As filed with the Securities and Exchange Commission on November 14, 1997.
==============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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 No. 0-15279
GENERAL COMMUNICATION, INC.
---------------------------
(Exact name of registrant as specified in its charter)
STATE OF ALASKA 92-0072737
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 Denali Street
Suite 1000
Anchorage, Alaska 99503
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (907) 265-5600
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (l) 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 .
The number of shares outstanding of the registrant's classes of common stock,
as of October 31, 1997 was:
45,276,687 shares of Class A common stock; and
4,064,246 shares of Class B common stock.
===============================================================================
1
<PAGE>
INDEX
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PAGE NO
<S> <C>
PART I. FINANCIAL INFORMATION
Item l. Consolidated Financial Statements..........................................3
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996.......................................................3
Consolidated Statements of Operations for the three
and nine months ended September 30, 1997 and 1996.......................5
Consolidated Statements of Stockholders' Equity
for the nine months ended September 30, 1997 and 1996....................6
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996................................7
Notes to Interim Condensed Consolidated Financial
Statements..............................................................8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................................26
Item 6. Exhibits and Reports on Form 8-K...........................................26
SIGNATURES................................................................................................27
</TABLE>
2
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Unaudited)
September 30, December 31,
ASSETS 1997 1996
- ------------------------------------------------------------------ ----------------- -----------------
(Amounts in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,312 13,349
Receivables, net of allowance for doubtful
Receivables of $909 and $597 35,039 28,768
Prepaid and other current assets 3,065 2,236
Deferred income taxes, net 1,094 835
Inventories 3,213 1,589
Notes receivable 615 325
------- -------
Total current assets 49,338 47,102
------- -------
Restricted cash (note 5) 40,253 ---
------- -------
Property and equipment in service, net 144,813 115,981
Construction in progress 20,144 20,770
------- -------
Net property and equipment 164,957 136,751
------- -------
Other assets:
Intangible assets, net 247,140 250,920
Deferred debt issuance costs, net 9,281 900
Transponder deposit 9,100 9,100
Undersea fiber optic cable deposit (note 4) 8,247 ---
Notes receivable 1,315 1,016
Other assets, at cost, net 1,428 1,546
------- -------
Total other assets 276,511 263,482
------- -------
Total assets $ 531,059 447,335
======= =======
</TABLE>
See accompanying notes to interim condensed consolidated financial
statements.
3
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
<CAPTION>
(Unaudited)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- ------------------------------------------------------------------- ----------------- ----------------
(Amounts in thousands)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt (note 3) $ 1,666 31,969
Current maturities of obligations under capital leases 84 71
Accounts payable 24,842 23,677
Accrued payroll and payroll related obligations 3,769 3,830
Accrued liabilities 6,099 4,173
Accrued interest 3,356 2,708
Subscriber deposits and deferred revenues 3,877 3,449
------- -------
Total current liabilities 43,693 69,877
Senior notes (note 3) 180,000 ---
Long-term debt, excluding current maturities (note 3) 61,872 191,273
Obligations under capital leases, excluding current
maturities 523 ---
Obligations under capital leases due to related parties,
excluding current maturities 611 675
Deferred income taxes, net 37,737 33,720
Other liabilities 2,229 2,236
------- -------
Total liabilities 326,665 297,781
------- -------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 50,000,000 shares; issued and
outstanding 45,276,687 and 36,586,973 shares at
September 30, 1997 and December 31, 1996,
respectively (note 4) 170,326 113,421
Class B. Authorized 10,000,000 shares; issued and
outstanding 4,064,246 and 4,074,028 shares at
September 30, 1997 and December 31, 1996,
respectively; convertible on a share-per-share basis
into Class A common stock 3,432 3,432
Less cost of 202,768 and 199,081 Class A common
shares held in treasury at September 30, 1997 and
December 31, 1996, respectively (1,039) (1,010)
Paid-in capital 4,478 4,229
Retained earnings 27,197 29,482
------- -------
Total stockholders' equity 204,394 149,554
------- -------
Commitments and contingencies (note 5)
Total liabilities and stockholders' equity $ 531,059 447,335
======= =======
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
4
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
(Amounts in thousands except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Telecommunication services $ 44,662 38,664 126,018 115,832
Cable services 13,294 --- 41,005 ---
------ ------ ------- -------
Total revenues 57,956 38,664 167,023 115,832
Cost of sales and services 28,868 22,226 85,814 66,350
Selling, general and administrative
expenses 19,535 10,609 53,850 31,930
Depreciation and amortization 5,767 1,812 17,495 5,616
------ ------ ------- -------
Operating income 3,786 4,017 9,864 11,936
Interest expense, net 4,588 269 12,765 898
------ ------ ------- -------
Net earnings (loss) before income
taxes and extraordinary item (802) 3,748 (2,901) 11,038
Income tax expense (benefit) (307) 1,608 (1,049) 4,610
------ ------ ------- -------
Net earnings (loss) before extraordinary
loss on early extinguishment of debt (495) 2,140 (1,852) 6,428
Loss on early extinguishment of debt,
net of income tax benefit of $268 433 --- 433 ---
------ ------ ------- -------
Net earnings (loss) $ (928) 2,140 (2,285) 6,428
====== ====== ======= =======
Earnings (loss) per common share:
Net earnings (loss) before extraordinary
loss on early extinguishment of debt $ (0.01) 0.09 (0.04) 0.26
Extraordinary loss (0.01) --- (0.01) ---
------ ------ ------- -------
Net earnings (loss) $ (0.02) 0.09 (0.05) 0.26
====== ====== ======= =======
Weighted average number of shares
of common stock and common
stock equivalents outstanding 48,096 25,090 44,933 24,847
====== ====== ======= =======
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
5
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<CAPTION>
Class A
(Unaudited) Shares of Class A Class B Shares
Common Stock Common Common Held in Paid-in Retained
(Amounts in thousands) Class A Class B Stock Stock Treasury Capital Earnings
------- ------- ----- ----- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 19,680 4,176 $ 13,912 3,432 (389) 4,041 22,020
Net earnings --- --- --- --- --- --- 6,428
Tax effect of excess stock
compensation expense for tax
purposes over amounts recognized
for financial reporting purposes --- --- --- --- --- 187 ---
Class B shares converted to Class A 90 (90)
Shares acquired pursuant to officer
deferred compensation agreement --- --- --- --- (621) --- ---
Shares issued under stock option plan 82 --- 187 --- --- --- ---
Shares issued and issuable under officer
stock option agreements --- --- --- --- --- 1 ---
------------------------------------------------------------------------------
Balances at September 30, 1996 19,852 4,086 $ 14,099 3,432 (1,010) 4,229 28,448
==============================================================================
Balances at December 31, 1996 36,587 4,074 $113,421 3,432 (1,010) 4,229 29,482
Net loss --- --- --- --- --- --- (2,285)
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- --- --- 198 ---
Class B shares converted to Class A 10 (10) --- --- --- --- ---
Shares issued upon public offering
(note 4) 7,000 --- 46,734 --- --- --- ---
Shares issued upon conversion of
convertible note (notes 2 and 4) 1,538 --- 9,983 --- --- --- ---
Shares acquired pursuant to officer
deferred compensation agreement --- --- --- --- (29) --- ---
Shares issued under stock option plan 142 --- 188 --- --- --- ---
Shares issued and issuable under officer
stock option agreements --- --- --- --- --- 51 ---
------------------------------------------------------------------------------
Balances at September 30, 1997 45,277 4,064 $170,326 3,432 (1,039) 4,478 27,197
==============================================================================
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
6
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(Unaudited)
Nine Months Ended
September 30,
1997 1996
---------------- ----------------
(Amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (2,285) 6,428
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization 17,495 5,616
Deferred income tax expense 3,956 1,892
Deferred compensation and compensatory
stock options 44 240
Bad debt expense, net of write-offs 312 3
Loss on early extinguishment of debt 701 ---
Other noncash income and expense items --- 28
Change in operating assets and liabilities
(note 2) (4,930) (5,460)
--------- --------
Net cash provided by operating activities 15,293 8,748
--------- --------
Cash flows from investing activities:
Purchases of property and equipment (40,699) (24,767)
Restricted cash investment (40,253) ---
Refunds of long-term deposits and purchases of
other assets (935) (1,964)
Payment of transponder deposit --- (7,800)
Payment of undersea fiber optic cable deposit (8,247) ---
Notes receivable issued (596) (397)
Payments received on notes receivable 7 249
--------- --------
Net cash used in investing activities (50,470) (34,769)
--------- --------
Cash flows from financing activities:
Long-term borrowings- Senior notes 180,000 ---
Long-term borrowings- bank debt and leases 80,700 29,100
Repayments of long-term borrowings and capital
lease obligations (229,932) (1,496)
Proceeds from equity offering 50,750 ---
Payments of deferred debt issuance costs,
underwriting fees and commissions (13,284) ---
Proceeds from common stock issuance 188 187
Purchase of treasury stock (29) (621)
--------- --------
Net cash provided by financing activities 68,393 27,170
--------- --------
Net increase in cash and cash equivalents (7,037) 1,238
Cash and cash equivalents at beginning of period 13,349 4,017
--------- --------
Cash and cash equivalents at end of period $ 6,312 5,255
========= ========
</TABLE>
See accompanying notes to interim condensed consolidated financial
statements.
