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 001-15471
COMCAST HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1709202
- --------------------------------------------------------------------------------
(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 ____ No X
As of March 31, 2003, there were 21,591,115 shares of Class A Common Stock,
916,198,519 shares of Class A Special Common Stock and 9,444,375 shares of Class
B Common Stock outstanding.
__________________________
The Registrant meets the conditions set forth in General Instructions H(1)(a)
and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.
COMCAST HOLDINGS 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)............................................2
Condensed Consolidated Statement of Operations for the Three Months
Ended March 31, 2003 and 2002 (Unaudited)....................................3
Condensed Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 2003 and 2002 (Unaudited)....................................4
Notes to Condensed Consolidated Financial Statements (Unaudited).............5
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................17
ITEM 4. Controls and Procedures.....................................................21
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings...........................................................21
ITEM 6. Exhibits and Reports on Form 8-K............................................23
SIGNATURES.............................................................................24
CERTIFICATIONS.........................................................................25
___________________________________
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 Holdings," "we," "us," "our" and the
"Company" refer to Comcast Holdings Corporation and its subsidiaries, and
"Comcast" refers to Comcast Corporation.
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
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 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.
COMCAST HOLDINGS 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.................................................. $1,151 $676
Investments................................................................ 320 525
Accounts receivable, less allowance for doubtful accounts of $157 and $160 961 1,015
Inventories, net........................................................... 482 479
Deferred income taxes...................................................... 129 129
Other current assets....................................................... 163 153
--------- -----------
Total current assets................................................... 3,206 2,977
--------- -----------
NOTES RECEIVABLE FROM AFFILIATE............................................... 351 191
INVESTMENTS................................................................... 625 627
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $3,872 and $3,604 6,939 6,916
FRANCHISE RIGHTS.............................................................. 16,617 16,611
GOODWILL...................................................................... 6,446 6,446
OTHER INTANGIBLE ASSETS, net of accumulated amortization of $1,035 and $975 1,456 1,481
OTHER NONCURRENT ASSETS, net.................................................. 452 440
--------- -----------
$36,092 $35,689
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................................................... $884 $792
Accrued expenses and other current liabilities............................. 1,991 1,874
Due to affiliates.......................................................... 491 76
Deferred income taxes...................................................... 27 46
Current portion of long-term debt.......................................... 24 23
--------- -----------
Total current liabilities.............................................. 3,417 2,811
--------- -----------
LONG-TERM DEBT, less current portion.......................................... 8,451 9,257
--------- -----------
NOTES PAYABLE TO AFFILIATES................................................... 451 22
--------- -----------
DEFERRED INCOME TAXES......................................................... 6,894 6,836
--------- -----------
OTHER NONCURRENT LIABILITIES.................................................. 1,224 1,265
--------- -----------
MINORITY INTEREST............................................................. 1,184 1,133
--------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
STOCKHOLDERS' EQUITY
Preferred stock - authorized 20,000,000 shares; issued, zero ..............
Class A common stock, $1.00 par value - authorized,
200,000,000 shares; issued, 21,591,115 .................................. 22 22
Class A special common stock, $1.00 par value - authorized,
2,500,000,000 shares; issued 916,198,519................................. 916 916
Class B common stock, $1.00 par value - authorized, 50,000,000 shares;
issued, 9,444,375 ....................................................... 9 9
Additional capital......................................................... 11,818 11,818
Retained earnings.......................................................... 1,710 1,595
Accumulated other comprehensive income (loss).............................. (4) 5
--------- -----------
Total stockholders' equity............................................. 14,471 14,365
--------- -----------
$36,092 $35,689
========= ===========
See notes to condensed consolidated financial statements.
2
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Dollars in millions)
Three Months Ended March 31,
2003 2002
--------- ---------
REVENUES
Service revenues......................................................... $1,875 $1,679
Net sales from electronic retailing...................................... 1,062 988
--------- ---------
2,937 2,667
--------- ---------
COSTS AND EXPENSES
Operating (excluding depreciation)....................................... 844 743
Cost of goods sold from electronic retailing (excluding depreciation) 673 629
Selling, general and administrative...................................... 528 487
Depreciation............................................................. 323 334
Amortization............................................................. 57 53
--------- ---------
2,425 2,246
--------- ---------
OPERATING INCOME............................................................. 512 421
OTHER INCOME (EXPENSE)
Interest expense......................................................... (172) (187)
Investment loss, net..................................................... (35) (248)
Equity in net losses of affiliates....................................... (13) (5)
Other expense............................................................ (1) (23)
--------- ---------
(221) (463)
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST...................... 291 (42)
INCOME TAX EXPENSE........................................................... (121) (3)
--------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST ...................................... 170 (45)
MINORITY INTEREST............................................................ (55) (44)
--------- ---------
NET INCOME (LOSS)............................................................ $115 ($89)
========= =========
See notes to condensed consolidated financial statements.
