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:
JUNE 30, 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
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(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 June 30, 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 JUNE 30, 2003
TABLE OF CONTENTS
Page Number
-----------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 2003
and December 31, 2002 (Unaudited)......................................................2
Condensed Consolidated Statement of Operations for the Three and Six Months
Ended June 30, 2003 and 2002 (Unaudited)...............................................3
Condensed Consolidated Statement of Cash Flows for the Six Months
Ended June 30, 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.............................................................18
ITEM 4. Controls and Procedures...............................................................24
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.....................................................................24
ITEM 6. Exhibits and Reports on Form 8-K......................................................24
SIGNATURES.......................................................................................25
-----------------------------------
This Quarterly Report on Form 10-Q is for the three and six months ended
June 30, 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
As more fully described elsewhere in this Quarterly Report, in July 2003
we, Comcast and Liberty Media Corporation entered into an agreement pursuant to
which Liberty will purchase our approximate 57% interest in QVC in a transaction
we expect to close by the end of 2003.
In addition, 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 JUNE 30, 2003
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in millions, except share data)
June 30, December 31,
2003 2002
--------- -----------
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents.................................................. $1,298 $676
Investments................................................................ 179 525
Accounts receivable, less allowance for doubtful accounts of $164 and $160 959 1,015
Inventories, net........................................................... 506 479
Deferred income taxes...................................................... 137 129
Due from affiliates........................................................ 317
Other current assets....................................................... 176 153
--------- -----------
Total current assets................................................... 3,572 2,977
--------- -----------
NOTE RECEIVABLE FROM AFFILIATE................................................ 198 191
INVESTMENTS................................................................... 694 627
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $4,174 and $3,604 6,902 6,916
FRANCHISE RIGHTS.............................................................. 16,631 16,611
GOODWILL...................................................................... 6,446 6,446
OTHER INTANGIBLE ASSETS, net of accumulated amortization of $1,103 and $975.. 1,388 1,481
OTHER NONCURRENT ASSETS, net.................................................. 362 440
--------- -----------
$36,193 $35,689
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable........................................................... $662 $792
Accrued expenses and other current liabilities............................. 1,909 1,874
Due to affiliates.......................................................... 76
Deferred income taxes...................................................... 45 46
Current portion of long-term debt.......................................... 378 23
--------- -----------
Total current liabilities.............................................. 2,994 2,811
--------- -----------
LONG-TERM DEBT, less current portion.......................................... 8,108 9,257
--------- -----------
NOTES PAYABLE TO AFFILIATES................................................... 565 22
--------- -----------
DEFERRED INCOME TAXES......................................................... 7,016 6,836
--------- -----------
OTHER NONCURRENT LIABILITIES.................................................. 1,107 1,265
--------- -----------
MINORITY INTEREST............................................................. 1,267 1,133
--------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
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......................................................... 12,273 11,818
Retained earnings.......................................................... 1,913 1,595
Accumulated other comprehensive income..................................... 3 5
--------- -----------
Total stockholders' equity............................................. 15,136 14,365
--------- -----------
$36,193 $35,689
========= ===========
See notes to condensed consolidated financial statements.
2
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Dollars in millions)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
--------- --------- --------- ---------
REVENUES
Service revenues....................................................... $1,927 $1,714 $3,802 $3,393
Net sales from electronic retailing.................................... 1,101 990 2,163 1,978
--------- --------- --------- ---------
3,028 2,704 5,965 5,371
--------- --------- --------- ---------
COSTS AND EXPENSES
Operating (excluding depreciation)..................................... 793 722 1,637 1,465
Cost of goods sold from electronic retailing (excluding depreciation).. 697 626 1,370 1,255
Selling, general and administrative.................................... 551 490 1,079 977
Depreciation........................................................... 350 342 673 676
Amortization........................................................... 56 46 113 99
--------- --------- --------- ---------
2,447 2,226 4,872 4,472
--------- --------- --------- ---------
OPERATING INCOME........................................................... 581 478 1,093 899
OTHER INCOME (EXPENSE)
Interest expense....................................................... (170) (182) (342) (369)
Investment income (loss), net.......................................... 29 (459) (6) (707)
Equity in net losses of affiliates..................................... (21) (44) (34) (49)
Other income (expense)................................................. 3 9 2 (14)
--------- --------- --------- ---------
(159) (676) (380) (1,139)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST.................... 422 (198) 713 (240)
INCOME TAX (EXPENSE) BENEFIT............................................... (148) 33 (269) 30
--------- --------- --------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST..................................... 274 (165) 444 (210)
MINORITY INTEREST.......................................................... (71) (45) (126) (89)
--------- --------- --------- ---------
NET INCOME (LOSS).......................................................... $203 ($210) $318 ($299)
========= ========= ========= =========
See notes to condensed consolidated financial statements.
