As filed with the Securities and Exchange Commission on August 14, 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 June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File 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 July 31, 1998 was:
45,397,961 shares of Class A common stock; and
4,062,520 shares of Class B common stock.
1
INDEX
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
PAGE NO
-------
PART I. FINANCIAL INFORMATION
Item l. Consolidated Financial Statements..........................................3
Consolidated Balance Sheets as of June 30, 1998
(unaudited) and December 31, 1997.......................................3
Consolidated Statements of Operations for the three
and six-month periods ended June 30, 1998 (unaudited)
and 1997 (unaudited)....................................................5
Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 1998
(unaudited) and 1997 (unaudited)........................................6
Consolidated Statements of Cash Flows for the six
months ended June 30, 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..........................................................31
Item 4. Submission of Matters to a Vote of Security Holders........................31
Item 6. Exhibits and Reports on Form 8-K...........................................32
SIGNATURES................................................................................................33
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30 December 31,
ASSETS 1998 1997
- -------------------------------------------------------------------- ----------------- -----------------
(Amounts in thousands)
Current assets:
Cash and cash equivalents $ 274 3,048
----------------- -----------------
Receivables:
Trade 36,798 29,599
Income taxes 8,870 4,752
Other 385 649
----------------- -----------------
46,053 35,000
Less allowance for doubtful receivables 1,058 1,070
----------------- -----------------
Net receivables 44,995 33,930
Prepaid and other current assets 1,942 2,520
Deferred income taxes, net 3,692 1,675
Inventories 2,857 2,164
Notes receivable 260 897
----------------- -----------------
Total current assets 54,020 44,234
Restricted cash (note 4) --- 39,406
----------------- -----------------
Property and equipment in service, net 176,974 165,993
Construction in progress 98,615 18,513
----------------- -----------------
Net property and equipment 275,589 184,506
----------------- -----------------
Other assets:
Intangible assets, net of amortization 243,839 246,534
Deferred loan and Senior Notes costs, net of amortization
10,325 9,379
Transponder deposit (note 4) 9,100 9,100
Undersea fiber optic cable deposit (note 4) --- 9,094
Notes receivable 1,411 1,331
Other assets, at cost, net of amortization 3,663 1,718
----------------- -----------------
Total other assets 268,338 277,156
----------------- -----------------
Total assets $ 597,947 545,302
================= =================
See accompanying notes to interim condensed consolidated financial statements.
3 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------------------------------------------------------------ ----------------- -----------------
(Amounts in thousands)
Current liabilities:
Current maturities of long-term debt (note 3) $ 1,706 1,634
Current maturities of obligations under capital leases 211 198
Accounts payable 23,319 25,107
Accrued interest 8,449 7,649
Accrued payroll and payroll related obligations 5,945 4,630
Accrued liabilities 6,157 6,019
Subscriber deposits and deferred revenues 4,440 3,898
Accrued income taxes --- 111
----------------- -----------------
Total current liabilities 50,227 49,246
Long-term debt, excluding current maturities (note 3) 299,953 248,450
Obligations under capital leases, including related party
obligations, excluding current maturities 884 990
Deferred income taxes, net of deferred income tax benefit 42,992 38,904
Other liabilities 3,352 3,273
----------------- -----------------
Total liabilities 397,408 340,863
----------------- -----------------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000,000 shares; issued and outstanding
45,342,813 and 45,279,045 shares at June 30, 1998 and
December 31, 1997, respectively 170,492 170,322
Class B. Authorized 10,000,000 shares; issued and outstanding
4,062,520 and 4,062,892 shares at June 30, 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 347,958 and 202,768 Class A common shares held in
treasury at June 30, 1998 and December 31,
1997, respectively (1,607) (1,039)
Paid-in capital 4,605 4,425
Retained earnings 23,617 27,299
----------------- -----------------
Total stockholders' equity 200,539 204,439
----------------- -----------------
Commitments and contingencies (note 4)
Total liabilities and stockholders' equity $ 597,947 545,302
================= =================
See accompanying notes to interim condensed consolidated financial
statements.
