UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended:
SEPTEMBER 30, 1998
OR
( ) Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from ________ to ________.
Commission File Number 333-31009
COMCAST CELLULAR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2687447
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1105 North Market Street, Wilmington, Delaware 19801
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (302) 427-8991
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days.
Yes X No __
--------------------------
As of September 30, 1998, there were 100 shares of Common Stock outstanding.
The Registrant meets the conditions set forth in General Instructions H (1)(a)
and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance
Sheet as of September 30, 1998 and December 31,
1997 (Unaudited)...........................................2
Condensed Consolidated Statement of
Operations and Accumulated Deficit for
the Nine and Three Months Ended September 30,
1998 and 1997 (Unaudited)..................................3
Condensed Consolidated Statement of Cash
Flows for the Nine Months Ended September 30,
1998 and 1997 (Unaudited)..................................4
Notes to Condensed Consolidated
Financial Statements (Unaudited).......................5 - 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations............................................8 - 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................12
Item 6. Exhibits and Reports on Form 8-K..........................12
SIGNATURE.........................................................13
-----------------------------------
This Quarterly Report on Form 10-Q contains forward looking statements made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that such forward looking statements
involve risks and uncertainties which could significantly affect expected
results in the future from those expressed in any such forward looking
statements made by, or on behalf, of the Company. Certain factors that could
cause actual results to differ materially include, without limitation, the
effects of legislative and regulatory changes; the potential for increased
competition; technological changes; the need to generate substantial growth in
the subscriber base by successfully launching, marketing and providing services
in identified markets; pricing pressures which could affect demand for the
Company's services; the Company's ability to expand its distribution; changes in
labor, equipment and capital costs; future acquisitions, strategic partnerships
and divestitures; general business and economic conditions; and other risks
detailed from time to time in the Company's periodic reports filed with the
Securities and Exchange Commission.
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in thousands, except share data)
September 30, December 31,
1998 1997
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.................................................... $14,150 $4,692
Accounts receivable, less allowance for doubtful accounts
of $7,112 and $6,356....................................................... 75,664 59,252
Inventories.................................................................. 10,544 14,154
Other current assets......................................................... 3,449 3,147
---------- ----------
Total current assets....................................................... 103,807 81,245
---------- ----------
INVESTMENT IN AFFILIATE......................................................... 28,641 28,570
---------- ----------
PROPERTY AND EQUIPMENT.......................................................... 636,278 595,861
Accumulated depreciation..................................................... (243,682) (182,632)
---------- ----------
Property and equipment, net.................................................. 392,596 413,229
---------- ----------
DEFERRED CHARGES AND OTHER...................................................... 1,277,196 1,275,861
Accumulated amortization..................................................... (347,429) (321,450)
---------- ----------
Deferred charges and other, net.............................................. 929,767 954,411
---------- ----------
$1,454,811 $1,477,455
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses........................................ $80,219 $100,159
Accrued interest............................................................. 40,469 17,388
Current portion of long-term debt............................................ 453 430
Due to affiliates............................................................ 913 47,116
---------- ----------
Total current liabilities.................................................. 122,054 165,093
---------- ----------
LONG-TERM DEBT, less current portion............................................ 1,234,249 1,224,511
---------- ----------
INVESTMENT IN AFFILIATE......................................................... 99,014
---------- ----------
DUE TO AFFILIATE................................................................ 13,725
---------- ----------
DEFERRED INCOME TAXES........................................................... 236,828 227,944
---------- ----------
MINORITY INTEREST AND OTHER..................................................... 7,216 5,878
---------- ----------
COMMITMENTS AND CONTINGENCIES
MANDATORILY REDEEMABLE PREFERRED STOCK HELD BY AFFILIATE........................ 189,430 173,602
---------- ----------
STOCKHOLDER'S DEFICIENCY
Common stock, $.01 par value - authorized, 1,000 shares;
issued, 100 shares ........................................................
