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Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended:

SEPTEMBER 30, 2006

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 001-32871

 


LOGO

COMCAST CORPORATION

(Exact name of registrant as specified in its charter)

 

PENNSYLVANIA   27-0000798
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

1500 Market Street, Philadelphia, PA 19102-2148

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (215) 665-1700

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.

 

Yes x No ¨

 


Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x                        Accelerated filer ¨                        Non-accelerated filer ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ¨ No x

As of September 30, 2006, there were 1,368,277,082 shares of our Class A Common Stock, 703,425,138 shares of our Class A Special Common Stock and 9,444,375 shares of our Class B Common Stock outstanding.

 



Table of Contents

COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

TABLE OF CONTENTS

 

                 Page
Number

PART I. FINANCIAL INFORMATION

  
  Item 1.   

Financial Statements

   2
     Condensed Consolidated Balance Sheet as of September 30, 2006 and December 31, 2005 (Unaudited)    2
     Condensed Consolidated Statement of Operations for the Three and Nine Months Ended September 30, 2006 and 2005 (Unaudited)    3
     Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2006 and 2005 (Unaudited)    4
    

Notes to Condensed Consolidated Financial Statements (Unaudited)

   5
  Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    31
  Item 3.    Quantitative and Qualitative Disclosures About Market Risk    39
  Item 4.    Controls and Procedures    39

PART II. OTHER INFORMATION

  
  Item 1.   

Legal Proceedings

   39
  Item 1a.   

Risk Factors

   39
  Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

   39
  Item 6.   

Exhibits

   40

SIGNATURES

   41

 


This Quarterly Report on Form 10-Q is for the three and nine months ended September 30, 2006. This Quarterly Report modifies and supersedes documents filed prior to this Quarterly Report. The Securities and Exchange Commission (“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 Quarterly Report. In addition, information that we file with the SEC in the future will automatically update and supersede information contained in this Quarterly Report. Throughout this Quarterly Report, we refer to Comcast Corporation as “Comcast”; Comcast and its consolidated subsidiaries as “we,” “us” and “our”; and Comcast Holdings Corporation as “Comcast Holdings.”

You should carefully review the information contained in this Quarterly Report and particularly consider any risk factors that we set forth in this Quarterly Report and in other reports or documents that we file from time to time with the SEC. In this Quarterly Report, we state our beliefs of future events and of our future financial performance. In some cases, you can identify these 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. In evaluating those statements, you should specifically consider various factors, including the risks outlined below. Actual events or our actual results may differ materially from any of our forward-looking statements.

Our businesses may be affected by, among other things, the following:

 

   

all of the services offered by our cable systems face a wide range of competition that could adversely affect our future results of operations

 

 

   

programming costs are increasing, which could adversely affect our future results of operations

 

 

   

we are subject to regulation by federal, state and local governments, which may impose costs and restrictions

 

 

   

we may face increased competition because of technological advances and new regulatory requirements, which could adversely affect our future results of operations

 

 

   

we face risks arising from the outcome of various litigation matters

 

 

   

acquisitions and other strategic transactions present many risks, and we may not realize the financial and strategic goals that were contemplated at the time of any transaction

 

 

   

our Chairman and CEO has considerable influence over our operations

 

 

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COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheet

(Unaudited)

 

(Dollars in millions, except share data)   September 30,
2006
    December 31,
2005
 

ASSETS

   

Current Assets

   

Cash and cash equivalents

  $ 2,774     $ 693  

Investments

    656       148  

Accounts receivable, less allowance for doubtful accounts of $150 and $132

    1,228       1,008  

Other current assets

    823       685  

Current assets of discontinued operations

          60  

Total current assets

    5,481       2,594  

Investments

    7,245       12,675  

Property and equipment, net of accumulated depreciation of $14,579 and $12,079

    20,671       17,704  

Franchise rights

    56,072       48,804  

Goodwill

    13,515       13,498  

Other intangible assets, net of accumulated amortization of $5,458 and $4,635

    4,457       3,118  

Other noncurrent assets, net

    531       635  

Noncurrent assets of discontinued operations, net

          4,118  
  $ 107,972     $ 103,146  

LIABILITIES AND STOCKHOLDERS’ EQUITY

   

Current Liabilities

   

Accounts payable and accrued expenses related to trade creditors

  $ 2,351     $ 1,985  

Accrued expenses and other current liabilities

    2,867       2,481  

Deferred income taxes

    185       2  

Current portion of long-term debt

    773       1,689  

Current liabilities of discontinued operations

          112  

Total current liabilities

    6,176       6,269  

Long-term debt, less current portion

    26,446       21,682  

Deferred income taxes

    27,499       27,370  

Other noncurrent liabilities

    6,453       6,921  

Noncurrent liabilities of discontinued operations

          28  

Minority interest

    676       657  

Commitments and Contingencies (Note 10)

   

Stockholders’ Equity

   

Preferred stock—authorized 20,000,000 shares; issued, zero

           

Class A common stock, $0.01 par value—authorized, 7,500,000,000 shares; issued, 1,611,917,582 and 1,607,007,818; outstanding, 1,368,277,082 and 1,363,367,318

    16       16  

Class A Special common stock, $0.01 par value—authorized, 7,500,000,000 shares; issued 750,714,981 and 813,097,757; outstanding, 703,425,138 and 765,807,914

    8       9  

Class B common stock, $0.01 par value—authorized, 75,000,000 shares; issued and outstanding, 9,444,375

           

Additional capital

    42,221       43,000  

Retained earnings

    6,088       4,825  

Treasury stock, 243,640,500 Class A common shares and 47,289,843 Class A Special common shares

    (7,517 )     (7,517 )

Accumulated other comprehensive loss

    (94 )     (114 )

Total stockholders’ equity

    40,722       40,219  
  $ 107,972     $ 103,146  

See notes to condensed consolidated financial statements.

 

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COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

Condensed Consolidated Statement of Operations

(Unaudited)

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(Dollars in millions, except per share data)       2006             2005             2006             2005      

Revenues

  $ 6,432     $ 5,284     $ 17,935     $ 15,659  

Costs and Expenses

       

Operating (excluding depreciation)

    2,300       1,894       6,559       5,570  

Selling, general and administrative

    1,695       1,394       4,528       4,057  

Depreciation

    963       863       2,748       2,525  

Amortization

    250       292       699       835  
    5,208       4,443       14,534       12,987  

Operating income

    1,224       841       3,401       2,672  

Other Income (Expense)

       

Interest expense

    (530 )     (422 )     (1,502 )     (1,333 )

Investment income (loss), net

    857       (104 )     935       36  

Equity in net (losses) income of affiliates

    (65 )     (18 )     (86 )     (19 )

Other income (expense)

    96       19       194       (58 )
    358       (525 )     (459 )     (1,374 )

Income from continuing operations before income taxes and minority interest

    1,582       316       2,942       1,298  

Income tax expense

    (610 )     (129 )     (1,126 )     (570 )

Income from continuing operations before minority interest

    972       187       1,816       728  

Minority interest

    (3 )     11       (10 )     (7 )

Net income from continuing operations

    969       198       1,806       721  

Income from discontinued operations, net of tax

    14       24       103       74  

Gain on discontinued operations, net of tax

    234             234        

Net Income

  $ 1,217     $ 222     $ 2,143     $ 795  

Basic earnings for common stockholders per common share

       

Income from continuing operations

  $ 0.46     $ 0.09     $ 0.85     $ 0.33  

Income from discontinued operations

    0.01       0.01       0.05       0.03  

Gain on discontinued operations

    0.11             0.11        

Net income

  $ 0.58     $ 0.10     $ 1.01     $ 0.36  

Diluted earnings for common stockholders per common share

       

Income from continuing operations

  $ 0.46     $ 0.09     $ 0.85     $ 0.33  

Income from discontinued operations

    0.01       0.01       0.05       0.03  

Gain on discontinued operations

    0.11             0.11        

Net income

  $ 0.58     $ 0.10     $ 1.01     $ 0.36  

See notes to condensed consolidated financial statements.

 

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COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

Condensed Consolidated Statement of Cash Flows

(Unaudited)

 

    Nine Months Ended
September 30,
 
(Dollars in millions)   2006     2005  

OPERATING ACTIVITIES

   

Net income

  $ 2,143     $ 795  

Adjustments to reconcile net income to net cash provided by operating activities:

   

Depreciation

    2,748       2,525  

Amortization

    699       835  

Share-based compensation expense

    145       40  

Noncash interest expense (income), net

    69       (8 )

Equity in net losses (income) of affiliates

    86       19  

(Gains) losses on investments and noncash other (income) expense, net

    (959 )     (35 )

Gain on discontinued operations

    (797 )      

Depreciation and amortization on discontinued operations

    139       181  

Noncash contribution expense

    10       8  

Minority interest

    10       7  

Deferred income taxes

    911       (61 )

Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:

   

Change in accounts receivable, net

    (136 )     (27 )

Change in accounts payable and accrued expenses related to trade creditors

    302       (61 )

Change in other operating assets and liabilities

    (238 )     (278 )

Net cash provided by (used in) operating activities

    5,132       3,940  

FINANCING ACTIVITIES

   

Proceeds from borrowings

    5,970       2,333  

Retirements and repayments of debt

    (2,222 )     (1,942 )

Repurchases of common stock

    (1,882 )     (1,291 )

Issuances of common stock

    133       76  

Other

    7       27  

Net cash provided by (used in) financing activities

    2,006       (797 )

INVESTING ACTIVITIES

   

Capital expenditures

    (3,051 )     (2,753 )

Cash paid for intangible assets

    (227 )     (204 )

Acquisitions, net of cash acquired

    (3,839 )     (196 )

Proceeds from sales and restructuring of investments

    2,519       626  

Purchases of investments

    (471 )     (310 )

Proceeds from sales (purchases) of short-term investments

    15       (66 )

Other

    (3 )     (113 )

Net cash (used in) provided by investing activities

    (5,057 )     (3,016 )

Increase in cash and cash equivalents

    2,081       127  

Cash and cash equivalents, beginning of period

    693       452  

Cash and cash equivalents, end of period

  $ 2,774     $ 579  

See notes to condensed consolidated financial statements.