7
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(l) (a) General
-------
General Communication, Inc. ("GCI"), an Alaska corporation, was
incorporated in 1979. GCI, Inc., an Alaska corporation, was
incorporated May 13, 1997 and is a wholly owned subsidiary of GCI.
GCI Holding, Inc. ("Holdings") is a wholly owned subsidiary of GCI,
Inc. and was incorporated May 13, 1997. GCI Communication Corp.
("GCC"), an Alaska corporation, is a wholly owned subsidiary of
Holdings and was incorporated in 1990. GCI Communication Services,
Inc. ("Communication Services"), an Alaska corporation, is a wholly
owned subsidiary of Holdings and was incorporated in 1992. GCI
Leasing Co., Inc. ("Leasing Company"), an Alaska corporation, is a
wholly owned subsidiary of Communication Services and was
incorporated in 1992. GCI, GCI, Inc., Holdings and GCC are engaged in
the transmission of interstate and intrastate private line and
switched message long distance telephone service between Anchorage,
Fairbanks, Juneau, and other communities in Alaska and the remaining
United States and foreign countries. GCC also provides northbound
services to certain common carriers terminating traffic in Alaska and
sells and services dedicated communications systems and related
equipment. Communication Services provides private network
point-to-point data and voice transmission services between Alaska,
Hawaii and the western contiguous United States. Leasing Company owns
and leases capacity on an undersea fiber optic cable used in the
transmission of interstate private line and switched message long
distance services between Alaska and the remaining United States and
foreign countries.
Cable television services are provided through GCI Cable, Inc. and
through its ownership in Prime Cable of Alaska L.P. ("Prime"), and
through GCI Cable, Inc.'s wholly owned subsidiaries GCI
Cable/Fairbanks, Inc., and GCI Cable/Juneau, Inc. (collectively "GCI
Cable" or "Cable Companies"). GCI Cable, Inc. and its subsidiaries
are Alaska corporations and were incorporated in 1996. GCI Cable,
Inc. is a wholly owned subsidiary of Holdings. Prime is a limited
partnership organized under the laws of the state of Delaware whose
partnership interests are wholly owned by GCI Cable, Inc.
GCI Transport Co., Inc., Fiber Hold Company, Inc., GCI Fiber Co.,
Inc., and GCI Satellite Co., Inc., all Alaska corporations, were
incorporated in 1997 to finance the acquisition of satellite
transponders and to construct and deploy the fiber optic cable system
further described in note 5. GCI Transport Co., Inc. is a wholly
owned subsidiary of Holdings. Fiber Hold Company, Inc., GCI Fiber
Co., Inc., and GCI Satellite Co., Inc. are wholly-owned subsidiaries
of GCI Transport Co., Inc. Alaska United Fiber System Partnership
("Alaska United") was organized in 1997 to construct, own and operate
the fiber optic cable system described above and in note 4. Alaska
United is a partnership wholly owned by the Company through GCI Fiber
Co., Inc. and Fiber Hold Co., Inc.
(b) Other
-----
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. The interim condensed consolidated financial
statements include the consolidated accounts of General
Communication,
8
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Inc. and its wholly owned subsidiaries (collectively, the "Company")
with all significant intercompany transactions eliminated. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the quarter ended September 30,
1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997. For further
information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year
ended December 31, 1996.
Reclassifications have been made to the 1996 financial statements to
make them comparable with the 1997 presentation.
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
--------------------------------------------------------------
Changes in operating assets and liabilities consist of (in
thousands):
<TABLE>
<CAPTION>
(Unaudited)
Nine-month periods ended September 30, 1997 1996
-------------------------------------- ----------- ----------
(Amounts in thousands)
<S> <C> <C>
Increase in receivables $ (6,583) (3,823)
Increase in prepaid and other current
assets (829) (857)
(Increase) decrease in inventory (1,624) 100
Increase (decrease) in accounts payable 1,165 (1,729)
Increase in accrued liabilities 1,926 288
Increase (decrease) in accrued payroll and
payroll realted obligations (61) 1,008
Decrease in accrued income taxes --- (547)
Increase in accrued interest 648 283
Increase (decrease) in deferred revenues 428 (183)
------- -----
$ (4,930) (5,460)
======= =======
</TABLE>
The holders of $10 million of convertible subordinated notes
exercised their conversion rights in January 1997 resulting in the
exchange of such notes for 1,538,457 shares of the Company's Class A
common stock.
Net income taxes received totaled $158,000 during the nine-month
period ended September 30, 1997 and income taxes paid totaled
$3,856,000 during the nine-month period ended September 30, 1996.
Interest paid totaled $15,423,000 and $1,572,000 during the
nine-month periods ended September 30, 1997 and 1996, respectively.
9
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
The Company recorded $198,000 and $187,000 during the nine months
ended September 30, 1997 and 1996, respectively, as paid-in capital
in recognition of the income tax effect of excess stock compensation
expense for tax purposes over amounts recognized for financial
reporting purposes.
