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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
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ____________
Commission file number 0-6983
COMCAST CORPORATION
[GRAPHIC OMITTED - LOGO]
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1709202
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
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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 [ ]
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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. [ ]
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As of December 31, 1998, the aggregate market value of the Class A Common Stock
and Class A Special Common Stock held by non-affiliates of the Registrant was
$1.755 billion and $19.234 billion, respectively.
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As of December 31, 1998, there were 328,630,366 shares of Class A Special Common
Stock, 31,690,063 shares of Class A Common Stock and 9,444,375 shares of Class B
Common Stock outstanding.
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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 1999.
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COMCAST CORPORATION
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1 Business.............................................................1
Item 2 Properties..........................................................16
Item 3 Legal Proceedings...................................................16
Item 4 Submission of Matters to a Vote of Security Holders.................16
Item 4A Executive Officers of the Registrant................................17
PART II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters.........................................18
Item 6 Selected Financial Data.............................................19
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................20
Item 8 Financial Statements and Supplementary Data.........................29
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................61
PART III
Item 10 Directors and Executive Officers of the Registrant..................61
Item 11 Executive Compensation..............................................61
Item 12 Security Ownership of Certain Beneficial Owners and Management......61
Item 13 Certain Relationships and Related Transactions......................61
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K.................................................62
SIGNATURES...................................................................67
This Annual Report on Form 10-K is for the year ending December 31, 1998.
This Annual Report modifies and supersedes documents filed prior to this Annual
Report. The SEC allows us to "incorporate by reference" information that we file
with them, which means that we can disclose important information to you by
referring you directly to those documents. Information incorporated by reference
is considered to be part of this Annual Report. In addition, information we file
with the SEC in the future will automatically update and supersede information
contained in this Annual Report. In this Annual Report, "Comcast," "we," "us"
and "our" refer to Comcast Corporation and its subsidiaries.
You should carefully review the information contained in this Annual
Report, but should particularly consider any risk factors we set forth in this
Annual Report and in other reports or documents that we file from time to time
with the SEC. In this Annual Report, we state our beliefs of future events and
of our future financial performance. In some cases, you can identify those
so-called "forward-looking statements" by words such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," or "continue" or the negative of those words and other comparable
words. You should be aware that those statements are only our predictions.
Actual events or results may differ materially. In evaluating those statements,
you should specifically consider various factors, including the risks outlined
below. Those factors may cause our actual results to differ materially from any
of our forward-looking statements.
Factors Affecting Future Operations
The cable communications industry and the provision of programming content
may be affected by, among other things:
o changes in laws and regulations,
o changes in the competitive environment,
o changes in technology,
o franchise related matters,
o market conditions that may adversely affect the availability of debt
and equity financing for working capital, capital expenditures or
other purposes,
o demand for the programming content we distribute or the willingness of
other video program providers to carry our content,
o general economic conditions.
PART I
ITEM 1 BUSINESS
We are principally engaged both in developing, managing and operating
hybrid fiber-coaxial broadband cable communications networks and in providing
programming content, primarily through QVC, our electronic retailing subsidiary.
We are currently the fourth-largest cable communications system operator in the
United States and are in the process of implementing high-speed Internet access
service and digital video applications to enhance the products available on our
cable networks.
Our consolidated cable operations served approximately 4.5 million
subscribers and passed approximately 7.4 million homes in the United States as
of December 31, 1998. We own interests in other cable communications companies
serving more than 237,000 subscribers. We expect to complete transactions in
1999 that will give us an ownership and management interest in cable systems
which, upon closing of certain pending transactions, will serve approximately
1.1 million subscribers.
We provide programming content through our majority-owned subsidiaries,
QVC, Inc. and E! Entertainment Television, Inc., and through other programming
investments, including Comcast SportsNet, The Golf Channel, Speedvision and
Outdoor Life. Through QVC, we market a wide variety of products directly to
consumers primarily on merchandise-focused television programs. QVC is
available, on a full and part-time basis, to over 70 million homes in the United
States, over 7.3 million homes in the United Kingdom and Ireland and over 14
million homes in Germany.
We are a Pennsylvania corporation that was organized in 1969. We have our
principal executive offices at 1500 Market Street, Philadelphia, PA 19102-2148.
Our telephone number is (215) 665-1700. We also have a world wide web site at
http://www.comcast.com. The information posted on our web site is not
incorporated into this Annual Report.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
You should see Note 10 to our consolidated financial statements in Item 8
of this report for information about our operations by industry segment.
GENERAL DEVELOPMENTS OF OUR BUSINESS
We entered into a number of significant transactions in 1998 and subsequent
to December 31, 1998. We have summarized these transactions below and have more
fully described them in Notes 1 and 3 to our consolidated financial statements
in Item 8 of this Annual Report.
Acquisition of Greater Philadelphia Cablevision
In February 1999, we agreed to acquire Greater Philadelphia Cablevision,
Inc., a subsidiary of Greater Media, Inc. that operates a cable communications
system serving approximately 79,000 subscribers in Philadelphia, Pennsylvania.
We will issue approximately 4.2 million shares of our Class A Special Common
Stock to complete the acquisition. The acquisition is expected to close in the
fourth quarter of 1999 if we receive all the necessary regulatory and other
approvals.
Sale of Comcast Cellular
In January 1999, we agreed to sell our wholly owned subsidiary, Comcast
Cellular Corporation, to SBC Communications, Inc. for approximately $400 million
in cash and the assumption of approximately $1.3 billion of Comcast Cellular
debt. Comcast Cellular provides telephone communications services pursuant to
licenses granted by the Federal Communications Commission to more than 829,000
subscribers in and around the City of Philadelphia, the State of Delaware and in
a significant portion of the State of New Jersey. We expect to recognize a
pre-tax gain on the sale of approximately $600 million. We expect to complete
this sale in the third quarter of 1999 if we receive all the necessary
regulatory and other approvals.
Sale of Primestar
As of December 31, 1998, we own a 9.5% interest in Primestar, Inc.
Primestar acquires, originates and provides television programming services
delivered by satellite to subscribers through a network of distributors. In
January 1999, Primestar announced the sale of its direct broadcast satellite
service to Hughes Electronics Corporation (a division of General Motors
Corporation and the parent company of DirecTV, a direct broadcast satellite
service competing with our cable communications systems) for $1.8 billion in
cash and stock. The sale of Primestar to Hughes Electronics is subject to the
consent of certain Primestar lenders and the receipt of necessary regulatory and
other approvals.
Investment in Prime Communications
In December 1998, we agreed to invest in Prime Communications LLC, a cable
television operator with cable communications systems serving approximately
430,000 subscribers. During the fourth quarter of 1998, we acquired a $50
million 12.75% subordinated note due 2008 from Prime. In addition, under the
terms of the agreement, we will lend Prime approximately $735 million in the
form of a 6% ten year note, which transaction we expect to occur in the third
quarter of 1999. In return we will receive a convertible note giving us the
right to acquire 90% of Prime. The note cannot be converted until the build out
of certain of Prime's cable systems is complete and regulatory and other
approvals are obtained, which is expected to occur in the third quarter of 2002.
Upon conversion of the note, we expect to assume approximately $550 million of
Prime debt. We will have the option to acquire the remaining 10% interest in
Prime for approximately $82 million, plus accrued interest at 7% per annum.
Sale of Sprint PCS
In November 1998, Sprint Corporation assumed total ownership and management
control of Sprint PCS, a personal communications services company serving the
United States. In exchange for our 15% partnership interest in Sprint PCS, we
received approximately 47.2 million shares of unregistered Series 2 Sprint PCS
common stock, 61,726 shares of Sprint PCS convertible preferred stock, which
converts into approximately 2.0 million shares of unregistered Series 2 Sprint
PCS common stock, and a warrant to purchase approximately 3.0 million shares of
unregistered Series 2 Sprint PCS common stock at $24.02 per share. As a result
of this exchange, we recognized a pre-tax gain of approximately $758 million
during the fourth quarter of 1998. We have registration rights, subject to
customary restrictions, which will allow us to sell the Sprint PCS stock that we
received.
Offering of Subsidiary Debt
In November 1998, Comcast Cable Communications, Inc., one of our wholly
owned subsidiaries, sold $800 million aggregate principal amount of 6.20% senior
notes due 2008 in a public offering. Interest on the notes is payable
semi-annually on May 15 and November 15 of each year, commencing May 15, 1999.
The notes are not redeemable prior to maturity. Comcast Cable used substantially
all of the net proceeds from the offering to repay existing intercompany
borrowings and for general corporate purposes.
Sale of Comcast UK Cable
In October 1998, we exchanged all of our shares of Comcast UK Cable
Partners Limited, one of our consolidated subsidiaries, with NTL Incorporated
for approximately 4.8 million shares of unregistered NTL common stock. As a
result of this exchange, we recognized a pre-tax gain of approximately $148
million during the fourth quarter of 1998. We have registration rights, subject
to customary restrictions, which will allow us to sell the NTL shares that we
received.
AT&T Acquisition of Teleport
In July 1998, we exchanged all of our shares of Teleport Communications
Group Inc., a competitive local exchange carrier, with AT&T Corp. for
approximately 24.2 million shares of unregistered AT&T common stock. As a result
of this exchange, we recognized a pre-tax gain of approximately $1.1 billion
during the third quarter of 1998. We have registration rights, subject to
customary restrictions, which will allow us to sell the AT&T shares that we
received.
Acquisition of Jones Intercable
In May and August 1998, we announced agreements to purchase certain
interests in Jones Intercable, Inc., for $700 million. We expect to close this
acquisition in the first half of 1999 if we receive all the necessary regulatory
and other approvals. Upon completion of this acquisition, we will own
approximately 12.8 million shares of Jones Intercable's Class A common stock and
2.9 million shares of its common stock. Those shares will represent
approximately 37% of the economic and 47% of the voting interest in Jones
Intercable. In addition, the 2.9 million shares of common stock that we will own
will represent approximately 57% of the outstanding common stock and will enable
us to elect 75% of the Board of Directors of Jones Intercable. We expect to
consolidate Jones Intercable in our financial statements upon closing of the
acquisition.
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DESCRIPTION OF OUR BUSINESSES
Cable Communications
Technology and Capital Improvements
Our broadband cable networks receive signals by means of:
o special antennae,
o microwave relay systems,
o earth stations.
These networks distribute a variety of video, telecommunications and data
services to residential and commercial subscribers.
In accordance with the October 1997 "social contract" we entered into with
the FCC, 80% of our cable subscribers will be served by a system with a capacity
of at least 550-MHz and at least 60% of our cable subscribers will be served by
a system with a capacity of at least 750-MHz by March 31, 1999. In addition, we
will provide free cable service connections, cable modems and modem service to
schools and to 250 public libraries in communities when we commercially deploy
cable modem service to residential customers in those communities.
In addition to meeting our "social contract" commitments, we are deploying
fiber optic cable and upgrading the technical quality of our broadband networks.
As a result, the reliability and capacity of our systems has increased, aiding
in the delivery of additional video programming and other services such as
enhanced digital video, high-speed Internet access service and, potentially,
telephony. During 1998, we introduced our digital converter cable service in 10
markets. As of December 31, 1998, approximately 78,000 subscribers were
receiving our digital service. Digital converter cable service allows us to use
digital compression to increase the channel capacity of our cable communications
systems to more than 100 channels, as well as to improve picture quality.
Franchises
Cable communications systems are constructed and operated under
non-exclusive franchises granted by state or local governmental authorities and
are subject to federal, state and local legislation and regulation. Franchises
typically contain many conditions which may include:
o rate and service conditions,
o construction schedules,
o types of programming and provision of services to schools and other
public institutions,
o insurance and indemnity bond requirements.
Our franchises typically provide for periodic payment of fees to
franchising authorities of up to 5% of "revenues" (as defined by each franchise
agreement). We normally pass those fees on to subscribers. In most cases, we
need the consent of the franchising authority to transfer our franchises. The
franchises are granted for varying lengths of time.
Although franchises historically have been renewed, renewals may include
less favorable terms and conditions. Under existing law, franchises should
continue to be renewed for companies that have provided adequate service and
have complied generally with franchise terms. The franchising authority may
choose to award additional franchises to competing companies at any time. We
have approximately 825 franchises in the United States.
Revenue Sources
We receive the majority of our revenues from subscription services.
Subscribers typically pay on a monthly basis and generally may discontinue
services at any time. Monthly subscription rates and related charges vary
according to the type of service selected and the type of equipment used by
subscribers. Packages of channels offered to subscribers may consist of
television signals of:
o national television networks,
o local and distant independent, specialty and educational television
stations,
o satellite-delivered programming,
o locally originated programs,
o audio programming,
o electronic retailing programs.
We also offer, for an additional monthly fee, one or more premium services,
such as:
o Home Box Office(R),
o Cinemax(R),
o Showtime(R),
o The Movie Channel(TM),
o Encore(R).
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These premium services generally offer, without commercial interruption,
feature motion pictures, live and taped sporting events, concerts and other
special features. The charge for premium services depends upon the type and
level of service selected by the subscriber.
We also generate revenues from advertising sales, pay-per-view services,
installation services, commissions from electronic retailing and other services.
Pay-per-view services permit a subscriber to order, for a separate fee,
individual feature motion pictures and special event programs, such as
professional boxing, professional wrestling and concerts. We also generate
revenues from the sale of advertising time to local, regional and national
advertisers on non-broadcast channels.
In December 1996, we began marketing @Home Corporation's high-speed cable
modem services in areas served by certain of our cable communications systems.
Residential subscribers can connect their personal computers via cable modems to
a high-speed national network developed and managed by @Home. Subscribers can
then access online information, including the Internet, at faster speeds than
that of conventional or Integrated Service Digital Network modems. Through
@Home, we provide businesses with Internet connectivity solutions and networked
business applications. @Home and Comcast aggregate content, sell advertising to
businesses and provide services to residential subscribers. As of December 31,
1998, the Comcast @Home service was available to over 1.8 million homes in nine
markets and served more than 51,000 customers.
Our sales efforts are primarily directed toward increasing penetration and
generating incremental revenues in our franchise areas. We sell our cable
communications services through:
o telemarketing,
o direct mail advertising,
o door-to-door selling,
o local media advertising.
Programming
We generally pay either a monthly fee per subscriber per channel or a
percentage of certain revenues for programming. Our programming costs are
increased by:
o increases in the number of subscribers,
o expansion of the number of channels provided to customers,
o increases in contract rates from programming suppliers.
We attempt to secure long-term programming contracts with volume discounts
and/or marketing support and incentives from programming suppliers. Our
programming contracts are generally for a fixed period of time and are subject
to negotiated renewal. We anticipate that future contract renewals will result
in programming costs that are higher than our costs today, particularly for
sports programming.
Customer Service
We are currently consolidating our local customer service operations into
large regional call centers. These regional call centers have technologically
advanced telephone systems that provide 24-hour per day, 7-day per week call
answering capability, telemarketing and other services. Because of these
technological advances, we can better serve our subscriber base and cross-market
new products and services. We have 10 call centers in operation as of December
31, 1998 which serve approximately 2.4 million subscribers. Subscribers in our
remaining cable systems receive customer service primarily through our local,
system-based representatives.
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Comcast's Cable Systems
The table below summarizes Homes Passed, Cable Subscribers and Cable
Penetration information for our cable communications systems as of December 31
(homes and subscribers in thousands):
1998 1997 1996(5) 1995 1994
Homes Passed (1)(4).................................. 7,382 7,138 6,975 5,570 5,491
Cable Subscribers (2)(4)............................. 4,511 4,366 4,280 3,407 3,307
Cable Penetration (3)(4)............................. 61.1% 61.2% 61.4% 61.2% 60.2%
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(1) A home is "passed" if we can connect it to our distribution system without
further extending the transmission lines.
(2) A dwelling with one or more television sets connected to a system counts as
one Cable Subscriber.
(3) Cable Penetration means the number of Cable Subscribers as a percentage of
Homes Passed.
(4) The information consists of cable systems whose financial results we
consolidate. The information does not include 341,000 Homes Passed and
237,000 Cable Subscribers in non-consolidated cable communications systems
in which we have ownership and management interests. The information also
does not include pending acquisitions (see "General Developments of Our
Business").
(5) In November 1996, we acquired the cable operations of The E.W. Scripps
Company.
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System Clusters
We manage most of our cable systems in geographic clusters. Clustering
permits us to deliver customer service and support in a more uniform, efficient
and cost effective manner. The following table summarizes Homes Passed, Cable
Subscribers and Cable Penetration for our eight largest regional cable clusters
as of December 31, 1998 (homes and subscribers in thousands):
Homes Cable Cable
Geographic Cluster Passed Subscribers Penetration
Mid-Atlantic......................................... 2,147.9 1,409.4 65.6%
Michigan............................................. 978.5 480.7 49.1%
Tennessee............................................ 499.2 326.3 65.4%
Southern California.................................. 517.2 271.4 52.5%
West Florida......................................... 413.4 269.9 65.3%
Sacramento........................................... 464.1 247.9 53.4%
Southeast Florida.................................... 452.1 236.4 52.3%
Indianapolis......................................... 243.5 147.4 60.5%
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5,715.9 3,389.4 59.3%
Other Systems........................................ 1,666.0 1,121.3 67.3%
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Total................................................ 7,381.9 4,510.7 61.1%
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Competition
Our cable communications systems compete with a number of different sources
which provide news, information and entertainment programming to consumers,
including:
o local television broadcast stations that provide off-air programming
which can be received using a roof-top antenna and television set,
o program distributors that transmit satellite signals containing video
programming, data and other information to receiving dishes of varying
sizes located on the subscriber's premises,
o satellite master antenna television systems, commonly known as SMATV,
which generally serve condominiums, apartment and office complexes and
residential developments,
o multichannel, multipoint distribution service operators, commonly
known as MMDS or wireless cable operators, which use low-power
microwave frequencies to transmit video programming and other
information over-the-air to subscribers,
o other cable operators who build and operate cable systems in the same
communities that we serve, commonly known as overbuilders,
o interactive online computer services,
o newspapers, magazines and book stores,
o movie theaters,
o live concerts and sporting events,
o home video products, including videotape cassette recorders.
Our cable communications systems will be competitive if we provide, at a
reasonable price to subscribers, superior technical performance, superior
customer service and a greater variety of video programming and other
communications services than are available from our competitors.
Modifications to federal law in 1996 changed the regulatory environment in
which our cable communications systems operate. Federal law now allows local
telephone companies to provide directly to subscribers a wide variety of
services that are competitive with our cable communications services. Some local
telephone companies:
o provide video services within and outside their telephone service
areas through a variety of methods, including broadband cable
networks, satellite program distribution and wireless transmission
facilities,
o have announced plans to construct and operate cable communications
systems in various states.
A local telephone company, Ameritech, has obtained approximately 14 cable
franchises in communities in Michigan that we also serve. It competes directly
with us in these areas by providing video and other broadband communications
services to subscribers. New facilities-based competitors such as RCN
Corporation and Knology Holdings, Inc. are now offering cable and related
communications services in several areas where we hold franchises.
Local telephone companies and other businesses construct and operate
communications facilities that provide access to the Internet and distribute
interactive computer-based services, data and other non-video services to homes
and businesses. These competitors are not required, in certain circumstances, to
comply with some of the material obligations imposed upon our cable systems
under our franchises. We cannot predict the likelihood of success of competing
video or broadband service ventures by local telephone companies or other
businesses. Nor can we predict the impact of these competitive ventures on our
cable communications systems and other businesses.
We operate each of our cable communications systems pursuant to a
non-exclusive franchise that is issued by the community's governing body such as
a city council, a county board of supervisors or a state regulatory agency.
Federal law prohibits franchising authorities from unreasonably denying requests
for additional franchises, and it permits franchising authorities to operate
cable systems. Companies that traditionally have not provided cable services and
that have substantial financial resources (such as public utilities that own
certain of the poles to which our cables are attached) may also obtain cable
franchises and may provide competing communications services.
In the past few years, Congress has enacted legislation and the FCC has
adopted regulatory policies intended to provide a more favorable operating
environment for existing and new technologies that provide, or have the
potential to provide, substantial competition to cable communications systems.
These technologies include direct broadcast satellite service, commonly known as
DBS, among others. According to recent government and industry reports,
conventional, medium and high-power satellites currently provide video
programming to over 10.6 million individual households, condominiums, apartment
and office complexes in the United States. DBS providers with medium and
high-power satellites typically offer to their subscribers more than 150
channels of programming, including program services similar to those provided by
cable systems.
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DBS systems use video compression technology to increase channel capacity
and digital technology to improve the quality of the signals transmitted to
their subscribers. DBS service currently has certain competitive advantages and
disadvantages compared to cable service. Advantages of DBS service include more
programming, greater channel capacity and the digital quality of signals
delivered to subscribers. The disadvantages of DBS service include high up-
front customer equipment and installation costs and a lack of local programming
and local service.
Two major companies are currently offering nationwide high-power DBS
services. Both companies have recently announced separate transactions that, if
completed, may significantly enhance the number of channels on which they can
provide programming to subscribers and may improve significantly their
competitive positions against cable operators. We are unable to predict the
effect these transactions may have on our business and operations.
Our cable systems also compete for subscribers with SMATV systems. SMATV
systems typically are not subject to regulation like local franchised cable
operators. SMATV systems offer subscribers both improved reception of local
television stations and many of the same satellite-delivered programming
services offered by franchised cable systems. In addition, some SMATV operators
are developing and/or offering packages of telephony, data and video services to
private residential and commercial developments. SMATV system operators often
enter into exclusive service agreements with building owners or homeowners'
associations, although some states have enacted laws to provide franchised cable
systems access to these complexes. Courts have reviewed challenges to these laws
and have reached varying results. Our ability to compete for subscribers in
residential and commercial developments served by SMATV system operators is
uncertain. However, we are developing competitive packages of services (video,
data and telephony) to offer to these residential and commercial developments.
Cable systems also compete with MMDS or wireless cable systems, which are
authorized to operate in areas served by our cable systems. Federal law
significantly limits certain local restrictions on the use of roof-top,
satellite and microwave antennae to receive satellite programming and
over-the-air broadcasting services.
Many of our cable systems are currently offering, or plan to offer,
interactive online computer services to subscribers. These cable systems will
compete with a number of other companies, many of whom have substantial
resources, such as:
o existing Internet service providers, commonly known as ISPs,
o local telephone companies,
o long distance telephone companies.
Recently, a number of companies, including telephone companies and ISP's,
have requested local authorities and the FCC to require cable operators to
provide access to cable's broadband infrastructure so that these companies may
deliver Internet services directly to customers over cable facilities. In a
recent report to Congress, the FCC declined to institute an administrative
proceeding to examine this issue at this time. At the present time, several
local jurisdictions are attempting to impose access obligations on a cable
operator as a condition for obtaining municipal consent for franchise transfers;
however, such conditions are currently being challenged in court. It is expected
that the FCC, Congress, and state and local regulatory authorities will continue
to consider actions in this area.
The deployment of Asymmetric Digital Subscriber Line technology, known as
ADSL, will allow Internet access to subscribers at data transmission speeds
equal to or greater than that of modems over conventional telephone lines.