3
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in millions)
Six Months Ended June 30,
2003 2002
------------ -------------
OPERATING ACTIVITIES
Net income (loss).................................................... $318 ($299)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation....................................................... 673 676
Amortization....................................................... 113 99
Non-cash interest expense, net..................................... 5 22
Equity in net losses of affiliates................................. 34 49
Losses (gains) on investments and other (income) expense, net...... 32 739
Minority interest.................................................. 126 89
Deferred income taxes.............................................. 123 (4)
Proceeds from sales of trading securities.......................... 85
Other.............................................................. (36) (10)
------------ -------------
1,473 1,361
Changes in working capital, net of effects of acquisitions and
divestitures
Decrease in accounts receivable, net............................. 54 9
(Increase) decrease in inventories, net.......................... (27) 40
Increase in other current assets................................. (39) (18)
Increase (decrease) in accounts payable, accrued expenses and other
current liabilities............................................ 45 (342)
------------ -------------
33 (311)
Net cash provided by operating activities........................ 1,506 1,050
------------ -------------
FINANCING ACTIVITIES
Proceeds from borrowings............................................. 710 632
Retirements and repayments of debt................................... (1,572) (1,169)
Net transactions with affiliates..................................... (333)
Capital contribution from parent..................................... 425
Proceeds from notes payable to affiliates............................ 539
Other................................................................ 66
------------ -------------
Net cash used in financing activities............................ (231) (471)
------------ -------------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired................................... (22) (16)
Proceeds from sales of (purchases of) short-term investments, net.... (2) 3
Proceeds from sales of investments................................... 212 596
Purchases of investments............................................. (43) (32)
Capital expenditures................................................. (724) (789)
Additions to intangible and other noncurrent assets.................. (74) (133)
------------ -------------
Net cash used in investing activities............................ (653) (371)
------------ -------------
INCREASE IN CASH AND CASH EQUIVALENTS................................... 622 208
CASH AND CASH EQUIVALENTS, beginning of period.......................... 676 350
------------ -------------
CASH AND CASH EQUIVALENTS, end of period................................ $1,298 $558
============ =============
See notes to condensed consolidated financial statements.
4
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 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 7).
SFAS No. 149
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." 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 adopted SFAS No. 149 on July 1, 2003 on a
5
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
prospective basis in accordance with the new statement. The Company does
not expect the adoption of SFAS No. 149 will have a material impact on its
financial statements.
SFAS No. 150
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope as a liability or, in some
circumstances, as an asset, with many such financial instruments having
been previously classified as equity. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective July 1, 2003. SFAS No. 150 is to be implemented by
reporting the cumulative effect of a change in an accounting principle for
financial instruments outstanding before the issuance date of the Statement
and still existing at July 1, 2003. Restatement is not permitted. The
Company is assessing the impact SFAS No. 150 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 9).
