UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended:
SEPTEMBER 30, 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 September 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 SEPTEMBER 30, 1998
TABLE OF CONTENTS
Page
Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheet
as of September 30, 1998 and December 31,
1997 (Unaudited)........................................2
Condensed Consolidated Statement of Operations
and Accumulated Deficit for the Nine and Three Months
Ended September 30, 1998 and 1997 (Unaudited)...........3
Condensed Consolidated Statement of Cash
Flows for the Nine Months Ended September 30,
1998 and 1997 (Unaudited)...............................4
Notes to Condensed Consolidated
Financial Statements (Unaudited)....................5 - 9
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................................10 - 14
PART II OTHER INFORMATION
Item 1 Legal Proceedings......................................15
Item 6 Exhibits and Reports on Form 8-K.......................15
SIGNATURE........................................................16
-----------------------------------
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 SEPTEMBER 30, 1998
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in millions, except share data)
September 30, December 31,
1998 1997
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................................... $53.2 $40.7
Short-term investments....................................................... 0.3 0.4
Investments, available for sale.............................................. 10.3
Cash held by an affiliate.................................................... 28.8 56.6
Accounts receivable, less allowance for doubtful
accounts of $20.2 and $16.7................................................ 73.1 72.8
Inventories.................................................................. 32.6 31.3
Other current assets......................................................... 17.7 18.0
-------- --------
Total current assets..................................................... 216.0 219.8
-------- --------
PROPERTY AND EQUIPMENT.......................................................... 3,131.3 2,667.3
Accumulated depreciation..................................................... (1,173.5) (1,021.2)
-------- --------
Property and equipment, net.................................................. 1,957.8 1,646.1
-------- --------
DEFERRED CHARGES................................................................ 5,833.6 5,655.7
Accumulated amortization..................................................... (1,705.2) (1,463.8)
-------- --------
Deferred charges, net........................................................ 4,128.4 4,191.9
-------- --------
$6,302.2 $6,057.8
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses........................................ $261.9 $239.9
Accrued interest............................................................. 70.0 26.6
Current portion of long-term debt............................................ 0.1 52.8
Due to affiliates............................................................ 129.6 125.6
-------- --------
Total current liabilities................................................ 461.6 444.9
-------- --------
LONG-TERM DEBT, less current portion............................................ 2,699.1 2,554.9
-------- --------
MINORITY INTEREST AND OTHER..................................................... 190.3 208.5
-------- --------
NOTES PAYABLE TO AFFILIATES..................................................... 809.6 695.2
-------- --------
DUE TO AFFILIATE................................................................ 493.8 398.8
-------- --------
DEFERRED INCOME TAXES, due to affiliate......................................... 1,456.2 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.......................................................... (2,874.9) (2,799.1)
Unrealized gains on marketable securities.................................... 0.3
-------- --------
Total stockholder's equity............................................... 191.6 267.1
-------- --------
$6,302.2 $6,057.8
======== ========
See notes to condensed consolidated financial statements.