(3) Long-term Debt and Senior Notes
-------------------------------
Long-term Debt
--------------
The Company, through its subsidiary GCI Holdings, Inc. entered into
new $200,000,000 and $50,000,000 credit facilities ("Senior Loan
facilities") effective August 1, 1997 that mature on June 30, 2005
and bear interest at either Libor plus 0.75% to 2.5%, depending on
the leverage ratio of Holdings and certain of its subsidiaries, or at
the greater of the prime rate or the federal funds effective rate (as
defined) plus 0.05%, in each case plus an additional 0.0% to 1.375%,
depending on the leverage ratio of Holdings and certain of its
subsidiaries. $57,700,000 was borrowed under the Senior Loan
facilities at September 30, 1997. The Company is required to pay a
commitment fee equal to 0.375% per annum on the unused portion of the
commitment.
While Holdings may elect at any time to reduce amounts due and
available under the Senior Loan facilities, a mandatory prepayment is
required each quarter, beginning September 30, 2000 as follows:
Percentage of
Reduction of
Date of Payment Outstanding Facilities
--------------- ----------------------
September 30, 2000 3.750%
December 31, 2000 3.750%
March 31, 2001 3.750%
June 30, 2001 3.750%
September 30, 2001 3.750%
December 31, 2001 3.750%
March 31, 2002 5.000%
June 30, 2002 5.000%
September 30, 2002 5.000%
December 31, 2002 5.000%
March 31, 2003 5.000%
June 30, 2003 5.000%
September 30, 2003 5.000%
December 31, 2003 5.000%
March 31, 2004 5.625%
June 30, 2004 5.625%
September 30, 2004 5.625%
December 31, 2004 5.625%
10
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2005 7.500%
December 31, 2005 7.500% and all remaining
outstanding balances
The Senior Loan facilities contain, among others, covenants requiring
maintenance of specific levels of operating cash flow to indebtedness
and to interest expense. The Senior Loan facilities include
limitations on acquisitions and additional indebtedness, and prohibit
any direct or indirect distribution, dividend, redemption or other
payment to any person on account of any general or limited
partnership interest in, or shares of capital stock or other
securities of Holdings or any of its subsidiaries. Holdings was in
compliance with all Senior Loan facilities covenants during the
period commencing August 1, 1997 (date of the loans) through
September 30, 1997.
The Senior Loan facilities are collateralized by essentially all of
Holdings' assets as well as a pledge of Holdings' stock by GCI, Inc.
$3.4 million of the Senior Loan facilities have been used to provide
a letter of credit to secure payment of certain access charges
associated with the Company's provision of telecommunications
services within the state of Alaska.
In connection with the funding of the Senior Loan facilities,
Holdings paid bank fees and other expenses of approximately
$2,880,000, which will be amortized to interest expense over the life
of the agreement.
Senior Notes
------------
On August 1, 1997 GCI, Inc. issued $180,000,000 of 9.75% senior notes
due 2007. The notes were issued at face value. Net proceeds to GCI,
Inc. after deducting underwriting discounts and commissions totaled
$174,600,000. Issuance costs will be amortized to interest expense
over the term of the Senior Notes.
The notes are not redeemable prior to August 1, 2002. After August 1,
2002 the notes are redeemable at the option of GCI, Inc. under
certain conditions and at stated redemption prices. The notes include
limitations on additional indebtedness and prohibit payment of
dividends, payments for the purchase, redemption, acquisition or
retirement of GCI, Inc.'s stock, payments for early retirement of
debt subordinate to the note, liens on property, and asset sales.
Holdings was in compliance with all covenants during the period
commencing August 1, 1997 (date of the notes) through September 30,
1997.
Net proceeds from the stock (see note 4) and senior note offerings
and initial draws on the new senior loan facilities were used to
repay borrowings outstanding under the Company's then existing credit
facilities and to provide initial funding for construction of the
undersea fiber optic cable (see note 6). The Company expects to
borrow funds under its new credit facilities in the future to fund
capital expenditures and for other general corporate purposes.
The Company's interim telephony agreement that was outstanding at
December 31, 1997 matured on April 25, 1997. Since the entire
facility matured within the twelve-month period ending
11
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
December 31, 1997, the outstanding balance at December 31, 1996 was
included in current maturities of long-term debt.
(4) Stockholders' Equity
--------------------
During January 1997, holders of $10 million of convertible
subordinated notes exercised their conversion rights, which allowed
them to exchange their notes for GCI Class A common shares at a
conversion price of $6.50 per share. As a result, the note holders
were issued a total of 1,538,457 shares of GCI Class A common stock.
General Communication, Inc. issued 7,000,000 shares of its class A
common stock on August 1, 1997 for $7.25 per share, before deducting
underwriting discounts and commissions. Net proceeds to General
Communication, Inc. totaled $47,959,100.
(5) Commitments and Contingencies
-----------------------------
Satellite Transponders
----------------------
The Company entered into a purchase and lease-purchase option
agreement in August 1995 for the acquisition of satellite
transponders to meet its long-term satellite capacity requirements.
The balance payable upon expected delivery of the transponders in
1998 is dependent upon a number of factors. The Company does not
expect the remaining balance payable at delivery to exceed $41
million.
Litigation
----------
The Company is involved in various lawsuits and legal proceedings
that have arisen in the normal course of business. While the ultimate
results of these matters cannot be predicted with certainty,
management does not expect them to have a material adverse effect on
the financial position, results of operations or liquidity of the
Company.
Cable Service Rate Deregulation
-------------------------------
Beginning in April 1993, the Federal Communications Commission
("FCC") adopted regulations implementing the Cable Television
Consumer Protection and Competition Act of 1992. Included are rules
governing rates charged by cable operators for the basic service
tier, the installation, lease and maintenance of equipment (such as
converter boxes and remote control units) used by subscribers to
receive this tier and for cable programming services other than
programming offered on a per-channel or per-program basis (the
"regulated services"). Generally, the regulations require affected
cable systems to charge rates for regulated services that have been
reduced to prescribed benchmark levels, or alternatively, to support
rates using costs-of-service methodology.
The regulated services rates charged by the Company may be reviewed
by the State of Alaska, operating through the Alaska Public Utilities
Commission ("APUC") for basic service, or by the FCC for cable
programming service. Refund liability for basic service rates is
limited to a one-year
12
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
period. Refund liability for cable programming service rates may be
calculated from the date a complaint is filed with the FCC until the
rate reduction is implemented.
In order for the State of Alaska to exercise rate regulation
authority over the Company's basic service rates, 25% of a systems'
subscribers must request such regulation by filing a petition with
the APUC. At September 30, 1997, the State of Alaska has rate
regulation authority over the Juneau system's basic service rates.
(The Juneau system serves approximately 9% of the Company's total
basic service subscribers at September 30, 1997.) Juneau's current
rates have been approved by the APUC and there are no other pending
filings with the APUC, therefore, there is no refund liability for
basic service at this time.
Complaints by subscribers relating to cable programming service rates
were filed with, and accepted by, the FCC for certain franchise
areas; however, filings made in response to those complaints related
to the period prior to July 15, 1994 were approved by the FCC.
Therefore, the potential liability for cable programming service
refunds would be limited to the period subsequent to July 15, 1994
for these areas. Management of the Company believes that it has
complied in all material respects with the provisions of the FCC
rules and regulations and that the Company is, therefore, not liable
for any refunds. Accordingly, no provision has been made in the
financial statements for any potential refunds. The FCC rules and
regulations are, however, subject to judgmental interpretations, and
the impact of potential rate changes or refunds ordered by the FCC
could cause the Company to make refunds and/or to be in default of
certain debt covenants.
