UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended:
MARCH 31, 2004
OR
( ) Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from ________ to ________.
Commission File Number 001-15471
COMCAST HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1709202
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 Market Street, Philadelphia, PA 19102-2148
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (215) 665-1700
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days.
Yes X No
----- -----
--------------------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-b2 of the Exchange Act). Yes ___ No X
As of March 31, 2004, there were 21,591,115 shares of Class A Common Stock,
916,198,519 shares of Class A Special Common Stock and 9,444,375 shares of Class
B Common Stock outstanding.
--------------------------
The Registrant meets the conditions set forth in General Instructions H(1)(a)
and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
TABLE OF CONTENTS
Page Number
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheet as of March 31, 2004
and December 31, 2003 (Unaudited)......................................................2
Condensed Consolidated Statement of Operations for the Three Months
Ended March 31, 2004 and 2003 (Unaudited)..............................................3
Condensed Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 2004 and 2003 (Unaudited)..............................................4
Notes to Condensed Consolidated Financial Statements (Unaudited).......................5
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................14
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk............................17
ITEM 4. Controls and Procedures...............................................................17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.....................................................................17
ITEM 6. Exhibits and Reports on Form 8-K......................................................17
SIGNATURES ......................................................................................18
-----------------------------------
This Quarterly Report on Form 10-Q is for the three months ended March 31,
2004. 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" and "our" 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 should particularly consider any risk factors that we set forth 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. In evaluating those statements, you should specifically consider
various factors, including the risks outlined below. Actual events or our actual
results may differ materially from any of our forward-looking statements.
Our businesses maybe affected by, among other things:
o changes in laws and regulations,
o changes in the competitive environment,
o changes in technology,
o industry consolidation and mergers,
o franchise related matters,
o market conditions that may adversely affect the availability of debt
and equity financing for working capital, capital expenditures or
other purposes,
o demand for the programming content we distribute or the willingness of
other video program distributors to carry our content, and
o general economic conditions.
As more fully described elsewhere in this Quarterly Report and in our
Annual Report on Form 10-K for the year ended December 31, 2003, on September
17, 2003, we sold to Liberty Media Corporation our approximate 57% interest in
QVC, Inc., which markets a wide variety of products directly to consumers
primarily on merchandise-focused television programs. Accordingly, financial
information related to QVC is presented as a discontinued operation in our
financial statements.
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in millions, except share data)
March 31, December 31,
2004 2003
------------ ---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................................. $814 $1,509
Investments................................................................ 247 139
Accounts receivable, less allowance for doubtful accounts of $66 and $74... 402 453
Other current assets....................................................... 181 179
------------ ------------
Total current assets................................................... 1,644 2,280
------------ ------------
NOTES RECEIVABLE FROM AFFILIATE............................................... 3,798 3,310
DUE FROM AFFILIATES, net...................................................... 1,648 943
INVESTMENTS................................................................... 3,251 3,363
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $4,729 and $4,456.. 6,381 6,571
FRANCHISE RIGHTS.............................................................. 16,620 16,620
GOODWILL...................................................................... 5,665 5,663
OTHER INTANGIBLE ASSETS, net of accumulated amortization of $1,098 and $1,022. 1,412 1,350
OTHER NONCURRENT ASSETS, net.................................................. 272 302
------------ ------------
$40,691 $40,402
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................................................... $299 $303
Accrued expenses and other current liabilities............................. 2,113 2,014
Deferred income taxes...................................................... 12 26
Current portion of long-term debt.......................................... 328 373
------------ ------------
Total current liabilities.............................................. 2,752 2,716
------------ ------------
LONG-TERM DEBT, less current portion.......................................... 7,832 7,828
NOTES PAYABLE TO AFFILIATES................................................... 234 61
DEFERRED INCOME TAXES......................................................... 8,408 8,288
OTHER NONCURRENT LIABILITIES.................................................. 2,136 2,289
MINORITY INTEREST............................................................. 319 316
COMMITMENTS AND CONTINGENCIES (NOTE 7)
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......................................................... 12,353 12,353
Retained earnings.......................................................... 5,721 5,623
Accumulated other comprehensive loss....................................... (11) (19)
------------ ------------
Total stockholders' equity............................................. 19,010 18,904
------------ ------------
$40,691 $40,402
============ ============
See notes to condensed consolidated financial statements.
