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FORM 10-K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ___________ TO ____________
Commission file number 0-6983
[GRAPHIC OMITTED - LOGO]
COMCAST CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1709202
(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer 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
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Class A Common Stock, $1.00 par value
Class A Special Common Stock, $1.00 par value
3-3/8% / 5-1/2% Step-up Convertible Subordinated
Debentures Due 2005
1-1/8% Discount Convertible Subordinated Debentures Due 2007
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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 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------------------------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
--------------------------
As of February 1, 1996, the aggregate market value of the Class A Common Stock
and Class A Special Common Stock held by non-affiliates of the Registrant was
not less than $688.6 million and $3.781 billion, respectively.
--------------------------
As of February 1, 1996, there were 193,169,033 shares of Class A Special Common
Stock, 37,497,885 shares of Class A Common Stock and 8,786,250 shares of Class B
Common Stock outstanding.
--------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Part III - The Registrant's definitive Proxy Statement for its Annual Meeting of
Shareholders presently scheduled to be held in June 1996.
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COMCAST CORPORATION
1995 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1 Business............................................................1
Item 2 Properties.........................................................22
Item 3 Legal Proceedings..................................................22
Item 4 Submission of Matters to a Vote of Security Holders................22
Item 4A Executive Officers of the Registrant...............................22
PART II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters....................................24
Item 6 Selected Financial Data............................................25
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations..................26
Item 8 Financial Statements and Supplementary Data........................37
Item 9 Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.............62
PART III
Item 10 Directors and Executive Officers of the Registrant.................62
Item 11 Executive Compensation.............................................62
Item 12 Security Ownership of Certain Beneficial
Owners and Management..........................................62
Item 13 Certain Relationships and Related Transactions.....................62
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K....................................................63
SIGNATURES ..................................................................71
___________________________
This Annual Report on Form 10-K for the year ended December 31, 1995, at the
time of filing with the Securities and Exchange Commission, modifies and
supersedes all prior documents (other than the Company's Current Report on Form
8-K filed on December 19, 1995) filed pursuant to Sections 13, 14 and 15(d) of
the Securities Exchange Act of 1934 for purposes of any offers or sales of any
securities after the date of such filing pursuant to any Registration Statement
or Prospectus filed pursuant to the Securities Act of 1933 which incorporates by
reference this Annual Report.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Annual
Report is forward looking, such as information relating to future capital
expenditures and the effects of future regulation and competition. Such forward
looking information involves important risks and uncertainties that could
significantly affect expected results in the future from those expressed in any
forward-looking statements made by, or on behalf of, the Company. These risks
and uncertainties include, but are not limited to, uncertainties relating to
economic conditions, acquisitions and divestitures, government and regulatory
policies, the pricing and availability of equipment, materials, inventories and
programming, technological developments and changes in the competitive
environment in which the Company operates.
PART I
ITEM 1 BUSINESS
Comcast Corporation and its subsidiaries (the "Company") is principally engaged
in the development, management and operation of wired and wireless
telecommunications and the provision of content. Wired telecommunications
includes cable and telecommunications services in the United States ("US") and
the United Kingdom ("UK"). Wireless telecommunications includes cellular
services, personal communications services, provided through the Company's
investment in Sprint Spectrum, and direct to home satellite television. Content
is provided through QVC, Inc. and its subsidiaries ("QVC"), an electronic
retailer, Comcast Content and Communication Corporation ("C3") and other
programming investments (see "General Developments of Business"). The Company's
consolidated domestic cable operations served more than 3.4 million subscribers
and passed more than 5.5 million homes as of December 31, 1995. The Company owns
a 50% interest in Garden State Cablevision L.P. ("Garden State"), a cable
communications company serving approximately 200,000 subscribers and passing
approximately 292,000 homes. In the UK, a subsidiary of the Company, Comcast UK
Cable Partners Limited ("Comcast UK Cable"), holds ownership interests in four
cable and telephony businesses that collectively have the potential to serve
over 1.6 million homes. The Company provides cellular telephone communications
services pursuant to licenses granted by the Federal Communications Commission
("FCC") in markets with a population of over 8.3 million, including the area in
and around the City of Philadelphia, Pennsylvania, the State of Delaware and a
significant portion of the State of New Jersey. Through QVC, the Company markets
a wide variety of products and reaches over 52 million homes across the US and
an additional 4 million in the UK.
The Company was organized in 1969 under the laws of the Commonwealth of
Pennsylvania and has its principal executive offices at 1500 Market Street,
Philadelphia, Pennsylvania, 19102-2148, (215) 665-1700.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See Note 11 to the Company's consolidated financial statements for information
about the Company's operations by industry segment.
GENERAL DEVELOPMENTS OF BUSINESS
Regulatory Developments
The Telecommunications Act of 1996 (the "1996 Telecom Act"), the most
comprehensive reform of the nation's telecommunications laws since the
Communications Act of 1934 (the "Communications Act"), became effective in
February 1996. The 1996 Telecom Act will result in changes in the marketplace
for cable communications, telephone and other telecommunications services (see
"Description of the Company's Businesses - Wired Telecommunications - Cable
Communications - Legislation and Regulation").
The Company has settled the majority of outstanding proceedings challenging its
rates charged for regulated cable services. In December 1995, the FCC adopted an
order approving a negotiated settlement of rate complaints pending against the
Company for cable programming service tiers ("CPSTs") which provided
approximately $6.6 million in refunds, plus interest, being given in the form of
bill credits, to approximately 1.3 million of the Company's cable subscribers.
This FCC order resolved 160 of the Company's benchmark rate cases covering the
period September 1993 through July 1994 and 104 of the Company's cost-of-service
cases for CPSTs covering the period September 1993 through December 1995. As
part of the negotiated settlement, the Company agreed to forego certain
inflation and external cost adjustments for systems covered by its
cost-of-service filings for CPSTs. The FCC's order has been appealed to a
federal appellate court by a local franchising authority whose rate complaint
against the Company was resolved by the negotiated settlement. The Company
currently is seeking to justify rates for basic cable services and equipment in
certain of its cable systems in the State of Connecticut on the basis of a
cost-of-service showing. The State of Connecticut has ordered the Company to
reduce such rates and to make refunds to subscribers. The Company has appealed
the Connecticut decision to the FCC. The Company's management believes that the
ultimate resolution of these pending regulatory matters will not have a material
adverse impact on the Company's financial position or results of operations.
Sprint Spectrum
Effective as of January 1996, the Company, Tele-Communications, Inc. ("TCI"),
Cox Communications, Inc. ("Cox," and together with the Company and TCI, the
"Cable Parents") and Sprint Corporation ("Sprint," and together with the Cable
Parents, the "Parents"), and certain subsidiaries of the Parents (the "Partner
Subsidiaries"), entered into a series of agreements relating to their previously
announced joint venture (March 1995) to engage in the communications business.
Under an Amended and Restated Agreement of Limited Partnership (the "Partnership
Agreement") of MajorCo, L.P. (known as "Sprint Spectrum"), the business of
Sprint Spectrum will be the provision of wireless telecommunications services
and will not include the previously authorized business of providing local
wireline communications services to residences and businesses. A partnership
owned entirely by subsidiaries of the Company owns 15% of Sprint Spectrum. The
Company accounts for its investment in Sprint Spectrum under the equity method.
Sprint Spectrum was the successful bidder for 29 personal communications
services ("PCS") licenses in the auction conducted by the FCC from December 1994
through mid-March 1995. The purchase price for the licenses was approximately
$2.11 billion, all of which has been paid to the FCC. Sprint Spectrum may also
elect to bid in subsequent auctions for PCS licenses. In addition, Sprint
Spectrum has invested, and may continue to invest, in other entities that hold
PCS licenses, may acquire PCS licenses from other license holders and may
affiliate with other license holders.
The Partner Subsidiaries have committed to contribute $4.2 billion in cash to
Sprint Spectrum through 1997, of which the Company's share is $630.0 million. Of
this funding requirement, the Company has made total cash capital contributions
to Sprint Spectrum of $346.0 million through December 31, 1995. The Company
anticipates that Sprint Spectrum's capital requirements over the next several
years will be significant. Requirements in excess of committed capital are
planned to be funded by Sprint Spectrum through external financing. Although it
is anticipated that external financing will be available to Sprint Spectrum on
acceptable terms and conditions, no assurances can be given as to such
availability. The timing of the Company's remaining capital contributions to
Sprint Spectrum is dependent upon a number of factors, including Sprint
Spectrum's ability to obtain external financing as well as its working capital
requirements.
Pursuant to separate Parent agreements, each Cable Parent and Sprint agreed to
negotiate in good faith on a market- by-market basis for the provision of local
wireline telephony services over the cable communications facilities of the
applicable Cable Parent under the Sprint brand. Accordingly, local telephony
offerings in each market will be the subject of individual agreements to be
negotiated with Sprint, rather than being provided through Sprint Spectrum as
originally contemplated. The offering of local wireline telephone services will
require the removal of regulatory and legislative barriers to local telephone
competition (see "Description of the Company's Businesses - Wired
Telecommunications - Cable Communications - Legislation and Regulation"). Each
Parent agreement also contains certain restrictions on the ability of each
Parent to offer and promote, or package certain of its cable communications
products or services with, certain products and services of other persons and
requires the applicable Cable Parent to make its cable communications facilities
available to Sprint for specified purposes to the extent that it has made such
facilities available to certain others for such purposes.
The Partner Subsidiaries also terminated a contribution agreement pursuant to
which they had agreed to contribute to Sprint Spectrum their respective
interests in Teleport Communications Group Inc., TCG Partners and certain local
joint ventures managed by such entities (collectively, "TCG"). TCG is one of the
largest competitive access providers in the US in terms of route miles. The
Parents reaffirmed their intention to continue to attempt to integrate the
business of TCG with that of Sprint Spectrum.
Scripps Cable
In October 1995, the Company announced its agreement to purchase the cable
television operations ("Scripps Cable") of The E.W. Scripps Company ("E.W.
Scripps") in exchange for shares of the Company's Class A Special Common Stock,
par value $1.00 per share (the "Class A Special Common Stock" -- see Item 5 -
"Market for the Registrant's Common Equity and Related Stockholder Matters"),
worth $1.575 billion (the "Base Consideration"), subject to certain closing
adjustments (the "Scripps Transaction"). Scripps Cable passes approximately 1.2
million homes and serves approximately 800,000 subscribers, with over 60% of its
subscribers located in Sacramento, California and
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Chattanooga and Knoxville, Tennessee. The purchase is expected to close in the
second half of 1996, subject to shareholder and regulatory approval and certain
other conditions.
Pursuant to the Agreement and Plan of Merger dated as of October 28, 1995 (the
"Merger Agreement") by and among the Company, E.W. Scripps and Scripps Howard,
Inc., a wholly owned subsidiary of E.W. Scripps, E.W. Scripps will distribute to
its shareholders all assets other than Scripps Cable. Following such
distribution, E.W. Scripps will be merged with and into the Company (the
"Merger") and each share of E.W. Scripps common stock issued and outstanding
immediately prior to the Merger will be converted into a portion of the shares
of the Class A Special Common Stock to be paid as consideration in the Merger.
Assuming (i) no adjustment has been made to the Base Consideration and (ii) the
closing price of the Class A Special Common Stock is equal to the execution
price ($20.075 per share), as such terms are defined in the Merger Agreement,
the Company would issue to E.W. Scripps' shareholders an aggregate of
approximately 78.5 million shares of Class A Special Common Stock in the Merger,
subject to certain adjustments. Such shares would represent, in the aggregate,
approximately 28.9% of the Class A Special Common Stock outstanding as of
December 31, 1995, on a pro forma basis.
Share Repurchase Program
Concurrent with the announcement of the Scripps Transaction, the Company
announced that its Board of Directors has authorized the repurchase of up to
$500.0 million of its outstanding common equity securities. The Company expects
such repurchases to be effected from time to time in the open market or in
private transactions, subject to market conditions.
QVC
In February 1995, the Company and TCI acquired all of the outstanding stock of
QVC not previously owned by them (approximately 65% of such shares on a fully
diluted basis) for $46, in cash, per share (the "QVC Acquisition"), representing
a total cost of approximately $1.4 billion. The QVC Acquisition, including the
exercise of certain warrants held by the Company, was financed with cash
contributions from the Company and TCI of $296.3 million and $6.6 million,
respectively, borrowings of $1.1 billion under a $1.2 billion QVC credit
facility and existing cash and cash equivalents held by QVC. Following the
acquisition, the Company and TCI own, through their respective subsidiaries,
57.45% and 42.55%, respectively, of QVC. The Company, through a management
agreement, is responsible for the day to day operations of QVC. The Company has
accounted for the QVC Acquisition under the purchase method of accounting and
QVC was consolidated with the Company effective February 1, 1995.
DESCRIPTION OF THE COMPANY'S BUSINESSES
WIRED TELECOMMUNICATIONS
Wired telecommunications consists primarily of the Company's domestic cable
communications operations. The Company's other wired telecommunications
businesses include its UK cable and telecommunications operations, along with
the Company's interests in alternate access providers, such as TCG (see "General
Developments of Business" - "Sprint Spectrum").
Cable Communications
General
A cable communications system receives signals by means of special antennae,
microwave relay systems, earth stations and fiber optics. The system amplifies
such signals, provides locally originated programs and ancillary services and
distributes programs to subscribers through a fiber optic and coaxial cable
system.
Cable communications systems generally offer subscribers the signals of all
national television networks; local and distant independent, specialty and
educational television stations; satellite-delivered non-broadcast channels;
locally originated programs; educational programs; audio programming; video
games; electronic retailing and public service announcements. In addition, each
of the Company's systems offer, for an extra monthly charge, one or more premium
services ("Pay Cable") such as Home Box Office(R), Cinemax(R), Showtime(R), The
Movie Channel(TM),
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Encore(R) and The (C)Disney Channel, which generally offer, without commercial
interruption, feature motion pictures, live and taped sporting events, concerts
and other special features. Substantially all of the Company's systems offer
pay-per-view services, which permit a subscriber to order, for a separate fee,
individual feature motion pictures and special event programs. The Company is
field testing non-entertainment services such as cable modem, data transfer and
other personal computer ("PC") based services ("Non-entertainment Services").
Cable communications systems are generally constructed and operated under
non-exclusive franchises granted by state or local governmental authorities.
Franchises typically contain many conditions, such as time limitations on
commencement or completion of construction; conditions of service, including
number of channels, types of programming and provision of free services to
schools and other public institutions; and the maintenance of insurance and
indemnity bonds. Cable franchises are subject to the Cable Communications Policy
Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act," and together with the 1984 Cable
Act, the "Cable Acts") and the 1996 Telecom Act (see "Legislation and
Regulation"), as well as FCC, state and local regulations.
The Company's franchises typically provide for periodic payments to the
governmental authority of franchise fees of up to 5% of revenues derived from
cable operations. Franchises are generally nontransferable without the consent
of the governmental authority. Many of the Company's franchises were granted for
an initial term of 15 years. Although franchises historically have been renewed
and, under the Cable Acts, should continue to be renewed for companies that have
provided adequate service and have complied generally with franchise terms,
renewal may be more difficult as a result of the 1992 Cable Act and may include
less favorable terms and conditions. Furthermore, the governmental authority may
choose to award additional franchises to competing companies at any time (see
"Competition" and "Legislation and Regulation"). In addition, under the 1996
Telecom Act certain providers of programming services may be exempt from local
franchising requirements.
Company's Systems
The table below sets forth a summary of Homes Passed and Cable Subscriber
information for the Company's domestic cable communications systems for the five
years ended December 31, 1995:
December 31,
1995 (5) 1994 (5) 1993 1992 (4) 1991 (4)
-------- -------- ---- -------- --------
(In thousands)
Homes Passed (1)(3) 5,570 5,491 4,211 4,154 4,218
Cable Subscribers (2)(3) 3,407 3,307 2,648 2,583 2,474
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(1) A home is deemed "passed" if it can be connected to the distribution system
without further extension of the transmission lines.
(2) A dwelling with one or more television sets connected to a system is
counted as one Cable Subscriber.
(3) Consists of systems whose financial results are consolidated with those of
the Company. Amounts do not include information for the Company's
investment in Garden State or in other systems managed by the Company in
which the Company has less than a 50% interest. As of December 31, 1995,
total Homes Passed and Cable Subscribers for such entities were 327,000 and
223,000, respectively.
(4) Includes 50% of the Homes Passed and Cable Subscribers of Storer
Communications, Inc. ("Storer") in 1991. Homes Passed decreased in 1992 due
to the difference between 50% of the total of Storer's Homes Passed for
1991 and those Homes Passed received in the December 1992 split up of
Storer between the Company and Storer's other 50% owner.
(5) Includes the consolidated systems acquired in the Company's 1994 purchase
of the US cable television and alternative access operations of Maclean
Hunter Limited.
Revenue Sources
The Company's cable communications systems offer varying levels of service,
depending primarily on their respective channel capacities. As of December 31,
1995, a majority of the Company's systems had the capacity to carry in excess of
50 channels.
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Monthly service rates and related charges vary in accordance with the type of
service selected by the subscriber. The Company may receive an additional
monthly fee for Pay Cable service, the charge for which varies with the type and
level of service selected by the subscriber. Additional charges are often
imposed for installation services, commercial subscribers, program guides and
other services. The Company also generates revenue from pay-per-view services,
advertising sales and commissions from electronic retailing. Subscribers
typically pay on a monthly basis and generally may discontinue services at any
time (see "Legislation and Regulation").
Programming and Suppliers
The Company generally pays either a monthly fee per subscriber or a percentage
of the Company's gross receipts for programming. Some of the programming
suppliers provide volume discount pricing structures and/or offer marketing
support to the Company.
National manufacturers are the primary sources of supplies, equipment and
materials utilized in the construction and upgrading of the Company's cable
communications systems. Construction, rebuild and upgrade costs for these
systems have increased during recent years and are expected to continue to
increase as a result of the need to construct increasingly complex systems,
overall demand for labor and other factors. The Company is unable to predict
whether increases in such costs will have a material impact on its operations.
UK Activities
The Company beneficially owns a 31.2% equity interest and controls 81.9% of the
total voting power of Comcast UK Cable. Comcast UK Cable is consolidated with
the Company. As of December 31, 1995, Comcast UK Cable has equity interests in
four operating companies (the "UK Operating Companies"): Birmingham Cable
Corporation Limited ("Birmingham Cable"), in which Comcast UK Cable owns a 27.5%
interest, Cable London PLC ("Cable London"), in which Comcast UK Cable owns a
49.0% interest, Cambridge Holding Company Limited ("Cambridge Cable"), in which
Comcast UK Cable owns a 50.0% interest and a 100% interest in the franchises for
Darlington and Teesside, England ("Teesside"). The UK Operating Companies hold
exclusive cable television licenses and non-exclusive telecommunications
licenses and provide integrated cable television, residential telephony and
business telecommunications services to subscribers in their respective
franchise areas.
In December 1995, Comcast UK Cable and the parent company of Singapore
Telecommunications Limited ("SingTel") executed a Share Exchange Agreement
relating to the exchange (the "SingTel Transaction") by SingTel of its 50%
interest in Cambridge Cable and certain loans made to Cambridge Cable for
approximately 8.9 million of Comcast UK Cable's Class A Common Shares and
(pound)3.7 million, subject to certain closing adjustments. If the SingTel
Transaction is consummated, which is anticipated to occur in the first half of
1996, Comcast UK Cable would begin consolidating the financial position and
results of operations of Cambridge Cable. Upon consummation of the SingTel
Transaction, the Company will beneficially own a 25.7% equity interest in and
control 77.6% of the total voting power of Comcast UK Cable. Consummation of the
SingTel Transaction is subject to a number of conditions, including the receipt
of necessary regulatory approvals.
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UK Operating Companies' Systems
The table below sets forth Homes Passed, Cable Subscriber and Telephony
Subscriber information for the UK Operating Companies' cable communications
systems for the five years ended December 31, 1995.
December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands)
Homes Passed (1) (2)
Birmingham Cable 292 227 156 104 39
Cable London 246 171 121 78 49
Cambridge Cable 151 115 75 36 5
Teesside 40
Cable Subscribers (2) (3)
Birmingham Cable 88 73 55 35 12
Cable London 52 42 30 20 9
Cambridge Cable 36 30 16 6 1
Teesside 14
Telephony Subscribers (2) (4)
Birmingham Cable 83 59 36 23 3
Cable London 41 32 18 12 3
Cambridge Cable 44 34 12
Teesside 20
(1) A home is deemed "passed" if it can be connected to the distribution system
without further extension of the transmission lines.
(2) Homes Passed, Cable Subscribers and Telephony Subscribers have not been
adjusted for the Company's proportionate ownership interests in the
respective UK Operating Companies.
(3) A dwelling with one or more television sets connected to a system is
counted as one Cable Subscriber.
(4) A dwelling with one or more telephone lines connected to a system is
counted as one Telephony Subscriber.
Teesside commenced construction of a cable telecommunications network to serve
its franchises in the third quarter of 1994 and added its initial cable and
telephony subscribers in June 1995. When build-out of the UK Operating
Companies' systems is complete, these systems will have the potential to serve
approximately 1.6 million homes and the businesses within their franchise areas.
Based on its December 31, 1995 proportionate ownership interests in the UK
Operating Companies, Comcast UK Cable's interests represent the potential to
serve approximately 835,000 homes.
Competition
Cable communications systems face competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment such as off-air television broadcast programming,
newspapers, movie theaters, live sporting events, interactive computer services
and home video products, including videotape cassette recorders. The extent to
which a cable communications system is competitive depends, in part, upon the
cable system's ability to provide, at a reasonable price to consumers, a greater
variety of programming and other communications services than are available
off-air or through other alternative delivery sources (see "Legislation and
Regulation") and upon superior technical performance and customer service.
The 1996 Telecom Act will make it easier for local exchange telephone companies
("LECs") and others to provide a wide variety of video services competitive with
services provided by cable systems and to provide cable services directly to
subscribers (see "Legislation and Regulation"). Various LECs currently are
seeking to provide video services within their telephone service areas through a
variety of distribution methods. Cable systems could be placed at a competitive
disadvantage if the delivery of video services by LECs becomes widespread since
LECs may not be required, under certain circumstances, to obtain local
franchises to deliver such video services or to comply with the variety of
obligations imposed upon cable systems under such franchises (see "Legislation
and Regulation"). Issues of cross-subsidization by LECs of video and telephony
services also pose strategic disadvantages for cable
- 6 -
operators seeking to compete with LECs who provide video services. The Company
cannot predict at this time the likelihood of success of video service ventures
by LECs or the impact on the Company of such competitive ventures.
Cable communications systems generally operate pursuant to franchises granted on
a non-exclusive basis. The 1992 Cable Act gives local franchising authorities
jurisdiction over basic cable service rates and equipment in the absence of
"effective competition," prohibits franchising authorities from unreasonably
denying requests for additional franchises and permits franchising authorities
to operate cable systems (see "Legislation and Regulation"). Well- financed
businesses from outside the cable industry (such as the public utilities that
own certain of the poles on which cable is attached) may become competitors for
franchises or providers of competing services (see "Legislation and Regulation -
The 1996 Telecom Act"). The costs of operating a cable system where a competing
service exists will be substantially greater than if there were no competition
present. Competition exists in several of the Company's systems. In addition,
LECs in various states have announced plans to compete with various of the
Company's cable communications systems.
Cable operators face additional competition from private satellite master
antenna television ("SMATV") systems that serve condominiums, apartment and
office complexes and private residential developments. The operators of these
SMATV systems often enter into exclusive agreements with building owners or
homeowners' associations. While the 1984 Cable Act gives a franchised cable
operator the right to use existing compatible easements within its franchise
area on nondiscriminatory terms and conditions, there have been conflicting
judicial decisions interpreting the scope of the access right granted to serve
such private property. Various states have enacted laws to provide franchised
cable systems access to such private complexes. These laws have been challenged
in the courts with varying results. Due to the widespread availability of
reasonably priced earth stations, SMATV systems now can offer both improved
reception of local television stations and many of the same satellite-delivered
program services offered by franchised cable systems. The ability of the Company
to compete for subscribers in residential and commercial developments served by
SMATV operators is uncertain. The 1996 Telecom Act gives cable operators greater
flexibility with respect to pricing of cable communications services provided to
subscribers in residential and commercial developments. It also broadens the
definition of SMATV systems not subject to regulation as a franchised cable
communications service.
The availability of reasonably-priced home satellite dish earth stations
("HSDs") enables individual households to receive many of the
satellite-delivered program services formerly available only to cable
subscribers. Furthermore, the 1992 Cable Act contains provisions, which the FCC
has implemented with regulations, to enhance the ability of cable competitors to
purchase and make available to HSD owners certain satellite-delivered cable
programming at competitive costs.
In recent years, the FCC and the Congress have adopted policies providing a more
favorable operating environment for new and existing technologies that provide,
or have the potential to provide, substantial competition to cable systems.
These technologies include, among others, the direct broadcast satellite ("DBS")
service whereby signals are transmitted by satellite to receiving facilities
located on the premises of subscribers. Programming is currently available to
the owners of HSDs through conventional, medium and high-powered satellites.
Primestar Partners L.P. ("Primestar"), a consortium comprised of cable
operators, including the Company and a satellite company, commenced operation in
1990 of a medium-power DBS satellite system using the Ku portion of the
frequency spectrum and currently provides service consisting of approximately 95
channels of programming, including broadcast signals and pay-per-view services.
DirecTV, which recently added AT&T Corp. as an investor, began offering
nationwide high-power DBS service in 1994 accompanied by extensive marketing
efforts. Several other major companies are preparing to develop and operate
high-power DBS systems, including MCI Communications Corp. and News Corp. DBS
systems are expected to use video compression technology to increase the channel
capacity of their systems to provide movies, broadcast stations and other
program services competitive with those of cable systems. The extent to which
DBS systems are competitive with the service provided by cable systems depends,
among other things, on the availability of reception equipment at reasonable
prices and on the ability of DBS operators to provide competitive programming.
Cable communications systems also compete with wireless program distribution
services such as multichannel, multipoint distribution service ("MMDS") which
use low-power microwave frequencies to transmit video programming over-the-air
to subscribers. There are MMDS operators who are authorized to provide or are
providing broadcast and satellite programming to subscribers in areas served by
the Company's cable systems. Recently, several Regional Bell Operating Companies
("BOCs") acquired significant interests in major MMDS companies operating
- 7 -
in certain of the Company's cable service areas. Additionally, the FCC has
pending a rulemaking proceeding in which it proposed to allocate frequencies in
the 28 GHz band for a new multichannel wireless video service similar to MMDS.
The Company is unable to predict whether wireless video services will have a
material impact on its operations.
Other new technologies may become competitive with Non-entertainment Services
that cable communications systems can offer. The FCC has authorized television
broadcast stations to transmit textual and graphic information useful both to
consumers and businesses. The FCC also permits commercial and non-commercial FM
stations to use their subcarrier frequencies to provide non-broadcast services
including data transmissions. The FCC established an over-the-air Interactive
Video and Data Service that will permit two-way interaction with commercial and
educational programming along with informational and data services. LECs and
other common carriers also provide facilities for the transmission and
distribution to homes and businesses of interactive computer-based services,
including the Internet, as well as data and other non-video services. The FCC
has conducted spectrum auctions for licenses to provide PCS. PCS will enable
license holders, including cable operators, to provide voice and data services
(see "Wireless Telecommunications - Cellular Telephone Communications -
Competition").
Advances in communications technology as well as changes in the marketplace and
the regulatory and legislative environment are constantly occurring. Thus, it is
not possible to predict the effect that ongoing or future developments might
have on the cable communications industry.
Legislation and Regulation
The Cable Acts and the 1996 Telecom Act amended the Communications Act and
established a national policy to guide the development and regulation of cable
systems. Principal responsibility for implementing the policies of the Cable
Acts is allocated between the FCC and state or local franchising authorities. In
addition, legislative and regulatory proposals by the Congress and federal
agencies, particularly the approximately eighty (80) rulemakings at the FCC
resulting from the 1996 Telecom Act and the many state regulatory proceedings
necessary to implement the 1996 Telecom Act, may materially affect the cable
communications industry. The following is a summary of federal laws and
regulations materially affecting the growth and operation of the cable
communications industry and a description of certain state and local laws.
The 1996 Telecom Act
The 1996 Telecom Act, the most comprehensive reform of the nation's
telecommunications laws since the Communications Act, became effective in
February 1996. The 1996 Telecom Act will result in changes in the marketplace
for cable communications, telephone and other telecommunications services.
