inc. ("QVC") completed the sale of its infomercial
operations in Mexico ("QVC Mexico"). The results of operations for QVC
Mexico for the 2003 and 2002 interim periods were not significant and are
included in equity in net losses of affiliates in the Company's
consolidated statement of operations.
2. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 143
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations," in June 2001. SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
Company adopted SFAS No. 143 on January 1, 2003, in accordance with the new
statement. The adoption of SFAS No. 143 had no impact on the Company's
financial condition or results of operations.
SFAS No. 148
The FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," in December 2002. SFAS No. 148 amends SFAS No.
123 to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 to require disclosure about the effects on
reported net income of an entity's stock-based employee compensation in
interim financial statements. SFAS No. 148 is effective for fiscal years
beginning after December 31, 2002. The Company adopted SFAS No. 148 on
January 1, 2003. The Company did not change to the fair value based method
of accounting for stock-based employee compensation. Accordingly, the
adoption of SFAS No. 148 would only affect the Company's financial
condition or results of operations if the Company elects to change to the
fair value method specified in SFAS No. 123. The adoption of SFAS No. 148
requires the Company to disclose the effects of its stock-based employee
compensation in interim financial statements beginning with the first
quarter of 2003 (see Note 8).
6
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
SFAS No. 149
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). The
Statement amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities under SFAS No. 133. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, for hedging
relationships designated after June 30, 2003, and to certain preexisting
contracts. The Company will adopt SFAS No. 149 on a prospective basis at
its effective date in the fiscal third quarter. The Company is assessing
the impact SFAS No. 149 may have on its financial statements.
FIN 45
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 expands on the
accounting guidance of SFAS No.'s 5, 57, and 107 and supercedes FIN 34. FIN
45 clarifies that a guarantor is required to disclose in its interim and
annual financial statements its obligations under certain guarantees that
it has issued, including the nature and terms of the guarantee, the maximum
potential amount of future payments under the guarantee, the carrying
amount, if any, for the guarantor's obligations under the guarantee, and
the nature and extent of any recourse provisions or available collateral
that would enable the guarantor to recover the amounts paid under the
guarantee. FIN 45 also clarifies that, for certain guarantees, a guarantor
is required to recognize, at the inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the guarantee. FIN
45 does not prescribe a specific approach for subsequently measuring the
guarantor's recognized liability over the term of the related guarantee.
The initial recognition and initial measurement provisions of FIN 45 apply
on a prospective basis to certain guarantees issued or modified after
December 31, 2002. The disclosure requirements in FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company adopted the disclosure provisions of FIN 45 in the fourth
quarter of 2002 and adopted the initial recognition and measurement
provisions of FIN 45 on January 1, 2003, as required by the Interpretation.
The impact of the adoption of FIN 45 will depend on the nature and terms of
guarantees entered into or modified by the Company in the future. The
adoption of FIN 45 in the first quarter of 2003 did not have a material
impact on the Company's consolidated financial statements (see Note 10).
3. EARNINGS PER SHARE
Earnings (loss) per common share is computed by dividing net income (loss)
for common stockholders by the weighted average number of common shares
outstanding during the period on a basic and diluted basis.
The Company's potentially dilutive securities include potential common
shares related to the Company's Zero Coupon Convertible Debentures due 2020
(the "Zero Coupon Debentures"), stock options, restricted stock, and Class
A Special common stock held in treasury. Diluted earnings for common
stockholders per common share ("Diluted EPS") considers the impact of
potentially dilutive securities except in periods in which there is a loss
as the inclusion of the potential common shares would have an antidilutive
effect. Diluted EPS excludes the impact of potential common shares related
to the Company's Zero Coupon Debentures in periods in which the weighted
average closing sale price of the Company's Class A Special common stock
during the period is not greater than 110% of the accreted conversion
price. Diluted EPS excludes the impact of potential common shares related
to the Company's stock options in periods in which the option exercise
price is greater than the average market price of the Company's common
stock for the period.
Diluted EPS for the interim periods in 2003 and 2002 excludes approximately
179.0 million and 82.2 million potential common shares, respectively,
related to the Company's stock option and restricted stock plans, Zero
Coupon Debentures, and common stock held in treasury because the assumed
issuance of such potential common shares is antidilutive in periods in
which there is a loss.
Weighted average shares outstanding and loss per share were the same for
both Basic EPS and Diluted EPS for both the 2003 and 2002 interim periods
since the Company reported a net loss for each period. Weighted average
shares
7
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
outstanding during the 2003 and 2002 interim periods were 2.255 billion
shares and 951 million shares, respectively.
4. ACQUISITIONS AND OTHER SIGNIFICANT EVENTS
Acquisition of Broadband
On November 18, 2002, the Company completed the acquisition of Broadband.
The allocation of the purchase price for the Broadband acquisition recorded
during the fourth quarter of 2002 is preliminary. The values of certain
assets and liabilities are based on preliminary valuations and are subject
to adjustment as additional information is obtained. Such additional
information includes: reports from valuation specialists; information
related to the cost of terminating or meeting contractual obligations; and
information related to preacquisition contingencies.
As of the acquisition date, the Company initiated certain integration
activities based on a preliminary plan to terminate employees and exit
certain contractual obligations. Under the guidance in Emerging Issues Task
Force ("EITF") 95-3, "Recognition of Liabilities in Connection with a
Purchase Business Combination," the plan must be finalized within one year
of the acquisition date and must identify all significant actions to be
taken to complete the plan. Therefore, costs related to terminating
employees and exiting contractual obligations of the acquired entity are
included in the purchase price allocation. Changes to these estimated
termination or exit costs are reflected as adjustments to the purchase
price allocation to the extent they occur within one year of the
acquisition date or if there are reductions in the amount of estimated
termination or exit costs accrued. Otherwise, changes will affect future
results of operations.
Liabilities associated with exit activities recorded in the purchase price
allocation consist of accrued employee termination and related costs of
$602 million and $929 million associated with either the cost of
terminating contracts or the present value of remaining amounts payable
under non-cancelable contracts. Amounts paid, adjustments made against
these accruals and interest accretion during the 2003 interim period were
as follows (in millions):
Employee Contract
Termination and Exit
Related Costs Costs
-------------------- ------------------
Balance, December 31, 2002.................................... $492 $913
Payments...................................................... (105) (16)
Adjustments................................................... 9
Interest accretion............................................ 10
------------------ ----------------
Balance, March 31, 2003....................................... $387 $916
================== ================
Bresnan Transaction
On March 20, 2003, the Company completed the previously announced
transaction with Bresnan Broadband Holdings, LLC and Bresnan
Communications, LLC (together, "Bresnan") pursuant to which the Company
transferred cable systems serving approximately 314,000 subscribers in
Montana, Wyoming and Colorado to Bresnan that the Company had acquired in
connection with the Broadband acquisition. The Company received $525
million in cash, plus preferred and common equity interests in Bresnan in
exchange for these cable systems. The assets (which consist primarily of
cable franchise rights, other intangible assets and property and equipment)
for these cable systems were reported as assets held for sale in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," in the Company's consolidated balance sheet as of December 31,
2002. The transfer of these cable systems was accounted for at fair value
with no gain or loss recognized. The results of operations for these cable
systems for the 2003 interim period were not significant and are included
in equity in net losses of affiliates in the Company's consolidated
statement of operations.
8
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
TWE Restructuring
On March 31, 2003, the Company announced the successful completion of the
previously announced restructuring of Time Warner Entertainment Company
L.P. ("TWE"). As a result of the restructuring, AOL Time Warner, Inc. ("AOL
Time Warner") has assumed complete control over TWE's content assets,
including Home Box Office, Warner Bros., and stakes in The WB Network,
Comedy Central and Court TV. All of AOL Time Warner's interests in cable,
including those held through TWE, are now held through or for the benefit
of a new subsidiary of AOL Time Warner called Time Warner Cable, Inc.
("TWC"). In exchange for its 27.6% interest in TWE, the Company received
common-equivalent preferred stock of AOL Time Warner, which will be
converted into $1.5 billion of AOL Time Warner common stock upon completion
of an effective registration statement filing with the SEC, and the Company
received a 21% economic stake in the business of TWC. In addition, the
Company received $2.1 billion in cash which was used to immediately repay
amounts outstanding under certain of the Company's credit facilities (see
Note 7). The TWE restructuring was accounted for as a fair value exchange
with no gain or loss recognized. TWC is expected to conduct an initial
public offering of common stock under the restructuring agreement. Also,
under the restructuring agreement, the Company will have registration
rights that should facilitate the disposal or monetization of its shares in
TWC and in AOL Time Warner.
As part of the process of obtaining approval of the Broadband acquisition
from the Federal Communications Commission ("FCC"), at the closing of the
Broadband acquisition, the Company placed its entire interest in TWE in
trust for orderly disposition. Any non-cash consideration received in
respect of such interest as a result of the TWE restructuring, including
the AOL Time Warner and TWC stock, will remain in trust until disposed of
or FCC approval is obtained to remove such interests from the trust.
Under the trust, the trustee will have exclusive authority to exercise any
management or governance rights associated with the securities in trust.
The trustee will also have the obligation, subject to the rights of the
Company as described in the last sentence of this paragraph, to exercise
available registration rights to effect the sale of such interests in a
manner intended to maximize the value received consistent with the goal of
disposing such securities in their entirety by November 2007. Following
this time, if any securities remain in trust, the trustee will be obligated
to dispose of the remaining interests as quickly as possible, and in any
event by May 2008. The trustee is also obligated, through November 2007, to
effect certain specified types of sale or monetization transactions with
respect to the securities as may be proposed by the Company from time to
time.
As a condition of the closing of the TWE restructuring, the Company entered
into a three-year nonexclusive agreement with AOL Time Warner under which
the AOL High-Speed Broadband service will be made available over a
three-year period on certain of the Company's cable systems which pass
approximately 10 million homes.
Unaudited Pro Forma Information
The following unaudited pro forma information has been presented as if the
Broadband acquisition occurred on January 1, 2002. This information is
based on historical results of operations, adjusted for acquisition costs,
and, in the opinion of management, is not necessarily indicative of what
the results would have been had the Company operated Broadband since
January 1, 2002.
(Amounts in millions,
except per share data)
Three Months Ended
March 31, 2002
------------------------
Revenues.................................... $5,031
Net loss.................................... ($709)
Diluted EPS................................. ($0.31)
9
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
5. INVESTMENTS
March 31, December 31,
2003 2002
----------- --------------
(in millions)
Fair value method
AT&T Corp.................................................... $110 $287
Cablevision.................................................. 787 694
Microsoft.................................................... 1,913 1,967
Sprint Corp. PCS Group....................................... 334 369
Vodaphone.................................................... 1,749 1,759
Other ....................................................... 81 82
----------- --------------
4,974 5,158
----------- --------------
Equity Method
Cable related................................................ 2,148 2,094
Other........................................................ 231 236
----------- --------------
2,379 2,330
----------- --------------
Cost method, principally TWC and AOL Time Warner
at March 31, 2003 and TWE at December 31, 2002
(see Note 4)................................................. 8,988 10,985
----------- --------------
Total investments............................................ 16,341 18,473
Less, current investments......................................... 3,153 3,266
----------- --------------
Non-current investments........................................... $13,188 $15,207
=========== ==============
Fair Value Method
The Company holds unrestricted equity investments in certain publicly
traded companies, which it accounts for as available for sale or trading
securities. The net unrealized pre-tax gains on investments accounted for
as available for sale securities as of March 31, 2003 and December 31, 2002
of $56 million and $72 million, respectively, have been reported in the
Company's consolidated balance sheet principally as a component of
accumulated other comprehensive loss, net of related deferred income taxes
of $20 million and $25 million, respectively.