2
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Dollars in millions)
Three Months Ended March 31,
2004 2003
--------- ----------
REVENUES..................................................................... $2,089 $1,881
COSTS AND EXPENSES
Operating (excluding depreciation)....................................... 791 720
Selling, general and administrative...................................... 548 479
Depreciation............................................................. 333 304
Amortization............................................................. 47 46
--------- ----------
1,719 1,549
--------- ----------
OPERATING INCOME............................................................. 370 332
OTHER INCOME (EXPENSE)
Interest expense......................................................... (158) (171)
Interest income (expense) on affiliate notes, net........................ 41 (3)
Investment loss, net..................................................... (52) (30)
Equity in net losses of affiliates....................................... (8) (10)
Other expense............................................................ (5) (1)
--------- ----------
(182) (215)
--------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTEREST........................................................ 188 117
INCOME TAX EXPENSE........................................................... (87) (48)
--------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST................... 101 69
MINORITY INTEREST............................................................ (3) (12)
--------- ----------
INCOME FROM CONTINUING OPERATIONS............................................ 98 57
INCOME FROM DISCONTINUED OPERATIONS, net of tax.............................. 58
--------- ----------
NET INCOME................................................................... $98 $115
========= ==========
See notes to condensed consolidated financial statements.
3
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in millions)
Three Months Ended March 31,
2004 2003
------------- -------------
OPERATING ACTIVITIES
Net income........................................................... $98 $115
Income from discontinued operations.................................. (58)
------------- -------------
Income from continuing operations.................................... 98 57
Adjustments to reconcile net income from continuing operations
to net cash provided by operating activities from continuing
operations:
Depreciation....................................................... 333 304
Amortization....................................................... 47 46
Non-cash interest expense, net..................................... 14 7
Non-cash interest (income) expense on affiliate notes, net......... (41) 3
Equity in net losses of affiliates................................. 8 10
Losses (gains) on investments and other (income) expense, net...... 62 40
Non-cash contribution expense...................................... 23
Minority interest.................................................. 3 12
Deferred income taxes.............................................. 40 39
Proceeds from sales of trading securities.......................... 32
Changes in operating assets and liabilities, net of effects of
acquisitions and divestitures
Change in accounts receivable, net............................... 51 65
Change in accounts payable....................................... (4) 66
Change in other operating assets and liabilities................. 132 57
------------- -------------
Net cash provided by operating activities from continuing
operations ................................................... 766 738
------------- -------------
FINANCING ACTIVITIES
Proceeds from borrowings............................................. 4 210
Retirements and repayments of debt................................... (269) (1,014)
Net transactions with affiliates..................................... (869) 684
------------- -------------
Net cash used in financing activities from continuing operations. (1,134) (120)
------------- -------------
INVESTING ACTIVITIES
Proceeds from sales (purchases) of short-term investments, net ...... 6 (8)
Proceeds from sales of investments................................... 115
Purchases of investments............................................. (33) (11)
Capital expenditures................................................. (275) (341)
Additions to intangible and other noncurrent assets.................. (25) (18)
------------- -------------
Net cash used in investing activities from continuing operations. (327) (263)
------------- -------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........................ (695) 355
CASH AND CASH EQUIVALENTS, beginning of period.......................... 1,509 400
------------- -------------
CASH AND CASH EQUIVALENTS, end of period................................ $814 $755
============= =============
See notes to condensed consolidated financial statements.
4
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
We have prepared these unaudited condensed consolidated financial
statements based upon Securities and Exchange Commission ("SEC") rules that
permit reduced disclosure for interim periods. We are an indirect wholly
owned subsidiary of Comcast Corporation ("Comcast"). Our presentation
differs from the consolidated financial statements of Comcast by excluding
both Comcast's corporate operations and certain cable operations, primarily
those acquired from AT&T in November 2002 (the Broadband acquisition).