Several telephone companies are introducing ADSL service and have requested the
FCC to allow them to provide high-speed broadband services, including
interactive online services, without regard to present service boundaries and
other regulatory restrictions. We are unable to predict the likelihood of
success of the online services offered by our competitors or the impact on our
business and operations of these competitive ventures.
We expect advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment to occur in the
future. We refer you to page 10 of this Annual Report for a detailed discussion
of legislative and regulatory factors. Other new technologies and services may
develop and may compete with services that our cable communications systems
offer. Consequently, we are unable to predict the effect that ongoing or future
developments might have on our business and operations.
Electronic Retailing
QVC is a domestic and international electronic media general merchandise
retailer which produces and distributes merchandise-focused television programs,
via satellite, to affiliated video program providers for retransmission to
subscribers. At QVC, program hosts describe and demonstrate the products and
viewers place orders directly with QVC. We own 57% of QVC.
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Revenue Sources
QVC sells a variety of consumer products and accessories including jewelry,
housewares, electronics, apparel and accessories, collectibles, toys and
cosmetics. It purchases, or obtains on consignment, products from domestic and
foreign manufacturers and wholesalers, often on favorable terms based on the
volume of the transactions. QVC intends to continue introducing new products and
product lines. QVC does not depend upon any one particular supplier for any
significant portion of its inventory.
Viewers place orders to purchase QVC 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. QVC's private label
credit card program is serviced by an unrelated third party. QVC ships
merchandise promptly from its distribution centers, typically within 24 hours
after receipt of an order. QVC's return policy permits customers to return,
within 30 days, any merchandise purchased for a full refund of the purchase
price and original shipping charges.
Distribution Channels
In the United States, QVC is transmitted live 24 hours a day, 7 days a
week, to approximately 58 million cable television homes. Approximately 1.5
million additional cable television homes receive QVC on a less than full time
basis. Approximately 9.8 million home satellite dish users receive QVC
programming. The QVC program schedule consists of one-hour and multi-hour
program segments. Each program theme is devoted to a particular category of
product or lifestyle. From time to time, special program segments are devoted to
merchandise associated with a particular celebrity, event, geographical region
or seasonal interest.
QVC sells products over electronic media in Germany, the United Kingdom and
Ireland. In the UK and Ireland, this service currently reaches over 7.3 million
cable television and home satellite dish-served homes. In Germany, this service
currently is available to over 14 million cable television and home satellite
dish-served homes. However, we estimate that only 4.6 million homes in Germany
have programmed their television sets to receive this service.
QVC also offers an interactive shopping service, iQVC, on the Internet. The
iQVC service offers a diverse array of merchandise, on-line, 24 hours a day, 7
days a week. iQVC also maintains a mailing list which e-mails product news to
subscribers.
QVC Transmission
An exclusive, protected, non-preemptible transponder on a communications
satellite transmits the QVC domestic signal. QVC subleases transponders for the
transmission of its signals to the UK and Germany. Each communications satellite
has a number of separate transponders. If our transponder fails, QVC's signal
will be transferred to a spare transponder. If no transponder is available, the
signal will be transferred to a preemptible transponder located on the same
satellite or, if available, to a transponder on another satellite owned by the
same lessor. 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. Because it has the exclusive use of a
protected, non-preemptible transponder, interruption is unlikely to occur.
However, we cannot offer assurances that there will not be an interruption or
termination of satellite transmission due to transponder failure. Interruption
or termination could have a material adverse effect on QVC.
Program Providers
We have entered into affiliation agreements with video program providers in
the US to carry QVC programming. Generally, there are no additional charges to
subscribers for the distribution of QVC. In return for carrying QVC, each
programming provider receives an allocated portion, based upon market share, of
up to five percent of the net sales of merchandise sold to customers located in
the programming provider'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 QVC's cable television homes can be
terminated in the sixth year of their respective terms by the programming
provider unless the programming provider earns a specified minimum level of
sales commissions. QVC's sales are currently at levels that meet minimum
requirements. The affiliation agreements provide for the programming provider to
broadcast commercials regarding QVC on other channels and to distribute QVC's
advertising material to subscribers. As of December 31, 1998, approximately 27%
of the total homes reached by QVC were attributable to QVC's affiliation
agreements with us and TeleCommunications, Inc., the indirect owner of a 43%
interest in QVC, and their respective subsidiaries.
If QVC can successfully negotiate with programming providers, then renewal
of these affiliation agreements will be on favorable terms. QVC competes for
cable channels against similar electronic retailing programming, as well as
against alternative programming supplied by other sources, including news,
public affairs,
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entertainment and sports programmers. QVC's business depends on its affiliation
with programming providers for the transmission of QVC programming. If a
significant number of homes are no longer served because of termination or
non-renewal of affiliation agreements, our financial results could be adversely
affected. QVC has incentive programs to induce programming providers to enter
into or extend affiliation agreements or to increase the number of homes under
existing affiliation agreements. These incentives include various forms of
marketing, launch and equipment purchase support. QVC will continue to recruit
additional programming providers and seek to enlarge its audience. Despite these
efforts, it is difficult to both renew or reach affiliation agreements with
programming 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 retail stores. Many of QVC's competitors are connected in chain or
franchise systems. On television, QVC competes with other satellite-transmitted
programs for channel space and viewer loyalty. We believe that, until digital
compression is utilized on a large-scale basis, most programming providers will
not devote more than two channels to televised shopping and may allocate only
one. Large-scale use of digital compression is 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 use of digital compression is
expected to provide programming providers with greater channel capacity. Greater
channel capacity would increase the opportunity for QVC, in addition to other
home shopping programs, to be distributed on additional channels.
---------------------------
Other Programming Investments
We have made investments in cable television networks and other programming
related enterprises as a means of generating additional revenues and subscriber
interest. Our programming investments as of December 31, 1998 include:
Ownership
Investment Description Percentage
- ----------------------------- ---------------------------------------------------------- -----------
CN8-The Comcast Network Regional and local programming 100.0%
Comcast SportsNet Regional sports programming and events 46.4%
E! Entertainment Entertainment-related news and original programming 39.7%
The Golf Channel Golf-related programming 43.3%
Outdoor Life Outdoor activities 16.8%
Speedvision Automotive, marine and aviation 14.8%
Sunshine Network Regional sports, public affairs and general entertainment 13.0%
Viewer's Choice Pay-per-view programming 11.1%
---------------------------
CN8-The Comcast Network
We created CN8-The Comcast Network, our regional programming service, in
late 1996. We deliver CN8 to more than 2.0 million cable subscribers in
Pennsylvania, New Jersey and Maryland. CN8 provides original programming,
including local and regional news and public affairs, regional sports, health
and cooking and family-oriented programming.
Comcast SportsNet
In July 1996, we acquired a 66% interest in Comcast Spectacor, L.P., a
partnership that owns the Philadelphia Flyers NHL hockey team, the Philadelphia
76ers NBA basketball team, and their arenas. In October 1997, Comcast- Spectacor
and the owner of the Philadelphia Phillies major league baseball team launched
Comcast SportsNet, a 24-hour regional sports programming network which provides
sports related programming, including Flyers, 76ers and Phillies games to
approximately 2.6 million viewers in the Philadelphia region. Comcast SportsNet
has entered into affiliation agreements with many of the video program providers
in the Philadelphia television market. Comcast SportsNet is delivered to
affiliates terrestrially.
E! Entertainment
E! Entertainment is our entertainment-related news and information service
with distribution to approximately 53 million customers as of December 31, 1998.
E! Entertainment seeks to attract viewers based on international interest in
Hollywood and entertainment industry news, information and features. We obtained
a controlling interest in E! Entertainment in March 1997.
- 9 -
The Golf Channel
The Golf Channel is a 24-hour network devoted exclusively to golf
programming. The programming schedule includes live golf coverage, golf
instruction programs and golf news.
Outdoor Life and Speedvision
Outdoor Life presents programming consisting primarily of outdoor life
themes. Speedvision presents a variety of programming of interest to automobile,
boat and airplane enthusiasts including news, historical and other information
and event coverage.
The Sunshine Network
The Sunshine Network is a regional sports and public affairs network,
providing programming emphasizing Florida's local sports teams and events in
Florida. Programming rights on the network include eight professional teams,
including the Orlando Magic and Miami Heat NBA basketball teams and the Tampa
Bay Lightning NHL hockey team.
Viewer's Choice
Viewer's Choice is the brand-name of a cable operator-controlled buying
cooperative for pay-per-view programming.
Internet Related Investments
We have made investments in various Internet-based programming-related
enterprises to participate in the growing interest among consumers in this new
media distribution system.
---------------------------
LEGISLATION AND REGULATION
Cable Communications
The Communications Act of 1934 establishes a national policy to regulate
the development and operation of cable communications systems. The
Communications Act allocates responsibility for enforcing federal policies among
the FCC, and state and local governmental authorities. The courts, especially
the federal courts, play an important oversight role as these statutory and
regulatory provisions are interpreted and enforced by the various federal, state
and local governmental units.
We expect that court actions and regulatory proceedings will refine the
rights and obligations of various parties, including the government, under the
Communications Act. The results of these judicial and administrative proceedings
may materially affect our business operations. In the following paragraphs, we
summarize the principal federal laws and regulations materially affecting the
growth and operation of the cable communications industry. We also provide a
brief description of certain state and local laws applicable to our businesses.
The Communications Act and FCC Regulations
The Communications Act and the regulations and policies of the FCC affect
significant aspects of our cable system operations, including:
o subscriber rates,
o the content of programming we offer our subscribers, as well as the
way we sell our program packages to subscribers and other video
program providers,
o the use of our cable systems by local franchising authorities, the
public and other unrelated third parties,
o our franchise agreements with governmental authorities,
o cable system ownership limitations and prohibitions,
o our use of utility poles and conduit.
Subscriber Rates
The Communications Act and the FCC's regulations and policies limit the
ability of cable systems to raise rates for basic services and equipment, as
well as for certain non-basic cable programming services, in communities that
are not subject to effective competition, as defined by federal law. Where there
is no effective competition, federal law gives franchising authorities the power
to regulate the monthly rates charged by the operator for:
o the lowest level of programming service, typically called basic
service, which generally includes local broadcast channels and public
access or governmental channels required by the operator's franchise,
o the installation, sale and lease of equipment used by subscribers to
receive basic service, such as converter boxes and remote control
units.
- 10 -
Several years ago the FCC adopted detailed rate regulations, guidelines and
rate forms that we and the franchising authority must use in connection with the
regulation of our basic service and equipment rates. If the franchising
authority concludes that our rates are not in accordance with the FCC's rate
regulations, it may require us to reduce our rates and to refund overcharges to
subscribers, with interest. We may appeal adverse rate decisions to the FCC. The
Communications Act and FCC regulations also permit franchising authorities to
file complaints with the FCC concerning rates we charge for certain non-basic
cable programming service tiers.
The Communications Act and the FCC's regulations also:
o prohibit regulation of rates charged by cable operators for
programming offered on a per channel or per program basis, and for
certain multi-channel groups of new non-basic programming,
o eliminate rate regulation of non-basic cable programming service tiers
after March 31, 1999, although Congress may consider legislation to
extend the period during which non-basic rates remain subject to
regulation,
o require operators to charge uniform rates throughout each franchise
area that is not subject to effective competition,
o prohibit regulation of non-predatory bulk discount rates offered by
operators to subscribers in commercial and residential developments,
o permit regulated equipment rates to be computed by aggregating costs
of broad categories of equipment at the franchise, system, regional or
company level.
Over the past few years, we have reached agreements with various regulatory
bodies to resolve outstanding rate disputes. In addition to the "social
contract" we reached with the FCC, we settled pending local rate proceedings in
1998 involving our basic service rates in certain of our systems. We believe
that the resolution of these proceedings did not have a material adverse impact
on our financial position, results of operations or liquidity.
Content Requirements
The Communications Act and the FCC's regulations contain broadcast signal
carriage requirements that allow local commercial television broadcast stations:
o to elect once every three years to require a cable communications
system to carry the station, subject to certain exceptions, or
o to negotiate with us on the terms by which we carry the station on our
cable communications system, commonly called retransmission consent.
The Communications Act requires a cable operator to devote up to one-third
of its activated channel capacity for the mandatory carriage of local commercial
television stations. The Communications Act also gives local non-commercial
television stations 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 must obtain retransmission
consent for:
o all "distant" commercial television stations (except for commercial
satellite-delivered independent "superstations" such as WGN),
o commercial radio stations,
o certain low-power television stations.
The FCC has also initiated an administrative proceeding to consider the
requirements, if any, for the mandatory carriage of digital television signals
offered by local broadcasters. We are unable to predict the outcome of this
proceeding or the impact of any new carriage requirements on the operation of
our cable systems.
The Communications Act requires our cable systems to permit subscribers to
purchase video programming 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. However, we are not required to comply with this requirement until
2002 for any of our cable systems that do not have addressable converter boxes
or have other substantial technological limitations. A limited number of our
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
this requirement.
To increase competition between cable operators and other video program
distributors, the Communications Act:
o precludes any satellite video programmer affiliated with a cable
company, or with a common carrier providing video programming directly
to its subscribers, from favoring an affiliated company over
competitors,
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o requires such programmers to sell their satellite-delivered
programming to other video program distributors,
o limits the ability of such programmers to offer exclusive programming
arrangements to their affiliates.
In two recent administrative determinations, the FCC's Cable Services
Bureau concluded that the program access rules did not apply to
terrestrially-delivered programming, such as Comcast SportsNet. These matters
are expected to be reviewed by the FCC.
The FCC and Congress are presently considering proposals that may enhance
the ability of DBS providers and other video program distributors to gain access
to additional programming and to transmit local broadcast signals to local
markets. These proposals, if adopted, will likely increase competition to our
cable systems.
The Communications Act contains restrictions on the transmission by cable
operators of obscene or indecent programming. It requires cable operators to
block fully both the video and audio portion of sexually explicit or indecent
programming on channels that are primarily dedicated to sexually oriented
programming or alternatively to carry such programming only at "safe harbor"
time periods. A three-judge federal district recently determined that this
provision was unconstitutional; however, the federal government announced that
it will appeal the lower court's ruling.
The FCC actively regulates other aspects of our programming, involving such
areas as:
o our use of syndicated and network programs and local sports broadcast
programming,
o advertising in children's programming,
o political advertising,
o origination cablecasting,
o sponsorship identification,
o closed captioning of video programming.
Use of Our Cable Systems by The Government and Unrelated Third Parties
The Communications Act allows franchising authorities and unrelated third
parties to have access to our cable systems' channel capacity. For example, it:
o permits franchising authorities to require cable operators to set
aside channels for public, educational and governmental access
programming;
o requires a cable system with 36 or more activated channels to
designate a significant 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 regulates various aspects of third party commercial use of channel
capacity on our cable systems, including the rates and certain terms and
conditions of the commercial use. The FCC is also considering proposals by
various Internet service providers to gain access to our cable systems on a
common carrier basis. We cannot predict if such proposals will be adopted or
whether, if adopted, they will have a material impact upon our business
operations.
Franchise Matters
Although franchising matters are normally regulated at the local level
through a franchise agreement and/or a local ordinance, the Communications Act
provides oversight and guidelines to govern our relationship with local
franchising authorities. For example, the Communications Act:
o 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,
o generally prohibits us from operating in communities without a
franchise,
o encourages competition with our existing cable systems by:
o allowing municipalities to operate cable systems without
franchises,
o preventing franchising authorities from granting exclusive
franchises or from unreasonably refusing to award additional
franchises covering an existing cable system's service area.
o permits local authorities, when granting or renewing our franchises,
to establish requirements for cable-related facilities and equipment,
but prohibits franchising authorities from establishing requirements
for specific video programming or information services other than in
broad categories,
o permits us to obtain modification of our franchise requirements from
the franchise authority or by judicial action if warranted by changed
circumstances,
- 12 -
o generally prohibits franchising authorities from:
o imposing requirements during the initial cable franchising
process or during franchise renewal that require, prohibit or
restrict us from providing telecommunications services,
o imposing franchise fees on revenues we derive from providing
telecommunications services over our cable systems, or
o restricting our use of any type of subscriber equipment or
transmission technology.
o limits our payment of franchise fees to the local franchising
authority to 5% of our gross revenues derived from providing cable
services over our cable system.
The Communications Act contains procedures designed to protect us against
arbitrary denials of the renewal of our franchises, although a franchising
authority under various conditions could deny us a franchise renewal. Moreover,
even if our franchise is renewed, the franchising authority may seek to impose
upon us 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 our cable system or franchise, the franchising authority may attempt to
impose more burdensome or onerous franchise requirements on us in connection
with a request for such consent. Historically, cable operators providing
satisfactory services to their subscribers and complying with the terms of their
franchises have typically obtained franchise renewals. We believe that we have
generally met the terms of our franchises and have provided quality levels of
service. We anticipate that our future franchise renewal prospects generally
will be favorable.
Various courts have considered whether franchising authorities have the
legal right to limit the number of franchises awarded within a community and to
impose certain substantive franchise requirements (e.g. access channels,
universal service and other technical requirements). These decisions have been
inconsistent and, until the United States 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
The Communications Act generally prohibits us from owning or operating a
SMATV or wireless cable system in any area where we provide franchised cable
service. We may, however, acquire and operate SMATV systems in our franchised
service areas if the programming and other services provided to SMATV
subscribers are offered according to the terms and conditions of our franchise
agreement.
The Communications Act also authorizes the FCC to impose nationwide limits
on the number of subscribers under the control of a cable operator. While a
federal district court has declared this limitation to be unconstitutional and
delayed its enforcement, the FCC recently reconsidered its cable ownership
regulations and:
o reaffirmed its 30% nationwide subscriber ownership limit, but
maintained its voluntary stay on enforcement of that regulation
pending further action,
o reaffirmed its subscriber ownership information reporting
requirements,
o opened an administrative proceeding to reevaluate its cable television
attribution rules.
Also pending on appeal is a challenge to the statutory and FCC regulatory
limitations on the number of channels that can be occupied on a cable system by
a video programmer in which a cable operator has an attributable ownership
interest. We are unable to predict the outcome of these judicial and regulatory
proceedings or the impact of any ownership restrictions on our business and
operations.
The Communications Act eliminated the statutory prohibition on the common
ownership, operation or control of a cable system and a television broadcast
station in the same market. While the FCC has eliminated its regulations which
precluded the cross-ownership of a national broadcasting network and a cable
system, it has not yet completed its review of other regulations which prohibit
the common ownership of other broadcasting interests and cable systems in the
same geographical areas.
Amendments to the Communications Act made far-reaching changes in the
relationship between local telephone companies and cable service providers.
These amendments:
o eliminated federal legal barriers to competition in the local
telephone and cable communications businesses, including allowing
local telephone companies to offer video services in their local
telephone service areas;
o preempted legal barriers to telecommunications competition that
previously existed in state and local laws and regulations;
- 13 -
o set basic standards for relationships between telecommunications
providers; and
o generally limited acquisitions and prohibited certain joint ventures
between local telephone companies and cable operators in the same
market.
Local telephone companies may provide service as traditional cable
operators with local franchises or they may opt to provide their programming
over unfranchised "open video systems," subject to certain conditions,
including, but not limited to, setting aside a portion of their channel capacity
for use by unaffiliated program distributors on a non-discriminatory basis. A
federal appellate court recently overturned various parts of the FCC's open
video rules, including the FCC's preemption of local franchising requirements
for open video operators. We expect the FCC to modify its open video rules to
comply with the federal court's decision, but we are unable to predict the
impact any rule modifications may have on our business and operations.
Pole Attachment Regulation
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 demonstrate to the FCC that they
adequately regulate pole attachment rates, as is the case in certain states in
which we operate. In the absence of state regulation, the FCC administers pole
attachment rates on a formula basis. The FCC's current rate formula, which is
being reevaluated by the FCC, governs the maximum rate certain utilities may
charge for attachments to their poles and conduit by cable operators providing
only cable services and, until 2001, by certain companies providing
telecommunications services. The FCC also adopted a second rate formula that
will be effective in 2001 and will govern the maximum rate certain utilities may
charge for attachments to their poles and conduit by companies providing
telecommunications services, including cable operators.
Any resulting increase in attachment rates due to the FCC's new rate
formula will be phased in over a five-year period in equal annual increments,
beginning in February 2001. Several parties have requested the FCC to reconsider
its new regulations and several parties have challenged the new rules in court.
A federal district court recently upheld the constitutionality of the new
statutory provision which requires that utilities provide cable systems and
telecommunications carriers with nondiscriminatory access to any pole, conduit
or right-of-way controlled by the utility; the utilities involved in that
litigation have appealed the lower court's decision. We are unable to predict
the outcome of this litigation or the ultimate impact of any revised FCC rate
formula or of any new pole attachment rate regulations on our business and
operations.
Other Regulatory Requirements of the
Communications Act and the FCC
The Communications Act also includes provisions, among others, regulating:
o customer service,
o subscriber privacy,
o marketing practices,
o equal employment opportunity,
o technical standards and equipment compatibility.
The FCC actively regulates other parts of our cable operations, involving
such areas as:
o hiring and promotion of employees and use of outside vendors,
o consumer protection and customer service,
o technical standards and testing of cable facilities,
o consumer electronics equipment compatibility,
o registration of cable systems,
o maintenance of various records and public inspection files,
o microwave frequency usage,
o antenna structure notification, marking and lighting.
The FCC may 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. The FCC has ongoing rulemaking proceedings that may change its
existing rules or lead to new regulations. We are unable to predict the impact
that any further FCC rule changes may have on our business and operations.
Other bills and administrative proposals pertaining to cable communications
have previously been introduced in Congress or have been considered by other
governmental bodies over the past several years. It is probable that further
attempts will be made by Congress and other governmental bodies relating to the
regulation of cable communications services.
- 14 -
Copyright
Our cable communications systems provide our subscribers with local and
distant television and radio broadcast signals which are protected by the
copyright laws. We generally do not obtain a license to use this programming
directly from the owners of the programming, but comply with an alternative
federal copyright licensing process. In exchange for filing certain reports and
contributing a percentage of our revenues to a federal copyright royalty pool,
we obtain blanket permission to retransmit copyrighted material.
In a report to Congress, the U.S. Copyright Office recommended that
Congress make major revisions to both the cable television and satellite
compulsory licenses. The possible simplification, modification or elimination of
the compulsory copyright license is the subject of continuing legislative
review. The elimination or substantial modification of the cable compulsory
license could adversely affect our ability to obtain suitable programming and
could substantially increase the cost of programming that remains available for
distribution to our subscribers. We cannot predict the outcome of this
legislative activity.
