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FORM 10-K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ____________
Commission file number 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 Identification No.)
incorporation or organization)
1201 Market Street, Suite 2201 Wilmington, Delaware 19801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (302) 594-8700
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [Not applicable]
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As of December 31, 1998, there were 1,000 shares of Common Stock outstanding.
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The Registrant meets the conditions set forth in General Instructions I(1)(a)
and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
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DOCUMENTS INCORPORATED BY REFERENCE
NONE
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<PAGE>
COMCAST CABLE COMMUNICATIONS, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1 Business.............................................................1
Item 2 Properties..........................................................12
Item 3 Legal Proceedings...................................................12
Item 4 Submission of Matters to a Vote of Security Holders.................12
PART II
Item 5 Market for the Registrant's Common Equity
and Related Stockholder Matters....................................13
Item 6 Selected Financial Data.............................................13
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................................14
Item 8 Financial Statements and Supplementary Data.........................19
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................36
PART III
Item 10 Directors and Executive Officers of the Registrant..................36
Item 11 Executive Compensation..............................................36
Item 12 Security Ownership of Certain Beneficial Owners and Management......36
Item 13 Certain Relationships and Related Transactions......................36
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................................37
SIGNATURES...................................................................39
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This Annual Report on Form 10-K is for the year ending December 31, 1998.
This Annual Report modifies and supersedes documents filed prior to this Annual
Report. The SEC allows us to "incorporate by reference" information that we file
with them, which means that we can disclose important information to you by
referring you directly to those documents. Information incorporated by reference
is considered to be part of this Annual Report. In addition, information we file
with the SEC in the future will automatically update and supersede information
contained in this Annual Report. In this Annual Report, "Comcast Cable," "we,"
"us" and "our" refer to Comcast Cable Communications, Inc. and its subsidiaries.
You should carefully review the information contained in this Annual
Report, but should particularly consider any risk factors we set forth in this
Annual Report and in other reports or documents that we file from time to time
with the SEC. In this Annual Report, we state our beliefs of future events and
of our future financial performance. In some cases, you can identify those
so-called "forward-looking statements" by words such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," or "continue" or the negative of those words and other comparable
words. You should be aware that those statements are only our predictions.
Actual events or results may differ materially. In evaluating those statements,
you should specifically consider various factors, including the risks outlined
below. Those factors may cause our actual results to differ materially from any
of our forward-looking statements.
Factors Affecting Future Operations
The cable communications industry may be affected by, among other things:
o changes in laws and regulations,
o changes in the competitive environment,
o changes in technology,
o franchise related matters,
o market conditions that may adversely affect the availability of debt
and equity financing for working capital, capital expenditures or
other purposes; and
o general economic conditions.
<PAGE>
PART I
ITEM 1 BUSINESS
We are principally engaged in developing, managing and operating hybrid
fiber-coaxial broadband cable communications networks. We are currently the
fourth-largest cable communications system operator in the United States and are
in the process of implementing high-speed Internet access service and digital
video applications to enhance the products available on our cable networks.
Our consolidated cable operations served approximately 4.5 million
subscribers and passed approximately 7.4 million homes in the United States as
of December 31, 1998. We own interests in other cable communications companies
serving more than 237,000 subscribers. We expect to complete transactions in
1999 that will give us an ownership and management interest in cable systems
which, upon closing of certain pending transactions, will serve approximately
1.0 million subscribers.
We are a wholly owned subsidary of Comcast Corporation. We are a Delaware
corporation that was organized in 1981. We have our principal executive offices
at 1201 Market Street, Suite 2201, Wilmington, Delaware 19801. Our telephone
number is (302) 594-8700. We also have a world wide web site at
http://www.comcast.com. The information posted on our web site is not
incorporated into this Annual Report.
GENERAL DEVELOPMENTS OF OUR BUSINESS
We entered into certain significant transactions in 1998. We have
summarized these transactions below and have more fully described them in Notes
3 and 4 to our consolidated financial statements in Item 8 of this Annual
Report.
Senior Notes Offering
In November 1998, we sold $800 million aggregate principal amount of 6.20%
senior notes due 2008 in a public offering. Interest on the notes is payable
semi-annually on May 15 and November 15 of each year, commencing May 15, 1999.
The notes are not redeemable prior to maturity. We used substantially all of the
net proceeds from the offering to repay existing intercompany borrowings and for
general corporate purposes.
Acquisition of Jones Intercable
In May and August 1998, we announced agreements to purchase certain
interests in Jones Intercable, Inc., for $700 million. We expect to close this
acquisition in the first half of 1999 if we receive all the necessary regulatory
and other approvals. Upon completion of this acquisition, we will own
approximately 12.8 million shares of Jones Intercable's Class A common stock and
2.9 million shares of its common stock. Those shares will represent
approximately 37% of the economic and 47% of the voting interest in Jones
Intercable. In addition, the 2.9 million shares of common stock that we will own
will represent approximately 57% of the outstanding common stock and will enable
us to elect 75% of the Board of Directors of Jones Intercable. We expect to
consolidate Jones Intercable in our financial statements upon closing of the
acquisition.
DESCRIPTION OF OUR BUSINESS
Technology and Capital Improvements
Our broadband cable networks receive signals by means of:
o special antennae,
o microwave relay systems,
o earth stations.
These networks distribute a variety of video, telecommunications and data
services to residential and commercial subscribers.
In accordance with the October 1997 "social contract" we entered into with
the FCC, 80% of our cable subscribers will be served by a system with a capacity
of at least 550-MHz and at least 60% of our cable subscribers will be served by
a system with a capacity of at least 750-MHz by March 31, 1999. In addition, we
will provide free cable service connections, cable modems and modem service to
schools and to 250 public libraries in communities when we commercially deploy
cable modem service to residential customers in those communities.
In addition to meeting our "social contract" commitments, we are deploying
fiber optic cable and upgrading the technical quality of our broadband networks.
As a result, the reliability and capacity of our systems has increased, aiding
in the delivery of additional video programming and other services such as
enhanced digital video, high-speed Internet access service and, potentially,
telephony. During 1998, we introduced our digital converter cable service in 10
markets. As of
<PAGE>
December 31, 1998, approximately 78,000 subscribers were receiving our digital
service. Digital converter cable service allows us to use digital compression to
increase the channel capacity of our cable communications systems to more than
100 channels, as well as to improve picture quality.
Franchises
Cable communications systems are constructed and operated under
non-exclusive franchises granted by state or local governmental authorities and
are subject to federal, state and local legislation and regulation. Franchises
typically contain many conditions which may include:
o rate and service conditions,
o construction schedules,
o types of programming and provision of services to schools and other
public institutions,
o insurance and indemnity bond requirements.
Our franchises typically provide for periodic payment of fees to
franchising authorities of up to 5% of "revenues" (as defined by each franchise
agreement). We normally pass those fees on to subscribers. In most cases, we
need the consent of the franchising authority to transfer our franchises. The
franchises are granted for varying lengths of time.
Although franchises historically have been renewed, renewals may include
less favorable terms and conditions. Under existing law, franchises should
continue to be renewed for companies that have provided adequate service and
have complied generally with franchise terms. The franchising authority may
choose to award additional franchises to competing companies at any time. We
have approximately 825 franchises in the United States.
Revenue Sources
We receive the majority of our revenues from subscription services.
Subscribers typically pay on a monthly basis and generally may discontinue
services at any time. Monthly subscription rates and related charges vary
according to the type of service selected and the type of equipment used by
subscribers. Packages of channels offered to subscribers may consist of
television signals of:
o national television networks,
o local and distant independent, specialty and educational television
stations,
o satellite-delivered programming,
o locally originated programs,
o audio programming,
o electronic retailing programs.
We also offer, for an additional monthly fee, one or more premium services,
such as:
o Home Box Office(R),
o Cinemax(R),
o Showtime(R),
o The Movie Channel(TM),
o Encore(R).
These premium services generally offer, without commercial interruption,
feature motion pictures, live and taped sporting events, concerts and other
special features. The charge for premium services depends upon the type and
level of service selected by the subscriber.
We also generate revenues from advertising sales, pay-per-view services,
installation services, commissions from electronic retailing and other services.
Pay-per-view services permit a subscriber to order, for a separate fee,
individual feature motion pictures and special event programs, such as
professional boxing, professional wrestling and concerts. We also generate
revenues from the sale of advertising time to local, regional and national
advertisers on non-broadcast channels.
In December 1996, we began marketing @Home Corporation's high-speed cable
modem services in areas served by certain of our cable communications systems.
Residential subscribers can connect their personal computers via cable modems to
a high-speed national network developed and managed by @Home. Subscribers can
then access online information, including the Internet, at faster speeds than
that of conventional or Integrated Service Digital Network modems. Through
@Home, we provide businesses with Internet connectivity solutions and networked
business applications. We and @Home aggregate content, sell advertising to
businesses and provide services to residential subscribers. As of December 31,
1998, the Comcast @Home service was available to over 1.8 million homes in nine
markets and served more than 51,000 customers.
Our sales efforts are primarily directed toward increasing penetration and
generating incremental revenues in our franchise areas. We sell our cable
communications services through:
o telemarketing,
o direct mail advertising,
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<PAGE>
o door-to-door selling,
o local media advertising.
Programming
We generally pay either a monthly fee per subscriber per channel or a
percentage of certain revenues for programming. Our programming costs are
increased by:
o increases in the number of subscribers,
o expansion of the number of channels provided to customers,
o increases in contract rates from programming suppliers.
We attempt to secure long-term programming contracts with volume discounts
and/or marketing support and incentives from programming suppliers. Our
programming contracts are generally for a fixed period of time and are subject
to negotiated renewal. We anticipate that future contract renewals will result
in programming costs that are higher than our costs today, particularly for
sports programming.
Customer Service
We are currently consolidating our local customer service operations into
large regional call centers. These regional call centers have technologically
advanced telephone systems that provide 24-hour per day, 7-day per week call
answering capability, telemarketing and other services. Because of these
technological advances, we can better serve our subscriber base and cross-market
new products and services. We have 10 call centers in operation as of December
31, 1998 which serve approximately 2.4 million subscribers. Subscribers in our
remaining cable systems receive customer service primarily through our local,
system-based representatives.
Our Cable Systems
The table below summarizes Homes Passed, Cable Subscribers and Cable
Penetration information for our cable communications systems as of December 31
(homes and subscribers in thousands):
<TABLE>
<CAPTION>
1998 1997 1996(5) 1995 1994
--------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Homes Passed (1)(4).................................. 7,382 7,138 6,975 5,570 5,491
Cable Subscribers (2)(4)............................. 4,511 4,366 4,280 3,407 3,307
Cable Penetration (3)(4)............................. 61.1% 61.2% 61.4% 61.2% 60.2%
- -------------------
<FN>
(1) A home is "passed" if we can connect it to our distribution system without
further extending the transmission lines.
(2) A dwelling with one or more television sets connected to a system counts as
one Cable Subscriber.
(3) Cable Penetration means the number of Cable Subscribers as a percentage of
Homes Passed.
(4) The information consists of cable systems whose financial results we
consolidate. The information does not include 341,000 Homes Passed and
237,000 Cable Subscribers in non-consolidated cable communications systems
in which we have ownership and management interests. The information also
does not include pending acquisitions (see "General Developments of Our
Business").
(5) In November 1996, we acquired the cable operations of The E.W. Scripps
Company.
</FN>
</TABLE>
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<PAGE>
System Clusters
We manage most of our cable systems in geographic clusters. Clustering
permits us to deliver customer service and support in a more uniform, efficient
and cost effective manner. The following table summarizes Homes Passed, Cable
Subscribers and Cable Penetration for our eight largest regional cable clusters
as of December 31, 1998 (homes and subscribers in thousands):
<TABLE>
<CAPTION>
Homes Cable Cable
Geographic Cluster Passed Subscribers Penetration
- --------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Mid-Atlantic......................................... 2,147.9 1,409.4 65.6%
Michigan............................................. 978.5 480.7 49.1%
Tennessee............................................ 499.2 326.3 65.4%
Southern California.................................. 517.2 271.4 52.5%
West Florida......................................... 413.4 269.9 65.3%
Sacramento........................................... 464.1 247.9 53.4%
Southeast Florida.................................... 452.1 236.4 52.3%
Indianapolis......................................... 243.5 147.4 60.5%
----------- -----------
5,715.9 3,389.4 59.3%
Other Systems........................................ 1,666.0 1,121.3 67.3%
----------- -----------
Total................................................ 7,381.9 4,510.7 61.1%
=========== ===========
</TABLE>
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Competition
Our cable communications systems compete with a number of different sources
which provide news, information and entertainment programming to consumers,
including:
o local television broadcast stations that provide off-air programming
which can be received using a roof-top antenna and television set,
o program distributors that transmit satellite signals containing video
programming, data and other information to receiving dishes of varying
sizes located on the subscriber's premises,
o satellite master antenna television systems, commonly known as SMATV,
which generally serve condominiums, apartment and office complexes and
residential developments,
o multichannel, multipoint distribution service operators, commonly
known as MMDS or wireless cable operators, which use low-power
microwave frequencies to transmit video programming and other
information over-the-air to subscribers,
o other cable operators who build and operate cable systems in the same
communities that we serve, commonly known as overbuilders,
o interactive online computer services,
o newspapers, magazines and book stores,
o movie theaters,
o live concerts and sporting events,
o home video products, including videotape cassette recorders.