In February 1996, the Telecommunications Act of 1996 was signed into
federal law that impacts the cable industry. Most notably, the bill
allows cable system operators to provide telephony services, allows
telephone companies to offer video services, and provides for
deregulation of cable programming service rates by 1999. Management
of the Company believes the bill will not have a significant adverse
impact on the financial position or results of operations of the
Company.
Undersea Fiber Optic Cable Contract Commitment
----------------------------------------------
The Company signed a contract in July 1997 for construction of the
undersea portion of a $115 to $125 million fiber optic cable system
connecting the cities of Anchorage, Juneau and Seattle via a subsea
route. Subsea and terrestrial connections will extend the fiber optic
cable to Fairbanks via Whittier and Valdez. Construction efforts will
begin during the late summer of 1998 with commercial services
expected to commence in December 1998. Pursuant to the contract, the
Company paid $8.2 million August 1, 1997 and will pay the remaining
balance in installments through December 1998 based on completion of
certain key milestones. Approximately $40.3 million of proceeds from
the public offerings, net of the $8.2 million paid in August (see
note 3) were contributed to Alaska United. The use of such proceeds
is restricted to funding the construction and deployment of the fiber
optic cable system and is reported as Restricted Cash in the
accompanying Interim Condensed Consolidated Financial Statements. The
Company has received commitments for $75 million in bank financing to
fund the remaining cost of construction and deployment.
13
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
<TABLE>
( 7 ) Supplemental financial information (Amounts in thousands)
----------------------------------
<CAPTION>
(Unaudited)
- ------------------------------------------------------------------------------------------------ ------------
Nine-month periods ended September 30, 1997 1996
- ------------------------------------------------------------------------------------------------ ------------
Long- Long-
Distance Cable Local Combined Distance
------------ ----------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunication revenues $ 125,763 --- 255 126,018 115,832
Cable revenues --- 41,005 --- 41,005 ---
- ------------------------------------------------------------------------------------------------ ------------
Total revenues 125,763 41,005 255 167,023 115,832
- ------------------------------------------------------------------------------------------------ ------------
Cost of sales and services:
Distribution costs and costs of
services 75,999 --- 404 76,403 66,350
Programming and copyright
costs --- 9,411 --- 9,411 ---
- ------------------------------------------------------------------------------------------------ ------------
Total cost of sales and services 75,999 9,411 404 85,814 66,350
- ------------------------------------------------------------------------------------------------ ------------
Selling, general and administrative
expenses:
Operating and engineering 8,275 --- 294 8,569 7,550
Cable television, including
management fees of $822 --- 13,717 --- 13,717 ---
Sales and communications 10,375 --- 264 10,639 8,920
General and administrative 17,477 --- 1,281 18,758 14,047
Bad debts 1,865 302 --- 2,167 1,413
- ----------------------------------------------------------------------------------------------- ------------
Total selling, general and
administrative expenses 37,992 14,019 1,839 53,850 31,930
- ------------------------------------------------------------------------------------------------ ------------
Depreciation and amortization 7,543 9,903 49 17,495 5,616
- ------------------------------------------------------------------------------------------------ ------------
Operating income (loss) $ 4,229 7,672 (2,037) 9,864 11,936
================================================================================================ ============
</TABLE>
14
<PAGE>
PART I.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Interim Condensed Consolidated Financial Statements and the notes
thereto. As used herein, EBITDA consists of earnings before interest (net),
income taxes, depreciation, amortization and other income (expense). EBITDA is a
measure commonly used in the telecommunications and cable television industries
to analyze companies on the basis of operating performance. It is not a measure
of financial performance under generally accepted accounting principles and
should not be considered as an alternative to net income as a measure of
performance nor as an alternative to cash flow as a measure of liquidity.
OVERVIEW
Long Distance Telecommunications Services
- -----------------------------------------
The Company has historically reported revenues principally from the provision of
interstate and intrastate long distance telecommunications services to
residential, commercial and governmental customers and to other common carriers
(principally MCI Telecommunications, Inc. ("MCI") and U.S. Sprint ("Sprint")).
These services accounted for approximately 93.0% of the Company's
telecommunications services revenues during the first nine months of 1997. The
balance of telecommunications services revenues have been attributable to
corporate network management contracts, telecommunications equipment sales and
service and other miscellaneous revenues (including revenues from prepaid and
debit calling cards, the installation and leasing of customers' VSAT equipment
and fees charged to MCI and Sprint for certain billing services). Factors that
have the greatest impact on year-to-year changes in telecommunications services
revenues include the rate per minute charged to customers and usage volumes,
usually expressed as minutes of use. These factors in turn depend in part upon
economic conditions in Alaska. The economy of Alaska is dependent upon the
natural resource industries, in particular oil production, as well as tourism,
government and United States military spending.
The Company's telecommunications cost of sales and services has consisted
principally of the direct costs of providing services, including local access
charges paid to local exchange carriers ("LECs") for the origination and
termination of long distance calls in Alaska, fees paid to other long distance
carriers to carry calls that terminate in areas not served by the Company's
network (principally the lower 49 states, most of which calls are carried over
MCI's network, and international locations, which calls are carried principally
over Sprint's network), and the cost of equipment sold to the Company's
customers. During the first nine months of 1997, local access charges accounted
for 46.7% of telecommunications cost of sales and services, fees paid to other
long distance carriers represented 36.9%, satellite transponder lease and
undersea fiber maintenance costs represented 8.3%, enterprise services and
outsourcing costs represented 5.2%, and telecommunications equipment accounted
for 2.9% of telecommunications cost of sales and services.
The Company's telecommunications selling, general, and administrative expenses
have consisted of operating and engineering, service, sales and communications,
management information systems, general and administrative, legal and regulatory
expenses. Most of these expenses consist of salaries, wages and benefits of
personnel and certain other indirect costs (such as rent, travel, utilities and
certain equipment costs). A significant portion of telecommunications selling,
general, and administrative expenses, 27.3%
15
<PAGE>
during the nine months ended September 30, 1997, represents the cost of the
Company's advertising, promotion and market analysis programs.
Cable Services
- --------------
Following the cable system acquisitions effective October 31, 1996, the Company
now reports a significant level of revenues and EBITDA from the provision of
cable services. During the first nine months of 1997, cable revenues and EBITDA
represented 24.6% and 64.2%, respectively, of consolidated revenues and EBITDA.
The cable systems serve 21 communities and areas in Alaska, including the
state's three largest population centers, Anchorage, Fairbanks and Juneau.
The Company generates cable services revenues from three primary sources: (1)
programming services, including monthly basic or premium subscriptions and
pay-per-view movies or other one-time events, such as sporting events; (2)
equipment rentals or installation; and (3) advertising sales. During the nine
months ended September 30, 1997 programming services generated 86.0% of total
cable services revenues, equipment rental and installation fees accounted for
7.8% of such revenues, advertising sales accounted for 3.9% of such revenues,
and other services accounted for the remaining 2.3% of total cable services
revenues. The primary factors that contribute to year-to-year changes in cable
services revenues are average monthly subscription and pay-per-view rates, the
mix among basic, premium and pay-per-view services, and the average number of
subscribers during a given reporting period.
The cable systems' operating, selling, general and administrative expenses have
consisted principally of programming and copyright expenses, labor, maintenance
and repairs, marketing and advertising, rental expense, property taxes and
depreciation and amortization. In the first nine months of 1997 programming and
copyright expenses represented approximately 28.2% of total cable operating
expenses. Marketing and advertising costs represented approximately 1.7% of such
total expenses and depreciation and amortization represented 29.7% of such
expenses.