Additional capital........................................................... 542,857 488,301
Accumulated deficit.......................................................... (891,548) (906,888)
---------- ----------
Total stockholder's deficiency............................................. (348,691) (418,587)
---------- ----------
$1,454,811 $1,477,455
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands)
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
SERVICE INCOME, net........................................... $338,049 $335,380 $116,775 $115,107
--------- --------- --------- ---------
COSTS AND EXPENSES
Operating.................................................. 28,898 28,242 10,076 9,311
Selling, general and administrative........................ 178,182 170,849 61,106 56,102
Depreciation and amortization.............................. 88,451 80,662 30,768 27,080
--------- --------- --------- ---------
295,531 279,753 101,950 92,493
--------- --------- --------- ---------
OPERATING INCOME.............................................. 42,518 55,627 14,825 22,614
OTHER (INCOME) EXPENSE
Interest expense........................................... 83,782 89,061 27,707 27,896
Investment income.......................................... (1,056) (1,898) (390) (328)
Equity in net (income) losses of affiliates................ (242) 4,524 (251) 1,004
Other...................................................... 992 1,173 366 733
--------- --------- --------- ---------
83,476 92,860 27,432 29,305
--------- --------- --------- ---------
LOSS BEFORE INCOME TAX BENEFIT AND
EXTRAORDINARY ITEM......................................... (40,958) (37,233) (12,607) (6,691)
INCOME TAX BENEFIT............................................ (14,991) (13,015) (4,607) (2,067)
--------- --------- --------- ---------
LOSS BEFORE EXTRAORDINARY ITEM................................ (25,967) (24,218) (8,000) (4,624)
EXTRAORDINARY ITEM............................................ (7,313)
--------- --------- --------- ---------
NET LOSS...................................................... (25,967) (31,531) (8,000) (4,624)
PREFERRED DIVIDENDS........................................... (15,828) (7,105) (5,412) (4,844)
--------- --------- --------- ---------
NET LOSS FOR COMMON STOCKHOLDER............................... ($41,795) ($38,636) ($13,412) ($9,468)
ACCUMULATED DEFICIT
Beginning of period ....................................... ($906,888) ($856,280) ($883,548) ($883,187)
Dividend of AWACS Garden State, Inc. to Parent............. 41,307
Net loss................................................... (25,967) (31,531) (8,000) (4,624)
--------- --------- --------- ---------
End of period.............................................. ($891,548) ($887,811) ($891,548) ($887,811)
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands)
Nine Months Ended September 30,
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss..................................................................... ($25,967) ($31,531)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization.............................................. 88,451 80,662
Non-cash interest expense.................................................. 1,469 29,337
Equity in net (income) losses of affiliates................................ (242) 4,524
Minority interest.......................................................... 1,029 1,149
Deferred management fees................................................... 2,211
Deferred income taxes and other............................................ (14,554) (15,781)
Extraordinary item......................................................... 7,313
---------- ----------
50,186 77,884
Changes in working capital accounts........................................ (11,158) 22,819
---------- ----------
Net cash provided by operating activities............................ 39,028 100,703
---------- ----------
FINANCING ACTIVITIES
Proceeds from borrowings of long-term debt................................... 35,000 1,018,370
Repayments of long-term debt................................................. (25,320) (1,155,076)
Deferred financing costs..................................................... (120) (28,353)
Proceeds from issuance of mandatorily redeemable preferred stock............. 161,478
Net transactions with affiliates............................................. 4,343 (932)
---------- ----------
Net cash provided by (used in) financing activities.................. 13,903 (4,513)
---------- ----------
INVESTING ACTIVITIES
Capital expenditures......................................................... (41,702) (87,213)
Other........................................................................ (1,771) (1,476)
---------- ----------
Net cash used in investing activities................................ (43,473) (88,689)
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS........................................... 9,458 7,501
CASH AND CASH EQUIVALENTS, beginning of period.................................. 4,692 4,980
---------- ----------
CASH AND CASH EQUIVALENTS, end of period........................................ $14,150 $12,481
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The condensed consolidated balance sheet as of December 31, 1997 has been
condensed from the audited consolidated balance sheet as of that date. The
condensed consolidated balance sheet as of September 30, 1998, the
condensed consolidated statement of operations and accumulated deficit for
the nine and three months ended September 30, 1998 and 1997 and the
condensed consolidated statement of cash flows for the nine months ended
September 30, 1998 and 1997 have been prepared by Comcast Cellular
Corporation (the "Company") and have not been audited by the Company's
independent auditors. In the opinion of management, all adjustments
necessary to present fairly the financial position, results of operations
and cash flows as of September 30, 1998 and for all periods presented have
been made.
