As filed with the Securities and Exchange Commission on May 15, 1998.
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 March 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 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 April 30, 1998 was:
45,341,813 shares of Class A common stock; and
4,062,520 shares of Class B common stock.
1
<PAGE>
INDEX
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
PAGE NO
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item l. Consolidated Financial Statements..........................................3
Consolidated Balance Sheets as of March 31, 1998
(unaudited) and December 31, 1997.......................................3
Consolidated Statements of Operations for the three
months ended March 31, 1998 (unaudited)
and 1997 (unaudited)....................................................5
Consolidated Statements of Stockholders' Equity
for the three months ended March 31, 1998
(unaudited) and 1997 (unaudited)........................................6
Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 (unaudited)
and 1997 (unaudited)....................................................7
Notes to Interim Condensed Consolidated Financial
Statements..............................................................8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................................26
Item 6. Exhibits and Reports on Form 8-K...........................................27
SIGNATURES................................................................................................28
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Unaudited)
March 31 December 31,
ASSETS 1998 1997
- -------------------------------------------------------------------- ----------------- -----------------
(Amounts in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,933 3,048
----------------- -----------------
Receivables:
Trade 33,633 29,599
Income taxes 7,612 4,752
Other 526 649
----------------- -----------------
41,771 35,000
Less allowance for doubtful receivables 1,185 1,070
----------------- -----------------
Net receivables 40,586 33,930
Prepaid and other current assets 2,893 2,520
Deferred income taxes, net 1,683 1,675
Inventories 2,575 2,164
Notes receivable 765 897
----------------- -----------------
Total current assets 52,435 44,234
Restricted cash (note 5) 26,254 39,406
----------------- -----------------
Property and equipment in service, net 181,021 165,993
Construction in progress 34,569 18,513
----------------- -----------------
Net property and equipment 215,590 184,506
----------------- -----------------
Other assets:
Intangible assets, net of amortization 245,073 246,534
Deferred loan and Senior Notes costs, net of amortization 10,170 9,379
Transponder deposit (note 5) 9,100 9,100
Undersea fiber optic cable deposit (note 5) --- 9,094
Notes receivable 1,424 1,331
Other assets, at cost, net of amortization 2,737 1,718
----------------- -----------------
Total other assets 268,504 277,156
----------------- -----------------
Total assets $ 562,783 545,302
================= =================
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
3 (Continued)
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
<CAPTION>
(Unaudited)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------------------------------------ ----------------- -----------------
(Amounts in thousands)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt (note 3) $ 1,669 1,634
Current maturities of obligations under capital leases 205 198
Accounts payable 21,664 25,107
Accrued interest 3,540 7,649
Accrued payroll and payroll related obligations 5,627 4,630
Accrued liabilities 5,437 6,019
Subscriber deposits and deferred revenues 4,225 3,898
Accrued income taxes 111 111
----------------- -----------------
Total current liabilities 42,478 49,246
Long-term debt, excluding current maturities (note 3) 272,045 248,450
Obligations under capital leases, including related party
obligations, excluding current maturities 937 990
Deferred income taxes, net of deferred income tax benefit 40,871 38,904
Other liabilities 3,384 3,273
----------------- -----------------
Total liabilities 359,715 340,863
----------------- -----------------
Stockholders' equity (note 4):
Common stock (no par):
Class A. Authorized 100,000,000 shares; issued and outstanding
45,335,248 and 45,279,045 shares at March 31,1998 and
December 31, 1997, respectively (note 4) 170,477 170,322
Class B. Authorized 10,000,000 shares; issued and outstanding
4,062,685 and 4,062,892 shares at March 31, 1998 and
December 31, 1997, respectively; convertible on a
share-per-share basis into Class A common stock 3,432 3,432
Less cost of 202,768 Class A common shares held in
treasury at March 31, 1998 and December 31, 1997 (1,039) (1,039)
Paid-in capital 4,515 4,425
Retained earnings 25,683 27,299
----------------- -----------------
Total stockholders' equity 203,068 204,439
----------------- -----------------
Commitments and contingencies (note 5)
Total liabilities and stockholders' equity $ 562,783 545,302
================= =================
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
4
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
1998 1997
------------------ -----------------
(Amounts in thousands except per share
amounts)
<S> <C> <C>
Revenues:
Telecommunication services $ 43,951 39,225
Cable services 14,201 13,656
------------------ -----------------
Total revenues 58,152 52,881
Cost of sales and services 27,315 27,168
Selling, general and administrative expenses 20,334 16,301
Depreciation and amortization 8,066 6,120
------------------ -----------------
Operating income 2,437 3,292
Interest expense, net 4,944 3,949
------------------ -----------------
Net loss before income taxes (2,507) (657)
Income tax benefit (891) (132)
------------------ -----------------
Net loss $ (1,616) (525)
================== =================
Basic net loss per common share $ (0.03) (0.01)
================== =================
Diluted net loss per common share $ (0.03) (0.01)
================== =================
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
5
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<CAPTION>
Class A
Shares of Common Class A Class B Shares
(Unaudited) 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, 1996 36,587 4,074 $ 113,421 3,432 (1,010) 4,229 29,482
Net loss --- --- --- --- --- --- (525)
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting --- --- --- --- --- 18 ---
purposes
Class B shares converted to Class A 3 (3) --- --- --- --- ---