3
COMCAST HOLDINGS 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 income (loss).................................................... $115 ($89)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation....................................................... 323 334
Amortization....................................................... 57 53
Non-cash interest expense, net..................................... 7 12
Equity in net losses of affiliates................................. 13 5
Losses (gains) on investments and other (income) expense, net 40 277
Minority interest.................................................. 55 44
Deferred income taxes.............................................. 39 17
Proceeds from sales of trading securities.......................... 32
Other.............................................................. (29) (37)
------------ -------------
652 616
Changes in working capital, net of effects of acquisitions and
divestitures
Decrease (increase) in accounts receivable, net.................. 54 (13)
(Increase) decrease in inventories, net.......................... (3) 28
Increase in other current assets................................. (10) (47)
Increase (decrease) in accounts payable, accrued expenses and
other current liabilities...................................... 192 (65)
------------ -------------
233 (97)
Net cash provided by operating activities........................ 885 519
------------ -------------
FINANCING ACTIVITIES
Proceeds from borrowings............................................. 210 520
Retirements and repayments of debt................................... (1,016) (451)
Net transactions with affiliates..................................... 415
Proceeds from notes payable to affiliates............................ 429
Other................................................................ 62
------------ -------------
Net cash provided by financing activities........................ 38 131
------------ -------------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired................................... (12)
Proceeds from sales of (purchases of) short-term investments, net (8) 1
Proceeds from sales of investments................................... 115 13
Increase in notes receivable from affiliate.......................... (160)
Purchases of investments............................................. (11) (4)
Capital expenditures................................................. (354) (399)
Additions to intangible and other noncurrent assets.................. (30) (56)
------------ -------------
Net cash used in investing activities............................ (448) (457)
------------ -------------
INCREASE IN CASH AND CASH EQUIVALENTS................................... 475 193
CASH AND CASH EQUIVALENTS, beginning of period.......................... 676 350
------------ -------------
CASH AND CASH EQUIVALENTS, end of period................................ $1,151 $543
============ =============
See notes to condensed consolidated financial statements.
4
COMCAST HOLDINGS 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 Holdings Corporation ("Comcast Holdings") and its subsidiaries (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. The Company is an indirect
wholly owned subsidiary of Comcast Corporation ("Comcast").
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.
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 Comcast 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 6).
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
5
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 8).
3. INVESTMENTS
March 31, December 31,
2003 2002
----------- --------------
(in millions)
Fair value method
AT&T Corp.................................................... $110 $287
Sprint Corp. PCS Group....................................... 334 369
Other ....................................................... 72 74
----------- --------------
516 730
Equity method..................................................... 314 317
Cost method....................................................... 115 105
----------- --------------
Total investments............................................ 945 1,152
Less, current investments......................................... 320 525
----------- --------------
Non-current investments........................................... $625 $627
=========== ==============
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 $46 million and $70 million, respectively, have been reported in the
Company's consolidated balance sheet principally as a component of
accumulated other comprehensive income (loss), net of related deferred
income taxes of $16 million and $25 million, respectively.
