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:
SEPTEMBER 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
- --------------------------------------------------------------------------------
(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 September 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 SEPTEMBER 30, 2003
TABLE OF CONTENTS
Page Number
-----------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheet as of September 30, 2003
and December 31, 2002 (Unaudited)......................................................2
Condensed Consolidated Statement of Operations for the Three and Nine Months
Ended September 30, 2003 and 2002 (Unaudited)..........................................3
Condensed Consolidated Statement of Cash Flows for the Nine Months
Ended September 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.............................................................19
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 nine months ended
September 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, on September
17, 2003, we sold our approximate 57% interest in QVC, Inc., our electronic
retailing subsidiary, to Liberty Media Corporation. The results of QVC have been
reported as discontinued operations for all periods presented in the
accompanying condensed consolidated financial statements.
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 SEPTEMBER 30, 2003
PART I. FINANCIAL INFORMATION
- ------ ---------------------
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in millions, except share data)
September 30, December 31,
2003 2002
------------ -----------
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents.................................................. $3,213 $400
Investments................................................................ 1,138 517
Accounts receivable, less allowance for doubtful accounts of $82 and $74.. 414 446
Other current assets....................................................... 261 133
Current assets of discontinued operations.................................. 1,481
------------ -----------
Total current assets................................................... 5,026 2,977
------------ -----------
NOTES RECEIVABLE FROM AFFILIATES.............................................. 853 191
DUE FROM AFFILIATES........................................................... 1,342
INVESTMENTS................................................................... 2,876 594
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $4,198 and $3,398 6,513 6,431
FRANCHISE RIGHTS.............................................................. 16,619 16,611
GOODWILL...................................................................... 5,611 5,611
OTHER INTANGIBLE ASSETS, net of accumulated amortization of $985 and $688.... 1,214 1,311
OTHER NONCURRENT ASSETS, net.................................................. 289 368
NONCURRENT ASSETS OF DISCONTINUED OPERATIONS.................................. 1,595
------------ -----------
$40,343 $35,689
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable........................................................... $249 $425
Accrued expenses and other current liabilities............................. 2,725 1,425
Due to affiliates.......................................................... 76
Deferred income taxes...................................................... 36 46
Current portion of long-term debt.......................................... 375 23
Current liabilities of discontinued operations............................. 816
------------ -----------
Total current liabilities.............................................. 3,385 2,811
------------ -----------
LONG-TERM DEBT, less current portion.......................................... 7,941 9,256
------------ -----------
NOTES PAYABLE TO AFFILIATES................................................... 49 22
------------ -----------
DEFERRED INCOME TAXES......................................................... 8,923 6,830
------------ -----------
OTHER NONCURRENT LIABILITIES.................................................. 1,187 1,216
------------ -----------
MINORITY INTEREST............................................................. 295 266
------------ -----------
NONCURRENT LIABILITIES AND MINORITY INTEREST OF
DISCONTINUED OPERATIONS.................................................... 923
------------ -----------
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......................................................... 12,331 11,818
Retained earnings.......................................................... 5,311 1,595
Accumulated other comprehensive income (loss).............................. (26) 5
------------ -----------
Total stockholders' equity............................................. 18,563 14,365
------------ -----------
$40,343 $35,689
============ ===========
See notes to condensed consolidated financial statements.
2
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Dollars in millions)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
--------- --------- --------- ---------
SERVICE REVENUES........................................................... $1,882 $1,698 $5,703 $5,102
COSTS AND EXPENSES
Operating (excluding depreciation)..................................... 661 597 2,054 1,831
Selling, general and administrative.................................... 491 459 1,469 1,340
Depreciation........................................................... 330 321 965 957
Amortization........................................................... 49 50 136 134
--------- --------- --------- ---------
1,531 1,427 4,624 4,262
--------- --------- --------- ---------
OPERATING INCOME........................................................... 351 271 1,079 840
OTHER INCOME (EXPENSE)
Interest expense....................................................... (161) (172) (500) (535)
Interest income (expense) on affiliate notes, net...................... (10) 2
Investment loss, net................................................... (166) (47) (198) (702)
Equity in net losses of affiliates..................................... (15) (9) (45) (55)
Other income (expense)................................................. (1) 5 1 (12)
--------- --------- --------- ---------
(353) (223) (740) (1,304)
--------- --------- --------- ---------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTEREST...................................................... (2) 48 339 (464)
INCOME TAX BENEFIT (EXPENSE)............................................... 84 (27) (48) 123
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST.......... 82 21 291 (341)
MINORITY INTEREST.......................................................... (14) 3 (33) (23)
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS................................... 68 24 258 (364)
INCOME FROM DISCONTINUED OPERATIONS, net of tax............................ 39 52 168 141
GAIN ON DISCONTINUED OPERATIONS, net of tax................................ 3,290 3,290
--------- --------- --------- ---------
NET INCOME (LOSS).......................................................... $3,397 $76 $3,716 ($223)
========= ========= ========= =========
See notes to condensed consolidated financial statements.