4
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------------- -------------- ---------------- ----------------
(Amounts in thousands, except per share amounts)
Revenues:
Telecommunication services $ 48,900 42,131 92,851 81,356
Cable services 14,041 14,055 28,242 27,711
-------------- -------------- ---------------- ----------------
Total revenues 62,941 56,186 121,093 109,067
Cost of sales and services 29,355 29,778 56,670 56,946
Selling, general and administrative 23,543 18,014 43,877 34,315
Depreciation and amortization 8,596 5,608 16,662 11,728
-------------- -------------- ---------------- ----------------
Operating income 1,447 2,786 3,884 6,078
Interest expense, net 4,767 4,228 9,711 8,177
-------------- -------------- ---------------- ----------------
Net loss before income taxes (3,320) (1,442) (5,827) (2,099)
Income tax benefit 1,254 610 2,145 742
-------------- -------------- ---------------- ----------------
Net loss $ (2,066) (832) (3,682) (1,357)
============== ============== ================ ================
Basic net loss per common share $ (.04) (.02) (.08) (.03)
============== ============== ================ ================
Diluted net loss per common share $ (.04) (.02) (.08) (.03)
============== ============== ================ ================
See accompanying notes to interim condensed consolidated financial statements.
5
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
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
--------------------------------------------------------------------------------
Balances at December 31, 1996 36,587 4,074 $ 113,421 3,432 (1,010) 4,229 29,482
Net loss --- --- --- --- --- --- (1,357)
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- --- --- 159 ---
Class B shares converted to Class A 5 (5) --- --- --- --- ---
Shares issued upon conversion of
convertible note 1,538 --- 9,983 --- --- --- ---
Shares purchased and held in Treasury --- --- --- --- (29) --- ---
Shares issued under stock option plan 37 --- 109 --- --- --- ---
--------------------------------------------------------------------------------
Balances at June 30, 1997 38,167 4,069 $ 123,513 3,432 (1,039) 4,388 28,125
================================================================================
Balances at December 31, 1997 45,279 4,063 $ 170,322 3,432 (1,039) 4,425 27,299
Net loss --- --- --- --- --- --- (3,682)
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- --- --- 20 ---
Shares purchased and held in Treasury --- --- --- --- (568) --- ---
Shares issued under stock option plan 64 --- 185 --- --- 160 ---
Stock offering issuance costs --- --- (15) --- --- --- ---
--------------------------------------------------------------------------------
Balances at June 30, 1998 45,343 4,063 $ 170,492 3,432 (1,607) 4,605 23,617
================================================================================
See accompanying notes to consolidated financial statements.
6
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1998 1997
---------------- -----------------
(Amounts in thousands)
Cash flows from operating activities:
Net loss $ (3,682) (1,357)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 16,662 11,728
Deferred income tax expense 2,091 2,457
Deferred compensation and compensatory stock
options 250 (111)
Bad debt expense, net of write-offs (12) 308
Other noncash income and expense items 147 168
Change in operating assets and liabilities (note 2) (10,283) (4,636)
---------------- -----------------
Net cash provided by operating activities 5,173 8,557
---------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment (94,853) (21,100)
Restricted cash investment 39,406 ---
Purchases of other assets (2,468) (655)
Notes receivable issued (200) (549)
Payments received on notes receivable 610 5
---------------- -----------------
Net cash used in investing activities (57,505) (22,299)
---------------- -----------------
Cash flows from financing activities:
Long-term borrowings - bank debt and leases 52,382 20,000
Repayments of long-term borrowings and capital lease
obligations (900) (12,462)
Stock offering issuance costs (15) ---
Payment of debt issuance costs (note 3) (1,526) ---
Proceeds from common stock issuance 185 109
Purchase of treasury stock (568) (29)
---------------- -----------------
Net cash provided by financing activities 49,558 7,618
---------------- -----------------
Net decrease in cash and cash equivalents (2,774) (6,124)
Cash and cash equivalents at beginning of period 3,048 13,349
---------------- -----------------
Cash and cash equivalents at end of period $ 274 7,225
================ =================
See accompanying notes to interim condensed consolidated financial statements.
7
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 sell and service 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. 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 4. 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 4. Alaska United is a
partnership wholly owned by the Company through GCI Fiber Co., Inc.
and Fiber Hold Co., Inc.
8 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(b) Net Loss Per Common Share
Shares used to calculate net loss per common share consist of the
following (amounts in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----------- ---------- ---------- -----------
Weighted average common shares outstanding
49,056 43,474 49,050 43,418
=========== ========== =========== ==========
Common equivalent shares outstanding of 857,000 and 817,000 are
anti-dilutive June 30, 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 six-month
period ended June 30, 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)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of:
Six-month periods ended June 30, 1998 1997
-------------------------------- ------------------ ----------------
(Amounts in thousands)
Increase in receivables $ (11,164) (3,614)
Increase (decrease) in prepaid and other current
assets 578 (487)
Increase in inventory (693) (1,648)
Increase (decrease) in accounts payable (1,788) 1,260
Increase in accrued liabilities 138 1,019
Increase (decrease) in accrued payroll and payroll
related obligations 1,315 (791)
Increase (decrease) in accrued interest 800 (468)
Increase in deferred revenues 542 93
Decrease in other liabilities (11) ---
------------------ ----------------
$ (10,283) (4,636)
================== ================
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 six-month periods ended June 30,
1998 and 1997.
