================================================================================
FORM 10-K
------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ____________
Commission file number 333-31009
COMCAST CELLULAR CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2687447
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1201 Market Street, Wilmington, Delaware 19801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (302) 594-8700
--------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
---------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
----------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
--------------------------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [Not applicable]
--------------------------
As of December 31, 1998, there were 100 shares of Common Stock outstanding.
--------------------------
The Registrant meets the conditions set forth in General Instructions I(1)(a)
and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
--------------------------
DOCUMENTS INCORPORATED BY REFERENCE
NONE
--------------------------
================================================================================
<PAGE>
COMCAST CELLULAR CORPORATION
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1 Business............................................................1
Item 2 Properties..........................................................8
Item 3 Legal Proceedings...................................................8
Item 4 Submission of Matters to a Vote of Security Holders.................8
PART II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters.....................................9
Item 6 Selected Financial Data.............................................9
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations..................10
Item 8 Financial Statements and Supplementary Data........................13
Item 9 Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.............26
PART III
Item 10 Directors and Executive Officers of the Registrant.................26
Item 11 Executive Compensation.............................................26
Item 12 Security Ownership of Certain Beneficial
Owners and Management..........................................26
Item 13 Certain Relationships and Related Transactions.....................26
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K....................................................27
SIGNATURES...................................................................28
This Annual Report on Form 10-K is for the year ending December 31, 1998,
at the time of filing with the Securities and Exchange Commission, modifies and
supersedes all prior documents filed pursuant to Sections 13, 14 and 15(d) of
the Securities Exchange Act of 1934 for purposes of any offers or sales of any
securities after the date of such filing pursuant to any Registration Statement
or Prospectus filed pursuant to the Securities Act of 1933 which incorporates by
reference this Annual Report.
This Annual Report on Form 10-K 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; the pending sale of the Company (see
"General Developments of Business" included in Item 1); 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>
PART I
ITEM 1 BUSINESS
Comcast Cellular Corporation (the "Company") is an indirect wholly owned
subsidiary of Comcast Corporation ("Comcast") and is a holding company that
conducts all of its operations through its wholly owned subsidiary, Comcast
Cellular Communications, Inc. ("CCCI") and CCCI's subsidiaries.
The Company provides cellular telephone communications services pursuant to
licenses granted by the Federal Communications Commission ("FCC") in markets
with an aggregate population ("Pops") of more than 8.1 million, including the
area in and around the City of Philadelphia, Pennsylvania, the State of Delaware
and a significant portion of the State of New Jersey.
The Company is a Delaware corporation organized in 1992 and has its
principal executive offices at 1201 Market Street, Wilmington, Delaware, 19801,
(302) 594-8700.
GENERAL DEVELOPMENTS OF BUSINESS
In January 1999, Comcast agreed to sell the Company to SBC Communications,
Inc. for approximately $400 million in cash and the assumption of approximately
$1.3 billion of the Company's debt. Comcast expects to complete this sale in the
third quarter of 1999 pending receipt of all necessary regulatory and other
approvals.
DESCRIPTION OF THE COMPANY'S BUSINESS
Company's Systems
The Company is engaged in the development, management and operation of
cellular telephone communications systems in various service areas pursuant to
licenses granted by the FCC.
The table below sets forth summary information regarding the ownership and
total Pops, in the markets served by the Company's systems by service area, as
of December 31, 1998 (in thousands):
Market Ownership Pops (1)
Consolidated Systems
Philadelphia, PA 100.0% 4,886.8
New Brunswick, NJ 100.0% 708.6
Wilmington, DE 100.0% 626.4
Long Branch, NJ 100.0% 597.9
Ocean County, NJ 100.0% 494.0
Atlantic City, NJ 97.4% 326.8
Trenton, NJ 87.2% 289.0
Vineland, NJ 94.6% 133.5
Aurora-Elgin, IL 83.4% 39.7
Joliet, IL 85.3% 30.5
-------
Consolidated Pops 8,133.2
=======
Managed System
Delaware 1 RSA 50.0% 131.0
-------
Total Pops 8,264.2
=======
- ---------------
(1) Source: 1999 Rand McNally Commercial Atlas & Marketing Guide.
<PAGE>
The following table sets forth the aggregate number of subscribers and
penetration in the Company's consolidated systems as of December 31 (subscribers
in thousands):
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Subscribers.......................... 829 783 762 665 501
Penetration.......................... 10.2% 9.5% 9.3% 8.5% 6.8%
---------------------------
The Company also holds twelve 10-MHz personal communications services
("PCS") licenses which cover the Philadelphia, PA Metropolitan Trading Area and
Allentown, PA Basic Trading Area. Such licenses were acquired in November 1997
from Comcast at Comcast's historical cost of $18.9 million.
Revenue Sources
The Company provides services to its cellular telephone subscribers similar
to those provided by conventional landline telephone systems, including custom
calling features such as call forwarding, call waiting, conference calling,
directory assistance and voice mail. The Company is responsible for the quality,
pricing and packaging of cellular telephone service for each of the systems it
owns or controls. The Company charges its customers for service activation,
monthly access, per-minute airtime and custom calling features, and generally
offers a variety of pricing options, most of which combine a fixed monthly
access fee and per-minute charges. The Company pays the local telephone service
company directly for interconnection of its cellular networks with the local
wireline telephone network.
The Company offers products and services to increase the value to the
customer of the basic wireless telephony service and to increase airtime
revenues. Such products include paging services, enhanced directory assistance
and concierge services, voice activated dialing, enhanced voice mail and prepaid
calling. The deployment of digital technology (see "Technology and Capital
Improvements") has allowed the Company to offer additional services such as
caller identification, short messaging, message waiting indicators and enhanced
call privacy through encryption. In addition, the Company offers data
transmission over its existing cellular network, which allows the rapid transfer
of data to and from personal computers, personal digital assistants and other
devices.
The Company currently markets its services under the Comcast Metrophone(R)
brand name in the Philadelphia, PA metropolitan statistical area and under the
Comcast CELLULARONE(R) brand name in its other markets in New Jersey and
Delaware. The Company markets its products and services through multiple
distribution channels throughout its contiguous markets. These channels include
direct channels, such as its direct sales force, retail stores and
telemarketing, and indirect channels, such as national and local retailers and
automotive dealers. The Company's long-term emphasis is on the development of
its direct distribution channels, particularly its own retail outlets and
telemarketing, as a means to reduce the cost to acquire subscribers and improve
the quality of new subscribers. The Company operates 53 retail outlets in its
markets and anticipates building additional retail outlets, as well as upgrading
its existing retail outlets in the future.
The Company sells cellular telephone equipment to its customers in order to
encourage use of its services. The Company's practice, as is typical in the
industry, is to sell telephones at or below cost in response to competitive
pressures.
Technology and Capital Improvements
Each of the Company's service areas is divided into segments referred to as
"cells" equipped with a receiver, signaling equipment and a low-power
transmitter. The use of low-power transmitters and the placement of cells close
to one another permits re-use of frequencies, thus substantially increasing the
volume of calls capable of being handled simultaneously over the number handled
by prior generation systems. Each cell has a coverage area generally ranging
from one to more than 100 square miles. A cellular telephone system includes one
or more computerized central switching facilities known as mobile switching
centers ("MSC") which control the automatic transfer of calls, coordinate calls
to and from cellular telephones and connect calls to the local exchange carrier
("LEC") or to an interexchange carrier. An MSC also records information on
system usage and subscriber statistics.
Each cell's facilities monitor the strength of the signal returned from the
subscriber's cellular telephone. When the signal strength declines to a
predetermined level and the transmission strength is greater at another cell in
or interconnected with the system, the MSC automatically and instantaneously
passes the mobile user's call in progress to the other cell without
disconnecting the call ("hand off"). Interconnection agreements between
- 2 -
<PAGE>
cellular telephone system operators and various LECs and interexchange carriers
establish the manner in which the cellular telephone system integrates with
other telecom-munications systems.
As required by the FCC, all cellular telephones are designed so that a
cellular telephone may be used wherever cellular service is available within the
United States ("US"). Each cellular telephone system in the US uses one of two
groups of channels, termed "Block A" and "Block B," which the FCC has allotted
for cellular service. Minor adjustments to cellular telephones may be required
to enable the subscriber to change from a cellular system on one frequency block
to a cellular system on the other frequency block.
While most MSCs process information digitally, radio transmission of
cellular telephone calls historically has been done on an analog basis. Digital
transmission of cellular telephone calls offers advantages, including larger
system capacity and the potential for lower incremental costs for additional
subscribers. The FCC allows carriers to provide digital service and requires
cellular carriers to provide analog service.