3
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in millions)
Nine Months Ended
September 30,
2003 2002
----------- -------------
OPERATING ACTIVITIES
Net income (loss)...................................................... $3,716 ($223)
Income from discontinued operations.................................... (168) (141)
Gain on discontinued operations........................................ (3,290)
----------- -------------
Income (loss) from continuing operations............................... 258 (364)
Adjustments to reconcile income (loss) from continuing operations to net cash
provided by operating activities from continuing operations:
Depreciation......................................................... 965 957
Amortization......................................................... 136 134
Non-cash interest expense, net....................................... 22 32
Equity in net losses of affiliates................................... 45 55
Losses (gains) on investments and other (income) expense, net........ 213 733
Minority interest.................................................... 33 23
Deferred income taxes................................................ 128 (60)
Proceeds from sales of trading securities............................ 85
Other................................................................ 2 (56)
----------- -------------
1,887 1,454
Changes in working capital, net of effects of acquisitions and
divestitures:
Decrease in accounts receivable, net................................ 30 11
Increase in other current assets.................................... (135) (5)
Increase in accounts payable, accrued expenses and other
current liabilities................................................ 284 183
----------- -------------
179 189
Net cash provided by operating activities from continuing operations 2,066 1,643
----------- -------------
FINANCING ACTIVITIES
Proceeds from borrowings............................................... 1,260 876
Retirements and repayments of debt..................................... (2,293) (1,801)
Net transactions with affiliates....................................... (1,430)
Capital contribution from parent....................................... 467
Proceeds from notes payable to affiliates.............................. 27
Other.................................................................. 70
----------- -------------
Net cash used in financing activities from continuing operations.... (1,969) (855)
----------- -------------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired..................................... (22) (16)
Proceeds from sales of (purchases of) short-term investments, net...... 4 4
Increase in notes receivable from affiliates........................... (662)
Proceeds from sale of discontinued operations.......................... 1,350
Proceeds from sales of Liberty Notes................................... 3,000
Proceeds from sales of investments..................................... 213 734
Purchases of investments............................................... (68) (48)
Capital expenditures................................................... (1,038) (1,035)
Additions to intangible and other noncurrent assets.................... (61) (231)
----------- -------------
Net cash provided by (used in) investing activities from continuing
operations ..................................................... 2,716 (592)
----------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS..................................... 2,813 196
CASH AND CASH EQUIVALENTS, beginning of period............................ 400 214
----------- -------------
CASH AND CASH EQUIVALENTS, end of period.................................. $3,213 $410
=========== =============
See notes to condensed consolidated financial statements.
4
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 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.
On September 17, 2003, the Company completed the sale of its approximate 57%
interest in QVC, Inc. ("QVC"). Accordingly, QVC has been presented as a
discontinued operation pursuant to Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (see Note 3).
Reclassifications
Certain reclassifications have been made to the prior year financial statements
to conform to those classifications used in 2003.
2. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 143
The Financial Accounting Standards Board ("FASB") issued 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 SEPTEMBER 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
prospective basis in accordance with the new statement. The adoption of SFAS No.
149 had no material impact on the Company's financial condition or results of
operations.
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 was effective July 1, 2003. The adoption of SFAS No. 150 did
not have a material impact on the Company's financial condition or results of
operations.
The FASB is addressing certain implementation issues associated with the
application of SFAS No. 150. On October 29, 2003, the FASB decided to defer
certain provisions of SFAS No. 150 related to mandatorily redeemable financial
instruments representing noncontrolling interests in subsidiaries included in
consolidated financial statements. The Company will monitor the actions of the
FASB and assess the impact, if any, that these actions 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 financial
condition or results of operations (see Note 9).
