AS FILED WITH SECURITIES AND EXCHANGE COMMISSION ON JULY 8, 1997.
REGISTRATION NO. 333-28001
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GENERAL COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)
ALASKA 92-0072737
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
2550 DENALI ST., SUITE 1000, ANCHORAGE, ALASKA 99503
(907) 265-5600
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
JOHN M. LOWBER
GENERAL COMMUNICATION, INC.
2550 DENALI STREET, SUITE 1000
ANCHORAGE, ALASKA 99503-2781
(907) 265-5600
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------------
COPIES TO:
CHARLES Y. TANABE, ESQ. JOEL M. SIMON, ESQ.
Sherman & Howard L.L.C. Paul, Hastings, Janofsky & Walker LLP
First Interstate Tower North 399 Park Avenue
633 Seventeenth Street, Suite 3000 31st Floor
Denver, Colorado 80202 New York, New York 10022
(303) 299-8108 (212) 318-6200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. /X/
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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SUBJECT TO COMPLETION
JULY 7, 1997
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PROSPECTUS
13,800,000 SHARES
GENERAL COMMUNICATION, INC.
[LOGO]
CLASS A COMMON STOCK
(NO PAR VALUE)
Of the 13,800,000 shares of Class A common stock, no par value per share (the
"Class A Common Stock"), offered hereby (the "Stock Offering"), 7,000,000 shares
are being sold by General Communication, Inc. (the "Company") and 6,800,000
shares are being sold by certain shareholders of the Company (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any of the proceeds from the sale of shares of Class A Common Stock by
the Selling Shareholders.
Concurrently with the Stock Offering, $150,000,000 of % Senior Notes Due 2007
will be offered to the public by GCI, Inc., a wholly owned subsidiary of the
Company (the "Debt Offering" and, together with the Stock Offering, the
"Offerings"). Consummation of one Offering is not contingent upon consummation
of the other Offering, and there can be no assurance that the Debt Offering will
be consummated.
The Company has two classes of common stock, the Class A Common Stock and the
Class B common stock, no par value per share (the "Class B Common Stock" and,
together with the Class A Common Stock, the "Common Stock"). The rights of the
Class A Common Stock and the Class B Common Stock are substantially identical,
except that holders of the Class A Common Stock are entitled to one vote per
share and holders of the Class B Common Stock are entitled to 10 votes per
share. The Class B Common Stock is fully convertible at any time into Class A
Common Stock, at the option of the holder, on a one-for-one basis. Both classes
of Common Stock vote together as one class on all matters generally submitted to
a vote of shareholders, including the election of directors. See "Description of
Capital Stock."
The Class A Common Stock is quoted on the Nasdaq National Market ("Nasdaq")
under the symbol "GNCMA." On July 2, 1997, the last reported sale price of the
Class A Common Stock on Nasdaq was $8.00 per share. See "Price Range of Common
Stock and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT COMPANY (1) SHAREHOLDERS
Per Share....................... $ $ $ $
Total(2)........................ $ $ $ $
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(1) Before deducting offering expenses payable by the Company, estimated at
$ .
(2) Certain Selling Shareholders have granted to the Underwriters a 30-day
option to purchase up to an aggregate of 2,070,000 additional shares of
Class A Common Stock at the Price to Public, less Underwriting Discount,
solely to cover over-allotments, if any. If the Underwriters exercise such
option in full, the total Price to Public, Underwriting Discount and
Proceeds to Selling Shareholders will be $ , $ and $ ,
respectively. See "Underwriting."
The shares of Class A Common Stock are offered subject to receipt and acceptance
by the Underwriters, to prior sale and to the Underwriters' right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the shares of Class A Common Stock
offered hereby will be made at the office of Salomon Brothers Inc, Seven World
Trade Center, New York, New York or through the facilities of The Depository
Trust Company, on or about , 1997.
SALOMON BROTHERS INC
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SCHRODER & CO. INC.
The date of this Prospectus is , 1997.
[LOGO]
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK, INCLUDING PURCHASES OF THE CLASS A COMMON STOCK TO COVER SOME OR ALL OF A
SHORT POSITION IN THE CLASS A COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND
THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
--------------------------
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE CLASS A COMMON
STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
--------------------------
It is expected that delivery of the Class A Common Stock will be made
against payment therefor on or about the date which is the fifth business day
following the date of this Prospectus (such settlement cycle being herein
referred to as "T+5"). Purchasers of shares of the Class A Common Stock should
be aware that trading of the Class A Common Stock on the date of this Prospectus
and the next succeeding business day may be affected by the T+5 settlement. See
"Underwriting."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," including statements regarding the anticipated development and
expansion of the Company's business, the markets in which the Company's services
are offered, anticipated capital expenditures and regulatory reform, the intent,
belief or current expectations of the Company, its directors or its officers,
primarily with respect to the future operating performance of the Company, and
other statements contained in this Prospectus regarding matters that are not
historical facts, are "forward-looking" statements. Because such statements
include risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially from those expressed or implied by
such forward-looking statements include, but are not limited to, the factors set
forth in "Risk Factors" and "Business."
MAP OF ALASKA SHOWING (1) THE CITIES AND AREAS SERVICED BY THE COMPANY AND
NATURE OF SERVICE, E.G., LONG DISTANCE, CABLE, PROPOSED LOCAL EXCHANGE AND PCS,
(2) A STYLIZED LINK TO AND OUTLINE OF THE LOWER 48 STATES, (3) FIBER OPTIC OCEAN
CABLE ROUTE, AND (4) USE OF SATELLITES FOR COMMUNICATIONS.
2
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING
ELSEWHERE IN, OR INCORPORATED BY REFERENCE INTO, THIS PROSPECTUS. UNLESS THE
CONTEXT OTHERWISE REQUIRES, THE "COMPANY" REFERS TO GENERAL COMMUNICATION, INC.
AND, WHERE APPLICABLE, ITS DIRECT AND INDIRECT SUBSIDIARIES. SEE "GLOSSARY" FOR
DEFINITIONS OF CERTAIN OTHER TERMS USED IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
OVER-ALLOTMENT OPTION OFFERED TO THE UNDERWRITERS IN THE STOCK OFFERING.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH UNDER THE
CAPTION "RISK FACTORS."
THE COMPANY
The Company is a diversified telecommunications provider with a leading
position in facilities-based long distance service in the State of Alaska and,
as a result of recent acquisitions, has become Alaska's leading cable television
service provider. The Company seeks to become the first significant provider in
Alaska of an integrated package of telecommunications and cable television
services. Complementing its long distance, cable and cellular resale operations,
the Company has announced plans to provide facilities-based competitive local
exchange and wireless communications services in Alaska's major population
centers. The Company expects to launch local exchange services in the second
half of 1997 initially in Anchorage where it has received a local exchange
certificate of authority and entered into an interconnection agreement with the
incumbent local exchange carrier ("LEC") which has been approved by the Alaska
Public Utilities Commission (the "APUC"). The Company also acquired a state-wide
30 MHz B-block personal communication service ("PCS") license in June 1995 for
approximately $1.65 million (or about $3.00 per population equivalent or "pop")
and is currently evaluating various technologies for a proposed wireless PCS
network.
The Alaskan voice, video and data markets are unique within the United
States. Alaska is physically distant from the rest of the United States and is
characterized by large geographical size and relatively small, dense population
clusters (with the exception of major population centers such as Anchorage,
Fairbanks and Juneau). It lacks a well-developed terrestrial transportation
infrastructure, and the majority of Alaska's communities are accessible only by
air or water. As a result, Alaska's telecommunications networks are different
from those found in the lower 49 states. Alaska today relies extensively on
satellite-based transmission for intrastate calling between remote communities
where investment in a terrestrial network would be uneconomic or impractical.
Also, given the remoteness of Alaska's communities and, in many cases, the lack
of major civic institutions such as hospitals, libraries and universities,
Alaskans are dependent on telecommunications to access the resources and
information of large metropolitan areas in the rest of the U.S. and elsewhere.
The Company believes that historical distinctions between telephony,
wireless communications and cable television services are disappearing as a
result of regulatory and technological changes. Upon becoming the first
significant integrated provider of such services in Alaska, the Company believes
that it will benefit from a number of advantages that would be difficult and
costly for a competitor to replicate. By providing multiple telecommunications
and cable services, the Company will be able to (i) expand the Company's
addressable market in Alaska and increase the Company's share of its customers'
voice, video and data expenditures, (ii) leverage the Company's existing
customer base by cross-selling its services, (iii) attract new customers and
improve customer retention rates by offering its customers a package of
services, a single bill and a single point-of-contact for customer service, (iv)
reduce capital spending requirements by sharing facilities, equipment and
rights-of-way, (v) contain administrative and personnel costs by combining
functional areas and (vi) reduce local access costs by bypassing some or all of
the incumbent LECs' facilities.
The Company began providing interstate long distance service in 1982 and
began providing intrastate long distance service in 1991. The Company provides a
full range of long distance services,
3
including direct dial, 800, message toll, private line, private network,
operator and calling and debit card services, to residential, commercial and
governmental customers and to other common carriers. In addition, the Company
sells data communication equipment and offers technical services.
The Company operates a state-of-the-art, competitive telecommunications
network employing the latest digital transmission technology based upon fiber
optic and digital microwave facilities within and between Anchorage, Fairbanks
and Juneau, a digital fiber optic cable linking Alaska to the contiguous 48
states and providing access to other carriers' networks for communication around
the world, and the use of satellite transmission to remote areas of Alaska (and
for certain interstate traffic as well). As of March 31, 1997, the Company's
long distance services were available, through the Company's network, to
approximately 90% of total Alaskan access lines. As of March 31, 1997, the
Company's residential customers were served by approximately 81,150 access
lines, representing approximately 41% of all Alaskan residential presubscribed
access lines. In addition, the Company had over 11,000 commercial, governmental
and other common carrier customers who were served by approximately 57,600
access lines, representing approximately 48% of all non-residential
presubscribed access lines in the State. The Company believes its network costs
are significantly lower than those of its principal competitor, AT&T Alascom
(the other leading long distance provider in Alaska), which, until it was
acquired by AT&T Corp. ("AT&T") in August 1995, had benefitted from an annual
direct subsidy from AT&T of approximately $80 million.
In 1993, the Company entered into a significant business relationship with
MCI Telecommunications Corp., a subsidiary of MCI Communications Corporation
(together with its subsidiaries, "MCI"), pursuant to which, among other things,
the Company agreed to provide transmission services for substantially all
Alaska-bound MCI long distance traffic and MCI agreed to provide transmission
services for substantially all of the Company's long distance traffic
terminating in the lower 49 states (excluding Washington, Oregon and Hawaii). As
of June 30, 1997, MCI owned 22.6% of the total combined outstanding Common
Stock, and 19.4% after giving effect to the Stock Offering, the majority of
which was acquired concurrently with entering into the 1993 agreements. MCI
presently controls nominations to two seats on the Company's board of directors
(the "Board") pursuant to a voting agreement among MCI and certain other
shareholders (the "Voting Agreement") that was entered into in connection with
the Company's acquisition of cable television systems (the "Cable Systems") from
several unrelated sellers. In 1993, the Company also entered into an agreement
with an affiliate of Sprint Corp. ("Sprint"), pursuant to which the Company
agreed to provide transmission services for all Alaska-bound Sprint long
distance traffic and Sprint agreed to handle substantially all of the Company's
international traffic.
The Company's telecommunications services revenues for the three months
ended March 31, 1997 were $39.2 million and operating cash flow or EBITDA (as
defined below) was $3.4 million (including $0.6 million of start-up losses from
the Company's local exchange and PCS operations), or approximately 8.7% of
telecommunications services revenues for the period. The Company's
telecommunications services revenues for the year ended December 31, 1996 were
$155.4 million and EBITDA was $21.4 million (including $0.9 million of start-up
losses from the Company's local exchange and PCS operations), or approximately
13.8% of telecommunications services revenues for the period. In the five-year
period ended December 31, 1996, the Company's telecommunications services
revenues grew at a compounded annual rate of approximately 15.5%.
Effective October 31, 1996, the Company became the leading cable television
services provider in Alaska upon its acquisition of the Cable Systems for total
consideration of approximately $280.1 million. The Cable Systems serve 21
communities and areas in Alaska, including the state's three largest urban
areas, Anchorage, Fairbanks and Juneau. As of March 31, 1997, the Cable Systems
passed 162,711 homes or approximately 70% of all households in Alaska and served
approximately 104,400 subscribers (92,940 equivalent basic subscribers),
representing 64% of households passed by the Cable Systems. As of March 31,
1997, the Cable Systems consisted of approximately 1,765 miles of installed
cable plant having between 300 and 450 MHz of channel capacity. See
"Business--Cable Television." On a pro
4
forma basis, assuming the Cable Systems had been acquired by the Company as of
January 1, 1996, the Cable Systems generated pro forma revenues for the year
ended December 31, 1996 of $55.3 million and pro forma EBITDA before management
fees of $27.0 million, or 48.8% of cable revenues. Pro forma revenues and EBITDA
from cable services would have represented 26.3% and 54.9%, respectively, of the
Company's pro forma consolidated revenues and EBITDA for 1996.
In connection with its acquisition of the Cable Systems, the Company entered
into a management agreement (the "Prime Management Agreement") with Prime II
Management, L.P. ("Prime Management"), a Delaware limited partnership affiliated
with certain sellers of the Cable Systems serving Anchorage and other areas (the
"Prime Sellers") to manage the Cable Systems. Under the Prime Management
Agreement, the Company will pay to Prime Management a net annualized fee for
managing the Cable Systems in the amount of $1,000,000 for the year ending
October 31, 1997, $750,000 for the year ending October 31, 1998, and $500,000
for each year ending October 31 thereafter that the Prime Management Agreement
is in effect. The Prime Management Agreement has a term of nine years but either
party may terminate the agreement in its discretion after October 31, 1998.
Certain of the Prime Sellers, which are parties to the Voting Agreement (the
"Voting Prime Sellers"), have the right to nominate two Board members pursuant
to the Voting Agreement and will own approximately 18.0% of the total
outstanding Common Stock after giving effect to the Stock Offering.
In providing cable service, the Company competes principally with
traditional television broadcasters, direct broadcast satellite television
("DBS") and wireless cable or multichannel, multipoint distribution service
("MMDS") providers. The receipt of DBS signals in Alaska currently has the
disadvantage of requiring subscribers to install larger satellite dishes
(generally three to six feet in diameter) than are generally required in the
lower 48 states because of the weaker satellite signals available in northern
latitudes. In addition, existing satellites (situated over the equator) have a
relatively low altitude above the horizon when viewed from Alaska, making their
signals subject to interference from mountains, buildings and other structures.
MMDS also requires that customers' receiving antennas have line-of-sight access
to transmitting radio towers, and both MMDS and DBS signals are subject to
interference from rain, snow, and wind.
BUSINESS STRATEGY
The Company's goal is to become the first significant provider of integrated
voice, video and data services in Alaska while maximizing growth in its revenues
and net income. The Company's strategies to achieve this objective fall
generally into four broad categories: (i) integrate the Company's
telecommunications and cable operations, (ii) expand the scope of the Alaskan
voice, video and data markets that the Company will address, (iii) increase the
Company's penetration of these markets, and (iv) improve the Company's
consolidated operating margins and utilization of the Company's capital
resources. These broad strategies are discussed below. The Company's strategic
focus over the next several years will be on Alaska. On a longer term basis, the
Company may consider growth opportunities outside Alaska, especially in areas of
the world with demographics and infrastructure characteristics similar to those
of Alaska.
INTEGRATE TELECOMMUNICATIONS AND CABLE OPERATIONS
The Company has begun integrating the Cable Systems into its preexisting
operations. As part of this integration, the Company plans to combine the
marketing and sales organizations, the billing systems, management information
systems ("MIS") and customer service organizations of the Cable Systems with
those of the Company's historical operations. This integration will enable the
Company to coordinate the marketing of its telecommunications and cable services
to the full range of the Company's customers, promote introduction of new
products and services, leverage consumer awareness of the GCI brand name and
provide its customers with a single bill and point-of-contact for customer
5
service. The Company estimates that the essential elements of this integration
will be completed by late 1997.
EXPAND ADDRESSABLE MARKET
As a result of its acquisition of the Cable Systems, the Company has
expanded its addressable market in Alaska to include both long distance and
cable services, which markets generated approximately $450 million in revenues
in 1996 for all providers of such services in Alaska. Following its introduction
of local exchange and wireless services, the Company's addressable market will
expand to approximately $800 million in total.
The Company intends to offer local exchange services in Anchorage and other
major Alaskan population centers principally using its own network facilities.
The Company expects to provide local exchange services initially in Anchorage in
the second half of 1997. The Company has installed 38 miles of a planned
130-mile fiber optic network in Anchorage, has installed a Lucent 5ESS switch
with both local and long distance capabilities and has entered into an agreement
with the incumbent LEC, Anchorage Telephone Utility ("ATU"), to interconnect the
Company's network with that of ATU and to purchase unbundled local loops
necessary to provide local service. The Alaskan local service market generated
approximately $320 million in revenues in 1996, approximately 34% of which were
attributable to Anchorage. The Company anticipates expanding its local service
to the Fairbanks and Juneau markets during 1998 and to other markets during
1999, subject to negotiating acceptable interconnection arrangements with the
LECs serving those markets and to obtaining the necessary regulatory approvals.
The Company plans to enter the facilities-based wireless communications
market through development of a PCS network. The Company believes that PCS
technology, if successfully implemented, will offer advantages over existing
analog cellular technology, such as superior audio quality, additional features,
better compatibility with wireline services, and longer battery life. PCS
technology is particularly suited for use in Alaska, which has relatively small,
dense population clusters in many geographically remote areas. The Company
estimates that the Alaskan cellular services market generated approximately $35
million in total revenues in 1996.
INCREASE PENETRATION OF ALL MARKET SEGMENTS
The Company believes that by offering a variety of branded
telecommunications and cable services, by increasing consumer awareness and
leveraging brand equity, and by emphasizing customer service and rewarding
consumer loyalty, it will be well-positioned to improve customer retention rates
and to increase market share in all service categories. The Company believes
that substantially all of its long distance and cable television customers are
potential wireless and local service customers. Cross-selling opportunities also
exist between the Company's long distance customers and its cable customers. The
Company estimates that, as of March 31, 1997, approximately 59% of the Company's
residential cable subscribers did not obtain long distance service from the
Company and that approximately 23% of the Company's total long distance
customers and 27% of the Company's residential long distance customers were
passed by the Cable Systems but did not buy cable service.
The Company plans significant upgrades to the existing cable plant in order
to expand channel capacity, add new services, improve network quality and
reliability and reduce theft. The Company expects that, by expanding customers'
service options, it will attract new customers, increase average revenue per
subscriber and reduce customer attrition rates. Currently, the Cable Systems
have between 300 and 450 MHz of channel capacity, or enough capacity to carry
between 36 and 60 channels. Over the next two years, the Company plans to
increase the capacity of the Cable Systems to between 450 and 550/750 MHz of
channel capacity, or enough capacity to carry between 60 and 76 channels.
6
The Company plans to begin offering cable modems in the fourth quarter of
1997. Cable modems represent a new technology which offers significantly faster
access to the Internet and other on-line data services than other currently
available technologies. The Company believes that Alaskans have a greater
propensity to access the Internet than consumers in other states for a variety
of reasons. Alaskans on average have completed more years of formal education
and have a higher per capita income and mean household income than the U.S.
average. Purchasing power is also enhanced by the lack of a state income tax and
the annual Permanent Fund dividend that each resident, regardless of age,
receives from the State (over $1,100 per person in 1996). In markets outside of
Anchorage, Fairbanks and Juneau, the limited availability of traditional sources
of information such as libraries, universities and museums contribute to heavy
use of the Internet as an information, education and communication resource. In
addition to offering cable modems, the Company plans to offer certain
specialized telecommunications services to support distance education and
telemedicine in rural areas of the State. Rural Alaskans often do not have
access to medical professionals within their community and the use of a
communication network to deliver a wide range of telemedical services (voice,
video and data) enhances the quality and timeliness of the services delivered
while concurrently reducing the overall cost of delivery. Likewise, the
educational infrastructure is limited in many areas of rural Alaska and distance
education services are being deployed to provide specialized curricula to
smaller village schools. Like telemedical services, distance education services
both improve the quality of education and reduce the cost of delivery.
IMPROVE CONSOLIDATED OPERATING MARGINS AND CAPITAL UTILIZATION
The Company believes that the combination of its long distance, local,
wireless communications and cable operations will enable it to achieve better
overall operating margins than would be possible if these operations were
managed as stand-alone enterprises. The Company expects to achieve certain
efficiencies by combining the marketing, sales, customer service, MIS and
administrative organizations of the Cable Systems with each other and with those
of the Company's preexisting operations. The Company also expects that its
planned provision of local services, while a potentially significant source of
revenues, will coincidentally result in a significant reduction in the Company's
local access fees paid to Alaskan LECs. Access fees charged to the Company by
incumbent Alaskan LECs for the use of their local networks to originate or
terminate long distance calls totaled $36.4 million in 1996, or approximately
28.2% of the Company's long distance revenues for this period. The Company
estimates that the average access charge payable by it to Alaskan LECs for
originating or terminating interstate access is approximately $0.043 per minute
of traffic and for originating or terminating intrastate access is approximately
$0.07 per minute of traffic (or a total of $0.14 for both originating and
terminating access).
In addition, the Company expects to leverage its investment in existing
cable plant and rights-of-way by, in some cases, overlaying (or using existing)
fiber optic cable for telephony or PCS applications. The incremental cost of
such network enhancements, especially when combined with planned upgrades to the
existing cable plant, is significantly less than the cost of building entirely
new network facilities.
7
THE OFFERING
Class A Common Stock offered by
the Company..................... 7,000,000 shares
Class A Common Stock offered by
the Selling Shareholders........ 6,800,000 shares
Total Class A Common Stock offered
hereby.......................... 13,800,000 shares
Common Stock outstanding after the
Offering (1) ................... 45,157,109 shares of Class A Common Stock; 4,068,934
shares of Class B Common Stock.
Use of Proceeds................... The net proceeds of the Stock Offering to the Company
will be used to reduce borrowings outstanding under the
Company's credit facilities. The Company expects to
reborrow funds under its credit facilities in the future
to fund capital expenditures and for other general
corporate purposes. The Company will not receive any of
the proceeds from the sale of shares by the Selling
Shareholders. See "Use of Proceeds" and "Description of
Credit Facilities."
Nasdaq Symbol..................... GNCMA
Concurrent Offerings.............. Concurrently with the Stock Offering, GCI, Inc., a
wholly owned subsidiary of the Company, is offering
$150,000,000 aggregate principal amount of its %
Senior Notes due 2007 (the "Notes"). The Debt Offering
and the Stock Offering are not conditioned upon one
another and, therefore, one Offering may be consummated
without the other Offering being consummated. See "Risk
Factors--Significant Capital Requirements; Concurrent
Offerings" and "Use of Proceeds."
- ------------------------
(1) Based on the number of shares of Class A Common Stock and Class B Common
Stock outstanding as of June 30, 1997 plus the number of shares offered in
the Stock Offering. Excludes the following: 2,593,790 shares of Class A
Common Stock issuable upon the exercise of stock options granted to
directors, officers and employees of the Company; and 202,768 shares of
Class A Common Stock held as treasury stock. See "Capitalization."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective purchasers of the Class A Common Stock.
8
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE, PER MINUTE AND PER SUBSCRIBER DATA)
The following table summarizes certain summary consolidated financial and
operating data of the Company and should be read in conjunction with, and is
qualified by reference to, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Consolidated Financial Statements of
the Company, the notes thereto and other financial data included elsewhere in
this Prospectus. The unaudited pro forma financial information reflects the
acquisition of the Cable Systems as if such acquisition had been consummated as
of January 1, 1996. See the Unaudited Pro Forma Combined Statement of Operations
included elsewhere in this Prospectus. The unaudited pro forma information
should be read in conjunction with the financial statements of Prime Cable of
Alaska, L.P., Alaska Cablevision, Inc. and Alaskan Cable Network and the notes
thereto included elsewhere in this Prospectus. See "Index to Financial
Statements."
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- PRO FORMA --------------------
1992 1993 1994 1995 1996 1996 (1) 1996 1997
--------- --------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues
Telecommunications services....... $ 96,499 $ 102,213 $ 116,981 $ 129,279 $ 155,419 $ 155,419 $ 37,969 $ 39,225
Cable services.................... -- -- -- -- 9,475 55,343 -- 13,656
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenues...................... 96,499 102,213 116,981 129,279 164,894 210,762 37,969 52,881
Operating income.................... 5,269 8,804 12,997 13,504 16,409 26,874 3,947 3,292
Net earnings (loss) before income
taxes............................. 1,524 6,715 11,681 12,601 12,690 11,395 3,687 (657)
Net earnings (loss)................. 890 3,951 7,134 7,502 7,462 6,700 2,137 (525)
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) per share....... $ 0.02 $ 0.17 $ 0.30 $ 0.31 $ 0.27 $ 0.16 $ .09 $ (0.01)
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
OTHER FINANCIAL DATA:
Capital expenditures................ $ 4,396 $ 5,744 $ 10,604 $ 8,938 $ 38,642 $ 45,718 $ 6,950 $ 9,529
Depreciation and amortization....... 7,486 6,978 6,639 5,993 9,409 20,553 1,887 6,120
Cable operating income.............. -- -- -- -- 2,196 12,660 -- 2,528
Cable EBITDA (2).................... -- -- -- -- 4,416 26,025 -- 6,025
Consolidated EBITDA (2)............. 12,755 15,782 19,636 19,497 25,818 47,427 5,834 9,412
Consolidated cash flow provided by
operating activities.............. 7,469 11,710 18,519 14,278 22,371 32,193 2,359 1,840
Consolidated cash flow provided
(used) by investing activities.... (7,531) (3,312) (11,359) (8,683) (122,646) -- (7,123) (10,059)
Consolidated cash flow provided
(used) by financing activities.... 2,155 (8,749) (8,134) (3,227) 109,607 -- 2,816 (400)
Cable cash flow provided by
operating activities.............. $ -- $ -- $ -- $ -- $ 2,778 $ 12,600 $ -- $ 8,278
OTHER OPERATING DATA:
Long distance (minutes in thousands)
Interstate minutes of use......... 333,009 364,906 406,751 458,131 562,084 562,084 131,621 147,568
Intrastate minutes of use......... 64,387 70,107 79,641 93,370 121,208 121,208 28,910 31,537
International minutes of use...... 4,304 4,251 5,318 6,385 7,524 7,524 1,890 1,738
--------- --------- --------- --------- --------- --------- --------- ---------
Total minutes of use.............. 401,700 439,264 491,710 557,886 690,816 690,816 162,421 180,843
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Average revenue per minute........ $ 0.184 $ 0.182 $ 0.186 $ 0.188 $ 0.179 $ 0.179 $ 0.184 $ 0.173
Cable (period-end data)
Homes passed (3).................. -- -- -- -- 162,395 162,395 -- 162,711
Equivalent basic
subscribers (4)................. -- -- -- -- 93,391 93,391 -- 92,940
Basic penetration (5)............. -- -- -- -- 57.5% 57.5% -- 57.1%
Premium service units (6)......... -- -- -- -- 77,609 77,609 -- 75,521
Premium penetration (7)........... -- -- -- -- 83.1% 83.1% -- 81.3%
Average monthly revenue per
equivalent basic
subscriber (8).................. -- -- -- -- $ 50.73 $ 50.73 -- $ 48.98
9
AS OF MARCH 31, 1997
-----------------------------------------------------------------
AS ADJUSTED AS ADJUSTED AS ADJUSTED
FOR DEBT FOR STOCK FOR BOTH
ACTUAL OFFERING ONLY OFFERING ONLY OFFERINGS
--------- ------------------ ------------------ --------------
(UNAUDITED)
BALANCE SHEET DATA:
Total assets.................................. $442,878 $ 497,878 $ 442,878 $ 497,878
Short-term debt and capital leases (including
current maturities)......................... 32,012 1,721 1,721 1,721
Long-term debt and capital leases (excluding
current maturities)......................... 181,528 266,819 159,399 214,399
Total stockholders' equity.................... $159,095 $ 159,095 $ 211,515 $ 211,515
- ------------------------------
(1) The Cable Systems were acquired effective October 31, 1996. Pro forma data
reflect the acquisition of the Cable Systems as if it had occurred on
January 1, 1996. See the Unaudited Pro Forma Combined Statement of
Operations included elsewhere in this Prospectus.
(2) 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 GAAP 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.
(3) Dwellings and commercial establishments that are or can be connected to the
distribution system of a cable system without further extension of the
transmission lines of that cable system.
(4) A number representing the sum of (a) residential customers receiving at
least the entry level of cable television service offered by a system
("Basic Service") at the system's standard residential rate for Basic
Service plus (b) for customers receiving Basic Service under bulk billing
arrangements at a rate less than the system's standard residential rate for
Basic Service (including multi-unit residential complexes, hotels, motels
and hospitals), the number derived by dividing the monthly amount billed to
all such subscribers for Basic Service by the monthly standard residential
rate for Basic Service.
(5) Equivalent basic subscribers divided by homes passed.
(6) Premium programming services selected by and sold to subscribers on an a la
carte or packaged basis for monthly fees in addition to the fee for Basic
Service. All customers who are listed as "premium service units" are also
included in "equivalent basic subscribers."
(7) Premium service units divided by equivalent basic subscribers.
(8) Total subscriber revenues for the year from the sale of cable television
services divided by average total equivalent basic subscribers divided by
12.
10
SUMMARY CABLE COMPANY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following tables set forth selected historical financial data separately
for the Cable Companies: (i) for, and as of the end of each of the years in the
five-year period ended December 31, 1995 and; (ii) for the six-month periods
ended June 30, 1995 and June 30, 1996. The data for the six-month periods ended
June 30, 1995 and June 30, 1996 have been derived from the unaudited financial
statements of the Cable Companies appearing elsewhere in this Prospectus. Such
unaudited financial statements, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair statement of the results for the unaudited periods. The following
information is qualified in its entirety by, and should be read in conjunction
with, the accompanying financial statements and notes thereto for the
corresponding Cable Company and the Company. See "Index to Financial
Statements."
PRIME CABLE OF ALASKA, L.P.
SIX
MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------- ---------
1991 1992 1993 1994 1995 1995
------------ ------------ --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues............................................... $ 25,951 $ 27,677 $ 29,101 $ 30,599 $ 32,594 $ 16,100
Operating, selling, general and administrative expenses
(1).................................................. 29,871 31,373 32,615 33,561 34,425 17,175
Operating income (loss) (1)............................ $ (3,920) $ (3,696) $ (3,514) $ (2,962) $ (1,831) $ (1,075)
OTHER OPERATING DATA:
Total assets (period-end).............................. $ 120,397 $ 111,179 $ 98,322 $ 85,303 $ 74,141 $ 80,061
EBITDA (before management fees) (2).................... 13,968 14,699 15,289 15,653 16,330 7,950
Cash flow provided by operating activities (3)......... $ -- $ -- $ 8,055 $ 8,450 $ 7,537 $ 3,652
1996
---------
STATEMENT OF OPERATIONS DATA:
Revenues............................................... $ 17,276
Operating, selling, general and administrative expenses
(1).................................................. 18,002
Operating income (loss) (1)............................ $ (726)
OTHER OPERATING DATA:
Total assets (period-end).............................. $ 61,224
EBITDA (before management fees) (2).................... 8,608
Cash flow provided by operating activities (3)......... $ 5,456
ALASKAN CABLE NETWORK (4)
SIX
MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------- ---------
1991 1992 1993 1994 1995 1995
------------ ------------ --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues............................................... $ 13,761 $ 13,914 $ 14,142 $ 13,883 $ 14,515 $ 7,224
Operating, selling, general and administrative expenses
(5).................................................. 13,221 14,013 13,775 13,367 13,883 6,858
Operating income (loss) (5)............................ $ 540 $ (99) $ 367 $ 516 $ 632 $ 366
OTHER OPERATING DATA:
Total assets (period-end).............................. $ 38,242 $ 35,167 $ 33,115 $ 33,380 $ 24,494 $ 24,106
EBITDA (before management fees) (2).................... 6,666 6,208 6,931 6,841 7,033 3,513
Cash flow provided by operating activities (3)......... $ -- $ -- $ 7,327 $ 6,279 $ 7,124 $ 3,643
1996
---------
STATEMENT OF OPERATIONS DATA:
Revenues............................................... $ 7,442
Operating, selling, general and administrative expenses
(5).................................................. 7,113
Operating income (loss) (5)............................ $ 329
OTHER OPERATING DATA:
Total assets (period-end).............................. $ 19,209
EBITDA (before management fees) (2).................... 3,598
Cash flow provided by operating activities (3)......... $ 3,049
ALASKA CABLEVISION, INC.
SIX
MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------- ---------
1991 1992 1993 1994 1995 1995
------------ ------------ --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues............................................... $ 5,488 $ 5,626 $ 5,660 $ 5,709 $ 5,920 $ 2,969
Operating, selling, general and administrative expenses
(6).................................................. 3,624 3,603 3,845 4,064 4,157 2,037
Operating income (loss) (6)............................ $ 1,864 $ 2,023 $ 1,815 $ 1,645 $ 1,763 $ 932
OTHER OPERATING DATA:
Total assets (period-end).............................. $ 2,212 $ 2,076 $ 2,211 $ 2,663 $ 3,306 $ 3,184
EBITDA (before management fees)........................ 2,836 2,981 2,817 2,530 2,583 1,359
Cash flow provided by operating activities (3)......... $ -- $ -- $ 1,495 $ 1,976 $ 1,776 $ 964
1996
---------
STATEMENT OF OPERATIONS DATA:
Revenues............................................... $ 3,007
Operating, selling, general and administrative expenses
(6).................................................. 2,119
Operating income (loss) (6)............................ $ 888
OTHER OPERATING DATA:
Total assets (period-end).............................. $ 3,446
EBITDA (before management fees)........................ 1,309
Cash flow provided by operating activities (3)......... $ 802
11
(1) Includes management fees paid by Prime in the amounts of $1,542,000,
$1,671,000 and $1,674,000 in 1993, 1994 and 1995, respectively, and $817,000
and $924,000 for the six months ended June 30, 1995 and 1996, respectively,
under management agreements in existence prior to the Company's acquisition
of Prime. These fees will not be relevant to the Company's ongoing cable
operating results. See "Business--Cable Television."
(2) 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 GAAP and should not be
considered as an alternative to net income as a measure of performance or as
an alternative to cash flow as a measure of liquidity. Other income
(expense) items are immaterial, except for a $2.7 million loss on disposal
of assets for Alaskan Cable Companies in 1993. See page F-56.
(3) Cash flow provided by operating activities for 1991 and 1992 is not
available.
(4) Combined for Alaskan Cable/Fairbanks, Alaskan Cable/Juneau, and Alaskan
Cable/Ketchikan-Sitka.
(5) Includes management fees paid by Alaskan Cable in the amounts of $202,000,
$233,000 and $225,000 in 1993, 1994 and 1995, respectively, and $113,000 and
$156,000 for the six months ended June 30, 1995 and 1996, respectively,
under management agreements in existence prior to the Company's acquisition
of cable systems from Alaskan Cable. These fees will not be relevant to the
Company's ongoing cable operating results. See "Business--Cable Television."
(6) Includes management fees paid by Alaska Cablevision in the amount of
$567,000, $571,000 and $400,000 in 1993, 1994 and 1995, respectively, and
$217,000 and $184,000 for the six months ended June 30, 1995 and 1996,
respectively, under management agreements in existence prior to the
Company's acquisition of cable systems from Alaska Cablevision. These fees
will not be relevant to the Company's ongoing cable operating results. See
"Business--Cable Television."
12
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION AND FINANCIAL DATA SET FORTH ELSEWHERE
IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CONSIDER THE FOLLOWING RISK
FACTORS IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE CLASS A
COMMON STOCK OFFERED HEREBY.
DEVELOPMENT AND EXPANSION RISKS
The Company's ability to become the first significant provider in Alaska of
an integrated package of telecommunications and cable television services will
depend in large part on its ability to enter into and succeed in the local
exchange service market, to establish PCS networks in Alaska, and to upgrade or
convert the Cable Systems from their present coaxial distribution system to a
hybrid fiber optic/coaxial distribution system so that additional cable and
telecommunications services can be offered and can be integrated with the
Company's existing telecommunications services. The entry into local exchange
service, the implementation of its PCS networks and the upgrade of the Cable
Systems are critical to the Company's ability to provide new services and
products to its customers. See "Business--Overview,"
"--Business Strategy" and "--PCS."
The successful implementation of the Company's expansion strategy is subject
to a variety of risks, including changes in the competitive climate in which the
Company operates, technological changes and compatibility risks, and legal and
regulatory risks (including possible delays in the full implementation of
deregulation under the federal Telecommunications Act of 1996 (the "1996 Telecom
Act")). The Company's expansion plans also depend on factors such as its ability
to obtain and maintain required governmental licenses and authorizations, its
ability to enter into interconnection agreements with established LECs, and its
ability to obtain financing, all in a timely manner, at reasonable costs and on
terms and conditions acceptable to the Company. There can be no assurance that
the Company's contemplated expansion of services will take place as planned or
that the expanded services will become profitable or generate positive cash
flows. See "Business--Business Strategy" and
"--Competition."
ABILITY TO MANAGE GROWTH
The Company's aggressive growth in telecommunication services, its
acquisition of a state-wide license for development of PCS services, and its
acquisition of cable television systems in Alaska have placed, and may continue
to place, a significant strain on the Company's administrative, operational and
financial resources and have increased demands on the Company's systems and
controls. The Company's ability to continue to manage its growth successfully
will require the Company to further enhance its operational, management,
financial and information systems and controls and to expand, train and manage
its employee base. In addition, as the Company increases its service offerings
and expands its targeted markets, there will be additional demands on the
Company's customer support, sales, marketing, and administrative resources and
infrastructure. There can be no assurance that the Company's administrative,
operating and financial resources, systems and controls will be adequate to
effectively manage the Company's growth. The inability of the Company to manage
its growth successfully could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Business--Business
Strategy."
SIGNIFICANT CAPITAL REQUIREMENTS; CONCURRENT OFFERINGS
Development and expansion of the Company's telecommunications and cable
operations will require substantial capital. The Company estimates that its
aggregate capital requirements for the next five years will be approximately
$445 to $505 million, including approximately $165 million for the purchase of
new satellite transponders and the construction of new undersea fiber optic
cable facilities. The Company's estimated capital requirements include, among
other things, the estimated costs (i) to
13
continue the expansion of the Company's long distance facilities and services;
(ii) to develop and deploy the Company's entry into local exchange services and
its PCS network; and (iii) to upgrade, expand and integrate the Cable Systems
into its telecommunications services business. The Company expects that the net
proceeds from the Offerings, together with internally generated cash flows and
borrowings under the Credit Facility (as defined below) and its separate
committed financing facility for GCI Transport Company, will provide sufficient
funds for the Company to expand its business as currently planned. The amount of
the Company's future capital requirements will depend upon many factors,
however, including regulatory, technological and competitive developments in the
telecommunications and cable television industries, and may differ materially
from the Company's estimates.
Concurrently with the Company's offering of the Class A Common Stock, GCI,
Inc., a wholly owned subsidiary of the Company is separately offering
$150,000,000 aggregate principal amount of its % Senior Notes due 2007.
Consummation of one Offering is not contingent upon consummation of the other
Offering, and there can be no assurance that the Debt Offering will be
consummated and, if so, on what terms. Without the proceeds from the Debt
Offering, the Company will have to seek alternative financing for a portion of
its business plan. In particular, if the Debt Offering is not consummated, the
Company will need to obtain additional financing for its planned construction of
the new undersea fiber optic cable facilities and certain elements of its
planned local exchange and PCS networks. In addition, the Company may be
required to seek additional capital if its actual capital requirements exceed
its estimates and it is unable to generate sufficient funds internally or borrow
sufficient funds under the Credit Facility. If the Company were to require
additional financing, there can be no assurance that additional financing would
be available to the Company or, if available, that it would be on terms
acceptable to the Company. The Debt Offering is contingent upon the Company
refinancing its Existing Credit Facilities. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Business--Business Strategy" and
"Description of Credit Facilities and Notes."
POTENTIAL ADVERSE EFFECT ON THE COMPANY IF FIBER FACILITY IS NOT CONSUMMATED
As described under "Description of Credit Facilities and Notes,"
subsidiaries of the Company plan to incur up to $75 million in additional
indebtedness to finance the construction of an undersea fiber optic cable (the
"Fiber Facility"). The Company requires the Fiber Facility in order to construct
new undersea fiber optic cable facilities, and although the Company has received
executed commitments from lenders to provide the Fiber Facility, there can be no
assurance that the Fiber Facility will be consummated.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company has substantial leverage. As of March 31, 1997, on an as
adjusted basis after giving effect to the Offerings and the application of the
net proceeds therefrom, the total consolidated indebtedness of the Company would
have been $216.1 million (or 50.5% of the total capitalization of the Company).
As of March 31, 1997, after giving effect to the Stock Offering only and the
application of the net proceeds therefrom, the total consolidated indebtedness
of the Company would have been $161.1 million (or 43.2% of the total
capitalization of the Company). See "Capitalization." The degree to which the
Company is leveraged may adversely affect the Company's ability to finance its
future operations, to compete effectively against better capitalized companies
and to withstand downturns in its business or the economy generally, and could
limit its ability to pursue business opportunities that may be in the best
interests of the Company and its security holders. If the Debt Offering is not
consummated, the Company will retain its Existing Credit Facilities at least
through 1997. If both Offerings are consummated, on or prior to the closing of
the Debt Offering, the Company will replace its existing $62.5 million senior
credit facility (the "Telephony Credit Facility") and its existing $205 million
senior credit facility (the "Cable Credit Facility" and, together with the
Telephony Credit Facility, the
14
"Existing Credit Facilities") with a new and enlarged bank credit facility (the
"Credit Facility") under which approximately $216.4 million will be available
for borrowing, subject to compliance with restrictive covenants. As of March 31,
1997, the Company had $68.1 million available under the Existing Credit
Facilities, subject to compliance with restrictive covenants. In either case,
the Company expects to continue to borrow funds and the applicable credit
facility will be secured by substantially all of the assets of the Company. See
"Description of Credit Facilities and Notes."
The Existing Credit Facilities, the Credit Facility and the Notes impose
restrictions on the operations and activities of the Company. Generally, the
most significant restrictions relate to debt incurrence, investments, capital
expenditures, sales of assets and the use of proceeds therefrom and cash
distributions from the Company. These restrictions require the Company to comply
with certain financial covenants including financial ratios. The Company is
currently in compliance with such covenants and ratios. The restrictions in the
indenture to be entered into in connection with the Notes (the "Indenture") will
be subject to a number of important qualifications and exceptions. As long as
the Company and its subsidiaries comply with specified leverage ratios, the
Company and its subsidiaries are permitted to incur an unlimited amount of
additional indebtedness to finance the acquisition of telecommunications and
cable assets, equipment and inventory and for capital expenditures and working
capital for the telecommunications and cable businesses and up to $90.0 million
of other indebtedness. The Indenture will also permit the Company to secure any
such indebtedness. The Indenture will also permit the Company's Unrestricted
Subsidiaries (as defined in the Indenture) to incur an unlimited amount of
indebtedness, $75 million of which is currently contemplated to be incurred as
project financing to construct an undersea fiber optic cable. The ability of the
Company to comply with the restrictions and covenants in the Existing Credit
Facilities, the Credit Facility and the Indenture will be dependent upon the
Company's future performance and various other factors, including factors beyond
its control. If the Company fails to comply with the restrictions and covenants
in the Indenture and the Existing Credit Facilities or the Credit Facility, the
Company's obligation to repay the Notes and its indebtedness under the Existing
Credit Facilities or the Credit Facility may be accelerated. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," and "Description of Credit
Facilities and Notes."
RELIANCE ON SIGNIFICANT CUSTOMERS
For the year ended December 31, 1996, the Company provided services to MCI
and to Sprint resulting in substantial revenues to the Company of approximately
29% of total revenues for 1996. These two customers are free to seek out long
distance communication services from competitors of the Company upon expiration
of their contracts (in 2001 in the case of MCI and in 1999 in the case of
Sprint) or earlier upon a default or the occurrence of a force majeure event or
a substantial change in applicable law or regulation under the applicable
contract. Loss of one or both of these major customers, or a considerable number
of other customers, would have a material adverse effect on the financial
condition and results of operations of the Company. See "Business--Long Distance
Operations."
RAPID CHANGES IN TECHNOLOGY AND CUSTOMER REQUIREMENTS
The telecommunications and cable television industries have been
characterized by rapid technological changes, frequent new service introductions
and evolving industry standards. The Company believes that its future success
will depend on its ability to anticipate such changes and to offer services that
meet these standards on a timely basis. There can be no assurance that the
Company will have sufficient resources to make necessary investments or to
introduce new services that would satisfy its customers. See
"Business--Competition."
15
GEOGRAPHIC CONCENTRATION AND ALASKAN ECONOMY
The Company offers a variety of voice, video and data services to
residential, commercial and governmental customers in the State of Alaska. As a
result of this geographic concentration, the Company's growth and operations
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. Any
deterioration in these markets could have an adverse impact on the demand for
telecommunications and cable television services and on the Company's results of
operations and financial condition. In addition, the customer base in Alaska is
limited. Alaska has a population of approximately 600,000 people, approximately
one-half of whom are located in the Anchorage area. No assurance can be given
that the Alaskan economy will continue to grow and to generate increased demand
for the Company's services. See "Business--Alaskan Voice, Video and Data
Markets" and "--Alaskan Economy."