Shares issued upon conversion of
convertible note 1,538 --- 9,983 --- --- --- ---
Shares purchased and held in Treasury --- --- --- --- (29) --- ---
Shares issued under stock option plan 31 --- 94 --- --- --- ---
-------------------------------------------------------------------------------
Balances at March 31, 1997 38,159 4,071 $ 123,498 3,432 (1,039) 4,247 28,957
===============================================================================
Balances at December 31, 1997 45,279 4,063 $ 170,322 3,432 (1,039) 4,425 27,299
Net earnings --- --- --- --- --- --- (1,616)
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting --- --- --- --- --- 10 ---
purposes
Shares issued under stock option plan 56 --- 170 --- --- 80 ---
Stock offering issuance costs (note 4) --- --- (15) --- --- --- ---
--------------------------------------------------------------------------------
Balances at March 31, 1998 45,335 4,063 $ 170,477 3,432 (1,039) 4,515 25,683
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
1998 1997
---------------- -----------------
(Amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,616) (525)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization 8,066 6,120
Deferred income tax expense 1,969 264
Deferred compensation and compensatory stock
options 168 (58)
Bad debt expense, net of write-offs 115 179
Other noncash income and expense items (26) 16
Change in operating assets and liabilities
(note 2) (14,342) (4,156)
---------------- -----------------
Net cash provided (used) by operating activities (5,666) 1,840
---------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment (28,167) (9,529)
Restricted cash investment 13,152 ---
Purchases of other assets (1,160) (197)
Notes receivable issued (30) (337)
Payments received on notes receivable 95 4
---------------- -----------------
Net cash used in investing activities (16,110) (10,059)
---------------- -----------------
Cash flows from financing activities:
Long-term borrowings - bank debt and leases 24,027 10,000
Repayments of long-term borrowings and capital lease
obligations (443) (10,448)
Stock offering issuance costs (note 4) (15) ---
Payment of debt issuance costs (1,078) ---
Proceeds from common stock issuance 170 77
Purchase of treasury stock --- (29)
---------------- -----------------
Net cash provided (used) by financing activities 22,661 (400)
---------------- -----------------
Net increase (decrease) in cash and cash equivalents 885 (8,619)
Cash and cash equivalents at beginning of period 3,048 13,349
---------------- -----------------
Cash and cash equivalents at end of period $ 3,933 4,730
================ =================
</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)
(1) General
(a) Organization
General Communication, Inc. ("GCI"), an Alaska corporation, was
incorporated in 1979. GCI, Inc., an Alaska corporation, was
incorporated in 1997 and is a wholly owned subsidiary of GCI. GCI
Holdings, Inc. ("Holdings") is a wholly owned subsidiary of GCI, Inc.
and was incorporated in 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. GCI, GCI, Inc., Holdings and GCC also provide
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. its
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.
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 in note 5. Alaska United is a
partnership wholly owned by the Company through GCI Fiber Co., Inc.
and Fiber Hold Co., Inc.
8 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(b) Net Loss Per Common Share
<TABLE>
Shares used to calculate net loss per common share consist of the
following (amounts in thousands):
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Weighted average common shares outstanding 49,190 43,167
Common equivalent shares outstanding --- ---
------------ -----------
49,190 43,167
============ ===========
</TABLE>
Common equivalent shares outstanding of 862,000 and 853,000 are
anti-dilutive at March 31, 1998 and 1997 and are not included in the
diluted net loss per share calculation.
(c) 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, 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 March 31, 1998 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998. 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, 1997.
9 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
<TABLE>
Changes in operating assets and liabilities consist of:
<CAPTION>
(Unaudited)
Three-month periods ended March 31, 1998 1997
-----------------------------------
------------------ ----------------
(Amounts in thousands)
<S> <C> <C>
Increase in receivables $ (6,771) (253)
Increase in prepaid and other current assets (373) (52)
Increase in inventory (411) (77)
Decrease in accounts payable (3,443) (1,357)
Increase (decrease) in accrued liabilities (582) 96
Increase (decrease) in accrued payroll and payroll
related obligations 997 (151)
Decrease in accrued interest (4,109) (2,357)
Increase in deferred revenues 327 (5)
Increase in other liabilities 23 ---
------------------ ----------------
$ (14,342) (4,156)
================== ================
</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.
No income taxes were paid during the three-month periods ended March
31, 1998 and 1997, respectively.
Interest paid totaled $10,800,000 and $6,300,000 during the
three-month periods ended March 31, 1998 and 1997, respectively.
(3) Long-term Debt
In January 1998 Alaska United closed a $75 million project finance
facility ("Fiber Facility") to construct a fiber optic cable system
connecting Anchorage, Fairbanks, Valdez, Whittier, Juneau and Seattle
as further described in note 5. The Fiber Facility provides up to $75
million in construction financing and will bear interest at either
Libor plus 3.0%, or at the Company's choice, the lender's prime rate
plus 1.75%. The interest rate will decline to Libor plus 2.5%-2.75%,
or at the Company's choice, the lender's prime rate plus 1.25%-1.5%
after the project completion date and when the loan balance is
$60,000,000 or less. Alaska United is required to pay a commitment
fee equal to 0.375% per annum on the unused portion of the
commitment. The Fiber Facility is a 10-year term loan that is
interest only for the first 5 years. The facility can be extended to
a 12 year term loan at any time between the second and fifth
anniversary of closing the facility if the Company can
10 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
demonstrate projected revenues from certain capacity commitments will
be sufficient to pay all operating costs, and interest and principal
installments based on the extended maturity.