Interest paid totaled $12,181,000 and $9,649,000 during the six-month
periods ended June 30, 1998 and 1997, respectively.
10 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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 4. 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 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. Alaska United was
in compliance with all covenants during the period commencing January
1998 (date of the Fiber Facility) through June 30, 1998.
All of Alaska United's assets, as well as a pledge of the partnership
interests' owning Alaska United, collateralize the Fiber Facility.
The Company was in compliance with all covenants of its senior notes
and senior credit facility through June 30, 1998.
(4) 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 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.
11 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $89,000 during the six-month periods ended June
30, 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 from time to time 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.
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
12 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
petition with the APUC. At June 30, 1998, the State of Alaska has
rate regulation authority over the Juneau system's basic service
rates. (The Juneau system serves approximately 8.5% of the Company's
total basic service subscribers at June 30, 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 $66.2 million during the
six-month period ended June 30, 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, net of the $9.1 million paid
in 1997, were contributed to Alaska United. The use of such proceeds
was restricted to funding the construction and deployment of the
fiber optic cable system and was reported as Restricted Cash in the
accompanying Interim Condensed Consolidated Financial Statements at
December 31, 1997. In January 1998, the Company secured up to $75
million in bank financing to fund the expected remaining cost of
construction and deployment (see note 3), of which $29.4 million has
been borrowed at June 30, 1998.
13 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
(5) Supplemental Financial Information
(Amounts in thousands)
Six-month period ended June 30, 1998
------------------------------------------------
Long-
Distance Cable Local Combined
------------ ----------- --------- -------------
Revenues:
Telecommunication revenues $ 89,789 --- 3,062 92,851
Cable revenues --- 28,242 --- 28,242
------------ ----------- --------- -------------
Total revenues 89,789 28,242 3,062 121,093
------------ ----------- --------- -------------
Cost of sales and services:
Distribution costs and costs of
services 47,886 --- 2,122 50,008
Programming and copyright costs --- 6,662 --- 6,662
------------ ----------- --------- -------------
Total cost of sales and services 47,886 6,662 2,122 56,670
------------ ----------- --------- -------------
Contribution 41,903 21,580 940 64,423
------------ ----------- --------- -------------
Selling, general and administrative expenses:
Telephony operating and engineering 5,675 --- 775 6,450
Cable television, including
management fees of $408 --- 9,863 --- 9,863
Sales and communications 9,038 --- 534 9,572
General and administrative 12,665 --- 4,079 16,744
Bad debts 1,018 230 --- 1,248
------------ ----------- --------- -------------
Total selling, general and
administrative expenses 28,396 10,093 5,388 43,877
Depreciation and amortization 7,501 7,861 1,300 16,662
------------ ----------- --------- -------------
Operating income (loss) $ 6,006 3,626 (5,748) 3,884
============ =========== ========= =============
14 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six-month period ended June 30, 1997
------------------------------------------------
Long-
Distance Cable Local Combined
------------ ----------- --------- -------------
Revenues:
Telecommunication revenues $ 81,356 --- --- 81,356
Cable revenues --- 27,711 --- 27,711
------------ ----------- --------- -------------
Total revenues 81,356 27,711 --- 109,067
------------ ----------- --------- -------------
Cost of sales and services:
Distribution costs and costs of
services 50,379 --- 236 50,615
Programming and copyright costs --- 6,331 --- 6,331
------------ ----------- --------- -------------
Total cost of sales and services 50,379 6,331 236 56,946
------------ ----------- --------- -------------
Contribution 30,977 21,380 (236) 52,121
------------ ----------- --------- -------------
Selling, general and administrative
expenses:
Telephony operating and engineering 5,430 --- --- 5,430
Cable television, including
management fees of $271 --- 9,286 --- 9,286
Sales and communications 6,580 --- 229 6,809
General and administrative 10,665 --- 983 11,648
Bad debts 936 206 --- 1,142
------------ ----------- --------- -------------
Total selling, general and
administrative expenses 23,611 9,492 1,212 34,315
Depreciation and amortization 4,918 6,810 --- 11,728
------------ ----------- --------- ------------
Operating income (loss) $ 2,448 5,078 (1,448) 6,078
============ =========== ========= =============
15
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 AND FORWARD LOOKING STATEMENTS
Certain statements in this quarterly report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1996 ("Securities Reform Act"). These statements may be
preceded by, followed by, or include the words "believes," "expects,"
"anticipates," or similar expressions. For those statements, the Company claims
protection of the safe-harbor for forward-looking statements contained in the
Securities Reform Act. Such forward-looking statements involve known and unknown
risks, uncertainties and other important factors that could cause the actual
results, performance and achievements of the Company, or industry results, to
differ materially from future results, performance or achievements expressed or