Our cable communications systems will be competitive if we provide, at a
reasonable price to subscribers, superior technical performance, superior
customer service and a greater variety of video programming and other
communications services than are available from our competitors.
Modifications to federal law in 1996 changed the regulatory environment in
which our cable communications systems operate. Federal law now allows local
telephone companies to provide directly to subscribers a wide variety of
services that are competitive with our cable communications services. Some local
telephone companies:
o provide video services within and outside their telephone service
areas through a variety of methods, including broadband cable
networks, satellite program distribution and wireless transmission
facilities,
o have announced plans to construct and operate cable communications
systems in various states.
A local telephone company, Ameritech, has obtained approximately 14 cable
franchises in communities in Michigan that we also serve. It competes directly
with us in these areas by providing video and other broadband communications
services to subscribers. New facilities-based competitors such as RCN
Corporation and Knology Holdings, Inc. are now offering cable and related
communications services in several areas where we hold franchises.
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<PAGE>
Local telephone companies and other businesses construct and operate
communications facilities that provide access to the Internet and distribute
interactive computer-based services, data and other non-video services to homes
and businesses. These competitors are not required, in certain circumstances, to
comply with some of the material obligations imposed upon our cable systems
under our franchises. We cannot predict the likelihood of success of competing
video or broadband service ventures by local telephone companies or other
businesses. Nor can we predict the impact of these competitive ventures on our
cable communications systems.
We operate each of our cable communications systems pursuant to a
non-exclusive franchise that is issued by the community's governing body such as
a city council, a county board of supervisors or a state regulatory agency.
Federal law prohibits franchising authorities from unreasonably denying requests
for additional franchises, and it permits franchising authorities to operate
cable systems. Companies that traditionally have not provided cable services and
that have substantial financial resources (such as public utilities that own
certain of the poles to which our cables are attached) may also obtain cable
franchises and may provide competing communications services.
In the past few years, Congress has enacted legislation and the FCC has
adopted regulatory policies intended to provide a more favorable operating
environment for existing and new technologies that provide, or have the
potential to provide, substantial competition to cable communications systems.
These technologies include direct broadcast satellite service, commonly known as
DBS, among others. According to recent government and industry reports,
conventional, medium and high-power satellites currently provide video
programming to over 10.6 million individual households, condominiums, apartment
and office complexes in the United States. DBS providers with medium and
high-power satellites typically offer to their subscribers more than 150
channels of programming, including program services similar to those provided by
cable systems.
DBS systems use video compression technology to increase channel capacity
and digital technology to improve the quality of the signals transmitted to
their subscribers. DBS service currently has certain competitive advantages and
disadvantages compared to cable service. Advantages of DBS service include more
programming, greater channel capacity and the digital quality of signals
delivered to subscribers. The disadvantages of DBS service include high up-
front customer equipment and installation costs and a lack of local programming
and local service.
Two major companies are currently offering nationwide high-power DBS
services. Both companies have recently announced separate transactions that, if
completed, may significantly enhance the number of channels on which they can
provide programming to subscribers and may improve significantly their
competitive positions against cable operators. We are unable to predict the
effect these transactions may have on our business and operations.
Our cable systems also compete for subscribers with SMATV systems. SMATV
systems typically are not subject to regulation like local franchised cable
operators. SMATV systems offer subscribers both improved reception of local
television stations and many of the same satellite-delivered programming
services offered by franchised cable systems. In addition, some SMATV operators
are developing and/or offering packages of telephony, data and video services to
private residential and commercial developments. SMATV system operators often
enter into exclusive service agreements with building owners or homeowners'
associations, although some states have enacted laws to provide franchised cable
systems access to these complexes. Courts have reviewed challenges to these laws
and have reached varying results. Our ability to compete for subscribers in
residential and commercial developments served by SMATV system operators is
uncertain. However, we are developing competitive packages of services (video,
data and telephony) to offer to these residential and commercial developments.
Cable systems also compete with MMDS or wireless cable systems, which are
authorized to operate in areas served by our cable systems. Federal law
significantly limits certain local restrictions on the use of roof-top,
satellite and microwave antennae to receive satellite programming and
over-the-air broadcasting services.
Many of our cable systems are currently offering, or plan to offer,
interactive online computer services to subscribers. These cable systems will
compete with a number of other companies, many of whom have substantial
resources, such as:
o existing Internet service providers, commonly known as ISPs,
o local telephone companies,
o long distance telephone companies.
Recently, a number of companies, including telephone companies and ISP's,
have requested local authorities and the FCC to require cable operators to
provide access to cable's broadband infrastructure so that these companies may
deliver Internet services directly to customers over cable facilities. In a
recent report to
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<PAGE>
Congress, the FCC declined to institute an administrative proceeding to examine
this issue at this time. At the present time, several local jurisdictions are
attempting to impose access obligations on a cable operator as a condition for
obtaining municipal consent for franchise transfers; however, such conditions
are currently being challenged in court. It is expected that the FCC, Congress,
and state and local regulatory authorities will continue to consider actions in
this area.
The deployment of Asymmetric Digital Subscriber Line technology, known as
ADSL, will allow Internet access to subscribers at data transmission speeds
equal to or greater than that of modems over conventional telephone lines.
Several telephone companies are introducing ADSL service and have requested the
FCC to allow them to provide high-speed broadband services, including
interactive online services, without regard to present service boundaries and
other regulatory restrictions. We are unable to predict the likelihood of
success of the online services offered by our competitors or the impact on our
business and operations of these competitive ventures.
We expect advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment to occur in the
future. We refer you to the next section of this Annual Report for a detailed
discussion of legislative and regulatory factors. Other new technologies and
services may develop and may compete with services that our cable communications
systems offer. Consequently, we are unable to predict the effect that ongoing or
future developments might have on our business and operations.
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LEGISLATION AND REGULATION
The Communications Act of 1934 establishes a national policy to regulate
the development and operation of cable communications systems. The
Communications Act allocates responsibility for enforcing federal policies among
the FCC, and state and local governmental authorities. The courts, especially
the federal courts, play an important oversight role as these statutory and
regulatory provisions are interpreted and enforced by the various federal, state
and local governmental units.
We expect that court actions and regulatory proceedings will refine the
rights and obligations of various parties, including the government, under the
Communications Act. The results of these judicial and administrative proceedings
may materially affect our business operations. In the following paragraphs, we
summarize the principal federal laws and regulations materially affecting the
growth and operation of the cable communications industry. We also provide a
brief description of certain state and local laws applicable to our businesses.
The Communications Act and FCC Regulations
The Communications Act and the regulations and policies of the FCC affect
significant aspects of our cable system operations, including:
o subscriber rates,
o the content of programming we offer our subscribers, as well as the
way we sell our program packages to subscribers and other video
program providers,
o the use of our cable systems by local franchising authorities, the
public and other unrelated third parties,
o our franchise agreements with governmental authorities,
o cable system ownership limitations and prohibitions,
o our use of utility poles and conduit.
Subscriber Rates
The Communications Act and the FCC's regulations and policies limit the
ability of cable systems to raise rates for basic services and equipment, as
well as for certain non-basic cable programming services, in communities that
are not subject to effective competition, as defined by federal law. Where there
is no effective competition, federal law gives franchising authorities the power
to regulate the monthly rates charged by the operator for:
o the lowest level of programming service, typically called basic
service, which generally includes local broadcast channels and public
access or governmental channels required by the operator's franchise,
o the installation, sale and lease of equipment used by subscribers to
receive basic service, such as converter boxes and remote control
units.
Several years ago the FCC adopted detailed rate regulations, guidelines and
rate forms that we and the franchising authority must use in connection with the
regulation of our basic service and equipment rates. If the franchising
authority concludes that our rates are not in accordance with the FCC's rate
regulations, it may require
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<PAGE>
us to reduce our rates and to refund overcharges to subscribers, with interest.
We may appeal adverse rate decisions to the FCC. The Communications Act and FCC
regulations also permit franchising authorities to file complaints with the FCC
concerning rates we charge for certain non-basic cable programming service
tiers.
The Communications Act and the FCC's regulations also:
o prohibit regulation of rates charged by cable operators for
programming offered on a per channel or per program basis, and for
certain multi-channel groups of new non-basic programming,
o eliminate rate regulation of non-basic cable programming service tiers
after March 31, 1999, although Congress may consider legislation to
extend the period during which non-basic rates remain subject to
regulation,
o require operators to charge uniform rates throughout each franchise
area that is not subject to effective competition,
o prohibit regulation of non-predatory bulk discount rates offered by
operators to subscribers in commercial and residential developments,
o permit regulated equipment rates to be computed by aggregating costs
of broad categories of equipment at the franchise, system, regional or
company level.
Over the past few years, we have reached agreements with various regulatory
bodies to resolve outstanding rate disputes. In addition to the "social
contract" we reached with the FCC, we settled pending local rate proceedings in
1998 involving our basic service rates in certain of our systems. We believe
that the resolution of these proceedings did not have a material adverse impact
on our financial position, results of operations or liquidity.
Content Requirements
The Communications Act and the FCC's regulations contain broadcast signal
carriage requirements that allow local commercial television broadcast stations:
o to elect once every three years to require a cable communications
system to carry the station, subject to certain exceptions, or
o to negotiate with us on the terms by which we carry the station on our
cable communications system, commonly called retransmission consent.
The Communications Act requires a cable operator to devote up to one-third
of its activated channel capacity for the mandatory carriage of local commercial
television stations. The Communications Act also gives local non-commercial
television stations mandatory carriage rights; however, such stations are not
given the option to negotiate retransmission consent for the carriage of their
signals by cable systems. Additionally, cable systems must obtain retransmission
consent for:
o all "distant" commercial television stations (except for commercial
satellite-delivered independent "superstations" such as WGN),
o commercial radio stations,
o certain low-power television stations.
The FCC has also initiated an administrative proceeding to consider the
requirements, if any, for the mandatory carriage of digital television signals
offered by local broadcasters. We are unable to predict the outcome of this
proceeding or the impact of any new carriage requirements on the operation of
our cable systems.
The Communications Act requires our cable systems to permit subscribers to
purchase video programming on a per channel or a per program basis without the
necessity of subscribing to any tier of service, other than the basic cable
service tier. However, we are not required to comply with this requirement until
2002 for any of our cable systems that do not have addressable converter boxes
or have other substantial technological limitations. A limited number of our
systems do not have the technological capability to offer programming in the
manner required by the statute and thus currently are exempt from complying with
this requirement.
To increase competition between cable operators and other video program
distributors, the Communications Act:
o precludes any satellite video programmer affiliated with a cable
company, or with a common carrier providing video programming directly
to its subscribers, from favoring an affiliated company over
competitors,
o requires such programmers to sell their satellite-delivered
programming to other video program distributors,
o limits the ability of such programmers to offer exclusive programming
arrangements to their affiliates.
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<PAGE>
In two recent administrative determinations, the FCC's Cable Services
Bureau concluded that the program access rules did not apply to
terrestrially-delivered programming, such as Comcast SportsNet. These matters
are expected to be reviewed by the FCC.
The FCC and Congress are presently considering proposals that may enhance
the ability of DBS providers and other video program distributors to gain access
to additional programming and to transmit local broadcast signals to local
markets. These proposals, if adopted, will likely increase competition to our
cable systems.
The Communications Act contains restrictions on the transmission by cable
operators of obscene or indecent programming. It requires cable operators to
block fully both the video and audio portion of sexually explicit or indecent
programming on channels that are primarily dedicated to sexually oriented
programming or alternatively to carry such programming only at "safe harbor"
time periods. A three-judge federal district recently determined that this
provision was unconstitutional; however, the federal government announced that
it will appeal the lower court's ruling.