Our cable communications systems often utilize music in the programs we
provide to subscribers including local advertising, local origination
programming and pay-per-view events. The rights to use this music are controlled
by music performance rights societies who negotiate on behalf of their copyright
owners for license fees covering each performance. The cable industry and one of
these societies have agreed upon a standard licensing agreement covering the
performance of music contained in programs originated by cable operators and in
pay-per-view events. Negotiations on a similar licensing agreement are in
process with another music performance rights organization. Rate courts
established by a federal court exist to determine appropriate copyright coverage
and payments in the event the parties fail to reach a negotiated settlement. We
cannot predict the outcome of these proceedings or the amount of any license
fees we may be required to pay for the use of music. We do not believe that the
amount of such fees will be significant to our financial position, results of
operations or liquidity.
State and Local Regulation
Our cable systems use local streets and rights-of-way. Consequently, we
must comply with state and local regulation which is typically imposed through
the franchising process. The terms and conditions of our franchises vary
materially from jurisdiction to jurisdiction. Each franchise generally contains
provisions governing:
o cable service rates,
o franchise fees,
o franchise term,
o system construction and maintenance obligations,
o system channel capacity,
o design and technical performance,
o customer service standards,
o franchise renewal,
o sale or transfer of the franchise,
o territory of the franchisee,
o indemnification of the franchising authority,
o use and occupancy of public streets,
o types of cable services provided.
A number of states subject cable systems to the jurisdiction of state
governmental agencies. Those states in which we operate that have enacted such
state level regulation are Connecticut, New Jersey and Delaware. State and local
franchising jurisdiction is not unlimited, however; it must be exercised
consistently with federal law. The Communications Act immunizes franchising
authorities from monetary damage awards arising from the regulation of cable
systems or decisions made on franchise grants, renewals, transfers and
amendments.
The summary of certain federal and state regulatory requirements in the
preceding pages does not 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 systems operate. Neither the outcome of these
proceedings nor their impact upon our cable operations can be predicted at this
time.
Content
The FCC does not directly regulate the content or transmission of
programming services like those offered by QVC and E! Entertainment. The FCC
does, however, exercise regulatory authority over the satellites and uplink
facilities which transmit programming services such as those provided by QVC and
E! Entertainment. The FCC has granted, subject to periodic reviews, permanent
licenses 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. The
- 15 -
FCC has licensing authority over satellites from which QVC and E! Entertainment
obtain transponder capacity, but does not regulate their rates, terms or
conditions of service. The FCC could, however, alter the regulatory obligations
applicable to satellite service providers. The QVC programming services offered
in the UK, Ireland and Germany are regulated by the media authorities in those
countries.
EMPLOYEES
As of December 31, 1998, we had approximately 17,000 employees. Of these
employees, approximately 8,800 were associated with cable communications,
approximately 5,700 were associated with electronic retailing and approximately
2,500 were associated with other divisions. We believe that our relationships
with our employees are good.
ITEM 2 PROPERTIES
Cable Communications
A central receiving apparatus, distribution cables, converters, customer
service call centers and local business offices are the principal physical
assets of a cable communications system. We own or lease the receiving and
distribution equipment of each system and own or lease parcels of real property
for the receiving sites, customer service call centers and local business
offices. In order to keep pace with technological advances, we are maintaining,
periodically upgrading and rebuilding the physical components of our cable
communications systems.
Electronic Retailing
Television studios, customer service call centers, business offices,
product warehouses and distribution centers are the principal physical assets of
our electronic retailing operations. These assets include QVC's studios and
offices, Studio Park, located in West Chester, Pennsylvania. QVC owns the
majority of these assets. In order to keep pace with technological advances, QVC
is maintaining, periodically upgrading and rebuilding the physical components of
our electronic retailing operations. QVC's warehousing and distribution
facilities will continue to be upgraded over the next several years.
We believe that substantially all of our physical assets are in good
operating condition.
ITEM 3 LEGAL PROCEEDINGS
We are subject to legal proceedings and claims which arise in the ordinary
course of our business. In the opinion of our management, the amount of ultimate
liability with respect to these actions will not materially affect our financial
position, results of operations or liquidity.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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ITEM 4A EXECUTIVE OFFICERS OF THE REGISTRANT
The current term of office of each of our officers expires at the first
meeting of our Board of Directors following the next Annual Meeting of
Shareholders, presently scheduled to be held in June 1999, or as soon thereafter
as each of their successors is elected and qualified. The following table sets
forth certain information concerning our principal executive officers, including
their ages, positions and tenure as of December 31, 1998:
Officer
Name Age Since Position with Comcast
- ---------------------------- ---------- ------------ --------------------------------------------------------
Ralph J. Roberts 78 1969 Chairman of the Board of Directors; Director
Julian A. Brodsky 65 1969 Vice Chairman of the Board of Directors; Director
Brian L. Roberts 39 1986 President; Director
Lawrence S. Smith 51 1988 Executive Vice President
John R. Alchin 50 1990 Senior Vice President; Treasurer
Stanley L. Wang 58 1981 Senior Vice President; General Counsel; Secretary
---------------------------
Ralph J. Roberts has served as a Director and as our Chairman of the Board
of Directors for more than five years. Mr. Roberts devotes a major portion of
his time to our business and affairs. Mr. Roberts has been the President and a
Director of Sural Corporation, a privately-held investment company, our
controlling shareholder, for more than five years. Mr. Roberts is the father of
Brian L. Roberts.
Julian A. Brodsky has served as a Director and as our Vice Chairman of the
Board of Directors for more than five years. Mr. Brodsky devotes a major portion
of his time to our business and affairs. Mr. Brodsky presently serves as the
Treasurer and as a Director of Sural. Mr. Brodsky is also a Director of RBB
Fund, Inc.
Brian L. Roberts has served as our President and as a Director for more
than five years. Mr. Roberts devotes a major portion of his time to our business
and affairs. Mr. Roberts presently serves as Vice President and as a Director of
Sural. As of December 31, 1998, our shares owned by Sural constituted
approximately 76% of the voting power of the two classes of our voting common
stock combined. Mr. Roberts has sole voting power over stock representing a
majority of voting power of all Sural stock and, therefore, has voting control
over Comcast. Mr. Roberts is also a Director of @Home Corporation. Mr. Roberts
is a son of Ralph J. Roberts.
Lawrence S. Smith was named our Executive Vice President in December 1995.
Prior to that time, Mr. Smith served as our Senior Vice President for more than
five years. Mr. Smith is our Principal Accounting Officer.
John R. Alchin has served as our Treasurer and as Senior Vice President for
more than five years. Mr. Alchin is our Principal Financial Officer.
Stanley L. Wang has served as our Senior Vice President, Secretary and
General Counsel for more than five years.
- 17 -
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Class A Special Common Stock is included on Nasdaq under the symbol
CMCSK and our Class A Common Stock is included on Nasdaq under the symbol CMCSA.
There is no established public trading market for our Class B Common Stock. Our
Class B Common Stock can be converted, 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.
Class A
Special Class A
------------------------------------------------------------
High Low High Low
1998
First Quarter...................................... $37 3/16 $29 7/8 $36 7/8 $30 1/8
Second Quarter..................................... 41 11/16 33 13/16 40 1/2 32 7/8
Third Quarter...................................... 48 3/4 37 3/8 48 1/16 37 1/2
Fourth Quarter..................................... 59 40 9/16 57 7/8 40 1/4
1997
First Quarter...................................... $19 3/8 $16 7/8 $18 15/16 $16 3/8
Second Quarter..................................... 22 1/4 14 5/8 22 3/16 14 1/2
Third Quarter...................................... 25 3/4 19 3/4 25 5/8 19 13/16
Fourth Quarter..................................... 32 9/16 25 19/32 32 3/4 25 11/16
--------------------
We began paying quarterly cash dividends on our Class A Common Stock in 1977.
Since 1978, we have paid equal dividends on shares of both our Class A Common
Stock and our Class B Common Stock. Since December 1986, when the Class A
Special Common Stock was issued, we have paid equal dividends on shares of our
Class A Special, Class A and Class B Common Stock. We declared dividends of
$.0933 for each of the years ended December 31, 1998 and 1997 on shares of our
Class A Special, Class A and Class B Common Stock. The declaration and payment
of future dividends and their amount depend upon our results of operations, our
financial condition and capital needs, and upon contractual restrictions on us
and our subsidiaries and other factors.
If you hold shares of our Class A Special Common Stock, you cannot vote in
the election of directors or otherwise, except where class voting is required by
law. In that case, if you hold Class A Special Common Stock, you have one vote
per share. Generally, if you hold Class A Common Stock, you have one vote per
share. If you hold Class B Common Stock, you have 15 votes per share. Generally,
including the election of directors, holders of Class A Common Stock and the
Class B Common Stock vote as one class except where class voting is required by
law. If you hold Class A Common Stock or Class B Common Stock, you have
cumulative voting rights.
As of December 31, 1998, there were 2,381 record holders of our Class A
Special Common Stock, 1,760 record holders of our Class A Common Stock and three
record holders of our Class B Common Stock.
- 18 -
ITEM 6 SELECTED FINANCIAL DATA
Year Ended December 31,
1998(1) 1997(1) 1996(1) 1995 1994
-------------------------------------------------------------
(Dollars in millions, except per share data)
-------------------------------------------------------------
Statement of Operations Data:
Revenues........................................... $5,145.3 $4,467.7 $3,612.3 $2,988.1 $1,089.2
Operating income................................... 557.1 466.6 465.9 397.7 213.4
Income (loss) from continuing operations before
extraordinary items........................... 1,007.7 (182.9) (6.4) 48.0 (46.1)
Loss from discontinued operations (2).............. 31.4 25.6 46.1 85.8 29.2
Extraordinary items................................ (4.2) (30.2) (1.0) (6.1) (11.7)
Net income (loss).................................. 972.1 (238.7) (53.5) (43.9) (87.0)
Basic earnings (loss) for common stockholders
per common share (3)
Income (loss) from continuing operations
before extraordinary items................. $2.67 ($0.58) ($0.02) $0.20 ($0.20)
Loss from discontinued operations (2)......... (0.09) (0.08) (0.19) (0.36) (0.12)
Extraordinary items........................... (0.01) (0.09) (0.03) (0.05)
----------- ----------- ----------- ---------- ---------
Net income (loss)............................. $2.57 ($0.75) ($0.21) ($0.19) ($0.37)
=========== =========== =========== ========== =========
Diluted earnings (loss) for common
stockholders per common share (3)
Income (loss) from continuing operations
before extraordinary items................. $2.50 ($0.58) ($0.02) $0.20 ($0.20)
Loss from discontinued operations (2)......... (0.08) (0.08) (0.19) (0.36) (0.12)
Extraordinary items........................... (0.01) (0.09) (0.03) (0.05)
----------- ----------- ----------- ---------- ---------
Net income (loss)............................. $2.41 ($0.75) ($0.21) ($0.19) ($0.37)
=========== =========== =========== ========== =========
Cash dividends declared per common share (3)....... $0.0933 $0.0933 $0.0933 $0.0933 $0.0933
Balance Sheet Data (at year end):
Total assets....................................... $14,817.4 $11,326.8 $10,660.4 $8,159.9 $5,480.0
Working capital.................................... 2,531.7 44.9 15.5 604.6 29.4
Long-term debt..................................... 5,464.2 5,334.1 5,998.3 6,014.8 4,066.0
Stockholders' equity (deficiency).................. 3,815.3 1,646.5 551.6 (827.7) (726.8)
Supplementary Financial Data:
Operating income before depreciation and
amortization (4).............................. $1,496.7 $1,293.1 $1,047.0 $881.0 $459.9
Net cash provided by (used in) (5).................
Operating activities.......................... 1,079.7 855.3 644.5 466.7 339.7
Financing activities.......................... 809.2 283.9 (88.0) 1,785.7 1,089.2
Investing activities.......................... (1,427.3) (1,056.5) (749.5) (2,060.3) (1,254.4)
- ----------
(1) You should 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 this financial data.
(2) In January 1999, we agreed to sell Comcast Cellular Corporation to SBC
Communications, Inc. This represents the results of Comcast Cellular which
is presented as a discontinued operation for all periods presented.
(3) We have adjusted these for our three-for-two stock split effective February
2, 1994.
(4) Operating income before depreciation and amortization is commonly referred
to in our 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 our 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 businesses in the our industries, although our measure
of operating cash flow may not be comparable to similarly titled measures
of other companies. 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 those measurements as an indicator of our
performance.
(5) This represents net cash provided by (used in) operating activities,
financing activities and investing activities as presented in the our
consolidated statement of cash flows.
- 19 -
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We have experienced significant growth in recent years through both
strategic acquisitions and growth in our existing businesses. We have
historically met our cash needs for operations through our cash flows from
operating activities. Cash requirements for acquisitions and capital
expenditures have been provided through our financing activities and sales of
long-term investments, as well as our existing cash, cash equivalents and
short-term investments.
In January 1999, we agreed to sell our wholly owned subsidiary, Comcast
Cellular Corporation ("Comcast Cellular"), to SBC Communications, Inc. for
approximately $400 million in cash and the assumption of approximately $1.3
billion of Comcast Cellular debt. We expect to recognize a pre-tax gain on the
sale of approximately $600 million. We expect to complete this sale in the third
quarter of 1999 if we receive all the necessary regulatory and other approvals.
The results of Comcast Cellular have been presented as a discontinued operation
in our consolidated financial statements.
General Developments of Business
See "General Developments of Business" in Part I and Note 3 to our
consolidated financial statements in Item 8.
Liquidity and Capital Resources
The cable communications and the electronic retailing industries are
experiencing increasing competition and rapid technological changes. Our future
results of operations will be affected by our ability to react to changes in the
competitive environment and by our ability to implement new technologies.
However, we believe that competition and technological changes will not
significantly affect our ability to obtain financing.
We believe that we will be able to meet our current and long-term liquidity
and capital requirements, including fixed charges, through our cash flows from
operating activities, existing cash, cash equivalents, short-term investments,
lines of credit and other external financing.
Cash, Cash Equivalents and Short-term Investments
We have traditionally maintained significant levels of cash, cash
equivalents and short-term investments to meet our short-term liquidity
requirements. Our cash equivalents and short-term investments are recorded at
fair value. Cash, cash equivalents and short-term investments as of December 31,
1998 and 1997 were $4.524 billion and $573.0 million, respectively. As of
December 31, 1998, our cash, cash equivalents and short-term investments include
$3.635 billion of our investments in AT&T Corp. ("AT&T"), Sprint PCS, NTL
Incorporated ("NTL"), Tele-Communications, Inc. ("TCI"), Liberty Media
Corporation ("Liberty") and TCI Ventures Group, Inc. ("TCI Ventures") (see Notes
3 and 4 to our consolidated financial statements included in Item 8). As of
December 31, 1998, $258.5 million of our cash, cash equivalents and short-term
investments is restricted to use by subsidiaries under contractual or other
arrangements.
Investments
See Notes 3 and 4 to our consolidated financial statements included in Item
8.
We do not have any additional significant contractual funding commitments
with respect to any of our investments. However, to the extent we do not fund
our investees' capital calls, we expose ourselves to dilution of our ownership
interests. We continually evaluate our existing investments as well as new
investment opportunities.
Investment Rights
In July 1996, we acquired a 66% interest in Comcast Spectacor, L.P.
("Comcast-Spectacor"), the owner of two professional sports teams and two arenas
in Philadelphia, Pennsylvania. We have the right to purchase the remaining 34%
interest in Comcast-Spectacor from our partner for its pro rata portion of the
fair market value (on a going concern basis as determined by an appraisal
process) of Comcast-Spectacor. Our partner also has the right to require us to
purchase its interests under the same terms. We may pay our partner for such
interests in shares of our Class A Special Common Stock, subject to certain
restrictions. If our partner exercises its exit rights and we elect not to
purchase its interest, we and our partner will use our best efforts to sell
Comcast-Spectacor.
The Walt Disney Company ("Disney"), in certain circumstances, is entitled
to cause Comcast Entertainment Holdings LLC (the "LLC"), which is owned 50.1% by
us and 49.9% by Disney, to purchase Disney's entire interest in the LLC at its
then fair market value (as determined by an appraisal process). If the LLC
elects not to purchase Disney's interests, Disney has the right, at its option,
to purchase either our entire interest in the LLC or all of the
- 20 -
shares of stock of E! Entertainment Television, Inc. ("E! Entertainment") held
by the LLC, in each case at fair market value. If Disney exercises its rights,
as described above, a portion or all of our $132.8 million aggregate principal
amount ten-year, 7% notes payable to Disney (the "Disney Notes") may be replaced
with a three year note due to Disney.
We and Liberty, a majority owned subsidiary of TCI, own approximately 57%
and 43%, respectively, of QVC, Inc. ("QVC"), an electronic retailer. We, through
a management agreement, are responsible for the day to day operations of QVC.
Liberty 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, we have 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. We 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,
our promissory note maturing not more than three years after issuance, our
equity securities or any combination thereof. If we elect 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 us. If Liberty elects not to purchase the stock of QVC
held by us, then we and Liberty will use our best efforts to sell QVC.
We own 55% of MHCP Holdings, L.L.C. ("MHCP Holdings"), an indirect
subsidiary of ours which holds cable communications systems serving
approximately 644,000 subscribers as of December 31, 1998. The California Public
Employees Retirement System ("CalPERS") owns the remaining 45% of MHCP Holdings.
At any time after December 18, 2001, CalPERS may elect to liquidate its interest
in MHCP Holdings at a price based upon the fair value of CalPERS' interest in
MHCP Holdings, adjusted, under certain circumstances, for certain performance
criteria relating to the fair value of MHCP Holdings or to our common stock.
Except in certain limited circumstances, we have the option to satisfy this
liquidity arrangement by purchasing CalPERS' interest for cash, through the
issuance of our common stock (subject to certain limitations) or by selling MHCP
Holdings.
Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Certain of our
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000 (the "Year 2000 Issue"). If this
situation occurs, the potential exists for computer system failure or
miscalculations by computer programs, which could cause disruption of
operations.
We are in the process of evaluating and addressing the impact of the Year
2000 Issue on our operations to ensure that our information technology and
business systems recognize calendar Year 2000. We are utilizing both internal
and external resources in implementing our Year 2000 program, which consists of
the following phases:
o Assessment Phase. Structured evaluation, including a detailed
inventory outlining the impact that the Year 2000 Issue may have on
current operations.
o Detailed Planning Phase. Establishment of priorities, development of
specific action steps and allocation of resources to address the
issues identified in the Assessment Phase.
o Conversion Phase. Implementation of the necessary system modifications
as outlined in the Detailed Planning Phase.
o Testing Phase. Verification that the modifications implemented in the
Conversion Phase will be successful in resolving the Year 2000 Issue
so that all inventory items will function properly, both individually
and on an integrated basis.
o Implementation Phase. Final roll-out of fully tested components into
an operational unit.
Based on an inventory conducted in 1997, we have identified computer
systems that will require modification or replacement so that they will properly
utilize dates beyond December 31, 1999. Many of our critical systems are new and
are already Year 2000 compliant as a result of the recent rebuild of many of our
cable communications systems. In addition, we have initiated communications with
all of our significant software suppliers and service bureaus to determine their
plans for remediating the Year 2000 Issue in their software which we use or rely
upon.
As of December 31, 1998, we are in the Conversion Phase of our Year 2000
remediation program and have entered the Testing Phase with respect to certain
of our key systems. Through December 31, 1998, we have incurred approximately
$4.7 million in connection with our Year 2000 remediation program. We estimate
that we will incur between approximately $8 million to $17 million of additional
expense through December 1999 in connection with our Year 2000 remediation
program. Our estimate to complete the remediation plan includes the
- 21 -
estimated time associated with mitigating the Year 2000 Issue for third party
software. However, we cannot guarantee that the systems of other companies on
which we rely will be converted on a timely basis, or that a failure to convert
by another company would not have a material adverse effect on us.
Our management will continue to periodically report the progress of our
Year 2000 remediation program to the Audit Committee of our Board of Directors.
We plan to complete the Year 2000 mitigation by the third quarter of 1999. Our
management has investigated and may consider potential contingency plans in the
event that our Year 2000 remediation program is not completed by that date.
The costs of the project and the date on which we plan to complete the Year
2000 modifications and replacements are based on our best estimates, which were
derived using assumptions of future events including the continued availability
of resources and the reliability of third party modification plans. However, we
cannot guarantee that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that may cause such
material differences include, but are not limited to, the availability and cost
of personnel with appropriate necessary skills and the ability to locate and
correct all relevant computer code and similar uncertainties.
We believe that with modifications to existing software and conversions to
new software, the Year 2000 Issue can be mitigated. However, if such
modifications and conversions are not made, or are not completed within an
adequate time frame, the Year 2000 Issue could have a material adverse impact on
our operations.
Capital Expenditures
During 1999, we expect to incur approximately $750 million of capital
expenditures, including $550 million primarily for the upgrading and rebuilding
of certain of our cable communications systems and the deployment of digital
converters and cable modems (excluding pending acquisitions), $85 million
primarily for the upgrading of QVC's warehousing and distribution facilities and
$40 million primarily for the upgrading of our cellular communications systems
(assuming the sale of Comcast Cellular closes during the third quarter of 1999).
The amount of such capital expenditures for years subsequent to 1999 will depend
on numerous factors, many of which are beyond our control. These factors
include:
o whether competition in a particular market necessitates a cable system
upgrade,
o whether a particular cable system has sufficient capacity to handle
new product offerings including the offering of cable modem, cable
telephony and telecommunications services,
o whether and to what extent we will be able to recover our investment
under FCC rate guidelines and other factors, and
o whether we acquire additional cable systems in need of upgrading or
rebuilding.
National manufacturers are the primary sources of supplies, equipment and
materials utilized in the construction, rebuild and upgrade of our cable
communications systems. Costs 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. Future
increases in such costs may be significant to our financial position, results of
operations and liquidity. We anticipate capital expenditures for years
subsequent to 1999 will continue to be significant. As of December 31, 1998, we
do not have any significant contractual obligations for capital expenditures.
Financing
See Notes 5 and 6 to our consolidated financial statements included in Item
8.
We have historically utilized a strategy of financing our acquisitions
through the issuance of our common stock or through the issuance of senior debt
at the acquired operating subsidiary level, through the issuance of senior debt
at the intermediate holding company and parent company levels and through public
offerings of subsidiary stock and debt instruments. As of December 31, 1998 and
1997, our long-term debt, including current portion, was $5.578 billion and
$5.466 billion, respectively, of which 18.0% and 17.7%, respectively, was at
variable rates.
Interest Rate Risk Management
We are exposed to market risk including changes in interest rates. To
manage the volatility relating to these exposures, we enter into various
derivative transactions pursuant to our policies in areas such as counterparty
exposure and hedging practices. Positions are monitored using techniques
including market value and sensitivity analyses. We do not hold or issue any
derivative financial instruments for trading purposes and are not a party to
leveraged instruments. The credit risks associated with our derivative financial
instruments are controlled through the evaluation and monitoring of the
creditworthiness of the counterparties. Although we may be exposed to losses in
the event of nonperformance by the counterparties, we do not expect such losses,
if any,
- 22 -
to be significant.