The Company's significant investment in switching and cell site equipment
manufactured by Lucent Technologies, Inc. has enabled it to deploy Time Division
Multiple Access ("TDMA") digital cellular technology throughout its
Pennsylvania/New Jersey and Delaware network. This technology was implemented at
the beginning of the fourth quarter of 1997. The deployment of this technology
permits the Company's subscribers and roamers to use both analog and TDMA
services throughout the Company's coverage area. The Company believes that it
will have sufficient capacity to accommodate both continued subscriber growth
and growth in subscriber minutes for the foreseeable future.
Roaming and Interconnection
Reciprocal agreements among cellular telephone system operators allow their
respective subscribers ("roamers") to place and receive calls in most service
areas throughout the country. Roamers are charged rates which are generally at a
premium to the regular service rate. The Company also offers various service
plans which allow customers who roam out of the Company's service area to pay
the same rates charged for local service in the Company's service area, rather
than passing through higher roaming rates customarily charged by many cellular
carriers. This billing practice provides the customer, in effect, with a broader
local service area but results in increased costs for the Company. The Company
has been reducing these costs through the continued negotiation of more
favorable roaming agreements with cellular service providers in relevant
markets.
In recent years, cellular carriers have experienced increased fraud
associated with roamer service, including Electronic Serial Number ("ESN")
cloning. The Company and other carriers have implemented a number of features
which have decreased the incidents of fraudulent use of their systems. The
Company has implemented authentication and radio frequency ("RF") fingerprinting
technologies which associate ESN/mobile number combinations with particular
cellular telephone units. While the sale of digital radio telephones, which are
authenticatable, is expected to make it more difficult to commit cellular fraud,
the potential for widespread fraudulent use of the Company's systems by cloning
or any other means could again become a concern.
Customer Service
The Company's New Jersey and Delaware operations, including customer care
operations, are consolidated with the operations of the Philadelphia market. The
Company's sales and marketing presence (including through the Company's direct
sales group and retail stores) and customer and dealer support are maintained
throughout the systems. In addition to overall reductions in operating costs and
increases in operational efficiencies, such consolidation permits an increased
emphasis by the Company upon more uniform, efficient and cost effective delivery
of customer service and support.
The Company utilizes the MacroCell(R) billing and customer care platform
developed and licensed by Convergys Information Management Group, Inc. Customer
service representatives are able to access current billing information in order
to respond to customer inquiries. To supplement the Company's customer service
operations, Company telemarketers contact customers periodically to determine
their satisfaction with the Company's service and to identify problems that can
lead to subscriber cancellations.
Licensing
The FCC generally grants two licenses to operate cellular telephone systems
in each market. The other cellular licensee in the Company's principal markets
is Bell Atlantic Mobile Systems, Inc. ("BAMS"). In addition to BAMS, the Company
competes for wireless customers with affiliates of AT&T Corporation, Sprint
Corporation and Omnipoint Communications, Inc. ("Omnipoint") (all of which
operate PCS networks) and
- 3 -
<PAGE>
Nextel Communications, Inc. ("Nextel")(which operates Specialized Mobile Radio
("SMR") networks).
Competition
In recent years, new mobile telecommunications service providers have
entered the market and created additional competition in the wireless
telecommunications or commercial mobile radio services ("CMRS") industry. Many
of these providers have access to substantial capital resources and operate,
directly or through affiliates, large regional, national and international
wireless telephone systems and bring significant wireless experience to the
marketplace. While there are only two cellular providers licensed in a given
area, new competitors continue to emerge, using different frequencies and new
technologies. Competition between wireless operators in each market is
principally on the basis of services and enhancements offered, technical quality
of the system, quality and responsiveness of customer service, price and
coverage area.
The most prominent new providers are the PCS operators. The term "PCS"
describes a variety of digital, wireless communications systems which are
currently best suited for use in densely populated areas. Broadband PCS service
competes directly with cellular service. In the Company's Philadelphia market,
AT&T Wireless Services, Inc., Omnipoint and PhillieCo, L.P., an affiliate of
Sprint Spectrum Holdings Company, L.P., have authorizations for broadband PCS
systems. In March, 1998, the FCC adopted an order that allows financially
troubled entities that won PCS C-Block licenses at auction to obtain financial
relief from their payment obligations and to return some or all of their C-Block
licenses to the FCC for reauctioning. The reauction of the returned licenses is
scheduled to begin in March, 1999, and will place additional spectrum in the
hands of potential competitors of the Company.
Cellular telephone systems, including the Company's systems, also face
actual or potential competition from other current and developing technologies,
including SMR systems operated by companies such as Nextel which uses its
available SMR spectrum in markets where the Company provides wireless service.
In addition to SMR systems, one-way paging or beeper services that feature voice
messaging, data services and tones are also available in the Company's markets.
These services may provide adequate capacity and sufficient mobile capabilities
for some potential cellular subscribers, thus providing additional competition
to the Company's systems.
The FCC requires cellular licensees to make their service available to
resellers, who typically purchase cellular service from licensees in the form of
blocks of numbers, then resell the service to the public. Thus, a reseller may
be both a customer and a competitor of a licensed cellular operator. Several
years ago the FCC initiated an administrative proceeding seeking comment on
whether resellers should be permitted to install separate switching facilities
in cellular systems, although it tentatively concluded not to require such
interconnections. This issue remains pending at the FCC. Presently the FCC does
not require CMRS providers to offer interconnection to other CMRS providers, but
it has stated that it will consider interconnection complaints on a case-by-case
basis and that it may consider in the future whether to impose more general
interconnection obligations on CMRS providers. The FCC is also considering
whether resellers should receive direct assignments of telephone numbers from
the North American Numbering Plan Administrator. Additionally, the FCC is
considering the imposition of an automatic roaming obligation on all CMRS
providers, meaning that, where CMRS systems are technically compatible,
subscribers could get automatic service from a compatible carrier when traveling
outside the home market.
It is likely that the FCC will offer additional spectrum for wireless
mobile licenses in the future. Applicants also have received and others are
seeking FCC authorization to construct and operate global satellite networks to
provide domestic and international mobile communications services from
geostationary and low earth orbit satellites. One such system, the Iridium
system, began commercial operations in 1998. In addition, the Omnibus Budget
Reconciliation Act of 1993 (the "1993 Budget Act") provided, among other things,
for the release of 200 MHz of federal government spectrum for commercial use
over a fifteen year period. Also, the World Trade Organization agreement, which
became effective in the US in February 1998, is intended to increase competition
in the provision of telecommunications services and to reduce barriers to entry
by telecommunications firms in foreign and domestic markets, and may lead to
greater foreign investment and participation in the CMRS industry. These
developments and further technological advances and regulatory changes may make
available other alternatives to cellular service, thereby introducing additional
sources of competition.
- 4 -
<PAGE>
LEGISLATION AND REGULATION
FCC Regulation
The FCC regulates many aspects of the licensing, construction, operation
and acquisition of wireless telephone systems, including the Company's cellular
systems, pursuant to the Communications Act of 1934 (as amended, the
"Communications Act").
Under the Communications Act, no party may transfer control of or assign an
FCC license without first obtaining FCC consent. FCC rules: (i) prohibit an
entity controlling one cellular system in a market from holding any interest in
the competing cellular system in the market, (ii) prohibit an entity from
holding non-controlling interests in more than one cellular system in any
market, if the common ownership interests present anti-competitive concerns
under FCC policies, and (iii) restrict the amount of CMRS spectrum that a single
entity may hold in any particular area to 45 MHz. The FCC commenced an
administrative rulemaking to re-evaluate the continuing need for the 45 MHz
broadband CMRS spectrum cap, and it may allow for market specific relief even if
it does not modify its general rule. If the CMRS spectrum cap is lifted, both
the Company and its competitors would have the ability to obtain additional
wireless licenses, thereby strengthening their market positions in a particular
market or markets. Elimination of the CMRS spectrum cap would not eliminate
antitrust review of industry mergers by the Department of Justice, and
acquisitions of CMRS licenses may only be consummated after obtaining FCC
consent to any required transfer of control or assignment application.
Cellular radio licenses generally expire ten years following grant of the
license in the particular market and are renewable for periods of ten years upon
application to the FCC. Licenses may be revoked for cause and license renewal
applications may be denied if the FCC determines that a renewal would not serve
the public interest. FCC rules provide that competing renewal applications for
cellular licenses will be considered in comparative hearings, and establish the
qualifications for competing applications and the standards to be applied in
such hearings. Under current policies, the FCC will grant incumbent cellular
licensees a "renewal expectancy" if the licensee has provided substantial
service to the public, substantially complied with applicable FCC rules and
policies and the Communications Act and is otherwise qualified to hold an FCC
license. The Company's cellular licenses expire from 1999 through 2008.