2
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
(Dollars in millions)
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
SERVICE INCOME................................................ $1,681.2 $1,537.0 $571.7 $515.1
--------- --------- --------- ---------
COSTS AND EXPENSES
Operating.................................................. 728.9 668.6 242.4 217.9
Selling, general and administrative........................ 381.7 350.7 129.2 117.1
Depreciation and amortization.............................. 495.1 462.7 171.5 155.9
--------- --------- --------- ---------
1,605.7 1,482.0 543.1 490.9
--------- --------- --------- ---------
OPERATING INCOME.............................................. 75.5 55.0 28.6 24.2
OTHER (INCOME) EXPENSE
Interest expense........................................... 163.0 174.2 55.1 54.3
Interest expense on notes payable to affiliates............ 42.0 24.8 14.7 12.4
Investment income, net..................................... (12.6) (3.6) (8.8) (1.6)
Other...................................................... (0.7) (0.1) (0.6) (0.1)
--------- --------- --------- ---------
191.7 195.3 60.4 65.0
--------- --------- --------- ---------
LOSS BEFORE INCOME TAX BENEFIT, MINORITY
INTEREST AND EXTRAORDINARY ITEMS........................... (116.2) (140.3) (31.8) (40.8)
INCOME TAX BENEFIT............................................ (27.6) (26.6) (6.9) (3.1)
--------- --------- --------- ---------
LOSS BEFORE MINORITY INTEREST AND
EXTRAORDINARY ITEMS........................................ (88.6) (113.7) (24.9) (37.7)
MINORITY INTEREST............................................. (12.9) (15.8) (3.4) (5.6)
--------- --------- --------- ---------
LOSS BEFORE EXTRAORDINARY ITEMS............................... (75.7) (97.9) (21.5) (32.1)
EXTRAORDINARY ITEMS........................................... (0.1) (17.6) (0.1) (2.1)
--------- --------- --------- ---------
NET LOSS...................................................... (75.8) (115.5) (21.6) (34.2)
ACCUMULATED DEFICIT
Beginning of period........................................ (2,799.1) (2,124.0) (2,853.3) (2,751.6)
Elimination of outstanding notes receivable from
affiliate through a non-cash dividend to parent.......... (546.3)
--------- --------- --------- ---------
End of Period.............................................. ($2,874.9) ($2,785.8) ($2,874.9) ($2,785.8)
========= ========= ========= =========
See notes to condensed consolidated financial statements.
3
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in millions)
Nine Months Ended September 30,
1998 1997
---- ----
OPERATING ACTIVITIES
Net loss..................................................................... ($75.8) ($115.5)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization.............................................. 495.1 462.7
Non-cash interest expense.................................................. 0.3 1.3
Non-cash interest expense on notes payable to affiliates................... 42.0 1.2
Deferred expenses charged by an affiliate.................................. 95.0 81.0
(Gain) loss on sales of investments........................................ (7.9) 1.6
Extraordinary items........................................................ 0.1 17.6
Minority interest.......................................................... (12.9) (15.8)
Deferred income tax benefit, due to affiliate.............................. (32.1) (57.8)
Other...................................................................... (0.8)
-------- --------
503.0 376.3
Change in working capital accounts......................................... 58.7 41.4
-------- --------
Net cash provided by operating activities............................ 561.7 417.7
-------- --------
FINANCING ACTIVITIES
Proceeds from borrowings..................................................... 827.0 1,805.8
Repayments of long-term debt................................................. (735.9) (2,392.8)
Proceeds from notes payable to affiliates.................................... 92.4 638.3
Repayment of notes payable to affiliates..................................... (20.0) (140.8)
Net transactions with affiliates............................................. 4.0 29.7
Deferred financing costs and other........................................... (0.7) (15.6)
-------- --------
Net cash provided by (used in) financing activities.................. 166.8 (75.4)
-------- --------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired........................................... (219.4) (7.1)
Sales of short-term investments.............................................. 0.1 21.4
Capital expenditures......................................................... (488.2) (367.1)
Decrease in cash held by an affiliate........................................ 27.8 16.6
Additions to deferred charges and other...................................... (36.3) (10.7)
-------- --------
Net cash used in investing activities................................ (716.0) (346.9)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ 12.5 (4.6)
CASH AND CASH EQUIVALENTS, beginning of period.................................. 40.7 38.4
-------- --------
CASH AND CASH EQUIVALENTS, end of period........................................ $53.2 $33.8
======== ========
See notes to condensed consolidated financial statements.
4
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 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 September 30, 1998, the
condensed consolidated statement of operations and accumulated deficit for
the nine and three months ended September 30, 1998 and 1997 and the
condensed consolidated statement of cash flows for the nine months ended
September 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 September 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 September 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 nine months ended September 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 nine months ended September 30, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") 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.