Although the long-term goal of this Act is to promote competition and decrease
regulation of these industries, in the short-term the law delegates to the FCC
(and in some cases the states) broad new rulemaking authority. The new law
requires many of these rulemakings to be completed in a limited period of time.
The following is a brief summary of the important features of the 1996 Telecom
Act that will affect the cable communications, telephone and other
telecommunications industries.
Cable Communications. The 1996 Telecom Act deregulates rates for CPSTs in March
1999 for large Multiple System Operators ("MSOs"), such as the Company, and
immediately for certain small operators. Deregulation will occur sooner for
systems in markets where comparable video services, other than DBS, are offered
by the LECs, or their affiliates, or by a third parties utilizing the LECs'
facilities or where "effective competition" is established under the 1992 Cable
Act. The 1996 Telecom Act also modifies the uniform rate provisions of the 1992
Cable Act by prohibiting regulation of bulk discount rates offered to
subscribers in commercial and residential developments and permits regulated
equipment rates to be computed by aggregating costs of broad categories of
equipment at the franchise, system, regional or company level. The 1996 Telecom
Act eliminates the right of individual subscribers to file rate complaints with
the FCC concerning certain CPSTs and requires the FCC to issue a final order
within 90 days after receipt of CPST rate complaints filed by any franchising
authority after the date of enactment of the 1996 Telecom Act. The 1996 Telecom
Act also modifies the existing statutory provisions governing cable system
technical standards, equipment compatibility, subscriber notice requirements and
program access, permits certain operators to include losses incurred prior to
September 1992 in setting regulated rates and repeals the three-year anti-
trafficking prohibition adopted in the 1992 Cable Act.
- 8 -
The 1996 Telecom Act eliminates the requirement that LECs obtain FCC approval
under Section 214 of the Communications Act before providing video services in
their telephone service areas and removes the telephone company/cable television
cross-ownership prohibition that had been codified by the 1984 Cable Act,
thereby facilitating the ability of the LECs to offer video services in their
telephone service areas. LECs may provide service as traditional cable operators
with local franchises or they may opt to provide their programming over
unfranchised "open video systems," in which case they must set aside a portion
of their channel capacity for use by unaffiliated program distributors and
satisfy certain other requirements. Under certain circumstances, cable operators
also may elect to offer services through open video systems. The 1996 Telecom
Act also prohibits a LEC from acquiring a cable operator in its telephone
service area except in limited circumstances.
Telephone. The 1996 Telecom Act removes barriers to entry in the local telephone
exchange market that is now monopolized by the seven BOCs and other LECs by
preempting state and local laws that restrict competition and by requiring all
LECs to provide nondiscriminatory access and interconnection to potential
competitors, such as cable operators and long distance companies. At the same
time, the new law eliminates the prospective effects of the AT&T, GTE and McCaw
consent decrees and permits the BOCs to enter the market for long distance
services (through a separate subsidiary) after they meet a series of
requirements intended to open their telephone service areas to competition. The
1996 Telecom Act also permits interstate utility companies to enter the
telecommunications market.
While the 1996 Telecom Act imposes new requirements with regard to
interconnection, it also directs the FCC to substantially relax much of its
regulation of LECs to promote competition. The new law also eliminates or
streamlines many of the requirements applicable to LECs, such as the requirement
to obtain prior approval of construction or acquisition of new plant. In
addition, the 1996 Telecom Act requires the FCC and states to review universal
service programs and encourage access to advanced telecommunications services by
schools, libraries and other public institutions.
Other Telecommunications Services. In addition to these provisions governing
regulation of specific segments of the market, the 1996 Telecom Act also
contains provisions regulating the content of video programming and computer
services. Specifically, the new law prohibits the use of computer services to
transmit "indecent" material to minors. The 1996 Telecom Act also requires the
FCC to prescribe guidelines for a ratings system for violent and indecent video
programming and requires all new television sets to contain a so-called "V-chip"
capable of blocking all programs with a given rating. The new law substantially
relaxes current broadcast ownership rules by eliminating the 12 station limit
for television station ownership, and, instead, limiting ownership to stations
with a potential aggregate reach of 35 percent of television households in the
US and eliminating the network/cable cross-ownership prohibition.
Rate Regulation
Prior to April 1993, virtually all of the Company's cable systems were free to
adjust cable rates without first obtaining governmental approval. The 1992 Cable
Act authorized rate regulation for cable communications services and equipment
in communities that are not subject to "effective competition," as defined in
the 1992 Cable Act and as amended by the 1996 Telecom Act. Virtually all cable
communications systems are now subject to rate regulation for basic cable
service and equipment by local officials under the oversight of the FCC, which
has prescribed detailed criteria for such rate regulation. The 1992 Cable Act
also requires the FCC to resolve complaints about rates for CPSTs (other than
programming offered on a per channel or per program basis, which programming is
not subject to rate regulation) and to reduce any such rates found to be
unreasonable. The 1996 Telecom Act provides for rate deregulation (see "The 1996
Telecom Act").
In April 1993, the FCC adopted regulations in accordance with the 1992 Cable Act
governing rates that may be charged to subscribers for basic cable service and
certain CPSTs (together, the "Regulated Services") and ordered an interim freeze
on existing rates. The FCC's rate regulations became effective in September 1993
and the FCC's rate freeze was extended until the earlier of May 1994 or the date
on which a cable system's basic cable service rate was regulated by a
franchising authority.
In implementing the 1992 Cable Act, the FCC adopted a benchmark methodology as
the principal method of regulating rates for Regulated Services. Cable operators
were also permitted to justify rates using a cost-of-service methodology. As of
September 1993, cable operators whose then current rates were above FCC
benchmark levels
- 9 -
were required, absent a successful cost-of-service showing, to reduce such rates
to the benchmark level or by up to 10% of those rates in effect on September 30,
1992, whichever reduction was less, adjusted for equipment costs, inflation and
programming modifications occurring subsequent to September 30, 1992. Effective
May 1994, the FCC modified its benchmark methodology to require reductions of up
to 17% of the rates for Regulated Services in effect on September 30, 1992,
adjusted for inflation, programming modifications, equipment costs and increases
in certain operating costs. In July 1994, the Company reduced rates for
Regulated Services in the majority of its cable systems to comply with the FCC's
modified benchmarks and regulations.
The FCC's initial "Going Forward" regulations limited rate increases for
Regulated Services after the establishment of an initial regulated rate to an
inflation-indexed amount plus increases for channel additions and certain
external costs beyond the cable operator's control, such as franchise fees,
taxes and increased programming costs. Under these regulations, cable operators
are entitled to take a 7.5% mark-up on certain programming cost increases. In
November 1994, the FCC modified these regulations and instituted an alternative
three-year flat fee mark-up plan for charges relating to new channels added to
the CPST. As of January 1995, cable operators were permitted to charge
subscribers for channels added to the CPST after May 1994, at a monthly rate of
up to 20 cents per added channel, up to a total of $1.20 plus an additional 30
cents for programming license fees per subscriber over the first two years of
the three-year period; cable operators may charge an additional 20 cents plus
the cost of the programming in the third year (1997) for one additional channel
added in that year. Alternatively, operators may increase rates by the amount of
any programming license fees in connection with such added channels, provided
that the total monthly rate increase per subscriber for the added channels,
including license fees, does not exceed $1.50 over the first two years, and
$1.70, plus any increase in the license fees for the added channels, in the
third year. Operators must make a one-time election to use either the 20 cents
per channel adjustment or the 7.5% mark-up on programming cost increases for all
channels added after December 31, 1994. The FCC is currently considering whether
to modify or eliminate the regulation allowing operators to receive the 7.5%
mark-up on increases in existing programming license fees. In September 1995,
the FCC authorized a new, alternative method of implementing rate adjustments
which will allow cable operators to increase rates for Regulated Services
annually on the basis of projected increases in external costs (inflation, costs
for programming, franchise-related obligations, and changes in the number of
regulated channels) rather than on the basis of cost increases incurred in the
preceding calendar quarter. Operators that elect not to recover all of their
accrued external costs and inflation pass-throughs each year may recover them
(with interest) in subsequent years.
In November 1994, the FCC adopted regulations permitting cable operators to
create new product tiers ("NPT") that will not be subject to rate regulation if
certain conditions are met. The FCC also revised its previously adopted policy
and concluded that packages of a la carte services are subject to rate
regulation by the FCC as CPSTs. Because of the uncertainty created by the FCC's
prior a la carte package guidelines, the FCC will allow cable operators,
including the Company, under certain circumstances, to treat previously offered
a la carte packages as NPTs.
Franchising authorities are empowered to regulate the rates charged for
additional outlets and for the installation, lease and sale of equipment used by
subscribers to receive the basic cable service tier, such as converter boxes and
remote control units. The FCC's rules require franchising authorities to
regulate these rates on the basis of actual cost plus a reasonable profit, as
defined by the FCC. The 1996 Telecom Act requires the FCC to revise its
regulations to permit operators to compute regulated equipment rates by
aggregating costs of broad categories of equipment at the franchise, system,
regional or company level. In November 1995, the FCC initiated a general
rulemaking proposal that permits cable operators to price services uniformly
across multiple franchise areas, as well as regional areas. If the FCC adopts
the proposals, cable operators that provide service to clusters of systems would
be permitted to charge uniform rates across large geographic areas. Because the
proposal is designed to be revenue neutral, it would not affect the overall
revenue that operators receive, but administrative and marketing costs could be
reduced.
Cable operators required to reduce rates may also be required to refund
overcharges with interest. Rate reductions will not be required where a cable
operator can demonstrate that existing rates for Regulated Services are
justified and reasonable using cost-of-service guidelines. In November 1993, the
FCC ruled that operators choosing to justify rates through a cost-of-service
submission must do so for all Regulated Services. In February 1994, the FCC
adopted interim cost-of-service regulations establishing, among other things,
the rebuttable presumptions of an industry-wide 11.25% after tax rate of return
on an operator's allowable rate base and that acquisition costs above original
historic book value of tangible assets should be excluded from the allowable
rate base. In December 1995, the FCC adopted final cost-of-service rate
regulations requiring, among other things, cable operators to exclude 34% of
system acquisition
- 10 -
costs related to intangible and tangible assets used to provide Regulated
Services. The FCC also reaffirmed the industry-wide 11.25% after tax rate of
return on an operator's allowable rate base, but initiated a further rulemaking
in which it proposes to use an operator's actual debt cost and capital structure
to determine an operator's cost of capital or rate of return.
The Company has settled the majority of outstanding proceedings challenging its
rates charged for regulated cable services. In December 1995, the FCC adopted an
order approving a negotiated settlement of rate complaints pending against the
Company for CPSTs which provided approximately $6.6 million in refunds, plus
interest, being given in the form of bill credits, to approximately 1.3 million
of the Company's cable subscribers. This FCC order resolved 160 of the Company's
benchmark rate cases covering the period September 1993 through July 1994 and
104 of the Company's cost-of-service cases for CPSTs covering the period
September 1993 through December 1995. As part of the negotiated settlement, the
Company agreed to forego certain inflation and external cost adjustments for
systems covered by its cost-of-service filings for CPSTs. The FCC's order has
been appealed to a federal appellate court by a local franchising authority
whose rate complaint against the Company was resolved by the negotiated
settlement. The Company currently is seeking to justify rates for basic cable
services and equipment in certain of its cable systems in the State of
Connecticut on the basis of a cost-of-service showing. The State of Connecticut
has ordered the Company to reduce such rates and to make refunds to subscribers.
The Company has appealed the Connecticut decision to the FCC. The Company's
management believes that the ultimate resolution of these pending regulatory
matters will not have a material adverse impact on the Company's financial
position or results of operations.
In June 1995, the US Court of Appeals for the District of Columbia Circuit
substantially upheld the cable rate regulations adopted by the FCC pursuant to
the 1992 Cable Act. In February 1996, the US Supreme Court declined to review
the circuit court decision.
"Anti-Buy Through" Provisions. The 1992 Cable Act requires cable systems to
permit subscribers to purchase video programming offered by the operator on a
per channel or a per program basis without the necessity of subscribing to any
tier of service, other than the basic cable service tier, unless the system's
lack of addressable converter boxes or other technological limitations does not
permit it to do so. The statutory exemption for cable systems that do not have
the technological capability to offer programming in the manner required by the
statute is available until a system obtains such capability, but not later than
December 2002. The FCC may waive such time periods, if deemed necessary. Most of
the Company's systems do not have the technological capability to offer
programming in the manner required by the statute and thus currently are exempt
from complying with the requirement.
Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast signal
carriage requirements that allow local commercial television broadcast stations
to elect once every three years to require a cable system to carry the station,
subject to certain exceptions, or to negotiate for "retransmission consent" to
carry the station. A cable system generally is required to devote up to
one-third of its activated channel capacity for the carriage of local commercial
television stations whether pursuant to the mandatory carriage or retransmission
consent requirements of the 1992 Cable Act. Local non-commercial television
stations are also given mandatory carriage rights; however, such stations are
not given the option to negotiate retransmission consent for the carriage of
their signals by cable systems. Additionally, cable systems are required to
obtain retransmission consent for all "distant" commercial television stations
(except for commercial satellite-delivered independent "superstations" such as
WTBS), commercial radio stations and certain low power television stations
carried by such systems after October 1993. In April 1993, a special three-judge
federal district court issued a decision upholding the constitutional validity
of the mandatory signal carriage requirements. In June 1994, the US Supreme
Court vacated this decision and remanded it to the district court to determine,
among other matters, whether the statutory carriage requirements are necessary
to preserve the economic viability of the broadcast industry. In December 1995,
the district court upheld the mandatory carriage requirements of the 1992 Cable
Act. In February 1996, the Supreme Court agreed to review this decision of the
district court. The Company cannot predict the ultimate outcome of this
litigation. Pending action by the Supreme Court, the mandatory broadcast signal
carriage requirements remain in effect.
Designated Channels. The 1984 Cable Act permits franchising authorities to
require cable operators to set aside certain channels for public, educational
and governmental access programming. The 1984 Cable Act also requires a cable
system with 36 or more channels to designate a portion of its channel capacity
for commercial leased access by third parties to provide programming that may
compete with services offered by the cable operator. The FCC has adopted rules
regulating: (i) the maximum reasonable rate a cable operator may charge for
commercial use of the
- 11 -
designated channel capacity; (ii) the terms and conditions for commercial use of
such channels; and (iii) the procedures for the expedited resolution of disputes
concerning rates or commercial use of the designated channel capacity.
Franchise Procedures. The 1984 Cable Act affirms the right of franchising
authorities (state or local, depending on the practice in individual states) to
award one or more franchises within their jurisdictions and prohibits
non-grandfathered cable systems from operating without a franchise in such
jurisdictions. The 1992 Cable Act encourages competition with existing cable
systems by (i) allowing municipalities to operate their own cable systems
without franchises; (ii) preventing franchising authorities from granting
exclusive franchises or from unreasonably refusing to award additional
franchises covering an existing cable system's service area; and (iii)
prohibiting (with limited exceptions) the common ownership of cable systems and
co-located MMDS or SMATV systems. In January, 1995, the FCC relaxed its
restrictions on ownership of SMATV systems to permit a cable operator to acquire
SMATV systems in the operator's existing franchise area so long as the
programming services provided through the SMATV system are offered according to
the terms and conditions of the cable operator's local franchise agreement.
The 1984 Cable Act also provides that in granting or renewing franchises, local
authorities may establish requirements for cable-related facilities and
equipment, but not for video programming or information services other than in
broad categories. Among the more significant provisions of the 1984 Cable Act is
a limitation on the payment of franchise fees to 5% of cable system revenues and
the opportunity for the cable operator to obtain modification of franchise
requirements by the franchise authority or judicial action if warranted by
changed circumstances. The Company's franchises typically provide for payment of
fees to franchising authorities of 5% of "revenues" (as defined by each
franchise agreement), which fees may be passed on to subscribers.
The 1984 Cable Act contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. The 1992 Cable Act makes
several changes to the renewal process which could make it easier for a
franchising authority to deny renewal. Moreover, even if the franchise is
renewed, the franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal. Similarly, if a franchising
authority's consent is required for the purchase or sale of a cable system or
franchise, such authority may attempt to impose more burdensome or onerous
franchise requirements in connection with a request for such consent.
Historically, franchises have been renewed for cable operators that have
provided satisfactory services and have complied with the terms of their
franchises. The Company believes that it has generally met the terms of its
franchises and has provided quality levels of service and it anticipates that
its future franchise renewal prospects generally will be favorable.
Various courts have considered whether franchising authorities have the legal
right to limit franchise awards to a single cable operator and to impose certain
substantive franchise requirements (e.g. access channels, universal service and
other technical requirements). These decisions have been somewhat inconsistent
and, until the US Supreme Court rules definitively on the scope of cable
operators' First Amendment protections, the legality of the franchising process
generally and of various specific franchise requirements is likely to be in a
state of flux.
Ownership Limitations. Pursuant to the 1992 Cable Act, the FCC adopted rules
prescribing national subscriber limits and limits on the number of channels that
can be occupied on a cable system by a video programmer in which the operator
has an attributable interest. The effectiveness of these FCC horizontal
ownership limits has been stayed because a federal district court found the
statutory limitation to be unconstitutional. An appeal of that decision is
pending. The 1996 Telecom Act eliminates the statutory prohibition on the common
ownership, operation or control of a cable system and a television broadcast
station in the same service area and directs the FCC to eliminate its regulatory
restrictions on cross-ownership of cable systems and national broadcasting
networks and to review its broadcast-cable ownership restrictions to determine
if they are necessary in the public interest.
LEC Ownership of Cable Systems. The 1984 Cable Act, FCC regulations, and the
1982 federal court consent decree that settled the antitrust suit against AT&T
regulated the provision of video programming and other information services by
LECs. The statutory provision and corresponding FCC regulations are of
particular competitive importance because LECs already own much of the plant
necessary for cable communications operations, such as poles, underground
conduit and associated rights-of-way. The 1996 Telecom Act makes far-reaching
changes in the regulation of LECs that provide cable services. The new law
eliminates current legal barriers to competition in the local telephone and
cable communications businesses, preempts legal barriers to competition that
previously existed in state and local laws and regulations, and sets basic
standards for relationships between telecommunications
- 12 -
providers (see "The 1996 Telecom Act"). The FCC and, in some cases, states are
required to conduct numerous rulemaking proceedings to implement the 1996
Telecom Act. The ultimate outcome of these rulemakings, and the ultimate impact
of the 1996 Telecom Act or any final regulations adopted pursuant to the new law
on the Company or its businesses cannot be determined at this time.
Pole Attachment. The Communications Act requires the FCC to regulate the rates,
terms and conditions imposed by public utilities for cable systems' use of
utility pole and conduit space unless state authorities can demonstrate that
they adequately regulate pole attachment rates, as is the case in certain states
in which the Company operates. In the absence of state regulation, the FCC
administers pole attachment rates on a formula basis. In some cases, utility
companies have increased pole attachment fees for cable systems that have
installed fiber optic cables and that are using such cables for the distribution
of non-video services. The FCC concluded that, in the absence of state
regulation, it has jurisdiction to determine whether utility companies have
justified their demand for additional rental fees and that the Communications
Act does not permit disparate rates based on the type of service provided over
the equipment attached to the utility's pole. The 1996 Telecom Act modifies the
current pole attachment provisions of the Communications Act by immediately
permitting certain providers of telecommunications services to rely upon the
protections of the current law and by requiring that utilities provide cable
systems and telecommunications carriers with nondiscriminatory access to any
pole, conduit or right-of-way controlled by the utility. Additionally, within
two years of enactment of the 1996 Telecom Act, the FCC is required to adopt new
regulations to govern the charges for pole attachments used by companies
providing telecommunications services, including cable operators. These new pole
attachment regulations will become effective five years after enactment of the
1996 Telecom Act, and any increase in attachment rates resulting from the FCC's
new regulations will be phased in equal annual increments over a period of five
years beginning on the effective date of the new FCC regulations.
Other Statutory Provisions. The 1992 Cable Act and the 1996 Telecom Act preclude
video programmers affiliated with cable companies or common carriers providing
video programming directly to subscribers from favoring the affiliated company
over competitors and requires such programmers to sell their programming to
other multichannel video distributors. This provision limits the ability of
cable program suppliers affiliated with cable companies or common carriers
providing video programming to offer exclusive programming arrangements to their
affiliates. The Cable Acts also include provisions, among others, concerning
horizontal and vertical ownership of cable systems, customer service, subscriber
privacy, commercial leased access channels, marketing practices, equal
employment opportunity, franchise renewal and transfer, award of franchises,
obscene or indecent programming, regulation of technical standards and equipment
compatibility. The FCC has adopted regulations implementing many of these
statutory provisions and it has received numerous petitions requesting
reconsideration of various aspects of its rulemaking proceedings.
Other FCC Regulations. In addition to the FCC regulations noted above, there are
other FCC regulations covering such areas as equal employment opportunity,
syndicated program exclusivity, network program non-duplication, registration of
cable systems, maintenance of various records and public inspection files,
microwave frequency usage, lockbox availability, origination cablecasting and
sponsorship identification, antenna structure notification, marking and
lighting, carriage of local sports programming, application of rules governing
political broadcasts, limitations on advertising contained in non-broadcast
children's programming, consumer protection and customer service, leased
commercial access, ownership of home wiring, indecent programming, programmer
access to cable systems, programming agreements, technical standards, consumer
electronics equipment compatibility and DBS implementation. The FCC has the
authority to enforce its regulations through the imposition of substantial
fines, the issuance of cease and desist orders and/or the imposition of other
administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities often used in connection with cable
operations.
Other bills and administrative proposals pertaining to cable communications have
previously been introduced in Congress or considered by other governmental
bodies over the past several years on matters such as rate regulation, customer
service standards, sports programming, franchising and copyright. It is probable
that further attempts will be made by Congress and other governmental bodies
relating to the regulation of communications services.
Copyright. Cable communications systems are subject to federal copyright
licensing covering carriage of television and radio broadcast signals. In
exchange for filing certain reports and contributing a percentage of their
revenues to a federal copyright royalty pool, cable operators can obtain blanket
permission to retransmit copyrighted material on broadcast signals. The nature
and amount of future payments for broadcast signal carriage cannot be predicted
at this time. The possible simplification, modification or elimination of the
compulsory copyright license is the
- 13 -
subject of continuing legislative review. The elimination or substantial
modification of the cable compulsory license could adversely affect the
Company's ability to obtain suitable programming and could substantially
increase the cost of programming that remained available for distribution to the
Company's subscribers. The Company cannot predict the outcome of this
legislative activity.
In October 1989, the special rate court of the US District Court for the
Southern District of New York imposed interim rates on the cable industry's use
of ASCAP-controlled music. Payment of these rates by cable programmers secures
licenses that cover the use of the music licensed by ASCAP by both the cable
programmers and their cable operator affiliates. A special rate court was
recently created for the other major music performing rights society, BMI, to
establish rates for the use of BMI-controlled music. BMI and cable industry
representatives recently concluded negotiations for a standard licensing
agreement covering the performance of BMI music contained in advertising and
other information inserted by operators into cable programming and on certain
local access and origination channels carried on cable systems. The Company's
settlement with BMI did not have a significant impact on the Company's financial
position or results of operations. ASCAP and cable industry representatives have
met to discuss the development of a standard licensing agreement covering
ASCAP-controlled music in local origination and access channels and pay-per-view
programming.
State and Local Regulation
Because a cable communications system uses local streets and rights-of-way,
cable systems are subject to state and local regulation, typically imposed
through the franchising process. Cable communications systems generally are
operated pursuant to nonexclusive franchises, permits or licenses granted by a
municipality or other state or local government entity. Franchises generally are
granted for fixed terms and in many cases are terminable if the franchisee fails
to comply with material provisions. The terms and conditions of franchises vary
materially from jurisdiction to jurisdiction. Each franchise generally contains
provisions governing cable service rates, franchise fees, franchise term, system
construction and maintenance obligations, system channel capacity, design and
technical performance, customer service standards, franchise renewal, sale or
transfer of the franchise, territory of the franchisee, indemnification of the
franchising authority, use and occupancy of public streets and types of cable
services provided. A number of states subject cable communications systems to
the jurisdiction of centralized state governmental agencies, some of which
impose regulation of a character similar to that of a public utility. Attempts
in other states to regulate cable communications systems are continuing and can
be expected to increase. To date, those states in which the Company operates
that have enacted such state level regulation are Connecticut, New Jersey and
Delaware. State and local franchising jurisdiction is not unlimited, however,
and must be exercised consistently with federal law. The 1992 Cable Act
immunizes franchising authorities from monetary damage awards arising from
regulation of cable systems or decisions made on franchise grants, renewals,
transfers and amendments.
The foregoing does not purport to describe all present and proposed federal,
state, and local regulations and legislation affecting the cable industry. Other
existing federal regulations, copyright licensing, and, in many jurisdictions,
state and local franchise requirements, are currently the subject of judicial
proceedings, legislative hearings and administrative proposals which could
change, in varying degrees, the manner in which cable communications systems
operate. Neither the outcome of these proceedings nor their impact upon the
cable communications industry or the Company can be predicted at this time.
UK Regulation
The operation of a cable television/telephony system in the UK is regulated
under both the Broadcasting Act 1990 (the "Broadcasting Act") (which replaced
the Cable and Broadcasting Act 1984 (the "UK Cable Act")) and the
Telecommunications Act 1984 (the "Telecommunications Act"). The operator of a
cable/telephony franchise covering over 1,000 homes must hold two principal
licenses: (i) a license (a "cable television license") issued in the past under
the UK Cable Act or since 1990 under the Broadcasting Act, which allows the
operator to provide cable television services in the franchise area, and (ii) a
telecommunications license issued under the Telecommunications Act, which allows
the operator to operate and use the physical network necessary to provide cable
television and telecommunications services. The Independent Television
Commission ("ITC") is responsible for the licensing and regulation of cable
television. The Department of Trade and Industry ("DTI") is responsible for
issuing, and the Office of Telecommunications ("OFTEL") is responsible for
regulating the holders of, the telecommunications licenses. In addition, an
operator is required to hold a license under the Wireless Telegraphy Acts of
1949-67 for the use of microwave distribution systems.
- 14 -
The cable television licenses held by the relevant subsidiaries of the UK
Operating Companies were issued under the UK Cable Act for 15-year periods and
are scheduled to expire beginning in late 2004. The telecommunications licenses
held by these subsidiaries of the UK Operating Companies are for 23-year periods
and are scheduled to expire beginning in late 2012.
WIRELESS TELECOMMUNICATIONS
The Company's wireless telecommunications operations primarily consist of the
Company's cellular telephone communications operations. The Company's other
wireless telecommunications businesses includes its DBS operations, including
the Company's investment in Primestar (see "Wired Telecommunications - Cable
Communications - Competition"), and its interest in Sprint Spectrum, which has
acquired 29 PCS licenses and is in the process of developing operations to
provide telecommunications services (see "General Developments of Business -
Sprint Spectrum").
Cellular Telephone Communications
General
The Company is engaged in the development, management and operation of cellular
telephone communications systems in various service areas pursuant to licenses
granted by the FCC. Each service area is divided into segments referred to as
"cells" equipped with a receiver, signaling equipment and a low-power
transmitter. The use of low-power transmitters and the placement of cells close
to one another permits re-use of frequencies, thus substantially increasing the
volume of calls capable of being handled simultaneously over the number handled
by conventional mobile telephone systems. Each cell has a coverage area
generally ranging from one to more than 25 miles. A cellular telephone system
includes a computerized central switching facility known as the mobile telephone
switching office ("MTSO") which controls the automatic transfer of calls,
coordinates calls to and from cellular telephones and connects calls to the LEC
or to an interexchange carrier. The MTSO also records information on system
usage and subscriber statistics.
Each cell's facilities monitor the strength of the signal returned from the
subscriber's cellular telephone. When the signal strength declines to a
predetermined level and the transmission strength is greater at another cell in
or interconnected with the system, the MTSO automatically and instantaneously
passes the mobile user's call in progress to the other cell without
disconnecting the call ("hand off"). Interconnection agreements between cellular
telephone system operators and various LECs and interexchange carriers establish
the manner in which the cellular telephone system integrates with other
telecommunications systems.
