UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): April 6, 2015
Comcast Corporation
(Exact
Name of Registrant
as Specified in its Charter)
Pennsylvania
(State or
Other Jurisdiction of Incorporation)
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001-32871 |
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27-0000798 |
(Commission File Number) |
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(IRS Employer Identification No.) |
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One Comcast Center
Philadelphia, PA |
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19103-2838 |
(Address of Principal Executive Offices) |
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Registrants telephone number, including area code: (215) 286-1700
(Former Name or Former Address, if Changed Since Last
Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the
registrant under any of the following provisions:
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 7.01. Regulation FD Disclosure
Charter Communications, Inc. (Charter) intends to file a Post-Effective Amendment to the Registration Statement on Form S-4 (Registration No.
333-200809) with the Securities and Exchange Commission relating to its proposed acquisition of Bright House Communications that will include certain historical combined financial statements for the Comcast Cable Systems to be Contributed to Midwest
Cable, Inc., or SpinCo, which is a newly formed entity that Comcast intends to spin-off to its shareholders. Accordingly, Comcast is furnishing the audited combined financial statements of Comcast Cable Systems to be Contributed to Midwest Cable,
Inc. as of December 31, 2014 and 2013 and for each of the three years in the period ended December 31, 2014 attached hereto as Exhibit 99.1.
Comcast does not intend for this Item 7.01 or Exhibit 99.1 to be treated as filed under the Securities Exchange Act of 1934, as amended,
or incorporated by reference into its filings under the Securities Act of 1933, as amended.
Item 9.01. Exhibits
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Exhibit Number |
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Description |
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99.1 |
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Audited Combined Financial Statements of Comcast Cable Systems to be Contributed to Midwest Cable, Inc. as of December 31, 2014 and 2013 and for each of the Three Years in the Period Ended December 31, 2014 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
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COMCAST CORPORATION |
Date: April 6, 2015 |
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By: |
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/s/ Lawrence J. Salva |
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Name: Lawrence J. Salva |
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Title: Executive Vice President, Chief Accounting
Officer and Controller |
Exhibit 99.1
Comcast Cable Systems to be Contributed to Midwest Cable, Inc.
Combined Financial Statements as of December 31, 2014 and 2013 and
for each of the Three Years in the Period Ended December 31, 2014
(Including Report of Independent Registered Public Accounting Firm)
INDEX TO COMBINED FINANCIAL STATEMENTS
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Index |
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Page |
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Combined Financial Statements of Comcast Cable Systems to be Contributed to Midwest Cable, Inc. |
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Report of Independent Registered Public Accounting Firm |
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F-2 |
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Combined Balance Sheet |
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F-3 |
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Combined Statement of Income |
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F-4 |
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Combined Statement of Cash Flows |
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F-5 |
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Combined Statement of Changes in Parent Company Net Investment |
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F-6 |
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Notes to Combined Financial Statements |
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F-7 |
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F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Midwest Cable, Inc.
Philadelphia, Pennsylvania
We have audited the accompanying
combined balance sheets of the Comcast Cable Systems to be Contributed to Midwest Cable, Inc. (the Company) as of December 31, 2014 and 2013 and the related combined statements of income, cash flows, and changes in parent company
net investment for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all material respects, the financial position of the Comcast Cable Systems to be
Contributed to Midwest Cable, Inc. as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 1, the Company is an integrated business of Comcast Corporation and is not a stand-alone
entity. The accompanying combined financial statements reflect the assets, liabilities, revenue, and expenses directly attributable to the Company, as well as allocations deemed reasonable by Comcast Corporation management, and do not necessarily
reflect the combined financial position, results of operations, and cash flows that would have resulted had the Company been operated as a stand-alone entity during the periods presented.
/s/ Deloitte & Touche LLP
Philadelphia,
Pennsylvania
April 6, 2015
F-2
Comcast Cable Systems to be Contributed to Midwest Cable, Inc.
Combined Balance Sheet
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As of December 31 (in millions) |
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2014 |
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2013 |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Receivables (net of allowance for doubtful accounts of $17 and $18, respectively) |
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137 |
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150 |
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Programming receivables |
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16 |
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14 |
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Other current assets |
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12 |
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9 |
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Total current assets |
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165 |
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173 |
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Property and equipment, net |
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1,944 |
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1,944 |
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Franchise rights |
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5,561 |
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5,561 |
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Goodwill |
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1,241 |
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1,241 |
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Other intangible assets, net |
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72 |
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78 |
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Other noncurrent assets |
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2 |
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2 |
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Total assets |
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$ |
8,985 |
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$ |
8,999 |
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Liabilities and Parent Company net investment |
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Current Liabilities: |
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Accounts payable and accrued expenses related to trade creditors |
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$ |
301 |
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$ |
283 |
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Accrued payroll and employee benefits |
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65 |
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41 |
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Subscriber advance payments |
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18 |
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18 |
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Accrued expenses and other current liabilities |
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36 |
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37 |
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Total current liabilities |
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420 |
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379 |
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Deferred income taxes |
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2,843 |
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2,842 |
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Other noncurrent liabilities |
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62 |
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54 |
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Commitments and contingencies (See Note 8) |
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Parent Company net investment |
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5,660 |
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5,724 |
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Total liabilities and Parent Company net investment |
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$ |
8,985 |
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$ |
8,999 |
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See accompanying notes to combined financial statements.