The cost, fair value and gross unrealized gains and losses related to the
Company's available for sale securities are as follows (in millions):
March 31, December 31,
2003 2002
----------- -----------
Cost............................................................. $169 $322
Gross unrealized gains........................................... 57 73
Gross unrealized losses.......................................... (1) (1)
----------- -----------
Fair value....................................................... $225 $394
=========== ===========
Cost Method
In connection with the Broadband acquisition, the Company acquired an
indirect interest in Charter Communications VIII, LLC ("CC VIII"), a cable
joint venture with Charter Communications, Inc. ("Charter"). In April 2002,
AT&T exercised its rights to cause Paul G. Allen ("Allen"), Charter's
Chairman, or his designee to purchase this indirect interest for
approximately $725 million in cash. The parties agreed to delay the
settlement of the purchase until April 14, 2003 while they negotiated
alternatives to the purchase. On April 14, 2003, the
10
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Company announced that the Company and Allen agreed to delay for a period
of up to 30 days the purchase by Allen of Comcast's interest in CC VIII.
The transaction is now expected to close in May 2003, unless the parties
agree to an alternative arrangement.
Investment Loss, Net
Investment loss, net for the interim periods includes the following (in
millions):
Three Months Ended
March 31,
2003 2002
----------- -----------
Interest and dividend income......................................... $33 $7
Gains on sales and exchanges of investments, net..................... 22 2
Investment impairment losses......................................... (55) (13)
Unrealized losses on trading securities.............................. (15) (1,020)
Mark to market adjustments on derivatives related
to trading securities........................................... (11) 847
Mark to market adjustments on derivatives and hedged items........... (204) (71)
----------- -----------
Investment loss, net............................................ ($230) ($248)
=========== ===========
6. GOODWILL
The changes in the carrying amount of goodwill by business segment (see
Note 11) for the periods presented are as follows (in millions):
Corporate
Cable Commerce and Other Total
------------ ------------ ------------ ------------
Balance, December 31, 2002...................... $15,644 $835 $918 $17,397
Purchase price allocation adjustments....... (358) (358)
Intersegment transfers...................... 20 (20)
------------ ------------ ------------ ------------
Balance, March 31, 2003......................... $15,306 $835 $898 $17,039
============ ============ ============ ============
During the 2003 interim period, the Company adjusted its preliminary
purchase price allocation of the Broadband acquisition. These adjustments
resulted in a reduction of goodwill and corresponding adjustments to
franchise rights, other noncurrent liabilities, deferred income taxes and
certain working capital accounts (see Note 4).
7. LONG-TERM DEBT
March 31, December 31,
2003 2002
----------- -----------
(in millions)
Notes exchangeable into common stock............................. $5,679 $5,459
Bank and public debt............................................. 26,682 28,702
Other, including capital lease obligations....................... 549 749
----------- -----------
Total debt.................................................. $32,910 $34,910
=========== ===========
11
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FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The Cross-Guarantee Structure
To simplify the Company's capital structure, effective with the acquisition
of Broadband, the Company and four of its cable holding company
subsidiaries fully and unconditionally guaranteed each other's debt
securities (the "Cross-Guarantee Structure"). Comcast Holdings Corporation
is not a guarantor, and none of its debt is guaranteed. Comcast MO of
Delaware, Inc. (formerly, MediaOne of Delaware, Inc. and Continental
Cablevision, Inc.) was not originally a part of the Cross-Guarantee
Structure. On March 12, 2003, the Company announced the successful
completion of a bondholder consent solicitation related to Comcast MO of
Delaware, Inc.'s $1.7 billion aggregate principal amount in debt securities
to permit it to become part of the Cross-Guarantee Structure. As of March
31, 2003, $24.432 billion of the Company's debt securities were entitled to
the benefits of the Cross-Guarantee Structure (see Note 12).
Senior Notes Offerings
In January and March 2003, the Company sold an aggregate of $3.0 billion of
public debt consisting of $600 million of 5.85% senior notes due 2010, $900
million of 6.50% senior notes due 2015, $750 million of 5.50% senior notes
due 2011 and $750 million of 7.05% senior notes due 2033. The Company used
all of the net proceeds from the offerings to repay a portion of the
Company's short-term debt outstanding.
Repayments of Debt with Proceeds from TWE Restructuring
On March 31, 2003, in connection with the closing of the TWE restructuring,
the Company received $2.1 billion in cash which was used to repay debt,
including the remaining outstanding balance of its short-term debt (see
Note 4).
Redemptions and Refinancings of Debt
On April 9, 2003, the Company announced that it intends to redeem at their
respective scheduled redemption price on May 9, 2003, the entire
outstanding aggregate principal amount of certain of its senior notes and
senior subordinated notes with maturities from 2003 to 2023 and interest
rates ranging from 8 1/4% to 9.65%. The Company intends to refinance the
redemptions with amounts available under the Company's existing credit
facilities. As of March 31, 2003, $451 million of these notes were
outstanding.
On May 5, 2003, the Company borrowed an aggregate of $2.75 billion,
representing all amounts available under two new credit agreements.
Borrowings under the new credit agreements, which are due in 2006, were
used to repay a portion of the $3.18 billion outstanding as of March 31,
2003 under the Company's term loan due 2004. The new credit agreements
replaced the Company's 364-day credit facility which expired in May 2003.
Notes Exchangeable into Common Stock
As a result of the Broadband acquisition, the Company assumed exchangeable
notes (the "Exchangeable Notes") which are mandatorily redeemable at the
Company's option into shares of Cablevision NY Group ("Cablevision") Class
A common stock or its cash equivalent, Microsoft Corporation ("Microsoft")
common stock or its cash equivalent, (i) Vodafone ADRs, (ii) the cash
equivalent, or (iii) a combination of cash and Vodafone ADRs, and Comcast
Class A Special common stock or its cash equivalent. The maturity value of
the Exchangeable Notes varies based upon the fair market value of the
security to which it is indexed. The Company's Exchangeable Notes are
collateralized by the Company's investments in Cablevision, Microsoft and
Vodafone, respectively, and the Comcast Class A Special common stock held
in treasury. As of March 31, 2003, the securities held by the Company
collateralizing the Exchangeable Notes were sufficient to satisfy the debt
obligations associated with the outstanding Exchangeable Notes.
ZONES
At maturity, holders of the Company's 2.0% Exchangeable Subordinated
Debentures due 2029 (the "ZONES") are entitled to receive in cash an amount
equal to the higher of the principal amount of the ZONES or the market
value of Sprint PCS common stock. Prior to maturity, each ZONES is
exchangeable at the holders' option for an amount of cash equal to 95% of
the market value of Sprint PCS Stock. As of March 31, 2003, the number of
Sprint PCS shares held by the Company exceeded the number of ZONES
outstanding.
12
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The Company split the accounting for the Exchangeable Notes and the ZONES
into derivative and debt components. The Company records the change in the
fair value of the derivative component of the Exchangeable Notes and the
ZONES (see Note 5) and the change in the carrying value of the debt
component of the Exchangeable Notes and the ZONES as follows (in millions):
Exchangeable Notes ZONES
---------------------- --------------------------
Three Months Ended Three Months Ended
March 31, March 31,
2003 2003 2002
------------ ----------- -----------
Balance at Beginning of Period:
Debt component................................ $6,981 $491 $468
Derivative component.......................... (1,522) 208 1,145
------------ ----------- -----------
Total 5,459 699 1,613
(Decrease) increase in debt component
to interest expense........................ (25) 6 6
Increase (decrease) in derivative component
to investment loss, net.................... 245 (1) (664)
Balance at End of Period:
Debt component................................ 6,956 497 474
Derivative component.......................... (1,277) 207 481
------------ ----------- -----------
Total ..................................... $5,679 $704 $955
============ =========== ===========
Interest Rates
Excluding the derivative component of the Exchangeable Notes and the ZONES
whose changes in fair value are recorded to investment loss, net, the
Company's effective weighted average interest rate on its total debt
outstanding was 6.54% and 5.86% as of March 31, 2003 and December 31, 2002,
respectively.
Derivatives
The Company uses derivative financial instruments to manage its exposure to
fluctuations in interest rates and securities prices. The Company has
issued indexed debt instruments and prepaid forward sale agreements whose
value, in part, is derived from the market value of certain publicly traded
common stock.
Lines and Letters of Credit
Certain subsidiaries of the Company had unused lines of credit of $4.763
billion under their respective credit facilities.
As of March 31, 2003, the Company and certain of its subsidiaries had
unused irrevocable standby letters of credit totaling $400 million to cover
potential fundings under various agreements.
8. STOCKHOLDERS' EQUITY
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations, as permitted by SFAS No. 123,
"Accounting for Stock-Based Compensation," as amended. Compensation expense
for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock. The Company records compensation
expense for restricted stock awards based on the quoted market price of the
Company's stock at the date of the grant and the vesting period. The
Company records compensation expense for stock appreciation rights based on
the changes in quoted market prices of the Company's stock or other
determinants of fair value.
13
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based compensation (dollars in millions, except per share
data):
Three Months Ended
March 31,
2003 2002
---------- ----------
Net loss, as reported........................................... ($297) ($89)
Deduct: Total stock-based compensation
expense determined under fair value based method
for all awards, net of related tax effects................. (38) (33)
---------- ----------
Pro forma, net loss............................................. ($335) ($122)
========== ==========
Basic and Diluted loss for common stockholders per common share:
As reported................................................ ($0.13) ($0.09)
Pro forma.................................................. ($0.15) ($0.13)
Total stock-based compensation expense was determined under the fair value
method for all awards assuming accelerated vesting of the Company's stock
options as permitted under SFAS No. 123. Had the Company applied the fair
value recognition provisions of SFAS No. 123 assuming straight-line rather
than accelerated vesting of its stock options, total stock-based
compensation expense, net of related tax effects, would have been $32
million and $27 million for the interim periods in 2003 and 2002,
respectively.
The weighted-average fair value at date of grant of a Class A common stock
option granted under the Company's option plans during the 2003 interim
period was $11.56. The weighted-average fair value at date of grant of a
Class A Special common stock option granted under the option plans during
the interim period in 2002 was $16.43. The fair value of each option
granted during the interim periods in 2003 and 2002 was estimated on the
date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
Three Months Ended March 31,
2003 2002
--------------- ----------------
Class A Class A Special
Common Stock Common Stock
--------------- ----------------
Dividend yield..................... 0% 0%
Expected volatility................ 29.2% 29.2%
Risk-free interest rate............ 3.8% 5.3%
Expected option lives (in years)... 8.0 8.0
Forfeiture rate.................... 3.0% 3.0%
The pro forma effect on net loss and net loss per share for the interim
periods by applying SFAS No. 123 may not be indicative of the effect on net
income or loss in future years since SFAS No. 123 does not take into
consideration pro forma compensation expense related to awards made prior
to January 1, 1995 and since additional awards in future years are
anticipated.