The Fiber Facility contains, among others, covenants requiring
certain intercompany loans and advances in order to maintain specific
levels of cash flow necessary to pay operating costs, interest and
principal installments. Additional covenants pertain to the timely
completion of certain project construction milestones. The Fiber
Facility also contains a guarantee that requires, among other terms
and conditions, Alaska United complete the project by the completion
date and pay any non-budgeted costs of the project.
All of Alaska United's assets, as well as a pledge of the partnership
interests' owning Alaska United, collateralize the Fiber Facility.
On August 1, 1997 GCI, Inc. issued $180,000,000 of 9.75% senior notes
due 2007 ("Senior Notes"). The Senior 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 Senior Notes are not redeemable prior to August 1, 2002. After
August 1, 2002 the Senior Notes are redeemable at the option of GCI,
Inc. under certain conditions and at stated redemption prices. The
Senior 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. GCI, Inc. was in compliance with all covenants during
the period commencing August 1, 1997 (date of the notes) through
March 31, 1998.
(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.
GCI 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 GCI totaled $47,959,100.
(5) Commitments and Contingencies
Deferred Compensation Plan
During 1995, the Company adopted a non-qualified, unfunded deferred
compensation plan to provide a means by which certain employees may
elect to defer receipt of designated percentages or amounts of their
compensation and to provide a means for certain other
11 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
deferrals of compensation. The Company may, at its discretion,
contribute matching deferrals equal to the rate of matching selected
by the Company. Participants immediately vest in all elective
deferrals and all income and gain attributable thereto. Matching
contributions and all income and gain attributable thereto vest over
a six-year period. Participants may elect to be paid in either a
single lump sum payment or annual installments over a period not to
exceed 10 years. Vested balances are payable upon termination of
employment, unforeseen emergencies, death and total disability.
Participants are general creditors of the Company with respect to
deferred compensation plan benefits. Compensation deferred pursuant
to the plan totaled approximately $0 and $12,000 during the quarters
ended March 31, 1998 and 1997, respectively.
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 during
the third quarter of 1998 in addition to the $9.1 million deposit
previously paid is not expected 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 Reregulation
Beginning in April 1993, the Federal Communications Commission
("FCC") adopted regulations implementing the Cable Television
Consumer Protection and Competition Act of 1992 ("The Cable 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 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.
12 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 March 31, 1998, 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 March 31, 1998.) 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, a telecommunications bill 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 $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. Subsea 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 made progress payments of $9.1 million during
the year ended December 31, 1997 and $13.6 million during the
three-month period ended March 31, 1998. The Company will pay the
remaining balance in installments through December 1998 based on
completion of certain key milestones. Approximately $39.4 million of
proceeds from the Senior Notes offering (see note 3), net of the $9.1
million paid in 1997, 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
13 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financial Statements. The Company has secured up to $75 million in
bank financing to fund the remaining cost of construction and
deployment (see note 3).
Fiber Capacity Exchange
The Company and Kanas Telecom, Inc. ("Kanas") signed a contract
November 21, 1997 that provides for an exchange of fiber optic cable
capacity between Anchorage and Fairbanks via Valdez. The Company and
Kanas will trade "dark fiber" capacity connecting Fairbanks, Valdez,
Whittier and Anchorage. Each company will provide their own
electronic equipment to place their fiber into service. The Company
will provide Kanas with dark fiber from Valdez to Anchorage. Kanas
will provide the Company with dark fiber between Valdez and
Fairbanks.