RECENT CABLE SYSTEM ACQUISITIONS
As of October 31, 1996, the Company acquired the Cable Systems for a total
purchase price of $280.1 million. On a pro forma basis, giving effect to the
acquisition of the Cable Systems as if it had occurred on January 1, 1996, the
Cable Systems' revenues and EBITDA before management fees would have comprised
26.3% of the Company's consolidated revenues and 54.9% of the Company's
operating cash flow for the year ended December 31, 1996. In acquiring the Cable
Systems, the Company obtained a substantial portion of the existing cable
television distribution systems in Alaska and gained entry into the cable
television business, in which it had no prior operating experience. In
connection with the acquisition, the Company entered into the Prime Management
Agreement with Prime Management to assist in the management of the Cable
Systems. The Company currently relies on Prime Management, which had managed the
Prime cable television systems prior to their acquisition by the Company, to
assist in the management of the Cable Systems, and there can be no assurance
that the Company's cable television business would not be adversely affected
should Prime Management's services become unavailable. Either party may
terminate the Prime Management Agreement in its discretion after October 31,
1998. In addition, given the Company's lack of experience in the cable
television industry, there can be no assurance that the Company will achieve
improved operating results, synergies and other benefits expected as a result of
the acquisition of the Cable Systems. See "Business--Cable Television."
COMPETITION
The long distance telecommunications industry is highly competitive.
Competition in the long distance business is based upon pricing, customer
service, billing services and perceived quality. The Company's principal
competitor in long distance service, AT&T Alascom (the other leading long
distance provider in Alaska), has substantially greater resources than the
Company and its interstate rates are integrated with those of a nationwide
communications firm, AT&T. While the Company initially competed in long distance
services based upon offering substantial discounts, those discounts have been
eroded in recent years due to lowering of prices by AT&T Alascom. If competition
for long distance services forces the Company to offer its services at greater
discounts, the consequent loss of revenues could have a material adverse effect
on the Company's financial condition and results of operations.
Recent changes in the regulation of the telecommunications industry may
affect the Company's competitive position as a provider of long distance
services. The 1996 Telecom Act effectively opened the local and long distance
markets to competition. Incumbent local exchange carriers may enter the market
for long distance services. In fact, the incumbent LEC in Anchorage has, as of
April 1997, begun providing long distance services in the Anchorage area on a
non-facilities-based basis. The Company is unable to predict the extent to which
this may have an adverse effect on the Company's financial condition and results
of operations.
16
The cable television industry is also highly competitive. In certain areas
of the United States, cable television systems face competition from other cable
operators offering cable television services in the same areas. Currently, the
Company believes it is not subject to competition from other cable operators in
the areas served by the Cable Systems. However, applicable law permits cable
operators to compete directly with incumbent cable systems. Cable television
systems also face competition from alternative methods of receiving and
distributing television signals such as traditional broadcast television, direct
broadcast satellite systems, satellite master antennae television systems and
wireless cable systems, and from other sources of news, information and
entertainment. The extent to which a cable television system is competitive
depends, in part, upon the cable system's ability to provide quality programming
and other services at competitive prices. Recent published reports indicate that
there has been a substantial increase in the number of DBS subscribers in the
United States in recent years. Thus, although it is difficult to assess the
ultimate impact that DBS will have on the cable industry or the Company's
financial condition and results of operations, DBS services may pose a
significant competitive threat to cable television systems.
Regulatory changes may also make it easier for LECs and others, including
utility companies, to provide video services competitive with services provided
by cable systems and to provide cable services directly to subscribers. Prior to
the 1996 Telecom Act, LECs were statutorily barred from providing video services
to subscribers in their service areas, with certain exceptions. The 1996 Telecom
Act repealed this statutory telephone/cable cross-ownership prohibition, and
recognizes several multiple entry options for telephone companies to provide
competitive video programming. LECs, including the Regional Bell Operating
Companies ("RBOCs"), generally will be allowed to compete with cable operators
both inside and outside the LECs' telephone service areas with certain
limitations.
The local exchange services market is also likely to become competitive.
AT&T has announced plans to enter the local exchange services market in Alaska
on a non-facilities-based basis. The 1996 Telecom Act mandates that states allow
local exchange competition and requires LECs, among other things, to take steps
to ensure local competition by allowing adequate interconnection and network
access to competing carriers. In addition, in the PCS industry, the Company may
face competition from other PCS providers as well as other providers offering
similar services, such as cellular carriers.
Management of the Company has no control over the possible future entry into
the Alaskan telecommunications or cable television markets of other potential
competitors, many of whom may be much larger than the Company and have much
greater resources than the Company. Aggressive competition for customers in
communities served by the Company could also result in increased marketing
expenditures by the Company. Resulting reductions in the Company's customer base
and rates and increases in the Company's costs could have a material adverse
effect on the Company's financial condition and results of operation. Because of
the high level of competition, the Company's ability to expand its operations
and increase market share is uncertain. Therefore, no assurance can be given
that the Company can achieve growth in products or revenues or that the Company
will not lose market share due to competitive pricing, greater resources of its
competitors or other factors. See "Business--Competition."
REGULATION
The Company is subject to regulation by the Federal Communications
Commission ("FCC") and by the APUC as a non-dominant provider of long distance
services. Among other regulatory requirements, the Company is required to file
tariffs with the FCC for interstate and international service, and with the APUC
for intrastate services, but such tariffs routinely become effective without
intervention by the FCC, the APUC or other third parties since the Company is a
non-dominant carrier. The Company received approval from the APUC in February
1997 to provide local exchange services in and around Anchorage and Hope,
Alaska.
17
Military franchise requirements also affect the Company in its provision of
telecommunications and cable television services to military bases. Substantial
changes in the federal regulation of the telecommunications and the cable
television industries were accomplished through the 1996 Telecom Act which
became law in February 1996. Certain provisions of the 1996 Telecom Act could
materially affect the growth and operation of the telecommunications and cable
television industries and the services provided by the Company. Although the
1996 Telecom Act is expected to reduce regulatory burdens, the
telecommunications and cable television industries may be subject to additional
competition as a result thereof. There are numerous rulemakings that have been
and that will be undertaken by the FCC, which will interpret and implement the
1996 Telecom Act's provisions. In addition, certain provisions of the 1996
Telecom Act are not immediately effective. Furthermore, certain of the 1996
Telecom Act's provisions have been, and are likely to continue to be, judicially
challenged. The Company is unable to predict the outcome of such rulemakings or
litigation or the substantive effect (financial or otherwise) of the 1996
Telecom Act and the rulemakings on the Company. See "Business--Regulation." The
Company is also subject to federal and state regulation as a cable television
operator pursuant to the Communications Act of 1934 (the "Communications Act"),
the Cable Communications Policy Act of 1984 (the "1984 Cable Act") and the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"
and, together with the 1984 Cable Act, the "Cable Acts"), all as amended by the
1996 Telecom Act. The 1992 Cable Act significantly expanded the scope of cable
television regulation on an industry-wide basis by imposing rate regulation,
carriage requirements for local broadcast stations, customer service obligations
and other requirements. The 1992 Cable Act and the FCC's rules implementing the
1992 Cable Act generally have increased the administrative and operational
expenses, and in certain instances required rate reductions for cable television
systems, and have resulted in additional regulatory oversight by the FCC and
state or local (depending on the regulatory scheme) authorities.
As an authorized local exchange service provider in parts of Alaska, the
Company is regulated as a LEC by the APUC. The APUC's February 1997 order
requires all Alaskan LECs, including the Company, to comply with several
regulatory requirements, including the filing of a local exchange service tariff
and the filing of certain annual and quarterly reports. In addition, the Company
is subject to other regulatory requirements, including certain obligations
imposed by the 1996 Telecom Act on all LECs, which requirements include
permitting resale of LEC services, number portability, dialing parity,
interconnection and reciprocal compensation. See "Business--Regulation."
As a PCS licensee, the Company is subject to regulation by the FCC and must
comply with certain buildout and other conditions of the license, as well as
with the FCC's regulations governing the PCS service. On a more limited basis,
the Company may be subject to certain regulatory oversight by the APUC (E.G., in
the areas of consumer protection and transfer of its license), although states
are not permitted to regulate the rates of PCS and other commercial mobile
service providers. PCS licensees may also be subject to regulatory requirements
of local jurisdictions pertaining to, among other things, the siting of tower
facilities. As a cellular reseller, the Company is deemed to be a common carrier
and is subject to the requirements of Title II of the Communications Act. In
light of the non-dominant market position of resellers, many of the obligations
traditionally imposed on common carriers are relaxed with respect to resellers.
Resellers are required to contribute to the Telecommunications Relay Services
Fund and to remit annual regulatory fees to the FCC. Cellular resellers may also
be subject to certain state requirements, although state regulation of mobile
service providers is limited in several respects by federal law. See
"Business--Regulation."
Other existing federal regulations, including copyright licensing rules, are
currently the subject of judicial proceedings, legislative hearings, and
administrative proposals which could change, in varying degrees, the manner in
which cable television systems operate. Neither the outcome of these
proceedings, nor their impact upon the cable television industry in general or
the Company's entry into that industry, can be predicted at this time. There can
be no assurance that future regulatory actions taken by Congress, the FCC or
other federal, state or local governmental authorities will not have an adverse
18
effect on the business, financial condition or results of operations of the
Company. See "Business-- Regulation."
CONCENTRATION OF STOCK OWNERSHIP
As of June 30, 1997, executive officers and directors of the Company and
their affiliates owned approximately 59.2% of the combined outstanding Common
Stock, representing 67.8% of the combined voting power of the Common Stock
(45.3% and 59.1%, respectively, after giving effect to the Stock Offering).
Certain of these shareholders are subject to the Voting Agreement pursuant to
which eight of the Company's ten directors are currently elected (two
nominations by the Voting Prime Sellers, two nominations by MCI, two nominations
by TCI-GCI, Inc., a wholly owned subsidiary of Tele-Communications, Inc.
(together with its subsidiaries, "TCI") and one nomination by each of Mr. Duncan
and Mr. Walp who currently serve as their own nominees). MCI owns 22.6% of the
combined outstanding Common Stock as of June 30, 1997, representing 26.6% of the
combined voting power of the Common Stock (19.4% and 24.5% after giving effect
to the Stock Offering). As of June 30, 1997, the Voting Prime Sellers
collectively own 25.7% of the combined outstanding Common Stock,representing
13.8% of the combined voting power of the Common Stock (18.0% and 10.3% after
giving effect to the Stock Offering). TCI expects to sell all of its shares of
Common Stock in the Stock Offering and, if it does so, it will thereafter no
longer be a party to the Voting Agreement. If TCI ceases to be a party to the
Voting Agreement, each other party to the Voting Agreement will have the right
to withdraw from the Voting Agreement by giving written notice to the other
parties, although the Company does not anticipate that any party will exercise
that right.
Following the Stock Offering and assuming that TCI is the only shareholder
that ceases to be a party to the Voting Agreement, the percentage of the
combined outstanding Common Stock subject to the Voting Agreement will decrease
from 54.0% to 40.7% (or from 56.3% to 44.6% of the combined voting power of the
Common Stock). Notwithstanding the withdrawal of TCI, the shareholders who are
party to the Voting Agreement will collectively be able to control the
management policy of the Company and all fundamental corporate actions,
including mergers, substantial acquisitions and dispositions and election of
directors to the Company's Board. This concentration of ownership may have the
effect of delaying or preventing a change of control of the Company, although
the Voting Agreement does not currently cover any matters other than the
election of directors. See "Principal and Selling Shareholders" and
"Management--Voting Agreement."
ANTI-TAKEOVER CONSIDERATIONS
The Company has an authorized class of 1,000,000 shares of preferred stock
that may be issued by the Board on such terms and with such rights, preferences
and designations as the Board may determine. Issuance of such preferred stock,
depending upon the rights, preferences and designations thereof, may have the
effect of delaying, deterring or preventing a change in control of the Company.
In addition, the Company's Restated Articles of Incorporation and revised Bylaws
provide that the Board of Directors be divided into three classes, each of which
is elected for a term of three years.
Such anti-takeover effects may deter a third party who would propose to
acquire the Company or to engage in a similar transaction affecting control of
the Company in which the Company's shareholders might receive a premium for
their shares over the then current market value. See "Description of Capital
Stock--Preferred Stock" and "--Potential Anti-Takeover Effect of the Restated
Articles of Incorporation and Bylaws of the Company."
THINLY TRADED STOCK; VOLATILITY OF STOCK PRICE
The Class A Common Stock is traded on Nasdaq. As of June 30, 1997, there
were approximately 1,759 shareholders of record of Class A Common Stock. The
Class A Common Stock has historically
19
experienced moderate levels of trading. As of May 31, 1997, there were 21 market
makers in the Class A Common Stock, only three of whom on the average had
trading volumes in excess of 100,000 shares per month during the year ended
December 31, 1996. During 1996, the average daily trading volume in Class A
Common Stock was approximately 38,253 shares per day and there can be no
assurance that a broader based market will develop. Even if the market for the
Class A Common Stock were to expand, there can be no assurance that the price of
the Class A Common Stock will not decline below the price to the public set
forth on the cover of this Prospectus. The Class B Common Stock is traded in the
over-the-counter market on a more limited basis than the Class A Common Stock.
As of June 30, 1997, there were approximately 691 shareholders of record of
Class B Common Stock. The market price of the Common Stock has historically
fluctuated significantly and may be subject to fluctuations in the future in
response to various factors and events, including the liquidity of the market
for the Common Stock, variations in the Company's quarterly operating results,
regulatory or other changes affecting the telecommunications industry generally
or the Company specifically, announcements of business developments by the
Company and its competitors, changes in operating results and changes in market
conditions. See "--Substantial Leverage; Ability to Service Debt,"
"--Competition," "--Regulation" and "Price Range of Common Stock and Dividend
Policy."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of a substantial amount of Common Stock, or the perception that
such sales may occur, could adversely affect the market price of the Common
Stock. Several of the Company's principal shareholders hold a significant
portion of Common Stock, and a decision by one or more of these shareholders to
sell their shares could adversely affect the market price of the Common Stock.
Upon completion of the Offerings, the Company will have approximately
45,157,109 shares of Class A Common Stock and 4,068,934 shares of Class B Common
Stock outstanding. Upon completion of the Stock Offering, all of the Company's
outstanding Common Stock will be freely tradeable under the Securities Act of
1933 (the "Securities Act"), except shares of Common Stock held by affiliates of
the Company and shares of Common Stock which are "restricted securities" within
the meaning of Rule 144 promulgated under the Securities Act ("Rule 144"), which
the Company estimates to be as many as 19,338,819 shares, and shares of Common
Stock held by former affiliates of the Cable Systems within the meaning of Rule
145 promulgated under the Securities Act ("Rule 145"), which could be as many as
10,770,879 shares (or 8,700,879 shares if the Underwriters' over-allotment
option is exercised in full). The Rule 145 restrictions that are applicable to
shares of Class A Common Stock received by affiliates of the owners of the Cable
Systems in connection with the Company's acquisition of the Cable Systems expire
on October 31, 1997. Shares of Common Stock acquired directly or indirectly from
the issuer or an affiliate of the issuer in transactions not involving any
public offering are "restricted securities" within the meaning of Rule 144. See
"Shares Eligible For Future Sale" for a description of the restrictions on
resale under Rule 144. Although shares of Common Stock held by MCI, the Prime
Sellers and the shareholders of Alaska Cablevision, Inc. may be subject to
restrictions on resale under Rule 144 or Rule 145, these parties have been
granted registration rights with respect to such shares which, if exercised by
them, would permit them to sell those shares free of the restrictions imposed by
Rule 144 and Rule 145. See "Principal and Selling Shareholders" and "Certain
Transactions--Registration Rights Agreements."
The Company and each of its directors and executive officers and certain
Selling Shareholders have entered into "lock-up" agreements with the
Underwriters, providing that, subject to certain exceptions, they will not, for
a period of 180 days from the date of this Prospectus, without the prior written
consent of Salomon Brothers Inc, offer, sell or contract to sell, or otherwise
dispose of, directly or indirectly, or announce an offering of, any shares of
Class A Common Stock or any securities convertible into, or exchangeable for,
shares of Class A Common Stock, provided that the Company may issue and sell
shares of Class A Common Stock pursuant to the Stock Purchase Plan. See
"Underwriting."
20
As of June 30, 1997, there were outstanding options to purchase 2,593,790
shares of Class A Common Stock, 2,408,600 of which were granted under the Stock
Option Plan. All of the 2,408,600 shares of Class A Common Stock issuable upon
the exercise of options granted under the Stock Option Plan have been registered
by the Company under the Securities Act on Form S-8.
DILUTION
Purchasers of Class A Common Stock will incur immediate and substantial
dilution in net tangible book value per share of $8.85 (assuming a public
offering price of $8.00 per share, the closing sale price per share of the Class
A Common Stock as of July 2, 1997). See "Dilution."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends in the foreseeable future.
See "Price Range of Common Stock and Dividend Policy."
21
THE COMPANY
CORPORATE BACKGROUND
The Company was founded in 1979 by Robert M. Walp and the Company's current
President and Chief Executive Officer, Ronald A. Duncan. From 1980 to 1987, the
Company was a wholly owned subsidiary of WestMarc Communications, Inc.
("WestMarc"). The Company was spun off in 1987 from WestMarc, a subsidiary of
TCI that was itself spun off by TCI in 1984. As a result of that spin off from
WestMarc, the Company became an independent publicly held company.
TCI acquired its stock in the Company through its ownership of WestMarc,
which was reacquired by TCI in 1990. In 1991, WestMarc provided financing to the
Company in exchange for convertible preferred stock of the Company on which
dividends were paid in shares of Class B Common Stock. That preferred stock and
an outstanding warrant were retired in 1993 in exchange for $3.8 million.
Certain major shareholders, including TCI and MCI, are parties to the Voting
Agreement which permits each of TCI and MCI to nominate two persons to the
Board. TCI expects to sell all of its shares of Common Stock in the Stock
Offering and, if it does so, it will thereafter no longer be a party to the
Voting Agreement. The Company currently expects, however, that TCI's nominees to
the Board will continue as directors of the Company following the Stock
Offering, notwithstanding that TCI would no longer have the right to nominate
two directors. See "Management--Voting Agreement" and "Principal and Selling
Shareholders."
The Class A Common Stock is designated as a national market system stock on
Nasdaq, and trades under the symbol "GNCMA." The Class B Common Stock is quoted
in the over-the-counter market and is traded on a more limited basis. The Debt
Offering and the Stock Offering will be the Company's first underwritten
offerings of securities. Consummation of the Debt Offering and the Stock
Offering are not contingent on each other.
The executive offices of the Company are located at 2550 Denali Street,
Suite 1000, Anchorage, Alaska 99503-2781, and its telephone number is (907)
265-5600.
22
CORPORATE STRUCTURE
The following chart depicts the corporate structure of the Company:
[CHART]
The Company's telecommunications operations are conducted primarily through
GCI Communication Corp., to which the Company transferred substantially all of
its assets and liabilities in 1990. The Company's telecommunications operations
are also conducted through two other subsidiaries. GCI Communication Services,
Inc. provides private network point-to-point data and voice transmission
services between Alaska, Hawaii and certain western states, and GCI Leasing Co.
Inc. is the owner of the Company's existing undersea fiber optic cable capacity.
The Company's cable operations are conducted through GCI Cable, Inc. and its
subsidiaries. GCI Transport Company and its subsidiaries were recently formed to
finance the acquisition of seven transponders on the Galaxy X satellite that is
expected to be launched in mid-1998, and to finance the construction of new
undersea fiber optic cable facilities linking Anchorage and Juneau to the lower
48 states at Seattle, Washington, with a terrestrial connection to Fairbanks.
GCI, Inc. was recently formed to be the obligor on the Notes to be issued in
the Debt Offering, while GCI Holdings, Inc. was recently formed to be the
borrower under the Credit Facility. If the Debt Offering is not consummated, the
Company will not refinance the Existing Credit Facilities, under which GCI
Communication Corp. and GCI Cable, Inc. are, and will remain, the obligors. See
"Description of Credit Facilities and Notes."
23
RECAPITALIZATION
During the last several years, the Company has financed the development,
construction and expansion of its business principally through internally
generated funds and borrowings under bank credit facilities. In order to finance
a portion of the improvements to its long distance facilities and cable
television systems, as well as its entry into wireless services and local
exchange services, and to improve its operating and financial flexibility, the
Company (i) concurrently with the Offerings will refinance the Existing Credit
Facilities with the Credit Facility (provided, that if the Debt Offering is not
consummated, the Existing Credit Facilities will not be refinanced); (ii) is
offering pursuant to this Prospectus 13.8 million shares of Class A Common
Stock, of which approximately 7.0 million shares will be for the account of the
Company and approximately 6.8 million shares will be for the account of the
Selling Shareholders; and (iii) concurrently with the Stock Offering, is
offering $150,000,000 in aggregate principal amount of the Notes (collectively,
the "Recapitalization"). The Company believes that its internally generated cash
flow, combined with the net proceeds of the Offerings and borrowings under the
Credit Facility and its separate committed financing facility for GCI Transport
Company, will provide sufficient funds for the Company to satisfy its working
capital requirements and capital expenditures for the foreseeable future.
However, consummation of one Offering is not contingent upon consummation of the
other Offering and there can be no assurance that the Debt Offering will be
consummated. Without the proceeds from the Debt Offering, the Company may have
to seek alternative financing for a portion of its business plan. In particular,
if the Debt Offering is not consummated, the Company will need to obtain
additional financing for its planned construction of the new undersea fiber
optic cable facilities and certain elements of its planned local exchange and
PCS networks. If the Company were to require additional financing, there can be
no assurance that additional financing would be available to the Company or, if
available, that it would be on terms acceptable to the Company. The Debt
Offering (but not the Stock Offering) is contingent upon the Company refinancing
its Existing Credit Facilities. See "Risk Factors--Significant Capital
Requirements; Concurrent Offerings," "Business--Business Strategy,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Use of Proceeds" and "Description
of Credit Facilities and Notes."
RECENT ACQUISITION OF CABLE SYSTEMS
As of October 31, 1996, the Company acquired the Cable Systems from the
following unrelated cable television companies: (i) Prime Cable of Alaska, L.P.,
a Delaware limited partnership ("Prime"); (ii) three corporations comprising
"Alaskan Cable"; Alaskan Cable Network/Fairbanks, Inc.; Alaskan Cable
Network/Juneau, Inc.; and Alaskan Cable Network/Ketchikan-Sitka, Inc.; (iii)
Alaska Cablevision, Inc., a Delaware corporation; (iv) McCaw/Rock Homer Cable
Systems, J.V., an Alaska joint venture; and (v) McCaw/Rock Seward Cable Systems,
J.V., an Alaska joint venture.
The total purchase price for the acquisition of the Cable Systems was $280.1
million, which included certain transaction and financing costs. The purchase
price included the issuance of approximately 14.7 million shares of Class A
Common Stock valued at $86.7 million, $72.8 million of cash, $110.6 million of
debt assumption and the issuance of $10.0 million in subordinated convertible
notes. The convertible notes were converted in accordance with their terms into
approximately 1.5 million shares of Class A Common Stock in January 1997.
Financing for the transactions consisted of a new $205 million bank credit
facility and additional capital provided by the sale of 2.0 million shares of
Class A Common Stock to MCI for $6.50 per share, a 30% premium to the $5.00 per
share market price immediately preceding the announcement of the Company's
acquisition of the Cable Systems. See "Business--Cable Television."
24
USE OF PROCEEDS
The net proceeds to the Company from the Stock Offering are estimated to be
approximately $52.4 million, assuming an initial public offering price of $8.00
per share (the closing sale price of the Class A Common Stock as of July 2,
1997), and after deducting estimated underwriting discounts and commissions and
other estimated offering expenses payable by the Company. The net proceeds from
the sale of shares being offered by the Selling Shareholders are estimated to be
approximately $51.4 million (approximately $67.1 million if the Underwriters'
over-allotment option is exercised in full), after deducting estimated
underwriting discounts and commissions payable by the Selling Shareholders. All
other expenses of the offering of shares on behalf of the Selling Shareholders
will be paid by the Company. The Company will not receive any of the proceeds
from the sale of shares of Class A Common Stock by the Selling Shareholders. The
net proceeds to the Company from the Debt Offering are estimated to be
approximately $145.0 million, after deducting estimated underwriting discounts
and commissions and other offering expenses payable by the Company.
Substantially all of the net proceeds of the Offerings will initially be
contributed to Holdings and its subsidiaries as equity and used to pay down the
outstanding balance under the Existing Credit Facilities, if only the Stock
Offering is consummated, or under the Credit Facility, if both Offerings are
consummated. In either case, amounts under the applicable credit facilities will
be redrawn as needed to implement the Company's five-year business plan. The
Existing Credit Facilities consist of the Telephony Credit Facility which
matures on July 24, 1997 and bears interest at LIBOR plus 1.75% to 3.00%
depending on the leverage ratio (7.33% weighted average at December 31, 1996)
and the Cable Credit Facility which matures on September 30, 2005 and bears
interest at LIBOR plus 1.125% to 2.875% depending on the leverage ratio. The
Credit Facility will mature on June 30, 2005 and will bear interest at either
Libor plus 0.75% to 2.5%, depending on the leverage ratio of Holdings and its
restricted subsidiaries, or at the greater of the prime rate or the federal
funds effective rate (as defined) plus 0.05%, in each case plus an additional
0.0% to 1.375%, depending on the leverage ratio of Holdings and its restricted
subsidiaries. As of June 30, 1997, the principal amount outstanding under the
Existing Credit Facilities was $214.5 million. If both Offerings are
consummated, initial borrowings under the Credit Facility will be used to
refinance the Existing Credit Facilities. The Company's ability to reborrow
under the Existing Credit Facilities or the Credit Facility will be subject to
certain conditions and there can be no assurance that the Company will be able
to satisfy such conditions at the time it desires to reborrow. See "Description
of Credit Facilities." Under the Company's current five-year business plan, the
Company expects to invest between $240 and $260 million to fund expansion of
long distance facilities (including approximately $40 million for satellite
transponders and approximately $125 million for new undersea fiber optic cable
facilities); between $140 and $160 million to fund development, construction and
operating costs of its local exchange and PCS networks and businesses; and
between $65 and $85 million to upgrade its cable television plant and to
purchase equipment for new cable television services. The precise allocation of
funds for these purposes will depend on the level and timing of the Company's
internally generated cash flow, future technological, regulatory and other
developments in or affecting the Company's business, the competitive climate and
the emergence of future opportunities.
Consummation of one Offering is not contingent upon consummation of the
other Offering and there can be no assurance that the Debt Offering will be
consummated. Without the proceeds from the Debt Offering, the Company may have
to seek alternative financing for a portion of its business plan. In particular,
if the Debt Offering is not consummated, the Company will need to obtain
additional financing for its planned construction of the new undersea fiber
optic cable facilities and certain elements of its planned local exchange and
PCS networks. If the Company were to require additional financing, there can be
no assurance that additional financing would be available to the Company or, if
available, that it would be on terms acceptable to the Company. The Debt
Offering (but not the Stock Offering) is contingent upon the Company refinancing
its Existing Credit Facilities. See "Risk Factors-- Significant Capital
Requirements; Concurrent Offerings," "Management's Discussion and Analysis of
Financial
25
Condition and Results of Operations--Liquidity and Capital Resources,"
"Business--Business Strategy" and "Description of Credit Facilities and Notes."
The Company may also evaluate potential joint ventures, strategic alliances
and acquisitions. Although the Company is not currently a party to any
understandings or agreements regarding any of the foregoing, the Company may use
the Credit Facility to finance in whole or in part such joint ventures,
strategic alliances or acquisitions should attractive opportunities arise.
DILUTION
At March 31, 1997, the historical net tangible book value of the Company was
a deficit of $90.9 million or $2.38 per share of Class A Common Stock.
"Historical net tangible book value per share" represents the Company's net
worth less intangible assets of $250.0 million divided by 38,159,000 shares of
Class A Common Stock outstanding on March 31, 1997. After giving effect to the
sale by the Company of 7,000,000 shares of Class A Common Stock pursuant to the
Stock Offering at an assumed public offering price of $8.00 per share (the
closing sale price per share as of July 2, 1997) and after deducting the
underwriting discount and expenses of the Stock Offering, the pro forma net
tangible book value of the Company at March 31, 1997, would have been a deficit
of $38.5 million, or $0.85 per share of Class A Common Stock. Such amount
represents an immediate increase in pro forma net tangible book value of $1.53
per share of Class A Common Stock to the existing stockholders and an immediate
dilution to new investors of $8.85 per share of Class A Common Stock. The
following table illustrates the dilution in pro forma net tangible book value
per share to new investors.
Assumed public offering price............................... $ 8.00
Historical net tangible book value (deficit) at March 31,
1997...................................................... $ (2.38)
Increase in net tangible book value attributable to net
proceeds of the Stock Offering............................ 1.53
---------
Pro forma net tangible book value (deficit) after the Stock
Offering.................................................. (.85)
---------
Dilution to new investors................................... $ 8.85
---------
---------
To the extent that additional shares are issued upon exercise of oustanding
stock options, there will be further dilution to new investors. See
"Management--Stock Option Plan."
26
CAPITALIZATION
(DOLLARS IN THOUSANDS)
The following table sets forth the consolidated capitalization of the
Company as of March 31, 1997 and as adjusted to give effect to the Offerings and
refinancing of the Company's Existing Credit Facilities (except for the As
Adjusted for Stock Offering Only column). This table should be read in
conjunction with the Company's Consolidated Financial Statements and the notes
thereto and the other financial information included elsewhere in this
Prospectus. See "Index to Financial Statements."
AS OF MARCH 31, 1997
-----------------------------------------------------
AS ADJUSTED AS ADJUSTED
FOR DEBT FOR STOCK AS ADJUSTED
OFFERING OFFERING FOR BOTH
ACTUAL ONLY (1) ONLY OFFERINGS (1)
----------- ------------ ------------ ------------
Cash and cash equivalents................................ $ 4,730 $ 54,730 $ 4,730 $ 54,730
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Short-term debt:
Current maturities of Existing Credit Facilities......... $ 30,291 $ -- $ -- $ --
Current maturities of Credit Facility.................... -- -- -- --
Current maturities of long-term debt and capital
leases................................................. 1,721 1,721 1,721 1,721
----------- ------------ ------------ ------------
Total short-term debt................................ 32,012 1,721 1,721 1,721
----------- ------------ ------------ ------------
Long-term debt (excluding current maturities):
Existing Credit Facilities............................... 175,709 -- 153,580 --
New Credit Facility...................................... -- 111,000 -- 58,580
Notes.................................................... -- 150,000 -- 150,000
Obligations under capital leases......................... 655 655 655 655
Other long-term debt..................................... 5,164 5,164 5,164 5,164
----------- ------------ ------------ ------------
Total long-term debt (excluding current
maturities)........................................ 181,528 266,819 159,399 214,399
----------- ------------ ------------ ------------
Stockholders' equity:
Class A Common Stock 50,000,000 shares authorized;
38,159,468 shares issued and outstanding; 45,159,468 as
adjusted for Stock Offering............................ 123,498 123,498 175,918 175,918
Class B Common Stock 10,000,000 shares authorized;
4,071,490 shares issued and outstanding................ 3,432 3,432 3,432 3,432
Less cost of 202,768 shares of Class A Common Stock held
in treasury............................................ (1,039) (1,039) (1,039) (1,039)
Paid-in capital.......................................... 4,247 4,247 4,247 4,247
Retained earnings........................................ 28,957 28,957 28,957 28,957
----------- ------------ ------------ ------------
Total stockholders' equity........................... 159,095 159,095 211,515 211,515
----------- ------------ ------------ ------------
Total capitalization................................. $ 372,635 $ 427,635 $ 372,635 $ 427,635
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
- ------------------------------
(1) Assumes refinancing of the Company's Existing Credit Facilities. See
"Description of Credit Facilities and Notes."
27
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Class A Common Stock and the Class B Common Stock were registered under
Section 12(g) of the Exchange Act in February 1987. The Class A Common Stock is
traded on Nasdaq under the symbol "GNCMA" and the Class B Common Stock is traded
on the over-the-counter market. The Class B Common Stock is convertible into
Class A Common Stock on a share for share basis at any time at the option of the
holder. The following table sets forth high and low sales prices for the Class A
Common Stock for the periods indicated as reported by Nasdaq and high and low
sales prices for the Class B Common Stock for the periods indicated as reported
by IDSI, a service provided by Interactive Data Corp.
CLASS A CLASS B
------------------ ------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
1995:
First Quarter................. 4 5/8 3 3/4 3 1/4 3
Second Quarter................ 4 1/4 3 7/8 3 3
Third Quarter................. 4 1/8 3 1/4 4 3
Fourth Quarter................ 5 1/8 3 3/4 6 3 1/2
1996:
First Quarter................. 6 13/16 4 1/2 5 4 1/4
Second Quarter................ 9 1/4 5 15/16 6 1/2 5 1/4
Third Quarter................. 8 3/8 5 3/4 6 1/2 5
Fourth Quarter................ 8 1/4 5 3/4 7 1/2 5 1/8
1997:
First Quarter................. 8 1/8 6 6 7/8 6 3/4
Second Quarter................ 8 5/8 6 1/4 6 3/4 6 5/8
Third Quarter (to July 2,
1997)....................... 8 1/4 7 7/8 6 3/4 6 5/8
The last reported sale price of the Class A Common Stock as reported by
Nasdaq on July 2, 1997 was $8.00 per share and the last reported sale price for
the Class B Common Stock as reported by the over-the-counter market on June 19
was $6.25 per share. As of June 30, 1997 there were approximately 1,759 holders
of record of Class A Common Stock and approximately 691 holders of record of
Class B Common Stock. These amounts do not include the number of shareholders
whose shares are held of record by brokers, but do include the brokerage house
as one shareholder.
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying dividends in the foreseeable future. Future
dividends, if any, will be at the discretion of the Board and will depend upon,
among other things, the Company's operations, capital requirements and surplus,
general financial condition, contractual restrictions in financing agreements
(such as the Credit Facility, the Existing Credit Facilities and the Indenture
entered into in connection with the Debt Offering, all of which restrict the
ability of the Company's subsidiaries to make upstream payments or loans,
including dividend payments) and such other factors as the Board may deem
relevant. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Description of Credit Facilities and Notes" and Note 6
to the Company's Consolidated Financial Statements.
28
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial data presented below under the captions
"Statement of Operations Data," "Other Financial Data," and "Balance Sheet Data"
for, and as of the end of, each of the years in the five-year period ended
December 31, 1996, excluding pro forma data, are derived from the Consolidated
Financial Statements of the Company, which financial statements have been
audited by KPMG Peat Marwick LLP, independent certified public accountants. The
Consolidated Financial Statements of the Company as of December 31, 1995 and
1996, and for each of the years in the three-year period ended December 31,
1996, and the report thereon (which is based partially upon the report of other
auditors), are included elsewhere in this Prospectus. The selected unaudited
data presented below for the three-month periods ended March 31, 1996 and 1997,
and as of March 31, 1997, are derived from the unaudited Consolidated Financial
Statements of the Company as of March 31, 1997 and for the three-month periods
ended March 31, 1996 and 1997, which are included elsewhere in this Prospectus.
The pro forma data are derived from the Unaudited Pro Forma Combined Statement
of Operations included elsewhere in this Prospectus. See "Index to Financial
Statements."
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- PRO FORMA --------------------
1992 1993 1994 1995 1996 1996 (1) 1996 1997
--------- --------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues
Telecommunications services........... $ 96,499 $ 102,213 $ 116,981 $ 129,279 $ 155,419 $ 155,419 $ 37,969 $ 39,225
Cable services........................ -- -- -- -- 9,475 55,343 -- 13,656
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenues.......................... 96,499 102,213 116,981 129,279 164,894 210,762 37,969 52,881
Cost of sales and services............ 55,576 56,437 63,877 72,091 92,664 104,180 21,302 27,168
Selling, general and administrative
expenses............................ 28,168 29,994 33,468 37,691 46,412 59,155 10,833 16,301
Depreciation and amortization......... 7,486 6,978 6,639 5,993 9,409 20,553 1,887 6,120
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income........................ 5,269 8,804 12,997 13,504 16,409 26,873 3,947 3,292
Interest expense (net)................ 3,745 2,089 1,316 903 3,719 15,512 260 3,949
--------- --------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) before income
taxes................................. 1,524 6,715 11,681 12,601 12,690 11,395 3,687 (657)
Income tax expense (benefit)............ 634 2,764 4,547 5,099 5,228 4,695 1,550 (132)
--------- --------- --------- --------- --------- --------- --------- ---------
Net earnings (loss)..................... 890 3,951 7,134 7,502 7,462 6,700 2,137 (525)
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) per share........... $ 0.02 $ 0.17 $ 0.30 $ 0.31 $ 0.27 $ 0.16 $ 0.09 $ (0.01)
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
OTHER FINANCIAL DATA:
Capital expenditures.................... $ 4,396 $ 5,744 $ 10,604 $ 8,938 $ 38,642 $ 45,718 $ 6,950 $ 9,529
Cable operating income.................. -- -- -- -- 2,196 12,660 -- 2,528
Cable EBITDA (2)........................ -- -- -- -- 4,416 26,025 -- 6,025
Consolidated EBITDA (2)................. 12,755 15,782 19,636 19,497 25,818 47,426 5,834 9,412
Consolidated cash flow provided by
operating activities.................. 7,469 11,710 18,519 14,278 22,371 32,193 2,359 1,840
Consolidated cash flow provided (used)
by investing activities............... (7,531) (3,312) (11,359) (8,683) (122,646) -- (7,123) (10,059)
Consolidated cash flow provided (used)
by financing activities............... 2,155 (8,749) (8,134) (3,227) 109,607 -- 2,816 (400)
Cable cash flow provided by operating
activities............................ $ -- $ -- $ -- $ -- $ 2,778 $ 12,600 $ -- $ 8,278
29
AS OF MARCH 31, 1997
---------------------------------------
AS OF DECEMBER 31, AS ADJUSTED AS ADJUSTED
----------------------------------------------------- FOR THE DEBT FOR THE STOCK
1992 1993 1994 1995 1996 ACTUAL OFFERING ONLY OFFERING ONLY
--------- --------- --------- --------- --------- --------- ------------- -------------
(UNAUDITED)
BALANCE SHEET DATA:
Total assets............ $ 72,351 $ 71,610 $ 74,249 $ 84,765 $ 447,335 $ 442,878 $ 497,878 $ 442,878
Short-term debt and
capital leases
(including current
maturities)........... 24,080 2,582 1,834 1,971 32,040 32,012 1,721 1,721
Long-term debt and
capital leases
(excluding current
maturities)........... 14,875 19,763 12,017 9,056 191,948 181,528 266,819 159,399
Total stockholders'
equity................ $ 13,870 $ 27,210 $ 35,093 $ 43,016 $ 149,554 $ 159,095 $ 159,095 $ 211,515
AS ADJUSTED
FOR BOTH
OFFERINGS
-----------
BALANCE SHEET DATA:
Total assets............ $ 497,878
Short-term debt and
capital leases
(including current
maturities)........... 1,721
Long-term debt and
capital leases
(excluding current
maturities)........... 214,399
Total stockholders'
equity................ $ 211,515
- ------------------------------
(1) The Cable Systems were acquired effective October 31, 1996. Pro forma data
reflect the acquisition of the Cable Systems as if the acquisition had
occurred on January 1, 1996. See the Unaudited Pro Forma Combined Statement
of Operations included elsewhere in this Prospectus.
(2) 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 GAAP 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.
30
SELECTED CABLE COMPANY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following tables set forth selected historical financial data separately
for the Cable Companies: (i) for, and as of the end of, each of the years in the
five-year period ended December 31, 1995 and (ii) for the six-month periods
ended June 30, 1995 and June 30, 1996. The data for the six-month periods ended
June 30, 1995 and June 30, 1996 have been derived from the unaudited financial
statements of the Cable Companies appearing elsewhere in this Prospectus. The
unaudited financial statements, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair statement of the results for the unaudited periods. The following
information is qualified in its entirety by, and should be read in conjunction
with, the accompanying financial statements and notes thereto for the
corresponding Cable Company and the Company. See "Index to Financial
Statements."
PRIME CABLE OF ALASKA, L.P.
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues............................................ $ 25,951 $ 27,677 $ 29,101 $ 30,599 $ 32,594 $ 16,100 $ 17,276
Operating, selling, general and administrative
expenses (1)...................................... 29,871 31,373 32,615 33,561 34,425 17,175 18,002
Operating income (loss) (1)......................... $ (3,920) $ (3,696) $ (3,514) $ (2,962) $ (1,831) $ (1,075) $ (726)
OTHER OPERATING DATA:
Total assets (period-end)........................... $ 120,397 $ 111,179 $ 98,322 $ 85,303 $ 74,141 $ 80,061 $ 61,224
EBITDA (before management fees) (2)................. 13,968 14,699 15,289 15,653 16,330 7,950 8,608
Cash flow provided by operating activities (3)...... $ -- $ -- $ 8,055 $ 8,450 $ 7,537 $ 3,652 $ 5,456
ALASKAN CABLE NETWORK (4)
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED
----------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues............................................ $ 13,761 $ 13,914 $ 14,142 $ 13,883 $ 14,515 $ 7,224 $ 7,442
Operating, selling, general and administrative
expenses (5)...................................... 13,221 14,013 13,775 13,367 13,883 6,858 7,113
Operating income (loss) (5)......................... $ 540 $ (99) $ 367 $ 516 $ 632 $ 366 $ 329
OTHER OPERATING DATA:
Total assets (period-end)........................... $ 38,242 $ 35,167 $ 33,115 $ 33,380 $ 24,494 $ 24,106 $ 19,209
EBITDA (before management fees) (2)................. 6,666 6,208 6,931 6,841 7,033 3,513 3,598
Cash flow provided by operating activities (3)...... $ -- $ -- $ 7,327 $ 6,279 $ 7,124 $ 3,643 $ 3,049
ALASKA CABLEVISION, INC.
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues............................................ $ 5,488 $ 5,626 $ 5,660 $ 5,709 $ 5,920 $ 2,969 $ 3,007
Operating, selling, general and administrative
expenses (6)...................................... 3,624 3,603 3,845 4,064 4,157 2,037 2,119
Operating income (loss) (6)......................... $ 1,864 $ 2,023 $ 1,815 $ 1,645 $ 1,763 $ 932 $ 888
OTHER OPERATING DATA:
Total assets (period-end)........................... $ 2,212 $ 2,076 $ 2,211 $ 2,663 $ 3,306 $ 3,184 $ 3,446
EBITDA (before management fees) (2)................. 2,836 2,981 2,817 2,530 2,583 1,359 1,309
Cash flow provided by operating activities (3)...... $ -- $ -- $ 1,495 $ 1,976 $ 1,776 $ 964 $ 802
31
- ------------------------------
(1) Includes management fees paid by Prime in the amounts of $1,542,000,
$1,671,000 and $1,674,000 in 1993, 1994 and 1995, respectively, and $817,000
and $924,000 for the six months ended June 30, 1995 and 1996, respectively,
under management agreements in existence prior to the Company's acquisition
of Prime. These fees will not be relevant to the Company's ongoing cable
operating results. See "Business--Cable Television."
(2) 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 GAAP and should not be
considered as an alternative to net income as a measure of performance or as
an alternative to cash flow as a measure of liquidity. Other income and
(expense) items are immaterial, except for a $2.7 million loss on disposal
of assets for Alaskan Cable Companies in 1993. See page F-52.
(3) Cash flow provided by operating activities for 1991 and 1992 is not
available.
(4) Combined for Alaskan Cable/Fairbanks, Alaskan Cable/Juneau, and Alaskan
Cable/Ketchikan-Sitka.
(5) Includes management fees paid by Alaskan Cable in the amounts of $202,000,
$233,000 and $225,000 in 1993, 1994 and 1995, respectively, and $113,000 and
$156,000 for the six months ended June 30, 1995 and 1996, respectively,
under management agreements in existence prior to the Company's acquisition
of cable systems from Alaskan Cable. These fees will not be relevant to the
Company's ongoing cable operating results. See "Business--Cable Television."
(6) Includes management fees paid by Alaska Cablevision in the amounts of
$567,000, $571,000 and $400,000 in 1993, 1994 and 1995, respectively, and
$217,000 and $184,000 for the six months ended June 30, 1995 and 1996,
respectively, under management agreements in existence prior to the
Company's acquisition of cable systems from Alaska Cablevision. These fees
will not be relevant to the Company's ongoing cable operating results. See
"Business--Cable Television."
32
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 CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO AND THE OTHER
FINANCIAL DATA APPEARING ELSEWHERE IN THIS PROSPECTUS. 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 GAAP AND SHOULD NOT BE CONSIDERED AS AN ALTERNATIVE TO NET INCOME AS A
MEASURE OF PERFORMANCE NOR AS AN ALTERNATIVE TO CASH FLOW AS A MEASURE OF
LIQUIDITY.
OVERVIEW
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 and Sprint). These services accounted for
approximately 86.5% of the Company's telecommunications services revenues in
1996 and 92.6% of the Company's telecommunications services revenues during the
first quarter of 1997. The balance of telecommunications services revenues have
been attributable to corporate network management contracts, telecommunications
equipment sales and service and other miscellaneous revenues (including revenues
from prepaid and debit calling cards, the installation and leasing of customers'
VSAT equipment and fees charged to MCI and Sprint for certain billing services).
