UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended:
JUNE 30, 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 333-30745
COMCAST CABLE COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2175755
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1105 North Market Street, Wilmington, DE 19801
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (302) 427-8991
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days.
Yes X No ___
--------------------------
As of June 30, 1998, there were 1,000 shares of Common Stock outstanding.
The Registrant meets the conditions set forth in General Instructions H(1)(a)
and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheet
as of June 30, 1998 and December 31,
1997 (Unaudited)......................................................2
Condensed Consolidated Statement of Operations
and Accumulated Deficit for the Six and Three Months
Ended June 30, 1998 and 1997 (Unaudited)..............................3
Condensed Consolidated Statement of Cash
Flows for the Six Months Ended June 30,
1998 and 1997 (Unaudited).............................................4
Notes to Condensed Consolidated
Financial Statements (Unaudited)..................................5 - 8
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of
Operations.......................................................9 - 11
PART II OTHER INFORMATION
Item 1 Legal Proceedings....................................................12
Item 6 Exhibits and Reports on Form 8-K.....................................12
SIGNATURE..........................................................................13
-----------------------------------
This Quarterly Report on Form 10-Q contains forward looking statements made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that such forward looking statements
involve risks and uncertainties which could significantly affect expected
results in the future from those expressed in any such forward looking
statements made by, or on behalf, of the Company. Certain factors that could
cause actual results to differ materially include, without limitation, the
effects of legislative and regulatory changes; the potential for increased
competition; technological changes; the need to generate substantial growth in
the subscriber base by successfully launching, marketing and providing services
in identified markets; pricing pressures which could affect demand for the
Company's services; the Company's ability to expand its distribution; changes in
labor, programming, equipment and capital costs; the Company's continued ability
to create or acquire programming and products that customers will find
attractive; future acquisitions, strategic partnerships and divestitures;
general business and economic conditions; and other risks detailed from time to
time in the Company's periodic reports filed with the Securities and Exchange
Commission.
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in millions, except share data)
June 30, December 31,
1998 1997
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................................... $53.0 $40.7
Short-term investments....................................................... 0.3 0.4
Cash held by an affiliate.................................................... 32.2 56.6
Accounts receivable, less allowance for doubtful
accounts of $16.9 and $16.7................................................ 71.1 72.8
Inventories.................................................................. 34.1 31.3
Other current assets......................................................... 14.9 18.0
-------- --------
Total current assets..................................................... 205.6 219.8
-------- --------
PROPERTY AND EQUIPMENT.......................................................... 2,978.3 2,667.3
Accumulated depreciation..................................................... (1,124.6) (1,021.2)
-------- --------
Property and equipment, net.................................................. 1,853.7 1,646.1
-------- --------
DEFERRED CHARGES................................................................ 5,818.5 5,655.7
Accumulated amortization..................................................... (1,623.1) (1,463.8)
-------- --------
Deferred charges, net........................................................ 4,195.4 4,191.9
-------- --------
$6,254.7 $6,057.8
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses........................................ $239.8 $239.9
Accrued interest............................................................. 29.9 26.6
Current portion of long-term debt............................................ 3.1 52.8
Due to affiliates............................................................ 122.5 125.6
-------- --------
Total current liabilities................................................ 395.3 444.9
-------- --------
LONG-TERM DEBT, less current portion............................................ 2,709.1 2,554.9
-------- --------
MINORITY INTEREST AND OTHER..................................................... 195.5 208.5
-------- --------
NOTES PAYABLE TO AFFILIATES..................................................... 814.8 695.2
-------- --------
DUE TO AFFILIATE................................................................ 462.6 398.8
-------- --------
DEFERRED INCOME TAXES, due to affiliate......................................... 1,464.5 1,488.4
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock, $1 par value - authorized and issued, 1,000 shares.............
Additional capital........................................................... 3,066.2 3,066.2
Accumulated deficit.......................................................... (2,853.3) (2,799.1)
-------- --------
Total stockholder's equity............................................... 212.9 267.1
-------- --------
$6,254.7 $6,057.8
======== ========
See notes to condensed consolidated financial statements.