Certain information and note disclosures normally included in the Company's
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's December
31, 1997 Annual Report on Form 10-K filed with the Securities and Exchange
Commission. The results of operations for the periods ended September 30,
1998 are not necessarily indicative of operating results for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement, which establishes
accounting and reporting standards for derivatives and hedging activities,
is effective for fiscal years beginning after June 15, 1999. Upon the
adoption of SFAS No. 133, all derivatives are required to be recognized in
the statement of financial position as either assets or liabilities and
measured at fair value. The Company is currently evaluating the impact the
adoption of SFAS No. 133 will have on its financial position and results of
operations.
Reclassifications
Certain reclassifications have been made to the prior year condensed
consolidated financial statements to conform to those classifications used
in 1998.
3. LONG-TERM DEBT
As of September 30, 1998, Comcast Cellular Communications, Inc. ("CCCI"), a
wholly-owned subsidiary of the Company, had outstanding $235.0 million
under its $400.0 million revolving credit facility, which consists of a
$300.0 million five and one quarter year revolving credit facility (the
"Tranche A Credit Facility") and a $100.0 million 364-day revolving credit
facility (the "Tranche B Credit Facility"). In October 1998, CCCI extended
the Tranche B Credit Facility for an additional 364 days. The Tranche B
Credit Facility will expire in October 1999. In November 1998, CCCI
borrowed an additional $40.0 million under its revolving credit facility,
the proceeds of which were used, together with available cash, to pay
semi-annual interest related to the Company's 9 1/2% Senior Notes due 2007
(the "Senior Notes").
As of September 30, 1998 and December 31, 1997, the Company's effective
weighted average interest rate on its long-term debt outstanding was 8.82%
and 8.88%, respectively.
In May 1997, the Company canceled $575.0 million of its revolving credit
loan. In connection with the reduction of the revolving credit loan, the
Company expensed unamortized debt acquisition costs of $11.3 million,
resulting in an extraordinary loss, net of tax, of $7.3 million during the
nine months ended September 30, 1997.
5
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
4. INVESTMENT IN AND DUE TO AFFILIATE
In 1992, AWACS Garden State, Inc. ("AWACS Garden State"), an indirect
subsidiary of the Company, issued a note (the "AWACS Note") with an initial
principal amount of $51.0 million to purchase, from a subsidiary of Comcast
Corporation ("Comcast"), the Company's parent, a 40% limited partnership
interest in Garden State Cablevision L.P. ("Garden State Cablevision"). The
AWACS Note bears interest at a rate of 11% per annum. Interest is payable
on a quarterly basis to the extent of available cash, with any unpaid
interest added to principal. Interest expense on the AWACS Note was $1.4
million and $3.8 million for the nine months ended September 30, 1998 and
1997, respectively, and $1.3 million for the three months ended September
30, 1997. The balance of the AWACS Note, classified as current due to
affiliates, was $50.4 million as of December 31, 1997. As of December 31,
1997, the Company's investment in Garden State Cablevision, classified as
investment in affiliate, was ($99.0) million.
Effective April 1, 1998, the Company transferred, via a dividend, its
indirect interest in AWACS Garden State to a wholly owned subsidiary of
Comcast at its net book value of $41.3 million.