Local Services
- --------------
The Company began offering local exchange services initially in Anchorage during
late September 1997, and expects that local exchange services will represent
less than 1.0% of revenues in 1997 and less than 7.0% of revenues in 1998. In
the first nine months of 1997 operating and engineering expenses represented
approximately 15.6% of total local services operating expenses. Marketing and
advertising costs represented approximately 14.0% of such total expenses,
customer service, general and administrative costs represented approximately
67.8% of such total expenses, and depreciation and amortization represented 2.6%
of such total expenses. The Company expects that it will generate moderately
negative EBITDA from local exchange services during this time period.
PCS Services
- ------------
In 1995 the Company began developing plans for PCS wireless communications
service deployment and is currently evaluating various vendors for a proposed
PCS network. In 1997 the Company conducted a technical trial of its candidate
technology. Outside plant communications infrastructure work was undertaken
during the 1996 and 1997 construction seasons. Switching and other central
office installation was undertaken in 1997. The Company currently expects to
launch PCS service in Anchorage as early as 1999.
The Company anticipates that depreciation and amortization and interest expense
on a consolidated basis will be substantially higher in 1997 as compared to 1996
resulting primarily from the cable company acquisitions. As a result, the
Company anticipates recording a net loss in 1997.
16
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected financial data of the Company as a
percentage of total revenues for the periods indicated and the percentage
changes in such data as compared to the corresponding prior year period:
(Underlying data rounded to the nearest thousands)
<TABLE>
<CAPTION>
Percentage Change
-----------------
Nine Months Three Months
Nine Months Ended Three Months Ended 1997 vs. 1997 vs.
September 30, September 30, Nine Months Three Months
1996 1997 1996 1997 1996 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues
Telecommunications
services 100.0% 75.3% 100.0% 76.7% 8.6% 14.9%
Cable services 0.0% 24.6% 0.0% 22.9% --- ---
Local services 0.0% 0.1% 0.0% 0.4% --- ---
- -----------------------------------------------------------------------------------------------------------------
Total revenues 100.0% 100.0% 100.0% 100.0% 44.2% 49.9%
Cost of sales and services 57.3% 51.4% 57.5% 49.8% 29.3% 29.9%
Selling, general and 27.6% 32.2% 27.4% 33.7% 68.7% 84.1%
administrative expenses
Depreciation and
amortization 4.8% 10.5% 4.7% 10.0% 211.5% 218.3%
- -----------------------------------------------------------------------------------------------------------------
Operating income 10.3% 5.9% 10.4% 6.5% -17.4% -5.8%
Net earnings (loss) before
income taxes and
extraordinary loss 9.5% -1.7% 9.7% -1.4% -126.3% -121.4%
Loss on early extinguishment of
debt, net 0.0% 0.3% 0.0% 0.7% NA NA
Net earnings (loss) 5.5% -1.4% 5.5% -1.6% -135.5% -143.4%
Other Operating Data:
Cable operating income (1) NA 18.7% NA 19.5% NA NA
Cable EBITDA (1) NA 42.9% NA 42.8% NA NA
Local operating loss (2) NA -798.8% NA -231.0% NA NA
Local EBITDA (2) NA -779.6% NA -211.8% NA NA
Consolidated EBITDA 15.2% 16.4% 15.1% 16.5% 55.9% 63.9%
<FN>
- --------------------------------------
(1) Computed as a percentage of total cable services revenues.
(2) Computed as a percentage of total local services revenues.
</FN>
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 ("1997") COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996 ("1996")
REVENUES. Total revenues increased 49.9% from $38.7 million in 1996 to $58.0
million in 1997. Long distance transmission revenues from commercial,
residential, governmental, and other common carrier customers increased 14.7%
from $36.0 in 1996 to $41.3 million in 1997. This increase in revenues resulted
in part from a 9.4% increase in minutes of interstate and international traffic
carried, which traffic totaled
17
<PAGE>
160.9 million minutes during the quarter, and a 9.7% increase in minutes of
intrastate traffic, which traffic totaled 34.2 million minutes during the
quarter. The increases in traffic resulted from (1) an increase in services
provided to other common carriers (principally MCI and Sprint), which other
common carrier revenues increased 23.3% from $12.9 million in 1996 to $15.9
million in 1997, (2) growth in the underlying economy, (3) usage stimulation
resulting from reductions in rates, and (4) an expansion of the Company's
service area resulting from the turn-up of a number of new satellite earth
station facilities located in rural Alaska. Private line and private network
transmission revenues increased 24.2% from $3.3 million in 1996 to $4.1 million
in 1997. The Company reported nine months of cable services revenues in 1997
following its acquisition of the cable systems effective October 31, 1996. The
number of subscribers increased approximately 1,100 and the number of homes
passed by the cable systems increased approximately 571 during the three-month
period ended September 30, 1997. The increase in subscribers is largely
attributed to the seasonal return of customers during the fall and winter months
as customers come back inside from summer activities. Anchorage area basic rates
were increased approximately 4.4% in April 1997 to reduce margin compression
resulting from increasing programming costs.
The Company's average revenue per minute on long distance traffic increased
approximately 2.0 percent for the third quarter of 1997 as compared to the same
period of 1996. Average rate per minute increases resulted primarily from
increased calling card rates commencing May 1997 and a change in the Company's
traffic mix. Such increases were offset in part by the Company's promotion of,
and customers' acceptance of new calling plans offering discounted rates and
length of service rebates.
COST OF SALES AND SERVICES. Cost of sales and services totaled $22.2 million in
1996 and $28.9 million in 1997. Of this increase, $3.1 million resulted from
cable services programming and copyright charges incurred during 1997.
Transmission access and distribution costs, which represent cost of sales for
transmission services, increased 13.7% from $20.5 million in 1996 to $23.3
million in 1997 and amounted to approximately 56.9 percent and 56.4 percent of
transmission revenues in 1996 and 1997, respectively. The decrease in
distribution costs as a percentage of transmission revenues results primarily
from (1) reductions in access charges paid by the Company to other carriers for
distribution of its traffic, and (2) avoidance of access charges resulting from
the Company's distribution and termination of its traffic on its own network
instead of paying other carriers to distribute and terminate its traffic.
Changes in distribution costs as a percentage of revenues will also occur as the
Company's traffic mix changes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 84.0% from $10.6 million in 1996 to $19.5
million in 1997, and, as a percentage of total revenues, increased from 27.4% in
1996 to 33.6% in 1997. Selling, general and administrative expenses increased as
a result of (1) increased sales, advertising and telemarketing costs which
totaled $3.0 million in 1996 as compared to $3.8 million in 1997; (2) bad debt
expense totaling $556,000 in 1996 compared to $1.0 million in 1997 (directly
associated with increased revenues); and (3) increased costs totaling $2.7
million in engineering, operations, customer service, accounting, human
resources, legal and regulatory, and management information services. Such costs
were associated with the development and introduction, or planned introduction,
of new products and services including local exchange services, PCS services,
and Internet services. Cable services selling, general and administrative costs
totaled $4.4 million in 1997. Local services selling, general and administrative
costs totaled $627,000 in 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$4.0 million from $1.8 million in 1996 to $5.8 million in 1997. Of this
increase, $3.1 million resulted from the Company's acquisition of the cable
systems effective October 31, 1996, with the balance of the increase
attributable to the Company's $38.6 million investment in facilities during 1996
for which a full year of depreciation will be recorded during the year ending
December 31, 1997 and the investment of $40.7 million
18
<PAGE>
in facilities through September 30, 1997 for which a partial year of
depreciation is being recorded during 1997.