3. ACQUISITIONS AND OTHER SIGNIFICANT EVENTS
Sale of QVC
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, which triggered an exit rights
process with respect to Liberty's approximate 42% interest in QVC. On June
25, 2003, the Company, Comcast and Liberty entered into an agreement (the
"June 2003 Agreement") which superceded and replaced the exit rights
process of the stockholders agreement, and pursuant to which Liberty had to
deliver to Comcast, no later than June 30, 2003, a notice setting forth
Liberty's determination of the aggregate fair value of the Company's and
Liberty's interests in QVC. On June 30, 2003, Liberty delivered notice to
Comcast setting the aggregate fair value of the Company's and Liberty's
interests in QVC at $13.75 billion. Under the terms of the June 2003
Agreement, Comcast had to elect either to purchase Liberty's interest in
QVC or sell the Company's approximate 57% interest in QVC to Liberty, based
on the value determined by Liberty.
On July 3, 2003, Comcast elected to sell its interest in QVC under a stock
purchase agreement with Liberty for approximately $7.9 billion. Liberty
will purchase the Company's interest in QVC in part with shares of
Liberty's Series A common stock (valued at $11.71 per share) representing
7.5% of the shares of Liberty common stock outstanding (after giving effect
to that issuance), or approximately 218 million shares based on the number
of
6
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Liberty shares currently outstanding. The remainder of the purchase price
will be paid in the form of a three-year senior unsecured note bearing
interest at LIBOR plus 1.5%. The values of the shares and the note to be
delivered to the Company are approximately $2.6 billion and $5.3 billion,
respectively. Under the stock purchase agreement, the Company will have
registration rights that should facilitate the disposal or monetization of
its shares in Liberty and in the note.
The Company expects to record a pre-tax gain on the sale of approximately
$6.5 billion. The fair value of the consideration to be received from
Liberty upon consummation of the transaction will be determined at the
closing date and will affect the actual pre-tax gain to be recorded by the
Company. The transaction is subject to customary closing conditions and
regulatory approvals. The Company expects to close the transaction by the
end of 2003.
Effective in the third quarter, the Company will classify QVC as an asset
held for sale and will report the results of operations for QVC in
discontinued operations for all periods presented in accordance with SFAS
No. 144.
4. INVESTMENTS
June 30, December 31,
2003 2002
----------- ------------
(in millions)
Fair value method
AT&T Corp.................................................... $ $287
Sprint Corp. PCS Group....................................... 357 369
Other ....................................................... 97 74
----------- ------------
454 730
Equity method..................................................... 306 317
Cost method....................................................... 113 105
----------- ------------
Total investments............................................ 873 1,152
Less, current investments......................................... 179 525
----------- ------------
Non-current investments........................................... $694 $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 June 30, 2003 and December 31, 2002
of $43 million and $70 million, respectively, have been reported in the
Company's consolidated balance sheet principally as a component of
accumulated other comprehensive income, net of related deferred income
taxes of $15 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):
June 30, December 31,
2003 2002
----------- -----------
Cost............................................................. $25 $269
Gross unrealized gains........................................... 43 71
Gross unrealized losses.......................................... (1)
----------- -----------
Fair value....................................................... $68 $339
=========== ===========
7
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Investment Income (Loss), Net
Investment income (loss), net for the interim periods includes the
following (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------- -------- -------- ---------
Interest and dividend income.................................... $21 $11 $26 $18
Gains (losses) on sales and exchanges of investments, net....... (103) 22 (101)
Investment impairment losses.................................... (14) (208) (69) (221)
Unrealized gains (losses) on trading securities................. 71 (420) 69 (1,440)
Mark to market adjustments on derivatives related
to trading securities...................................... (68) 324 (65) 1,171
Mark to market adjustments on derivatives and hedged items...... 19 (63) 11 (134)
-------- --------- -------- --------
Investment income (loss), net................................... $29 ($459) ($6) ($707)
======== ========= ======== ========
5. GOODWILL
The changes in the carrying amount of goodwill by business segment (see
Note 10) 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, June 30, 2003.......................... $4,713 $835 $898 $6,446
============ ============ ============ ============
6. 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 certain 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. As of June 30, 2003, $23.766
billion of Comcast's debt securities were entitled to the benefits of the
Cross-Guarantee Structure, including $6.936 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.
In May 2003, the Company redeemed, at its scheduled redemption price, the
$154 million outstanding principal amount of its 8 1/4% senior subordinated
notes due 2008. The Company financed the redemption with amounts available
under its existing credit facilities.