As of September 30, 1998, long-term due to affiliate consists of amounts
due to AWACS Garden State in connection with tax savings received by the
Company during prior year periods in which AWACS Garden State joined with
an indirect subsidiary of the Company in filing consolidated federal tax
returns.
5. RELATED PARTY TRANSACTIONS
Comcast and Comcast Cellular Communications, Inc. ("CCCI"), a wholly owned
subsidiary of the Company, were parties to a management agreement (the "Old
Management Agreement") pursuant to which Comcast managed the business and
operations of CCCI. In May 1997, the Old Management Agreement was
terminated and replaced with a new management agreement (the "New
Management Agreement") which provides for an annual management fee of 1.5%
of revenues. The New Management Agreement eliminated the prior management
fee which was limited to $5.0 million, subject to annual increases based on
the consumer price index. The New Management Agreement has a ten year term.
Management fees of $5.0 million, $4.7 million, $1.7 million and $1.7
million were charged to selling, general and administrative expenses during
the nine and three months ended September 30, 1998 and 1997, respectively
(on a pro forma basis, giving effect to the New Management Agreement,
management fees for the nine and three months ended September 30, 1997
would have been $5.0 million and $1.7 million, respectively).
During 1997, the Company authorized 10,000 shares of $.01 par value
preferred stock and designated 5,200 of such shares as Series A Preferred
Stock. In May 1997, the Company issued 1,614.775 shares of its mandatorily
redeemable Series A Preferred Stock to Comcast Financial Corporation, a
wholly owned subsidiary of Comcast. Each holder of the Series A Preferred
Stock is entitled to receive cumulative cash dividends at the annual rate
of $12,000 per share, payable semi-annually on May 1 and November 1 each
year, in arrears. At the option of the Company, by declaration of the
Company's Board of Directors, dividends may be paid in additional shares of
Series A Preferred Stock (the "Additional Shares") instead of cash through
May 1, 2007. To the extent dividends are paid in Additional Shares, such
Additional Shares shall be valued at $100,000 per share with a liquidation
value of $100,000 per share. The Series A Preferred Stock is redeemable, at
the option of the Company, at any time prior to May 2, 2007, at a
redemption price of $100,000 per share, plus accrued and unpaid dividends,
and is mandatorily redeemable on May 2, 2007 after final maturity of the
Senior Notes, subject to certain conditions. The Series A Preferred Stock
is generally non-voting. During the nine and three months ended September
30, 1998 and 1997, the Company accrued $15.8 million, $7.1 million, $5.4
million and $4.8 million, respectively, of dividends on the Series A
Preferred Stock, with a corresponding reduction in additional capital. Such
amounts have been excluded from the Company's condensed consolidated
statement of cash flows due to their noncash nature.
6
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONCLUDED
(Unaudited)
6. STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
The Company made cash payments for interest of $59.2 million, $24.7
million, $4.0 million and $2.5 million during the nine and three months
ended September 30, 1998 and 1997, respectively.
The Company made cash payments for income taxes of $0.4 million and $0.2
million during the nine and three months ended September 30, 1997.
7. CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially
affect the financial position, results of operations or liquidity of the
Company.
7
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information for this item is omitted pursuant to Securities and Exchange
Commission General Instruction to Form 10-Q, except as noted below.