INTEREST EXPENSE, NET. Interest expense, net of interest income, increased from
$269,000 in 1996 to $4.6 million in 1997. This increase resulted primarily from
increases in the Company's average outstanding indebtedness incurred in
connection with its acquisition of the cable systems and investment in new
facilities during 1997, offset in part by increases in the amount of interest
capitalized during 1997.
INCOME TAX EXPENSE. Income tax expense decreased from $1.6 million in 1996 to a
benefit of $307,000 in 1997 due to the Company incurring a net loss before
income taxes and extraordinary item in 1997 as compared to net earnings in 1996.
LOSS ON EXTINGUISHMENT OF DEBT. The Company recorded a net loss on
extinguishment of debt of $433,000 in 1997 resulting from refinancing its
previously outstanding Senior Credit Facility effective August 1, 1997. The loss
resulted from the write-off of unamortized deferred debt issuance costs. The
loss is reported in the accompanying interim condensed consolidated financial
statements net of an income tax benefit of $268,000.
NINE MONTHS ENDED SEPTEMBER 30, 1997 ("1997") COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996 ("1996")
REVENUES. Total revenues increased 44.2% from $115.8 million in 1996 as compared
to $167.0 million in 1997. Long distance transmission revenues from commercial,
residential, other common carriers and governmental customers increased 10.4%
from $106.0 million in 1996 to $117.0 million in 1997. This increase reflected a
9.8% increase in interstate and international minutes of use to 463 million
minutes and a 9.9% increase in intrastate minutes of use to 100 million minutes.
Approximately $7.7 million of the long distance transmission revenue growth in
1997 was due to a 21.6% increase in revenues from other common carriers
(principally MCI and Sprint), from $35.7 million in 1996 to $43.4 million in
1997. Revenue growth in 1997 was also due to (1) a 11.3% increase in private
line and private network transmission services revenues, from $10.6 million in
1996 to $11.8 million in 1997; and (2) reporting nine months of cable services
revenues in 1997 totaling $41.0 million following the Company's acquisition of
the cable systems effective October 31, 1996.
The above increases in revenues were offset in part by a 2.8% reduction in the
Company's average revenue per minute on long distance traffic from $0.182 per
minute in 1996 to $0.177 per minute in 1997. The decrease in revenues per minute
resulted from the Company's promotion of and customers' enrollment in new
calling plans offering discounted rates and length of service rebates. Systems
sales and services revenues increased 2.7% from $7.3 million in 1996 to $7.5
million in 1997.
COST OF SALES AND SERVICES. Cost of sales and services was $66.4 million in 1996
and $85.8 million in 1997. As a percentage of total revenues, cost of sales and
services decreased from 57.3% in 1996 to 51.4% in 1997. The decrease in cost of
sales and services as a percentage of revenues during 1997 as compared to 1996
resulted primarily from the addition of cable television operations commencing
October 31, 1996 which has proportionately lower cost of sales and services as a
percentage of revenues than does telecommunication operations.
Transmission access and distribution costs increased 14.4% from $60.4 million in
1996 to $69.1 million in 1997 and amounted to approximately 57.0% and 59.1% of
transmission revenues in 1996 and 1997, respectively. The increase in
distribution costs as a percentage of transmission revenues results primarily
19
<PAGE>
from reduced average rate per minute billed to customers in 1997 as compared to
1996 without an offsetting reduction in the rate per minute billed to the
Company for access and termination services. Additionally, 1996 costs were
reduced by refunds received in the first and second quarters totaling
approximately $960,000 from a local exchange carrier and the National Exchange
Carriers Association in respect of earnings by them which exceeded regulatory
requirements. 1996 transmission access and distribution costs excluding these
refunds were 57.9% of transmission services revenues. Changes in distribution
costs as a percentage of revenues will also occur as the Company's traffic mix
changes. Increases in cost of products sold and network services cost of sales
as a proportion of the associated revenues also contributed to the increase in
1997 costs as compared to 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 69.0% from $31.9 million in 1996 to $53.9
million in 1997. As a percentage of total revenues, selling, general and
administrative expenses increased from 27.6% in 1996 to 32.3% in 1997. Selling,
general and administrative expenses increased as a result of increased sales and
customer service volumes, additional bad debt expense totaling $2.2 million in
1997 compared to $1.4 million in 1996 (directly associated with increased
revenues), and increased sales, advertising and telemarketing costs totaling
$10.6 million in 1997 compared to $8.9 million in 1996, due to the introduction
of new services, various marketing plans and other proprietary rate plans.
Additionally, selling, general and administrative expenses increased in 1997 due
to an increase of approximately $3.3 million in engineering, operations,
accounting, human resources, legal and regulatory, and management information
services expenses. Such costs were associated with the development and
introduction, or planned introduction, of new products and services including
local services, cable television services, rural message and data telephone
services, PCS services, and Internet services. Cable services selling, general
and administrative costs totaled $13.7 million in 1997. Local services selling,
general and administrative costs totaled $1.8 million in 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
212.5% from $5.6 million in 1996 to $17.5 million in 1997. Of this increase,
$9.9 million resulted from the Company's acquisition of the cable systems
effective October 31, 1996, with the balance of the increase attributable to the
Company's $38.6 million investment in facilities during 1996 for which a full
year of depreciation will be recorded during the year ending December 31, 1997
and the investment of $40.7 million in facilities through September 30, 1997 for
which a partial year of depreciation is being recorded during 1997.
INTEREST EXPENSE, NET. Interest expense, net of interest income, increased from
$898,000 in 1996 to $12.8 million in 1997. This increase resulted primarily from
increases in the Company's average outstanding indebtedness resulting primarily
from its acquisition of the cable systems and construction of new facilities in
rural Alaska, offset in part by increases in the amount of interest capitalized
during 1997.
INCOME TAX EXPENSE. Income tax expense decreased from $4.6 million in 1996 to a
benefit of $1.0 million in 1997 due to the Company incurring a net loss before
income taxes and extraordinary item in 1997 as compared to net earnings in 1996.
The Company's effective income tax rate decreased from 41.8% in 1996 to 36.6% in
1997 due to the net loss and the proportional amount of items that are
nondeductible for income tax purposes.
As a result of its acquisition of the cable systems, the Company acquired net
operating loss carryforwards ("NOL carryforwards") for income tax purposes
totaling $58.5 million which begin to expire in 2004 if not utilized. However,
the Company's utilization of these NOL carryforwards is subject to certain
limitations pursuant to Section 382 of the Internal Revenue Code. Because of the
limitation on the NOL carryforwards, the Company established an $8.1 million
valuation allowance to offset the gross amount of the deferred tax
20
<PAGE>
asset. The amount of the valuation allowance was based on an estimate of the
amount of the NOL carryforwards that will not be utilized, and the effective
income tax rate. The amount of deferred tax asset considered realizable,
however, could be reduced if estimates of future taxable income during the
carryforward periods are reduced.