F-3
Comcast Cable Systems to be Contributed to Midwest Cable, Inc.
Combined Statement of Income
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Year ended December 31 (in millions) |
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2014 |
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2013 |
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2012 |
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Revenue |
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$ |
4,641 |
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$ |
4,470 |
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$ |
4,275 |
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Costs and Expenses: |
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Programming |
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1,034 |
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972 |
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888 |
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Other operating and administrative |
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1,527 |
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1,452 |
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1,392 |
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Advertising, marketing and promotion |
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347 |
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338 |
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319 |
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Shared asset usage charge |
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127 |
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124 |
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111 |
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Depreciation |
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513 |
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512 |
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529 |
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Amortization |
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19 |
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30 |
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42 |
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3,567 |
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3,428 |
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3,281 |
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Operating income |
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1,074 |
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1,042 |
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994 |
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Interest expense |
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(6 |
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(1 |
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(2 |
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Income before income taxes |
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1,068 |
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1,041 |
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992 |
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Income tax expense |
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(418 |
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(409 |
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(390 |
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Net income |
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$ |
650 |
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$ |
632 |
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$ |
602 |
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See accompanying notes to combined financial statements.
F-4
Comcast Cable Systems to be Contributed to Midwest Cable, Inc.
Combined Statement of Cash Flows
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Year ended December 31 (in millions) |
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2014 |
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2013 |
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2012 |
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Operating Activities |
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Net income |
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$ |
650 |
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$ |
632 |
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$ |
602 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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532 |
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542 |
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571 |
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Shared asset usage charge |
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127 |
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124 |
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111 |
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Share-based compensation |
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6 |
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6 |
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5 |
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Deferred income taxes |
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1 |
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7 |
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(53 |
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Changes in operating assets and liabilities: |
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Change in receivables, net |
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13 |
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(16 |
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(16 |
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Change in accounts payable and accrued expenses related to trade creditors |
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3 |
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8 |
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Change in other operating assets and liabilities |
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26 |
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(1 |
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(2 |
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Net cash provided by operating activities |
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1,358 |
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1,302 |
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1,218 |
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Investing Activities |
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Capital expenditures |
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(474 |
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(466 |
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(411 |
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Cash paid for intangible assets |
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(15 |
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(14 |
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(11 |
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Net cash used in investing activities |
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(489 |
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(480 |
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(422 |
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Financing Activities |
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Change in Parent Company net investment |
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(869 |
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(822 |
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(796 |
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Net cash used in financing activities |
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(869 |
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(822 |
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(796 |
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Increase (decrease) in cash and cash equivalents |
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Cash and cash equivalents, beginning of year |
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Cash and cash equivalents, end of year |
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$ |
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$ |
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$ |
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See accompanying notes to combined financial statements.
F-5
Comcast Cable Systems to be Contributed to Midwest Cable, Inc.
Combined Statement of Changes in Parent Company Net Investment
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(in millions) |
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Parent Company Net Investment |
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Balance, January 1, 2012 |
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$ |
5,833 |
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Transactions with Parent Company, net |
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(682 |
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Net income |
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602 |
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Balance, December 31, 2012 |
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5,753 |
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Transactions with Parent Company, net |
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(661 |
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Net income |
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632 |
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Balance, December 31, 2013 |
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5,724 |
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Transactions with Parent Company, net |
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(714 |
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Net income |
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650 |
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Balance, December 31, 2014 |
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$ |
5,660 |
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See accompanying notes to combined financial statements.
F-6
Comcast Cable Systems to be Contributed to Midwest Cable, Inc.
Notes to Combined Financial Statements
Note 1: Basis of
Presentation
Background
On April 25, 2014, Comcast Corporation (Comcast) entered into an agreement with Charter Communications, Inc. (Charter) to satisfy
its undertaking in the merger agreement with Time Warner Cable, Inc. (TWC) with respect to the divestiture of subscribers. Among other things, the agreement contemplates a spin-off of cable systems serving approximately 2.5 million
existing Comcast video subscribers into Midwest Cable, Inc., a newly formed entity and currently a wholly owned subsidiary of Comcast (Midwest Cable, SpinCo, we, us, our). Midwest Cable was
formed in the state of Delaware as a limited liability company in May 2014 and converted to a corporation in Delaware in September 2014. Upon consummation of the SpinCo merger (as defined below), it is expected that Midwest Cable will change its
legal name to GreatLand Connections Inc.