6
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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............................................................. $121 $269
Gross unrealized gains........................................... 46 71
Gross unrealized losses.......................................... (1)
----------- -----------
Fair value....................................................... $167 $339
=========== ===========
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......................................... $5 $7
Gains on sales and exchanges of investments, net 22 2
Investment impairment losses......................................... (55) (13)
Unrealized losses on trading securities.............................. (2) (1,020)
Mark to market adjustments on derivatives related
to trading securities........................................... 3 847
Mark to market adjustments on derivatives and hedged items (8) (71)
----------- -----------
Investment loss, net............................................ ($35) ($248)
=========== ===========
4. GOODWILL
The changes in the carrying amount of goodwill by business segment (see
Note 9) for the periods presented are as follows (in millions):
Corporate
Cable Commerce and Other Total
------------ ------------ ------------ ------------
Balance, December 31, 2002...................... $4,693 $835 $918 $6,446
Intersegment transfers...................... 20 (20)
------------ ------------ ------------ ------------
Balance, March 31, 2003......................... $4,713 $835 $898 $6,446
============ ============ ============ ============
5. LONG-TERM DEBT
The Cross-Guarantee Structure
To simplify Comcast's capital structure, effective with its acquisition of
AT&T Corp.'s broadband business ("Broadband") on November 18, 2002, Comcast
and four of its cable holding company subsidiaries, including the Company's
wholly owned subsidiary Comcast Cable Communications, Inc. ("Comcast
Cable"), fully and unconditionally guaranteed each other's debt securities
(the "Cross-Guarantee Structure"). Comcast Holdings 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,
Comcast announced the successful completion of a bondholder consent
solicitation related to
7
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 Comcast's debt
securities were entitled to the benefits of the Cross-Guarantee Structure,
including $7.093 billion of Comcast Cable's debt securities.
Repayments and Redemptions of Debt
On March 31, 2003, in connection with the closing of the restructuring of
Time Warner Entertainment Company L.P., an investment accounted for under
the cost method by Comcast, Comcast received $2.1 billion in cash which was
used to repay debt, including $800 million of amounts outstanding under
Comcast Cable's revolving credit facility.
On May 9, 2003, the Company redeemed, at its scheduled redemption price,
the outstanding principal amount of its 8 1/4% senior subordinated notes
due 2008. The Company refinanced the redemption with amounts available
under the Company's existing credit facilities. As of March 31, 2003, $150
million of these notes were outstanding.
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.
The Company split the accounting for the ZONES into derivative and debt
components. The Company records the change in the fair value of the
derivative component of the ZONES (see Note 3) and the change in the
carrying value of the debt component of the ZONES as follows (in millions):
ZONES
--------------------------
Three Months Ended
March 31,
2003 2002
----------- -----------
Balance at Beginning of Period:
Debt component................................ $491 $468
Derivative component.......................... 208 1,145
----------- -----------
Total 699 1,613
Increase in debt component
to interest expense........................... 6 6
Decrease in derivative component
to investment loss, net....................... (1) (664)
Balance at End of Period:
Debt component................................ 497 474
Derivative component.......................... 207 481
----------- -----------
Total $704 $955
=========== ===========
Interest Rates
Excluding the derivative component of 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 7.51% and 7.07% as
of March 31, 2003 and December 31, 2002, respectively.
8
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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
As of March 31, 2003, certain subsidiaries of the Company had unused lines
of credit of $4.397 billion under their respective credit facilities. On
May 5, 2003, Comcast borrowed an aggregate of $2.75 billion, representing
all amounts available under two new credit agreements. The new credit
agreements replaced the Company's 364-day credit facility, which expired in
May 2003. As a result of the refinancing, amounts available under the
Company's unused lines of credit were reduced to $2.472 billion.
As of March 31, 2003, the Company and certain of its subsidiaries had
unused irrevocable standby letters of credit totaling $43 million to cover
potential fundings under various agreements.
6. 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 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 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 stock or other determinants of fair value.
The following table illustrates the effect on net income (loss) if the
Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based compensation (dollars in millions):
Three Months Ended
March 31,
2003 2002
---------- ----------
Net income (loss), as reported.................................. $115 ($89)
Deduct: Total stock-based compensation
expense determined under fair value based method
for all awards, net of related tax effects (21) (33)
---------- ----------
Pro forma, net income (loss).................................... $94 ($122)
========== ==========
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 $19
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 Comcast's option plans during the 2003 interim period
was $11.62. 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
9
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 income (loss) 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.
Comprehensive Income (Loss)
The Company's total comprehensive income (loss) for the interim periods was
as follows (in millions):
Three Months Ended
March 31,
2003 2002
--------- ----------
Net income (loss).................................... $115 ($89)
Unrealized losses on marketable securities (37) (141)
Reclassification adjustments for losses
included in net income (loss)...................... 22 5
Unrealized losses on the effective portion of
....................................cash flow hedges (4)
Foreign currency translation gains (losses) 6 (12)
--------- ----------
Comprehensive income (loss).......................... $106 ($241)
========= ==========
7. 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........................................................ $106 $110
Income taxes.................................................... $36 $30
8. COMMITMENTS AND CONTINGENCIES
Contingencies
On March 3, 2003, Comcast 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
10
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Company may pay Liberty for the QVC stock in cash, in a promissory note
maturing not more than three years after issuance, in Comcast's 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 Comcast is not required to issue securities
representing more than 4.9% of the outstanding equity or vote of Comcast'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.