As required by the FCC, all cellular telephones are designed for compatibility
with cellular systems in all markets within the US so that a cellular telephone
may be used wherever cellular service is available. Each cellular telephone
system in the US uses one of two groups of channels, termed "Block A" and "Block
B," which the FCC has allotted for cellular service. Minor adjustments to
cellular telephones may be required to enable the subscriber to change from a
cellular system on one frequency block to a cellular system on the other
frequency block.
While most MTSOs process information digitally, most radio transmission of
cellular telephone calls is done on an analog basis. Digital transmission of
cellular telephone calls offers advantages, including improved voice quality
under certain conditions, larger system capacity and the potential for lower
incremental costs for additional subscribers. The FCC allows carriers to provide
digital service and requires cellular carriers to provide analog service. The
Company's conversion from analog to digital radio technology is expected to
commence in 1997 and to take a number of years.
The Company provides services to its cellular telephone subscribers similar to
those provided by conventional landline telephone systems, including custom
calling features such as call forwarding, call waiting, conference calling,
directory assistance and voice mail. The Company is responsible for the quality,
pricing and packaging of cellular telephone service for each of the systems it
owns and controls.
Reciprocal agreements among cellular telephone system operators allow their
respective subscribers ("roamers") to place and receive calls in most service
areas throughout the country. Roamers are charged rates which are generally at a
premium to the regular service rate. In recent years, cellular carriers have
experienced increased fraud associated
- 15 -
with roamer service, including Electronic Serial Number ("ESN") cloning. The
Company and other carriers have taken steps to combat roamer fraud, but it is
uncertain to what extent roamer fraud will continue. In 1995, the Company
implemented a number of features which it believes will decrease the incidents
of fraudulent use of its systems. Among these are Personal Identification
Numbers ("PINs"), which are required to be used by a majority of the Company's
customers, and the Company's Security Zone feature which restricts customer
usage outside the Company's consolidated footprint. The Company has established
interoperability with the Washington-Baltimore cellular provider, and is
currently working on interoperability with the New York cellular provider, to
permit its customers' use of both PINs and Security Zone in neighboring systems
frequented by the Company's customers.
In addition, the Company is evaluating the implementation of authentication and
RF fingerprinting technologies which will associate ESN/mobile number
combinations with particular cellular telephone units. The use of digital
technologies also purportedly will make it more difficult to commit cellular
fraud.
Allegations of harmful effects from the use of hand-held cellular phones have
caused the cellular industry to fund additional research to review and update
previous studies concerning the safety of the emissions of electromagnetic
energy from cellular phones. In August 1993, the FCC adopted a notice of
proposed rulemaking to consider the incorporation of the new standard for
radiofrequency exposure adopted by the American National Standards Institute in
association with the Institute of Electrical and Electronic Engineers, Inc. The
FCC is considering the application of the new standard to low-power devices such
as hand-held mobile transceivers. In addition, the FCC is considering how the
new standard should apply to cellular transmitter sites. Pursuant to the 1996
Telecom Act, this proceeding must be completed within 180 days of the
legislation's enactment.
Company's Systems
The table below sets forth summary information regarding the total population
("Pops") in the markets served by the Company's systems by Metropolitan
Statistical Area ("MSAs") and Rural Service Area ("RSAs") and aggregate
subscriber information as of December 31, 1995.
Approximate Approximate Approximate
Market Ownership Pops (1) Net Pops
------ --------- -------- --------
MSAs:
Atlantic City, NJ 47% 333,000 157,000
Aurora-Elgin, IL 81% 46,000 37,000
Joliet, IL 83% 35,000 29,000
Long Branch, NJ 100% 587,000 587,000
New Brunswick, NJ 100% 700,000 700,000
Philadelphia, PA 100% 4,899,000 4,899,000
Trenton, NJ 85% 330,000 281,000
Wilmington, DE 100% 612,000 612,000
---------- ----------
7,542,000 7,302,000
---------- ----------
RSAs:
Ocean County, NJ 100% 466,000 466,000
Vineland, NJ 94% 138,000 130,000
Kent and Sussex, DE 50% 252,000 126,000
---------- ----------
856,000 722,000
---------- ----------
8,398,000 8,024,000
========= =========
- -----------
(1) Source: 1996 Rand McNally Commercial Atlas & Marketing Guide
As of December 31, 1995, the Company's cellular telephone business had 665,000
subscribers in the markets listed above.
- 16 -
Competition
The cellular telephone business is currently a regulated duopoly. The FCC
generally grants two licenses to operate cellular telephone systems in each
market. One of the two licenses was initially awarded to a company or group
affiliated with the local landline telephone carriers in the market (the
"Wireline" license), and the other license was initially awarded to a company,
individual, or group not affiliated with any landline telephone carrier (the
"Non- Wireline" license).
The Company's systems are all Non-Wireline systems and compete directly with the
Wireline licensee in each market in attracting and retaining cellular telephone
customers and dealers. Competition between the two licensees in each market is
principally on the basis of services and enhancements offered, technical quality
of the system, quality and responsiveness of customer service, price and
coverage area. The Wireline licensee in the Company's principal markets is
Cellco Partnership, a joint venture between Bell Atlantic Mobile Systems, Inc.
and NYNEX Mobile Communications Co. The Company's principal Wireline competitor
is significantly larger and may have access to more substantial financial
resources than the Company.
The FCC requires cellular licensees to provide service to resellers of cellular
service which purchase cellular service from licensees, usually in the form of
blocks of numbers, then resell the service to the public. Thus, a reseller may
be both a customer and a competitor of a licensed cellular operator. The FCC
currently is seeking comment on whether resellers should be permitted to install
separate switching facilities in cellular systems, although it has tentatively
concluded not to require such interconnects. The FCC is also considering whether
resellers should receive direct assignments of telephone numbers from LECs.
Cellular telephone systems, including the Company's systems, also face actual or
potential competition from other current and developing technologies.
Specialized Mobile Radio ("SMR") systems, such as those used by taxicabs, as
well as other forms of mobile communications service, may provide competition in
certain markets. SMR systems are permitted by FCC rules to be interconnected to
the public switched telephone network and are significantly less expensive to
build and operate than cellular telephone systems. SMR systems are, however,
licensed to operate on substantially fewer channels per system than cellular
telephone systems and generally lack cellular's ability to expand capacity
through frequency reuse by using many low-power transmitters and to hand-off
calls. Nextel Communications, Inc., in which the Company holds an equity
interest, has begun to implement its proposal to use its available SMR spectrum
in various metropolitan areas more efficiently to increase capacity and to
provide a broad range of mobile radio communications services. This proposal,
known as ESMR service, could provide additional competition to existing cellular
carriers, including the Company. In 1994, the FCC decided to license SMR systems
in the 800 MHz bands for wide-area use, thus increasing potential competition
with cellular. The FCC recently decided to license SMR spectrum in contiguous
blocks via the competitive bidding process. Although wide-area SMR spectrum has
not yet been assigned, the licensing change may further the competitive
potential of SMR services.
One-way paging or beeper services that feature voice message, data services and
tones are also available in the Company's markets. These services may provide
adequate capacity and sufficient mobile capabilities for some potential cellular
subscribers, thus providing additional competition to the Company's systems.
Certain new technologies and regulatory proposals potentially could affect the
competitive position of the cellular industry. The most prominent is PCS, which
includes a variety of digital, wireless communications systems currently
primarily suited for use in densely populated areas. At the power levels that
the FCC's rules now provide, each cell of a PCS system would have more limited
coverage than a cell in a cellular telephone system. Current proposals for PCS
include advanced cordless telephones, or CT-2, mobile data networks, and
personal communications networks that might provide services similar to those
provided by cellular at costs lower than those currently charged by cellular
system operators. The FCC has allocated spectrum and adopted rules for both
narrow and broadband PCS services. In 1994, the FCC completed a spectrum auction
for nationwide narrowband PCS licenses, undertook the first regional narrowband
PCS auction, and began the first auction of broadband PCS spectrum (see "General
Developments of Business - Sprint Spectrum"). All of the 30 MHz Major Trading
Area licenses for PCS were issued by June 1995 and PCS licensees are required to
construct their networks to be capable of covering one third of their service
area population within five years of the date of licensing. Broadband PCS
service likely will become a direct competitor to cellular service. In December
1995, the FCC commenced the auction of additional PCS spectrum designated for
license to small businesses, rural telephone companies and other entrepreneurs.
The FCC intends to offer additional spectrum for Commercial Mobile Radio Service
("CMRS") licenses in the future.
- 17 -
Applicants have received and others are seeking FCC authorization to construct
and operate global satellite networks to provide domestic and international
mobile communications services from geostationary and low earth orbit
satellites. In addition, the Omnibus Budget Reconciliation Act of 1993 ("1993
Budget Act") provided, among other things, for the release of 200 MHz of Federal
government spectrum for commercial use over a fifteen year period. The FCC has
already allotted 25 MHz of spectrum for fixed and mobile use. The 1993 Budget
Act also authorized the FCC to conduct competitive bidding for certain radio
spectrum licenses and required the FCC to adopt new rules that eliminate the
regulatory distinctions between common and private carriers for those private
carriers who interconnect with the public switched telephone network and make
their services available to a substantial portion of the public for profit.
These developments and further technological advances may make available other
alternatives to cellular service thereby creating additional sources of
competition.
Legislation and Regulation
FCC Regulation
The FCC regulates the licensing, construction, operation and acquisition of
cellular telephone systems pursuant to the Communications Act. For licensing
purposes, the FCC divided the US into separate markets: 306 MSAs and 428 RSAs.
In each market, the allocated cellular frequencies are divided into two blocks:
Block A, initially awarded for utilization by Non-Wireline entities such as the
Company, and Block B, initially awarded for utilization by affiliates of local
exchange Wireline telephone companies. There is no technical or operational
difference between Wireline and Non-Wireline systems other than different
frequencies.
Under the Communications Act, no party may transfer control of or assign a
cellular license without first obtaining FCC consent. FCC rules (i) prohibit an
entity controlling one system in a market from holding any interest in the
competing cellular system in the market and (ii) prohibit an entity from holding
non-controlling interests in more than one system in any market, if the common
ownership interests present anticompetitive concerns under FCC policies.
Cellular radio licenses generally expire on October 1 of the tenth year
following grant of the license in the particular market and are renewable for
periods of ten years upon application to the FCC. Licenses may be revoked for
cause and license renewal applications denied if the FCC determines that a
renewal would not serve the public interest. FCC rules provide that competing
renewal applications for cellular licenses will be considered in comparative
hearings, and establish the qualifications for competing applications and the
standards to be applied in such hearings. Under current policies, the FCC will
grant incumbent cellular licensees a "renewal expectancy" if the licensee has
provided substantial service to the public, substantially complied with
applicable FCC rules and policies and the Communications Act and is otherwise
qualified to hold an FCC license. The FCC has granted renewal of the Company's
licenses for the Philadelphia and Wilmington MSAs.
The FCC requires LECs in each market to offer reasonable terms and facilities
for the interconnection of both cellular telephone systems in that market to the
LECs' landline network. Cellular telephone companies affiliated with the LEC are
required to disclose how their systems will interconnect with the landline
network. The licensee not affiliated with the LEC has the right to interconnect
with the landline network in a manner no less favorable than that of the
licensee affiliated with the LEC. In addition, the licensee not affiliated with
the LEC may, at its discretion, request reasonable interconnection arrangements
that are different than those provided to the affiliated licensee in that
market, and the LEC must negotiate such requests in good faith. The FCC
reiterated its position on interconnection issues in a declaratory ruling which
clarified that LECs are expected to provide, within a reasonable time, the
agreed-upon form of interconnection.
The FCC regulates the ability of cellular operators to bundle the provision of
service with hardware, the resale of cellular service by third parties and the
coordination of frequency usage with other cellular licensees. The FCC also
regulates the height and power of base station transmitting facilities and
signal emissions in the cellular system. Cellular systems also are subject to
Federal Aviation Administration and FCC regulations concerning the siting,
construction, marking and lighting of cellular transmitter towers and antennae.
In addition, the FCC also regulates the employment practices of cellular
operators.
The Communications Act currently restricts foreign ownership or control over
commercial mobile radio licenses, which include cellular radio service licenses.
The FCC recently decided to consider the opportunities that other nations
provide to US companies in their communications industries as a factor in
deciding whether to permit higher levels of indirect foreign ownership in
companies controlling common carrier and certain other radio licenses. The
- 18 -
1996 Telecom Act relaxes these restrictions by eliminating the statutory
provisions restricting foreign officers and directors in licensees and their
parent corporations.
To date, the FCC has undertaken significant efforts to reconsider the regulation
of CMRS providers in the wake of competitive developments in the
telecommunications marketplace. For instance, the FCC is considering whether all
CMRS providers should provide interconnection to all other CMRS providers.
Moreover, the FCC has proposed new rules to govern LEC-CMRS interconnection.
Resolution of the issues raised in these proceedings may affect the costs of
providing cellular service and the way in which the Company conducts its
business.
Finally, the 1996 Telecom Act relieves BOC-affiliated cellular providers of
their equal access obligations. As such, BOC-affiliated carriers are afforded
greater flexibility in contracting with interexchange carriers for the provision
of long distance services. Prior to the legislative change, cellular systems
affiliated with the BOCs were required to offer equal access to interexchange
carriers and those affiliated with AT&T voluntarily provided equal access.
Nevertheless, the FCC retains authority to require all CMRS operators to provide
unblocked access through the use of other mechanisms if customers are being
denied access to the telephone toll service providers of their choice, and if
such denial is contrary to the public interest.
State Regulation and Local Approvals
Except for the State of Illinois, the states in which the Company presently
operates currently do not regulate cellular telephone service. In the 1993
Budget Act, Congress gave the FCC the authority to preempt states from
regulating rates or entry into CMRS, including cellular. In the CMRS order,
described above, the FCC preempted the states and established a procedure for
states to petition the FCC for authority to regulate rates and entry into CMRS.
The FCC, to date, has denied all state petitions to regulate the rates charged
by CMRS providers.
The scope of the allowable level of state regulation of CMRS, however, remains
unclear. The 1993 Budget Act does not identify the "other terms and conditions"
of CMRS service that can be regulated by the states. Moreover, the FCC recently
issued a Notice of Proposed Rulemaking requesting comment on the authority of
states to regulate intrastate LEC-CMRS interconnection. The resolution of this
issue will impact the extent to which cellular providers will be subject to
state regulation of CMRS interconnection to the LECs. The siting of cells also
remains subject to state and local jurisdiction.
CONTENT
Content consists primarily of the Company's 57.45% ownership interest in QVC,
which is consolidated with and managed by the Company. In addition, the Company
recently formed C3, whose worldwide activities will be focused on four distinct
areas: development and production of programming for the Company and other media
outlets; enhancement of existing and creation of new distribution channels;
expansion of transactional services; and acquisitions of programming and media
related companies. In the programming sector, C3 will assist the Company with
its programming investments which include E! Entertainment, Viewer's Choice,
Turner Broadcasting, The Golf Channel, Speedvision, Outdoor Life, Music Choice,
Lightspan and the Sunshine Network.
Electronic Retailing
General
The Company provides electronic retailing services through QVC, a nationwide
general merchandise retailer. Through its merchandise-focused television
programs (the "QVC Service"), QVC sells a wide variety of products directly to
consumers. The products are described and demonstrated live by program hosts,
and orders are placed directly with QVC by viewers who call a toll-free '800'
telephone number. QVC television programming is produced at its facilities in
Pennsylvania and is broadcast nationally via satellite to affiliated local cable
system operators and other multichannel video programming providers ("Program
Carriers") who have entered into carriage agreements (the "Affiliation
Agreements") with QVC and who retransmit the QVC programming to their
subscribers.
- 19 -
The QVC Service
Products. QVC sells a variety of consumer products and accessories including
jewelry, apparel and accessories, housewares, collectibles, electronics, toys
and cosmetics. QVC obtains products from domestic and foreign manufacturers and
wholesalers and is often able to make purchases on favorable terms based on the
volume of the transactions. QVC intends to continue introducing new products and
product lines. QVC is not dependent upon any one particular supplier for any
significant portion of its inventory.
Programming. The QVC program schedule consists of one-hour and multi-hour
program segments. Each program segment has a theme devoted to a particular
category of product or lifestyle. From time to time, QVC broadcasts special
program segments devoted to merchandise associated with a particular celebrity,
event, geographical region or seasonal interest. QVC selects all products
presented on its programs, stocks the merchandise, processes all orders and
ships from its own distribution centers.
Process. Viewers place orders to purchase merchandise by calling a toll-free
telephone number. QVC uses automatic call distributing equipment to distribute
calls to its operators. The majority of all payments for purchases are made with
a major credit card or QVC's private label credit card. The accounts receivable
from QVC's private label credit card program are purchased (with recourse) and
serviced by an unrelated third party. QVC's policy is to ship merchandise
promptly, typically within two to three days after receipt of an order. QVC
offers a return policy which permits customers to return within 30 days any
merchandise purchased from QVC for a full refund of the purchase price and
original shipping charges.
Primary Channel. QVC's main channel (the "Primary Channel"), as of December 31,
1995, is transmitted live 24 hours a day, 7 days a week, to approximately 49
million cable television homes and on a part-time basis to approximately 3
million additional cable television homes. In addition, the QVC Service can be
received by approximately 4 million home satellite dish users.
Q2. QVC's secondary channel ("Q2"), which broadcasts 24 hours a day, 7 days a
week, reaches in excess of 9 million homes. In January 1996, the Company
announced that the format of Q2 programming would be changed, effective in the
first half of 1996, to become a faster-paced, news-like format, combining live
hosts and edited tape of top products and stories from the Primary Channel.
QVC UK. In October 1993, QVC launched an electronic retailing program service in
the UK ("QVC--The Shopping Channel") through a joint venture agreement with
British Sky Broadcasting Limited. This service currently reaches over 4 million
homes in the UK.
iQVC. In December 1995, QVC launched its interactive shopping service ("iQVC")
on The Microsoft Network ("MSN"), Microsoft Corporation's new on-line service.
The iQVC service will offer MSN's on-line members a diverse array of
merchandise, available on-line, 24 hours a day, 7 days a week.
QVC Service Transmission
The QVC Service signal is transmitted via two exclusive, protected,
non-preemptible transponders on communications satellites. Each communications
satellite has a number of separate transponders. 'Protected' status means that,
in the event of transponder failure, QVC's signal will be transferred to a spare
transponder or, if none is available, to a preemptible transponder located on
the same satellite or, in certain cases, to a transponder on another satellite
owned by the same lessor if one is available at the time of the failure.
'Non-preemptible' status means that the transponder cannot be preempted in favor
of a user of a 'protected' transponder that has failed. QVC has never had an
interruption in programming due to transponder failure and believes that because
it has the exclusive use of two protected, non-preemptible transponders, such
interruption is unlikely to occur. There can be no assurance, however, that
there will not be an interruption or termination of satellite transmission due
to transponder failure. Such interruption or termination could have a material
adverse effect on QVC.
Program Carriers
QVC has entered into Affiliation Agreements with Program Carriers to carry the
QVC Service. There are generally no additional charges to the subscribers for
distribution of the QVC Service. In return for carrying the QVC Service,
- 20 -
each Program Carrier receives five percent (5%) of the net sales of merchandise
sold to customers located in the Program Carrier's service area. The terms of
most Affiliation Agreements are automatically renewable for one-year terms
unless terminated by either party on at least 90 days notice prior to the end of
the term. Affiliation Agreements covering most of the QVC's cable television
homes can be terminated in the sixth year of their respective terms by the
Program Carrier unless the Program Carrier earns a specified minimum level of
sales commissions. QVC's sales are currently at levels that would meet such
minimum requirements. The Affiliation Agreements provide for the Program Carrier
to broadcast commercials regarding the QVC Service on other channels and to
distribute QVC's advertising material to subscribers. As of December 31, 1995,
approximately 30% of the total homes reached by QVC were attributable to QVC's
Affiliation Agreements with the Company and TCI, and their respective
subsidiaries.
Renewal of these Affiliation Agreements on favorable terms is dependent upon
QVC's ability to negotiate successfully with Program Carriers. The QVC Service
competes for cable channels with competitive programming as well as alternative
programming supplied by a variety of other well-established sources, including
news, public affairs, entertainment and sports programmers. QVC's business is
highly dependent on its affiliation with Program Carriers for the transmission
of the QVC Service. The loss of a significant number of cable television homes
because of termination or non-renewal of Affiliation Agreements would have a
material adverse effect on QVC. To induce Program Carriers to enter into or
extend Affiliation Agreements or to increase the number of cable television
homes under existing Affiliation Agreements, QVC has developed other incentive
programs, including various forms of marketing, launch and equipment purchase
support. QVC will attempt to continue to recruit additional Program Carriers and
seek to enlarge the audience for the QVC Service.
Legislation and Regulation
The FCC does not directly regulate programming services like those offered by
QVC. The FCC does, however, exercise regulatory authority over the satellites
and uplink facilities which transmit programming services such as those provided
by QVC. The FCC has granted permanent licenses subject to periodic reviews to
QVC for its uplink facilities (and for backup equipment of certain of these
facilities) at sufficient power levels for transmission of the QVC Service.
Regarding the satellites from which QVC obtains transponder capacity, the FCC
presently exercises licensing authority but does not regulate the rates, terms
or conditions of service provided by these facilities. Pursuant to its residual
statutory authority, the FCC could, however, alter the regulatory obligations
applicable to satellite service providers.
Competition
QVC operates in a highly competitive environment. As a general merchandise
retailer, QVC competes for consumer expenditures and interest with the entire
retail industry, including department, discount, warehouse and specialty stores,
mail order and other direct sellers, shopping center and mall tenants and
conventional free-standing stores, many of which are connected in chain or
franchise systems. On television, it is also in competition with other
satellite-transmitted programs for channel space and viewer loyalty. QVC
believes that, at the present time, most Program Carriers are not willing to
devote more than two channels to televised shopping and may allocate only one
until digital compression is utilized on a large-scale basis several years in
the future. Many systems have limited channel capacity and may be precluded from
adding any new programs at the present time. The development and utilization of
digital compression is expected to provide Program Carriers with greater channel
capacity thereby increasing the opportunity for the QVC Service, in addition to
other home shopping programs, to be broadcast on additional channels.
Seasonality
QVC's business is seasonal in nature, with its major selling season during the
last quarter of the calendar year. Net revenue for the fourth quarter of the
year ended December 31, 1995 accounted for approximately 32% of QVC's annual net
sales from electronic retailing.
- 21 -
EMPLOYEES
As of December 31, 1995, the Company had 12,200 employees, excluding employees
in managed operations. Of these employees, 5,700 were associated with cable
communications, 4,700 were associated with electronic retailing and 1,100 were
associated with cellular telephone communications. The Company believes that its
relationships with its employees are good.
ITEM 2 PROPERTIES
Domestic Cable Communications
The principal physical assets of a cable communications system consist of a
central receiving apparatus, distribution cables, converters and local business
offices. The Company owns or leases the receiving and distribution equipment of
each system and owns or leases parcels of real property for the receiving sites
and local business offices. The physical components of cable communications
systems require maintenance and periodic upgrading and rebuilding to keep pace
with technological advances. A significant number of the Company's systems will
be upgraded or rebuilt over the next several years.
Cellular Communications
The principal physical assets of a cellular telephone communications system
include cell sites and central switching equipment. The Company primarily leases
its sites used for its transmission facilities and its administrative offices.
The physical components of a cellular telephone communications system require
maintenance and upgrading to keep pace with technological advances. It is
anticipated that the Company's systems will be converted to digital technology
over the next several years.
Electronic Retailing
The principal physical assets of the Company's electronic retailing operations
consist of television studios, telecommunications centers, local business
offices and various product warehouses and distribution centers. The Company,
through QVC, owns the majority of these assets. The physical components of
electronic retailing operations require maintenance and require periodic
upgrading and rebuilding to keep pace with technological advances. It is
anticipated that QVC's warehousing and distribution facilities will be upgraded
or rebuilt over the next several years.
The Company's management believes that substantially all of its physical assets
are in good operating condition.
ITEM 3 LEGAL PROCEEDINGS
The Company is not party to litigation which, in the opinion of the Company's
management, will have a material adverse effect on the Company's financial
position or results of operations.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through a solicitation
of proxies or otherwise, during the fourth quarter of the year ended December
31, 1995.
ITEM 4A EXECUTIVE OFFICERS OF THE REGISTRANT
The current term of office of each of the officers expires at the first meeting
of the Board of Directors of the Company following the next Annual Meeting of
Shareholders, presently scheduled to be held in June 1996, or as soon thereafter
as each of their successors is duly elected and qualified.
- 22 -
The following table sets forth certain information concerning the principal
executive officers of the Company, including their ages, positions and tenure as
of February 1, 1996.
Officer
Name Age Since Position with the Company
Ralph J. Roberts 75 1969 Chairman of the Board of Directors;
Director
Julian A. Brodsky 62 1969 Vice Chairman of the Board of
Directors; Director
Brian L. Roberts 36 1986 President; Director
Lawrence S. Smith 48 1988 Executive Vice President
John R. Alchin 47 1990 Senior Vice President; Treasurer
Stanley L. Wang 55 1981 Senior Vice President; General
Counsel; Secretary
Ralph J. Roberts has served as a Director and Chairman of the Board of Directors
of the Company for more than five years. Mr. Roberts has been the President and
a Director of Sural Corporation, a privately-held investment company ("Sural"),
the Company's largest shareholder, for more than five years. Mr. Roberts devotes
a major portion of his time to the business and affairs of the Company. The
shares of the Company owned by Sural constitute approximately 78% of the voting
power of the two classes of the Company's voting common stock combined. Mr.
Roberts has voting control of Sural. Mr. Roberts is also a Director of Comcast
UK Cable Partners Limited, Cablevision Investment of Detroit, Inc. and Storer
Communications, Inc.
Julian A. Brodsky has served as Vice Chairman of the Board of Directors for more
than five years. Mr. Brodsky presently serves as the Treasurer and a Director of
Sural. Mr. Brodsky devotes a major portion of his time to the business and
affairs of the Company. Mr. Brodsky is also a Director of Comcast UK Cable
Partners Limited, Cablevision Investment of Detroit, Inc., Storer
Communications, Inc., and RBB Fund, Inc.
Brian L. Roberts has served as President of the Company and as a Director for
more than five years. Mr. Roberts presently serves as Vice President and a
Director of Sural. Mr. Roberts devotes a major portion of his time to the
affairs of the Company. Mr. Roberts is also a Director of Turner Broadcasting
System, Inc., Comcast UK Cable Partners Limited, Cablevision Investment of
Detroit, Inc. and Storer Communications, Inc. In addition, Mr. Roberts presently
serves as the Chairman of the National Cable Television Association. He is a son
of Ralph J. Roberts.
Lawrence S. Smith was named Executive Vice President of the Company in December
1995. Prior to that time, Mr. Smith served as Senior Vice President of the
Company for more than five years. Mr. Smith is the Principal Accounting Officer
of the Company. Mr. Smith is a Director of Comcast UK Cable Partners Limited.
John R. Alchin has served as Treasurer and Senior Vice President of the Company
for more than five years. Mr. Alchin is a Director of Comcast UK Cable Partners
Limited.
Stanley L. Wang has served as Senior Vice President, Secretary and General
Counsel of the Company for more than five years. Mr. Wang is a Director of
Cablevision Investment of Detroit, Inc. and Storer Communications, Inc.
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PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Class A Special Common Stock and Class A Common Stock of the Company are
traded in the over-the-counter market and are included on Nasdaq under the
symbols CMCSK and CMCSA, respectively. There is no established public trading
market for the Class B Common Stock of the Company. The Class B Common Stock is
convertible, on a share for share basis, into Class A Special or Class A Common
Stock. The following table sets forth, for the indicated periods, the closing
price range of the Class A Special and Class A Common Stock as furnished by
Nasdaq. Such price ranges have been adjusted for the Company's three-for-two
stock split effective February 2, 1994 and rounded to the nearest one-eighth.
Class A
Special Class A
High Low High Low
1995
First Quarter.................. $16 5/16 $14 9/16 $16 3/8 $14 3/8
Second Quarter................. 19 1/16 14 18 7/8 13 3/4
Third Quarter.................. 22 18 5/8 22 1/8 18 9/16
Fourth Quarter................. 20 5/8 16 5/8 20 7/16 16 1/2
1994
First Quarter.................. $23 1/8 $17 5/8 $23 1/8 $18 1/8
Second Quarter................. 18 3/4 15 19 1/8 15 1/8
Third Quarter.................. 17 3/4 15 18 15 1/8
Fourth Quarter................. 17 5/8 14 5/8 17 3/4 14 1/4
The Company began paying quarterly cash dividends on its Class A Common Stock in
1977. Since 1978, the Company has paid equal dividends on shares of both the
Class A Common Stock and the Class B Common Stock. Since December 1986, when the
Class A Special Common Stock was issued, the Company has paid equal dividends on
shares of the Class A Special, Class A and Class B Common Stock. The Company
declared dividends of $.0933 for each of the years ended December 31, 1995 and
1994 on shares of Class A Special, Class A and Class B Common Stock (as adjusted
for the Company's three-for-two stock split effective February 2, 1994).