LOSS ON EXTINGUISHMENT OF DEBT. The Company recorded a net loss on
extinguishment of debt of $433,000 in 1997 resulting from refinancing its
previously outstanding Senior Credit Facility effective August 1, 1997. The loss
resulted from the write-off of unamortized deferred debt issuance costs. The
loss is reported in the accompanying financial statements net of an income tax
benefit of $268,000.
SEASONALITY; FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The following chart provides selected unaudited statement of operations data
from the Company's quarterly results of operations during 1996 and 1997:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
----------------------------------------------------------
1996
----
<S> <C> <C> <C> <C> <C>
Revenues
Telecommunications services $ 37,969 39,199 38,664 39,587 155,419
Cable services --- --- --- 9,475 9,475
-----------------------------------------------------------
Total revenues 37,969 39,199 38,664 49,062 164,894
Operating income 3,947 3,970 4,017 4,475 16,409
Net earnings $ 2,137 2,150 2,140 1,035 7,462
===========================================================
Net earnings per share $ 0.09 0.09 0.09 0.02 0.27
===========================================================
Cable EBITDA $ --- --- --- 4,416 4,416
===========================================================
Consolidated EBITDA $ 5,834 5,888 5,829 8,267 25,818
===========================================================
21
<PAGE>
(Dollars in thousands, except per share amounts)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
----------------------------------------------------------
1997
----
Revenues
Telecommunications services $ 39,225 42,131 44,407 125,763
Cable services 13,656 14,055 13,294 41,005
Local services --- --- 255 255
----------------------------------- ------------
Total revenues 52,881 56,186 57,956 167,023
Operating income 3,292 2,786 3,786 9,864
Loss on early extinguishment
of debt --- --- 433 433
Net loss $ (525) (832) (928) (2,285)
=================================== ============
Net loss per share $ (0.01) (0.02) (0.02) (0.05)
=================================== ============
Cable EBITDA $ 6,025 5,863 5,687 17,575
=================================== ============
Consolidated EBITDA $ 9,412 8,394 9,553 27,359
=================================== ============
</TABLE>
Total revenues in the quarter ended September 30, 1997 were $58.0 million,
representing a 3.2% increase over total revenues in the second quarter of 1997
of $56.2 million. This increase in revenues resulted in part from (1) by a 5.5%
increase in telecommunications services revenues to $44.4 million in the third
quarter of 1997 from $42.1 million during the second quarter of 1997. This
increase is attributable in part to the increase in minutes of traffic carried
during the third quarter of 1997 of approximately 9.0 million minutes as
compared to the second quarter of 1997 (a 4.8% increase), and (2) an increase in
the average rate per minute billed during the third quarter of 1997 of
approximately $0.001 as compared to the second quarter of 1997 (a 0.6%
increase). Partially offsetting this increase was a decrease in cable services
revenues to $13.3 million in the third quarter of 1997 from $14.1 million in the
second quarter of 1997. As further described below, cable revenues are generally
lower during the summer months as compared to the winter months.
Operating expenses increased during the third quarter of 1997 as compared to the
second quarter of 1997 principally as a result of (1) operating and turn-up
costs, including rent and utilities, of the Company's new rural DAMA satellite
earth-station facilities, and (2) personnel, sales, engineering, operations,
customer service, management information systems, accounting, human resources,
legal and regulatory expenses associated with the development and introduction,
or planned introduction, of new products and services including local services,
PCS services and Internet services.
The Company expects that its EBITDA and EBITDA margins during the remainder of
1997 may improve due to (1) cable service rate increases beginning in April
1997, and (2) increased revenue generation from the Company's rural telephony
expansion and new service and product offerings to offset expenses generated by
these endeavors. The Company reported a net loss of $928,000 for the third
quarter of 1997 as compared to a net loss of $832,000 during the second quarter
of 1997. The net loss was attributable to (1) increased selling, general and
administrative costs incurred during the third quarter of 1997 as compared to
the second quarter of 1997, (2) increased interest expense, and (3) the
write-off of $701,000 in deferred debt issuance costs.
22
<PAGE>
Long distance revenues have historically been highest in the summer months as a
result of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial fishing, and oil and
gas activities. Cable television revenues, on the other hand, are higher in the
winter months because consumers spend more time at home and tend to watch more
television during these months. The Company's ability to implement construction
projects is also reduced during the winter months because of cold temperatures,
snow and short daylight hours.
ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards No. 128, Earnings Per Share, supersedes APB
Opinion No. 15, Earnings Per Share, and specifies the computation, presentation,
and disclosure requirements for earnings per share ("EPS") for entities with
publicly held common stock or common stock equivalents. The statement replaces
Primary EPS and Fully Diluted EPS with Basic EPS and Diluted EPS, respectively.
Basic EPS, unlike Primary EPS, excludes all dilution while Diluted EPS, like
Fully Diluted EPS, reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
Due to an immaterial difference between Primary and Fully Diluted EPS, the
Company has historically only presented a single EPS. The Company in the future
will present both Basic and Diluted EPS for income (loss) from continuing
operations and net income (loss). The statement is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
After adoption, all prior period EPS data will be restated. The adoption of the
new statement will have minimal effect on the Company's EPS.
In February 1997, the Accounting Standards Board issued SFAS No. 129, Disclosure
Of Information About Capital Structure. SFAS No. 129 consolidates the existing
guidance in authoritative literature relating to a company's capital structure.
SFAS No. 129 is effective for financial statements for periods ending after
December 15, 1997. Capital structure disclosures required by this standard
include liquidation preferences of preferred stock, information about the
pertinent rights and privileges of the outstanding equity securities, and the
redemption amounts for all issues of capital stock that are redeemable at fixed
or determinable prices on fixed or determinable dates. Management of the Company
does not expect that adoption of SFAS No. 129 will have a material impact on the
Company's financial statement disclosures.
In June 1997, the Accounting Standards Board issued SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Statement 130 is applicable to all
entities that provide a full set of financial statements consisting of a
statement of financial position, results of operations and cash flows. SFAS No.
130 is effective for interim and annual periods beginning after December 15,
1997. Management of the Company does not expect that adoption of SFAS No. 130
will have a material impact on the Company's financial statement disclosures.
In June 1997, the Accounting Standards Board issued SFAS No. 131, Financial
Reporting for Segments of a Business Enterprise which applies to all public
business enterprises. SFAS No. 131 specifies the computation, presentation, and
disclosure requirements for business segment information. SFAS No. 131
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, but retains the requirement to report information about major
customers. It amends SFAS No. 94, Consolidation of All Majority-Owned
Subsidiaries, to remove the special disclosure requirements for previously
unconsolidated subsidiaries. Statement 131 is effective for financial statements
for periods beginning after December 15, 1997. Management of the Company does
not expect that adoption of SFAS No. 131 will have a material impact on the
Company's financial statement disclosures.
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company reported cash flows from operating activities during the nine months
ended September 30, 1997 of $15.3 million, net of changes in the components of
working capital. Additional sources of cash during the nine months ended
September 30, 1997 included long-term borrowings of $260.7 million and class A
common stock offering proceeds totaling $50.8 million as further described
below. The Company's expenditures for property and equipment, including
construction in progress, totaled $24.8 million and $40.7 million during the
nine months ended September 30, 1996 and 1997, respectively. Uses of cash during
the first three quarters of 1997 included repayment of $229.9 million of
long-term borrowings and capital lease obligations, payment of deferred debt
issuance costs, underwriting fees and commissions totaling $13.3 million,
investment of $40.3 million in restricted cash, payment of a undersea fiberoptic
cable deposit totaling $8.2 million, and an increase in notes receivable of
$596,000.