2
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
(Amounts in millions)
Six Months Ended Three Months Ended
June 30, June 30,
1998 1997 1998 1997
SERVICE INCOME................................................ $1,109.5 $1,021.9 $568.3 $520.8
--------- --------- --------- ---------
COSTS AND EXPENSES
Operating.................................................. 486.5 450.7 243.7 225.4
Selling, general and administrative........................ 252.5 233.6 126.6 118.9
Depreciation and amortization.............................. 323.6 306.8 161.7 168.0
--------- --------- --------- ---------
1,062.6 991.1 532.0 512.3
--------- --------- --------- ---------
OPERATING INCOME.............................................. 46.9 30.8 36.3 8.5
OTHER (INCOME) EXPENSE
Interest expense........................................... 107.9 119.9 54.4 63.2
Interest expense on notes payable to affiliates............ 27.3 12.4 14.4 3.3
Investment income and other, net........................... (3.9) (2.0) (1.6) (2.0)
--------- --------- --------- ---------
131.3 130.3 67.2 64.5
--------- --------- --------- ---------
LOSS BEFORE INCOME TAX BENEFIT, MINORITY INTEREST AND
EXTRAORDINARY ITEMS........................................ (84.4) (99.5) (30.9) (56.0)
INCOME TAX BENEFIT............................................ (20.7) (23.5) (6.3) (14.2)
--------- --------- --------- ---------
LOSS BEFORE MINORITY INTEREST AND EXTRAORDINARY
ITEMS...................................................... (63.7) (76.0) (24.6) (41.8)
MINORITY INTEREST............................................. (9.5) (10.2) (4.3) (5.2)
--------- --------- --------- ---------
LOSS BEFORE EXTRAORDINARY ITEMS............................... (54.2) (65.8) (20.3) (36.6)
EXTRAORDINARY ITEMS........................................... (15.5) (15.5)
--------- --------- --------- ---------
NET LOSS...................................................... (54.2) (81.3) (20.3) (52.1)
ACCUMULATED DEFICIT
Beginning of period........................................ (2,799.1) (2,124.0) (2,833.0) (2,153.2)
Elimination of outstanding notes receivable from affiliate
through a non-cash dividend to parent................... (546.3) (546.3)
--------- --------- --------- ---------
End of period.............................................. ($2,853.3) ($2,751.6) ($2,853.3) ($2,751.6)
========= ========= ========= =========
See notes to condensed consolidated financial statements.
3
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in millions)
Six Months Ended June 30,
1998 1997
---- ----
OPERATING ACTIVITIES
Net loss..................................................................... ($54.2) ($81.3)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization.............................................. 323.6 306.8
Non-cash interest expense.................................................. 0.2 1.1
Non-cash interest expense on notes payable to affiliates................... 27.3 1.2
Deferred expenses charged by an affiliate.................................. 63.8 54.6
Loss on sale of investment................................................. 1.6
Extraordinary items........................................................ 15.5
Minority interest.......................................................... (9.5) (10.2)
Deferred income tax benefit, due to affiliate.............................. (23.7) (44.2)
Other...................................................................... (0.1)
-------- --------
327.4 245.1
Changes in working capital accounts........................................ 1.6 11.9
-------- --------
Net cash provided by operating activities............................ 329.0 257.0
-------- --------
FINANCING ACTIVITIES
Proceeds from borrowings..................................................... 817.0 1,805.8
Repayments of long-term debt................................................. (712.7) (1,937.7)
Proceeds from notes payable to affiliates.................................... 92.3 141.0
Repayment of notes payable to affiliates..................................... (100.8)
Net transactions with affiliates............................................. (3.1) 56.2
Deferred financing costs..................................................... (0.7) (15.2)
-------- --------
Net cash provided by (used in) financing activities.................. 192.8 (50.7)
-------- --------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired........................................... (219.4) (7.1)
Capital expenditures......................................................... (293.7) (251.5)
Sale of short-term investments............................................... 0.1 21.2
Decrease in cash held by an affiliate........................................ 24.4 43.7
Additions to deferred charges and other...................................... (20.9) (6.8)
-------- --------
Net cash used in investing activities................................ (509.5) (200.5)
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS........................................... 12.3 5.8
CASH AND CASH EQUIVALENTS, beginning of period.................................. 40.7 38.4
-------- --------
CASH AND CASH EQUIVALENTS, end of period........................................ $53.0 $44.2
======== ========
See notes to condensed consolidated financial statements.