Comprehensive Income (Loss)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This statement, which establishes standards for reporting and
disclosure of comprehensive income, is effective for interim and annual
periods beginning after December 15, 1997. The Company adopted SFAS No. 130
effective January 1, 1998. Total comprehensive loss for the nine and three
months ended September 30, 1998 and 1997 was $75.5 million, $115.5 million,
$21.3 million and $34.2 million, respectively. Total comprehensive loss
includes net loss and unrealized gains (losses) on marketable securities
for the periods presented.
Reclassifications
Certain reclassifications have been made to the prior year condensed
consolidated financial statements to conform to those classifications used
in 1998.
5
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
3. SIGNIFICANT EVENTS
AT&T Acquisition of TCGI
In January 1998, AT&T Corp. ("AT&T") entered into a definitive merger
agreement with Teleport Communications Group, Inc. ("TCGI"). Upon closing
of the merger on July 23, 1998, the Company received 173,532 shares of
unregistered AT&T common stock in exchange (the "Exchange") for the 184,022
shares of TCGI Class B Common Stock held by the Company. As a result of the
Exchange, the Company recognized a pre-tax gain of $7.9 million during the
nine and three months ended September 30, 1998, representing the difference
between the fair value of the AT&T stock received and the Company's basis
in TCGI. Such gain is included in investment income in the Company's
condensed consolidated statement of operations and accumulated deficit. 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 September 30, 1998, the Company has recorded its investment in AT&T,
classified as available for sale, at its estimated fair value. The
unrealized pre-tax gain of $0.5 million has been reported in the Company's
condensed consolidated balance sheet as a component of stockholder's
equity, net of related deferred income tax expense of $0.2 million.
Acquisition of Jones Intercable
In September 1998, Comcast determined that it would contribute, via a
capital contribution to the Company, all of the shares in Jones Intercable,
Inc. ("Jones Intercable") to be acquired by Comcast from BCI Telecom
Holding and affiliates of Glenn R. Jones (the "Jones Acquisition") in
transactions previously announced by Comcast. The shares to be acquired
consist of an aggregate of approximately 12.8 million shares of Jones
Intercable Class A Common Stock and approximately 2.9 million shares of
Jones Intercable Common Stock (the "Common Stock"), representing
approximately 37% of the economic and 47% of the voting interest in Jones
Intercable. In addition, the 2.9 million shares of Common Stock will
represent approximately 57% of the outstanding Common Stock which class of
stock elects 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, a public company, owns or manages cable operations serving
approximately 1.0 million customers.
The contribution, which is subject to the receipt of required regulatory
and other approvals, will be effective immediately following closing of the
Jones Acquisition, which is expected to occur in the first quarter of 1999.
As a result, Jones Intercable will become a consolidated public-company
subsidiary of the Company.
4. LONG-TERM DEBT
Debt Offering
On November 10, 1998, the Company announced that it has sold $800.0 million
aggregate principal amount of 6.20% senior notes due 2008 in a public
offering (the "Offering"). Interest on the notes will be payable
semi-annually on May 15 and November 15 of each year, commencing May 15,
1999. The notes are redeemable only upon maturity on November 15, 2008. The
Company expects to use substantially all of the net proceeds from the
Offering to repay existing notes payable to affiliates (see Note 5) and for
general purposes. The Offering is expected to close on November 16, 1998.
Interest Rates
As of September 30, 1998 and December 31, 1997, the Company's effective
weighted average interest rate on its long-term debt outstanding was 7.88%
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 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.
6
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
As of November 2, 1998, certain subsidiaries of the Company had unused
lines of credit of $568.0 million, $68.0 million of which is 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 $27.1 million and $3.2 million,
resulting in extraordinary losses, net of tax, of $17.6 million and $2.1
million during the nine and three months ended September 30, 1997,
respectively.
5. 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 September 1998, the Company repaid the $20.0 million
principal amount note with existing cash held by an affiliate. In May 1998,
the Company issued an additional $72.4 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 September 30, 1998 and December 31, 1997, Notes Payable include
$743.0 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
September 30, 1998 (weighted average interest rate of 7.78% and 7.71% as of
September 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 $42.0 million, $24.8 million, $14.7
million and $12.4 million of interest expense on the notes during the nine
and three months ended September 30, 1998 and 1997, respectively. Accrued
interest relating to such notes of $66.6 million and $24.6 million is
included in notes payable to affiliates as of September 30, 1998 and
December 31, 1997, respectively.