 

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COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Condensed Consolidated Financial Statements

Basis of Presentation

We have prepared these unaudited condensed consolidated financial statements based upon Securities and Exchange Commission (“SEC”) rules that permit reduced disclosure for interim periods.

These financial statements include all adjustments that are necessary for a fair presentation of our results of operations and financial condition for the interim periods shown, including normal recurring accruals and other items. The results of operations for the interim periods presented are not necessarily indicative of results for the full year.

For a more complete discussion of our accounting policies and certain other information, refer to our annual financial statements for the preceding fiscal year as filed with the SEC.

Reclassifications

Certain reclassifications have been made in our segment presentation to be consistent with our management reporting presentation (see Note 11).

Note 2: Recent Accounting Pronouncements

SFAS No. 123R

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment” (“SFAS No. 123R”) using the Modified Prospective Approach. See Note 8 for further detail regarding the adoption of this standard.

SFAS No. 155

In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an Amendment of FASB Statements No. 133 and 140” (“SFAS No. 155”). SFAS No. 155 allows financial instruments that contain an embedded derivative and that otherwise would require bifurcation to be accounted for as a whole on a fair value basis, at the holders’ election. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. We do not expect that the adoption of SFAS No. 155 will have a material impact on our consolidated financial statements.

EITF Issue No. 06-3

In June 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (“EITF 06-3”). EITF 06-3 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The provisions of EITF 06-3 will be effective for us as of January 1, 2007. We are currently evaluating the requirements of EITF 06-3 and the impact it may have on our consolidated financial statements.

FASB Interpretation No. 48

In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the recognition threshold and measurement of a tax position

 

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QUARTER ENDED SEPTEMBER 30, 2006

 

taken on a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. FIN 48 also requires expanded disclosure with respect to the uncertainty in income taxes. We are currently evaluating the requirements of FIN 48 and the impact it may have on our consolidated financial statements.

SAB No. 108

In September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements” (“SAB No. 108”). SAB No. 108 requires the use of two alternative approaches in quantitatively evaluating materiality of misstatements. If the misstatement as quantified under either approach is material to the current year financial statements, the misstatement must be corrected. If the effect of correcting the prior year misstatements, if any, in the current year income statement is material, the prior year financial statements should be corrected. In the year of adoption (fiscal years ending after November 15, 2006 or calendar year 2006 for us), the misstatements may be corrected as an accounting change by adjusting opening retained earnings rather than being included in the current year income statement. We are currently evaluating the requirements of SAB No. 108 and the impact it may have on our consolidated financial statements.

SFAS No. 158

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”). SFAS No. 158 requires companies to recognize in their statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status and to measure a plan’s assets and its obligations that determine its funded status as of the end of the company’s fiscal year. Additionally, SFAS No. 158 requires companies to recognize changes in the funded status of a defined benefit postretirement plan in the year that the changes occur and those changes will be reported in comprehensive income. The provision of SFAS No. 158 that will require us to recognize the funded status of our postretirement plans, and the disclosure requirements, will be effective for us as of December 31, 2006. We do not expect that the adoption of SFAS No. 158 will have a material impact on our consolidated financial statements.

Note 3: Earnings Per Share

Basic earnings for common stockholders per common share (“Basic EPS”) is computed by dividing net income for common stockholders by the weighted-average number of common shares outstanding during the period.

Our potentially dilutive securities include potential common shares related to our stock options and restricted share units. Diluted earnings for common stockholders per common share (“Diluted EPS”) considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an antidilutive effect.

Diluted EPS for the three and nine months ended September 30, 2006, excludes approximately 82 million and 94 million potential common shares, respectively, and Diluted EPS for the three and nine months ended September 30, 2005, excludes approximately 93 million and 87 million potential common shares, respectively, related to our share-based compensation plans, because the inclusion of the potential common shares would have an antidilutive effect. Diluted EPS for the three and nine months ended September 30, 2005, excludes the impact of potential common shares related to our Comcast exchangeable notes (settled using cash in 2005).

 

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COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

The following table reconciles the numerator and denominator of the computations of Diluted EPS for common stockholders for the periods presented:

 

    Three Months Ended September 30,
    2006   2005
(Amounts in millions, except per share data)   Income   Shares   Per Share
Amount
  Income   Shares   Per Share
Amount

Basic EPS for common stockholders

  $ 1,217   2,096   $ 0.58   $ 222   2,196   $ 0.10

Effect of dilutive securities:

           

Assumed exercise or issuance of shares relating to stock plans

          13                   13        

Diluted EPS

  $ 1,217   2,109   $ 0.58   $ 222   2,209   $ 0.10
    Nine Months Ended September 30,
    2006   2005
(Amounts in millions, except per share data)   Income   Shares   Per Share
Amount
  Income   Shares   Per Share
Amount

Basic EPS for common stockholders

  $ 2,143   2,114   $ 1.01   $ 795   2,206   $ 0.36

Effect of dilutive securities:

           

Assumed exercise or issuance of shares relating to stock plans

          10                   13        

Diluted EPS

  $ 2,143   2,124   $ 1.01   $ 795   2,219   $ 0.36

Note 4: Acquisitions and Other Significant Events

Adelphia and Time Warner Transactions

In April 2005, we entered into an agreement with Adelphia, in which we agreed to acquire certain assets and assume certain liabilities of Adelphia (the “Adelphia Acquisition”). At the same time, we and Time Warner Cable Inc. and certain of its affiliates (“TWC”) entered into several agreements in which we agreed to (i) have our interest in Time Warner Entertainment Company, L.P. (“TWE”) redeemed, (ii) have our interest in TWC redeemed (together with the TWE redemption, the “Redemptions”), and (iii) exchange certain cable systems acquired from Adelphia and certain historic Comcast cable systems with TWC (the “Exchanges”). On July 31, 2006, these transactions were completed. We collectively refer to the Adelphia Acquisition, the Redemptions and the Exchanges as the “Adelphia and Time Warner transactions.” Also in April 2005, Adelphia and TWC entered into an agreement for the acquisition of substantially all of the remaining cable system assets and the assumption of certain of the liabilities of Adelphia.

The Adelphia and Time Warner transactions, which are described in more detail below, resulted in a net increase of 1.7 million video subscribers, a net cash payment by us of approximately $1.5 billion and the disposition of our ownership interests in TWE and TWC and the assets of two cable system partnerships. The valuations of assets acquired and estimated gains on these transactions are based on preliminary third-party valuations. Refinements may occur as these valuations are finalized.

The Adelphia and Time Warner transactions added cable systems located in California, Colorado, Connecticut, Florida, Georgia, Louisiana, Maryland, Massachusetts, Minnesota, Mississippi, Oregon, Pennsylvania, Tennessee, Vermont, Virginia and West Virginia. We expect that the larger systems will result in economies of scale.

The Adelphia Acquisition

We paid approximately $3.6 billion in cash for the acquisition of Adelphia’s interest in two cable system partnerships and certain Adelphia cable systems and to satisfy certain related liabilities. Approximately $2.4 billion of the amount paid related to the acquisition of Adelphia’s interest in Century—TCI California Communications, L.P. (“Century”) and Parnassos Communications, L.P. (“Parnassos” and together with Century the “Partnerships”). We held a 25% interest in Century and a 33.33% interest in Parnassos. Our prior interests in the Partnerships were accounted for as cost method investments. After acquiring Adelphia’s interests in the

 

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QUARTER ENDED SEPTEMBER 30, 2006

 

Partnerships, we transferred the cable systems held by the Partnerships to TWC in the Exchanges, as discussed further below.

In addition to acquiring Adelphia’s interest in Century and Parnassos, we acquired cable systems from Adelphia, which we continue to own and operate, located in Florida, Georgia, Pennsylvania and Virginia, for approximately $600 million in cash.

The Redemptions

Our 4.7% interest in TWE was redeemed in exchange for 100% of the equity interests in a subsidiary of TWE holding both cable systems with an estimated fair value of $600 million and approximately $147 million in cash. Our 17.9% interest in TWC was redeemed in exchange for 100% of the capital stock of a subsidiary of TWC holding both cable systems with an estimated fair value of $2.7 billion and approximately $1.9 billion in cash. Our ownership interests in TWE and TWC were accounted for as cost method investments.

We recognized a gain of approximately $560 million, in the aggregate, on the Redemptions, that are included within investment income (loss), net. As indicated previously, the estimated gain is subject to refinement as valuations are finalized.

The Exchanges

The estimated fair value of the cable systems we transferred to and received from TWC was approximately $8.6 billion and $8.5 billion, respectively. TWC made net cash payments aggregating approximately $67 million to us for certain preliminary adjustments related to the Exchanges.

The cable systems we transferred to TWC included our historic Comcast cable systems located in Los Angeles, Cleveland and Dallas (“historic Comcast Exchange Systems”) and the cable systems held by Century and Parnassos. The operating results of the historic Comcast Exchange Systems are reported as discontinued operations for all periods presented in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”).

As a result of the Exchanges, we recognized a gain on the sale of discontinued operations of $234 million, net of tax of $563 million (see “Discontinued Operations” below), and a gain on the sale of the Century and Parnassos cable systems of approximately $134 million, that are included within investment income (loss), net. The valuations of assets acquired and estimated gain on the Exchanges are based on preliminary third-party valuations. Refinements may occur as these valuations are finalized.

The cable systems that TWC transferred to us in the Exchanges included cable systems that TWC acquired from Adelphia in its asset purchase from Adelphia and certain historic TWC cable systems.

Purchase Price Allocation

The cable systems acquired in the Adelphia and Time Warner transactions were accounted for in accordance with SFAS No. 141, “Business Combinations” (“SFAS No. 141”). The results of operations for the acquired cable systems have been included in our consolidated financial statements since the acquisition date (July 31, 2006) and are reported in our Cable segment. As a result of the redemption of our investment in TWC and the exchange of the cable systems held by Century and Parnassos, we reversed approximately $600 million in historical deferred tax liabilities, primarily attributable to the excess of tax basis of the assets acquired over the tax basis of the assets exchanged. A portion of the goodwill recorded associated with the Exchanges is expected to be amortizable for tax purposes. The purchase price allocation is preliminary and subject to refinement as valuations are finalized.