4
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The condensed consolidated balance sheet as of December 31, 1997 has been
condensed from the audited consolidated balance sheet as of that date. The
condensed consolidated balance sheet as of June 30, 1998, the condensed
consolidated statement of operations and accumulated deficit for the six
and three months ended June 30, 1998 and 1997 and the condensed
consolidated statement of cash flows for the six months ended June 30, 1998
and 1997 have been prepared by Comcast Cable Communications, Inc. (the
"Company") and have not been audited by the Company's independent auditors.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows as of June 30, 1998 and for all
periods presented have been made.
Certain information and note disclosures normally included in the Company's
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's December
31, 1997 Annual Report on Form 10-K filed with the Securities and Exchange
Commission. The results of operations for the periods ended June 30, 1998
are not necessarily indicative of operating results for the full year.
Reorganization
On April 24, 1997, Comcast Corporation ("Comcast"), the Company's parent,
completed a restructuring of the legal organization of certain of its
subsidiaries (the "Reorganization"). The Reorganization involved Comcast's
contribution to the Company of ownership interests in certain of its
consolidated subsidiaries, all of which were under Comcast's direct or
indirect control (the "Contributed Subsidiaries"). The Reorganization has
been accounted for in a manner similar to a pooling of interests.
Accordingly, the Company's condensed consolidated financial statements for
the six and three months ended June 30, 1997 include the accounts of the
Contributed Subsidiaries.
In addition, certain expenses directly related to the Company's operations
which were historically paid by Comcast on behalf of the Company have been
reflected in the Company's condensed consolidated statement of operations
and accumulated deficit for the six and three months ended June 30, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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.
Reclassifications
Certain reclassifications have been made to the prior year condensed
consolidated financial statements to conform to those classifications used
in 1998.
3. LONG-TERM DEBT
Interest Rates
As of June 30, 1998 and December 31, 1997, the Company's effective weighted
average interest rate on its long-term debt outstanding was 7.93% and
8.14%, respectively.
Lines of Credit
In March 1998, the revolving credit facility of a majority owned subsidiary
of the Company was amended to, among other things, increase borrowings
available to the subsidiary from $750.0 million to $875.0 million and to
defer
5
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
scheduled maturities of long-term debt. Available borrowings under the
subsidiary's revolving credit facility, as amended, reduce quarterly in
installments beginning in 1999 through its final maturity in 2003.
As of July 31, 1998, certain subsidiaries of the Company had unused lines
of credit of $658.0 million. The availability and use of the unused lines
of credit are restricted by the covenants of the related debt agreements
and to subsidiary general purposes and dividend declaration.
Extraordinary Items
In connection with the refinancing and redemption of certain subsidiaries'
indebtedness, the Company expensed unamortized debt acquisition costs and
incurred debt extinguishment costs of $23.9 million, resulting in
extraordinary losses, net of tax, of $15.5 million during the six and three
months ended June 30, 1997.
4. NOTES PAYABLE TO AFFILIATES
In April 1998, the Company issued a $20.0 million principal amount note,
payable to a subsidiary of Comcast which bears interest at a rate of 8.5%
and is due in 2007. In May 1998, the Company issued an additional $72.3
million principal amount note, payable to a subsidiary of Comcast which
bears interest at a rate of 8.5% and is due in 2007. Borrowings under these
notes were used by the Company for debt service requirements and general
purposes.
As of June 30, 1998 and December 31, 1997, Notes Payable include $762.9
million and $670.6 million principal amount of Notes Payable to Comcast and
certain of its wholly owned subsidiaries. Notes payable to affiliates bear
interest at rates ranging from 7.25% to 9.25% as of June 30, 1998 (weighted
average interest rate of 7.80% and 7.71% as of June 30, 1998 and December
31, 1997) with maturities from 2002 to 2007. The notes are payable to
Comcast and certain of its wholly owned subsidiaries. The Company incurred
$27.3 million, $12.4 million, $14.4 million and $3.3 million of interest
expense on the notes during the six and three months ended June 30, 1998
and 1997, respectively. Accrued interest relating to such notes of $51.9
million and $24.6 million is included in notes payable to affiliates as of
June 30, 1998 and December 31, 1997, respectively.