8
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 June 30, 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 4) and the change in the
carrying value of the debt component of the ZONES as follows (in millions):
Six Months Ended
June 30,
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........................... 12 11
Increase (decrease) in derivative component
to investment income (loss), net.............. 65 (935)
Balance at End of Period:
Debt component................................ 503 479
Derivative component.......................... 273 210
----------- -----------
Total $776 $689
=========== ===========
Interest Rates
Excluding the derivative component of the ZONES whose changes in fair value
are recorded to investment income (loss), net, the Company's effective
weighted average interest rate on its total debt outstanding was 7.45% and
7.07% as of June 30, 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
As of June 30, 2003, certain subsidiaries of the Company had unused lines
of credit of $2.472 billion under their respective credit facilities.
As of June 30, 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.
7. 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,
9
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
"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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------- -------- -------- ---------
Net income (loss), as reported.................................. $203 ($210) $318 ($299)
Deduct: Total stock-based compensation
expense determined under fair value based method
for all awards, net of related tax effects................. (25) (36) (46) (69)
-------- -------- -------- ---------
Pro forma, net income (loss).................................... $178 ($246) $272 ($368)
======== ======== ======== ========
Total stock-based compensation expense was determined under the fair value
method for all awards assuming accelerated vesting of 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 stock options, total stock-based compensation
expense, net of related tax effects, would have been $21 million and $28
million for the three months ended June 30, 2003 and 2002, respectively,
and $40 million and $55 million for the six months ended June 30, 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 three and six months
ended June 30, 2003 was $7.67 and $10.53, respectively. The weighted-
average fair value at date of grant of a Class A Special common stock
option granted under the option plans during the three and six months ended
June 30, 2002 was $12.98 and $16.30, respectively. 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 June 30, Six Months Ended June 30,
2003 2002 2003 2002
--------------- ---------------- ---------------- ----------------
Class A Class A Special Class A Class A Special
Common Stock Common Stock Common Stock Common Stock
--------------- ---------------- ---------------- ----------------
Dividend yield..................... 0% 0% 0% 0%
Expected volatility................ 29.8% 30.0% 29.4% 29.2%
Risk-free interest rate............ 2.1% 5.3% 3.3% 5.3%
Expected option lives (in years)... 3.5 8.0 6.7 8.0
Forfeiture rate.................... 3.0% 3.0% 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.
10
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Comprehensive Income (Loss)
The Company's total comprehensive income (loss) for the interim periods was
as follows (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
--------- ---------- --------- ----------
Net income (loss).................................... $203 ($210) $318 ($299)
Unrealized losses on marketable securities........... (1) (223) (38) (364)
Reclassification adjustments for losses
included in net income (loss)...................... (1) 198 21 203
Unrealized gains on the effective portion
of cash flow hedges................................ 4
Foreign currency translation gains (losses).......... 9 5 15 (7)
--------- ---------- --------- ----------
Comprehensive income (loss).......................... $210 ($226) $316 ($467)
========= ========== ========= ==========
8. 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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
--------- ---------- --------- ----------
Interest............................................. $228 $237 $334 $347
Income taxes......................................... $152 $129 $188 $159
9. COMMITMENTS AND CONTINGENCIES
Contingencies
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.
11
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 purports to require annual fixed price payments,
subject to adjustment for various factors, including inflation. The term
sheet also purports to require Comcast 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 Comcast 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. 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 purported 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 opposed 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, sought an extension of time from the Court to respond to
Starz Encore's amended complaint. Both Starz Encore's motion to amend and
Comcast's motion to extend time are fully briefed and have been submitted
to the Court for decision.