 

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COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

Discontinued Operations

As discussed above, the operating results of the historic Comcast Exchange Systems transferred to TWC are reported as discontinued operations for all periods presented in accordance with SFAS No. 144. The following represents the operating results of the historic Comcast Exchange Systems for the three and nine months ended September 30, 2006 and 2005:

 

    Three Months Ended
September 30,
   Nine Months Ended
September 30,
(Dollars in millions)       2006            2005            2006            2005    

Revenues

  $ 109    $ 293    $ 734    $ 880

Income before income taxes

    23      39      121      118

Income tax expense

    9      15      18      44

Net income

    14      24      103      74

The operating results of discontinued operations for the three and nine months ended September 30, 2006, include one and seven months, respectively, as the closing date of the Exchanges was July 31, 2006.

Unaudited Pro Forma Information

The following unaudited pro forma information has been presented as if the Adelphia and Time Warner transactions occurred on January 1, 2005. This information is based on historical results of operations, adjusted for purchase price allocations and is not necessarily indicative of what the results would have been had we operated entities since January 1, 2005.

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(Dollars in millions)       2006             2005             2006             2005      

Revenues

  $ 6,669     $ 5,931     $ 19,585     $ 17,595  

Income from continuing operations before income taxes and minority interest

    1,604       314       3,113       1,348  

Income tax expense

    (619 )     (128 )     (1,194 )     (590 )

Income from continuing operations before minority interest

    985       186       1,919       758  

Minority interest

    (3 )     11       (10 )     (7 )

Net income from continuing operations

  $ 982     $ 197     $ 1,909     $ 751  

Basic earnings for common stockholders per common share

  $ 0.47     $ 0.09     $ 0.90     $ 0.34  

Diluted earnings for common stockholders per common share

  $ 0.47     $ 0.09     $ 0.90     $ 0.34  

 

Dissolution of Texas and Kansas City Cable Partnership

In July 2006, we initiated the dissolution of our 50/50 cable system partnership with TWC, known as Texas and Kansas City Cable Partners, L.P. Once the dissolution was triggered, the non-triggering party had the right to choose and take full ownership of one of two pools of the partnership’s cable systems together with any debt allocated to such asset pool by the triggering partner. One pool consisted of the cable systems serving Houston, Texas (“Houston Asset Pool”) and the other pool consisted of cable systems serving Kansas City, south and west Texas and New Mexico (“Kansas City Asset Pool”).

In July 2006, we notified TWC of our election to dissolve the partnership and the allocation of all of its debt, which totaled approximately $2 billion as of July 1, 2006, to the Houston Asset Pool. In August 2006, TWC notified us that it selected the Kansas City Asset Pool and as a result, we will receive the Houston Asset Pool. The $2 billion of debt allocated to the Houston Asset Pool was required to be refinanced within 60 days of the August 1, 2006 selection date. This debt included $600 million owed to each partner (for an aggregate of $1.2 billion). We refinanced this debt in October 2006 (see Note 7).

SpectrumCo, LLC

SpectrumCo, LLC, a joint venture including us, TWC, Cox Communications, Advance/Newhouse and Sprint Nextel Communications, was the winning bidder for 137 wireless spectrum licenses for approximately $2.4 billion

 

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QUARTER ENDED SEPTEMBER 30, 2006

 

in the Federal Communications Commission’s advanced wireless spectrum auction that concluded in September 2006. Our portion of the total cost to purchase the licenses is $1.3 billion. We paid $331 million prior to September 30, 2006, with the remainder paid in October 2006. Based on its currently planned activities, we have determined that SpectrumCo, LLC is not a variable interest entity. We will account for this joint venture as an equity method investment based on its current governance structure notwithstanding our majority interest.

Susquehanna

On April 30, 2006, we acquired the cable systems of Susquehanna Cable Co. and its subsidiaries (“Susquehanna”) for a total purchase price of approximately $775 million. The Susquehanna systems acquired are located primarily in Pennsylvania, New York, Maine, and Mississippi.

Prior to the acquisition, we held an approximate 30% equity ownership interest in Susquehanna that we accounted for as an equity method investment. On May 1, 2006, Susquehanna Cable Co. redeemed the approximate 70% equity ownership interest in Susquehanna held by Susquehanna Media Co., which resulted in Susquehanna becoming 100% owned by us.

The results of operations of the Susquehanna systems have been included in our consolidated financial statements since the acquisition date and are reported in our Cable segment. We allocated the purchase price to working capital, property and equipment, customer relationship intangibles, nonamortizing franchise rights and goodwill. The purchase price allocation is preliminary and subject to refinement as valuations are finalized. The acquisition of the Susquehanna cable systems was not significant to our consolidated financial statements for the three or nine months ended September 30, 2006.

Note 5: Investments

 

(Dollars in millions)   September 30,
2006
   December 31,
2005

Fair value method

    

Cablevision

  $ 116    $ 120

Discovery Holding Company

    145      152

Embarq Corporation

    63     

Liberty Capital

    418     

Liberty Global

    390      336

Liberty Interactive

    510     

Liberty Media

         787

Sprint Nextel

    448      614

Time Warner

    1,037      994

Vodafone

    50      54

Other

    47      90
    3,224      3,147

Equity method, principally cable-related

    2,992      2,823

Cost method, principally AirTouch at September 30, 2006, and Time Warner Cable and AirTouch at December 31, 2005

    1,685      6,853

Total investments

    7,901      12,823

Less, current investments

    656      148

Noncurrent investments

  $ 7,245    $ 12,675

 

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QUARTER ENDED SEPTEMBER 30, 2006

 

The cost, fair value and unrealized gains and losses related to our available for sale securities, which consist principally of our investment in Time Warner Inc., are as follows:

 

(Dollars in millions)   September 30,
2006
   December 31,
2005
 

Cost

  $ 1,087    $ 1,104  

Unrealized gains

    75      62  

Unrealized losses

         (6 )

Fair value

  $ 1,162    $ 1,160  

Redemption of Sprint Nextel Convertible Preferred Stock

In March 2006, we received proceeds of $62 million in connection with Sprint Nextel’s redemption of all of its outstanding Seventh Series B Convertible Preferred Stock (“Sprint Preferred Stock”), including all 61,726 shares of Sprint Preferred Stock held by us. In connection with the redemption transaction, we recognized investment income of $8 million.

Liberty Media Restructuring Transaction

In May 2006, we received 25 million shares of Liberty Media Interactive (“Liberty Interactive”) Series A common stock and 5 million shares of Liberty Media Capital (“Liberty Capital”) Series A common stock in connection with Liberty Media Corporation’s (“Liberty Media”) restructuring. In the restructuring, each share of Liberty Media Series A common stock received 0.25 shares of the new Liberty Interactive Series A common stock and 0.05 shares of Liberty Capital Series A common stock for each share of Liberty Media Series A common stock. We have classified all of the shares of Liberty Interactive and Liberty Capital common stock we received as trading securities at fair value. All of these shares collateralize our Liberty Media prepaid forward sales obligation.

Sprint Nextel Spin-off Transaction

In May 2006, we received approximately 1.3 million shares of Embarq Corporation (“Embarq”) common stock in connection with the spin-off by Sprint Nextel of Embarq, its local communications business. In the spin-off, each share of Sprint Nextel common stock received 0.05 shares of the new Embarq common stock. We have classified all of the shares of Embarq common stock we received as trading securities at fair value. All of these shares collateralize our ZONES debt and our Sprint Nextel prepaid forward sales obligation.

Dissolution of Texas and Kansas City Cable Partnership

We have historically accounted for our interest in Texas and Kansas City Cable Partners, L.P. as an equity method investment and will continue to do so until the Houston Asset Pool is distributed to us, which is subject to customary government and other approvals and is expected to take place during the first quarter of 2007 (see Note 4). However, effective July 1, 2006 (the beginning of the month when dissolution was initiated), the economic return to us on our interest in the partnership tracks the performance of the Houston Asset Pool, and we will no longer be entitled to any benefits of ownership or responsible for the obligations of the Kansas City Asset Pool. As a result, we will report our share of the earnings and losses of the partnership based solely on the operating results of the Houston Asset Pool. Because we are on a one quarter lag for recording the results of our equity method investments, this change will be reflected beginning in our fourth quarter. Effective for the third quarter of 2006, for segment reporting purposes we have included the operating results of the Houston Asset Pool in our Cable segment (see Note 11(a)).

 

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QUARTER ENDED SEPTEMBER 30, 2006

 

Investment Income (Loss), Net

Investment income (loss), net includes the following:

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
(Dollars in millions)       2006             2005             2006             2005      

Interest and dividend income

  $ 55     $ 30     $ 136     $ 81  

Gains (losses) on sales and exchanges of investments, net

    745       13       753       (15 )

Investment impairment losses

                      (3 )

Unrealized gains (losses) on trading securities and hedged items

    81       (18 )     82       (112 )

Mark to market adjustments on derivatives related to trading securities and hedged items

    (22 )     (126 )     (46 )     71  

Mark to market adjustments on derivatives

    (2 )     (3 )     10       14  

Investment income (loss), net

  $ 857     $ (104 )   $ 935     $ 36  

In connection with the Adelphia and Time Warner transactions, we recognized gains of approximately $694 million, in the aggregate, on the redemption of our interest in TWE and TWC and the exchange of cable systems held by Century and Parnassos (see Note 4). These amounts are included within the “Gains (losses) on sales and exchanges of investments, net” caption in the table above.

Note 6: Goodwill

The December 31, 2005 Cable segment balance excludes $720 million related to discontinued operations. The changes in the carrying amount of goodwill by business segment for the nine months ended September 30, 2006, are as follows:

 

(Dollars in millions)       Cable             Content        Corporate
    and Other    
       Total      

Balance, December 31, 2005

  $ 12,273     $ 966    $ 259    $ 13,498  

Settlements or adjustments

    (605 )               (605 )

Acquisitions

    602            20      622  

Balance, September 30, 2006

  $ 12,270     $ 966    $ 279    $ 13,515  

Settlements are primarily due to adjustments to certain pre-acquisition tax liabilities associated with the acquisition of AT&T Corp.’s broadband cable business (“Broadband”). Acquisitions are due to the Adelphia and Time Warner transactions and Susquehanna.