Subsequent to the Broadband acquisition, all of our and Comcast's cable
operations are operated as a single integrated cable business unit. Our
condensed consolidated financial statements reflect the assets,
liabilities, revenues and expenses directly attributable to us, as well as
allocations deemed reasonable by management, to present our financial
position, results of operations and cash flows on a stand-alone basis.
These allocations are further described in Note 9. All significant
intercompany accounts and transactions within our financial statements have
been eliminated.
These financial statements include all adjustments that are necessary for a
fair presentation of our 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.
Effective in the first quarter of 2004, we changed the unit of accounting
used for testing impairment of our indefinite-lived franchise rights to
geographic regions and performed impairment testing of our cable franchise
rights. We did not record any impairment charges in connection with this
impairment testing.
For a more complete discussion of our accounting policies and certain other
information, refer to the financial statements included in our Annual
Report on Form 10-K for the year ended December 31, 2003.
On September 17, 2003, we completed the sale of our 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."
The results of operations of QVC included within income from discontinued
operations, net of tax for the three months ended March 31, 2003 are as
follows (in millions):
Revenues.................................................. $1,062
Income before income taxes and minority interest.......... $172
Income tax expense........................................ $73
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to those classifications used in 2004.
2. RECENT ACCOUNTING PRONOUNCEMENTS
FIN 46/FIN 46R
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN
46"). We adopted the provisions of FIN 46 effective January 1, 2002. Since
our initial application of FIN 46, the FASB addressed various
implementation issues regarding the application of FIN 46 to entities
outside its originally interpreted scope, focusing on Special Purpose
Entities, or SPEs. In December 2003, the FASB revised FIN 46 ("FIN 46R"),
which delayed the required implementation date until March 31, 2004 for
entities that are not SPEs. The adoption of FIN 46R did not have a material
impact on our financial condition or results of operations.
5
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
EITF 03-16
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus
regarding Issue No. 03-16, "Accounting for Investments in Limited Liability
Companies" ("EITF 03-16"). EITF 03-16 requires investments in limited
liability companies ("LLCs") that have separate ownership accounts for each
investor to be accounted for similar to a limited partnership investment
under Statement of Position No. 78-9, "Accounting for Investments in Real
Estate Ventures." Investors would be required to apply the equity method of
accounting to their investments at a much lower ownership threshold than
the 20% threshold applied under Accounting Principles Board ("APB") No. 18,
"The Equity Method of Accounting for Investments in Common Stock." EITF
03-16 is effective for the first period beginning after June 15, 2004, and
will be applied as a change in accounting principle with a cumulative
effect reflected in the income statement. We are currently assessing the
impact that the adoption of EITF 03-16 will have on our financial condition
and results of operations.
3. INVESTMENTS
March 31, December 31,
2004 2003
---------------- -----------------
(in millions)
Fair value method
Liberty................................................. $2,413 $2,644
Sprint.................................................. 546 349
Other................................................... 92 41
---------------- -----------------
3,051 3,034
Equity method............................................... 323 329
Cost method................................................. 124 139
---------------- -----------------
Total investments....................................... 3,498 3,502
Less, current investments................................... 247 139
---------------- -----------------
Noncurrent investments ..................................... $3,251 $3,363
================ =================
Fair Value Method
We hold unrestricted equity investments, which we account for as available
for sale or trading securities, in certain publicly traded companies. The
net unrealized pre-tax gains on investments accounted for as available for
sale securities as of March 31, 2004 and December 31, 2003 of $46 million
and $42 million, respectively, have been reported in our consolidated
balance sheet principally as a component of accumulated other comprehensive
loss, net of related deferred income taxes of $16 million and $15 million,
respectively.