(6) Supplemental financial information
<TABLE>
(Amounts in thousands)
<CAPTION>
(Unaudited) Three-month period ended March 31, 1998
------------------------------------------------
Long-
Distance Cable Local Combined
------------ ----------- --------- -------------
<S> <C> <C> <C> <C>
Revenues:
Telecommunication revenues $ 42,937 --- 1,014 43,951
Cable revenues --- 14,201 --- 14,201
------------ ----------- --------- -------------
Total revenues 42,937 14,201 1,014 58,152
------------ ----------- --------- -------------
Cost of sales and services:
Distribution costs and costs of
services 23,045 --- 875 23,920
Programming and copyright costs --- 3,395 --- 3,395
------------ ----------- --------- -------------
Total cost of sales and services 23,045 3,395 875 27,315
------------ ----------- --------- -------------
Contribution 19,892 10,806 139 30,837
------------ ----------- --------- -------------
Selling, general and administrative expenses:
Telephony operating and engineering 2,675 --- 262 2,937
Cable television, including
management fees of $188 --- 4,863 --- 4,863
Sales and communications 3,129 --- 267 3,396
General and administrative 6,907 --- 1,694 8,601
Bad debts 389 148 --- 537
------------ ----------- --------- -------------
Total selling, general and
administrative expenses 13,100 5,011 2,223 20,334
Depreciation and amortization 3,375 3,624 1,067 8,066
============ =========== ========= =============
Operating income (loss) $ 3,417 2,171 (3,151) 2,437
============ =========== ========= =============
</TABLE>
14 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Three-month period ended March 31, 1997
------------------------------------------------
Long-
Distance Cable Local Combined
------------ ----------- --------- -------------
<S> <C> <C> <C> <C>
Revenues:
Telecommunication revenues $ 39,225 --- --- 39,225
Cable revenues --- 13,656 --- 13,656
------------ ----------- --------- -------------
Total revenues 39,225 13,656 --- 52,881
------------ ----------- --------- -------------
Cost of sales and services:
Distribution costs and costs of
services 23,884 --- 118 24,002
Programming and copyright costs --- 3,166 --- 3,166
------------ ----------- --------- -------------
Total cost of sales and services 23,884 3,166 118 27,168
------------ ----------- --------- -------------
Contribution 15,341 10,490 (118) 25,713
------------ ----------- --------- -------------
Selling, general and administrative
expenses:
Telephony operating and engineering 2,792 --- --- 2,792
Cable television, including
management fees of $271 --- 4,368 --- 4,368
Sales and communications 2,864 --- 50 2,914
General and administrative 5,238 --- 466 5,704
Bad debts 426 97 --- 523
------------ ----------- --------- -------------
Total selling, general and
administrative expenses 11,320 4,465 516 16,301
Depreciation and amortization 2,623 3,497 --- 6,120
============ =========== ========= =============
Operating income (loss) $ 1,398 2,528 (634) 3,292
============ =========== ========= =============
</TABLE>
15
<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.
FACTORS AFFECTING FUTURE PERFORMANCE
Future operating results of the Company will depend upon many factors and
will be subject to various risks and uncertainties, including those set forth in
this and other sections of Form 10-Q. The information contained in Form 10-Q
includes forward-looking statements regarding the Company's future performance.
Future results of the Company may differ materially from any forward-looking
statement due to such assumptions and risks. Future performance cannot be
ensured.
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 Sprint Corporation ("Sprint")). These
services accounted for approximately 91.5% of the Company's telecommunications
services revenues during the first quarter of 1998. The balance of
telecommunications services revenues have been attributable to corporate network
management contracts, telecommunications equipment sales and service, Internet
services and other miscellaneous revenues (including revenues from prepaid and
debit calling cards, the installation and leasing of customers' very small
aperture terminal ("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 long distance 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 long distance 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
16 (Continued)
<PAGE>
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 quarter of 1998, local access
charges accounted for 38.8% of telecommunications cost of sales and services,
fees paid to other long distance carriers represented 35.2%, satellite
transponder lease and undersea fiber maintenance costs represented 10.1%,
enterprise services and outsourcing costs represented 7.4%, and
telecommunications equipment costs accounted for 2.8% of telecommunications cost
of sales and services.
The Company's long distance telecommunications selling, general, and
administrative expenses have consisted of operating and engineering, customer
service, sales and communications, management information systems, general and
administrative, and 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, insurance and property taxes). A
significant portion of telecommunications selling, general, and administrative
expenses, 23.9% during the first quarter of 1998, represents the cost of the
Company's advertising, promotion and market analysis programs.
Cable Services. During the first quarter of 1998, cable revenues and
EBITDA represented 24.4% and 55.2%, respectively, of consolidated revenues and
EBITDA. The cable systems serve 26 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 first
quarter of 1998 programming services generated 86.5% of total cable services
revenues, equipment rental and installation fees accounted for 7.6% of such
revenues, advertising sales accounted for 3.9% of such revenues, and other
services accounted for the remaining 2.0% 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' cost of sales and selling, general and administrative
expenses have consisted principally of programming and copyright expenses,
labor, maintenance and repairs, marketing and advertising, rental expense, and
property taxes. During the first quarter of 1998 programming and copyright
expenses represented approximately 40.4% of total cable cost of sales and
selling, general and administrative expenses. Marketing and advertising costs
represented approximately 12.3% of such total expenses.
Plant upgrades in Petersburg and Wrangell were completed during the first
quarter of 1998. A plant upgrade to 550 MHz began in Anchorage during the first
quarter of 1998 with completion expected during the second quarter of 1998.
Plant upgrades allow the Company to offer additional programming services and
value to its customers.
17 (Continued)
<PAGE>
Local Services. The Company began offering local exchange services in
Anchorage during late September 1997. Local exchange services revenues totaled
$1.0 million during the first quarter of 1998 representing 1.7% of total
revenues. The Company expects local services revenues to represent less than
6.0% of total revenues in 1998. During the first quarter of 1998 operating and
engineering expenses represented approximately 8.5% of total local services cost
of sales and selling, general and administrative expenses. Marketing and
advertising costs represented approximately 8.6% of such total expenses,
customer service, and general and administrative costs represented approximately
54.7% of such total expenses. The Company expects that it will continue to
generate operating losses and negative EBITDA from local exchange services
during 1998. Factors that have the greatest impact on year-to-year changes in
local services revenues include the rates charged to customers the number of
customers served.
Internet Services. The Company's statewide SchoolAccess services (Internet
access and related products and services for Alaska schools) commenced January
1998. SchoolAccess revenues totaled $903,000 during the first quarter of 1998
representing 1.6% of total revenues. The Company began offering retail Internet
services in April 1998. The Company expects Internet services revenues will
represent less than 3.0% of total revenues in 1998. Factors that have the
greatest impact on year-to-year changes in Internet services revenues include
the rates charged to customers the number of customers served.