Factors that have the greatest impact on year-to-year changes in
telecommunications services revenues include the rate per minute charged to
customers and usage volumes, usually expressed as minutes of use. These factors
in turn depend in part upon economic conditions in Alaska. The economy of Alaska
is dependent upon the natural resource industries, in particular oil production,
as well as tourism, government and United States military spending. See
"Business--Alaskan Economy."
The Company's telecommunications cost of sales and services has consisted
principally of the direct costs of providing services, including local access
charges paid to 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. In 1996, local access charges
accounted for 49.8% of telecommunications cost of sales and services, fees paid
to other long distance carriers represented 34.7%, satellite transponder lease
and undersea fiber maintenance costs represented 9.1%, and telecommunications
equipment accounted for 5.2% of telecommunications cost of sales and services.
During the three months ended March 31, 1997, local access charges accounted for
45.7% of telecommunications cost of sales and services, fees paid to other long
distance carriers represented 32.1%, satellite transponder lease and undersea
fiber maintenance costs represented 9.4% and telecommunications equipment
accounted for 2.9% of telecommunications cost of sales and services.
The Company's telecommunications selling, general, and administrative
expenses have consisted of operating and engineering, service, sales and
marketing, general and administrative, legal and regulatory expenses. Most of
these expenses consist of salaries, wages and benefits of personnel and certain
other indirect costs (such as rent, travel, utilities and certain equipment
costs). A significant portion of selling, general, and administrative expenses,
28.6% in 1996 and 17.9% during the three months ended March 31, 1997, represents
the cost of the Company's advertising and promotion programs.
Following the acquisition of the Cable Systems effective October 31, 1996,
the Company now reports a significant level of revenues and EBITDA from the
provision of cable services. During the first
33
quarter of 1997, cable revenues and EBITDA represented 25.8% and 64.0%,
respectively, of consolidated revenues and EBITDA. On a pro forma basis,
assuming the Cable Systems had been acquired by the Company as of January 1,
1996, revenues and EBITDA from cable services would have represented 26.3% and
54.9%, respectively, of the Company's consolidated revenues and EBITDA for 1996.
The Cable Systems serve 21 communities and areas in Alaska, including the
state's three largest population centers, Anchorage, Fairbanks and Juneau. As of
March 31, 1997, the Cable Systems passed 162,711 homes or approximately 70% of
all households in Alaska and served approximately 104,400 subscribers (92,940
equivalent basic subscribers), representing 64% of households passed by the
Cable Systems.
The Company generates cable services revenues from three primary sources:
(i) programming services, including monthly basic or premium subscriptions and
pay-per-view movies or other one-time events, such as sporting events; (ii)
equipment rentals or installation; and (iii) advertising sales. In 1996, on a
pro forma basis, programming services generated 86.0% of total cable services
revenues, equipment rental or installation accounted for 8.0% of such revenues,
advertising sales accounted for 4.0% 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' operating, selling, general and administrative expenses
have consisted principally of programming and copyright expenses, labor,
maintenance and repairs, marketing and advertising, rental expense, property
taxes and depreciation and amortization. In 1996, on a pro forma basis,
programming and copyright expenses represented approximately 31.8% of total
cable operating expenses. Marketing and advertising costs represented
approximately 2.7% of such total expenses and depreciation and amortization
represented 31.3% of such expenses.
The Company expects to commence offering local exchange services initially
in Anchorage during the second half of 1997, and expects that local exchange
services will represent less than 2.0% of revenues in 1997 and less than 8.0% of
revenues in 1998. The Company expects that it may generate moderately negative
EBITDA from local exchange services during this time period.
The Company began developing plans for PCS wireless communications service
deployment in 1995 and is currently evaluating various technologies for a
proposed PCS network. The Company expects to launch PCS service in Anchorage as
early as 1999.
34
RESULTS OF OPERATIONS
The following table sets forth selected financial data of the Company as a
percentage of total revenues for the periods indicated and the percentage
changes in such data as compared to the corresponding prior year period:
PERCENTAGE CHANGE
THREE MONTHS ENDED ----------------------
YEAR ENDED DECEMBER 31, MARCH 31, 1995 1996
---------------------------------- ---------------------- VS. VS.
1994 1995 1996 1996 1997 1994 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Revenues
Telecommunications services... 100.0% 100.0% 94.2% 100.0% 74.2% 10.5% 20.2%
Cable services -- -- 5.8 -- 25.8 -- --
----- ----- ----- ----- ----- ----- ---
Total revenues.................. 100.0% 100.0% 100.0% 100.0% 100.0% 10.5% 27.5%
Cost of sales and services.... 54.6 55.8 56.2 56.1 51.4 12.9 28.5
Selling, general and
administrative expenses..... 28.6 29.2 28.1 28.5 30.8 12.6 23.1
Depreciation and
amortization................ 5.7 4.6 5.7 5.0 11.6 (9.7) 57.0
Operating income................ 11.1 10.4 10.0 10.4 6.2 3.9 21.5
Net earnings (loss) before
income taxes.................. 10.0 9.7 7.7 9.7 (1.2) 7.9 0.7
Net earnings (loss)............. 6.1% 5.8% 4.5% 5.6% (1.0%) 5.2% (0.5%)
OTHER OPERATING DATA:
Cable operating income (1)...... -- -- 23.2% -- 18.5% -- --
Cable EBITDA (1)(2)............. -- -- 48.4 -- 46.1 -- --
Consolidated EBITDA............. 16.8% 15.1% 15.7% 15.4% 17.8% (0.7%) 32.4%
THREE MONTHS
1997 VS.
THREE MONTHS
1996
----------------
STATEMENT OF OPERATIONS DATA:
Revenues
Telecommunications services... 3.3%
Cable services --
-----
Total revenues.................. 39.2%
Cost of sales and services.... 27.5
Selling, general and
administrative expenses..... 50.5
Depreciation and
amortization................ 224.3
Operating income................ (16.6%)
Net earnings (loss) before
income taxes.................. --
Net earnings (loss)............. --
OTHER OPERATING DATA:
Cable operating income (1)...... --
Cable EBITDA (1)(2)............. --
Consolidated EBITDA............. 61.3%
- ------------------------------
(1) Computed as a percentage of total cable services revenues.
(2) Computed before deducting management fees. Under the Prime Management
Agreement, the Company will pay Prime Management a net annualized fee for
managing all of the Cable Systems in the amount of $1,000,000 for the year
ending October 31, 1997, $750,000 for the year ending October 31, 1998 and
$500,000 for each year ending October 31 thereafter that the Prime
Management Agreement is in effect. See "Business--Cable Television."
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
REVENUES. Total revenues increased 39.2% from $38.0 million for the three
months ended March 31, 1996 to $52.9 million for the three months ended March
31, 1997. Long distance transmission revenues from commercial, residential,
governmental, and other common carrier customers increased 6.5% from $34.1
million for the three months ended March 31, 1996 to $36.3 million for the three
months ended March 31, 1997. This increase in revenues resulted in part from a
12% increase in minutes of interstate and international traffic carried, which
traffic totaled 149.3 million minutes, and a 9.4% increase in minutes of
intrastate traffic, which traffic totaled 31.5 million minutes during the
quarter. The increases in traffic resulted from growth in the underlying
economy, usage stimulation resulting from reductions in rates, an increase in
the number of presubscribed lines assigned to the Company, and an expansion of
the Company's service area resulting from the turn-up of a number of new
satellite earth station facilities located in rural Alaska. Revenue and minutes
growth were also driven by an increase in services provided to other common
carriers (principally MCI and Sprint), which other common carrier revenues
increased from $10.7 million for the three months ended March 31, 1996 to $13.4
million for the three months ended March 31, 1997. System sales and network
service revenues decreased 20.7% from $2.9 million for the three months ended
March 31, 1996 to $2.3 million for the three months ended March 31, 1997,
principally due to the temporary increase in the level of activity in the prior
year related to the provision of services under a new outsourcing contract with
National Bank of Alaska. Private line
and private network transmission revenues increased 5.9% from $3.4 million for
the three months ended March 31, 1996 to $3.6 million for the three months ended
March 31, 1997. The Company reported three
35
months of cable services revenues in 1997 following its acquisition of the Cable
Systems effective October 31, 1996. The Company estimates that its facilities
passed 162,711 homes in Alaska and that it had approximately 104,400 basic
subscribers (92,940 equivalent basic subscribers) as of March 31, 1997. There
was little change in the number of subscribers, the rates charged those
subscribers, or the number of homes passed by the Cable Systems during the
three-month period ended March 31, 1997.
The increases in telecommunication services revenues were offset in part by
a 6.0% reduction in the Company's average revenue per minute on long distance
traffic from $0.184 per minute for the three months ended March 31, 1996 to
$0.173 per minute for the three months ended March 31, 1997. The decrease in the
average revenue per minute resulted from the Company's promotion of, and
customers' greater than anticipated acceptance of new calling plans offering
discounted rates and length of service rebates.
COST OF SALES AND SERVICES. Cost of sales and services totaled $21.3
million for the three months ended March 31, 1996 and $27.2 million for the
three months ended March 31, 1997. Of this increase, $3.2 million resulted from
cable services programming and copyright charges incurred during the first
quarter of 1997. Long distance transmission services costs increased from $19.2
million for the three months ended March 31, 1996 to $21.7 million for the three
months ended March 31, 1997. The increase in transmissions costs was
approximately proportional to the increase in the number of minutes carried in
the first quarter of 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 50.9% from $10.8 million for the three months
ended March 31, 1996 to $16.3 million for the three months ended March 31, 1997,
and, as a percentage of revenues, increased from 28.5% for the three months
ended March 31, 1996 to 30.7% for the three months ended March 31, 1997.
Selling, general and administrative expenses increased as a result of increased
sales and customer service volumes and bad debt expense totaling $523,000 for
the three months ended March 31, 1997 compared to $397,000 for the three months
ended March 31, 1996 (directly associated with increased revenues), and was
offset by a reduction in sales, advertising and telemarketing costs which
totaled $3.1 million for the three months ended March 31, 1996 as compared to
$2.9 million for the three months ended March 31, 1997. Selling, general and
administrative expenses also increased for the three months ended March 31, 1997
due to increased costs totaling $1.1 million in sales, engineering, operations,
accounting, human resources, legal and regulatory, and management information
services. Such costs were associated with the development and introduction, or
planned introduction, of new products and services including local exchange
services, PCS services, and Internet services. Cable services selling, general
and administrative costs totaled $4.4 million during the quarter ended March 31,
1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $4.2 million from $1.9 million for the three months ended March 31,
1996 to $6.1 million for the three months ended March 31, 1997. Of this
increase, $3.5 million resulted from the Company's acquisition of the Cable
Systems effective October 31, 1996, with the balance of the increase
attributable to the Company's $38.6 million investment in facilities during
1996.
INTEREST EXPENSE, NET. Interest expense, net of interest income, increased
from $260,000 for the three months ended March 31, 1996 to $3.9 million for the
three months ended March 31, 1997. This increase resulted primarily from
increases in the Company's average outstanding indebtedness incurred in
connection with its acquisition of the Cable Systems and investment in new
facilities during 1996, offset in part by increases in the amount of interest
capitalized during 1997.
INCOME TAX EXPENSE. Income tax expense decreased from $1.6 million for the
three months ended March 31, 1996 to a benefit of $132,000 for the three months
ended March 31, 1997 due to the Company incurring a net loss before income taxes
for the three months ended March 31, 1997 as compared to net earnings for the
three months ended March 31, 1996. The Company's effective income tax rate
36
decreased from 42.0% for the three months ended March 31, 1996 to 20.1% for the
three months ended March 31, 1997 due to the net loss and the proportional
amount of items that are nondeductible for tax purposes.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Total revenues increased 27.5% from $129.3 million in 1995 to
$164.9 million in 1996. Long distance transmission revenues from commercial,
residential and governmental customers increased 18.8% from $120.0 million in
1995 to $142.6 million in 1996. This increase reflected a 22.6% increase in
interstate and international minutes of use to 570 million minutes and a 29.8%
increase in intrastate minutes of use to 121.2 million minutes, principally due
to a new marketing program which the Company launched during the third quarter
of 1995. This program consisted of the introduction of a new flat-rate calling
plan coupled with telemarketing, direct sales, and the promotion of a $1.0
million sweepstakes. Revenue growth in 1996 was also due to a 23.7% increase in
revenues from other common carriers (principally MCI and Sprint), from $38.8
million in 1995 to $48.0 million in 1996, and a 23.7% increase in private line
and private network transmission services revenues, from $11.4 million in 1995
to $14.1 million in 1996. Systems sales and services revenues also increased
44.4% from $7.2 million in 1995 to $10.4 million in 1996, primarily due to the
commencement in the first quarter of 1996 of services provided under a new
outsourcing contract with National Bank of Alaska. The Company also reported two
months' of cable services revenues in 1996 following its acquisition of the
Cable Systems effective October 31, 1996.
The above increases in revenues were offset in part by a 4.8% reduction in
the Company's average revenue per minute on long distance traffic from $0.188
per minute in 1995 to $0.179 per minute in 1996. The decrease in revenues
resulted from the Company's promotion of and customers' enrollment in new
calling plans offering discounted rates and length of service rebates.
COST OF SALES AND SERVICES. Cost of sales and services was $72.1 million in
1995 and $92.7 million in 1996. As a percentage of total revenues, cost of sales
and services increased from 55.8% in 1995 to 56.2% in 1996. The increase in cost
of sales and services as a percentage of revenues during 1996 as compared to
1995 resulted primarily from the reduced average revenue per minute billed to
customers in 1996 as compared to 1995 without an offsetting reduction in the
revenue per minute billed to the Company for the local access and interstate
termination services it obtains from third parties. These increases were offset
in part by refunds in the first two quarters of 1996 aggregating approximately
$960,000 from a LEC and the National Exchange Carriers Association in respect of
earnings by them which exceeded regulatory requirements.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 23.1% from $37.7 million in 1995 to $46.4
million in 1996. As a percentage of total revenues, selling, general and
administrative expenses decreased from 29.2% in 1995 to 28.1% in 1996. Selling,
general and administrative expenses increased as a result of increased sales and
customer service volumes, additional bad debt expense totaling $1.7 million in
1996 compared to $1.5 million in 1995 (directly associated with increased
revenues), and increased sales, advertising and telemarketing costs totaling
$13.0 million in 1996 compared to $9.9 million in 1995, due to the introduction
of various marketing plans and other proprietary rate plans. Additionally,
selling, general and administrative expenses increased in 1996 due to an
increase of approximately $2.7 million in sales, engineering, operations,
accounting, human resources, legal and regulatory, and management information
services expenses. Such costs were associated with the development and
introduction, or planned introduction, of new products and services including
local services, cable television services, rural message and data telephone
services, PCS services, and Internet services.
37
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 56.7% from $6.0 million in 1995 to $9.4 million in 1996. This increase
resulted primarily from the Company's acquisition of the Cable Systems effective
October 31, 1996.
INTEREST EXPENSE, NET. Interest expense, net of interest income, increased
309.7% from $903,000 in 1995 to $3.7 million in 1996. This increase resulted
primarily from increases in the Company's average outstanding indebtedness
resulting primarily from its acquisition of the Cable Systems and construction
of new facilities in rural Alaska, offset in part by increases in the amount of
interest capitalized during 1996.
INCOME TAX EXPENSE. Income tax expense increased 2.0% from $5.1 million in
1995 to $5.2 million in 1996 due to an increase in net earnings before income
taxes and a slightly higher effective income tax rate from 40.5% in 1995 to
41.2% in 1996.
As a result of its acquisition of the Cable Systems, the Company acquired
net operating loss carryforwards ("NOL carryforwards") for income tax purposes
totaling $58.5 million which begin to expire in 2004 if not utilized. However,
the Company's utilization of these NOL carryforwards is subject to certain
limitations pursuant to Section 382 of the Internal Revenue Code. Because of the
limitation on the NOL carryforwards, the Company established an $8.1 million
valuation allowance to offset the gross amount of the deferred tax asset. The
amount of the valuation allowance was based on an estimate of the amount of the
NOL carryforwards that will not be utilized, and the effective income tax rate.
The amount of deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforwards period are reduced.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Total revenues increased 10.5% from $117.0 million in 1994 to
$129.3 million in 1995. Revenue growth was primarily attributable to increases
in minutes of use and the average revenue per minute for long distance traffic.
The Company's average revenue per minute increased 1.1% from $0.186 in 1994 to
$0.188 in 1995. Interstate minutes of use increased 12.7% to 464.5 million
minutes and intrastate minutes of use increased 17.3% to 93.4 million minutes.
Revenue growth was also attributable to a 21.6% increase in revenues derived
from other common carriers (principally MCI and Sprint), from $31.9 million in
1994 to $38.8 million in 1995, and a 7.6% increase in private line and private
network transmission services revenues, from $10.6 million in 1994 to $11.4
million in 1995.
These increases in revenues were partially offset by a 20.9% decline in
system sales and services revenues from $9.1 million in 1994 to $7.2 million in
1995. This decline was due to fewer large-dollar equipment sales orders received
during 1995 as well as a temporary reduction in the level of the Company's
outsourcing services provided to the oil field services industry.
COST OF SALES AND SERVICES. Cost of sales and services was $63.9 million in
1994 and $72.1 million in 1995. Cost of sales and services as a percentage of
total revenues increased from 54.6% of revenues in 1994 to 55.8% in 1995. The
increase in cost of sales and services as a percentage of revenues resulted
primarily from increases in costs associated with the Company's lease of
transponder capacity. The two wideband transponders the Company owned reached
the end of their expected useful life in August 1994, at which time the Company
leased replacement capacity. The cost of the leased capacity contributed to an
increase in distribution costs during 1995 as compared to 1994. During 1995 the
Company incurred approximately $450,000 for nonrecurring costs related to breaks
in the undersea fiber optic cable and costs associated with its new DAMA
technology. The Company also experienced reduced margins associated with
equipment sales and service contracts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 12.5% from $33.5 million in 1994 to $37.7
million in 1995. As a percentage of total revenues, selling, general and
administrative expenses increased from 28.6% in 1994 to 29.2% in 1995. Increases
38
in selling, general and administrative expenses for the period were primarily
due to increased personnel necessary to support the Company's expansion efforts
and the increase in minutes of traffic carried. Additional costs were incurred
during the fourth quarter of 1995 attributable to the promotion of the Company's
calling plans.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
decreased 9.1% from $6.6 million in 1994 to $6.0 million in 1995. The decrease
was attributable primarily to the Company's retirement of two owned wideband
transponders in August 1994 that were replaced with leased rather than owned
capacity.
INTEREST EXPENSE, NET. Interest expense, net of interest income, decreased
30.5% from $1.3 million in 1994 to $903,000 in 1995. This decrease resulted
primarily from a reduction in the Company's average outstanding indebtedness.
INCOME TAX EXPENSE. Income tax expense increased 13.3% from $4.5 million in
1994 to $5.1 million in 1995 due to an increase in net earnings before income
taxes and a higher effective income tax rate from 38.9% in 1994 to 40.5% in
1995.
39
SEASONALITY; FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The following chart provides selected unaudited statement of operations data
from the Company's quarterly results of operations during 1995 and 1996 and for
the three months ended March 31, 1997:
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER QUARTER TOTAL YEAR
- ------------------------------------------------------ --------- --------- --------- --------- -----------
Revenues
Telecommunications services......................... $ 29,693 $ 31,860 $ 33,363 $ 34,363 $ 129,279
Cable services...................................... -- -- -- -- --
--------- --------- --------- --------- -----------
Total revenues........................................ 29,693 31,860 33,363 34,363 129,279
Operating income...................................... 2,958 3,337 4,108 3,101 13,504
Net earnings.......................................... 1,607 1,836 2,252 1,807 7,502
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Net earnings per share................................ $ 0.07 $ 0.08 $ 0.09 $ 0.07 $ 0.31
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Consolidated EBITDA................................... $ 4,538 $ 4,897 $ 5,716 $ 4,346 $ 19,497
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER TOTAL YEAR
- ------------------------------------------------------ --------- --------- --------- --------- -----------
Revenues
Telecommunications services......................... $ 37,969 $ 37,199 $ 38,664 $ 41,587 $ 155,419
Cable services...................................... -- -- -- 9,475 9,475
--------- --------- --------- --------- -----------
Total revenues........................................ 37,969 37,199 38,664 51,062 164,894
Operating income...................................... 3,947 3,970 4,017 4,475 16,409
Net earnings.......................................... 2,137 2,150 2,140 1,035 7,462
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Net earnings per share................................ $ 0.09 $ 0.09 $ 0.09 $ 0.02 $ 0.27
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Cable EBITDA.......................................... $ -- $ -- $ -- $ 4,416 $ 4,416
Consolidated EBITDA................................... $ 5,834 $ 5,888 $ 5,829 $ 8,267 $ 25,818
FIRST
1997 QUARTER
- ------------------------------------------------------ ---------
Revenues
Telecommunications services......................... $ 39,225
Cable services...................................... 13,656
---------
Total revenues........................................ 52,881
Operating income...................................... 3,292
Net earnings (loss)................................... (525)
---------
---------
Net earnings (loss) per share......................... $ (0.01)
---------
---------
Cable EBITDA.......................................... $ 6,025
Consolidated EBITDA................................... $ 9,412
Total revenues in the quarter ended March 31, 1997 were $52.9 million,
representing a 3.6% increase over total revenues in the fourth quarter of 1996
of $51.1 million. This increase in revenues resulted in part from an increase in
cable services revenues to $13.7 million in the first quarter of 1997 from $9.5
million in the fourth quarter of 1996 because the Company reported three months
of cable services revenues in the first quarter of 1997 and only two months of
such revenues during the fourth quarter of 1996. This revenue increase was
partially offset by a 5.7% decrease in telecommunications services revenues to
$39.2 million in the first quarter of 1997 from $41.6 million during the fourth
quarter of 1996. This decrease is attributable in part to a reduction in the
average revenues per minute reported
40
by the Company, which resulted from the Company's promotion of, and customers'
greater than anticipated acceptance of, new calling plans offering discounted
rates and length of service rebates.
Operating expenses increased during the first quarter of 1997 as compared to
the fourth quarter of 1996 principally as a result of (i) turn-up costs,
including rent and utilities, of the Company's new rural DAMA satellite
earth-station facilities, (ii) personnel, sales, engineering, operations,
accounting, human resources, legal and regulatory expenses associated with the
development and introduction, or planned introduction, of new products and
services including local services, PCS services and Internet services and (iii)
increases in cable programming costs and copyright charges effective January 1,
1997.
The Company expects that its EBITDA and EBITDA margins during 1997 may
improve due to (i) increasing average long-distance revenues per minute, (ii)
cable service rate increases beginning in April 1997 and (iii) revenue
generation from the Company's rural telephony expansion and new service and
product offerings to offset expenses already generated by these endeavors.
The Company reported a net loss of $0.5 million for the first quarter of
1997 as compared to net earnings of $1.0 million during the fourth quarter of
1996. In addition to the margin compression experienced by the Company in the
first quarter of 1997 discussed above, the net loss was attributable to higher
depreciation and amortization and interest expenses associated with reporting a
full three months of cable services operations in the first quarter of 1997 and
only two months of such costs in the fourth quarter of 1996.
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 tend to watch more television, and
spend more time at home, during these months. The Company's ability to implement
construction projects is also reduced during the winter months because of cold
temperatures, snow and short daylight hours.
ACCOUNTING PRONOUNCEMENT
Financial Accounting Standards No. 128, EARNINGS PER SHARE, supersedes APB
Opinion No. 15, EARNINGS PER SHARE, and specifies the computation, presentation,
and disclosure requirements for earnings per share ("EPS") for entities with
publicly held common stock or common stock equivalents. The statement replaces
Primary EPS and Fully Diluted EPS with Basic EPS and Diluted EPS, respectively.
Basic EPS, unlike Primary EPS, excludes all dilution while Diluted EPS, like
Fully Diluted EPS, reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
Due to an immaterial difference between Primary and Fully Diluted EPS, the
Company has historically only presented a single EPS. The Company in the future
will present both Basic and Diluted EPS for income (loss) from continuing
operations and net income (loss). The statement is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
After adoption, all prior period EPS data will be restated. The adoption of the
new statement will have minimal effect on the Company's EPS.
In February 1997, the Accounting Standards Board issued SFAS No. 129,
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE. SFAS No. 129 consolidates the
existing guidance in authoritative literature relating to a company's capital
structure. SFAS No. 129 is effective for financial statements for periods ending
after December 15, 1997. Capital structure disclosures required by this standard
include liquidation preferences of preferred stock, information about the
pertinent rights and privileges of the outstanding equity securities, and the
redemption amounts for all issues of capital stock that are redeemable at fixed
or determinable prices on fixed or determinable dates. Management of the Company
does not
41
expect that adoption of SFAS No. 129 will have a material impact on the
Company's financial statement disclosures.
LIQUIDITY AND CAPITAL RESOURCES
The Company reported cash flows from operating activities during the three
months ended March 31, 1997 of $1.8 million, net of changes in the components of
working capital. Additional sources of cash during the three months ended March
31, 1997 included long-term borrowings of $10.0 million. The Company's
expenditures for property and equipment, including construction in progress,
totaled $7.0 million and $9.5 million during the three months ended March 31,
1996 and 1997, respectively. Uses of cash during the first quarter of 1997
included repayment of $10.4 million of long-term borrowings and capital lease
obligations and an increase in notes receivable of $337,000.
The Company reported cash flows from operating activities in 1996 of $22.4
million, net of changes in the components of working capital. Additional sources
of cash in 1996 included long-term borrowings of $208.0 million, sales of
additional Common Stock to MCI of $13.0 million, and payments on notes
receivable of $288,000. The Company's uses of cash included payment of the cash
portion of the consideration for the acquisition of the Cable Systems. The total
purchase price for the acquisition of the Cable Systems was $280.1 million and
was financed by the Company through the issuance to the sellers of the Cable
Systems of approximately 14.7 million shares of Class A Common Stock (valued at
$86.7 million), the payment of $72.8 million in cash, the assumption of
approximately $110.6 million in existing indebtedness, and the issuance to one
seller of $10.0 million in subordinated convertible notes. The notes were
converted into approximately 1.5 million shares of Class A Common Stock in
January 1997. Other uses of cash during 1996 included payment of a $9.1 million
transponder purchase deposit, repayment of $5.0 million of long-term borrowings
and capital lease obligations, purchase of $621,000 of Common Stock held by an
officer, which stock is held in treasury to satisfy a deferred compensation
obligation in lieu of satisfying the obligation in cash, payment of loan fees
totaling $764,000, and investment in other assets.
The Company's expenditures for property and equipment, including
construction in progress, totaled $38.6 million and $8.9 million during 1996 and
1995, respectively. The Company anticipates that its capital expenditures in
1997 will be between $60 million and $65 million. Planned capital expenditures
over the next five years include $240.0 million to $260.0 million to fund
expansion of long distance facilities, (including approximately $40.0 million
for satellite transponders and approximately $125.0 million for new undersea
fiber optic cable facilities which will be financed by GCI Transport Company)
between $140.0 million and $160.0 million to fund development, construction and
operating costs of its local exchange and PCS networks and businesses; and
between $65.0 million and $85.0 million to upgrade its cable television plant
and to purchase equipment for new cable television services. Sources of funds
for these planned capital expenditures include net proceeds of the Offerings,
internally generated cash flows and borrowings under the Company's Credit
Facility and its separate committed financing for GCI Transport Company, all of
which funds will be necessary to complete the Company's planned capital
expenditures. Consummation of one Offering is not contingent upon consummation
of the other Offering and there can be no assurance that the Debt Offering will
be consummated. The Debt Offering is contingent upon the Company refinancing its
Existing Credit Facilities. Without the proceeds from the Debt Offering, the
Company may have to seek alternative financing for a portion of its business
plan. In particular, if the Debt Offering is not consummated, the Company will
need to obtain additional financing for its planned construction of the new
undersea fiber optic cable facilities and certain elements of its planned local
exchange and PCS networks. See "Risk Factors--Significant Capital Requirements;
Concurrent Offerings," "Use of Proceeds" and "Business--Business Strategy."
The Credit Facility and the Notes will impose restrictions on the operations
and activities of the Company, including requirements that the Company comply
with certain financial covenants and financial ratios. Under the Credit
Facility, Holdings may not permit the ratio of senior debt to annualized
42
operating cash flow of Holdings and its restricted subsidiaries to exceed 3.5 to
1.0, total debt to annualized operating cash flow to exceed 7.0 to 1.0, and
annualized operating cash flow to interest expense to exceed 1.5 to 1.0. Each of
the foregoing ratios decreases in specified increments during the life of the
Credit Facility. The Credit Facility will also require Holdings to maintain a
ratio of annualized operating cash flow to debt service of Holdings and its
restricted subsidiaries of at least 1.25 to 1.0, and annualized operating cash
flow to fixed charges of at least 1.0 to 1.0 (which adjusts to 1.05 to 1.0 in
April, 2003 and thereafter). The Credit Facility will also limit capital
expenditures of Holdings and its restricted subsidiaries to no more than $55.0
million, $90.0 million, and $65.0 million in 1997, 1998 and 1999, respectively.
See "Description of Credit Facilities and Notes." The Notes will impose a
requirement that the leverage ratio of GCI, Inc. and its restricted subsidiaries
will not exceed 7.5 to 1.0 prior to December 31, 1999 and 6.0 to 1.0 thereafter,
subject to the ability of GCI, Inc. and its restricted subsidiaries to incur
specified permitted indebtedness without regard to such ratios.
Net receivables increased $7.1 million from December 31, 1995 to December
31, 1996 and $5.0 million from March 31, 1996 to March 31, 1997 resulting from:
(i) increased MTS revenues in 1996 as compared to 1995 and in 1997 as compared
to 1996; (ii) increased amounts due from other common carriers attributed to
growth in their traffic carried by the Company; (iii) increased private line
sales activity in 1996 as compared to 1995 and in 1997 as compared to 1996; and
(iv) increases in receivables resulting from the Cable Systems acquisition.
The Company reported a working capital deficit of $27.3 million as of March
31, 1997. During April 1997 the Company extended the maturity of its Telephony
Credit Facility from April 1997 to July 1997. Since the entire facility matures
within the twelve-month period ending March 31, 1998, the outstanding balance as
of March 31, 1997 was included in current maturities of long-term debt. Except
for the classification of the Company's senior indebtedness as current, working
capital at March 31, 1997 totaled $4.6 million, a $4.6 million decrease from
working capital similarly recomputed at December 31, 1996.
INFLATION
The Company does not believe that inflation has a significant effect on its
operations.
43
BUSINESS
OVERVIEW
The Company is a diversified telecommunications provider with a leading
position in facilities-based long distance service in the State of Alaska and,
as a result of recent acquisitions, has become Alaska's leading cable television
service provider. The Company seeks to become the first significant provider in
Alaska of an integrated package of telecommunications and cable television
services. Complementing its long distance, cable and cellular resale operations,
the Company has announced plans to provide facilities-based competitive local
exchange and wireless communications services in Alaska's major population
centers. The Company expects to launch local exchange services in Anchorage in
the second half of 1997. The Company also acquired a state-wide 30 MHz B-block
PCS license in June 1995 for approximately $1.65 million (or about $3.00 per
pop) and is currently evaluating various technologies for a proposed wireless
PCS network.
The Company believes that the size and growth potential of the voice, video
and data markets, the increasing deregulation of telecommunications services,
and the increased convergence of telephony, wireless and cable services offer
the Company considerable opportunities to integrate its telecommunications and
cable services and expand into communications markets both within and, over the
longer-term, outside of Alaska. The Company expects the rate of growth in
industry-wide telecommunications revenues to increase as the historical
dominance of monopoly providers is challenged as a result of deregulation.
Considerable deregulation has already taken place in the United States as a
result of the 1996 Telecom Act, with the barriers to competition among
telecommunications, local exchange and cable providers being lowered. The
Company believes that its acquisition of the Cable Systems and its development
of local exchange service and PCS leave it well-positioned to take advantage of
this deregulation process in telecommunications markets.
The Company began providing interstate long distance service in 1982 and
began providing intrastate long distance service in 1991. The Company provides a
full range of long distance services, including direct dial, 800, message toll,
private line, private network, operator and calling and debit card services, to
residential, commercial and governmental customers and to other common carriers.
In addition, the Company sells data communication equipment and offers technical
services.
The Company operates a state-of-the-art, competitive telecommunications
network employing the latest digital transmission technology based upon fiber
optic and digital microwave facilities within and among Anchorage, Fairbanks and
Juneau, a digital fiber optic cable linking Alaska to the contiguous 48 states
and providing access to other carriers' networks for communication around the
world, and the use of satellite transmission to remote areas of Alaska (and for
certain interstate traffic as well). As of March 31, 1997, the Company's long
distance services were available, through the Company's network, to
approximately 90% of total Alaskan access lines. As of March 31, 1997, the
Company's residential customers were served by approximately 81,150 access
lines, representing approximately 41% of all Alaskan residential presubscribed
access lines. In addition, the Company had over 11,000 commercial, governmental
and other common carrier customers who were served by approximately 57,600
access lines, representing approximately 48% of all presubscribed
non-residential access lines in the State.
Effective October 31, 1996, the Company became the leading cable television
services provider in Alaska upon its acquisition of the Cable Systems from
several unrelated sellers for total consideration of approximately $280.1
million. The Cable Systems serve 21 communities and areas in Alaska, including
the state's three largest urban areas, Anchorage, Fairbanks and Juneau. As of
March 31, 1997, the Cable Systems passed 162,711 homes or approximately 70% of
all households in Alaska and served approximately 104,400 subscribers (92,940
equivalent basic subscribers), representing 64% of households passed by the
Cable Systems. As of March 31, 1997, the Cable Systems consisted of
approximately 1,765 miles of installed cable plant having between 300 and 450
MHz of channel capacity.
44
BUSINESS STRATEGY
The Company's goal is to become the first significant provider of integrated
voice, video and data services in Alaska while maximizing growth in its revenues
and net income. The Company's strategies to achieve this objective fall
generally into four broad categories: (i) integrate the Company's
telecommunications and cable operations, (ii) expand the scope of the Alaskan
voice, video and data markets that the Company will address, (iii) increase the
Company's penetration of these markets, and (iv) improve the Company's
consolidated operating margins and utilization of the Company's capital
resources. These broad strategies are discussed below. The Company's strategic
focus over the next several years will be on Alaska. On a longer-term basis, the
Company may consider growth opportunities outside Alaska, especially in areas of
the world with demographics and infrastructure characteristics similar to those
of Alaska.
INTEGRATE TELECOMMUNICATIONS AND CABLE OPERATIONS
The Company has begun integrating the Cable Systems into its preexisting
operations. As part of this integration, the Company plans to combine the
marketing and sales organizations, the billing systems, MIS and customer service
organizations of the Cable Systems with those of the Company's historical
operations. This integration will enable the Company to coordinate the marketing
of its telecommunications and cable services to the full range of the Company's
customers, promote introduction of new products and services, leverage consumer
awareness of the GCI brand name and provide its customers with a single bill and
point-of-contact for customer service. The Company estimates that the essential
elements of this integration will be completed by late 1997.
EXPAND ADDRESSABLE MARKET
As a result of its acquisition of the Cable Systems, the Company has
expanded its addressable market in Alaska to include both long distance and
cable services, which markets generated approximately $450 million in revenues
in 1996 for all providers of such services in Alaska. Following its introduction
of local exchange and wireless services, the Company's addressable market will
expand to approximately $800 million in total.
The Company intends to offer local exchange services in Anchorage and other
major Alaskan population centers principally using its own network facilities.
The Company expects to provide local exchange services initially in Anchorage in
the second half of 1997. The Company has installed 38 miles of a planned
130-mile fiber optic network in Anchorage, installed a Lucent 5ESS switch with
both local and long distance capabilities and has entered into an agreement with
the encumbent LEC, ATU, to interconnect the Company's network with that of ATU
and to purchase unbundled local loops necessary to provide local service. The
Company's agreement with ATU has been approved by the APUC. The Alaskan local
service market generated approximately $320 million in revenues in 1996,
approximately 34% of which were attributable to Anchorage. The Company
anticipates expanding its local service to the Fairbanks and Juneau markets
during 1998 and to other markets during 1999, subject to negotiating acceptable
interconnection arrangements with the LECs serving those markets and to
obtaining the necessary regulatory approvals.
The Company plans to enter the facilities-based wireless communications
market through development of a PCS network. The Company believes that PCS
technology, if successfully implemented, will offer advantages over existing
analog cellular technology, such as superior audio quality, additional features,
better compatibility with wireline services, and longer battery life. PCS
technology is particularly suited for use in Alaska, which has relatively small,
dense population clusters in many geographically remote areas. The Company
estimates that the Alaskan cellular services market generated approximately $35
million in total revenues in 1996.
45
INCREASE PENETRATION OF ALL MARKET SEGMENTS
The Company believes that by offering a variety of branded
telecommunications and cable services, by increasing consumer awareness and
leveraging brand equity, and by emphasizing customer service and rewarding
consumer loyalty, it will be well-positioned to improve customer retention rates
and to increase its market share in all service categories. The Company believes
that substantially all of its long distance and cable television customers are
potential wireless and local service customers. Cross-selling opportunities also
exist between the Company's long distance customers and its cable customers. The
Company estimates that, as of March 31, 1997, approximately 59% of the Company's
residential cable subscribers did not obtain long distance service from the
Company and that approximately 23% of the Company's total long distance
customers and 27% of the Company's residential long distance customers were
passed by the Cable Systems but did not buy cable service.
The Company plans significant upgrades to the existing cable plant in order
to expand channel capacity, add new services, improve network quality and
reliability and reduce theft. The Company expects that, by expanding customers'
service options, it will attract new customers, increase average revenue per
subscriber and reduce customer attrition rates. Currently, the Cable Systems
have between 300 and 450 MHz of channel capacity, or enough capacity to carry
between 36 and 60 channels. Over the next two years, the Company plans to
increase the capacity of the Cable Systems to between 450 and 550/750 MHz of
channel capacity, or enough capacity to carry between 60 and 76 channels.
The Company plans to begin offering cable modems in the fourth quarter of
1997. Cable modems represent a new technology which offers significantly faster
access to the Internet and other on-line data services than other currently
available technologies. The Company believes that Alaskans have a greater
propensity to access the Internet than consumers in other states for a variety
of reasons. Alaskans on average have completed more years of formal education
and have a higher per capita income and mean household income than the U.S.
average. Purchasing power is also enhanced by the lack of a state income tax and
the annual Permanent Fund dividend that each resident, regardless of age,
receives from the State (over $1,100 per person in 1996). In markets outside of
Anchorage, Fairbanks and Juneau, the limited availability of traditional sources
of information such as libraries, universities and museums contribute to heavy
use of the Internet as an information, education and communication resource. In
addition to offering cable modems, the Company plans to offer certain
specialized telecommunications services to support distance education and
telemedicine in rural areas of the State. Rural Alaskans often do not have
access to medical professionals within their community and the use of a
communication network to deliver a wide range of telemedical services (voice,
video and data) enhances the quality and timeliness of the services delivered
while concurrently reducing the overall cost of delivery. Likewise, the
educational infrastructure is limited in many areas of rural Alaska and distance
education services are being deployed to provide specialized curricula to
smaller village schools. Like telemedical services, distance education services
both improve the quality of education and reduce the cost of delivery.
IMPROVE CONSOLIDATED OPERATING MARGINS AND CAPITAL UTILIZATION
The Company believes that the combination of its long distance, local,
wireless communications and cable operations will enable it to achieve better
overall operating margins than would be possible if these operations were
managed as stand-alone enterprises. The Company expects to achieve certain
efficiencies by combining the marketing, sales, customer service, MIS and
administrative organizations of the Cable Systems with each other and with those
of the Company's preexisting operations. The Company also expects that its
planned provision of local services, while a potentially significant source of
revenues, will coincidentally result in a significant reduction in the Company's
local access fees paid to Alaskan LECs. Access fees charged to the Company by
incumbent Alaskan LECs for the use of their local networks to originate or
terminate long distance calls totaled $36.4 million in 1996, or approximately
28.2% of the Company's long distance revenues for this period. The Company
estimates that the
46
average access charge payable by it to Alaskan LECs for originating or
terminating interstate access is approximately $0.043 per minute of traffic and
for originating or terminating intrastate access is approximately $0.07 per
minute of traffic (or a total of approximately $0.14 for originating and
terminating access).
In addition, the Company expects to leverage its investment in existing
cable plant and rights-of-way by, in some cases, overlaying (or using existing)
fiber optic cable for telephony or PCS applications. The incremental cost of
such network enhancements, especially when combined with planned upgrades to the
existing cable plant, is significantly less than the cost of building entirely
new network facilities.
ALASKAN VOICE, VIDEO AND DATA MARKETS
The Alaskan voice, video and data markets are unique within the United
States. Alaska is physically distant from the rest of the United States and is
characterized by large geographical size and relatively small, dense population
clusters (with the exception of major population centers such as Anchorage,
Fairbanks and Juneau). It lacks a well-developed terrestrial transportation
infrastructure, and the majority of Alaska's communities are accessible only by
air or water. As a result, Alaska's telecommunications networks are different
from those found in the lower 49 states. Alaska today relies extensively on
satellite-based transmission for intrastate calling between remote communities
where investment in a terrestrial network would be uneconomic or impractical.
Also, given the remoteness of Alaska's communities and, in many cases, lack of
major civic institutions such as hospitals, libraries and universities, Alaskans
are dependent on telecommunications to access the resources and information of
large metropolitan areas in the rest of the U.S. and elsewhere. In addition to
satellite-based communications, the telecommunications infrastructure in Alaska
includes traditional copper wire, digital microwave links between Anchorage and
Fairbanks and Juneau and fiber optic cable. For interstate and international
communication, Alaska is currently connected to the lower 48 states by undersea
fiber optic cable with a capacity of nine DS3s and is backed-up by additional
satellite capacity. Calls to Hawaii and international calls are routed from the
lower 48 states by various means.
Prior to 1982, Alascom, Inc. ("Alascom") was the sole long distance carrier
in Alaska. Alascom was required to maintain a number of low bandwidth links and
expand service to remote or less-developed areas of the state. Interstate rates
initially charged for Alaskan telecommunications services were substantially
higher than interstate rates in the contiguous states. In 1972, the FCC
established a policy of rate integration intended to equalize all domestic
interstate rates based on distances of calls. This policy was used to support a
subsidy mechanism to help Alascom cover higher costs associated with rural
operations. When the Company began providing interstate long distance service in
1982, AT&T provided almost all of the telecommunications services in the lower
49 states, and Alascom provided almost all of the long distance
telecommunications services in Alaska and between Alaska and the lower 49 states
and foreign countries. Although Alascom's business was highly subsidized, the
Company competed in long distance services against Alascom without the advantage
of a subsidy. In 1983, the State of Alaska petitioned the FCC to initiate a
rulemaking to determine how to rationalize the policies of rate integration and
competition in the Alaskan market in light of the rapid changes in the
telecommunications industry brought on by the AT&T divestiture and changing FCC
competition policies. This action ultimately led to a negotiated buyout of
Alascom from Pacific Telecom, Inc. ("PTI") by AT&T in August 1995 for
consideration of approximately $290 million. After the buyout, Alascom changed
its name to AT&T Alascom. See "--Competition" and "--Regulation."
The Alaskan telecommunications business today comprises three distinct
markets: long distance services (interstate and intrastate), local exchange
services and wireless communications services (cellular and, eventually, PCS).
In the long distance market, the Company competes against AT&T Alascom and ATU,
and may in the future compete against other new market entrants. In the local
exchange market, the Company will compete against various incumbent local
exchange carriers, including ATU in the Anchorage area and PTI in Juneau. In
June 1997, Century Telephone Enterprises,
47
Inc. announced an agreement to purchase PTI. PTI is also expected to be the
local exchange carrier in Fairbanks by the end of 1997. In the wireless
communications market, the Company's PCS business expects to compete against the
cellular subsidiaries of AT&T and ATU in the Anchorage market and the cellular
subsidiaries of PTI and others outside of Anchorage. Other PCS providers may
compete against the Company as well, although the Company is unable to determine
the extent of this competition at the present time. For calendar year 1996, the
aggregate telecommunications market in Alaska generated revenues of
approximately $738 million. Of this amount, approximately $383 million was
attributable to interstate and intrastate long distance service, approximately
$320 million was attributable to local exchange services, and approximately $35
million was attributable to wireless communications services. Over the five-year
period ended December 1996, these markets have grown, in aggregate, at a
compounded annual rate of approximately 6%. Over the same period, the long
distance, local and cellular markets have individually grown at compounded
annual rates of approximately 6%, 5% and 22%, respectively.
The market for programmed video services in Alaska includes traditional
broadcast television, cable television, wireless cable, and direct broadcast
satellite ("DBS") systems. The urban centers in Alaska are served by broadcast
television stations including network affiliates and independent stations.
Anchorage, Fairbanks and Juneau are served by seven, four and two broadcast
stations, respectively. In addition, several smaller communities such as Bethel
are served by one local television station. Approximately 240 rural communities
receive a single state-sponsored channel of television by a satellite dish and a
low power transmitter. Anchorage and Fairbanks are served by a UHF subscription
television operator that has been successful in gaining customers, particularly
in areas not served by cable. Additionally, Anchorage is served by a MMDS
operator that has made minor inroads into the Company's cable customer base.
In Alaska, cable television was introduced in the 1970s to provide
television signals to communities with few or no available off-air television
signals and to communities with poor reception or other reception difficulties
caused by terrain interference. Since that time, as on the national level, the
cable television providers in Alaska have added non-broadcast programming,
utilized improved technology to increase channel capacity and expanded service
markets to include more densely populated areas and those communities in which
off-air reception is not problematic.