The FCC regulates the ability of cellular operators to bundle the provision
of service with hardware, the resale of cellular service by third parties and
the coordination of frequency usage with other cellular licensees. The FCC also
regulates the height and power of base station transmitting facilities and
signal emissions in the cellular system. Cellular systems also are subject to
Federal Aviation Administration and FCC regulations concerning the siting,
construction, marking and lighting and registration of cellular transmitter
towers and antennae. In addition, the FCC also regulates the employment
practices of cellular operators.
Allegations of harmful effects from the use of hand-held cellular phones
have caused the cellular industry to fund additional research to review and
update previous studies concerning the safety of the emissions of
electromagnetic energy from cellular phones. The FCC also has adopted standards
for limiting human exposure to RF energy from cellular/PCS telecommunications
facilities. The FCC has determined that these standards preempt state and local
regulation of RF exposure.
The FCC also requires LECs in each market to offer reasonable terms and
facilities for the interconnection of wireless telephone systems in that market
to the LECs' landline network. In August 1996, the FCC adopted a national
regulatory framework for implementing the local competition provision of the
Telecommunications Act of 1996 ("1996 Act"), including adoption of rules
delineating interconnection obligations of incumbent LECs, unbundling
requirements for incumbent LECs, network elements, requirements for access to
local rights of way, dialing parity and telephone numbering and number
portability, and requirements for resale of and nondiscriminatory access to
incumbent LEC services. The FCC established a national regulatory framework that
sets pricing standards and negotiations and arbitration guidelines. These FCC
standards were upheld in all respects relevant to the Company's operations by
the US Supreme Court on January 25, 1999. A subsidiary of the Company has
already renegotiated its interconnection contracts with Bell Atlantic
Corporation ("Bell Atlantic"). The agreements, covering Pennsylvania, New
Jersey, Delaware and Maryland, provide for the reciprocal transport and
termination of CMRS traffic by Bell Atlantic and the Company at substantially
reduced rates.
- 5 -
<PAGE>
In its implementation of the 1996 Act, the FCC established federal
universal service requirements that affect CMRS operators. Under the FCC's
rules, wireless service providers potentially are eligible to receive universal
service subsidies for the first time; however, they also are required to
contribute to both federal and state universal service funds. Many states are
also moving forward to develop state universal service fund programs. A number
of these state funds require contributions, varying greatly from state to state,
from CMRS carriers. Multiple parties have challenged various aspects of the
FCC's universal service order and the cases have been consolidated in the United
States Court of Appeals for the Fifth Circuit in New Orleans. A judicial
determination adverse to the FCC, as well as any further modification to the
FCC's universal service rules, could impact the CMRS carrier support payments
required for federal and state universal service programs.
Under the current federal universal service program, CMRS and other
telecommunications carriers contribute to the federal program supporting high
cost telephone service areas based upon their reported interstate
telecommunications revenues. The FCC adopted interim "safe harbor" rules for
CMRS carriers to use to report the allocation of their telecommunications
revenues to either federal (interstate) or state (intrastate) jurisdiction. The
FCC also initiated a rulemaking to determine whether its interim safe harbor of
15% of interstate revenues generally reflects the experience of the CMRS
industry and should be made permanent, or whether other jurisdictional
allocation methods should be adopted. Depending upon the jurisdictional
composition of the Company's telecommunications revenues, adoption of the safe
harbor reporting convention could affect the level of the Company's federal and
state universal service contributions.
The 1996 Act also relieved cellular providers affiliated with Regional Bell
Operating Companies ("RBOCs") of their obligations to provide equal access to
long distance carriers. RBOC-affiliated carriers are now afforded greater
flexibility in contracting with interexchange carriers for the provision of long
distance services. Nevertheless, the FCC retains authority to require all CMRS
operators to provide unblocked access through the use of other mechanisms if
customers are being denied access to the telephone toll service providers of
their choice, and if such denial is contrary to the public interest. The FCC
adopted uniform rules, which will expire in January 2002, governing incumbent
LEC participation in broadband CMRS within each LEC's landline telephone region.
While the FCC eliminated the requirements in its cellular rules for full
structural separation of the incumbent LEC cellular affiliate from the LEC
landline affiliate, the FCC adopted rules designed to address incentives
incumbent LECs may have to engage in anti-competitive practices against
unaffiliated CMRS providers, such as discriminatory interconnection,
cost-shifting and anti-competitive pricing. The FCC requires incumbent LECs (i)
to create separate corporations for their in-region broadband CMRS operations
(whether cellular, PCS or other), and (ii) to apply existing FCC rules on
affiliate transactions and use of customer proprietary network information to
LEC-CMRS operations. Additionally, the order addressed provisions of the 1996
Act that govern incumbent LEC joint marketing of CMRS and landline services, as
well as LEC obligations to disclose material changes in their networks.
The FCC has established a requirement that CMRS providers be capable of
transmitting calls for 911 assistance from individuals using teletext ("TTY")
devices, primarily people with speech or hearing disabilities. Although the
obligation took effect on October 1, 1998, the FCC granted requests for waiver
of the requirement from individual CMRS providers, including the Company, to
allow an industry forum time to complete discussions on technical solutions to
TTY access to 911 services. The FCC also has adopted a requirement that CMRS
providers be capable of providing certain capabilities in connection with calls
to public safety officials via 911. These capabilities include transmission of
the caller's telephone number, the ability to return the call and transmission
of the specific location of the caller. The requirement to provide location
information will become effective in 2001, subject to development by requesting
public agencies of adequate cost recovery mechanisms.
The FCC requires all CMRS providers, including the Company, to offer local
number portability, a capability which permits subscribers to change their
service providers without changing their telephone numbers. The FCC has extended
the deadline for CMRS implementation of local number portability of November 24,
2002 to allow for resolution of technical and operational issues posed by
wireless number portability by industry-wide policy forums and for completion of
initial build-outs of PCS systems. This extension is subject to change if the
FCC concludes that CMRS number portability is required to enable number pooling
or other mechanisms for conserving telephone numbers. The Company is unable to
predict the outcome of any further FCC review or modification of the local
number portability requirement or the ultimate impact of this requirement on the
Company's business and operations.
- 6 -
<PAGE>
In addition, state commissions have become increasingly aggressive in their
efforts to conserve numbering resources. These efforts may disproportionately
impact wireless service providers by imposing additional costs or limiting
access to numbering resources. Examples of state conservation methods include
number pooling, number rationing and transparent overlays. Number pooling is
especially problematic for wireless providers because it is dependent on
implementation of number portability technology. Recently, the FCC released a
public notice soliciting comment on proposed number optimization methods
discussed in a report prepared by the Resource Optimization Working Group of the
North American Numbering Council. Adoption of some of the methods discussed in
the report could have a disproportionate impact on CMRS operators.
The FCC recently adopted new rules limiting the use of customer proprietary
network information ("CPNI") by telecommunications carriers, including the
Company, in marketing a broad range of telecommunications and other services to
their customers and the customers of affiliated companies. The FCC has received
numerous petitions for reconsideration of its CPNI rules, the majority of them
from CMRS carriers. The FCC has stayed portions of its rules that relate to how
carriers identify CPNI that a customer has restricted, particularly the portion
of the rules that requires all carriers to develop an electronic auditing and
compliance system. This stay will extend for six months after the date that the
CPNI rules are reconsidered. The Company does not anticipate that the rules will
result in a significant adverse impact on its financial position, results of
operations or liquidity.
The FCC has determined that the interstate, interexchange (commonly
referred to as long distance) offerings of CMRS providers are subject to the
interstate, interexchange rate averaging and integration provisions of the
Communications Act. Rate averaging requires the Company to average its
interstate long distance CMRS rates between high cost and urban areas. The FCC
has delayed implementation of the rate integration requirements with respect to
"wide area" rate plans offered by the Company pending further reconsideration of
its rules. The FCC also delayed the requirement that there be CMRS long distance
rate integration among the Company's CMRS affiliates. On December 31, 1998, the
FCC reaffirmed on reconsideration that its interexchange rate integration rules
apply to interexchange CMRS services. The FCC announced it would initiate a
further proceeding to determine how integration requirements apply to typical
CMRS offerings, including "One-Rate" plans. Until this further proceeding is
concluded, the FCC will enforce only CMRS long distance rate integration on the
Company's services where an interstate toll charge is separately stated and
billed to CMRS customers. To the extent that the Company offers services subject
to the FCC's rate integration and averaging requirements, these requirements
generally reduce the Company's pricing flexibility for its services. There can
be no assurance that the FCC will decline to impose rate integration or
averaging requirements on the Company or decline to require the Company to
integrate its CMRS long distance rates across its CMRS affiliates.