14
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Comcast Option Plans
The Company maintains stock option plans for certain employees, directors
and other persons (collectively, the "Comcast Option Plans"). The following
table summarizes the activity of the Comcast Option Plans during the 2003
interim period (options in thousands):
Class A Class A Special
Common Stock Common Stock
---------------------- ----------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
--------- ------------ --------- -----------
Outstanding at beginning of period.... 63,575 $43.31 64,890 $28.57
Granted............................... 16,843 27.23
Exercised............................. (167) 15.85 (316) 9.71
Canceled.............................. (801) 41.38 (252) 38.96
--------- ---------
Outstanding at end of period.......... 79,450 39.98 64,322 28.63
========= =========
Exercisable at end of period.......... 58,010 44.79 25,000 21.91
========= =========
Comprehensive Loss
The Company's total comprehensive loss for the interim periods was as follows
(in millions):
Three Months Ended
March 31,
2003 2002
--------- ----------
Net loss............................................. ($297) ($89)
Unrealized losses on marketable securities........... (31) (141)
Reclassification adjustments for losses
included in net loss............................... 24 5
Unrealized losses on the effective portion of
cash flow hedges................................... (4)
Foreign currency translation gains (losses).......... 6 (12)
--------- ----------
Comprehensive loss................................... ($298) ($241)
========= ==========
9. STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
The Company made cash payments for interest and income taxes during the
interim periods as follows (in millions):
Three Months Ended
March 31,
2003 2002
-------- ---------
Interest........................................................ $567 $110
Income taxes.................................................... $41 $30
10. COMMITMENTS AND CONTINGENCIES
Commitments
Certain subsidiaries of the Company support debt compliance with respect to
obligations aggregating $1.731 billion as of March 31, 2003 of certain
cable television partnerships and investments in which the Company holds an
15
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FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
ownership interest (see Note 5). The obligations expire between May 2008
and September 2010. Although there can be no assurance, management believes
that it will not be required to meet its obligations under such
commitments. The total notional amount of commitments for the Company was
$1.731 billion as of March 31, 2003, at which time there were no quoted
market prices for similar agreements.
Contingencies
On March 3, 2003, the Company announced that Liberty Media Corporation
("Liberty") delivered a notice to it, pursuant to the stockholders
agreement between the Company and Liberty, that triggers an exit rights
process with respect to Liberty's approximate 42% interest in QVC. An
appraisal process will determine the value of QVC. The Company will then
have the right to purchase Liberty's interest in QVC based on the
determined value. The Company may pay Liberty for the QVC stock in cash, in
a promissory note maturing not more than three years after issuance, in its
equity securities or in a combination of these, subject to Liberty's right
to request payment in all equity securities and the parties' obligation to
use reasonable efforts to consummate the purchase in the most tax efficient
method available (provided that the Company is not required to issue
securities representing more than 4.9% of the outstanding equity or vote of
the Company's common stock). If the Company elects not to purchase
Liberty's interest in QVC, Liberty then will have a similar right to
purchase the Company's approximate 57% interest in QVC. If neither the
Company nor Liberty elect to purchase the interest of the other, then the
Company and Liberty are required to use their best efforts to sell QVC;
either company is permitted to be a purchaser in any such sale. The Company
and Liberty may agree not to enter into a transaction, or may agree to a
transaction other than that specified in the stockholders agreement. Under
the current terms of the stockholders agreement between the Company and
Liberty, the Company would no longer control QVC if it elects not to
purchase Liberty's interest in QVC.
Litigation has been filed against the Company as a result of alleged
conduct of the Company with respect to its investment in and distribution
relationship with At Home Corporation. At Home was a provider of high-speed
Internet access and content services which filed for bankruptcy protection
in September 2001. Filed actions are: (i) class action lawsuits against the
Company, Brian L. Roberts (the Company's President and Chief Executive
Officer and a director), AT&T (the former controlling shareholder of At
Home and also a former distributor of the At Home service) and other
corporate and individual defendants in the Superior Court of San Mateo
County, California, alleging breaches of fiduciary duty on the part of the
Company and the other defendants in connection with transactions agreed to
in March 2000 among At Home, the Company, AT&T and Cox Communications, Inc.
(Cox is also an investor in At Home and a former distributor of the At Home
service); (ii) class action lawsuits against Comcast Cable Communications,
Inc., AT&T and others in the United States District Court for the Southern
District of New York, alleging securities law violations and common law
fraud in connection with disclosures made by At Home in 2001; and (iii) a
lawsuit brought in the United States District Court for the District of
Delaware in the name of At Home by certain At Home bondholders against the
Company, Brian L. Roberts, Cox and others, alleging breaches of fiduciary
duty relating to the March 2000 transactions and seeking recovery of
alleged short- swing profits of at least $600 million pursuant to Section
16(b) of the Securities Exchange Act of 1934 purported to have arisen in
connection with certain transactions relating to At Home stock effected
pursuant to the March 2000 agreements. The actions in San Mateo County,
California have been stayed by the United States Bankruptcy Court for the
Northern District of California, the court in which At Home filed for
bankruptcy, as violating the automatic bankruptcy stay. In the Southern
District of New York actions, the court ordered the actions consolidated
into a single action. An amended consolidated class action complaint was
filed on November 8, 2002. All of the defendants served motions to dismiss
on February 11, 2003.
Under the terms of the Broadband acquisition, the Company is contractually
liable for 50% of any liabilities of AT&T relating to At Home, including
any resulting from any pending or threatened litigation. AT&T will be
liable for the other 50% of these liabilities. In addition to the actions
against AT&T described above, where the Company is also a defendant, there
are two additional actions brought by At Home's bondholders' liquidating
trust against AT&T, not naming the Company: (i) a lawsuit filed against
AT&T and certain of its senior officers in Santa Clara, California state
court alleging various breaches of fiduciary duties, misappropriation of
trade secrets and other causes of action in connection with the
transactions in March 2000 described above, and prior and subsequent
16
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
alleged conduct on the part of the defendants, and (ii) an action filed
against AT&T in the District Court for the Northern District of California,
alleging that AT&T infringes an At Home patent by using its broadband
distribution and high-speed Internet backbone networks and equipment. AT&T
moved to dismiss the Santa Clara action on the grounds that California is
an inconvenient forum, but the court denied AT&T's motion. AT&T also moved
to transfer the Northern District of California action to the Southern
District of New York as being a more convenient venue. AT&T's motion was
denied on April 25, 2003.
The Company denies any wrongdoing in connection with the claims which have
been made directly against the Company, its subsidiaries and Brian L.
Roberts, and intends to defend all of these claims vigorously. In
management's opinion, the final disposition of these claims is not expected
to have a material adverse effect on the Company's consolidated financial
position, but could possibly be material to the Company's consolidated
results of operations of any one period. Further, no assurance can be given
that any adverse outcome would not be material to such consolidated
financial position.
Management is continuing to evaluate this litigation and is unable to
currently determine what impact, if any, that the Company's 50% share of
the AT&T At Home potential liabilities would have on the Company's
consolidated financial position or results of operations. No assurance can
be given that any adverse outcome would not be material.
Some of the entities formerly attributed to Broadband which are now
subsidiaries of the Company are parties to an affiliation term sheet with
Starz Encore Group LLC, an affiliate of Liberty Media Corporation, which
extends to 2022. The term sheet requires annual fixed price payments,
subject to adjustment for various factors, including inflation. The term
sheet also requires the Company to pay two-thirds of Starz Encore's
programming costs above levels designated in the term sheet. Excess
programming costs that may be payable by the Company in future years are
not presently estimable, and could be significant.
By letter dated May 29, 2001, Broadband disputed the enforceability of the
excess programming pass-through provisions of the Starz Encore term sheet
and questioned the validity of the term sheet as a whole. Broadband also
has raised certain issues concerning the uncertainty of the provisions of
the term sheet and the contractual interpretation and application of
certain of its provisions to, among other things, the acquisition and
disposition of cable systems. In July 2001, Starz Encore filed a lawsuit in
Colorado state court seeking payment of the 2001 excess programming costs
and a declaration that the term sheet is a binding and enforceable
contract. In October 2001, Broadband and Starz Encore agreed to delay any
further proceedings in the litigation until August 31, 2002 to allow the
parties time to continue negotiations toward a potential business
resolution of this dispute. As part of this standstill agreement, Broadband
and Starz Encore settled Starz Encore's claim for the 2001 excess
programming costs, and Broadband agreed to continue to make the standard
monthly payments due under the term sheet, with a full reservation of
rights with respect to these payments. In connection with the standstill
agreement, the court granted a stay on October 30, 2001. The terms of the
stay order allowed either party to petition the court to lift the stay
after April 30, 2002 and to proceed with the litigation. Broadband and
Starz Encore agreed to extend the standstill agreement to and including
January 31, 2003, with a requirement that the parties attempt to mediate
the dispute. A mediation session held in January 2003 did not result in any
resolution of the matter.
On November 18, 2002, the Company and Comcast Holdings filed suit against
Starz Encore in the United States District Court for the Eastern District
of Pennsylvania. The Company and Comcast Holdings seek a declaratory
judgment that, pursuant to their rights under a March 17, 1999 contract
with a predecessor of Starz Encore, upon the completion of the Broadband
acquisition that contract now provides the terms under which Starz Encore
programming is acquired and transmitted by the Company's cable systems. On
January 8, 2003, Starz Encore filed a motion to dismiss the lawsuit on the
grounds that claims asserted by the Company and Comcast Holdings raised
issues of state law that the United States District Court should decline to
decide. The Company has responded contesting these assertions. That motion
has been submitted to the Court for decision.
17
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
On January 31, 2003, Starz Encore filed an amended complaint in its lawsuit
against Broadband in Colorado state court. The amended complaint adds the
Company and Comcast Holdings as defendants and adds new claims against the
Company, Comcast Holdings and Broadband asserting alleged breaches of, and
interference with, the standstill agreement relating to the lawsuit filed
by the Company and Comcast Holdings in federal District Court in
Pennsylvania and to the defendants' position that since the completion of
the Broadband acquisition, the March 17, 1999 contract now provides the
terms under which Starz Encore programming is acquired and transmitted by
the Company's cable systems.
On March 3, 2003, Starz Encore filed a motion for leave to file a second
amended complaint that would add allegations that Broadband has breached
certain joint-marketing obligations under the term sheet and that the
Company and Comcast Holdings have breached certain joint-marketing
obligations under the March 17, 1999 contract and other agreements. The
Company, Comcast Holdings and Broadband intend to oppose Starz Encore's
motion for leave to file a second amended complaint and, in light of Starz
Encore's pending motion for leave to amend, have sought an extension of
time from the Court to respond to Starz Encore's amended complaint.
On April 3, 2003, the Company and Comcast Holdings filed a motion for
summary judgment in the federal action in Pennsylvania. On April 16, 2003,
Starz Encore filed a motion seeking (i) to strike the affidavit supporting
the summary judgment motion or, in the alternative, (ii) a general
postponement of Starz Encore's response date (or at a minimum a three week
extension). On April 29, 2003, the Company and Comcast Holdings filed an
opposition to Starz Encore's motion. The Court has not yet ruled on either
motion.
An entity formerly attributed to Broadband, which is now a subsidiary of
the Company, is party to a master agreement that may not expire until
December 31, 2012, under which it purchases certain billing services from
CSG Systems, Inc. The master agreement requires monthly payments, subject
to adjustment for inflation. The master agreement also contains a most
favored nation provision that may affect the amounts paid thereunder.