Interest Rate Risk
The use of interest rate risk management instruments, such as interest rate
exchange agreements ("Swaps"), interest rate cap agreements ("Caps") and
interest rate collar agreements ("Collars"), is required under the terms of
certain of our outstanding debt agreements. Our policy is to manage interest
costs using a mix of fixed and variable rate debt. Using Swaps, we agree to
exchange, at specified intervals, the difference between fixed and variable
interest amounts calculated by reference to an agreed-upon notional principal
amount. Caps are used to lock in a maximum interest rate should variable rates
rise, but enable us to otherwise pay lower market rates. Collars limit our
exposure to and benefits from interest rate fluctuations on variable rate debt
to within a certain range of rates.
The table set forth below summarizes the fair values and contract terms of
financial instruments subject to interest rate risk maintained by us as of
December 31, 1998 (dollars in millions):
Expected Maturity Date Fair Value at
1999 2000 2001 2002 2003 Thereafter Total 12/31/98
Debt
Fixed Rate.................... $7.3 $18.3 $227.6 $105.6 $7.3 $3,705.6 $4,071.7 $4,489.0
Average Interest Rate...... 9.0% 8.1% 9.5% 8.6% 9.2% 8.3% 8.4%
Variable Rate................. $106.2 $185.9 $322.9 $370.5 $520.5 $1,506.0 $1,506.0
Average Interest Rate...... 5.4% 5.6% 5.8% 5.8% 6.1% 5.9%
Interest Rate Instruments
Variable to Fixed Swaps (1)... $50.0 $504.1 $127.5 $143.5 $36.7 $200.0 $1,061.8 ($13.3)
Average Pay Rate........... 5.7% 5.5% 4.9% 4.9% 4.9% 7.7% 5.7%
Average Receive Rate....... 5.0% 5.0% 5.3% 5.3% 5.4% 5.9% 5.3%
Caps.......................... $240.0 $240.0
Average Cap Rate........... 7.0% 7.0%
Collar........................ $50.0 $50.0
Average Cap Rate........... 6.3% 6.3%
Average Floor Rate......... 4.0% 4.0%
(1) Includes $361.8 million of Swaps which become effective in the year 2000
maturing through 2003 and $200.0 million of Swaps which become effective in
the year 2000 maturing 2008.
---------------------------
The notional amounts of interest rate instruments, as presented in the
table above are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The estimated fair value
approximates the proceeds (costs) to settle the outstanding contracts. Interest
rates on variable debt are estimated by us using the average implied forward
London Interbank Offer Rate ("LIBOR") rates for the year of maturity based on
the yield curve in effect at December 31, 1998, plus the borrowing margin in
effect for each credit facility at December 31, 1998. Average receive rates on
the Variable to Fixed Swaps are estimated by us using the average implied
forward LIBOR rates for the year of maturity based on the yield curve in effect
at December 31, 1998. While Swaps, Caps and Collars represent an integral part
of our interest rate risk management program, their incremental effect on
interest expense for the years ended December 31, 1998, 1997 and 1996 was not
significant.
Equity Price Risk
In connection with the share repurchase programs authorized by our Board of
Directors, we sold put options on shares of our Class A Special Common Stock. We
sold put options on 2.75 million shares, 2.0 million shares and 1.0 million
shares during 1998, 1997 and 1996, respectively. The put options give the holder
the right to require us to repurchase such shares at specified prices on
specific dates. The put options sold during 1997 and 1996 expired unexercised.
The amount we would be obligated to pay to repurchase such shares upon exercise
of the put options, totaling $111.2 million and $31.4 million, has been
reclassified from additional capital to common equity put options in our
December 31, 1998 and 1997 consolidated balance sheet. The difference between
the proceeds from the sale of these put options and their estimated fair value
was not significant as of December 31, 1998 and 1997.
- 23 -
Statement of Cash Flows
Cash and cash equivalents increased $461.6 million as of December 31, 1998
from December 31, 1997. The increase in cash and cash equivalents resulted from
cash flows from operating, financing and investing activities as explained
below.
Net cash provided by operating activities from continuing operations
amounted to $1.080 billion for the year ended December 31, 1998 due principally
to our operating income from continuing operations before depreciation and
amortization (see "Results of Operations"), including the effects of the
consolidation of Comcast-Spectacor effective January 1, 1998 (see Note 3 to our
consolidated financial statements included in Item 8), and changes in working
capital as a result of the timing of receipts and disbursements.
Net cash provided by financing activities from continuing operations, which
includes borrowings and repayments of debt, as well as the issuances and
repurchases of our equity securities, was $809.2 million for the year ended
December 31, 1998. During 1998, we borrowed $1.938 billion, consisting primarily
of $797.9 million of 6.20% senior notes due 2008 and $827.0 million of
subsidiary revolving credit in connection with a refinancing. During 1998, we
repaid $1.113 billion of our long-term debt, primarily in connection with the
refinancing of certain subsidiary indebtedness. In addition, during 1998, we had
net issuances of $28.9 million of our common stock and we paid cash dividends of
$36.0 million on our common stock and Series A Preferred Stock. Deferred
financing costs of $16.3 million were incurred during 1998 principally in
connection with the issuance of the 6.20% senior notes due 2008.
Net cash used in investing activities from continuing operations was $1.427
billion for the year ended December 31, 1998. Net cash used in investing
activities includes acquisitions of cable communications systems, net of cash
acquired, of $309.7 million, capital contributions to and purchases of
investments of $202.1 million and capital expenditures of $898.9 million, offset
by proceeds from the sales of short-term investments and call options of $169.5
million and proceeds from the repayment of a loan by an investee of $74.7
million. The sale of Comcast UK Cable resulted in a reduction to cash and cash
equivalents of $140.4 million due to the receipt of approximately 4.8 million
shares of NTL in exchange for all of our shares in Comcast UK Cable (see Note 3
to our consolidated financial statements included in Item 8).
Results of Operations
The effects of our recent acquisitions and the consolidation of
Comcast-Spectacor effective January 1, 1998, as well as increased levels of
capital expenditures, were to increase significantly our revenues and expenses,
resulting in substantial increases in our operating income before depreciation
and amortization, depreciation expense, amortization expense and interest
expense. Investment income has increased significantly in 1998 as a result of
the gains we recognized on the exchange of our interest in Teleport
Communications Group Inc. ("Teleport") for AT&T common stock, the Sprint PCS
restructuring and the exchange of our interest in Comcast UK Cable for NTL
common stock. In addition, our equity in net losses of affiliates has increased
principally as a result of losses incurred by Sprint PCS. See "Operating Results
by Business Segment" and "Consolidated Analysis".
- 24 -
Our summarized consolidated financial information for the three years ended
December 31, 1998 is as follows (dollars in millions, "NM" denotes percentage is
not meaningful):
Year Ended
December 31, Increase/(Decrease)
1998 1997 $ %
Revenues...................................................... $5,145.3 $4,467.7 $677.6 15.2%
Cost of goods sold from electronic retailing.................. 1,462.0 1,270.2 191.8 15.1
Operating, selling, general and administrative expenses....... 2,186.6 1,904.4 282.2 14.8
-------- ------- --------
Operating income before depreciation and amortization (1) .... 1,496.7 1,293.1 203.6 15.7
Depreciation.................................................. 463.9 404.1 59.8 14.8
Amortization.................................................. 475.7 422.4 53.3 12.6
-------- ------- --------
Operating income.............................................. 557.1 466.6 90.5 19.4
-------- ------- --------
Interest expense.............................................. 466.7 458.9 7.8 1.7
Investment income............................................. (1,828.0) (149.4) 1,678.6 NM
Equity in net losses of affiliates............................ 515.9 343.8 172.1 50.1
Gain from equity offering of affiliate........................ (157.8) (7.7) 150.1 NM
Other expense................................................. 2.9 9.7 (6.8) (70.1)
Income tax expense............................................ 594.0 70.4 523.6 NM
Minority interest............................................. (44.3) (76.2) (31.9) (41.9)
-------- ------- --------
Income (loss) from continuing operations before
extraordinary items........................................ $1,007.7 ($182.9) $1,190.6 NM
======== ======= ========
Year Ended
December 31, Increase/(Decrease)
1997 1996 $ %
Revenues...................................................... $4,467.7 $3,612.3 $855.4 23.7%
Cost of goods sold from electronic retailing.................. 1,270.2 1,114.2 156.0 14.0
Operating, selling, general and administrative expenses....... 1,904.4 1,451.1 453.3 31.2
-------- ------- --------
Operating income before depreciation and amortization (1) .... 1,293.1 1,047.0 246.1 23.5
Depreciation.................................................. 404.1 259.2 144.9 55.9
Amortization.................................................. 422.4 321.9 100.5 31.2
-------- ------- --------
Operating income.............................................. 466.6 465.9 0.7 0.2
-------- ------- --------
Interest expense.............................................. 458.9 448.4 10.5 2.3
Investment income............................................. (149.4) (120.0) 29.4 24.5
Equity in net losses of affiliates............................ 343.8 144.8 199.0 NM
Gain from equity offering of affiliate........................ (7.7) (40.6) (32.9) (81.0)
Other expense (income)........................................ 9.7 (21.3) 31.0 NM
Income tax expense............................................ 70.4 109.0 (38.6) (35.4)
Minority interest............................................. (76.2) (48.0) 28.2 58.8
-------- ------- --------
Loss from continuing operations before extraordinary items.... ($182.9) ($6.4) $176.5 NM
======== ======= ========
- ------------
(1) Operating income before depreciation and amortization is commonly referred
to in our 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 our 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 businesses in our industries, although our measure of
operating cash flow may not be comparable to similarly titled measures of
other companies. 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 our
performance. See "Statement of Cash Flows" above for a discussion of net
cash provided by operating activities.
- 25 -
Operating Results by Business Segment
The following represent the operating results of our significant business
segments, including: "Cable Communications" and "Electronic Retailing." The
remaining components of our operations are not independently significant to our
consolidated financial position or results of operations (see Note 10 to our
consolidated financial statements included in Item 8).
---------------------------
Cable Communications
As a result of the acquisition of the cable television operations ("Scripps
Cable") of The E.W. Scripps Company (the "Scripps Acquisition"), we commenced
consolidating the financial results of Scripps Cable effective November 1, 1996.
The following table presents financial information for the years ended December
31, 1998, 1997 and 1996 for our cable communications segment (dollars in
millions):
Year Ended
December 31, Increase
1998 1997 $ %
Service income................................... $2,277.4 $2,073.0 $204.4 9.9%
Operating, selling, general and
administrative expenses..................... 1,180.8 1,085.3 95.5 8.8
-------- -------- ------
Operating income before depreciation
and amortization (a)........................ $1,096.6 $987.7 $108.9 11.0%
======== ======== ======
Year Ended
December 31, Increase
1997 1996 $ %
Service income................................... $2,073.0 $1,641.0 $432.0 26.3%
Operating, selling, general and
administrative expenses..................... 1,085.3 837.2 248.1 29.6
-------- -------- ------
Operating income before depreciation
and amortization (a)........................ $987.7 $803.8 $183.9 22.9%
======== ====== ======
- ---------------
(a) See footnote (1) on page 25.
Of the respective $204.4 million and $432.0 million increases in service
income for the years ended December 31, 1998 and 1997, $30.2 million and $280.4
million are attributable to the effects of the acquisitions of cable
communications systems, $31.8 million and $27.1 million are attributable to
subscriber growth, $109.0 million and $108.9 million relate to changes in rates,
$20.5 million and $8.6 million are attributable to growth in cable advertising
sales and $12.9 million and $7.0 million relate to other product offerings.
Of the respective $95.5 million and $248.1 million increases in operating,
selling, general and administrative expenses for the years ended December 31,
1998 and 1997, $15.8 million and $145.3 million are attributable to the effects
of the acquisitions of cable communications systems, $48.9 million and $34.9
million are attributable to increases in the costs of cable programming as a
result of subscriber growth, additional channel offerings and changes in rates,
$5.3 million and $5.9 million are attributable to growth in cable advertising
sales, $1.5 million and $15.6 million are attributable to increases in costs
associated with customer service and $24.0 million and $46.4 million result from
increases in the costs of labor, other volume related expenses and costs
associated with new product offerings. We anticipate that the cost of cable
programming will increase in the future as cable programming rates increase and
additional sources of cable programming become available.
- 26 -
Electronic Retailing
The following table sets forth the operating results for our electronic
retailing segment (dollars in millions):
Year Ended
December 31, Increase
1998 1997 $ %
Net sales from electronic retailing.............. $2,402.7 $2,082.5 $320.2 15.4%
Cost of goods sold from electronic retailing..... 1,462.0 1,270.2 191.8 15.1
Operating, selling, general and administrative
expenses.................................... 506.5 474.6 31.9 6.7
-------- -------- ------
Operating income before depreciation
and amortization (a)........................ $434.2 $337.7 $96.5 28.6%
======== ======== ======
Gross margin..................................... 39.2% 39.0%
======== ========
Year Ended
December 31, Increase
1997 1996 $ %
Net sales from electronic retailing.............. $2,082.5 $1,835.8 $246.7 13.4%
Cost of goods sold from electronic retailing..... 1,270.2 1,114.2 156.0 14.0
Operating, selling, general and administrative
expenses.................................... 474.6 421.3 53.3 12.7
-------- -------- ------
Operating income before depreciation
and amortization (a)........................ $337.7 $300.3 $37.4 12.5%
======== ======== ======
Gross margin..................................... 39.0% 39.3%
======== ========
- ---------------
(a) See footnote (1) on page 25.
The respective increases in net sales from electronic retailing of $320.2
million and $246.7 million for the years ended December 31, 1998 and 1997 are
primarily attributable to the effects of 5.6% and 7.4% increases, respectively,
in the average number of homes receiving QVC services in the US and 11.8% and
13.7% increases, respectively, in the average number of homes receiving QVC
services in the UK.
An allowance for returned merchandise is provided as a percentage of sales
based on historical experience. The return provision was approximately 21% of
gross sales for each of the years ended December 31, 1998, 1997 and 1996.
The increases in cost of goods sold from electronic retailing are primarily
related to the growth in net sales. The changes in gross margin between these
periods are primarily due to slight changes in product mix from year to year.
Of the respective increases in operating, selling, general and
administrative expenses of $31.9 million and $53.3 million for the years ended
December 31, 1998 and 1997, $21.7 million and $30.6 million are attributable to
higher sales volume, $3.2 million and $25.5 million are attributable to start-up
costs incurred by QVC in Germany, which began operations in the fourth quarter
of 1996, and the remaining changes are primarily attributable to additional
costs associated with new businesses, offset by the reduction in expenses
realized upon consolidation of QVC's multichannel operations in 1996.
---------------------------
Consolidated Analysis
The $59.8 million increase in depreciation expense from 1997 to 1998 is
primarily attributable to the effects of capital expenditures, the consolidation
of Comcast-Spectacor effective January 1, 1998, increased losses on asset
disposals in connection with our cable communications rebuild activities and the
acquisition of cable communications systems. The $144.9 million increase in
depreciation expense from 1996 to 1997 is primarily attributable to the effects
of capital expenditures and the effects of the Scripps Acquisition in November
1996.
The $53.3 million increase in amortization expense from 1997 to 1998 is
primarily attributable to the
- 27 -
consolidation of Comcast-Spectacor effective January 1, 1998 and the acquisition
of cable communications systems. The $100.5 million increase in amortization
expense from 1996 to 1997 is primarily attributable to the effects of the
Scripps Acquisition in November 1996.
We anticipate that, for the foreseeable future, interest expense will be a
significant cost to us and will have a significant adverse effect on our ability
to realize net earnings. We believe we will continue to be able to meet our
obligations through our ability both to generate operating income before
depreciation and amortization and to obtain external financing.
The $1.679 billion increase in investment income from 1997 to 1998 is
primarily attributable to the $1.092 billion gain recognized on the exchange of
our interest in Teleport for AT&T common stock, the $758.5 million gain
recognized on the restructuring of Sprint PCS and the $148.3 million gain
recognized on the exchange of our interest in Comcast UK Cable for NTL common
stock, all recognized in 1998. These gains were partially offset by a $152.8
million loss on certain of our investments based primarily on a decline in value
that we considered other than temporary and investment expense of $105.5 million
incurred during 1998 related to changes in the value of call options related to
our investment in TCI, TCI Ventures and Liberty common stock. The $29.4 million
increase in investment income from 1996 to 1997 is primarily attributable to the
$68.9 million gain recognized in 1997 on the sale of our Teleport Class A Common
Stock, offset, in part, by the $47.3 million gain recognized upon the exchange
of the shares of Turner Broadcasting System, Inc. ("TBS") held by us for Time
Warner, Inc. ("Time Warner") common stock in 1996 as a result of the merger of
Time Warner and TBS in October 1996.
The $172.1 million and $199.0 million increases in equity in net losses of
affiliates from 1997 to 1998 and from 1996 to 1997 are primarily due to losses
incurred by Sprint PCS. With the restructuring of Sprint PCS in the fourth
quarter of 1998, we will no longer account for our investment in Sprint PCS
under the equity method and, as a result, will no longer record our
proportionate share of Sprint PCS' net losses in our consolidated statement of
operations (see Notes 3 and 4 to our consolidated financial statements included
in Item 8).
During the years ended December 31, 1998, 1997 and 1996, Teleport issued
shares of its Class A Common Stock. As a result of these stock issuances, we
recorded a $157.8 million, $7.7 million and $40.6 million increase in our
proportionate share of Teleport's net assets as a gain from equity offering of
affiliate in our 1998, 1997 and 1996 consolidated statement of operations. We
recorded the increase in our proportionate share of Teleport's net assets one
quarter in arrears.
The $6.8 million decrease and $31.0 million increase in other expense from
1997 to 1998 and from 1996 to 1997 are primarily attributable to the effects of
fluctuations in the foreign currency exchange rate.
The $523.6 million increase and $38.6 million decrease in income tax
expense from 1997 to 1998 and from 1996 to 1997 are primarily attributable to
changes in our income before income taxes and minority interest, and
non-deductible foreign losses and non-deductible equity in net losses of
affiliates.
The $31.9 million decrease and $28.2 million increase in minority interest
income from 1997 to 1998 and from 1996 to 1997 are primarily attributable to
minority interests in the net loss of Comcast UK Cable and the net income of
QVC, and the effects of the consolidation of Comcast-Spectacor effective January
1, 1998.
Extraordinary items for the years ended December 31, 1998, 1997 and 1996 of
$4.2 million, $30.2 million and $1.0 million, respectively, consist of
unamortized debt acquisition costs and debt extinguishment costs, net of related
tax benefits, expensed in connection with the redemption and refinancing of
certain indebtedness.
For the years ended December 31, 1998, 1997 and 1996, our distributions
from investees and earnings before extraordinary items, income tax expense,
equity in net losses of affiliates and fixed charges (interest expense) were
$2.584 billion, $690.2 million and $695.8 million, respectively. Such earnings
were adequate to cover our fixed charges (including capitalized interest of
$18.0 million and $32.1 million during 1997 and 1996, respectively), of $466.7
million, $476.9 million and $480.5 million for the years ended December 31,
1998, 1997 and 1996, respectively. Our fixed charges include non-cash interest
expense of $42.5 million, $56.5 million and $51.5 million for the years ended
December 31, 1998, 1997 and 1996, respectively.
We believe that our losses will not significantly affect the performance of
our normal business activities because of our existing cash, cash equivalents
and short-term investments, our ability to generate operating income before
depreciation and amortization and our ability to obtain external financing.
We believe that our operations are not materially affected by inflation.
- 28 -
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, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity (deficiency)
and of cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the consolidated financial
statements of QVC, Inc. ("QVC") (a consolidated subsidiary) which statements
reflect total assets constituting 14% and 19% of the Company's consolidated
total assets as of December 31, 1998 and 1997 and total revenues constituting
47%, 47% and 51% of the Company's consolidated revenues for the years ended
December 31, 1998, 1997 and 1996, respectively. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included in the Company's consolidated financial
statements for QVC, is based solely upon the report of such 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 report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report 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, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 22, 1999
- 29 -
COMCAST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions, except share data)
December 31,
ASSETS 1998 1997
CURRENT ASSETS
Cash and cash equivalents............................................. $870.7 $409.1
Investments........................................................... 3,653.4 163.9
Accounts receivable, less allowance for doubtful
accounts of $120.7 and $108.8....................................... 549.3 439.6
Inventories, net...................................................... 343.8 309.9
Other current assets.................................................. 207.1 155.9
--------- ---------
Total current assets.............................................. 5,624.3 1,478.4
--------- ---------
INVESTMENTS.............................................................. 602.4 1,235.8
--------- ---------
PROPERTY AND EQUIPMENT................................................... 3,886.7 3,689.5
Accumulated depreciation.............................................. (1,362.3) (1,205.9)
--------- ---------
Property and equipment, net........................................... 2,524.4 2,483.6
--------- ---------
DEFERRED CHARGES
Franchise and license acquisition costs............................... 4,763.6 4,847.9
Excess of cost over net assets acquired and other..................... 3,450.9 3,089.5
--------- ---------
8,214.5 7,937.4
Accumulated amortization.............................................. (2,148.2) (1,808.4)
--------- ---------
Deferred charges, net................................................. 6,066.3 6,129.0
--------- ---------
$14,817.4 $11,326.8
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses................................. $1,600.3 $1,095.4
Accrued interest...................................................... 73.5 72.2
Net liabilities of discontinued operations............................ 165.2 133.6
Deferred income taxes................................................. 1,140.1
Current portion of long-term debt..................................... 113.5 132.3
--------- ---------
Total current liabilities......................................... 3,092.6 1,433.5
--------- ---------
LONG-TERM DEBT, less current portion..................................... 5,464.2 5,334.1
--------- ---------
DEFERRED INCOME TAXES.................................................... 1,500.1 1,849.5
--------- ---------
MINORITY INTEREST AND OTHER.............................................. 834.0 1,031.8
--------- ---------
COMMITMENTS AND CONTINGENCIES
COMMON EQUITY PUT OPTIONS................................................ 111.2 31.4
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock - authorized, 20,000,000 shares; 5% series A
convertible, no par value; issued, 6,370 at redemption value........ 31.9 31.9
5.25% series B mandatorily redeemable convertible, $1,000 par value;
issued, 540,690 and 513,211 at redemption value..................... 540.7 513.2
Class A special common stock, $1 par value - authorized,
500,000,000 shares; issued, 328,630,366 and 317,025,969 ............ 328.6 317.0
Class A common stock, $1 par value - authorized,
200,000,000 shares; issued, 31,690,063 and 31,793,487............... 31.7 31.8
Class B common stock, $1 par value - authorized,
50,000,000 shares; issued, 9,444,375 and 8,786,250 ................. 9.4 8.8
Additional capital.................................................... 3,311.5 3,030.6
Accumulated deficit................................................... (1,488.2) (2,415.9)
Unrealized gains on marketable securities............................. 1,049.5 140.7
Cumulative translation adjustments.................................... 0.2 (11.6)
--------- ---------
Total stockholders' equity........................................ 3,815.3 1,646.5
--------- ---------
$14,817.4 $11,326.8
========= =========
See notes to consolidated financial statements.