The FCC actively regulates other aspects of our programming, involving such
areas as:
o our use of syndicated and network programs and local sports broadcast
programming,
o advertising in children's programming,
o political advertising,
o origination cablecasting,
o sponsorship identification,
o closed captioning of video programming.
Use of Our Cable Systems by The Government and Unrelated Third Parties
The Communications Act allows franchising authorities and unrelated third
parties to have access to our cable systems' channel capacity. For example, it:
o permits franchising authorities to require cable operators to set
aside channels for public, educational and governmental access
programming;
o requires a cable system with 36 or more activated channels to
designate a significant portion of its channel capacity for commercial
leased access by third parties to provide programming that may compete
with services offered by the cable operator.
The FCC regulates various aspects of third party commercial use of channel
capacity on our cable systems, including the rates and certain terms and
conditions of the commercial use. The FCC is also considering proposals by
various Internet service providers to gain access to our cable systems on a
common carrier basis. We cannot predict if such proposals will be adopted or
whether, if adopted, they will have a material impact upon our business
operations.
Franchise Matters
Although franchising matters are normally regulated at the local level
through a franchise agreement and/or a local ordinance, the Communications Act
provides oversight and guidelines to govern our relationship with local
franchising authorities. For example, the Communications Act:
o affirms the right of franchising authorities (state or local,
depending on the practice in individual states) to award one or more
franchises within their jurisdictions,
o generally prohibits us from operating in communities without a
franchise,
o encourages competition with our existing cable systems by:
o allowing municipalities to operate cable systems without
franchises,
o preventing franchising authorities from granting exclusive
franchises or from unreasonably refusing to award additional
franchises covering an existing cable system's service area.
o permits local authorities, when granting or renewing our franchises,
to establish requirements for cable-related facilities and equipment,
but prohibits franchising authorities from establishing requirements
for specific video programming or information services other than in
broad categories,
o permits us to obtain modification of our franchise requirements from
the franchise authority or by judicial action if warranted by changed
circumstances,
o generally prohibits franchising authorities from:
o imposing requirements during the initial cable franchising
process or during franchise renewal that require, prohibit or
restrict us from providing telecommunications services,
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<PAGE>
o imposing franchise fees on revenues we derive from providing
telecommunications services over our cable systems, or
o restricting our use of any type of subscriber equipment or
transmission technology.
o limits our payment of franchise fees to the local franchising
authority to 5% of our gross revenues derived from providing cable
services over our cable system.
The Communications Act contains procedures designed to protect us against
arbitrary denials of the renewal of our franchises, although a franchising
authority under various conditions could deny us a franchise renewal. Moreover,
even if our franchise is renewed, the franchising authority may seek to impose
upon us new and more onerous requirements such as significant upgrades in
facilities and services or increased franchise fees as a condition of renewal.
Similarly, if a franchising authority's consent is required for the purchase or
sale of our cable system or franchise, the franchising authority may attempt to
impose more burdensome or onerous franchise requirements on us in connection
with a request for such consent. Historically, cable operators providing
satisfactory services to their subscribers and complying with the terms of their
franchises have typically obtained franchise renewals. We believe that we have
generally met the terms of our franchises and have provided quality levels of
service. We anticipate that our future franchise renewal prospects generally
will be favorable.
Various courts have considered whether franchising authorities have the
legal right to limit the number of franchises awarded within a community and to
impose certain substantive franchise requirements (e.g. access channels,
universal service and other technical requirements). These decisions have been
inconsistent and, until the United States Supreme Court rules definitively on
the scope of cable operators' First Amendment protections, the legality of the
franchising process generally and of various specific franchise requirements is
likely to be in a state of flux.
Ownership Limitations
The Communications Act generally prohibits us from owning or operating a
SMATV or wireless cable system in any area where we provide franchised cable
service. We may, however, acquire and operate SMATV systems in our franchised
service areas if the programming and other services provided to SMATV
subscribers are offered according to the terms and conditions of our franchise
agreement.
The Communications Act also authorizes the FCC to impose nationwide limits
on the number of subscribers under the control of a cable operator. While a
federal district court has declared this limitation to be unconstitutional and
delayed its enforcement, the FCC recently reconsidered its cable ownership
regulations and:
o reaffirmed its 30% nationwide subscriber ownership limit, but
maintained its voluntary stay on enforcement of that regulation
pending further action,
o reaffirmed its subscriber ownership information reporting
requirements,
o opened an administrative proceeding to reevaluate its cable television
attribution rules.
Also pending on appeal is a challenge to the statutory and FCC regulatory
limitations on the number of channels that can be occupied on a cable system by
a video programmer in which a cable operator has an attributable ownership
interest. We are unable to predict the outcome of these judicial and regulatory
proceedings or the impact of any ownership restrictions on our business and
operations.
The Communications Act eliminated the statutory prohibition on the common
ownership, operation or control of a cable system and a television broadcast
station in the same market. While the FCC has eliminated its regulations which
precluded the cross-ownership of a national broadcasting network and a cable
system, it has not yet completed its review of other regulations which prohibit
the common ownership of other broadcasting interests and cable systems in the
same geographical areas.
Amendments to the Communications Act made far-reaching changes in the
relationship between local telephone companies and cable service providers.
These amendments:
o eliminated federal legal barriers to competition in the local
telephone and cable communications businesses, including allowing
local telephone companies to offer video services in their local
telephone service areas;
o preempted legal barriers to telecommunications competition that
previously existed in state and local laws and regulations;
o set basic standards for relationships between telecommunications
providers; and
o generally limited acquisitions and prohibited certain joint ventures
between local telephone
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<PAGE>
companies and cable operators in the same market.
Local telephone companies may provide service as traditional cable
operators with local franchises or they may opt to provide their programming
over unfranchised "open video systems," subject to certain conditions,
including, but not limited to, setting aside a portion of their channel capacity
for use by unaffiliated program distributors on a non-discriminatory basis. A
federal appellate court recently overturned various parts of the FCC's open
video rules, including the FCC's preemption of local franchising requirements
for open video operators. We expect the FCC to modify its open video rules to
comply with the federal court's decision, but we are unable to predict the
impact any rule modifications may have on our business and operations.
Pole Attachment Regulation
The Communications Act requires the FCC to regulate the rates, terms and
conditions imposed by public utilities for cable systems' use of utility pole
and conduit space unless state authorities demonstrate to the FCC that they
adequately regulate pole attachment rates, as is the case in certain states in
which we operate. In the absence of state regulation, the FCC administers pole
attachment rates on a formula basis. The FCC's current rate formula, which is
being reevaluated by the FCC, governs the maximum rate certain utilities may
charge for attachments to their poles and conduit by cable operators providing
only cable services and, until 2001, by certain companies providing
telecommunications services. The FCC also adopted a second rate formula that
will be effective in 2001 and will govern the maximum rate certain utilities may
charge for attachments to their poles and conduit by companies providing
telecommunications services, including cable operators.
Any resulting increase in attachment rates due to the FCC's new rate
formula will be phased in over a five-year period in equal annual increments,
beginning in February 2001. Several parties have requested the FCC to reconsider
its new regulations and several parties have challenged the new rules in court.
A federal district court recently upheld the constitutionality of the new
statutory provision which requires that utilities provide cable systems and
telecommunications carriers with nondiscriminatory access to any pole, conduit
or right-of-way controlled by the utility; the utilities involved in that
litigation have appealed the lower court's decision. We are unable to predict
the outcome of this litigation or the ultimate impact of any revised FCC rate
formula or of any new pole attachment rate regulations on our business and
operations.
Other Regulatory Requirements of the
Communications Act and the FCC
The Communications Act also includes provisions, among others, regulating:
o customer service,
o subscriber privacy,
o marketing practices,
o equal employment opportunity,
o technical standards and equipment compatibility.
The FCC actively regulates other parts of our cable operations, involving
such areas as:
o hiring and promotion of employees and use of outside vendors,
o consumer protection and customer service,
o technical standards and testing of cable facilities,
o consumer electronics equipment compatibility,
o registration of cable systems,
o maintenance of various records and public inspection files,
o microwave frequency usage,
o antenna structure notification, marking and lighting.
The FCC may enforce its regulations through the imposition of substantial
fines, the issuance of cease and desist orders and/or the imposition of other
administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities often used in connection with cable
operations. The FCC has ongoing rulemaking proceedings that may change its
existing rules or lead to new regulations. We are unable to predict the impact
that any further FCC rule changes may have on our business and operations.
Other bills and administrative proposals pertaining to cable communications
have previously been introduced in Congress or have been considered by other
governmental bodies over the past several years. It is probable that further
attempts will be made by Congress and other governmental bodies relating to the
regulation of cable communications services.
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<PAGE>
Copyright
Our cable communications systems provide our subscribers with local and
distant television and radio broadcast signals which are protected by the
copyright laws. We generally do not obtain a license to use this programming
directly from the owners of the programming, but comply with an alternative
federal copyright licensing process. In exchange for filing certain reports and
contributing a percentage of our revenues to a federal copyright royalty pool,
we obtain blanket permission to retransmit copyrighted material.
In a report to Congress, the U.S. Copyright Office recommended that
Congress make major revisions to both the cable television and satellite
compulsory licenses. The possible simplification, modification or elimination of
the compulsory copyright license is the subject of continuing legislative
review. The elimination or substantial modification of the cable compulsory
license could adversely affect our ability to obtain suitable programming and
could substantially increase the cost of programming that remains available for
distribution to our subscribers. We cannot predict the outcome of this
legislative activity.
Our cable communications systems often utilize music in the programs we
provide to subscribers including local advertising, local origination
programming and pay-per-view events. The rights to use this music are controlled
by music performance rights societies who negotiate on behalf of their copyright
owners for license fees covering each performance. The cable industry and one of
these societies have agreed upon a standard licensing agreement covering the
performance of music contained in programs originated by cable operators and in
pay-per-view events. Negotiations on a similar licensing agreement are in
process with another music performance rights organization. Rate courts
established by a federal court exist to determine appropriate copyright coverage
and payments in the event the parties fail to reach a negotiated settlement. We
cannot predict the outcome of these proceedings or the amount of any license
fees we may be required to pay for the use of music. We do not believe that the
amount of such fees will be significant to our financial position, results of
operations or liquidity.
State and Local Regulation
Our cable systems use local streets and rights-of-way. Consequently, we
must comply with state and local regulation which is typically imposed through
the franchising process. The terms and conditions of our franchises vary
materially from jurisdiction to jurisdiction. Each franchise generally contains
provisions governing:
o cable service rates,
o franchise fees,
o franchise term,
o system construction and maintenance obligations,
o system channel capacity,
o design and technical performance,
o customer service standards,
o franchise renewal,
o sale or transfer of the franchise,
o territory of the franchisee,
o indemnification of the franchising authority,
o use and occupancy of public streets,
o types of cable services provided.
A number of states subject cable systems to the jurisdiction of state
governmental agencies. Those states in which we operate that have enacted such
state level regulation are Connecticut, New Jersey and Delaware. State and local
franchising jurisdiction is not unlimited, however; it must be exercised
consistently with federal law. The Communications Act immunizes franchising
authorities from monetary damage awards arising from the regulation of cable
systems or decisions made on franchise grants, renewals, transfers and
amendments.
The summary of certain federal and state regulatory requirements in the
preceding pages does not describe all present and proposed federal, state and
local regulations and legislation affecting the cable industry. Other existing
federal regulations, copyright licensing, and, in many jurisdictions, state and
local franchise requirements, are currently the subject of judicial proceedings,
legislative hearings and administrative proposals which could change, in varying
degrees, the manner in which cable systems operate. Neither the outcome of these
proceedings nor their impact upon our cable operations can be predicted at this
time.
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<PAGE>
EMPLOYEES
As of December 31, 1998, we had approximately 8,800 employees. We believe
that our relationships with our employees are good.
ITEM 2 PROPERTIES
A central receiving apparatus, distribution cables, converters, customer
service call centers and local business offices are the principal physical
assets of a cable communications system. We own or lease the receiving and
distribution equipment of each system and own or lease parcels of real property
for the receiving sites, customer service call centers and local business
offices. In order to keep pace with technological advances, we are maintaining,
periodically upgrading and rebuilding the physical components of our cable
communications systems.
We believe that substantially all of our physical assets are in good
operating condition.