implied by such statements. The reader is cautioned that important factors, such
as the following risks, uncertainties, and other factors, in addition to those
contained elsewhere in this document, could affect future results of the
Company, its long-distance telecommunication services, local access services,
and cable services and could cause those results to differ materially from those
expressed in the forward-looking statements:
- Material adverse changes in the economic conditions in the
markets served by the Company
- Regulatory and competitive environment of the business segments
in which the Company operates
- Uncertainties inherent in new business strategies, new product
launches and development plans, including local access services,
Internet services, PCS services, digital video services, cable
modem services, and transmission services
- Rapid technological changes
- Development and financing of telecommunication, local access,
PCS, and cable networks and services
- Future financial performance, including availability, terms and
deployment of capital
- Availability of qualified personnel
16 (Continued)
- Changes in, or failure, or inability, to comply with, government
regulations, including, without limitation, regulations of the
Federal Communications Commission, the Alaska Public Utilities
Commission, and adverse outcomes from regulatory proceedings
- Competitor responses to the Company's products and services and
overall market acceptance of such products and services
- The cost of the Company's year 2000 compliance efforts
- Uncertainties in federal military spending levels and military
base closures in markets in which the Company operates
These forward-looking statements (and such risks, uncertainties and other
factors) are made only as of the date of this report and the Company expressly
disclaims any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained in this document to reflect any
change in the Company's expectations with regard to those statements or any
other change in events, conditions or circumstances on which any such statement
is based.
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 90.0% of the Company's telecommunications
services revenues during the second 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, fisheries, 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 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 second quarter of 1998, local access charges
accounted for 41.2% of telecommunications cost of sales and services, fees paid
to other long distance carriers represented 31.7%, satellite transponder lease
and undersea fiber maintenance costs represented 9.2%, enterprise services and
outsourcing costs represented 5.6%, Internet costs accounted for 7.1%, and
telecommunications equipment costs accounted for 4.4% of telecommunications cost
of sales and services.
17 (Continued)
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 long distance telecommunications selling, general, and
administrative expenses, 38.6% during the second quarter of 1998, represents the
cost of the Company's advertising, promotion and market analysis programs.
Long distance telecommunications services face significant competition
from AT&T Alascom, Inc., long-distance resellers, and from local telephone
companies that have entered the long-distance market as allowed by the 1996
federal Telecommunications Act. The number of active long-distance customers
billed by the Company has decreased approximately 1.1% during the second quarter
of 1998, and has decreased approximately 2.4% during the first two quarters of
1998. Increased usage volumes and traffic carried for other common carriers have
offset usage reductions attributed to decreased active customers billed. The
Company believes its approach to developing, pricing, and providing
long-distance telecommunication services will continue to allow it to be
competitive in providing those services.
Cable services. During the second quarter of 1998, cable revenues and
EBITDA represented 22.3% and 56.7%, 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 second
quarter of 1998 programming services generated 88.2% of total cable services
revenues, equipment rental and installation fees accounted for 7.7% of such
revenues, and advertising sales and other services accounted for the remaining
4.1% 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 second quarter of 1998 programming and copyright
expenses represented approximately 39.1% of total cable cost of sales and
selling, general and administrative expenses. Marketing and advertising costs
represented approximately 12.2% of such total expenses.
Cable services face competition from alternative methods of receiving and
distributing television signals and from other sources of news, information and
entertainment. The Company believes its cable television services will continue
to be competitive based on providing, at
18 (Continued)
reasonable prices, a greater variety of programming and other communication
services than are available off-air or through other alternative delivery
sources and upon superior technical performance and customer service.
Local access services. The Company began offering local exchange services
in Anchorage during late September 1997 and provided service to approximately
24,000 lines at June 30, 1998. Approximately 4,000 additional lines were sold
and awaiting connection at June 30, 1998. Local exchange services revenues
totaled $2.0 million during the second quarter of 1998 representing 3.2% of
total second quarter 1998 revenues.
During the second quarter of 1998 operating and engineering expenses
represented approximately 11.6% of total local access services cost of sales and
selling, general and administrative expenses. Marketing and advertising costs
represented approximately 6.1% of such total expenses, and customer service, and
general and administrative costs represented approximately 54.1% of such total
expenses.