The cost, fair value and unrealized gains and losses related to our
available for sale securities are as follows (in millions):
March 31, December 31,
2004 2003
----------------- -----------------
Cost....................................................... $82 $44
Unrealized gains........................................... 46 43
Unrealized losses.......................................... (1)
---------------- ----------------
Fair value................................................. $128 $86
================ =================
6
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
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
March 31,
2004 2003
----------------- -----------------
Interest and dividend income (expense)............................ ($6) $4
Gains on sales and exchanges of investments, net.................. 22
Investment impairment losses...................................... (55)
Mark to market adjustments on trading securities.................. (17) (2)
Mark to market adjustments on derivatives related
to trading securities........................................ (41) 3
Mark to market adjustments on derivatives and hedged items........ 12 (2)
---------------- -----------------
Investment loss, net......................................... ($52) ($30)
================ =================
4. LONG-TERM DEBT
The Cross-Guarantee Structure
To simplify Comcast's capital structure, Comcast and certain of its cable
holding company subsidiaries, including our wholly owned subsidiary Comcast
Cable Communications, LLC ("Comcast Cable"), have unconditionally
guaranteed each other's debt securities and indebtedness for borrowed
money. As of March 31, 2004, $20.642 billion of Comcast's debt securities
were entitled to the benefits of the cross-guarantee structure, including
$6.697 billion of Comcast Cable's debt securities.
Comcast Holdings Corporation is not a guarantor, and none of its debt is
guaranteed. As of March 31, 2004, $1.199 billion of debt was outstanding at
Comcast Holdings Corporation.
Redemption of Debt
On March 31, 2004, we redeemed all $250 million principal amount of our
8.875% senior notes due 2007. The redemption was financed with available
cash.
ZONES
At maturity, holders of our 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
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
common stock. As of March 31, 2004, the number of Sprint shares we held
exceeded the number of ZONES outstanding.
We separated the accounting for the ZONES into derivative and debt
components. We record the change in the fair value of the derivative
component of the ZONES and the change in the carrying value of the debt
component of the ZONES as follows (in millions):
7
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
ZONES
----------------------------
Three Months Ended
March 31,
2004 2003
------------ ------------
Balance at Beginning of Period:
Debt component..................... $515 $491
Derivative component............... 268 208
------------ ------------
Total........................... 783 699
Change in debt component
to interest expense................ 6 6
Change in derivative component
to investment loss, net............ 169 (1)
Balance at End of Period:
Debt component..................... 521 497
Derivative component............... 437 207
------------ ------------
Total........................... $958 $704
============ ============
Interest Rates
Excluding the derivative component of the ZONES whose changes in fair value
are recorded to investment loss, net, our effective weighted average
interest rate was 7.47% and 7.56% as of March 31, 2004 and December 31,
2003, respectively.
Derivatives
We use derivative financial instruments to manage our exposure to
fluctuations in interest rates and securities prices. We have issued
indexed debt instruments and prepaid forward sale agreements whose value,
in part, is derived from the market value of certain publicly traded common
stock.
Lines and Letters of Credit
As of March 31, 2004, we and certain of our subsidiaries had unused lines
of credit of $287 million under our respective credit facilities.
As of March 31, 2004, we and certain of our subsidiaries had unused
irrevocable standby letters of credit totaling $13 million to cover
potential fundings under various agreements.
5. STOCKHOLDERS' EQUITY
Stock-Based Compensation
We account for stock-based compensation in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related
interpretations, as permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") 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. We record 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. We record 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 that applying the fair value
recognition provisions of SFAS No. 123 to stock-based compensation would
have had on net income. Upon further analysis during 2003, it was
determined that the expected option lives for options granted in prior
years should have been 7 years rather than the 8 years used
8
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
previously. The amounts in the table reflect this revision for all periods
presented. 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 (dollars in millions, except per share
data):
Three Months Ended
March 31,
2004 2003
---------- ----------
Net income, as reported............................... $98 $115
Add: Total stock-based compensation expense
included in net income, as reported above.... 2 1
Deduct: Total stock-based compensation expense
determined under fair value based method
for all awards relating to continuing operations,
net of related tax effects................... (18) (19)
Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards relating to discontinued operations,
net of related tax effects................... (3)
---------- ----------
Pro forma, net income................................. $82 $94
========== ==========
The pro forma effect on net income 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
also because additional awards in future years are anticipated.