Following the closing date of the Comcast/TWC merger, Comcast will distribute all of the shares of Midwest
Cables common stock on a pro rata basis to holders of Comcast Class A common stock, Class A Special common stock and Class B common stock (Comcast common stock) as of the record date (the spin-off).
Immediately prior to the spin-off, Comcast will contribute to Midwest Cable systems currently owned by Comcast serving approximately 2.5 million video subscribers in the Midwestern and Southeastern United States (the SpinCo
systems), together with the related subscribers, the assets and liabilities primarily related to the SpinCo systems and certain other assets and liabilities, including certain bank debt and/or term loans that will exist at the date of the
spin-off, a portion of the proceeds of which will have been distributed to Comcast prior to such contribution. In connection with such contribution and prior to the spin-off, Midwest Cable will issue notes and stock to Comcast. The
consummation of the spin-off is subject to a number of closing conditions, including, among others, completion of the Comcast/TWC merger, the receipt of certain regulatory approvals, approval by Charters stockholders in connection with the
SpinCo merger (as defined below) and certain conditions relating to the financing for the spin-off. On March 17, 2015, the stockholders of Charter approved the issuance of common stock of New Charter to shareholders of SpinCo in connection with
the SpinCo merger.
Following the spin-off, Charter will reorganize such that a new publicly traded entity, New Charter, will become the parent of
Charter. Another newly formed, wholly owned subsidiary of New Charter will merge with and into Midwest Cable, with Midwest Cable being the surviving entity (the SpinCo merger). It is intended that the spin-off, together with the related
transactions described in the preceding paragraph, will qualify as a tax-free reorganization and a tax-free distribution and that the SpinCo merger will qualify as a tax-free transaction. Following consummation of the SpinCo merger, holders of
Comcast common stock as of the record date will own approximately 67% of Midwest Cables common stock, New Charter will own the remaining approximately 33% and Comcast will have no remaining interest in Midwest Cable.
We offer a variety of video, high-speed Internet and voice services (cable services) over our geographically-aligned cable distribution system to
residential and commercial customers located in the Midwestern and Southeastern United States. As of December 31, 2014, we served 2.5 million video customers, 2.4 million high-speed Internet customers and 1.2 million voice
customers.
Basis of Presentation
We are currently
part of Comcasts Cable Communications (Comcast Cable) reportable segment, and our assets and liabilities consist of those that Comcast considers to be primarily related to the cable systems that comprise our operations. Comcast may
also transfer certain other assets or liabilities in connection with the closing of the transactions that are not primarily related to our operations, which are not reflected in our combined balance sheet. Our operations are conducted by
various indirect subsidiaries of Comcast. The accompanying combined financial statements have been derived from Comcasts historical accounting records.
The combined statement of income includes all revenue and expenses directly attributable to our business. Expenses include costs for facilities, functions and
services that we use at shared sites and costs for certain functions and
F-7
services performed by centralized Comcast operations and directly charged to us based on usage. The combined statement of income also includes allocations of costs for administrative functions
and services performed on our behalf by other centralized functions within Comcast. These costs were primarily allocated based on the relative proportion of our video customer relationships to total Comcast Cable video customer relationships. All of
the allocations and estimates reflected in the combined financial statements are based on assumptions that management believes are reasonable. However, these allocations and estimates are not necessarily indicative of the costs and expenses that
would have resulted if we had been operated as a separate entity. Following the spin-off, we will incur costs to replace Comcast support and to allow us to function as an independent, publicly traded company. In particular, we will be required to
obtain new programming arrangements, primarily through Charter, as well as through some direct relationships with programmers. See Note 3 for additional information on our allocations.
We present our operations in one reportable business segment, as management has historically evaluated our performance and allocated resources on a combined
basis as a part of Comcast Cable.
Note 2: Accounting Policies
The combined financial statements are prepared in
accordance with generally accepted accounting principles in the United States (GAAP), which requires us to select accounting policies, including, in certain cases, industry-specific policies, and make estimates that affect the reported
amount of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and contingent liabilities. Actual results could differ from these estimates. All transactions, accounts and profits between individual cable
systems that comprise us have been eliminated.