In the face of an increase in local siting disputes, the FCC initiated an
administrative rulemaking to consider, among other things, the procedure for
obtaining relief from state and local regulations pertaining to the placement of
facilities, guidelines governing the types of information that a state or local
government can request to judge compliance with FCC emissions rules, and the
adoption of a presumption that facilities licensed by the FCC comply with the
FCC's radio frequency emissions guidelines. In August 1998, the FCC announced a
facilities siting agreement between state and local officials and several
wireless industry associations. This agreement establishes an informal dispute
resolution process that can be used by the Company to resolve disputes affecting
the siting of its wireless facilities.
The FCC initiated a notice of inquiry on calling party pays, a mechanism
that would allow CMRS providers to offer service plans under which callers to
CMRS customers would pay for the calls that they make. A calling party pays
offering would establish a system similar to that used in European countries.
In April 1998, the FCC initiated an administrative rulemaking proceeding to
determine the obligations of telecommunications carriers to make their services
accessible to individuals with disabilities. The FCC has proposed regulations
implementing statutory requirements governing accessibility of
telecommunications services like those offered by the Company to persons with
disabilities, and could adopt proposals requiring modifications to existing
customer equipment as well as requirements governing new equipment and carrier
networks.
The FCC is also considering adopting rules to govern customer billing by
telecommunications services providers such as the Company. The FCC proposed that
more billing detail be provided to consumers, which could add to the expense of
the billing process as systems are modified to conform to any new requirements.
Additionally, the FCC is considering whether carriers,
- 7 -
<PAGE>
such as the Company, that decide to pass through their mandatory universal
service contributions to their customers, should be required to provide a full
explanation of the program and ensure that the carriers that pass through their
contribution do not over recover their mandatory contributions from their
customers. Adoption of some of the FCC's proposals could increase the complexity
of the Company's billing processes and restrict the Company's ability to bill
customers for services in the most commercially advantageous way.
The FCC has also extended the date to June 30, 2000 for wireless carriers
such as the Company to comply with existing requirements under the
Communications Assistance for Law Enforcement Act ("CALEA") and has proposed to
adopt additional requirements, including, among other things, a proposal to
require the furnishing of location information when law enforcement authorities
monitor telephone calls under court order. The adoption of additional CALEA
requirements could require additional expenditures by the Company to ensure its
ability to comply.
State Regulation and Local Approvals
Except for the State of Illinois, the states in which the Company presently
operates currently do not regulate cellular telephone service. In the 1993
Budget Act, Congress gave the FCC the authority to preempt states from
regulating rates or entry into CMRS, including cellular. The FCC, to date, has
denied all state petitions to regulate the rates charged by CMRS providers.
The scope of the allowable level of state regulation of CMRS, however,
remains unclear. The 1993 Budget Act does not identify the "other terms and
conditions" of CMRS service that can be regulated by the states. Moreover, the
extent to which states may regulate intrastate LEC-CMRS interconnection remains
unresolved. The resolution of this issue will determine the extent to which
cellular providers will be subject to state regulation of CMRS interconnection
to the LECs. The siting of cells also remains subject to state and local
jurisdiction although petitions seeking clarification of states' siting
authority are currently pending at the FCC.
EMPLOYEES
As of December 31, 1998, the Company had approximately 1,600 employees. The
Company believes that its relationships with its employees are good.
ITEM 2 PROPERTIES
The principal physical assets of a cellular telephone communications system
include cell sites and central switching equipment. The Company primarily leases
its sites used for its transmission facilities, retail stores and administrative
offices. The physical components of a cellular telephone communications system
require maintenance and upgrading to keep pace with technological advances.
During 1997, the Company's systems, including its cell sites and switching
equipment were upgraded with TDMA digital cellular technology, permitting its
subscribers and roamers to use both analog and TDMA services throughout the
Company's coverage area.
The Company's management believes that substantially all of its physical
assets are in good operating condition.
ITEM 3 LEGAL PROCEEDINGS
The Company is subject to 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 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information for this item is omitted pursuant to SEC General Instruction I
to Form 10-K.
- 8 -
<PAGE>
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Common Stock
Absence of Trading Market
The common stock of the Company is not publicly traded. Therefore, there is no
established public trading market for the common stock, and none is expected to
develop in the foreseeable future.
Holder
All of the shares of common stock of the Company, $.01 par value, are owned by
Comcast Cellular Holdings Corporation, a wholly owned subsidiary of Comcast.
Dividends
None.
ITEM 6 SELECTED FINANCIAL DATA
Information for this item is omitted pursuant to SEC General Instruction I to
Form 10-K.
- 9 -
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information for this item is omitted pursuant to SEC General Instruction I
to Form 10-K, except as noted below.
Results of Operations
Summarized consolidated financial information for Comcast Cellular
Corporation (the "Company"), an indirect wholly owned subsidiary of Comcast
Corporation ("Comcast"), for the years ended December 31, 1998 and 1997 is as
follows (dollars in millions, "NM" denotes percentage is not meaningful):
<TABLE>
<CAPTION>
Year Ended
December 31, Increase / (Decrease)
1998 1997 $ %
<S> <C> <C> <C> <C>
Service income, net.............................. $455.2 $444.9 $10.3 2.3%
Operating, selling, general and administrative
expenses.................................... 280.2 274.9 5.3 1.9
------ ------
Operating income before depreciation and
amortization (1)............................ 175.0 170.0 5.0 2.9
Depreciation and amortization.................... 122.0 109.8 12.2 11.1
------ ------
Operating income................................. 53.0 60.2 (7.2) (12.0)
------ ------
Interest expense................................. 111.6 117.8 (6.2) (5.3)
Investment income................................ (1.5) (2.7) (1.2) (44.4)
Equity in net losses of affiliates............... 0.2 6.6 (6.4) (97.0)
Other............................................ 1.3 1.3
Income tax benefit............................... (21.5) (22.9) (1.4) (6.1)
Extraordinary items.............................. (10.7) (10.7) NM
------ ------
Net loss.................................... ($37.1) ($50.6) ($13.5) (26.7%)
====== ======
<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 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, net
Service income increased by $10.3 million 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.
Operating, Selling, General and Administrative Expenses
The $5.3 million increase in operating, selling, general and administrative
expenses from 1997 to 1998 is primarily attributable to growth in subscribers.
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 $6.8 million and
-10 -
<PAGE>
$6.4 million were charged to selling, general and administrative expenses during
the years ended December 31, 1998 and 1997, respectively (on a pro forma basis,
giving effect to the New Management Agreement, management fees for the year
ended December 31, 1997 would have been $6.7 million).
Depreciation and Amortization Expense
The $12.2 million increase in depreciation and amortization expense from
1997 to 1998 is 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.
Interest Expense
The $6.2 million decrease in interest expense from 1997 to 1998 is
primarily due to the transfer of AWACS Garden State, Inc. ("AWACS Garden
State"), which was an indirect subsidiary of the Company (see below), and the
effects of a decrease in the Company's effective weighted average interest rate.
In 1992, AWACS Garden State 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 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 $5.2 million for the years ended December 31, 1998 and
1997, respectively.
Equity in Net Losses of Affiliates
Under the terms of the partnership agreement, 49.5% of Garden State
Cablevision's net (income) losses were allocated to the Company. During the
years ended December 31, 1998 and 1997, the Company recognized equity in net
(income) loss of Garden State Cablevision of ($0.2) million and $5.4 million,
respectively.
Effective April 1, 1998, the Company distributed its indirect interest in
AWACS Garden State to a wholly owned subsidiary of Comcast at its net book value
of $41.3 million.
Extraordinary Items
Extraordinary items for the year ended December 31, 1997 of $10.7 million
consist of unamortized debt acquisition costs and debt extinguishment costs of
$16.4 million, net of related tax benefit of $5.7 million, expensed in
connection with the refinancing of the Company's existing credit facility with
the proceeds from the offering of the Company's $1.0 billion principal amount 9
1/2% senior notes due 2007 in May 1997 and borrowings under the Company's new
$400.0 million revolving credit facility in November 1997.