It is the intention of the Board of Directors to continue to pay regular
quarterly cash dividends on all classes of the Company's stock; however, the
declaration and payment of future dividends and their amount depend upon the
results of operations, financial condition and capital needs of the Company,
contractual restrictions of the Company and its subsidiaries and other factors.
The holders of the Class A Special Common Stock are not entitled to vote in the
election of directors or otherwise, except where class voting is required by
applicable law or the Company's Articles of Incorporation, in which case, each
holder of Class A Special Common Stock shall be entitled to one vote per share.
Each holder of Class A Common Stock has one vote per share and each holder of
Class B Common Stock has 15 votes per share. The Articles of Incorporation
provide that the Class A Special Common Stock, the Class A Common Stock and the
Class B Common Stock vote as separate classes on certain amendments to the
Articles of Incorporation regarding conversion rights of the Class B Common
Stock and as required by applicable law. Under applicable law, holders of Class
A Special Common Stock have voting rights in the event of certain amendments to
the Articles of Incorporation and certain mergers and other fundamental
corporate changes. In all other instances, including the election of directors,
the Class A Common Stock and the Class B Common Stock vote as one class. Neither
the holders of Class A Common Stock nor the holders of Class B Common Stock have
cumulative voting rights.
As of February 1, 1996, there were 2,332 record holders of the Company's Class A
Special Common Stock and 1,792 record holders of the Company's Class A Common
Stock. Sural Corporation is the sole record holder of the Company's Class B
Common Stock.
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ITEM 6 SELECTED FINANCIAL DATA
Year Ended December 31,
1995 (1) 1994 (1) 1993 (1)(5) 1992 (5) 1991
-------- -------- ----------- -------- ----
(Dollars in thousands, except per share data)
Statement of Operations Data:
Revenues.............................. $3,362,946 $1,375,304 $1,338,228 $900,345 $721,000
Operating income...................... 329,791 239,794 264,896 165,106 144,951
Equity in net losses of affiliates.... 86,618 40,884 28,872 104,306 83,366
Loss before extraordinary items
and cumulative effect of
accounting changes.................. (37,849) (75,325) (98,871) (217,935) (155,572)
Extraordinary items................... (6,084) (11,703) (17,620) (52,297)
Cumulative effect of accounting
changes............................. (742,734)
Net loss.............................. (43,933) (87,028) (859,225) (270,232) (155,572)
Loss per share before extraordinary
items and cumulative effect of
accounting changes (2).............. (.16) (.32) (.46) (1.08) (.87)
Extraordinary items per share (2)..... (.02) (.05) (.08) (.26)
Cumulative effect of accounting
changes per share (2)............... (3.47)
Net loss per share (2)................ (.18) (.37) (4.01) (1.34) (.87)
Cash dividends
declared per share (2).............. .0933 .0933 .0933 .0933 .0933
Balance Sheet Data:
At year end:
Total assets........................ 9,580,308 6,762,984 4,948,276 4,271,898 2,793,584
Working capital (deficiency)........ 531,589 (52,132) 176,569 36,886 381,183
Long-term debt...................... 6,943,766 4,810,541 4,154,830 3,973,514 2,452,912
Stockholders' (deficiency) equity... (827,651) (726,789) (870,531) (181,641) 19,480
Supplementary Financial Data:
Operating income before
depreciation and amortization (3)... 1,018,843 576,256 606,396 397,153 309,250
Net cash provided by
operating activities (4)............ 520,693 368,994 345,892 252,297 176,228
- ---------------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of events which affect the
comparability of the information reflected in the above selected financial
data.
(2) As adjusted for the Company's three-for-two stock split effective February
2, 1994.
(3) "Operating income before depreciation and amortization" (commonly referred
to in the Company's businesses as "operating cash flow") is presented as a
measure of the Company's ability to generate cash to service its
obligations, including debt service obligations, and to finance capital and
other expenditures. In part due to the capital intensive nature of the
telecommunications industry and the significant level of non-cash
depreciation and amortization expense, operating cash flow is frequently
used as one of the bases for comparing companies in the industry. Operating
cash flow does not purport to represent net income or net cash provided by
operating activities, as those terms are defined under generally accepted
accounting principles, and should not be considered as an alternative to
such measurements as an indicator of the Company's performance.
(4) Represents net cash provided by operating activities as presented in the
Company's consolidated statement of cash flows.
(5) Comparability of the information presented for the years ended December 31,
1993 and 1992 is affected by the Company's acquisitions of AWACS, Inc., the
Non-Wireline cellular telephone system serving the Philadelphia MSA, from
Metromedia Company in March 1992 and Storer in December 1992. Prior to
December 1992, the Company had a 50% interest in Storer which was accounted
for under the equity method.
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ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company has experienced significant growth in recent years through both
strategic acquisitions and growth in its existing businesses. The Company has
historically met its cash needs for operations through its cash flows from
operating activities. Cash requirements for acquisitions and capital
expenditures have been provided through the Company's financing activities and
sales of long-term investments as well as its existing cash and cash equivalents
and short-term investments.
General Developments of Business
Sprint Spectrum
Effective as of January 1996, the Company, Tele-Communications, Inc. ("TCI"),
Cox Communications, Inc. ("Cox," and together with the Company and TCI, the
"Cable Parents") and Sprint Corporation ("Sprint," and together with the Cable
Parents, the "Parents"), and certain subsidiaries of the Parents (the "Partner
Subsidiaries"), entered into a series of agreements relating to their previously
announced joint venture (March 1995) to engage in the communications business.
Under an Amended and Restated Agreement of Limited Partnership (the "Partnership
Agreement") of MajorCo, L.P. (known as "Sprint Spectrum"), the business of
Sprint Spectrum will be the provision of wireless telecommunications services
and will not include the previously authorized business of providing local
wireline communications services to residences and businesses. A partnership
owned entirely by subsidiaries of the Company owns 15% of Sprint Spectrum. The
Company accounts for its investment in Sprint Spectrum under the equity method.
Sprint Spectrum was the successful bidder for 29 personal communications
services ("PCS") licenses in the auction conducted by the Federal Communications
Commission ("FCC") from December 1994 through mid-March 1995. The purchase price
for the licenses was approximately $2.11 billion, all of which has been paid to
the FCC. Sprint Spectrum may also elect to bid in subsequent auctions for PCS
licenses. In addition, Sprint Spectrum has invested, and may continue to invest,
in other entities that hold PCS licenses, may acquire PCS licenses from other
license holders and may affiliate with other license holders.
Pursuant to separate Parent agreements, each Cable Parent and Sprint agreed to
negotiate in good faith on a market-by-market basis for the provision of local
wireline telephony services over the cable communications facilities of the
applicable Cable Parent under the Sprint brand. Accordingly, local telephony
offerings in each market will be the subject of individual agreements to be
negotiated with Sprint, rather than being provided through Sprint Spectrum as
originally contemplated. The offering of local wireline telephone services will
require the removal of regulatory and legislative barriers to local telephone
competition (see "Description of the Company's Businesses - Wired
Telecommunications - Cable Communications - Legislation and Regulation"). Each
Parent agreement also contains certain restrictions on the ability of each
Parent to offer and promote, or package certain of its cable communications
products or services with, certain products and services of other persons and
requires the applicable Cable Parent to make its cable communications facilities
available to Sprint for specified purposes to the extent that it has made such
facilities available to others for such purposes.
The Partner Subsidiaries also terminated a contribution agreement pursuant to
which they had agreed to contribute to Sprint Spectrum their respective
interests in Teleport Communications Group Inc., TCG Partners and certain local
joint ventures managed by such entities (collectively, "TCG"). TCG is one of the
largest competitive access providers in the United States ("US") in terms of
route miles. The Parents reaffirmed their intention to continue to attempt to
integrate the business of TCG with that of Sprint Spectrum.
Scripps Cable
In October 1995, the Company announced its agreement to purchase the cable
television operations ("Scripps Cable") of The E.W. Scripps Company ("E.W.
Scripps") in exchange for shares of the Company's Class A Special Common Stock,
par value $1.00 per share (the "Class A Special Common Stock" -- see Item 5 -
"Market for the Registrant's Common Equity and Related Stockholder Matters"),
worth $1.575 billion (the "Base Consideration"), subject to certain closing
adjustments (the "Scripps Transaction"). Scripps Cable passes approximately 1.2
million homes and serves approximately 800,000 subscribers, with over 60% of its
subscribers located in Sacramento, California and
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Chattanooga and Knoxville, Tennessee. The purchase is expected to close in the
second half of 1996, subject to shareholder and regulatory approval and certain
other conditions.
Pursuant to the Agreement and Plan of Merger dated as of October 28, 1995 (the
"Merger Agreement") by and among the Company, E.W. Scripps and Scripps Howard,
Inc., a wholly owned subsidiary of E.W. Scripps, E.W. Scripps will distribute to
its shareholders all assets other than Scripps Cable. Following such
distribution, E.W. Scripps will be merged with and into the Company (the
"Merger") and each share of E.W. Scripps common stock issued and outstanding
immediately prior to the Merger will be converted into a portion of the shares
of the Class A Special Common Stock to be paid as consideration in the Merger.
Assuming (i) no adjustment has been made to the Base Consideration and (ii) the
closing price of the Class A Special Common Stock is equal to the execution
price ($20.075 per share), as such terms are defined in the Merger Agreement,
the Company would issue to E.W. Scripps' shareholders an aggregate of
approximately 78.5 million shares of Class A Special Common Stock in the Merger,
subject to certain adjustments. Such shares would represent, in the aggregate,
approximately 28.9% of the Class A Special Common Stock outstanding as of
December 31, 1995, on a pro forma basis.
Share Repurchase Program
Concurrent with the announcement of the Scripps Transaction, the Company
announced that its Board of Directors has authorized a market repurchase program
(the "Repurchase Program") pursuant to which the Company may purchase, at such
times and on such terms as it deems appropriate, up to $500.0 million of its
outstanding common equity securities subject to certain restrictions and market
conditions. Through December 31, 1995, the Company had repurchased shares of its
common stock for aggregate consideration of $12.4 million. Through February 1,
1996, the Company had repurchased additional shares for aggregate consideration
of $4.0 million.
QVC
In February 1995, the Company and TCI acquired all of the outstanding stock of
QVC, Inc. and its subsidiaries ("QVC") not previously owned by them
(approximately 65% of such shares on a fully diluted basis) for $46, in cash,
per share (the "QVC Acquisition"), representing a total cost of approximately
$1.4 billion. The QVC Acquisition, including the exercise of certain warrants
held by the Company, was financed with cash contributions from the Company and
TCI of $296.3 million and $6.6 million, respectively, borrowings of $1.1 billion
under a $1.2 billion QVC credit facility and existing cash and cash equivalents
held by QVC. Following the acquisition, the Company and TCI own, through their
respective subsidiaries, 57.45% and 42.55%, respectively, of QVC. The Company,
through a management agreement, is responsible for the day to day operations of
QVC. The Company has accounted for the QVC Acquisition under the purchase method
of accounting and QVC was consolidated with the Company effective February 1,
1995.
Maclean Hunter
In December 1994, the Company, through Comcast MHCP Holdings, L.L.C. (the
"LLC"), acquired the US cable television and alternate access operations of
Maclean Hunter Limited ("Maclean Hunter") from Rogers Communications Inc. and
all of the outstanding shares of Barden Communications, Inc. (collectively, such
acquisitions are referred to as the "Maclean Hunter Acquisition") for
approximately $1.2 billion in cash. The Company and the California Public
Employees' Retirement System ("CalPERS") invested $305.6 million and $250.0
million, respectively, in the LLC, which is owned 55% by a wholly owned
subsidiary of the Company and 45% by CalPERS, and is managed by the Company. The
balance of the Maclean Hunter Acquisition was financed through borrowings under
a credit facility of a wholly owned subsidiary of the LLC. The Company has
accounted for the Maclean Hunter Acquisition under the purchase method of
accounting and has consolidated Maclean Hunter effective December 22, 1994.
-------------------------
Liquidity and Capital Resources
Cash, Cash Equivalents and Short-term Investments
The Company has traditionally maintained significant levels of cash, cash
equivalents and short-term investments to meet its short-term liquidity
requirements. Cash, cash equivalents and short-term investments as of December
31, 1995 and 1994 were $910.0 million and $465.5 million, respectively. As of
December 31, 1995, approximately $410
- 27 -
million of the Company's cash, cash equivalents and short-term investments was
restricted to use by subsidiaries of the Company under contractual or other
arrangements, including approximately $341 million which is restricted to use by
Comcast UK Cable Partners Limited ("Comcast UK Cable"), a subsidiary of the
Company.
The Company's cash and cash equivalents and short-term investments are recorded
at cost which approximates their fair value. At December 31, 1995, the Company's
short-term investments of $371.0 million had a weighted average maturity of
approximately 14 months. However, due to the high degree of liquidity and the
intent of management to use these investments as needed to fund its commitments,
the Company considers these as current assets.
Investments
Under the provisions of the Partnership Agreement, the Partner Subsidiaries have
committed to contribute $4.2 billion in cash to Sprint Spectrum through 1997, of
which the Company's share is $630.0 million. Of this funding requirement, the
Company has made total cash capital contributions to Sprint Spectrum of $346.0
million through December 31, 1995. The Company anticipates that Sprint
Spectrum's capital requirements over the next several years will be significant.
Requirements in excess of committed capital are planned to be funded by Sprint
Spectrum through external financing. Although it is anticipated that external
financing will be available to Sprint Spectrum on acceptable terms and
conditions, no assurances can be given as to such availability. The timing of
the Company's remaining capital contributions to Sprint Spectrum is dependent
upon a number of factors, including Sprint Spectrum's ability to obtain external
financing as well as its working capital requirements.
In July 1995, the Company sold 11.3 million shares of Nextel common stock for
$212.6 million (the "Nextel Transaction"). As a result of this transaction, the
Company recognized a pre-tax gain of $36.2 million. In February 1996, in
connection with certain preemptive rights of the Company under previously
existing agreements with Nextel, the Company purchased approximately 8.16
million shares, classified as available for sale, of Nextel common stock at
$12.25 per share, for a total cost of $99.9 million. The Company continues to
hold options, which expire in 1997, to acquire an additional 25 million shares
of Nextel common stock at $16 per share.
In January 1995, the Company exchanged its investments in Heritage
Communications, Inc. with TCI for approximately 13.3 million publicly-traded
Class A common shares of TCI with a fair market value of approximately $290.0
million. Shortly thereafter, the Company sold approximately 9.1 million
unrestricted TCI shares for total proceeds of approximately $188.0 million
(collectively, the "Heritage Transaction"). As a result of these transactions,
the Company recognized a pre-tax gain of approximately $141.0 million in 1995.
The Company does not have any additional significant contractual commitments
with respect to any of its investments. However, to the extent the Company does
not fund its investees' capital calls, it exposes itself to dilution of its
ownership interests.
Minority Interest Rights
Liberty Media Corporation ("Liberty"), a majority-owned subsidiary of TCI, may,
at certain times following February 9, 2000, trigger the exercise of certain
exit rights with respect to its investment in QVC. If the exit rights are
triggered, the Company has first right to purchase Liberty's stock in QVC at
Liberty's pro rata portion of the fair market value (on a going concern or
liquidation basis, whichever is higher, as determined by an appraisal process)
of QVC. The Company may pay Liberty for such stock, subject to certain rights of
Liberty to consummate the purchase in the most tax-efficient method available,
in cash, the Company's promissory note maturing not more than three years after
issuance, the Company's equity securities or any combination thereof. If the
Company elects not to purchase the stock of QVC held by Liberty, then Liberty
will have a similar right to purchase the stock of QVC held by the Company. If
Liberty elects not to purchase the stock of QVC held by the Company, then
Liberty and the Company will use their best efforts to sell QVC.
As a result of the Maclean Hunter Acquisition, at any time after December 18,
2001, CalPERS may elect to liquidate its interest in the LLC at a price based
upon the fair value of CalPERS' interest in the LLC, adjusted, under certain
circumstances, for certain performance criteria relating to the fair value of
the LLC or to the Company's common stock. Except in certain limited
circumstances, the Company, at its option, may satisfy this liquidity
arrangement by purchasing CalPERS' interest for cash, through the issuance of
the Company's common stock (subject to certain limitations) or by selling the
LLC.
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Capital Expenditures
It is anticipated that during 1996, the domestic operations of the Company will
incur approximately $600 million of capital expenditures, including $300 million
for the upgrading and rebuilding of certain of the Company's cable
communications systems, $100 million for the upgrading of QVC's warehousing and
distribution facilities and $120 million for the upgrading of the Company's
cellular communications systems. The amount of such capital expenditures for
years subsequent to 1996 will depend on numerous factors, many of which are
beyond the Company's control. These factors include whether competition in a
particular market necessitates a system upgrade, whether a particular system has
sufficient capacity to handle new product offerings including the offering of
cable telephony and telecommunications services, whether and to what extent the
Company will be able to recover its investment under FCC rate guidelines and
whether the Company acquires additional systems in need of upgrading or
rebuilding. The Company, however, anticipates capital expenditures for years
subsequent to 1996 will continue to be significant. As of December 31, 1995, the
Company does not have any significant contractual obligations for capital
expenditures.
Financing
The Company has historically utilized a strategy of financing its acquisitions
through senior debt at the acquired operating subsidiary level. Additional
financing has also been obtained by the Company through the issuance of
subordinated debt at the intermediate holding company and parent company levels
and, to some extent, through public offerings of a subsidiary company's stock
and debt instruments. As of December 31, 1995 and 1994, the Company's long-term
debt, including current portion, was $7.029 billion and $4.993 billion,
respectively, of which approximately 54% and 61%, respectively, was at variable
rates. Maturities of long-term debt for the five years commencing in 1996 are
$85.4 million, $154.8 million, $691.6 million, $444.3 million and $575.9
million. As of February 1, 1996, certain subsidiaries of the Company had unused
lines of credit of $1.541 billion. Use of these unused lines of credit is
restricted by the covenants of the related debt agreements and to subsidiary
debt refinancing, subsidiary general corporate purposes and dividend
declaration. The Company's long-term debt had estimated fair values of $7.074
billion and $4.828 billion as of December 31, 1995 and 1994, respectively. The
Company's weighted average interest rate was approximately 8.32%, 7.75% and
8.45% during the years ended December 31, 1995, 1994 and 1993, respectively. The
Company continually evaluates its debt structure with the intention of reducing
its debt service requirements when desirable.
In May 1995, the Company issued $250.0 million principal amount of its 9-3/8%
senior subordinated debentures due 2005. In October 1995, the Company issued
$250.0 million principal amount of its 9-1/8% senior subordinated debentures due
2006. In November 1995, Comcast UK Cable received net proceeds of approximately
$291.1 million from the sale of approximately $517.3 million principal amount at
maturity of its 11.20% senior discount debentures due 2007 (the "2007 Discount
Debentures"). Interest will accrete on the 2007 Discount Debentures at 11.20%
per annum compounded semi-annually from November 15, 1995 to November 15, 2000,
after which date interest will be paid in cash on each May 15 and November 15,
through November 15, 2007. The net proceeds from the offering will be utilized
by Comcast UK Cable for future advances and capital contributions to its equity
investees and subsidiary primarily for the build-out of their telecommunications
networks in the United Kingdom ("UK").
In conjunction with the Repurchase Program, in December 1995, the Company sold
put options on 3.0 million shares of its Class A Special Common Stock. The put
options give the holder the right to require the Company to repurchase such
shares at specified prices on specific dates during the period from May through
July 1996. Proceeds of $2.6 million from the sale of these put options were
credited to additional capital. The amount the Company would be obligated to pay
to repurchase such shares if all outstanding put options were exercised,
totaling $52.1 million, has been reclassified to a temporary equity account in
the Company's consolidated balance sheet as of December 31, 1995. Through
February 1, 1996, the Company sold additional put options on 1.0 million shares
of its Class A Special Common Stock, with expiration dates in July 1996. If the
put options sold in January 1996 were exercised, the Company would be obligated
to pay $17.5 million to repurchase such shares.
Risk Management
The Company has entered into certain foreign exchange forward contracts, foreign
exchange option contracts and interest rate swap and cap agreements as a normal
part of its risk management efforts.
Foreign exchange forward contracts are used by Comcast UK Cable to hedge against
the risk that monetary assets held or denominated in currencies other than its
functional currency (the UK Pound Sterling or "UK Pound") are
- 29 -
devalued as a result of changes in exchange rates. The notional amount of these
contracts was $20.0 million and $100.0 million as of December 31, 1995 and 1994,
respectively. Foreign exchange forward contracts provide an effective hedge
against such monetary assets held since gains and losses realized on the
contracts, which were not significant to the Company's results of operations,
are offset against gains or losses realized on the underlying hedged assets. The
remaining forward contract matures during 1996.
During 1995, Comcast UK Cable entered into certain foreign exchange put option
contracts which may be settled only on November 16, 2000. These put option
contracts are used to limit Comcast UK Cable's exposure to the risk that the
eventual cash outflows related to net monetary liabilities denominated in
currencies other than the UK Pound (principally the 2007 Discount Debentures)
are adversely affected by changes in exchange rates. As of December 31, 1995,
Comcast UK Cable has (pound)250.0 million notional amount of foreign exchange
put option contracts to purchase US dollars at an exchange rate of $1.35 per
(pound)1.00 (the "Ratio"). Foreign exchange put option contracts provide a
hedge, to the extent the exchange rate falls below the Ratio, against Comcast UK
Cable's net monetary liabilities denominated in US dollars since gains and
losses realized on the put option contracts are offset against foreign exchange
gains or losses realized on the underlying net liabilities. Premiums paid for
such put option contracts were not significant and have been recorded as assets
in the Company's consolidated balance sheet. These premiums are being amortized
over the terms of the related contracts.
In order to reduce hedging costs, Comcast UK Cable has sold (pound)250.0 million
notional amount of foreign exchange call option contracts. These call option
contracts may only be settled on their expiration dates. Of these call option
contracts, (pound)200.0 million notional amount settle on November 16, 1996 at
an exchange rate of $1.70 per (pound)1.00 and (pound)50.0 million notional
amount settle on November 16, 2000 at an exchange rate of $1.62 per (pound)1.00.
Changes in fair value between measurement dates relating to these call option
contracts are not significant and have been recorded in the Company's
consolidated statement of operations.
The Company has entered into interest rate swap and cap agreements to limit the
Company's exposure to adverse fluctuations in interest rates. At December 31,
1995, $1.2 billion of the Company's variable rate debt was protected by these
products. Such agreements mature on various dates through 2000 and the related
differentials to be paid or received are recognized over the terms of the
agreements. The estimated fair value of such instruments, based on discounted
future cash flow models, was not significant to the Company as of December 31,
1995.
The credit risks associated with the Company's derivative financial instruments
are controlled through the evaluation and continual monitoring of the
creditworthiness of the counterparties. Although the Company may be exposed to
losses in the event of nonperformance by the counterparties, the Company does
not expect such losses, if any, to be significant.
-------------------------
The Company expects to continue to recognize significant losses and to continue
to pay dividends; therefore, it anticipates that it will continue to have a
deficiency in stockholders' equity that will increase through the date of
consummation of the Scripps Transaction. If the Scripps Transaction is
consummated, the Company will no longer have a deficiency in stockholders'
equity; however, the Company will continue to recognize losses for the
foreseeable future, resulting in decreases in stockholders' equity. The
telecommunications industry, including cable and cellular communications, and
the electronic retailing industry are experiencing increasing competition and
rapid technological changes. The Company's future results of operations will be
affected by its ability to react to changes in the competitive environment and
by its ability to implement new technologies. However, management believes that
competition, technological changes and its significant losses and deficiency in
stockholders' equity will not significantly affect its ability to obtain
financing.
The Company believes that it will be able to meet its current and long-term
liquidity and capital requirements, including its fixed charges, through its
cash flows from operating activities, existing cash, cash equivalents,
short-term investments and lines of credit and other external financing.
Statement of Cash Flows
Cash and cash equivalents increased $203.7 million as of December 31, 1995 from
December 31, 1994 and $174.9 million as of December 31, 1994 from December 31,
1993. Changes in cash and cash equivalents resulted from cash flows from
operating, financing and investing activities which are explained below.
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Net cash provided by operating activities amounted to $520.7 million, $369.0
million and $345.9 million for the years ended December 31, 1995, 1994 and 1993,
respectively. The increase of $151.7 million in net cash provided by operating
activities from 1994 to 1995 was principally due to effects of the QVC
Acquisition and the Maclean Hunter Acquisition. The increase of $23.1 million in
net cash provided by operating activities from 1993 to 1994 was principally due
to a decrease in the Company's net cash interest expense, primarily from the
effects of lower levels of debt outstanding and a lower average cost of debt,
and changes in working capital as a result of the timing of receipts and
disbursements.
Net cash provided by financing activities, which includes the issuances of
securities as well as borrowings, was $2.036 billion, $1.115 billion and $437.2
million for the years ended December 31, 1995, 1994 and 1993, respectively.
During 1995, the Company borrowed $3.728 billion including $1.1 billion in
connection with the QVC Acquisition, $1.085 billion in connection with the
refinancing of certain indebtedness, $300.9 million associated with the funding
of Sprint Spectrum, $300.0 million of the 2007 Discount Debentures, $250.0
million principal amount of the Company's 9-3/8% senior subordinated debentures
due 2005 and $250.0 million principal amount of the Company's 9-1/8% senior
subordinated debentures due 2006. In addition, during 1995, the Company retired
and repaid $1.620 billion of its long-term debt, including $1.186 billion in
connection with the refinancing of certain indebtedness, and $175.0 million of
optional repayments on QVC's credit facility. Proceeds from borrowings of $1.201
billion in 1994 included $1.015 billion relating to the Maclean Hunter
Acquisition. During 1994, the Company repurchased or redeemed and retired $509.0
million of its long-term debt including the Company's $150.0 million, 11-7/8%
senior subordinated debentures due 2004. Additionally, net cash provided by
financing activities in 1994 excludes the conversion of $186.2 million of
long-term debt into 16.8 million shares of Class A Special Common Stock of the
Company. In 1994, the Company received an equity contribution to a subsidiary of
$250.0 million in connection with the Maclean Hunter Acquisition and received
proceeds from the issuance of common stock of Comcast UK Cable of $209.4
million. During 1993, proceeds from borrowings of $954.0 million included $200.0
million principal amount of 9-1/2% senior subordinated debentures due 2008,
$250.0 million principal amount of 3-3/8% / 5-1/2% step-up convertible
subordinated debentures due 2005 and net proceeds of $300.0 million from the
issuance of $541.9 million principal amount at maturity of its 1-1/8% discount
convertible subordinated debentures due 2007. During 1993, the Company retired
$493.0 million of long-term debt. Additionally, net cash provided by financing
activities in 1993 excludes the conversion of $185.4 million of long-term debt
into 17.3 million shares of Class A Special Common Stock of the Company.
Net cash used in investing activities was $2.353 billion, $1.309 billion and
$836.1 million for the years ended December 31, 1995, 1994 and 1993,
respectively. During 1995, net cash used in investing activities includes
acquisitions of $1.386 billion, principally the acquisition of QVC, net of cash
acquired, additional cash investments in affiliates of $480.2 million, including
capital contributions to Sprint Spectrum of $327.5 million, additions to
property and equipment of $623.0 million and net purchases of short-term
investments of $240.8 million. Such amounts were offset by proceeds from sales
of long-term investments of $410.5 million, principally in connection with the
Heritage Transaction and the Nextel Transaction. Acquisitions in 1994 consisted
principally of $1.2 billion paid, including certain transaction costs, in
connection with the Maclean Hunter Acquisition. Net proceeds of $389.3 million
from the sale of short-term investments during 1994 were used principally to
redeem and retire long-term debt. In addition, during 1994, the Company made
capital expenditures of $269.9 million and made additional cash investments in
affiliates of $125.0 million. During 1993, the Company purchased $384.9 million
of short-term investments, made $158.4 million of capital expenditures and made
long-term investments of $272.5 million. Investments in 1993 included the
purchase of an interest in and loans made to TCG of $77.8 million, the purchase
of additional interests in Nextel totaling $118.2 million and the purchase of
additional shares of QVC totaling $32.1 million.