PCS Services. The Company began developing plans for PCS wireless
communications service deployment in 1995 and is currently evaluating various
vendors for a proposed PCS network. In 1997 the Company conducted a technical
trial of its candidate technology. The Company currently expects to launch PCS
service in Anchorage in 1999, although it may be deferred beyond that date.
Depreciation and amortization and interest expense on a consolidated basis
is expected to be higher in 1998 as compared to 1997 resulting primarily from
additional depreciation on 1997 and 1998 capital expenditures and additional
outstanding long-term debt. As a result, the Company expects that it will
continue to record net losses in 1998.
18 (Continued)
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
The following table sets forth selected Statement of Operations data 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)
<CAPTION>
Quarter Ended Percentage
(Unaudited) March 31, Change
--------- ------
1997 vs.
1997 1998 1998
Statement of Operations Data: ------------ ------------- -------------
<S> <C> <C> <C>
Revenues:
Telecommunications services........... 74.2% 73.8% 9.5%
Cable services........................ 25.8% 24.4% 4.0%
Local services........................ --- 1.8% ---
------------ ------------- -------------
Total revenues........................... 100.0% 100.0% 10.0%
Cost of sales and services........... 51.4% 47.0% 0.5%
Selling, general and administrative
expenses.......................... 30.8% 35.0% 24.7%
Depreciation and amortization........ 11.6% 13.9% 31.8%
------------ ------------- -------------
Operating income......................... 6.2% 4.2% (26.0)%
------------ ------------- -------------
Net loss before income taxes............. (1.2)% (4.3)% 281.6%
------------ ------------- -------------
Net loss (1.0)% (2.8)% 207.8%
============ ============= =============
Other Operating Data:
Cable operating income (1)........... 18.5% 15.3% (14.1)%
Cable EBITDA (1)........................ 44.1% 40.8% (3.8)%
Local operating loss (2)............. --- (310.7)% 397.0%
Local EBITDA (2).................... --- (205.5)% 228.7%
Consolidated EBITDA.................. 17.8% 18.1% 11.6%
<FN>
--------------------------
(1) Computed as a percentage of total cable services revenues.
(2) Computed as a percentage of total local services revenues.
</FN>
</TABLE>
19 (Continued)
<PAGE>
THREE MONTHS ENDED March 31, 1998 ("1998") COMPARED TO THREE MONTHS ENDED MARCH
31, 1997 ("1997")
REVENUES. Total revenues increased 10.0% from $52.9 million in 1997 to
$58.2 million in 1998. Long distance transmission revenues from commercial,
residential, governmental, and other common carrier customers increased 8.3%
from $36.3 million in 1997 to $39.3 million in 1998. This increase reflected a
5.6% increase in interstate minutes of use to 158.2 million minutes and a 3.1%
increase in intrastate minutes of use to 33.0 million minutes. Long distance
revenue growth in 1998 was largely due to a 7.5% increase in revenues from other
common carriers (principally MCI and Sprint), from $13.4 million in 1997 to
$14.4 million in 1998 and a 25.0% increase in private line and private network
transmission services revenues, from $3.6 million in 1997 to $4.5 million in
1998. The Company's average rate per minute on long distance traffic was
constant at $0.173 per minute in 1998 as compared to 1997. Cable revenues
increased 3.6% from $13.7 million in 1997 to $14.2 million in 1998 resulting
primarily from a 4.0% increase in basic subscribers of approximately 4,200 as of
March 31, 1998 as compared to March 31, 1997. The number of homes passed by the
cable systems increased approximately 940 during the three-month period ended
March 31, 1998. The Company began offering local services in Anchorage in
September 1997 with first quarter 1998 revenues totaling $1.0 million.
Product sales and network services revenues increased 4.2% from $2.4
million in 1997 to $2.5 million in 1998, primarily due to increased network
services revenues in 1998 as compared to 1997.
COST OF SALES AND SERVICES. Cost of sales and services totaled $27.2
million in 1997 and $27.3 million in 1998. As a percentage of total revenues,
cost of sales and services decreased from 51.4% in 1997 to 47.0% in 1998. The
decrease in cost of sales and services as a percentage of revenues is primarily
attributed to: 1) a refund received in the first quarter of 1998 totaling
approximately $1.1 million from a local exchange carrier in respect of its
earnings that exceeded regulatory requirements, 2) reductions in access charges
paid by the Company to other carriers for distribution of its traffic, 3)
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, and 4) changes in the Company's product
mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 24.7% from $16.3 million in 1997 to $20.3
million in 1998, and, as a percentage of revenues, increased from 30.8% in 1997
to 35.0% in 1998. This increase resulted from:
1. Operating, engineering, sales, customer service and
administrative costs totaling $516,000 in 1997 as compared to
$2.2 million in 1998 associated with the Company's local
services segment which initiated service in September 1997. The
first quarter increase was necessary to provide the operations,
engineering, customer service and support infrastructure
necessary to accommodate the expected growth in the Company's
local services customer base.