Results of Operations
Summarized consolidated financial information for Comcast Cellular Corporation
(the "Company") for the nine and three months ended September 30, 1998 and 1997
is as follows (dollars in millions, "NM" denotes percentage is not meaningful):
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Increase / (Decrease)
1998 1997 $ %
<S> <C> <C> <C> <C>
Service income, net.............................. $338.0 $335.4 $2.6 0.8%
Operating, selling, general and administrative
expenses.................................... 207.0 199.1 7.9 4.0
------ ------
Operating income before depreciation and
amortization (1)............................ 131.0 136.3 (5.3) (3.9)
Depreciation and amortization.................... 88.5 80.7 7.8 9.7
------ ------
Operating income................................. 42.5 55.6 (13.1) (23.6)
------ ------
Interest expense................................. 83.8 89.1 (5.3) (5.9)
Investment income................................ (1.1) (1.9) (0.8) (42.1)
Equity in net (income) losses of affiliates...... (0.2) 4.5 (4.7) NM
Other............................................ 1.0 1.1 (0.1) (9.1)
Income tax benefit............................... (15.0) (13.0) 2.0 15.4
Extraordinary item............................... (7.3) (7.3) NM
------ ------
Net loss.................................... ($26.0) ($31.5) ($5.5) (17.5%)
====== ======
Three Months Ended
September 30, Increase / (Decrease)
1998 1997 $ %
Service income, net.............................. $116.7 $115.1 $1.6 1.4%
Operating, selling, general and administrative
expenses.................................... 71.1 65.4 5.7 8.7
------ ------
Operating income before depreciation and
amortization (1)............................ 45.6 49.7 (4.1) (8.2)
Depreciation and amortization.................... 30.8 27.1 3.7 13.7
------ ------
Operating income................................. 14.8 22.6 (7.8) (34.5)
------ ------
Interest expense................................. 27.7 27.9 (0.2) (0.7)
Investment income................................ (0.5) (0.3) 0.2 66.7
Equity in net (income) losses of affiliates...... (0.2) 1.0 (1.2) NM
Other............................................ 0.4 0.7 (0.3) (42.9)
Income tax benefit............................... (4.6) (2.1) 2.5 NM
------ ------
Net loss.................................... ($8.0) ($4.6) $3.4 73.9%
====== ======
- ----------
<FN>
(1) Operating income before depreciation and amortization is commonly referred
to in the cellular industry as "operating cash flow." Operating cash flow
is a measure of a company's ability to generate cash to service its
obligations, including debt service obligations, and to finance capital and
other expenditures. In part due to the capital intensive
8
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
nature of the cellular industry and the resulting significant level of
non-cash depreciation and amortization expense, operating cash flow is
frequently used as one of the bases for evaluating cellular businesses,
although the Company's measure of operating cash flow may not be comparable
to similarly titled measures of other companies. Operating cash flow does
not purport to represent net income or net cash provided by operating
activities, as those terms are defined under generally accepted accounting
principles, and should not be considered as an alternative to such
measurements as an indicator of the Company's performance.
</FN>
</TABLE>
Service income increased by $2.6 million and $1.6 million for the nine and three
month periods from 1997 to 1998, as subscriber growth was offset, in part, by
the effects of increased use of promotional and free minute plans offered to
subscribers. These plans generally have higher access fees and increase the
minutes of use per subscriber while lowering the average rate per minute of use.
The respective $7.9 million and $5.7 million increases in operating, selling,
general and administrative expenses for the nine and three month periods from
1997 to 1998 are primarily attributable to increases in commission costs
associated with more gross sales in 1998.
Comcast Corporation ("Comcast"), the Company's parent, and Comcast Cellular
Communications, Inc. ("CCCI"), a wholly owned subsidiary of the Company, were
parties to a management agreement (the "Old Management Agreement") pursuant to
which Comcast managed the business and operations of CCCI. In May 1997, the Old
Management Agreement was terminated and replaced with a new management agreement
(the "New Management Agreement") which provides for an annual management fee of
1.5% of revenues. The New Management Agreement eliminated the prior management
fee which was limited to $5.0 million, subject to annual increases based on the
consumer price index. The New Management Agreement has a ten year term.
Management fees of $5.0 million, $4.7 million, $1.7 million and $1.7 million
were charged to selling, general and administrative expenses during the nine and
three months ended September 30, 1998 and 1997, respectively (on a pro forma
basis, giving effect to the New Management Agreement, management fees for the
nine and three months ended September 30, 1997 would have been $5.0 million and
$1.7 million, respectively).
The respective $7.8 million and $3.7 million increases in depreciation and
amortization expense for each of the nine and three month periods from 1997 to
1998 are primarily attributable to the effects of capital expenditures and
losses on asset disposals offset, in part, by a decrease in amortization expense
as a result of certain intangible assets becoming fully amortized in 1997.