Results of Operations
The effects of the QVC Acquisition and the Maclean Hunter Acquisition have been
to increase significantly the Company's revenues and expenses, resulting in
substantial increases in its operating income before depreciation and
amortization, net interest expense and depreciation and amortization expense
(see "Operating Results by Business Segment" below). As a result of the
increases in depreciation and amortization expense and interest expense
associated with these acquisitions and their financing, it is expected that the
Company will continue to recognize significant losses for the foreseeable
future.
- 31 -
Summarized consolidated financial information for the Company for the three
years ended December 31, 1995, 1994 and 1993 is as follows (dollars in millions,
"NM" denotes percentage is not meaningful):
Year Ended
December 31, Increase/ (Decrease)
1995 1994 $ %
Revenues $3,362.9 $1,375.3 $1,987.6 144.5%
Cost of goods sold from electronic retailing 898.3 898.3 NM
Operating, selling, general and administrative expenses 1,445.8 799.0 646.8 81.0
-------- --------
Operating income before depreciation and
amortization (1) 1,018.8 576.3 442.5 76.8
Depreciation and amortization 689.0 336.5 352.5 104.8
-------- --------
Operating income 329.8 239.8 90.0 37.5
-------- --------
Interest expense 524.7 313.4 211.3 67.4
Investment income (229.8) (24.6) 205.2 NM
Equity in net losses of affiliates 86.6 40.9 45.7 111.7
Other (6.3) 6.3 NM
Income tax expense (benefit) 42.1 (9.2) 51.3 NM
Minority interest (49.7) (5.4) 44.3 NM
Extraordinary items (6.1) (11.7) (5.6) (47.9)
-------- --------
Net loss ($43.9) ($87.0) ($43.1) (49.5%)
======== ========
Year Ended
December 31, Increase/(Decrease)
1994 1993 $ %
Revenues $1,375.3 $1,338.2 $37.1 2.8%
Operating, selling, general and administrative expenses 799.0 731.8 67.2 9.2
-------- --------
Operating income before depreciation and
amortization (1) 576.3 606.4 (30.1) (5.0)
Depreciation and amortization 336.5 341.5 (5.0) (1.5)
-------- --------
Operating income 239.8 264.9 (25.1) (9.5)
-------- --------
Interest expense 313.4 347.4 (34.0) (9.8)
Investment income (24.6) (29.2) (4.6) (15.8)
Equity in net losses of affiliates 40.9 28.9 12.0 41.5
Other 1.5 1.5 100.0
Income tax expense (benefit) (9.2) 15.2 (24.4) (160.5)
Minority interest (5.4) 5.4 NM
Extraordinary items (11.7) (17.6) (5.9) (33.5)
Cumulative effect of accounting changes (742.7) (742.7) NM
-------- --------
Net loss ($87.0) ($859.2) ($772.2) (89.9%)
======== ========
- ------------
(1) Operating income before depreciation and amortization is commonly referred
to in the Company's businesses as "operating cash flow." Operating cash
flow is a measure of a company's ability to generate cash to service its
obligations, including debt service obligations, and to finance capital and
other expenditures. In part due to the capital intensive nature of the
Company's businesses and the resulting significant level of non-cash
depreciation and amortization expense, operating cash flow is frequently
used as one of the bases for comparing the Company's businesses. Operating
cash flow does not purport to represent net income or net cash provided by
operating activities, as those terms are defined under generally accepted
accounting principles, and should not be considered as an alternative to
such measurements as an indicator of the Company's performance. See
"Statement of Cash Flows" above for a discussion of net cash provided by
operating activities.
Operating Results by Business Segment
The following represent the operating results of the Company's significant
business segments, including: "Domestic Cable Communications," the most
significant of the Company's wired telecommunications operations; "Electronic
Retailing," the most significant of the Company's content businesses; and
"Cellular Communications," the most significant of the Company's wireless
telecommunications operations. The remaining components of the Company's
operations are not independently significant to the Company's consolidated
financial position or results of operations (see Note 11 to the Company's
consolidated financial statements).
- 32 -
Domestic Cable Communications
The following table sets forth operating results for the Company's domestic
cable communications segment (dollars in millions).
Year Ended
December 31, Increase
1995 1994 $ %
Service income $1,454.9 $1,065.3 $389.6 36.6%
Operating, selling, general and
administrative expenses 736.4 547.8 188.6 34.4
-------- -------- ------
Operating income before depreciation
and amortization (a) $718.5 $517.5 $201.0 38.8%
====== ====== ======
Year Ended
December 31, Increase/(Decrease)
1994 1993 $ %
Service income $1,065.3 $1,092.7 ($27.4) (2.5%)
Operating, selling, general and
administrative expenses 547.8 540.7 7.1 1.3
-------- -------- ------
Operating income before depreciation
and amortization (a) $517.5 $552.0 ($34.5) (6.3%)
====== ====== ======
- ---------------
(a) See footnote (1) on page 32.
The Maclean Hunter Acquisition accounted for $270.1 million of the $389.6
million increase in service income from 1994 to 1995. Of the remaining increase
of $119.5 million, $46.0 million is attributable to subscriber growth, $54.6
million relates to changes in rates, which includes the change in the estimated
effects of cable rate regulation, $14.0 million results from growth in cable
advertising sales and $4.9 million relates to growth in other product offerings.
The reduction in service income from 1993 to 1994 of $27.4 million is
attributable to a reduction in rates, which includes the estimated effects on
regulated rates as a result of cable rate regulation, of $76.8 million offset,
in part, by the effects of subscriber growth of $32.6 million, growth in cable
advertising sales of $9.2 million and growth in other product offerings of $7.6
million.
The Maclean Hunter Acquisition accounted for $143.7 million of the $188.6
million increase in operating, selling, general and administrative expenses from
1994 to 1995. Of the remaining increase of $44.9 million, $22.6 million is
attributable to increases in the costs of cable programming as a result of
subscriber growth, additional channel offerings and changes in rates, $7.2
million is attributable to increases in expenses associated with the growth in
cable advertising sales and $15.1 million results from increases in the cost of
labor and other volume related expenses. The $7.1 million increase from 1993 to
1994 is attributable to increases in the costs of labor, billing and cable
programming as a result of subscriber growth, partially offset by a reduction of
franchise fee expense. Franchise fees were reported by the Company as a
component of operating expenses prior to the implementation of the Cable
Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act").
Effective September 1, 1993, the Company commenced charging subscribers directly
for such fees as permitted under the 1992 Cable Act and recording amounts
charged as an offset to operating expenses resulting in a decrease in franchise
fee expense of $15.9 million from 1993 to 1994. It is anticipated that the
Company's cost of cable programming will increase in the future as cable
programming rates increase and additional sources of cable programming become
available.
- 33 -
Electronic Retailing
As a result of the QVC Acquisition, the Company commenced consolidating the
financial results of QVC, effective February 1, 1995. The following table
presents comparative pro forma financial information for the years ended
December 31, 1995 and 1994 and is presented herein for purposes of analysis and
may not reflect what actual operating results would have been had the Company
owned QVC since January 1, 1994 (dollars in millions).
Year Ended
December 31, Increase
1995 1994 $ %
Net sales from electronic retailing $1,619.2 $1,374.5 $244.7 17.8%
Cost of goods sold from electronic retailing 976.4 839.5 136.9 16.3
Operating, selling, general and administrative
expenses 387.4 326.1 61.3 18.8
-------- -------- ------
Operating income before depreciation
and amortization (a) $255.4 $208.9 $46.5 22.3%
====== ====== ======
Gross margin on sales 39.7% 38.9%
- ---------------
(a) See footnote (1) on page 32.
The consolidation of QVC's UK operations, effective April 1, 1995, resulted in
an increase in net sales from electronic retailing of $48.4 million from 1994 to
1995. The remaining increase of $196.3 million from 1994 to 1995 includes QVC's
new businesses, which accounted for $34.4 million of the increase, and the
effect of a 9.2% increase in the average number of QVC homes receiving QVC
services.
The $136.9 million increase in cost of goods sold from electronic retailing is
directly related to the growth in net sales. The 0.8 percentage point increase
in gross margin is due to slight changes in product mix from year to year,
resulting in the decrease in cost of goods sold as a percentage of net sales.
The consolidation of QVC's UK operations, effective April 1, 1995, resulted in
an increase in operating, selling, general and administrative expenses of $25.8
million from 1994 to 1995. The remaining increase of $35.5 million from 1994 to
1995 is attributable to higher sales volume, increases in advertising costs and
additional costs associated with new businesses.
Cellular Communications
The following table sets forth the operating results for the Company's cellular
communications segment (dollars in millions).
Year Ended
December 31, Increase
1995 1994 $ %
Service Income $374.9 $286.1 $88.8 31.0%
Operating, selling, general and administrative
expenses 237.1 169.8 67.3 39.6
-------- -------- ------
Operating income before depreciation
and amortization (a) $137.8 $116.3 $21.5 18.5%
====== ====== ======
Year Ended
December 31, Increase
1994 1993 $ %
Service Income $286.1 $202.0 $84.1 41.6%
Operating, selling, general and administrative
expenses 169.8 109.9 59.9 54.5
-------- -------- ------
Operating income before depreciation
and amortization (a) $116.3 $92.1 $24.2 26.3%
====== ====== ======
- ---------------
(a) See footnote (1) on page 32.
Of the respective $88.8 million and $84.1 million increases in service income
from 1994 to 1995 and from 1993 to 1994, $99.6 million and $81.3 million,
respectively, are attributable to the Company's subscriber growth, $10.1
- 34 -
million and $11.1 million, respectively, are attributable to growth in roamer
revenue as a result of the overall growth in the cellular industry and $4.1
million and $1.2 million, respectively, are attributable to new products.
Offsetting these increases are decreases of $25.0 million and $9.5 million,
respectively, resulting from reductions in average minutes-of-use per cellular
subscriber from both comparative periods. The Company expects that the decrease
in average minutes-of-use per cellular subscriber to continue in the future,
which is consistent with industry trends.
Of the respective $67.3 million and $59.9 million increases in operating,
selling, general and administrative expenses from 1994 to 1995 and from 1993 to
1994, $34.8 million and $55.4 million, respectively, are related to subscriber
growth, including the costs to acquire and service subscribers. The remaining
increases of $32.5 million and $4.5 million, respectively, are due to increases
in other expenses, including subscriber retention costs, administrative costs
and theft of service in 1995.
Consolidated Analysis
The $352.5 million increase in depreciation and amortization expense from 1994
to 1995 is due to the acquisitions of QVC and Maclean Hunter, the effects of the
rebuild of certain of the Company's cellular equipment, as described below, and
capital expenditures during the periods, offset by the effects of asset
disposals during the periods. The $5.0 million decrease from 1993 to 1994 is due
to certain of the Company's assets becoming fully depreciated in 1993, partially
offset by the effects of capital expenditures.
In 1995, the Company's cellular division purchased approximately $172.0 million
of switching and cell site equipment which replaced the existing switching and
cell site equipment. The Company substantially completed the rebuild in the
third quarter of 1995. Accordingly, during 1995, the Company charged to its
results of operations approximately $110.0 million which represented the
difference between the net book value of the equipment replaced and the residual
value realized upon its disposal. This charge has been reflected in the
Company's consolidated statement of operations as a component of depreciation
and amortization expense.
The $211.3 million increase in interest expense from 1994 to 1995 is primarily
due to increased levels of debt associated with the acquisitions of QVC and
Maclean Hunter. The $34.0 million decrease from 1993 to 1994 is due to the
effects of lower levels of debt outstanding and a lower average cost of debt.
The Company anticipates that, for the foreseeable future, interest expense will
be a significant cost to the Company and will have a significant adverse effect
on the Company's ability to realize net earnings. The Company believes it will
continue to be able to meet its obligations through its ability both to generate
operating income before depreciation and amortization and to obtain external
financing.
The $205.2 million increase in investment income from 1994 to 1995 is
principally due to the $177.2 million in gains realized in the Heritage
Transaction and Nextel Transaction. The remaining increase for this period is
due to the effects of the QVC Acquisition and an increase in the Company's cash,
cash equivalents and short-term investments, offset by $15.3 million of losses
recorded relating to the net realizable value of certain of the Company's
investments. The $4.6 million decrease from 1993 to 1994 is attributable to a
decrease in the Company's cash, cash equivalents and short-term investments for
this period.
The increases in equity in net losses of affiliates for both periods are due to
increased losses incurred by the Company's international investees, losses
incurred by Sprint Spectrum and certain programming investees and the effects of
the QVC Acquisition.
The $51.3 million increase in income tax expense from 1994 to 1995 is primarily
attributable to the consolidation of QVC for financial reporting purposes. The
$24.4 million increase in income tax benefit from 1993 to 1994 is primarily
attributable to the fact that the 1993 provision for income taxes includes an
increase in income tax expense of approximately $21.0 million relating to the
federal income tax rate change from 34% to 35%.
The $44.3 million increase in minority interest from 1994 to 1995 is
attributable to minority interests in the net income or loss of QVC, Maclean
Hunter and Comcast UK Cable. The $5.4 million increase from 1993 to 1994 is
primarily attributable to minority interests in the net losses of Comcast UK
Cable.
The Company incurred debt extinguishment costs totaling $9.4 million during the
year ended December 31, 1995 in connection with the refinancing of certain
indebtedness, resulting in the Company recording an extraordinary loss, net of
tax, of $6.1 million or $.02 per share. During 1994, the Company paid premiums
and
- 35 -
expensed unamortized debt acquisition costs totaling $18.0 million, primarily in
connection with the redemption of its $150.0 million, 11-7/8% senior
subordinated debentures due 2004, resulting in the Company recording an
extraordinary loss, net of tax, of $11.7 million or $.05 per share. The Company
paid similar premiums of $27.1 million during 1993 in connection with the
redemption of certain of its debt resulting in the Company recording an
extraordinary loss, net of tax, of $17.6 million or $.08 per share.
On January 1, 1993, the Company recorded a one time non-cash charge resulting
from the adoption of Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes," SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," totaling $742.7 million or $3.47 per
share, net of tax.
For the years ended December 31, 1995, 1994 and 1993, the Company's earnings
before cumulative effect of accounting changes, extraordinary items, income tax
expense (benefit), equity in net losses of affiliates and fixed charges
(interest expense) were $615.7 million, $269.8 million and $292.7 million,
respectively. Excluding the pre-tax gains of $177.2 million recognized in 1995
in connection with the Heritage Transaction and the Nextel Transaction, such
earnings were not adequate to cover the Company's fixed charges of $524.7
million, $313.5 million and $347.4 million for the years ended December 31,
1995, 1994 and 1993, respectively. These fixed charges include non-cash interest
of $53.8 million, $53.5 million and $62.3 million for the years ended December
31, 1995, 1994 and 1993, respectively. For all periods presented, the inadequacy
of these earnings to cover fixed charges is primarily due to the substantial
non-cash charges for depreciation and amortization expense, including the 1995
charge associated with the rebuild of certain of the Company's cellular
equipment.
The Company believes that its losses and inadequacy of earnings to cover fixed
charges will not significantly affect the performance of its normal business
activities because of its existing cash and cash equivalents and short-term
investments, its ability to generate operating income before depreciation and
amortization and its ability to obtain external financing.
The Company believes that its operations are not materially affected by
inflation.
Regulatory Developments
The Telecommunications Act of 1996 (the "1996 Telecom Act"), the most
comprehensive reform of the nation's telecommunications laws since the
Communications Act of 1934, became effective in February 1996. The 1996 Telecom
Act will result in changes in the marketplace for cable communications,
telephone and other telecommunications services, including the deregulation of
rates on cable programming service tiers ("CPSTs") in March 1999 for large
Multiple System Operators, such as the Company, and immediately for certain
small operators (see "Description of the Company's Businesses - Wired
Telecommunications - Cable Communications - Legislation and Regulation").
The Company has settled the majority of outstanding proceedings challenging its
rates charged for regulated cable services. In December 1995, the FCC adopted an
order approving a negotiated settlement of rate complaints pending against the
Company for CPSTs which provided approximately $6.6 million in refunds, plus
interest, being given in the form of bill credits, to approximately 1.3 million
of the Company's cable subscribers. This FCC order resolved 160 of the Company's
benchmark rate cases covering the period September 1993 through July 1994 and
104 of the Company's cost-of-service cases for CPSTs covering the period
September 1993 through December 1995. As part of the negotiated settlement, the
Company agreed to forego certain inflation and external cost adjustments for
systems covered by its cost-of-service filings for CPSTs. The FCC's order has
been appealed to a federal appellate court by a local franchising authority
whose rate complaint against the Company was resolved by the negotiated
settlement. The Company currently is seeking to justify rates for basic cable
services and equipment in certain of its cable systems in the State of
Connecticut on the basis of a cost-of-service showing. The State of Connecticut
has ordered the Company to reduce such rates and to make refunds to subscribers.
The Company has appealed the Connecticut decision to the FCC. The Company's
management believes that the ultimate resolution of these pending regulatory
matters will not have a material adverse impact on the Company's financial
position or results of operations.
- 36 -
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Comcast Corporation
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance sheet of Comcast
Corporation and its subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' deficiency and of
cash flows for each of the three years in the period ended December 31, 1995.
Our audits also included the financial statement schedule listed in the Index at
Item 14(b)(i). These financial statements and the financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and the financial statement
schedule based on our audits. We did not audit the consolidated financial
statements of QVC, Inc. ("QVC") as of and for the eleven month period ended
December 31, 1995 and the consolidated financial statements of Comcast
International Holdings, Inc. ("International") and the financial statements of
Garden State Cablevision L.P. ("Garden State") as of and for each of the two
years in the period ended December 31, 1994. QVC and International are
consolidated with the Company. The Company's investment in Garden State is
accounted for under the equity method. QVC's financial statements reflect total
assets and revenues constituting 20% and 44%, respectively, of the Company's
consolidated total assets and revenues as of and for the year ended December 31,
1995. The Company's combined equity in the net assets of International and
Garden State of $111 million as of December 31, 1994 and the Company's combined
equity in the net losses of International and Garden State for the years ended
December 31, 1994 and 1993 of $39 million and $33 million, respectively, are
included in the Company's consolidated financial statements. The financial
statements of QVC, International and Garden State were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar as it relates
to the amounts included in the Company's consolidated financial statements for
QVC, International and Garden State for the periods specified above, is based
solely upon the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, such
consolidated financial statements present fairly, in all material respects, the
financial position of Comcast Corporation and its subsidiaries as of December
31, 1995 and 1994, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles. Also, in our opinion, the financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in the notes to consolidated financial statements, the Company
changed its method of accounting for income taxes effective January 1, 1993 to
conform with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes."
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 29, 1996
- 37 -
COMCAST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
December 31,
ASSETS 1995 1994
CURRENT ASSETS
Cash and cash equivalents............................................. $539,061 $335,320
Short-term investments, at cost which
approximates fair value............................................. 370,982 130,134
Accounts receivable, less allowance for doubtful
accounts of $81,273 and $11,272..................................... 390,698 108,245
Inventories, net...................................................... 243,447 18,553
Prepaid charges and other............................................. 49,671 16,254
Deferred income taxes................................................. 59,799
---------- ----------
Total current assets.............................................. 1,653,658 608,506
---------- ----------
INVESTMENTS, principally in affiliates................................... 906,383 797,075
---------- ----------
PROPERTY AND EQUIPMENT................................................... 2,575,633 2,081,256
Accumulated depreciation.............................................. (932,031) (823,570)
---------- ----------
Property and equipment, net........................................... 1,643,602 1,257,686
---------- ----------
DEFERRED CHARGES
Franchise and license acquisition costs............................... 3,570,620 3,569,745
Excess of cost over net assets acquired and other..................... 2,981,817 1,375,868
---------- ----------
6,552,437 4,945,613
Accumulated amortization..............................................(1,175,772) (845,896)
---------- ----------
Deferred charges, net................................................. 5,376,665 4,099,717
---------- ----------
$9,580,308 $6,762,984
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses................................. $963,991 $417,506
Accrued interest...................................................... 72,675 60,219
Current portion of long-term debt..................................... 85,403 182,913
---------- ----------
Total current liabilities......................................... 1,122,069 660,638
---------- ----------
LONG-TERM DEBT, less current portion..................................... 6,943,766 4,810,541
---------- ----------
DEFERRED INCOME TAXES.................................................... 1,517,995 1,390,849
---------- ----------
MINORITY INTEREST AND OTHER.............................................. 772,004 627,745
---------- ----------
COMMITMENTS AND CONTINGENCIES
COMMON EQUITY PUT OPTIONS................................................ 52,125
---------- ----------
STOCKHOLDERS' DEFICIENCY
Preferred stock, no par value - authorized, 20,000,000
shares; issued, none
Class A special common stock, $1 par value - authorized,
500,000,000 shares; issued, 192,844,814 and 191,230,684............. 192,845 191,231
Class A common stock, $1 par value - authorized,
200,000,000 shares; issued, 37,706,517 and 39,019,809............... 37,707 39,020
Class B common stock, $1 par value - authorized,
50,000,000 shares; issued, 8,786,250 ............................... 8,786 8,786
Additional capital.................................................... 843,113 875,501
Accumulated deficit...................................................(1,914,292) (1,827,647)
Unrealized gains on marketable securities............................. 22,210 3,862
Cumulative translation adjustments.................................... (18,020) (17,542)
---------- ----------
Total stockholders' deficiency.................................... (827,651) (726,789)
---------- ----------
$9,580,308 $6,762,984
========== ==========
See notes to consolidated financial statements.
- 38 -
COMCAST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands, except per share data)
Year Ended December 31,
1995 1994 1993
REVENUES
Service income............................................. $1,875,258 $1,375,304 $1,338,228
Net sales from electronic retailing........................ 1,487,688
---------- ---------- ----------
3,362,946 1,375,304 1,338,228
---------- ---------- ----------
COSTS AND EXPENSES
Operating.................................................. 803,357 409,841 407,846
Cost of goods sold from electronic retailing............... 898,271
Selling, general and administrative........................ 642,475 389,207 323,986
Depreciation and amortization.............................. 689,052 336,462 341,500
---------- ---------- ----------
3,033,155 1,135,510 1,073,332
---------- ---------- ----------
OPERATING INCOME.............................................. 329,791 239,794 264,896
INVESTMENT (INCOME) EXPENSE
Interest expense........................................... 524,727 313,477 347,448
Investment income.......................................... (229,848) (24,606) (29,249)
Equity in net losses of affiliates......................... 86,618 40,884 28,872
Other...................................................... (6,296) 8 1,515
---------- ---------- ----------
375,201 329,763 348,586
---------- ---------- ----------
LOSS BEFORE INCOME TAX EXPENSE (BENEFIT), MINORITY
INTEREST, EXTRAORDINARY ITEMS AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGES............................... (45,410) (89,969) (83,690)
INCOME TAX EXPENSE (BENEFIT).................................. 42,171 (9,234) 15,229
---------- ---------- ----------
LOSS BEFORE MINORITY INTEREST, EXTRAORDINARY
ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGES.................................................... (87,581) (80,735) (98,919)
MINORITY INTEREST............................................. (49,732) (5,410) (48)
---------- ---------- ----------
LOSS BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGES.................... (37,849) (75,325) (98,871)
EXTRAORDINARY ITEMS .......................................... (6,084) (11,703) (17,620)
CUMULATIVE EFFECT OF ACCOUNTING CHANGES....................... (742,734)
---------- ---------- ----------
NET LOSS ($43,933) ($87,028) ($859,225)
========== ========== ==========
LOSS PER SHARE
Loss before extraordinary items and cumulative effect
of accounting changes.................................... ($.16) ($.32) ($.46)
Extraordinary items........................................ (.02) (.05) (.08)
Cumulative effect of accounting changes.................... (3.47)
---------- ---------- ----------
Net loss................................................. ($.18) ($.37) ($4.01)
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING ............................................... 239,679 236,262 213,939
========== ========== ==========
See notes to consolidated financial statements.
- 39 -
COMCAST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31,
1995 1994 1993
OPERATING ACTIVITIES
Net loss................................................... ($43,933) ($87,028) ($859,225)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization............................ 689,052 336,462 341,500
Interest expense......................................... 53,792 53,490 62,316
Equity in net losses of affiliates....................... 86,618 40,884 28,872
Gain on sale of subsidiary............................... (5,523) (5,825)
Gain on sales of long-term investments................... (182,962)
Extraordinary items...................................... 6,084 11,703 17,620
Cumulative effect of accounting changes.................. 742,734
Deferred income taxes, minority interest and other....... (65,368) 4,271 456
---------- ---------- ---------
537,760 353,957 334,273
Increase in accounts receivable, net..................... (62,421) (28,296) (14,406)
Increase in inventories, net............................. (57,487) (7,325) (988)
Increase in prepaid charges and other.................... (23,330) (5,256) (668)
Increase in accounts payable and accrued expenses........ 114,307 57,503 21,133
Increase (decrease) in accrued interest.................. 11,864 (1,589) 6,548
---------- ---------- ---------
Net cash provided by operating activities.............. 520,693 368,994 345,892
---------- ---------- ---------
FINANCING ACTIVITIES
Proceeds from borrowings................................... 3,728,208 1,201,084 953,952
Retirement and repayment of debt........................... (1,619,639) (508,986) (493,047)
(Repurchases) issuances of common stock, net............... (7,091) 2,893 6,652
Issuance of common stock of a subsidiary, net.............. 209,394
Equity contribution to a subsidiary........................ 6,556 250,000
Dividends.................................................. (22,350) (22,688) (20,739)
Other...................................................... (49,970) (16,492) (9,620)
---------- ---------- ---------
Net cash provided by financing activities.............. 2,035,714 1,115,205 437,198
---------- ---------- ---------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired......................... (1,386,001) (1,292,589) (9,315)
(Purchases) sales of short-term investments, net........... (240,848) 389,252 (384,948)
Increase in investments, principally in affiliates......... (480,210) (125,034) (272,529)
Proceeds from sales of long-term investments............... 410,533
Additions to property and equipment........................ (622,996) (269,943) (158,396)
Proceeds from sale of subsidiary........................... 28,183
Other...................................................... (33,144) (39,182) (10,902)
---------- ---------- ---------
Net cash used in investing activities.................. (2,352,666) (1,309,313) (836,090)
---------- ---------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS........................................... 203,741 174,886 (53,000)
CASH AND CASH EQUIVALENTS, beginning of year.................. 335,320 160,434 213,434
---------- ---------- ---------
CASH AND CASH EQUIVALENTS, end of year........................ $539,061 $335,320 $160,434
========== ========== =========
See notes to consolidated financial statements.
- 40 -
COMCAST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(Dollars in thousands)
Unrealized
Common Stock Gains on Cumulative
Class A Additional Accumulated Marketable Translation
Special Class A Class B Capital Deficit Securities Adjustments Total
BALANCE, JANUARY 1, 1993 $87,846 $38,974 $8,786 $540,309 ($837,967) $ ($19,589) ($181,641)
Net loss (859,225) (859,225)
Issuance of common stock 145 1,756 1,901
Conversion of convertible subordinated
debt to common stock 11,537 174,824 186,361
Exercise of options 624 131 10,878 11,633
Retirement of common stock (94) (158) (6,630) (6,882)
Cash dividends, $.0933 per share (20,739) (20,739)
Stock dividend, 50%, effective
February 2, 1994 73,895 (73,895)
Cumulative translation adjustments (1,939) (1,939)
-------- ------- ------ -------- ----------- ------- -------- ---------
BALANCE, DECEMBER 31, 1993 173,953 38,947 8,786 647,242 (1,717,931) (21,528) (870,531)
Net loss (87,028) (87,028)
Issuance of common stock 265 2,205 2,470
Conversion of convertible subordinated
debt to common stock 16,765 166,690 183,455
Exercise of options 527 81 6,000 6,608
Retirement of common stock (279) (8) (5,898) (6,185)
Cash dividends, $.0933 per share (22,688) (22,688)
Unrecognized gain on issuance of common
stock of a subsidiary 59,262 59,262
Unrealized gains on marketable
securities 3,862 3,862
Cumulative translation adjustments 3,986 3,986
-------- ------- ------ -------- ----------- ------- -------- ---------
BALANCE, DECEMBER 31, 1994 191,231 39,020 8,786 875,501 (1,827,647) 3,862 (17,542) (726,789)
Net loss (43,933) (43,933)
Issuance of common stock 1,102 17,442 18,544
Conversion of convertible subordinated
debt to common stock 395 3,960 4,355
Exercise of options 270 126 3,162 3,558
Retirement of common stock (153) (1,439) (7,471) (20,362) (29,425)
Cash dividends, $.0933 per share (22,350) (22,350)
Temporary equity related to put options (52,125) (52,125)
Proceeds from sale of put options 2,644 2,644
Unrealized gains on marketable
securities 18,348 18,348
Cumulative translation adjustments (478) (478)
-------- ------- ------ -------- ----------- ------- -------- ---------
BALANCE, DECEMBER 31, 1995 $192,845 $37,707 $8,786 $843,113 ($1,914,292) $22,210 ($18,020) ($827,651)
======== ======= ====== ======== =========== ======= ======== =========
See notes to consolidated financial statements.