6. 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 nine and three months ended September 30, 1998 and 1997, the
Company's service income includes $7.0 million, $7.2 million, $2.5 million
and $3.2 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 $96.4 million, $88.0 million,
$32.5 million and $29.0 million during the nine and three months ended
September 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 nine months
ended September 30, 1998 and 1997 were $4.1 million and $3.5 million,
respectively. Deferred
7
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
management fees were $141.0 million and $136.9 million as of September 30,
1998 and December 31, 1997, respectively.
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
$571.2 million, $506.9 million, $190.8 million and $163.6 million,
including $482.5 million, $424.0 million, $161.7 million and $137.6 million
of Programming Charges, during the nine and three months ended September
30, 1998 and 1997, respectively. The Programming Charges include $35.6
million, $33.6 million, $11.1 million and $13.8 million during the nine and
three months ended September 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 nine months ended September 30,
1998 and 1997 were $90.9 million and $77.5 million, respectively. Deferred
Programming Charges were $352.8 million and $261.9 million as of September
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 September 30, 1998 and
December 31, 1997, $28.8 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 nine and three months ended September 30, 1998 and 1997, the
Company recognized investment income of $2.7 million, $2.8 million, $0.5
million and $0.9 million, respectively, on cash held by CFAC.
7. STATEMENT OF CASH FLOWS-SUPPLEMENTAL INFORMATION
The Company made cash payments for interest on its long-term debt of $119.3
million, $130.5 million, $14.9 million and $17.8 million during the nine
and three months ended September 30, 1998 and 1997, respectively. The
Company made cash payments for interest on the notes payable to affiliates
of $23.6 million and $12.4 million during the nine and three months
September 30, 1997.
The Company made cash payments for state income taxes of $4.4 million, $6.1
million, $0.3 million and $1.7 million during the nine and three months
ended September 30, 1998 and 1997, respectively.
8
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED
(Unaudited)
8. COMMITMENTS AND 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.
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.
9
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 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 nine and three months ended September 30, 1998 and
1997 is as follows (dollars in millions, "NM" denotes percentage is not
meaningful):
Nine Months Ended
September 30, Increase / (Decrease)
1998 1997 $ %
Service income............................................ $1,681.2 $1,537.0 $144.2 9.4%
Operating, selling, general and administrative expenses... 1,110.6 1,019.3 91.3 9.0
-------- --------
Operating income before depreciation and
amortization (1)....................................... 570.6 517.7 52.9 10.2
Depreciation and amortization............................. 495.1 462.7 32.4 7.0
-------- --------
Operating income.......................................... 75.5 55.0 20.5 37.3
-------- --------
Interest expense.......................................... 163.0 174.2 (11.2) (6.4)
Interest expense on notes payable to affiliates........... 42.0 24.8 17.2 69.4
Investment income, net.................................... (12.6) (3.6) 9.0 NM
Other..................................................... (0.7) (0.1) 0.6 NM
Income tax benefit........................................ (27.6) (26.6) 1.0 3.8
Minority interest......................................... (12.9) (15.8) (2.9) (18.4)
Extraordinary items....................................... (0.1) (17.6) (17.5) NM
-------- --------
Net loss.................................................. ($75.8) ($115.5) ($39.7) (34.4%)
======== ========
Three Months Ended
September 30, Increase / (Decrease)
1998 1997 $ %
Service income............................................ $571.7 $515.1 $56.6 11.0%
Operating, selling, general and administrative expenses... 371.6 335.0 36.6 10.9
-------- --------
Operating income before depreciation and
amortization (1)....................................... 200.1 180.1 20.0 11.1
Depreciation and amortization............................. 171.5 155.9 15.6 10.0
-------- --------
Operating income.......................................... 28.6 24.2 4.4 18.2
-------- --------
Interest expense.......................................... 55.1 54.3 0.8 1.5
Interest expense on notes payable to affiliates........... 14.7 12.4 2.3 18.5
Investment income, net.................................... (8.8) (1.6) 7.2 NM
Other..................................................... (0.6) (0.1) 0.5 NM
Income tax benefit........................................ (6.9) (3.1) 3.8 NM
Minority interest......................................... (3.4) (5.6) (2.2) (39.3)
Extraordinary items....................................... (0.1) (2.1) (2.0) (95.2)
-------- --------
Net loss.................................................. ($21.6) ($34.2) ($12.6) (36.8%)
======== ========
<FN>
- ------------
(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
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COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
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 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.