5. RELATED PARTY TRANSACTIONS
Comcast, on behalf of the Company, has an affiliation agreement with QVC,
Inc. ("QVC"), an electronic retailer and a majority-owned and controlled
subsidiary of Comcast, to carry its programming. In return for carrying QVC
programming, the Company receives incentive payments based on the number of
subscribers receiving the QVC channel. In addition, the Company receives an
allocated portion, based upon market share, of a percentage of net sales of
merchandise sold to QVC customers located in the Company's service area.
For the six and three months ended June 30, 1998 and 1997, the Company's
service income includes $4.5 million, $4.0 million, $2.0 million and $2.1
million, respectively, relating to QVC.
Comcast, through management agreements, manages the operations of the
Company's subsidiaries, including rebuilds and upgrades. The management
agreements generally provide that Comcast will supervise the management and
operations of the cable systems and arrange for and supervise (but not
necessarily perform itself) certain administrative functions. As
compensation for such services, the agreements provide for Comcast to
charge management fees of up to 6% of gross revenues. Comcast charged the
Company's subsidiaries management fees of $63.9 million, $58.8 million,
$32.7 million and $29.8 million during the six and three months ended June
30, 1998 and 1997, respectively. These management fees are included in
selling, general and administrative expenses in the Company's condensed
consolidated statement of operations and accumulated deficit. Comcast has
agreed to permit certain subsidiaries of the Company to defer payment of a
portion of these expenses with the deferred portion being treated as a
subordinated long-term liability due to affiliate which will not be paid
until the subsidiaries' existing long-term debt is retired. In addition,
payment of certain of these expenses has been deferred until the California
Public Employees' Retirement System ("CalPERS") no longer has an interest
in Comcast MHCP Holdings, LLC (the "LLC"), a majority owned subsidiary of
the Company. Management fees deferred during the six months ended June 30,
1998 and 1997 were $2.7 million and $2.4 million, respectively. Deferred
management fees were $139.6 million and $136.9 million as of June 30, 1998
and December 31, 1997, respectively.
6
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED
(Unaudited)
On behalf of the Company, Comcast seeks and secures long-term programming
contracts that generally provide for payment based on either a monthly fee
per subscriber per channel or a percentage of certain subscriber revenues.
Comcast charges each of the Company's subsidiaries for programming on a
basis which generally approximates the amount each such subsidiary would be
charged if it purchased such programming directly from the supplier,
subject to limitations imposed by debt facilities for certain subsidiaries,
and did not benefit from the purchasing power of Comcast's consolidated
operations. Amounts charged to the Company by Comcast for programming (the
"Programming Charges") are included in operating expenses in the Company's
condensed consolidated statement of operations and accumulated deficit. The
Company purchases certain other services, including insurance and employee
benefits, from Comcast under cost-sharing arrangements on terms that
reflect Comcast's actual cost. The Company reimburses Comcast for certain
other costs (primarily salaries) under cost-reimbursement arrangements.
Under all of these arrangements, the Company incurred total expenses of
$380.4 million, $343.3 million, $189.9 million and $171.9 million,
including $320.8 million, $286.4 million, $159.9 million and $143.7 million
of Programming Charges, during the six and three months ended June 30, 1998
and 1997, respectively. The Programming Charges include $24.5 million,
$19.7 million, $12.8 million and $10.5 million during the six and three
months ended June 30, 1998 and 1997, respectively, relating to programming
purchased by the Company, through Comcast, from suppliers in which Comcast
holds an equity interest.
Comcast has agreed to permit certain of the Company's subsidiaries to defer
payment of a portion of the Programming Charges with the deferred portion
being treated as a subordinated long-term liability due to affiliate which
will not be payable until the subsidiaries' existing long-term debt is
retired. In addition, payment of certain of the Programming Charges has
been deferred until CalPERS no longer has an interest in the LLC.