Net receivables increased $6.3 million from December 31, 1996 to September 30,
1997 resulting from: (1) increased MTS revenues in 1997 as compared to 1996; (2)
increased amounts due from other common carriers attributed to growth in their
traffic carried by the Company; and (3) increased private line sales activity in
1997 as compared to 1996.
The Company reported a working capital deficit of $22.8 million as of December
31, 1996. The Company's then existing credit facility matured within the
following twelve-month period resulting in the outstanding balance as of
December 31, 1996 being included in current maturities of long-term debt. Except
for the classification of the Company's senior indebtedness as current, working
capital at December 31, 1996 totaled $4.6 million. Working capital at September
30, 1997 totaled $5.6 million, a $1.0 million increase from working capital
recomputed at December 31, 1996.
General Communication, Inc. issued 7.0 million shares of its class A common
stock on August 1, 1997 for $7.25 per share, before deducting underwriting
discounts and commissions. Net proceeds to General Communication, Inc. totaled
$47,959,100. Concurrently with the stock offering, $180.0 million of 9.75%
senior notes due 2007 were issued to the public by GCI, Inc., a newly created
wholly owned subsidiary of General Communication, Inc. Net proceeds to GCI, Inc.
after deducting underwriting discounts and commissions totaled $174,600,000.
Concurrently with the public offerings described above, GCI Holdings, Inc.
("Holdings", a newly created wholly-owned subsidiary of GCI, Inc.) entered into
new $200,000,000 and $50,000,000 credit facilities effective August 1, 1997. The
new facilities mature June 30, 2005 and bear interest at either Libor plus 0.75%
to 2.5%, depending on the leverage ratio of Holdings and certain of its
subsidiaries, or at the greater of the prime rate or the federal funds effective
rate (as defined) plus 0.05%, in each case plus an additional 0.0% to 1.375%,
depending on the leverage ratio of Holdings and certain of its subsidiaries.
$57,700,000 was drawn on the credit facilities as of September 30, 1997.
The new credit facilities and the public notes impose restrictions on the
operations and activities of the Company, including requirements that the
Company comply with certain financial covenants and financial ratios. Under the
credit facility, Holdings may not permit the ratio of senior debt to annualized
operating cash flow of Holdings and certain of its subsidiaries to exceed 3.5 to
1.0, total debt to annualized operating cash flow to exceed 7.0 to 1.0, and
annualized operating cash flow to interest expense to exceed 1.5 to 1.0. Each of
the foregoing ratios decreases in specified increments during the life of the
credit facility. The credit facility will also require Holdings to maintain a
ratio of annualized operating cash flow to debt service of Holdings and certain
of its subsidiaries of at least 1.25 to 1.0, and annualized operating cash flow
to fixed
24
<PAGE>
charges of at least 1.0 to 1.0 (which adjusts to 1.05 to 1.0 in April, 2003 and
thereafter). The credit facility will also limit capital expenditures of
Holdings and certain of its subsidiaries to no more than $55.0 million
(post-closing), $90.0 million, and $65.0 million in 1997, 1998 and 1999,
respectively. The public notes impose a requirement that the leverage ratio of
GCI, Inc. and certain of its subsidiaries will not exceed 7.5 to 1.0 prior to
December 31, 1999 and 6.0 to 1.0 thereafter, subject to the ability of GCI, Inc.
and certain of its subsidiaries to incur specified permitted indebtedness
without regard to such ratios.
Net proceeds from the public offerings and new credit facility were used to
retire amounts owing under the Company's existing credit agreements, fund $50
million in capital for use in constructing an undersea fiberoptic cable, and for
working capital requirements.
The Company anticipates that its capital expenditures in 1997 may total as much
as $75.0 million. Planned capital expenditures over the next five years include
$240.0 million to $260.0 million to fund expansion of long distance facilities,
(including approximately $40.0 million for satellite transponders and
approximately $115.0 to $125.0 million for new undersea fiber optic cable
facilities which will be financed by GCI Transport Co., Inc., a newly created
subsidiary of GCI Holdings, Inc.) between $140.0 million and $160.0 million to
fund development, construction and operating costs of its local exchange and PCS
networks and businesses; and between $65.0 million and $85.0 million to upgrade
its cable television plant and to purchase equipment for new cable television
services. Sources of funds for these planned capital expenditures include net
proceeds of the public offerings described above, internally generated cash
flows and borrowings under the Company's new credit facilities described above
and its separate committed financing for GCI Transport Co., Inc., all of which
funds will be necessary to complete the Company's planned capital expenditures.
Management expects that cash flow generated by the Company and borrowings under
its facilities will be sufficient to meet its planned capital expenditures and
working capital requirements. The Company's ability to invest in discretionary
capital and other projects will depend upon its future cash flows and access to
borrowings under its credit facilities.
INFLATION
The Company does not believe that inflation has a significant effect on its
operations.
25
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Information regarding pending legal proceedings to which the Company
is a party is included in Note 5 of Notes to Interim Condensed
Consolidated Financial Statements and is incorporated herein by
reference.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended September 30,
1997:
Report dated August 1, 1997 describing Alaska United Fiber System
Partnership's down payment on a financial commitment to proceed
with the construction of a $115 to $125 million fiber optic
submarine cable system linking the state of Alaska, with landings
in Juneau, Whittier and Valdez, Alaska, with the state of
Washington, with a landing in Richmond Beach at Puget Sound near
Seattle, Washington.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL COMMUNICATION, INC.
November 14, 1997 By: /s/ Ronald A. Duncan
- ------------------------ ----------------------
(Date) Ronald A. Duncan, President and Director
(Principal Executive Officer)
November 14, 1997 By: /s/ John M. Lowber
- ------------------------ --------------------
(Date) John M. Lowber, Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
November 14, 1997 By: /s/ Alfred J. Walker
- ------------------------ ----------------------
(Date) Alfred J. Walker, Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
27
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
INTERIM CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000808461
<NAME> GENERAL COMMUNICATION, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 46,565
<SECURITIES> 0
<RECEIVABLES> 35,948
<ALLOWANCES> 909
<INVENTORY> 3,213
<CURRENT-ASSETS> 49,338
<PP&E> 218,943
<DEPRECIATION> 53,986
<TOTAL-ASSETS> 531,059
<CURRENT-LIABILITIES> 43,693
<BONDS> 243,006
0
0
<COMMON> 172,719
<OTHER-SE> 31,675
<TOTAL-LIABILITY-AND-EQUITY> 531,059
<SALES> 0
<TOTAL-REVENUES> 167,023
<CGS> 0
<TOTAL-COSTS> 85,814
<OTHER-EXPENSES> 69,178
<LOSS-PROVISION> 2,167
<INTEREST-EXPENSE> 12,765
<INCOME-PRETAX> (2,901)
<INCOME-TAX> (1,049)
<INCOME-CONTINUING> (1,852)
<DISCONTINUED> 0
<EXTRAORDINARY> 433
<CHANGES> 0
<NET-INCOME> (2,285)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