</FN>
Of the respective $144.2 million and $56.6 million increases in service income
for the nine and three month periods from 1997 to 1998, $20.0 million and $10.1
million are attributable to the effects of the acquisitions of cable
communications systems, $24.8 million and $7.7 million are attributable to
subscriber growth, $79.0 million and $28.8 million relate to changes in rates,
$14.1 million and $4.8 million are attributable to growth in cable advertising
sales and $6.3 million and $5.2 million relate to other product offerings.
Of the respective $91.3 million and $36.6 million increases in operating,
selling, general and administrative expenses for the nine and three month
periods from 1997 to 1998, $13.1 million and $6.5 million are attributable to
the effects of the acquisitions of cable communication systems, $49.3 million
and $18.3 million are attributable to increases in the costs of cable
programming as a result of changes in rates, subscriber growth and additional
channel offerings, $5.8 million and $2.2 million are attributable to growth in
advertising sales and $23.1 million and $9.6 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 nine and three months ended September 30, 1998 and 1997,
the Company's service income includes $7.0 million, $7.2 million, $2.5 million
and $3.2 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 $96.4
million, $88.0 million, $32.5 million and $29.0 million during the nine and
three months ended September 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 $571.2 million, $506.9 million, $190.8 million and
$163.6 million, including $482.5 million, $424.0 million, $161.7 million and
$137.6 million of Programming Charges, during the nine and three months ended
September 30, 1998 and 1997, respectively. The Programming Charges include $35.6
million, $33.6 million, $11.1 million and $13.8 million during the nine and
three months ended September 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 SEPTEMBER 30, 1998
The respective $32.4 million and $15.6 million increases in depreciation and
amortization expense for the nine and three month periods from 1997 to 1998 are
primarily attributable to the effects of capital expenditures, increased losses
on asset disposals in connection with the Company's rebuild activities and the
acquisition of cable communications systems. As a result of the increases in
depreciation and amortization expense, it is expected that the Company will
continue to recognize significant losses for the foreseeable future.
The $11.2 million decrease in interest expense for the nine month period from
1997 to 1998 is primarily attributable to a decrease in the average balance of
debt outstanding and a decrease 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 $17.2 million and $2.3 million increases in interest expense on
notes payable to affiliates for the nine and three month periods from 1997 to
1998 are primarily attributable to increases in the balance of notes
outstanding.
In January 1998, AT&T Corp. ("AT&T") entered into a definitive merger agreement
with Teleport Communications Group, Inc. ("TCGI"). Upon closing of the merger on
July 23, 1998, the Company received 173,532 shares of unregistered AT&T common
stock in exchange (the "Exchange") for the 184,022 shares of TCGI Class B Common
Stock held by the Company. As a result of the Exchange, the Company recognized a
pre-tax gain of $7.9 million during the nine and three months ended September
30, 1998, representing the difference between the fair value of the AT&T stock
received and the Company's basis in TCGI. Such gain is included in investment
income, net in the Company's condensed consolidated statement of operations and
accumulated deficit.
The respective $1.0 million and $3.8 million increases in income tax benefit for
the nine and three months periods from 1997 to 1998 are primarily attributable
to decreases in state tax expense, offset, in part, by decreases in loss before
income tax benefit, minority interest and extraordinary items.