Recently, both broadcast television and cable operators have had to compete
against new entrants to the market including wireless cable and DBS operators.
In cities with higher population densities, MMDS or wireless cable operators can
now deliver video signals to homes with line-of-sight access to the transmitting
location. In both urban and rural locations, DBS operators offer satellite-based
programming packages to subscribers. Because of Alaska's high latitude, DBS
signals are not as strong as they are in the lower 48 states and currently
require the use of receiving dishes that are substantially larger (ranging
generally from three feet to six feet in diameter) than those required in the
lower 48 states. In addition, the relatively low altitude above the horizon of
DBS satellites in the eastern portion of the satellite arc when viewed from
Alaska makes their signals subject to blockage from mountains, buildings and
other structures. MMDS also requires that customers' receiving antennas have
line-of-sight access to transmitting radio towers, and both MMDS and DBS signals
are subject to interference from rain, snow and wind. Future satellite launches
may provide enhanced service and signal quality to DBS providers operating in
Alaska. Recent published reports indicate that there has been a substantial
increase in the number of DBS subscribers in the United States in recent years.
Thus, although it is difficult to assess the ultimate impact that DBS will have
on the cable industry or upon the Company's financial condition and results of
operations, DBS services may pose a significant competitive threat to cable
television systems.
At present, 21 communities and areas in Alaska, including the state's three
largest urban areas (Anchorage, Fairbanks and Juneau) are served by the Cable
Systems. As of March 31, 1997, the Cable Systems passed 162,711 homes or
approximately 70% of all households in Alaska and served approximately 104,400
subscribers (92,940 equivalent basic subscribers), representing 64% of
households
48
passed by the Cable Systems. It is difficult if not impossible to determine the
exact number of homes passed by cable in Alaska because many rural communities
served by cable are very small and the cable systems are independently owned and
operated. A number of cable operators other than the Company provide cable
service in Alaska, although the Company does not believe any cable operators are
currently providing service in the areas served by the Cable Systems. All of
these companies are relatively small, with the largest having fewer than 6,000
subscribers. Aggregate revenues for all providers in the Alaskan cable
television market are estimated to be $62.0 million for 1996, a 4.0% increase
over the prior year.
LONG DISTANCE OPERATIONS
SERVICES
The Company commenced providing interstate long distance service in November
1982 and commenced providing intrastate long distance service in May 1991. The
Company provides a full range of long distance services, including direct dial,
800 message toll, private line, private network, operator, and calling and debit
card services, to residential, commercial and government customers and to other
common carriers. The Company also sells data communication equipment and offers
technical services.
As of March 31, 1997, approximately 90% of total Alaskan access lines were
accessible through the Company's satellite, fiber optic or leased digital
microwave networks. As of March 31, 1997, the Company's residential customers
were served by approximately 81,150 access lines, representing approximately 41%
of all Alaskan residential presubscribed access lines. In addition, the Company
had over 11,000 commercial, governmental and other common carrier customers who
were served by approximately 57,600 access lines, representing approximately 48%
of all non-residential presubscribed access lines in the State. All service
areas constructed prior to January 1, 1996 in which the Company has facilities
have completed the equal access balloting process (which permits customers, by
completing a ballot, to designate their preferred long distance carrier). Among
these communities, the Company carries 33% to 49% of the southbound interstate
message toll service ("MTS") traffic and 21% to 48% of the intrastate MTS
traffic originating in these service areas. Among the sites constructed in 1996,
the communities of Barrow, Bethel, Nome, Togiak and Unalakleet have completed
the equal access balloting process. The communities of Ekwak, New Stuyahok,
Kollganek and Levelock also completed the equal access balloting process in
1997. The Company is currently negotiating equal access conversion with the LECs
in the remainder of the sites constructed in western Alaska during 1996.
The Company provides interstate and intrastate switched MTS and private line
and private network communication services between the major communities in
Alaska, and to and from the lower 49 states and foreign countries. The Company's
message toll services include intrastate, interstate and international direct
dial, 800, calling and debit card, operator and enhanced conference calling, as
well as termination of northbound toll service for MCI, Sprint and several
resellers who do not have facilities of their own in Alaska. The Company also
provides origination of southbound calling card and 800 toll services for MCI
and Sprint customers. Regulated telephone relay services for the deaf,
hard-of-hearing and speech-impaired are provided through the Company's operator
service center. The Company offers its message toll services to commercial,
residential, government and other common carrier customers. Subscribers may
generally cancel service at any time. Toll related services accounted for
approximately 82.7% of the Company's total telecommunications services revenues
in 1996. Private line and private network services utilize voice and data
transmission circuits, dedicated to particular subscribers, which link an office
in one location to another in a different location. The Company provided private
line and private network communication products and services to approximately
769 commercial and government accounts in 1996. Private line and private network
communication products and services generated $14.9 million in revenue in 1996
or approximately 9.6% of total telecommunications services revenues.
49
Although the Company has several agreements to facilitate the origination
and termination of international toll traffic, it has neither foreign operations
nor export sales. Revenues associated with international toll traffic were $6.3
million in 1996.
The following table summarizes the Company's switched MTS traffic minutes
for the periods indicated:
INTERSTATE MINUTES
-------------------------------------
SOUTHBOUND NORTHBOUND INTER-
FOR YEAR ENDED (TO LOWER 49 (FROM LOWER CALLING INTRASTATE NATIONAL
DECEMBER 31, STATES) 49 STATES) CARD MINUTES MINUTES TOTAL
- --------------- ------------ ------------ --------- ----------- ----------- ---------
(AMOUNTS IN THOUSANDS)
1993 203,652 144,994 16,260 70,107 4,251 439,264
1994 231,226 158,059 17,466 79,641 5,318 491,710
1995 263,023 176,893 18,215 93,370 6,385 557,886
1996 326,471 209,154 26,459 121,208 7,524 690,816
In addition to providing communication services, the Company designs, sells,
services and operates, on behalf of certain customers, dedicated communication
and computer networking equipment and provides field/depot, third party,
technical support, consulting and outsourcing services through its systems sales
and service business. The Company's equipment sales and services revenue was
$9.8 million in the year ended December 31, 1996, or approximately 6.3% of total
telecommunications services revenues. The Company has expanded its technical
services business to include outsourcing, onsite technical contract services and
telecommunications consulting. The Company manages substantially all of the
telecommunications and computer networking assets of BP Exploration (Alaska),
the largest oil company presently operating in Alaska, pursuant to a contract
that expires on December 31, 1997. The Company is currently negotiating a
three-year extension of such contract and expects to finalize the extension
shortly. The Company was also awarded a six-year contract, effective October 31,
1995, to assume management responsibility for all of the telecommunications and
computer networking assets of National Bank of Alaska.
SIGNIFICANT CUSTOMERS
In 1993, the Company entered into a significant business relationship with
MCI which includes the following agreements: (i) the Company agreed to terminate
all Alaska-bound MCI long distance traffic and MCI agreed to terminate all of
the Company's long distance traffic terminating in the lower 49 states,
excluding Washington, Oregon and Hawaii (the "MCI Traffic Carriage Agreement");
(ii) MCI licensed certain service marks to the Company for use in Alaska; (iii)
MCI, in connection with providing to the Company credit enhancement to permit
the Company to purchase a portion of an undersea cable linking Seward, Alaska,
with Pacific City, Oregon, leased from the Company all of the capacity owned by
the Company on the undersea fiber optic cable and the Company leased such
capacity back from MCI; (iv) MCI purchased certain service marks of the Company;
and (v) the parties agreed to share some communications network resources and
various marketing, engineering and operating resources. The Company also handles
MCI's 800 traffic originating in Alaska and terminating in the lower 49 states
and handles traffic for MCI's calling card customers when they are in Alaska,
while MCI originates calls for the Company's calling card customers when they
are in the lower 49 states. Concurrently with entering into the MCI Traffic
Carriage Agreement, MCI purchased approximately 31% of the then outstanding
Class A Common Stock and approximately 31% of the then outstanding Class B
Common Stock and presently controls nominations to two seats on the Board
pursuant to the Voting Agreement. Concurrently with the Company's acquisition of
the Cable Systems, MCI purchased an additional 2.0 million shares of Class A
Common Stock for $13.0 million or $6.50 per share, a 30% premium to the market
price of $5.00 per share immediately preceding the announcement of the Company's
acquisition of the Cable Systems. As of June 30, 1997, MCI owned 22.6% of the
outstanding combined Common Stock, representing 26.6%
50
of the total voting power of the Common Stock. After giving effect to the Stock
Offering, MCI will own 19.4% of the outstanding combined Common Stock,
representing 24.5% of the total voting power of the Common Stock. See "--Cable
Television" and "Principal and Selling Shareholders."
Revenues attributed to the MCI Traffic Carriage Agreement, which expires in
2001, were approximately $29.2 million in 1996, or approximately 17.7% of total
revenues. The contract was amended in 1996 to reduce the rate to be charged by
the Company for southbound MCI traffic for the period April 1, 1996 through July
1, 1999 and thereafter. The rate reduction, if applied to the number of
southbound minutes carried by the Company in all of 1996, would have been
approximately $570,000.
In 1993, the Company entered into a long-term agreement with Sprint pursuant
to which the Company agreed to terminate all Alaska-bound Sprint long distance
traffic and Sprint agreed to handle substantially all of the Company's
international traffic. Services provided to Sprint pursuant to the contract,
which expires in 1999, resulted in revenues in 1996 of $18.8 million, or 11.4%
of total revenues.
NETWORK
The Company operates a state-of-the-art, competitive telecommunications
network employing the latest digital transmission technology based upon fiber
optic and digital microwave facilities within and between Anchorage, Fairbanks
and Juneau, a digital fiber optic cable linking Alaska to the lower 48 states
and providing access to other carriers' networks for communication around the
world, and the use of satellite transmission to remote areas of Alaska (and for
certain interstate traffic as well).
The Company's C-band satellite network currently uses six leased C-band
transponders on the Galaxy IX satellite and will transition to six owned C-band
transponders on the Galaxy X satellite that is expected to be launched in
mid-1998. The Company's MTS services and private line and network services
(excluding VSAT services) are distributed primarily via its C-band satellite
network which is also used for transmissions to remote areas of Alaska. In
connection with its C-band distribution network, the Company owns and operates
five 13-meter earth stations in Anchorage, Fairbanks and Juneau, Alaska,
Issaquah, Washington and Dallas, Texas. In addition, the Company owns and
operates six 9-meter and three 7-meter earth stations throughout the State. The
Company also owns 49% of a 13-meter earth station on Adak Island, providing MTS
and private line services. During 1996, the Company installed its six 9-meter
earth stations in Barrow, Kotzebue, Nome, Bethel, Dillingham, and King Salmon,
Alaska.
The Company also uses its C-band satellite capacity to operate a Demand
Assigned Multiple Access ("DAMA") satellite network to serve rural communities
in Alaska, which includes features of both a toll switch and a satellite
transmission network. Most existing satellite technology relies on fixed channel
assignments to a central hub. The Company's DAMA communication technology,
developed in 1994, assigns satellite capacity on an as needed basis. The digital
DAMA system allows calls to be made between remote villages using only one
satellite hop, thereby reducing satellite delay and capacity requirements while
improving quality. The Company has obtained the necessary APUC and FCC approvals
waiving current prohibitions against construction of competitive facilities in
rural Alaska. A four-module demonstration system was constructed in 1994 and was
integrated into the Company's telecommunications network in 1995. The Company's
56-site DAMA project in rural communities of Alaska is substantially complete,
and half of the sites are currently providing service. The DAMA system is
currently capable of interfacing with LECs using standard toll to local office
signaling protocols. A signaling system number 7 ("SS7") interface to DAMA
signaling capabilities is currently under development, as is an integrated
services digital network ("ISDN") rate interface capability.
The Company's Ku-band satellite network uses one leased Ku-band transponder
on the Hughes SBS5 satellite and will transition to an owned Ku-band transponder
on the Galaxy X satellite once that satellite is successfully launched. The
Ku-band network is higher power and is used primarily for point-to-point data
communications. The Company's Ku-band network comprises an 8.1-meter hub station
located in Anchorage and a 7.3-meter hub station located near Seattle,
Washington from which the
51
Company provides services to 98 VSAT earth stations located throughout the state
of Alaska and 6 VSAT earth stations in the lower 48 states. Substantially all of
these VSAT earth stations are owned by the Company's customers.
The majority of the Company's interstate long distance traffic is carried to
and from the contiguous 48 states over the Seward, Alaska branch of the undersea
fiber optic cable that connects Pacific City, Oregon to Miura, Japan. Of the
nine DS3s of capacity between Seward and Pacific City in this undersea cable,
the Company owns one and leases 57% of another DS3 channel.
The Company utilizes leased digital microwave facilities to carry long
distance traffic within and between Anchorage, Fairbanks and Juneau. These
facilities are leased from AT&T Alascom under agreements that provide for annual
lease payments of approximately $2.4 million in 1997, $2.5 million in 1998 and
decreasing to approximately $662,000 in 1999. The Company's business plan
anticipates a reduction in its use of leased digital microwave facilities from
AT&T Alascom as it expands its own facilities.
The Company's switched network consists of three medium capacity Digital
Switch Corp. DEX digital toll switches located in Anchorage, Fairbanks and
Juneau, the three main urban centers in Alaska. The Company owns and operates
these switching centers as well as a fourth digital toll switch in Seattle,
Washington. The Company leases switching capacity in Dallas, Texas from GTE
Telecom. These switches provide a wide range of toll services including routing
of direct dial, calling card, toll free and operator assisted calls.
Since 1990, the Company has utilized SS7 in its main toll switched network
to speed call setup and provide enhanced service. In 1993, the Company began SS7
interconnection with other interexchange carriers and local exchange carriers so
that approximately 75% of the state's interstate direct dial and toll free (800
and 888) traffic is currently processed using SS7 signaling. The Company leases
and operates a toll tandem switch located in Anchorage that provides the
Company's first intelligent network service for routing of toll free calls.
The Company's future switched network plans call for consolidating its
network on new combined long distance and local switches. Such a switch (a
Lucent 5ESS switch) was installed in Anchorage for activation in April 1997 and
was interconnected with the incumbent LEC's network in May 1997 for the exchange
of local access traffic. Additional 5ESS combined long distance/local switches
are planned for installation in Fairbanks and Juneau in 1998 and in Seattle,
Washington in 2000. These new switching systems will enable the Company to offer
local and long distance traffic, as well as operator assisted calls, via a
single switching platform. The switches will be service switching point ("SSP")
functional, allowing the removal of the Company's current leased toll tandem
switch. In early 1998, the Company plans to add enhanced SS7 signaling
capabilities and to introduce advanced intelligent network switched services.
The Company plans to construct a state-of-the-art undersea fiber optic
network connecting Anchorage, Alaska to Seattle, Washington, with a spur to
Juneau and a terrestrial connection to Fairbanks. The system will use optical
amplifiers and is designed to accommodate growth from an initial equipped
capacity of OC-48 on each city-pair segment to at least OC-192 by the addition
of terminal equipment at the landing stations. The physical configuration will
include a cable extending from the Seattle, Washington landing station to the
Whittier, Alaska landing station with an offshore branching unit connected to
the Juneau landing station. Redundant, ring-protected inland extensions will be
constructed from the Whittier and Seattle landing stations to their adjacent
primary cities. At Juneau, the Company's existing fiber network will provide the
inland extension. The submarine cable portion of the project will be constructed
on a turn-key basis by the Company's supplier. The Company has completed the
necessary marine survey and expects to enter into a supply contract in time to
allow the beginning of commercial service in late 1998. The anticipated service
life of the cable is 25 years.
52
The traffic patterns experienced by the Company in the Alaskan market vary
by location. The majority of interstate traffic is carried to and from the lower
49 states by undersea fiber optic cable, with some traffic carried by leased
digital microwave facilities and satellite. In Anchorage, 98% of interstate long
distance traffic is routed to and from the lower 49 states via undersea fiber
and 2% of interstate traffic is routed via satellite. In Fairbanks, interstate
traffic is split 45% on a combined route of leased digital microwave facilities
and undersea fiber and 55% routed via satellite. Juneau's interstate traffic is
routed entirely by satellite. Anchorage's intrastate traffic to Fairbanks is
routed via leased digital microwave facilities and intrastate traffic to Juneau
is routed 48% by leased digital microwave facilities and 52% by satellite.
Intrastate traffic between Juneau and Fairbanks is carried by leased digital
microwave facilities. In addition, the Company carries some traffic between
Juneau and Ketchikan and Sitka via leased digital microwave facilities. All
other intrastate traffic is carried predominantly by satellite.
The Company recently installed a new network monitoring and control center
in Anchorage, Alaska. The new control center enables the Company to centralize
its network personnel and to remotely monitor and reconfigure the network as
needed. This capability will result in more efficient use of the Company's
personnel for maintenance of the Company's facilities.
CABLE TELEVISION
The Cable Systems serve 21 communities and areas in Alaska including
Anchorage, Fairbanks and Juneau, the state's three largest urban areas. As of
March 31, 1997, the Cable Systems passed 162,711 homes or approximately 70% of
all households in Alaska and served approximately 104,400 subscribers (92,940
equivalent basic subscribers), representing 64% of households passed by the
Cable Systems. As of March 31, 1997, the Cable Systems consisted of
approximately 1,765 miles of installed cable plant having between 300 and 450
MHz of channel capacity (or enough capacity to carry between 36 and 60
channels). On a pro forma basis, assuming the Cable Systems had been acquired by
the Company as of January 1, 1996, the Cable Systems generated pro forma
revenues for the year ended December 31, 1996 of approximately $55.3 million and
EBITDA before management fees of approximately $27.0 million, or 48.8% of pro
forma cable revenues. Pro forma revenues and EBITDA from cable services would
have represented 26.3% and 54.9%, respectively, of the Company's consolidated
revenues and EBITDA for 1996.
The following table sets forth selected combined operating data regarding
the Cable Systems as of December 31, 1994, 1995 and 1996. All data is
approximate and excludes data from two immaterial cable systems.
AS OF MARCH
AS OF DECEMBER 31, 31,
-------------------------------- -----------
1994 1995 1996 1997
--------- --------- ---------- -----------
Homes passed........................................... 157,278 159,486 162,395 162,711
Equivalent basic subscribers........................... 92,623 94,502 93,391 92,940
Basic penetration...................................... 58.9% 59.3% 57.5% 57.1%
Premium service units.................................. --(1) --(1) 77,609 75,521
Premium penetration.................................... --(1) --(1) 83.1% 83.1%
Average monthly revenue per equivalent basic
subscriber........................................... $ 45.16 $ 46.76 $ 50.73 $ 48.98
- ------------------------------
(1) Comparable information is not available.
REGIONAL CABLE SYSTEMS
For internal management purposes, the Company has recently divided its cable
television systems into five regions, the Anchorage, Arctic, Interior,
Southcentral and Southeast regions. Most of the
53
subscribers of the Cable Systems are located in Anchorage (the largest of the
systems), the Interior region (which includes Fairbanks) and the Southeast
region, which includes Juneau.
ANCHORAGE REGION. The Anchorage Region includes cable systems serving
Anchorage, Eagle River, Chugiak, Fort Richardson and Elmendorf Air Force Base.
As of March 31, 1997, the Anchorage cable system passed 100,926 homes and had
62,127 basic subscribers. The Anchorage cable system offers basic service that
includes 18 channels. In addition, subscribers can subscribe to a cable
programming service tier ("CPST") which includes 26 channels or a new product
tier ("NPT") which includes TNT, CNN, Discovery, America's Talking, Outdoor Life
and the Sci-/Fi Channel. Each optional tier is available at additional cost. The
Anchorage system is fully addressable, with all optional services (other than
broadcast basic) scrambled. Average monthly revenues per subscriber in the
region for 1996 were $45.60. The Anchorage system currently has 885 miles of 450
MHz plant installed, of which 337 miles are overhead and 548 miles are
underground. The Company is upgrading the Anchorage system to a 550/750 MHz
hybrid fiber optic and coaxial cable network, including the installation of
approximately 130 miles of fiber optic cable. As of March 31, 1997,
approximately 38 miles of fiber optic cable had been installed, with completion
expected in 1998. The fiber optic plant will originally support a 550 MHz analog
platform with 200 MHz reserved for digital services. This fiber network will
also be used in conjunction with the Company's planned local exchange and PCS
operations in Anchorage.
SOUTHEAST REGION. The Southeast Region includes cable systems serving
Juneau, Sitka, Petersburg, Ketchikan and Wrangell. These systems passed 22,676
homes and had 18,416 basic subscribers as of March 31, 1997. The Juneau cable
system offers an 11-channel basic service package and two CPSTs, including CPST
1 that includes basic service plus an additional four channels and CPST 2 which
includes basic service plus an additional 34 channels. The Ketchikan cable
system offers an eight channel basic service and a CPST 1 which includes basic
service plus an additional 33 channels and a CPST 2 which includes basic
service, CPST 1 and an additional four channels. The Sitka cable system offers
an eight channel basic service and an expanded basic service which adds 38
additional channels to the basic service offering. The Petersburg and Wrangell
cable systems offer basic service which includes three channels, one of which is
a Public Broadcasting System ("PBS") channel. The CPST 1 includes basic service
and either 24 or 25 channels, and the CPST 2 adds an additional eight to 14
channels. In addition, both systems offer four to five channels of premium pay
service. Average monthly revenues per subscriber in the region for 1996 were
$44.97. The Juneau system was recently rebuilt to support a 450 MHz platform
using a fiber optic cable backbone. Sitka and Ketchikan are both also at 450 MHz
, and Petersburg and Wrangell are expected to be upgraded to 450 MHz in 1997
from their current 300 and 330 MHz levels, respectively. Juneau is the only
cable system that is currently subject to rate regulation by the APUC; such
regulation extends only to the basic service tier.
INTERIOR REGION. The Interior Region includes cable systems serving
Fairbanks, Eielson Air Force Base, Fort Greeley, Fort Wainwright and the
community of North Pole. The Fairbanks cable system offers a "limited service"
tier which includes 12 channels and no pay-per-view service. In addition, a
"satellite service" option is available at additional cost which includes the
limited service options plus 24 additional channels. These systems passed 20,605
homes and had 9,901 basic subscribers as of March 31, 1997. Average monthly
revenues per subscriber in the region for 1996 were $40.24. Fairbanks will be
upgraded to a 450 MHz system in December 1997 and subsequently to 550 MHz, with
the four headends in the region slated to be interconnected with fiber optic
links and additional fiber optic cable to be deployed to give the primary
headend a direct link to local broadcasters. This will substantially improve
network feeds, especially for the area's military bases and the community of
North Pole.
SOUTHCENTRAL REGION. The Southcentral Region includes cable systems serving
Cordova, Homer Kenai, Kodiak, Seward, Soldotna and Valdez. The Kodiak, Valdez
and Cordova cable systems generally include basic service which includes three
channels, one of which is a PBS channel. The CPST 1 in these markets includes
basic service and either 24 or 25 channels and the CPST 2 adds an additional
eight to
54
14 channels. In addition, the Valdez and Cordova systems offer four to five
channels of premium pay service and the Kodiak system is capable of eight
channels of premium pay services and three channels of pay-per-view programming.
In 1994, the Kodiak system was rebuilt to add addressability and the additional
channel capacity. The Kenai cable system offers a basic service including 32
channels as well as pay-per-view services. The Seward cable system includes 39
channels packaged into two levels of service. The basic service includes three
channels, one of which is a PBS channel. The CPST 1 includes basic service and
30 additional channels and five channels of premium pay services are also
offered. All of the channels, with the exception of local origination
programming, are received via satellite. In addition, the system provides 12
channels to 300 outlets in a State of Alaska correctional facility through a
separate receive and headend site. The Homer cable system offers a basic service
consisting of seven channels, including three local translator channels. A CPST,
available at additional cost, adds an incremental 29 channels. All of the
channels, with the exception of the local translator channels and local
origination programming, are received via satellite. The Homer system is fully
addressable and five channels of premium pay services are available. These
systems passed 14,858 homes and had 10,992 basic subscribers as of March 31,
1997. Average monthly revenues per subscriber in the region for 1996 were
$43.01. Bandwidths for cable plant in the region vary from 300 to 450 MHz. The
Company plans to upgrade all cable plant in the region to 450 MHz during the
second half of 1998.
ARCTIC REGION. The Arctic Region includes cable systems serving Bethel,
Kotzebue and Nome. The Bethel cable system offers a basic service package
consisting of 14 channels and a CPST which adds 13 channels at an additional
cost per month. The Kotzebue and Nome cable systems offer basic service which
includes three channels, one of which is a PBS channel. The CPST 1, which
includes basic service, also includes either 22 or 24 channels and CPST 2
provides an additional eight or nine channels. In addition, both systems offer
four to five channels of premium service. All of the channels, with the
exception of one local translator and the local origination programming, are
received via satellite. These systems passed 3,646 homes and had 2,987 basic
subscribers as of March 31, 1997. Average monthly revenues per subscriber in the
region for 1996 were $61.31. Bandwidths for cable plant in the region vary from
300 to 450 MHz. The Company plans to upgrade all cable plant in the region to
450 MHz during the second half of 1998.
INTEGRATION WITH TELECOMMUNICATIONS OPERATIONS
In early 1997, the Company began integrating various telecommunications and
cable functions, including sales and marketing, customer service, public
relations, MIS, accounting and finance, human resources, and purchasing. In
connection with this functional integration, the Company intends to create a
billing system which will provide customers the option of receiving a single
bill for all services provided by the Company and to provide a single point of
contact for customer service. The Company believes that integration of these
functions will help maintain consistent policies and procedures within the
Company, will increase efficiency by reducing duplicative effort and expense,
and will enhance the Company's ability to cooperatively brand, market and
promote its telecommunications and cable services. The Company estimates that
the essential elements of this integration will be completed by late 1997.
PRIME MANAGEMENT AGREEMENT
In connection with its acquisition of the Cable Systems, the Company entered
into the Prime Management Agreement with Prime Management to manage the Cable
Systems. Assuming the Stock Offering is completed, the Voting Prime Sellers will
own 18.0% of the total outstanding combined Common Stock and will control
nominations to two seats on the Board pursuant to the Voting Agreement. See
"Management--Voting Agreements" and "Principal Selling Shareholders."
Under the Prime Management Agreement, the Company will pay to Prime
Management a net annualized fee for managing the Cable Systems in the amount of
$1,000,000 for the year ending October 31, 1997, $750,000 for the year ending
October 31, 1998, and $500,000 for each year ending
55
October 31 thereafter that the Prime Management Agreement is in effect. Any
portion of the management fee which is past due shall bear interest at a rate
per annum equal to 17.5% until paid. In addition, the Company is required to
reimburse Prime Management for any costs and expenses incurred by it in
connection with the Cable Systems, including travel and entertainment expenses.
The contract states that such costs and expenses are not anticipated to exceed
$200,000 on an annualized basis. The Prime Management Agreement has a term of
nine years but either party may terminate the agreement in its discretion after
October 31, 1998. In addition, the agreement may be terminated earlier under the
following circumstances: (i) with respect to the Cable Systems acquired from
Prime, by the Company upon the termination or revocation of the Company's cable
television certificate of public convenience and necessity or franchise for a
cable system; (ii) upon the sale of all or substantially all of the assets of
the Cable Systems or the sale of all of the equity interests in the Cable
Systems; (iii) upon Prime Management's material breach of the agreement and
failure to cure within 30 days; (iv) by Prime Management upon the Company's
material breach of the agreement and failure to cure within 30 days; or (v) by
either party upon 30 days written notice if the other party shall enter into
certain events involving bankruptcy, insolvency or reorganization.
LOCAL EXCHANGE SERVICES
The Company intends to offer local exchange services in Anchorage and other
major Alaskan population centers principally over its own network facilities and
resold local loops beginning in Anchorage in the second half of 1997. The
Company's entry into the local exchange services market will enable it to
cross-sell its long distance, wireless communications, cable and Internet
services. By offering cross-program discounts, the Company believes it can
attract a larger market share and improve customer retention rates. The Company
believes it can also save access costs it would otherwise pay to incumbent LECs.
The Company intends to provide a full-featured competitive local service,
including basic dialtone, custom local access signaling, centrex, voice mail,
ISDN, directory listing, directory assistance, inside wire and equipment
maintenance, and local private line services. The Company plans to offer local
exchange services initially in Anchorage to its existing long distance customers
and then to Internet service providers and other businesses, including large
business accounts.
The Company estimates that statewide 1996 local exchange service revenues
totaled approximately $320 million, inclusive of local access revenues of
approximately $174 million. The current local access market in Anchorage
comprises over 145,000 access lines. Fairbanks and Juneau have approximately
32,000 and 22,000 access lines, respectively. Total incumbent local exchange
revenues in Anchorage for 1995 were in excess of $102 million, including
approximately $28.9 million in dialtone, $12.5 million in enhanced services,
$25.2 million in access charges, $7.4 million in subscriber line charges, $17.5
million in yellow page revenue, and about $9 million in other revenues.
ATU, the incumbent LEC in Anchorage, and the Company have entered into an
interconnection agreement which was arbitrated and approved by the APUC. The
APUC, as part of the arbitration and approval process, established an immediate
effective date for the interconnection agreement, as of January 14, 1997. While
some initial delays have occurred due to differences in interpretation of the
agreement and unexpected delays may occur in the future, interconnection
implementation with ATU is currently proceeding. The interconnection agreement
provides for the interconnection and exchange of local traffic between the
Company and ATU under the provisions of the 1996 Telecom Act, and has set rates
for wholesale service, unbundled network element resale and colocation.
On May 20, 1997, the Company filed an action requesting preliminary and
permanent injunctive relief against ATU in the U.S. District Court at Anchorage.
The suit sought immediate implementation of transitional local number
portability. The Company believes that the obligation on the part of ATU to
provide number portability is explicit in Section 251(b)(2) of the 1996 Telecom
Act, and the method for implementation is contained in the interconnection
agreement between the parties. The Company alleged that ATU repudiated its
obligation to immediately implement local number portability, citing the
56
need for additional regulatory adjudication on an ancillary issue. The Company
contended that the technical solutions for implementing local number portability
and interconnections are currently in place and have been tested, and the suit
seeks immediate implementation. No damages were sought. The Company has
dismissed the suit without prejudice based upon ATU's verbal agreement to honor
the implementation schedule.
The Company plans to provide local exchange service through one or more of
loop resale, facilities-based service and total system resale. Loop resale would
involve the use by the Company of only the incumbent LEC's local loop, the
copper wire pair that interconnects the subscriber's telephone equipment to the
LEC's central office. In connection with loop resale, the Company would colocate
or virtually colocate switching equipment at the LEC's wire center to enable
interconnection of these local loops to the Company's switches and transmission
network. In this case, with the exception of the use of the passive copper loop,
the Company could then offer its own switch and network-based services
independently from the incumbent LEC. Facilities-based service would include
service provided over the Company's fiber optic metropolitan area network
("MAN") and microwave radio facilities, and potentially through the use of
wireless local loop equipment and the coaxial cable television network. Total
system resale would involve the purchase of discounted retail end-to-end service
from the incumbent LEC, which provides all physical facilities for switching and
transmission of the call.
In 1996, the Company commenced construction of its Anchorage MAN. The MAN
will enable the Company to provide facilities-based local exchange services to
the full range of the Company's customers, as well as local access services to
AT&T Alascom or other interexchange carriers. The MAN will also permit the
Company to provide high speed data services for large commercial customers. As
of March 1997, the Company had installed approximately 38 miles of fiber optic
cable and expects to complete construction of the planned 130 mile Anchorage MAN
in 1998. The Company has installed a new host local switch, a Lucent
Technologies 5ESS, in Anchorage and expects to complete system acceptance
testing and interconnection of that switch to the Anchorage MAN during the
second quarter of 1997. The Company also plans to install six remote switches at
six of ATU's eight end-offices beginning in the second quarter of 1997, and
intends to complete these installations in the second half of 1997. At a seventh
ATU end-office, the Company intends to install subscriber line carrier (SLC)
equipment. As part of the MAN, the Company will extend new fiber optic cable
facilities into large multi-tenant commercial buildings and into Anchorage's
largest multiple dwelling residential units.
The Anchorage fiber optic MAN will benefit the Company's cable television
transmission infrastruc-
ture because it can be used to reduce the cascade depth of a portion of the
existing coaxial cable trunk plant between the cable headend facilities and
various neighborhood distribution feeder networks. This hybrid fiber-coaxial
architecture will provide increased bandwidth and improved noise and distortion
suppression in the trunk plant through the reduction of coaxial cable trunk
amplifier cascade depth. The system is being designed to provide up to 750 MHz
of usable bandwidth for a combination of 550 MHz analog and 200 MHz digital
cable video services.
The Company is currently planning the initial phase of construction for a
Fairbanks MAN, with construction of approximately 35 miles of fiber optic cable
expected to commence in late 1997. In connection with the acquisition of the
Cable Systems, the Company has also acquired fiber optic networks in Juneau and
Kodiak. These comprise an additional 52 miles of fiber optic cable plant. Plans
to interconnect long distance/local switches to the Fairbanks and Juneau MANs
are currently under development.
PCS
The Company plans to develop a wireless PCS network. PCS allows reception
and initiation of calls from any location within the area serviced by the PCS
network. The Company's PCS business segment will compete against traditional
cellular service providers and may, depending on the technology selected and
deployed, become an effective alternative to incumbent LEC facilities for local
exchange
57
services in certain areas. The Company is reviewing various PCS technologies and
plans to settle on one technology by the end of 1997. The Company's planned MAN
networks will provide the fiber optic cable backbone to link PCS cell sites in
major population centers. The Company expects to launch its PCS service in
Anchorage in 1999 and in Fairbanks and Juneau in 2000.
In March 1995, the FCC completed a nationwide auction of A- and B-block PCS
licenses, each having 30 MHz of radio spectrum in the 1900 MHz band for private
development of PCS networks. In the FCC auction, Alaska was assigned two such 30
MHz bandwidths, designated statewide A-block PCS and statewide B-block PCS. The
A and B PCS licenses include build-out requirements which require that the
licensee provide service to one-third of licensed pops within five years (by
June 2000) and to two-thirds of licensed pops within ten years (by June 2005).
The FCC subsequently auctioned 30 MHz C-block licenses and 10 MHz D-, E- and
F-block licenses. The Company was the successful bidder for a 30 MHz statewide
B-block PCS license and paid approximately $1.65 million or about $3.00 per pop.
The small cell architecture of PCS systems and the nature of radio
propagation in PCS frequencies mean that PCS users will not be able to roam or
use their handsets outside of areas covered by PCS cells unless the PCS units
are also able to function as analog cellular handsets or consumers use a
separate analog handset when roaming. Although the Company is aware of several
suppliers with plans to manufacture such units, none are currently available. In
addition, the Company would be required to enter into interconnection agreements
with cellular suppliers or obtain licenses for use of cellular spectrum to
permit in-state roaming. Although the Company expects to enter into such
arrangements, none has as yet been made. The inability of PCS customers to use
their handsets outside of the areas covered by PCS cells may reduce the
attractiveness of PCS technology to potential customers. However, in Alaska, the
Company intends to cover all urban areas with PCS cells, reducing or eliminating
roaming for the vast majority of the population.
MARKETING AND SALES
The Company's marketing and sales strategy hinges on its ability to leverage
(i) its unique position as an integrated provider of multiple telecommunications
and cable services, (ii) its well-recognized and respected brand name in the
Alaskan marketplace and (iii) its leading market positions in long distance and
cable television services. By pursuing a marketing strategy that takes advantage
of these characteristics, the Company believes it can increase its market
penetration, improve customer retention rates, increase its share of its
customers' aggregate voice, video and data services expenditures and achieve
continued growth in revenues and operating cash flow.
The Company's marketing and sales organization is comprised of approximately
295 people. This organization is subdivided into four subsidiary marketing
groups, each having responsibility for marketing all relevant telecommunications
or cable services to the Company's four principal customer groups, which include
consumer, commercial, other common carrier and rural customers. The four
customer-group heads and the director, customer operations (customer service and
operator services) all report to the Senior Vice President--Sales and Marketing.
The Company's consumer marketing group consists of 24 employees. The
marketing team is supported by a customer service group staffed by approximately
129 sales or customer service representatives. The Company historically competed
in the residential market primarily on the basis of price. However, as price
competition intensified in recent years, the Company has shifted to a strategy
that places increased emphasis on strong customer service, that rewards
consumers for their loyalty to the Company and that focuses on the development
of value-added services. In this regard, the Company has expanded its customer
service group, adopted creative promotions that offer rebates to customers on
the basis of usage volumes and length of service with the Company, and
introduced innovative billing solutions. The Company further intends to provide
residential customers with a package of high-quality diversified
telecommunications and cable services that will entice consumers to purchase
multiple
58
services from the Company by offering package discounts, and will offer a single
bill and point of contact for customer service. The Company's advertising
strategy for this segment has relied, and will continue to rely, heavily on
television, radio and print media.
The Company's commercial marketing group consists of 71 employees.
Commercial customers for telecommunications services have a wide variety of
experiences and needs. Many smaller businesses do not have the staff or
technical expertise to select from among the many alternatives available to
them, and respond well to a consultative approach from telecommunications
providers. The Company believes that by offering customers such as these a
diversified package of services from a single source, along with the technical
expertise to help them evaluate which service combinations will best fit their
individual requirements, the Company can provide significant value added
resources in implementing their telecommunications decisions. Similarly, large
businesses which have the resources and volume of telecommunications usage to
justify in house expertise frequently outsource these functions as a means of
increasing productivity and reducing expenses. These functions can effectively
be addressed by the Company.
The Company's marketing and sales organization has five employees that focus
on other common carrier marketing and sales. The group is responsible for
managing the Company's business with MCI and Sprint as well as other common
carriers and resellers purchasing services from the Company.
The unique characteristics of communities in rural Alaska have led the
Company to designate a separate group of eight employees to focus exclusively on
marketing to this segment of the Alaskan population, which comprises
approximately 23.1% of Alaska's total population. Because the large number of
small communities in rural Alaska have relatively little exposure to mass media,
and because these communities tend to be very tight-knit, the Company's
marketing approach to these communities emphasizes the development of trust
between the Company and community members through direct personal involvement by
Company employees in local business or community organizations and events.
COMPETITION
TELECOMMUNICATIONS. The telecommunications industry is intensely
competitive, rapidly evolving and subject to constant technological change.
Competition is based upon pricing, customer service, billing services and
perceived quality. Certain of the Company's competitors are substantially larger
and have greater financial, technical and marketing resources than the Company.
Although the Company believes it has the human and technical resources to pursue
its strategy and compete effectively in this competitive environment, its
success will depend upon its continued ability to profitably provide high
quality, high value services at prices generally competitive with, or lower
than, those charged by its competitors.
The Company's principal competitor in long distance services, AT&T Alascom,
has substantially greater resources than the Company. This competitor's
interstate rates are integrated with those of AT&T Corp. and are regulated in
part by the FCC. While the Company initially competed based upon offering
substantial discounts, those discounts have been eroded in recent years due to
the lowering of prices by AT&T Alascom. Under the terms of AT&T's acquisition of
Alascom, AT&T Alascom rates and services must "mirror" those offered by AT&T, so
changes in AT&T prices indirectly affect the rates and services of the Company.
AT&T's and AT&T Alascom's prices are regulated under a price cap plan whereby
their rate of return is no longer directly regulated or restricted. AT&T and
AT&T Alascom are allowed to raise and lower prices for three groups of services
within pre-established floor and ceiling levels with little regulatory
oversight. These services include products offered to the following: (i) small
businesses or residential customers; (ii) users of 800 services; and (iii) large
business and governmental customers. Price increases by AT&T and AT&T Alascom
generally improve the Company's ability to raise its prices while price
decreases pressure the Company to follow. The Company has, so far, successfully
adjusted its pricing and marketing strategies to respond to AT&T pricing
practices. However, if AT&T Alascom significantly lowers its rates, the Company
may be forced to reduce its rates, which could have a material adverse effect on
the Company's financial condition and results of operations.
59
In the local exchange market, the Company believes that the 1996 Telecom Act
and state legislative regulatory initiatives and developments, as well as a
recent series of transactions and proposed transactions between telephone
companies, long distance carriers and cable companies, increase the likelihood
that barriers to local exchange competition will be substantially reduced or
removed. These initiatives include requirements that LECs negotiate with
entities such as the Company to provide interconnection to the existing local
telephone network, to allow the purchase, at cost-based rates, of access to
unbundled network elements, to establish dialing parity, to obtain access to
rights-of-way and to resell services offered by the incumbent LECs. Certain
pricing provisions of the FCC's decision implementing the interconnection
portions of the 1996 Telecom Act (the "Interconnection Decision") have been
challenged and are currently stayed by the U.S. Court of Appeals for the Eighth
Circuit, on a jurisdictional basis. While the stay may affect the level of
prices in the near term, it does not appear that it will limit or delay the
development of competition in the Alaskan local exchange switched services
market. In addition, the 1996 Telecom Act expressly prohibits any legal barriers
to competition in intrastate or interstate communications service under state
and local laws. The 1996 Telecom Act further empowers the FCC, after notice and
an opportunity for comment, to preempt the enforcement of any statute,
regulation or legal requirement that prohibits, or has the effect of
prohibiting, the ability of any entity to provide any intrastate or interstate
telecommunications service. See "--Regulation."
The 1996 Telecom Act provides incumbent LECs with new competitive
opportunities. The 1996 Telecom Act removes previous restrictions concerning the
provision of long distance service by LECs and also provides them with increased
pricing flexibility. Under the 1996 Telecom Act, the RBOCs will, upon the
satisfaction of certain conditions, be able to offer long distance services that
would enable them to duplicate the "one-stop" integrated telecommunications
approach used by the Company. The Company believes that it has certain
advantages over these companies in providing its telecommunications services,
including the Company's brand awareness by Alaskan customers, its owned
telecommunications network, and management's prior experience in, and knowledge
of, the Alaskan market. The 1996 Telecom Act provides that rates charged by
incumbent LECs for interconnection to the incumbent carrier's network are to be
nondiscriminatory and based upon the cost of providing such interconnection, and
may include a "reasonable profit," which terms are subject to interpretation by
regulatory authorities. If the incumbent LECs charge alternative providers such
as the Company unreasonably high fees for interconnection to the LECs' networks,
or significantly lower their retail rates for local exchange services, the
Company's local service business could be placed at a significant competitive
disadvantage. See "--Regulation."
In May 1996, ATU filed an application with the APUC to provide long distance
telecommunications services as a reseller of intrastate telecommunications
services throughout the State of Alaska. The application was acted upon
favorably in September 1996 and ATU began in April 1997 offering interstate and
intrastate long distance services in the Anchorage area on a
non-facilities-based basis.
Competition for the Company's PCS services will come primarily from
traditional cellular providers and new PCS entrants. Anchorage has mature
cellular systems in both the wireline (ATU) and non-wireline (AT&T Wireless)
license blocks that together have achieved approximately 20% penetration of
potential subscribers based on the number of existing wireline access lines.
Cellular service has not penetrated Fairbanks and Juneau to the same degree as
Anchorage. Cellular pricing has been high in Alaska compared to the lower 48
states, but rates in Anchorage have become more competitive since the Company
entered the cellular resale market two years ago.
Of the five other Alaskan PCS licensees, none have announced plans for
service in Alaska. The high cost of a PCS system infrastructure may deter some
license owners from building a system. PCS has the potential disadvantage when
compared to cellular service of requiring the licensee to enter into
interconnection agreements with cellular providers in order to permit PCS
subscribers with dual-mode handsets to continue to receive service once they
stray from the PCS service area. However, the Company
60
believes that the portion of the Alaskan population which will need to operate
outside the Company's planned PCS service areas is small.
CABLE COMPETITION. Cable television systems face competition from
alternative methods of receiving and distributing television signals and from
other sources of news, information and entertainment such as off-air television
broadcast programming, radio, newspapers, movie theaters, live sporting events,
interactive computer services and home video products, including videotape
cassettes and laser disks. The extent to which a cable television system is
competitive depends, in part, upon the cable system's ability to provide quality
programming and other services at competitive prices.
The 1996 Telecom Act authorizes LECs and others to provide a wide variety of
video services competitive with services provided by cable systems and to
provide cable services directly to subscribers. See "--Regulation." Certain LECs
in Alaska may seek to provide video services within their telephone service
areas through a variety of distribution methods. The Cable Systems could be
placed at a competitive disadvantage if the delivery of video services by LECs
becomes widespread since LECs may not be required, under certain circumstances,
to obtain local franchises to deliver such video services or to comply with the
variety of obligations imposed upon cable systems under such franchises. Issues
of cross-subsidization by LECs of video and telephony services also pose
strategic disadvantages for cable operators seeking to compete with LECs who
provide video services.
Cable television systems generally operate pursuant to franchises granted on
a non-exclusive basis. The 1992 Cable Act gives local franchising authorities
jurisdiction over basic cable service rates and equipment in the absence of
"effective competition," prohibits franchising authorities from unreasonably
denying requests for additional franchises and permits franchising authorities
to operate cable systems. Well-financed businesses from outside the cable
industry (such as the public utilities that own certain of the poles on which
cable is attached) may become competitors for franchises or providers of
competing services. See "--Regulation."