- 30 -
COMCAST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in millions, except per share data)
Year Ended December 31,
1998 1997 1996
REVENUES
Service income............................................. $2,742.6 $2,385.2 $1,776.5
Net sales from electronic retailing........................ 2,402.7 2,082.5 1,835.8
-------- -------- --------
5,145.3 4,467.7 3,612.3
-------- -------- --------
COSTS AND EXPENSES
Operating.................................................. 1,410.3 1,204.1 911.8
Cost of goods sold from electronic retailing............... 1,462.0 1,270.2 1,114.2
Selling, general and administrative........................ 776.3 700.3 539.3
Depreciation............................................... 463.9 404.1 259.2
Amortization............................................... 475.7 422.4 321.9
-------- -------- --------
4,588.2 4,001.1 3,146.4
-------- -------- --------
OPERATING INCOME.............................................. 557.1 466.6 465.9
OTHER (INCOME) EXPENSE
Interest expense........................................... 466.7 458.9 448.4
Investment income.......................................... (1,828.0) (149.4) (120.0)
Equity in net losses of affiliates......................... 515.9 343.8 144.8
Gain from equity offering of affiliate..................... (157.8) (7.7) (40.6)
Other...................................................... 2.9 9.7 (21.3)
-------- -------- --------
(1,000.3) 655.3 411.3
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAX EXPENSE, MINORITY INTEREST AND
EXTRAORDINARY ITEMS........................................ 1,557.4 (188.7) 54.6
INCOME TAX EXPENSE............................................ 594.0 70.4 109.0
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
MINORITY INTEREST AND EXTRAORDINARY ITEMS.................. 963.4 (259.1) (54.4)
MINORITY INTEREST............................................. (44.3) (76.2) (48.0)
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEMS........................................ 1,007.7 (182.9) (6.4)
LOSS FROM DISCONTINUED OPERATIONS, net of income tax
benefit of $19.1 million, $14.8 million and $24.6 million.. 31.4 25.6 46.1
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS...................... 976.3 (208.5) (52.5)
EXTRAORDINARY ITEMS .......................................... (4.2) (30.2) (1.0)
-------- -------- --------
NET INCOME (LOSS)............................................. 972.1 (238.7) (53.5)
PREFERRED DIVIDENDS........................................... (29.1) (14.8) (0.7)
-------- -------- --------
NET INCOME (LOSS) FOR COMMON STOCKHOLDERS..................... $943.0 ($253.5) ($54.2)
======== ======== ========
BASIC EARNINGS (LOSS) FOR COMMON STOCKHOLDERS
PER COMMON SHARE
Income (loss) from continuing operations before
extraordinary items...................................... $2.67 ($.58) ($.02)
Loss from discontinued operations.......................... (.09) (.08) (.19)
Extraordinary items........................................ (.01) (.09)
-------- -------- --------
Net income (loss)........................................ $2.57 ($.75) ($.21)
======== ======== ========
BASIC WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING................................. 366.5 339.0 247.6
======== ======== ========
DILUTED EARNINGS (LOSS) FOR COMMON STOCKHOLDERS
PER COMMON SHARE
Income (loss) from continuing operations before
extraordinary items...................................... $2.50 ($.58) ($.02)
Loss from discontinued operations.......................... (.08) (.08) (.19)
Extraordinary items........................................ (.01) (.09)
-------- -------- --------
Net income (loss)........................................ $2.41 ($.75) ($.21)
======== ======== ========
DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING.................................. 403.0 339.0 247.6
======== ======== ========
See notes to consolidated financial statements.
- 31 -
COMCAST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
Year Ended December 31,
1998 1997 1996
OPERATING ACTIVITIES
Net income (loss).......................................... $972.1 ($238.7) ($53.5)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities from
continuing operations:
Depreciation............................................. 463.9 404.1 259.2
Amortization............................................. 475.7 422.4 321.9
Non-cash interest expense, net........................... 29.2 32.3 16.8
Equity in net losses of affiliates....................... 515.9 343.8 144.8
Gain from equity offering of affiliate................... (157.8) (7.7) (40.6)
Gains on investments, net................................ (1,758.5) (81.0) (69.2)
Minority interest........................................ (44.3) (76.2) (48.0)
Loss from discontinued operations........................ 31.4 25.6 46.1
Extraordinary items...................................... 4.2 30.2 1.0
Deferred income taxes and other.......................... 418.2 (40.6) 15.0
--------- --------- ---------
950.0 814.2 593.5
Changes in working capital............................... 129.7 41.1 51.0
--------- --------- ---------
Net cash provided by operating activities from
continuing operations............................... 1,079.7 855.3 644.5
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from borrowings................................... 1,938.0 1,951.1 657.5
Retirement and repayment of debt........................... (1,113.4) (2,586.6) (559.2)
Issuance of preferred stock................................ 500.0
Issuances (repurchases) of common stock, net............... 28.9 470.2 (175.9)
Dividends.................................................. (36.0) (34.0) (26.8)
Deferred financing costs................................... (16.3) (16.9) (5.0)
Other...................................................... 8.0 0.1 21.4
--------- --------- ---------
Net cash provided by (used in) financing activities
from continuing operations.......................... 809.2 283.9 (88.0)
--------- --------- ---------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired......................... (309.7) (170.1) (24.8)
Proceeds from sales of short-term investments, net......... 145.9 45.6 210.2
Capital contributions to and purchases of investments...... (202.1) (268.7) (475.4)
Proceeds from sales of and distributions from investments.. 23.6 171.1 165.1
Proceeds from investees' repayments of loans............... 74.7 30.6
Capital expenditures....................................... (898.9) (795.5) (554.4)
Sale of subsidiary, net of cash sold....................... (140.4)
Additions to deferred charges.............................. (108.4) (58.8) (38.0)
Other...................................................... (12.0) (10.7) (32.2)
--------- --------- ---------
Net cash used in investing activities from
continuing operations............................... (1,427.3) (1,056.5) (749.5)
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS - CONTINUING OPERATIONS................... 461.6 82.7 (193.0)
CASH AND CASH EQUIVALENTS, beginning of year.................. 409.1 326.4 519.4
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year........................ $870.7 $409.1 $326.4
========= ========= =========
See notes to consolidated financial statements.
- 32 -
COMCAST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Dollars in millions, except per share data)
Accumulated Other
Comprehensive Income (Loss)
Unrealized
Gains Cumulative
on Transla-
Preferred Stock Common Stock Accumu- Marketable tion
Series Series Class A Additional lated Secur- Adjust-
A B Special Class A Class B Capital Defici t ities ments Total
BALANCE, JANUARY 1, 1996............$ $ $192.8 $37.7 $8.8 $843.1 ($1,914.3) $22.2 ($18.0) ($827.7)
Comprehensive income (loss):
Net loss......................... (53.5)
Unrealized losses on marketable
securities, net of deferred
taxes of ($11.9)................ (22.1)
Cumulative translation
adjustments ................... 12.0
Total comprehensive loss............ (63.6)
Issuance of common stock......... 97.2 1,526.3 1,623.5
Issuance of preferred stock...... 31.9 31.9
Exercise of options.............. 0.2 0.2 3.0 3.4
Retirement of common stock....... (6.9) (3.9) (41.4) (133.2) (185.4)
Cash dividends, common,
$.0933 per share.............. (26.1) (26.1)
Cash dividends, Series A
preferred ..................... (0.7) (0.7)
Unrecognized gain on issuance of
common stock of a subsidiary... 11.6 11.6
Temporary equity related to
put options ................... (17.5) (17.5)
Proceeds from sales and
extensions of put options...... 2.2 2.2
----- ------ ------ ----- ---- -------- --------- -------- ---- --------
BALANCE, DECEMBER 31, 1996.......... 31.9 283.3 34.0 8.8 2,326.6 (2,127.1) 0.1 (6.0) 551.6
Comprehensive income (loss):
Net loss......................... (238.7)
Unrealized gains on marketable
securities, net of deferred
taxes of $75.8................. 140.6
Cumulative translation adjustments (5.6)
Total comprehensive loss............ (103.7)
Issuance of common stock......... 24.9 475.4 500.3
Issuance of preferred stock...... 500.0 500.0
Exercise of options.............. 1.0 14.8 15.8
Conversion of convertible
subordinated debt to common
stock.......................... 8.4 210.1 218.5
Retirement of common stock....... (0.6) (2.2) (22.3) (17.7) (42.8)
Cash dividends, common,
$.0933 per share............... (32.4) (32.4)
Cash dividends, Series A
preferred ..................... (1.6) (1.6)
Series B preferred dividends..... 13.2 (13.2)
Temporary equity related to
put options ................... 38.2 38.2
Proceeds from sales and
extensions of put options...... 2.6 2.6
----- ------ ------ ----- ---- -------- --------- -------- ---- --------
BALANCE, DECEMBER 31, 1997.......... 31.9 513.2 317.0 31.8 8.8 3,030.6 (2,415.9) 140.7 (11.6) 1,646.5
Comprehensive income:
Net income....................... 972.1
Unrealized gains on marketable
securities, net of deferred
taxes of $489.4................ 908.8
Cumulative translation
adjustments.................... 11.8
Total comprehensive income.......... 1,892.7
Conversion of convertible
subordinated debt to
common stock................... 10.4 347.2 357.6
Exercise of options.............. 1.4 0.6 33.8 35.8
Retirement of common stock....... (0.2) (0.1) (2.6) (10.0) (12.9)
Cash dividends, common,
$.0933 per share............... (34.4) (34.4)
Cash dividends, Series A
preferred...................... (1.6) (1.6)
Series B preferred dividends..... 27.5 (27.5)
Temporary equity related to put
options........................ (79.8) (79.8)
Proceeds from sales of put options 11.4 11.4
----- ------ ------ ----- ---- -------- --------- -------- ---- --------
BALANCE, DECEMBER 31, 1998..........$31.9 $540.7 $328.6 $31.7 $9.4 $3,311.5 ($1,488.2) $1,049.5 $0.2 $3,815.3
===== ====== ====== ===== ==== ======== ========= ======== ==== ========
See notes to consolidated financial statements.
- 33 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. BUSINESS
Comcast Corporation and its subsidiaries (the "Company") is principally
engaged in the development, management and operation of broadband cable
networks and the provision of programming content.
Cable communications includes cable and telecommunications services in the
United States ("US"). The Company's consolidated cable operations served
approximately 4.5 million subscribers and passed approximately 7.4 million
homes as of December 31, 1998.
Programming content is provided through the Company's consolidated
subsidiaries, QVC, Inc. ("QVC"), E! Entertainment Television, Inc. ("E!
Entertainment") and Comcast SportsNet (see Note 3), and other investments,
including The Golf Channel, Speedvision and Outdoor Life. Through QVC, the
Company markets a wide variety of products and is available to, on a full
and part-time basis, over 70 million homes in the US, over 7.3 million
homes in the United Kingdom ("UK") and over 14 million homes in Germany. E!
Entertainment is an entertainment-related news and information service with
distribution to approximately 53 million customers as of December 31, 1998.
Comcast SportsNet is a regional sports programming network which provides
sports related programming to approximately 2.6 million viewers in the
Philadelphia region.
In January 1999, the Company agreed to sell its indirect wholly owned
subsidiary, Comcast Cellular Corporation ("Comcast Cellular"), to SBC
Communications, Inc. for approximately $400 million in cash and the
assumption of approximately $1.3 billion of Comcast Cellular debt. As of
December 31, 1998, Comcast Cellular provides telephone communications
services pursuant to licenses granted by the Federal Communications
Commission ("FCC") to more than 829,000 subscribers in and around the City
of Philadelphia, the State of Delaware and a significant portion of the
State of New Jersey. Revenues for Comcast Cellular were $455.2 million,
$444.9 million and $426.1 million for the years ended December 31, 1998,
1997 and 1996, respectively. The sale of Comcast Cellular is expected to
close in the third quarter of 1999 subject to the receipt of all necessary
regulatory and other approvals. The results of operations of Comcast
Cellular have been presented as a discontinued operation in accordance with
Accounting Principles Board ("APB") Opinion 30, "Reporting the Results of
Operations Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER ITEMS
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and all wholly owned or controlled subsidiaries. All significant
intercompany accounts and transactions among consolidated entities have
been eliminated.
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
- 34 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
management as of December 31, 1998 and 1997, and have not been
comprehensively revalued for purposes of these consolidated financial
statements since such dates.
Cash Equivalents
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. The carrying amounts of
the Company's cash equivalents approximate their fair values.
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 average cost method,
which approximates the first-in, first-out method.
Investments
Investments consist principally of equity securities and US Government
obligations, commercial paper, repurchase agreements and certificates of
deposit with maturities of greater than three months when purchased.
Investments in entities in which the Company has the ability to exercise
significant influence over the operating and financial policies of the
investee and investments in partnerships which are not controlled by the
Company are accounted for under the equity method. 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, additional contributions made and
dividends received. 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 20 years, which is consistent with the estimated
lives of the underlying assets.
Unrestricted publicly traded investments are classified as available for
sale and recorded at their fair value, with unrealized gains or losses
resulting from changes in fair value between measurement dates recorded as
a component of other comprehensive income.
Restricted publicly traded investments and investments in privately held
companies are stated at cost, adjusted for any known diminution in value.
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.........................8-40 years
Operating facilities...............................5-20 years
Other equipment....................................2-10 years
Improvements 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 as a
component of depreciation expense.
Deferred Charges
Franchise and license acquisition costs are amortized on a straight-line
basis over their legal or estimated useful lives of 3 to 40 years. The
excess of cost over the fair value of net assets acquired is being
amortized on a straight-line basis over estimated useful lives of 20 to 40
years.
- 35 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
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.
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 other comprehensive income. Revenues and expenses are
translated using average exchange rates prevailing during the year. Foreign
currency transaction gains and losses are included in other (income)
expense.
Revenue Recognition
Service income is recognized as service is provided. Credit risk is managed
by disconnecting services to cable customers who are delinquent. Net sales
from electronic retailing are recognized at the time of shipment to
customers. The Company's policy is to allow customers to return merchandise
for credit up to thirty days after date of shipment. An allowance for
returned merchandise is provided as a percentage of sales based on
historical experience. The return provision was approximately 21% of gross
sales for each of the years ended December 31, 1998, 1997 and 1996.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, as permitted by Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation."
Compensation expense for stock options is measured as the excess, if any,
of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. Compensation
expense for restricted stock awards is recorded annually based on the
quoted market price of the Company's stock at the date of the grant and the
vesting period. Compensation expense for stock appreciation rights is
recorded annually based on the changes in quoted market prices of the
Company's stock or other determinants of fair value at the end of the year
(see Note 6).
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.
Investment Income
Investment income includes interest income and gains, net of losses, on the
sales of marketable securities and long-term investments. Gross realized
gains and losses are recognized using the specific identification method
(see Note 4). Investment income also includes impairment losses resulting
from adjustments to the net realizable value of certain of the Company's
long-term investments.
Capitalized Interest
Interest is capitalized as part of the historical cost of acquiring
qualifying assets, including investments in equity method investees while
the investee has activities in progress necessary to commence its planned
principal operations. Capitalized interest for the years ended December 31,
1997 and 1996 was $18.0 million and $32.1 million, respectively.
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 consolidated
financial statements in the period of enactment.
- 36 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
Derivative Financial Instruments
The Company uses derivative financial instruments, including interest rate
exchange agreements ("Swaps"), interest rate cap agreements ("Caps") and
interest rate collar agreements ("Collars") to manage its exposure to
fluctuations in interest rates and common stock option contracts to manage
its exposure to fluctuations in the price of its Class A Special Common
Stock ("Comcast Put Options"). The Company also enters into call options on
certain of its equity investments ("Covered Call Options").
Swaps, Caps and Collars are matched with either fixed or variable rate debt
and periodic cash payments are accrued on a settlement basis as an
adjustment to interest expense. Any premiums associated with these
instruments are amortized over their term and realized gains or losses as a
result of the termination of the instruments are deferred and amortized
over the remaining term of the underlying debt. Unrealized gains and losses
as a result of these instruments are recognized when the underlying hedged
item is extinguished or otherwise terminated.
Proceeds from sales of Comcast Put Options are recorded in stockholders'
equity and an amount equal to the redemption price of the common stock is
reclassified from permanent equity to temporary equity. Subsequent changes
in the market value of Comcast Put Options are not recorded. Covered Call
Options are marked to market on a current basis in the Company's
consolidated statement of operations.
Those instruments that have been entered into by the Company to hedge
exposure to interest rate risks are periodically examined by the Company to
ensure that the instruments are matched with underlying liabilities, reduce
the Company's risks relating to interest rates and, through market value
and sensitivity analysis, maintain a high correlation to the interest
expense of the hedged item. For those instruments that do not meet the
above criteria, variations in their fair value are marked-to-market on a
current basis in the Company's consolidated statement of operations.
The Company does not hold or issue any derivative financial instruments for
trading purposes and is not a party to leveraged instruments (see Note 5).
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.
Sale of Stock by a Subsidiary or Equity Method Investee
Changes in the Company's proportionate share of the underlying equity of a
consolidated subsidiary or equity method investee which result from the
issuance of additional securities by such subsidiary or investee are
recognized as gains or losses in the Company's consolidated statement of
operations unless gain realization is not assured in the circumstances.
Gains for which realization is not assured are credited directly to
additional capital.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement, which establishes accounting and reporting standards for
derivatives and hedging activities, is effective for fiscal years beginning
after June 15, 1999. Upon the adoption of SFAS No. 133, all derivatives are
required to be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. The Company is currently
evaluating the impact the adoption of SFAS No. 133 will have on its
financial position and results of operations.
Earnings (Loss) for Common Stockholders Per Common Share
Earnings (loss) for common stockholders per common share is computed by
dividing net income (loss), after deduction of preferred stock dividends,
when applicable, by the weighted average number of common shares
outstanding during the period on a basic and diluted basis. The following
table reconciles the numerator and denominator of the computations of
diluted earnings (loss) for common stockholders per common share ("Diluted
EPS") for the years ended December 31, 1998, 1997 and 1996, respectively.
- 37 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
(Amounts in millions, except per share data)
Year Ended
December 31,
1998 1997 1996
Net income (loss) for common stockholders...................... $943.0 ($253.5) ($54.2)
Dilutive securities effect on net income (loss) for common
stockholders................................................ 1.0
Preferred dividends............................................ 29.1
-------------- ------------ -----------
Net income (loss) for common stockholders used for
Diluted EPS................................................. $973.1 ($253.5) ($54.2)
============== ============ ===========
Weighted average number of common shares outstanding........... 366.5 339.0 247.6
Dilutive securities:
1 1/8% discount convertible subordinated debentures,
redeemed March 1998.................................. 2.5
Series A and B convertible preferred stock............. 22.6
Stock option and restricted stock plans................ 11.4
-------------- ------------ -----------
Diluted weighted average number of common shares
outstanding................................................. 403.0 339.0 247.6
============== ============ ===========
Diluted earnings (loss) for common stockholders per
common share................................................ $2.41 ($.75) ($.21)
============== ============ ===========
Put options sold by the Company on 2.75 million shares of its Class A
Special Common Stock (see Note 6) were outstanding during the year ended
December 31, 1998 but were not included in the computation of Diluted EPS
as the options' exercise price was less than the average market price of
the Company's Class A Special Common Stock during the period.
For the years ended December 31, 1997 and 1996, the Company's potential
common shares of 53.2 million shares and 42.9 million shares have an
antidilutive effect on loss for common stockholders per common share and,
therefore, have not been used in determining the total weighted average
number of common shares outstanding.
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to those classifications used in 1998.
3. ACQUISITIONS AND OTHER SIGNIFICANT EVENTS
Acquisition of Greater Philadelphia Cablevision
In February 1999, the Company agreed to acquire Greater Philadelphia
Cablevision, Inc., a subsidiary of Greater Media, Inc. that operates a
cable system serving approximately 79,000 subscribers in Philadelphia,
Pennsylvania. The Company will issue approximately 4.2 million shares of
its Class A Special Common Stock to complete the acquisition. The
acquisition is expected to close in the fourth quarter of 1999, subject to
receipt of all necessary regulatory and other approvals.
- 38 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
Sale of Primestar
As of December 31, 1998, the Company owns a 9.5% interest in Primestar,
Inc. ("Primestar"). Primestar acquires, originates and provides television
programming services delivered by satellite through a network of
distributors. In January 1999, Primestar announced the sale of its direct
broadcast satellite service to Hughes Electronics Corporation (a division
of General Motors Corporation and the parent company of DirecTV, a direct
broadcast satellite service) ("Hughes Electronics") for approximately $1.8
billion in cash and stock. The sale of Primestar to Hughes Electronics is
subject to the consent of certain Primestar lenders and the receipt of
necessary regulatory and other approvals.
Investment in Prime Communications
In December 1998, the Company agreed to invest in Prime Communications LLC
("Prime"), a cable television operator with cable communications systems
serving approximately 430,000 subscribers. During the fourth quarter of
1998, the Company acquired a $50 million 12.75% subordinated note due 2008
from Prime. In addition, under the terms of the agreement, the Company will
lend Prime approximately $735 million in the form of a 6% ten year note,
expected to occur in the third quarter of 1999. In return, the Company will
receive a convertible note giving the Company the right to acquire 90% of
Prime. The note cannot be converted until the build out of certain of
Prime's cable systems is complete and regulatory and other approvals are
obtained, which is expected to occur in the third quarter of 2002. Upon
conversion of the note, the Company expects to assume approximately $550
million of Prime debt. The Company will have the option to acquire the
remaining 10% interest in Prime for approximately $82 million, plus accrued
interest at 7% per annum.
Sale of Sprint PCS
The Company, Tele-Communications, Inc. ("TCI"), Cox Communications, Inc.
("Cox," and together with the Company and TCI, the "Cable Partners") and
Sprint Corporation ("Sprint") engaged in the wireless communications
business through a limited partnership known as "Sprint PCS."
In November 1998, Sprint assumed ownership and management control of Sprint
PCS and issued a new class of Sprint stock (the "Sprint PCS Stock") to
track the performance of Sprint's combined wireless operations. In exchange
for its 15% interest in Sprint PCS, the Company received approximately 47.2
million shares of unregistered Series 2 Sprint PCS common stock, 61,726
shares of Sprint PCS preferred stock (convertible into approximately 2.0
million shares of unregistered Series 2 Sprint PCS common stock) and a
warrant to purchase approximately 3.0 million shares of unregistered Series
2 Sprint PCS common stock at $24.02 per share. As a result of the exchange,
the Company recognized a pre-tax gain of $758.5 million during the fourth
quarter of 1998 representing the difference between the fair value of the
Sprint PCS common stock, convertible preferred stock and warrant, and the
Company's basis in Sprint PCS. This gain is included in investment income
in the Company's consolidated statement of operations. The Company has
registration rights, subject to customary restrictions, which will allow
the Company to sell the Sprint PCS Stock received. As of December 31, 1998,
the Company has recorded its investment in Sprint PCS at its estimated fair
value.