FIN 46
The Company adopted the provisions of FASB Interpretation No. 46 "Consolidation
of Variable Interest Entities" ("FIN 46") effective January 1, 2002. FIN 46
clarifies the application of Accounting Research Bulletin 51 to certain
entities, defined as variable interest entities ("VIEs"), in which equity
investors do not have characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its activities
without additional subordinated support from other parties. At the time of the
initial application, FIN 46 had no impact on the Company's financial condition
or results of operations because the Company previously consolidated all VIEs in
which it was the primary beneficiary. Since the Company's initial application,
the FASB has been addressing various implementation issues that could
potentially broaden the application of FIN 46 to entities outside its originally
interpreted scope and has issued and proposed several FASB Staff Positions. The
Company does not expect that these FASB Staff Positions will have a material
impact on its financial statements.
6
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
3. ACQUISITIONS AND OTHER SIGNIFICANT EVENTS
Sale of QVC
On September 17, 2003, the Company completed the sale to Liberty Media
Corporation ("Liberty") of all shares of QVC common stock held by a number of
indirect wholly-owned subsidiaries of the Company, for an aggregate amount of
approximately $7.7 billion, consisting of $4 billion principal amount of
Liberty's Floating Rate Senior Notes due 2006 (the "Liberty Notes"), $1.35
billion in cash and approximately 218 million shares of Liberty Series A common
stock. The shares had a fair value on the closing date of $10.73 per share. The
consideration received, net of transaction costs, over the Company's carrying
value of the net assets of QVC resulted in a gain of approximately $3.290
billion, net of approximately $2.865 billion of related income taxes.
The Liberty Notes and shares of Liberty Series A common stock received in the
transaction have been registered with the SEC. On September 24, 2003, the
Company, through its wholly-owned indirect subsidiaries, sold an aggregate of
$3.0 billion principal amount of the Liberty Notes for net proceeds of
approximately $3.0 billion. The remaining Liberty Notes held by the Company,
which bear interest at LIBOR plus 1.5%, are classified as available for sale and
the shares of Liberty Series A common stock received by the Company in
connection with the sale of QVC are classified as trading securities (see Note
4).
The current and noncurrent assets and liabilities of QVC included within the
related discontinued operations captions are as follows (in millions):
December 31,
2002
-----------
Cash............................................................. $276
Accounts receivable, less allowance for doubtful accounts........ 569
Inventories, net................................................. 479
Other current assets............................................. 157
-----------
Total current assets of discontinued operations............. $1,481
===========
Property and equipment, net of accumulated depreciation.......... $485
Goodwill......................................................... 835
Other intangible assets, net of accumulated amortization......... 170
Other noncurrent assets, net..................................... 105
-----------
Total noncurrent assets of discontinued operations.......... $1,595
===========
Accounts payable................................................. $367
Accrued expenses and other current liabilities................... 449
-----------
Total current liabilities of discontinued operations........ $816
===========
Minority interest................................................ $867
Other noncurrent liabilities..................................... 56
-----------
Total noncurrent liabilities and minority interest of
discontinued operations................................. $923
===========
7
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The results of operations of QVC prior to its disposition are included within
income from discontinued operations, net of tax in the following periods (in
millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues................................................... $752 $1,012 $2,915 $3,000
Income before income taxes and minority interest........... $123 $146 $496 $419
The 2003 periods include QVC operations through August 31, 2003 as reported to
the Company by QVC. The amount of income from discontinued operations and gain
on discontinued operations is subject to reallocation as additional information
is obtained from QVC, which will have no effect on net income.
4. INVESTMENTS
September 30, December 31,
2003 2002
-------------- --------------
(in millions)
Fair value method
AT&T Corp.................................................... $ $287
Liberty...................................................... 3,212 43
Sprint Corp. PCS Group....................................... 354 369
Other ....................................................... 23 24
-------------- --------------
3,589 723
Equity method..................................................... 316 284
Cost method....................................................... 109 104
-------------- --------------
Total investments............................................ 4,014 1,111
Less, current investments......................................... 1,138 517
-------------- --------------
Non-current investments........................................... $2,876 $594
============== ==============
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 September 30, 2003 and December 31, 2002 of $29 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 $10 million and $25
million, respectively.