The Cable Systems face limited additional competition from private satellite
master antenna television ("SMATV") systems that serve condominiums, apartment
and office complexes and private residential developments. The operators of
these SMATV systems often enter into exclusive agreements with building owners
or homeowners' associations. Due to the widespread availability of reasonably-
priced earth stations, SMATV systems now can offer both improved reception of
local television stations and many of the same satellite-delivered program
services offered by franchised cable systems. The ability of the Cable Systems
to compete for subscribers in residential and commercial developments served by
SMATV operators is uncertain. The 1996 Telecom Act gives cable operators greater
flexibility with respect to pricing of cable television services provided to
subscribers in multi-dwelling unit residential and commercial developments.
However, it also broadens the definition of SMATV systems not subject to
regulation as a franchised cable television service.
The availability of reasonably-priced home satellite dish earth stations
("HSDs") enables individual households to receive many of the
satellite-delivered program services formerly available only to cable
subscribers. Furthermore, the 1992 Cable Act contains provisions, which the FCC
has implemented with regulations, to enhance the ability of cable competitors to
purchase and make available to HSD owners certain satellite-delivered cable
programs at competitive costs.
In recent years, the FCC and the Congress have adopted policies providing a
more favorable operating environment for new and existing technologies that
provide, or have the potential to provide, substantial competition to cable
systems. These technologies include, among others, DBS services which transmit
signals by satellite to receiving facilities located on the premises of
subscribers. Programming is currently available to the owners of HSDs through
conventional, medium and high-powered satellites. Primestar Partners L.P., a
consortium comprised of cable operators and a satellite company, commenced
operation in 1990 of a medium-power DBS satellite system using the Ku portion of
the frequency spectrum and, as of December 31, 1996, provided service consisting
of approximately 95
61
channels of programming, including broadcast signals and pay-per-view services.
DirecTV, which has entered into a marketing alliance with AT&T, began offering
nationwide high-power DBS service in 1994 accompanied by extensive marketing
efforts. Several other major companies are preparing to develop and operate
high-power DBS systems, including MCI and News Corp. DBS systems use video
compression technology to increase the channel capacity of their systems to
provide movies, broadcast stations and other program services competitive with
those of cable systems. The extent to which DBS systems are competitive with the
service provided by cable systems depends, among other things, on the
availability of reception equipment at reasonable prices and on the ability of
DBS operators to provide competitive programming. DBS services generally do not
currently provide local programming and DBS signals are subject to degradation
from atmospheric conditions such as rain, snow and wind. The receipt of DBS
service in Alaska currently has the disadvantage of requiring subscribers to
install larger satellite dishes (generally three to six feet in diameter) than
are generally required in the lower 48 states because of the weaker satellite
signals available in northern latitudes. In addition, existing satellites have a
relatively low altitude above the horizon when viewed from Alaska, making their
signals subject to interference from mountains, buildings and other structures.
Recent published reports indicate that there has been a substantial increase in
the number of DBS subscribers in the United States in recent years. Thus,
although it is difficult to assess the ultimate impact that DBS will have on the
cable industry or the Company's financial condition and results of operations,
DBS services may pose a significant competitive threat to cable television
systems.
Cable television systems also compete with wireless program distribution
services such as MMDS providers which use low-power microwave frequencies to
transmit video programming over-the-air to subscribers. There are MMDS operators
who are authorized to provide or are providing broadcast and satellite
programming to subscribers in areas served by several of the Cable Systems,
including Anchorage and Fairbanks. ATU recently purchased a 30% interest in one
such wireless operator that operates in the Anchorage and Fairbanks areas.
Additionally, the FCC has allocated frequencies in the 28 GHz band for a new
multichannel wireless video service similar to MMDS. MMDS operations have the
disadvantage of requiring that customers' receiving antennas have line-of-sight
access to transmitting radio towers, making their signals subject to
interference from mountains, buildings and other structures, and are subject to
interference from rain, snow and wind. The Company is unable to predict whether
competition from wireless video services will have a material impact on its
financial condition or results of operations.
Other new technologies may become competitive with non-entertainment
services that cable television systems can offer. The FCC has authorized
television broadcast stations to transmit textual and graphic information useful
to both consumers and businesses. The FCC also permits commercial and
non-commercial FM stations to use their subcarrier frequencies to provide
non-broadcast services including data transmissions. The FCC established an
over-the-air interactive video and data service that will permit two-way
interaction with commercial and educational programming along with informational
and data services. LECs and other common carriers also provide facilities for
the transmission and distribution to homes and businesses of interactive
computer-based services, including the Internet, as well as data and other
non-video services. The FCC has conducted spectrum auctions for licenses to
provide PCS. PCS will enable license holders, including cable operators, to
provide voice and data services. The Company recently acquired a state-wide PCS
license. See "--PCS."
Advances in communications technology as well as changes in the marketplace
are constantly occurring. The Company cannot predict the effect that ongoing or
future developments might have on the telecommunications and cable television
industries or on the Company.
PROPERTIES
The Company's executive offices and operating facilities for its
telecommunications operations are located in leased office space in Anchorage,
Fairbanks and Juneau, Alaska, and Seattle, Washington.
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The facilities in Fairbanks and Juneau, Alaska, and Seattle, Washington are
occupied under short-term operating lease agreements while one of the Anchorage
properties is leased pursuant to a 15-year capital lease agreement that expires
in September, 2006. The Company also owns or leases various earth station,
microwave and distribution sites used in its telecommunications operations and
owns or leases various local office, headend and tower sites used in its cable
television operations.
The Company's other properties consist mainly of equipment, including a
portion of the undersea fiber optic cable linking Alaska and Oregon that is
owned subject to an outstanding mortgage, cable television plant, head-end
distribution equipment, switches, microwave facilities and other electronic
equipment. Substantially all of the Company's properties and equipment are
subject to a security interest in favor of the Company's lenders. The Company
believes that its properties and equipment are in good condition and are
adequate for the Company's present needs.
ALASKAN ECONOMY
The Company offers voice, video and data services to customers primarily
throughout Alaska. As a result of this geographic concentration, the Company's
growth and operations depend upon economic conditions in Alaska. Alaska has a
population of approximately 600,000 people, approximately one-half of whom are
located in the Anchorage area. The economy of Alaska is dependent upon the
natural resource industries, and in particular oil production, as well as
tourism, mining, government, and United States military spending. Any
deterioration in these markets could have an adverse impact on the Company's
financial condition and results of operations. The oil industry over the past
several years has contributed in excess of 75% of unrestricted State government
revenues received from all segments of the Alaskan economy and is believed to be
directly or indirectly responsible for over one-third of Alaska's economic base.
Unrestricted State revenues are available for any legitimate governmental
purpose. The volume of oil transported by the TransAlaska Oil Pipeline System
over the past 20 years has been as high as 2.0 million barrels per day in 1988.
Over the past several years, it has begun to decline and is expected to average
approximately 1.4 million barrels per day in 1997. The volume of oil transported
by that pipeline is expected to decrease to 1.0 million barrels per day in less
than ten years, based upon available data regarding presently developed oil
fields using the pipeline for transport. The two largest producers of oil in
Alaska independently have taken steps to significantly increase their
investments in new oil fields and enhanced recovery projects to slow the decline
of existing fields. Both companies have invested large sums of money in
developing and implementing enhanced oil recovery techniques at the Prudhoe Bay
field and other nearby fields. Effective March 1997, the State of Alaska passed
new legislation relaxing state oil royalties with respect to marginal oil fields
that the oil companies claim would not be economic to develop otherwise. No
assurance can be given that these two oil companies or other oil companies doing
business in Alaska will be successful in discovering new fields or further
developing existing fields which are economic to develop and produce oil with
access to the pipeline or other means of transport to market, even with the
reduced level of taxation. Should the oil companies not be successful in these
discoveries or developments, the trend of continued decline in oil production
from the Prudhoe Bay field area is inevitable with a corresponding adverse
impact on the economy of the State, in general, and on demand for
telecommunications and cable television services and, therefore, on the Company,
in particular.
The growth rate of the Alaskan economy was generally higher during the
11-year period of initial operation of the pipeline (1977-1988) both in the
private sector and in government spending as compared to the eight-year period
of operations since the downturn in oil throughput began in 1989. While other
Alaskan industries have experienced growth since 1988, including mining,
tourism, international air freight transportation, and retail sales, and while
state and federal government spending remain significant factors in the Alaskan
economy, revenues generated from oil production and oil support industry
operations have remained the most significant segments of the Alaskan economy.
As such, the Alaskan economy is closely tied to the price of oil in the
international marketplace.
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The Alaskan economy is also supported by the United States armed services
and the United States Coast Guard which maintain bases in Anchorage, Fairbanks,
Adak, Kodiak, and other communities in Alaska. The military presence in the
State of Alaska provides a significant source of revenues to the economy of the
State. The Company provides message toll services in a variety of ways to the
United States government and its armed forces personnel. The Company also
provides private lines for secured point-to-point data and voice transmission
services to military personnel. A reduction in federal military spending or
closure of a major facility in Alaska could have a substantial adverse impact on
the State and would both directly and indirectly affect the Company. Since 1994,
several minor military bases have closed or been scheduled for closure or are
operating at reduced strength. While troop strength in Alaska and the military's
share of the Alaskan labor force are at historically low levels, the military
remains one of the most significant contributors to Alaska's economy.
REGULATION
THE FOLLOWING SUMMARY OF REGULATORY DEVELOPMENTS AND LEGISLATION DOES NOT
PURPORT TO DESCRIBE ALL PRESENT AND PROPOSED FEDERAL, STATE, AND LOCAL
REGULATION AND LEGISLATION AFFECTING THE TELECOMMUNICATIONS AND CABLE TELEVISION
INDUSTRIES. OTHER EXISTING FEDERAL AND STATE REGULATIONS ARE CURRENTLY THE
SUBJECT OF JUDICIAL PROCEEDINGS, LEGISLATIVE HEARINGS AND ADMINISTRATIVE
PROPOSALS WHICH COULD CHANGE, IN VARYING DEGREES, THE MANNER IN WHICH THESE
INDUSTRIES OPERATE. NEITHER THE OUTCOME OF THESE PROCEEDINGS NOR THEIR IMPACT
UPON THE TELECOMMUNICATIONS AND CABLE TELEVISION INDUSTRIES OR THE COMPANY CAN
BE PREDICTED AT THIS TIME. THIS SECTION ALSO SETS FORTH A BRIEF DESCRIPTION OF
REGULATORY AND TARIFF ISSUES PERTAINING TO THE OPERATIONS OF THE COMPANY.
The federal government regulates interstate telecommunications through
various laws administered by the FCC. The 1996 Telecom Act, the most
comprehensive reform of the nation's telecommunications laws since the
Communications Act, was signed into law in February 1996. The 1996 Telecom Act
will result in changes in the marketplace for cable television, telephone and
other telecommunications services. In addition, cable television operators are
subject to the 1984 Cable Act, the 1992 Cable Act and the 1996 Telecom Act, as
well as the rules and regulations of the FCC, and, where applicable, state and
local regulations.
FEDERAL REGULATION OF TELEPHONY. The 1996 Telecom Act promotes local
exchange competition as a national policy by eliminating legal barriers to
competition in the local telephone business and setting standards to govern the
relationships among telecommunications providers. The 1996 Telecom Act expressly
prohibits any legal barriers to competition in intrastate or interstate
communications service under state and local laws. The 1996 Telecom Act further
empowers the FCC, after notice and an opportunity for comment, to preempt the
enforcement of any statute, regulation or legal requirement that prohibits, or
has the effect of prohibiting, any entity from providing any intrastate or
interstate telecommunications service. Subject to this limitation, however, the
state and local governments retain a significant amount of their existing
regulatory authority. The 1996 Telecom Act imposes a variety of new duties on
incumbent local exchange carriers in order to promote competition in local
exchange and access services. Certain duties are also imposed on all LECs,
including new market entrants such as the Company. Some smaller telephone
companies may seek suspension or modification of these duties, and some
companies serving rural areas are exempt from these duties. The duties created
by the 1996 Telecom Act include the following:
Reciprocal Compensation Requires all LECs to complete calls originated by
competing carriers under reciprocal arrangements at
prices based on a reasonable approximation of long-run
incremental cost or through mutual exchange of traffic
without explicit payment.
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Resale Requires all LECs to permit resale of their
telecommunications services without unreasonable
restrictions or conditions. In addition, incumbent LECs
are required to offer wholesale versions of all retail
services to other telecommunications carriers for resale
at discounted rates, based on the costs avoided by the
incumbent LEC in the wholesale offering.
Interconnection Requires incumbent LECs to permit all telecommunications
carriers including their competitors to interconnect
with their facilities. Such interconnection must be
provided to competitors at any technically feasible
point within their networks, on nondiscriminatory terms,
at prices based on cost (which may include a reasonable
profit). At the option of the carrier seeking
interconnection, physical colocation of the requesting
carrier's equipment in the incumbent LEC's premises must
be offered, except where the incumbent LEC can
demonstrate space limitations or other technical
impediments to colocation.
Unbundled Access Requires incumbent LECs to provide nondiscriminatory
access to unbundled network elements (including network
facilities, equipment, features, functions, and
capabilities) at any technically feasible point within
their networks, on reasonable, just and
nondiscriminatory rates, terms and conditions, at prices
based on long-run incremental cost (which may include a
reasonable profit). Such access must allow requesting
carriers to combine network elements to provide such
telecommunications services.
Number Portability Requires all LECs to permit users of telecommunications
services to retain existing telephone numbers without
impairment of quality, reliability or convenience when
switching from one telecommunications carrier to another
to the extent technically feasible.
Dialing Parity Requires all LECs to provide "1+" equal access to
competing providers of local exchange service and toll
service, and to provide nondiscriminatory access to
telephone numbers, operator services, directory
assistance, and directory listing, with no unreasonable
dialing delays.
Access to Rights-of-Way Requires all LECs to permit competing carriers access to
poles, ducts, conduits and rights-of-way at regulated
prices.
Incumbent LECs are required to negotiate in good faith with
telecommunications carriers requesting any or all of the above arrangements.
Certain, but not all, FCC rules regarding pricing of interconnection agreements
have been stayed by the U.S. Court of Appeals for the Eighth Circuit in a case
challenging certain of the FCC's interconnection regulations. However, carriers
still may negotiate agreements, and if the negotiating carriers cannot reach
agreement within a prescribed time, either carrier may request binding
arbitration of the disputed issues by the relevant state regulatory commission.
The 1996 Telecom Act also eliminates previous prohibitions on the provision
of InterLATA long distance service by the RBOCs and the GTE Operating Companies
("GTEOCs"). The RBOCs are now permitted to provide InterLATA long distance
service outside those states in which they provide local
65
exchange service ("out-of-region long distance service") upon receipt of any
necessary state or federal regulatory approvals that are otherwise applicable to
the provision of intrastate or interstate long distance service. Under the 1996
Telecom Act, the RBOCs will be allowed to provide long distance service within
the regions in which they also provide local exchange service ("in-region
service") upon specific approval of the FCC and satisfaction of other
conditions, including compliance with a checklist of regulations and policies,
including those pertaining to interconnection, designed to enhance competition
in the local marketplace. The GTEOCs are permitted to enter the long distance
market without regard to limitations by region, although regulatory approvals
otherwise applicable to the provision of long distance service will need to be
obtained. The GTEOCs are also subject to the provisions of the 1996 Telecom Act
that impose interconnection and other requirements on LECs.
The 1996 Telecom Act imposes certain restrictions on the RBOCs in connection
with the RBOCs' entry into long distance services. Among other things, the RBOCs
must pursue such activities only through separate subsidiaries with separate
books and records, financing, management and employees, and all affiliate
transactions must be conducted on an arm's length and nondiscriminatory basis.
The RBOCs are also prohibited from jointly marketing local and long distance
services, equipment and certain information services unless competitors are
permitted to offer similar packages of local and long distance services in their
market. Further, RBOCs must obtain in-region long distance authority before
jointly marketing local and long distance services in a particular state.
Additionally, AT&T and other major carriers serving more than 5% of the nation's
presubscribed long distance access lines are also restricted, under certain
conditions, from packaging their long distance services and local services
provided over RBOC facilities. These restrictions do not, however, apply to the
Company because it does not serve more than 5% of the nation's presubscribed
access lines.
Prior to passage of the 1996 Telecom Act, the FCC had already established
different levels of regulations for dominant and non-dominant carriers. For
purposes of domestic common carrier telecommunications regulation, large LECs
and the RBOCs are currently considered dominant carriers for the provision of
interstate access services, while other interstate services providers, such as
the Company, are considered non-dominant carriers. The FCC has recently proposed
that the RBOCs offering out-of-region interstate long distance services be
regulated as non-dominant carriers, as long as such services are offered by an
affiliate of the RBOC that complies with certain structural separation
requirements. The FCC regulates many of the rates, charges and services of
dominant carriers to a greater degree than non-dominant carriers.
As a non-dominant long distance carrier, the Company may install and operate
facilities for the transmission of domestic interstate communications without
prior FCC authorization, although FCC authorization is required for the
provision of international telecommunications by non-dominant carriers. Services
of non-dominant carriers are subject to relatively limited regulation by the
FCC. Non-dominant carriers currently are required to file tariffs listing the
rates, terms and conditions of interstate and international services provided by
the carrier. Periodic reports concerning the carrier's interstate circuits and
deployment of network facilities also are required to be filed. The FCC
generally does not exercise direct oversight over cost justification and the
level of charges for services of non-dominant carriers, although it has the
power to do so. Among other requirements pursuant to the Communications Act, the
Company must offer its interstate and international services on a
nondiscriminatory basis, at just and reasonable rates, and remains subject to
FCC complaint and enforcement procedures and private causes of action.
On October 29, 1996, the FCC adopted an order in which it eliminated the
requirement that non-dominant interstate carriers such as the Company maintain
tariffs on file with the FCC for domestic interstate services. The FCC's order
was issued pursuant to authority granted to the FCC in the 1996 Telecom Act to
"forbear" from regulating any telecommunications service provider if the FCC
determines that the public interest will be served. Pursuant to the order,
following a nine-month transition period, relationships between carriers and
their customers were to be set by contract and long distance
66
companies were no longer to be required to file with the FCC tariffs for
interstate interexchange services. Carriers also have the option to immediately
cease filing tariffs. The FCC's order, however, has been stayed by a federal
court and carriers must currently continue to file interstate tariffs with the
FCC.
The FCC also imposes prior approval requirements on transfers of control and
assignments of operating authorizations. The FCC has the authority to generally
condition, modify, cancel, terminate or revoke operating authority for failure
to comply with federal laws or the rules, regulations and policies of the FCC.
Fines or other penalties also may be imposed for such violations. There can be
no assurance that the FCC or third parties will not raise issues with regard to
the Company's compliance with applicable laws and regulations. In addition, the
Company is subject to various regulatory fees and assessments, including an
obligation to contribute to the Universal Service Fund.
The FCC, through its proceedings implementing the interconnection provisions
of the 1996 Telecom Act, has ordered the RBOCs and all but one of the other LECs
having in excess of $100 million in gross annual revenue for regulated services
to provide expanded interconnection to LEC central offices to any competitive
access provider, interexchange carrier or end user seeking such interconnection
for the provision of interstate access services. The FCC has imposed mandatory
virtual colocation obligations on the LECs. Virtual colocation is a service in
which the LEC leases or purchases equipment designated by the interconnector and
exerts compete physical control over the equipment, including central office
installation, maintenance and repair. As noted above, the 1996 Telecom Act now
requires most incumbent LECs to offer physical colocation. As a result, the
Company is able to reach most business customers in its metropolitan service
areas and can expand its potential customer base. Subsequent to the enactment of
the 1996 Telecom Act, the FCC has begun a series of expedited rulemaking
proceedings to implement the requirements of the 1996 Telecom Act concerning
interconnection with LEC facilities and other essential terms of the
relationships between competing LECs. On August 8, 1996, the FCC adopted the
Interconnection Decision to implement the interconnection, resale, dialing
parity and numbering administration provisions of the 1996 Telecom Act. Certain
provisions of these rules have been appealed to various U.S. Courts of Appeals.
These appeals have been consolidated into proceedings currently pending before
the U.S. Court of Appeals for the Eighth Circuit. Applications for a stay of the
proposed rules were rejected by the FCC. However, the U.S. Court of Appeals for
the Eighth Circuit has granted a stay of certain provisions of the
Interconnection Decision, including the pricing rules and rules that would have
permitted telecommunications carriers to "pick and choose" among various
provisions of approved interconnection agreements. The FCC applied to the U.S.
Supreme Court to vacate the judicial stay, but the U.S. Supreme Court, on
November 23, 1996, refused to vacate the stay. All other provisions of the
Interconnection Decision remain in effect pending resolution of the consolidated
case on the merits. In a separate proceeding, the FCC implemented the number
portability requirements of the 1996 Telecom Act. These FCC rules are also the
subject of a court appeal.
When ordering interconnection, the FCC granted LECs additional flexibility
in pricing their interstate special and switched access services on a central
office specific basis. Under this pricing scheme, LECs may establish pricing
zones based on access traffic density and charge different prices for central
offices in each zone. Although no assurances are possible, the Company
anticipates that the FCC will grant LECs increasing pricing flexibility as the
number of interconnection agreements and competitors increases. In a concurrent
proceeding, the FCC enacted interim pricing rules that restructure LEC switched
transport rates in order to facilitate competition for switched access.
As a PCS licensee, the Company is subject to regulation by the FCC, and must
comply with certain buildout and other conditions of the license, as well as
with the FCC's regulations governing the PCS service. As a cellular reseller,
the Company is deemed to be a common carrier and is subject to the requirements
of Title II of the Communications Act. In light of the non-dominant market
position of resellers, many of the obligations traditionally imposed on common
carriers are relaxed with respect to resellers. Resellers are required to
contribute to the Telecommunications Relay Services Fund and to
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remit annual regulatory fees to the FCC. Cellular resellers may also be subject
to certain state requirements.
Pursuant to the Communications Act, the FCC has the authority to license the
use of electromagnetic spectrum for radio communication. The Company holds
various FCC licenses for its satellite and microwave transmission facilities
used in its provision of telecommunication services. These licenses generally
have expiration dates and require applications for renewal. Moreover, the
Company may require additional licenses in the future.
FEDERAL REGULATION OF CABLE TELEVISION. The operation of cable television
systems is extensively regulated by federal legislation, FCC regulations and by
Alaska's state government. The discussion below summarizes the 1996 Telecom Act
as it affects the cable television industry and reviews prior federal cable
television regulation as revised by the 1996 Telecom Act.
Rate regulation of the Company's cable television services is divided
between the FCC and the State of Alaska. The FCC's jurisdiction extends to the
CPST, which consists largely of satellite-delivered programming (excluding basic
tier programming and programming offered on a per-channel or per-program basis).
Depending on the regulatory schemes in the relevant states, state and local
franchising authorities ("LFAs"), I.E., in Alaska the APUC, are primarily
responsible for regulating rates for the basic tier of cable services ("BST"),
which will typically contain at least the local broadcast stations and Public
Access, Educational and Government ("PEG") channels. Equipment rates are also
regulated by LFAs. The FCC retains appeal jurisdiction from LFA decisions. Cable
services offered on a per-channel or per-program-only basis generally remain
unregulated.
The 1996 Telecom Act eliminates CPST rate regulation for all cable operators
as of March 31, 1999. In the interim, CPST rate regulation can be triggered only
by an LFA complaint to the FCC. An LFA complaint must be based upon more than
one subscriber complaint. Prior to the 1996 Telecom Act, an FCC review of CPST
rates could be occasioned by a single subscriber complaint to the FCC. The 1996
Telecom Act does not disturb existing or pending CPST rate settlements between
the Company and the FCC. The Company's BST rates remain subject to LFA
regulation under the 1996 Telecom Act, although Juneau is the only system that
is currently subject to rate regulation by the APUC.
Existing law precludes rate regulation wherever a cable operator faces
"effective competition." The 1996 Telecom Act expands the definition of
effective competition to include any franchise area where a local exchange
carrier (or affiliate) provides video programming services to subscribers by any
means other than through direct broadcast satellite. There is no statutory
penetration minimum for the LEC to qualify as an effective competitor, but it
must provide "comparable" programming services (12 channels including some
broadcast channels) in the franchise area. The Company believes it is in
compliance with all applicable regulations regarding rates for service, and such
regulations will not have a material adverse effect on the Company's cable
television operations.
Under the 1996 Telecom Act, the Company and all other cable operators will
be allowed to aggregate on a franchise system, regional or company level, its
equipment costs into broad categories, such as converter boxes, regardless of
the varying levels of functionality of the equipment within each such broad
category. The 1996 Telecom Act will allow the Company to average together costs
of different types of converters (including non-addressable, addressable, and
digital). The statutory changes will also facilitate the rationalizing of
equipment rates across jurisdictional boundaries. These cost-aggregation rules
do not apply to the limited equipment used by "BST-only" subscribers.
The 1996 Telecom Act immediately relaxes the "uniform rate" requirements of
the 1992 Cable Act (which required a cable operator to charge uniform rates
throughout its franchise areas) by specifying that such requirements do not
apply where the operator faces "effective competition," and by exempting bulk
discounts to multiple dwelling units, although complaints about "predatory"
pricing may be made
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to the FCC. Upon a prima facie showing that there are reasonable grounds to
believe that the discounted price is predatory, the cable system operator will
have the burden of proving otherwise.
Under the 1996 Telecom Act, investor-owned utilities must make poles and
conduits available to cable systems under delineated terms. Electric utilities
are given the right to deny access to particular poles on a nondiscriminatory
basis for lack of capacity, safety, reliability, and generally accepted
engineering purposes. The current method for determining rates charged by
telephone and utility companies for cable delivery of cable and non-cable
services will continue for five years. However, the FCC will establish a new
formula for poles used by cable operators for telecommunications services which
will result in higher pole rental rates for cable operators. Any increases
pursuant to this formula may not be made for five years and will be phased in
equal increments over years five though ten. This new FCC formula does not apply
in states which regulate pole rents. Pole owners must impute pole rentals to
themselves if they offer telecommunications or cable services. Cable operators
need not pay future "make-ready" on poles currently contracted if the make-ready
is required to accommodate the attachments of another user, including the pole
owner. The Company is still negotiating to obtain the consent to the assignment
of certain pole attachment agreements by the sellers of the Cable Systems to the
Company. However, the Company has been permitted to continue to use necessary
poles in the operation of the Cable Systems.
The 1996 Telecom Act declares that no state or local law or regulation may
prohibit or have the effect of prohibiting any entity from providing any
interstate or intrastate telecommunications service. States are authorized to
impose "competitively neutral" requirements regarding universal service, public
safety and welfare, service quality, and consumer protection. The 1996 Telecom
Act further provides that cable operators and affiliates providing
telecommunications services are not required to obtain a separate franchise from
LFAs for such services. The 1996 Telecom Act prohibits LFAs from requiring cable
operators to provide telecommunications service or facilities as a condition of
a grant of a franchise, franchise renewal, or franchise transfer, except that
LFAs can seek "institutional networks" as part of such franchise negotiations.
The 1996 Telecom Act allows telephone companies to compete directly with
cable operators by repealing the telephone company-cable cross-ownership ban and
the FCC's video dialtone regulations. This will allow LECs, including the RBOCs,
to compete with cable operators both inside and outside their telephone service
areas, with certain regulatory safeguards. If a LEC provides video via radio
waves, it is subject to broadcast jurisdiction. If a LEC provides common carrier
channel service it is subject to common carrier jurisdiction. A LEC providing
video programming to subscribers is otherwise regulated as a cable operator
(including franchising, leased access, and customer service requirements),
unless the LEC elects to provide its programming via an "open video system." LEC
owned programming services will also be fully subject to program access
requirements.
The 1996 Telecom Act replaces the FCC's video dialtone rules with an "open
video system" ("OVS") plan by which LECs can provide cable service in their
telephone service area. LECs complying with the FCC OVS regulations will receive
relaxed oversight. The 1996 Telecom Act requires the FCC to act on any OVS
certification within ten days of its filing. Only the program access, negative
option billing prohibition, subscriber privacy, Equal Employment Opportunity
("EEO"), PEG, must-carry and retransmission consent provisions of the
Communications Act will apply to LECs providing OVS. Franchising, rate
regulation, customer service provisions, leased access and equipment
compatibility rules will not apply. Cable copyright provisions will apply to
programmers using OVS. LFAs may require OVS operators to pay "franchise fees"
only to the extent that the OVS provider or its affiliates provide cable
services over the OVS. Such fees may not exceed the franchise fees charged to
cable operators in the area, and the OVS provider may pass through the fees as a
separate subscriber bill item. OVS operators will be subject to LFA general
right-of-way management regulations.
69
The 1996 Telecom Act requires the FCC to adopt, within six months,
regulations prohibiting an OVS operator from discriminating among programmers,
and ensuring that OVS rates, terms, and conditions for service are reasonable
and nondiscriminatory. Further, the FCC is to adopt regulations prohibiting a
LEC-OVS operator, or its affiliates, from occupying more than one-third of the
system's activated channels when demand for channels exceeds supply, although
there are not numeric limits. The 1996 Telecom Act also mandates OVS regulations
governing channel sharing, extending the FCC's sports exclusivity, network
nonduplication, and syndex regulations, and controlling the positioning of
programmers on menus and program guides. The FCC has issued open video system
regulations. The 1996 Telecom Act does not require LECs to use separate
subsidiaries to provide incidental interLATA video or audio programming services
to subscribers or for their own programming ventures.
While there remains a general prohibition on LEC buyouts of cable systems
(any ownership interest exceeding 10%) within a LEC's telephone service area,
cable operator buyouts of LEC systems within a cable operator's service area,
and joint ventures between cable operators and LECs in the same market, the 1996
Telecom Act provides some exceptions. A rural exemption permits buyouts where
the purchased system serves an area with fewer than 35,000 inhabitants outside
an urban area. Where a LEC purchases a cable system, that system plus any other
system in which the LEC has an interest may not serve 10% or more of the LEC's
telephone service area. Additional exceptions are also provided for such
buyouts. The 1996 Telecom Act also provides the FCC with the power to grant
waivers of the buyout provisions in cases where (i) the cable operator or LEC
would be subject to undue economic distress, (ii) the system or facilities would
not be economically viable, or (iii) the anticompetitive effects of the proposed
transaction are clearly outweighed by the effect of the transaction in meeting
community needs. The LFA must approve any such waiver.
The 1996 Telecom Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utilities Holding Company Act. Electric
utilities must establish separate subsidiaries known as "exempt
telecommunications companies" and must apply to the FCC for operating authority.
It is anticipated that large utility holding companies may become significant
competitors to both cable television and other telecommunications providers.
Several such utilities have been granted broad authority by the FCC to engage in
activities which could include the provision of video programming.
The 1996 Telecom Act eliminates broadcast/cable cross-ownership restrictions
(including the broadcast network/cable restriction), but leaves in place FCC
regulations prohibiting local cross-ownership between television stations and
cable systems. The FCC is empowered by the 1996 Telecom Act to adopt rules to
ensure carriage, channel positioning and nondiscriminatory treatment of
non-affiliated broadcast stations by cable systems affiliated with a broadcast
network. The SMATV and MMDS cable cross-ownership restrictions have been
eliminated for cable operators subject to effective competition.
The 1996 Telecom Act preserves must carry rights (which are described in
greater detail below) for local television broadcasters, and clarifies that the
geographic scope of must carry is to be based on commercial publications which
delineate television markets based on viewing patterns. The FCC is directed to
grant or deny must carry requests within 120 days of a complaint being filed
with the FCC.
The 1996 Telecom Act directs an FCC equipment comparability rulemaking
emphasizing that (i) narrow technical standards, mandating a minimum degree of
common design among televisions, VCRs, and cable systems, and relying heavily on
the open marketplace, should be pursued; (ii) competition for all converter
features unrelated to security descrambling should be maximized; and (iii)
adopted standards should not affect unrelated telephone and computer features.
The 1996 Telecom Act directs the FCC to adopt regulations which assure the
competitive availability of converters ("navigation devices") from vendors other
than cable operators. The 1996 Telecom Act provides that the FCC's rules may not
impinge upon signal security concerns of theft of service protections. Waivers
will be possible where the cable operator shows the waiver is necessary for the
introduction of new services. Once the equipment market becomes competitive, FCC
regulations in this area will be terminated.
70
The 1996 Telecom Act requires cable operators, upon subscriber request, to
fully scramble or block at no charge the audio and video portion of any channel
not specifically subscribed to by a household. Further, the 1996 Telecom Act
provides that sexually explicit programming must be fully scrambled or blocked.
If the cable operator cannot fully scramble or block its signal, it must
restrict transmission to those hours of the day when children are unlikely to
view the programming. On March 24, 1997, the United States Supreme Court let
stand a lower court ruling that allows enforcement of this provision pending a
constitutional challenge. In response to this ruling, the FCC declared that its
rules implementing the scrambling provision would become effective on May 18,
1997. The scrambling provision may increase operating expenses for cable
television system operators, including the Company, and provide a competitive
advantage to less regulated providers of video programming services.
The 1984 Cable Act regulated to some degree and the 1992 Cable Act more
extensively regulated the cable television industry and the vast majority of
that regulation remains unchanged by the 1996 Telecom Act. Among other things,
the 1984 Cable Act (i) requires cable television systems with 36 or more
"activated" channels to reserve a percentage of such channels for commercial use
by unaffiliated third parties; (ii) permits franchise authorities to require the
cable operator to provide channel capacity, equipment and facilities for public
educational and governmental access; and (iii) regulates the renewal of
franchises.
The 1992 Cable Act greatly expanded federal and local regulation of the
cable television industry. The Company believes that the 1992 Cable Act taken as
a whole has had and will continue to have a material adverse impact upon the
cable industry in general and upon the Company's cable operations specifically.
See related discussion under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations." Certain of the more
significant areas of regulation imposed by the 1992 Cable Act are discussed
below.
The 1992 Cable Act directed the FCC to promulgate regulations regarding the
sale and acquisition of cable programming between multichannel video program
distributors (including cable operators) and programming services in which a
cable operator has an attributable interest. The legislation and the
implementation regulations adopted by the FCC preclude most exclusive
programming contracts (unless the FCC first determines the contract serves the
public interest) and generally prohibit a cable operator which has an
attributable interest in a programmer from improperly influencing the terms and
conditions of sale to unaffiliated multichannel video program distributors.
Further, the 1992 Cable Act requires that such cable affiliated programmers make
their programming services available to cable operators and competing video
technologies such as MMDS and DBS, and to telephone company providers of video
services, on terms and conditions that do not unfairly discriminate among such
competitors.
Under the 1992 Cable Act, the FCC adopted regulations prohibiting cable
operators from requiring a financial interest in a program service as a
condition to carriage of such service, coercing exclusive rights in a
programming service or favoring affiliated programmers so as to restrain
unreasonably the ability of unaffiliated programmers to compete.
The 1992 Cable Act subjected all cable systems, including the Cable Systems,
to rate regulation, except in those cases where they face "effective
competition." The FCC was required to establish standards and procedures
governing regulation of rates for basic cable service, equipment and
installation, which were then to be implemented by the pertinent state and local
franchising authorities. The 1992 Cable Act also required the FCC, upon
complaint from a franchising authority or a cable subscriber, to review the
"reasonableness" of rates for CPSTs. The 1996 Telecom Act circumscribed the
review of CPST rates of the Cable Systems by amending the 1992 Cable Act to
allow only LFAs to file complaints. Complaints by subscribers of the Cable
Systems regarding CPST rates were filed with and accepted by the FCC for certain
franchise areas. However, filings were made in response to those complaints
relating to the period prior to July 15, 1994, and the disputed rates were
approved by the FCC. Potential liability for CPST rate refunds for the Cable
Systems is limited to the period after July 15, 1994. Services offered
71
on an individual basis, such as pay television and pay-per-view services, are
not generally subject to rate regulation.
On April 1, 1993, the FCC adopted rate regulations governing virtually all
cable systems. Such regulations were revised on February 22, 1994. Under such
regulations, existing basic and tier service rates typically are evaluated
against "benchmark" rates established by the FCC and are subject to mandatory
reductions. Equipment and installation charges are regulated based on "actual
costs." As noted above, the 1996 Telecom Act provides that rate regulation of
the CPST automatically sunsets on March 31, 1999.
The FCC also allowed cable operators to justify rates under "cost of
service" rules, which allow "high cost" systems to establish rates in excess of
the benchmark level. The FCC's interim cost of service rules allowed a cable
operator to recover through rates for regulated cable services its normal
operating expenses plus a rate of return equal to 11.25 percent on the rate
base. However, the FCC significantly limited the inclusion in the rate base of
acquisition costs in excess of the book value of tangible assets. As a result,
the Company's predecessors with respect to the Cable Systems pursued cost of
service justifications in only a few cases. On December 15, 1995, the FCC
adopted slightly more favorable cost of service rules.
The FCC's rate regulations generally permit cable operators to adjust rates
to account for inflation and increases in certain external costs, including
programming costs, to the extent such increases exceed the rate of inflation.
However, a cable operator may pass through increases in the cost of programming
services affiliated with such cable operator to the extent such costs exceed the
rate of inflation only if the price charged by the programmer to the affiliated
cable operator reflects either prevailing prices offered in the marketplace by
the programmer to unaffiliated third parties or the fair market value of the
programming. The FCC's revised regulations confirm that increases in pole
attachment fees ordinarily will not be accorded external cost treatment. The FCC
recently adopted a method for recovering external costs and inflation on an
annual basis. The new method minimizes the need for frequent rate adjustments
and the regulatory lag problems associated with the previous rate adjustment
methodology.
The regulations also provide mechanisms for adjusting rates when regulated
tiers are affected by channel additions or deletions. Additional programming
costs resulting from channel additions can be accorded the same external
treatment as other program costs increases, and cable operators presently are
permitted to recover a mark-up on their programming expenses. Under one option,
operators were allowed a flat ($.20) fee increase per channel added to an
existing CPST, with an aggregate cap of such increases ($1.20) plus a license
fee reserve ($.30) through 1996. In 1997, an additional flat ($.20) fee increase
is available, and the license fees for additional channels and for increases in
existing channels are no longer be subject to the aggregate cap. This optional
approach for adding services is scheduled to expire on December 31, 1997.
The FCC adopted additional rules that permit channels of new programming
services to be added to cable systems in a separate new product tier which the
FCC has determined will not be rate regulated at this time. The FCC has also
adopted rules allowing operators to raise rates based on costs incurred in
connection with a substantial upgrade of the cable system.
From time to time the Company evaluates its rates in light of market
conditions. Past rate changes have not had a material adverse effect on the
operating income of the Cable Systems and the changes currently being
contemplated are not expected to have such an effect. Certain rate actions
previously taken by the Cable Systems are subject to modification or
reconsideration during the course of ongoing proceedings before the FCC.
72
As required by the 1992 Cable Act, the FCC has adopted comprehensive
regulations establishing minimum standards for customer service and technical
system performance. Franchising authorities are allowed to enforce customer
service requirements that are more strict than the FCC standards.
The 1992 Cable Act granted broadcasters a choice of "must carry" rights or
"retransmission consent" rights. By October of 1993 and every three years
thereafter, cable operations were required to secure permission from
broadcasters that elected retransmission consent rights before retransmitting
the broadcasters' signals. Local and distant broadcasters can require cable
operators to make a payment as a condition to carriage of such broadcasters'
station on a cable system. Established "superstations" were not granted such
rights.
The 1992 Cable Act also imposed obligations to carry "local" broadcast
stations for such stations which chose a "must carry" right, as distinguished
from the "retransmission consent" right described above. The rules adopted by
the FCC generally provided for mandatory carriage by cable systems of all local
full-power commercial television broadcast signals selecting must carry,
including the signals of stations carrying home-shopping programming and,
depending on a cable system's channel capacity, non-commercial television
broadcast signals. The United States Supreme Court recently upheld the must
carry regulations on constitutional grounds.
The 1992 Cable Act required the FCC to (i) promulgate rules and regulations
establishing reasonable limits on the number of cable subscribers which may be
served by a single multiple system cable operator or entities in which it has an
attributable interest, (ii) prescribe rules and regulations establishing
reasonable limits on the number of channels on a cable system that will be
allowed to carry programming in which the owner of such cable system has an
attributable interest, and (iii) consider the necessity and appropriateness of
imposing limitations on the degree to which multichannel video programming
distributors (including cable operators) may engage in the creation or
production of video programming.
Under the 1992 Cable Act and the FCC's regulations, a cable operator may not
hold a license for a MMDS system within the same geographic area in which it
provides cable service. The 1996 Telecom Act allows such ownership if effective
competition exists in that geographic area.
The 1992 Cable Act anti-buy-through rules require cable systems to permit
subscribers to purchase video programming offered by the operator on a per
channel or a per program basis without the necessity of subscribing to any tier
of service, other than the basic cable service tier, unless the system's lack of
addressable converter boxes or other technological limitations does not permit
it to do so. The statutory exemption for cable systems that do not have the
technological capability to offer programming in the manner required by the
statute is available until a system obtains such capability, but not later than
December 2002. The FCC may waive such time periods, if deemed necessary. The
majority of the Company's subscribers are served by systems that have the
technological capability to comply with the anti-buy-through rules. The
contemplated upgrades of the Company's systems will enable all of the Cable
Systems to comply with such rules by 2002.
The 1996 Telecom Act and the 1992 Cable Act contain numerous other
provisions which, together with the 1984 Cable Act, create a comprehensive
regulatory framework. Violation by a cable operator of the statutory provisions
or the rules and regulations of the FCC can subject the operator to substantial
monetary penalties and other significant sanctions such as suspension of
licenses and authorizations, issuance of cease and desist orders, and imposition
of penalties that could be of severe consequence to the conduct of a cable
operator's business. Many of the specific obligations imposed on the operation
of cable television systems under these laws and regulations are complex and
burdensome and increase the Company's cost of doing business.
In the normal course of its business, the Company obtains licenses from the
FCC for two-way communications stations, and, in certain cases, microwave relay
stations and other facilities used in its
73
cable television operation. Based upon its experience with and knowledge of the
renewal process, the Company has no reason to believe that such licenses will
not be renewed as they expire.
Pursuant to lease agreements with local public utilities, the cable
facilities in the Company's Cable Systems are generally attached to utility
poles or are in underground ducts controlled by the utility owners. The rates
and conditions imposed on the Company for such attachments or occupation of
utility space are generally subject to regulation by the FCC or, in some
instances, by state agencies, and are subject to change. As described above, the
1996 Telecom Act significantly revises the regulation of pole attachment rates
and access.
STATE REGULATION OF TELEPHONY AND CABLE. The State of Alaska has the
authority to regulate telecommunications services that originate and terminate
within the State, and it exercises that authority through the APUC. In 1990 the
Alaskan legislature introduced intrastate competition in Alaska, and the Company
through its subsidiary, GCI Communication Corp., began providing long distance
intrastate telecommunications services on May 15, 1991, on its own facilities in
the areas where it provided interstate service and through resale of others'
services where it had no facilities. The APUC developed regulations that allow
for the certification of additional carriers for such intrastate
telecommunications services and, to varying degrees, require filing of tariffs
and regulation of the rates for such services. Under the APUC's current policy
and regulations, all certified carriers are required to file tariffs for the
provision of intrastate services. When filing for a rate increase, the dominant
carrier is required to file an accompanying rate case. Non-dominant carriers
such as the Company are not rate regulated. Tariff revisions filed by
non-dominant carriers routinely become effective without intervention by the
APUC or third parties. Tariffs can be filed or revised on 30 days notice. The
APUC currently restricts the provision of facilities-based interexchange service
in certain thinly populated areas. The Company has obtained a limited waiver of
this rule to allow deployment of its DAMA facilities in 56 sites in rural Alaska
and has filed a petition with the APUC to preempt the rule under the 1996
Telecom Act.
In 1992, GCI Communication Corp. obtained a Certificate of Public
Convenience and Necessity from the APUC pursuant to which it provides telephone
relay services ("TRS") for the deaf, hard-of-hearing and speech impaired through
the Company's operator service center in Wasilla, Alaska. Intrastate TRS
operating costs, capital costs and a rate of return are being funded through a
universal access surcharge billed by all local telephone companies in Alaska.
Under an FCC decision, commencing in 1993, a portion of the TRS operating costs
have been recovered through an interstate pool administered by the National
Exchange Carrier Association.
The Company received approval from the APUC in February 1997 to provide
local exchange service in Anchorage and Hope, Alaska. As an authorized local
exchange service provider in parts of Alaska, the Company is regulated as a LEC
by the APUC. The APUC's February 1997 Order requires the Company to comply with
several regulatory requirements, including the filing of a local exchange
service tariff and the filing of certain annual and quarterly reports. The
Company intends to file an application with the APUC requesting approval for
provision of local exchange services in Fairbanks, Juneau and other areas of
Alaska. The Company intends to offer local services through its own facilities
or resale of LEC facilities.
As a PCS licensee, the Company is subject to limited regulatory oversight by
the APUC (E.G., in the areas of consumer protection and transfer of its
licenses), although pursuant to federal law states are not permitted to regulate
the rates of PCS and other commercial mobile service providers. PCS licensees
may also be subject to regulatory requirements of local jurisdictions pertaining
to, among other things, the selling of tower facilities.
Cable television systems generally are constructed and operated under the
authority of nonexclusive certificates, permits or "franchises" granted by local
or, as in Alaska, state governmental authorities. The Company's franchises
consist of 15 certificates of public convenience issued by the APUC for the
Cable Systems and several military franchise agreements required to provide
cable service on military bases. Operation of the Cable Systems also requires
several FCC radio-band frequency licenses.
74
Federal law limits the power of the franchising authorities to impose
obligations on cable television operators as a condition of the granting or
renewal of a franchise. Franchises contain varying provisions relating to
construction and operation of cable television systems, such as time limitations
on commencement or completion of construction; quality of service, including (in
certain circumstances) requirements as to the number of channels and broad
categories of programming offered to subscribers; rate regulation; provision of
service to certain institutions; provision of channels for public access and
commercial leased-use; and maintenance of insurance and indemnity bonds.