The Sprint PCS Stock is divided into three categories: (i) Series 1 (one
vote per share) to be held by the public, (ii) Series 2 (1/10 vote per
share other than in class votes) to be held by the Cable Partners, and
(iii) Series 3 (one vote per share) to be held by two of Sprint's major
shareholders. The Cable Partners have registration rights, subject to
customary restrictions, that, if used, would permit the monetization of
their Sprint PCS holdings through equity offerings or derivatives. If the
Series 2 shares are transferred by a Cable Partner, the transferred shares
become full vote Series 1 shares.
Sale of Comcast UK Cable
In October 1998, the Company received approximately 4.8 million shares of
unregistered NTL Incorporated ("NTL") common stock, an alternative
telecommunications company in the UK, in exchange for all of the shares of
Comcast UK Cable Partners Limited ("Comcast UK Cable"), a consolidated
subsidiary of the Company, held by the Company (the "NTL Transaction"). As
a result of the exchange, the Company recognized a pre-tax gain of
- 39 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
$148.3 million during the fourth quarter of 1998, representing the
difference between the fair value of the NTL common stock received and the
Company's basis in Comcast UK Cable. Such gain is included in investment
income in the Company's consolidated statement of operations. Certain
conditions agreed to in the NTL Transaction restrict the Company's ability
to sell the NTL common stock received for a period of 150 days after the
closing of the NTL Transaction. As of December 31, 1998, the Company has
recorded its investment in NTL at its estimated fair value.
AT&T Acquisition of Teleport
In July 1998, AT&T Corp. ("AT&T") merged with Teleport Communications Group
Inc. ("Teleport") with AT&T as the surviving corporation (the "AT&T
Transaction"). Upon closing of the AT&T Transaction, the Company received
approximately 24.2 million shares of unregistered AT&T common stock in
exchange for the approximately 25.6 million shares of Teleport Class B
Common Stock held by the Company (see Note 4). As a result of the exchange,
the Company recognized a pre-tax gain of $1.092 billion during the third
quarter of 1998, representing the difference between the fair value of the
AT&T stock received and the Company's basis in Teleport. Such gain is
included in investment income in the Company's consolidated statement of
operations. The Company has registration rights, subject to customary
restrictions, which allow the Company to effect a registration of the AT&T
shares received. As of December 31, 1998, the Company has recorded its
investment in AT&T at its estimated fair value.
Acquisition of Jones Intercable
In May 1998, the Company agreed to purchase from BCI Telecom Holding
("BTH") 6.4 million Class A Common Shares in Jones Intercable, Inc. ("Jones
Intercable"), and a 49% interest in the BTH subsidiaries which were to
continue to own BTH's remaining 6.4 million shares of Jones Intercable
Class A Common Stock. At the same time, the Company agreed to acquire
approximately 2.9 million shares of Common Stock of Jones Intercable (the
"Control Shares"), if and when acquired by BTH from affiliates of Jones
Intercable's controlling shareholder under an existing option (the "Control
Option") to acquire such shares (which absent extraordinary circumstances
would not have been exercisable until December 2001). The Company was to
purchase the remaining 51% of the BTH subsidiaries when the Control Shares
were acquired. The Company, BTH, Jones Intercable and Jones Intercable's
controlling shareholder agreed in August 1998 to accelerate the Control
Option to permit its early exercise and the early closing of the
transactions with BTH. At closing (expected to occur in the first half of
1999, subject to the receipt of required regulatory approvals), the Company
will pay BTH a total of $500 million in cash to acquire the 12.8 million
shares of Jones Intercable Class A Common Stock and $200 million in cash to
acquire the Control Shares. After closing, the Company will control
approximately 37% of the economic and 47% of the voting interest in Jones
Intercable. In addition, the Control Shares will represent shares having
the right to elect approximately 75% of the Board of Directors of Jones
Intercable. The transaction will be funded either with new borrowings, with
available borrowings under existing lines of credit or by other means.
Jones Intercable is a public company, which upon closing of certain pending
transactions, will own or manage cable operations serving approximately 1.0
million customers.
E! Entertainment
On March 31, 1997, the Company, through Comcast Entertainment Holdings LLC
(the "LLC"), which is owned 50.1% by the Company and 49.9% by The Walt
Disney Company ("Disney"), purchased a 58.4% interest in E! Entertainment
from Time Warner, Inc. ("Time Warner") for $321.9 million (the "E!
Acquisition"). The E! Acquisition was funded by cash contributions to the
LLC by the Company and Disney of $132.8 million and $189.1 million,
respectively. In connection with the E! Acquisition, the Company
contributed its 10.4% interest in E! Entertainment to the LLC. To fund the
cash contribution to the LLC, the Company borrowed $132.8 million from
Disney in the form of two 10-year, 7% notes (the "Disney Notes").
In December 1997, the LLC acquired the 10.4% interest in E! Entertainment
held by Cox for $57.1 million. The acquisition was funded by cash
contributions to the LLC by the Company and Disney of $28.6 million and
$28.5 million, respectively. As of December 31, 1998 and 1997, the LLC owns
a 79.2% interest in E! Entertainment.
- 40 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
The Company accounted for the acquisitions under the purchase method and E!
Entertainment was consolidated with the Company effective March 31, 1997.
Microsoft Investment
In June 1997, the Company and Microsoft Corporation ("Microsoft") completed
a Stock Purchase Agreement. Microsoft purchased and the Company issued
approximately 24.6 million shares of the Company's Class A Special Common
Stock at $20.29 per share, for $500.0 million and 500,000 shares of the
Company's newly issued 5.25% Series B Mandatorily Redeemable Convertible
Preferred Stock, par value $1,000 per share (the "Series B Preferred
Stock"), for $500.0 million (see Note 6).
Scripps Cable
In November 1996, the Company acquired the cable television operations
("Scripps Cable") of The E.W. Scripps Company ("E.W. Scripps") in exchange
for approximately 93.0 million shares of the Company's Class A Special
Common Stock, valued at $1.552 billion (the "Scripps Acquisition"). The
Company accounted for the Scripps Acquisition under the purchase method and
Scripps Cable was consolidated with the Company effective November 1, 1996.
As the consideration given in exchange for Scripps Cable was shares of
Class A Special Common Stock, the Scripps Acquisition had no significant
impact on the Company's consolidated statement of cash flows.
Comcast-Spectacor
In July 1996, the Company completed its acquisition (the "Sports Venture
Acquisition") of a 66% interest in the Philadelphia Flyers Limited
Partnership, a Pennsylvania limited partnership ("PFLP"), the assets of
which, after giving effect to the Sports Venture Acquisition, consist of
(i) the National Basketball Association ("NBA") franchise to own and
operate the Philadelphia 76ers basketball team and related assets (the
"Sixers"), (ii) the National Hockey League ("NHL") franchise to own and
operate the Philadelphia Flyers hockey team and related assets, and (iii)
two adjacent arenas, leasehold interests in and development rights related
to the land underlying the arenas and other adjacent parcels of land
located in Philadelphia, Pennsylvania (collectively, the "Arenas").
Concurrent with the completion of the Sports Venture Acquisition, PFLP was
renamed Comcast Spectacor, L.P. ("Comcast-Spectacor").
The Sports Venture Acquisition was completed in two steps. In April 1996,
the Company purchased the Sixers for $125.0 million in cash plus assumed
net liabilities of $11.0 million through a partnership controlled by the
Company. To complete the Sports Venture Acquisition, in July 1996, the
Company contributed its interest in the Sixers, exchanged approximately 3.5
million shares of the Company's Class A Special Common Stock and 6,370
shares of the Company's newly issued 5% Series A Convertible Preferred
Stock (the "Series A Preferred Stock") (see Note 6), and paid $15.0 million
in cash for its current interest in Comcast-Spectacor. The remaining 34%
interest in Comcast-Spectacor is owned by a group, including the former
majority owner of PFLP, who also manages Comcast-Spectacor (the "Minority
Group"). In connection with the Sports Venture Acquisition, Comcast-
Spectacor assumed the outstanding liabilities relating to the Sixers and
the Arenas, including a mortgage and other obligations of $155.0 million.
The issuance of the Series A Preferred Stock and the Class A Special Common
Stock in the Sports Venture Acquisition had no impact on the Company's
consolidated statement of cash flows due to their non-cash nature.
- 41 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
4. INVESTMENTS
December 31,
1998 1997
(Dollars in millions)
Equity method................................................ $11.1 $839.1
Fair value method............................................ 4,170.0 346.5
Cost method ................................................ 74.7 214.1
--------- --------
Total investments............................... 4,255.8 1,399.7
Less, current investments.................................... 3,653.4 163.9
--------- --------
Non-current investments...................................... $602.4 $1,235.8
========= ========
Equity Method
The Company records its proportionate interests in the net income (loss) of
substantially all of its equity method investees three months in arrears.
As of December 31, 1997, the Company held interests representing less than
20% of the total outstanding ownership interests in certain of its equity
method investees. The equity method of accounting was utilized for these
investments based on the type of investment (e.g. general partnership
interest), board representation, participation in a controlling investor
group, significant shareholder rights or a combination of these and other
factors. The Company's recorded investments exceed its proportionate
interests in the book value of the investees' net assets by $82.3 million
as of December 31, 1998 (primarily related to the investment in The Golf
Channel). Such excess is 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 totaled $215.3 million and $1.424
billion as of December 31, 1998 and 1997, respectively. Summarized
financial information for the Company's equity method investees for 1998,
1997 and 1996 is as follows (dollars in millions).
- 42 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
Sprint UK Comcast
PCS Teleport Investees Spectacor Other Combined
Year Ended December 31, 1998:
Combined Results of Operations
Revenues, net.......................... $1,136.5 $605.8 $197.8 $638.6 $2,578.7
Operating, selling, general and
administrative expenses.............. 2,587.6 558.7 153.3 653.8 3,953.4
Depreciation and amortization.......... 749.5 163.4 69.7 69.1 1,051.7
Operating loss......................... (2,200.6) (116.3) (25.2) (84.3) (2,426.4)
Net loss (a)........................... (2,572.8) (190.6) (78.8) (134.2) (2,976.4)
Company's Equity in Net Loss
Equity in current period net loss...... ($385.9) ($27.2) ($28.9) ($66.4) ($508.4)
Amortization expense................... (3.5) (0.5) (3.5) (7.5)
------- ------- ------- ------- ------- --------
Total equity in net loss............. ($389.4) ($27.2) ($29.4) ($69.9) ($515.9)
======= ======= ======= ======= ======= ========
Year Ended December 31, 1997:
Combined Results of Operations
Revenues, net.......................... $111.5 $431.3 $197.5 $140.8 $743.9 $1,625.0
Operating, selling, general and
administrative expenses.............. 959.4 398.5 168.4 117.9 820.9 2,465.1
Depreciation and amortization.......... 194.2 133.9 76.0 46.5 66.2 516.8
Operating loss......................... (1,042.1) (101.1) (46.9) (23.6) (143.2) (1,356.9)
Net loss (a)........................... (1,187.3) (192.9) (92.2) (39.6) (189.3) (1,701.3)
Company's Equity in Net Loss
Equity in current period net loss...... ($178.1) ($30.5) ($34.6) ($26.2) ($65.3) ($334.7)
Amortization expense................... (1.5) (0.2) (0.6) (5.4) (1.4) (9.1)
------- ------- ------- ------- ------- --------
Total equity in net loss............. ($179.6) ($30.7) ($35.2) ($31.6) ($66.7) ($343.8)
======= ======= ======= ======= ======= ========
Year Ended December 31, 1996:
Combined Results of Operations
Revenues, net.......................... $0.1 $192.9 $155.2 $440.0 $788.2
Operating, selling, general and
administrative expenses.............. 208.0 180.9 140.9 486.0 1,015.8
Depreciation and amortization.......... 1.9 57.2 57.6 60.0 176.7
Operating loss......................... (209.8) (45.2) (43.3) (106.0) (404.3)
Net loss (a)........................... (344.9) (84.8) (72.2) (140.8) (642.7)
Company's Equity in Net Loss
Equity in current period net loss...... ($51.7) ($15.1) ($28.6) ($45.9) ($141.3)
Amortization income (expense).......... 0.6 (1.1) (0.3) (2.7) (3.5)
------- ------- ------- ------- ------- --------
Total equity in net loss............. ($51.1) ($16.2) ($28.9) ($48.6) ($144.8)
======= ======= ======= ======= ======= ========
- ---------
(a) see footnote (1) on page 44.
- 43 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
Sprint UK Comcast
PCS Teleport Investees Spectacor Other Combined
Combined Financial Position
As of December 31, 1998 (2):
Current assets..................... $57.8 $57.8
Noncurrent assets.................. 314.7 314.7
Current liabilities................ 41.9 41.9
Noncurrent liabilities............. 451.4 451.4
As of December 31, 1997:
Current assets..................... $317.3 $440.8 $35.9 $84.9 $219.4 $1,098.3
Noncurrent assets.................. 5,483.3 1,675.2 716.4 285.4 915.7 9,076.0
Current liabilities................ 440.2 302.8 74.6 107.7 747.5 1,672.8
Noncurrent liabilities............. 3,312.9 1,061.6 558.7 188.0 377.2 5,498.4
- --------
(1) Net loss also represents loss from continuing operations before
extraordinary items and cumulative effect of changes in accounting
principles.
(2) Financial position information as of December 31, 1998 is not presented for
Sprint PCS, Teleport, the UK Investees or Comcast-Spectacor as such
investments were no longer accounted for under the equity method as of that
date.
Sprint PCS. Effective November 1998, the Company accounts for its
investment in Sprint PCS under the fair value method (see Note 3).
Teleport. For the years ended December 31, 1998, 1997 and 1996, Teleport
issued shares of its Class A Common Stock. As a result of these stock
issuances, the Company recognized a $157.8 million, $7.7 million and $40.6
million, respectively, increase in its proportionate share of Teleport's
net assets as a gain from equity offering of affiliate. The Company
recorded its proportionate share of Teleport's net assets one quarter in
arrears. In March 1997, the Company received 2.76 million shares of
Teleport Class A Common Stock from Teleport in exchange for the Company's
shares of an alternate access provider. In May 1997, the Company sold all
of its shares of Teleport Class A Stock for $68.9 million and recognized a
$68.9 million pre-tax gain, which is included in investment income in the
Company's 1997 consolidated statement of operations. In July 1998, in
connection with the AT&T Transaction (see Note 3), the Company exchanged
its interest in Teleport for shares of AT&T common stock.
UK Investees. In October 1998, the Company exchanged its interest in
Comcast UK Cable for shares of NTL common stock (see Note 3).
Comcast-Spectacor. Effective January 1, 1998, the Company began
consolidating the accounts of Comcast- Spectacor, an affiliate previously
accounted for under the equity method, due to certain call rights held by
the Company which became exercisable effective January 16, 1998.
Other. The Company's other equity investees include investments in cable
communications and programming content providers. The Company does not
consider these other equity method investments to be individually
significant to its consolidated financial position, results of operations
or liquidity.
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.
Fair Value Method
The Company holds unrestricted equity investments in certain publicly
traded companies, with an historical cost (including $1.999 billion of
pre-tax gains recognized during 1998 - see Note 3) of $2.555 billion and
$130.0
- 44 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
million as of December 31, 1998 and 1997, respectively. The Company has
recorded these investments, which are classified as available for sale, at
their estimated fair values of $4.170 billion and $346.5 million as of
December 31, 1998 and 1997, respectively. The unrealized pre-tax gains as
of December 31, 1998 and 1997 of $1.615 billion and $216.5 million,
respectively, have been reported in the Company's consolidated balance
sheet as a component of stockholders' equity, net of related deferred
income tax expense of $565.1 million and $75.8 million, respectively.
@Home. In July 1997, At Home Corporation ("@Home"), an investee of the
Company previously accounted for under the equity method, completed an
initial public offering of its Series A Common Stock (the "@Home IPO").
@Home provides Internet services to customers and businesses over the cable
television infrastructure in a limited number of cities in the US.
Effective July 1, 1997, due to the dilution of the Company's equity and
voting interests and other factors subsequent to the @Home IPO, the Company
discontinued the equity method of accounting for its investment in @Home.
The Company holds approximately 8.0 million contractually restricted shares
(the "Restricted Shares") and approximately 6.6 million unrestricted shares
(the "Unrestricted Shares") of @Home Series A Common Stock (the "@Home
Series A Stock"), as of December 31, 1998 and 1997. The Company has
recorded the Restricted Shares at their historical cost of $1.1 million and
the Unrestricted Shares, which are classified as available for sale, at
their estimated fair value of $486.4 million and $164.6 million, based on
the quoted market price of the @Home Series A Stock as of December 31, 1998
and 1997, respectively.
TCI. As of December 31, 1998 and 1997, the Company holds approximately 3.1
million shares of TCI Class A Common Stock, approximately 2.4 million
shares of Liberty Media Corporation ("Liberty") Class A Common Stock and
approximately 2.3 million shares of TCI Ventures Group, Inc. ("TCI
Ventures") Class A Common Stock (as adjusted for the one-for-two stock
split for Liberty and one-for-one stock split for TCI Ventures in February
1998) (together, the "TCI Stock"). In March 1998, the Company sold call
options relating to the TCI Stock for $20.7 million. Such call options
expire between March and September 1999. During the year ended December 31,
1998, the Company recorded pre-tax investment expense of $105.5 million
related to the increase in the value of the call options.
During the years ended December 31, 1997 and 1996, the Company recognized
pre-tax gains of $33.3 million and $82.6 million, respectively, on sales of
certain of its fair value method investments. These gains were recorded as
a reclassification from other comprehensive income to investment income.
Cost Method
It is not practicable to estimate the fair value of the Company's
investments in privately held companies, accounted for under the cost
method, due to a lack of quoted market prices and excessive costs involved
in determining such fair value.
Impairment Losses
During the years ended December 31, 1998, 1997 and 1996, the Company
recorded pre-tax losses of $152.8 million, $2.5 million and $15.0 million,
respectively, on certain of its investments based on a decline in value
that was considered other than temporary. Such pre-tax losses are included
in investment income in the Company's consolidated statement of operations.
- 45 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
5. LONG-TERM DEBT
December 31,
1998 1997
(Dollars in millions)
Notes payable to banks and insurance companies, due
in installments through 2003.......................................... $1,690.8 $1,753.3
8-1/8% Senior notes, due 2004........................................... 299.8 299.7
8-3/8% Senior notes, due 2007........................................... 596.5 596.3
6.20% Senior notes, due 2008............................................ 797.9
8-7/8% Senior notes, due 2017........................................... 545.6 545.5
8-1/2% Senior notes, due 2027........................................... 249.6 249.6
11.20% Senior discount debentures, due 2007............................. 378.3
10-1/4% Senior subordinated debentures, due 2001........................ 125.0 125.0
9-3/8% Senior subordinated debentures, due 2005......................... 234.1 234.1
9-1/8% Senior subordinated debentures, due 2006......................... 223.7 250.0
9-1/2% Senior subordinated debentures, due 2008......................... 200.0 200.0
10-5/8% Senior subordinated debentures, due 2012........................ 282.5 300.0
1-1/8% Discount convertible subordinated debentures, due 2007........... 355.9
7% Disney Notes, due 2007 (see Note 3).................................. 132.8 132.8
Other debt, due in installments principally through 2000................ 199.4 45.9
-------- --------
5,577.7 5,466.4
Less current portion.................................................... 113.5 132.3
-------- --------
$5,464.2 $5,334.1
======== ========
Maturities of long-term debt outstanding as of December 31, 1998 for the four
years after 1999 are as follows (dollars in millions):
2000................................................. $204.2
2001................................................. 550.5
2002................................................. 476.1
2003................................................. 527.8
Cable Notes
In November 1998, Comcast Cable Communications, Inc. ("Comcast Cable"),a
wholly owned subsidiary of the Company, sold $800.0 million of 6.20%
nonrecourse public debt due 2008. Comcast Cable used substantially all of
the net proceeds from the offering to repay existing intercompany
borrowings to the Company and for general corporate purposes.
In May 1997, Comcast Cable sold a total of $1.7 billion of nonrecourse
public debt with interest rates ranging from 8 1/8% to 8 7/8% and maturity
dates from 2004 to 2027. Comcast Cable used the net proceeds from the
offerings to repay existing borrowings by their subsidiaries.
The Cable Notes are unsecured and unsubordinated obligations of Comcast
Cable and rank pari passu with all other unsecured and unsubordinated
indebtedness and other obligations of Comcast Cable. The Cable Notes are
effectively subordinated to all liabilities of Comcast Cable's
subsidiaries, including trade payables. The Cable Notes
- 46 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
are obligations only of Comcast Cable and are not guaranteed by and do not
otherwise constitute obligations of the Company.
The indenture for the Cable Notes, among other things, contains
restrictions (with certain exceptions) on the ability of Comcast Cable and
its Restricted Subsidiaries (as defined) to: (i) make dividend payments or
other restricted payments; (ii) create liens or enter into sale and
leaseback transactions; and (iii) enter into mergers, consolidations, or
sales of all or substantially all of their assets.
Redemption of 1 1/8% Debentures
In March 1998, the Company completed the redemption of its $541.9 million
principal amount 1 1/8% discount convertible subordinated debentures due
2007 (the "1 1/8% Debentures"). The Company issued 10.4 million shares of
its Class A Special Common Stock upon conversion of $540.2 million
principal amount of 1 1/8% Debentures while $1.7 million principal amount
of 1 1/8% Debentures was redeemed for cash at a redemption price of 67.112%
of the principal amount, together with accrued interest thereon.
Stockholders' equity was increased by the full amount of 1 1/8% Debentures
converted plus accrued interest, less unamortized debt acquisition costs.
Unamortized debt acquisition costs related to the 1 1/8% Debentures
redeemed for cash were not significant. The issuance of the Company's Class
A Special Common Stock upon conversion of the 1 1/8% Debentures had no
impact on the Company's consolidated statement of cash flows due its
noncash nature.
Extraordinary Items
Extraordinary items for the years ended December 31, 1998, 1997 and 1996 of
$4.2 million, $30.2 million and $1.0 million, respectively, consist of
unamortized debt acquisition costs and debt extinguishment costs, net of
related tax benefits, expensed principally in connection with the
redemption and refinancing of certain indebtedness.
Interest Rates
The fixed interest rate on notes payable to insurance companies was 8.6% as
of December 31, 1998. 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 2.0%;
Federal Funds rate plus 0.5% to 1.5%; and
LIBOR plus 0.375% to 1.875%.
As of December 31, 1998 and 1997, the Company's effective weighted average
interest rate on its variable rate bank debt outstanding was 5.80% and
6.64%, respectively.
Interest Rate Risk Management
The Company is exposed to market risk including changes in interest rates.
To manage the volatility relating to these exposures, the Company enters
into various derivative transactions pursuant to the Company's policies in
areas such as counterparty exposure and hedging practices. Positions are
monitored using techniques including market value and sensitivity analyses.