The cost, fair value and unrealized gains and losses related to the Company's
available for sale securities are as follows (in millions):
September 30, December 31,
2003 2002
----------- -----------
Cost...................................... $1,024 $269
Unrealized gains.......................... 34 71
Unrealized losses......................... (5) (1)
----------- -----------
Fair value................................ $1,053 $339
=========== ===========
8
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Investment Loss, Net
Investment loss, net for the interim periods includes the following (in
millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- ---------- --------
Interest and dividend income.................................... $4 $6 $12 $19
Gains (losses) on sales and exchanges of investments, net....... 22 (101)
Investment impairment losses.................................... (6) (69) (227)
Unrealized losses on trading securities......................... (167) (181) (98) (1,621)
Mark to market adjustments on derivatives related
to trading securities...................................... (1) 139 (66) 1,310
Mark to market adjustments on derivatives and hedged items...... (2) (5) 1 (82)
-------- -------- ---------- --------
Investment loss, net............................................ ($166) ($47) ($198) ($702)
======== ======== ========== ========
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 and Other Total
------------ ------------ ------------
Balance, December 31, 2002...................... $4,693 $918 $5,611
Intersegment transfers...................... 20 (20)
------------ ------------ ------------
Balance, September 30, 2003..................... $4,713 $898 $5,611
============ ============ ============
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 September 30, 2003, $22.568 billion of Comcast's
debt securities were entitled to the benefits of the Cross-Guarantee Structure,
including $6.932 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.
9
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Repayments of Debt with Proceeds from Sales of QVC and Liberty Notes
In September 2003, in connection with the sale of QVC and the sale of the
Liberty Notes, the Company received an aggregate of approximately $4.35 billion
in cash (see Note 3). In September 2003, the Company used a portion of the cash
proceeds to repay $550 million on the Comcast Cable revolving credit facility
due 2005 and also repaid $1.130 billion outstanding on certain of Comcast's bank
credit facilities.
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 September 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):
Nine Months Ended
September 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........................... 18 17
Increase (decrease) in derivative component
to investment loss, net....................... 64 (1,053)
Balance at End of Period:
Debt component................................ 509 485
Derivative component.......................... 272 92
----------- -----------
Total $781 $577
=========== ===========
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 7.49% and 7.07% as of September
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 September 30, 2003, certain subsidiaries of the Company had unused lines
of credit of $2.508 billion under their respective credit facilities.
As of September 30, 2003, the Company and certain of its subsidiaries had unused
irrevocable standby letters of credit totaling $42 million to cover potential
fundings under various agreements.
10
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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, "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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- -------
Net income (loss), as reported.................................. $3,397 $76 $3,716 ($223)
Deduct: Total stock-based compensation expense
determined under fair value based method
for all awards relating to continuing operations, net
of related tax effects............................ (25) (33) (63) (94)
Total stock-based compensation expense determined
under fair value based method for all awards relating
to discontinued operations, net of related tax
effects ......................................... (5) (4) (12) (12)
-------- -------- -------- -------
Pro forma, net income (loss).................................... $3,367 $39 $3,641 ($329)
======== ======== ======== =======
Total stock-based compensation expense was determined under the fair value
method for all awards using the accelerated recognition method as permitted
under SFAS No. 123. Had the Company applied the fair value recognition
provisions of SFAS No. 123 using the straight-line rather than the accelerated
recognition method of its stock options, total stock-based compensation expense
relating to continuing operations, net of related tax effects, would have been
$21 million and $26 million for the three months ended September 30, 2003 and
2002, respectively, and $55 million and $75 million for the nine months ended
September 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 plan during the three and nine months
ended September 30, 2003 was $12.94 and $10.76, respectively. The
weighted-average fair value at date of grant of a Class A Special common stock
option granted under the Company's option plans during the three and nine months
ended September 30, 2002 was $10.33 and $15.50, 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:
11
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 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................ 28.2% 31.5% 29.3% 29.5%
Risk-free interest rate............ 4.1% 4.6% 3.4% 5.2%
Expected option lives (in years)... 8.0 8.0 6.9 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.