Franchises usually require the consent of the franchising authority prior to a
transfer of the franchise or a transfer or change in ownership or operating
control of the franchisee.
Subject to applicable law, a cable television franchise may be terminated
prior to its expiration date if the operator fails to comply with the material
terms and conditions of the franchise. Under the 1984 Cable Act, if a franchise
is lawfully terminated, and if the franchising authority acquires ownership of
the cable television system or effects a transfer of ownership to a third party,
such acquisition or transfer must be at an equitable price or, in the case of a
franchise existing on the effective date of the 1984 Cable Act, at a price
determined in accordance with the terms of the franchise, if any.
The 1984 Cable Act, as supplemented by the renewal provisions of the 1992
Cable Act, establishes an orderly process for franchise renewal which protects
cable operators against unfair denials of renewals when the operator's past
performance and proposal for future performance meet the standards established
by the 1984 Cable Act. These provisions are not generally relevant in Alaska
where the certificates of public convenience granted by the APUC to operate
cable systems are perpetual in duration, subject to revocation for cause.
Franchises issued by the U.S. government to provide cable television service on
military bases are subject to the renewal provisions of the 1992 Cable Act.
In order for the APUC to exercise rate regulation authority over a cable
system's basic service rates, 25% of the cable system's subscribers must request
such regulation by filing a petition with the APUC. In July 1990, the APUC
instituted rate regulation over the Company's Juneau operations pertaining to
basic cable service and installation. The State of Alaska does not currently
exercise rate regulation authority over the Company's other Cable Systems.
Therefore, as of March 31, 1997, there was no refund liability for basic service
at those other locations. Since rate regulation over the Company's Juneau
operations began in 1990 and through March 31, 1997, no refund liability has
existed for this location.
EMPLOYEES
As of June 30, 1997, the Company employed a total of 861 employees,
including employees involved with the operation of the Cable Systems. The
Company believes that its future success will depend upon its continued ability
to attract and retain highly skilled and qualified employees. The Company
believes that its relations with its employees are satisfactory.
LEGAL PROCEEDINGS
Except as set forth in this section, the Company is not a party to or
subject to, and none of its properties are subject to, any material pending
legal proceedings. The Company is a party to various claims and pending
litigation as part of the normal course of its business. The Company is also
involved in several administrative proceedings (including informal complaint
proceedings) and filings with the FCC and state regulatory authorities. In the
opinion of management, the nature and disposition of these matters are
considered routine and arise in the ordinary course of business. Management
believes that, even if these matters were to be resolved unfavorably to the
Company, they would not have a materially adverse effect on the Company's
financial condition or results of operations.
75
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information about the Company's
directors and executive officers as of the date of this Prospectus.
NAME AGE POSITION
- --------------------------- --- ------------------------------------------------------------------------------
Carter F. Page(1)(2) 65 Chairman and Director
Ronald A. Duncan(1) 45 President, Chief Executive Officer and Director
Robert M. Walp(1) 69 Vice Chairman and Director
John M. Lowber(2) 47 Senior Vice President, Chief Financial Officer, Secretary and Treasurer
G. Wilson Hughes 51 Executive Vice President and General Manager
William C. Behnke 39 Senior Vice President-Marketing and Sales
Richard P. Dowling 53 Senior Vice President-Corporate Development
Dana L. Tindall 35 Senior Vice President-Regulatory Affairs
Donne F. Fisher(1)(2) 59 Director
Jeffery C. Garvey(1) 48 Director
John W. Gerdelman(1) 44 Director
William P. Glasgow(1) 39 Director
Donald Lynch(1) 49 Director
Larry E. Romrell(1) 57 Director
James M. Schneider(1) 44 Director
- ------------------------
(1) Member of Audit Committee and Compensation Committee.
(2) Member of Finance Committee.
CARTER F. PAGE. Mr. Page has served as Chairman and a director of the
Company since 1980. His term as director expires in 1999. From December 1987 to
December 1989, he served as a consultant to WestMarc in matters related to the
Company. Mr. Page served as President and director of WestMarc from 1972 to
December 1987. Since then and to the present, he has been managing general
partner of Semaphore Partners, a general partnership and investment vehicle in
the communications industry.
RONALD A. DUNCAN. Mr. Duncan is a co-founder of the Company and has been a
director of the Company since 1979. His term as director expires in 1997. Mr.
Duncan is his own nominee to the Board pursuant to the Voting Agreement. Mr.
Duncan has served as President and Chief Executive Officer of the Company since
January 1, 1989. From 1979 through December 1988 he was the Executive Vice
President of the Company.
ROBERT M. WALP. Mr. Walp is a co-founder of the Company. He has been a
director of the Company since 1979, has served as Vice Chairman of the Company
since January 1, 1989 and is also an employee of the Company. Mr. Walp is his
own nominee to the Board pursuant to the Voting Agreement. His term as director
expires in 1999. From 1979 through 1988, Mr. Walp served as President and Chief
Executive Officer of the Company.
JOHN M. LOWBER. Mr. Lowber has served as Chief Financial Officer of the
Company since January 1987, as Secretary and Treasurer since July 1988 and as
Senior Vice President-Administration since
76
December 1989. Mr. Lowber was Vice President-Administration for the Company from
1985 to December 1989. Prior to joining the Company, Mr. Lowber was a senior
manager at KPMG Peat Marwick.
G. WILSON HUGHES. Mr. Hughes has served as Executive Vice President and
General Manager of the Company since June 1991. Mr. Hughes was President and a
member of the board of directors of Northern Air Cargo, Inc. from March 1989 to
June 1991. From June 1984 to December 1988 he was President and a member of the
board of directors of Enserch Alaska Services, Inc.
WILLIAM C. BEHNKE. Mr. Behnke has served as Senior Vice President-Marketing
and Sales for the Company since January 1994. Mr. Behnke was Vice President of
the Company and President of GCI Network Systems, Inc., a former subsidiary of
the Company, from February 1992 to January 1994. From June 1989 to February 1992
he was Vice President of the Company and General Manager of GCI Network Systems,
Inc. From August 1984 to June 1989 Mr. Behnke was Senior Vice President for
TransAlaska Data Systems, Inc.
RICHARD P. DOWLING. Mr. Dowling has served as Senior Vice
President-Corporate Development for the Company since December 1990. Mr. Dowling
was Senior Vice President-Operations and Engineering for the Company from
December 1989 to December 1990. From 1981 to December 1989 he served as Vice
President-Operations and Engineering for the Company.
DANA L. TINDALL. Ms. Tindall has served as Senior Vice President-Regulatory
Affairs since January 1994. Ms. Tindall was Vice President-Regulatory Affairs
for the Company from January 1991 to January 1994. From October 1989 through
December 1990, Ms. Tindall was Director of Regulatory Affairs for the Company
and she served as Manager of Regulatory Affairs for the Company from 1985 to
October 1989. In addition, Ms. Tindall was an adjunct professor of
Telecommunications Economics at Alaska Pacific University from September through
December 1995.
DONNE F. FISHER. Mr. Fisher has served as a director of the Company since
1980 and is one of TCI's nominees to the Board pursuant to the Voting Agreement.
His term as director expires in 1998. Mr. Fisher has been a consultant to TCI
since January 1996 and a director of TCI since 1980. From 1982 until 1996, he
held various executive officer positions with TCI and its subsidiaries. Mr.
Fisher serves on the boards of directors of most of TCI's subsidiaries and the
boards of directors of DMX, Inc. and United Video Satellite Group, Inc. Mr.
Fisher also acts as executor of the Estate of Bob Magness, one of the Company's
principal shareholders.
JEFFERY C. GARVEY. Mr. Garvey has served as a director of the Company since
his appointment by the Board in December 1996 to fill a new seat created in the
expansion of the Board from seven to ten members and is one of the Voting Prime
Sellers' nominees to the Board pursuant to the Voting Agreement. His term as
director expires in 1997. Since June 1989, Mr. Garvey has been General Partner
of Austin Ventures, L.P., a shareholder of Alaska Cable, Inc. (one of the
entities merged into a subsidiary of the Company as a part of the acquisition of
the Cable Systems). Mr. Garvey joined Austin Ventures in 1979, and prior to that
he was Senior Vice President in charge of the National and Specialized Lending
Divisions of PNC Bank (formerly Provident National Bank) in Philadelphia,
Pennsylvania. From 1971 to 1976 he held several positions with Pittsburgh
National Bank focusing on broadcast communications.
JOHN W. GERDELMAN. Mr. Gerdelman has served as a director of the Company
since July 1994 and is one of MCI's nominees to the Board pursuant to the Voting
Agreement. His term as director expires in 1999. Mr. Gerdelman has been
President, Network Services, for MCI, a wholly-owned subsidiary of MCI
Communications Corporation, since September 1994. He was Senior Vice President
for MCI from July 1992 to September 1994. From July 1989 to July 1992 Mr.
Gerdelman was President of MCI Services, Inc., a subsidiary of MCI.
WILLIAM P. GLASGOW. Mr. Glasgow has served as a director of the Company
since his appointment by the Board in December 1996 to fill a new seat created
in the expansion of the Board from seven to ten
77
members and is one of the Voting Prime Sellers' nominees to the Board pursuant
to the Voting Agreement. His term as director expires in 1998. Mr. Glasgow has
been President of Prime II Management, Inc., a Delaware corporation, and sole
general partner of Prime Management since July 1996. Mr. Glasgow was President
of Prime Cable Fund I, Inc., a Delaware corporation and the sole general partner
of Prime from July 1996 to the merger of the corporation with a subsidiary of
the Company as a part of the acquisition of the Cable Systems. Prior to that he
was Senior Vice President-Finance of both corporations from September 1991 and
Vice President-Finance of Prime Cable Fund I, Inc. from February 1989 to
September 1991. Mr. Glasgow joined Prime Cable Corp. (an affiliate of Prime II
Management, Inc.) in 1983 and served in various capacities until that
corporation was liquidated in 1987.
DONALD LYNCH. Mr. Lynch has served as a director of the Company since his
appointment by the Board in December 1996 to fill a new seat created in the
expansion of the Board from seven to ten members and is one of MCI's nominees to
the Board pursuant to the Voting Agreement. His term as director expires in
1997. Mr. Lynch is a Senior Vice President of MCI and has been with MCI for over
15 years in various executive positions.
LARRY E. ROMRELL. Mr. Romrell has served as a director of the Company since
1980 and is one of TCI's nominees to the Board pursuant to the Voting Agreement.
His term as director expires in 1997. Since 1994, Mr. Romrell has been an
Executive Vice President of TCI and the President and a director of TCI
Technology Ventures, Inc. From 1991 to 1994, Mr. Romrell was a Senior Vice
President of TCI. Mr. Romrell is also a director of Teleport Communications
Group, Inc. and of United Video Satellite Group. He serves on the compensation
committee of United Video Satellite Group.
JAMES M. SCHNEIDER. Mr. Schneider has served as a director of the Company
since July 1994. His term as director expires in 1998. Mr. Schneider has been
the Vice President Finance for Dell Computer Corporation since September 1996.
Prior to that he was Senior Vice President Finance for MCI Communications
Corporation in Washington, D.C. since September 1993. Mr. Schneider was with the
accounting firm of Price Waterhouse from 1973 to September 1993 and was a
partner in that firm from October 1983 to September 1993.
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board currently consists of ten directors, divided into three
classes of directors serving staggered three-year terms. Directors of the
Company are elected at the annual meeting of shareholders and serve until they
resign or are removed or until their successors are elected and qualified.
Executive officers of the Company generally are appointed at the Board's first
meeting after each annual meeting of shareholders and serve at the discretion of
the Board.
VOTING AGREEMENT
Eight of the ten directors of the Company are nominated by certain
shareholders (the "Voting Shareholders") of the Company who are party to the
Voting Agreement that was entered into on October 31, 1996, in connection with
the Company's acquisition of Prime. Pursuant to the Voting Agreement, each
Voting Shareholder will vote its stock and take all actions within its power to
maintain the size of the Board at eight or more directors and to cause to be
elected to the Board (i) two directors nominated by MCI; (ii) one director
nominated by Mr. Duncan; (iii) one director nominated by Mr. Walp; (iv) two
directors nominated by TCI; and (v) two directors nominated by the Voting Prime
Sellers for so long as (1) the Voting Prime Sellers (and their distributees who
agree in writing to be bound by the terms of the agreement) collectively own at
least 10% of the then issued and outstanding shares of Class A Common Stock and
(2) the Prime Management Agreement is in full force and effect; however, if only
one of these two conditions is met, the Voting Prime Sellers are entitled to
nominate only one director, and if neither of these conditions is met, the
Voting Prime Sellers are not entitled to nominate any directors. The obligation
of the Voting Shareholders to vote for the Voting Prime Sellers' nominees and
maintain the
78
Board at eight or more directors exists for so long as the Voting Prime Sellers
collectively own 10% of the issued and then-outstanding shares of Class A Common
Stock or so long as the Prime Management Agreement is in effect. The Voting
Agreement states that the shares subject to it are also to be voted on other
matters to which the parties unanimously agree, but, as of the date of this
Prospectus, no other matters are subject to the Voting Agreement.
If any Voting Shareholder (other than the Voting Prime Sellers) disposes of
more than 25% of the votes represented by its holdings of the Common Stock of
the Company, such Voting Shareholder will cease to be subject to the Voting
Agreement and such disposition triggers on behalf of each other Voting
Shareholder the right to withdraw from the Voting Agreement. Unless earlier
terminated, the Voting Agreement will continue until the earlier of completion
of the annual shareholder meeting of the Company in June 2001 or until there is
only one party to the Voting Agreement.
TCI expects to sell all of its shares of the Company's Common Stock in the
Stock Offering. If TCI does so, it will no longer be subject to the Voting
Agreement and each other party to the agreement will have the right to withdraw
from the Voting Agreement by giving written notice to the other parties. The
Company currently expects that TCI's nominees to the Board will continue as
directors of the Company and that the other parties will not terminate their
rights and obligations under the Voting Agreement.
COMMITTEES OF THE BOARD
The Board currently has three Committees: the Audit Committee, the
Compensation Committee, and the Finance Committee. The Audit Committee is
composed of all members of the Board. The Audit Committee's duties include (i)
making recommendations to the Board on conducting the annual audit of the
Company and its subsidiaries, including the selection of an external auditor to
conduct the annual audit and such other audits or accounting reviews of those
entities as the Audit Committee deems necessary, (ii) reviewing the plan or
scope of an audit or review and the results of such audit or review, and (iii)
carrying out other duties as delegated in writing by the Board.
The Compensation Committee is composed of all members of the Board. The
Compensation Committee establishes compensation policies regarding executive
officers and directors and makes recommendations to the Board regarding such
compensation, including establishing an overall cap on executive compensation
and setting performance standards for executive officer compensation.
The Finance Committee is composed of Messrs. Fisher, Page and Lowber. Its
duties are to review Company finance matters from time to time and provide
guidance to the Chief Financial Officer regarding these matters.
DIRECTOR COMPENSATION
In December 1996, each person who was then a director of the Company (other
than the MCI representatives) received $2,000 in director fees for the period
from July 1996 to June 1997. It is MCI's policy that its directors not accept
remuneration for serving on a board of directors other than those of MCI and its
subsidiaries. The non-MCI directors who joined the Company in December will
receive a prorated fee for the July 1996 to July 1997 period. During the year
ended December 31, 1996, the directors on the Board received no other direct
compensation for serving on the Board, but were reimbursed for travel and
out-of-pocket expenses incurred in connection with attendance at meetings of the
Board.
During February 1997, the Company made a contingent grant of 25,000 options
to each of Messrs. Fisher, Schneider and Page with an exercise price of $7.50
per share, such options to vest in 25% increments for each year that the
optionee participates in at least 50% of Board meetings. The options were
granted subject, among other things, to the Company obtaining shareholder
approval to increase the number of shares of Class A Common Stock that it is
authorized to issue.
79
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth certain information
concerning the cash and non-cash compensation earned during fiscal years 1994,
1995 and 1996 by the Company's Chief Executive Officer and by each of the four
other most highly compensated executive officers of the Company or its
subsidiaries whose individual combined salary and bonus exceeded $100,000 during
the fiscal year ended December 31, 1996 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ---------------
------------------------------------------------------------ SECURITIES ALL OTHER
OTHER ANNUAL UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) ($)(1)(2)
- ------------------------------ --------- ----------- ----------- ----------------------- --------------- ---------------
Ronald A. Duncan 1996 120,000(3) 3,000 -0- -0- 178,633
President and Chief 1995 119,550(4) -0- -0- -0- 159,206
Executive Officer 1994 89,550(4) 99,960 -0- -0- 121,747
William C. Behnke 1996 110,000 5,363 -0- -0- 22,066
Senior Vice President-- 1995 110,002 -0- -0- 50,000 20,066
Marketing and Sales 1994 109,168 136,194 -0- -0- 66
G. Wilson Hughes 1996 150,000 6,040 -0- -0- 100,920
Executive Vice President 1995 150,002 -0- -0- 260,000 91,046
and General Manager 1994 150,003 89,698 -0- -0- 75,686
John M. Lowber 1996 125,000 5,860 -0- -0- 78,842
Senior Vice President-- 1995 125,000 -0- -0- 100,000 80,321
Administration, Chief 1994 125,514 117,757 -0- -0- 77,814
Financial Officer,
Secretary/Treasurer
Dana L. Tindall 1996 110,000 34,630 -0- -0- 10,203
Senior Vice President-- 1995 103,699 24,000 -0- -0- 14,949
Regulatory Affairs 1994 93,555 99,082 -0- -0- 63,241(5)
- ------------------------------
(1) The amounts reflected in this column include accruals under deferred
compensation agreements between the Company and the named individuals as
follows: Mr. Duncan, $161,551, $144,470 and $110,425 in 1996, 1995 and 1994,
respectively; Mr. Behnke, $22,000 and $20,000 in 1996 and 1995,
respectively; Mr. Hughes, $85,128, $74,741 and $59,843 in 1996, 1995 and
1994, respectively and Mr. Lowber, $65,000 in each of 1996, 1995 and 1994.
See "--Employment and Deferred Compensation Agreements."
(2) The amounts reflected in this column also include matching contributions by
the Company under the Stock Purchase Plan as follows: Mr. Duncan, $15,000,
$10,756, and $9,240 in 1996, 1995 and 1994, respectively; Mr. Hughes,
$14,475, $12,750, and $15,000 in 1996, 1995 and 1994, respectively; Mr.
Lowber, $12,857, $12,852, and $11,844 in 1996, 1995 and 1994, respectively;
and Ms. Tindall, $10,137, $12,802, and $13,190 in 1996, 1995 and 1994,
respectively. Amounts shown for Mr. Duncan include premiums of $82 under a
term life insurance policy paid in each of 1996, 1995 and 1994; $2,000 paid
to Mr. Duncan in each of 1996, 1995 and 1994 for serving on the Board; and
$1,898 paid to Mr. Duncan in 1995 in lieu of a contribution by the Company
to the Stock Purchase Plan. Amounts shown for Mr. Behnke include premiums of
$66 under a term life insurance policy paid in each of 1996, 1995 and 1994.
Amounts shown for Mr. Hughes include premiums of $1,317, $1,305 and $843
under life insurance policies paid in each of 1996, 1995 and 1994,
respectively; and $2,250 paid to Mr. Hughes in 1995 in lieu of a
contribution by the Company to the Stock Purchase Plan. Amounts shown for
Mr. Lowber include premiums of $985, $980 and $970 under life insurance
policies paid in each of 1996, 1995 and 1994, respectively; and $1,489 paid
to Mr. Lowber in 1995 in lieu of a contribution by the Company to the Stock
Purchase Plan. Amounts shown for Ms. Tindall include premiums of $66, $54
and $51 under a term life insurance policy paid in 1996, 1995 and 1994,
respectively; and $2,093 paid to Ms. Tindall in 1995 in lieu of a
contribution by the Company to the Stock Purchase Plan.
(3) Does not include $50,000 of Mr. Duncan's 1997 salary that was paid in
advance during 1996.
(4) Mr. Duncan received $30,000 of his 1995 salary as an advance in 1994. The
$30,000 advance payment is included in his 1995 salary.
80
(5) The Company and Ms. Tindall entered into a deferred compensation agreement
dated August 15, 1994, which provides that, in the event Ms. Tindall
exercises stock options pursuant to the Stock Option Agreement between the
Company and Ms. Tindall dated June 2, 1993, the Company will pay to Ms.
Tindall $1.00 per share so exercised, up to a maximum of $50,000.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information concerning each exercise of stock
options during the year ended December 31, 1996 by each of the Named Executive
Officers and the fiscal year-end value of unexercised options held by each of
the Named Executive Officers.
AGGREGATED OPTION EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END ($)(1)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------ -------------- ------------- ---------------------------- ----------------------------
Ronald A. Duncan........ -0- $ -0- 140,000 60,000 $ 717,500 $ 307,500
William C. Behnke....... -0- -0- 185,190 50,000 1,204,584 206,250
G. Wilson Hughes........ -0- -0- 250,000 260,000 1,593,750 1,072,500
John M. Lowber.......... -0- -0- 205,000 145,000 1,275,625 643,125
Dana L. Tindall......... 9,517(2) 16,357(2) 106,400 50,000 528,100 236,250
- ------------------------------
(1) Represents the difference between the fair market value of the securities
underlying the options and the exercise price of the options based on the
last trading price on December 31, 1996.
(2) The Company paid $16,357 to Ms. Tindall for cancellation of options to
purchase 9,517 shares of Class A Common Stock with an exercise price per
share of $2.25. The payment amount was calculated by multiplying the number
of shares by the difference between the market price of the Class A Common
Stock on the date of such cancellation and the exercise price of the options
canceled.
EMPLOYMENT AND DEFERRED COMPENSATION AGREEMENTS
The Company entered into a Deferred Bonus Agreement with Mr. Duncan in June
1989 (the "First Duncan Agreement"). Under the First Duncan Agreement, the
Company credited $325,000 to Mr. Duncan as of June 12, 1989 as a deferred bonus
for Mr. Duncan's past service to the Company. Amounts in the account were to
accrue interest at 10% per annum unless there was an irrevocable investment
election by Mr. Duncan to have the balance in the account treated as though it
were invested in the Common Stock of the Company. In July 1989, Mr. Duncan made
such election, and the Company purchased a total of 105,111 shares of Class A
Common Stock in its name for the benefit of Mr. Duncan, which are held in
treasury and are not voted. The full amount of the deferred bonus, including the
distribution of any stock, will be due and payable to Mr. Duncan upon the
termination of his employment with the Company.
81
The Company entered into a Deferred Compensation Agreement with Mr. Duncan
in August 1993 (as amended, the "Second Duncan Agreement"), under which the
Company will pay to Mr. Duncan deferred compensation in an amount not to exceed
$625,000, plus interest at the rate paid by the Company under the Telephony
Credit Facility, in addition to his regular compensation. This deferred
compensation is to be credited to Mr. Duncan each July 1 that he is employed by
the Company in amounts as follows:
YEAR AMOUNT
- ------------------------------------------------------------- -----------
1993......................................................... $ 100,000
1994......................................................... 100,000
1995......................................................... 125,000
1996......................................................... 150,000
1997......................................................... 150,000
-----------
Total........................................................ $ 625,000
-----------
-----------
All deferred compensation (including the present value of any uncredited
amounts) plus accrued interest will be due and payable in ten equal annual
payments to Mr. Duncan upon the termination of his employment with the Company;
provided that, should he voluntarily terminate his employment or if his
employment is terminated for cause, only that portion (with interest) of the
deferred compensation credited as of the December 31 immediately preceding his
termination will be due and payable, and the remainder of the deferred
compensation will be forfeited. In September 1995, the Company agreed with Mr.
Duncan that the vested and unvested portions of his deferred compensation under
the Second Duncan Agreement would be payable in shares of Class A Common Stock
in lieu of cash. To fund this obligation, the Company bought a total of 13,750
shares in the open market during September 1995 and October 1995 at a weighted
average price of $3.48 per share. In July 1996, the Company purchased from Mr.
Duncan an additional 76,470 shares of Class A Common Stock at the then market
price of $8.125 per share. In lieu of the of the amount to be credited in 1997,
Mr. Duncan's deferred compensation account will receive credit for 18,372 shares
of Class A Common Stock. Accordingly, the balance owed Mr. Duncan pursuant to
the Second Duncan Agreement is denominated in 90,220 shares of Class A Common
Stock. The Company is holding the shares in treasury until the shares are
distributed to Mr. Duncan. The shares are not voted and may not be disposed of
by the Company or Mr. Duncan.
On April 30, 1991, the Company entered into a deferred compensation
agreement with Mr. Hughes (as amended in 1996, the "Hughes Agreement"). Under
the terms of the Hughes Agreement, Mr. Hughes is entitled to an annual base
salary of $150,000 and customary benefits. Pursuant to the agreement, Mr. Hughes
was granted stock options in 1991 for 250,000 shares of Class A Common Stock at
an exercise price of $1.75 per share, all of which are fully vested and
exercisable. The Hughes Agreement also provides for Mr. Hughes to receive
deferred compensation, with interest compounded annually at 10%, of $50,000 in
each of 1992, 1993 and 1994, $65,000 in 1995 and $75,000 in 1996 and each year
thereafter, to accrue on December 31 of each year. Each contribution by the
Company is accrued at the end of the year in which the contribution is made.
Upon termination, Mr. Hughes may elect to have the full balance of the deferred
compensation paid in cash, in a lump sum or in monthly installments for up to
ten years. If the monthly installment method is chosen, the unpaid balance will
continue to accrue interest at 10%. Interest accrued under the Hughes Agreement
in the amounts of $9,843, $9,741 and $10,128 during the years ended December 31,
1994, 1995 and 1996, respectively. In September 1995, the Company bought 3,750
shares of Class A Common Stock in the public market at a purchase price of
$3.375 per share to fund certain of the vested portions of Mr. Hughes' deferred
compensation. In March 1997, the Company bought 3,687 shares of Class A Common
Stock at a purchase price of $7.75 per share, again to fund certain of the
vested portions of Mr. Hughes' deferred compensation. The stock is held in
treasury by the Company for the benefit of Mr. Hughes, is not voted and may not
be disposed of by the Company or Mr. Hughes.
82
The Company entered into an employment and deferred compensation agreement
with Mr. Lowber in July 1992. Under the terms of the agreement, Mr. Lowber is
entitled to an annual base salary of $125,000 and customary benefits. In
addition, Mr. Lowber is eligible to receive an annual cash bonus of up to
$30,000 based upon the Company's and his performance. The agreement also
provides for Mr. Lowber to receive deferred compensation of $450,000 ($65,000
per year from July 1992 through July 1999). If Mr. Lowber's employment or
position with the Company is terminated, or if he dies, the entire $450,000 will
be immediately payable. If Mr. Lowber voluntarily resigns, he will lose the
unvested portion of his deferred compensation. The deferred compensation has
been used to purchase a life insurance policy which has been collaterally
assigned to the Company to the extent of premiums paid by the Company. The
Company's deferred compensation contributions will be made each July 1 through
1999 and are fully vested when made. At the earlier of termination of employment
or upon election by Mr. Lowber subsequent to the end of the seven year term of
the agreement, the collateral assignment of the insurance policy will be
terminated.
In February 1995, the Company agreed to pay deferred compensation to Mr.
Behnke in the amount of $20,000 per year for each of 1995 and 1996, each
contribution by the Company to vest at the end of the calendar year during which
the allocation was made, and accruing interest at 10% per annum. The first
allocation under the plan was made in December 1995. Effective January 1, 1997,
the Company and Mr. Behnke entered into a compensation agreement (the "Behnke
Agreement") which provides for compensation through December 31, 2001. The
Behnke Agreement provides for base compensation of $150,000 per year, increasing
$5,000 annually for the years ending December 31, 1999, 2000 and 2001. The
Behnke Agreement provides for target incentive compensation of $45,000 per year
of which 78% will be deferred. Pursuant to the Behnke Agreement, the Company
agreed to grant Mr. Behnke an option to purchase 100,000 shares of Class A
Common Stock at an exercise price of $7.00 per share, which will vest in equal
amounts on January 1 of 2000, 2001 and 2002, the grant of such options being
contingent on, among other things, the Company obtaining shareholder approval to
increase the number of shares of Class A Common Stock that it is authorized to
issue. Pursuant to the Behnke Agreement, the Company will create a deferred
compensation account for Mr. Behnke in the amount of $285,000, of which $40,000
was vested December 31, 1996 and the rest of which will vest as earned under the
incentive compensation provision of the Behnke Agreement. Mr. Behnke may direct
the Company to invest the entire $285,000 in the Company's Common Stock. The
vested portions of the deferred compensation account will be paid to Mr. Behnke
upon termination of his employment with the Company. The Company also agreed to
cooperate with Mr. Behnke to sell in the Stock Offering 35,000 shares of Class A
Common Stock that he will receive upon exercise of vested stock options.
In February 1995, the Company established a non-qualified, unfunded deferred
compensation plan to provide a means by which certain employees of the Company
may elect to defer receipt of designated percentages or amounts of their
compensation and to provide a means for certain other deferrals of compensation.
Employees eligible to participate in the plan are determined by the Board. The
Company may, at its discretion, contribute matching deferrals in amounts
selected by the Company. Participants immediately vest in all elective deferrals
and all income and gain attributable to that participation. Matching
contributions and all income and gain attributable to them vest on a
case-by-case basis as determined by the Company. 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 or total disability and change of
control or insolvency of the Company. Participants are general unsecured
creditors of the Company with respect to deferred compensation benefits of the
plan. Mr. Lowber participated in the plan with respect to a deferral of $56,000
earned in 1995 which was paid in 1996. As of the date of this Prospectus, Mr.
Lowber was the only Named Executive Officer to participate in the plan.
83
1997 STOCK OPTION GRANTS
During February 1997, the Company made a contingent grant under the 1986
Stock Option Plan of options to purchase Class A Common Stock to certain
executive officers and non-employee directors of the Company, subject, among
other things, to the Company obtaining shareholder approval to increase the
number of shares of Class A Common Stock that it is authorized to issue. The
approved contingent options include 25,000 options to each of Mr. Fisher, Mr.
Schneider and Mr. Page with an exercise price of $7.50 per share, such options
to vest in 25% increments for each year that the optionee participates in at
least 50% of Board meetings. The contingent grant of 100,000 options at an
exercise price of $7.00 per share to each of Mr. Lowber, Mr. Behnke and Ms.
Tindall was also approved. Mr. Lowber's options vest ratably over a three-year
period beginning in December 1999, Mr. Behnke's options vest ratably over a
three-year period beginning in January 2000 and Ms. Tindall's options vest
ratably over a three-year period beginning in June 1999.
STOCK OPTION PLAN
Under the Company's 1986 Stock Option Plan, as amended (the "Stock Option
Plan"), the Company is authorized to grant non-qualified options to purchase up
to 3,200,000 shares of Class A Common Stock to officers, employees, non-employee
directors and other key employees of the Company. The number of shares for which
options may be granted is subject to adjustment upon the occurrence of stock
dividends, stock splits, mergers, consolidations and certain other changes in
corporate structure or capitalization. As of May 15, 1997, 2,408,600 shares were
subject to outstanding options, 683,062 shares had been issued upon the exercise
of options under the Stock Option Plan, and 108,338 shares remained available
for additional grants under the Stock Option Plan. Shares of Class A Common
Stock issued under the Stock Option Plan have been registered under the
Securities Act on Form S-8. The Company intends to seek shareholder approval to
increase the number of options available for grant under the Stock Option Plan
by 2.5 million.
The Stock Option Plan is administered by the Board or, in certain instances,
by a committee of disinterested persons which selects optionees and determines
the terms of each option, including the number of shares covered by each option,
the exercise price and the option exercise period which, under the Stock Option
Plan, may be from six months through up to ten years from the date of grant.
Options granted that have not become exercisable terminate upon the termination
of the employment or directorship of the optionholder, and exercisable options
terminate from one month to one year after such termination, depending on the
cause of such termination. If an option expires or terminates, the shares
subject to such option become available for additional grants under the Stock
Option Plan.
STOCK PURCHASE PLAN
In December 1986, the Company adopted an Employee Stock Purchase Plan (as
amended, the "Stock Purchase Plan"), that is qualified under Section 401 of the
Internal Revenue Code of 1986, as amended. All employees of the Company have
completed at least one year of service are eligible to participate in the Stock
Purchase Plan. Eligible employees may elect to reduce their taxable compensation
in any even dollar amount up to 10% of such compensation up to a maximum per
employee of $9,500 for 1997. Employees may contribute up to an additional 10% of
their compensation with after-tax dollars. Subject to certain limitations, the
Company may make matching contributions of Common Stock for the benefit of
employees, which contributions vest over six years. No more than 10% of any one
employee's compensation will be matched in any year. In addition, the
combination of salary reductions, after-tax contributions and Company matching
contributions for any employee cannot exceed the lesser of $30,000 or 25% of
such employee's compensation (determined after salary reduction) for any year.
Prior to July 1, 1995, employee and Company contributions were invested in
Common Stock. On and after that date, employees could direct their contributions
to be invested in Common Stock, MCI common stock, TCI common stock or various
identified mutual funds. Employee contributions invested in Common Stock are
eligible to receive up to 100% Company matching contributions in Common Stock
84
as determined by the Company each year. Employee contributions that are directed
into investments other than Common Stock are eligible to receive Company
matching contributions of up to 50%, as determined by the Company each year. All
contributions are invested in the name of the plan for the benefit of the
respective participants in the plan. The participants generally do not have
voting or disposition power with respect to the Company shares allocated to
their accounts; such shares are voted by the plan committee. However, pursuant
to the Stock Purchase Plan, the Company offered all participants the opportunity
to include in the Stock Offering up to 50% of the Common Stock allocated to them
under the Stock Purchase Plan.
The Stock Purchase Plan is administered through a plan administrator
(currently Alfred J. Walker) and a plan committee appointed by the Board. The
assets of the plan are invested from time to time by the trustee at the
direction of the plan committee, except that participants have the right to
direct the investment of their contributions to the Stock Purchase Plan
(although an election to invest in Common Stock is generally irrevocable). The
plan administrator and members of the plan committee are all employees of the
Company or its subsidiaries. The plan committee has broad administrative
discretion under the terms of the plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is composed of all members of the Board, and the
identity and relationships of the Board. Two Board members, Mr. Walp and Mr.
Duncan, are officers of the Company. During the year ended December 31, 1996,
Messrs. Walp and Duncan participated in deliberations of the Compensation
Committee concerning executive officer compensation other than deliberations
concerning their own compensation. No executive officer of the Company served as
a member of a compensation committee or board of directors of any other entity,
one of whose executive officers served as a director of the Company.
The Company entered into a long-term capital lease agreement (the "Lease")
in 1991 with a partnership in which Mr. Duncan, the President, CEO and a
director of the Company, held a 50% ownership interest. Mr. Duncan sold his
interest in the partnership in 1992 to Dani Bowman, who later became Mr.
Duncan's spouse, but remained a guarantor on the note issued by National Bank of
Alaska that was used to finance the acquisition of the property subject to the
Lease. The property under the Lease consists of a building presently occupied by
the Company (the "Property"). The Lease term is 15 years with monthly payments
of $14,400, increasing in $800 increments at each two year anniversary of the
Lease, beginning in 1993. If the partnership sells the Property prior to the end
of the tenth year of the Lease, the partnership will pay to the Company one-half
of the net proceeds in excess of $900,000. If the Property is not sold prior to
the end of the tenth year of the Lease, the partnership will pay to the Company
the greater of (i) one-half of the appreciated value of the Property over
$900,000 and (ii) $500,000. The Property was capitalized in 1991 at the
partnership's cost of $900,000 and the Lease obligation was recorded in the
consolidated financial statements of the Company located elsewhere in this
Prospectus.
In July 1996, the Company purchased 76,470 shares of Class A Common Stock
from Mr. Duncan at the then market price of $8.125 per share. The shares were
purchased for the purpose of funding Mr. Duncan's deferred compensation account
under the Second Duncan Agreement, following his election to have the balance
owed to him denominated in Class A Common Stock in lieu of cash. The Company is
holding the shares in treasury until the shares are distributed to Mr. Duncan.
The shares are not voted and may not be disposed of by the Company or Mr.
Duncan. See "Management--Executive Compensation" and "--Employment and Deferred
Compensation Agreements."
As of June 30, 1997, Mr. Duncan was indebted to the Company in the aggregate
principal amount of $700,000 plus accrued interest of $149,453 (the "Outstanding
Duncan Loans"). Mr. Duncan borrowed $500,000 of the Outstanding Duncan Loans
from the Company in August 1993 to repay a portion of indebtedness to WestMarc
that he assumed from others. The $500,000 loan accrues interest at the
85
Company's variable rate under the Telephony Credit Facility and is secured by
223,000 shares of Class A Common Stock owned by Mr. Duncan pursuant to the
Pledge Agreement between Mr. Duncan and the Company dated August 13, 1993. The
principal becomes due and payable, together with accrued interest, on the
earlier of 90 days after the termination of Mr. Duncan's employment with the
Company and July 30, 1998. This note is nonrecourse to Mr. Duncan.
The Company loaned $150,000 of the Outstanding Duncan Loans to Mr. Duncan in
December 1996 and an additional $50,000 in January 1997 for his personal
requirements. These loans accrue interest at the Company's variable rate under
the Telephony Credit Facility, are unsecured and become due and payable,
together with accrued interest, on December 31, 2001.
The largest aggregate principal amount of indebtedness owed by Mr. Duncan to
the Company at any time since January 1, 1996 was $710,000, $700,000 of which
remained outstanding at June 30, 1997. During 1996, Mr. Duncan borrowed from and
repaid to the Company the principal amount of $210,000 for his personal
requirements. The $210,000 loan accrued interest at the Company's variable rate
under the Telephony Credit Facility and was secured by Class A Common Stock
owned by Mr. Duncan. During 1996, Mr. Duncan also repaid the Company for $1,638
of payments made by the Company to others on behalf of Mr. Duncan during 1995.
Such amounts did not accrue interest and were unsecured.
CERTAIN TRANSACTIONS
MCI AGREEMENTS
As of June 30, 1997, MCI owned 22.6% of the outstanding combined Common
Stock, representing 26.6% of the total voting power of the Common Stock. After
giving effect to the Stock Offering, MCI will own 19.4% of the outstanding
combined Common Stock, representing 24.5% of the total voting power. In 1993,
MCI entered into a significant business relationship with the Company which
includes the following agreements: (i) under the MCI Traffic Carriage Agreement,
the Company agreed to terminate all Alaska-bound MCI long distance traffic and
MCI agreed to terminate all of the Company's long distance traffic terminating
in the lower 49 states, excluding Washington, Oregon and Hawaii; (ii) MCI
licensed certain service marks to the Company for use in Alaska; (iii) MCI, in
connection with providing to the Company credit enhancement to permit the
Company to purchase a portion of an undersea cable linking Seward, Alaska, with
Pacific City, Oregon, leased from the Company all of the capacity owned by the
Company on the undersea fiber optic cable and the Company leased such capacity
back from MCI; (iv) MCI purchased certain service marks of the Company; and (v)
the parties agreed to share some communications network resources and various
marketing, engineering and operating resources. The Company also handles MCI's
800 traffic originating in Alaska and terminating in the lower 49 states and
handles traffic for MCI's calling card customers when they are in Alaska, while
MCI originates calls for the Company's calling card customers when they are in
the lower 49 states. Revenues attributed to these agreements in 1994, 1995 and
1996 were approximately $19.5 million, $23.9 million and $29.2 million,
respectively. Pursuant to these agreements, the Company paid MCI $12.7 million,
$13.0 million and $12.8 million in 1994, 1995 and 1996, respectively. The
Company believes that the terms of these agreements are at least as favorable to
the Company as could be obtained from a non-affilate. Concurrently with entering
into the MCI Traffic Carriage Agreement, MCI purchased approximately 31% of the
then outstanding Class A Common Stock and approximately 31% of the then
outstanding Class B Common Stock and presently controls nominations to two seats
on the Board pursuant to the Voting Agreement. MCI's current nominees are Mr.
Gerdelman, the President of Network Services for MCI, and Mr. Lynch, a Senior
Vice President of MCI. Concurrently with the Company's acquisition of the Cable
Systems effective October 31, 1996, MCI purchased an additional 2.0 million
shares of Class A Common Stock for $13.0 million or $6.50 per share, a 30%
premium to the $5.00 per share market price immediately preceding the
announcement of the Company's acquisition of the Cable Systems.
86
WESTMARC AGREEMENTS
The Company purchased services and used certain facilities of WestMarc, a
wholly-owned subsidiary of TCI, to allow the Company to provide its
telecommunications services in certain of the lower 49 states. The total of such
purchases from WestMarc by the Company during the years ended December 31, 1995
and 1996 were approximately $245,000 and $244,000, respectively. The Company
expects to continue purchasing services from WestMarc at levels comparable to
past purchases. TCI controls nominations to two seats on the Board pursuant to
the Voting Agreement. Its current nominees are Mr. Fisher and Mr. Romrell. TCI
expects to sell all of its shares of Common Stock in the Stock Offering. If it
does so, it will no longer be subject to the Voting Agreement and each other
party to the agreement will have the right to withdraw from the Voting Agreement
by giving written notice to the other parties. The Company currently expects
that TCI's nominees to the Board will continue as directors of the Company and
that the other parties will not terminate their rights and obligations under the
Voting Agreement.
PRIME MANAGEMENT AGREEMENT
In connection with its acquisition of the Cable Systems, the Company entered
into the Prime Management Agreement with Prime Management to manage the Cable
Systems. After giving effect to the Stock Offering, the Voting Prime Sellers
will own 18.0% of the total outstanding combined Common Stock, representing
10.3% of the total voting power, and will control nominations to two seats on
the Board pursuant to the Voting Agreement.
Under the Prime Management Agreement, the Company will pay to Prime
Management a net annualized fee for managing the Cable Systems in the amount of
$1,000,000 for the year ending October 31, 1997, $750,000 for the year ending
October 31, 1998, and $500,000 for each year ending October 31 thereafter that
the Prime Management Agreement is in effect. Any portion of the management fee
which is past due shall bear interest at a rate per annum equal to 17.5% until
paid. In addition, the Company is required to reimburse Prime Management for any
costs and expenses incurred by it in connection with the Cable Systems,
including travel and entertainment expenses (the contract states that such costs
and expenses are not anticipated to exceed $200,000 on an annualized basis). The
Prime Management Agreement has a term of nine years but either party may
terminate the agreement in its discretion after October 31, 1998.
DUNCAN LEASE
The Company entered into a long-term capital lease agreement in 1991 with a
partnership in which Mr. Duncan, the President, Chief Executive Officer and
director of the Company, held a 50% ownership interest. See
"Management--Compensation Committee Interlocks and Insider Participation."
DUNCAN AND HUGHES STOCK SALES
In July 1996, the Company purchased 76,470 shares of Class A Common Stock
from Mr. Duncan at the then market price of $8.125 per share. See
"Management--Compensation Committee Interlocks and Insider Participation." In
March 1997, the Company purchased 3,687 shares of Class A Common Stock from Mr.
Hughes at the then market price of $7.75 per share. The shares were purchased
for the purpose of funding Mr. Hughes's deferred compensation account under the
Hughes Agreement. The Company is holding the shares in treasury until they are
distributed to Mr. Hughes. The shares are not voted and may not be disposed of
by the Company or Mr. Hughes. See "Management--Executive Compensation" and
"--Employment and Deferred Compensation Agreements."
INDEBTEDNESS OF MANAGEMENT
A significant portion of the compensation paid to executive officers of the
Company is in the form of stock options. Because insider sales of capital stock
of the Company upon exercise of such options may have a negative impact on the
price of the Company's Common Stock, the Board has encouraged executive officers
of the Company not to exercise stock options and sell the underlying stock to
meet
87
personal financial requirements, and has instead extended loans to such
executive officers secured by their shares or options. Total indebtedness of
management at June 30, 1997 was $1,777,941 (including accrued interest of
$274,582), $1,073,359 in principal amount of which was secured by shares or
options, $185,000 in principal amount of which was otherwise secured by
collateral of the borrowers and $20,000 in principal amount of which was
unsecured.
As of June 30, 1997, Mr. Duncan was indebted to the Company in the aggregate
principal amount of $700,000 plus accrued interest of $149,453. See
"Management--Compensation Committee Interlocks and Insider Participation." As of
June 30, 1997, Mr. Behnke, Mr. Dowling and Ms. Tindall were indebted to the
Company in the respective principal amounts of $148,000, $330,359 and $70,000,
plus accrued interest of $26,441, $82,997 and $7,590, respectively. The $148,000
principal amount owed by Mr. Behnke is secured by options to purchase 85,190
shares of Class A Common Stock (the "Behnke Collateral"), is due and payable,
together with accrued interest, on June 30, 1997, and consists of (i) $48,000
borrowed in April 1993 for his personal requirements, which amount bears
interest at 9% per annum, (ii) $50,000 borrowed in September 1995 for his
personal requirements, which amount bears interest at the Company's variable
rate under the Telephony Credit Facility and (iii) $50,000 borrowed in January
1997 for his personal requirements, which amount bears interest at the Company's
variable rate under the Telephony Credit Facility. The $330,359 principal amount
owed by Mr. Dowling bears interest at the rate of 10% per annum, is secured by
160,297 shares of Class A Common Stock and 74,028 shares of Class B Common Stock
and consists of $224,359 borrowed in August 1994 and $86,000 borrowed in April
1995, each to pay income taxes due upon exercise of stock options. Mr. Dowling's
loans are payable in equal installments of principal and interest each year for
ten years beginning in August 1995. Payment has not yet been made on the notes,
and Mr. Dowling is currently negotiating extensions of the notes with the
Company. An additional $20,000 advanced to Mr. Dowling in June 1997, which
amount bears interest at 9% per annum, is unsecured and is payable upon demand.