2. Increased telecommunication general and administrative expenses
of $13.1 million in 1998 as compared to $11.3 million in 1997
due to increased personnel and other costs in customer service,
engineering, operations, accounting, human resources, legal and
20 (Continued)
<PAGE>
regulatory, and management information services. Cost increases
were associated with the development, introduction, or planned
introduction, and support of new products and services including
rural message and data telephone services, PCS services, and
Internet services. Increased customer service expenses were
associated with support of increased sales volumes and
expenditures necessary for continuing integration of customer
service operations across product lines.
3. Increased telecommunication segment sales, advertising and
telemarketing costs totaling $2.9 million in 1997 compared to
$3.1 million in 1998. Increased selling costs were associated
with the introduction of various marketing plans and other
proprietary rate plans and cross promotion of products and
services.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 31.8% from $6.1 million in 1997 to $8.1 million in 1998. The increase
is attributable to the Company's $64.6 million investment in facilities during
1997 for which a full year of depreciation will be recorded during 1998 and the
first quarter 1998 facilities investment of $28.2 million.
INTEREST EXPENSE, NET. Interest expense, net of interest income, increased
25.2% from $3.9 million in 1997 to $4.9 million in 1998. This increase resulted
from increases in the Company's average outstanding indebtedness resulting
primarily from construction of new long distance and local telecommunication
equipment and facilities and expansion and upgrades of cable television
facilities. Such increases were offset in part by increases in the amount of
interest capitalized during 1998.
INCOME TAX BENEFIT. Income tax benefit increased from $132,000 in 1997 to
$891,000 in 1998 due to an increase in the net loss before income taxes in 1998
as compared to 1997. The Company's effective income tax rate increased from
20.1% in 1997 to 35.5% in 1998 due to the increased net loss and the
proportional amount of items that are nondeductible for income tax purposes.
As a result of its acquisition of the Cable Companies, the Company has
available net operating loss carryforwards for income tax purposes totaling
$37.6 million at March 31, 1998 which begin to expire in 2004 if not utilized.
The Company's utilization of these carryforwards is subject to certain
limitations pursuant to section 382 of the Internal Revenue Code.
The amount of deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward periods are reduced. The Company estimates that its effective
income tax rate for financial statement purposes will be approximately 36% in
1998. The Company expects that its operations will generate net income before
income taxes during the carryforward periods to allow utilization of loss
carryforwards for which no allowance has been established.
21 (Continued)
<PAGE>
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
<TABLE>
The following chart provides selected unaudited statement of operations
data from the Company's quarterly results of operations during 1997 and 1998:
<CAPTION>
(Dollars in thousands, except per share amounts)
First Second Third Fourth Total
(Unaudited) Quarter Quarter Quarter Quarter Year
------------------------------------------------------------------------------
1997
----
<S> <C> <C> <C> <C> <C> <C>
Revenues
Telecommunications services $ 39,225 42,131 44,407 42,271 168,034
Cable services 13,656 14,055 13,294 14,160 55,165
Local services --- --- 255 355 610
------------------------------------------------------------------------------
Total revenues 52,881 56,186 57,956 56,786 223,809
Operating income 3,292 2,786 3,786 5,518 15,382
Extraordinary item, net of income tax
benefit --- --- 433 88 521
Net income (loss) $ (525) (832) (928) 102 (2,183)
==============================================================================
Basic net earnings (loss) per share $ (0.01) (0.02) (0.02) 0.00 (0.05)
==============================================================================
Diluted net earnings (loss) per share $ (0.01) (0.02) (0.02) 0.00 (0.05)
==============================================================================
Other financial data:
Cable EBITDA $ 6,025 5,863 5,687 6,168 23,743
==============================================================================
Local EBITDA $ (634) (814) (540) (2,443) (3,797)
==============================================================================
Consolidated EBITDA $ 9,412 8,394 9,553 11,790 39,149
==============================================================================
1998
----
Revenues
Telecommunications services $ 42,937 42,937
Cable services 14,201 14,201
Local services 1,014 1,014
------------------------------------------------------------------------------
Total revenues 58,152 58,152
Operating income 2,437 2,437
Net loss $ (1,616) (1,616)
==============================================================================
Basic net loss per share $ (0.03) (0.03)
==============================================================================
Diluted net loss per share $ (0.03) (0.03)
==============================================================================
Other financial data:
Cable EBITDA $ 5,795 5,795
==============================================================================
Local EBITDA $ (2,084) (2,084)
==============================================================================
Consolidated EBITDA $ 10,503 10,503
==============================================================================
</TABLE>
22 (Continued)
<PAGE>
Total revenues for the quarter ended March 31, 1998 were $58.2 million,
representing a 2.5% increase from total revenues in the fourth quarter of 1997
of $56.8 million. This increase in total revenues resulted from the following:
1. A 1.4% increase in telecommunications services revenues to $42.9
million in the first quarter of 1998 from $42.3 million during the
fourth quarter of 1997. This increase is attributable in part to an
increase in minutes of traffic carried during the first quarter of
1998 of approximately 5.6 million minutes as compared to the fourth
quarter of 1997 (a 3.0% increase).
2. An increase in Internet revenues included in the Telecommunications
segment totaling $800,000 in 1998.