Note 7: Long-term Debt

Debt Assumed

On May 1, 2006, in connection with the Susquehanna transaction (see Note 4) we assumed a $185 million principal amount variable-rate term loan due 2008. The interest rate on the term loan is the London Interbank Offered Rate (“LIBOR”) plus 0.5%.

 

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QUARTER ENDED SEPTEMBER 30, 2006

 

Debt Borrowings

During the nine months ended September 30, 2006, we issued senior notes as follows:

 

(Dollars in millions)       Issue Date            Par Value    

Senior Notes, with an interest rate of 5.90%, maturing 2016

  March 2006    $ 1,000

Senior Notes, with an interest rate of 6.45%, maturing 2037

  March 2006      1,250

Senior Notes, with an interest rate of 7.00%, maturing 2055

  May 2006      345

Senior Notes, with an interest rate of 6.50%, maturing 2017

  July 2006      1,000

Senior Notes, with an interest rate of 7.00%, maturing 2055

  September 2006      1,125
        
       4,720

Floating-Rate Notes, with an interest rate of LIBOR + 0.3%, maturing 2009

  July 2006      1,250
        
     $ 5,970
        

We used the net proceeds of these offerings for working capital and general corporate purposes, including the repayment of commercial paper obligations (see below), the Adelphia and Time Warner transactions and the refinancing of debt allocated to the Houston Asset Pool in October 2006 (see Note 4).

Debt Repayments

During the nine months ended September 30, 2006, we repaid senior notes and senior subordinated notes at their scheduled maturity dates as follows:

 

(Dollars in millions)   Payment Date    Principal

Senior Notes, with an interest rate of 6.375%

  January 2006    $ 500

Senior Notes, with an interest rate of 6.875%

  February 2006      388

Senior Notes, with an interest rate of 8.3%

  May 2006      600

Senior Subordinated Notes, with an interest rate of 10.5%

  June 2006      119
        
     $ 1,607
        

These repayments were funded with available cash. During the nine months ended September 30, 2006, we also repaid all $549 million of amounts outstanding under our commercial paper program and $66 million in other debt.

Lines and Letters of Credit

As of September 30, 2006, we and certain of our subsidiaries had unused lines of credit totaling $4.657 billion under various credit facilities and unused irrevocable standby letters of credit totaling $382 million to cover potential fundings under various agreements.

Note 8: Stockholders’ Equity

Stock Option Plans

We maintain stock option plans for certain employees under which fixed price stock options may be granted and the option price is generally not less than the fair value of a share of the underlying stock at the date of grant. Under our stock option plans, approximately 168 million shares of our Class A and Class A Special common stock are reserved for issuance upon the exercise of options, including those outstanding as of September 30, 2006. Option terms are generally 10 years, with options generally becoming exercisable between two and nine and one half years from the date of grant.

The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatility is based on a blend of implied and historical volatility of our Class A common stock. We use historical data on exercises of stock options and other factors to estimate the expected term of the options granted. The risk-free rate is based on the U.S. Treasury yield curve in effect at the date of grant.

 

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QUARTER ENDED SEPTEMBER 30, 2006

 

The following table summarizes the weighted-average fair values at date of grant of a Class A common stock option granted under our stock option plans and the related weighted-average valuation assumptions:

 

   

Three Months

Ended

September 30,

   

Nine Months

Ended

September 30,

 
       2006         2005         2006         2005    

Fair value

  $ 13.73     $ 11.76     $ 10.83     $ 13.10  

Dividend yield

    0 %     0 %     0 %     0 %

Expected volatility

    27.0 %     27.0 %     27.0 %     27.1 %

Risk-free interest rate

    4.8 %     4.2 %     4.8 %     4.3 %

Expected option life (in years)

    7.0       7.0       7.0       7.0  

Forfeiture rate

    3.0 %     3.0 %     3.0 %     3.0 %

The following table summarizes the activity of our stock option plans for the nine months ended September 30, 2006:

 

     Options
(in thousands)
    Weighted-
Average
Exercise
Price
   Weighted-
Average
Remaining
Contractual Term
(in years)
  

Aggregate
Intrinsic Value

(in millions)

Class A Common Stock

         

Outstanding as of January 1, 2006

  80,827     $ 37.09      

Granted

  12,051     $ 26.81      

Exercised

  (3,205 )   $ 25.23      

Forfeited

  (2,265 )   $ 29.66      

Expired

  (1,078 )   $ 39.59               

Outstanding as of September 30, 2006

  86,330     $ 36.26    5.7    $ 499.4

Exercisable as of September 30, 2006

  49,539     $ 41.42    3.8    $ 220.3

Class A Special Common Stock

         

Outstanding as of January 1, 2006

  51,299     $ 31.35      

Exercised

  (1,710 )   $ 15.83      

Forfeited

  (55 )   $ 32.34      

Expired

  (1,088 )   $ 35.85               

Outstanding as of September 30, 2006

  48,446     $ 31.83    3.6    $ 287.3

Exercisable as of September 30, 2006

  43,191     $ 32.04    3.6    $ 251.0

We also maintain a deferred stock option plan for certain employees and directors that provided the optionees with the opportunity to defer the receipt of shares of our Class A or Class A Special common stock that would otherwise be deliverable upon exercise by the optionees of their stock options. As of September 30, 2006, approximately 1.4 million shares of Class A Special common stock were issuable under exercised options, the receipt of which was irrevocably deferred by the optionees pursuant to our deferred stock option plan.

Restricted Stock Plan

We maintain a restricted stock plan under which certain employees and directors (“Participants”) may be granted restricted share unit awards in our Class A or Class A Special common stock (the “Restricted Stock Plan”). Under our Restricted Stock Plan, approximately 27 million shares of our Class A and Class A Special common stock are reserved for issuance pursuant to awards under the plan, including those outstanding as of September 30, 2006. Awards of restricted share units are valued by reference to shares of common stock that entitle Participants to receive, upon the settlement of the unit, one share of common stock for each unit. The awards vest annually, generally over a period not to exceed five years from the date of the award, and do not have voting rights.

 

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QUARTER ENDED SEPTEMBER 30, 2006

 

The following table summarizes the weighted-average fair value at date of grant and the compensation expense recognized related to restricted share unit awards:

 

    Three Months Ended
September 30,
   Nine Months
Ended
September 30,
     2006    2005    2006    2005

Weighted-average fair value

  $ 34.04    $ 30.30    $ 29.62    $ 33.50

Compensation expense recognized (in millions)

  $ 18    $ 16    $ 47    $ 40

 

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QUARTER ENDED SEPTEMBER 30, 2006

 

The following table summarizes the activity of the Restricted Stock Plan for the nine months ended September 30, 2006:

 

    

Number of Nonvested
Share Unit Awards

(in thousands)

    Weighted-
Average Grant
Date Fair Value

Class A Common Stock

   

Unvested awards as of January 1, 2006

  5,649     $ 32.55

Awards granted

  4,862     $ 29.62

Awards vested

  (1,050 )   $ 32.73

Awards forfeited

  (476 )   $ 31.16

Unvested awards as of September 30, 2006

  8,985     $ 30.96

Class A Special Common Stock

   

Unvested awards as of January 1, 2006

  69     $ 36.69

Awards vested

  (68 )   $ 37.13

Unvested awards as of September 30, 2006

  1     $ 27.47

As of September 30, 2006, 381,000 and 96,000 shares of Class A common and Class A Special common stock, respectively, were issuable under vested restricted share unit awards, the receipt of which was irrevocably deferred by Participants pursuant to the Restricted Stock Plan.

Share-Based Compensation

Prior to January 1, 2006, we accounted for our share-based compensation plans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), and accordingly did not recognize compensation expense for stock options with an exercise price equal to or greater than the market price of the underlying stock at the date of grant. Had the fair-value based method as prescribed by SFAS No. 123 been applied, additional pre-tax compensation expense of $40 million and $118 million would have been recognized for the three and nine months ended September 30, 2005, respectively. The pre-tax compensation expense includes the expense related to discontinued operations, which for the three and nine months ended September 30, 2005, was $1 million and $3 million, respectively. Had the fair-value based method as prescribed by SFAS No. 123 been applied, the effect on net income and earnings per share would have been as follows:

 

(Dollars in millions, except per share data)   Three Months Ended
September 30, 2005
    Nine Months Ended
September 30, 2005
 

Net income, as reported

  $ 222     $ 795  

Add: Share-based compensation expense included in net income, as reported above, net of related tax effects

    11       27  

Less: Share-based compensation expense determined under fair value-based method for all awards, net of related tax effects

    (37 )     (102 )

Pro forma, net income

  $ 196     $ 720  

Basic earnings for common stockholders per common share:

   

As reported

  $ .10     $ .36  

Pro forma

  $ .09     $ .33  

Diluted earnings for common stockholders per common share:

   

As reported

  $ .10     $ .36  

Pro forma

  $ .09     $ .32  

Effective January 1, 2006, we adopted SFAS No. 123R using the Modified Prospective Approach. SFAS No. 123R revises SFAS No. 123 and supersedes APB No. 25. SFAS No. 123R requires the cost of all share-based payments to

 

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employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values at grant date, or the date of later modification, over the requisite service period. In addition, SFAS No. 123R requires unrecognized cost (based on the amounts previously disclosed in our pro forma footnote disclosure) related to options vesting after the date of initial adoption to be recognized in the financial statements over the remaining requisite service period.

Under the Modified Prospective Approach, the amount of compensation cost recognized includes: (i) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123 and (ii) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. Prior to the adoption of SFAS No. 123R, we recognized the majority of our share-based compensation costs using the accelerated recognition method. We recognize the cost of previously granted share-based awards under the accelerated recognition method and recognize the cost of new share-based awards on a straight-line basis over the requisite service period. The incremental pre-tax share-based compensation expense recognized due to the adoption of SFAS No. 123R for the three and nine months ended September 30, 2006, was $31 million and $98 million, respectively. Total share-based compensation expense recognized under SFAS No. 123R, including the incremental pre-tax share-based compensation expense above, was $49 million and $145 million, with an associated tax benefit of $17 million and $50 million, respectively, for the three and nine months ended September 30, 2006. The amount of share-based compensation capitalized or related to discontinued operations was not material to our consolidated financial statements.