On May 10, 2002, Broadband filed a demand for arbitration against CSG
before the American Arbitration Association asserting, among other things,
the right to terminate the master agreement and seeking damages under the
most favored nation provision or otherwise. On May 31, 2002, CSG answered
Broadband's arbitration demand and asserted various counterclaims,
including for (i) breach of the master agreement; (ii) a declaration that
the Company is now bound by the master agreement to use CSG as its
exclusive provider for certain billing and customer care services; (iii)
tortious interference with prospective contractual relations; and (iv)
civil conspiracy. A hearing in the arbitration is scheduled to commence on
May 9, 2003.
On June 21, 2002, CSG filed a lawsuit against Comcast Holdings in federal
court in Denver, Colorado asserting claims related to the master agreement
and the pending arbitration. On November 4, 2002, CSG withdrew its
complaint against Comcast Holdings without prejudice. On November 15, 2002,
the Company initiated a lawsuit against CSG in federal court in
Philadelphia, Pennsylvania asserting that cable systems owned by Comcast
Holdings are not required to use CSG as a billing service or customer care
provider pursuant to the master agreement, and that the former Broadband
cable systems owned by the Company may be added to a billing service
agreement between the Company and CSG. CSG moved to dismiss or stay the
lawsuit on the ground that the issues raised by the complaint could be
wholly or substantially determined by the above-mentioned arbitration. By
Order dated February 10, 2003, the Court stayed the lawsuit until further
notice.
On January 8, 2003, Liberty Digital, Inc. filed a complaint in Colorado
state court against the Company and Comcast Cable Holdings, LLC (formerly
AT&T Broadband LLC and Tele-Communications, Inc.), a wholly owned
subsidiary of the Company. The complaint alleges that Comcast Cable
Holdings breached a 1997 "contribution agreement" between Liberty Digital
and Comcast Cable Holdings and that the Company tortiously interfered with
that agreement. The complaint alleges that this purported agreement
obligates Comcast Cable Holdings to pay fees to Liberty Digital totaling
$18 million (increasing at CPI) per year through 2017. The Company and
Comcast Cable Holdings filed their answer to the complaint on March 5,
2003, in which the Company and Comcast Cable Holdings denied the essential
allegations of the complaint and asserted various affirmative defenses.
18
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
In management's opinion, the final disposition of the Starz Encore, CSG and
Liberty Digital contractual disputes is not expected to have a material
adverse effect on the Company's consolidated financial position or results
of operations. However, no assurance can be given that any adverse outcome
would not be material to such consolidated financial position or results of
operations.
The Company is subject to other legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to such actions is not expected
to materially affect the financial condition, results of operations or
liquidity of the Company.
In connection with a license awarded to an affiliate, the Company is
contingently liable in the event of nonperformance by the affiliate to
reimburse a bank which has provided a performance guarantee. The amount of
the performance guarantee is approximately $165 million; however the
Company's current estimate of the amount of expenditures (principally in
the form of capital expenditures) that will be made by the affiliate
necessary to comply with the performance requirements will not exceed $50
million.
19
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
11. FINANCIAL DATA BY BUSINESS SEGMENT
The following represents the Company's significant business segments,
"Cable" and "Commerce." The components of net income (loss) below operating
income (loss) before depreciation and amortization are not separately
evaluated by the Company's management on a segment basis (in millions).
Corporate and
Cable Commerce Other (1) Total
----- -------- -------------- -----
Three Months Ended March 31, 2003
- ---------------------------------
Revenues (2)......................................... $4,232 $1,062 $224 $5,518
Operating income before depreciation
and amortization (3)............................ 1,421 211 6 1,638
Depreciation and amortization........................ 1,080 31 54 1,165
Operating income (loss).............................. 341 180 (48) 473
Interest expense..................................... 448 1 76 525
Capital expenditures................................. 953 13 5 971
Three Months Ended March 31, 2002
- ---------------------------------
Revenues (2)......................................... $1,469 $988 $210 $2,667
Operating income before depreciation
and amortization (3)............................ 597 192 19 808
Depreciation and amortization........................ 293 27 67 387
Operating income (loss).............................. 304 165 (48) 421
Interest expense..................................... 146 3 38 187
Capital expenditures................................. 358 32 9 399
As of March 31, 2003
- --------------------
Assets............................................... $100,314 $3,083 $6,615 $110,012
Long-term debt, less current portion................. 25,236 5,022 30,258
As of December 31, 2002
- -----------------------
Assets............................................... $106,291 $3,000 $3,814 $113,105
Long-term debt, less current portion................. 26,033 1 1,923 27,957
_______________
(1) Other includes segments not meeting certain quantitative guidelines for
reporting including the Company's content operations and elimination
entries related to the segments presented. Corporate and other assets
consist primarily of the Company's investments and intangible assets
related to the Company's content operations (see Notes 5 and 6).
(2) Revenues include $215 million and $140 million during the 2003 and 2002
interim periods, respectively, of non-US revenues, principally related to
the Company's commerce segment. No single customer accounted for a
significant amount of the Company's revenues in any period.
(3) Operating income before depreciation and amortization is commonly
referred to in the Company's businesses as EBITDA. EBITDA is the measure
of profit or loss used to evaluate performance of all of the Company's
operating segments and operating units within all of the Company's
segments. EBITDA is defined as operating income before depreciation and
amortization and impairment charges, if any, related to fixed and
intangible assets. As such, it eliminates the significant level of
non-cash depreciation and amortization expense that results from the
capital intensive nature of the Company's businesses and intangible
assets recognized in business combinations and is unaffected by the
Company's capital structure or investment activities. EBITDA is
frequently used as one of the bases for comparing the Company's operating
performance with other companies in the Company's industries, although
the Company's measure of EBITDA may not be directly comparable to
similarly titled measures of other companies. EBITDA should not be
considered as a substitute for operating income (loss), net income
(loss), net cash provided by operating activities or other measures of
performance or liquidity reported in accordance with GAAP.
20
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In November 2002, in order to simplify the Company's capital structure, the
Company and four of its cable holding company subsidiaries, Comcast Cable
Communications, Inc. (Comcast Cable or "CCCI"), Comcast Cable
Communications Holdings, Inc. (Comcast Cable Communications Holdings or
"CCCH"), Comcast MO Group, Inc. ("Comcast MO Group"), and Comcast Cable
Holdings, LLC (Comcast Cable Holdings or "CCH"), fully and unconditionally
guaranteed each other's debt securities. Comcast MO of Delaware, Inc.
("Comcast MO of Delaware") was not originally a part of the Cross-Guarantee
Structure. On March 12, 2003, the Company announced the successful
completion of a bondholder consent solicitation related to Comcast MO of
Delaware's $1.7 billion aggregate principal amount in debt securities to
permit it to become part of the Cross-Guarantee Structure (see Note 7).
Comcast MO Group and CCH (as of December 31, 2002) and Comcast MO Group,
CCH and Comcast MO of Delaware (as of March 31, 2003 and for the 2003
interim period) are collectively referred to as the "Combined CCHMO
Parents." Condensed consolidating financial information of the Company is
as follows (in millions):
Comcast Corporation
Condensed Consolidating Balance Sheet
As of March 31, 2003
Elimination
Combined Non- and Consolidated
Comcast CCCI CCCH CCHMO Guarantor Consolidation Comcast
Parent Parent Parent Parents Subsidiaries Adjustments Corporation
-------- -------- -------- --------- -------- --------- -----------
ASSETS
Cash and cash equivalents................ $ $ $ $ $1,024 $ $1,024
Investments.............................. 31 3,122 3,153
Accounts receivable, net................. 1,323 1,323
Inventories, net......................... 482 482
Deferred income taxes.................... 129 129
Other current assets..................... 10 367 377
-------- -------- -------- --------- -------- --------- -----------
Total current assets................... 41 6,447 6,488
-------- -------- -------- --------- -------- --------- -----------
INVESTMENTS.............................. 13,188 13,188
INVESTMENTS IN AND AMOUNTS DUE FROM
SUBSIDIARIES ELIMINATED UPON
CONSOLIDATION.......................... 42,088 21,016 29,849 37,993 13,800 (144,746)
PROPERTY AND EQUIPMENT, net.............. 18,961 18,961
FRANCHISE RIGHTS......................... 48,290 48,290
GOODWILL................................. 17,039 17,039
OTHER INTANGIBLE ASSETS, net............. 5,273 5,273
OTHER NONCURRENT ASSETS, net............ 86 52 37 598 773
-------- -------- -------- --------- -------- --------- -----------
Total Assets............................. $42,215 $21,068 $29,886 $37,993 $123,596 ($144,746) $110,012
======== ======== ======== ========= ======== ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable......................... $ $ $ $ $1,631 $ $1,631
Accrued expenses and other current
liabilities ........................... 212 175 56 273 4,154 4,870
Deferred income taxes.................... 1,093 1,093
Current portion of long-term debt........ 856 1,796 2,652
-------- -------- -------- --------- -------- --------- -----------
Total current liabilities.............. 212 175 56 1,129 8,674 10,246
-------- -------- -------- --------- -------- --------- -----------
LONG-TERM DEBT, less current portion..... 3,670 7,093 5,998 6,815 6,682 30,258
DEFERRED INCOME TAXES.................... 23,125 23,125
OTHER NONCURRENT LIABILITIES............. 279 200 5,121 5,600
MINORITY INTEREST........................ 2,729 2,729
STOCKHOLDERS' EQUITY
Common stock............................. 25 25
Other stockholders' equity............... 38,029 13,800 23,832 29,849 77,265 (144,746) 38,029
-------- -------- -------- --------- -------- --------- -----------
Total Stockholders' Equity............. 38,054 13,800 23,832 29,849 77,265 (144,746) 38,054
-------- -------- -------- --------- -------- --------- -----------
Total Liabilities and Stockholders'
Equity............................... $42,215 $21,068 $29,886 $37,993 $123,596 ($144,746) $110,012
======== ======== ======== ========= ======== ========= ===========
21
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Comcast Corporation
Condensed Consolidating Balance Sheet
As of December 31, 2002
Elimination
Combined Non- and Consolidated
Comcast CCCI CCCH CCHMO Guarantor Consolidation Comcast
Parent Parent Parent Parents Subsidiaries Adjustments Corporation
-------- -------- -------- --------- -------- --------- -----------
ASSETS
Cash and cash equivalents................ $ $ $ $ $781 $ $781
Investments.............................. 30 3,236 3,266
Accounts receivable, net................. 1,383 1,383
Inventories, net......................... 479 479
Assets held for sale..................... 613 613
Deferred income taxes.................... 129 129
Other current assets..................... 22 403 425
-------- -------- -------- --------- -------- --------- -----------
Total current assets................... 52 7,024 7,076
-------- -------- -------- --------- -------- --------- -----------
INVESTMENTS.............................. 15,207 15,207
INVESTMENTS IN AND AMOUNTS DUE FROM
SUBSIDIARIES ELIMINATED UPON
CONSOLIDATION.......................... 39,356 21,818 33,683 40,749 13,913 (149,519)
PROPERTY AND EQUIPMENT, net.............. 18,866 18,866
FRANCHISE RIGHTS......................... 48,222 48,222
GOODWILL................................. 17,397 17,397
OTHER INTANGIBLE ASSETS, net............. 5,599 5,599
OTHER NONCURRENT ASSETS, net............ 74 99 121 444 738
-------- -------- -------- --------- -------- --------- -----------