The respective $5.3 million and $0.2 million decreases in interest expense for
the nine and three month periods from 1997 to 1998 are primarily due to the
effects of a decrease in the Company's effective weighted average interest rate
and the transfer of AWACS Garden State (see below).
In 1992, AWACS Garden State, Inc. ("AWACS Garden State"), an indirect subsidiary
of the Company, issued a note (the "AWACS Note") with an initial principal
amount of $51.0 million to purchase, from a subsidiary of Comcast, a 40% limited
partnership in Garden State Cablevision L.P. ("Garden State Cablevision"). The
AWACS Note bears interest at a rate of 11% per annum. Interest is payable on a
quarterly basis to the extent of available cash, with any unpaid interest added
to principal. Interest expense on the AWACS Note was $1.4 million and $3.8
million for the nine months ended September 30, 1998 and 1997, respectively, and
$1.3 million for the three months ended September 30, 1997.
Under the terms of the partnership agreement, 49.5% of Garden State
Cablevision's net (income) losses were allocated to the Company. During the nine
months ended September 30, 1998 and 1997, the Company recognized equity in net
(income) loss of Garden State Cablevision of ($0.2) million and $4.1 million,
respectively. During the three months ended September 30, 1997, the Company
recognized equity in net loss of Garden State Cablevision of $1.1 million.
Effective April 1, 1998, the Company transferred, via a dividend, its indirect
interest in AWACS Garden State to a wholly owned subsidiary of Comcast at its
net book value of $41.3 million.
9
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
The respective $2.0 million and $2.5 million increases in income tax benefit for
the nine and three month periods from 1997 to 1998 are primarily attributable to
fluctuations in the Company's loss before income tax benefit and extraordinary
item.
In May 1997, the Company canceled $575.0 million of its revolving credit loan.
In connection with the reduction of the revolving credit loan, the Company
expensed unamortized debt acquisition costs of $11.3 million, resulting in an
extraordinary loss, net of tax, of $7.3 million during the nine months ended
September 30, 1997.
For the nine and three months ended September 30, 1998 and 1997, the Company's
earnings before extraordinary item, income tax benefit, equity in net (income)
losses of affiliates and fixed charges (interest expense) was $42.6 million,
$56.4 million, $14.9 million and $22.2 million, respectively. Such earnings were
not adequate to cover the Company's fixed charges of $83.8 million, $89.1
million, $27.7 million and $27.9 million for these periods, respectively. Fixed
charges include non-cash interest expense of $1.5 million, $29.3 million, $0.1
million and $1.3 million for the nine and three months ended September 30, 1998
and 1997, respectively. The inadequacy of the Company's earnings to cover fixed
charges is primarily due to substantial non-cash charges for depreciation and
amortization expense of $88.5 million, $80.7 million, $30.8 million and $27.1
million during the nine and three months ended September 30, 1998 and 1997,
respectively.
The Company anticipates that, for the foreseeable future, depreciation,
amortization and interest expense will continue to be significant and will have
a significant adverse effect on the Company's ability to realize net earnings.
The Company believes that its losses will not significantly affect the
performance of its normal business activities because of its existing cash and
cash equivalents, its ability to generate operating income before depreciation
and amortization and its ability to obtain external financing.
The Company believes that its operations are not materially affected by
inflation.
Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Certain of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000 (the "Year 2000 Issue"). If this
situation occurs, the potential exists for computer system failure or
miscalculations by computer programs, which could cause disruption of
operations.
The Company is in the process of evaluating and addressing the impact of the
Year 2000 Issue on its operations to ensure that its information technology and
business systems recognize calendar Year 2000. The Company is utilizing both
internal and external resources in implementing its Year 2000 program, which
consists of the following phases:
Assessment Phase
Structured evaluation, including a detailed inventory outlining the impact that
the Year 2000 Issue may have on current operations.