- 41 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. BUSINESS
Comcast Corporation and its subsidiaries (the "Company") is principally
engaged in the development, management and operation of wired and wireless
telecommunications and the provision of content. Wired telecommunications
includes cable and telecommunications services in the United States ("US")
and the United Kingdom ("UK"). Wireless telecommunications includes
cellular services, personal communications services, provided through the
Company's investment in Sprint Spectrum, and direct to home satellite
television. Content is provided through QVC, Inc. and its subsidiaries
("QVC"), an electronic retailer, Comcast Content and Communication
Corporation ("C3") and other programming investments. The Company's
consolidated domestic cable operations served more than 3.4 million
subscribers and passed more than 5.5 million homes as of December 31, 1995.
The Company owns a 50% interest in Garden State Cablevision L.P. ("Garden
State"), a cable communications company serving approximately 200,000
subscribers and passing approximately 292,000 homes. In the UK, a
subsidiary of the Company, Comcast UK Cable Partners Limited ("Comcast UK
Cable"), holds ownership interests in four cable and telephony businesses
that collectively have the potential to serve over 1.6 million homes. The
Company provides cellular telephone communications services pursuant to
licenses granted by the Federal Communications Commission ("FCC") in
markets with a population of over 8.3 million, including the area in and
around the City of Philadelphia, Pennsylvania, the State of Delaware and a
significant portion of the State of New Jersey. Through QVC, the Company
markets a wide variety of products and reaches over 52 million homes across
the US and an additional 4 million in the UK.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and all wholly owned, majority owned and controlled subsidiaries. All
significant intercompany accounts and transactions among the consolidated
entities have been eliminated. Included in the Company's consolidated
balance sheet as of December 31, 1995 and 1994 are the net assets of
foreign subsidiaries which total approximately $115.2 million and $146.4
million, respectively.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Values
The estimated fair value amounts presented in these notes to consolidated
financial statements have been determined by the Company using available
market information and appropriate methodologies. However, considerable
judgment is required in interpreting market data to develop the estimates
of fair value. The estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts. Such fair value estimates are based on pertinent information
available to management as of December 31, 1995 and 1994, and have not been
comprehensively revalued for purposes of these consolidated financial
statements since such dates. Current estimates of fair value may differ
significantly from the amounts presented herein.
Cash Equivalents and Short-term Investments
Cash equivalents consist principally of US Government obligations,
commercial paper, repurchase agreements and certificates of deposit with
maturities of three months or less when purchased. Short-term investments
consist principally of US Government obligations, commercial paper,
repurchase agreements and certificates of deposit with maturities greater
than three months when purchased. The carrying amounts of the Company's
cash equivalents and short-term investments, classified as available for
sale securities, approximate their fair values, which are based on quoted
market prices, as of December 31, 1995 and 1994.
- 42 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued)
Inventories - Electronic Retailing
Inventories, consisting primarily of products held for sale, are stated at
the lower of cost or market. Cost is determined by the first-in, first-out
method.
Net Sales and Returns - Electronic Retailing
Net sales from electronic retailing are recognized at the time of shipment
to customers. An allowance for returned merchandise is provided as a
percentage of sales based on historical experience.
Investments, Principally in Affiliates
Investments are accounted for based on the Company's ability to exercise
significant influence over the operating and financial policies of the
investee. Equity method investments are recorded at original cost and
adjusted periodically to recognize the Company's proportionate share of the
investees' net income or losses after the date of investment, and
additional contributions made and dividends received. Unrestricted publicly
traded investments, classified as available for sale, are recorded at their
fair value as of December 31, 1995 and 1994, with unrealized gains or
losses resulting from changes in fair value between measurement dates
recorded as a component of stockholders' deficiency. Restricted publicly
traded investments and investments in privately held companies are stated
at cost, adjusted for any known diminution in value.
Investment Income
Investment income includes interest income and gains, net of losses, on the
sales of marketable securities. Gross realized gains and losses are
recognized using the specific identification method (see Note 4). In 1995,
investment income also includes losses incurred relating to the net
realizable value of certain of the Company's investments.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided by the
straight-line method over estimated useful lives as follows:
Buildings and improvements 15-40 years
Operating facilities 5-20 years
Other equipment 2-10 years
Improvements and extraordinary repairs that extend asset lives are
capitalized; other repairs and maintenance charges are expensed as
incurred. The cost and related accumulated depreciation applicable to
assets sold or retired are removed from the accounts and the gain or loss
on disposition is recognized in net loss.
Deferred Charges
Franchise and license acquisition costs are amortized on a straight-line
basis over their legal or estimated useful lives up to 40 years. The excess
of cost over the fair value of net assets acquired is being amortized over
their estimated useful lives of up to 40 years.
Valuation of Long-Lived Assets
The Company periodically evaluates the recoverability of its long-lived
assets, including property and equipment and deferred charges, using
objective methodologies. Such methodologies include evaluations based on
the cash flows generated by the underlying assets or other determinants of
fair value.
Postretirement and Postemployment Benefits
The estimated costs of retiree benefits and benefits for former or inactive
employees, after employment but before retirement, are accrued and recorded
as a charge to operations during the years the employees provide services.
Foreign Currency Translation
Assets and liabilities of the Company's foreign subsidiaries, where the
functional currency is the local currency, are translated into US dollars
at the December 31 exchange rate. The related translation adjustments are
recorded as a separate component of stockholders' deficiency. Revenues
- 43 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued)
and expenses are translated using average exchange rates prevailing during
the year. Foreign currency transaction gains and losses are included in net
loss.
Income Taxes
The Company recognizes deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities and expected benefits of utilizing net
operating loss carryforwards. The impact on deferred taxes of changes in
tax rates and laws, if any, applied to the years during which temporary
differences are expected to be settled, are reflected in the financial
statements in the period of enactment.
Loss per Share
For the years ended December 31, 1995, 1994 and 1993, the Company's common
stock equivalents have an antidilutive effect on the loss per share and
therefore, have not been used in determining the total weighted average
number of common shares outstanding. Fully diluted loss per share for 1995,
1994 and 1993 is antidilutive and, therefore, has not been presented.
Stock Split
On December 21, 1993, the Company's Board of Directors (the "Board")
authorized a three-for-two stock split in the form of a 50% stock dividend
payable on February 2, 1994 to shareholders of record on January 12, 1994.
The dividend was paid in Class A Special Common Stock to the holders of
Class A Common, Class A Special Common and Class B Common Stock. Average
number of shares outstanding and related prices, per share amounts, share
conversion and stock option data have been retroactively restated to
reflect the stock split.
Derivative Financial Instruments
The Company does not hold or issue any derivative financial instruments for
trading purposes. The credit risks associated with the Company's derivative
financial instruments are controlled through the evaluation and monitoring
of the creditworthiness of the counterparties. Although the Company may be
exposed to losses in the event of nonperformance by the counterparties, the
Company does not expect such losses, if any, to be significant.
New Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," which will be adopted by the Company in 1996 as
required by this statement. The Company has elected to continue to measure
such compensation expense using the method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," as permitted by SFAS No. 123. When adopted, SFAS No. 123 will
not have any effect on the Company's financial position or results of
operations but will require the Company to provide expanded disclosure
regarding its stock-based employee compensation plans.
Effective January 1, 1995, the Company adopted the provisions of SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." There was no cumulative effect of the adoption
of SFAS No. 121.
- 44 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued)
Effective January 1, 1994, the Company adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
(see Note 4).
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
109, "Accounting for Income Taxes", SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other than Pensions" and SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." The cumulative effect
of the adoption of SFAS No. 109, SFAS No. 106 and SFAS No. 112 increased
the Company's net loss for the year ended December 31, 1993 by $742.7
million, or $3.47 per share.
Reclassifications
Certain reclassifications have been made to the prior years consolidated
financial statements to conform to those classifications used in 1995.
3. ACQUISITIONS AND OTHER SIGNIFICANT EVENTS
Sprint Spectrum
Effective as of January 1996, the Company, Tele-Communications, Inc.
("TCI"), Cox Communications, Inc. ("Cox," and together with the Company and
TCI, the "Cable Parents") and Sprint Corporation ("Sprint," and together
with the Cable Parents, the "Parents"), and certain subsidiaries of the
Parents (the "Partner Subsidiaries"), entered into a series of agreements
relating to their previously announced joint venture (March 1995) to engage
in the communications business. Under an Amended and Restated Agreement of
Limited Partnership (the "Partnership Agreement") of MajorCo, L.P. (known
as "Sprint Spectrum"), the business of Sprint Spectrum will be the
provision of wireless telecommunications services and will not include the
previously authorized business of providing local wireline communications
services to residences and businesses. A partnership owned entirely by
subsidiaries of the Company owns 15% of Sprint Spectrum. The Company
accounts for its investment in Sprint Spectrum under the equity method (see
Note 4).
Sprint Spectrum was the successful bidder for 29 personal communications
services ("PCS") licenses in the auction conducted by the FCC from December
1994 through mid-March 1995. The purchase price for the licenses was
approximately $2.11 billion, all of which has been paid to the FCC. Sprint
Spectrum may also elect to bid in subsequent auctions for PCS licenses. In
addition, Sprint Spectrum has invested, and may continue to invest, in
other entities that hold PCS licenses, may acquire PCS licenses from other
license holders and may affiliate with other license holders.
The Partner Subsidiaries have committed to contribute $4.2 billion in cash
to Sprint Spectrum through 1997, of which the Company's share is $630.0
million. Of this funding requirement, the Company has made total cash
capital contributions to Sprint Spectrum of $346.0 million through December
31, 1995. The Company anticipates that Sprint Spectrum's capital
requirements over the next several years will be significant. Requirements
in excess of committed capital are planned to be funded by Sprint Spectrum
through external financing. Although it is anticipated that external
financing will be available to Sprint Spectrum on acceptable terms and
conditions, no assurances can be given as to such availability. The timing
of the Company's remaining capital contributions to Sprint Spectrum is
dependent upon a number of factors, including Sprint Spectrum's ability to
obtain external financing as well as its working capital requirements.
Pursuant to separate Parent agreements, each Cable Parent and Sprint agreed
to negotiate in good faith on a market-by-market basis for the provision of
local wireline telephony services over the cable communications facilities
of the applicable Cable Parent under the Sprint brand. Accordingly, local
telephony offerings in each market will be the subject of individual
agreements to be negotiated with Sprint, rather than being provided through
Sprint Spectrum as originally contemplated. The offering of local wireline
telephone services will require the removal of regulatory and legislative
barriers to local telephone competition. Each Parent agreement also
contains certain restrictions on the ability of each Parent to offer and
promote, or package certain of its cable communications products or
services with, certain products and services of other persons and requires
the
- 45 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued)
applicable Cable Parent to make its cable communications facilities
available to Sprint for specified purposes to the extent that it has made
such facilities available to others for such purposes.
The Partner Subsidiaries also terminated a contribution agreement pursuant
to which they had agreed to contribute to Sprint Spectrum their respective
interests in Teleport Communications Group Inc., TCG Partners
(collectively, "Teleport") and certain local joint ventures managed by such
entities (with Teleport, "TCG"). TCG is one of the largest competitive
access providers in the US in terms of route miles. The Parents reaffirmed
their intention to continue to attempt to integrate the business of TCG
with that of Sprint Spectrum.
Scripps Cable
In October 1995, the Company announced its agreement to purchase the cable
television operations ("Scripps Cable") of The E.W. Scripps Company ("E.W.
Scripps") in exchange for shares of the Company's Class A Special Common
Stock, par value $1.00 per share (the "Class A Special Common Stock"),
worth $1.575 billion (the "Base Consideration"), subject to certain closing
adjustments (the "Scripps Transaction"). Scripps Cable passes approximately
1.2 million homes and serves approximately 800,000 subscribers, with over
60% of its subscribers located in Sacramento, California and Chattanooga
and Knoxville, Tennessee. The purchase is expected to close in the second
half of 1996, subject to shareholder and regulatory approval and certain
other conditions.
Pursuant to the Agreement and Plan of Merger dated as of October 28, 1995
(the "Merger Agreement") by and among the Company, E.W. Scripps and Scripps
Howard, Inc., a wholly owned subsidiary of E.W. Scripps, E.W. Scripps will
distribute to its shareholders all assets other than Scripps Cable.
Following such distribution, E.W. Scripps will be merged with and into the
Company (the "Merger") and each share of E.W. Scripps common stock issued
and outstanding immediately prior to the Merger will be converted into a
portion of the shares of the Class A Special Common Stock to be paid as
consideration in the Merger. Assuming (i) no adjustment has been made to
the Base Consideration and (ii) the closing price of the Class A Special
Common Stock is equal to the execution price ($20.075 per share), as such
terms are defined in the Merger Agreement, the Company would issue to E.W.
Scripps' shareholders an aggregate of approximately 78.5 million shares of
Class A Special Common Stock in the Merger, subject to certain adjustments.
Such shares would represent, in the aggregate, approximately 28.9% of the
Class A Special Common Stock outstanding as of December 31, 1995, on a pro
forma basis.
Share Repurchase Program
Concurrent with the announcement of the Scripps Transaction, the Company
announced that its Board has authorized a market repurchase program (the
"Repurchase Program") pursuant to which the Company may purchase, at such
times and on such terms as it deems appropriate, up to $500.0 million of
its outstanding common equity securities, subject to certain restrictions
and market conditions (see Notes 6 and 9).
QVC
In February 1995, the Company and TCI acquired all of the outstanding stock
of QVC not previously owned by them (approximately 65% of such shares on a
fully diluted basis) for $46, in cash, per share (the "QVC Acquisition"),
representing a total cost of approximately $1.4 billion. The QVC
Acquisition, including the exercise of certain warrants held by the
Company, was financed with cash contributions from the Company and TCI of
$296.3 million and $6.6 million, respectively, borrowings of $1.1 billion
under a $1.2 billion QVC credit facility and existing cash and cash
equivalents held by QVC. Following the acquisition, the Company and TCI
own, through their respective subsidiaries, 57.45% and 42.55%,
respectively, of QVC. The Company, through a management agreement, is
responsible for the day to day operations of QVC. The Company has accounted
for the QVC Acquisition under the purchase method of accounting and QVC was
consolidated with the Company effective February 1, 1995.
- 46 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued)
Maclean Hunter
In December 1994, the Company, through Comcast MHCP Holdings, L.L.C. (the
"LLC"), acquired the US cable television and alternate access operations of
Maclean Hunter Limited ("Maclean Hunter") from Rogers Communications Inc.
and all of the outstanding shares of Barden Communications, Inc. ("BCI,"
and collectively, such acquisitions are referred to as the "Maclean Hunter
Acquisition") for approximately $1.2 billion in cash. The Company and the
California Public Employees' Retirement System ("CalPERS") invested $305.6
million and $250.0 million, respectively, in the LLC, which is owned 55% by
a wholly owned subsidiary of the Company and 45% by CalPERS, and is managed
by the Company. The balance of the Maclean Hunter Acquisition was financed
through borrowings under a credit facility of a wholly owned subsidiary of
the LLC. The Company has accounted for the Maclean Hunter Acquisition under
the purchase method of accounting and has consolidated Maclean Hunter
effective December 22, 1994.
Cellular Rebuild
In 1995, the Company's cellular division purchased approximately $172.0
million of switching and cell site equipment which replaced the existing
switching and cell site equipment (the "Cellular Rebuild"). The Company
substantially completed the Cellular Rebuild in the third quarter of 1995.
Accordingly, during 1995, the Company charged to its results of operations
approximately $110.0 million which represented the difference between the
net book value of the equipment replaced and the residual value realized
upon its disposal. This charge has been reflected in the Company's
consolidated statement of operations as a component of depreciation and
amortization expense.
Unaudited Pro Forma Information
The following unaudited pro forma information for the years ended December
31, 1995 and 1994 has been presented as if the QVC Acquisition and the
Maclean Hunter Acquisition had occurred on January 1, 1994. This unaudited
pro forma information is based on historical results of operations adjusted
for acquisition costs and, in the opinion of management, is not necessarily
indicative of what the results would have been had the Company operated the
acquired entities since January 1, 1994 (dollars in millions, except per
share data).
Year Ended December 31,
1995 1994
Revenues ................................. $3,493.3 $3,003.9
Loss before extraordinary items .......... (42.8) (163.0)
Net loss ................................. (48.9) (174.7)
Net loss per share ....................... (.20) (.74)
4. INVESTMENTS
December 31,
1995 1994
(Dollars in thousands)
Investments - Equity method............... $681,347 $389,851
Investments - Public companies............ 170,096 216,002
Investments - Privately held companies.... 54,940 191,222
------ -------
$906,383 $797,075
======== ========
- 47 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued)
Investments - Equity Method
Summarized financial information for equity method investments for 1995,
1994 and 1993 is as follows (dollars in thousands):
Three Months Year Ended
Ended December 31, Year Ended Year Ended
January 31,1995 1995 December 31, December 31,
QVC (2) Other Combined (1) 1994 (2) 1993
Combined Results of Operations
Revenues, net............................... $425,921 $638,579 $1,064,500 $1,698,806 $165,688
Depreciation and amortization............... 12,992 154,440 167,432 154,374 70,501
Operating income (loss)..................... 58,247 (209,626) (151,379) 20,034 (38,519)
Net income (loss) as reported
by affiliates........................... 28,333 (310,604) (282,271) (136,967) (66,587)
Company's Equity in Net Income (Loss)
Equity in current period net income
(loss).................................... $4,286 ($85,545) ($81,259) ($40,254) ($28,872)
Amortization income (expense) (3)........... 1,194 (6,553) (5,359) (630)
-------- -------- ---------- ---------- --------
Total equity in net income (loss)......... $5,480 ($92,098) ($86,618) ($40,884) ($28,872)
======== ======== ========== ========== ========
December 31, December 31,
1995 (1) 1994 (2)
Combined Financial Position
Current assets.................................. $437,160 $751,914
Noncurrent assets............................... 4,288,327 2,059,285
Current liabilities............................. 318,378 638,209
Noncurrent liabilities.......................... 1,683,110 974,815
(1) Excludes the results of operations (subsequent to January 31, 1995) and
financial position of QVC, which were consolidated with the Company
effective February 1, 1995.
(2) Through January 31, 1995, QVC's fiscal year end was January 31, and
therefore, the Company recorded its equity interest in QVC's net income
two months in arrears. For the year ended December 31, 1995, the
Company recorded its proportionate interest in QVC's net income for the
period from November 1, 1994 through January 31, 1995. Such results
were not previously recorded by the Company since QVC's results of
operations were recorded two months in arrears. The effect of this
one-time adjustment was not significant to the Company's results of
operations. The summarized financial information as of and for the year
ended December 31, 1994 includes financial information for QVC as of
and for the twelve months ended October 31, 1994.
(3) The differences between the Company's recorded investments and its
proportionate interests in the book value of the investees' net assets
are being amortized to equity in net income or loss, primarily over a
period of twenty years, which is consistent with the estimated lives of
the underlying assets.
The original cost of investments accounted for under the equity method of
accounting totaled approximately $964.7 million and $565.4 million as of
December 31, 1995 and 1994, respectively. As of December 31, 1995 and 1994,
equity method investments include the Company's interests in Sprint
Spectrum (see Note 3), TCG (see Note 3), Garden State and interests in
three of its four UK cable and telecommunications businesses.
Effective January 1, 1994, the Company commenced accounting for QVC (see
Note 3), TCG and certain other investments under the equity method of
accounting due to changes in the nature of the relationships between the
Company and the investees which allow the Company to exercise significant
influence over their operating and financial policies. The Company's prior
year financial statements were not restated due to the insignificance of
the Company's proportionate ownership interests in the net income or loss
of the investees for those periods.
- 48 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued)
Comcast UK Cable holds, among other things, the Company's equity method
investments in UK affiliates: Birmingham Cable Corporation Limited, Cable
London PLC and Cambridge Holding Company Limited. On September 27, 1994,
Comcast UK Cable consummated an initial public offering (the "IPO") of 15.0
million of its Class A Common Shares for net proceeds of $209.4 million. As
a result of the IPO and related transactions, the Company beneficially owns
approximately 31.2% of the total outstanding Comcast UK Cable common
shares. Because the Class A Common Shares are entitled to one vote per
share and the Class B Common Shares are entitled to ten votes per share,
the Company, through its ownership of the Class B Common Shares, controls
approximately 81.9% of the total voting power of all outstanding Comcast UK
Cable common shares and continues to consolidate Comcast UK Cable. As a
result of the IPO and related transactions, the Company recorded an
aggregate minority interest liability in Comcast UK Cable of $261.4 million
in 1994. In addition, the Company recorded the increase in its
proportionate share of Comcast UK Cable's net assets as an increase in
additional capital of $59.3 million.
The Company holds a 20% interest in Teleport with an original cost of
approximately $66.0 million as of December 31, 1995 and 1994. The Company
also had loans to Teleport totaling $53.8 million and $39.5 million at
December 31, 1995 and 1994, respectively.
Investments - Public Companies
As of December 31, 1994, the Company held 11.3 million shares of common
stock of Nextel Communications, Inc. ("Nextel"), classified as available
for sale, representing a 10.7% interest in Nextel's then outstanding common
stock. Nextel is a specialized mobile radio licensee developing an enhanced
service capability. In July 1995, the Company sold these shares for $212.6
million (the "Nextel Transaction"). As a result of this transaction, the
Company recognized a pre-tax gain of $36.2 million in 1995.
The Company had recorded its investment in Nextel common stock, with an
historical cost of $175.9 million as of December 31, 1994, at its estimated
fair value, resulting in an unrealized pre-tax loss of $14.0 million as of
December 31, 1994. As of December 31, 1995, the Company held approximately
693,000 shares of Nextel common stock. The Company has recorded its
investment, with an historical cost of $11.1 million, at its estimated fair
value, resulting in an unrealized pre-tax loss of approximately $905,000 as
of December 31, 1995.
As of December 31, 1995 and 1994, the Company owns options to acquire
approximately 25.0 million and 25.2 million shares of Nextel common stock,
respectively, principally at $16 per share, with an estimated fair value of
$99.7 million and $149.2 million, respectively, which are recorded at their
historical cost of $20.0 million and $23.5 million, respectively.
Investments in options have been valued using the Black-Scholes Option
Pricing method.
In February 1996, in connection with certain preemptive rights of the
Company under previously existing agreements with Nextel, the Company
purchased approximately 8.16 million shares, classified as available for
sale, of Nextel common stock at $12.25 per share, for a total cost of $99.9
million. Had the Company owned such shares as of December 31, 1995, the
fair value of these shares would have been $120.3 million.
The Company holds unrestricted equity investments in certain other publicly
traded companies with an historical cost of $104.8 million and $10.7
million as of December 31, 1995 and 1994, respectively. As of December 31,
1995 and 1994, the Company has recorded these investments at their
estimated fair values of $139.9 million and $30.6 million, resulting in
unrealized pre-tax gains of $35.1 million and $19.9 million, respectively.
Investments - Privately Held Companies
In January 1995, the Company exchanged its investments in Heritage
Communications, Inc. ("Heritage") with TCI for approximately 13.3 million
publicly-traded Class A common shares of TCI with a fair market value of
approximately $290.0 million. Shortly thereafter, the Company sold
approximately 9.1 million unrestricted TCI shares for total proceeds of
approximately $188.0 million (collectively, the "Heritage Transaction"). As
a result of these transactions, the Company recognized a pre-tax gain of
approximately $141.0 million in 1995.
- 49 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued)
It is not practicable to estimate the fair value of the Company's other
investments in privately held companies with a recorded cost, excluding
Heritage, of $54.9 million and $50.3 million as of December 31, 1995 and
1994, respectively, due to a lack of quoted market prices and excessive
costs involved in determining such fair value.
5. LONG-TERM DEBT
December 31,
1995 1994
(Dollars in thousands)
Notes payable to banks and insurance companies, due
in installments through 2004.......................................... $4,476,460 $3,280,035
Senior participating redeemable zero coupon notes, due 2000............. 402,401 361,538
11.20% Senior discount debentures, due 2007............................. 304,246
10% Subordinated debentures, due 2003................................... 124,615 122,858
10-1/4% Senior subordinated debentures, due 2001........................ 125,000 125,000
9-3/8% Senior subordinated debentures, due 2005......................... 250,000
9-1/8% Senior subordinated debentures, due 2006......................... 250,000
9-1/2% Senior subordinated debentures, due 2008......................... 200,000 200,000
10-5/8% Senior subordinated debentures, due 2012........................ 300,000 300,000
Convertible subordinated debt:
Zero coupon convertible subordinated notes............................ 4,345
3-3/8% / 5-1/2% Step-up convertible subordinated
debentures, due 2005................................................ 250,000 250,000
1-1/8% Discount convertible subordinated debentures, due 2007......... 327,514 314,546
Other debt, due in installments principally through 1998................ 18,933 35,132
---------- ----------
7,029,169 4,993,454
Less current portion................................................... 85,403 182,913
---------- ----------
$6,943,766 $4,810,541
========== ==========
The maturities of long-term debt outstanding as of December 31, 1995, as
adjusted for the refinancing of a subsidiary's indebtedness in February
1996, for the four years after 1996 are as follows:
(Dollars in thousands)
1997............................. $154,789
1998............................. 691,560
1999............................. 444,304
2000............................. 575,864
Zero Notes
The Company issued the Senior participating redeemable zero coupon notes,
due 2000 (the "Zero Notes"), in conjunction with its 1992 acquisition of
AWACS, Inc. ("AWACS"), the non-wireline cellular telephone system serving
the Philadelphia Metropolitan Statistical Area, from Metromedia Company.
The Zero Notes outstanding have an aggregate face amount payable at
maturity of $629.4 million, accreting at 11% per annum. If, at maturity, or
an earlier redemption date, 35%, subject to reduction in certain
circumstances, of the private market value, as determined by applicable
procedures, of the Company's cellular subsidiaries is greater than the
accreted value plus certain premiums, then such greater amount will
constitute the redemption price. The holders of the Zero Notes have the
right, upon request of the holders of the majority of the notes, to require
the Company to redeem the Zero Notes at any time on or after March 5, 1998.
The accreted value of the Zero Notes, without
- 50 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued)
giving effect to the alternative formula based on the private market value
of the cellular business, of $402.4 million as of December 31, 1995 has
been presented above as a 1998 maturity. As of December 31, 1995,
approximately $188.4 million accreted value of the Zero Notes is payable,
at the Company's option, either in cash or the Company's Class A Special
Common Stock.
2007 Discount Debentures
In November 1995, Comcast UK Cable received net proceeds of approximately
$291.1 million from the sale of approximately $517.3 million principal
amount at maturity of its 11.20% senior discount debentures due 2007 (the
"2007 Discount Debentures"). Interest will accrete on the 2007 Discount
Debentures at 11.20% per annum compounded semi-annually from November 15,
1995 to November 15, 2000, after which date interest will be paid in cash
on each May 15 and November 15, through November 15, 2007.
Convertible Subordinated Debt
The 3-3/8% / 5-1/2% step-up convertible subordinated debentures due 2005
are convertible into the Company's Class A Special Common Stock at a
conversion price of $24.50 per share. Interest on the debentures accrues at
a rate per annum of 3-3/8% from the date of issuance to September 8, 1997,
from and after such time the Company will have the right to redeem the
debentures for cash. Interest will accrue at a rate per annum of 5- 1/2%
from September 9, 1997 to maturity, or earlier redemption.