The Company loaned Ms. Tindall $70,000 for her personal requirements in January
1996, which amount bears interest at the Company's variable rate under the
Telephony Credit Facility, is secured by options to purchase 156,400 shares of
Class A Common Stock and is due and payable, together with accrued interest, on
January 16, 1999. Ms. Tindall is required to make prepayments on the note equal
to 20% of the gross amount of any incentive compensation earned by her. The
largest aggregate principal amount of indebtedness owed by each of Mr. Behnke,
Mr. Dowling and Ms. Tindall to the Company at any time since January 1, 1996 was
$148,000, $330,359 and $70,000, respectively.
The Company loaned $45,000 to Mr. Hughes in December 1995 for his personal
requirements. The principal under the promissory note bears interest at the
Company's variable rate under the Telephony Credit Facility, is secured by
options to purchase 250,000 shares of Class A Common Stock and by 3,000 shares
of Class A Common Stock owned by Mr. Hughes (the "Hughes Collateral") and is
due, together with accrued interest, on March 31, 1997. Mr. Hughes is currently
negotiating an extension of the note with the Company. Accrued interest under
the note totaled $5,371 at June 30, 1997. In August 1996, Mr. Hughes received an
advance of $25,000 from the Company. This indebtedness does not bear interest,
is secured by the Hughes Collateral and is to be repaid from future incentive
compensation payments earned by Mr. Hughes.
The Company loaned $185,000 to Mr. Lowber during April 1997 to purchase real
property. The promissory note will be secured by a deed of trust for such
property, bears interest at 6.49% and will be due and payable, together with
accrued interest, in three equal annual installments beginning June 30, 2000.
Accrued interest under the note totaled $2,730 at June 30, 1997.
AGREEMENT NOT TO EXERCISE OPTIONS
The number of authorized but unissued shares of Class A Common Stock as of
the date of this Prospectus, net of shares reserved for issuance upon exercise
of options and conversion of outstanding shares of Class B Common Stock, is
approximately 5.2 million. Upon consummation of the Stock Offering, the Company
will be required to issue approximately 7.0 million shares of Class A Common
88
Stock. In order to make available for issuance an additional 1.8 million shares
of Class A Common Stock in addition to the 5.2 million currently available,
certain holders of options to acquire an aggregate of approximately 1.8 million
shares of Class A Common Stock have agreed not to exercise those options until
such time as the Company's shareholders have approved an increase in the amount
of authorized but unissued Class A Common Stock. The foregoing agreements
require the Company to use its best efforts to obtain shareholder approval to
increase its authorized Class A Common Stock as promptly as practicable, but not
before its next annual meeting.
REGISTRATION RIGHTS AGREEMENTS
The Company has entered into registration rights agreements (the
"Registration Rights Agreements") with TCI, MCI and the former owners of Prime,
Alaskan Cable and Alaska Cablevision. Approximately 24,315,082 shares of Class A
Common Stock and 1,865,834 shares of Class B Common Stock were subject to the
Registration Rights Agreements as of May 15, 1997. After giving effect to the
Stock Offering, 19,022,388 shares of Class A Common Stock and 1,275,791 shares
of Class B Common Stock will be subject to the Registration Rights Agreements.
The terms of the Registration Rights Agreements vary although they generally
share several common terms.
If the Company proposes to register any of its securities under the
Securities Act for its own account or for the account of other shareholders, the
Company must notify all of the holders under the Registration Rights Agreements
of the Company's intent to register such common stock and allow the holders an
opportunity to include their shares ("Registrable Shares") in the Company's
registration. Each holder also has the right under certain circumstances to
require the Company to register all or any portion of such holder's Registrable
Shares under the Securities Act. The Registration Rights Agreements are subject
to certain limitations and restrictions including the right of the Company to
limit the number of Registrable Shares included in the registration. Generally,
the Company is required to pay all registration expenses in connection with each
registration of Registrable Shares pursuant to the Registration Rights
Agreements.
The Registration Rights Agreements between the Company and the Prime Sellers
and between the Company and Alaskan Cable require the Company to effect no more
than two registrations at the request of each holder; provided that each
registration request by the Prime Sellers or Alaskan Cable must include
Registrable Shares having an aggregate market value of not less than $2.5
million. The first demand registration under the Prime and Alaskan Cable
Registration Rights Agreements may be requested only by the holders of a minimum
of 25% of the Registrable Shares.
The Registration Rights Agreement between the Company and the shareholders
of Alaska Cablevision requires the Company to effect no more than 10
registrations at the request of such shareholders; provided, that each
registration request must include at least 150,000 Registrable Shares. The first
demand registration under the Alaska Cablevision Registration Rights Agreement
may be requested only by the holders of a minimum of 10% of the Registrable
Shares.
The Registration Rights Agreement between the Company and MCI dated March
31, 1993 requires the Company to effect no more than two registrations at the
request of MCI; provided, that each registration request by MCI must include
Registrable Shares having an aggregate market value of more than $500,000. MCI
executed a second Registration Rights Agreement with the Company dated October
31, 1996, pursuant to which the Company is required to effect no more than two
registrations at the request of MCI, each request to cover Registrable Shares
having an aggregate market value of at least $1.5 million.
Under the Registration Rights Agreement between the Company and TCI
(originally with WestMarc but transferred to TCI when the Registrable Shares
were transferred by WestMarc), the Company is required, subject to specified
limitations, to effect no more than two registrations at the request of TCI, so
long as the request relates to Registrable Shares having an aggregate market
value of more than $500,000.
89
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Class A Common Stock and Class B Common Stock as of June 30, 1997,
before and after giving effect to the Stock Offering, by (i) each person known
by the Company to beneficially own 5% or more of the outstanding shares of Class
A Common Stock or Class B Common Stock, (ii) each director of the Company, (iii)
each of the Named Executive Officers, and (iv) all current executive officers
and directors of the Company as a group. The table also reflects the number of
shares to be sold by each of the selling shareholders in the Stock Offering. All
information with respect to beneficial ownership has been furnished to the
Company by the respective shareholders of the Company.
SHARES BENEFICIALLY OWNED
PRIOR TO THE STOCK OFFERING
-------------------------------------------------------------------- NUMBER OF
AMOUNT AND NATURE PERCENT OF TOTAL CLASS A
NAME AND ADDRESS OF BENEFICIAL TITLE OF OF BENEFICIAL PERCENT OF SHARES COMBINED VOTING SHARES
OWNER (2) CLASS OWNERSHIP CLASS OUTSTANDING POWER OFFERED
- ------------------------------ ---------- ----------------- ------------- ----------------- --------------- --------------
PARTIES TO VOTING AGREEMENT:
MCI Telecommunications Class A 8,251,509(3) 21.6% 22.6% 26.6% --
Corporation Class B 1,275,791(3) 31.4%
1801 Pennsylvania Ave., N.W.
Washington, D.C. 20006
Ronald A. Duncan Class A 1,011,988(3)(5) 2.6% 3.0% 4.3% --
Class B 239,929(3)(5) 5.9%
Robert M. Walp Class A 572,845(3)(6) 1.5% 2.1% 4.6% 200,000(6)
Class B 303,457(3)(6) 7.5%
Tele-Communications, Inc. Class A -- -- 1.4% 7.5% 590,043(18)
5619 DTC Parkway Class B 590,043(3) 14.5%
Englewood, CO 80111
Voting Prime Sellers:
Prime Cable Growth Partners, Class A 7,423,569(3) 19.5% 17.6% 9.4% 1,484,713(17)
L.P. and its affiliates (4) Class B -- --
3000 One American Center
600 Congress Avenue
Austin, TX 78701
William Blair Venture Partners Class A 1,237,262(3) 3.2% 2.9% 1.6% --
III Limited Partnership Class B -- --
222 West Adams Street
Chicago, IL 60606
Austin Ventures, L.P. Class A 791,848(3) 2.1% 1.9% 1.0% --
114 West 7th Street Class B -- --
Suite 1300
Austin, TX 78701
Centennial Fund III, L.P. Class A 742,357(3) 1.9% 1.8% * --
1428 15th Street Class B -- --
Denver, CO 80202
BancBoston Capital, Inc. Class A 332,323(3) * * * 257,793
175 Federal Street, 10th Floor Class B -- --
Boston, MA 02110
First Chicago Investment Class A 301,407(3) * * * 233,810
Corporation Class B -- --
One First National Plaza
Chicago, IL 60670
SHARES BENEFICIALLY OWNED
AFTER THE STOCK OFFERING (1)
-----------------------------------------------------------------------
PERCENT OF TOTAL
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF PERCENT OF SHARES COMBINED VOTING
OWNER (2) BENEFICIAL OWNERSHIP CLASS OUTSTANDING POWER
- ------------------------------ -------------------- ------------- ----------------- ---------------
PARTIES TO VOTING AGREEMENT:
MCI Telecommunications 8,251,509(3) 18.3% 19.4% 24.5%
Corporation 1,275,791(3) 31.4%
1801 Pennsylvania Ave., N.W.
Washington, D.C. 20006
Ronald A. Duncan 791,945(3)(5)(18) 1.8% 2.5% 6.3%
459,972(3)(5)(18) 11.3%
Robert M. Walp 372,845(3)(6) * 1.4% 4.0%
303,457(3)(6) 7.5%
Tele-Communications, Inc. -- -- -- --
5619 DTC Parkway -- --
Englewood, CO 80111
Voting Prime Sellers:
Prime Cable Growth Partners, 5,938,856(3)(4) 13.2%(4) 12.1%(4) 6.9%(4)
L.P. and its affiliates (4) -- --
3000 One American Center
600 Congress Avenue
Austin, TX 78701
William Blair Venture Partners 1,237,262(3) 2.7% 2.5% 1.4%
III Limited Partnership -- --
222 West Adams Street
Chicago, IL 60606
Austin Ventures, L.P. 791,848(3) 1.8% 1.6% *
114 West 7th Street -- --
Suite 1300
Austin, TX 78701
Centennial Fund III, L.P. 742,357(3) 1.6% 1.5% *
1428 15th Street -- --
Denver, CO 80202
BancBoston Capital, Inc. 74,530(3) * * *
175 Federal Street, 10th Floor -- --
Boston, MA 02110
First Chicago Investment 67,597(3) * * *
Corporation -- --
One First National Plaza
Chicago, IL 60670
90
SHARES BENEFICIALLY OWNED
PRIOR TO THE STOCK OFFERING
-------------------------------------------------------------------- NUMBER OF
AMOUNT AND NATURE PERCENT OF TOTAL CLASS A
NAME AND ADDRESS OF BENEFICIAL TITLE OF OF BENEFICIAL PERCENT OF SHARES COMBINED VOTING SHARES
OWNER (2) CLASS OWNERSHIP CLASS OUTSTANDING POWER OFFERED
- ------------------------------ ---------- ----------------- ------------- ----------------- --------------- --------------
Madison Dearborn Partners V Class A 30,916(3) * * * 23,982
Three First National Plaza Class B -- --
Suite 1330
Chicago, IL 60602
Aggregate Voting Prime Sellers Class A 10,859,682 28.5% 25.7% 13.8% 2,000,298(20)
Class B -- --
AGGREGATE SHARES SUBJECT TO Class A 20,422,112(7) 53.5% 54.0% 56.3% 2,200,298(7)
VOTING AGREEMENT Class B 2,400,591(7) 59.0% 590,043(18)
Jack Kent Cooke Incorporated Class A 2,923,077 7.7% 6.9% 3.7% 2,923,077
Kent Farms Route 713 Class B -- --
Middleburg, VA 20117
Kearns-Tribune Corporation Class A 300,200 * 1.2% 3.2% --
400 Tribune Building Class B 225,000 5.5%
Salt Lake City, UT 84111
General Communication, Inc. Class A 2,001,566 5.2% 5.1% 4.4% 682,263
Employee Stock Purchase Plan Class B 145,147 3.6%
(8)
2550 Denali Street,
Suite 1000
Anchorage, AK 99503
William C. Behnke Class A 185,274(9) * * * 35,000(9)
Class B -- --
Donne F. Fisher (individually Class A 287,975(10) * 2.2% 8.6% --
and as Co-Personal Class B 648,491(10) 15.9%
Representative to the Estate
of Bob Magness)
Jeffery C. Garvey Class A 8,246(11) * * * --
Class B -- --
John W. Gerdelman Class A -- -- -- -- --
Class B -- --
William P. Glasgow Class A -- -- -- -- --
Class B -- --
G. Wilson Hughes Class A 341,670(12) * * * --
Class B 2,735(12) *
John M. Lowber Class A 271,762(13) * * * 32,557(13)
Class B 6,266(13) *
Donald Lynch Class A -- -- -- -- --
Class B -- --
Carter F. Page Class A 197,487(14) * * * --
Class B 25,246 *
Larry E. Romrell Class A -- -- * * --
Class B 328 *
James M. Schneider Class A -- -- -- -- --
Class B -- --
Dana L. Tindall Class A 153,905(15) * * * --
Class B 3,792(15) *
SHARES BENEFICIALLY OWNED
AFTER THE STOCK OFFERING (1)
-----------------------------------------------------------------------
PERCENT OF TOTAL
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF PERCENT OF SHARES COMBINED VOTING
OWNER (2) BENEFICIAL OWNERSHIP CLASS OUTSTANDING POWER
- ------------------------------ -------------------- ------------- ----------------- ---------------
Madison Dearborn Partners V 6,934(3) * * *
Three First National Plaza -- --
Suite 1330
Chicago, IL 60602
Aggregate Voting Prime Sellers 8,859,384(20) 19.6%(20) 18.0%(20) 10.3%(20)
-- --
AGGREGATE SHARES SUBJECT TO 18,001,771(7)(18) 39.9%(7) 40.7%(7) 44.6%(7)
VOTING AGREEMENT 2,030,591(7)(18) 49.9%
Jack Kent Cooke Incorporated -- -- -- --
Kent Farms Route 713 -- --
Middleburg, VA 20117
Kearns-Tribune Corporation 300,200 * 1.1% 3.0%
400 Tribune Building 225,000 5.5%
Salt Lake City, UT 84111
General Communication, Inc. 1,319,303 2.9% 3.0% 3.2%
Employee Stock Purchase Plan 145,147 3.6%
(8)
2550 Denali Street,
Suite 1000
Anchorage, AK 99503
William C. Behnke 150,274(9) * * *
-- --
Donne F. Fisher (individually 102,975(10)(18) * 1.9% 9.8%
and as Co-Personal 833,491(10)(18) 20.5%
Representative to the Estate
of Bob Magness)
Jeffery C. Garvey 8,246(11) * * *
-- --
John W. Gerdelman -- -- -- --
-- --
William P. Glasgow -- -- -- --
-- --
G. Wilson Hughes 341,670(12) * * *
2,735(12) *
John M. Lowber 239,205(13) * * *
6,266(13) *
Donald Lynch -- -- -- --
-- --
Carter F. Page 12,487(14)(18) * * 2.5%
210,246(18) 5.2%
Larry E. Romrell -- -- * *
328 *
James M. Schneider -- -- -- --
-- --
Dana L. Tindall 153,905(15) * * *
3,792(15) *
91
SHARES BENEFICIALLY OWNED
PRIOR TO THE STOCK OFFERING
-------------------------------------------------------------------- NUMBER OF
AMOUNT AND NATURE PERCENT OF TOTAL CLASS A
NAME AND ADDRESS OF BENEFICIAL TITLE OF OF BENEFICIAL PERCENT OF SHARES COMBINED VOTING SHARES
OWNER (2) CLASS OWNERSHIP CLASS OUTSTANDING POWER OFFERED
- ------------------------------ ---------- ----------------- ------------- ----------------- --------------- --------------
All Directors and Executive Class A 3,334,552(16) 8.5% 10.7% 20.5% 267,557
Officers As a Group (15 Class B 1,307,420(16) 32.1%
Persons)
Ameritas Life Insurance Class A 4,784 * * * 4,784
Corp. (19)
KLANS Associates (19) Class A 1,557 * * * 1,557
Pillsbury Master Retirement Class A 14,333 * * * 14,333
Trust (19)
Tribune Company Master Trust Class A 7,107 * * * 7,107
for Pension Plans (19)
K.D.F., a Massachusetts Class A 17,968 * * * 17,968
general partnership (19)
Fidelity Pension Trust (19) Class A 7,167 * * * 7,167
Commerce BancShares, Inc. (19) Class A 10,802 * * * 10,802
Robert G. Holman (19) Class A 144 * * * 144
Equitable Life Assurance Class A 9,561 * * * 9,561
Society of the United
States (19)
Donald Adams (19) Class A 107,226 * * * 60,000
Karen Evans (19) Class A 106,153 * * * 106,153
Samuel Evans (19) Class A 129,743 * * * 129,743
--------------
TOTAL SHARES OFFERED BY
SELLING SHAREHOLDERS: 6,800,000(21)
SHARES BENEFICIALLY OWNED
AFTER THE STOCK OFFERING (1)
-----------------------------------------------------------------------
PERCENT OF TOTAL
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF PERCENT OF SHARES COMBINED VOTING
OWNER (2) BENEFICIAL OWNERSHIP CLASS OUTSTANDING POWER
- ------------------------------ -------------------- ------------- ----------------- ---------------
All Directors and Executive 2,476,952(16)(18) 5.5% 8.7% 25.0%
Officers As a Group (15 1,897,463(16)(18) 46.6%
Persons)
Ameritas Life Insurance -- -- -- --
Corp. (19)
KLANS Associates (19) -- -- -- --
Pillsbury Master Retirement -- -- -- --
Trust (19)
Tribune Company Master Trust -- -- -- --
for Pension Plans (19)
K.D.F., a Massachusetts -- -- -- --
general partnership (19)
Fidelity Pension Trust (19) -- -- -- --
Commerce BancShares, Inc. (19) -- -- -- --
Robert G. Holman (19) -- -- -- --
Equitable Life Assurance -- -- -- --
Society of the United
States (19)
Donald Adams (19) 47,226 * * *
Karen Evans (19) -- -- -- --
Samuel Evans (19) -- -- -- --
TOTAL SHARES OFFERED BY
SELLING SHAREHOLDERS:
- ------------------------------
* Represents beneficial ownership of less than 1% of the corresponding class
of common stock.
(1) Based upon the sale of all shares offered in the Stock Offering assuming no
exercise of the Underwriters' over-allotment option in the Stock Offering.
(2) Beneficial ownership is determined in accordance with Rule 13d-3 of the
Exchange Act. Shares of Common Stock that a person has the right to acquire
within 60 days of June 30, 1997 are deemed to be beneficially owned by such
person and are included in the computation of the ownership and voting
percentages only of such person. Each person has sole voting and investment
power with respect to the shares indicated except as otherwise stated in the
footnotes to the table.
(3) Each of these persons is party to a Voting Agreement dated as of October
31, 1996 (the "Voting Agreement") and may be deemed to be the beneficial
owner of all of the 20,442,112 shares of Class A Common Stock (18,001,771
shares after the Stock Offering) and 2,400,591 shares of Class B Common
Stock (2,030,591 shares after the Stock Offering) that are subject to the
Voting Agreement. See "--Changes in Control." MCI and Centennial report
shared voting and investment power with respect to shares held by them that
are subject to the Voting Agreement. BancBoston and Madison Dearborn report
shared voting power with respect to shares held by them that are subject to
the Voting Agreement. Prime, Austin Ventures, William Blair and Messrs.
Duncan and Walp report shared voting power with respect to shares held by
them that are subject to the Voting Agreement and shares held by other
parties to the Voting Agreement. Prime also reports shared investment power
with respect to shares held by it.
(4) Represents the aggregate number of shares reported by the following group
members in a Schedule 13D filed with the Securities and Exchange Commission
on November 12, 1996: Prime Cable G.P., Inc., Prime Cable Growth Partners,
L.P., Prime Cable Limited Partnership, Prime II Management Group, Inc.,
Prime II Management, Inc., Prime II Management L.P., Prime Investors, L.P.,
Prime Venture I Holdings, L.P., Prime Venture I, Inc. and Prime Venture II,
L.P. Collectively, Prime Cable Growth Partners, L.P. and its affiliates have
granted to the Underwriters an option to purchase up to 2,070,000 additional
shares of Class A Common Stock solely to cover over-allotments, if any. If
the entire over-allotment option is exercised, the shares of Class A Common
Stock held by such Selling Shareholders will decrease to 3,868,856 (8.6% of
the then-outstanding
92
Class A Common Stock, representing 7.9% of the total shares outstanding and
4.5% of the combined voting power of the then-outstanding Common Stock).
(5) Includes 140,000 shares of Class A Common Stock which Mr. Duncan has the
right to acquire within 60 days of June 30, 1997 by the exercise of vested
stock options. Includes 95,683 shares of Class A Common Stock and 6,221
shares of Class B Common Stock allocated to Mr. Duncan under the Stock
Purchase Plan. Does not include 105,111 or 90,220 shares of Class A Common
Stock held by the Company in treasury pursuant to the First Duncan Agreement
and the Second Duncan Agreement, respectively. See "Management--Executive
Compensation" and "--Employment and Deferred Compensation Agreements." Does
not include 18,560 shares of Class A Common Stock or 8,242 shares of Class B
Common Stock held by the Amanda Miller Trust, with respect to which Mr.
Duncan has no voting or investment power. Does not include 5,760 shares of
Class A Common Stock or 27,020 shares of Class B Common Stock held by Dani
Bowman, Mr. Duncan's wife, of which Mr. Duncan disclaims beneficial
ownership.
(6) Includes 38,229 shares of Class A Common Stock and 2,408 shares of Class B
Common Stock allocated to Mr. Walp under the Stock Purchase Plan. Includes
200,000 shares of Class A Common Stock held by a charitable remainder unit
trust of which Mr. Walp is trustee, which shares will be sold in the Stock
Offering.
(7) Does not include shares allocated to Messrs. Duncan and Walp under the
Stock Purchase Plan or shares that Mr. Duncan has the right to acquire by
exercise of vested stock options. Prime Cable Growth Partners, L.P. and its
affiliates have collectively granted to the Underwriters an option to
purchase up to 2,070,000 additional shares of Class A Common Stock solely to
cover over-allotments, if any. If the entire over-allotment option is
exercised, the number of shares of Class A Common Stock held by the parties
to the Voting Agreement will decrease to 15,931,771 (35.2% of the
then-outstanding Class A Common Stock, representing 36.4% of the total
shares outstanding and 42.1% of the combined voting power of the
then-outstanding Common Stock).
(8) Voting and investment power with respect to shares held by the Stock
Purchase Plan are exercised by the plan committee comprised of Manuel
Hernandez, Valerie Longeski, Jimmy Sipes and Tami Graff, each of whom is an
employee of the Company.
(9) Includes 185,190 shares (150,190 shares after the Stock Offering) which Mr.
Behnke has the right to acquire within 60 days of June 30, 1997 by the
exercise of vested stock options. Mr. Behnke will exercise options to
purchase 35,000 shares of Class A Common Stock immediately prior to the
Stock Offering, which shares will be sold in the Stock Offering.
(10) Includes 76,668 shares of Class A Common Stock and 620,803 shares of Class
B Common Stock held by the Estate of Bob Magness, for which Mr. Fisher is
Co-Personal Representative.
(11) Mr. Garvey is a general partner of Austin Ventures, L.P. and disclaims
beneficial ownership of the shares held by that partnership and other
general partners of that partnership.
(12) Includes 310,000 shares of Class A Common Stock which Mr. Hughes has the
right to acquire within 60 days of June 30, 1997 by the exercise of vested
stock options. Includes 28,670 shares of Class A Common Stock and 2,735
shares of Class B Common Stock allocated to Mr. Hughes under the Stock
Purchase Plan. Does not include 7,437 shares of Class A Common Stock held in
treasury by the Company pursuant to the Hughes Agreement. See
"Management--Employment and Deferred Compensation Agreements."
(13) Includes 205,000 shares which Mr. Lowber has the right to acquire within 60
days of June 30, 1997 by the exercise of vested stock options. Includes
59,117 shares of Class A Common Stock (25,560 shares after the Stock
Offering) and 5,996 shares of Class B Common Stock allocated to Mr. Lowber
under the Stock Purchase Plan. The 32,557 shares to be sold in the Stock
Offering are beneficially owned by Mr. Lowber through participation in the
Employee Stock Purchase Plan.
(14) Does not include 8,550 shares of Class A Common Stock held in trust for the
benefit of Mr. Page's grandchildren of which Mr. Page disclaims beneficial
ownership. The trustee of the trust is Keith Page, Mr. Page's son.
(15) Includes 116,400 shares which Ms. Tindall has the right to acquire within
60 days of June 30, 1997 by the exercise of vested stock options. Includes
37,246 shares of Class A Common Stock and 3,792 shares of Class B Common
Stock allocated to Ms. Tindall under the Stock Purchase Plan.
(16) Includes 1,061,590 shares of Class A Common Stock (1,026,590 shares after
the Stock Offering) which such persons have the right to acquire within 60
days of June 30, 1997 through the exercise of vested stock options. Includes
281,583 shares of Class A Common Stock (249,026 shares after the Stock
Offering) and 24,300 shares of Class B Common Stock allocated to such
persons under the Stock Purchase Plan. Does not include ownership of parties
to the Voting Agreement other than Messrs. Duncan and Walp.
(17) Of the shares offered, 247,452 are offered by Prime Venture I Holdings,
L.P., 544,395 are offered by Prime Cable Growth Partners, L.P., 445,414
shares are offered by Prime Cable Limited Partnership and 247,452 shares are
offered by Prime Venture II, L.P. Prime Cable Growth Partners, L.P. and its
affiliates have collectively granted to the Underwriters an option to
purchase up to 2,070,000 additional shares of Class A Common Stock solely to
cover over-allotments, if any.
(18) Immediately prior to the Stock Offering, TCI will exchange its Class B
Common Stock for Class A Common Stock with existing holders as follows: Mr.
Duncan, 220,043 shares; Mr. Fisher, 185,000 shares; and Mr. Page, 185,000
shares. As a result, TCI will not be a party to the Voting Agreement after
the Stock Offering.
93
(19) Each of these shareholders acquired his or her shares of Class A Common
Stock in connection with the Company's acquisition of the Cable Systems. See
"The Company--Recent Acquisition of Cable Systems."
(20) Prime Cable Growth Partners, L.P. and its affiliates have collectively
granted to the Underwriters an option to purchase up to 2,070,000 additional
shares of Class A Common Stock solely to cover over-allotments, if any. If
the entire over-allotment option is exercised, the number of shares of Class
A Common Stock held by the Voting Prime Sellers will decrease to 6,789,384
(15.0% of the then-outstanding Class A Common Stock, representing 13.8% of
the total shares outstanding and 7.9% of the combined voting power of the
then-outstanding Common Stock).
(21) The 32,557 shares to be sold by Mr. Lowber are beneficially owned by him
through participation in the Employee Stock Purchase Plan and are also
included in the 682,263 shares to be sold by the Employee Stock Purchase
Plan.
CHANGES IN CONTROL
VOTING AGREEMENT. As of October 31, 1996, four principal shareholders,
including two officers and directors of the Company (Messrs. Duncan and Walp,
TCI and MCI) entered into the Voting Agreement with the Voting Prime Sellers
through their designated agent, Prime Management. The Voting Agreement replaced
a previous voting agreement among Messrs. Duncan and Walp, TCI and MCI. The
Voting Agreement provides, in part, that the voting stock of the parties will be
voted at shareholder meetings as a block in favor of two nominees proposed by
each of MCI, TCI and the Voting Prime Sellers, and one nominee proposed by each
of Messrs. Duncan and Walp. TCI expects to sell all of its shares of Common
Stock in the Stock Offering. If it does so, it will no longer be subject to the
Voting Agreement and each other party to the agreement will have the right to
withdraw from the Voting Agreement by giving written notice to the other
parties. The Company currently expects that TCI's nominees to the Board will
continue as directors of Parent and that the other parties will not terminate
their rights and obligations under the Voting Agreement. See "Management--Voting
Agreement."
PLEDGED ASSETS AND SECURITIES. The obligations of the Company under the
Credit Facility are secured by substantially all of the assets of the Company.
Upon a default by the Company under such agreements, the Company's lenders could
gain control of the assets of the Company, including the capital stock of the
Company's subsidiaries.
DESCRIPTION OF CREDIT FACILITIES AND NOTES
THE EXISTING CREDIT FACILITIES
The Company's Existing Credit Facilities consist of the $62.5 million
Telephony Credit Facility, under which $29.0 million was available for borrowing
as of March 31, 1997 and the $205.0 million Cable Credit Facility, under which
$39.1 million was available for borrowing as of March 31, 1997, in each case
subject to compliance with restrictive covenants. The Telephony Credit Facility
currently matures on July 24, 1997 but the Company has obtained a commitment on
the part of its lenders to extend the maturity to December 31, 1997 if the Debt
Offering is not consummated. The weighted average interest rate under the
Telephony Credit Facility was 7.33% at December 31, 1996. The Telephony Credit
Facility is guaranteed by the Company and is secured by all of the capital stock
of GCI Communication Corp., GCI Communication Services and GCI Leasing Company
(subject to the prior stock lien granted to National Bank of Alaska).
Obligations under the Cable Credit Facility mature on September 30, 2005.
The Cable Credit Facility provides for interest at the lender's prime rate plus
1.875%. At the Company's option, interest on all or a specified portion of the
indebtedness may be fixed for periods ranging from one to six months based on
Eurodollar rates plus 2.875%. As security for borrowings under the Cable Credit
Facility, the Company has pledged substantially all of the Cable Company assets
and stock of the Company's cable subsidiaries. The Company is also required to
pledge the stock of any other subsidiary that it may subsequently incorporate.
Among other restrictions, both the Telephony Credit Facility and the Cable
Credit Facility restrict the payment of cash dividends, limit the use of
borrowings, limit the creation of additional long-term
94
indebtedness and the issuance of additional equity and require the maintenance
of certain financial ratios. Throughout the year ending December 31, 1996 the
Company was in full compliance with all terms of the Telephony Credit Facility
and the Cable Credit Facility. See "Risk Factors--Substantial Leverage; Ability
to Service Debt," "Use of Proceeds," "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
THE CREDIT FACILITY
The Debt Offering is contingent on the Company refinancing its Existing
Credit Facilities with the Credit Facility, a new and enlarged single senior
credit agreement, on or before closing of the Debt Offering. If the Debt
Offering is not consummated, the Company will not immediately refinance its
Existing Credit Facilities. The Company has formed a new subsidiary, Holdings,
to be the obligor under the Credit Facility and expects that the Company will
guarantee the obligations of Holdings on a PARI PASSU basis with the Notes. The
Company expects that the aggregate principal amount available to be borrowed
under the Credit Facility will be up to $275.0 million (a portion of which is a
separate $50 million tranche which will cease to be available to the extent not
borrowed within one year). The Company anticipates that the Credit Facility will
be secured by substantially all of the assets of the Company and that it will
restrict the payment of cash dividends, limit borrowings, limit the incurrence
of additional long-term indebtedness and the issuance of additional equity,
require the maintenance of certain financial ratios, limit liens, investments,
changes of management and changes of control, transactions with affiliates,
mergers and acquisitions, asset sales and changes in business. Advances under
the Credit Facility will bear interest at either LIBOR plus a margin based on
the leverage ratio of Holdings and its restricted subsidiaries or at the greater
of the prime rate or the federal funds effective rate (as defined) plus a margin
based on the leverage ratio of Holdings and its restricted subsidiaries. The
Credit Facility is expected to mature on June 30, 2005, subject to required
reductions in the commitment amounts commencing September 30, 2000. The Company
would also be required to pay certain commitment and facility fees and to
reimburse certain expenses of the lenders. Holdings' obligations under the
Credit Facility are secured by a lien on substantially all assets of Holdings
and its restricted subsidiaries, including the stock of those subsidiaries,
subject to the existing lien securing the Existing Fiber Lease Facility (as
defined below). See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
THE NOTES
The Notes are expected to be senior unsecured obligations of GCI, Inc. in a
principal amount of $150 million, with interest at rates related to market rates
for similar debt. Interest on the Notes would be payable semiannually until the
Notes are paid at maturity in 2007, unless the principal amount of the Notes is
paid sooner in accordance with the indenture. Upon the occurrence of a change of
control, as defined, GCI, Inc. would be required to offer to purchase the Notes
at a price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest. The Notes would be redeemable at the option of GCI, Inc. at
specified redemption prices commencing in 2002. In addition, prior to a date to
be specified in 2000, the Issuer would be permitted to redeem up to 33 1/3% of
the Notes out of the net cash proceeds of one or more public equity offerings.
The terms of the Notes would contain limitations on the ability of GCI, Inc. and
its restricted subsidiaries to incur additional indebtedness, limitations on
investments, payment of dividends and other restricted payments and limitations
on liens, asset sales, mergers, transactions with affiliates, and operation of
unrestricted subsidiaries. The Notes also limit the ability of GCI, Inc. and its
restricted subsidiaries to enter into or suffer to exist specified restrictions
on the ability of GCI, Inc. to receive distribution from restricted
subsidiaries.
THE FIBER FACILITY
The Company also plans to incur up to $75 million in additional indebtedness
to finance the construction of an undersea fiber optic cable (the "Fiber
Facility"). Indebtedness incurred under the
95
Fiber Facility is expected to mature approximately ten years after the initial
borrowing under the Fiber Facility (subject to extension for an additional two
years if certain conditions are met) and to accrue interest at rates equal to
LIBOR plus 3.0% or the prime rate plus 1.75%. The borrower under the Fiber
Facility would be an indirect wholly-owned subsidiary of the Company and an
unrestricted subsidiary under the Credit Facility and the indenture governing
the Notes, and indebtedness under the Fiber Facility would be secured by
substantially all assets of that subsidiary. Other subsidiaries of the Company,
including Holdings and GCI, Inc., would enter into various agreements intended
to assure the ability of that subsidiary to meet its obligations under the Fiber
Facility, including leases of capacity, keep-well agreements, and a completion
guarantee.
THE EXISTING FIBER LEASE FACILITY
On December 31, 1992, Leasing Company entered into a $12,000,000 loan
agreement (the "Existing Fiber Lease Facility"), of which approximately
$9,000,000 of the proceeds were used to acquire capacity on the undersea fiber
optic cable linking Seward, Alaska and Pacific City, Oregon. Concurrently,
Leasing Company leased the capacity under a ten year all events, take or pay,
contract to MCI, who subleased the capacity back to the Company. The lease and
sublease agreements provide for equivalent terms of 10 years and identical
monthly payments of $200,000. The proceeds of the lease agreement with MCI were
pledged as primary security for the financing. The Existing Fiber Lease Facility
provides for monthly payments of $170,000 including principal and interest
through the earlier of January 1, 2003, or until repaid. The Existing Fiber
Lease Facility provides for interest at the prime rate plus one-quarter percent.
Additional collateral includes substantially all of the assets of Leasing
Company including the fiber capacity and a security interest in all of its
outstanding stock. MCI has a second position security interest in the assets of
Leasing Company.
DESCRIPTION OF CAPITAL STOCK
THE FOLLOWING SUMMARY DESCRIPTION OF THE CAPITAL STOCK OF THE COMPANY DOES
NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
PROVISIONS OF THE COMPANY'S RESTATED ARTICLES OF INCORPORATION AND ITS REVISED
BYLAWS, BOTH OF WHICH ARE INCORPORATED HEREIN BY REFERENCE.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The Company's authorized capital stock consists of 50.0 million shares of
Class A Common Stock, 10.0 million shares of Class B Common Stock, and 1.0
million shares of undesignated preferred stock, no par value. As of June 30,
1997, there were 38,157,109 shares of Class A Common Stock and 4,068,934 shares
of Class B Common Stock issued and outstanding. After giving effect to the Stock
Offering, there will be 45,157,109 shares of Class A Common Stock and 4,068,934
shares of Class B Common Stock issued and outstanding. As of the date of this
Prospectus, there are no shares of preferred stock designated or issued.
The number of authorized but unissued shares of Class A Common Stock as of
the date of this Prospectus, net of shares reserved for issuance upon exercise
of options and conversion of outstanding shares of Class B Common Stock, is
approximately 5.2 million. Upon the consummation of the Stock Offering, the
Company will be required to issue approximately 7.0 million shares of Class A
Common Stock. In order to make available for issuance an additional 1.8 million
shares of Class A Common Stock in addition to the 5.2 million shares currently
available, certain holders of options to acquire an aggregate of approximately
1.8 million shares of Class A Common Stock have agreed not to exercise those
options until such time as the Company's shareholders have approved an increase
in the amount of authorized but unissued Class A Common Stock. The foregoing
agreements require the Company to use its best efforts to obtain shareholder
approval to increase its authorized Class A Common Stock as promptly as
practicable, but not before its next annual meeting expected to be in October
1997.
96
COMMON STOCK
The Class A Common Stock and Class B Common Stock are identical in all
respects except that holders of Class A Common Stock are entitled to one vote
per share, while holders of Class B Common Stock are entitled to ten votes per
share. The Class A Common Stock and Class B Common Stock vote together as a
single class on all matters submitted to a vote of shareholders, including the
election of directors. Cumulative voting for directors is not permitted.
The rights of the holders of Common Stock discussed herein are subject to
any rights that the Board may hereafter confer on holders of preferred stock,
which rights may adversely affect the rights of holders of Common Stock. Holders
of Common Stock have no preemptive, subscription, redemption or conversion
rights, except that holders of each outstanding share of Class B Common Stock
may convert such shares into shares of Class A Common Stock on a one-for-one
basis.
All outstanding shares of Class A Common Stock and Class B Common Stock are,
and the shares of Class A Common Stock to be issued in the Stock Offering will
be, validly issued, fully paid and non-assessable.
PREFERRED STOCK
The Board may, without further action by the Company's shareholders, issue
shares of preferred stock in one or more series and may, at the time of
issuance, determine the rights, preferences, and limitations of each series.
Holders of preferred stock would normally be entitled to receive a preference
payment in the event of any liquidation, dissolution or winding-up of the
Company before any payment is made to the holders of the Common Stock. The
issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to the holders of Common Stock or could adversely
affect the rights and powers, including voting rights, of the holders of Common
Stock. In certain circumstances, the issuance of preferred stock could have the
effect of decreasing the market price of the Common Stock. Issuance of preferred
stock could also have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from acquiring, a majority of the
outstanding voting stock of the Company. The Company has no present plans to
issue any shares of preferred stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Restated Articles of Incorporation provide for the
indemnification to the full extent permitted by, and in the manner permissible
under, the laws of the State of Alaska and any other applicable laws, of any
person who is made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative, or investigative, other than an action
by or in the right of the Company, by reason of the fact that he or she is or
was a director, officer, employee or agent of the Company or is or was serving
at the request of the Company as an officer, director, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise. The
Restated Articles of Incorporation provide that these requirements are deemed to
be a contract between the Company and each director and officer who serves in
such capacity at any time while those requirements of the Articles are in
effect. The Company had not as of the date of this Prospectus entered into any
express agreement with its officers and directors setting forth these terms of
indemnification. In addition to providing indemnification for non-derivative
action that is similar to the indemnification in the Restated Articles, the
Company's revised Bylaws further provide for indemnification of any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the Company to procure a
judgment in its favor by reason of or arising from the fact that the person is
or was a director, officer, employee, or agent of the Company, or is or was
serving at the request of the Company as a director, officer, employee, or agent
of another enterprise.
The Bylaws provide that, unless otherwise ordered by a court,
indemnification will only be made by the Company upon a determination by (i) a
majority of the disinterested directors of the Board, (ii) a majority vote of
shareholders or (iii) independent legal counsel that such indemnification is
proper
97
because the person to be indemnified met the applicable standard of conduct. The
Bylaws also provide, in accordance with Alaska law, that indemnification will
not be made by the Company in respect of any claim, issue, or matter as to which
the person has been adjudged to be liable for negligence or misconduct in the
performance of the person's duty to the Company, except to the extent that the
court in which the action or suit was brought determines upon application that,
despite the adjudication of liability, in view of all circumstances of the case,
the person is fairly and reasonably entitled to indemnification for such
expenses that the court considers proper. The Bylaws also provide that to the
extent a director, officer, employee, or agent of the Company has been
successful in his or her defense of an action for which he or she is entitled to
indemnification, that person will be indemnified against expenses and attorney
fees actually and reasonably incurred in connection with the defense. The Bylaws
also provide that the Company may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee, or agent of the Company
or who is or was serving at the request of the Company as a director, officer,
employee or agent of another enterprise against any liability asserted against
that person and incurred by that person in any such capacity, or arising out of
that status, whether or not the Company would have the power to indemnify that
person against such liability under provisions of the Bylaws.
POTENTIAL ANTI-TAKEOVER EFFECT OF THE RESTATED ARTICLES OF INCORPORATION AND
BYLAWS OF THE COMPANY
The Restated Articles of Incorporation and revised Bylaws of the Company
contain provisions that could have an anti-takeover effect. The provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the Board and in the policies formulated by the Board. These
provisions also are intended to help ensure that the Board, if confronted by an
unsolicited proposal from a third party which has acquired a block of stock of
the Company, will have sufficient time to review the proposal and appropriate
alternatives to the proposal and to act in what it believes to be the best
interests of the shareholders. The Board of Directors has no current plans to
formulate or effect additional measures that could have an anti-takeover effect.
The Restated Articles of Incorporation provide for a board of directors
divided into three classes of directors serving staggered three-year terms. The
classification of directors has the effect of making it more difficult for
shareholders to change the composition of the Board in a relatively short period
of time. At least two annual meetings of shareholders, instead of one, generally
will be required to effect a change in a majority of the Board. Such a delay may
help ensure that the Board and the shareholders, if confronted with an
unsolicited proposal by a shareholder attempting to force a stock repurchase at
a premium above market, a proxy contest or an extraordinary corporate
transaction, will have sufficient time to review the proposal and appropriate
alternatives to the proposal and to act in what it believes to be in the best
interests of the shareholders.
The overall effect of these provisions, as well as the ability of the Board
to issue preferred stock, may be to render more difficult the accomplishment of
mergers or other takeover or change in control attempts. To the extent that this
ability has this effect, removal of the Company's incumbent Board and management
may be rendered more difficult. Further, this may have an adverse effect on the
ability of shareholders of the Company to participate in a tender or exchange
offer for the Common Stock and in so doing diminish the market value of the
Common Stock. See "Risk Factors--Concentration of Stock Ownership" and
"--Anti-Takeover Considerations."
TRANSFER AGENT
The transfer agent and registrar for the Class A Common Stock and the Class
B Common Stock is ChaseMellon Shareholder Services, with offices in San
Francisco, California.
98
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of a substantial amount of Common Stock, or the perception that
such sales may occur, could adversely affect the market price of the Common
Stock. Several of the Company's principal shareholders hold a significant
portion of Common Stock, and a decision by one or more of these shareholders to
sell their shares could adversely affect the market price of the Common Stock.
Upon completion of the Offerings, the Company will have approximately
45,157,109 shares of Class A Common Stock and 4,068,934 shares of Class B Common
Stock outstanding. Upon completion of the Stock Offering, all of the Company's
outstanding Common Stock will be freely tradeable under the Securities Act of
1933 (the "Securities Act"), except shares of Common Stock held by affiliates of
the Company and shares of Common Stock which are "restricted securities" within
the meaning of Rule 144 promulgated under the Securities Act ("Rule 144"), which
the Company estimates to be as many as 19,338,819 shares, and shares of Common
Stock held by former affiliates of the Cable Systems within the meaning of Rule
145 promulgated under the Securities Act ("Rule 145") which could be as many as
10,770,879 shares (or 8,700,879 shares if the Underwriters' over-allotment
option is exercised in full). The Rule 145 restrictions that are applicable to
shares of Class A Common Stock received by affiliates of the owners of the Cable
Systems in connection with the Company's acquisition of the Cable Systems expire
on October 31, 1997. Shares of Common Stock acquired directly or indirectly from
the issuer or an affiliate of the issuer in transactions not involving any
public offering are "restricted securities" within the meaning of Rule 144.
Holders of restricted shares generally will be entitled to sell their shares in
the public securities market without registration under the Securities Act to
the extent permitted by Rule 144 promulgated under the Securities Act or
pursuant to an exemption under the Securities Act. In general, under Rule 144 as
currently in effect, any holder, including an affiliate of the Company, of
restricted securities as to which at least one year has elapsed since the later
of the date of the acquisition of such restricted securities from the Company or
from an affiliate is entitled to sell, within any three-month period a number of
shares that does not exceed the greater of one percent of the then outstanding
shares of Common Stock or the average weekly trading volume in the Common Stock
during the four calendar weeks preceding such sale. Shares of Common Stock held
by affiliates which are not restricted securities are also subject to these
restrictions on the amount of securities that may be sold. Sales under Rule 144
also are subject to certain manner-of-sale provisions, notice requirements and
the availability of current public information about the Company. A person who
is not an affiliate of the Company at any time during the three months preceding
a sale, and who has beneficially owned restricted securities for at least two
years, is entitled to sell such shares under Rule 144(k) without regard to the
limitations described above. Although shares of Common Stock held by MCI, the
Prime Sellers and the shareholders of Alaska CableVision, Inc. may be subject to
restrictions on resale under Rule 144 or Rule 145, these parties have been
granted registration rights with respect to such shares which, if exercised by
them, would permit them to sell those shares free of the restrictions imposed by
Rule 144 and Rule 145. See "Principal and Selling Shareholders" and "Certain
Transactions--Registration Rights Agreements."