The use of interest rate risk management instruments, such as Swaps, Caps
and Collars, is required under the terms of certain of the Company's
outstanding debt agreements. The Company's policy is to manage interest
costs using a mix of fixed and variable rate debt. Using Swaps, the Company
agrees to exchange, at specified intervals, the difference between fixed
and variable interest amounts calculated by reference to an agreed-upon
notional principal amount. Caps are used to lock in a maximum interest rate
should variable rates rise, but enable the Company to otherwise pay lower
market rates. Collars limit the Company's exposure to and benefits from
interest rate fluctuations on variable rate debt to within a certain range
of rates.
- 47 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
The following table summarizes the terms of the Company's existing Swaps,
Caps and Collars as of December 31, 1998 and 1997 (dollars in millions):
Notional Average Estimated
Amount Maturities Interest Rate Fair Value
As of December 31, 1998
Variable to Fixed Swaps.......... $1,061.8 1999-2008 5.7% ($13.3)
Caps............................. 240.0 1999 7.0%
Collar........................... 50.0 2000 6.3%/4.0%
As of December 31, 1997
Variable to Fixed Swaps.......... $550.0 1998-2000 5.6% $4.2
Caps............................. 150.0 1998 6.7%
Collar........................... 50.0 1998 7.0%/4.9% 0.2
The notional amounts of interest rate instruments, as presented in the
above table, are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The estimated fair value
approximates the proceeds (costs) to settle the outstanding contracts.
While Swaps, Caps and Collars represent an integral part of the Company's
interest rate risk management program, their incremental effect on interest
expense for the years ended December 31, 1998, 1997 and 1996 was not
significant.
Estimated Fair Value
The Company's long-term debt had estimated fair values of $5.995 billion
and $5.848 billion as of December 31, 1998 and 1997, 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.
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, 1998, $258.5 million of the Company's cash, cash
equivalents and short-term investments is restricted to use by subsidiaries
of the Company under contractual or other arrangements. Restricted net
assets of the Company's subsidiaries were approximately $2.5 billion as of
December 31, 1998.
Lines and Letters of Credit
As of December 31, 1998, certain subsidiaries of the Company had unused
lines of credit of $966.8 million, $366.8 million of which is restricted by
the covenants of the related debt agreements and to subsidiary general
purposes and dividend declaration.
As of December 31, 1998, the Company and certain of its subsidiaries had
unused irrevocable standby letters of credit totaling $121.6 million to
cover potential fundings associated with several projects.
- 48 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
6. STOCKHOLDERS' EQUITY (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. The shares can be issued with
such designations, preferences, qualifications, privileges, limitations,
restrictions, options, conversion rights and other special or related
rights as the Company's Board of Directors (the "Board") shall from time to
time fix by resolution.
In June 1997, in connection with Microsoft's investment in the Company (see
Note 3), the Company issued the Series B Preferred Stock. The Series B
Preferred Stock has a 5.25% pay-in-kind annual dividend. Dividends will be
paid quarterly through the issuance of additional shares of Series B
Preferred Stock (the "Additional Shares") and will be cumulative from the
Issuance Date (except that dividends on the Additional Shares will accrue
from the date such Additional Shares are issued). The Series B Preferred
Stock, including the Additional Shares, is convertible, at the option of
Microsoft, into 21.2 million shares of the Company's Class A Special Common
Stock, subject to adjustment in certain limited circumstances, which equals
an initial conversion price of $23.54 per share, increasing as a result of
the Additional Shares to $33.91 per share on June 30, 2004. The Series B
Preferred Stock is mandatorily redeemable on June 30, 2017, or, at the
option of the Company beginning on June 30, 2004 or at the option of
Microsoft on June 30, 2004 or on June 30, 2012. Upon redemption, the
Company, at its option, may redeem the Series B Preferred Stock with cash,
Class A Special Common Stock or a combination thereof. As the Company
currently intends to redeem the Series B Preferred Stock with Class A
Special Common Stock upon redemption, the Series B Preferred Stock has been
classified as a component of stockholders' equity as of December 31, 1998.
The Series B Preferred Stock is generally non-voting.
In July 1996, in connection with the Sports Venture Acquisition (see Note
3), the Company issued 6,370 shares of Series A Preferred Stock. Each
holder of shares of the Series A Preferred Stock is entitled to receive
cumulative cash dividends at the annual rate of $250 per share, payable
quarterly in arrears. The Series A Preferred Stock is redeemable, at the
option of the Company, beginning in July 1999 at a redemption price of
$5,000 per share plus accrued and unpaid dividends, subject to certain
conditions and conversion adjustments. The Series A Preferred Stock is
convertible, at the option of the holder, into shares of the Company's
Class A Special Common Stock at a ratio of 209.1175 shares of Class A
Special Common Stock for each share of Series A Preferred Stock, subject to
certain conditions. The holders of the Series A Preferred Stock are not
entitled to any voting rights except as otherwise provided by the Company's
Articles of Incorporation or by applicable law.
Common Stock
The Company's Class A Special Common Stock is generally nonvoting and each
share of the Company's Class A Common Stock is entitled to one vote. Each
share of the Company's 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.
Repurchase Program
Based on the trade date for stock repurchases, during the years ended
December 31, 1998, 1997 and 1996, the Company repurchased 0.3 million
shares, 2.3 million shares and 10.5 million shares, respectively, of its
common stock for aggregate consideration of $12.9 million, $36.2 million
and $180.0 million, respectively, pursuant to its Board-authorized
repurchase programs.
As part of the repurchase programs, the Company sold Comcast Put Options on
2.75 million, 2.0 million and 1.0 million shares, during the years ended
December 31, 1998, 1997 and 1996, respectively.
The Comcast Put Options give the holder the right to require the Company to
repurchase such shares at specified prices on specific dates. The Comcast
Put Options sold during 1997 and 1996 expired unexercised. The amount the
Company would be obligated to pay to repurchase such shares upon exercise
of the Comcast Put Options,
- 49 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
totaling $111.2 million and $31.4 million, has been reclassified from
additional capital to common equity put options in the Company's December
31, 1998 and 1997 consolidated balance sheet, respectively. The difference
between the proceeds from the sale of these put options and their estimated
fair value was not significant as of December 31, 1998 and 1997.
Stock-Based Compensation Plans
As of December 31, 1998, the Company and its subsidiaries have several
stock-based compensation plans for certain employees, officers, directors
and other persons designated by the applicable compensation committees of
the Boards of Directors of the Company and its subsidiaries. These plans
are described below.
Comcast Option Plan. The Company maintains qualified and nonqualified stock
option plans for certain employees, directors and other persons under which
fixed stock options are granted and the option price is generally not less
than the fair value of a share of the underlying stock at the date of grant
(collectively, the "Comcast Option Plan"). Under the Comcast Option Plan,
31.2 million shares of Class A Special Common Stock were reserved as of
December 31, 1998. Option terms are generally from five to 10 1/2 years,
with options generally becoming exercisable between two and 9 1/2 years
from the date of grant.
A summary of the activity of the Comcast Option Plan as of and for the
years ended December 31, 1998, 1997 and 1996 is presented below (options in
thousands):
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
Class A Special Common Stock
Outstanding at beginning of year.. 16,110 $15.50 14,851 $14.54 14,208 $14.25
Granted........................... 8,175 33.06 2,599 19.47 1,308 17.41
Exercised......................... (1,985) 13.20 (795) 9.95 (199) 8.72
Canceled.......................... (799) 20.96 (545) 16.40 (466) 16.08
------ ------ ------
Outstanding at end of year........ 21,501 22.18 16,110 15.50 14,851 14.54
====== ====== ======
Exercisable at end of year........ 7,695 $14.59 7,693 $13.91 6,875 $13.40
====== ====== ======
Class A Common Stock
Outstanding at beginning of year.. 229 $4.87
Exercised......................... (229) 4.87
Canceled..........................
------
Outstanding at end of year........
======
Exercisable at end of year........
======
Class B Common Stock
Outstanding at beginning of year.. 658 $5.70 658 $5.70 658 $5.70
Exercised......................... (658) 5.70
------ ------ ------
Outstanding at end of year....... 658 $5.70 658 $5.70
====== ====== ======
Exercisable at end of year........ 658 $5.70 658 $5.70
====== ====== ======
- 50 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
The following table summarizes information about the Class A Special Common
Stock options outstanding under the Comcast Option Plan as of December 31,
1998 (options in thousands):
Options Outstanding Options Exercisable
Weighted-
Range of Number Average Weighted- Number Weighted-
Exercise Outstanding Remaining Average Exercisable Average
Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
$6.22 to $12.08 3,376 1.5 years $8.78 2,916 $8.62
$13.42 to $18.38 4,794 6.7 years 15.89 1,198 14.45
$18.63 to $32.86 7,440 5.2 years 22.65 3,581 19.50
$33.88 to $55.19 5,891 9.5 years 34.40
------ -----
21,501 7,695
====== =====
The weighted-average fair value at date of grant of a Class A Special
Common Stock option granted under the Comcast Option Plan during 1998, 1997
and 1996 was $17.07, $10.18 and $9.71, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
dividend yield of .44%, .52% and .53% for 1998, 1997 and 1996,
respectively; expected volatility of 31.3%, 30.1% and 34.9% for 1998, 1997
and 1996, respectively; risk-free interest rate of 5.6%, 6.5% and 6.8% for
1998, 1997 and 1996, respectively; expected option lives of 9.9 years for
all years; and a forfeiture rate of 3.0% for all years.
QVC Tandem Plan. QVC established a qualified and nonqualified combination
stock option/Stock Appreciation Rights ("SAR") plan (collectively, the "QVC
Tandem Plan") during 1995 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 price is generally not
less than the fair value, as determined by an independent appraisal, of a
share of the underlying common stock of QVC (the "QVC Common Stock") at the
date of grant. As of the latest valuation date, the fair value of a share
of QVC Common Stock was $741.79. If the SAR feature of the QVC Tandem Plan
is elected by the eligible participant, the participant receives 75% of the
excess of the fair value of a share of QVC Common Stock over the exercise
price of the option to which it is attached at the exercise date. Option
holders have stated an intention not to exercise the SAR feature of the QVC
Tandem Plan. Because the exercise of the option component is more likely
than the exercise of the SAR feature, compensation expense is measured
based on the stock option component. Under the QVC Tandem Plan, option/SAR
terms are ten years from the date of grant, with options/SARs generally
becoming exercisable over four years from the date of grant. As of December
31, 1998, 230,000 shares of QVC Common Stock were reserved under the plan.
Compensation expense of $1.0 million, $3.4 million and $4.0 million was
recorded under the QVC Tandem Plan during the years ended December 31,
1998, 1997 and 1996, respectively.
- 51 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
A summary of the activity of the QVC Tandem Plan as of and for the years
ended December 31, 1998, 1997 and 1996 is presented below (options/SARs in
thousands):
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Options/ Exercise Options/ Exercise Options/ Exercise
SARs Price SARs Price SARs Price
Outstanding at
beginning of year....... 180 $363.99 164 $192.16 142 $177.05
Granted..................... 72 664.76 74 601.28 26 271.23
Exercised................... (41) 186.01 (55) 177.05
Canceled.................... (5) 511.01 (3) 262.20 (4) 177.05
------ ------ ------
Outstanding at end of year.. 206 500.82 180 363.99 164 192.16
====== ====== ======
Exercisable at end of year.. 37 $397.46 20 $205.42 36 $177.05
====== ====== ======
The following table summarizes information about the options/SARs
outstanding under the QVC Tandem Plan as of December 31, 1998 (options/SARs
in thousands):
Options/SARs OutstandingOptions/SARs Exercisable
Weighted-
Number Average Number
Exercise Outstanding Remaining Exercisable
Prices at 12/31/98 Contractual Life at 12/31/98
$177.05 64 6.4 years 19
522.31 2 7.5 years 1
585.19 6 8.0 years 2
634.25 71 8.8 years 15
651.84 46 9.7 years
688.14 10 9.2 years
741.79 7 9.8 years
------ -----
206 37
====== =====
The weighted-average fair value at date of grant of a QVC Common Stock
option/SAR granted during 1998, 1997 and 1996 was $296.67, $331.93 and
$385.13, respectively. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: no dividend yield for all years;
expected volatility of 20% for all years; risk-free interest rate of 4.9%,
6.2% and 6.8% for 1998, 1997 and 1996, respectively; expected option lives
of 10 years for all years; and a forfeiture rate of 3.0% for all years.
- 52 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
Had compensation expense for the Company's two aforementioned stock-based
compensation plans been determined based on the fair value at the grant
dates for awards under those plans under the provisions of SFAS No. 123,
the Company's net income (loss) and net income (loss) per share would have
changed to the pro forma amounts indicated below (dollars in millions,
except per share data):
1998 1997 1996
Net income (loss) - As reported...................... $972.1 ($238.7) ($53.5)
Net income (loss) - Pro forma........................ 936.4 (252.0) (61.0)
Net income (loss) for common stockholders -
As reported...................................... $943.0 ($253.5) ($54.2)
Net income (loss) for common stockholders -
Pro forma........................................ 907.3 (266.7) (61.7)
Basic earnings (loss) for common stockholders
per common share - As reported................... $2.57 ($.75) ($.21)
Basic earnings (loss) for common stockholders
per common share - Pro forma..................... 2.48 (.79) (.24)
Diluted earnings (loss) for common stockholders
per common share - As reported................... $2.41 ($.75) ($.21)
Diluted earnings (loss) for common stockholders
per common share - Pro forma..................... 2.33 (.79) (.24)
The pro forma effect on net income (loss) and net income (loss) per share
for the years ended December 31, 1998, 1997 and 1996 by applying SFAS No.
123 may not be indicative of the pro forma effect on net income or loss in
future years since SFAS No. 123 does not take into consideration pro forma
compensation expense related to awards made prior to January 1, 1995 and
since additional awards in future years are anticipated.
Other Stock-Based Compensation Plans
The Company maintains a restricted stock program under which management
employees may be granted restricted shares of the Company's Class A Special
Common Stock. The shares awarded vest annually, generally over a period not
to exceed five years from the date of the award, and do not have voting or
dividend rights until vesting occurs. At December 31, 1998, there were 1.0
million unvested shares granted under the program, of which 167,000 vested
in January 1999. During the years ended December 31, 1998, 1997 and 1996,
328,000, 208,000 and 951,000 shares were granted under the program,
respectively, with a weighted-average grant date market value of $34.66,
$17.36 and $19.16 per share, respectively. Compensation expense recognized
during the years ended December 31, 1998, 1997 and 1996 under this program
was $5.3 million, $7.1 million and $5.5 million, respectively. There was no
significant difference between the amount of compensation expense
recognized by the Company during the years ended December 31, 1998, 1997
and 1996 and the amount that would have been recognized had compensation
expense been determined under the provisions of SFAS No. 123.
The Company and QVC established SAR plans during 1996 and 1995 for certain
employees, officers, directors and other persons (the "QVC SAR Plans").
Under the QVC SAR Plans, eligible participants are entitled to receive a
cash payment from the Company or QVC equal to 100% of the excess, if any,
of the fair value of a share of QVC Common Stock at the exercise date over
the fair value of such a share at the grant date. The SARs have a term of
ten years from the date of grant and become exercisable over four to five
years from the date of grant. During the years ended December 31, 1998,
1997 and 1996, 5,000, 4,000 and 11,000 SARs were awarded, respectively, and
20,000 SARs were outstanding at December 31, 1998, of which 6,000 were
exercisable. Compensation expense related to the QVC SAR Plans of $3.2
million, $3.4 million and $4.5 million was recorded during the years ended
- 53 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
December 31, 1998, 1997 and 1996, respectively. There was no significant
difference between the amount of compensation expense recognized and the
amount that would have been recognized had compensation expense been
determined under the provisions of SFAS No. 123.
E! Entertainment established a SAR plan in 1995 for certain of its
employees and officers (the "E! SAR Plan"). By written agreement between
the participants and E! Entertainment, the E! SAR Plan was terminated
effective December 31, 1998 in exchange for a lump-sum payment of a
negotiated amount which was paid in February 1999. Terms of the agreement
also included the complete and full release of E! Entertainment from any
further liability associated with the E! SAR Plan. Compensation expense
related to the E! SAR Plan was $11.6 million and $7.0 million during the
years ended December 31, 1998 and 1997, respectively. There was no
significant difference between the amount of compensation expense
recognized and the amount that would have been recognized had compensation
expense been determined under the provisions of SFAS No. 123.
7. INCOME TAXES
The Company joins with its 80% or more owned subsidiaries (the
"Consolidated Group") in filing consolidated federal income tax returns.
QVC, E! Entertainment and Comcast Communications Properties, Inc., an
indirect majority owned subsidiary of the Company, each file separate
consolidated federal income tax returns. Income tax expense consists of the
following components:
Year Ended December 31,
1998 1997 1996
(Dollars in millions)
Current expense
Federal.................................................... $135.5 $94.4 $82.0
State...................................................... 27.5 24.7 23.0
-------- ------- --------
163.0 119.1 105.0
-------- ------- --------
Deferred expense (benefit)
Federal.................................................... 424.6 (47.5) 4.3
State...................................................... 6.4 (1.2) (0.3)
-------- ------- --------
431.0 (48.7) 4.0
-------- ------- --------
Income tax expense......................................... $594.0 $70.4 $109.0
======== ======= ========
- 54 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
The effective income tax expense of the Company differs from the statutory
amount because of the effect of the following items:
Year Ended December 31,
1998 1997 1996
(Dollars in millions)
Federal tax at statutory rate.............................. $545.1 ($66.1) $19.1
Non-deductible depreciation and amortization............... 41.0 42.6 32.0
State income taxes, net of federal benefit................. 22.0 15.3 14.8
Non-deductible (deductible) foreign (income) losses
and equity in net losses of affiliates................... (11.2) 53.1 27.5
Additions to valuation allowance........................... 3.0 16.3 18.3
Other...................................................... (5.9) 9.2 (2.7)
------ ----- ------
Income tax expense......................................... $594.0 $70.4 $109.0
====== ===== ======
Deferred income tax expense (benefit) resulted from the following
differences between financial and income tax reporting:
Year Ended December 31,
1998 1997 1996
(Dollars in millions)
Depreciation and amortization......................... ($69.0) ($94.5) ($60.0)
Accrued expenses not currently deductible............. (26.7) (13.2) (6.3)
Non-deductible reserves for bad debts,
obsolete inventory and sales returns................ (9.6) (10.9) (11.0)
Temporary differences associated with sale
or exchange of securities........................... 508.8 6.4 30.9
Losses from affiliated partnerships................... (9.6) 45.9 25.6
Change in net operating loss carryforwards............ 35.5 2.2 3.0
Change in valuation allowance and other............... 1.6 15.4 21.8
------ ------ ------
Deferred income tax expense (benefit)................. $431.0 ($48.7) $4.0
====== ====== ======
- 55 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
Significant components of the Company's net deferred tax liability are as
follows:
December 31,
1998 1997
(Dollars in millions)
Deferred tax assets:
Net operating loss carryforwards.................... $324.7 $343.8
Differences between book and
tax basis of property and equipment
and deferred charges.............................. 24.5 24.5
Reserves for bad debts, obsolete inventory
and sales returns................................. 94.4 84.8
Other............................................... 89.6 62.9
Less: Valuation allowance........................... (282.5) (279.5)
-------- --------
$250.7 $236.5
-------- --------
Deferred tax liabilities:
Temporary differences, principally book and
tax basis of property and equipment and
deferred charges.................................... 1,582.6 1,785.6
Differences between book and tax basis
in investments.................................... 1,201.4 207.9
-------- --------
2,784.0 1,993.5
-------- --------
Net deferred tax liability............................ $2,533.3 $1,757.0
======== ========
The Company recorded approximately $489.4 million of deferred income taxes
in 1998 in connection with unrealized gains on marketable securities which
are included in other comprehensive income.
The deferred tax liability is net of deferred tax assets of $106.9 million
and $92.5 million as of December 31, 1998 and 1997, respectively, which are
included in other current assets in the Company's consolidated balance
sheet. Further, the Company has recorded deferred tax liabilities of $1.140
billion related to current investments which have been included in current
liabilities. 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 Consolidated
Group and Comcast Communications Properties, Inc. have net operating loss
carryforwards for which deferred tax assets have been recorded of
approximately $150.0 million and $45.0 million, respectively, which expire
primarily in periods through 2018.
During the year ended December 31, 1998, the Company settled all issues
primarily related to the deductibility of amortization of cable television
distribution rights raised by the Internal Revenue Service in its
examination of QVC, through fiscal tax year 1993. Such settlement resulted
in a reversal of previously recorded deferred tax liabilities of $135.5
million. As a result of the settlement, the Company recorded an adjustment
to reduce goodwill by $119.7 million during 1998. Such adjustment has been
excluded from the Company's consolidated statement of cash flows due to its
noncash nature.
8. STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
The Company made cash payments for interest of $418.9 million, $467.2
million and $408.1 million during the years ended December 31, 1998, 1997
and 1996, respectively.
- 56 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
The Company made cash payments for income taxes of $129.2 million, $113.7
million and $101.3 million during the years ended December 31, 1998, 1997
and 1996, respectively.
9. COMMITMENTS AND CONTINGENCIES
Commitments
The Company has the right to purchase the minority interests in
Comcast-Spectacor from the Minority Group for the Minority Group's pro rata
portion of the fair market value (on a going concern basis as determined by
an appraisal process) of Comcast-Spectacor. The Minority Group also has the
right to require the Company to purchase its interests under the same
terms. The Company may pay the Minority Group for such interests in shares
of the Company's Class A Special Common Stock, subject to certain
restrictions. If the Minority Group exercises its exit rights and the
Company elects not to purchase their interest, the Company and the Minority
Group will use their best efforts to sell Comcast-Spectacor.
Disney, in certain circumstances, is entitled to cause the LLC to purchase
Disney's entire interest in the LLC at its then fair market value (as
determined by an appraisal process). If the LLC elects not to purchase
Disney's interests, Disney has the right, at its option, to purchase either
the Company's entire interest in the LLC or all of the shares of stock of
E! Entertainment held by the LLC, in each case at fair market value. In the
event that Disney exercises its rights, as described above, a portion or
all of the Disney Notes (see Notes 3 and 5) may be replaced with a three
year note due to Disney.
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.
At any time after December 18, 2001, the California Public Employees
Retirement System ("CalPERS") may elect to liquidate its interest in MHCP
Holdings, L.L.C. ("MHCP Holdings"), a 55% owned indirect subsidiary of the
Company (which holds cable communications systems serving approximately
644,000 subscribers as of December 31, 1998) in which CalPERS owns the
remaining 45% interest, at a price based upon the fair value of CalPERS'
interest in MHCP Holdings, adjusted, under certain circumstances, for
certain performance criteria relating to the fair value of MHCP Holdings 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 MHCP
Holdings.
- 57 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
Minimum annual rental commitments for office space, equipment and
transponder service agreements under noncancellable operating leases as of
December 31, 1998 are as follows:
(Dollars
in millions)
1999........................................ $45.1
2000........................................ 47.6
2001........................................ 43.2
2002........................................ 40.5
2003........................................ 39.9
Thereafter.................................. 202.0
Rental expense of $64.8 million, $65.8 million and $44.2 million for 1998,
1997 and 1996, respectively, has been charged to operations.