The respective $2.9 million and $2.2 million decreases in minority interest for
the nine and three months periods from 1997 to 1998 are attributable to the
effects of decreases in the net loss of the LLC.
In connection with the refinancing and redemption of certain subsidiaries'
indebtedness, the Company expensed unamortized debt acquisition costs and
incurred debt extinguishment costs of $27.1 million and $3.2 million, resulting
in extraordinary losses, net of tax, of $17.6 million and $2.1 million during
the nine and three months ended September 30, 1997.
For the nine and three months ended September 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
$101.7 million, $74.5 million, $41.4 million and $31.5 million, respectively.
Such earnings were not adequate to cover the Company's fixed charges of $205.0
million, $199.0 million, $69.8 million and $66.7 million for the nine and three
months ended September 30, 1998 and 1997, respectively. The Company's fixed
charges include non-cash interest expense of $42.3 million, $2.5 million, $14.8
million and $0.2 million for the nine and three months ended September 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, investments, available for sale 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.
--------------------
12
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
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 the Company's
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.
The Company is in the process of evaluating and addressing the impact of the
Year 2000 Issue on its operations to ensure that its information technology and
business systems recognize calendar Year 2000. The Company is utilizing both
internal and external resources in implementing its Year 2000 program, which
consists of the following phases:
Assessment Phase
Structured evaluation, including a detailed inventory outlining the impact that
the Year 2000 Issue may have on current operations.
Detailed Planning Phase
Establishment of priorities, development of specific action steps and allocation
of resources to address the issues identified in the Assessment Phase.
Conversion Phase
Implementation of the necessary system modifications as outlined in the Detailed
Planning Phase.
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.
Implementation Phase
Final roll-out of fully tested components into an operational unit.
Based on an inventory conducted in 1997, the Company has identified computer
systems that will require modification or replacement so that they will properly
utilize dates beyond December 31, 1999. Many of the Company's critical systems
are new and are already Year 2000 compliant as a result of the Company's recent
rebuild of many of its cable communications systems. In addition, the Company
has initiated communications with all of its significant software suppliers and
service bureaus to determine their plans for remediating the Year 2000 Issue in
their software which the Company uses or relies upon.
As of September 30, 1998, the Company is in the Conversion Phase of its Year
2000 remediation program and has entered the Testing Phase with respect to
certain of its key systems. Through September 30, 1998, the Company has incurred
approximately $2.5 million in connection with its Year 2000 remediation program.
The Company estimates that it will incur between approximately $4 million to $6
million of additional expense through December 1999 in connection with its Year
2000 remediation program. The Company's estimate to complete the remediation
plan includes the estimated time associated with mitigating the Year 2000 Issue
for third party software. However, there can be no guarantee that the systems of
other companies on which the Company relies will be converted on a timely basis,
or that a failure to convert by another company would not have a material
adverse effect on the Company.
Management of the Company will continue to periodically report the progress of
its Year 2000 remediation program to the Audit Committee of Comcast's Board of
Directors. The Company plans to complete the Year 2000 mitigation by the third
quarter of 1999. Management of the Company has investigated and may consider
potential contingency plans in the event that the Company's Year 2000
remediation program is not completed by that date.
The costs of the project and the date on which the Company plans to complete the
Year 2000 modifications and replacements are based on management's 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, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those plans.
Specific
13
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
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.
The Company believes 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
the operations of the Company.
14
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 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:
(i) Comcast Cable Communications, Inc. filed a Current Report on
Form 8-K under Item 5 on September 17, 1998 relating to the
capital contribution from Comcast Corporation ("Comcast") to
the Company of all of the shares in Jones Intercable, Inc. to
be acquired by Comcast from BCI Telecom Holding and affiliates
of Glenn R. Jones in transactions previously announced by
Comcast.
15
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 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
Principal Accounting Officer
/S/ JOSEPH J. EUTENEUER
--------------------------------------
Joseph J. Euteneuer
Vice President (Authorized Officer)
Date: November 16, 1998
16