Comprehensive Income
Our total comprehensive income for the interim periods was as follows (in
millions):
Three Months Ended
March 31,
2004 2003
--------- ----------
Net income.......................................... $98 $115
Unrealized losses on marketable securities.......... (37)
Reclassification adjustments for losses
included in net income.......................... 8 22
Foreign currency translation gains.................. 6
--------- ----------
Comprehensive income................................ $106 $106
========= ==========
6. STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
We made cash payments for interest and income taxes related to continuing
operations during the interim periods as follows (in millions):
9
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Three Months Ended
March 31,
2004 2003
--------- ----------
Interest............................................ $95 $106
Income taxes........................................ $17 $11
During 2004, we transferred certain assets to Comcast through a non-cash
intercompany transaction in the amount of $43 million.
7. COMMITMENTS AND CONTINGENCIES
Contingencies
At Home
-------
Litigation has been filed against us as a result of our alleged conduct
with respect to our investment in and distribution relationship with At
Home Corporation. At Home was a provider of high-speed Internet services
that filed for bankruptcy protection in September 2001. Filed actions are:
(i) class action lawsuits against us, Brian L. Roberts (our President and
Chief Executive Officer and a director), AT&T (the former controlling
shareholder of At Home and also a former distributor of the At Home
service) and other corporate and individual defendants in the Superior
Court of San Mateo County, California, alleging breaches of fiduciary duty
in connection with transactions agreed to in March 2000 among At Home,
AT&T, Cox Communications, Inc. (Cox is also an investor in At Home and a
former distributor of the At Home service) and us; (ii) class action
lawsuits against Comcast Cable Communications, LLC, AT&T and others in the
United States District Court for the Southern District of New York,
alleging securities law violations and common law fraud in connection with
disclosures made by At Home in 2001; and (iii) a lawsuit brought in the
United States District Court for the District of Delaware in the name of At
Home by certain At Home bondholders against us, Brian L. Roberts, Cox and
others, alleging breaches of fiduciary duty relating to the March 2000
transactions and seeking recovery of alleged short-swing profits of at
least $600 million pursuant to Section 16(b) of the Securities Exchange Act
of 1934 purported to have arisen in connection with certain transactions
relating to At Home stock effected pursuant to the March 2000 agreements.
The actions in San Mateo County, California have been stayed by the United
States Bankruptcy Court for the Northern District of California, the court
in which At Home filed for bankruptcy, as violating the automatic
bankruptcy stay. In the Southern District of New York actions, the court
ordered the actions consolidated into a single action. All of the
defendants served motions to dismiss on February 11, 2003. The court
dismissed the common law claims against us and Mr. Roberts, leaving only a
claim for "control person" liability under the Securities Exchange Act of
1934. In a subsequent decision, the court limited the remaining claim
against us and Mr. Roberts to disclosures that are alleged to have been
made by At Home prior to August 28, 2000. The Delaware case has been
transferred to the United States District Court for the Southern District
of New York, and we have moved to dismiss the Section 16(b) claims.
We deny any wrongdoing in connection with the claims that have been made
directly against us, our subsidiaries and Brian L. Roberts, and intend to
defend all of these claims vigorously. In our opinion, the final
disposition of these claims is not expected to have a material adverse
effect on our consolidated financial position, but could possibly be
material to our consolidated results of operations of any one period.
Further, no assurance can be given that any adverse outcome would not be
material to our consolidated financial position.
Other
-----
We are subject to other legal proceedings and claims that arise in the
ordinary course of our business. In our opinion, the amount of ultimate
liability with respect to such actions is not expected to materially affect
our financial position, results of operations or liquidity.
10
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
8. FINANCIAL DATA BY BUSINESS SEGMENT
Our reportable segments consist of our Cable and Content businesses.
Beginning in the first quarter of 2004, although they do not meet the
quantitative disclosure requirements of SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," we have elected to
separately disclose our content businesses as a reportable segment. Our
content segment consists of our national networks E! Entertainment, Style
Network, The Golf Channel, Outdoor Life Network and G4. As a result of this
change, we have presented the comparable 2003 Content segment amounts. In
evaluating our segments' profitability, the components of net income (loss)
below operating income (loss) before depreciation and amortization are not
separately evaluated by our management (in millions).