The 1-1/8% discount convertible subordinated debentures due 2007 are
convertible into the Company's Class A Special Common Stock at a conversion
rate equal to 19.3125 shares per $1,000 principal amount at maturity. The
conversion price will not be adjusted for accrued interest or original
issue discount. The debentures were issued at 55.363% of their principal
amount of $541.9 million at maturity resulting in a 6% effective annual
yield to maturity. At any time on or after October 15, 1997, the Company
may redeem such debentures for cash.
During 1994, $34.1 million of the zero coupon convertible subordinated
notes due 1995 were converted into approximately 3.3 million shares of the
Company's Class A Special Common Stock. In January 1995, the remaining $4.3
million of the notes were converted by the holders into approximately
395,000 shares of the Company's Class A Special Common Stock.
In February 1994, substantially all of the Company's 7% convertible
subordinated debentures due 2001 were converted into approximately 13.5
million shares of the Company's Class A Special Common Stock.
Debt Extinguishment
The Company incurred debt extinguishment costs totaling $9.4 million during
1995 in connection with the refinancing of certain indebtedness, resulting
in the Company recording an extraordinary loss, net of tax, of $6.1 million
or $.02 per share. During 1994, the Company paid premiums and expensed
unamortized debt acquisition costs totaling $18.0 million, primarily in
connection with the redemption of its $150.0 million, 11-7/8% Senior
subordinated debentures due 2004, resulting in the Company recording an
extraordinary loss, net of tax, of $11.7 million or $.05 per share. The
Company paid similar premiums of $27.1 million during 1993 in connection
with the redemption of certain of its debt resulting in the Company
recording an extraordinary loss, net of tax, of $17.6 million or $.08 per
share.
Interest Rates
Fixed interest rates on notes payable to banks and insurance companies
range from 8.6% to 10.57%. Bank debt interest rates vary based upon one or
more of the following rates at the option of the Company:
Prime rate to prime plus 1%;
London Interbank Offered Rate (LIBOR) plus 1/2% to 2-1/8%; and
Certificate of deposit rate plus 7/8% to 2-1/8%.
As of December 31, 1995 and 1994, the Company's effective weighted average
interest rate on its variable rate bank and insurance company debt
outstanding was 7.87% and 7.63%, respectively.
- 51 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued)
Foreign Currency and Interest Rate Risk Management
The Company has entered into interest rate swap and cap agreements to limit
its exposure to adverse fluctuations in interest rates. As of December 31,
1995 and 1994, $1.2 billion and $415.0 million, respectively, of the
Company's variable rate debt was protected by these products. Such
agreements mature on various dates through 2000.
The Company has entered into certain foreign exchange option contracts as a
normal part of its foreign currency risk management efforts. During 1995,
Comcast UK Cable entered into certain foreign exchange put option contracts
which may be settled only on November 16, 2000. These put option contracts
are used to limit Comcast UK Cable's exposure to the risk that the eventual
cash outflows related to net monetary liabilities denominated in currencies
other than its functional currency (the UK Pound Sterling or "UK Pound")
(principally the 2007 Discount Debentures) are adversely affected by
changes in exchange rates. As of December 31, 1995, Comcast UK Cable has
(pound)250.0 million notional amount of foreign exchange put option
contracts to purchase US dollars at an exchange rate of $1.35 per
(pound)1.00 (the "Ratio"). Foreign exchange put option contracts provide a
hedge, to the extent the exchange rate falls below the Ratio, against
Comcast UK Cable's net monetary liabilities denominated in US dollars since
gains and losses realized on the put option contracts are offset against
foreign exchange gains or losses realized on the underlying net
liabilities. Premiums paid for such put option contracts were not
significant and have been recorded as assets in the Company's consolidated
balance sheet. These premiums are being amortized over the terms of the
related contracts.
In order to reduce hedging costs, Comcast UK Cable has sold (pound)250.0
million notional amount of foreign exchange call option contracts. These
call option contracts may only be settled on their expiration dates. Of
these call option contracts, (pound)200.0 million notional amount settle on
November 16, 1996 at an exchange rate of $1.70 per (pound)1.00 and
(pound)50.0 million notional amount settle on November 16, 2000 at an
exchange rate of $1.62 per (pound)1.00. Changes in fair value between
measurement dates relating to these call option contracts are not
significant and have been recorded in the Company's consolidated statement
of operations.
Debt Covenants
Certain of the Company's subsidiaries' loan agreements contain restrictive
covenants which limit the subsidiaries' ability to enter into arrangements
for the acquisition of property and equipment, investments, mergers and the
incurrence of additional debt. Certain of these agreements require that
certain ratios and cash flow levels be maintained and contain certain
restrictions on dividend payments and advances of funds to the Company. The
Company and its subsidiaries were in compliance with such restrictive
covenants for all periods presented. In addition, the stock of certain
subsidiary companies is pledged as collateral for the notes payable to
banks and insurance companies.
As of December 31, 1995, approximately $410 million of the Company's cash,
cash equivalents and short-term investments was restricted to use by
subsidiaries of the Company under contractual or other arrangements,
including approximately $341 million which is restricted to use by Comcast
UK Cable.
Lines and Letters of Credit
As of February 1, 1996, certain subsidiaries of the Company had unused
lines of credit of $1.541 billion. Use of these unused lines of credit is
restricted by the covenants of the related debt agreements and to
subsidiary debt refinancing, subsidiary general corporate purposes and
dividend declaration.
As of December 31, 1995, the Company and certain of its subsidiaries had
unused irrevocable standby letters of credit totaling $63.9 million to
cover potential fundings associated with several projects.
- 52 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued)
6. STOCKHOLDERS' DEFICIENCY
Preferred Stock
The Company is authorized to issue, in one or more series, up to a maximum
of 20.0 million shares of preferred stock without par value. The shares can
be issued with such designations, preferences, qualifications, privileges,
limitations, restrictions, options, conversion rights and other special or
related rights as the Board shall from time to time fix by resolution.
Common Stock
Class A Special Common Stock is generally nonvoting and each share of Class
A Common Stock is entitled to one vote. Each share of Class B Common Stock
is entitled to fifteen votes and is convertible, share for share, into
Class A or Class A Special Common Stock, subject to certain restrictions.
As of December 31, 1995, 20.7 million shares of Class A Special Common
Stock were reserved for issuance upon conversion of the Company's
convertible subordinated debentures.
Repurchases and Retirements
Through December 31, 1995, the Company had repurchased shares of its common
stock for aggregate consideration of $12.4 million pursuant to the
Repurchase Program (see Note 3). Through February 1, 1996, the Company had
repurchased additional shares for aggregate consideration of $4.0 million.
In addition, the Company sold put options on 3.0 million shares of its
Class A Special Common Stock in December 1995. Through February 1, 1996,
the Company sold additional put options on 1.0 million shares of its Class
A Special Common Stock (see Note 9).
In December 1995, the Company issued 751,000 shares of its Class A Special
Common Stock to the Company's Retirement-Investment Plan in exchange for an
equivalent number of shares of its Class A Common Stock, held as an
investment of the plan.
Stock Option Plans
The Company maintains qualified and nonqualified stock option plans for
employees, directors and other persons under which the option prices are
not less than the fair market value of the shares at the date of grant.
Under these plans, 16.3 million shares of Class A Special Common Stock,
229,000 shares of Class A Common Stock and 658,000 shares of Class B Common
Stock were reserved as of December 31, 1995. Option terms are generally
from five to ten and one-half years with options becoming exercisable at
various dates.
- 53 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued)
Changes in the number of shares subject to outstanding but unexercised
options under the Company's option plans for the years ended December 31,
1995, 1994 and 1993 were as follows:
Common Stock
Class A
Special Class A Class B
BALANCE, JANUARY 1, 1993........................................ 7,342,018 667,463 658,125
Options granted at prices of $12.00 to $22.08 per share...... 1,186,350
Options exercised at prices of $1.57 to $12.58 per share..... (935,515) (196,968)
Options cancelled............................................ (80,125) (2,525)
--------- --------- ---------
BALANCE, DECEMBER 31, 1993...................................... 7,512,728 467,970 658,125
Options granted at prices of $16.13 to $23.28 per share...... 5,165,216
Options exercised at prices of $1.73 to $11.92 per share..... (526,857) (81,472)
Options cancelled............................................ (282,236) (24,935)
--------- --------- ---------
BALANCE, DECEMBER 31, 1994...................................... 11,868,851 361,563 658,125
Options granted at prices of $14.63 to $22.00 per share...... 2,899,339
Options exercised at prices of $3.32 to $15.50 per share..... (267,505) (128,651)
Options cancelled............................................ (292,391) (3,700)
--------- --------- ---------
BALANCE, DECEMBER 31, 1995...................................... 14,208,294 229,212 658,125
========== ======= =======
Average price of options outstanding at
December 31, 1995............................................ $14.25 $4.87 $5.70
========== ======= =======
As of December 31, 1995, options to purchase 5.8 million shares of Class A
Special Common Stock, 226,000 shares of Class A Common Stock and 557,000
shares of Class B Common Stock were exercisable.
Restricted Stock Plan
The Company has a restricted stock program whereby management employees may
be granted restricted shares of the Company's Class A Special Common Stock.
Shares are subject to certain vesting provisions. The shares awarded do not
have voting or dividend rights until vesting occurs. Restrictions on the
awards expire annually, over a period generally not to exceed five years
from the date of the awards. The Company recognizes compensation expense
over the vesting period. As of December 31, 1995, there were 1.1 million
unvested shares granted under the program of which 509,000 vested in
January 1996. Total compensation expense recognized in 1995, 1994 and 1993
under this program was $4.6 million, $4.4 million and $3.4 million,
respectively.
QVC Stock Option/SAR Plans
QVC maintains a qualified and nonqualified combination stock option/Stock
Appreciation Rights ("SAR") plan (the "QVC Tandem Plan") and a SAR plan
(the "QVC SAR Plan") for employees, officers, directors and other persons
designated by the Compensation Committee of QVC's Board of Directors. Under
the QVC Tandem Plan, the option prices are not less than the fair market
values at the date of grant. If the SAR feature of the Tandem Plan is
elected, eligible participants receive 75% of the excess of the fair market
value of a share of QVC stock over the exercise price of the option to
which it is attached at the exercise date. Because the exercise of the
option component is more likely, no compensation expense has been recorded.
Under the QVC SAR Plan, eligible participants are entitled to receive 100%
of the excess of the fair market value of the QVC stock at the exercise
date over the fair value of such stock at the date of grant. Option and SAR
terms may be up to 10 years from the date of grant, with options and SARs
becoming exercisable at various dates.
During the year ended December 31, 1995, 142,000 options were granted at a
price of $460 per share. As the first vesting date was January 1, 1996, no
options were exercisable as of December 31, 1995. Holders have stated an
intention not to exercise the SAR feature of the QVC Tandem Plan.
- 54 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued)
Under the QVC SAR plan, 8,500 SARs are outstanding as of December 31, 1995
and compensation expense of $1.1 million was recorded in 1995 related to
such plan.
7. INCOME TAXES
As a result of the Maclean Hunter Acquisition, the Company's deferred
income tax liability was increased in 1994 by approximately $488.0 million
for temporary differences between the financial reporting basis and the
income tax reporting basis of the assets of Maclean Hunter and BCI at the
date of acquisition. Deferred charges were increased by the same amount as
prescribed by SFAS No. 109.
As a result of the QVC Acquisition, the Company's deferred income tax
liability was increased in 1995 by $45.7 million for temporary differences
between the financial reporting basis and the income tax reporting basis of
the assets of QVC at the date of acquisition. Deferred charges were
increased by the same amount as prescribed by SFAS No. 109. At the date of
acquisition, QVC had a net deferred income tax liability of $33.2 million,
which was assumed by the Company.
The Company joins with its subsidiaries which it owns 80% or more in filing
consolidated federal income tax returns. Both QVC and the direct subsidiary
of the LLC file separate consolidated federal income tax returns.
Income tax expense (benefit) consists of the following components:
Year Ended December 31,
1995 1994 1993
(Dollars in thousands)
Current expense
Federal.................................................... $45,223 $8,098 $5,099
State...................................................... 14,283 12,408 9,320
------- ------- -------
59,506 20,506 14,419
------- ------- -------
Deferred expense (benefit)
Federal.................................................... (21,991) (27,912) (216)
State...................................................... 4,656 (1,828) 1,026
------- ------- -------
(17,335) (29,740) 810
------- ------- -------
Income tax expense (benefit)............................... $42,171 ($9,234) $15,229
======= ======= =======
- 55 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued)
The effective income tax expense (benefit) of the Company differs from the
statutory amount because of the effect of the following items:
Year Ended December 31,
1995 1994 1993
(Dollars in thousands)
Federal tax at statutory rate.............................. ($15,894) ($31,489) ($29,291)
Non-deductible depreciation and amortization............... 23,734 3,235 3,153
State income taxes, net of federal benefit................. 12,310 6,877 6,725
Non-deductible equity in net losses of affiliates.......... 17,258 10,550 4,838
Deductible permanent differences associated
with redemption of securities............................ (37,694)
Increase in corporate federal income tax rate.............. 20,589
Additions to valuation allowance........................... 1,440 605 47,494
Other...................................................... 3,323 988 (585)
-------- -------- --------
Income tax expense (benefit)............................... $42,171 ($9,234) $15,229
======== ======== ========
Deferred income tax expense (benefit) resulted from the following
differences between financial and income tax reporting:
Year Ended December 31,
1995 1994 1993
(Dollars in thousands)
Depreciation and amortization......................... ($68,267) ($36,357) ($34,694)
Accrued expenses not currently deductible............. (2,697) (22,287)
Non-deductible reserves for bad debts,
obsolete inventory and sales returns................ (14,208)
Deductible temporary differences associated
with sale or redemption of securities............... 22,667 7,031
Utilization of net operating loss carryforwards....... 40,956 28,299
Deferred tax assets arising from current
period losses ...................................... (9,995) (39,610)
Increase in corporate federal income tax rate......... 20,589
Change in valuation allowance and other............... 14,209 605 47,494
-------- -------- --------
Deferred income tax expense (benefit)................. ($17,335) ($29,740) $810
======== ======== ========
- 56 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued)
Significant components of the Company's net deferred tax liability are as
follows:
December 31,
1995 1994
(Dollars in thousands)
Deferred tax assets:
Net operating loss carryforwards.................... $257,851 $288,812
Differences between book and
tax basis of property and equipment
and deferred charges.............................. 26,811 29,330
Reserves for bad debts, obsolete inventory
and sales returns................................. 62,895
Other............................................... 43,333 40,636
Less: Valuation allowance........................... (244,897) (274,736)
---------- ----------
145,993 84,042
---------- ----------
Deferred tax liabilities, principally
differences between book and tax
basis of property and equipment and
deferred charges.................................. 1,604,189 1,474,891
---------- ----------
Net deferred tax liability............................ $1,458,196 $1,390,849
========== ==========
The Company's valuation allowance against deferred tax assets includes
approximately $120.0 million for which any subsequent tax benefits
recognized will be allocated to reduce goodwill and other noncurrent
intangible assets. For income tax reporting purposes, the subsidiaries of
the LLC have net operating loss carryforwards of approximately $18.0
million, for which a deferred tax asset has been recorded, which expire
primarily in 2010.
8. STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
The Company made cash payments for interest of approximately $459.1
million, $261.6 million and $278.6 million during the years ended December
31, 1995, 1994 and 1993, respectively.
The Company made cash payments for income taxes of approximately $35.4
million during the year ended December 31, 1995. Cash payments for income
taxes during the years ended December 31, 1994 and 1993 were not
significant.
9. COMMITMENTS AND CONTINGENCIES
Commitments
Liberty Media Corporation ("Liberty"), a majority owned subsidiary of TCI,
may, at certain times following February 9, 2000, trigger the exercise of
certain exit rights with respect to its investment in QVC. If the exit
rights are triggered, the Company has first right to purchase Liberty's
stock in QVC at Liberty's pro rata portion of the fair market value (on a
going concern or liquidation basis, whichever is higher, as determined by
an appraisal process) of QVC. The Company may pay Liberty for such stock,
subject to certain rights of Liberty to consummate the purchase in the most
tax-efficient method available, in cash, the Company's promissory note
maturing not more than three years after issuance, the Company's equity
securities or any combination thereof. If the Company elects not to
purchase the stock of QVC held by Liberty, then Liberty will have a similar
right to purchase the stock of QVC held by the Company. If Liberty elects
not to purchase the stock of QVC held by the Company, then Liberty and the
Company will use their best efforts to sell QVC.
- 57 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued)
As a result of the Maclean Hunter Acquisition, at any time after December
18, 2001, CalPERS may elect to liquidate its interest in the LLC at a price
based upon the fair value of CalPERS' interest in the LLC, adjusted, under
certain circumstances, for certain performance criteria relating to the
fair value of the LLC or to the Company's common stock. Except in certain
limited circumstances, the Company, at its option, may satisfy this
liquidity arrangement by purchasing CalPERS' interest for cash, through the
issuance of the Company's common stock (subject to certain limitations) or
by selling the LLC.
In conjunction with the Repurchase Program, in December 1995, the Company
sold put options on 3.0 million shares of its Class A Special Common Stock.
The put options give the holder the right to require the Company to
repurchase such shares at specified prices on specific dates during the
period from May through July 1996. Proceeds of $2.6 million from the sale
of these put options were credited to additional capital. The amount the
Company would be obligated to pay to repurchase such shares if all
outstanding put options were exercised, totaling $52.1 million, has been
reclassified to a temporary equity account in the Company's consolidated
balance sheet as of December 31, 1995. Through February 1, 1996, the
Company sold additional put options on 1.0 million shares of its Class A
Special Common Stock, with expiration dates in July 1996. If the put
options sold in January 1996 were exercised, the Company would be obligated
to pay $17.5 million to repurchase such shares.
During 1994, Comcast UK Cable entered into foreign exchange forward
contracts to protect Comcast UK Cable from the risk that monetary assets
held or denominated in US dollars are devalued as a result of changes in
exchange rates. The notional amount of these contracts was $20.0 million
and $100.0 million as of December 31, 1995 and 1994, respectively. Foreign
exchange forward contracts provide an effective hedge against such monetary
assets held since gains and losses realized on the contracts, which were
not significant to the Company's results of operations, are offset against
gains or losses realized on the underlying hedged assets. The remaining
forward contract matures during 1996.
See Note 5 for a description of certain foreign exchange option contracts
entered into by Comcast UK Cable during 1995.
Minimum annual rental commitments for office space and equipment under
noncancellable operating leases as of December 31, 1995 are as follows:
(Dollars
in thousands)
1996 $33,800
1997 29,230
1998 27,191
1999 25,336
2000 21,735
Thereafter 106,051
Rental expense of $44.6 million, $21.9 million and $19.3 million for 1995,
1994 and 1993, respectively, has been charged to operations.
Contingencies
The Company is subject to claims which arise in the ordinary course of its
business and other legal proceedings. In the opinion of management, the
amount of ultimate liability with respect to these actions will not
materially affect the financial position or results of operations of the
Company.
The Company has settled the majority of outstanding proceedings challenging
its rates charged for regulated cable services. In December 1995, the FCC
adopted an order approving a negotiated settlement of rate complaints
pending against the Company for cable programming service tiers ("CPSTs")
which provided approximately $6.6 million in refunds, plus interest, being
given in the form of bill credits, to approximately 1.3 million of the
Company's cable subscribers. This FCC order resolved 160 of the Company's
benchmark rate
- 58 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued)
cases covering the period September 1993 through July 1994 and 104 of the
Company's cost-of-service cases for CPSTs covering the period September
1993 through December 1995. As part of the negotiated settlement, the
Company agreed to forego certain inflation and external cost adjustments
for systems covered by its cost-of-service filings for CPSTs. The FCC's
order has been appealed to a federal appellate court by a local franchising
authority whose rate complaint against the Company was resolved by the
negotiated settlement. The Company currently is seeking to justify rates
for basic cable services and equipment in certain of its cable systems in
the State of Connecticut on the basis of a cost-of-service showing. The
State of Connecticut has ordered the Company to reduce such rates and to
make refunds to subscribers. The Company has appealed the Connecticut
decision to the FCC. The Company's management believes that the ultimate
resolution of these pending regulatory matters will not have a material
adverse impact on the Company's financial position or results of
operations.
10. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summary table of the estimated fair value of the Company's
financial instruments is made in accordance with the provisions of SFAS No.
107, "Disclosures About Fair Value of Financial Instruments." See Note 2
for a description of methodologies used for such disclosures.
December 31, 1995 December 31, 1994
(Dollars in thousands)
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Investments - Public
companies - (see Note 4)........... $170,096 $249,783 $216,002 (1) $341,785 (1)
(1) Excludes publicly traded investments accounted for under the equity
method.
The Company's long-term debt had carrying amounts of $7.029 billion and
$4.993 billion and estimated fair values of $7.074 billion and $4.828
billion as of December 31, 1995 and 1994, respectively. The estimated fair
value of the Company's publicly traded debt is based on quoted market
prices for that debt. Interest rates that are currently available to the
Company for issuance of debt with similar terms and remaining maturities
are used to estimate fair value for debt issues for which quoted market
prices are not available.
The estimated liability to settle the Company's interest rate swap and cap
agreements was $7.7 million and $39.0 million as of December 31, 1995 and
1994, respectively.
The differences between the carrying amounts and the estimated fair value
of the Company's foreign exchange forward contracts and foreign exchange
option contracts were not significant as of December 31, 1995 and 1994 (see
Notes 5 and 9).
The difference between the proceeds received from the sale of put options
on the Company's common stock (see Note 9) and the estimated fair value of
such options was not significant as of December 31, 1995.
- 59 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Continued)
11. FINANCIAL DATA BY BUSINESS SEGMENT
The following represents the Company's significant business segments,
including: "Domestic Cable Communications," the most significant of the
Company's wired telecommunications operations; "Electronic Retailing," the
most significant of the Company's content businesses; and "Cellular
Communications," the most significant of the Company's wireless
telecommunications operations. The remaining components of the Company's
operations are not independently significant to the Company's consolidated
financial position or results of operations and are included under the
caption "Corporate and Other" (dollars in thousands).
Domestic
Cable Electronic Cellular Corporate
Communications Retailing Communications and Other(1) Total
1995
Revenues.................................... $1,454,932 $1,487,688 $374,880 $45,446 $3,362,946
Depreciation and amortization............... 372,457 86,131 205,733 24,731 689,052
Operating income (loss)..................... 345,998 145,802 (67,923) (94,086) 329,791
Interest expense............................ 245,555 75,301 74,669 129,202 524,727
Assets...................................... 4,531,075 2,096,381 1,352,724 1,600,128 9,580,308
Long-term debt.............................. 2,984,182 911,335 928,923 2,119,326 6,943,766
Capital expenditures and acquisitions....... 234,584 1,337,977 306,378 130,058 2,008,997
Equity in net (losses) income of
affiliates................................ (17,609) 265 (1,374) (67,900) (86,618)
1994
Revenues.................................... $1,065,316 $ $286,137 $23,851 $1,375,304
Depreciation and amortization............... 229,534 89,916 17,012 336,462
Operating income (loss)..................... 287,960 26,413 (74,579) 239,794
Interest expense............................ 151,128 58,556 103,793 313,477
Assets...................................... 4,504,764 84,122 1,205,047 969,051 6,762,984
Long-term debt.............................. 2,852,877 744,538 1,213,126 4,810,541
Capital expenditures and acquisitions....... 1,456,497 79,719 26,316 1,562,532
Equity in net (losses) income of
affiliates................................ (8,259) 11,187 (43,812) (40,884)
1993
Revenues.................................... $1,092,746 $ $202,032 $43,450 $1,338,228
Depreciation and amortization............... 240,523 84,740 16,237 341,500
Operating income (loss)..................... 311,448 7,403 (53,955) 264,896
Interest expense............................ 152,508 74,421 120,519 347,448
Assets...................................... 2,436,952 69,114 1,277,619 1,164,591 4,948,276
Long-term debt.............................. 2,049,332 689,984 1,415,514 4,154,830
Capital expenditures and acquisitions....... 100,518 49,531 17,662 167,711
Equity in net losses of affiliates.......... (9,197) (19,675) (28,872)
(1) Corporate and other includes certain elimination entries related to
the segments presented.
- 60 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 and 1993 (Concluded)
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth Total
Quarter (2) Quarter Quarter (2) Quarter Year
(Dollars in thousands, except per share data)
1995
Revenues................................. $663,606 $823,572 $870,249 $1,005,519 $3,362,946
Operating income before
depreciation and amortization (1)...... 219,606 260,824 264,144 274,269 1,018,843
Operating income (3)..................... (23,871) 117,258 116,512 119,892 329,791
Loss before extraordinary items (3)...... (628) (29,294) (1,953) (5,974) (37,849)
Extraordinary items...................... (5,407) (677) (6,084)
Net loss (3)............................. (628) (29,294) (7,360) (6,651) (43,933)
Loss per share before
extraordinary items.................... (.12) (.01) (.03) (.16)
Extraordinary items per share............ (.02) (.02)
Net loss per share....................... (.12) (.03) (.03) (.18)
Cash dividends per share................. .0233 .0233 .0233 .0233 .0933
1994
Revenues................................. $328,703 $340,640 $345,744 $360,217 $1,375,304
Operating income before
depreciation and amortization (1)...... 141,520 148,553 146,125 140,058 576,256
Operating income......................... 64,275 65,304 63,310 46,905 239,794
Loss before extraordinary items.......... (15,777) (12,756) (17,246) (29,546) (75,325)
Extraordinary items...................... (11,580) (123) (11,703)
Net loss................................. (27,357) (12,879) (17,246) (29,546) (87,028)
Loss per share before
extraordinary items.................... (.07) (.05) (.07) (.13) (.32)
Extraordinary items per share............ (.05) (.05)
Net loss per share....................... (.12) (.05) (.07) (.13) (.37)
Cash dividends per share................. .0233 .0233 .0233 .0233 .0933
- ---------------
(1) Operating income before depreciation and amortization is commonly referred
to in the Company's businesses as "operating cash flow." Operating cash
flow is a measure of a company's ability to generate cash to service its
obligations, including debt service obligations, and to finance capital and
other expenditures. In part due to the capital intensive nature of the
Company's businesses and the resulting significant level of non-cash
depreciation and amortization expense, operating cash flow is frequently
used as one of the bases for comparing the Company's businesses. Operating
cash flow does not purport to represent net income or net cash provided by
operating activities, as those terms are defined under generally accepted
accounting principles, and should not be considered as an alternative to
such measurements as an indicator of the Company's performance.
(2) Results of operations for the first quarter of 1994 and for the third
quarter of 1995 were affected by premiums paid and losses incurred in
connection with the redemption of certain of the Company's debt, shown as
extraordinary items in the Company's consolidated statement of operations.
(3) Results of operations were affected by the Cellular Rebuild and the
Heritage Transaction in the first quarter of 1995 and by the Nextel
Transaction in the third quarter of 1995 (see Notes 3 and 4).
- 61 -
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
The information called for by Item 10, Directors and Executive Officers of the
Registrant (except for the information regarding executive officers called for
by Item 401 of Regulation S-K which is included in Part I hereof as Item 4A in
accordance with General Instruction G(3)), Item 11, Executive Compensation, Item
12, Security Ownership of Certain Beneficial Owners and Management, and Item 13,
Certain Relationships and Related Transactions, is hereby incorporated by
reference to the Registrant's definitive Proxy Statement for its Annual Meeting
of Shareholders presently scheduled to be held in June 1996, which shall be
filed with the Securities and Exchange Commission within 120 days of the end of
the Registrant's latest fiscal year.
- 62 -
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements of the Company are included
in Part II, Item 8:
Independent Auditors' Report............................................37
Consolidated Balance Sheet--December 31, 1995 and 1994..................38
Consolidated Statement of Operations--Years
Ended December 31, 1995, 1994 and 1993................................39
Consolidated Statement of Cash Flows--Years
Ended December 31, 1995, 1994 and 1993................................40
Consolidated Statement of Stockholders'
Deficiency--Years Ended December 31, 1995, 1994 and 1993..............41
Notes to Consolidated Financial Statements..............................42
(b) (i) The following financial statement schedule required to be filed by
Items 8 and 14(d) of Form 10-K is included in Part IV:
Schedule II -- Valuation and Qualifying Accounts ...................73
All other schedules are omitted because they are not applicable, not
required or the required information is included in the financial
statements or notes thereto.