Programming Charges deferred during the six months ended June 30, 1998 and
1997 were $61.1 million and $52.2 million, respectively. Deferred
Programming Charges were $323.0 million and $261.9 million as of June 30,
1998 and December 31, 1997, respectively.
Current due to affiliates in the Company's condensed consolidated balance
sheet primarily consists of amounts due to Comcast and its affiliates under
the cost-sharing arrangements described above and amounts payable to
Comcast and its affiliates as reimbursement for payments made, in the
ordinary course of business, by such affiliates on behalf of the Company.
The Company has entered into a custodial account arrangement with Comcast
Financial Agency Corporation ("CFAC"), a wholly owned subsidiary of
Comcast, under which CFAC provides cash management services to the Company.
Under this arrangement, the Company's cash receipts are deposited with and
held by CFAC, as custodian and agent, which invests and disburses such
funds at the direction of the Company. As of June 30, 1998 and December 31,
1997, $32.2 million and $56.6 million, respectively, of the Company's cash
was held by CFAC. These amounts have been classified as cash held by an
affiliate in the Company's condensed consolidated balance sheet. During the
six and three months ended June 30, 1998 and 1997, the Company recognized
investment income of $2.2 million, $1.9 million, $0.7 million and $0.8
million, respectively, on cash held by CFAC.
6. STATEMENT OF CASH FLOWS-SUPPLEMENTAL INFORMATION
The Company made cash payments for interest on its long-term debt of $104.4
million, $112.7 million, $95.3 million and $58.0 million during the six and
three months ended June 30, 1998 and 1997, respectively. The Company made
cash payments for interest on the notes payable to affiliates of $11.2
million and $3.8 million during the six and three months June 30, 1997.
The Company made cash payments for state income taxes of $4.1 million, $4.4
million, $3.6 million and $3.6 million during the six and three months
ended June 30, 1998 and 1997, respectively.
7. 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.
7
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED
(Unaudited)
The Federal Communications Commission and the Company entered into a
"social contract" in which the Company has committed to complete certain
system upgrades and improvements by March 1999 in return for which it was
able, after December 31, 1997, to move a limited number of previously
regulated programming services in certain cable franchises to an
unregulated new product tier.
In June 1998, the Department of Public Utility Control of the State of
Connecticut issued an Amended Decision resolving a dispute pending since
1994 involving basic service rates and equipment and installation charges
for certain of the Company's cable systems in the State. The Amended
Decision provides for refunds of approximately $1.8 million over a one-year
period to subscribers and establishes maximum permitted basic service rates
and equipment and installation charges through March 1999.
8
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information for this item is omitted pursuant to Securities and Exchange
Commission General Instruction H to Form 10- Q, except as noted below.
Results of Operations
Summarized consolidated financial information for Comcast Cable Communications,
Inc. (the "Company") for the six and three months ended June 30, 1998 and 1997
is as follows (dollars in millions, "NM" denotes percentage is not meaningful):
Six Months Ended
June 30, Increase / (Decrease)
1998 1997 $ %
Service income............................................ $1,109.5 $1,021.9 $87.6 8.6%
Operating, selling, general and administrative expenses... 739.0 684.3 54.7 8.0
-------- -------- -----
Operating income before depreciation and
amortization (1)....................................... 370.5 337.6 32.9 9.7
Depreciation and amortization............................. 323.6 306.8 16.8 5.5
-------- -------- -----
Operating income.......................................... 46.9 30.8 16.1 52.3
-------- -------- -----
Interest expense.......................................... 107.9 119.9 (12.0) (10.0)
Interest expense on notes payable to affiliates........... 27.3 12.4 14.9 NM
Investment income and other, net.......................... (3.9) (2.0) 1.9 95.0
Income tax benefit........................................ (20.7) (23.5) (2.8) (11.9)
Minority interest......................................... (9.5) (10.2) (0.7) (6.9)
Extraordinary items....................................... (15.5) (15.5) NM
-------- -------- -----
Net loss.................................................. ($54.2) ($81.3) ($27.1) 33.3%
======== ======== =====
Three Months Ended
June 30, Increase / (Decrease)
1998 1997 $ %
Service income............................................ $568.3 $520.8 $47.5 9.1%
Operating, selling, general and administrative expenses... 370.3 344.3 26.0 7.6
-------- -------- -----
Operating income before depreciation and
amortization (1)....................................... 198.0 176.5 21.5 12.2
Depreciation and amortization............................. 161.7 168.0 (6.3) (3.8)
-------- -------- -----
Operating income.......................................... 36.3 8.5 27.8 NM
-------- -------- -----
Interest expense.......................................... 54.4 63.2 (8.8) (13.9)
Interest expense on notes payable to affiliates........... 14.4 3.3 11.1 NM
Investment income and other, net.......................... (1.6) (2.0) (0.4) (20.0)
Income tax benefit........................................ (6.3) (14.2) (7.9) (55.6)
Minority interest......................................... (4.3) (5.2) (0.9) (17.3)
Extraordinary items....................................... (15.5) (15.5) NM
-------- -------- -----
Net loss.................................................. ($20.3) ($52.1) ($31.8) 61.0%
======== ======== =====
- ------------
(1) Operating income before depreciation and amortization is commonly referred
to in the cable communications business 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
cable communications business 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 cable
communications industry, although the Company's measure of operating cash
flow may not
9
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
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.