ITEM 3 LEGAL PROCEEDINGS
We are subject to legal proceedings and claims which arise in the ordinary
course of our business. In the opinion of our management, the amount of ultimate
liability with respect to these actions will not materially affect our financial
position, results of operations or liquidity.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information for this Item is omitted pursuant to SEC General Instruction I
to Form 10-K.
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<PAGE>
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Common Stock
Absence of Trading Market
Our common stock is not publicly traded. Therefore, there is no established
public trading market for the common stock, and none is expected to develop in
the foreseeable future.
Holder
All of our shares of common stock, $1.00 par value, are owned by Comcast
Corporation.
Dividends
None.
ITEM 6 SELECTED FINANCIAL DATA
Information for this item is omitted pursuant to SEC General Instruction I to
Form 10-K.
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<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information for this item is omitted pursuant to SEC General Instruction I
to Form 10-K, except as noted below.
Liquidity and Capital Resources
Interest Rate Risk Management
See Note 4 to our consolidated financial statements included in Item 8.
We are exposed to market risk including changes in interest rates. To
manage the volatility relating to these exposures, we enter into various
derivative transactions pursuant to our policies in areas such as counterparty
exposure and hedging practices. Positions are monitored using techniques
including market value and sensitivity analyses. We do not hold or issue any
derivative financial instruments for trading purposes and are not a party to
leveraged instruments. The credit risks associated with our derivative financial
instruments are controlled through the evaluation and monitoring of the
creditworthiness of the counterparties. Although we may be exposed to losses in
the event of nonperformance by the counterparties, we do not expect such losses,
if any, to be significant.
Interest Rate Risk
The use of interest rate risk management instruments, such as interest rate
exchange agreements ("Swaps"), interest rate cap agreements ("Caps") and
interest rate collar agreements ("Collars"), is required under the terms of
certain of our outstanding debt agreements. Our policy is to manage interest
costs using a mix of fixed and variable rate debt. Using Swaps, we agree to
exchange, at specified intervals, the difference between fixed and variable
interest amounts calculated by reference to an agreed-upon notional principal
amount. Caps are used to lock in a maximum interest rate should variable rates
rise, but enable us to otherwise pay lower market rates. Collars limit our
exposure to and benefits from interest rate fluctuations on variable rate debt
to within a certain range of rates.
The table set forth below summarizes the fair values and contract terms of
financial instruments subject to interest rate risk maintained by us as of
December 31, 1998 (dollars in millions):
<TABLE>
<CAPTION>
Expected Maturity Date Fair Value at
1999 2000 2001 2002 2003 Thereafter Total 12/31/98
---- ---- ---- ---- ---- ---------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt
Fixed Rate.................... $0.1 $0.1 $100.0 $100.1 $0.1 $2,489.8 $2,690.2 $2,994.0
Average Interest Rate...... 10.9% 11.0% 8.6% 8.6% 10.0% 7.8% 7.8%
Variable Rate................. $72.0 $109.4 $131.2 $459.4 $772.0 $772.0
Average Interest Rate...... 5.8% 6.0% 6.1% 6.2% 6.1%
Interest Rate Instruments
Variable to Fixed Swaps....... $50.0 $50.0 ($0.1)
Average Pay Rate........... 5.7% 5.7%
Average Receive Rate....... 5.0% 5.0%
Caps.......................... $240.0 $240.0
Average Cap Rate........... 7.0% 7.0%
Collar........................ $50.0 $50.0
Average Cap Rate........... 6.3% 6.3%
Average Floor Rate......... 4.0% 4.0%
</TABLE>
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<PAGE>
The notional amounts of interest rate instruments, as presented in the
table above are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The estimated fair value
approximates the proceeds (costs) to settle the outstanding contracts. Interest
rates on variable debt are estimated by us using the average implied forward
London Interbank Offer Rate ("LIBOR") rates for the year of maturity based on
the yield curve in effect at December 31, 1998, plus the borrowing margin in
effect for each credit facility at December 31, 1998. Average receive rates on
the Variable to Fixed Swaps are estimated by us using the average implied
forward LIBOR rates for the year of maturity based on the yield curve in effect
at December 31, 1998. While Swaps, Caps and Collars represent an integral part
of our interest rate risk management program, their incremental effect on
interest expense for the years ended December 31, 1998 and 1997 was not
significant.
Results of Operations
We are a wholly owned subsidiary of Comcast Corporation ("Comcast"). Our
summarized consolidated financial information for the years ended December 31,
1998 and 1997 is as follows (dollars in millions, "NM" denotes percentage is not
meaningful):
<TABLE>
<CAPTION>
Year Ended
December 31, Increase / (Decrease)
1998 1997 $ %
<S> <C> <C> <C> <C>
Service income............................................ $2,277.4 $2,073.0 $204.4 9.9%
Operating, selling, general and administrative expenses... 1,493.0 1,363.6 129.4 9.5
-------- -------- -------
Operating income before depreciation and
amortization (1)....................................... 784.4 709.4 75.0 10.6
Depreciation and amortization............................. 674.1 626.1 48.0 7.7
-------- -------- -------
Operating income.......................................... 110.3 83.3 27.0 32.4
-------- -------- -------
Interest expense.......................................... 223.6 227.9 (4.3) (1.9)
Interest expense on notes payable to affiliates........... 52.1 37.3 14.8 39.7
Investment income......................................... (14.6) (5.1) 9.5 NM
Other income.............................................. (0.8) (0.1) 0.7 NM
Income tax benefit........................................ (35.8) (43.6) (7.8) (17.9)
Minority interest......................................... (17.0) (21.0) (4.0) (19.0)
Extraordinary items....................................... (0.1) (16.7) (16.6) NM
-------- -------- -------
Net loss.................................................. ($97.3) ($128.8) ($31.5) (24.5%)
======== ======== =======
<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 depreciation and amortization expense, operating cash flow is
frequently used as one of the bases for comparing businesses in the cable
communications industry, although our measure of operating cash flow may
not be comparable to similarly titled measures of other companies.
Operating cash flow does not purport to represent net income or net cash
provided by operating activities, as those terms are defined under
generally accepted accounting principles, and should not be considered as
an alternative to such measurements as an indicator of our performance.
</FN>
</TABLE>
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<PAGE>
Of the $204.4 million increase in service income from 1997 to 1998, $30.2
million is attributable to the effects of the acquisitions of cable
communications systems, $31.8 million is attributable to subscriber growth,
$109.0 million relates to the changes in rates, $20.5 million is attributable to
growth in cable advertising sales and $12.9 million relates to other product
offerings.
Of the $129.4 million increase in operating, selling, general and
administrative expenses from 1997 to 1998, $19.3 million is attributable to the
effects of the acquisitions of cable communications systems, $66.2 million is
attributable to an increase in the costs of cable programming as a result of
subscriber growth, additional channel offerings and changes in rates, $1.5
million is attributable to an increase in costs associated with customer
service, $5.3 million is attributable to growth in cable advertising sales and
$37.1 million results from an increase in the costs of labor, other volume
related expenses and costs associated with new product offerings. It is
anticipated that our cost of cable programming will increase in the future as
cable programming rates increase and additional sources of cable programming
become available.
Comcast, on our behalf, 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, we
receive an allocated portion, based upon market share, of a percentage of net
sales of merchandise sold to QVC customers located in our service area. For the
years ended December 31, 1998 and 1997, our service income includes $13.3
million and $10.2 million, respectively, relating to QVC.
Comcast, through management agreements, manages the operations of our
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 our subsidiaries management fees of $130.4 million and
$119.7 million during the years ended December 31, 1998 and 1997, respectively.
These management fees are included in selling, general and administrative
expenses in our consolidated statement of operations.
On our behalf, 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 our subsidiaries for programming on a basis which generally approximates the
amount that 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 us by Comcast for
programming (the "Programming Charges") are included in operating expenses in
our consolidated statement of operations. We purchase certain other services,
including insurance and employee benefits, from Comcast under cost-sharing
arrangements on terms that reflect Comcast's actual cost. We reimburse Comcast
for certain other expenses (primarily salaries) under cost-reimbursement
arrangements. Under all of these arrangements, we incurred total expenses of
$760.9 million and $674.6 million, including $640.5 million and $560.9 million
of Programming Charges, during the years ended December 31, 1998 and 1997,
respectively. The Programming Charges include $59.4 million and $49.0 million
during the years ended December 31, 1998 and 1997, respectively, relating to
programming purchased by us, through Comcast, from suppliers in which Comcast
holds an equity interest.
The $48.0 million increase in depreciation and amortization expense from
1997 to 1998 is primarily attributable to the effects capital expenditures,
increased losses on asset disposals in connection with our rebuild activities
and the acquisition of cable communications systems.
We anticipate that, for the foreseeable future, interest expense will be a
significant cost to us and will have a significant adverse effect on our ability
to realize net earnings. We believe we will continue to be able to meet our
obligations through our ability both to generate operating income before
depreciation and amortization and to obtain external financing.
The $14.8 million increase in interest expense on notes payable to
affiliates from 1997 to 1998 is primarily attributable to increases in the
average balance of notes outstanding.
The $9.5 million increase in investment income from 1997 to 1998 is
primarily attributable to the $7.9 million gain recognized on the exchange of
our interest in Teleport Communications Group, Inc. for AT&T common stock during
1998.
The $7.8 million decrease in income tax benefit from 1997 to 1998 is
primarily attributable to the decrease in our loss before income tax benefit,
minority interest and extraordinary items.
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<PAGE>
The $4.0 million decrease in minority interest from 1997 to 1998 is
attributable to the effects of a decrease in the net loss of our majority owned
subsidiary, Comcast MHCP Holdings, L.L.C.
In connection with the refinancing and redemption of certain subsidiaries'
indebtedness, we expensed unamortized debt acquisition costs and incurred debt
extinguishment costs of $27.1 million, resulting in an extraordinary loss, net
of tax, of $16.7 million during the year ended December 31, 1997.
For the years ended December 31, 1998 and 1997, our earnings before
extraordinary items, income tax benefit and fixed charges (interest expense and
interest expense on notes payable to affiliates) were $142.7 million and $109.5
million, respectively. Such earnings were not adequate to cover our fixed
charges of $275.7 million and $265.2 million for the years ended December 31,
1998 and 1997, respectively. Our fixed charges include non-cash interest expense
of $2.7 million and $2.6 million for the years ended December 31, 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.
We believe that our losses and inadequacy of earnings to cover fixed
charges will not significantly affect the performance of our normal business
activities because of our existing cash, cash equivalents, short-term
investments and cash held by an affiliate, our ability to generate operating
income before depreciation and amortization and our ability to obtain external
financing.
We believe that our operations are not materially affected by inflation.
Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Certain of our
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000 (the "Year 2000 Issue"). If this
situation occurs, the potential exists for computer system failure or
miscalculations by computer programs, which could cause disruption of
operations.
We are in the process of evaluating and addressing the impact of the Year
2000 Issue on our operations to ensure that our information technology and
business systems recognize calendar Year 2000. We are utilizing both internal
and external resources in implementing our Year 2000 program, which consists of
the following phases:
o Assessment Phase. Structured evaluation, including a detailed
inventory outlining the impact that the Year 2000 Issue may have on
current operations.
o Detailed Planning Phase. Establishment of priorities, development of
specific action steps and allocation of resources to address the
issues identified in the Assessment Phase.
o Conversion Phase. Implementation of the necessary system modifications
as outlined in the Detailed Planning Phase.
o Testing Phase. Verification that the modifications implemented in the
Conversion Phase will be successful in resolving the Year 2000 Issue
so that all inventory items will function properly, both individually
and on an integrated basis.
o Implementation Phase. Final roll-out of fully tested components into
an operational unit.
Based on an inventory conducted in 1997, we have identified computer
systems that will require modification or replacement so that they will properly
utilize dates beyond December 31, 1999. Many of our critical systems are new and
are already Year 2000 compliant as a result of the recent rebuild of many of our
cable communications systems. In addition, we have initiated communications with
all of our significant software suppliers and service bureaus to determine their
plans for remediating the Year 2000 Issue in their software which we use or rely
upon.
As of December 31, 1998, we are in the Conversion Phase of our Year 2000
remediation program and have entered the Testing Phase with respect to certain
of our key systems. Through December 31, 1998, we have incurred approximately
$2.6 million in connection with our Year 2000 remediation program. We estimate
that we will incur between approximately $4 million to $6 million of additional
expense through December 1999 in connection with our Year 2000 remediation
program. Our estimate to complete the remediation plan includes the estimated
time associated with mitigating the Year 2000 Issue for third party software.