Local exchange services EBITDA totaled ($2.4) million during the second
quarter of 1998. The Company expects that its local exchange services will
continue to generate operating losses and negative EBITDA during 1998 and a
portion of 1999. Factors that have the greatest impact on year-to-year changes
in local access services revenues include the rates charged to customers and the
number of customers served.
The Company's local access services faces significant competition from the
Anchorage Telephone Utility and AT&T Alascom, Inc. The Company believes its
approach to developing, pricing, and providing local access telecommunication
services will continue to allow it to be competitive in providing those
services.
Internet services. The Company's statewide SchoolAccess services (Internet
access and related products and services for Alaska schools) commenced January
1998. SchoolAccess revenues totaled $1.1 million during the second quarter of
1998 representing 1.8% of total revenues. The Company began offering retail
Internet services in April 1998. Factors that have the greatest impact on
year-to-year changes in Internet services revenues include the rates charged to
customers and the number of customers served.
The Company competes with several Internet service providers in its
markets. The Company believes its approach to developing, pricing, and providing
Internet services will continue to allow it to be competitive in providing those
services.
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.
Other expenses and net loss. Depreciation and amortization and interest
expense on a consolidated basis is expected to be higher in 1998 as compared to
1997 resulting primarily from
19 (Continued)
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.
RESULTS OF OPERATIONS
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)
Percentage Change
Six Months Three Months
Six Months Ended Three Months Ended 1998 vs. 1998 vs.
June 30, June 30, Six Months Three Months
(Unaudited) 1997 1998 1997 1998 1997 1997
---- ---- ---- ---- ---- ----
Statement of Operations Data:
Revenues
Telecommunications services 74.6% 74.1% 75.0% 74.4% 10.4% 11.2%
Cable services 25.4% 23.3% 25.0% 22.3% 1.9% (0.1)%
Local access services 0.0% 2.6% 0.0% 3.3% NA NA
- ----------------------------------------------------------------------------------------------------------------------
Total revenues 100.0% 100.0% 100.0% 100.0% 11.0% 12.0%
Cost of sales and services 52.2% 46.8% 53.0% 46.6% (0.5)% (1.4)%
Selling, general and 31.5% 36.2% 32.1% 37.4% 27.9% 30.7%
administrative expenses
Depreciation and amortization 10.8% 13.8% 10.0% 13.7% 42.1% 53.3%
- ----------------------------------------------------------------------------------------------------------------------
Operating income 5.5% 3.2% 4.9% 2.3% (36.1)% (48.1)%
Net loss before income taxes (1.9)% (4.8)% (2.6)% (5.3)% 177.6% 130.2%
Net loss (1.2)% (3.0)% (1.5)% (3.3)% 171.3% 148.3%
Other Operating Data:
Cable operating income (1) 18.3% 12.8% 18.1% 10.4% (28.6)% (42.9)%
Cable EBITDA (1) 42.9% 40.7% 41.7% 40.5% (3.4)% (2.9)%
Local operating loss (2) NA (187.7)% NA (126.8)% 297.0% 219.0%
Local EBITDA (2) NA (145.3)% NA (115.4)% 207.2% 190.4%
Consolidated EBITDA 16.3% 17.0% 14.9% 16.0% 15.4% 19.6%
<FN>
--------------------------
(1) Computed as a percentage of total cable services revenues.
(2) Computed as a percentage of total local access services revenues.
</FN>
20 (Continued)
THREE MONTHS ENDED JUNE 30, 1998 ("1998") COMPARED TO THREE MONTHS ENDED JUNE
30, 1997 ("1997")
REVENUES. Total revenues increased 12.0% from $56.2 million in 1997 to
$62.9 million in 1998. Long distance transmission revenues from commercial,
residential, governmental, and other common carrier customers increased 7.4%
from $39.3 million in 1997 to $42.2 million in 1998. This increase reflected a
9.4% increase in interstate minutes of use to 167.3 million minutes and a 1.6%
increase in intrastate minutes of use to 34.9 million minutes. Long distance
revenue growth in 1998 was largely due to a 26.9% increase in revenues from
other common carriers (principally MCI and Sprint) and private line services,
from $18.2 million in 1997 to $23.1 million in 1998. The Company's average rate
per minute on long distance traffic decreased 5.1% from $0.178 per minute in
1997 to $0.169 per minute in 1998.