Corporate
and
Cable (1) Content Other (2) Total
Three Months Ended March 31, 2004
---------------------------------
Revenues (3).................................. $1,819 $176 $94 $2,089
Operating income (loss) before depreciation
and amortization (4).......................... 739 69 (58) 750
Depreciation and amortization................. 329 35 16 380
Operating income (loss)....................... 410 34 (74) 370
Capital expenditures.......................... 261 4 10 275
Three Months Ended March 31, 2003
---------------------------------
Revenues (3).................................. $1,645 $145 $91 $1,881
Operating income (loss) before depreciation
and amortization (4).......................... 675 41 (34) 682
Depreciation and amortization................. 299 32 19 350
Operating income (loss)....................... 376 9 (53) 332
Capital expenditures.......................... 335 3 3 341
As of March 31, 2004
--------------------
Assets........................................ $35,379 $2,067 $3,245 $40,691
As of December 31, 2003
-----------------------
Assets........................................ $34,952 $2,110 $3,340 $40,402
---------------
(1) Our regional programming networks Comcast SportsNet, Comcast SportsNet
Mid-Atlantic, Comcast SportsNet Chicago, Cable Sports Southeast and
CN8-The Comcast Network are included in our cable segment.
(2) Corporate and other includes corporate activities, elimination entries
and all other businesses not presented in our cable or content
segments. Assets included in this caption consist primarily of our
investments (see Note 3).
(3) Non-US revenues were not significant in any period. No single customer
accounted for a significant amount of our revenue in any period.
(4) Operating income (loss) before depreciation and amortization is
defined as operating income before depreciation and amortization,
impairment charges, if any, related to fixed and intangible assets and
gains or losses from the sale of assets, if any. 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. This measure
should not be considered as a substitute for operating
11
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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.
9. RELATED PARTY TRANSACTIONS
Our content businesses generate a portion of their revenues through the
sale of subscriber services under affiliation agreements with cable
subsidiaries of Comcast. These amounts, which are included in service
revenues in our consolidated statement of operations, totaled $9 million
for each of the three months ended March 31, 2004 and 2003. Amounts related
to similar affiliation agreements between our content businesses and our
wholly owned subsidiaries are eliminated in our consolidated financial
statements.
Comcast has entered into management agreements with our 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 our consolidated
statement of operations, totaled $39 million and $37 million for the three
months ended March 31, 2004 and 2003, respectively.
We reimburse Comcast for certain cable-related costs under a cost sharing
agreement. These charges, which are included in selling, general and
administrative expenses in our consolidated statement of operations,
totaled $53 million and $33 million for the three months ended March 31,
2004 and 2003, respectively.
We purchase certain other services 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 our
consolidated statement of operations, totaled $48 million and $38 million
for the three months ended March 31, 2004 and 2003, respectively.
Comcast Financial Agency Corporation ("CFAC"), an indirect wholly owned
subsidiary of ours, provides cash management services to Comcast and to
certain cable subsidiaries of Comcast. Under this arrangement, Comcast's
and these subsidiaries' cash receipts are deposited with and held by CFAC,
as custodian and agent, which invests and disburses such funds at our
direction. Interest income related to this cash was not significant during
the 2004 or 2003 interim periods.
With the exception of cash payments related to interest and income taxes,
we consider all of our transactions with Comcast or its affiliates to be
financing transactions, which are presented as net transactions with
affiliates in our consolidated statement of cash flows. Our significant
financing transactions with Comcast and its affiliates are described below.
As of March 31, 2004 and December 31, 2003, due from affiliates in our
consolidated balance sheet primarily consists of amounts due from Comcast
and from certain cable subsidiaries of Comcast for advances we made for
working capital and capital expenditures in the ordinary course of
business.
As of March 31, 2004 and December 31, 2003, notes receivable from affiliate
consists of an aggregate of $3.766 billion and $3.284 billion principal
amount, respectively, of notes receivable from Comcast. The notes
receivable bear interest at rates ranging from 5.0% to 7.5% and are due
between 2012 and 2013. As of March 31, 2004 and December 31, 2003, notes
receivable from affiliate includes $32 million and $26 million,
respectively, of interest receivable related to the notes.