Earnings to Fixed Charges
For the years ended December 31, 1998 and 1997, the Company's earnings
before extraordinary items, income tax benefit, equity in net losses of
affiliates and fixed charges (interest expense) was $53.2 million and $61.6
million, respectively. Such amounts were not adequate to cover the Company's
fixed charges of $111.6 million and $117.8 million for these periods,
respectively. Fixed charges include non-cash interest expense of $1.5 million
and $30.7 million for the years ended December 31, 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
$122.0 million and $109.8 million during the years ended December 31, 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
- 11 -
<PAGE>
in implementing its Year 2000 program, which consists of the following phases:
Assessment Phase
Structured evaluation, including a detailed inventory outlining the impact
that the Year 2000 Issue may have on current operations.
Detailed Planning Phase
Establishment of priorities, development of specific action steps and
allocation of resources to address the issues identified in the Assessment
Phase.
Conversion Phase
Implementation of the necessary system modifications as outlined in the
Detailed Planning Phase.
Testing Phase
Verification that the modifications implemented in the Conversion Phase
will be successful in resolving the Year 2000 Issue so that all inventory items
will function properly, both individually and on an integrated basis.
Implementation Phase
Final roll-out of fully tested components into an operational unit.
Based on an inventory conducted in 1997, the Company has identified
computer systems that will require modification or replacement so that they will
properly utilize dates beyond December 31, 1999. Many of the Company's critical
systems are new and are already Year 2000 compliant as a result of the Company's
recent 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 December 31, 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 December 31, 1998, the Company has incurred
$0.9 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.
- 12 -
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
Comcast Cellular Corporation
Wilmington, Delaware
We have audited the accompanying consolidated balance sheet of Comcast Cellular
Corporation (the "Company") (an indirect wholly owned subsidiary of Comcast
Corporation) and its subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholder's deficiency and of
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Comcast Cellular Corporation and
its subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
February 9, 1999
- 13 -
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................................. $24,422 $4,692
Accounts receivable, less allowance for doubtful accounts
of $4,870 and $6,356................................................ 75,302 59,252
Inventories........................................................... 23,292 14,154
Other current assets.................................................. 4,937 3,147
---------- ----------
Total current assets.............................................. 127,953 81,245
---------- ----------
INVESTMENT IN AFFILIATE.................................................. 28,214 28,570
---------- ----------
PROPERTY AND EQUIPMENT................................................... 686,240 595,861
Accumulated depreciation.............................................. (267,993) (182,632)
---------- ----------
Property and equipment, net........................................... 418,247 413,229
---------- ----------
DEFERRED CHARGES AND OTHER............................................... 1,276,531 1,275,861
Accumulated amortization.............................................. (356,311) (321,450)
---------- ----------
Deferred charges and other, net....................................... 920,220 954,411
---------- ----------
$1,494,634 $1,477,455
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses................................. $116,979 $100,159
Accrued interest...................................................... 16,802 17,388
Current portion of long-term debt..................................... 461 430
Due to affiliates..................................................... 18,508 47,116
---------- ----------
Total current liabilities........................................... 152,750 165,093
---------- ----------
LONG-TERM DEBT, less current portion..................................... 1,274,159 1,224,511
---------- ----------
INVESTMENT IN AFFILIATE.................................................. 99,014
---------- ----------
DEFERRED INCOME TAXES.................................................... 230,046 227,944
---------- ----------
MINORITY INTEREST AND OTHER.............................................. 8,073 5,878
---------- ----------
COMMITMENTS AND CONTINGENCIES
MANDATORILY REDEEMABLE PREFERRED STOCK HELD BY AFFILIATE................. 195,059 173,602
---------- ----------
STOCKHOLDER'S DEFICIENCY
Common stock, $.01 par value - authorized, 1,000 shares;
issued, 100 shares .................................................
Additional capital.................................................... 537,228 488,301
Accumulated deficit................................................... (902,681) (906,888)
---------- ----------
Total stockholder's deficiency...................................... (365,453) (418,587)
---------- ----------
$1,494,634 $1,477,455
========== ==========
</TABLE>
See notes to consolidated financial statements.
- 14 -
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
SERVICE INCOME, net........................................... $455,199 $444,946 $426,053
-------- -------- --------
COSTS AND EXPENSES
Operating.................................................. 37,874 35,525 36,876
Selling, general and administrative........................ 242,375 239,383 235,176
Depreciation and amortization.............................. 122,004 109,820 117,225
-------- -------- --------
402,253 384,728 389,277
-------- -------- --------
OPERATING INCOME.............................................. 52,946 60,218 36,776
OTHER (INCOME) EXPENSE
Interest expense........................................... 111,623 117,756 116,297
Investment income.......................................... (1,508) (2,696) (2,525)
Equity in net losses of affiliates......................... 185 6,603 6,559
Litigation settlement...................................... 21,647
Other...................................................... 1,281 1,359 2,449
-------- -------- --------
111,581 123,022 144,427
-------- -------- --------
LOSS BEFORE INCOME TAX BENEFIT
AND EXTRAORDINARY ITEMS.................................... (58,635) (62,804) (107,651)
INCOME TAX BENEFIT............................................ (21,525) (22,867) (38,067)
-------- -------- --------
LOSS BEFORE EXTRAORDINARY ITEMS............................... (37,110) (39,937) (69,584)
EXTRAORDINARY ITEMS........................................... (10,671)
-------- -------- --------
NET LOSS...................................................... (37,110) (50,608) (69,584)
PREFERRED DIVIDENDS........................................... (21,457) (12,124)
-------- -------- --------
NET LOSS FOR COMMON STOCKHOLDER............................... ($58,567) ($62,732) ($69,584)
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
- 15 -
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................................... ($37,110) ($50,608) ($69,584)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Extraordinary items...................................... 10,671
Depreciation and amortization............................ 122,004 109,820 117,225
Non-cash interest expense................................ 1,497 30,714 69,400
Equity in net losses of affiliates....................... 185 6,603 6,559
Minority interest........................................ 1,316 1,157 773
Deferred management fees................................. 2,211 5,545
Deferred income taxes and other.......................... (21,295) (25,545) (38,070)
------- ------- -------
66,597 85,023 91,848
Changes in working capital accounts...................... (11,245) 17,223 30,248
------- ------- -------
Net cash provided by operating activities.............. 55,352 102,246 122,096
------- ------- -------
FINANCING ACTIVITIES
Proceeds from borrowings of long-term debt................. 75,000 1,243,370 166,908
Repayments of long-term debt............................... (25,430) (1,305,180) (36,500)
Deferred financing costs................................... (125) (28,912)
Repayments under deferred payment plan..................... (120,177)
Repayment of long-term due to affiliate.................... (35,479)
Proceeds from issuance of mandatorily redeemable
preferred stock held by affiliate........................ 161,478
Net transactions with affiliates........................... 8,346 (21,351) 7,100
------- ------- -------
Net cash provided by (used in) financing activities...... 57,791 49,405 (18,148)
------- ------- -------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired......................... (18,918) (13,958)
Capital expenditures....................................... (91,255) (130,021) (116,018)
Proceeds from sale of equipment and other.................. 256
Purchase of minority interests, license acquisition
costs and other.......................................... (2,158) (3,000) (24,367)
Distributions from Garden State Cablevision................ 35,479
------- ------- -------
Net cash used in investing activities.................. (93,413) (151,939) (118,608)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................................ 19,730 (288) (14,660)
CASH AND CASH EQUIVALENTS, beginning of year.................. 4,692 4,980 19,640
------- ------- -------
CASH AND CASH EQUIVALENTS, end of year........................ $24,422 $4,692 $4,980
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
- 16 -
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIENCY
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Additional Accumulated
Stock Capital Deficit Total
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996............................ $ $500,425 ($786,696) ($286,271)
Net loss......................................... (69,584) (69,584)
--------- -------- --------- ---------
BALANCE, DECEMBER 31, 1996.......................... 500,425 (856,280) (355,855)
Net loss......................................... (50,608) (50,608)
Preferred dividends.............................. (12,124) (12,124)
--------- -------- --------- ---------
BALANCE, DECEMBER 31, 1997.......................... 488,301 (906,888) (418,587)
Distribution of AWACS Garden State, Inc. to Parent 70,384 41,317 111,701
Net loss......................................... (37,110) (37,110)
Preferred dividends.............................. (21,457) (21,457)
--------- -------- --------- ---------
BALANCE, DECEMBER 31, 1998.......................... $ $537,228 ($902,681) ($365,453)
========= ======== ========= =========
</TABLE>
See notes to consolidated financial statements.