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.
Some of the entities formerly attributed to Broadband which are now
subsidiaries of Comcast 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 Comcast to pay two-thirds of Starz Encore's programming costs
above levels designated in the term sheet.
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
11
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 filed suit against Starz
Encore in the United States District Court for the Eastern District of
Pennsylvania. The Company and Comcast 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 Comcast'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 raised issues of state law that
the United States District Court should decline to decide. The Company and
Comcast 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 the
Company and Comcast as defendants and adds new claims against the Company,
Comcast and Broadband asserting alleged breaches of, and interference with,
the standstill agreement relating to the lawsuit filed by the Company and
Comcast 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 have breached certain joint-marketing obligations under
the March 17, 1999 contract and other agreements. The Company, Comcast 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 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 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 Comcast's
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
Comcast is now bound by the master agreement to use CSG as its exclusive
provider for certain billing and customer care
12
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
services; (iii) tortious interference with prospective contractual
relations; and (iv) civil conspiracy. A hearing in the arbitration
commenced on May 9, 2003.
On June 21, 2002, CSG filed a lawsuit against the Company 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 the Company without prejudice. On November 15, 2002, Comcast
initiated a lawsuit against CSG in federal court in Philadelphia,
Pennsylvania asserting that cable systems owned by the Company 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 Comcast may be added to a billing service agreement between Comcast 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.
In management's opinion, the final disposition of the Starz Encore and CSG
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.
13
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
9. 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)......................................... $1,645 $1,062 $230 $2,937
Operating income before depreciation
and amortization (3)............................ 675 211 6 892
Depreciation and amortization........................ 299 31 50 380
Operating income (loss).............................. 376 180 (44) 512
Interest expense..................................... 139 1 32 172
Capital expenditures................................. 335 13 6 354
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............................................... $29,006 $3,083 $4,003 $36,092
Long-term debt, less current portion 7,103 1,348 8,451
As of December 31, 2002
- -----------------------
Assets............................................... $29,844 $3,000 $2,845 $35,689
Long-term debt, less current portion 7,908 1 1,348 9,257
_______________
(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 3 and 4).
(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.
14
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
10. RELATED PARTY TRANSACTIONS
QVC has an affiliation agreement with Comcast Cable Communications
Holdings, Inc. ("CCCH"), a wholly owned subsidiary of Comcast, to carry
QVC's programming. In return for carrying QVC programming, QVC pays CCCH an
allocated portion, based upon market share, of a percentage of net sales of
merchandise sold to QVC customers located in CCCH's service area. These
amounts, which are included in selling, general and administrative expenses
in the Company's consolidated statement of operations, totaled $4 million
during the 2003 interim period. Amounts related to a similar affiliation
agreement between QVC and Comcast Cable are eliminated in the Company's
consolidated financial statements.
The Company's content businesses generate a portion of their revenues
through the sale of subscriber services to CCCH under affiliation
agreements. These amounts, which are included in service revenues in the
Company's consolidated statement of operations, totaled $9 million during
the 2003 interim period. Amounts related to similar affiliation agreements
between the Company's content businesses and Comcast Cable are eliminated
in the Company's consolidated financial statements.
Effective January 1, 2003, Comcast has entered into management agreements
with the Company's cable subsidiaries. The management agreements generally
provide that Comcast supervise the management and operations of the cable
systems and arrange for and supervise certain administrative functions. As
compensation for such services, the agreements provide for Comcast to
charge management fees based on a percentage of gross revenues. These
charges, which are included in selling, general and administrative expenses
in the Company's consolidated statement of operations, totaled $37 million
during the 2003 interim period. During the 2002 interim period, similar
management agreements existed between Comcast Cable and its subsidiaries.
Accordingly, amounts related to those agreements were eliminated in the
Company's consolidated financial statements during the 2002 interim period.
Effective January 1, 2003, Comcast Cable reimburses Comcast Cable
Communications Management, LLC ("CCCM"), a wholly owned subsidiary of
Comcast but not of the Company, for certain costs under a cost sharing
agreement. These charges, which are included in selling, general and
administrative expenses in the Company's consolidated statement of
operations, totaled $33 million during the 2003 interim period. During the
2002 interim period, a similar cost sharing agreement existed between
Comcast Cable and its subsidiaries. Accordingly, amounts related to that
agreement were eliminated in the Company's consolidated financial
statements during the 2002 interim period.