Total Assets............................. $39,482 $21,917 $33,804 $40,749 $126,672 ($149,519) $113,105
======== ======== ======== ========= ======== ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable......................... $1 $ $ $ $1,662 $ $1,663
Accrued expenses and other current
liabilities............................ 208 107 46 469 4,819 5,649
Liabilities related to assets held
for sale............................... 13 13
Deferred income taxes.................... 1,105 1,105
Short-term debt.......................... 3,750 3,750
Current portion of long-term debt........ 1,465 1,738 3,203
-------- -------- -------- --------- -------- --------- -----------
Total current liabilities.............. 209 107 3,796 1,934 9,337 15,383
-------- -------- -------- --------- -------- --------- -----------
LONG-TERM DEBT, less current portion..... 680 7,897 6,005 4,932 8,443 27,957
DEFERRED INCOME TAXES.................... 23,110 23,110
OTHER NONCURRENT LIABILITIES............. 264 200 5,188 5,652
MINORITY INTEREST........................ 2,674 2,674
STOCKHOLDERS' EQUITY
Common stock............................. 25 25
Other stockholders' equity............... 38,304 13,913 24,003 33,683 77,920 (149,519) 38,304
-------- -------- -------- --------- -------- --------- -----------
Total Stockholders' Equity............. 38,329 13,913 24,003 33,683 77,920 (149,519) 38,329
-------- -------- -------- --------- -------- --------- -----------
Total Liabilities and Stockholders'
Equity............................ $39,482 $21,917 $33,804 $40,749 $126,672 ($149,519) $113,105
======== ======== ======== ========= ======== ========= ===========
22
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Comcast Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2003
Elimination
Combined Non- and Consolidated
Comcast CCCI CCCH CCHMO Guarantor Consolidation Comcast
Parent Parent Parent Parents Subsidiaries Adjustments Corporation
-------- ------- --------- -------- -------- ---------- ----------
REVENUES
Service revenues......................... $ $ $ $ $4,456 $ $4,456
Net sales from electronic retailing...... 1,062 1,062
Management fee revenue................... 95 37 58 58 (248)
-------- ------- --------- -------- -------- ---------- ----------
95 37 58 58 5,518 (248) 5,518
-------- ------- --------- -------- -------- ---------- ----------
COSTS AND EXPENSES
Operating (excluding depreciation)....... 1,930 1,930
Cost of goods sold from electronic
retailing (excluding depreciation).... 673 673
Selling, general and administrative...... 38 37 58 58 1,334 (248) 1,277
Depreciation............................. 799 799
Amortization............................. 366 366
-------- ------- --------- -------- -------- ---------- ----------
38 37 58 58 5,102 (248) 5,045
-------- ------- --------- -------- -------- ---------- ----------
OPERATING INCOME............................ 57 416 473
OTHER INCOME (EXPENSE)
Interest expense......................... (44) (135) (113) (115) (118) (525)
Investment loss, net..................... (230) (230)
Equity in net income (losses) of
affiliates............................. (305) 229 (337) (262) 121 534 (20)
Other income............................. 18 18
-------- ------- --------- -------- -------- ---------- ----------
(349) 94 (450) (377) (209) 534 (757)
-------- ------- --------- -------- -------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND
MINORITY INTEREST......................... (292) 94 (450) (377) 207 534 (284)
INCOME TAX BENEFIT (EXPENSE)................ (5) 47 40 40 (54) 68
-------- ------- --------- -------- -------- ---------- ----------
INCOME (LOSS) BEFORE MINORITY INTEREST...... (297) 141 (410) (337) 153 534 (216)
MINORITY INTEREST........................... (81) (81)
-------- ------- --------- -------- -------- ---------- ----------
NET INCOME (LOSS)........................... ($297) $141 ($410) ($337) $72 $534 ($297)
======== ======= ========= ======== ======== ========== ==========
23
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Comcast Corporation
Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2002
Elimination
Combined Non- and Consolidated
Comcast CCCI CCCH CCHMO Guarantor Consolidation Comcast
Parent Parent Parent Parents Subsidiar Adjustments Corporation
-------- ------- --------- -------- -------- ---------- ----------
REVENUES
Service revenues......................... $ $ $ $ $1,679 $ $1,679
Net sales from electronic retailing...... 988 988
-------- ------- --------- -------- -------- ---------- ----------
2,667 2,667
-------- ------- --------- -------- -------- ---------- ----------
COSTS AND EXPENSES
Operating (excluding depreciation)....... 743 743
Cost of goods sold from electronic
retailing (excluding depreciation).... 629 629
Selling, general and administrative...... 487 487
Depreciation............................. 334 334
Amortization............................. 53 53
-------- ------- --------- -------- -------- ---------- ----------
2,246 2,246
-------- ------- --------- -------- -------- ---------- ----------
OPERATING INCOME............................ 421 421
OTHER INCOME (EXPENSE)
Interest expense......................... (140) (47) (187)
Investment loss, net..................... (248) (248)
Equity in net income (losses) of
affiliates............................. 192 96 (293) (5)
Other expense............................ (23) (23)
-------- ------- --------- -------- -------- ---------- ----------
52 (222) (293) (463)
-------- ------- --------- -------- -------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST.................... 52 199 (293) (42)
INCOME TAX BENEFIT (EXPENSE)................ 49 (52) (3)
-------- ------- --------- -------- -------- ---------- ----------
INCOME (LOSS) BEFORE MINORITY INTEREST...... 101 147 (293) (45)
MINORITY INTEREST........................... (44) (44)
-------- ------- --------- -------- -------- ---------- ----------
NET INCOME (LOSS)........................... $101 $103 ($293) ($89)
======== ======= ========= ======== ======== ========== ==========
24
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Comcast Corporation
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2003
Elimination
Combined Non- and Consolidated
Comcast CCCI CCCH CCHMO Guarantor Consolidation Comcast
Parent Parent Parent Parents Subsidiaries Adjustments Corporation
-------- ------- --------- -------- -------- ---------- ----------
OPERATING ACTIVITIES
Net income (loss)............................ ($297) $141 ($410) ($337) $72 $534 ($297)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation.............................. 799 799
Amortization.............................. 366 366
Non-cash interest (income) expense, net... (4) (33) 16 (21)
Equity in net (income) losses of
affiliates.............................. 305 (229) 337 262 (121) (534) 20
Losses (gains) on investments and other
(income) expense, net................... 247 247
Minority interest......................... 55 55
Deferred income taxes..................... (182) (182)
Proceeds from sales of trading securities. 32 32
Other..................................... 10 10
------ ------- --------- -------- --------- ---------- ----------
8 (92) (73) (108) 1,294 1,029
Changes in working capital
Decrease in accounts receivable, net.... 61 61
Increase in inventories, net............ (3) (3)
Increase in other current assets........ 48 48
Increase (decrease) in accounts
payable, accrued expenses and other
current liabilities................... 4 68 10 (196) (221) (335)
------ ------- --------- -------- --------- ---------- ----------
4 68 10 (196) (115) (229)
Net cash provided by (used in)
operating activities.................. 12 (24) (63) (304) 1,179 800
------ ------- --------- -------- --------- ---------- ----------
FINANCING ACTIVITIES
Proceeds from borrowings.................. 3,690 200 10 3,900
Retirements and repayments of debt........ (700) (1,000) (3,750) (608) (21) (6,079)
Other..................................... (16) (16)
------ ------- --------- -------- --------- ---------- ----------
Net cash provided by (used in)
financing activities.................. 2,990 (800) (3,750) (608) (27) (2,195)
------ ------- --------- -------- --------- ---------- ----------
INVESTING ACTIVITIES
Net transactions with affiliates............. (3,002) 824 3,813 912 (2,547)
Proceeds from sales of (purchases of)
short-term investments, net............... (9) (9)
Proceeds from restructuring of TWE investment 2,100 2,100
Proceeds from sales of investments and
assets held for sale..................... 668 668
Purchases of investments..................... (72) (72)
Capital expenditures......................... (971) (971)
Additions to intangible and other noncurrent
assets................................... (78) (78)
------ ------- --------- -------- --------- ---------- ----------
Net cash provided by (used in) investing
activities............................... (3,002) 824 3,813 912 (909) 1,638
------ ------- --------- -------- --------- ---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS........ 243 243
CASH AND CASH EQUIVALENTS, beginning of
period................................... 781 781
------ ------- --------- -------- --------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period..... $ $ $ $ $1,024 $ $1,024
====== ======= ========= ======== ========= ========== ==========
25
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED
(Unaudited)
Comcast Corporation
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2002
Elimination
Combined Non- and Consolidated
Comcast CCCI CCCH CCHMO Guarantor Consolidation Comcast
Parent Parent Parent Parents Subsidiaries Adjustments Corporation
-------- ------- --------- -------- -------- ---------- ----------
OPERATING ACTIVITIES
Net income (loss)............................ $101 $103 ($293) ($89)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation.............................. 334 334
Amortization.............................. 53 53
Non-cash interest (income) expense, net... (3) 15 12
Equity in net (income) losses of
affiliates.............................. (192) (96) 293 5
Losses (gains) on investments and other
(income) expense, net................... 277 277
Minority interest......................... 44 44
Deferred income taxes..................... 17 17
Other..................................... (37) (37)
-------- ------- --------- -------- -------- ---------- ----------
(94) 710 616
Changes in working capital
Increase in accounts receivable, net.... (13) (13)
Decrease in inventories................. 28 28
Increase in other current assets........ (47) (47)
Increase (decrease) in accounts
payable, accrued expenses and other
current liabilities.................... 34 (99) (65)
-------- ------- --------- -------- -------- ---------- ----------
34 (131) (97)
Net cash provided by (used in) operating
activities.............................. (60) 579 519
-------- ------- --------- -------- -------- ---------- ----------
FINANCING ACTIVITIES
Proceeds from borrowings.................. 400 120 520
Retirements and repayments of debt........ (451) (451)
Other..................................... 62 62
-------- ------- --------- -------- -------- ---------- ----------
Net cash provided by (used in) financing
activities.............................. 400 (269) 131
-------- ------- --------- -------- -------- ---------- ----------
INVESTING ACTIVITIES
Net transactions with affiliates.......... (340) 340
Acquisitions, net of cash required........ (12) (12)
Proceeds from sales of (purchase of)
short-term investments, net............. 1 1
Proceeds from sales of investments........ 13 13
Purchases of investments.................. (4) (4)
Capital expenditures...................... (399) (399)
Additions to intangible and other
noncurrent assets....................... (56) (56)
-------- ------- --------- -------- -------- ---------- ----------
Net cash provided by (used in) investing
activities.............................. (340) (117) (457)
-------- ------- --------- -------- -------- ---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS........ 193 193
CASH AND CASH EQUIVALENTS, beginning of
period.................................. 350 350
-------- ------- --------- -------- -------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period..... $ $ $ $ $543 $ $543
======== ======= ========= ======== ======== ========== ==========
26
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We have grown significantly in recent years through both strategic
acquisitions and growth in our existing businesses. On November 18, 2002, we
completed the acquisition of AT&T Corp.'s broadband business (the "Broadband
acquisition"). The Broadband acquisition substantially increased the size of our
cable operations and caused significant changes in our capital structure,
including a substantially higher amount of debt. As a result, direct comparisons
of our results of operations for periods prior to November 18, 2002 to
subsequent periods are not meaningful. See "Results of Operations" for a
discussion of the effects of the Broadband acquisition on our results of
operations.