12
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 services; (iii) tortious
interference with prospective contractual relations; and (iv) civil
conspiracy. The evidentiary hearing commenced on May 9, 2003 and concluded
on June 17, 2003. The parties filed and exchanged opening post-hearing
briefs on July 25, 2003 and are scheduled to file and exchange reply briefs
on August 8, 2003. Final oral arguments are currently scheduled for
September 10 and 11, 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 JUNE 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
10. 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 June 30, 2003
- --------------------------------
Revenues (2)......................................... $1,716 $1,101 $211 $3,028
Operating income before depreciation
and amortization (3)............................ 738 219 30 987
Depreciation and amortization........................ 325 34 47 406
Operating income (loss).............................. 413 185 (17) 581
Interest expense..................................... 136 2 32 170
Capital expenditures................................. 350 16 4 370
Three Months Ended June 30, 2002
- --------------------------------
Revenues (2)......................................... $1,541 $990 $173 $2,704
Operating income before depreciation
and amortization (3)............................ 654 194 18 866
Depreciation and amortization........................ 298 29 61 388
Operating income (loss).............................. 356 165 (43) 478
Interest expense..................................... 141 3 38 182
Capital expenditures................................. 331 51 8 390
Six Months Ended June 30, 2003
- --------------------------------
Revenues (2)......................................... $3,361 $2,163 $441 $5,965
Operating income before depreciation
and amortization (3)............................ 1,413 430 36 1,879
Depreciation and amortization........................ 624 65 97 786
Operating income (loss).............................. 789 365 (61) 1,093
Interest expense..................................... 275 3 64 342
Capital expenditures................................. 685 29 10 724
Six Months Ended June 30, 2002
- --------------------------------
Revenues (2)......................................... $3,010 $1,978 $383 $5,371
Operating income before depreciation
and amortization (3)............................ 1,251 386 37 1,674
Depreciation and amortization........................ 591 56 128 775
Operating income (loss).............................. 660 330 (91) 899
Interest expense..................................... 287 6 76 369
Capital expenditures................................. 689 83 17 789
As of June 30, 2003
- -------------------
Assets............................................... $29,384 $3,237 $3,572 $36,193
Long-term debt, less current portion................. 6,635 1,473 8,108
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
- ---------------
14
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(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 4 and 5).
(2) Revenues include $241 million, $146 million, $456 million and $286 million
during the three months ended June 30, 2003 and 2002 and during the six
months ended June 30, 2003 and 2002, 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 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.
The Company's management and Board of Directors use this measure in
evaluating the Company's consolidated operating performance and the
operating performance of all of its operating segments. This metric is used
to allocate resources and capital to the Company's operating segments and
is a significant component of the Company's annual incentive compensation
programs. This measure is also useful to investors as it is one of the
bases for comparing the Company's operating performance with other
companies in its industries, although the Company's measure may not be
directly comparable to similar measures used by other companies. This
measure 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
generally accepted accounting principles.
15
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
11. 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
and $8 million during the three and six months ended June 30, 2003,
respectively. 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 $8 million and $17
million during the three and six months ended June 30, 2003, respectively.
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 $34 million
and $71 million during the three and six months ended June 30, 2003,
respectively. 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 $42 million and $82 million during the three and six
months ended June 30, 2003, respectively. During the 2002 interim period,
similar costs were included in selling, general and administrative expenses
in the Company's consolidated statement of operations.
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
arrangements 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 and $76
million during the three and six months ended June 30, 2003, respectively.
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 periods.
Current due from affiliates in the Company's consolidated balance sheet as
of June 30, 2003 primarily consists of amounts due from Comcast, CCCH and
CCCM for advances made by the Company for working capital and capital
expenditures in the ordinary course of business. Current due to affiliates
in the Company's consolidated balance sheet as of December 31, 2002
primarily consists of amounts due to Comcast and its affiliates under the
cost
16
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED
(Unaudited)
sharing arrangements 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.
As of June 30, 2003 and December 31, 2002, note receivable from affiliate
consists of a $191 million principal amount note receivable from Comcast.
The note receivable bears interest at a rate of 7.5% and is due in 2012.
Investment income (loss), net includes $3 million and $7 million for the
three and six months ended June 30, 2003, respectively, of interest income
related to the note. As of June 30, 2003, note receivable from affiliate
includes $7 million of interest receivable related to the note.