Cable revenues remained relatively constant at approximately $14.0 million
in 1997 and 1998. The number of homes passed by the cable systems and basic
subscribers increased approximately 860 and 5,100, respectively, at June 30,
1998 as compared to June 30, 1997. Pay-per-view and premium service revenue
decreases offset increases attributable to subscriber growth. The Company began
offering local access services in Anchorage in September 1997 with second
quarter 1998 revenues totaling $2.0 million. Product sales and network services
revenues increased 52.2% from $2.3 million in 1997 to $3.5 million in 1998,
primarily due to increased network services revenues and SchoolAccess revenues
in 1998 as compared to 1997.
COST OF SALES AND SERVICES. Cost of sales and services totaled $29.8
million in 1997 and $29.4 million in 1998. As a percentage of total revenues,
cost of sales and services decreased from 53.0% in 1997 to 46.6% in 1998. The
decrease in cost of sales and services as a percentage of revenues is primarily
attributed to: 1) reductions in access charges paid by the Company to other
carriers for distribution of its traffic, 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, and 3) changes in the Company's product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 30.7% from $18.0 million in 1997 to $23.5
million in 1998, and, as a percentage of revenues, increased from 32.1% in 1997
to 37.4% in 1998. This increase resulted from:
- Operating, engineering, sales, customer service and
administrative costs totaling $696,000 in 1997 as compared to
$3.2 million in 1998 associated with the Company's local access
services segment which initiated service in September 1997. The
second 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 access services customer base.
21 (Continued)
- Increased telecommunication segment operating, engineering,
general and administrative expenses totaling $9.4 million in
1998 as compared to $8.6 million in 1997 due to increased
personnel and other costs in customer service, engineering,
operations, accounting, human resources, legal and 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, digital
video services, cable modem 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.
- Increased telecommunication segment sales, advertising and
telemarketing costs totaling $3.7 million in 1997 compared to
$5.9 million in 1998. Increased selling costs were associated
with the introduction of various marketing plans and other
proprietary rate plans and continuing cross promotion of
products and services.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 53.3% from $5.6 million in 1997 to $8.6 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
1998 facilities investment of $94.9 million through June 30.
INTEREST EXPENSE, NET. Interest expense, net of interest income, increased
14.3% from $4.2 million in 1997 to $4.8 million in 1998. This increase resulted
from increases in the Company's average outstanding indebtedness resulting
primarily from the purchase and construction of new long distance and local
telecommunication equipment and facilities and expansion and upgrades of cable
television facilities.
INCOME TAX BENEFIT. Income tax benefit increased from $610,000 in 1997 to
$1.3 million 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 decreased from
42.3% in 1997 to 37.8% in 1998 due to the increased net loss and the
proportional amount of items that are nondeductible for income tax purposes.
22 (Continued)
SIX MONTHS ENDED JUNE 30, 1998 ("1998") COMPARED TO SIX MONTHS ENDED JUNE 30,
1997 ("1997")
REVENUES. Total revenues increased 11.0% from $109.1 million in 1997 to
$121.1 million in 1998. Long distance transmission revenues from commercial,
residential, governmental, and other common carrier customers increased 7.8%
from $75.6 million in 1997 to $81.5 million in 1998. This increase reflected a
7.6% increase in interstate minutes of use to 325.8 million minutes and a 2.2%
increase in intrastate minutes of use to 67.9 million minutes. Long distance
revenue growth in 1998 was largely due to a 19.6% increase in revenues from
other common carriers (principally MCI and Sprint) and private line services,
from $35.2 million in 1997 to $42.1 million in 1998. The Company's average rate
per minute on long distance traffic decreased 2.8% from $0.176 per minute in
1997 to $0.171 per minute in 1998 primarily due to the introduction of
discounted residential and commercial international calling plans.
Cable revenues increased 1.9% from $27.7 million in 1997 to $28.2 million
in 1998. The number of homes passed by the cable systems and basic subscribers
increased approximately 860 and 5,100, respectively, at June 30, 1998 as
compared to June 30, 1997. Pay-per-view and premium service revenue decreases
partially offset increases attributable to subscriber growth. Local access
services revenues totaled $3.1 million in 1998. Product sales and network
services revenues increased 27.7% from $4.7 million in 1997 to $6.0 million in
1998, primarily due to increased network services revenues and SchoolAccess
revenues in 1998 as compared to 1997.
COST OF SALES AND SERVICES. Cost of sales and services totaled $56.9
million in 1997 and $56.7 million in 1998. As a percentage of total revenues,
cost of sales and services decreased from 52.2% in 1997 to 46.8% 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.