We have historically met our cash needs for operations through our cash
flows from operating activities. We have generally financed our acquisitions and
capital expenditures through issuances of our common stock, borrowings of
long-term debt, sales of investments and from existing cash, cash equivalents
and short-term investments.
General Developments of Business
Refer to Note 4 to our financial statements included in Item 1 for a
discussion of our acquisitions and other significant events.
Liquidity and Capital Resources
The cable and the electronic retailing industries are experiencing
increasing competition and rapid technological changes. Our future results of
operations will be affected by our ability to react to changes in the
competitive environment and by our ability to implement new technologies. We
believe that competition and technological changes will not significantly affect
our ability to obtain financing.
We believe that we will be able to meet our current and long-term liquidity
and capital requirements, including fixed charges, through our cash flows from
operating activities, existing cash, cash equivalents and investments, and
through available borrowings under our existing credit facilities.
Available sources of financing to fund these requirements include our
existing cash and cash equivalents, amounts available under our and our
subsidiaries' lines of credit, which total $4.763 billion, and through the
future sales or monetizations of our investments.
In addition, as more fully described in Note 4 to our financial statements
included in Item 1 (see TWE Restructuring), upon closing of the TWE
restructuring agreement, we received common-equivalent preferred stock of the
AOL Time Warner, Inc., which will be converted into $1.5 billion of AOL Time
Warner common stock upon completion of an effective registration statement
filing with the SEC, and an approximate 21% economic interest in Time Warner
Cable, Inc.
Cash and Cash Equivalents
We have traditionally maintained significant levels of cash and cash
equivalents to meet our short-term liquidity requirements. Our cash equivalents
are recorded at fair value. Cash and cash equivalents as of March 31, 2003 were
$1.024 billion, substantially all of which is unrestricted.
Investments
A significant portion of our investments are in publicly traded companies
and are reflected at fair value which fluctuates with market changes.
We do not have any significant contractual funding commitments with respect
to any of our investments. Our ownership interests in these investments may,
however, be diluted if we do not fund our investees' non-binding capital calls.
We continually evaluate our existing investments, as well as new investment
opportunities.
Refer to Note 5 to our financial statements included in Item 1 for a
discussion of our investments.
Financing
As of March 31, 2003 and December 31, 2002, our debt, including capital
lease obligations, was $32.910 billion and $34.910 billion, respectively.
The $2.0 billion decrease from December 31, 2002 to March 31, 2003 results
principally from the effects of our net repayments during 2003. Included in our
debt as of March 31, 2003 and December 31, 2002 was short-term debt and current
portion of long-term debt of $2.652 and $6.953 billion, respectively.
27
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
In January and March 2003, we sold an aggregate of $3.0 billion of public
debt consisting of $600 million of 5.85% senior notes due 2010, $900 million of
6.50% senior notes due 2015, $750 million of 5.50% senior notes due 2011 and
$750 million of 7.05% senior notes due 2033. We used all of the net proceeds
from the offerings to repay a portion of our short-term debt.
On March 31, 2003, in connection with the closing of the TWE restructuring
we received $2.1 billion in cash which was used to repay debt, including the
remaining outstanding balance of our short-term debt.
On April 9, 2003, we announced that we intend to redeem at their respective
scheduled redemption price on May 9, 2003, the entire outstanding aggregate
principal amount of certain of our senior notes and senior subordinated notes
with maturities from 2003 to 2023 and interest rates ranging from 8 1/4% to
9.65%. We intend to refinance the redemptions with amounts available under our
existing credit facilities. As of March 31, 2003, $451 million of these notes
were outstanding.
On May 5, 2003, we borrowed an aggregate of $2.75 billion, representing all
amounts available under two new credit agreements. Borrowings under the new
credit agreements, which are due in 2006, were used to repay a portion of the
$3.18 billion outstanding as of March 31, 2003 under our term loan due 2004. The
new credit agreements replaced our 364-day credit facility which expired in May
2003.
Excluding the effects of interest rate risk management instruments, 19.8%
and 31.8% of our long- term debt, including short-term debt and current portion,
as of March 31, 2003 and December 31, 2002, respectively, was at variable rates.
We have and may in the future, depending on certain factors including
market conditions, make optional repayments on our debt obligations, which may
include open market repurchases of our outstanding public notes and debentures.
Refer to Note 7 to our financial statements included in Item 1 for a
discussion of our long-term debt.
Equity Price Risk Management
We have entered into cashless collar agreements (the "Equity Collars") and
prepaid forward sales agreements ("Prepaid Forward Sales") which we account for
at fair value. The Equity Collars and Prepaid Forward Sales limit our exposure
to and benefits from price fluctuations in the common stock of certain of our
investments accounted for as trading securities.
The change in the fair value of our investments accounted for as trading
securities was substantially offset by the changes in the fair values of the
Equity Collars and the derivative components of the ZONES, Exchangeable Notes
and Prepaid Forward Sales. See "Results of Operations - Investment Loss, Net"
below.
_______________________
Statement of Cash Flows
Cash and cash equivalents increased $243 million as of March 31, 2003 from
December 31, 2002. The increase in cash and cash equivalents resulted from cash
flows from operating, financing and investing activities, which are explained
below.
Net cash provided by operating activities amounted to $800 million for the
three months ended March 31, 2003, due principally to our operating income
before depreciation and amortization (see "Results of Operations"), and by
changes in working capital as a result of the timing of receipts and
disbursements and the effects of interest and income tax payments.
Net cash used in financing activities consists primarily of borrowings and
repayments of debt. Net cash used in financing activities was $2.195 billion for
the three months ended March 31, 2003. During the three months ended March 31,
2003, we borrowed $3.900 billion, consisting of:
o $3.000 billion of senior notes, and
o $900 million under revolving credit facilities.
During the three months ended March 31, 2003, we repaid $6.079 billion of
our debt, consisting of:
o $3.750 billion of our short-term debt,
o $1.710 billion on certain of our revolving credit facilities,
o $608 million of our senior notes, and
o $11 million under capital leases and other.
28
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
Net cash provided by investing activities was $1.638 billion for the three
months ended March 31, 2003, including capital expenditures of $971 million,
proceeds from the restructuring of our TWE investment of $2.100 billion, and
proceeds from sales of investments and assets held for sale of $668 million.
_______________________
Results of Operations
The effects of the Broadband acquisition were to increase our revenues and
expenses, resulting in increases in our operating income before depreciation and
amortization. The increase in our depreciation expense from the 2002 to 2003
interim period is primarily due to the effects of the Broadband acquisition and
our increased levels of capital expenditures. The increases in our amortization
expense and interest expense from the 2002 to 2003 interim period are primarily
due to the effects of the Broadband acquisition.
As the effect of the Broadband acquisition was to substantially increase
the size of our cable operations, direct comparisons of our results of
operations for periods prior to November 18, 2002 to subsequent periods are not
meaningful. Refer to "Pro Forma Results" below for additional information
relating to our cable segment operating results as if the Broadband acquisition
occurred on January 1, 2002.
29
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
Our summarized financial information for the interim periods is as follows
(dollars in millions, "NM" denotes percentage is not meaningful):
Three Months Ended
March 31, Increase / (Decrease)
2003 2002 $ %
--------- --------- ---------- ---------
Revenues..................................................... $5,518 $2,667 $2,851 106.9%
Cost of goods sold from electronic retailing................. 673 629 44 7.0
Operating, selling, general and administrative expenses...... 3,207 1,230 1,977 160.7
Depreciation and amortization................................ 1,165 387 778 201.0
--------- --------- ---------- ---------
Operating income............................................. 473 421 52 12.4
--------- --------- ---------- ---------
Interest expense............................................. (525) (187) 338 180.7
Investment loss, net......................................... (230) (248) (18) (7.3)
Equity in net losses of affiliates........................... (20) (5) 15 300.0
Other income (expense)....................................... 18 (23) 41 NM
Income tax benefit (expense)................................. 68 (3) 71 NM
Minority interest............................................ (81) (44) 37 84.1
--------- --------- ---------- ---------
Net loss..................................................... ($297) ($89) $208 233.7%
========= ========= ========== =========
Operating income before depreciation and amortization (1).... $1,638 $808 $830 102.8%
========= ========= ========== =========
____________
(1) Operating income before depreciation and amortization is commonly referred
to in our businesses as EBITDA. EBITDA is the measure of profit or loss
used to evaluate performance of all of our operating segments and operating
units within all of our segments. EBITDA is defined as operating income
before depreciation and amortization and impairment charges, if any,
related to fixed and intangible assets. As such, it eliminates the
significant level of non-cash depreciation and amortization expense that
results from the capital intensive nature of our businesses and intangible
assets recognized in business combinations and is unaffected by our capital
structure or investment activities. EBITDA is frequently used as one of the
bases for comparing our operating performance with other companies in our
industries, although our measure of EBITDA may not be directly comparable
to similarly titled measures of other companies. Because we use EBITDA as
the measure of our segment profit or loss, we reconcile it to operating
income, the most directly comparable financial measure calculated and
presented in accordance with Generally Accepted Accounting Principles
(GAAP), in the business segment footnote to our financial statements.
Therefore, we believe our measure of EBITDA is not a Non-GAAP financial
measure as contemplated by Regulation G adopted by the Securities and
Exchange Commission. EBITDA should not be considered as a substitute for
operating income (loss), net income (loss), net cash provided by operating
activities or other measures of performance or liquidity reported in
accordance with GAAP.
Consolidated Operating Results
Revenues
The increase in consolidated revenues for the interim period from 2002 to
2003 is primarily attributable to an increase in service revenues in our Cable
segment due to the effects of the Broadband acquisition and, to a lesser extent,
to an increase in net sales in our Commerce segment (see "Operating Results by
Business Segment" below). The remaining increase is primarily the result of
increases in revenues from our content operations, principally due to increases
in distribution of our cable channels.
Cost of goods sold from electronic retailing
Refer to the "Commerce" section of "Operating Results by Business Segment"
below for a discussion of the increase in cost of goods sold from electronic
retailing.
Operating, selling, general and administrative
expenses
The increase in consolidated operating, selling, general and administrative
expenses for the interim period from 2002 to 2003 is primarily attributable to
increases in expenses in our Cable segment due to the effects of the
30
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
Broadband acquisition and, to a lesser extent, to increases in expenses in our
Commerce segment (see "Operating Results by Business Segment" below). The
remaining increases are primarily the result of increased expenses in our
content operations, principally due to growth in our historical operations.
Depreciation and Amortization
The increase in depreciation and amortization expense for the interim
period from 2002 to 2003 is primarily attributable to our Cable segment and is
principally due to the effects of the Broadband acquisition, as well as our
increased levels of capital expenditures. As a result of the Broadband
acquisition, we recorded approximately $4 billion of franchise related customer
relationship intangible assets which we are amortizing over their average
estimated useful life of approximately four years.
_______________________
Operating Results by Business Segment
The following represent the operating results of our significant business
segments, "Cable" and "Commerce." The remaining components of our operations are
not independently significant to our consolidated financial condition or results
of operations. Refer to Note 11 to our financial statements included in Item 1
for a summary of our financial data by business segment (dollars in millions).