Cash received from option exercises under all share-based payment arrangements for the three and nine months ended September 30, 2006, was $54 million and $96 million, respectively. The total intrinsic value (market value on date of exercise less exercise price) of options exercised for the nine months ended September 30, 2006, was $53 million. The tax benefit realized from stock options exercised for the nine months ended September 30, 2006, was $17 million.

As of September 30, 2006, there was $231 million of total unrecognized, pre-tax compensation cost related to nonvested stock options. This cost is expected to be recognized over a weighted-average period of approximately two and one half years.

The total fair value of restricted share units that vested during the nine months ended September 30, 2006, was $30 million. As of September 30, 2006, there was $190 million of total unrecognized pre-tax compensation cost related to nonvested restricted share unit awards. This cost is expected to be recognized over a weighted-average period of approximately two and one half years.

SFAS No. 123R also required us to change the classification, in our condensed consolidated statement of cash flows, of any tax benefits realized upon the exercise of stock options or issuance of restricted share unit awards in excess of that which is associated with the expense recognized for financial reporting purposes. These amounts are presented as a financing cash inflow rather than as a reduction of income taxes paid in our condensed consolidated statement of cash flows. The excess cash tax benefit classified as a financing cash inflow for the nine months ended September 30, 2006, was $7 million.

Comprehensive Income

Our total comprehensive income for the three and nine months ended September 30, 2006 and 2005, was as follows:

 

    Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
(Dollars in millions)       2006             2005            2006            2005      

Net income

  $ 1,217     $ 222    $ 2,143    $ 795  

Unrealized (losses) gains on marketable securities

    (2 )     87      12      55  

Reclassification adjustments for (losses) gains included in net income

    2       2      8      (1 )

Comprehensive income

  $ 1,217     $ 311    $ 2,163    $ 849  

 

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QUARTER ENDED SEPTEMBER 30, 2006

 

Note 9: Statement of Cash Flows—Supplemental Information

During the nine months ended September 30, 2006, we exchanged investments for cable systems in the Redemptions and cable systems for cable systems in the Exchanges (see Note 4). These transactions are noncash investing activities.

We made cash payments for interest and income taxes during the three and nine months ended September 30, 2006 and 2005, as follows:

 

    Three Months Ended
September 30,
   Nine Months Ended
September 30,
(Dollars in millions)     2006        2005        2006        2005  

Interest

  $ 542    $ 559    $ 1,452    $ 1,438

Income taxes

  $ 200    $ 48    $ 611    $ 475

Note 10: Commitments and Contingencies

Commitments

Certain of our subsidiaries support debt compliance with respect to obligations of certain cable television partnerships and investments in which we hold an ownership interest (see Note 5). The obligations expire between March 2007 and March 2011. Although there can be no assurance, we believe that we will not be required to meet our obligations under such commitments. The total notional amount of our commitments was $1.161 billion as of September 30, 2006, at which time there were no quoted market prices for similar agreements.

Contingencies

At Home Cases

Litigation has been filed against us as a result of our alleged conduct with respect to our investment in and distribution relationship with At Home Corporation. At Home was a provider of high-speed Internet services that filed for bankruptcy protection in September 2001. Filed actions are: (i) class action lawsuits against us, AT&T (the former controlling shareholder of At Home and also a former distributor of the At Home service) and others in the United States District Court for the Southern District of New York, alleging securities law violations and common law fraud in connection with disclosures made by At Home in 2001; and (ii) a lawsuit brought in the United States District Court for the District of Delaware in the name of At Home by certain At Home bondholders against us, Brian L. Roberts (our Chairman and Chief Executive Officer and a director), Cox (Cox is also an investor in At Home and a former distributor of the At Home service) and others, alleging breaches of fiduciary duty relating to March 2000 agreements (which, among other things, revised the distributor relationships), and seeking recovery of alleged short-swing profits pursuant to Section 16(b) of the Exchange Act (purported to have arisen in connection with certain transactions relating to At Home stock effected pursuant to the March 2000 agreements).

In the Southern District of New York actions (item (i) above), the court dismissed all claims. The court also dismissed a complaint filed by an individual shareholder on the same grounds as the class action, and dismissed without prejudice certain state law claims raised in that complaint. The Plaintiffs in the class action and the individual action are appealing these decisions. The Delaware case (item (ii) above) was transferred to the United States District Court for the Southern District of New York. The court dismissed the Section 16(b) claims, and the breach of fiduciary duty claim for lack of federal jurisdiction. The Court of Appeals for the Second Circuit denied plaintiffs’ appeal from the decision dismissing the Section 16(b) claims, and the U.S. Supreme Court denied plaintiffs’ petition for a further appeal. Plaintiffs recommenced the breach of fiduciary duty claim in Delaware Chancery Court. The Court has set a trial date in October 2007.

Under the terms of the Broadband acquisition, we are contractually liable for 50% of any liabilities of AT&T in the actions described in items (i) and (ii) above (in which we are also a defendant).

 

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COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

We deny any wrongdoing in connection with the claims that have been made directly against us, our subsidiaries and Brian L. Roberts, and are defending all of these claims vigorously. The final disposition of these claims is not expected to have a material adverse effect on our consolidated financial position, but could possibly be material to our consolidated results of operations of any one period. Further, no assurance can be given that any adverse outcome would not be material to our consolidated financial position.

 

AT&T—Wireless and Common Stock Cases

Under the terms of the Broadband acquisition, we were potentially responsible for a portion of the liabilities arising from two purported securities class action lawsuits brought against AT&T and others and consolidated in the United States District Court for the District of New Jersey. One of these lawsuits, referred to in our prior disclosures as the “Common Stock Case,” was settled in 2005.

In April 2006, the remaining lawsuit, referred to in our prior disclosures as the “Wireless Case,” settled for $150 million, of which our portion is $22.5 million. The additional amount recorded related to the settlement did not have a material impact on our results of operations for the nine months ended September 30, 2006.

AT&T—TCI Cases

In June 1998, the first of a number of purported class action lawsuits was filed by then-shareholders of Tele-Communications, Inc. (“TCI”) Series A TCI Group Common Stock (“Common A”) against AT&T and the directors of TCI relating to the acquisition of TCI by AT&T (“TCI Shareholder Suits”). A consolidated amended complaint combining the filed actions was filed in February 1999 in the Delaware Court of Chancery. The consolidated amended complaint alleges that former members of the TCI board of directors breached their fiduciary duties to Common A shareholders by agreeing to transaction terms whereby holders of the Series B TCI Group Common Stock received a 10% premium over what Common A shareholders received.

In connection with the TCI acquisition (completed in early 1999), AT&T agreed under certain circumstances to indemnify TCI’s former directors for certain liabilities, potentially including those incurred in connection with this action. In connection with the Broadband acquisition, (i) we agreed to indemnify AT&T for certain liabilities, potentially including those incurred by AT&T in connection with this action, and (ii) we assumed certain obligations of TCI to indemnify its former directors, potentially including those incurred in connection with this action.

In October 2006, an agreement in principle was reached to settle the TCI Shareholder Suits, subject to Court approval. We have agreed to contribute approximately $44 million to the settlement. If the settlement is finalized and approved, all claims arising from the TCI Shareholder Suits, including all indemnity claims for which we could have liability, will be dismissed with prejudice. The additional amount recorded related to the settlement did not have a material impact on our results of operations for the three and nine months ended September 30, 2006.

Patent Litigation

We are a defendant in several unrelated lawsuits claiming infringement of various patents relating to various aspects of our businesses. In certain of these cases other industry participants are also defendants, and also in certain of these cases we expect that any potential liability would be the responsibility of our equipment vendors pursuant to applicable contractual indemnification provisions. To the extent that the allegations in these lawsuits can be analyzed by us at this stage of their proceedings, we believe the claims are without merit and intend to defend the actions vigorously. The final disposition of these claims is not expected to have a material adverse effect on our consolidated financial position, but could possibly be material to our consolidated results of operations of any one period. Further, no assurance can be given that any adverse outcome would not be material to our consolidated financial position.

Antitrust Cases

We are defendants in two purported class actions pending in the United States District Courts for the District of Massachusetts and the Eastern District of Pennsylvania, respectively. The potential class in the Massachusetts case

 

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COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

is our subscriber base in the “Boston Cluster” area, and the potential class in the Pennsylvania case is our subscriber base in the “Philadelphia and Chicago clusters,” as those terms are defined in the complaints. In each case, plaintiffs allege that certain subscriber exchange transactions with other cable providers resulted in unlawful “horizontal market restraints” in those areas and seek damages pursuant to antitrust statutes, including treble damages.

As a result of recent events in both cases relating to the procedural issue of whether plaintiffs’ claims could proceed in court or, alternatively, whether plaintiffs should be compelled to arbitrate their claims pursuant to arbitration clauses in their subscriber agreements, it has become more likely that these cases will proceed in court. Our motion to dismiss the Pennsylvania case on the pleadings was denied, and plaintiffs have moved to certify a class action. We are opposing plaintiffs’ motion and are proceeding with class discovery. We have moved to dismiss the Massachusetts case.

We believe the claims in these actions are without merit and are defending the actions vigorously. The final disposition of these claims is not expected to have a material adverse effect on our consolidated financial position, but could possibly be material to our consolidated results of operations of any one period. Further, no assurance can be given that any adverse outcome would not be material to our consolidated financial position.

Other

We are subject to other legal proceedings and claims that arise in the ordinary course of our business. The amount of ultimate liability with respect to such actions is not expected to materially affect our financial position, results of operations or liquidity.

 

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COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

Note 11: Financial Data By Business Segment

Our reportable segments consist of our Cable and Content businesses. Our Content segment consists of our national cable networks E!, Style Network, The Golf Channel, VERSUS (formerly known as OLN), G4 and AZN Television. In evaluating the profitability of our segments, the components of net income (loss) below operating income (loss) before depreciation and amortization are not separately evaluated by our management.