Contingencies
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially
affect the financial position, results of operations or liquidity of the
Company.
- 58 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
10. FINANCIAL DATA BY BUSINESS SEGMENT
The following represents the Company's significant business segments,
"Cable Communications" and "Electronic Retailing." The components of net
income (loss) below operating income (loss) are not separately evaluated by
the Company's management on a segment basis (see the Company's consolidated
statement of operations) (dollars in millions).
Cable Electronic Corporate
Communications Retailing and Other(1) Total
1998
Revenues..................................................... $2,277.4 $2,402.7 $465.2 $5,145.3
Operating income (loss) before depreciation
and amortization (2)....................................... 1,096.6 434.2 (34.1) 1,496.7
Depreciation and amortization................................ 674.2 126.1 139.3 939.6
Operating income (loss)...................................... 422.4 308.1 (173.4) 557.1
Interest expense............................................. 223.6 51.1 192.0 466.7
Assets....................................................... 6,449.4 2,208.7 6,159.3 14,817.4
Long-term debt............................................... 3,462.1 626.8 1,375.3 5,464.2
Capital expenditures......................................... 711.1 67.2 120.6 898.9
1997
Revenues..................................................... $2,073.0 $2,082.5 $312.2 $4,467.7
Operating income (loss) before depreciation
and amortization (2)....................................... 987.7 337.7 (32.3) 1,293.1
Depreciation and amortization................................ 626.1 115.0 85.4 826.5
Operating income (loss)...................................... 361.6 222.7 (117.7) 466.6
Interest expense............................................. 227.9 56.3 174.7 458.9
Assets....................................................... 6,057.8 2,268.3 3,000.7 11,326.8
Long-term debt............................................... 2,554.9 768.8 2,010.4 5,334.1
Capital expenditures......................................... 497.8 97.3 200.4 795.5
1996
Revenues..................................................... $1,641.0 $1,835.8 $135.5 $3,612.3
Operating income (loss) before depreciation
and amortization (2)....................................... 803.8 300.3 (57.1) 1,047.0
Depreciation and amortization................................ 420.3 107.7 53.1 581.1
Operating income (loss)...................................... 383.5 192.6 (110.2) 465.9
Interest expense............................................. 228.3 65.2 154.9 448.4
Assets....................................................... 6,938.3 2,162.7 1,559.4 10,660.4
Long-term debt............................................... 3,078.1 842.6 2,077.6 5,998.3
Capital expenditures......................................... 290.9 63.6 199.9 554.4
- --------------
(1) Other includes segments not meeting certain quantitative guidelines for
reporting. Other includes certain operating businesses, including
Comcast-Spectacor (effective January 1, 1998), E! Entertainment (effective
March 31, 1997), the Company's consolidated UK cable and telecommunications
operations (prior to October 29, 1998), the Company's DBS operations (prior
to April 1, 1998) and elimination entries related to the segments
presented. Corporate and other assets consist primarily of the Company's
investments (see Note 4).
(2) 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 businesses in the Company's
industries, although the Company's measure of operating cash flow may not
be comparable to similarly titled measures of other companies. 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.
- 59 -
COMCAST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 and 1996 (Concluded)
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter (5) Year
(Dollars in millions, except per share data)
1998 (2)
Revenues...................................... $1,254.5 $1,205.9 $1,238.0 $1,446.9 $5,145.3
Operating income before depreciation
and amortization (1)........................ 348.8 353.4 373.2 421.3 1,496.7
Operating income.............................. 109.4 124.1 132.9 190.7 557.1
Income (loss) from continuing operations
before extraordinary items (3).............. (68.9) (79.9) 723.7 432.8 1,007.7
Basic earnings (loss) for common
stockholders per common share
Income (loss) from continuing operations
before extraordinary items................ (0.21) (0.24) 1.96 1.15 2.67
Net income (loss)........................... (0.24) (0.25) 1.93 1.12 2.57
Diluted earnings (loss) for common
stockholders per common share
Income (loss) from continuing operations
before extraordinary items................ (0.21) (0.24) 1.80 1.07 2.50
Net income (loss)........................... (0.24) (0.25) 1.78 1.04 2.41
Cash dividends per common share............... .0233 .0233 .0233 .0233 .0933
1997 (4)
Revenues...................................... $1,026.9 $1,068.3 $1,089.0 $1,283.5 $4,467.7
Operating income before depreciation
and amortization (1)........................ 296.0 316.6 313.6 366.9 1,293.1
Operating income.............................. 111.5 92.2 99.5 163.4 466.6
Loss from continuing operations before
extraordinary items......................... (53.1) (11.8) (49.3) (68.7) (182.9)
Basic loss for common stockholders per
common share
Loss from continuing operations
before extraordinary items................ (0.16) (0.04) (0.17) (0.21) (0.58)
Net loss.................................... (0.20) (0.12) (0.19) (0.25) (0.75)
Diluted loss for common stockholders
per common share
Loss from continuing operations before
extraordinary items....................... (0.16) (0.04) (0.17) (0.21) (0.58)
Net loss.................................... (0.20) (0.12) (0.19) (0.25) (0.75)
Cash dividends per common share............... .0233 .0233 .0233 .0233 .0933
- --------------
(1) See Note 10, note 2.
(2) Results of operations for 1998 include the results of Comcast-Spectacor
which was consolidated effective January 1, 1998 and the results of Comcast
UK Cable through October 29, 1998 (see Note 3).
(3) Results of operations were affected by the gain on the AT&T Transaction in
the third quarter of 1998 and the gains on the NTL Transaction and the
Sprint PCS restructuring in the fourth quarter of 1998 (see Note 3).
(4) Results of operations for the second quarter of 1997 include the results of
E! Entertainment, which have been consolidated effective March 31, 1997
(see Note 3).
(5) The Company's consolidated results of operations for the fourth quarter of
1998 and 1997 are also affected by the seasonality of the Company's
electronic retailing operations.
- 60 -
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 our definitive Proxy Statement for our Annual Meeting of
Shareholders presently scheduled to be held in June 1999, which shall be filed
with the Securities and Exchange Commission within 120 days of the end of our
latest fiscal year.
- 61 -
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements of ours are included in
Part II, Item 8:
Independent Auditors' Report...................................29
Consolidated Balance Sheet--December 31, 1998 and 1997.........30
Consolidated Statement of Operations--Years
Ended December 31, 1998, 1997 and 1996.......................31
Consolidated Statement of Cash Flows--Years
Ended December 31, 1998, 1997 and 1996.......................32
Consolidated Statement of Stockholders' Equity
(Deficiency)--Years Ended December 31, 1998, 1997 and 1996...33
Notes to Consolidated Financial Statements.....................34
(b)(i) The following financial statement schedules required to be
filed by Items 8 and 14(d) of Form 10-K are included in Part IV:
Schedule I - Condensed Financial Information of Registrant
Unconsolidated (Parent Only)
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable,
not required or the required information is included in the
consolidated financial statements or notes thereto.
(c) Reports on Form 8-K:
None.
(d) Exhibits required to be filed by Item 601 of Regulation S-K:
3.1(a) Amended and Restated Articles of Incorporation filed on
July 24, 1990 (incorporated by reference to Exhibit 3.1(a)
to our Annual Report on Form 10-K for the year ended
December 31, 1995).
3.1(b) Amendment to Restated Articles of Incorporation filed on
July 14, 1994 (incorporated by reference to Exhibit 3.1(b)
to our Annual Report on Form 10-K for the year ended
December 31, 1995).
3.1(c) Amendment to Restated Articles of Incorporation filed on
July 12, 1995 (incorporated by reference to Exhibit 3.1(c)
to our Annual Report on Form 10-K for the year ended
December 31, 1995).
3.1(d) Amendment to Restated Articles of Incorporation filed on
June 24, 1996 (incorporated by reference to Exhibit 4.1(d)
to our Registration Statement on Form S-3, as amended,
filed on July 16, 1996).
3.1(e) Form of Statement of Designations, Preferences and Rights
of 5% Series A Convertible Preferred Stock of the Company
(incorporated by reference to Exhibit 4.1(e) to our
Registration Statement on Form S-3 filed on July 16,
1996).
3.1(f) Form of Statement of Designations, Preferences and Rights
of Series B Convertible Preferred Stock of the Company
(incorporated by reference to Exhibit 3.1 to our Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997).
3.2 Amended and Restated By-Laws (incorporated by reference to
Exhibit 3(ii) to our 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 our Registration Statement on
Form S-7 filed 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 our Annual
Report on Form 10-K for the year ended December 31, 1986).
- 62 -
4.3 Indenture, dated as of October 17, 1991, between the
Company and Bank of Montreal/Harris Trust (successor to
Morgan Guaranty Trust Company of New York), as Trustee
(incorporated by reference to Exhibit 2 to our Current
Report on Form 8-K filed on October 31, 1991).
4.4 Form of Debenture relating to our 10-1/4% Senior
Subordinated Debentures due 2001 (incorporated by
reference to Exhibit 4(19) to our Annual Report on Form
10-K for the year ended December 31, 1991).
4.5 Form of Debenture relating to our $300,000,000 10-5/8%
Senior Subordinated Debentures due 2012 (incorporated by
reference to Exhibit 4(17) to our Annual Report on Form
10-K for the year ended December 31, 1992).
4.6 Form of Debenture relating to our $200,000,000 9-1/2%
Senior Subordinated Debentures due 2008 (incorporated by
reference to Exhibit 4(18) to our Annual Report on Form
10-K for the year ended December 31, 1992).
4.7 Indenture, dated as of February 20, 1991, between us and
Bankers Trust Company, as Trustee (incorporated by
reference to Exhibit 4.3 to our Registration Statement on
Form S-3 (File No. 33-32830), filed on January 11, 1990).
4.8 Form of Debenture relating to our $250.0 million 9-3/8%
Senior Subordinated Debentures due 2005 (incorporated by
reference to Exhibit 4.1 to our Quarterly Report on Form
10-Q for the quarter ended June 30, 1995).
4.9 Form of Debenture relating to our $250.0 million 9-1/8%
Senior Subordinated Debentures due 2006 (incorporated by
reference to Exhibit 4.13 to our Annual Report on Form
10-K for the year ended December 31, 1995).
10.1* Comcast Corporation 1986 Non-Qualified Stock Option Plan,
as amended and restated, effective December 10, 1996
(incorporated by reference to Exhibit 10.3 to our Annual
Report on Form 10-K for the year ended December 31, 1996).
10.2* Comcast Corporation 1987 Stock Option Plan, as amended and
restated, effective December 15, 1998.
10.3* Comcast Corporation 1996 Stock Option Plan, as amended and
restated, effective December 15, 1998.
10.4* Comcast Corporation 1996 Deferred Compensation Plan, as
amended and restated, effective December 15, 1998.
10.5* Comcast Corporation 1990 Restricted Stock Plan, as amended
and restated, effective December 15, 1998.
10.6* 1992 Executive Split Dollar Insurance Plan (incorporated
by reference to Exhibit 10(12) to our Annual Report on
Form 10-K for the year ended December 31, 1992).
10.7* Comcast Corporation 1996 Cash Bonus Plan, as amended and
restated, effective December 15, 1998.
10.8* Comcast Corporation 1996 Executive Cash Bonus Plan, dated
August 15, 1996 (incorporated by reference to Exhibit
10.10 to our Annual Report on Form 10-K for the year ended
December 31, 1996).
10.9* Compensation and Deferred Compensation Agreement by and
between Comcast Corporation and Ralph J. Roberts, as
amended and restated, effective August 31, 1998
(incorporated by reference to Exhibit 10.1 to our
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
10.10 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 our Registration Statement on Form S-8
filed on October 5, 1995).
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 our
Registration Statement on Form S-8 filed on October 5,
1995).
- --------
* Constitutes a management contract or compensatory plan or arrangement.
- 63 -
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 our Current Report on Form 8-K filed on
December 17, 1992, as amended by Form 8 filed January 8,
1993).
10.13* Comcast Corporation 1997 Deferred Stock Option Plan, as
amended and restated, effective December 18, 1997
(incorporated by reference to Exhibit 10.13 to our Annual
Report on Form 10-K for the year ended December 31, 1997).
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 our Current Report on Form 8-K
filed 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 our Current Report on Form 8-K
filed 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
our Current Report on Form 8-K filed 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 our Current Report on Form 8-K
filed on December 17, 1992, as amended by Form 8 filed
January 8, 1993).
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 our
Current Report on Form 8-K filed 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 our Current
Report on Form 8-K filed 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 our Current
Report on Form 8-K filed 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 our Current
Report on Form 8-K filed 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 our Current
Report on Form 8-K filed 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 our Current
Report on Form 8-K filed on December 17, 1992, as amended
by Form 8 filed January 8, 1993).
10.24 Amended and Restated Stockholders Agreement, dated as of
February 9, 1995, among the Company, 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 our Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995).
- --------
* Constitutes a management contract or compensatory plan or arrangement.
- 64 -
10.25(a) 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 on February
17, 1995 by QVC Programming Holdings, Inc., the Company
and Tele-Communications, Inc. with respect to the tender
offer for all outstanding shares of QVC, Inc.).
10.25(b)** Amendment No. 3, dated as of July 19, 1996, to the Credit
Agreement, dated as of February 15, 1995, among QVC, Inc.
and the Banks listed therein.
10.26 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, the Company (incorporated by
reference to Exhibit 10.1 to our Current Report on Form
8-K filed on January 6, 1995).
10.27 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 our Current
Report on Form 8-K filed on January 6, 1995).
10.28 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 our Current Report on Form 8-K filed on January 6,
1995).
10.29 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 our Current Report on Form
8-K filed on January 6, 1995).
10.30 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 the Company, 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 our Current Report on Form 8-K filed on January 6,
1995).
10.31 Registration Rights and Price Protection Agreement, dated
as of December 22, 1994, by and between the Company and
The California Public Employees' Retirement System
(incorporated by reference to Exhibit 10.8 to our Current
Report on Form 8-K filed on January 6, 1995).
10.32** Credit Agreement, dated as of November 15, 1996, among
Comcast SCH Holdings, Inc., the banks listed therein,
Nationsbank of Texas, N.A., as Documentation Agent, The
Chase Manhattan Bank, as Syndication Agent, The Bank of
New York, The Chase Manhattan Bank and Nationsbank of
Texas, N.A., as Managing Agents, and The Bank of New York,
as Administrative Agent.
10.33 Indenture dated as of May 1, 1997, between Comcast Cable
Communications, Inc. and Bank of Montreal Trust Company,
as Trustee, in respect of Comcast Cable Communications,
Inc.'s 8-1/8% Notes due 2004, 8-3/8% Notes due 2007,
8-7/8% Notes due 2017, 8-1/2% Notes due 2027 and 6.20%
Notes due 2008 (incorporated by reference to Exhibit
4.1(a) to the Registration Statement on Form S-4 (File No.
333-30745) of Comcast Cable
Communications, Inc.).
- ----------
* 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 -
10.34 Purchase and Sale Agreement dated as of January 19, 1999
among SBC Communications Inc., Comcast Cellular Holdings
Corporation, Comcast Financial Corporation and Comcast
Corporation.
21 List of Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of KPMG LLP.
27.1 Financial Data Schedule.
99.1 Report of Independent Public Accountants to QVC, Inc., as
of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996.
- 66 -
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 February 26, 1999.
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 Dated
/s/ Ralph J. Roberts
- -------------------------------
Ralph J. Roberts Chairman of the Board of Directors; Director February 26, 1999
/s/ Julian A. Brodsky
- ------------------------------- Vice Chairman of the Board of Directors; February 26, 1999
Julian A. Brodsky Director
/s/ Brian L. Roberts
- ------------------------------- President; Director (Principal Executive February 26, 1999
Brian L. Roberts Officer)
/s/ Lawrence S. Smith
- ------------------------------- Executive Vice President February 26, 1999
Lawrence S. Smith (Principal Accounting Officer)
/s/ John R. Alchin
- ------------------------------- Senior Vice President, Treasurer (Principal February 26, 1999
John R. Alchin Financial Officer)
/s/ Gustave G. Amsterdam
- -------------------------------
Gustave G. Amsterdam Director February 26, 1999
/s/ Sheldon M. Bonovitz
- -------------------------------
Sheldon M. Bonovitz Director February 26, 1999
/s/ Joseph L. Castle II
- -------------------------------
Joseph L. Castle II Director February 26, 1999
/s/ Bernard C. Watson
- -------------------------------
Bernard C. Watson Director February 26, 1999
/s/ Irving A. Wechsler
- -------------------------------
Irving A. Wechsler Director February 26, 1999
/s/ Anne Wexler
- -------------------------------
Anne Wexler Director February 26, 1999
- 67 -
COMCAST CORPORATION AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
REGISTRANT UNCONSOLIDATED (PARENT ONLY)
CONDENSED BALANCE SHEET
(In millions, except share data)
December 31,
ASSETS 1998 1997
Cash and cash equivalents............................................. $31.2 $12.8
Other current assets.................................................. 18.4 5.9
-------- --------
Total current assets................................................ 49.6 18.7
Investments in and amounts due from subsidiaries
eliminated upon consolidation....................................... 5,679.6 3,487.0
Property and equipment, net........................................... 14.0 38.5
Other assets, net..................................................... 23.5 45.5
-------- --------
$5,766.7 $3,589.7
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued interest...................................................... $30.5 $35.0
Other current liabilities............................................. 286.3 108.1
-------- --------
Total current liabilities........................................... 316.8 143.1
-------- --------
Long-term debt........................................................ 1,065.3 1,464.9
-------- --------
Deferred income taxes and other....................................... 458.1 303.8
-------- --------
Common equity put options............................................. 111.2 31.4
-------- --------
Stockholders' equity
Preferred stock - authorized, 20,000,000 shares;
5% series A convertible, no par value; issued,
6,370 at redemption value......................................... 31.9 31.9
5.25% series B mandatorily redeemable convertible,
$1,000 par value; issued, 540,690 and 513,211
at redemption value............................................... 540.7 513.2
Class A special common stock, $1 par value - authorized,
500,000,000 shares; issued, 328,630,366 and 317,025,969........... 328.6 317.0
Class A common stock, $1 par value - authorized,
200,000,000 shares; issued, 31,690,063 and 31,793,487............. 31.7 31.8
Class B common stock, $1 par value - authorized,
50,000,000 shares; issued, 9,444,375 and 8,786,250................ 9.4 8.8
Additional capital.................................................. 3,311.5 3,030.6
Accumulated deficit................................................. (1,488.2) (2,415.9)
Unrealized gains on marketable securities, including
securities held by subsidiaries................................... 1,049.5 140.7
Cumulative translation adjustments of subsidiaries.................. 0.2 (11.6)
-------- --------
Total stockholders' equity........................................ 3,815.3 1,646.5
-------- --------
$5,766.7 $3,589.7
======== ========
- 68 -
COMCAST CORPORATION AND SUBSIDIARIES
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF
REGISTRANT UNCONSOLIDATED (PARENT ONLY)
CONDENSED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
(In millions, except per share data)
Year Ended December 31,
1998 1997 1996
REVENUES, principally intercompany fees eliminated
upon consolidation......................................... $320.1 $286.8 $212.0
GENERAL AND ADMINISTRATIVE EXPENSES........................... 83.2 69.5 55.6
--------- --------- ---------
OPERATING INCOME.............................................. 236.9 217.3 156.4
OTHER (INCOME) EXPENSE
Interest expense, including intercompany interest, net..... 239.1 231.2 263.6
Equity in net (income) losses of affiliates and other...... (976.2) 238.6 (16.3)
--------- --------- ---------
(737.1) 469.8 247.3
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAX BENEFIT
AND EXTRAORDINARY ITEMS.................................... 974.0 (252.5) (90.9)
INCOME TAX BENEFIT............................................ (2.1) (16.6) (37.4)
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS...................... 976.1 (235.9) (53.5)
EXTRAORDINARY ITEMS........................................... (4.0) (2.8)
--------- --------- ---------
NET INCOME (LOSS)............................................. 972.1 (238.7) (53.5)
ACCUMULATED DEFICIT
Beginning of year.......................................... (2,415.9) (2,127.1) (1,914.3)
Retirement of common stock................................. (10.0) (17.7) (133.2)
Cash dividends, $.0933 per share per year.................. (34.4) (32.4) (26.1)
--------- --------- ---------
End of year................................................ ($1,488.2) ($2,415.9) ($2,127.1)
========= ========= =========
- 69 -
COMCAST CORPORATION AND SUBSIDIARIES
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF
REGISTRANT UNCONSOLIDATED (PARENT ONLY)
CONDENSED STATEMENT OF CASH FLOWS
(In millions)
Year Ended December 31,
1998 1997 1996
OPERATING ACTIVITIES
Net income (loss).......................................... $972.1 ($238.7) ($53.5)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................ 13.2 7.0 8.9
Non-cash interest expense, net........................... 3.7 106.8 136.2
Equity in net (income) losses of affiliates.............. (976.6) 275.2 (15.2)
Extraordinary items...................................... 4.0 2.8
Deferred income taxes and other.......................... 104.2 88.9 68.4
--------- -------- --------
120.6 242.0 144.8
Changes in working capital............................... 155.2 (80.1) 41.3
--------- -------- --------
Net cash provided by operating activities............ 275.8 161.9 186.1
--------- -------- --------
FINANCING ACTIVITIES
Retirement and repayment of debt .......................... (50.6) (59.5)
Issuance of preferred stock................................ 500.0
Issuances (repurchases) of common stock, net............... 28.9 470.2 (175.9)
Dividends.................................................. (36.0) (34.0) (26.8)
Other...................................................... (32.8) 12.7 43.0
--------- -------- --------
Net cash (used in) provided by financing activities.. (90.5) 889.4 (159.7)
--------- -------- --------
INVESTING ACTIVITIES
Net transactions with affiliates........................... (164.0) (1,026.4) 9.5
Capital expenditures....................................... (2.9) (18.6) (20.8)
Other...................................................... (3.2) (13.0)
--------- -------- --------
Net cash used in investing activities................ (166.9) (1,048.2) (24.3)
--------- -------- --------
INCREASE IN CASH AND CASH EQUIVALENTS......................... 18.4 3.1 2.1
CASH AND CASH EQUIVALENTS, beginning of year.................. 12.8 9.7 7.6
--------- -------- --------
CASH AND CASH EQUIVALENTS, end of year........................ $31.2 $12.8 $9.7
========= ======== ========
- 70 -
COMCAST CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In millions)
Additions
Balance at Charged to Deductions Balance
Beginning Costs and from at End
of Year Expenses Reserves(A) of Year
Allowance for Doubtful Accounts
1998..................................... $108.8 $52.2 $40.3 $120.7
1997..................................... 94.0 55.1 40.3 108.8
1996..................................... 78.0 45.2 29.2 94.0
Allowance for Obsolete
Electronic Retailing Inventories
1998..................................... $44.5 $39.0 $22.6 $60.9
1997..................................... 34.7 37.0 27.2 44.5
1996..................................... 28.5 29.7 23.5 34.7
(A) Uncollectible accounts and obsolete inventory written off.
- 71 -