Comprehensive Income (Loss)
The Company's total comprehensive income (loss) for the interim periods was as
follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
--------- ---------- --------- ----------
Net income (loss).................................... $3,397 $76 $3,716 ($223)
Unrealized (losses) gains on marketable securities... (19) 25 (44) (339)
Reclassification adjustments for (gains) losses
included in net income (loss)...................... (14) 7 203
Unrealized losses (gains) on the effective portion
of cash flow hedges................................ 1 (198) 1 (198)
Foreign currency translation gains (losses).......... 3 (1) 5 (8)
--------- ---------- --------- ----------
Comprehensive income (loss).......................... $3,368 ($98) $3,685 ($565)
========= ========== ========= ==========
8. STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
The Company made cash payments for interest and income taxes related to
continuing operations during the interim periods as follows (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
--------- ---------- --------- ----------
Interest............................................. $90 $101 $420 $441
Income taxes......................................... $12 $2 $56 $11
The Liberty shares and Liberty Notes received in connection with the sale of QVC
are non-cash investing activities (see Note 3).
12
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
9. COMMITMENTS AND CONTINGENCIES
Contingencies
At Home.
- --------
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 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. All of the defendants served motions to dismiss on February 11, 2003.
The court dismissed the common law claims against the Company and Mr. Roberts,
leaving only a claim against them for "control person" liability under the
Securities Exchange Act of 1934. The Delaware case has been transferred to the
United States District Court for the Southern District of New York.
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.
Starz Encore.
- -------------
Some of the entities formerly attributed to Broadband which are now subsidiaries
of Comcast were parties to a 1997 affiliation term sheet with Starz Encore Group
LLC ("Starz Encore"), an affiliate of Liberty, which was the subject of a
lawsuit by Starz Encore against Broadband in Colorado State Court that preceded
Comcast's acquisition of Broadband. In November 2002, the Company and Comcast
filed suit against Starz Encore in the United States District Court for the
Eastern District of Pennsylvania relating to that term sheet.
In January 2003, Starz Encore filed an amended complaint in its lawsuit against
Broadband in Colorado state court. The amended complaint added the Company and
Comcast as defendants and added new claims against the Company, Comcast and
Broadband asserting alleged breaches of, and interference with, a standstill
agreement relating to the lawsuit filed by the Company and Comcast in federal
District Court in Pennsylvania. On September 19, 2003, Comcast, Starz Encore and
certain of their affiliates entered into a confidential settlement agreement
that provided for the dismissal with prejudice of both the Colorado lawsuit and
the Pennsylvania lawsuit, subject to the execution of a contemporaneous
amendment to an existing affiliation agreement between Comcast and Starz Encore
13
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
that originally applied only to the cable systems of the Company. The amended
affiliation agreement now applies to all Comcast owned and operated systems,
including the former Broadband systems, and provides for: (i) payment on a
per-subscriber basis rather than the flat fee arrangement that formerly existed
under the 1997 term sheet between Broadband and Starz Encore; (ii) elimination
of the pass-through of any of Starz Encore's incremental programming costs, such
as there had been under the 1997 term sheet between Broadband and Starz Encore;
and (iii) enhanced joint marketing efforts promoting Starz Encore products. The
parties have filed stipulations of dismissal of both the Colorado and
Pennsylvania lawsuits with prejudice.
Other.
- ------
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.