We believe the judgments and related estimates for the following item are critical in the preparation of
the combined financial statements:
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valuation and impairment testing of cable franchise rights (see Note 5) |
In addition, the following accounting
policies are specific to the industry in which we operate:
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customer installation revenue (see Revenue Recognition below) |
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customer installation costs (see Note 4) |
Information on other accounting policies or methods related to the
combined financial statements is included, where applicable, in their respective footnotes that follow. Below is a discussion of accounting policies and methods used in the combined financial statements that are not presented within other footnotes.
Revenue Recognition
We generate revenue primarily
from subscriptions to cable services and from the sale of advertising. We recognize revenue from cable services as each service is provided. Customers are typically billed in advance on a monthly basis based on the services and features they receive
and the type of equipment they use. We manage credit risk by screening applicants through the use of internal customer information, identification verification tools and credit bureau data. If a customers account is delinquent, various
measures are used to collect outstanding amounts, including termination of the customers cable services. Since installation revenue obtained from the connection of customers to the cable systems is less than related direct selling costs, we
recognize revenue as connections are completed.
As part of Comcasts distribution agreements with cable networks, we generally receive an allocation
of scheduled advertising time that is sold to local, regional and national advertisers. We recognize advertising revenue when the advertising is aired. In most cases, the available advertising units are sold by Comcasts sales force. In some
cases, Comcast works with representation firms as an extension of its sales force to sell a portion of the allocated advertising units allocated to us. Comcast also represents the advertising sales efforts of other multichannel video providers in
some markets. Since Comcast is acting as the principal in these arrangements, we report the advertising that is sold as revenue and the fees paid to representation firms and multichannel video providers as other operating and administrative
expenses.
F-8
Revenue earned from other sources is recognized when services are provided or events occur. Under the terms of
our cable franchise agreements, we are generally required to pay to the cable franchising authority an amount based on our gross video revenue. The fees are normally passed through to the cable customers, and we classify the fees as a component of
revenue with the corresponding costs included in other operating and administrative expenses. The fees recognized in revenue for 2014, 2013 and 2012 were $135 million, $139 million and $134 million, respectively.
Programming Expenses
Programming expenses are the fees
paid to license the programming that is distributed to video customers. Programming is acquired for distribution to our video customers, generally under multiyear agreements that Comcast has with distributors, with rates typically based on the
number of customers that receive the programming, channel positioning and the extent of distribution. From time to time, these contracts expire and programming continues to be provided under interim arrangements while the parties negotiate new
contractual terms, sometimes with effective dates that affect prior periods. While payments are typically made under the prior contracts terms, the amount of programming expenses recorded during these interim arrangements is based on estimates
of the ultimate contractual terms expected to be negotiated. Differences between actual amounts determined upon resolution of negotiations and amounts recorded during these interim arrangements are recorded in the period of resolution.
Advertising Expenses
Advertising costs are expensed as
incurred.
Cash and Cash Equivalents
Comcast uses a
centralized approach to cash management and financing of its operations. Our cash is collected by Comcast daily, and Comcast funds our operating and investing activities as needed. Cash transfers to and from Comcasts cash management process
are reflected as a component of Parent Company net investment in the combined balance sheet. Accordingly, no cash and cash equivalents are reflected in the combined balance sheet for any of the periods presented.
Goodwill
We assess the recoverability of our goodwill
annually, or more frequently whenever events or substantive changes in circumstances indicate that the carrying amount of a reporting unit may exceed its fair value. We test goodwill for impairment at the reporting unit level. The assessment of
recoverability may first consider qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A
quantitative assessment is performed if the qualitative assessment results in a more-likely-than-not determination or if a qualitative assessment is not performed. The quantitative assessment considers if the carrying amount of a reporting unit
exceeds its fair value, in which case an impairment charge is recorded to the extent the carrying amount of the reporting units goodwill exceeds its implied fair value. Unless an impairment charge is considered material and presented
separately, we recognize it as a component of amortization expense.
Asset Retirement Obligations
Certain of our cable franchise agreements and lease agreements contain provisions requiring us to restore facilities or remove property in the event that the
franchise or lease agreement is not renewed. We expect to continually renew our cable franchise agreements and therefore cannot reasonably estimate any liabilities associated with such agreements. A remote possibility exists that franchise
agreements could be terminated unexpectedly, which could result in us incurring significant expense in complying with restoration or removal provisions. The disposal obligations related to our properties are not material to the combined financial
statements. We do not have any significant liabilities related to asset retirements recorded in the combined financial statements.
Parent Company Net
Investment
Parent Company net investment in the combined balance sheet represents Comcasts historical investment in our business, our
accumulated net earnings after taxes, and the net effect of transactions with and allocations from Comcast. See Note 3 for additional information on our allocations.
F-9
Fair Value of Financial Instruments
Our financial instruments consist primarily of accounts receivable and accounts payable. The carrying values of accounts receivable and accounts payable
approximate their respective fair values.