 

(Dollars in millions)   Cable(a)    Content    Corporate and
Other(b)(g)
    Eliminations(c)     Total

Three Months Ended September 30, 2006

           

Revenues(d)

  $ 6,312    $ 258    $ 46     $ (184 )   $ 6,432

Operating income (loss) before depreciation and amortization(e)

    2,507      88      (104 )     (54 )     2,437

Depreciation and amortization

    1,157      42      17       (3 )     1,213

Operating income (loss)

    1,350      46      (121 )     (51 )     1,224

Capital expenditures

    1,206      5      2       (16 )     1,197

Three Months Ended September 30, 2005

           

Revenues(d)

  $ 5,028    $ 237    $ 51     $ (32 )   $ 5,284

Operating income (loss) before depreciation and amortization(e)(f)

    1,991      71      (105 )     39       1,996

Depreciation and amortization

    1,107      38      15       (5 )     1,155

Operating income (loss)(f)

    884      33      (120 )     44       841

Capital expenditures

    849      4      8       50       911

Nine Months Ended September 30, 2006

           

Revenues(d)

  $ 17,205    $ 770    $ 222     $ (262 )   $ 17,935

Operating income (loss) before depreciation and amortization(e)

    6,955      198      (249 )     (56 )     6,848

Depreciation and amortization

    3,269      124      66       (12 )     3,447

Operating income (loss)

    3,686      74      (315 )     (44 )     3,401

Capital expenditures

    2,946      18      16       71       3,051

Nine Months Ended September 30, 2005

           

Revenues(d)

  $ 14,877    $ 684    $ 204     $ (106 )   $ 15,659

Operating income (loss) before depreciation and amortization(e)(f)

    5,910      240      (227 )     109       6,032

Depreciation and amortization

    3,212      112      51       (15 )     3,360

Operating income (loss)(f)

    2,698      128      (278 )     124       2,672

Capital expenditures

    2,594      11      24       124       2,753

As of September 30, 2006

           

Assets

  $ 101,308    $ 2,331    $ 3,785     $ 548     $ 107,972

As of December 31, 2005

           

Assets

  $ 100,774    $ 2,530    $ 2,760     $ (2,918 )   $ 103,146

(a)

For the three and nine months ended September 30, 2006, approximately 63% of our Cable segment’s revenues were derived from our video services. For the three and nine months ended September 30, 2005, approximately 64% and 65%, respectively, of our Cable segment’s revenues were derived from our video services. For the three and nine months ended September 30, 2006, approximately 21% of our Cable segment’s revenues were derived from our high-speed Internet services. For the three and nine months ended September 30, 2005, approximately 19% of our Cable segment’s revenues were derived from our high-speed Internet services. The remaining revenues were derived primarily from phone, advertising and other revenues. Our regional sports and news networks (Comcast SportsNet, Comcast SportsNet Mid-Atlantic, Comcast SportsNet Chicago,

 

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COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

 

Comcast SportsNet West, Cable Sports Southeast, The mtn.—the MountainWest Sports Network, and CN8-The Comcast Network) are included in our Cable segment. Effective August 1, 2006 (the date of TWC’s selection), the Cable segment also includes the operating results of the cable systems serving Houston, Texas held in the Texas and Kansas City Cable partnership (see Note 4). However, for our consolidated operating results the partnership will continue to be treated as an equity method investment until the distribution date of the Houston Asset Pool. Accordingly, the operating results of the Houston Asset Pool are reversed in the Eliminations column to reconcile to our consolidated operating results (see Note 11).

 

(b)

Corporate and Other includes Comcast Spectacor, a portion of operating results of our less than wholly owned technology development ventures (see “(g)” below), corporate activities and all other businesses not presented in our Cable or Content segments. Assets included in this caption consist primarily of our investments (see Note 5).

 

(c)

Included in the Eliminations column are intersegment transactions that our segments enter into with one another. The most common types of transactions are the following:

 

   

our Content segment generates revenue by selling cable network programming to our Cable segment, which represents a substantial majority of the revenue elimination amount

 

 

   

our Cable segment receives incentives offered by our Content segment when negotiating programming contracts that are recorded as a reduction of programming costs

 

 

   

our Cable segment generates revenue by selling the use of satellite feeds to our Content segment

 

 

(d)

Non-U.S. revenues were not significant in any period. No single customer accounted for a significant amount of our revenue in any period.

 

(e)

To measure the performance of our operating segments, we use operating income before depreciation and amortization, excluding impairment charges related to fixed and intangible assets, and gains or losses from the sale of assets, if any. This measure eliminates the significant level of noncash depreciation and amortization expense that results from the capital-intensive nature of our businesses and from intangible assets recognized in business combinations. It is also unaffected by our capital structure or investment activities. We use this measure to evaluate our consolidated operating performance, the operating performance of our operating segments, and to allocate resources and capital to our operating segments. It is also a significant component of our annual incentive compensation programs. We believe that this measure is useful to investors because it is one of the bases for comparing our operating performance with other companies in our industries, although our measure may not be directly comparable to similar measures used by other companies. This measure should not be considered as a substitute for operating income (loss), net income (loss), net cash provided by operating activities or other measures of performance or liquidity reported in accordance with Generally Accepted Accounting Principles (“GAAP”).

 

(f)

To be consistent with our management reporting presentation, the 2005 segment amounts have been adjusted as if stock options had been expensed as of January 1, 2005 (see Note 8). For the three months ended September 30, 2005, the adjustments reducing operating income before depreciation and amortization by segment were $30 million for Cable, $1 million for Content and $9 million for Corporate and Other. For the nine months ended September 30, 2005, the adjustments reducing operating income before depreciation and amortization by segment were $86 million for Cable, $3 million for Content and $29 million for Corporate and Other. For the three and nine months ended September 30, 2005, the total adjustments of $40 million and $118 million, respectively, are reversed in the Eliminations column to reconcile to our consolidated 2005 amounts.

 

(g)

We consolidate our less than wholly owned technology development ventures that we control or we are deemed the primary beneficiary. These ventures are with various corporate partners, such as Motorola and Gemstar. The ventures have been created to share the costs of development of new technologies for set-top boxes and other devices. The results of these entities are included within Corporate and Other. Cost allocations are made to the Cable segment based on our percentage ownership in each entity. The remaining net costs related to the minority corporate partners are included in the Corporate and Other segment.

 

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COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

Note 12: Condensed Consolidating Financial Information

Comcast Corporation and five of our cable holding company subsidiaries, Comcast Cable Communications, LLC (“CCCL”), Comcast Cable Communications Holdings, Inc. (“CCCH”), Comcast MO Group, Inc. (“Comcast MO Group”), Comcast Cable Holdings, LLC (“CCH”), and Comcast MO of Delaware, LLC (“Comcast MO of Delaware”) fully and unconditionally guaranteed each other’s debt securities. Comcast MO Group, CCH and Comcast MO of Delaware are collectively referred to as the “Combined CCHMO Parents.”

In September 2005, Comcast Corporation unconditionally guaranteed Comcast Holdings’ ZONES due October 2029 and its 10 5/8% Senior Subordinated Debentures due 2012, both of which were issued by Comcast Holdings; accordingly we have added Comcast Holdings’ condensed consolidated information for all periods presented. Our condensed consolidating financial information is as follows:

Comcast Corporation

Condensed Consolidating Balance Sheet

September 30, 2006

 

(Dollars in millions)   Comcast
Parent
  CCCL
Parent
  CCCH
Parent
  Combined
CCHMO
Parents
  Comcast
Holdings
  Non-
Guarantor
Subsidiaries
  Elimination
and
Consolidation
Adjustments
    Consolidated
Comcast
Corporation

ASSETS

               

Cash and cash equivalents

  $ 5   $   $   $   $ 21   $ 2,748   $     $ 2,774

Investments

                        656           656

Accounts receivable, net

                        1,228           1,228

Other current assets

    19                     804           823

Current assets of discontinued operations

                                 

Total current assets

    24                 21     5,436           5,481

Investments

                        7,245           7,245

Investments in and amounts due from subsidiaries eliminated upon consolidation

    60,425     30,446     37,238     40,584     23,871     1,297     (193,861 )    

Property and equipment, net

    15         2         1     20,653           20,671

Franchise rights

                        56,072           56,072

Goodwill

                        13,515           13,515

Other intangible assets, net

                        4,457           4,457

Other noncurrent assets, net

    127     17     21         32     334           531

Noncurrent assets of discontinued operations, net

                                 

Total assets

  $ 60,591   $ 30,463   $ 37,261   $ 40,584   $ 23,925   $ 109,009   $ (193,861 )   $ 107,972

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Accounts payable and accrued expenses related to trade creditors

  $   $   $   $   $   $ 2,351   $     $ 2,351

Accrued expenses and other current liabilities

    538     250     66     50     77     1,886           2,867

Deferred income taxes

                        185           185

Current portion of long-term debt

        600         40         133           773

Current liabilities of discontinued operations

                                 

Total current liabilities

    538     850     66     90     77     4,555           6,176

Long-term debt, less current portion

    13,642     4,396     3,498     3,256     901     753           26,446

Deferred income taxes

    4,629                 907     21,963           27,499

Other noncurrent liabilities

    1,060     49             76     5,268           6,453

Noncurrent liabilities of discontinued operations

               

Minority interest

                        676           676

Stockholders’ Equity

               

Common stock

    24                               24

Other stockholders’ equity

    40,698     25,168     33,697     37,238     21,964     75,794     (193,861 )     40,698

Total stockholders’ equity

    40,722     25,168     33,697     37,238     21,964     75,794     (193,861 )     40,722

Total liabilities and stockholders’ equity

  $ 60,591   $ 30,463   $ 37,261   $ 40,584   $ 23,925   $ 109,009   $ (193,861 )   $ 107,972

 

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COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

Comcast Corporation

Condensed Consolidating Balance Sheet

December 31, 2005

 

(Dollars in millions)   Comcast
Parent
  CCCL
Parent
  CCCH
Parent
  Combined
CCHMO
Parents
  Comcast
Holdings
  Non-
Guarantor
Subsidiaries
  Elimination
and
Consolidation
Adjustments
    Consolidated
Comcast
Corporation

ASSETS

               