14
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
10. FINANCIAL DATA BY BUSINESS SEGMENT
As a result of the sale of QVC, the Company's only reportable segment is
"Cable." The Company's other business segments, including the Company's content
operations, do not meet the quantitative guidelines for segment reporting. 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 Other (1) Total
----- ------------- -----
Three Months Ended September 30, 2003
- -------------------------------------
Revenues (2)......................................... $1,718 $164 $1,882
Operating income (loss) before depreciation
and amortization (3)............................ 742 (12) 730
Depreciation and amortization........................ 333 46 379
Operating income (loss).............................. 409 (58) 351
Interest expense..................................... 130 31 161
Capital expenditures................................. 324 19 343
Three Months Ended September 30, 2002
- -------------------------------------
Revenues (2)......................................... $1,548 $150 $1,698
Operating income (loss) before depreciation
and amortization (3)............................ 645 (3) 642
Depreciation and amortization........................ 309 62 371
Operating income (loss).............................. 336 (65) 271
Interest expense..................................... 140 32 172
Capital expenditures................................. 322 7 329
Nine Months Ended September 30, 2003
- -------------------------------------
Revenues (2)......................................... $5,079 $624 $5,703
Operating income before depreciation
and amortization (3)............................ 2,155 25 2,180
Depreciation and amortization........................ 957 144 1,101
Operating income (loss).............................. 1,198 (119) 1,079
Interest expense..................................... 405 95 500
Capital expenditures................................. 1,009 29 1,038
Nine Months Ended September 30, 2002
- -------------------------------------
Revenues (2)......................................... $4,558 $544 $5,102
Operating income before depreciation
and amortization (3)............................ 1,896 35 1,931
Depreciation and amortization........................ 900 191 1,091
Operating income (loss).............................. 996 (156) 840
Interest expense..................................... 428 107 535
Capital expenditures................................. 1,011 24 1,035
As of September 30, 2003
- -------------------------------------
Assets............................................... $29,754 $10,589 $40,343
Long-term debt, less current portion................. 6,634 1,307 7,941
As of December 31, 2002
Assets............................................... $29,844 $5,845 $35,689
Long-term debt, less current portion................. 7,908 1,348 9,256
_______________
15
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(1) Other includes segments not meeting certain quantitative guidelines for
reporting and elimination entries related to the segment presented.
Corporate and other assets consist primarily of the Company's investments
and intangible assets related to the Company's content operations and, as
of December 31, 2002, $3.076 billion of assets associated with discontinued
operations (see Notes 3, 4 and 5).
(2) No single customer accounted for a significant amount of the Company's
revenues in any period.
(3) Operating income (loss) before depreciation and amortization is defined as
operating income (loss) 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.
16
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 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
income from discontinued operations in the Company's consolidated statement of
operations, totaled $3 million and $11 million during the three and nine months
ended September 30, 2003, respectively. Amounts related to a similar affiliation
agreement between QVC and Comcast Cable, which are included in service revenues
and income from discontinued operations in the Company's consolidated statement
of operations, totaled $4 million and $13 million during the three and nine
months ended September 30, 2003, respectively.
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 and $26 million during the three and
nine months ended September 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 $39 million and $109 million during the three
and nine months ended September 30, 2003, respectively. During the 2002 interim
periods, 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
periods.
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 $47 million and $129 million
during the three and nine months ended September 30, 2003, respectively. During
the 2002 interim periods, 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 $40 million and $116 million during the three and nine
months ended September 30, 2003, respectively. During the 2002 interim periods,
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 periods.
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.
Due from affiliates in the Company's consolidated balance sheet as of September
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. Due to affiliates in the Company's consolidated
balance sheet as
17
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
of December 31, 2002 primarily consists of amounts due to Comcast and its
affiliates under the cost 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 September 30, 2003 and December 31, 2002, notes receivable from affiliates
consist of an aggregate of $843 million and $191 million principal amount,
respectively, of notes receivable from Comcast and from a subsidiary of CCCH.
The notes receivable bear interest at rates ranging from 5.0% to 7.5% and are
due between 2012 and 2013. As of September 30, 2003, notes receivable from
affiliates includes $10 million of interest receivable related to the notes. As
of September 30, 2003 and December 31, 2002, notes payable to affiliates consist
of an aggregate of $47 million and $22 million principal amount, respectively,
of notes payable to subsidiaries of CCCH. The notes payable bear interest at
7.5% and are due between 2012 and 2013. As of September 30, 2003, notes payable
to affiliates includes $2 million of interest payable related to the notes.
18
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 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").
Business Developments
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 (see Sale of QVC), on September 17, 2003 we sold to Liberty Media
Corporation ("Liberty") our approximate 57% interest in QVC, Inc. ("QVC") for
approximately $7.7 billion under a stock purchase agreement. We received from
Liberty three-year senior unsecured notes (the "Liberty Notes") bearing interest
at LIBOR plus 1.5%, approximately 218 million shares of Liberty Series A common
stock and cash. The values of the notes, shares and cash received were
approximately $4.0 billion, $2.339 billion and $1.35 billion, respectively. In
accordance with Statement of Financial Accounting Standards No. 144 ("SFAS
144"), QVC's operations are presented as a discontinued operation in our
financial statements.