Detailed Planning Phase
Establishment of priorities, development of specific action steps and allocation
of resources to address the issues identified in the Assessment Phase.
Conversion Phase
Implementation of the necessary system modifications as outlined in the Detailed
Planning Phase.
Testing Phase
Verification that the modifications implemented in the Conversion Phase will be
successful in resolving the Year 2000 Issue so that all inventory items will
function properly, both individually and on an integrated basis.
Implementation Phase
Final roll-out of fully tested components into an operational unit.
10
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
Based on an inventory conducted in 1997, the Company has identified computer
systems that will require modification or replacement so that they will properly
utilize dates beyond December 31, 1999. Many of the Company's critical systems
are new and are already Year 2000 compliant as a result of the Company's recent
implementation of a fully digital cellular communications network. In addition,
the Company has initiated communications with all of its significant software
suppliers and service bureaus to determine their plans for remediating the Year
2000 Issue in their software which the Company uses or relies upon.
As of September 30, 1998, the Company is in the Conversion Phase of its Year
2000 remediation program and has entered the Testing Phase with respect to
certain of its key systems. Through September 30, 1998, the Company has incurred
$0.7 million in connection with its Year 2000 remediation program. The Company
estimates that it will incur between approximately $2 million to $3 million of
additional expense through December 1999 in connection with its Year 2000
remediation program. The Company's estimate to complete the remediation plan
includes the estimated time associated with mitigating the Year 2000 Issue for
third party software. However, there can be no guarantee that the systems of
other companies on which the Company relies will be converted on a timely basis,
or that a failure to convert by another company would not have a material
adverse effect on the Company.
Management of the Company will continue to periodically report the progress of
its Year 2000 remediation program to the Audit Committee of Comcast's Board of
Directors. The Company plans to complete the Year 2000 mitigation by the third
quarter of 1999. Management of the Company has investigated and may consider
potential contingency plans in the event that the Company's Year 2000
remediation program is not completed by that date.
The costs of the project and the date on which the Company plans to complete the
Year 2000 modifications and replacements are based on management's best
estimates, which were derived using assumptions of future events including the
continued availability of resources and the reliability of third party
modification plans. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those plans.
Specific factors that may cause such material differences include, but are not
limited to, the availability and cost of personnel with appropriate necessary
skills and the ability to locate and correct all relevant computer code and
similar uncertainties.
The Company believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue can be mitigated. However, if
such modifications and conversions are not made, or are not completed within an
adequate time frame, the Year 2000 Issue could have a material adverse impact on
the operations of the Company.
11
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially
affect the financial position, results of operations or liquidity of the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
27.1 Financial Data Schedule.
(b) Reports on Form 8-K - none.
12
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
COMCAST CELLULAR CORPORATION
----------------------------
/S/ LAWRENCE S. SMITH
----------------------------
Lawrence S. Smith
Principal Accounting Officer
/S/ JOSEPH J. EUTENEUER
----------------------------
Joseph J. Euteneuer
Vice President (Authorized Officer)
Date: November 16, 1998
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statement of operations and consolidated balance sheet and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001041854
<NAME> COMCAST CELLULAR CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 14,150
<SECURITIES> 0
<RECEIVABLES> 82,776
<ALLOWANCES> (7,112)
<INVENTORY> 10,544
<CURRENT-ASSETS> 103,807
<PP&E> 636,278
<DEPRECIATION> (243,682)
<TOTAL-ASSETS> 1,454,811
<CURRENT-LIABILITIES> 122,054
<BONDS> 1,234,249
189,430
0
<COMMON> 0
<OTHER-SE> (348,691)
<TOTAL-LIABILITY-AND-EQUITY> 1,454,811
<SALES> 338,049
<TOTAL-REVENUES> 338,049
<CGS> 0
<TOTAL-COSTS> (295,531)
<OTHER-EXPENSES> (992)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (83,782)
<INCOME-PRETAX> (40,958)
<INCOME-TAX> 14,991
<INCOME-CONTINUING> (25,967)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,967)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