- 17 -
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. BUSINESS
Comcast Cellular Corporation ("the Company"), is an indirect wholly owned
subsidiary of Comcast Corporation ("Comcast") and is a holding company that
conducts all of its operations through its wholly owned subsidiary, Comcast
Cellular Communications, Inc. ("CCCI") and CCCI's subsidiaries.
The Company provides cellular telephone communications services pursuant to
licenses granted by the Federal Communications Commission in markets with a
population of more than 8.1 million, including the area in and around the
City of Philadelphia, Pennsylvania, the State of Delaware and a significant
portion of the State of New Jersey.
In January 1999, Comcast agreed to sell the Company to SBC Communications,
Inc. ("SBC") for approximately $400 million in cash and the assumption of
approximately $1.3 billion of the Company's debt. Comcast expects to
complete this sale in the third quarter of 1999 pending receipt of all
necessary regulatory and other approvals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and all wholly owned or controlled subsidiaries. All significant
intercompany accounts and transactions among consolidated entities have
been eliminated.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Values
The estimated fair value amounts presented in these notes to consolidated
financial statements have been determined by the Company using available
market information and appropriate methodologies. However, considerable
judgment is required in interpreting market data to develop the estimates
of fair value. The estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts. Such fair value estimates are based on pertinent information
available to management as of December 31, 1998 and 1997, and have not been
comprehensively revalued for purposes of these consolidated financial
statements since such dates.
A reasonable estimate of fair values of the due to affiliates in the
Company's consolidated balance sheet is not practicable to obtain because
of the related party nature of these items and the lack of quoted market
prices.
Cash Equivalents
Cash equivalents consist principally of overnight investments in money
market funds with maturities of three months or less when purchased. The
carrying amounts of the Company's cash equivalents, classified as available
for sale securities, approximate their fair values as of December 31, 1998
and 1997.
Inventories
Inventories, which include products held for sale, materials and supplies,
are stated at the lower of cost or market. Products held for sale are
stated at weighted average cost, which approximates market.
Investments
Investments in entities in which the Company has the ability to exercise
significant influence over the operating and financial policies of the
investee are accounted for under the equity method. Equity method
investments are
- 18 -
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
recorded at original cost and adjusted periodically to recognize the
Company's proportionate share of the investees' net income or losses after
the date of investment, additional contributions made and dividends
received. Investments in privately held companies are stated at cost,
adjusted for any known diminution in value.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided by the
straight-line method over estimated useful lives as follows:
Buildings...................................... 10-40 years
Operating facilities........................... 8-12 years
Other equipment................................ 2-8 years
Improvements that extend asset lives are capitalized; other repairs and
maintenance charges are expensed as incurred. The cost and related
accumulated depreciation applicable to assets sold or retired are removed
from the accounts and the gain or loss on disposition is recognized as a
component of depreciation expense.
Deferred Charges and Other
Deferred charges consist principally of the excess of cost over the fair
value of net assets acquired, license acquisition costs and debt
acquisition costs. The excess of cost over the fair value of net assets
acquired is being amortized on a straight-line basis over the estimated
useful life of up to 40 years. License acquisition costs are being
amortized on a straight-line basis over the estimated useful lives of the
licenses of up to 40 years. Debt acquisition costs are being amortized on a
straight-line basis over the term of the related debt, ranging from five to
ten years.
Valuation of Long-Lived Assets
The Company periodically evaluates the recoverability of its long-lived
assets, including property and equipment and deferred charges using
objective methodologies. Such methodologies include evaluations based on
the cash flows generated by the underlying assets or other determinants of
fair value.
Revenue Recognition
Service income is recognized as service is provided and is recorded net of
long distance and roaming incollect charges. Credit risk is managed by
disconnecting services to customers who are delinquent.
Postretirement and Postemployment Benefits
The estimated costs of retiree benefits and benefits for former or inactive
employees, after employment but before retirement, are accrued and recorded
as a charge to operations during the years the employees provide services.
The Company's retiree benefit obligation is unfunded and all benefits are
paid by Comcast.
Income Taxes
The Company recognizes deferred tax assets and liabilities for temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities and expected benefits of utilizing net
operating loss carryforwards. The impact on deferred taxes of changes in
tax rates and laws, if any, applied to the years during which temporary
differences are expected to be settled, are reflected in the consolidated
financial statements in the period of enactment.
Derivative Financial Instruments
The Company uses derivative financial instruments, such as interest rate
exchange agreements ("Swaps") to manage its exposure to fluctuations in
interest rates. Swaps are matched with either fixed or variable rate debt
and periodic cash payments are accrued on a settlement basis as an
adjustment to interest expense. Any premiums associated with these
instruments are amortized over their term and realized gains or losses as a
result of the termination of the instruments are deferred and amortized
over the remaining term of the underlying debt. Unrealized gains and losses
as a result of these instruments are recognized when the underlying hedged
item is extinguished or otherwise terminated.
- 19 -
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
Those instruments that have been entered into by the Company to hedge
exposure to interest rate risks are periodically examined by the Company to
ensure that the instruments are matched with underlying liabilities, reduce
the Company's risks relating to interest rates and, through market value
and sensitivity analysis, maintain a high correlation to the interest
expense or underlying value of the hedged item. For those instruments that
do not meet the above criteria, variations in their fair value are
marked-to-market on a current basis in the Company's consolidated statement
of operations.
The Company does not hold or issue any derivative financial instruments for
trading purposes and is not a party to leveraged instruments (see Note 4).
The credit risks associated with the Company's derivative financial
instruments are controlled through the evaluation and monitoring of the
creditworthiness of the counterparties. Although the Company may be exposed
to losses in the event of nonperformance by the counterparties, the Company
does not expect such losses, if any, to be significant.
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 years' consolidated
financial statements to conform to those classifications used in 1998.
3. ACQUISITIONS AND OTHER SIGNIFICANT EVENTS
PCS License Acquisition
In November 1997, the Company acquired twelve 10-MHz personal
communications services ("PCS") licenses covering the Philadelphia and
Allentown, PA markets from Comcast at Comcast's historical cost of $18.9
million. The cost of this acquisition was funded with proceeds from
borrowings under the Revolving Credit Facility (see Note 4). This
acquisition was accounted for under the purchase method.
Delaware 1 RSA
In May 1996, the Company and Southwestern Bell Mobile Systems, through a
partnership owned 50% by each of them, purchased the remaining 84% limited
partnership interests of the Delaware 1 Rural Statistical Area ("RSA")
Limited Partnership, the licensee of the non-wireline cellular license for
the Kent and Sussex, DE RSA (the "Delaware 1 RSA") for $44.1 million in
cash, of which the Company's share was $22.1 million. The surviving entity,
C-SW Cellular Partnership, a Delaware general partnership, now holds the
cellular license for the Delaware 1 RSA. American Cellular Network
Corporation, an indirect wholly owned subsidiary of the Company, manages
the daily operations of the C-SW Cellular Partnership's interest in the
Delaware 1 RSA. The Company's investment of $28.2 million and $28.6 million
as of December 31, 1998 and 1997, respectively, is accounted for under the
equity method and is classified as investment in affiliate in the Company's
consolidated balance sheet.
Litigation Settlement
The Company was involved in various civil lawsuits and administrative
proceedings regarding the ownership, operation and transfer of the license
for its Atlantic City cellular system. In March 1995, the Company entered
into a Settlement Agreement (the "Settlement Agreement") with respect to
outstanding civil litigation. In June 1996, the Company paid and expensed
$21.6 million under the Settlement Agreement.
- 20 -
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
1998 1997
(dollars in thousands)
<S> <C> <C>
9 1/2% Senior Notes due 2007.............. $998,544 $998,435
Revolving Credit Facility................. 275,000 225,000
Other, due through 2001................... 1,076 1,506
---------- ----------
1,274,620 1,224,941
Less current portion...................... 461 430
---------- ----------
$1,274,159 $1,224,511
========== ==========
</TABLE>
Maturities of long-term debt outstanding as of December 31, 1998 for the
four years after 1999 are as follows (dollars in thousands):
2000.................................... $495
2001.................................... 120
2002....................................
2003.................................... 275,000
As of December 31, 1998 and 1997, the Company's effective weighted average
interest rate on its long-term debt outstanding was 8.69% and 8.88%,
respectively.