23 (Continued)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 28.0% from $34.3 million in 1997 to $43.9
million in 1998, and, as a percentage of revenues, increased from 31.4% in 1997
to 36.3% in 1998. This increase resulted from:
- Operating, engineering, sales, customer service and
administrative costs totaling $1.2 million in 1997 as compared
to $5.4 million in 1998 associated with the Company's local
access services segment which initiated service in September
1997.
- Increased telecommunication segment operations, engineering,
general and administrative expenses totaling $19.4 million in
1998 as compared to $17.0 million in 1997 due to increased
personnel and other costs in customer service, engineering,
operations, accounting, human resources, legal and 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, digital
video services, cable modem 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.
- Increased telecommunication segment sales, advertising and
telemarketing costs totaling $6.6 million in 1997 compared to
$9.0 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 42.1% from $11.7 million in 1997 to $16.7 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 1998 facilities investment of $94.9 million through June 30.
INTEREST EXPENSE, NET. Interest expense, net of interest income, increased
18.3% from $8.2 million in 1997 to $9.7 million in 1998. This increase resulted
from increases in the Company's average outstanding indebtedness resulting
primarily from the purchase and construction of new long distance and local
telecommunication equipment and facilities and expansion and upgrades of cable
television facilities.
INCOME TAX BENEFIT. Income tax benefit increased from $742,000 in 1997 to
$2.1 million 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
35.4% in 1997 to 36.8% in 1998 due to the increased net loss and the
proportional amount of items that are nondeductible for income tax purposes.
24 (Continued)
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 June 30, 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 38% 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.
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 1997 and 1998:
(Dollars in thousands, except per share amounts)
First Second Third Fourth Total
(Unaudited) Quarter Quarter Quarter Quarter Year
-----------------------------------------------------------------------------
1997
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 access 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) (1,809) (3,797)
=============================================================================
Consolidated EBITDA $ 9,412 8,394 9,553 11,790 39,149
=============================================================================
25 (Continued)
(Dollars in thousands, except per share amounts)
First Second Third Fourth Total
(Unaudited) Quarter Quarter Quarter Quarter Year
-----------------------------------------------------------------------------
1998
Revenues
Telecommunications services $ 42,937 46,852 89,789
Cable services 14,201 14,041 28,242
Local access services 1,014 2,048 3,062
-----------------------------------------------------------------------------
Total revenues 58,152 62,941 121,093
Operating income 2,437 1,447 3,884
Net loss $ (1,616) (2,066) (3,682)
=============================================================================
Basic net loss per share $ (0.03) (0.04) (0.08)
=============================================================================
Diluted net loss per share $ (0.03) (0.04) (0.08)
=============================================================================
Other financial data:
Cable EBITDA $ 5,795 5,692 11,487
=============================================================================
Local EBITDA $ (2,084) (2,364) (4,448)
=============================================================================
Consolidated EBITDA $ 10,503 10,043 20,546
=============================================================================
Total revenues for the quarter ended June 30, 1998 were $62.9 million,
representing a 8.1% increase from total revenues in the first quarter of 1998 of
$58.2 million. This increase in total revenues resulted from the following:
- A 6.6% increase in telecommunications services revenues to $46.9
million in the second quarter of 1998 from $44.0 million during
the first quarter of 1998. This increase is attributable in part
to an increase in minutes of traffic carried during the second
quarter of 1998 of approximately 10.8 million minutes as
compared to the first quarter of 1998 (a 5.6% increase).
- An increase in local access services revenues totaling $1.0
million in the second quarter of 1998 as compared to the first
quarter of 1998 (a 102.0% increase)
- These increases were offset, in part, by a reduction in the
average rate per minute billed by the company during the second
quarter of 1998 of approximately $0.004 as compared to the first
quarter of 1998 (a 2.4% decrease).
Cost of sales and services for the quarter ended June 30, 1998 totaled
$29.4 million, representing a 7.7% increase from total cost of sales and
services in the first quarter of 1998 of $27.3 million. Increased cost of sales
resulted primarily from the 8.1% increase in revenues described above, and 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.
26 (Continued)
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 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.
In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position ("SOP") 98-5, "Reporting on the costs of
Start-Up Activities". SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs and requires costs of start-up activities
and organization costs to be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998.
Management of the Company expects that the adoption of SOP 98-5 will result in a
one-time expense of approximately $375,000 (net of income tax effect) in the
first quarter of 1999 associated with the write-off of unamortized start-up
costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's first and second quarter 1998 ("1998") cash provided by
operating activities totaled $5.2 million, net of changes in the components of
working capital. Sources of cash during 1998 included long-term borrowings of
$52.4 million and class A common stock sales proceeds totaling $185,000. The
Company's expenditures for property and equipment, including construction in
progress, totaled $21.1 million and $94.9 million for the six-month periods
ended June 30, 1997
27 (Continued)
and 1998, respectively. Uses of cash during 1998 included repayment of $900,000
of long-term borrowings and capital lease obligations, payment of deferred debt
issuance costs totaling $1.5 million, an increase in other assets of $2.5
million, and purchases of treasury stock totaling $568,000.