Recent Accounting Pronouncements
Revenue Recognition
In May 2014, the Financial
Accounting Standards Board and the International Accounting Standards Board updated the accounting guidance related to revenue recognition. The updated accounting guidance provides a single, contract-based revenue recognition model to help improve
financial reporting by providing clearer guidance on when an entity should recognize revenue, and by reducing the number of standards to which entities have to refer. The updated accounting guidance will be effective for us on January 1, 2017,
and early adoption is not permitted. The updated accounting guidance provides companies with alternative methods of adoption. We are currently in the process of determining the impact that the updated accounting guidance will have on our combined
financial statements and our method of adoption.
Note 3: Related Party Transactions
Shared Asset Usage Charge
We share certain operating and administrative sites with Comcast, such as its national backbone. These shared assets are not included in the combined balance
sheet; however, the shared asset usage charge represents the depreciation of these sites that has been allocated to us based on our relative usage of the respective facilities.
Shared Services and Other Allocated Costs
The combined
financial statements include transactions involving shared services (including expenses primarily related to personnel, logistics, advertising and marketing, other overhead functions, IT support, and network communications support) and certain
corporate administrative services (including charges for services such as accounting matters, investor relations, tax, treasury and cash management, insurance, legal, and risk management) that were provided to us by Comcast. These allocated costs
are included in other operating and administrative expenses and advertising, marketing and promotion costs in the combined statement of income, and are presented in the combined balance sheet as a component of Parent Company net investment. These
costs were primarily allocated based on the relative proportion of our video customer relationships to those of Comcast Cable and represent managements reasonable estimate of the costs incurred. However, these amounts are not necessarily
representative of the costs required for us to operate as an independent, publicly traded company.
Amounts recorded in other operating and administrative
expenses for these services in 2014, 2013, and 2012 were $242 million, $176 million and $168 million, respectively. The 2014 amounts include $52 million of transaction related costs. Amounts recorded in advertising, marketing and promotion
costs for these services in 2014, 2013, and 2012 were $108 million, $99 million and $92 million, respectively.
Transactions with NBCUniversal and
Other Affiliates
We enter into transactions in the ordinary course of our operations, including purchases of programming and purchases and sales of
advertising, with NBCUniversal Media, LLC (NBCUniversal), a consolidated subsidiary of Comcast, and other affiliates of Comcast. The following tables present transactions with NBCUniversal and its consolidated subsidiaries and other
affiliates of Comcast that are included in the combined financial statements.
Combined Balance Sheet
|
|
|
|
|
|
|
|
|
December 31 (in millions) |
|
2014 |
|
|
2013 |
|
Receivables, net |
|
$ |
26 |
|
|
$ |
26 |
|
Accounts payable and accrued expenses related to trade creditors |
|
|
25 |
|
|
|
25 |
|
F-10
Combined Statement of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 (in millions) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
Revenue |
|
$ |
86 |
|
|
$ |
61 |
|
|
$ |
86 |
|
Costs and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Programming |
|
|
132 |
|
|
|
137 |
|
|
|
146 |
|
Other operating and administrative |
|
|
10 |
|
|
|
8 |
|
|
|
9 |
|
Advertising, marketing and promotion |
|
|
7 |
|
|
|
4 |
|
|
|
4 |
|
Note 4: Property and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 (in millions) |
|
Weighted-Average
Original Useful Life as
of December 31, 2014 |
|
|
2014 |
|
|
2013 |
|
Cable distribution system |
|
|
11 years |
|
|
$ |
3,236 |
|
|
$ |
3,164 |
|
Customer premise equipment |
|
|
6 years |
|
|
|
2,778 |
|
|
|
2,738 |
|
Other equipment |
|
|
5 years |
|
|
|
201 |
|
|
|
203 |
|
Buildings and leasehold improvements |
|
|
18 years |
|
|
|
154 |
|
|
|
154 |
|
Land |
|
|
N/A |
|
|
|
16 |
|
|
|
16 |
|
Property and equipment, at cost |
|
|
|
|
|
|
6,385 |
|
|
|
6,275 |
|
Less: Accumulated depreciation |
|
|
|
|
|
|
(4,441 |
) |
|
|
(4,331 |
) |
Property and equipment, net |
|
|
|
|
|
$ |
1,944 |
|
|
$ |
1,944 |
|
Property and equipment are stated at cost. We capitalize improvements that extend asset lives and expense repairs and
maintenance costs as incurred. We record depreciation using the straight-line method over the assets estimated useful life. For assets that are sold or retired, we remove the applicable cost and accumulated depreciation and, unless the gain or
loss on disposition is considered material and presented separately, we recognize it as a component of depreciation expense.