3. An increase in local services revenues totaling $659,000 in 1998.
4. These increases were offset, in part, by a reduction in the average
rate per minute billed by the company during the first quarter of
1998 of approximately $0.003 as compared to the fourth quarter of
1997 (a 0.6% decrease).
Cost of sales and services for the quarter ended March 31, 1998 totaled
$27.3 million, representing a 7.9% increase from total cost of sales and
services in the fourth quarter of 1997 of $25.3 million. Increased cost of sales
resulted from:
1. A 1.4% increase in long-distance telecommunications revenues.
2. An increase in local services costs totaling $1.0 million in 1998.
3. Universal Service Fund costs totaling $665,000 in 1998.
4. An increase in Internet costs included in the Telecommunications
segment totaling $368,000 in 1998.
5. These increases were offset, in part, by a refund in the first
quarter of 1998 aggregating approximately $1.1 million from a local
exchange carrier in respect of its earnings that exceeded regulatory
requirements.
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. Local service operations are not
expected to exhibit significant seasonality. 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
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. This new standard requires companies to disclose
segment data based on how management makes decisions about allocating resources
to segments and how it measures segment performance. SFAS 131 requires companies
to disclose a measure of segment profit or loss, segment assets, and
reconciliations to consolidated totals. It also requires entity-wide disclosures
about a company's products and services, its major customers and the material
countries in which it holds assets and
23 (Continued)
<PAGE>
reports revenues. Statement 131 is effective for financial statements for
periods beginning after December 15, 1997. Management of the Company expects
that adoption of SFAS No. 131 will not have a material impact on the Company's
year-end 1998 financial statement disclosures.
In February 1998, the Accounting Standards Board issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS
132 standardizes the disclosure requirements for pensions and postretirement
benefits where practical. It also eliminates certain disclosures and requires
additional information on changes in benefit obligations and fair values of plan
assets. The Company will adopt SFAS 132 in its 1998 year-end financial
statements. SFAS 132 is not expected to have a significant effect on the
Company's pension and postretirement benefit plan disclosures.
LIQUIDITY AND CAPITAL RESOURCES
The Company's first quarter 1998 ("1998") cash used by operating
activities totaled $5.7 million, net of changes in the components of working
capital. Sources of cash during 1998 included long-term borrowings of $24.0
million and class A common stock sales proceeds totaling $170,000. The Company's
expenditures for property and equipment, including construction in progress,
totaled $9.5 million and $28.2 million for the quarters ended March 31, 1997 and
1998, respectively. Uses of cash during 1998 included repayment of $443,000 of
long-term borrowings and capital lease obligations, payment of deferred debt
issuance costs totaling $1.1 million and an increase in other assets of $1.2
million.
Net receivables increased $6.7 million from December 31, 1997 to March 31,
1998 resulting from increased revenues in 1998 as compared to 1997 and an
increase in refundable income taxes in 1998 of $2.9 million.
Accounts payable decreased $3.4 million and accrued interest decreased
$4.1 million from December 31, 1997 to March 31, 1998 resulting from the
Company's payment of amounts accrued at December 31, 1997 during the first
quarter of 1998.
Working capital at March 31, 1998 totaled $10.0 million, a $15.0 million
increase from the working capital deficit of $5.0 million at December 31, 1997.
The increase in working capital is primarily attributed to 1) payment of
accounts payable and accrued interest at December 31, 1997 with cash generated
by operating activities, 2) payment of amounts accrued for facilities expansion
and equipment at December 31, 1997 with cash generated by operating activities
and cash obtained through the Company's credit agreements, and 3) increases in
trade accounts receivable and refundable income taxes.
On January 27, 1998 Alaska United closed a $75 million project finance
facility ("Fiber Facility") to construct a fiber optic cable system connecting
Anchorage, Fairbanks, Valdez, Whittier, Juneau and Seattle (see notes 3 and 5 to
the accompanying Notes to Interim Condensed Consolidated Financial Statements).
The Fiber Facility provides up to $75 million in construction financing and will
bear interest at either Libor plus 3.0%, or at the Company's choice, the
lender's prime rate plus 1.75%. The interest rate will decline to Libor plus
2.5%-2.75%, or at the Company's choice, the lender's prime rate plus 1.25%-1.5%
after the project completion date and when the loan balance is
24 (Continued)
<PAGE>
$60,000,000 or less. Alaska United is required to pay a commitment fee equal to
0.375% per annum on the unused portion of the commitment. The Fiber Facility is
a 10-year term loan that is interest only for the first 5 years. The facility
can be extended to a 12 year term loan at any time between the second and fifth
anniversary of closing the facility if the Company can demonstrate projected
revenues from certain capacity commitments will be sufficient to pay all
operating costs, and interest and principal installments based on the extended
maturity. $1.0 million was borrowed under the facility at March 31, 1998.
The Fiber Facility contains, among others, covenants requiring certain
intercompany loans and advances in order to maintain specific levels of cash
flow necessary to pay operating costs, interest and principal installments.
Additional covenants pertain to the timely completion of certain project
construction milestones. The Fiber Facility also contains a guarantee that
requires, among other terms and conditions, Alaska United complete the project
by the completion date and pay any non-budgeted costs of the project. All of
Alaska United's assets, as well as a pledge of the partnership interests' owning
Alaska United, collateralize the Fiber Facility.