Effective upon the closing of Comcast's acquisition of Broadband on
November 18, 2002, the Company purchases certain other services, including
insurance and employee benefits, from Comcast under cost sharing agreements
on terms that reflect Comcast's actual cost. These charges, which are
included in selling, general and administrative expenses in the Company's
consolidated statement of operations, totaled $38 million during the 2003
interim period. During the 2002 interim period, similar cost sharing
agreements existed between Comcast Holdings and Comcast Cable. Accordingly,
amounts related to those agreements were eliminated in the Company's
consolidated financial statements during the 2002 interim period.
Comcast Financial Agency Corporation ("CFAC"), an indirect wholly owned
subsidiary of the Company, provides cash management services to Comcast and
CCCH. Under this arrangement, Comcast's and CCCH's cash receipts are
deposited with and held by CFAC, as custodian and agent, which invests and
disburses such funds at the direction of the Company. Interest income
related to cash deposited by Comcast and CCCH in CFAC was not significant
during the 2003 interim period.
Current due to affiliates in the Company's consolidated balance sheet
primarily consists of amounts due to Comcast and its affiliates under the
management and cost sharing agreements described above and amounts payable
to Comcast and its affiliates as reimbursements for costs incurred, in the
ordinary course of business, by such affiliates on behalf of the Company.
15
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED
(Unaudited)
As of March 31, 2003 and December 31, 2002, notes receivable from affiliate
consist of an aggregate of $351 million and $191 million principal amount,
respectively, of notes receivable from Comcast. The notes receivable bear
interest at rates ranging from 5.25% to 7.5% and are due between 2012 and
2013. As of March 31, 2003 and December 31, 2002, notes payable to
affiliates consist of an aggregate of $451 million and $22 million
principal amount, respectively, of notes payable to Comcast and a
subsidiary of CCCH. The notes payable bear interest at rates ranging from
5.25% to 7.5% and are due between 2012 and 2013. Interest relating to such
notes as of March 31, 2003 and December 31, 2002 was not significant and is
included in due to affiliates in the Company's consolidated balance sheet.
16
COMCAST HOLDINGS 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
Information for this item is omitted pursuant to SEC General Instruction H
to Form 10-Q, except as noted below.
We are an indirect wholly owned subsidiary of Comcast Corporation
("Comcast").
Overview
We have grown significantly in recent years through both strategic
acquisitions and growth in our existing businesses. 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.
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..................................................... $2,937 $2,667 $270 10.1%
Cost of goods sold from electronic retailing 673 629 44 7.0
Operating, selling, general and administrative expenses 1,372 1,230 142 11.5
Depreciation and amortization................................ 380 387 (7) (1.8)
--------- --------- ---------- ---------
Operating income............................................. 512 421 91 21.6
Interest expense............................................. (172) (187) (15) (8.0)
Investment loss, net......................................... (35) (248) (213) (85.9)
Equity in net losses of affiliates........................... (13) (5) 8 160.0
Other expense................................................ (1) (23) (22) (95.7)
Income tax expense........................................... (121) (3) 118 NM
Minority interest............................................ (55) (44) 11 25.0
--------- --------- ---------- ---------
Net income (loss)............................................ $115 ($89) $204 NM
========= ========= ========== =========
Operating income before depreciation and amortization (1) $892 $808 $84 10.4%
========= ========= ========== =========
____________
(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.
17
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
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 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 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.
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 9 to our financial statements included in Item 1
for a summary of our financial data by business segment.
Cable
The following table presents financial information for our Cable segment
(dollars in millions).
Three Months Ended
March 31, Increase
2003 2002 $ %
--------- --------- --------- --------
Video........................................................ $1,230 $1,150 $80 7.0%
High-speed Internet.......................................... 204 119 85 71.3
Advertising sales............................................ 92 81 11 13.9
Other........................................................ 68 68
Franchise fees............................................... 51 51
--------- --------- --------- --------
Revenues................................................ 1,645 1,469 176 12.0
Operating, selling, general and administrative expenses ..... 970 872 98 11.3
--------- --------- --------- --------
Operating income before depreciation
and amortization (a).................................... $675 $597 $78 12.9%
========= ========= ========= ========
_______________
(a) See footnote (1) on page 17.