We capitalize the costs
associated with the construction of and improvements to our cable transmission and distribution facilities, costs associated with acquiring and deploying new customer premise equipment, and costs associated with installation of our services in
accordance with accounting guidance related to cable television companies. Costs capitalized include all direct labor and materials, as well as various indirect costs. All costs incurred in connection with subsequent disconnects and reconnects are
expensed as they are incurred. As a result of Comcasts centralized operations, certain property and equipment, such as cable distribution system infrastructure, has been included in the combined financial statements based on allocations from
Comcast using certain proportionate estimates, including plant miles.
We evaluate the recoverability of our property and equipment whenever events or
substantive changes in circumstances indicate that the carrying amount may not be recoverable. The evaluation is based on the cash flows generated by the underlying asset groups, including estimated future operating results, trends or other
determinants of fair value. If the total of the expected future undiscounted cash flows were less than the carrying amount of the asset group, we would recognize an impairment charge to the extent the carrying amount of the asset group exceeded its
estimated fair value. Unless an impairment charge is considered material and presented separately, we recognize it as a component of depreciation expense. We have not recognized any impairment charges for 2014, 2013 and 2012.
F-11
Note 5: Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
2013 |
|
December 31 (in millions) |
|
Weighted-Average Original Useful Life as of December 31, 2014 |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
Indefinite-Lived Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise rights |
|
|
N/A |
|
|
$ |
5,561 |
|
|
|
|
|
|
$ |
5,561 |
|
|
|
|
|
Finite-Lived Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cable franchise renewal costs and contractual operating rights |
|
|
10 years |
|
|
|
184 |
|
|
$ |
(116 |
) |
|
|
197 |
|
|
$ |
(124 |
) |
Software |
|
|
5 years |
|
|
|
9 |
|
|
|
(7 |
) |
|
|
21 |
|
|
|
(18 |
) |
Customer relationships |
|
|
7 years |
|
|
|
4 |
|
|
|
(3 |
) |
|
|
4 |
|
|
|
(3 |
) |
Other agreements and rights |
|
|
10 years |
|
|
|
3 |
|
|
|
(2 |
) |
|
|
4 |
|
|
|
(3 |
) |
Total |
|
|
|
|
|
$ |
5,761 |
|
|
$ |
(128 |
) |
|
$ |
5,787 |
|
|
$ |
(148 |
) |
Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets consist of our cable franchise rights. Our cable franchise rights represent the values we attributed to agreements with
state and local authorities that allow access to homes and businesses in cable service areas acquired in business combinations. We do not amortize our cable franchise rights because we have determined that they meet the definition of
indefinite-lived intangible assets since there are no legal, regulatory, contractual, competitive, economic or other factors that limit the period over which these rights will contribute to our cash flows. We reassess this determination periodically
or whenever events or substantive changes in circumstances occur. Costs we incur in negotiating and renewing cable franchise agreements are included in other intangible assets and are generally amortized on a straight-line basis over the term of the
franchise agreement.
We assess the recoverability of our cable franchise rights annually, or more frequently whenever events or substantive changes in
circumstances indicate that the assets might be impaired. The assessment of recoverability may first consider qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less
than its carrying amount. A quantitative assessment is performed if the qualitative assessment results in a more-likely-than-not determination or if a qualitative assessment is not performed. When performing a quantitative assessment, we estimate
the fair value of our cable franchise rights primarily based on a discounted cash flow analysis that involves significant judgment. When analyzing the fair values indicated under the discounted cash flow models, we also consider multiples of
operating income before depreciation and amortization generated by the underlying assets, current market transactions, and profitability information. If the fair value of our cable franchise rights were less than the carrying amount, we would
recognize an impairment charge for the difference between the estimated fair value and the carrying value of the assets. Unless presented separately, the impairment charge is included as a component of amortization expense. We have not recognized
any impairment charges for 2014, 2013 and 2012.
Finite-Lived Intangible Assets
Estimated Amortization Expense of Finite-Lived Intangibles
|
|
|
|
|
(in millions) |
|
|
|
2015 |
|
$ |
16 |
|
2016 |
|
$ |
13 |
|
2017 |
|
$ |
11 |
|
2018 |
|
$ |
9 |
|
2019 |
|
$ |
8 |
|
Finite-lived intangible assets are subject to amortization and consist primarily of cable franchise renewal costs and
software. Our finite-lived intangible assets are amortized primarily on a straight-line basis over their estimated useful life or the term of the respective agreement.
F-12
We capitalize direct development costs associated with internal-use software, including external direct costs of
material and services and payroll costs for employees devoting time to these software projects. We also capitalize costs associated with the purchase of software licenses. We include these costs in other intangible assets and amortize them on a
straight-line basis over a period not to exceed five years. We expense maintenance and training costs, as well as costs incurred during the preliminary stage of a project, as they are incurred. We capitalize initial operating system software costs
and amortize them over the life of the associated hardware.