As of June 30, 2003 and December 31, 2002, notes payable to affiliates
consist of an aggregate of $561 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. Investment income (loss), net includes $2 million
and $4 million for the three and six months ended June 30, 2003,
respectively, of interest expense related to the notes. As of June 30,
2003, notes payable to affiliates includes $4 million of interest payable
related to the notes.
17
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 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.
As more fully described in Note 3 to our financial statements included in
Item 1, in July 2003, we, Comcast and Liberty Media Corporation ("Liberty")
entered into a stock purchase agreement pursuant to which Liberty will purchase
our approximate 57% interest in QVC for approximately $7.9 billion in a
transaction we expect to close by the end of 2003. Upon closing of the
transaction, we expect to receive from Liberty shares of Liberty Series A common
stock and a three-year senior unsecured note bearing interest in LIBOR plus
1.5%. The values of the shares and the note to be delivered to us are
approximately $2.6 billion and $5.3 billion, respectively. Under the stock
purchase agreement, we will have registration rights that should facilitate the
disposal or monetization of our shares in Liberty and in the note.
Our summarized financial information for the interim periods is as follows
(dollars in millions, "NM" denotes percentage is not meaningful):
Three Months Ended
June 30, Increase / (Decrease)
2003 2002 $ %
--------- --------- ---------- ---------
Revenues..................................................... $3,028 $2,704 $324 12.0%
Cost of goods sold from electronic retailing................. 697 626 71 11.3
Operating, selling, general and administrative expenses...... 1,344 1,212 132 10.9
Depreciation and amortization................................ 406 388 18 4.6
--------- --------- ---------- ---------
Operating income............................................. 581 478 103 21.5
--------- --------- ---------- ---------
Interest expense............................................. (170) (182) (12) (6.6)
Investment income (loss), net................................ 29 (459) 488 NM
Equity in net losses of affiliates........................... (21) (44) (23) (52.3)
Other income................................................. 3 9 (6) (66.7)
Income tax (expense) benefit................................. (148) 33 (181) NM
Minority interest............................................ (71) (45) 26 57.8
--------- --------- ---------- ---------
Net income (loss)............................................ $203 ($210) $413 NM
========= ========= ========== =========
18
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
Six Months Ended
June 30, Increase / (Decrease)
2003 2002 $ %
--------- --------- ---------- ---------
Revenues..................................................... $5,965 $5,371 $594 11.1%
Cost of goods sold from electronic retailing................. 1,370 1,255 115 9.2
Operating, selling, general and administrative expenses...... 2,716 2,442 274 11.2
Depreciation and amortization................................ 786 775 11 1.4
--------- --------- ---------- ---------
Operating income............................................. 1,093 899 194 21.6
--------- --------- ---------- ---------
Interest expense............................................. (342) (369) (27) (7.3)
Investment loss, net......................................... (6) (707) (701) (99.2)
Equity in net losses of affiliates........................... (34) (49) (15) (30.6)
Other income (expense)....................................... 2 (14) 16 NM
Income tax (expense) benefit................................. (269) 30 (299) NM
Minority interest............................................ (126) (89) 37 41.6
--------- --------- ---------- ---------
Net income (loss)............................................ $318 ($299) $617 NM
========= ========= ========== =========
Consolidated Operating Results
Revenues
The increases in consolidated revenues for the interim periods from 2002 to
2003 are primarily attributable to increases in service revenues in our Cable
segment and, to a lesser extent, to increases in net sales in our Commerce
segment (see "Operating Results by Business Segment" below). The remaining
increases are primarily the result of increases in revenues from our content
operations, principally due to increases in distribution and advertising
revenues 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 increases in cost of goods sold from electronic
retailing.
Operating, selling, general and administrative expenses
The increases in consolidated operating, selling, general and
administrative expenses for the interim periods from 2002 to 2003 are primarily
attributable to increases in expenses in our Cable segment, costs associated
with management agreements between Comcast and the Company's cable subsidiaries
during the 2003 interim periods that had been eliminated in consolidation in
2002, 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. These
increases were offset, in part, by the effects of reduced corporate overhead
which, upon closing of Comcast's acquisition of Broadband on November 18, 2002,
are recorded by the Comcast parent rather than by the Comcast Holdings parent.