Video revenue consists of our basic, expanded basic, premium, pay-per-view,
equipment and digital cable services. The $80 million increase in video revenues
for the interim period from 2002 to 2003 is attributable to the effects of
subscriber growth, driven principally by growth in digital subscribers, and rate
increases. From March 31, 2002 to March 31, 2003, we added approximately 466,000
digital subscribers or a 25.1% increase in digital subscribers. During the 2003
interim period, we added approximately 76,000 digital subscribers.
The increase in high-speed Internet revenue for the interim period from
2002 to 2003 is primarily due to growth in high-speed Internet subscribers. From
March 31, 2002 to March 31, 2003, we added approximately 678,000 high-speed
Internet subscribers or a 65.1%
18
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
increase in high-speed Internet subscribers. During the 2003 interim period, we
added approximately 192,000 high-speed Internet 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 phone revenues, installation revenues, guide
revenues, commissions from electronic retailing, revenues of our regional sports
programming networks and revenue from other product offerings.
The increase in operating, selling, general and administrative expense for
the interim period from 2002 to 2003 is primarily due 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.
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.
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 17.
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 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 increase in sales volume.
19
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
Consolidated Analysis
Interest Expense
The decrease in interest expense for the interim period from 2002 to 2003
is primarily attributable to the effects of our lower amount of outstanding debt
as a result of our net debt repayments.
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................................... $5 $7
Gains on sales and exchanges of investments, net 22 2
Investment impairment losses................................... (55) (13)
Unrealized losses on trading securities........................ (2) (1,020)
Mark to market adjustments on derivatives
related to trading securities............................. 3 847
Mark to market adjustments on derivatives and hedged items (8) (71)
--------- ----------
Investment loss, net...................................... ($35) ($248)
========= ==========
Other Expense
The decrease in other expense for the interim period from 2002 to 2003 is
attributable to the loss on the sale of one of our equity method investees in
the 2002 interim period.
Income Tax Expense
The change in income tax expense for the interim period from 2002 to 2003
is primarily the result of the effects of changes in our income (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.
We believe that our operations are not materially affected by inflation.
20
COMCAST HOLDINGS 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 our 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.
We deny any wrongdoing in connection with the claims which have been made
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 our
consolidated financial position.
Some of the entities formerly attributed to Broadband which are now
subsidiaries of Comcast 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 Comcast to pay two-thirds of Starz Encore's programming costs
above levels designated in the term sheet.
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
21
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
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, Comcast filed suit against Starz Encore Group LLC 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 Comcast's
cable systems. On January 8, 2003, Starz Encore filed a motion to dismiss
the lawsuit on the grounds that claims asserted by Comcast raised issues of
state law that the United States District Court should decline to decide.
We and Comcast 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 as defendants and adds new claims against us, Comcast and
Broadband asserting alleged breaches of, and interference with, the
standstill agreement relating to the lawsuit filed by us and Comcast 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 have breached certain joint-marketing obligations under the March
17, 1999 contract and other agreements. We, Comcast 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, we and Comcast 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
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 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 Comcast's
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
Comcast 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 commenced on May 9, 2003.
22
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
On June 21, 2002, CSG filed a lawsuit against us 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 us without prejudice. On November 15, 2002, Comcast initiated a
lawsuit against CSG in federal court in Philadelphia, Pennsylvania
asserting that cable systems owned by us 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 Comcast may be added
to a billing service agreement between Comcast 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.
In management's opinion, the final disposition of the Starz Encore and CSG
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
None.
(b) Reports on Form 8-K:
None.
23
COMCAST HOLDINGS 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 HOLDINGS CORPORATION
----------------------------------------
/S/ LAWRENCE J. SALVA
----------------------------------------
Lawrence J. Salva
Senior Vice President and Controller
(Principal Accounting Officer)
Date: May 15, 2003
24
CERTIFICATIONS
I, Brian L. Roberts, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Comcast Holdings
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 15, 2003
/s/ BRIAN L. ROBERTS
- --------------------------------------------
Name: Brian L. Roberts
Chief Executive Officer
25
I, Lawrence S. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Comcast Holdings
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 15, 2003
/s/ LAWRENCE S. SMITH
- -------------------------------------------
Name: Lawrence S. Smith
Co-Chief Financial Officer
26
I, John R. Alchin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Comcast Holdings
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 15, 2003
/s/ JOHN R. ALCHIN
- --------------------------------------------
Name: John R. Alchin
Co-Chief Financial Officer
27