However, we cannot guarantee that the systems of other companies on which we
rely will be converted on a timely basis, or that a failure to convert by
another company would not have a material adverse effect on us.
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<PAGE>
Our management will continue to periodically report the progress of our
Year 2000 remediation program to the Audit Committee of Comcast's Board of
Directors. We plan to complete the Year 2000 mitigation by the third quarter of
1999. Our management has investigated and may consider potential contingency
plans in the event that our Year 2000 remediation program is not completed by
that date.
The costs of the project and the date on which we plan to complete the Year
2000 modifications and replacements are based on our best estimates, which were
derived using assumptions of future events including the continued availability
of resources and the reliability of third party modification plans. However, we
cannot guarantee that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that may cause such
material differences include, but are not limited to, the availability and cost
of personnel with appropriate necessary skills and the ability to locate and
correct all relevant computer code and similar uncertainties.
We believe that with modifications to existing software and conversions to
new software, the Year 2000 Issue can be mitigated. However, if such
modifications and conversions are not made, or are not completed within an
adequate time frame, the Year 2000 Issue could have a material adverse impact on
our operations.
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<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
Comcast Cable Communications, Inc.
Wilmington, Delaware
We have audited the accompanying consolidated balance sheet of Comcast Cable
Communications, Inc. (a wholly owned subsidiary of Comcast Corporation) and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholder's equity (deficiency) and of cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Comcast Cable Communications, Inc.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, on April 24,
1997, Comcast Corporation completed a restructuring of the legal organization of
certain of its subsidiaries. The Company's consolidated financial statements
have been presented giving effect to the reorganization for all periods
presented in a manner similar to a pooling of interests.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 22, 1999
- 19 -
<PAGE>
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions, except share data)
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................................... $34.5 $40.7
Investments.................................................................. 13.4 0.4
Cash held by an affiliate.................................................... 57.1 56.6
Accounts receivable, less allowance for doubtful
accounts of $19.4 and $16.7................................................ 90.9 72.8
Inventories.................................................................. 34.6 31.3
Other current assets......................................................... 14.9 18.0
-------- --------
Total current assets..................................................... 245.4 219.8
-------- --------
PROPERTY AND EQUIPMENT.......................................................... 3,276.5 2,667.3
Accumulated depreciation..................................................... (1,180.4) (1,021.2)
-------- --------
Property and equipment, net.................................................. 2,096.1 1,646.1
-------- --------
DEFERRED CHARGES
Franchise acquisition costs.................................................. 3,833.1 3,818.0
Excess of cost over net assets acquired and other............................ 2,043.3 1,837.7
-------- --------
5,876.4 5,655.7
Accumulated amortization..................................................... (1,768.5) (1,463.8)
-------- --------
Deferred charges, net........................................................ 4,107.9 4,191.9
-------- --------
$6,449.4 $6,057.8
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses........................................ $324.0 $239.9
Accrued interest............................................................. 35.4 26.6
Deferred income taxes, due to affiliate...................................... 4.6
Current portion of long-term debt............................................ 0.1 52.8
Due to affiliates............................................................ 166.6 125.6
-------- --------
Total current liabilities................................................ 530.7 444.9
-------- --------
LONG-TERM DEBT, less current portion............................................ 3,462.1 2,554.9
-------- --------
MINORITY INTEREST AND OTHER..................................................... 181.8 208.5
-------- --------
NOTES PAYABLE TO AFFILIATES..................................................... 134.6 695.2
-------- --------
DUE TO AFFILIATE................................................................ 524.8 398.8
-------- --------
DEFERRED INCOME TAXES, due to affiliate......................................... 1,442.4 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.......................................................... (2,896.4) (2,799.1)
Unrealized gains on marketable securities.................................... 3.2
-------- --------
Total stockholder's equity............................................... 173.0 267.1
-------- --------
$6,449.4 $6,057.8
======== ========
</TABLE>
See notes to consolidated financial statements.
- 20 -
<PAGE>
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
SERVICE INCOME................................................ $2,277.4 $2,073.0 $1,641.0
COSTS AND EXPENSES
Operating.................................................. 972.5 884.1 667.8
Selling, general and administrative........................ 520.5 479.5 366.6
Depreciation and amortization.............................. 674.1 626.1 420.3
-------- -------- --------
2,167.1 1,989.7 1,454.7
-------- -------- --------
OPERATING INCOME.............................................. 110.3 83.3 186.3
OTHER (INCOME) EXPENSE
Interest expense........................................... 223.6 227.9 228.4
Interest expense on notes payable to affiliates............ 52.1 37.3 32.1
Investment income.......................................... (14.6) (5.1) (25.9)
Other (income) expense..................................... (0.8) (0.1) 0.5
-------- -------- --------
260.3 260.0 235.1
-------- -------- --------
LOSS BEFORE INCOME TAX BENEFIT, MINORITY
INTEREST AND EXTRAORDINARY ITEMS........................... (150.0) (176.7) (48.8)
INCOME TAX BENEFIT............................................ (35.8) (43.6) (4.5)
-------- -------- --------
LOSS BEFORE MINORITY INTEREST AND
EXTRAORDINARY ITEMS........................................ (114.2) (133.1) (44.3)
MINORITY INTEREST............................................. (17.0) (21.0) (21.7)
-------- -------- --------
LOSS BEFORE EXTRAORDINARY ITEMS............................... (97.2) (112.1) (22.6)
EXTRAORDINARY ITEMS........................................... (0.1) (16.7)
-------- -------- --------
NET LOSS...................................................... ($97.3) ($128.8) ($22.6)
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
- 21 -
<PAGE>
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................... ($97.3) ($128.8) ($22.6)
-------- -------- --------
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization............................ 674.1 626.1 420.3
Non-cash interest expense................................ 0.4 1.4 2.0
Non-cash interest expense on notes payable to affiliates. 2.3 1.2 6.2
Deferred expenses charged by an affiliate................ 126.0 107.0 66.6
(Gain) loss on sales of investments...................... (7.9) 1.6 (19.8)
Minority interest........................................ (17.0) (21.0) (21.7)
Extraordinary items...................................... 0.1 16.7
Deferred income tax benefit, due to affiliate............ (43.1) (49.7) (44.6)
Other.................................................... (0.8)
-------- -------- --------
636.8 554.5 386.4
Changes in working capital............................... 64.3 (5.0) 13.6
-------- -------- --------
Net cash provided by operating activities.............. 701.1 549.5 400.0
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from borrowings................................... 1,724.9 1,805.8 448.0
Repayments of long-term debt............................... (870.9) (2,395.1) (284.5)
Proceeds from notes payable to affiliates.................. 137.4 699.1 59.7
Repayment of notes payable to affiliates................... (700.3) (104.7) (1.4)
Net transactions with affiliates........................... 41.0 (26.7) 92.5
Deferred financing costs and other......................... (12.0) (15.8) (2.7)
-------- -------- --------
Net cash provided by (used in) financing activities...... 320.1 (37.4) 311.6
-------- -------- --------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired......................... (259.7) (7.1) (5.0)
Sale of short-term investments............................. 0.1 21.6
Capital expenditures....................................... (711.1) (497.8) (298.2)
Increase in cash held by an affiliate...................... (0.5) (3.1) (26.6)
Increase in notes receivable from affiliates............... (340.0)
Additions to deferred charges and other.................... (56.2) (23.4) (15.0)
-------- -------- --------
Net cash used in investing activities.................. (1,027.4) (509.8) (684.8)
-------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS................................................ (6.2) 2.3 26.8
CASH AND CASH EQUIVALENTS, beginning of year.................. 40.7 38.4 11.6
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year........................ $34.5 $40.7 $38.4
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
- 22 -
<PAGE>
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIENCY)
(Dollars in millions)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Loss
Notes Unrealized
Receivable Gains on
Common Additional Accumulated from Marketable
Stock Capital Deficit Affiliate Securities Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996........................... $ $1,463.7 ($2,101.4) ($437.0) $9.7 ($1,065.0)
Comprehensive loss:
Net loss........................................ (22.6)
Unrealized loss on marketable securities, net of
deferred taxes of ($6.0)...................... (11.1)
Total comprehensive loss........................ (33.7)
Capital contributions........................... 1,552.5 1,552.5
Interest income on notes receivable from affiliate 52.9 (52.9)
Income taxes on interest income on notes receivable
from affiliate................................ (18.5) (18.5)
Increase in notes receivable from affiliate..... (340.0) (340.0)
---------- -------- --------- ------ ------- -------
BALANCE, DECEMBER 31, 1996......................... 3,050.6 (2,124.0) (829.9) (1.4) 95.3
Comprehensive loss:
Net loss........................................ (128.8)
Change in unrealized loss on marketable securities,
net of deferred taxes of $0.7................. 1.4
Total comprehensive loss........................ (127.4)
Interest income on notes receivable from affiliate 23.9 (23.9)
Income taxes on interest income on notes receivable
from affiliate................................ (8.3) (8.3)
Exchange of outstanding notes payable to and
notes receivable from affiliates.............. 307.5 307.5
Elimination of outstanding notes receivable from
affiliate through a non-cash dividend to Comcast (546.3) 546.3
---------- -------- --------- ------ ------- -------
BALANCE, DECEMBER 31, 1997......................... 3,066.2 (2,799.1) 267.1
Comprehensive loss:
Net loss........................................ (97.3)
Unrealized gains on marketable securities,
net of deferred taxes of $1.7................. 3.2
Total comprehensive loss........................ (94.1)
---------- -------- --------- ------ ------- -------
BALANCE, DECEMBER 31, 1998......................... $ $3,066.2 ($2,896.4) $ $3.2 $173.0
========== ======== ========= ====== ======= =======
</TABLE>
See notes to consolidated financial statements.
- 23 -
<PAGE>
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. BUSINESS
Comcast Cable Communications, Inc., a Delaware corporation, and
subsidiaries (the "Company") is a wholly owned subsidiary of Comcast
Corporation ("Comcast"). The Company and its subsidiaries are engaged in
the development, management and operation of hybrid-fiber coaxial broadband
cable networks. The Company's systems served approximately 4.5 million
subscribers and passed approximately 7.4 million homes as of December 31,
1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER ITEMS
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and all wholly owned or controlled subsidiaries. All significant
intercompany accounts and transactions among consolidated entities have
been eliminated.
Reorganization
On April 24, 1997, Comcast 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 consolidated
financial statements include the accounts of the Contributed Subsidiaries
for all periods presented.
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 consolidated statement of operations for all
periods presented.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Values
The estimated fair value amounts presented in these notes to consolidated
financial statements have been determined by the Company using available
market information and appropriate methodologies. However, considerable
judgment is required in interpreting market data to develop the estimates
of fair value. The estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts. Such fair value estimates are based on pertinent information
available to management as of December 31, 1998 and 1997, and have not been
comprehensively revalued for purposes of these consolidated financial
statements since such dates.
A reasonable estimate of fair value of the amounts due to/from affiliates
in the Company's consolidated balance sheet is not practicable to obtain
because of the related party nature of these items and the lack of quoted
market prices.
Cash Equivalents and Cash Held by an Affiliate
Cash equivalents principally consist of repurchase agreements with
maturities of three months or less when purchased. The carrying amounts of
the Company's cash equivalents approximate their fair values.
- 24 -
<PAGE>
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
Cash held by an affiliate consists of cash held by a subsidiary of Comcast
under a cash management program (see Note 6).
Investments
Investments consist principally of equity securities and certificates of
deposit with maturities of greater than three months when purchased.
Investments in entities in which the Company has the ability to exercise
significant influence over the operating and financial policies of the
investee and investments in partnerships which are not controlled by the
Company are accounted for under the equity method. Equity method
investments are recorded at original cost and adjusted periodically to
recognize the Company's proportionate share of the investees' net income or
losses after the date of investment, additional contributions made and
dividends received.
Unrestricted publicly traded investments are classified as available for
sale and recorded at their fair value, with unrealized gains or losses
resulting from changes in fair value between measurement dates recorded as
a component of other comprehensive income.
Investments in privately held companies are stated at cost, adjusted for
any known diminution in value.
Inventories
Inventories, which include materials and supplies, are stated at average
cost which is less than market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over estimated useful lives as follows:
Buildings and improvements ........................ 15-40 years
Operating facilities............................... 5-20 years
Other equipment.................................... 2-10 years
Improvements that extend asset lives are capitalized; other repairs and
maintenance charges are expensed as incurred. The cost and related
accumulated depreciation applicable to assets sold or retired are removed
from the accounts and the gain or loss on disposition is recognized as a
component of depreciation expense.