As of March 31, 2004 and December 31, 2003, notes payable to affiliates
consists of an aggregate of $228 million and $58 million principal amount,
respectively, of notes payable to Comcast and certain cable subsidiaries of
Comcast. The notes payable bear interest at rates ranging from 5.0% to 7.5%
and are due between
12
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED
(Unaudited)
2012 and 2013. As of March 31, 2004 and December 31, 2003, notes payable to
affiliates includes $6 million and $3 million, respectively, of interest
payable related to the notes.
QVC, a discontinued operation, has an affiliation agreement with certain
cable subsidiaries of Comcast to carry QVC's programming. In return for
carrying QVC programming, QVC pays these Comcast subsidiaries an allocated
portion, based upon market share, of a percentage of net sales of
merchandise sold to QVC customers located in their service areas. These
amounts, which are included in income from discontinued operations in our
consolidated statement of operations, totaled $4 million during the three
months ended March 31, 2003. Amounts related to a similar affiliation
agreement between QVC and our wholly owned subsidiaries, which are included
in service revenues and income from discontinued operations in our
consolidated statement of operations, totaled $6 million during the three
months ended March 31, 2003.
13
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
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.
Overview
We are an indirect wholly owned subsidiary of Comcast Corporation
("Comcast"). We are principally involved in the management and operation of
broadband communications networks (our cable segment) and in the management of
programming content over cable and satellite television networks (our content
segment). During the first quarter of 2004, we received over 87% of our revenue
from our cable segment, primarily through monthly subscriptions to our video,
high-speed Internet and phone services, as well as from advertising. Subscribers
typically pay us monthly, based on rates and related charges that vary according
to their chosen level of service and the type of equipment they use. Revenue
from our content segment is derived from the sale of advertising time and
affiliation agreements with cable and satellite television companies.
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.
Business Developments
There were no significant acquisitions or events since those reported in
our December 31, 2003 Annual Report on Form 10-K.
Results of Continuing Operations
Revenues
Consolidated revenues for the first quarter of 2004 increased $208 million
from the same quarter in 2003. Of this increase, $174 million relates to our
cable segment, which is discussed separately below. The remaining increase is
primarily the result of our content segment, which achieved combined revenue
growth of 21.7% during the first quarter of 2004 compared to the same quarter in
2003. This increase in our content segment was the result of increases in
distribution revenues and in advertising revenue.
Operating, selling, general and administrative expenses
Consolidated operating, selling, general and administrative expenses for
the first quarter of 2004 increased $140 million from the same quarter in 2003.
Of this increase, $110 million relates to our cable segment, which is discussed
separately below. The remaining increase is primarily the result of increases in
corporate expenses.
Depreciation
Depreciation expense increased $29 million for the first quarter of 2004
compared to the same quarter in 2003, primarily relating to our cable segment.
This increase is principally due to our recent capital expenditures.
Amortization
Amortization expense increased $1 million for the first quarter of 2004
compared to the same quarter in 2003, remaining stable primarily due to a
reduction in acquisition activity.
14
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
Cable Segment Operating Results
The following table presents our cable segment operating results (dollars
in millions):
Three Months Ended
March 31, Increase
2004 2003 $ %
---------- ---------- ---------- ----------
Video....................................................... $1,300 $1,230 $70 5.7%
High-speed Internet......................................... 287 204 83 40.7
Advertising sales........................................... 105 92 13 14.1
Other....................................................... 71 68 3 4.4
Franchise fees.............................................. 56 51 5 9.8
---------- ---------- ---------- ----------
Revenues................................................ 1,819 1,645 174 10.6
Operating, selling, general and administrative expenses...... 1,080 970 110 11.3
---------- ---------- ---------- ----------
Operating income before depreciation
and amortization (a).................................... $739 $675 $64 9.5%
========== ========== ========== ==========
- ---------------
(a) Operating income before depreciation and amortization is defined as
operating income before depreciation and amortization, impairment charges,
if any, related to fixed and intangible assets and gains or losses from the
sale of assets, if any. 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 operating income before
depreciation and amortization 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.
Revenues
Video revenue consists of our basic, expanded basic, premium, pay-per-view,
equipment and digital cable services. The increase in video revenue for the
interim period from 2003 to 2004 is primarily due to the effects of rate
increases in our traditional video service and growth in digital subscribers.