Cable
The discussion of our cable segment operating results is presented as a
historical comparison of the 2003 interim period and the pre-Broadband
acquisition 2002 interim period. In order to provide additional information
relating to our cable segment operating results, we also present a discussion
comparing our cable segment operating results on a pro forma basis. Pro Forma
data is used by management to evaluate performance when significant acquisitions
or dispositions occur. Historical data reflects results of acquired businesses
only after the acquisition dates while pro forma data enhances comparability of
financial information between periods by adjusting the data as if the
acquisitions (or dispositions) occurred at the beginning of the prior year. Our
pro forma data is only adjusted for the timing of acquisitions and does not
include adjustments for costs related to integration activities, cost savings or
synergies that have or may be achieved by the combined businesses. In the
opinion of management, this information is not indicative of what our results
would have been had we operated Broadband since January 1, 2002, nor of our
future results.
Pro Forma Results
As previously described, the following discussion includes the pro forma
results of our cable segment operations as if the Broadband acquisition had
occurred on January 1, 2002.
Three Months Ended
March 31, Increase/(Decrease)
2003 2002 $ %
--------- --------- --------- --------
Video....................................................... $2,982 $2,827 $155 5.4%
High-speed Internet......................................... 492 312 180 57.5
Phone....................................................... 224 175 49 27.9
Advertising sales........................................... 235 217 18 8.3
Other....................................................... 147 165 (18) (10.9)
Franchise fees.............................................. 151 148 3 2.0
--------- --------- --------- --------
Revenues................................................ 4,231 3,844 387 10.0
Operating, selling, general and administrative expenses...... 2,810 2,798 12 0.4
--------- --------- --------- --------
Operating income before depreciation and amortization (a).... $1,421 $1,046 $375 35.8%
========= ========= ========= ========
_______________
(a) See footnote (1) on page 30.
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COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
Video revenue consists of our basic, expanded basic, premium, pay-per-view,
equipment and digital cable services. The increase in video revenue for the
interim period from 2002 to 2003 is primarily due to the effects of rate
increases in our traditional analog video service and growth in digital
subscribers, offset by subscriber losses in the newly acquired cable systems
during 2002. From March 31, 2002 to March 31, 2003, we added approximately
1,289,000 digital subscribers, or a 23.4% increase in digital subscribers.
The increase in high-speed Internet revenue for the interim period from
2002 to 2003 is primarily due to the addition of approximately 1,387,000
high-speed Internet subscribers from March 31, 2002 to March 31, 2003, or a
52.3% increase in high-speed Internet subscribers, as well as to the effects of
rate increases and less promotional discounting.
The increase in phone revenue for the interim period from 2002 to 2003 is
primarily due to the addition of approximately 262,000 phone subscribers from
March 31, 2002 to March 31, 2003, or a 22.7% increase in phone subscribers.
The increase in advertising sales revenue for the interim period from 2002
to 2003 is primarily due to the effects of a stronger advertising market and the
continued leveraging of our market-wide fiber interconnects.
Other revenue includes installation revenues, guide revenues, commissions
from electronic retailing, revenues of our digital media center, revenues of our
regional sports programming networks and revenue from other product offerings.
The increase in franchise fees collected from our cable subscribers for the
interim period from 2002 to 2003 is primarily attributable to the increase in
our revenues upon which the fees apply.
Operating, selling, general and administrative expense for the 2003 interim
period did not increase significantly from 2002 primarily because the effects of
approximately $88 million of acquisition and employee termination related costs
recorded by Broadband during the 2002 interim period offset the effects of
increases in the costs of cable programming, high-speed Internet subscriber
growth, and increases in labor costs and other volume related expenses in our
operations.
Our cost of programming increases as a result of changes in rates,
subscriber growth, additional channel offerings and our acquisitions. We
anticipate the cost of cable programming will increase in the future as cable
programming rates increase and additional sources of cable programming become
available.
Historical Results
Three Months Ended
March 31, Increase
2003 2002 $ %
--------- --------- --------- --------
Video........................................................ $2,982 $1,150 $1,832 159.3%
High-speed Internet.......................................... 492 119 373 313.4
Phone........................................................ 224 6 218 NM
Advertising sales............................................ 236 81 155 191.4
Other........................................................ 147 62 85 137.1
Franchise fees............................................... 151 51 100 196.1
--------- --------- --------- --------
Revenues................................................ 4,232 1,469 2,763 188.0
Operating, selling, general and administrative expenses...... 2,811 872 1,939 222.4
--------- --------- --------- --------
Operating income before depreciation and amortization (a).... $1,421 $597 $824 137.9%
========= ========= ========= ========
_______________
(a) See footnote (1) on page 30.
Of the $1.832 billion increase in video revenues for the interim period
from 2002 to 2003, $1.752 billion is attributable to the effects of our
acquisition of Broadband and $80 million relates to changes in rates and
subscriber growth in our historical operations, driven principally by growth in
digital subscribers. From March 31, 2002 to March 31, 2003, we added
approximately 466,000 digital subscribers in our historical operations, or a
25.1% increase in digital subscribers. During the 2003 interim period, we added
approximately 169,000 digital subscribers.
The increase in high-speed Internet revenue for the
32
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
interim period from 2002 to 2003 is primarily due to the effects of the
Broadband acquisition and growth in high- speed Internet subscribers. From March
31, 2002 to March 31, 2003, we added approximately 678,000 high- speed Internet
subscribers in our historical operations, or a 65.1% increase in high-speed
Internet subscribers. During the 2003 interim period, we added approximately
417,000 high-speed Internet subscribers.
The increase in phone revenue is attributable to the effects of our
acquisition of Broadband.
The increase in advertising sales revenue for the interim period from 2002
to 2003 is primarily due to the effects of the Broadband acquisition, as well as
to the effects of a stronger advertising market and the continued leveraging of
our market-wide fiber interconnects.
The increase in other revenue for the interim period from 2002 to 2003 is
primarily attributable to the effects of the Broadband acquisition.
The increase in franchise fees collected from our cable subscribers for the
interim period from 2002 to 2003 is primarily attributable to the increase in
our revenues upon which the fees apply.
The increase in operating, selling, general and administrative expense for
the interim period from 2002 to 2003 is primarily due to the effects of the
Broadband acquisition, as well as to the effects of increases in the costs of
cable programming, high-speed Internet subscriber growth, and, to a lesser
extent, increases in labor costs and other volume related expenses in our
historical operations.
Commerce (QVC, Inc. and Subsidiaries) Three Months Ended
March 31, Increase
2003 2002 $ %
--------- --------- --------- --------
Net sales from electronic retailing.......................... $1,062 $988 $74 7.5%
Cost of goods sold from electronic retailing................. 673 629 44 7.0
Operating, selling, general and administrative
expenses................................................ 178 167 11 6.6
--------- --------- --------- --------
Operating income before depreciation and amortization (a).... $211 $192 $19 9.8%
========= ========= ========= ========
Gross margin................................................. 36.6% 36.4%
========= =========
_______________
(a) See footnote (1) on page 30.
The $74 million increase in net sales from electronic retailing for the
interim period from 2002 to 2003 is attributable to increases in net sales in
Germany, Japan, and the United Kingdom, and to the effects of fluctuations in
foreign currency exchange rates during the interim periods. Net sales from
electronic retailing in the United States for the interim period in 2003 were
flat as compared to the prior year period, principally as a result of a decrease
in net sales per home. Changes in the average number of homes receiving QVC
services and net sales per home in the United States as compared to the prior
year interim period are as follows:
Three Months Ended
March 31, 2003
-------------------
Increase in average number of homes.......................... 3.1%
Decrease in net sales per home............................... 2.6%
It is unlikely that the number of homes receiving the QVC service
domestically will continue to grow at rates comparable to prior periods given
that the QVC service is already received by approximately 97% of all U.S. cable
television homes and substantially all satellite television homes in the U.S.
Future growth in sales will depend increasingly on continued additions of new
customers from homes already receiving the QVC service and growth in repeat
sales to existing customers.
The increase in cost of goods sold is primarily related to the growth in
net sales. The increase in gross margin is primarily due to the effects of a
shift in sales mix.
The increase in operating, selling, general and administrative expenses is
primarily attributable to higher variable costs and personnel costs associated
with the
33
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
increase in sales volume.
Consolidated Analysis
Interest Expense
The increase in interest expense for the interim period from 2002 to 2003
is due to the effects of our increased amount of debt outstanding as a result of
the Broadband acquisition.
We anticipate that, for the foreseeable future, interest expense will be
significant. We believe we will continue to be able to meet our obligations
through our ability both to generate cash flow from operations and to obtain
external financing.
_______________________
Investment Loss, Net
Investment loss, net for the interim periods includes the following (in
millions):
Three Months Ended
March 31,
2003 2002
--------- ----------
Interest and dividend income................................... $33 $7
Gains on sales and exchanges of investments, net............... 22 2
Investment impairment losses................................... (55) (13)
Unrealized losses on trading securities........................ (15) (1,020)
Mark to market adjustments on derivatives related
to trading securities..................................... (11) 847
Mark to market adjustments on derivatives and hedged items..... (204) (71)
--------- ----------
Investment loss, net...................................... ($230) ($248)
========= ==========
Investment loss during the 2003 interim period of $197 million resulting
from the fair value adjustment of the derivative component of the Comcast
exchangeable notes was not offset in our statement of operations by the
corresponding increase in the fair value of the Comcast Class A Special common
stock held in treasury during the period since the Comcast common stock will
continue to be carried at our historical cost and not adjusted for changes in
fair value between measurement dates. Accordingly, our future results of
operations may be affected by fluctuations in the fair value of the derivative
component of the Comcast exchangeable notes in future periods.
Income Tax Benefit (Expense)
The change in income tax benefit (expense) for the interim period from 2002
to 2003 is primarily the result of the effects of changes in our loss before
taxes and minority interest.
Minority Interest
The increase in minority interest for the interim period from 2002 to 2003
is attributable to the effects of changes in the net income or loss of our less
than wholly owned consolidated subsidiaries, as well as to the minority
interests in certain subsidiaries acquired in connection with the Broadband
acquisition.
We believe that our operations are not materially affected by inflation.
34
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
ITEM 4. CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures. Our chief executive officer
and our co-chief financial officers, after evaluating the
effectiveness of our "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and
15d-14(c)) as of a date (the "Evaluation Date") within 90 days
before the filing date of this quarterly report, have concluded
that as of the Evaluation Date, our disclosure controls and
procedures were adequate and designed to ensure that material
information relating to us and our consolidated subsidiaries would
be made known to them by others within those entities.
(b) Changes in internal controls. There were no significant changes in
our internal controls or to our knowledge, in other factors that
could significantly affect our internal controls and procedures
subsequent to the Evaluation Date.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Litigation has been filed against us as a result of alleged conduct with
respect to our investment in and distribution relationship with At Home
Corporation. At Home was a provider of high-speed Internet access and
content services which filed for bankruptcy protection in September 2001.