Cash and cash equivalents

  $   $   $   $   $   $ 693   $     $ 693

Investments

                        148           148

Accounts receivable, net

                        1,008           1,008

Other current assets

    16             669       685

Current assets of discontinued operations

                        60           60

Total current assets

    16                     2,578           2,594

Investments

                        12,675           12,675

Investments in and amounts due from subsidiaries eliminated upon consolidation

    53,103     29,562     36,042     40,482     22,742     955     (182,886 )    

Property and equipment, net

    11         2         3     17,688           17,704

Franchise rights

                        48,804           48,804

Goodwill

                        13,498           13,498

Other intangible assets, net

                    4     3,114           3,118

Other noncurrent assets, net

    122     21     23       43     426       635

Noncurrent assets of discontinued operations, net

                        4,118           4,118

Total assets

  $ 53,252   $ 29,583   $ 36,067   $ 40,482   $ 22,792   $ 103,856   $ (182,886 )   $ 103,146

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Accounts payable and accrued expenses related to trade creditors

  $   $   $   $   $   $ 1,985   $     $ 1,985

Accrued expenses and other current liabilities

    447     224     113     127     89     1,481           2,481

Deferred income taxes

                        2           2

Current portion of long-term debt

      620       995       74       1,689

Current liabilities of discontinued operations

                        112           112

Total current liabilities

    447     844     113     1,122     89     3,654           6,269

Long term-debt, less current portion

    8,243     4,988     3,498     3,318     981     654           21,682

Deferred income taxes

    3,470                 811     23,089           27,370

Other noncurrent liabilities

    873     54             50     5,944           6,921

Noncurrent liabilities of discontinued operations

              28       28

Minority interest

                        657           657

Stockholders’ Equity

               

Common stock

    25                               25

Other stockholders’ equity

    40,194     23,697     32,456     36,042     20,861     69,830     (182,886 )     40,194

Total stockholders’ equity

    40,219     23,697     32,456     36,042     20,861     69,830     (182,886 )     40,219

Total liabilities and stockholders’ equity

  $ 53,252   $ 29,583   $ 36,067   $ 40,482   $ 22,792   $ 103,856   $ (182,886 )   $ 103,146

 

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COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

Comcast Corporation

Condensed Consolidating Statement of Operations

For the Three Months Ended September 30, 2006

 

(Dollars in millions)   Comcast
Parent
    CCCL
Parent
    CCCH
Parent
    Combined
CCHMO
Parents
    Comcast
Holdings
    Non-
Guarantor
Subsidiaries
    Elimination
and
Consolidation
Adjustments
    Consolidated
Comcast
Corporation
 

Revenues

               

Service revenues

  $     $     $     $     $     $ 6,432     $     $ 6,432  

Management fee revenue

    137       49       74       74       2             (336 )      
    137       49       74       74       2       6,432       (336 )     6,432  

Costs and Expenses

               

Operating (excluding depreciation)

                                  2,300             2, 300  

Selling, general and administrative

    64       49       74       74       5       1,765       (336 )     1,695  

Depreciation

    1                               962             963  

Amortization

                                  250             250  
    65       49       74       74       5       5,277       (336 )     5,208  

Operating income (loss)

    72                         (3 )     1,155             1,224  

Other Income (Expense)

               

Interest expense

    (210 )     (96 )     (80 )     (62 )     (26 )     (56 )           (530 )

Investment income (loss), net

                            49       808             857  

Equity in net (losses) income of affiliates

    1,307       376       736       777       337       (83 )     (3,515 )     (65 )

Other income (expense)

                                  96             96  
    1,097       280       656       715       360       765       (3,515 )     358  

Income (loss) from continuing operations before income taxes and minority interest

    1,169       280       656       715       357       1,920       (3,515 )     1,582  

Income tax (expense) benefit

    48       39       29       21       (7 )     (740 )           (610 )

Income (loss) from continuing operations before minority interest

    1,217       319       685       736       350       1,180       (3,515 )     972  

Minority interest

                                  (3 )           (3 )

Net income from continuing operations

    1,217       319       685       736       350       1,177       (3,515 )     969  

Income from discontinued operations, net of tax

                                  14             14  

Gain on discontinued operations, net of tax

                                                           234                  234  

Net Income

  $ 1,217     $ 319     $ 685     $ 736     $ 350     $ 1,425     $ (3,515 )   $ 1,217  

 

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COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

Comcast Corporation

Condensed Consolidating Statement of Operations

For the Three Months Ended September 30, 2005

 

(Dollars in millions)   Comcast
Parent
    CCCL
Parent
    CCCH
Parent
    Combined
CCHMO
Parents
    Comcast
Holdings
    Non-
Guarantor
Subsidiaries
    Elimination
and
Consolidation
Adjustments
    Consolidated
Comcast
Corporation
 

Revenues

               

Service revenues

  $     $     $     $     $     $ 5,284     $     $ 5,284  

Management fee revenue

    115       44       71       71       1             (302 )      
    115       44       71       71       1       5,284       (302 )     5,284  

Costs and Expenses

               

Operating (excluding depreciation)

                                  1,894             1,894  

Selling, general and administrative

    53       44       71       71       3       1,454       (302 )     1,394  

Depreciation

    1                               862             863  

Amortization

                            3       289             292  
    54       44       71       71       6       4,499       (302 )     4,443  

Operating income (loss)

    61                         (5 )     785             841  

Other Income (Expense)

               

Interest expense

    (98 )     (124 )     (82 )     (38 )     (24 )     (56 )           (422 )

Investment income (loss), net

                            (86 )     (18 )           (104 )

Equity in net income (losses) of affiliates

    246       339       240       264       228       13       (1,348 )     (18 )

Other income (expense)

                                  19             19  
    148       215       158       226       118       (42 )     (1,348 )     (525 )

Income (loss) from continuing operations before income taxes and minority interest

    209       215       158       226       113       743       (1,348 )     316  

Income tax (expense) benefit

    13       43       28       14       40       (267 )           (129 )

Income (loss) from continuing operations before minority interest

    222       258       186       240       153       476       (1,348 )     187  

Minority interest

                                  11             11  

Net income from continuing operations

    222       258       186       240       153       487       (1,348 )     198  

Income from discontinued operations, net of tax

                                  24             24  

Gain on discontinued operations, net of tax

                                               

Net Income

  $ 222     $ 258     $ 186     $ 240     $ 153     $ 511     $ (1,348 )   $ 222  

 

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COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

Comcast Corporation

Condensed Consolidating Statement of Operations

For the Nine Months Ended September 30, 2006

 

(Dollars in millions)   Comcast
Parent
    CCCL
Parent
    CCCH
Parent
    Combined
CCHMO
Parents
    Comcast
Holdings
    Non-
Guarantor
Subsidiaries
    Elimination
and
Consolidation
Adjustments
    Consolidated
Comcast
Corporation
 

Revenues

               

Service revenues

  $     $     $     $     $     $ 17,935     $     $ 17,935  

Management fee revenue

    383       142       224       224       6             (979 )      
    383       142       224       224       6       17,935       (979 )     17,935  

Costs and Expenses

               

Operating (excluding depreciation)

                                  6,559             6,559  

Selling, general and administrative

    189       142       224       224       12       4,716       (979 )     4,528  

Depreciation

    6                         2       2,740             2,748  

Amortization

                            4       695             699  
    195       142       224       224       18       14,710       (979 )     14,534  

Operating income (loss)

    188                         (12 )     3,225             3,401  

Other Income (Expense)

               

Interest expense

    (532 )     (303 )     (244 )     (198 )     (72 )     (153 )           (1,502 )

Investment income (loss), net

                            74       861             935  

Equity in net (losses) income of affiliates

    2,367       1,159       1,470       1,599       967       (86 )     (7,562 )     (86 )

Other income (expense)

                                  194             194  
    1,835       856       1,226       1,401       969       816       (7,562 )     (459 )

Income (loss) from continuing operations before income taxes and minority interest

    2,023       856       1,226       1,401       957       4,041       (7,562 )     2,942  

Income tax (expense) benefit

    120       111       86       69       4       (1,516 )           (1,126 )

Income (loss) from continuing operations before minority interest

    2,143       967       1,312       1,470       961       2,525       (7,562 )     1,816  

Minority interest

                                  (10 )           (10 )

Net income from continuing operations

    2,143       967       1,312       1,470       961       2,515       (7,562 )     1,806  

Income from discontinued operations, net of tax

                                  103             103  

Gain on discontinued operations, net of tax

                                  234             234  

Net Income

  $ 2,143     $ 967     $ 1,312     $ 1,470     $ 961     $ 2,852     $ (7,562 )   $ 2,143  

 

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COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

Comcast Corporation

Condensed Consolidating Statement of Operations

For the Nine Months Ended September 30, 2005

 

(Dollars in millions)   Comcast
Parent
    CCCL
Parent
    CCCH
Parent
    Combined
CCHMO
Parents
    Comcast
Holdings
    Non-
Guarantor
Subsidiaries
    Elimination
and
Consolidation
Adjustments
    Consolidated
Comcast
Corporation
 

Revenues

               

Service revenues

  $     $     $     $     $     $ 15,659     $     $ 15,659  

Management fee revenue

    339       130       207       207       5             (888 )      
    339       130       207       207       5       15,659       (888 )     15,659  

Costs and Expenses

               

Operating (excluding depreciation)

                                  5,570             5,570  

Selling, general and administrative

    144       130       207       207       9       4, 248       (888 )     4,057  

Depreciation

    2                         2       2,521             2,525  

Amortization

                            8       827             835  
    146       130       207       207       19       13,166       (888 )     12,987  

Operating income (loss)

    193                         (14 )     2,493             2,672  

Other Income (Expense)

               

Interest expense

    (249 )     (364 )     (247 )     (233 )     (77 )     (163 )           (1,333 )

Investment income (loss), net

                            (35 )     71             36  

Equity in net income (losses) of affiliates

    831       1,020       519       670       771       (7 )     (3,823 )     (19 )

Other income (expense)

                                  (58 )           (58 )
    582       656       272       437       659       (157 )     (3,823 )     (1,374 )

Income (loss) from continuing operations before income taxes and minority interest