(c) Exhibits required to be filed by Item 601 of Regulation S-K:
2.1 Agreement and Plan of Merger by and among The E.W. Scripps
Company, Scripps Howard, Inc., and Comcast Corporation dated as
of October 28, 1995 (incorporated by reference to Exhibit 10.1
to Comcast Corporation's Current Report on Form 8-K filed on
December 19, 1995).
2.2 Voting Agreement by and among Comcast Corporation, The E.W.
Scripps Company, Sural Corporation and The Edward W. Scripps
Trust, dated as of October 28, 1995 (incorporated by reference
to Exhibit 10.1 to Comcast Corporation's Current Report on Form
8-K filed on December 19, 1995).
3.1(a) Amended and Restated Articles of Incorporation filed on July 24,
1990.
3.1(b) Amendment to Articles of Incorporation filed on July 14, 1994.
3.1(c) Amendment to Restated Articles of Incorporation filed on July
12, 1995.
3.2 Amended and Restated By-Laws (incorporated by reference to
Exhibit 3(ii) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993).
4.1 Specimen Class A Common Stock Certificate (incorporated by
reference to Exhibit 2(a) to the Company's Registration
Statement on Form S-7 filed with the Commission on September 17,
1980, File No. 2-69178).
4.2 Specimen Class A Special Common Stock Certificate (incorporated
by reference to Exhibit 4(2) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1986).
4.3(a) Indenture (including form of Note), dated as of May 15, 1983,
between Storer Communications, Inc. and The Chase Manhattan
Bank, N.A., as Trustee, relating to 10% Subordinated Debentures
due May 2003 of Storer Communications, Inc. (incorporated by
reference to Exhibit 4.6 to the Registration Statement on Form
S-1 (File No. 2-98938) of SCI Holdings, Inc.).
4.3(b) First Supplemental Indenture, dated December 3, 1986
(incorporated by reference to Exhibit 4.5 to the Current Report
on Form 8-K of Storer Communications, Inc. dated December 3,
1986).
- 63 -
4.4 Amended and Restated Indenture dated as of June 5, 1992 among
Comcast Cellular Corporation, the Company and The Bank of New
York, as Trustee, relating to $500,493,000 Series A Senior
Participating Redeemable Zero Coupon Notes due 2000 and
$500,493,000 Series B Senior Participating Redeemable Zero
Coupon Notes due 2000 (incorporated by reference to Exhibit 4.3
to the Registration Statement on Form S-1 (File No. 33-46863) of
Comcast Cellular Corporation).
4.5 Indenture, dated as of October 17, 1991, between the Company and
Morgan Guaranty Trust Company of New York, as Trustee
(incorporated by reference to Exhibit 2 to the Company's Current
Report on Form 8-K filed with the Commission on October 31,
1991).
4.6 Form of Debenture relating to the Company's 10-1/4% Senior
Subordinated Debentures due 2001 (incorporated by reference to
Exhibit 4(19) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1991).
4.7 Form of Debenture relating to the Company's $300,000,000 10-5/8%
Senior Subordinated Debentures due 2012 (incorporated by
reference to Exhibit 4(17) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1992).
4.8 Form of Debenture relating to the Company's $200,000,000 9-1/2%
Senior Subordinated Debentures due 2008 (incorporated by
reference to Exhibit 4(18) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1992).
4.9 Indenture, dated as of February 20, 1991, between the Company
and Bankers Trust Company, as Trustee (incorporated by reference
to Exhibit 4.3 to the Company's Registration Statement on Form
S-3, File No. 33-32830, filed with the Commission on January 11,
1990).
4.10 Form of Debenture relating the Company's 3-3/8% / 5-1/2% Step-up
Convertible Subordinated Debentures Due 2005 (incorporated by
reference to Exhibit 4(14) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993).
4.11 Form of Debenture relating to the Company's 1-1/8% Discount
Convertible Subordinated Debentures Due 2007 (incorporated by
reference to Exhibit 4 to the Company's Current Report on Form
8-K filed with the Commission on November 15, 1993).
4.12 Form of Debenture relating to Comcast Corporation's $250.0
million 9-3/8% Senior Subordinated Debentures due 2005
(incorporated by reference to Exhibit 4.1 to Comcast
Corporation's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995).
4.13 Form of Debenture relating to Comcast Corporation's $250.0
million 9-1/8% Senior Subordinated Debentures due 2006.
4.14 Indenture dated as of November 15, 1995, between Comcast UK
Cable Partners Limited and Bank of Montreal Trust Company, as
Trustee, in respect of Comcast UK Cable Partners Limited's
11.20% Senior Discount Debentures due 2007 (incorporated by
reference to Exhibit 4.1 to the Registration Statement on Form
S-1 (File No. 33-96932) of Comcast UK Cable Partners Limited).
4.14(a) Form of Debenture relating to Comcast Corporation's 11.20%
Senior Discount Debentures due 2007 (incorporated by reference
to Exhibit 4.2 to the Registration Statement on Form S-1 (File
No. 33-96932) of Comcast UK Cable Partners Limited).
- 64 -
10.1/*/ Credit Agreement, dated as of September 14, 1995, between
Comcast Cellular Communications, Inc., the banks listed therein,
The Bank of New York, Barclays Bank PLC, The Chase Manhattan
Bank, N.A., PNC Bank, National Association, and The
Toronto-Dominion Bank, as Arranging Agents, and Toronto Dominion
(Texas), Inc., as Administrative Agent.
10.2/*/ Credit Agreement, dated as of September 19, 1995, between
Comcast Holdings, Inc., the banks listed therein, The Chase
Manhattan Bank, N.A., as Arranging Agent, Bank of Montreal, CIBC
Inc., The Long-term Credit Bank of Japan, Limited, Royal Bank of
Canada and Societe Generale, as Managing Agents, and The Chase
Manhattan Bank, N.A., as Administrative Agent.
10.3* 1982 Incentive Stock Option Plan, as amended (incorporated by
reference to Exhibit 10(12) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1991).
10.4(a)*1986 Amended and Restated Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 10(11) to the Company's
Annual Report on Form 10-K for the year ended December 31,
1991).
10.4(b)*Amendment to 1986 Non-Qualified Stock Option Plan, dated
September 16, 1994 (incorporated by reference to Exhibit 10.5(b)
to Comcast Corporation's Annual Report on Form 10-K for the year
ended December 31, 1994).
10.5(a)*Comcast Corporation 1987 Stock Option Plan, as amended and
restated (incorporated by reference to Exhibit 99 to the
Company's Registration Statement on Form S-8 filed on December
16, 1994).
10.5(b)*Amendment to 1987 Stock Option Plan, dated September 16, 1994
(incorporated by reference to Exhibit 10.6(b) to Comcast
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1994).
10.6 The Comcast Corporation Retirement-Investment Plan, as amended
and restated effective January 1, 1993 (revised through
September 30, 1995) (incorporated by reference to Exhibit 10.1
to Form S-8 of Comcast Corporation filed on October 5, 1995).
10.7* Amended and Restated Deferred Compensation Plan, dated January
1, 1995 (incorporated by reference to Exhibit 10.8 to Comcast
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1994).
10.8* 1990 Restricted Stock Plan, as amended and restated effective
December 13, 1995.
10.9* 1992 Executive Split Dollar Insurance Plan (incorporated by
reference to Exhibit 10(12) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1992).
10.10* Form of Compensation and Deferred Compensation Agreement and
Stock Appreciation Bonus Plan for Ralph J. Roberts (incorporated
by reference to Exhibit 10(13) to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993).
10.11 Defined Contribution Plans Master Trust Agreement, between
Comcast Corporation and State Street Bank and Trust Company
(incorporated by reference to Exhibit 10.2 to Form S-8 of
Comcast Corporation filed on October 5, 1995).
------------------
* Constitutes a management contract or compensatory plan
or arrangement.
/*/ Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K,
the Registrant agrees to furnish a copy of the
referenced agreement to the Commission upon request.
- 65 -
10.12 Tax Sharing Agreement, dated as of December 2, 1992, among
Storer Communications, Inc., TKR Cable I, Inc., TKR Cable II,
Inc., TKR Cable III, Inc., Tele-Communications, Inc., the
Company and each of the Departing Subsidiaries that are
signatories thereto (incorporated by reference to Exhibit 4 to
the Company's Current Report on Form 8-K filed with the
Commission on December 17, 1992, as amended by Form 8 filed
January 8, 1993).
10.13(a)Credit Agreement, dated as of December 2, 1992, among Comcast
Storer, Inc. and The Bank of New York, The Bank of Nova Scotia,
Canadian Imperial Bank of Commerce, The Chase Manhattan Bank
(National Association), Chemical Bank, LTCB Trust Company and
The Toronto- Dominion Bank, as managing agents, and The Bank of
New York, as administrative agent (incorporated by reference to
Exhibit 5 to the Company's Current Report on Form 8-K filed with
the Commission on December 17, 1992, as amended by Form 8 filed
January 8, 1993).
10.13(b)/*/ Amendment No. 1, dated as of November 30, 1994, to the
Credit Agreement dated as of December 2, 1992, among Comcast
Storer, Inc., the banks named therein and The Bank of New York,
as administrative agent.
10.13(c)/*/ Amendment No. 2, dated as of December 13, 1995, to the
Credit Agreement dated as of December 2, 1992, as amended, among
Comcast Storer, Inc., the banks named therein and The Bank of
New York, as administrative agent.
10.13(d)/*/ Amendment No. 3 and Waiver, dated as of February 29, 1996, to
the Credit Agreement dated as of December 2, 1992, as amended,
among Comcast Storer, Inc., the banks named therein and The Bank
of New York, as administrative agent.
10.14 Note Purchase Agreement, dated as of November 15, 1992, among
Comcast Storer, Inc., Storer Communications, Inc., Comcast
Storer Finance Sub, Inc. and each of the respective purchasers
named therein (incorporated by reference to Exhibit 6 to the
Company's Current Report on Form 8-K filed with the Commission
on December 17, 1992, as amended by Form 8 filed January 8,
1993).
10.15 Payment Agreement, dated December 2, 1992, among the Company,
Comcast Storer, Inc., SCI Holdings, Inc., Storer Communications,
Inc. and each of the Remaining Subsidiaries that are signatories
thereto (incorporated by reference to Exhibit 7 to the Company's
Current Report on Form 8-K filed with the Commission on December
17, 1992, as amended by Form 8 filed January 8, 1993).
10.16 Intercreditor and Collateral Agency Agreement, dated as of
December 2, 1992, among Comcast Storer, Inc., Comcast Cable
Communications, Inc., Storer Communications, Inc., the banks
party to the Credit Agreement dated as of December 2, 1992, the
purchasers of the Senior Notes under the separate Note Purchase
Agreements each dated as of November 15, 1992, the Senior
Lenders (as defined therein) and The Bank of New York as
collateral agent for the Senior Lenders (incorporated by
reference to Exhibit 8 to the Company's Current Report on Form
8-K filed with the Commission on December 17, 1992, as amended
by Form 8 filed January 8, 1993).
10.17 Tax Sharing Agreement, dated December 2, 1992, between the
Company and Comcast Storer, Inc. (incorporated by reference to
Exhibit 9 to the Company's Current Report on Form 8-K filed with
the Commission on December 17, 1992, as amended by Form 8 filed
January 8, 1993).
------------------
/*/ Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K,
the Registrant agrees to furnish a copy of the
referenced agreement to the Commission upon request.
- 66 -
10.18 Pledge Agreement, dated as of December 2, 1992, between Comcast
Cable Communications, Inc. and The Bank of New York
(incorporated by reference to Exhibit 10 to the Company's
Current Report on Form 8-K filed with the Commission on December
17, 1992, as amended by Form 8 filed January 8, 1993).
10.19 Pledge Agreement, dated as of December 2, 1992, between Comcast
Storer, Inc. and The Bank of New York (incorporated by reference
to Exhibit 11 to the Company's Current Report on Form 8- K filed
with the Commission on December 17, 1992, as amended by Form 8
filed January 8, 1993).
10.20 Pledge Agreement, dated as of December 2, 1992, between Storer
Communications, Inc. and The Bank of New York (incorporated by
reference to Exhibit 12 to the Company's Current Report on Form
8-K filed with the Commission on December 17, 1992, as amended
by Form 8 filed January 8, 1993).
10.21 Note Pledge Agreement, dated as of December 2, 1992, between
Comcast Storer, Inc. and The Bank of New York (incorporated by
reference to Exhibit 13 to the Company's Current Report on Form
8-K filed with the Commission on December 17, 1992, as amended
by Form 8 filed January 8, 1993).
10.22 Guaranty Agreement, dated as of December 2, 1992, between Storer
Communications, Inc. and The Bank of New York (incorporated by
reference to Exhibit 14 to the Company's Current Report on Form
8-K filed with the Commission on December 17, 1992, as amended
by Form 8 filed January 8, 1993).
10.23 Guaranty Agreement, dated as of December 2, 1992, between
Comcast Storer Finance Sub, Inc. and The Bank of New York
(incorporated by reference to Exhibit 15 to the Company's
Current Report on Form 8-K filed with the Commission on December
17, 1992, as amended by Form 8 filed January 8, 1993).
10.24(a)Stock Purchase Agreement, dated September 14, 1992, among the
Company, Comcast FCI, Inc. and Fleet Call, Inc. (incorporated by
reference to Exhibit A to Amendment No. 1 to the Company's
Schedule 13D dated September 22, 1992 filed with respect to
Fleet Call, Inc.).
10.24(b)Letter Agreement, dated October 28, 1992, amending Stock
Purchase Agreement (incorporated by reference to Exhibit L to
Amendment No. 2 to the Company's Schedule 13D dated February 23,
1993 filed with respect to Fleet Call, Inc.).
10.24(c)Letter Agreement, dated November 24, 1992, amending Stock
Purchase Agreement (incorporated by reference to Exhibit M to
Amendment No. 2 to the Company's Schedule 13D dated February 23,
1993 filed with respect to Fleet Call, Inc.).
10.24(d)Notice, dated February 15, 1993, from Fleet Call, Inc. to the
Company pursuant to the Stock Purchase Agreement (incorporated
by reference to Exhibit N to Amendment No. 2 to the Company's
Schedule 13D dated February 23, 1993 filed with respect to Fleet
Call, Inc.).
10.24(e)Acknowledgement, dated February 15, 1993, among the Company,
Comcast FCI, Inc. and Fleet Call, Inc. (incorporated by
reference to Exhibit O to Amendment No. 2 to the Company's
Schedule 13D dated February 23, 1993 filed with respect to Fleet
Call, Inc.).
10.24(f)Letter Agreement, dated February 15, 1993, amending the Stock
Purchase Agreement (incorporated by reference to Exhibit P to
Amendment No. 2 to the Company's Schedule 13D dated February 23,
1993 filed with respect to Fleet Call, Inc.).
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10.24(g)Letter Agreement, dated July 22, 1993, among the Company,
Comcast FCI, Inc. and Nextel Communications, Inc. (formerly
Fleet Call, Inc.) (incorporated by reference to Exhibit A to
Amendment No. 3 to Schedule 13D dated July 27, 1993 filed by the
Company with respect to Nextel Communications, Inc.).
10.24(h)Amendment, dated August 4, 1994, to Stock Purchase Agreement
dated as of September 14, 1992 among Comcast Corporation,
Comcast FCI, Inc. and Nextel Communications, Inc. (incorporated
by reference to Exhibit C to Amendment No. 7 to the Schedule 13D
of Comcast Corporation relating to common stock of Nextel
Communications, Inc. filed on August 9, 1994).
10.24(i)Amendment to Stock Purchase Agreement between Comcast
Corporation, Comcast FCI, Inc. and Nextel Communications, Inc.,
dated as of April 3, 1995 (incorporated by reference to Exhibit
5.4 to Comcast Corporation's Current Report on Form 8-K filed on
April 13, 1995).
10.25 Option Agreement, dated September 14, 1992, between Fleet Call,
Inc. and Comcast FCI, Inc. (incorporated by reference to Exhibit
B to Amendment No. 1 to the Company's Schedule 13D dated
September 22, 1992 filed with respect to Fleet Call, Inc.).
10.26 Stockholders' Voting Agreement, dated September 14, 1992, among
Comcast FCI, Inc. and the other parties named therein
(incorporated by reference to Exhibit E to Amendment No. 1 to
the Company's Schedule 13D dated September 22, 1992 filed with
respect to Fleet Call, Inc.).
10.27(a)Share Purchase Agreement, dated June 18, 1994, between Comcast
Corporation and Rogers Communications Inc. (incorporated by
reference to Exhibit 10(3) to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994).
10.27(b)First Amendment to Share Purchase Agreement, dated as of
December 22, 1994, by and between Comcast Corporation and Rogers
Communications Inc., to the Share Purchase Agreement dated June
18, 1994 (incorporated by reference to Exhibit 10.9 to the
Company's Current Report on Form 8-K filed on January 6, 1995).
10.28(a)Agreement and Plan of Merger, dated August 4, 1994, among
Comcast Corporation, Liberty Media Corporation, Comcast QMerger,
Inc. and QVC, Inc. (incorporated by reference to Exhibit 99.49
to Amendment No. 21 to the Schedule 13D of Comcast Corporation
relating to common stock of QVC, Inc. filed on August 8, 1994).
10.28(b)First Amendment to Agreement and Plan of Merger, dated as of
February 3, 1995, (incorporated by reference to Exhibit (c)(35)
to Amendment No. 17 to the Tender Offer Statement on Schedule
14D-1 filed with the Securities and Exchange Commission on
February 6, 1995 by QVC Programming Holdings, Inc., Comcast
Corporation and Tele-Communications, Inc. with respect to the
tender offer for all outstanding shares of QVC, Inc.).
10.29 Amended and Restated Stockholders Agreement, dated as of
February 9, 1995, among Comcast Corporation, Comcast QVC, Inc.,
QVC Programming Holdings, Inc., Liberty Media Corporation, QVC
Investment, Inc. and Liberty QVC, Inc. (incorporated by
reference to Exhibit 10.5 to Comcast Corporation's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995).
10.30 Credit Agreement, dated as of February 15, 1995, among QVC, Inc.
and the Banks listed therein (incorporated by reference to
Exhibit (b)(6) to Amendment No. 21 to the Tender Offer Statement
on Schedule 14D-1 filed with the Securities and Exchange
Commission on February 17, 1995 by QVC Programming Holdings,
Inc., Comcast Corporation and Tele-Communications, Inc. with
respect to the tender offer for all outstanding shares of QVC,
Inc.).
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10.31 Credit Agreement, dated as of September 14, 1994, among Comcast
Cable Tri-Holdings, Inc., The Bank of New York, The Chase
Manhattan Bank (National Association), PNC Bank, National
Association, as Managing Agents, and the Bank of New York, as
Administrative Agent, and the banks named therein (incorporated
by reference to Exhibit 10.3 to the Current Report on Form 8- K
of the Company filed on November 2, 1994).
10.32 Comcast MHCP Holdings, L.L.C. Amended and Restated Limited
Liability Company Agreement, dated as of December 18, 1994,
among Comcast Cable Communications, Inc., The California Public
Employees' Retirement System and, for certain limited purposes,
Comcast Corporation (incorporated by reference to Exhibit 10.1
to the Company's Current Report on Form 8-K filed on January 6,
1995).
10.33 Credit Agreement, dated as of December 22, 1994, among Comcast
MH Holdings, Inc., the banks listed therein, The Chase Manhattan
Bank (National Association), NationsBank of Texas, N.A. and the
Toronto-Dominion Bank, as Arranging Agents, The Bank of New
York, The Bank of Nova Scotia, Canadian Imperial Bank of
Commerce and Morgan Guaranty Trust Company of New York, as
Managing Agents and NationsBank of Texas, N.A., as
Administrative Agent (incorporated by reference to Exhibit 10.2
to the Company's Current Report on Form 8-K filed on January 6,
1995).
10.34 Pledge Agreement, dated as of December 22, 1994, between Comcast
MH Holdings, Inc. and NationsBank of Texas, N.A., as the secured
party (incorporated by reference to Exhibit 10.3 to the
Company's Current Report on Form 8-K filed on January 6, 1995).
10.35 Pledge Agreement, dated as of December 22, 1994, between Comcast
Communications Properties, Inc. and NationsBank of Texas, N.A.,
as the Secured Party (incorporated by reference to Exhibit 10.4
to the Company's Current Report on Form 8-K filed on January 6,
1995).
10.36 Affiliate Subordination Agreement (as the same may be amended,
modified, supplemented, waived, extended or restated from time
to time, this "Agreement"), dated as of December 22, 1994, among
Comcast Corporation, Comcast MH Holdings, Inc., (the
"Borrower"), any affiliate of the Borrower that shall have
become a party thereto and NationsBank of Texas, N.A., as
Administrative Agent under the Credit Agreement dated as of
December 22, 1994, among the Borrower, the Banks listed therein,
The Chase Manhattan Bank (National Association), NationsBank of
Texas, N.A. and The Toronto-Dominion Bank, as Arranging Agents,
The Bank of New York, The Bank of Nova Scotia, Canadian Imperial
Bank of Commerce and Morgan Guaranty Trust Company of New York,
as Managing Agents, and the Administrative Agent (incorporated
by reference to Exhibit 10.5 to the Company's Current Report on
Form 8-K filed on January 6, 1995).
10.37 Registration Rights and Price Protection Agreement, dated as of
December 22, 1994, by and between Comcast Corporation and The
California Public Employees' Retirement System (incorporated by
reference to Exhibit 10.8 to the Company's Current Report on
Form 8-K filed on January 6, 1995).
10.38 Amended and Restated Agreement of Limited Partnership of
MajorCo, L.P., a Delaware Limited Partnership, dated as of
January 31, 1996, among Sprint Spectrum, L.P., TCI Network
Services, Comcast Telephony Services and Cox Telephony
Partnership (incorporated by reference to Exhibit 1 to Comcast
Corporation's Current Report on Form 8-K filed on February 12,
1996).
10.39 Parents Agreement, dated as of January 31, 1996, between Comcast
Corporation and Sprint Corporation (incorporated by reference to
Exhibit 3 to Comcast Corporation's Current Report on Form 8-K
filed on February 12, 1996).
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10.40 Agreement of Limited Partnership of MinorCo, L.P., a Delaware
Limited Partnership, dated as of March 28, 1995, among Sprint
Spectrum, L.P., TCI Network Services, Comcast Telephony Services
and Cox Telephony Partnership (incorporated by reference to
Exhibit 5.3 to Comcast Corporation's Current Report on Form 8-K
filed on April 13, 1995).
21 List of Subsidiaries.
23.1 Consent of Deloitte & Touche LLP
23.2 Consents of Arthur Andersen LLP
23.3 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule.
99.1 Report of Independent Public Accountants to QVC, Inc., as of
December 31, 1995 and for the eleven-month period then ended.
99.2 Report of Independent Public Accountants to Garden State
Cablevision L.P., as of December 31, 1994 and 1993 and for the
years then ended.
99.3 Report of Independent Public Accountants to Comcast
International Holdings, Inc., as of December 31, 1994 and 1993
and for the years then ended (incorporated by reference to
Exhibit 99.3 to Comcast Corporation's Annual Report on Form 10-K
for the year ended December 31, 1994).
(c) Reports on Form 8-K
(i) Comcast Corporation filed a Current Report on Form 8-K under
Item 5 on November 7, 1995 relating its October 29, 1995
announcement of its agreement to purchase the cable television
operations of The E.W. Scripps Company.
(ii) Comcast Corporation filed a Current Report on Form 8-K under
Item 5 on December 19, 1995 relating its agreement to purchase
the cable television operations of The E.W. Scripps Company,
which included Comcast Corporation's Unaudited Pro Forma
Condensed Consolidated Financial Statements and the Combined
Financial Statements of The E.W. Scripps Company Cable
Television Division.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 in Philadelphia,
Pennsylvania on March 1, 1996.
Comcast Corporation
By: /s/ Brian L. Roberts
---------------------------------
Brian L. Roberts
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Ralph J. Roberts
- ----------------------------
Ralph J. Roberts Chairman of the Board of March 1, 1996
Directors; Director
/s/ Julian A. Brodsky
- ----------------------------
Julian A. Brodsky Vice Chairman of the Board of March 1, 1996
Directors; Director
/s/ Brian L. Roberts
- ----------------------------
Brian L. Roberts President; Director (Principal March 1, 1996
Executive Officer)
/s/ Lawrence S. Smith
- ----------------------------
Lawrence S. Smith Executive Vice President March 1, 1996
(Principal Accounting Officer)
/s/ John R. Alchin
----------------------------
John R. Alchin Senior Vice President, Treasurer March 1, 1996
(Principal Financial Officer)
/s/ Daniel Aaron
- ----------------------------
Daniel Aaron Director March 1, 1996
/s/ Gustave G. Amsterdam
- ----------------------------
Gustave G. Amsterdam Director March 1, 1996
/s/ Sheldon M. Bonovitz
- ----------------------------
Sheldon M. Bonovitz Director March 1, 1996
/s/ Joseph L. Castle II
- ----------------------------
Joseph L. Castle II Director March 1, 1996
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SIGNATURE TITLE DATE
/s/ Bernard C. Watson
- ----------------------------
Bernard C. Watson Director March 1, 1996
/s/ Irving A. Wechsler
- ----------------------------
Irving A. Wechsler Director March 1, 1996
/s/ Anne Wexler
- ----------------------------
Anne Wexler Director March 1, 1996
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COMCAST CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in thousands)
Additions
Balance at Effect of Charged to Deductions Balance
Beginning QVC Costs and from at End
of Year Acquisition Expenses Reserves(A) of Year
Allowance for Doubtful Accounts
1995 $11,272 $57,835 $51,434 $39,268 $81,273
1994 11,792 21,321 21,841 11,272
1993 9,817 20,427 18,452 11,792
Allowance for Obsolete
Electronic Retailing Inventories
1995 $ $18,396 $28,364 $18,298 $28,462
(A) Uncollectible accounts and obsolete inventory written off.
- 73 -
INDEX TO EXHIBITS
Exhibit
Number Exhibit
3.1(a) Amended and Restated Articles of Incorporation filed on July 24,
1990.
3.1(b) Amendment to Articles of Incorporation filed on July 14, 1994.
3.1(c) Amendment to Restated Articles of Incorporation filed on July 12,
1995.
4.13 Form of Debenture relating to Comcast Corporation's $250.0
million 9-1/8% Senior Subordinated Debentures due 2006.
10.1/*/ Credit Agreement, dated as of September 14, 1995, between Comcast
Cellular Communications, Inc., the banks listed therein, The Bank
of New York, Barclays Bank PLC, The Chase Manhattan Bank, N.A.,
PNC Bank, National Association, and The Toronto-Dominion Bank, as
Arranging Agents, and Toronto Dominion (Texas), Inc., as
Administrative Agent.
10.2/*/ Credit Agreement, dated as of September 19, 1995, between Comcast
Holdings, Inc., the banks listed therein, The Chase Manhattan
Bank, N.A., as Arranging Agent, Bank of Montreal, CIBC Inc., The
Long-term Credit Bank of Japan, Limited, Royal Bank of Canada and
Societe Generale, as Managing Agents, and The Chase Manhattan
Bank, N.A., as Administrative Agent.
10.8* 1990 Restricted Stock Plan, as amended and restated effective
December 13, 1995.
10.13(b)/*/ Amendment No. 1, dated as of November 30, 1994, to the Credit
Agreement dated as of December 2, 1992, among Comcast Storer,
Inc., the banks named therein and The Bank of New York, as
administrative agent.
10.13(c)/*/ Amendment No. 2, dated as of December 13, 1995, to the Credit
Agreement dated as of December 2, 1992, as amended, among Comcast
Storer, Inc., the banks named therein and The Bank of New York,
as administrative agent.
10.13(d)/*/ Amendment No. 3 and Waiver, dated as of February 29, 1996, to the
Credit Agreement dated as of December 2, 1992, as amended, among
Comcast Storer, Inc., the banks named therein and The Bank of New
York, as administrative agent.
21 List of Subsidiaries.
23.1 Consent of Deloitte & Touche LLP
23.2 Consents of Arthur Andersen LLP
23.3 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule.
99.1 Report of Independent Public Accountants to QVC, Inc., as of
December 31, 1995 and for the eleven-month period then ended.
99.2 Report of Independent Public Accountants to Garden State
Cablevision L.P., as of December 31, 1994 and 1993 and for the
years then ended.
- --------------
* Constitutes a management contract or compensatory plan or arrangement.
/*/ Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant
agrees to furnish a copy of the referenced agreement to the Commission
upon request
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