Of the respective $87.6 million and $47.5 million increases in service income
for the six and three month periods from 1997 to 1998, $9.9 million is
attributable to the effects of the acquisitions of cable communications systems,
$17.1 million and $8.6 million are attributable to subscriber growth, $50.2
million and $25.9 million relate to changes in rates, $9.3 million and $5.4
million are attributable to growth in cable advertising sales and the remaining
changes relate to other product offerings.
Of the respective $54.7 million and $26.0 million increases in operating,
selling, general and administrative expenses for the six and three month periods
from 1997 to 1998, $6.6 million is attributable to the effects of the
acquisitions of cable communication systems, $31.0 million and $13.2 million are
attributable to increases in the costs of cable programming as a result of
changes in rates, subscriber growth and additional channel offerings, $3.6
million and $1.6 million are attributable to growth in advertising sales and
$13.5 million and $4.6 million result from increases in the cost of labor, other
volume related expenses and costs associated with new product offerings. It is
anticipated that the Company's cost of cable programming will increase in the
future as cable programming rates increase and additional sources of cable
programming become available.
Comcast Corporation ("Comcast"), the Company's parent, on behalf of the Company,
has an affiliation agreement with QVC, Inc. ("QVC"), an electronic retailer and
a majority-owned and controlled subsidiary of Comcast, to carry its programming.
In return for carrying QVC programming, the Company receives incentive payments
based on the number of subscribers receiving the QVC channel. In addition, the
Company receives an allocated portion, based upon market share, of a percentage
of net sales of merchandise sold to QVC customers located in the Company's
service area. For the six and three months ended June 30, 1998 and 1997, the
Company's service income includes $4.5 million, $4.0 million, $2.0 million and
$2.1 million, respectively, relating to QVC.
Comcast, through management agreements, manages the operations of the Company's
subsidiaries, including rebuilds and upgrades. The management agreements
generally provide that Comcast will supervise the management and operations of
the cable systems and arrange for and supervise (but not necessarily perform
itself) certain administrative functions. As compensation for such services, the
agreements provide for Comcast to charge management fees of up to 6% of gross
revenues. Comcast charged the Company's subsidiaries management fees of $63.9
million, $58.8 million, $32.7 million and $29.8 million during the six and three
months ended June 30, 1998 and 1997, respectively. These management fees are
included in selling, general and administrative expenses in the Company's
condensed consolidated statement of operations and accumulated deficit.