In connection with the rebuild and upgrade of cable systems, the Company
depreciates the remaining net book value of the assets over the estimated
rebuild or upgrade period. Under this policy, the Company recorded
additional depreciation expense of $34.4 million, $24.6 million and $15.8
million during the years ended December 31, 1998, 1997 and 1996,
respectively.
Deferred Charges
Franchise acquisition costs are amortized on a straight-line basis over
their legal or estimated useful lives of 12 to 40 years. The excess of cost
over the fair value of net assets acquired is being amortized on a
straight-line basis over estimated useful lives of 20 to 40 years. Debt
acquisition costs are being amortized on a straight-line basis over the
term of the related debt.
Valuation of Long-Lived Assets
The Company periodically evaluates the recoverability of its long-lived
assets, including property and equipment and deferred charges, using
objective methodologies. Such methodologies include evaluations based on
the cash flows generated by the underlying assets or other determinants of
fair value.
- 25 -
<PAGE>
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
Revenue Recognition
Service income is recognized as service is provided. Credit risk is managed
by disconnecting services to customers who are delinquent.
Postretirement and Postemployment Benefits
The estimated costs of retiree benefits and benefits for former or inactive
employees, after employment but before retirement, are accrued and recorded
as a charge to operations during the years the employees provide services.
The Company's retiree benefit obligation is unfunded and all benefits are
provided and paid by Comcast. Accordingly, the Company's liability for
these costs is included in due to affiliates.
A wholly owned subsidiary of the Company has agreements with certain former
key executives that provide for supplemental retirement benefits. The
actuarial present value of benefits payable under these agreements has been
accrued.
Investment Income
Investment income includes interest income and gains, net of losses, on the
sale or exchange of marketable securities and long-term investments. Gross
realized gains and losses are recognized using the specific identification
method.
Income Taxes
The Company recognizes deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities and expected benefits of utilizing net
operating loss carryforwards. The impact on deferred taxes of changes in
tax rates and laws, if any, applied to the years during which temporary
differences are expected to be settled, are reflected in the consolidated
financial statements in the period of enactment.
Derivative Financial Instruments
The Company uses derivative financial instruments, including interest rate
exchange agreements ("Swaps"), interest rate cap agreements ("Caps") and
interest rate collar agreements ("Collars"), to manage its exposure to
fluctuations in interest rates. Swaps, Caps and Collars are matched with
either fixed or variable rate debt and periodic cash payments are accrued
on a settlement basis as an adjustment to interest expense. Any premiums
associated with these instruments are amortized over their term and
realized gains or losses as a result of the termination of the instruments
are deferred and amortized over the remaining term of the underlying debt.
Unrealized gains and losses as a result of these instruments are recognized
when the underlying hedged item is extinguished or otherwise terminated.
Those instruments that have been entered into by the Company to hedge
exposure to interest rate risk are periodically examined by the Company to
ensure that the instruments are marked with underlying liabilities, reduce
the Company's risks relating to interest rates, and, through market value
and sensitivity analysis, maintain a high correlation to the interest
expense of the hedged item. For those instruments that do not meet the
above criteria, variations in their fair value are marked-to-market on a
current basis in the Company's consolidated statement of operations.
The Company does not hold or issue any derivative financial instruments for
trading purposes and is not a party to leveraged instruments (see Note 4).
The credit risks associated with the Company's derivative financial
instruments are controlled through the evaluation and monitoring of the
creditworthiness of the counterparties. Although the Company may be exposed
to losses in the event of nonperformance by the counterparties, the Company
does not expect such losses, if any, to be significant.
- 26 -
<PAGE>
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
statement, which establishes accounting and reporting standards for
derivatives and hedging activities, is effective for fiscal years beginning
after June 15, 1999. Upon the adoption of SFAS No. 133, all derivatives are
required to be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. The Company is currently
evaluating the impact the adoption of SFAS No. 133 will have on its
financial position and results of operations.
Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to those classifications used in 1998.
3. ACQUISITIONS
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 is a public company, which upon closing of certain pending
transactions, will own or manage 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 half of 1999. As
a result, Jones Intercable will become a consolidated public-company
subsidiary of the Company.
Scripps Cable
In November 1996, Comcast acquired the cable television operations
("Scripps Cable") of The E.W. Scripps Company ("E.W. Scripps") in exchange
for approximately 93.0 million shares of Comcast's Class A Special Common
Stock valued at $1.552 billion (the "Scripps Acquisition"). Comcast
accounted for the Scripps Acquisition under the purchase method. Following
the Scripps Acquisition, Comcast contributed Scripps Cable to the Company
(the "Scripps Contribution") at Comcast's historical cost. The Scripps
Contribution was recorded as an increase in additional capital and Scripps
Cable was consolidated with the Company effective November 1, 1996. As the
Scripps Contribution was a non-cash transaction, it had no significant
impact on the Company's consolidated statement of cash flows.
- 27 -
<PAGE>
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
Unaudited Pro Forma Information
The following unaudited pro forma information for the year ended December
31, 1996 has been presented as if the Scripps Contribution had occurred on
January 1, 1996. This unaudited pro forma information is based on
historical results of operations adjusted for acquisition costs and, in the
opinion of management, is not necessarily indicative of what the results
would have been had the Company operated Scripps Cable since January 1,
1996 (dollars in millions):
Service income................................... $1,893.8
Loss before extraordinary items.................. (118.3)
Net loss......................................... (118.3)
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
1998 1997
(Dollars in millions)
<S> <C> <C>
Notes payable to banks and insurance companies,
due in installments through 2003....................................... $972.0 $915.7
8 1/8% Senior notes, due 2004.............................................. 299.8 299.7
8 3/8% Senior notes, due 2007.............................................. 596.5 596.3
6.20% Senior notes, due 2008............................................... 797.9
8 7/8% Senior notes, due 2017.............................................. 545.6 545.5
8 1/2% Senior notes, due 2027.............................................. 249.6 249.6
Other debt, due in installments principally through 2007................... 0.8 0.9
-------- --------
3,462.2 2,607.7
Less current portion....................................................... 0.1 52.8
-------- --------
$3,462.1 $2,554.9
======== ========
</TABLE>
Maturities of long-term debt outstanding as of December 31, 1998 for the
four years after 1999 are as follows (dollars in millions):
2000................................................. 72.1
2001................................................. 209.4
2002................................................. 231.3
2003................................................. 459.5
In addition to the Company's outstanding long-term debt as presented in the
table above, the Company had an aggregate of $134.6 million and $695.2
million of notes payable to Comcast and Comcast's subsidiaries as of
December 31, 1998 and 1997, respectively (see Note 5).
Senior Notes
In November 1998, the Company sold $800.0 million aggregate principal
amount of 6.20% senior notes due 2008. The Company used substantially all
of the net proceeds from the offering to repay existing notes payable to
affiliates (see Note 5) and for general purposes.
Interest on all of the Senior Notes is payable semiannually in May and
November of each year. The 6.20% Senior Notes are redeemable only upon
maturity on November 15, 2008, the 8 1/2% Senior Notes are redeemable, in
whole or in part, at the option of the Company at any time after May 1,
2009, and the remaining Senior Notes are redeemable, in whole or in part,
at the option of the Company at any time. In each case, the Senior Notes
are redeemable at a price equal to the greater of (i) 100% of their
principal amount, plus accrued interest thereon to the date of redemption,
or (ii) the sum of the present values of the remaining scheduled payments
of principal and
- 28 -
<PAGE>
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
interest thereon discounted to the date of redemption on a semiannual basis
at the Adjusted Treasury Rate (as defined), plus accrued interest on the
Senior Notes to the date of redemption. Each holder of the 8 1/2% Senior
Notes may require the Company to repurchase all or a portion of the 8 1/2%
Senior Notes owned by such holder on May 1, 2009 at a purchase price equal
to 100% of the principal amount thereof.
The Senior Notes are unsecured and unsubordinated obligations of the
Company and rank pari passu with all other unsecured and unsubordinated
indebtedness and other obligations of the Company. The Senior Notes are
effectively subordinated to all liabilities of the Company's subsidiaries,
including trade payables.
The indenture for the Senior Notes, among other things, contains
restrictions (with certain exceptions) on the ability of the Company and
its Restricted Subsidiaries (as defined) to: (i) make dividend payments or
other restricted payments; (ii) create liens or enter into sale and
leaseback transactions; and (iii) enter into mergers, consolidations, or
sales of all or substantially all of their assets.
Extraordinary Items
In connection with the refinancing, redemption and optional repayment of
certain indebtedness, the Company expensed unamortized debt acquisition
costs and incurred debt extinguishment costs of $27.1 million, resulting in
extraordinary losses, net of tax, of $16.7 million during the year ended
December 31, 1997.
Interest Rates
The fixed interest rate on notes payable to insurance companies was 8.6% as
of December 31, 1998. Bank debt interest rates vary based upon one or more
of the following rates at the option of the Company:
Base Rate (higher of federal funds rate plus 0.5% or prime rate) to
Base Rate plus 0.75%;
London Interbank Offered Rate ("LIBOR") plus 0.375% to LIBOR plus
1.75%
As of December 31, 1998 and 1997, the Company's effective weighted average
interest rate on its outstanding variable rate notes payable to banks was
6.08% and 6.97%, respectively.
Interest Rate Risk Management
The Company is exposed to market risk including changes in interest rates.
To manage the volatility relating to these exposures, the Company enters
into various derivative transactions pursuant to the Company's policies in
areas such as counterparty exposure and hedging practices. Positions are
monitored using techniques including market value and sensitivity analyses.
The use of interest rate risk management instruments, such as Swaps, Caps
and Collars, is required under the terms of certain of the Company's
outstanding debt agreements. The Company's policy is to manage interest
costs using a mix of fixed and variable rate debt. Using Swaps, the Company
agrees to exchange, at specified intervals, the difference between fixed
and variable interest amounts calculated by reference to an agreed-upon
notional principal amount. Caps are used to lock in a maximum interest rate
should variable rates rise, but enable the Company to otherwise pay lower
market rates. Collars limit the Company's exposure to and benefits from
interest rate fluctuations on variable rate debt to within a certain range
of rates.
- 29 -
<PAGE>
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
The following table summarizes the terms of the Company's existing Swaps,
Caps and Collars as of December 31, 1998 and 1997 (dollars in millions):
<TABLE>
<CAPTION>
Notional Average Estimated
Amount Maturities Interest Rate Fair Value
<S> <C> <C> <C> <C>
As of December 31, 1998
Variable to Fixed Swaps......................... $50.0 1999 5.7% ($0.1)
Caps............................................ 240.0 1999 7.0%
Collar.......................................... 50.0 2000 6.3%/4.0%
As of December 31, 1997
Variable to Fixed Swaps......................... $100.0 1998-1999 5.7% $0.1
Caps............................................ 150.0 1998 6.7%
Collar.......................................... 50.0 1998 7.0%/4.9% 0.2
</TABLE>
The notional amounts of interest rate instruments, as presented in the
above table, are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The estimated fair value
approximates the proceeds (costs) to settle the outstanding contracts.
While Swaps, Caps and Collars represent an integral part of the Company's
interest rate risk management program, their incremental effect on interest
expense for the years ended December 31, 1998, 1997 and 1996 was not
significant.
Estimated Fair Value
The Company's long-term debt had estimated fair values of $3.766 billion
and $2.862 billion as of December 31, 1998 and 1997, respectively. The
estimated fair value of the Company's publicly traded debt is based on the
quoted market price for that debt. Interest rates that are currently
available to the Company for issuance of debt with similar terms and
remaining maturities are used to estimate fair value for debt issues for
which quoted market prices are not available.
Debt Covenants
Certain of the Company's subsidiaries' loan agreements contain restrictive
covenants which, among other things, limit the Company's ability to enter
into arrangements for the acquisition or disposition of property and
equipment, investments, mergers and the incurrence of additional debt.
Certain of these agreements require that certain ratios and cash flow
levels be maintained and contain certain restrictions on dividend payments,
payment of management fees and advances of funds to affiliated entities and
the Company. The Company and its subsidiaries were in compliance with such
restrictive covenants for all periods presented. In addition, the stock of
certain subsidiary companies is pledged as collateral for unused
irrevocable standby letters of credit on behalf of affiliates.
As of December 31, 1998, a portion of the Company's cash, cash equivalents,
short-term investments and cash held by an affiliate is restricted to use
by subsidiaries of the Company under contractual arrangements, including
subsidiary credit agreements.