    775       656       272       437       645       2,336       (3,823 )     1,298  

Income tax (expense) benefit

    20       127       86       82       44       (929 )           (570 )

Income (loss) from continuing operations before minority interest

    795       783       358       519       689       1,407       (3,823 )     728  

Minority interest

                                  (7 )           (7 )

Net income from continuing operations

    795       783       358       519       689       1,400       (3,823 )     721  

Income from discontinued operations, net of tax

                                  74             74  

Gain on discontinued operations, net of tax

                                               

Net Income

  $ 795     $ 783     $ 358     $ 519     $ 689     $ 1,474     $ (3,823 )   $ 795  

 

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COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

Comcast Corporation

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 30, 2006

 

(Dollars in millions)   Comcast
Parent
    CCCL
Parent
    CCCH
Parent
    Combined
CCHMO
Parents
    Comcast
Holdings
    Non-
Guarantor
Subsidiaries
    Elimination
and
Consolidation
Adjustments
  Consolidated
Comcast
Corporation
 

Operating Activities

               

Net cash provided by (used in) operating activities

  $ 95     $ (168 )   $ (196 )   $ (234 )   $ 47     $ 5,588     $   $ 5,132  

Financing Activities

               

Proceeds from borrowings

    5,960                               10           5,970  

Retirements and repayments of debt

    (550 )     (619 )           (988 )     (27 )     (38 )         (2,222 )

Repurchases of common stock

    (1,882 )                                       (1,882 )

Issuances of common stock

    133                                         133  

Other

    7                                         7  

Net cash provided by (used in) financing activities

    3,668       (619 )           (988 )     (27 )     (28 )         2,006  

Investing Activities

               

Net transactions with affiliates

    (3,800 )     787       196       1,222       (9 )     1,604            

Capital expenditures

    (5 )                             (3,046 )         (3,051 )

Cash paid for intangible assets

                                  (227 )         (227 )

Acquisitions, net of cash acquired

                                  (3,839 )         (3,839 )

Proceeds from sales and restructuring of investments

    47                         10       2,462           2,519  

Purchases of investments

                                  (471 )         (471 )

Proceeds from sales (purchases) of short-term investments, net

                                  15           15  

Other

                                  (3 )         (3 )

Net cash provided by (used in) investing activities

    (3,758 )     787       196       1,222       1       (3,505 )         (5,057 )

Increase in cash and cash equivalents

    5                         21       2,055           2,081  

Cash and cash equivalents, beginning of period

                                  693           693  

Cash and cash equivalents, end of period

  $ 5     $     $     $     $ 21     $ 2,748     $   $ 2,774  

 

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Table of Contents

COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

Comcast Corporation

Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 30, 2005

 

(Dollars in millions)   Comcast
Parent
    CCCL
Parent
    CCCH
Parent
    Combined
CCHMO
Parents
    Comcast
Holdings
    Non-
Guarantor
Subsidiaries
    Elimination
and
Consolidation
Adjustments
  Consolidated
Comcast
Corporation
 

Operating Activities

               

Net cash provided by (used in) operating activities

  $ 152     $ (175 )   $ (175 )   $ (374 )   $ (114 )   $ 4,626     $   $ 3,940  

Financing Activities

               

Proceeds from borrowings

    2,332                               1           2,333  

Retirements and repayments of debt

    (1 )                 (1,590 )     (11 )     (340 )         (1,942 )

Repurchases of common stock

    (1,291 )                                       (1,291 )

Issuances of common stock

    76                                         76  

Other

                                  27           27  

Net cash provided by (used in) financing activities

    1,116                   (1,590 )     (11 )     (312 )         (797 )

Investing activities

               

Net transactions with affiliates

    (1,268 )     175       175       1,964       125       (1,171 )          

Capital expenditures

                                  (2,753 )         (2,753 )

Cash paid for intangible assets

                                  (204 )         (204 )

Acquisitions, net of cash acquired

                                  (196 )         (196 )

Proceeds from sales and restructuring of investments

                                  626           626  

Purchases of investments

                                  (310 )         (310 )

Proceeds from sales (purchases) of short-term investments, net

                                  (66 )         (66 )

Other

                                  (113 )         (113 )

Net cash provided by (used in) investing activities

    (1,268 )     175       175       1,964       125       (4,187 )         (3,016 )

Increase in cash and cash equivalents

                                  127           127  

Cash and cash equivalents, beginning of period

                                  452           452  

Cash and cash equivalents, end of period

  $     $     $     $     $     $ 579     $   $ 579  

 

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Table of Contents

COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are the nation’s largest broadband cable provider and offer a wide variety of consumer entertainment and communication products and services, serving approximately 24 million video subscribers, 11 million high-speed Internet subscribers and 2 million phone subscribers as of September 30, 2006. We also have a controlling interest in six national cable networks (E! Entertainment Television; Style Network; The Golf Channel; VERSUS (formerly known as OLN); G4; and AZN Television) and other entertainment-related businesses. We classify our operations in two reportable segments: Cable and Content. Our Cable segment develops, manages and operates our broadband cable systems, including video, high-speed Internet and phone services. The majority of our Cable segment revenue is earned from monthly subscriptions for these cable services. Other revenue sources include advertising and the operation of our regional sports and news networks. The Cable segment generates more than 95% of our consolidated revenues. Revenue from our Content segment is earned primarily from advertising revenues and from monthly per subscriber license fees paid by cable system operators and satellite television companies.

Financial results for the three and nine months ended September 30, 2006, reflect the completion of the previously reported transactions with Adelphia and Time Warner, including significant non-operating gains and the presentation of our cable systems located in Cleveland, Dallas and Los Angeles as discontinued operations. These items had a significant impact on our net income for the periods presented and are discussed separately below. In addition to these significant non-recurring items, highlights for the nine months ended September 30, 2006 include the following:

 

   

revenue growth of 15.7% and operating income before depreciation and amortization growth of 17.7% in our Cable segment compared to the same period in 2005, driven by continued growth in our digital cable and high-speed Internet services, rate increases in our video services and the results of the new systems

 

 

   

subscriber growth associated with our historical cable systems for digital (approximately 1.2 million), high-speed Internet (approximately 1.2 million) and Comcast Digital Voice (approximately 1.0 million) services since December 31, 2005

 

 

   

dissolution of the Texas and Kansas City Cable Partnership (see below) that we expect will ultimately result in us acquiring cable systems serving Houston, Texas.

 

 

   

participation in a consortium of investors (“SpectrumCo, LLC”) that was a winning bidder in the advanced wireless spectrum auction (see Note 4)

 

 

   

acquisition of the cable systems of Susquehanna Communications, located in Pennsylvania, New York, Maine, and Mississippi (see Note 4)

 

 

   

repurchase of approximately 64 million shares of our Class A Special common stock pursuant to our Board-authorized share repurchase program for approximately $1.9 billion

 

Adelphia and Time Warner Transactions

In April 2005, we entered into an agreement with Adelphia, in which we agreed to acquire certain assets and assume certain liabilities of Adelphia (the “Adelphia Acquisition”). At the same time, we and Time Warner Cable Inc. and certain of its affiliates (“TWC”) entered into several agreements in which we agreed to (i) have our interests in Time Warner Entertainment Company, L.P. (“TWE”) redeemed, (ii) have our interest in TWC redeemed (together with the TWE redemption, the “Redemptions”), and (iii) exchange certain cable systems acquired from Adelphia and certain historic Comcast cable systems with TWC (the “Exchanges”). On July 31, 2006, these transactions were completed. We collectively refer to the Adelphia Acquisition, the Redemptions and the Exchanges as the “Adelphia and Time Warner transactions” (see Note 4).

 

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COMCAST CORPORATION AND SUBSIDIARIES — FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2006

 

The Adelphia and Time Warner transactions resulted in a net increase of 1.7 million video subscribers, a net cash payment by us of approximately $1.5 billion and the disposition of our ownership interests in TWE and TWC and the assets of two cable system partnerships. As a result of these transactions, we recognized gains, that are included in investment income (loss), net, of $694 million (see Note 5). The operating results of our historic Comcast cable systems located in Los Angeles, Dallas and Cleveland, included in the Exchanges, are reported as discontinued operations for all periods presented. As a result of the Exchanges, we also recognized a gain on the sale of discontinued operations of $234 million, net of tax of $563 million.

The valuations of assets acquired and estimated gains on these transactions are based on preliminary third-party valuations. Refinements may occur as these valuations are finalized.

Dissolution of Texas and Kansas City Cable Partnership

In July 2006, we initiated the dissolution of our 50/50 cable system partnership with TWC, known as Texas and Kansas City Cable Partners, L.P. (see Note 4). The partnership consisted of two asset pools. One pool consisted of the cable systems serving Houston, Texas (“Houston Asset Pool”) and the other pool consisted of cable systems serving Kansas City, south and west Texas and New Mexico (“Kansas City Asset Pool”). In August 2006, TWC notified us that it selected the Kansas City Asset Pool and accordingly, we will receive the Houston Asset Pool. As a result, the economic return to us on our interest in the partnership tracks the performance of the Houston Asset Pool and we are no longer entitled to any benefits of ownership or responsible for the obligations of the Kansas City Asset Pool. For segment reporting purposes, we have included the operating results of the Houston Asset Pool in our Cable segment’s operating results beginning August 1, 2006 (the selection date). However, for our consolidated operating results the partnership will continue to be treated as an equity method investment until the distribution date of the Houston Asset Pool. Accordingly, the operating results of the Houston Asset Pool are reversed in the Eliminations column to reconcile to our consolidated operating results (see Note 11).

 


The following provides further details of these highlights and insights into our consolidated financial statements, including discussion of our results of operations and our liquidity and capital resources.

Consolidated Operating Results

 

   

Three Months Ended

September 30,

    Increase /(Decrease)    

Nine Months Ended

September 30,

    Increase /(Decrease)  
(Dollars in millions)       2006             2005         2005 to 2006     2006     2005     2005 to 2006  

Revenues

  $ 6,432     $ 5,284     21.7 %   $ 17,935     $ 15,659     14.5 %

Costs and expenses

           

Operating, selling, general and administrative (excluding depreciation)

    3,995       3,288     21.5       11,087       9,627     15.2  

Depreciation

    963       863     11.6