On behalf of the Company, Comcast seeks and secures long-term programming
contracts that generally provide for payment based on either a monthly fee per
subscriber per channel or a percentage of certain subscriber revenues. Comcast
charges each of the Company's subsidiaries for programming on a basis which
generally approximates the amount each such subsidiary would be charged if it
purchased such programming directly from the supplier, subject to limitations
imposed by debt facilities for certain subsidiaries, and did not benefit from
the purchasing power of Comcast's consolidated operations. Amounts charged to
the Company by Comcast for programming (the "Programming Charges") are included
in operating expenses in the Company's condensed consolidated statement of
operations and accumulated deficit. The Company purchases certain other
services, including insurance and employee benefits, from Comcast under
cost-sharing arrangements on terms that reflect Comcast's actual cost. The
Company reimburses Comcast for certain other costs (primarily salaries) under
cost-reimbursement arrangements. Under all of these arrangements, the Company
incurred total expenses of $380.4 million, $343.3 million, $189.9 million and
$171.9 million, including $320.8 million, $286.4 million, $159.9 million and
$143.7 million of Programming Charges, during the six and three months ended
June 30, 1998 and 1997, respectively. The Programming Charges include $24.5
million, $19.7 million, $12.8 million and $10.5 million during the six and three
months ended June 30, 1998 and 1997, respectively, relating to programming
purchased by the Company, through Comcast, from suppliers in which Comcast holds
an equity interest.
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COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
The $16.8 million increase in depreciation and amortization expense for the six
month period from 1997 to 1998 is primarily attributable to the effects of
capital expenditures and increased losses on asset disposals in connection with
the Company's cable system rebuild activities.
The $6.3 million decrease in depreciation and amortization expense for the three
month period from 1997 to 1998 is primarily attributable to the effects of the
final purchase price allocation during the three months ended June 30, 1997
relating to the November 1996 acquisition of the cable television operations of
The E.W. Scripps Company.
The respective $12.0 million and $8.8 million decreases in interest expense for
the six and three month periods from 1997 to 1998 are primarily attributable to
reduced levels of debt outstanding offset, in part, by an increase in the
Company's weighted average interest rate. The Company anticipates that, for the
foreseeable future, interest expense will be a significant cost to the Company
and will have a significant adverse effect on the Company's ability to realize
net earnings. The Company believes it will continue to be able to meet its
obligations through its ability both to generate operating income before
depreciation and amortization and to obtain external financing.
The respective $14.9 million and $11.1 million increases in interest expense on
notes payable to affiliates for the six and three month periods from 1997 to
1998 are primarily attributable to increases in the balance of notes
outstanding.
As a result of the signficant levels of depreciation and amortization expense
and interest expense, it is expected that the Company will continue to recognize
significant losses for the foreseeable future.
The respective $2.8 million and $7.9 million decreases in income tax benefit for
the six and three month periods from 1997 to 1998 are primarily attributable to
decreases in the Company's loss before income tax benefit, minority interest and
extraordinary items.
In connection with the refinancing and redemption of certain subsidiaries'
indebtedness, the Company expensed unamortized debt acquisition costs and
incurred debt extinguishment costs of $23.9 million, resulting in extraordinary
losses, net of tax, of $15.5 million during the six and three months ended June
30, 1997.
For the six and three months ended June 30, 1998 and 1997, the Company's
earnings before extraordinary items, income tax benefit and fixed charges
(interest expense and interest expense on notes payable to affiliates) were
$60.3 million, $43.0 million, $42.2 million and $15.7 million, respectively.
Such earnings were not adequate to cover the Company's fixed charges of $135.2
million, $132.3 million, $68.8 million and $66.5 million for the six and three
months ended June 30, 1998 and 1997, respectively. The Company's fixed charges
include non-cash interest expense of $27.5 million, $2.3 million, $14.5 million
and $0.1 million for the six and three months ended June 30, 1998 and 1997,
respectively. The inadequacy of these earnings to cover fixed charges is
primarily due to the substantial non-cash charges for depreciation and
amortization expense.
The Company believes that its losses and inadequacy of earnings to cover fixed
charges will not significantly affect the performance of its normal business
activities because of its existing cash, cash equivalents, short-term
investments and cash held by an affiliate, its ability to generate operating
income before depreciation and amortization and its ability to obtain external
financing.
The Company believes that its operations are not materially affected by
inflation.
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COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
27.1 Financial Data Schedule.
(b) Reports on Form 8-K - none.
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COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
COMCAST CABLE COMMUNICATIONS, INC.
/S/ LAWRENCE S. SMITH
Lawrence S. Smith
Executive Vice President
(Principal Accounting Officer)
Date: August 14, 1998
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