Depreciation and Amortization
The increases in depreciation and amortization for the interim periods from
2002 to 2003 are primarily attributable to increases in amortization expense in
our commerce segment as a result of additional distribution fees paid by QVC
under multi-year affiliation agreements with cable and satellite system
operators.
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 10 to our financial statements included in Item 1
for a summary of our financial data by business segment.
19
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
Cable
The following table presents financial information for our Cable segment
(dollars in millions).
Three Months Ended
June 30, Increase
2003 2002 $ %
--------- --------- --------- --------
Video....................................................... $1,257 $1,186 $71 6.0%
High-speed Internet......................................... 229 140 89 63.6
Advertising sales........................................... 109 100 9 10.0
Other....................................................... 68 64 4 6.3
Franchise fees.............................................. 53 51 2 3.9
--------- --------- --------- --------
Revenues............................................... $1,716 1,541 175 11.4
Operating, selling, general and administrative expenses..... 978 887 91 10.3
--------- --------- --------- --------
Operating income before depreciation
and amortization (a)................................... $738 $654 $84 13.0%
========= ========= ========= =========
Six Months Ended
June 30, Increase
2003 2002 $ %
--------- --------- --------- --------
Video....................................................... $2,486 $2,336 $150 6.5%
High-speed Internet......................................... 433 259 174 67.2
Advertising sales........................................... 202 181 21 11.6
Other....................................................... 136 132 4 3.0
Franchise fees.............................................. 104 102 2 2.0
--------- --------- --------- --------
Revenues................................................ $3,361 3,010 351 11.7
Operating, selling, general and administrative expenses...... 1,948 1,759 189 10.7
--------- --------- --------- --------
Operating income before depreciation
and amortization (a).................................... $1,413 $1,251 $162 13.0%
========= ========= ========= =========
- ------------
(a) Operating income before depreciation and amortization 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. Our
management and Board of Directors use this measure in evaluating our
consolidated operating performance and the operating performance of all of
our operating segments. This metric is used to allocate resources and
capital to our operating segments and is a significant component of our
annual incentive compensation programs. We believe that this measure is
also useful to investors as it is one of the bases for comparing our
operating performance with other companies in our industries, although our
measure may not be directly comparable to similar measures used by other
companies. Because we use this measure 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. This measure 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.
Video revenue consists of our basic, expanded basic, premium, pay-per-view,
equipment and digital cable services. The increases in video revenue for the
interim periods from 2002 to 2003 are primarily due to the effects of increases
in average monthly revenue per basic subscriber as a result of rate increases in
our traditional analog video service and growth in digital subscribers. These
increases were offset by lower pay-per-view revenue due to the absence of major
boxing events in the second quarter of 2003. From June 30, 2002 to June 30,
2003, we added approximately 435,000 digital subscribers or a 22.0% increase in
digital subscribers. During the three and six months ended June 30, 2003, we
added approximately 95,000 and 171,000 digital subscribers, respectively.
The increases in high-speed Internet revenue for the interim periods from
2002 to 2003 are primarily due to
20
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
the addition of approximately 713,000 high-speed Internet subscribers from June
30, 2002 to June 30, 2003, or a 61.0% increase in high-speed Internet
subscribers, as well as to the effects of increases in average monthly revenue
per subscriber as a result of rate increases. During the three and six months
ended June 30, 2003, we added approximately 164,000 and 356,000 high-speed
Internet subscribers, respectively.
The increases in advertising sales revenue for the interim periods from
2002 to 2003 are primarily due to the effects of growth in regional/national
advertising as a result of the continuing success of our regional interconnects,
and growth in a soft local advertising market.