Senior Notes
Interest on the Senior Notes is payable in cash semi-annually on May 1 and
November 1 of each year. The Senior Notes are redeemable, in whole or in
part, at the option of the Company, at any time on or after May 1, 2002 at
a redemption price, initially of 104.75% of the principal amount of the
Senior Notes and declining annually to 100% on May 1, 2005, plus accrued
and unpaid interest, if any, to the date of redemption. In addition, prior
to May 1, 2000, the Company may redeem the Senior Notes at a price equal to
108.5% of the principal amount, plus accrued and unpaid interest, if any,
to the redemption date, with the net cash proceeds from one or more Public
Equity Offerings (as defined); provided, however, that at least 65% of the
originally issued principal amount of the Senior Notes would remain
outstanding after giving effect to any such redemption. Upon the occurrence
of a Change of Control Triggering Event (as defined), each holder of the
Senior Notes will have the right to require the Company to repurchase such
holder's Senior Notes at 101% of the principal amount, plus accrued and
unpaid interest, if any, to the repurchase date.
The Senior Notes are general unsecured obligations of the Company ranking
senior to all subordinated Indebtedness (as defined) of the Company and
pari passu in right of payment with all other existing and future unsecured
unsubordinated Indebtedness (as defined) and other liabilities of the
Company. The Senior Notes are subordinate to all liabilities, including
trade payables, of the Company's subsidiaries.
The indenture for the Senior Notes imposes certain limitations on the
ability of the Company and its Restricted Subsidiaries (as defined) to,
among other things, incur Indebtedness (as defined), make Restricted
Payments (as defined), including the payment of cash dividends on the
Company's Series A Preferred Stock (see Note 6), effect certain Asset Sales
(as defined), enter into certain transactions with affiliates, merge or
consolidate with any other person or transfer all or substantially all of
their properties and assets.
Revolving Credit Facility
The Company has a credit agreement with certain banks (the "Revolving
Credit Facility"), which consists of a $300.0 million five and one-quarter
year revolving credit facility (the "Tranche A Facility") and a $96.5
million 364-day revolving credit facility (the "Tranche B Facility").
Amounts outstanding under the Tranche B Facility at the end of the 364-day
period are convertible, at the Company's option, into a four and
one-quarter year term loan.
- 21 -
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
Borrowings under the Revolving Credit Facility bear interest at a rate
equal to, at the option of the Company, either (a) the greater of the (i)
prime rate or (ii) the federal funds rate plus 1/2% or (b) the Applicable
Margin, as defined based on CCCI's leverage ratio, plus the London
Interbank Offered Rate. Initial borrowings under the Tranche A Facility
were used principally to repay existing debt, to pay interest on the Senior
Notes, to purchase twelve 10-MHz PCS licenses from Comcast (see Note 3),
and to repay previously deferred management fees to Comcast (see Note 7).
The Tranche B Facility will expire in October 1999.
Borrowings under the Revolving Credit Facility are senior to the Senior
Notes. The Revolving Credit Facility contains various covenants, including
financial covenants restricting changes in control (or making such an event
of default) and limiting the payment of dividends, distributions and loans
and advances to the Company.
Extraordinary Items
Extraordinary items for the year ended December 31, 1997 of $10.7 million
consist of unamortized debt acquisition costs and debt extinguishment costs
of $16.4 million, net of related tax benefit of $5.7 million, expensed in
connection with the refinancing of the Company's existing credit facility
with the proceeds from the offering of the Senior Notes in May 1997 and
borrowings under the Revolving Credit Facility in November 1997.
Interest Rate Risk Management
The Company is exposed to market risk including changes in interest rates.
To manage the volatility relating to these exposures, the Company enters
into various derivative transactions pursuant to the Company's policies in
areas such as counterparty exposure and hedging practices. Positions are
monitored using techniques including market value and sensitivity analyses.
The use of interest rate risk management instruments, such as Swaps, was
required under the terms of certain of the Company's previously outstanding
debt agreements. The Company's policy is to manage interest costs using a
mix of fixed and variable rate debt. Using Swaps, the Company agrees to
exchange, at specified intervals, the difference between fixed and variable
interest amounts calculated by reference to an agreed-upon notional
principal amount.
The following table summarizes the terms of the Company's existing Swap as
of December 31, 1997 (dollars in thousands). The Company's Swap was
terminated in May 1998.
<TABLE>
<CAPTION>
Notional Average
Amount Maturities Interest Rate
<S> <C> <C> <C>
As of December 31, 1997
Variable to Fixed Swap.............. $50,000 1998 5.65%
</TABLE>
The notional amounts of interest rate instruments, as presented in the
above table, are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. While derivative financial
instruments represent an integral part of the Company's interest rate risk
management program, their incremental effect on interest expense for the
years ended December 31, 1998, 1997 and 1996 was not significant.
Estimated Fair Value
The Company's long-term debt had carrying amounts of $1.275 billion and
$1.225 billion and estimated fair values of $1.316 billion and $1.274
billion as of December 31, 1998 and 1997, respectively. The estimated fair
value of the Company's publicly traded debt is based on quoted market
prices for that debt. Interest rates that are currently available to the
Company for issuance of debt with similar terms and remaining maturities
are used to estimate fair value for debt issues for which quoted market
prices are not available.
The difference between the carrying value and estimated fair value of the
Company's Swap was not significant as of December 31, 1997, and has been
estimated based upon amounts at which such Swap could be settled.
- 22 -
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
5. INVESTMENT IN AND DUE TO AFFILIATES
In 1992, AWACS Garden State, Inc. ("AWACS Garden State"), which was 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 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, $5.2 million and $8.2 million
for the years ended December 31, 1998, 1997 and 1996, respectively. The
balance of the AWACS Note, classified as 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 distributed 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 December 31, 1998, due to affiliates consists principally 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.
6. MANDATORILY REDEEMABLE PREFERRED STOCK
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 years ended December 31, 1998 and 1997,
the Company accrued $21.5 million and $12.1 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
consolidated statement of cash flows due to their noncash nature.
In connection with the closing of the sale of the Company to SBC (see Note
1), the Series A Preferred Stock will be exchanged into shares representing
approximately 49% of the total number of outstanding shares of the
Company's common stock.
7. RELATED PARTY TRANSACTIONS
Comcast and CCCI 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 $6.8 million, $6.4 million and $5.5 million were charged
to selling, general and administrative expenses during the years ended
December 31, 1998, 1997 and 1996, respectively (on a pro forma basis,
giving effect to the New Management Agreement, management fees for the
years ended December 31, 1997 and 1996 would have been $6.7 million and
$6.4 million, respectively).
- 23 -
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Continued)
In November 1997, the Company repaid $17.0 million of previously deferred
management fees to Comcast with a portion of the proceeds from the initial
borrowings under the Revolving Credit Facility (see Note 4).
8. INCOME TAXES
Comcast, the Company and CCCI have entered into a tax sharing agreement
(the "Tax Sharing Agreement") whereby, the Company joins with Comcast in
filing a consolidated federal income tax return. Comcast allocates income
tax expense or benefit to the Company as if the Company was filing a
separate federal income tax return. Tax benefits from both losses and tax
credits are made available to the Company as it is able to realize such
benefits on a separate return basis. The Company is required to pay to
Comcast for income taxes an amount equal to that amount of tax the Company
would pay if it filed a separate tax return. Subsidiaries which were less
than 80% owned have been excluded from the Tax Sharing Agreement, as they
were not members of the Comcast consolidated group for tax purposes.
Accordingly, their tax liabilities have been determined on a separate
company basis.
Significant components of the Company's net deferred tax liability are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Deferred tax liabilities:
Difference between book and tax basis of property and equipment........ $395,200 $397,658
-------- --------
Deferred tax assets:
Net operating loss carryforwards....................................... 177,899 180,096
Difference between book and tax basis of property and equipment and
deferred charges..................................................... 24,911
Less valuation allowance............................................... (12,745) (35,293)
-------- --------
165,154 169,714
-------- --------
Net deferred tax liability............................................. $230,046 $227,944
======== ========
</TABLE>
The Company's net deferred income tax liability increased by approximately
$24.0 million as a result of the distribution of its interest in AWACS
Garden State (see Note 5).