From March 31, 2003 to March 31, 2004, we added approximately 432,000 digital
subscribers, or an 18.6% increase in digital subscribers. We expect continued
growth in our video services revenue.
The increase in high-speed Internet revenue for the interim period from
2003 to 2004 is primarily due to the addition of approximately 651,000
high-speed Internet subscribers from March 31, 2003 to March 31, 2004, or a
37.9% increase in high-speed Internet subscribers. We expect continued
high-speed Internet revenue growth as overall demand for our services continues
to increase.
The increase in advertising sales revenue for the interim period from 2003
to 2004 is primarily due to the effects of growth in regional/national
advertising as a result of the continuing success of our regional interconnects
and a stronger local advertising market.
Other revenue includes installation revenues, guide revenues, commissions
from electronic retailing, revenue from our regional programming networks,
commercial data revenue, revenue from other product offerings and phone
revenues.
The increase in franchise fees collected from our cable subscribers for the
interim period from 2003 to 2004 is primarily attributable to the increase in
our revenues upon which the fees apply.
15
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
Expenses
Total operating, selling, general and administrative expenses increased for
the interim period from 2003 to 2004 primarily as a result of increases in the
costs of cable programming, increases in labor and other volume related expenses
associated with the growth in our high-speed Internet and digital cable services
and an increase in management fees.
------------------------------------
Consolidated Income (Expense) Items
Interest Expense
The change in interest expense for the interim period from 2003 to 2004 is
due to our decreased amount of debt outstanding as a result of our debt
reduction during 2003.
Interest Income (Expense) on Affiliate Notes, Net
The change in interest income (expense) on affiliate notes, net for the
interim period from 2003 to 2004 is due to an increase in our notes receivable
from affiliate during 2003.
Investment Loss, Net
Investment loss, net for the interim periods includes the following (in
millions):
Three Months Ended
March 31,
2004 2003
---------- ----------
Interest and dividend income (expense)........................ ($6) $4
Gains on sales and exchanges of investments, net.............. 22
Investment impairment losses.................................. (55)
Mark to market adjustments on trading securities.............. (17) (2)
Mark to market adjustments on derivatives
related to trading securities............................ (41) 3
Mark to market adjustments on derivatives and hedged items.... 12 (2)
---------- ----------
Investment loss, net.................................... ($52) ($30)
========== ==========
We have entered into derivative financial instruments that we account for
at fair value and which economically hedge the market 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 in 2004
of the mark to market adjustment on approximately 116 million shares of our
Liberty common shares discussed below, was substantially offset by the changes
in the fair value of the related derivatives.
We are exposed to changes in the fair value of approximately 116 million
shares of Liberty common stock we hold and account for as a trading security as
we have not entered into a corresponding derivative to hedge this market
exposure. Accordingly, our investment income (loss) is affected by fluctuations
in the fair value of the Liberty common stock. Investment loss, net for the
first quarter of 2004 includes a loss of $110 million related to this financial
instrument.
Income Tax Expense
The change in income tax expense for the interim period from 2003 to 2004
is primarily the result of the effects of changes in our income before taxes and
minority interest.
Minority Interest
The change in minority interest for the interim period from 2003 to 2004 is
attributable to the effects of changes in the net income or loss of our less
than wholly owned consolidated subsidiaries.
We believe that our operations are not materially affected by inflation.
16
COMCAST HOLDINGS CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to the information required under
this Item from what was disclosed in our 2003 Form 10-K.
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 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 are reasonably likely to materially affect,
our internal control over financial reporting.
PART II. OTHER INFORMATION
- ------- -----------------
ITEM 1. LEGAL PROCEEDINGS
Refer to Note 7 to our condensed financial statements included in Item 1
of this Quarterly Report on Form 10-Q 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.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMCAST HOLDINGS CORPORATION
----------------------------------
/S/ LAWRENCE J. SALVA
----------------------------------
Lawrence J. Salva
Senior Vice President and Controller
(Principal Accounting Officer)
Date: May 14, 2004
18