Filed actions are: (i) class action lawsuits against us, Brian L. Roberts
(our President and Chief Executive Officer and a director), AT&T (the
former controlling shareholder of At Home and also a former distributor of
the At Home service) and other corporate and individual defendants in the
Superior Court of San Mateo County, California, alleging breaches of
fiduciary duty on the part of us and the other defendants in connection
with transactions agreed to in March 2000 among At Home, us, AT&T and Cox
Communications, Inc. (Cox is also an investor in At Home and a former
distributor of the At Home service); (ii) class action lawsuits against
Comcast Cable Communications, Inc., AT&T and others in the United States
District Court for the Southern District of New York, alleging securities
law violations and common law fraud in connection with disclosures made by
At Home in 2001; and (iii) a lawsuit brought in the United States District
Court for the District of Delaware in the name of At Home by certain At
Home bondholders against us, Brian L. Roberts, Cox and others, alleging
breaches of fiduciary duty relating to the March 2000 transactions and
seeking recovery of alleged short swing profits of at least $600 million
pursuant to Section 16(b) of the Securities Exchange Act of 1934 purported
to have arisen in connection with certain transactions relating to At Home
stock effected pursuant to the March 2000 agreements. The actions in San
Mateo County, California have been stayed by the United States Bankruptcy
Court for the Northern District of California, the court in which At Home
filed for bankruptcy, as violating the automatic bankruptcy stay. In the
Southern District of New York actions, the court ordered the actions
consolidated into a single action. An amended consolidated class action
complaint was filed on November 8, 2002. All of the defendants served
motions to dismiss on February 11, 2003.
Under the terms of the Broadband acquisition, we are contractually liable
for 50% of any liabilities of AT&T relating to At Home, including any
resulting from any pending or threatened litigation. AT&T will be liable
for the other 50% of these liabilities. In addition to the actions against
AT&T described above, where we are also a defendant, there are two
additional actions brought by At Home's bondholders' liquidating trust
against AT&T, not naming us: (i) a lawsuit filed against AT&T and certain
of its senior officers in Santa Clara, California state court alleging
various breaches of fiduciary duties, misappropriation of trade secrets and
other causes of action in connection with the transactions in March 2000
described above, and prior and subsequent alleged conduct on the part of
the defendants, and (ii) an action filed against AT&T in the District Court
for the Northern District of California, alleging that AT&T infringes an At
Home patent by using its broadband distribution and high-speed Internet
backbone networks and equipment. AT&T moved to dismiss the Santa Clara
action on the grounds that California is an inconvenient forum, but the
court denied AT&T's motion. AT&T also moved to transfer the Northern
District of California action to the Southern District of New York as being
a more convenient venue. AT&T's motion was denied on April 25, 2003.
35
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
We deny any wrongdoing in connection with the claims which have been made
directly against us, our subsidiaries and Brian L. Roberts, and intend to
defend all of these claims vigorously. In management's opinion, the final
disposition of these claims is not expected to have a material adverse
effect on our consolidated financial position, but could possibly be
material to our consolidated results of operations of any one period.
Further, no assurance can be given that any adverse outcome would not be
material to such consolidated financial position.
Management is continuing to evaluate this litigation and is unable to
currently determine what impact, if any, that our 50% share of the AT&T At
Home potential liabilities would have on our consolidated financial
position or results of operations. No assurance can be given that any
adverse outcome would not be material.
Some of the entities formerly attributed to Broadband which are now our
subsidiaries are parties to an affiliation term sheet with Starz Encore
Group LLC, an affiliate of Liberty Media Corporation, which extends to
2022. The term sheet requires annual fixed price payments, subject to
adjustment for various factors, including inflation. The term sheet also
requires us to pay two-thirds of Starz Encore's programming costs above
levels designated in the term sheet. Excess programming costs that may be
payable by us in future years are not presently estimable, and could be
significant.
By letter dated May 29, 2001, Broadband disputed the enforceability of the
excess programming pass-through provisions of the Starz Encore term sheet
and questioned the validity of the term sheet as a whole. Broadband also
has raised certain issues concerning the uncertainty of the provisions of
the term sheet and the contractual interpretation and application of
certain of its provisions to, among other things, the acquisition and
disposition of cable systems. In July 2001, Starz Encore filed a lawsuit in
Colorado state court seeking payment of the 2001 excess programming costs
and a declaration that the term sheet is a binding and enforceable
contract. In October 2001, Broadband and Starz Encore agreed to delay any
further proceedings in the litigation until August 31, 2002 to allow the
parties time to continue negotiations toward a potential business
resolution of this dispute. As part of this standstill agreement, Broadband
and Starz Encore settled Starz Encore's claim for the 2001 excess
programming costs, and Broadband agreed to continue to make the standard
monthly payments due under the term sheet, with a full reservation of
rights with respect to these payments. In connection with the standstill
agreement, the court granted a stay on October 30, 2001. The terms of the
stay order allowed either party to petition the court to lift the stay
after April 30, 2002 and to proceed with the litigation. Broadband and
Starz Encore agreed to extend the standstill agreement to and including
January 31, 2003, with a requirement that the parties attempt to mediate
the dispute. A mediation session held in January 2003 did not result in any
resolution of the matter.
On November 18, 2002, we filed suit against Starz Encore in the United
States District Court for the Eastern District of Pennsylvania. We seek a
declaratory judgment that, pursuant to our rights under a March 17, 1999
contract with a predecessor of Starz Encore, upon the completion of the
Broadband acquisition that contract now provides the terms under which
Starz Encore programming is acquired and transmitted by our cable systems.
On January 8, 2003, Starz Encore filed a motion to dismiss the lawsuit on
the grounds that claims asserted by us raised issues of state law that the
United States District Court should decline to decide. We have responded
contesting these assertions. That motion has been submitted to the Court
for decision.
On January 31, 2003, Starz Encore filed an amended complaint in its lawsuit
against Broadband in Colorado state court. The amended complaint adds us
and Comcast Holdings as defendants and adds new claims against us, Comcast
Holdings and Broadband asserting alleged breaches of, and interference
with, the standstill agreement relating to the lawsuit filed by us and
Comcast Holdings in federal District Court in Pennsylvania and to the
defendants' position that since the completion of the Broadband
acquisition, the March 17, 1999 contract now provides the terms under which
Starz Encore programming is acquired and transmitted by our cable systems.
On March 3, 2003, Starz Encore filed a motion for leave to file a second
amended complaint that would add allegations that Broadband has breached
certain joint-marketing obligations under the term sheet and that we and
Comcast Holdings have breached certain joint-marketing obligations under
the March 17, 1999 contract and other agreements. We, Comcast Holdings and
Broadband intend to oppose Starz Encore's motion for leave to file a
36
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
second amended complaint and, in light of Starz Encore's pending motion for
leave to amend, have sought an extension of time from the Court to respond
to Starz Encore's amended complaint.
On April 3, 2003, we and Comcast Holdings filed a motion for summary
judgment in the federal action in Pennsylvania. On April 16, 2003, Starz
Encore filed a motion seeking (i) to strike the affidavit supporting the
summary judgment motion or, in the alternative, (ii) a general postponement
of Starz Encore's response date (or at a minimum a three week extension).
On April 29, 2003, we and Comcast Holdings filed an opposition to Starz
Encore's motion. The Court has not yet ruled on either motion.
An entity formerly attributed to Broadband, which is now our subsidiary, is
party to a master agreement that may not expire until December 31, 2012,
under which it purchases certain billing services from CSG Systems, Inc.
The master agreement requires monthly payments, subject to adjustment for
inflation. The master agreement also contains a most favored nation
provision that may affect the amounts paid thereunder.
On May 10, 2002, Broadband filed a demand for arbitration against CSG
before the American Arbitration Association asserting, among other things,
the right to terminate the master agreement and seeking damages under the
most favored nation provision or otherwise. On May 31, 2002, CSG answered
Broadband's arbitration demand and asserted various counterclaims,
including for (i) breach of the master agreement; (ii) a declaration that
we are now bound by the master agreement to use CSG as our exclusive
provider for certain billing and customer care services; (iii) tortious
interference with prospective contractual relations; and (iv) civil
conspiracy. A hearing in the arbitration is scheduled to commence on May 9,
2003.
On June 21, 2002, CSG filed a lawsuit against Comcast Holdings in federal
court in Denver, Colorado asserting claims related to the master agreement
and the pending arbitration. On November 4, 2002, CSG withdrew its
complaint against Comcast Holdings without prejudice. On November 15, 2002,
we initiated a lawsuit against CSG in federal court in Philadelphia,
Pennsylvania asserting that cable systems owned by Comcast Holdings are not
required to use CSG as a billing service or customer care provider pursuant
to the master agreement, and that the former Broadband cable systems owned
by us may be added to a billing service agreement between us and CSG. CSG
moved to dismiss or stay the lawsuit on the ground that the issues raised
by the complaint could be wholly or substantially determined by the
above-mentioned arbitration. By Order dated February 10, 2003, the Court
stayed the lawsuit until further notice.
On January 8, 2003, Liberty Digital, Inc. filed a complaint in Colorado
state court against us and Comcast Cable Holdings, LLC (formerly AT&T
Broadband LLC and Tele-Communications, Inc.), our wholly owned subsidiary.
The complaint alleges that Comcast Cable Holdings breached a 1997
"contribution agreement" between Liberty Digital and Comcast Cable Holdings
and that we tortiously interfered with that agreement. The complaint
alleges that this purported agreement obligates Comcast Cable Holdings to
pay fees to Liberty Digital totaling $18 million (increasing at CPI) per
year through 2017. We and Comcast Cable Holdings filed our answer to the
complaint on March 5, 2003, in which we and Comcast Cable Holdings denied
the essential allegations of the complaint and asserted various affirmative
defenses.
In management's opinion, the final disposition of the Starz Encore, CSG and
Liberty Digital contractual disputes is not expected to have a material
adverse effect on our consolidated financial position or results of
operations. However, no assurance can be given that any adverse outcome
would not be material to such consolidated financial position or results of
operations.
We are subject to other legal proceedings and claims which arise in the
ordinary course of our business. In the opinion of our management, the
amount of ultimate liability with respect to such actions is not expected
to materially affect our financial condition, results of operations or
liquidity.
37
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
10.1 Term Life Insurance Premium and Tax Bonus Agreement between
Comcast Holdings Corporation and Brian L. Roberts, dated as of
September 23, 1998.
(b) Reports on Form 8-K:
(i) We filed a Current Report on Form 8-K under Items 5 and 7(c) on
January 10, 2003 announcing the closing of a $1.5 billion note
offering and announcing a shareholder proposal deadline for our
2003 Annual Meeting of Shareholders.
(ii) We filed a Current Report on Form 8-K under Item 5 on February 5,
2003 announcing the resignation of a member of our Board of
Directors and his subsequent replacement.
(iii) We filed a Current Report on Form 8-K under Items 5 and 7(c) on
March 6, 2003 announcing our results of operations for the year
ended December 31, 2002 and announcing that Liberty Media
Corporation delivered a notice to us that triggers an exit rights
process with respect to QVC, Inc.
38
COMCAST CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMCAST CORPORATION
----------------------------------------
/S/ LAWRENCE J. SALVA
----------------------------------------
Lawrence J. Salva
Senior Vice President and Controller
(Principal Accounting Officer)
Date: May 9, 2003
39
CERTIFICATIONS
I, Brian L. Roberts, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Comcast Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003
/s/ BRIAN L. ROBERTS
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Name: Brian L. Roberts
Chief Executive Officer
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I, Lawrence S. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Comcast Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003
/s/ LAWRENCE S. SMITH
- -------------------------------------------
Name: Lawrence S. Smith
Co-Chief Financial Officer
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I, John R. Alchin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Comcast Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003
/s/ JOHN R. ALCHIN
- --------------------------------------------
Name: John R. Alchin
Co-Chief Financial Officer
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