We evaluate the recoverability of our intangible assets subject to amortization whenever
events or substantive changes in circumstances indicate that the carrying amount may not be recoverable. The evaluation is based on the cash flows generated by the underlying asset groups, including estimated future operating results, trends or
other determinants of fair value. If the total of the expected future undiscounted cash flows were less than the carrying amount of the asset group, we would recognize an impairment charge to the extent the carrying amount of the asset group
exceeded its estimated fair value. Unless presented separately, the impairment charge is included as a component of amortization expense. We have not recognized any impairment charges for 2014, 2013 and 2012.
Note 6: Employee Compensation and Benefit Plans
Postretirement Benefit Plans
Certain of our employees have historically participated in the Comcast Postretirement Healthcare Stipend Program (the stipend plan). The stipend
plan is an unfunded postretirement plan that provides an annual stipend for reimbursement of healthcare costs to each eligible employee based on years of service. Under the stipend plan, we are not exposed to the increasing costs of healthcare
because the benefits are fixed at a predetermined amount.
The expense reflected in the combined statement of income related to our employees
participation in the stipend plan is actuarially determined using certain Comcast-directed assumptions, including the discount rate. For 2014, 2013 and 2012, we recorded expenses of $3 million each year.
As of December 31, 2014 and 2013, our share of Comcasts unfunded liability associated with the stipend plan was $39 million and $27 million,
respectively.
Deferred Compensation Plans
Comcast
maintains unfunded, nonqualified deferred compensation plans for certain members of management (each, a participant). The amount of compensation deferred by each participant is based on participant elections. Participant accounts are
credited with income primarily based on a fixed annual rate. The related expense was not material to the combined statement of income for all periods presented. Participants are eligible to receive distributions of the amounts credited to their
account based on elected deferral periods that are consistent with the plans and applicable tax law.
Certain of our employees have historically
participated in the deferred compensation plans sponsored by Comcast. As of December 31, 2014 and 2013, our benefit obligation related to these plans was $4 million and $2 million, respectively.
Retirement Investment Plans
Comcast sponsors several
401(k) defined contribution retirement plans that allow eligible employees to contribute a portion of their compensation through payroll deductions in accordance with specified plan guidelines. Comcast makes contributions to the plans that include
matching a percentage of the employees contributions up to certain limits. Certain of our employees have historically participated in the plans. In 2014, 2013 and 2012, the combined statement of income included amounts charged for the defined
contribution retirement plans totaling $18 million, $15 million and $14 million, respectively.
Share-Based Compensation
Comcast maintains various programs that allow for the grant of share-based compensation to Comcasts officers, directors, and certain employees, including
some of our employees. Comcast Class A common stock underlies all awards granted under these programs. Accordingly, the amounts presented are not necessarily indicative of our future performance and do not necessarily reflect the results that
we would have experienced as an independent, publicly traded company for the periods presented.
F-13
The expense reflected in the combined statement of income related to share-based compensation is based on the
estimated fair value of our employees awards at the date of grant and is recognized over the period in which any related services are provided. Amounts recognized for share-based compensation for 2014, 2013 and 2012 totaled $6 million, $6
million and $5 million, respectively.
Note 7: Income Taxes
Our operations have historically been included in
Comcasts U.S. federal and certain state tax returns. Income taxes as presented are calculated as if we were a separate corporation that filed separate income tax returns. We believe the assumptions underlying the calculation of income taxes on
a separate return basis are reasonable. However, income tax expense and liabilities as presented in these combined financial statements do not necessarily reflect the results that we would have reported as an independent, publicly traded company for
the periods presented.
Current income tax expense is offset by a corresponding change in Parent Company net investment on the combined balance sheet.
Components of Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 (in millions) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
Current expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
344 |
|
|
$ |
333 |
|
|
$ |
367 |
|
State |
|
|
73 |
|
|
|
69 |
|
|
|
76 |
|
|
|
|
417 |
|
|
|
402 |
|
|
|
443 |
|
Deferred expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
2 |
|
|
|
(48 |
) |
State |
|
|
1 |
|
|
|
5 |
|
|
|
(5 |
) |
|
|
|
1 |
|
|
|
7 |
|
|
|
(53 |
) |
Income tax expense |
|
$ |
418 |
|
|
$ |
409 |
|
|
$ |
390 |
|
Our effective income tax rates in 2014, 2013 and 2012 were 39.1%, 39.3% and 39.3%, respectively. Our effective tax rate
differs from the federal statutory amount primarily due to the impact of state income taxes, net of federal benefits received.