Restricted net assets of the Company's subsidiaries were approximately $2.9
billion as of December 31, 1998. The restricted net assets of subsidiaries
exceeds the Company's consolidated net assets as certain of the Company's
subsidiaries have a stockholder's deficiency.
Lines and Letters of Credit
As of December 31, 1998, certain subsidiaries of the Company had unused
lines of credit of $703.0 million, $103.0 million of which is restricted by
the covenants of the related debt agreements and to subsidiary general
purposes and dividend declaration.
As of December 31, 1998 the Company and certain of its subsidiaries had
unused irrevocable standby letters of credit totaling $2.3 million to cover
potential fundings associated with several projects.
- 30 -
<PAGE>
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
5. NOTES PAYABLE TO AFFILIATES
As of December 31, 1998 and 1997, notes payable to affiliates (the "Notes
Payable") include $130.7 million and $670.6 million principal amount of
Notes Payable to Comcast and certain of its wholly owned subsidiaries. As
of December 31, 1998 and 1997, accrued interest relating to such Notes
Payable of $3.9 million and $24.6 million, respectively, was added to the
principal. The Notes Payable bear interest at rates ranging from 7.25% to
9.25% as of December 31, 1998 (weighted average interest rate of 7.73% and
7.71% as of December 31, 1998 and 1997) and are due in 2002.
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 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 years ended December 31,
1998, 1997 and 1996, the Company's service income includes $13.3 million,
$10.2 million and $8.3 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 $130.4 million, $119.7 million
and $93.2 million in 1998, 1997 and 1996, respectively. These management
fees are included in selling, general and administrative expenses in the
Company's consolidated statement of operations. 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, L.L.C. (the "LLC"), a majority owned subsidiary of
the Company (see Note 9). Management fees deferred in 1998, 1997 and 1996
were $5.5 million, $4.7 million and $4.3 million, respectively. Deferred
management fees were $142.4 million and $136.9 million as of December 31,
1998 and 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 that 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 consolidated statement of operations. 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
$760.9 million, $674.6 million and $505.0 million, including $640.5
million, $560.9 million and $417.0 million of Programming Charges, in 1998,
1997 and 1996, respectively. The Programming Charges include $59.4 million,
$49.0 million and $26.2 million in 1998, 1997 and 1996, respectively,
relating to programming purchased by the Company, through Comcast, from
suppliers in which Comcast holds an equity interest.
- 31 -
<PAGE>
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
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 in 1998, 1997 and 1996 were $120.5 million,
$102.3 million and $62.3 million, respectively. Deferred Programming
Charges were $382.4 million and $261.9 million as of December 31, 1998 and
1997, respectively.
Current due to affiliates in the Company's 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 December 31, 1998 and 1997,
$57.1 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 consolidated balance sheet. During the years
ended December 31, 1998, 1997 and 1996, the Company recognized investment
income of $3.1 million, $3.9 million and $4.1 million, respectively, on
cash held by CFAC.
7. INCOME TAXES
The Company and its 80% or more owned subsidiaries (the "Cable Consolidated
Group") join with Comcast in filing a consolidated federal income tax
return. Comcast allocates income tax expense or benefit to the Company as
if the Company was filing a separate federal income tax return. Comcast
Communications Properties, Inc. ("CCP"), an indirect majority owned
subsidiary of the Company, files a separate consolidated federal income tax
return. Tax benefits from both losses and tax credits are made available to
the Company as it is able to realize such benefits on a separate return
basis. The Company pays Comcast for income taxes an amount equal to the
amount of tax it would pay if it filed a separate tax return.
The LLC is treated as a partnership for income tax purposes. As such, any
taxable income or loss attributable to the LLC, excluding any income or
loss from its subsidiaries, flows through to the Company and CalPERS based
on their respective ownership percentages.
Income tax benefit consists of the following components (dollars in
millions):
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Current expense
Federal.............................................. $1.9 $ $32.8
State................................................ 5.4 6.1 7.3
------ ------ -----
7.3 6.1 40.1
------ ------ -----
Deferred (benefit) expense
Federal.............................................. (41.1) (48.2) (48.3)
State................................................ (2.0) (1.5) 3.7
------ ------ -----
(43.1) (49.7) (44.6)
------ ------ -----
Income tax benefit................................... ($35.8) ($43.6) ($4.5)
====== ====== =====
</TABLE>
- 32 -
<PAGE>
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
The effective income tax benefit of the Company differs from the statutory
amount because of the effect of the following items (dollars in millions):
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Federal tax at statutory rate........................ ($52.5) ($61.8) ($17.1)
Non-deductible depreciation and amortization......... 21.5 21.5 12.5
State income taxes, net of federal benefit........... 2.2 3.1 7.2
Interest income, taxable to CalPERS.................. (7.5) (6.7) (5.9)
Other................................................ .5 0.3 (1.2)
------ ------ ------
Income tax benefit................................... ($35.8) ($43.6) ($4.5)
====== ====== ======
</TABLE>
Deferred income tax benefit resulted from the following differences between
financial and income tax reporting (dollars in millions):
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Depreciation and amortization........................ ($65.0) ($87.5) ($54.9)
Accrued expenses not currently deductible............ (1.0)
Deductible costs accrued in prior years.............. 1.2 2.8 6.5
Temporary differences associated
with sale or exchange of securities.............. 3.0 (6.9) 6.9
Change in net operating loss carryforwards........... 22.8 44.6 (4.4)
Change in valuation allowance and other.............. (5.1) (2.7) 2.3
------ ------ ------
Deferred income tax benefit.......................... ($43.1) ($49.7) ($44.6)
====== ====== ======
</TABLE>
Significant components of the Company's net deferred tax liability are as
follows (dollars in millions):
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................................... $110.1 $132.9
Less valuation allowance............................................... (95.6) (97.5)
-------- --------
14.5 35.4
-------- --------
Deferred tax liabilities, principally differences between book
and tax basis of property and equipment and deferred charges........... 1,461.5 1,523.8
-------- --------
Net deferred tax liability............................................. $1,447.0 $1,488.4
======== ========
</TABLE>
The Company's valuation allowance against deferred tax assets includes
approximately $60.0 million for which any subsequent tax benefit recognized
will be allocated to reduce goodwill and other noncurrent intangible
assets. For income tax reporting purposes, CCP has a net operating loss
carryforward of approximately $40.0 million for which a deferred tax asset
has been recorded and which expires through 2018.
- 33 -
<PAGE>
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
8. STATEMENT OF CASH FLOWS-SUPPLEMENTAL INFORMATION
The Company made cash payments for interest on its long-term debt of $214.4
million, $225.4 million and $214.4 million in 1998, 1997 and 1996,
respectively. The Company made cash payments for interest on the Notes
Payable of $70.5 million, $17.7 million and $25.6 million in 1998, 1997 and
1996, respectively.
The Company made cash payments to Comcast for federal income taxes of $32.9
million and $19.9 million in 1997 and 1996, respectively. The Company made
cash payments to the respective state taxing authorities for state income
taxes of $5.4 million, $7.0 million and $6.6 million in 1998, 1997 and
1996, respectively.
9. COMMITMENTS AND CONTINGENCIES
Commitments
At any time after December 18, 2001, CalPERS may elect to liquidate its
interest in the LLC, a 55% owned indirect subsidiary of the Company (which
holds cable communications systems serving approximately 644,000
subscribers as of December 31, 1998) in which CalPERS owns the remaining
45% interest, at a price based upon the fair value of CalPERS' interest in
the LLC, adjusted, under certain circumstances, for certain performance
criteria relating to the fair value of the LLC or to Comcast's common
stock. Except in certain limited circumstances, Comcast, at its option, may
satisfy this liquidity arrangement by purchasing CalPERS' interest for
cash, by issuing its common stock (subject to certain limitations) or by
selling the LLC.
In December 1996, an indirect majority owned subsidiary of the Company
entered into an operating lease agreement granting certain rights of use of
certain non-cable assets to the counterparty for a period of five years,
subject to certain conditions. Pursuant to this agreement, the Company
received an advance payment of $17.0 million, representing the total
minimum lease payments to be received over the lease term. The Company has
recorded this amount in other long-term liabilities in its consolidated
balance sheet and is amortizing such amount to service income over the
lease term on a straight-line basis.
Minimum annual rental commitments for office space and equipment under
noncancelable operating leases are as follows (dollars in millions):
1999............................................. $8.7
2000............................................. 7.5
2001............................................. 6.6
2002............................................. 5.5
2003............................................. 4.7
Thereafter....................................... 14.4
Pole rentals have been excluded from the above schedule as they are
generally cancelable after an initial period by either party upon notice.
Rental expense (including pole rentals) of $23.8 million, $22.6 million and
$19.7 million has been charged to operations in 1998, 1997 and 1996,
respectively.
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 31, 1999 in return for which it
- 34 -
<PAGE>
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Concluded)
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 31, 1999.
- 35 -
<PAGE>
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
The information called for by Item 10, Directors and Executive Officers of the
Registrant, Item 11, Executive Compensation, Item 12, Security Ownership of
Certain Beneficial Owners and Management, and Item 13, Certain Relationships and
Related Transactions, is omitted pursuant to SEC General Instruction I of Form
10-K.
- 36 -
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements of ours are included in
Part II, Item 8:
Independent Auditors' Report......................................19
Consolidated Balance Sheet--December 31, 1998 and 1997............20
Consolidated Statement of Operations--Years
Ended December 31, 1998, 1997 and 1996..........................21
Consolidated Statement of Cash Flows--Years
Ended December 31, 1998, 1997 and 1996..........................22
Consolidated Statement of Stockholder's Equity
(Deficiency)--Years Ended December 31, 1998, 1997 and 1996......23
Notes to Consolidated Financial Statements........................24
(b) (i) The following financial statement schedules required to be filed
by Items 8 and 14(d) of Form 10-K are included in Part IV:
Schedule I - Condensed Financial Information of Registrant
Unconsolidated (Parent Only)
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable,
not required or the required information is included in the
consolidated financial statements or notes thereto.
(c) Reports on Form 8-K
(i) We filed a Current Report on Form 8-K under Item 5 on November 10,
1998 relating to our unaudited financial position and the results
of operations for the nine and three months ended September 30,
1998.
(d) Exhibits required to be filed by Item 601 of Regulation S-K:
3.1 Certificate of Incorporation filed on April 2, 1981
(incorporated by reference to Exhibit 3.1(a) to our
Registration Statement on Form S-4, as amended, filed on
September 22, 1997).
3.2 By-laws (incorporated by reference to Exhibit 3.2 to our
Registration Statement on Form S-4, as amended, filed on
September 22, 1997).
4.1(a) Indenture dated as of May 1, 1997 by and between Comcast
Cable Communications, Inc. and Bank of Montreal Trust Company
(incorporated by reference to Exhibit 4.1(a) to our
Registration Statement on Form S-4, as amended, filed on
September 22, 1997).
4.1(b) Form of Notes relating to our 8 1/8% Senior Notes due 2004,
8 3/8% Senior Notes due 2007, 6.20% Senior Notes due 2008,
8 7/8% Senior Notes due 2017 and 8 1/2% Senior Notes due 2027
(incorporated by reference to Exhibit 4.1(b) to the Company's
Registration Statement on Form S-4, as amended, filed on
September 22, 1997).
10.1 Tax Sharing Agreement, dated as of December 2, 1992, among
Storer Communications, Inc., TKR Cable I, Inc., TKR Cable II,
Inc., TKR Cable III, Inc., Tele-Communications, Inc., Comcast
Corporation and each of the Departing Subsidiaries that are
signatories thereto (incorporated by reference to Exhibit 4
to Comcast Corporation's Current Report on Form 8-K filed on
December 17, 1992, as amended by Form 8 filed January 8,
1993).
10.2 Tax Sharing Agreement, dated December 2, 1992, between
Comcast Corporation and Comcast Storer, Inc. (incorporated by
reference to Exhibit 9 to Comcast Corporation's Current
Report on Form 8-K filed on December 17, 1992, as amended by
Form 8 filed January 8, 1993).
10.3 Comcast MHCP Holdings, L.L.C. Amended and Restated Limited
Liability Company Agreement, dated as of December 18, 1994,
among the Comcast Cable Communications, Inc., The California
Public Employees' Retirement System and, for certain limited
purposes, Comcast
- 37 -
<PAGE>
Corporation (incorporated by reference to Exhibit 10.1 to
Comcast Corporation's Current Report on Form 8-K filed on
January 6, 1995).