Our summarized financial information for the interim periods is as follows
(dollars in millions, "NM" denotes percentage is not meaningful):
Three Months Ended
September 30, Increase / (Decrease)
2003 2002 $ %
--------- --------- ---------- ---------
Service revenues............................................. $1,882 $1,698 $184 10.8%
Operating, selling, general and administrative expenses...... 1,152 1,056 96 9.1
Depreciation................................................. 330 321 9 2.8
Amortization................................................. 49 50 (1) (2.0)
--------- --------- ---------- ---------
Operating income............................................. 351 271 80 29.5
--------- --------- ---------- ---------
Interest expense............................................. (161) (172) (11) (6.4)
Interest expense on affiliate notes, net..................... (10) 10 NM
Investment loss, net......................................... (166) (47) 119 253.2
Equity in net losses of affiliates........................... (15) (9) 6 66.7
Other income (expense)....................................... (1) 5 (6) NM
Income tax benefit (expense)................................. 84 (27) 111 NM
Minority interest............................................ (14) 3 (17) NM
--------- --------- ---------- ---------
Income from continuing operations............................ $68 $24 $44 183.3%
========= ========= ========== =========
19
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
Nine Months Ended
September 30, Increase / (Decrease)
2003 2002 $ %
--------- --------- ---------- ---------
Service revenues............................................. $5,703 $5,102 $601 11.8%
Operating, selling, general and administrative expenses...... 3,523 3,171 352 11.1
Depreciation................................................. 965 957 8 0.8
Amortization................................................. 136 134 2 1.5
--------- --------- ---------- ---------
Operating income............................................. 1,079 840 239 28.5
--------- --------- ---------- ---------
Interest expense............................................. (500) (535) (35) (6.5)
Interest income on affiliate notes, net...................... 2 2 NM
Investment loss, net......................................... (198) (702) (504) (71.8)
Equity in net losses of affiliates........................... (45) (55) (10) (18.2)
Other income (expense)....................................... 1 (12) 13 NM
Income tax benefit (expense)................................. (48) 123 (171) NM
Minority interest............................................ (33) (23) 10 43.5
--------- --------- ---------- ---------
Income (loss) from continuing operations..................... $258 ($364) $622 NM%
========= ========= ========== =========
Consolidated Operating Results
Revenues
Consolidated revenues for the three and nine month interim periods
increased $184 million and $601 million, respectively. Of these increases, $170
million and $521 million, respectively, relate to our cable segment, which is
discussed separately below. The remaining increases are primarily the result of
our content businesses, which achieved combined revenue growth of 17.5% and
16.2%, respectively, for the three and nine month interim periods. Such
increases were primarily the result of increases in distribution revenues and in
advertising.
Operating, selling, general and administrative
expenses
Consolidated operating, selling, general and administrative expenses for
the three and nine month interim periods increased $96 million and $352 million,
respectively. Of these increases, $73 million and $262 million, respectively,
relate to our cable segment, which is discussed separately below. The remaining
increases for the interim periods are primarily attributable to 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 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.
Cable Operating Results
The following represents the operating results of our Cable segment. The
remaining components of our operations are not independently significant to our
consolidated financial condition or results of operations (dollars in millions).
20
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
Cable
The following table presents financial information for our Cable segment
(dollars in millions).
Three Months Ended
September 30, Increase
2003 2002 $ %
--------- --------- --------- --------
Video....................................................... $1,249 $1,180 $69 5.8%
High-speed Internet......................................... 244 156 88 56.4
Advertising sales........................................... 102 93 9 9.7
Other....................................................... 71 70 1 1.4
Franchise fees.............................................. 52 49 3 6.1
--------- --------- --------- --------
Revenues............................................... $1,718 1,548 170 11.0
Operating, selling, general and administrative expenses..... 976 903 73 8.1
--------- --------- --------- --------
Operating income before depreciation
and amortization (a)................................... $742 $645 $97 15.0%
========= ========= ========== ==========
Nine Months Ended
September 30, Increase
2003 2002 $ %
--------- --------- --------- --------
Video....................................................... $3,735 $3,516 $219 6.2%
High-speed Internet......................................... 677 415 262 63.1
Advertising sales........................................... 304 274 30 10.9
Other....................................................... 206 202 4 2.0
Franchise fees.............................................. 157 151 6 4.0
--------- --------- --------- --------
Revenues................................................ $5,079 4,558 521 11.4
Operating, selling, general and administrative expenses...... 2,924 2,662 262 9.8
--------- --------- --------- --------
Operating income before depreciation
and amortization (a).................................... $2,155 $1,896 $259 13.7%
========= ========= ========== ==========
____________
(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. From
September 30, 2002 to September 30, 2003, we added approximately 437,000 digital
subscribers, or a 20.7% increase in digital subscribers. During the three and
nine months ended September 30, 2003, we added approximately 133,000 and 304,000
digital subscribers respectively.