The Company's expenditures for property and equipment, including
construction in progress, totaled $28.2 million and $9.5 million during the
first quarters of 1998 and 1997, respectively. The Company anticipates that its
capital expenditures in 1998 may total as much as $225.0 million, including
approximately $40.0 million for satellite transponders and approximately $125.0
million for new undersea fiber optic cable facilities. Planned capital
expenditures over the next five years include $50.0 million to $70.0 million to
fund expansion of long distance facilities, between $120.0 million and $140.0
million to fund development, construction and operating costs of its local
exchange and PCS networks and businesses; and between $55.0 million and $65.0
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 internally generated cash flows and borrowings under the
Company's credit facilities including borrowings under the new $75 million
project financing described above. All such funds will be necessary to complete
the Company's capital expenditure plans.
The Alaska United project will provide a high capacity fiber optic link
between Fairbanks, Anchorage, Valdez, and Juneau, Alaska, and the lower 48
states through Seattle, Washington. Its initial capacity will be more than five
times the capacity of Alaska's current undersea fiber to the lower 48. After a
preliminary route survey was completed and initial cost components determined, a
detailed sea floor survey was commissioned. On August 1, 1997 the Company issued
a down payment to TSS to begin construction. Manufacturing of the cable and its
electronics has been underway since that time. The cable is expected to be laid
from August to October 1998. Testing will occur after that, and services are
expected to commence in December 1998.
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. Management anticipates that cash flow generated by the
Company and borrowings under its credit facilities will be sufficient to meet
its planned capital expenditures and working capital requirements
25 (Continued)
<PAGE>
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 amount payable upon expected delivery of
the transponders during the third quarter of 1998 is not expected to exceed $41
million.
YEAR 2000 COSTS
The "Year 2000" issue affects the Company's installed computer systems,
network elements, software applications, and other business systems that have
time-sensitive programs that may not properly reflect or recognize the year
2000. Because many computers and computer applications define dates by the last
two digits of the year, "00" may not be properly identified as the year 2000.
This error could result in miscalculations or system failures.
The Company has established a year 2000 task force to coordinate the
identification, evaluation, and implementation of changes to financial and
operating computer systems and applications necessary to achieve a year 2000
date conversion with no effect on customers or disruption to business
operations. These actions are necessary to insure that the systems and
applications will recognize and process the year 2000 and beyond. Major areas of
potential business impact have been identified and are being assessed, and
initial conversion efforts are underway using both internal and external
resources.
The Year 2000 issue may also affect the systems and applications of the
Company's customers and vendors. The Company is also contacting others with whom
it conducts business to receive the appropriate warranties and assurances that
those third parties are, or will be, Year 2000 compliant.
The total cost of modifications and conversions is not known at this time.
The Company's management estimates that the incremental cost of compliance over
the cost of normal software upgrades and replacements and its effect on the
Company's future results of operations totals approximately $3 million in each
of 1998 and 1999, subject to further review as part of the detailed conversion
planning. The cost of modifications and conversions is being expensed as
incurred. 1998 Costs incurred through March 31 totaled approximately $80,000.
If compliance is not achieved in a timely manner, the Year 2000 issue
could have a material effect on the Company's operations. However, the Company
is focusing on identifying and addressing all aspects of its operations that may
be affected by the Year 2000 issue and is addressing the most critical
applications first. As a result, the Company's management does not believe its
operations will be materially adversely affected.
Funds for year 2000 costs are expected to be provided from the Company's
operating activities and credit facilities. Management must balance the
requirements for funding discretionary capital expenditures with required year
2000 efforts given its limited resources.
INFLATION
The Company does not believe that inflation has a significant effect on
its operations.
26
<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 March
31, 1998 - None
---------------------
* Filed herewith.
27
<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.
May 12, 1998 By: /s/ Ronald A. Duncan
- --------------------------------- --------------------------------
(Date) Ronald A. Duncan, President
and Director
(Principal Executive Officer)
May 12, 1998 By: /s/ John M. Lowber
- --------------------------------- --------------------------------
(Date) John M. Lowber, Senior Vice
President and Chief Financial
Officer
(Principal Financial Officer)
May 12, 1998 By: /s/ Alfred J. Walker
- --------------------------------- --------------------------------
(Date) Alfred J. Walker, Vice President
and Chief Accounting Officer
(Principal Accounting Officer)
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
INTERIM CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND THE INTERIM CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 30,187
<SECURITIES> 0
<RECEIVABLES> 41,771
<ALLOWANCES> 1,185
<INVENTORY> 2,575
<CURRENT-ASSETS> 52,435
<PP&E> 280,172
<DEPRECIATION> 64,582
<TOTAL-ASSETS> 562,783
<CURRENT-LIABILITIES> 42,478
<BONDS> 272,982
0
0
<COMMON> 172,870
<OTHER-SE> 30,198
<TOTAL-LIABILITY-AND-EQUITY> 562,783
<SALES> 0
<TOTAL-REVENUES> 58,152
<CGS> 0
<TOTAL-COSTS> 27,315
<OTHER-EXPENSES> 27,863
<LOSS-PROVISION> 537
<INTEREST-EXPENSE> 5,472
<INCOME-PRETAX> (2,507)
<INCOME-TAX> (891)
<INCOME-CONTINUING> (1,616)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,616)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