Net receivables increased $11.1 million from December 31, 1997 to June 30,
1998 resulting from increased revenues in 1998 as compared to 1997 and an
increase in refundable income taxes in 1998.
Accounts payable decreased $1.8 million from December 31, 1997 to June 30,
1998 resulting from the Company's payment of amounts accrued at December 31,
1997 during the first quarter of 1998.
Accrued interest increased $800,000 from December 31, 1997 to June 30,
1998 resulting from interest incurred on additional indebtedness outstanding
during 1998 as compared to December 31, 1997.
Working capital at June 30, 1998 totaled $3.8 million, a $8.8 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 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 4 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 $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. $29.4 million was borrowed under the facility at June 30, 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-
28 (Continued)
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 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 Tyco Submarine Systems, Inc. to begin construction.
Manufacturing of the cable and its electronics has been underway since that
time. The cable is expected to be laid from late August to October 1998. Testing
will occur after that, and services are expected to commence in December 1998.
The Company was notified in August 1998 that a potential customer for
Alaska United's fiber services (AT&T) has selected another carrier to meet its
immediate needs for additional fiber capacity to and from Alaska. AT&T stated
that it elected to lease a minimum amount of capacity for a short term and that
the Company will have the opportunity to provide fiber capacity in the future.
The other carrier's facilities were under construction at June 30, 1998 with
service expected to commence in late 1998 or 1999. The Company will use half the
capacity of the Alaska United project to carry its own traffic, in addition to
its existing owned and leased facilities. While the Alaska United project would
have received a financial benefit from carrying AT&T's traffic, the project can
be supported solely by the Company's own network capacity requirements. GCI will
continue to pursue opportunities to sell capacity on its system to AT&T and
others.
The Company's expenditures for property and equipment, including
construction in progress, totaled $94.9 million and $21.1 million during the
first two 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 continue to upgrade its cable television plant and to purchase
equipment for new cable television services, including digital video services
and cable modem services. Sources of funds for these planned capital
expenditures are expected to include internally generated cash flows and
borrowings under the Company's credit facilities including borrowings under the
new $75 million project financing described above.
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.
29 (Continued)
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 $2 million in 1998
and $4 million in 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 June 30 totaled approximately $260,000.
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.
30 (Continued)
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Information regarding pending legal proceedings to which the Company
is a party is included in Note 4 of Notes to Interim Condensed
Consolidated Financial Statements and is incorporated herein by
reference.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) Date of meeting - June 4, 1998
Nature of meeting - 1998 annual meeting
(b) Election of Directors:
Names of directors elected at the meeting:
Donne F. Fisher Votes: 54,009,905 for; 1,367,485 withhold
William P. Glasgow Votes: 54,990,085 for; 387,305 withhold
James M. Schneider Votes: 55,105,849 for; 271,541 withhold
Names of directors whose term of office continued after the
meeting:
Ronald A. Duncan
Jeffery C. Garvey
John W. Gerdelman
Donald Lynch
Carter F. Page
Larry E. Romrell
Robert M. Walp
(c) Other matters voted upon:
None
(d) Not applicable.
31 (Continued)
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10.86 - Credit and Security Agreement Dated as of
January 27, 1998 among Alaska United Fiber System
Partnership as Borrower and The Lenders Referred to Herein
and Credit Lyonnais New York Branch as Administrative Agent
and Nationsbank of Texas, N.A. as Syndication Agent and TD
Securities (USA), Inc. as Documentation Agent *
Exhibit 27.1 - Financial Data Schedule *
(b) Reports on Form 8-K filed during the quarter ended June 30, 1998
- None
---------------------
* Filed herewith.
32 (Continued)
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.
August 12, 1998 By: /s/ Ronald A. Duncan
- --------------------------------- ---------------------------
(Date) Ronald A. Duncan, President
and Director
(Principal Executive
Officer)
August 12, 1998 By: /s/ John M. Lowber
- --------------------------------- ---------------------------
(Date) John M. Lowber, Senior Vice
President and Chief
Financial Officer
(Principal Financial
Officer)
August 12, 1998 By: /s/ Alfred J. Walker
- --------------------------------- ---------------------------
(Date) Alfred J. Walker, Vice
President and Chief
Accounting Officer
(Principal Accounting
Officer)
33