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 increases in operating, selling, general and administrative expense for
the interim periods from 2002 to 2003 are 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
June 30, Increase
2003 2002 $ %
--------- --------- --------- --------
Net sales from electronic retailing.......................... $1,101 $990 $111 11.3%
Cost of goods sold from electronic retailing................. 697 626 71 11.3
Operating, selling, general and administrative
expenses................................................ 185 170 15 8.8
--------- --------- --------- --------
Operating income before depreciation
and amortization (a).................................... $219 $194 $25 13.2%
========= ========== ========= =========
Gross margin................................................. 36.7 % 36.7 %
========= ==========
Six Months Ended
June 30, Increase
2003 2002 $ %
--------- --------- --------- --------
Net sales from electronic retailing.......................... $2,163 $1,978 $185 9.4%
Cost of goods sold from electronic retailing................. 1,370 1,255 115 9.2
Operating, selling, general and administrative
expenses................................................ 363 337 26 7.7
--------- --------- --------- --------
Operating income before depreciation
and amortization (a).................................... $430 $386 $44 11.5%
========= ========== ========= =========
Gross margin................................................. 36.7 % 36.5 %
========= ==========
- ---------------
(a) See footnote (a) on page 20.
Of the $111 million and $185 million increases in net sales from electronic
retailing for the interim periods from 2002 to 2003, $93 million and $167
million, respectively, are 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. The remaining increases in
net sales from electronic retailing are attributable to growth in QVC's U.S.
operations. 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
periods are as follows:
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COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
Three Months Six Months
Ended Ended
June 30, 2003 June 30, 2003
------------- -------------
Increase in average number of homes............. 2.4% 2.7%
Increase (decrease) in net sales per home....... 0.4% (1.1%)
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 domestic 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 increases in cost of goods sold are primarily related to the growth in
net sales. The increase in gross margin for the six month interim period from
2002 to 2003 is primarily due to the effects of a shift in sales mix.
The increases in operating, selling, general and administrative expenses
are primarily attributable to higher variable costs and personnel costs
associated with the increases in sales volume.
Consolidated Analysis
Interest Expense
The decreases in interest expense for the interim periods from 2002 to 2003
are 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 Income (Loss), Net
Investment income (loss), net for the interim periods includes the
following (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
--------- ---------- --------- ---------
Interest and dividend income................................... $21 $11 $26 $18
Gains (losses) on sales and exchanges of investments, net...... (103) 22 (101)
Investment impairment losses................................... (14) (208) (69) (221)
Unrealized gains (losses) on trading securities................ 71 (420) 69 (1,440)
Mark to market adjustments on derivatives
related to trading securities............................. (68) 324 (65) 1,171
Mark to market adjustments on derivatives and hedged items..... 19 (63) 11 (134)
--------- ---------- --------- ---------
Investment income (loss), net............................. $29 ($459) ($6) ($707)
========= ========== ========= =========
Equity in Net Losses of Affiliates
The decreases in equity in net losses of affiliates for the interim periods
from 2002 to 2003 are primarily attributable to decreases in the net losses of
certain of our international equity method investees.
Other Income (Expense)
The change in other income (expense) for the six month interim period from
2002 to 2003 is attributable to the loss on the sale of one of our equity method
investees in the first quarter of 2002.
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COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
Income Tax (Expense) Benefit
The changes in income tax (expense) benefit for the interim periods from
2002 to 2003 are primarily the result of the effects of changes in our income
(loss) before taxes and minority interest.
Minority Interest
The increases in minority interest for the interim periods from 2002 to
2003 are 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.
23
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
ITEM 4. 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-15(e) or
15d-15(e)) as of the end of the period covered by this quarterly report,
have concluded, based on the evaluation of these controls and procedures
required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, that 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.
Changes in internal control over financial reporting. There were no changes
in our internal control over financial reporting identified in connection
with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15
or 15d-15 that occurred during our last fiscal quarter that have materially
affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II. OTHER INFORMATION
- ------- -----------------
ITEM 1. LEGAL PROCEEDINGS
Refer to Note 9 to our condensed financial statements included in Item 1
for a discussion of recent developments related to our legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
31 Certifications of Chief Executive Officer and Co-Chief Financial
Officers pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certification of Chief Executive Officer and Co-Chief Financial
Officers pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K:
None.
24
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 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: August 7, 2003
25