10.4 Credit Agreement, dated as of December 22, 1994, among
Comcast MH Holdings, Inc., the banks listed therein, The
Chase Manhattan Bank (National Association), NationsBank of
Texas, N.A. and the Toronto-Dominion Bank, as Arranging
Agents, The Bank of New York, The Bank of Nova Scotia,
Canadian Imperial Bank of Commerce and Morgan Guaranty Trust
Company of New York, as Managing Agents and NationsBank of
Texas, N.A., as Administrative Agent (incorporated by
reference to Exhibit 10.2 to Comcast Corporation's Current
Report on Form 8- K filed on January 6, 1995).
10.5 Pledge Agreement, dated as of December 22, 1994, between
Comcast MH Holdings, Inc. and NationsBank of Texas, N.A., as
the secured party (incorporated by reference to Exhibit 10.3
to Comcast Corporation's Current Report on Form 8-K filed on
January 6, 1995).
10.6 Pledge Agreement dated as of December 22, 1994, between
Comcast Communications Properties, Inc. and NationsBank of
Texas, N.A., as the Secured Party (incorporated by reference
to Exhibit 10.4 to Comcast Corporation's Current Report on
Form 8-K filed on January 6, 1995).
10.7 Affiliate Subordination Agreement (as the same may be
amended, modified, supplemented, waived, extended or restated
from time to time, this "Agreement"), dated as of December
22, 1994, among Comcast Corporation, Comcast MH Holdings,
Inc. (the "Borrower"), any affiliate of the Borrower that
shall have become a party thereto and NationsBank of Texas,
N.A., as Administrative Agent under the Credit Agreement
dated as of December 22, 1994, among the Borrower, the Banks
listed therein, The Chase Manhattan Bank (National
Association), NationsBank of Texas, N.A. and The
Toronto-Dominion Bank, as Arranging Agents. The Bank of New
York, The Bank of Nova Scotia, Canadian Imperial Bank of
Commerce and Morgan Guaranty Trust Company of New York, as
Managing Agents, and the Administrative Agent (incorporated
by reference to Exhibit 10.5 to Comcast Corporation's Current
Report on Form 8- K filed on January 6, 1995).
10.8 Registration Rights and Price Protection Agreement, dated as
of December 22, 1994, by and between Comcast Corporation and
The California Public Employees' Retirement System
(incorporated by reference to Exhibit 10.8 to Comcast
Corporation's Current Report on Form 8- K filed on January 6,
1995).
10.9 Management Agreement, dated as of April 24, 1997, between
Comcast Cable Communications, Inc. and Comcast Corporation
(incorporated by reference to Exhibit 10.11 to our
Registration Statement on Form S-4, as amended, filed on
September 22, 1997).
10.10 Promissory Note, dated as of July 2, 1997, between Comcast
Cable Communications, Inc. and Comcast Corporation
(incorporated by reference to Exhibit 10.13 to our
Registration Statement on Form S-4, as amended, filed on
September 22, 1997).
10.11 Credit Agreement, dated as of November 15, 1996, among
Comcast SCH Holdings, Inc., the banks listed therein,
Nationsbank of Texas, N.A., as Documentation Agent, The Chase
Manhattan Bank, as Syndication Agent, The Bank of New York,
The Chase Manhattan Bank and Nationsbank of Texas, N.A., as
Managing Agents, and The Bank of New York, as Administrative
Agent (incorporated by reference to Exhibit 10.35 to Comcast
Corporation's Form 10-K filed on March 3, 1998).
12.1 Statement re: Computation of Ratio of Earnings to Fixed
Charges.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
- 38 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in Philadelphia,
Pennsylvania on March 19, 1999.
Comcast Cable Communications, Inc.
By: /s/ Brian L. Roberts
-----------------------------------
Brian L. Roberts
Vice Chairman and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Ralph J. Roberts
- -----------------------
Ralph J. Roberts Chairman; Director March 19, 1999
/s/ Julian A. Brodsky
- -----------------------
Julian A. Brodsky Vice Chairman; Director March 19, 1999
/s/ Brian L. Roberts
- -----------------------
Brian L. Roberts Vice Chairman; Director (Principal March 19, 1999
Executive Officer)
/s/ Lawrence S. Smith
- -----------------------
Lawrence S. Smith Executive Vice President March 19, 1999
(Principal Accounting Officer)
/s/ John R. Alchin
- -----------------------
John R. Alchin Senior Vice President, Treasurer March 19, 1999
(Principal Financial Officer)
/s/ Stanley L. Wang
- -----------------------
Stanley L. Wang Senior Vice President, Secretary; March 19, 1999
Director
- 39 -
<PAGE>
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
REGISTRANT UNCONSOLIDATED (PARENT ONLY)
CONDENSED BALANCE SHEET
(Dollars in millions, except share data)
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS
Other current assets......................................................... $ $0.2
-------- --------
Total current assets..................................................... 0.2
Investments in and amounts due to/from subsidiaries eliminated
upon consolidation, net...................................................... 2,751.6 2,091.0
Deferred charges, net........................................................... 27.1 17.1
-------- --------
$2,778.7 $2,108.3
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accrued interest and other................................................... $30.9 $24.1
-------- --------
Total current liabilities................................................ 30.9 24.1
-------- --------
Long-term debt............................................................... 2,489.4 1,691.1
-------- --------
Notes payable to affiliate................................................... 72.3
-------- --------
Deferred income taxes, due to affiliates..................................... 83.7 51.9
-------- --------
Other liabilities ........................................................... 1.7 1.8
-------- --------
STOCKHOLDER'S EQUITY
Common stock, $1 par value - authorized and issued, 1,000 shares.............
Additional capital........................................................... 3,066.2 3,066.2
Accumulated deficit.......................................................... (2,896.4) (2,799.1)
Unrealized gains on marketable securities held by a subsidiary............... 3.2
-------- --------
Total stockholder's equity............................................... 173.0 267.1
-------- --------
$2,778.7 $2,108.3
======== ========
</TABLE>
- 40 -
<PAGE>
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF
REGISTRANT UNCONSOLIDATED (PARENT ONLY)
CONDENSED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
(In millions)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
AMORTIZATION.................................................. $1.7 $1.0 $
--------- --------- ---------
OPERATING LOSS................................................ 1.7 1.0
OTHER (INCOME) EXPENSE
Interest (income) expense on affiliate notes, net.......... (142.4) (93.3) 16.4
Interest expense (income), net............................. 149.9 96.5 (0.6)
Equity in net losses of affiliates......................... 82.1 117.9 5.1
--------- --------- ---------
89.6 121.1 20.9
LOSS BEFORE INCOME TAX EXPENSE................................ (91.3) (122.1) (20.9)
INCOME TAX EXPENSE............................................ 6.0 6.7 1.7
--------- --------- ---------
NET LOSS...................................................... (97.3) (128.8) (22.6)
ACCUMULATED DEFICIT
Beginning of year.......................................... (2,799.1) (2,124.0) (2,101.4)
Elimination of outstanding notes receivable from
affiliate through a non-cash dividend to Comcast......... (546.3)
--------- --------- ---------
End of year................................................ ($2,896.4) ($2,799.1) ($2,124.0)
========= ========= =========
</TABLE>
- 41 -
<PAGE>
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF
REGISTRANT UNCONSOLIDATED (PARENT ONLY)
CONDENSED STATEMENT OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................... ($97.3) ($128.8) ($22.6)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Amortization............................................. 1.7 1.0
Non-cash interest expense................................ 0.4
Equity in net losses of affiliates....................... 82.1 117.9 5.1
Deferred income tax benefit.............................. 31.8 50.4 (4.3)
------ -------- --------
18.7 40.5 (21.8)
Changes in working capital and other liabilities......... 6.9 29.1 2.2
------ -------- --------
Net cash provided by (used in) operating activities.... 25.6 69.6 (19.6)
------ -------- --------
FINANCING ACTIVITIES
Proceeds from borrowings................................... 797.9 1,691.1
Proceeds from notes payable to affiliate................... 72.4 72.3
Repayment of notes payable to affiliates................... (144.7) (45.0)
Deferred financing costs................................... (11.7) (18.1) 0.3
------ -------- --------
Net cash provided by financing activities................ 713.9 1,700.3 0.3
------ -------- --------
INVESTING ACTIVITIES
Net transactions with affiliates........................... (739.5) (1,769.9) 14.8
------ -------- --------
Net cash (used in) provided by investing activities...... (739.5) (1,769.9) 14.8
------ -------- --------
DECREASE IN CASH AND CASH EQUIVALENTS......................... (4.5)
CASH AND CASH EQUIVALENTS, beginning of year.................. 4.5
------ -------- --------
CASH AND CASH EQUIVALENTS, end of year........................ $ $ $
====== ======== ========
</TABLE>
- 42 -
<PAGE>
COMCAST CABLE COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In millions)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Deductions Balance
Beginning Effect of Costs and from at End
of Year Acquisitions Expenses Reserves(A) of Year
Allowance for Doubtful Accounts
<S> <C> <C> <C> <C> <C>
1998..................................... $16.7 $ $15.8 $13.1 $19.4
1997..................................... 12.0 18.4 13.7 16.7
1996..................................... 10.7 1.4 15.7 15.8 12.0
</TABLE>
(A) Uncollectible accounts written off.
- 43 -
Exhibit 12.1
COMCAST CABLE COMMUNICATIONS, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(dollars in millions)
<TABLE>
<CAPTION>
Years Ended December 31,
1996
Pro
1998 1997 Forma(1) Actual
<S> <C> <C> <C> <C>
Earnings (loss) before fixed charges (2):
Loss before extraordinary items ($97.2) ($112.1) ($118.3) ($22.6)
Income tax benefit (35.8) (43.6) (50.2) (4.5)
Fixed charges 275.7 265.2 260.5 260.5
------ ------ ------ ------
$142.7 $109.5 $92.0 $233.4
====== ====== ====== ======
Fixed charges (2):
Interest expense $223.6 $227.9 $228.4 $228.4
Interest expense on notes payable
to affiliates 52.1 37.3 32.1 32.1
------ ------ ------ ------
$275.7 $265.2 $260.5 $260.5
====== ====== ====== ======
Ratio of earnings to fixed charges (3) -- -- -- --
<FN>
_______________________
(1) Pro forma ratio of earnings to fixed charges information is presented as if
the Scripps Acquisition (as defined herein) occurred on January 1, 1996.
(2) For the purpose of calculating the ratio of earnings to fixed charges,
earnings consist of loss before extraordinary items, income tax benefit,
and fixed charges. Fixed charges consist of interest expense and interest
expense on notes payable to affiliates.
(2) For the years ended December 31, 1998, 1997 and 1996, earnings, as defined
above, were inadequate to cover fixed charges by $133.0 million, $155.7
million and $27.1 million, respectively. On a pro forma basis, for the year
ended December 31, 1996, earnings, as defined above, were inadequate to
cover fixed charges by $168.5 million.
</FN>
</TABLE>
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES
To the Board of Directors and Stockholder
Comcast Cable Communications, Inc.
Wilmington, Delaware
We consent to the incorporation by reference in Registration Statement Number
333-66649 of Comcast Cable Communications, Inc. and its subsidiaries (the
"Company") on Form S-3 of our report dated February 22, 1999, appearing in the
Annual Report on Form 10-K of Comcast Cable Communications, Inc. and its
subsidiaries for the year ended December 31, 1998.
Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedules of the Company, listed in Item
14(b)(i). These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
February 22, 1999
Philadelphia, Pennsylvania
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001040573
<NAME> COMCAST CABLE COMMUNICATIONS, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 35
<SECURITIES> 71
<RECEIVABLES> 110
<ALLOWANCES> (19)
<INVENTORY> 35
<CURRENT-ASSETS> 245
<PP&E> 3,277
<DEPRECIATION> (1,181)
<TOTAL-ASSETS> 6,449
<CURRENT-LIABILITIES> 531
<BONDS> 3,462
0
0
<COMMON> 0
<OTHER-SE> 173
<TOTAL-LIABILITY-AND-EQUITY> 6,449
<SALES> 2,277
<TOTAL-REVENUES> 2,277
<CGS> 0
<TOTAL-COSTS> (2,167)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (276)
<INCOME-PRETAX> (150)<F1>
<INCOME-TAX> 36
<INCOME-CONTINUING> (97)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (97)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> Loss before income tax benefit and other items excludes the effect of
minority interests, net of tax, of $17.
</FN>
</TABLE>