Income tax benefit consists of the following components (dollars in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Current expense
Federal.......................................... $ $ $
State............................................ 388 180 313
-------- -------- --------
388 180 313
-------- -------- --------
Deferred benefit
Federal.......................................... (19,072) (20,714) (36,836)
State............................................ (2,841) (2,333) (1,544)
-------- -------- --------
(21,913) (23,047) (38,380)
-------- -------- --------
Income tax benefit................................... ($21,525) ($22,867) ($38,067)
======== ======== ========
</TABLE>
- 24 -
<PAGE>
The effective income tax benefit of the Company differs from the statutory
amount because of the effect of the following items (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Federal tax at statutory rate........................ ($20,522) ($21,981) ($37,678)
State income taxes, net of federal benefit........... (1,594) (1,400) (800)
Other, net........................................... 591 514 411
-------- -------- --------
Income tax benefit................................... ($21,525) ($22,867) ($38,067)
======== ======== ========
</TABLE>
As of December 31, 1998, the Company has available net operating loss
carryforwards of approximately $450.0 million for which a deferred tax
asset has been recorded and which expire through the year 2018.
9. STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
The Company made cash payments for interest of $110.7 million, $72.8
million and $48.7 million during the years ended December 31, 1998, 1997
and 1996, respectively.
The Company made cash payments for income taxes of $0.2 million, $0.4
million and $0.8 million during the years ended December 31, 1998, 1997 and
1996, respectively.
10. COMMITMENTS AND CONTINGENCIES
The Company primarily leases its sites used for its transmission
facilities, retail stores and administrative offices under noncancellable
operating leases expiring on various dates through 2039. The leases
generally provide for fixed annual rentals plus certain real estate taxes
and other costs. Rental expense of $14.2 million, $11.5 million and $10.5
million for 1998, 1997 and 1996, respectively, has been charged to
operations.
As of December 31, 1998, the minimum rental commitments under
noncancellable operating leases are as follows (dollars in thousands):
1999............................................. $12,756
2000............................................. 11,238
2001............................................. 9,005
2002............................................. 8,215
2003............................................. 7,281
Thereafter....................................... 37,826
The Company is subject to 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.
- 25 -
<PAGE>
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
The information called for by Item 10, Directors and Executive Officers of
the Registrant, Item 11, Executive Compensation, Item 12, Security Ownership of
Certain Beneficial Owners and Management, and Item 13, Certain Relationships and
Related Transactions is omitted pursuant to SEC General Instruction I of Form
10-K.
- 26 -
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements of the Company
are included in Part II, Item 8:
Independent Auditors' Report...................................13
Consolidated Balance Sheet--December 31, 1998 and 1997.........14
Consolidated Statement of Operations--Years
Ended December 31, 1998, 1997 and 1996.......................15
Consolidated Statement of Cash Flows--Years
Ended December 31, 1998, 1997 and 1996.......................16
Consolidated Statement of Stockholder's Deficiency--Years
Ended December 31, 1998, 1997 and 1996.......................17
Notes to Consolidated Financial Statements.....................18
(b) (i) The following financial statement schedule required to be
filed by Item 14(d) of Form 10-K is included in Part IV:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not
applicable, not required or the required information is
included in the consolidated financial statements or notes
thereto.
(c) Reports on Form 8-K - none.
(d) Exhibits required to be filed by Item 601 of Regulation S-K:
3.1 Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4, as amended, filed on
September 30, 1997).
3.2 By-laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on
Form S-4, as amended, filed on September 30, 1997).
4.1 Indenture dated as of May 8, 1997 by and between the
Company and The Bank of New York, as Trustee, in respect
of the 9 1/2% Senior Notes due 2007 (including the form of
Notes) (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-4, as amended,
filed on September 30, 1997).
10.1 Management Agreement dated as of May 20, 1997 by and
between Comcast Corporation ("Comcast") and Comcast
Cellular Communications, Inc. ("CCCI") (incorporated by
reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-4, as amended, filed on September 30,
1997).
10.2 Tax Sharing Agreement dated as of March 5, 1992 by and
among the Company, Comcast Cellular Holdings, Inc., CCCI
and Comcast, as amended May 20, 1997 (incorporated by
reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-4, as amended, filed on September 30,
1997).
10.3 Credit Agreement dated as of October 14, 1997 among the
Company, the banks listed therein, The Bank of New York,
Barclays Bank PLC, The Chase Manhattan Bank, N.A., PNC
Bank National Association, and the Toronto-Dominion Bank,
as Arranging Agents, and Toronto Dominion (Texas), Inc.,
as Administrative Agent.
10.4 Purchase and Sale Agreement dated as of January 19, 1999
among SBC Communications, Inc., Comcast Cellular Holdings
Corporation, Comcast Financial Corporation and Comcast
(incorporated by reference to Exhibit 10.34 to the Comcast
Corporation Annual Report on Form 10-K for the year ended
December 31, 1998).
12.1 Statement re: Computation of Ratio of Earnings to Fixed
Charges.
27.1 Financial Data Schedule.
- 27 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in Philadelphia,
Pennsylvania on March 18,1999.
Comcast Cellular Corporation
By: /s/ Brian L. Roberts
------------------------------------
Brian L. Roberts
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Ralph J. Roberts
- -----------------------
Ralph J. Roberts Chairman; Director March 18,1999
/s/ Julian A. Brodsky
- -----------------------
Julian A. Brodsky Vice Chairman; Director March 18,1999
/s/ Brian L. Roberts
- -----------------------
Brian L. Roberts President; Director March 18,1999
(Principal Executive Officer)
/s/ Lawrence S. Smith
- -----------------------
Lawrence S. Smith Executive Vice President March 18,1999
(Principal Accounting Officer)
/s/ John R. Alchin
- -----------------------
John R. Alchin Senior Vice President, Treasurer March 18,1999
(Principal Financial Officer)
/s/ Stanley L. Wang
- -----------------------
Stanley L. Wang Senior Vice President, Secretary; March 18,1999
Director
- 28 -
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
Board of Directors and Stockholder
Comcast Cellular Corporation
Wilmington, Delaware
We have audited the consolidated financial statements of Comcast Cellular
Corporation (the "Company") (an indirect wholly owned subsidiary of Comcast
Corporation) and its subsidiaries as of December 31, 1998 and 1997, and for each
of the three years in the period ended December 31, 1998, and have issued our
report thereon dated February 9, 1999; such report is included elsewhere in this
Form 10-K. Our audits also included the financial statement schedule of the
Company, listed in Item 14. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
February 9, 1999
- 29 -
<PAGE>
COMCAST CELLULAR CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Deductions Balance
Beginning Costs and from at End
of Year Expenses Reserves(A) of Year
Allowance for Doubtful Accounts
<S> <C> <C> <C> <C>
1998..................................... $6,356 $5,881 $7,367 $4,870
1997..................................... 3,148 9,502 6,294 6,356
1996..................................... 3,264 14,032 14,148 3,148
<FN>
(A) Uncollectible accounts written off.
</FN>
</TABLE>
- 30 -
Exhibit 12.1
COMCAST CELLULAR CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Earnings before fixed charges (1):
Loss before extraordinary items and
cumulative effects of accounting changes ($37,110) ($ 39,937) ($ 69,584)
Income tax benefit........................ (21,525) (22,867) (38,067)
Equity in net losses of affiliates ....... 185 6,603 6,559
Distributions from Garden State
Cablevision ............................ 35,479
Fixed charges (interest expense) ......... 111,623 117,756 116,297
--------- --------- ---------
$ 53,173 $ 61,555 $ 50,684
========= ========= =========
Ratio of earnings to fixed charges (2) ... -- -- --
<FN>
_______________________
(1) For the purpose of calculating the ratio of earnings to fixed charges,
earnings consist of distributions from Garden State Cablevision and loss
before extraordinary items and cumulative effect of accounting changes,
income tax benefit, equity in net losses of affiliates and fixed charges.
Fixed charges consist of interest expense.
(2) For the years ended December 31, 1998, 1997 and 1996, earnings, as defined
above, were inadequate to cover fixed charges by $58.5 million, $56.2
million and $65.6 million, respectively.
</FN>
</TABLE>
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 24,422
<SECURITIES> 0
<RECEIVABLES> 80,172
<ALLOWANCES> (4,870)
<INVENTORY> 23,292
<CURRENT-ASSETS> 127,953
<PP&E> 686,240
<DEPRECIATION> (267,993)
<TOTAL-ASSETS> 1,494,634
<CURRENT-LIABILITIES> 152,750
<BONDS> 1,274,159
195,059
0
<COMMON> 0
<OTHER-SE> (365,453)
<TOTAL-LIABILITY-AND-EQUITY> 1,494,634
<SALES> 455,199
<TOTAL-REVENUES> 455,199
<CGS> 0
<TOTAL-COSTS> (402,253)
<OTHER-EXPENSES> (1,281)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (111,623)
<INCOME-PRETAX> (58,635)
<INCOME-TAX> 21,525
<INCOME-CONTINUING> (37,110)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,110)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