We base our provision for
income taxes on our current period income, changes in our deferred income tax assets and liabilities, income tax rates, and tax planning opportunities that would be available to us on a separate company basis in the jurisdictions in which we
operate. We recognize deferred tax assets and liabilities when there are temporary differences between the financial reporting basis and tax basis of our assets and liabilities. When a change in the tax rate or tax law has an impact on deferred
taxes, we apply the change based on the years in which the temporary differences are expected to reverse. We record the change in the combined financial statements in the period of enactment. As of December 31, 2014 and 2013, we had not
recognized any loss carryforward or valuation allowances. The determination of the realization of future loss carryforwards would be dependent on our taxable income or loss, apportionment percentages, and state laws that can change from year to year
and impact the amount of such carryforwards. We would recognize a valuation allowance if we were to determine it is more likely than not that some portion, or all, of a deferred tax asset will not be realized.
Our deferred tax assets were not material. We have assessed the nature of the deferred tax assets and have determined that no valuation allowance is
necessary. Our net deferred tax liability is primarily attributable to differences between our book and tax basis of property and equipment and intangible assets. As of December 31, 2014 and 2013, our net deferred tax liability for both periods
included $2.2 billion related to cable franchise rights that will remain unchanged unless we recognize an impairment or dispose of a cable franchise, and approximately $600 million related to property and equipment.
F-14
Uncertain Tax Positions
We have not recorded any liabilities for uncertain tax positions. We determined that, after completion of the spin-off, Comcast would be considered the primary
obligor of substantially all income tax deficiencies attributable to us for periods prior to the spin-off. In the event that, subsequent to the spin-off, an income tax deficiency is asserted against us attributable to a period prior to the spin-off,
we would be indemnified under a tax matters agreement between us and Comcast.
Note 8: Commitments and Contingencies
Commitments
The table below summarizes our minimum annual rental commitments for office space and equipment under operating leases.
|
|
|
|
|
As of December 31, 2014 (in millions) |
|
Operating Leases |
|
2015 |
|
$ |
10 |
|
2016 |
|
$ |
9 |
|
2017 |
|
$ |
8 |
|
2018 |
|
$ |
7 |
|
2019 |
|
$ |
5 |
|
Thereafter |
|
$ |
16 |
|
The table below presents our rent expense charged to operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 (in millions) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
Rent expense |
|
$ |
29 |
|
|
$ |
26 |
|
|
$ |
27 |
|
Contingencies
In June
2010, the City of Detroit (the City) initiated an action against us in the U.S. District Court for the Eastern District of Michigan in which the City sought a ruling that certain aspects of the Michigan Uniform Video Services Local
Franchise Act were unlawful under the Federal Cable Communications Policy Act of 1984 and the Constitution of the State of Michigan. The City also sought declaratory relief as to our applicable cable franchise obligations and monetary relief for our
alleged non-compliance. We appealed the U.S. District Courts ruling on summary judgment in favor of the City to the U.S. Court of Appeals for the Sixth Circuit in July 2013, and in October 2014 we resolved this action through mediation with
the City. As a result of the resolution of this action, we recorded $16 million in other operating and administrative expenses and $6 million in interest expense in 2014.
We are subject to other legal proceedings and claims that arise in the ordinary course of our business. While the amount of ultimate liability with respect to
such actions is not expected to materially affect our results of operations, cash flows or financial position, any litigation resulting from any such legal proceedings or claims could be time consuming and injure our reputation.
F-15
Note 9: Supplemental Financial Information
For 2014, 2013 and 2012, our revenue was derived from
the following sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
2014 |
|
|
2013 |
|
|
2012 |
|
Residential: |
|
|
|
|
|
|
|
|
|
|
|
|
Video |
|
$ |
2,211 |
|
|
$ |
2,203 |
|
|
$ |
2,137 |
|
High-speed Internet |
|
|
1,212 |
|
|
|
1,125 |
|
|
|
1,052 |
|
Voice |
|
|
375 |
|
|
|
380 |
|
|
|
387 |
|
Commercial services |
|
|
379 |
|
|
|
320 |
|
|
|
253 |
|
Advertising |
|
|
265 |
|
|
|
237 |
|
|
|
257 |
|
Other |
|
|
199 |
|
|
|
205 |
|
|
|
189 |
|
Total |
|
$ |
4,641 |
|
|
$ |
4,470 |
|
|
$ |
4,275 |
|
Subsequent Events
We
have evaluated all subsequent event activity through April 6, 2015, which is the issue date of these combined financial statements, and concluded that no subsequent events have occurred that would require recognition in the combined financial
statements or disclosure in the notes to the combined financial statements.
F-16
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