The increases in high-speed Internet revenue for the interim periods from
2002 to 2003 are primarily due to the addition of approximately 733,000
high-speed Internet subscribers from September 30, 2002 to
21
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
September 30, 2003, or a 54.8% increase in high-speed Internet subscribers.
During the three and nine months ended September 30, 2003, we added
approximately 190,000 and 546,000 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.
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 Loss, Net
Investment loss, net for the interim periods includes the following (in
millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
--------- ---------- --------- ---------
Interest and dividend income................................... $4 $6 $12 $19
Gains (losses) on sales and exchanges of investments, net...... 22 (101)
Investment impairment losses................................... (6) (69) (227)
Unrealized losses on trading securities........................ (167) (181) (98) (1,621)
Mark to market adjustments on derivatives
related to trading securities............................. (1) 139 (66) 1,310
Mark to market adjustments on derivatives and hedged items..... (2) (5) 1 (82)
--------- ---------- --------- ---------
Investment loss, net...................................... ($166) ($47) ($198) ($702)
========= ========= ========== =========
We have entered into derivative financial instruments which we account for
at fair value and which limit our exposure to and benefits from price
fluctuations in the common stock of certain of our investments accounted for as
trading securities. Investment loss, net includes the fair value adjustments
related to our trading securities and derivative financial instruments. The
change in the fair value of our investments accounted for as trading securities,
with the exception of the Liberty Series A common shares, was substantially
offset by the changes in the fair values of the related derivatives. The Liberty
Series A common shares we received in the sale of QVC have been classified as
trading securities; however, currently there is no corresponding derivative to
hedge this market exposure. As such, the decline in value in these shares during
the quarter is included in investment
22
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
loss, net. Accordingly, our future results of operations may be affected by
fluctuations in the fair value of the Liberty Series A common stock in future
periods.
Equity in Net Losses of Affiliates
The increase in equity in net losses of affiliates for the three month
interim period from 2002 to 2003 is primarily attributable to the effects of our
additional investments and to changes in the net income or loss of our equity
method investees. The decrease in equity in net losses of affiliates for the
nine month interim period from 2002 to 2003 is primarily attributable to
decreases in the net losses of certain of our international equity method
investees, offset, in part, by the effects of our additional investments and to
changes in the net income or loss of our equity method investees.
Other Income (Expense)
The change in other income (expense) for the nine 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.
Income Tax Benefit (Expense)
The changes in income tax benefit (expense) 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 and the effects of the resolution of
certain tax contingencies.
Minority Interest
The changes 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.
Discontinued Operations
The decrease in income from discontinued operations for the three month
interim period from 2002 to 2003 is primarily attributable to the 2003 period
including QVC's results through August 31, while the 2002 period includes
results for the full three month interim period. The increase in income from
discontinued operations for the nine month interim period from 2002 to 2003 is
primarily attributable to a decrease in investment loss, net, offset in part by
the 2003 period including results through August 31, while the 2002 period
includes results for the full nine month interim period. As a result of the
sale, we recognized a $3.290 billion gain, net of approximately $2.865 billion
of related income taxes.
We believe that our operations are not materially affected by inflation.
23
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 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:
10.1 Amended and Restated Stock Purchase Agreement dated as of June
30, 2003 among Comcast QVC, Inc., Comcast Corporation, Liberty
Media Corporation, and QVC, Inc. (incorporated by reference to
Exhibit 10.1 to Comcast Corporation's Current Report on Form 8-K
filed on October 1, 2003).
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 SEPTEMBER 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: November 13, 2003
25