The Company and each of its directors and executive officers and certain
selling shareholders have entered into "lock-up" agreements with the
Underwriters, providing that, subject to certain exceptions, they will not, for
a period of 180 days from the date of this Prospectus, without the prior written
consent of Salomon Brothers Inc, offer, sell or contract to sell, or otherwise
dispose of, directly or indirectly, or announce an offering of, any shares of
Class A Common Stock or any securities convertible into, or exchangeable for,
shares of Class A Common Stock, provided that the Company may issue and sell
shares of Class A Common Stock pursuant to the Stock Purchase Plan. See
"Underwriting."
As of June 30, 1997, there were outstanding options to purchase 2,593,790
shares of Class A Common Stock, 2,408,600 of which were granted under the Stock
Option Plan. All of the 2,408,600 shares of Class A Common Stock issuable upon
the exercise of options granted under the Stock Option Plan have been registered
by the Company under the Securities Act on Form S-8.
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UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
among the Company, the Selling Shareholders and the Underwriters (the
"Underwriting Agreement"), the Company and the Selling Shareholders have agreed
to issue and sell to the Underwriters named below (the "Underwriters"), for whom
Salomon Brothers Inc, Donaldson, Lufkin & Jenrette Securities Corporation and
Schroder & Co. Inc. are acting as representatives (the "Representatives"), and
each of the Underwriters has severally agreed to purchase from the Company and
the Selling Shareholders the aggregate number of shares of Class A Common Stock
set forth opposite its name below:
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------------------------- -------------
Salomon Brothers Inc ..............................................................................
Donaldson, Lufkin & Jenrette Securities Corporation................................................
Schroder & Co. Inc.................................................................................
-------------
13,800,000
-------------
-------------
In the Underwriting Agreement, the Underwriters have severally agreed,
subject to the terms and conditions set forth therein, to purchase all of the
shares of Class A Common Stock offered hereby (other than those subject to the
over-allotment option described below) if any such shares are purchased. In the
event of a default by any Underwriter, the Underwriting Agreement provides that,
in certain circumstances, the purchase commitments of the non-defaulting
Underwriters may be increased or the Underwriting Agreement may be terminated.
The Company has been advised by the Representatives that the several
Underwriters propose initially to offer the shares of Class A Common Stock to
the public at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. At the
public offering, the public offering price and such concessions may be changed.
Certain Selling Shareholders have granted the Underwriters an option,
exercisable within 30 days of the date of this Prospectus, to purchase up to
2,070,000 additional shares of Class A Common Stock to cover over-allotments, if
any, at the price to the public set forth on the cover page of this Prospectus.
To the extent that the Underwriters exercise such option, in whole or in part,
each Underwriter will have a firm commitment, subject to certain conditions, to
purchase the same proportion of the option shares as the number of shares of
Class A Common Stock to be purchased by such Underwriter in the above table
bears to the total number of shares of Class A Common Stock offered by the
Underwriters hereby.
It is expected that delivery of the Class A Common Stock will be made
against payment therefor on or about the fifth business day following the date
of this Prospectus. Under Rule 15c6-1 of the U.S. Securities and Exchange
Commission under the Exchange Act, trades in the secondary market generally are
required to settle in three business days, unless the parties to any such trade
expressly agree otherwise. Accordingly, purchasers who wish to trade Class A
Common Stock on the date hereof or the next succeeding business day will be
required, by virtue of the fact that the Class A Common Stock
100
initially will settle in T+5, to specify an alternate settlement cycle at the
time of any such trade to prevent a failed settlement. Purchasers of Class A
Common Stock who wish to trade Class A Common Stock on the date hereof or the
next succeeding business day should consult their own advisor.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act, and contribute to payments the Underwriters may be required
to make in respect thereof.
The Company, its directors and officers, the Selling Shareholders and
certain other shareholders have each agreed with the Underwriters that they will
not offer, sell or contract to sell, or otherwise dispose of, directly or
indirectly, or announce an offering of, any shares of Common Stock or any
securities convertible into, or exchangeable for, shares of Common Stock for a
period of 180 days from the date of this Prospectus, without the prior written
consent of Salomon Brothers Inc.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain, or otherwise affect the market price of the Class A Common
Stock. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M under the Securities Exchange Act of
1934, as amended, pursuant to which such persons may bid for or purchase Class A
Common Stock for the purposes of stabilizing their market price. The
Underwriters also may create a short position for their respective accounts by
selling more Class A Common Stock in connection with this Offering than they are
committed to purchase from the Company, and in such case may purchase shares of
Class A Common Stock in the open market following completion of this Offering to
cover all or a portion of such short position. In addition, Salomon Brothers
Inc, on behalf of the Underwriters, may impose "penalty bids" under contractual
arrangements between the Underwriters whereby it may reclaim from an Underwriter
(or dealer participating in this Offering) for the account of the Underwriters,
the selling concession with respect to Class A Common Stock that is distributed
in this Offering but subsequently purchased for the account of the Underwriters
in the open market. Any of the transactions described in this paragraph may
result in the maintenance of the price of the shares of Class A Common Stock at
a level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph are required, and, if they are
undertaken, they may be discontinued at any time.
LEGAL MATTERS
The validity of the Class A Common Stock and certain other legal matters in
connection with the Class A Common Stock offered hereby are being passed upon
for the Company by Wohlforth, Argetsinger, Johnson & Brecht, a Professional
Corporation, Anchorage, Alaska, and by Sherman & Howard L.L.C., Denver,
Colorado, special counsels for the Company. Paul, Hastings, Janofsky & Walker
LLP, New York, New York has acted as legal counsel to the Underwriters in
connection with the Offerings.
EXPERTS
The consolidated financial statements and schedule of the Company as of
December 31, 1996 and 1995, and for each of the years in the three-year period
ended December 31, 1996, have been included in this Prospectus and in the
Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, which, as
to the year ended December 31, 1996, are based in part on the report of Ernst &
Young LLP, independent auditors, (whose report covers the consolidated financial
statements of GCI Cable, Inc, (a subsidiary of the Company) and its
subsidiaries, as of December 31, 1996 and for the period from inception (April
12, 1996) to December 31, 1996, which are not included separately herein), given
upon the authority of said firms as experts in accounting and auditing.
The financial statements of Prime Cable of Alaska, L.P. at December 31, 1995
and 1994 and for each of the two years in the period ended December 31, 1995,
and the combined financial statements of the
101
Alaskan Cable Network at December 31, 1995 and 1994 and for each of the three
years in the period ended December 31, 1995, appearing in this Prospectus and
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
The audited financial statements of Alaska Cablevision at December 31, 1995
and 1994, and for each of the three years in the period ended December 31, 1995,
appearing in this Prospectus and Registration Statement have been audited by
Carl & Carlsen, independent auditors, as set forth in their report appearing
elsewhere herein and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended ("Exchange Act") and in accordance therewith is
required to file reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549 and at the following Regional Offices of the
Commission: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549. The Commission maintains a Web site that contains reports, proxy and
information statements and other information filed electronically by the
Company, and can be found at http:\\www.sec.gov.
The Class A Common Stock is designated a national market system stock on
Nasdaq. The Class B Common Stock is traded in the over-the-counter market.
Reports, proxy statements and other information concerning the Company can be
inspected at the offices of Nasdaq located at 1735 K Street, N.W., Washington,
D.C. 20006.
The Company has filed a Registration Statement with the Commission with
respect to the Class A Common Stock offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not include all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, as permitted by the rules and regulations of the Commission.
For further information with respect to the Company and the Class A Common
Stock, reference is made to the Registration Statement and the exhibits and
schedules filed as a part thereof. The Registration Statement, including any
amendments, schedules and exhibits filed or incorporated by reference as a part
of it, is available for inspection and copying as set forth above. Statements
contained in this Prospectus about the contents of any contract or other
document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
its entirety by such reference.
INCORPORATION BY REFERENCE
The following documents are specifically incorporated by reference in this
Prospectus:
1. The Company's Annual Report on Form 10-K for the year ended December 31,
1996 (Commission File No. 0-15279), as amended by a Form 10-K/A filed April 30,
1997;
2. The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997; and
3. All other reports filed pursuant to Section 13(a) or 15(d) of the
Exchange Act since December 31, 1996.
102
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14, or 15(d) of the Exchange Act, prior to the termination of this
Offering shall be deemed to be incorporated by reference into this Prospectus.
Any statement contained in a document incorporated or deemed to be
incorporated by reference in this Prospectus shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained in it (or in any other subsequently filed document that is or is
deemed to be incorporated by reference) modifies or supersedes such previous
statement. Any statement so modified or superseded shall not be deemed to
constitute a part of this Prospectus except as so modified or superseded.
All information appearing in this Prospectus is qualified in its entirety by
the information and financial statements (including notes thereto) appearing in
the documents incorporated herein by reference.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT PRESENTED
IN THIS REGISTRATION STATEMENT OR DELIVERED WITH IT. THESE DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE IN THIS REGISTRATION STATEMENT) ARE AVAILABLE WITHOUT CHARGE, UPON
WRITTEN OR ORAL REQUEST BY ANY PERSON TO WHOM THIS PROSPECTUS HAS BEEN
DELIVERED, FROM INVESTOR RELATIONS DEPARTMENT, GENERAL COMMUNICATION, INC., 2550
DENALI STREET, SUITE 1000, ANCHORAGE, ALASKA 99503-2781 (TELEPHONE NO.
907/265-5628).
GLOSSARY
APUC -- The Alaska Public Utilities Commission.
ATU -- The Anchorage Telephone Utility, a public utility and local telephone
exchange owned by the Municipality of Anchorage and the largest
municipally-owned LEC in the country.
AVERAGE MONTHLY REVENUE PER EQUIVALENT BASIC SUBSCRIBER -- Total subscriber
revenues for the year from the sale of cable television services divided by
average total equivalent basic subscribers divided by 12.
BASIC PENETRATION -- Equivalent basic subscribers divided by homes passed.
BST -- Basic tier of cable services.
CAP (COMPETITIVE ACCESS PROVIDER) -- A company that provides its customers
with an alternative to the local exchange company for local transport of private
line and special access telecommunications services.
CENTRAL OFFICES -- The switching centers or central switching facilities of
the local exchange companies.
COLOCATION -- The ability of a CAP such as the Company to connect its
network to the LECs central offices. Physical colocation occurs when a CAP
places its network connection equipment inside the local exchange company's
central offices. Virtual colocation is an alternative to physical colocation
pursuant to which the LEC permits a CAP to connect its network to the LEC's
central offices on comparable terms, even though the CAP's network connection
equipment is not physically located inside the central offices.
CPST -- Cable programming service tier.
DAMA -- Demand assigned multiple access.
DBS -- Direct broadcast satellite television.
103
DEDICATED -- Telecommunications lines reserved for use by particular
customers.
DIALING PARITY -- The ability of a competing local or toll service provider
to provide telecommunications services in such a manner that customers have the
ability to route automatically, without the use of any access code, their
telecommunications to the service provider of the customer's designation and the
ability of customers to dial the same number of digits on a competitor's network
as on the LEC's network.
DIGITAL -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies employ a
sequence of these pulses to represent information as opposed to the continuously
viable analog signal. The precise digital numbers minimize distortion in the
case of audio transmission.
DS3 --Digital signal level 3, a 44.736 megabits per second digital
transmission facility.
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 GAAP 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.
EQUIVALENT BASIC SUBSCRIBERS -- A number representing the sum of (a)
residential customers receiving at least the entry level of cable television
service offered by a system ("Basic Service") at the system's standard
residential rate for Basic Service plus (b) for customers receiving Basic
Service under bulk billing arrangements at a rate less than the system's
standard residential rate for Basic Service (including multi-unit residential
complexes, hotels, motels and hospitals), the number derived by dividing the
monthly amount billed to all such subscribers for Basic Service by the monthly
standard residential rate for Basic Service.
GTEOC -- GTE Operating Companies.
HOMES PASSED -- Dwellings and commercial establishments that are or can be
connected to the distribution system of a cable system without further extension
of the transmission lines of that cable system.
HSD -- Home satellite dish earth stations.
INTERCONNECTION -- Interconnection of facilities between or among local
exchange carriers, including potential physical colocation of one carrier's
equipment in the other carrier's premises to facilitate such interconnection.
INTERLATA -- Telecommunications services originating in a LATA and
terminating outside of that LATA.
INTRALATA -- Telecommunications services originating and terminating within
the same LATA.
ISDN -- Integrated services digital network.
LATA (LOCAL ACCESS AND TRANSPORT AREA) -- A geographic area composed of
contiguous local exchanges, usually but not always within a single state.
LFA -- Local franchising authority.
LOCAL EXCHANGE -- A geographic area determined by the appropriate state
regulatory authority in which calls generally are transmitted without toll
charges to the calling or called party.
LEC (LOCAL EXCHANGE CARRIER) -- A company providing local telephone
services.
104
LONG DISTANCE CARRIERS (INTEREXCHANGE CARRIERS) -- Long distance carriers
provide services between local exchanges on an interstate or intrastate basis. A
long distance carrier may offer services over its own or another carrier's
facilities.
MAN -- Metropolitan area network.
MMDS -- Multichannel, multipoint distribution service.
MTS -- Message toll service.
NPT -- New product tier.
OVS -- Open video system.
PACS -- Personal access communications system.
PCS (PERSONAL COMMUNICATION SERVICE) -- A telephone service with respect to
which a telephone number or numbers are assigned to a person rather than to a
fixed location thereby allowing that person to receive and make calls from any
location within the area serviced by the personal communication service.
PEG -- Public access, educational and government.
POP -- The estimates of the 1995 population of a Metropolitan Statistics
Area for which the FCC licensed communications systems or a Rural Service Area
for which the FCC licensed communications systems, as derived from the 1995
population estimates prepared by Strategic Mapping, Inc.
PREMIUM PENETRATION -- Premium service units divided by equivalent basic
subscribers.
PREMIUM SERVICE UNITS -- Premium programming services selected by and sold
to subscribers on an la carte or packaged basis for monthly fees in addition to
the fee for Basic Service.
SMATV -- Satellite master antenna television.
SS7 -- Signaling system number 7.
SSP -- Service switching point, an SS7 network element.
SWITCH -- A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
SWITCHED ACCESS TRANSPORT SERVICES -- Transportation of switched traffic
along dedicated lines between the local exchange company central offices and
long distance carrier pop.
SWITCHED TRAFFIC -- Telecommunications traffic along the public switched
network. This traffic is generally switched at the LEC's central offices.
TRS -- Telephone relay services.
UNBUNDLED ACCESS -- Access to unbundled elements of a telecommunications
services provider's network, including network facilities, equipment, features,
functions and capabilities, at any technically feasible point within such
network.
VSAT --Very small aperture terminal.
105
INDEX TO FINANCIAL STATEMENTS
PAGE
---------
COMPANY
Independent Auditors' Report--KPMG Peat Marwick LLP...................................................... F-3
Report of Independent Auditors--Ernst & Young LLP........................................................ F-5
Consolidated Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997 (unaudited).............. F-6
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and the
three-month periods ended March 31, 1996 and 1997 (unaudited).......................................... F-8
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996 and
the three-month periods ended March 31, 1996 and 1997 (unaudited)...................................... F-9
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and for the
three-month periods ended March 31, 1996 and 1997 (unaudited).......................................... F-10
Notes to Consolidated Financial Statements............................................................... F-11
PRIME CABLE
Report of Independent Auditors--Ernst & Young LLP........................................................ F-37
Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996 (unaudited) and June 30, 1996
(unaudited)............................................................................................ F-38
Statements of Operations for the years ended December 31, 1994 and 1995 and for the nine-month periods
ended September 30, 1995 and 1996 (unaudited) and for the six-month periods ended June 30, 1995 and
1996 (unaudited)....................................................................................... F-39
Statements of Changes in Partners' Capital Deficiency for the years ended December 31, 1994 and 1995..... F-40
Statements of Cash Flows for the years ended December 31, 1994 and 1995 and for the nine-month periods
ended September 30, 1995 and 1996 (unaudited) and for the six-month periods ended June 30, 1995 and
1996 (unaudited)....................................................................................... F-41
Notes to Financial Statements............................................................................ F-42
MD&A Discussion regarding Prime Cable.................................................................... F-51
ALASKAN CABLE NETWORK (Combined for Alaskan Cable/Fairbanks, Alaskan Cable/Juneau, and Alaskan
Cable/Ketchikan)
Report of Independent Auditors--Ernst & Young LLP........................................................ F-54
Combined Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996 (unaudited)................... F-55
Combined Statements of Income for the years ended December 31, 1993, 1994 and 1995 and for the six-month
periods ended June 30, 1995 and 1996 (unaudited)....................................................... F-56
Combined Statements of Shareholders' Equity for the years ended December 31, 1993, 1994 and 1995......... F-57
Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and for the
six-month periods ended June 30, 1995 and 1996 (unaudited)............................................. F-58
Notes to Combined Financial Statements................................................................... F-59
MD&A Discussion regarding Alaskan Cable Network.......................................................... F-67
F-1
PAGE
---------
ALASKA CABLEVISION
Report of Independent Auditors--Carl & Carlsen........................................................... F-70
Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996 (unaudited)............................ F-71
Statements of Income for the years ended December 31, 1993, 1994 and 1995 and for the six-month periods
ended June 30, 1995 and 1996 (unaudited)............................................................... F-72
Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995.................. F-73
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and for the six-month
periods ended June 30, 1995 and 1996 (unaudited)....................................................... F-74
Notes to Financial Statements............................................................................ F-75
MD&A Discussion regarding Alaska Cablevision............................................................. F-78
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS OF THE COMPANY........................................ F-81
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
General Communication, Inc.:
We have audited the accompanying consolidated balance sheets of General
Communication, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of GCI Cable, Inc., a wholly owned subsidiary, which 1996 statements
reflect total assets of $310 million and total revenues of $9.5 million of the
related consolidated totals. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for GCI Cable, Inc., is based solely on the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of General Communication, Inc. and
Subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
Anchorage, Alaska
February 21, 1997
F-3
(This page has been left blank intentionally.)
F-4
REPORT OF INDEPENDENT AUDITORS
Board of Directors
GCI Cable, Inc. and Subsidiaries
We have audited the consolidated balance sheet of GCI Cable, Inc. and
Subsidiaries as of December 31, 1996 and the related consolidated statements of
operations, shareholder's equity and cash flows for the period from inception
(April 12, 1996) to December 31, 1996 (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of GCI Cable, Inc.
and Subsidiaries at December 31, 1996, and the consolidated results of their
operations and their cash flows for the period from inception (April 12, 1996)
to December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Austin, Texas
February 14, 1997
F-5
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
1997 1996 1995
----------- ----------- ---------
(AMOUNTS IN THOUSANDS)
Current assets:
Cash and cash equivalents............................................. $ 4,730 13,349 4,017
----------- ----------- ---------
Receivables:
Trade............................................................... 27,815 27,953 21,737
Other............................................................... 1,803 1,412 253
----------- ----------- ---------
29,618 29,365 21,990
Less allowance for doubtful receivables............................... 776 597 295
----------- ----------- ---------
Net receivables..................................................... 28,842 28,768 21,695
----------- ----------- ---------
Prepaid and other current assets...................................... 2,288 2,236 1,566
Deferred income taxes, net (note 7)................................... 871 835 746
Inventories........................................................... 1,666 1,589 991
Notes receivable (note 4)............................................. 330 325 167
----------- ----------- ---------
Total current assets................................................ 38,727 47,102 29,182
----------- ----------- ---------
Property and equipment, at cost (notes 6, 9, 10 and 11)
Land and buildings.................................................... 692 692 73
Telephony distribution systems........................................ 90,256 81,414 67,434
Cable television distribution systems................................. 53,250 52,284 0
Transportation equipment.............................................. 1,072 1,064 0
Support equipment..................................................... 20,559 19,994 11,610
Property and equipment under capital leases........................... 2,030 2,030 2,030
----------- ----------- ---------
167,859 157,478 81,147
Less amortization and accumulated depreciation........................ 45,770 41,497 33,789
----------- ----------- ---------
Net property and equipment in service............................... 122,089 115,981 47,358
Construction in progress.............................................. 19,901 20,770 3,096
----------- ----------- ---------
Net property and equipment.......................................... 141,990 136,751 50,454
Notes receivable (note 4)............................................... 1,344 1,016 904
Intangible assets, net of amortization (notes 2 and 5).................. 249,243 250,920 3,125
Transponder deposit (note 13)........................................... 9,100 9,100 0
Deferred loan costs, net of amortization................................ 759 900 110
Other assets, at cost, net of amortization.............................. 1,715 1,546 990
----------- ----------- ---------
Total assets........................................................ $ 442,878 447,335 84,765
----------- ----------- ---------
----------- ----------- ---------
See accompanying notes to consolidated financial statements.
F-6
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
MARCH 31, DECEMBER 31,
1997 1996 1995
----------- ----------- ---------
(AMOUNTS IN THOUSANDS)
Current liabilities:
Current maturities of long-term debt (note 6)......................... $ 31,938 31,969 1,689
Current maturities of obligations under capital leases (note 11)...... 74 71 282
Accounts payable...................................................... 22,320 23,677 16,861
Accrued payroll and payroll related obligations....................... 3,679 3,830 2,108
Accrued liabilities................................................... 4,269 4,173 1,134
Accrued income taxes (note 7)......................................... 0 0 547
Accrued interest...................................................... 351 2,708 132
Subscriber deposits and deferred revenues............................. 3,444 3,449 1,317
----------- ----------- ---------
Total current liabilities........................................... 66,075 69,877 24,070
Long-term debt, excluding current maturities (note 6)................. 180,873 191,273 8,291
Obligations under capital leases, excluding current maturities (note
11)................................................................. 0 0 26
Obligations under capital leases due to related parties, excluding
current maturities (notes 10 and 11)................................ 655 675 739
Deferred income taxes, net (note 7)................................... 34,020 33,720 7,004
Other liabilities..................................................... 2,160 2,236 1,619
----------- ----------- ---------
Total liabilities................................................... 283,783 297,781 41,749
----------- ----------- ---------
Stockholders' equity (notes 2, 3, 6, 7 and 8):
Common stock (no par):
Class A. Authorized 50,000,000 shares; issued and outstanding
36,586,973 and 19,680,199 shares at December 31, 1996 and 1995,
respectively........................................................ 123,498 113,421 13,912
Class B. Authorized 10,000,000 shares; issued and outstanding
4,074,028 and 4,175,434 shares at December 31, 1996 and 1995,
respectively; convertible on a share-per-share basis into Class A
common stock........................................................ 3,432 3,432 3,432
Less cost of 199,081 and 122,611 Class A common shares held in
treasury at December 31, 1996 and 1995, respectively................ (1,039) (1,010) (389)
Paid-in capital......................................................... 4,247 4,229 4,041
Retained earnings....................................................... 28,957 29,482 22,020
----------- ----------- ---------
Total stockholders' equity.......................................... 159,095 149,554 43,016
----------- ----------- ---------
Commitments and contingencies (notes 11 and 13).........................
Total liabilities and stockholders' equity........................ $ 442,878 447,335 84,765
----------- ----------- ---------
----------- ----------- ---------
See accompanying notes to consolidated financial statements.
F-7
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED YEARS ENDED
-------------------- -------------------------------------
MARCH 31, DECEMBER 31,
1997 1996 1996 1995 1994
--------- --------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenues (notes 9 and 10):
Telecommunication services....................... $ 39,225 37,969 155,419 129,279 116,981
Cable services................................... 13,656 -- 9,475 0 0
--------- --------- ----------- ----------- -----------
Total revenues................................. 52,881 37,969 164,894 129,279 116,981
Cost of sales and services......................... 27,168 21,302 92,664 72,091 63,877
Operating, selling, general and administrative
expenses......................................... 16,301 10,833 46,412 37,691 33,468
Depreciation and amortization...................... 6,120 1,887 9,409 5,993 6,639
--------- --------- ----------- ----------- -----------
Operating income (note 9)...................... 3,292 3,947 16,409 13,504 12,997
Interest expense, net (notes 3 and 6).............. 3,949 260 3,719 903 1,316
--------- --------- ----------- ----------- -----------
Net earnings before income taxes............... (657) 3,687 12,690 12,601 11,681
Income tax expense (notes 3 and 7)................. (132) 1,550 5,228 5,099 4,547
--------- --------- ----------- ----------- -----------
Net earnings................................... $ (525) 2,137 7,462 7,502 7,134
--------- --------- ----------- ----------- -----------
--------- --------- ----------- ----------- -----------
Net earnings per common share.................. $ (0.01) 0.09 0.27 0.31 0.30
--------- --------- ----------- ----------- -----------
--------- --------- ----------- ----------- -----------
Weighted average number of shares of common stock
equivalents outstanding.......................... 43,167 24,854 27,668 24,426 24,083
--------- --------- ----------- ----------- -----------
--------- --------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements.
F-8
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SHARES OF CLASS A
COMMON STOCK CLASS A CLASS B SHARES
------------------------ COMMON COMMON HELD IN
(AMOUNTS IN THOUSANDS) CLASS A CLASS B STOCK STOCK TREASURY
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1993................................. 19,001 4,114 $ 13,470 3,432 (328)
Net earnings.................................................. -- -- -- -- --
Class B shares converted to Class A........................... 9 (9) -- -- --
Tax effect of excess stock compensation expense for tax
purposes over amounts recognized for financial reporting
purposes.................................................... -- -- -- -- --
Shares issued under stock option plan......................... 72 -- 96 -- --
Shares issued under warrant agreement, net.................... 254 -- 185 -- --
Shares issued and issuable under officer stock option
agreements.................................................. 281 74 79 -- --
----------- ----- ----------- ----- -----------
Balances at December 31, 1994................................. 19,617 4,179 13,830 3,432 (328)
Net earnings.................................................. -- -- -- -- --
Class B shares converted to Class A........................... 3 (3) -- -- --
Tax effect of excess stock compensation expense for tax
purposes over amounts recognized for financial reporting
purposes.................................................... -- -- -- -- --
Shares purchased and held in Treasury......................... -- -- -- -- (61)
Shares issued under stock option plan......................... 40 -- 82 -- --
Shares issued and issuable under officer stock option
agreements.................................................. 20 -- -- -- --
----------- ----- ----------- ----- -----------
Balances at December 31, 1995................................. 19,680 4,176 13,912 3,432 (389)
Net earnings.................................................. -- -- -- -- --
Tax effect of excess stock compensation expense for tax
purposes over amounts recognized for financial reporting
purposes.................................................... -- -- -- -- --
Shares issued under stock option plan......................... 1 -- 1 -- --
Shares issued and issuable under officer stock option
agreements.................................................. -- -- -- -- --
----------- ----- ----------- ----- -----------
Balances at March 31, 1996 (unaudited)........................ 19,681 4,176 13,913 3,432 (389)
Net earnings (Unaudited)...................................... -- -- -- -- --
Class B shares converted to Class A........................... 102 (102) -- -- --
Tax effect of excess stock compensation expense for tax
purposes over amounts recognized for financial reporting
purposes.................................................... -- -- -- -- --
Shares issued to MCI.......................................... 2,000 -- 13,000 -- --
Shares issued pursuant to acquisitions, net of costs totaling
$432........................................................ 14,723 -- 86,278 -- --
Shares purchased and held in Treasury......................... -- -- -- -- (621)
Shares issued under stock option plan......................... 81 -- 230 -- --
----------- ----- ----------- ----- -----------
Balances at December 31, 1996................................. 36,587 4,074 113,421 3,432 (1,010)
Net Loss (Unaudited)..........................................
Tax effect of excess stock compensation expense for tax
purposes over amounts recognized for financial reporting
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 (unaudited)........................ 38,159 4,071 $ 123,498 3,432 (1,039)
----------- ----- ----------- ----- -----------
----------- ----- ----------- ----- -----------
PAID-IN RETAINED
(AMOUNTS IN THOUSANDS) CAPITAL EARNINGS
----------- -----------
Balances at December 31, 1993................................. 3,252 7,384
Net earnings.................................................. -- 7,134
Class B shares converted to Class A........................... -- --
Tax effect of excess stock compensation expense for tax
purposes over amounts recognized for financial reporting
purposes.................................................... 371 --
Shares issued under stock option plan......................... -- --
Shares issued under warrant agreement, net.................... -- --
Shares issued and issuable under officer stock option
agreements.................................................. 18 --
----- -----------
Balances at December 31, 1994................................. 3,641 14,518
Net earnings.................................................. -- 7,502
Class B shares converted to Class A........................... -- --
Tax effect of excess stock compensation expense for tax
purposes over amounts recognized for financial reporting
purposes.................................................... 397 --
Shares purchased and held in Treasury......................... -- --
Shares issued under stock option plan......................... -- --
Shares issued and issuable under officer stock option
agreements.................................................. 3 --
----- -----------
Balances at December 31, 1995................................. 4,041 22,020
Net earnings.................................................. -- 2,137
Tax effect of excess stock compensation expense for tax
purposes over amounts recognized for financial reporting
purposes.................................................... 16 --
Shares issued under stock option plan......................... -- --
Shares issued and issuable under officer stock option
agreements.................................................. 1 --
----- -----------
Balances at March 31, 1996 (unaudited)........................ 4,058 24,157
Net earnings (Unaudited)...................................... -- 5,325
Class B shares converted to Class A........................... -- --
Tax effect of excess stock compensation expense for tax
purposes over amounts recognized for financial reporting
purposes.................................................... 171 --
Shares issued to MCI.......................................... -- --
Shares issued pursuant to acquisitions, net of costs totaling
$432........................................................ -- --
Shares purchased and held in Treasury......................... -- --
Shares issued under stock option plan......................... -- --
----- -----------
Balances at December 31, 1996................................. 4,229 29,482
Net Loss (Unaudited).......................................... (525)
Tax effect of excess stock compensation expense for tax
purposes over amounts recognized for financial reporting
purposes.................................................... 18 --
Class B shares converted to Class A........................... -- --
Shares issued upon conversion of convertible note............. -- --
Shares purchased and held in Treasury......................... -- --
Shares issued under stock option plan......................... -- --
----- -----------
Balances at March 31, 1997 (unaudited)........................ 4,247 28,957
----- -----------
----- -----------
See accompanying notes to consolidated financial statements.
F-9
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
--------------------- -----------------------------------
1997 1996 1996 1995 1994
---------- --------- ------------ --------- ----------
(AMOUNTS IN THOUSANDS)
Cash flows from operating activities:
Net earnings.................................... $ (525) 2,137 7,462 7,502 7,134
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization................. 5,979 1,887 9,409 5,993 6,639
Amortization of deferred loan costs........... 141 0 63 230 100
Deferred income tax expense................... 264 13 2,252 1,017 1,588
Deferred compensation and
compensatory stock options.................. (18) 143 619 433 343
Disposals of property and equipment........... 0 0 30 170 0
Bad debt expense, net of write-offs........... 179 (37) (34) (114) (312)
Other noncash income and expense items........ 16 (11) (42) 354 (36)
Change in operating assets and liabilities
(note 3).................................... (4,196) (1,773) 2,612 (1,307) 3,063
---------- --------- ------------ --------- ----------
Net cash provided by operating activities......... 1,840 2,359 22,371 14,278 18,519
---------- --------- ------------ --------- ----------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired
(notes 2 and 3)............................... 0 0 (72,818) 0 0
Purchases of property and equipment............. (9,529) (6,950) (38,642) (8,938) (10,604)
Purchases of other assets including long-term
deposits...................................... (197) (45) (10,959) (510) (1,110)
Proceeds from the sale of investment security... 0 0 0 832 0
Notes receivable issued......................... (337) (130) (515) (251) (339)
Payments received on notes receivable........... 4 2 288 184 10
Restricted cash investments..................... 0 0 0 0 684
---------- --------- ------------ --------- ----------
Net cash used in investing activities............. (10,059) (7,123) (122,646) (8,683) (11,359)
---------- --------- ------------ --------- ----------
Cash flows from financing activities:
Long-term borrowings............................ 10,000 3,300 208,000 0 0
Repayments of long-term borrowings and capital
lease obligations............................. (10,448) (485) (5,039) (2,824) (8,494)
Proceeds from common stock issuance............. 77 1 13,231 82 360
Purchase of treasury stock...................... (29) 0 (621) (61) 0
Retirement of bank debt assumed................. 0 0 (105,200) 0 0
Payment of deferred loan costs.................. 0 0 (764) (424) 0
---------- --------- ------------ --------- ----------
Net cash provided (used) by financing
activities.................................... (400) 2,816 109,607 (3,227) (8,134)
---------- --------- ------------ --------- ----------
Net increase (decrease) in cash and cash
equivalents..................................... (8,619) (1,948) 9,332 2,368 (974)
Cash and cash equivalents at beginning of
period.......................................... 13,349 4,017 4,017 1,649 2,623
---------- --------- ------------ --------- ----------
Cash and cash equivalents at end of period...... $ 4,730 2,069 13,349 4,017 1,649
---------- --------- ------------ --------- ----------
---------- --------- ------------ --------- ----------
See accompanying notes to consolidated financial statements.
F-10
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(a) ORGANIZATION
General Communication, Inc. ("GCI"), an Alaska corporation, was incorporated
in 1979. GCI Communication Corp. ("GCC"), an Alaska corporation, is a wholly
owned subsidiary of GCI and was incorporated in 1990. GCI Communication
Services, Inc. ("Communication Services"), an Alaska corporation, is a
wholly-owned subsidiary of GCI 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 and GCC are engaged in
the transmission of interstate and intrastate private line and switched message
long distance telephone service between Anchorage, Fairbanks, Juneau, and other
communities in Alaska and the remaining United States and foreign countries. GCC
also provides northbound services to certain common carriers terminating traffic
in Alaska and sells and services dedicated communications systems and related
equipment. Communication Services provides private network point-to-point data
and voice transmission services between Alaska, Hawaii and the western
contiguous United States. Leasing Company owns and leases capacity on an
undersea fiber optic cable used in the transmission of interstate private line
and switched message long distance services between Alaska and the remaining
United States and foreign countries.
Cable television services are provided through GCI Cable, Inc. and through
its ownership in Prime Cable of Alaska L.P. ("Prime"), and through GCI Cable,
Inc.'s wholly owned subsidiaries GCI Cable/ Fairbanks, Inc., and GCI
Cable/Juneau, Inc. (collectively "GCI Cable" or "Cable Companies"). GCI Cable,
Inc. and its subsidiaries are Alaska corporations and were incorporated in 1996.
GCI Cable, Inc. is a wholly-owned subsidiary of GCI. Prime is a limited
partnership organized under the laws of the state of Delaware whose partnership
interests are wholly owned by GCI Cable, Inc.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of GCI, its
wholly-owned subsidiaries GCC, Communication Services, GCI Cable, and
Communication Services' wholly owned subsidiary Leasing Company (collectively
"the Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
(c) NET EARNINGS PER COMMON SHARE
Primary earnings per common share are determined by dividing net earnings by
the weighted number of common and common equivalent shares outstanding:
1996 1995 1994
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
Weighted average common shares outstanding..................... 26,498 23,723 23,199
Common equivalent shares outstanding........................... 1,170 703 884
--------- --------- ---------
27,668 24,426 24,083
--------- --------- ---------
--------- --------- ---------
The difference between shares for primary and fully diluted earnings per
share was not significant in any period presented.
(d) CASH AND CASH EQUIVALENTS
F-11
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
Cash equivalents consist of short-term, highly liquid investments which are
readily convertible into cash.
(e) INVENTORIES
Inventory of merchandise for resale and parts is stated at the lower of cost
or market. Cost is determined using the first-in, first-out method for parts and
the specific identification method for equipment held for resale.
Cable television inventories are carried at the lower of cost (weighted
average unit cost) or market.
(f) PROPERTY AND EQUIPMENT
TELECOMMUNICATIONS PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Construction costs of transmission
facilities are capitalized. Equipment financed under capital leases is recorded
at the lower of fair market value or the present value of future minimum lease
payments. Construction in progress represents distribution systems and support
equipment not placed in service on December 31, 1996; management intends to
place this equipment in service during 1997.
The Company's investment in jointly owned earth station assets on Adak
Island, Alaska is stated at cost and is depreciated on a straight-line basis
over lives ranging from 10 to 12 years. Revenues derived from customers whose
service transits the joint facilities are recognized based upon the level of
service and supporting facilities that are provided by each owner.
Depreciation and amortization is computed on a straight-line basis based
upon the shorter of the lease term or the estimated useful lives of the assets
ranging from 3 to 20 years for distribution systems and 5 to 10 years for
support equipment. Amortization of equipment financed under capitalized leases
is included in depreciation expense.
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. Gains or losses are recognized at the time of
ordinary retirements, sales or other dispositions of property.
CABLE TELEVISION PROPERTY AND EQUIPMENT
Cable television equipment depreciation is computed by the straight-line
method over the estimated useful lives of the assets. The composite method and a
10 year life are used for cable television distribution systems. Under the
composite method, proceeds from the retirement of cable television distribution
system assets are credited to the allowance for depreciation. Gains or losses on
disposition of property, plant and equipment (other than cable television
distribution systems) are credited or charged to income. Maintenance and repairs
are charged to expense as incurred. Expenditures for major renewals and
betterments are capitalized.
(g) OTHER ASSETS
Intangible assets are valued at the lower of unamortized cost or fair value.
Management reviews the valuation and amortization of intangible assets on a
periodic basis, taking into consideration any events or circumstances which
might result in diminished fair value.
F-12
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
Goodwill represents the excess of cost over fair value of net assets
acquired and is being amortized on a straight-line basis over periods of 20 to
40 years. Goodwill and certificates of operating rights arising from the 1996
acquisition of the Cable Companies are amortized using the straight line method
over forty years.
Other assets, excluding deferred loan costs, certificates of operating
rights and goodwill, are recorded at cost and are amortized on a straight-line
basis over 2 to 15 years.
The cost of the Company's PCS license and related financing costs have been
capitalized as a long-term other asset. Once the associated assets are placed
into service, the recorded cost of the license will begin being amortized over a
40 year period using the straight line method.
(h) DEFERRED LOAN COSTS
Debt issuance costs are deferred and amortized using the straight-line
method, which approximates the interest method, over the term of the related
debt.
(i) REVENUE FROM SERVICES AND PRODUCTS
Revenues generated from long distance telecommunication services are
recognized when the services are provided. Revenues from the sale of equipment
are recognized at the time the equipment is delivered or installed. Service
revenues are derived primarily from maintenance contracts on equipment and are
recognized on a prorated basis over the term of the contract.
Cable television and private line telecommunication revenues are generally
billed in advance and are recognized as the associated service is provided.
Other revenues are recognized when the service is provided.
(j) ADVERTISING EXPENSE
The Company expenses advertising costs as incurred. Advertising expenses
were approximately $3,061,000, $1,924,000 and $796,000 for 1996, 1995 and 1994,
respectively.
(k) INTEREST EXPENSE
Interest costs incurred during the construction period of significant
capital projects are capitalized. Interest capitalized by the Company totaled
$1,034,000, $112,000, and $0 during the years ended December 31, 1996, 1995, and
1994.
(l) INCOME TAXES
Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities be recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable earnings in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are
recognized to the extent that the benefits are more likely to be realized than
not.
(m) STOCK OPTION PLAN
F-13
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
(n) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(o) CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash, temporary investments, and
accounts receivable. Excess cash is invested in high quality short-term liquid
money instruments issued by highly-rated financial institutions. At December 31,
1996, substantially all of the Company's cash balances were invested in
short-term liquid money instruments. Though limited to one geographical area,
the concentration of credit risk with respect to the Company's receivables is
minimized due to the large number of customers, individually small balances,
short payment terms and required deposits.
(p) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
(q) RECLASSIFICATIONS
Reclassifications have been made to the 1994 and 1995 financial statements
to make them comparable with the 1996 presentation.
F-14
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
(r) UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial interim financial statements have been
prepared in accordance with generally accepted accounting principals for interim
financial information. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the quarter ended March 31, 1997 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1997,
F-15
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(2) ACQUISITION OF CABLE TELEVISION SYSTEMS
Effective October 31, 1996, following shareholder and regulatory approvals,
the Company completed the acquisition of seven Alaska cable television companies
("Cable Systems"). Under the terms of the transactions, accounted for using the
purchase method, the final purchase price was $280.1 million, which was the
aggregate value for all the Cable Systems and included certain transaction and
financing costs. The purchase price included issuance of 14.7 million shares of
GCI's Class A common stock and cash, debt assumption and issuance of
subordinated notes. Financing for the transactions resulted from borrowings
under a new $205 million bank credit facility and from additional capital
provided from the sale of two million shares of GCI's Class A common stock to
MCI Telecommunications Corporation for $6.50 per share.
Acquisition costs totaling $304.4 million were allocated to tangible and
identifiable intangible assets and liabilities based upon fair market values.
Approximately $206.5 million was allocated to the certificate of operating
rights and approximately $42.4 was allocated to goodwill.
Various tax attributes of Prime gave rise to a deferred tax liability (see
Note 7) of $24.4 million recorded by the Company as a result of the acquisition.
During January 1997, holders of the GCI subordinated notes exercised a
conversion option which allowed them to exchange their notes for GCI Class A
common shares at a predetermined conversion price of $6.50 per share. As a
result, the note holders will receive a total of 1,538,457 shares of GCI Class A
common stock. As of January 1997, 1,415,385 shares were issued for the converted
notes. The remaining shares will be issued upon release of the related notes
still held in escrow (see below).
The final closing required approval of the Alaska Public Utilities
Commission (APUC), which was granted on September 23, 1996. The APUC approval
included several conditions placed on the transfer, such as continuing the
existing conditions requiring provision of public access channels and requiring
the cable operations to file annual income and operating statements.
In connection with the Acquisitions, GCI placed 1,093,750 shares of GCI
Class A common stock, $800,000 of GCI subordinated notes, and $150,000 cash into
an indemnity escrow account. The various selling entities collectively placed
the same amounts in escrow. Upon satisfactory completion of the indemnity period
(180 days after each closing), the escrowed amounts will be returned to GCI and
the various sellers.
The following table sets forth for the periods indicated, in comparative
columnar form, unaudited pro forma operating data and pro forma per-share data
for the Company including operating data for Prime Cable of Alaska L.P., Alaska
Cablevision, Inc., and Alaskan Cable companies. Results of operations and per
share data, where applicable, is provided for the following items: (1) total
revenues; (2) earnings before extraordinary items; (3) cumulative effect of
accounting changes; and (4) net earnings. The pro forma information shown gives
effect to the cable company acquisitions as if they had occurred as of the
beginning of the periods presented. Company common stock issued pursuant to the
cable company acquisitions is valued at approximately $5.89 per share (the
trading price for the shares on the dates surrounding the announcement of the
transactions) for purposes of the pro forma presentation below.
The pro forma financial data are unaudited and are not necessarily
indicative of the results of operations of the Company that would have occurred
had the cable company acquisitions been
F-16
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(2) ACQUISITION OF CABLE TELEVISION SYSTEMS (CONTINUED)
completed as of the beginning of the earliest periods presented or of the future
results of operations of the Company.
YEARS ENDED
DECEMBER 31,
----------------------
1996 1995
----------- ---------
(AMOUNTS IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
Total revenues................................................... $ 210,762 182,308
Net earnings..................................................... $ 6,700 5,918
Net earnings per common share.................................... $ 0.16 0.14
Shares used in computation....................................... 41,604 41,149
(3) CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURES
Changes in operating assets and liabilities consist of (in thousands):
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS)
(Increase) decrease in trade receivables.... $ 138 (2,089) (4,604) (4,701) 63
(Increase) decrease in other receivables.... (391) 20 (134) (32) (91)
(Increase) decrease in prepaid and other
current assets............................. (52) (374) (467) (222) 312
(Increase) decrease in inventory............ (77) (34) 412 (317) (38)
(Increase) in income taxes receivable....... 0 0 (1,026) 0 0
Increase (decrease) in accounts payable..... (1,357) (22) 5,517 5,020 1,434
Increase (decrease) in accrued
liabilities................................ 96 (69) 914 423 195
Increase (decrease) in accrued payroll and
payroll related obligations................ (151) 73 1,723 (1,928) 1,238
Increase (decrease) in accrued income
taxes...................................... 0 917 (547) 330 163
Increase in accrued interest................ (2,357) 10 2,188 31 14
Increase (decrease) in deferred revenues.... (5) (120) (4) 220 (90)
(Decrease) in components of other
liabilities................................ (40) (85) (1,360) (131) (137)
--------- --------- --------- --------- ---------
$ (4,196) (1,773) 2,612 (1,307) 3,063
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
F-17
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(3) CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURES (CONTINUED)
Acquisitions of businesses, net of cash acquired for the year ended December
31, 1996 consists of (in thousands):
Fair value of assets acquired................................... $ 304,441
Bank debt and net working capital deficit assumed............... (110,538)
Common stock issued to sellers.................................. (86,710)
Convertible, subordinated debt issued to sellers................ (10,000)
Net deferred income tax liability............................... (24,375)
---------
Net cash used to acquire business............................... $ 72,818
---------
---------
Income taxes paid totaled $0 and $633,000 for the three months ended March
31, 1997 and 1996, respectively, (unaudited) and $4,361,000, $3,752,000 and
$2,796,000 during 1996, 1995 and 1994, respectively.
Interest paid totaled approximately $6,300,000 and $407,000 for the three
months ended March 31, 1997 and 1996, respectively, (unaudited) and ($2,657,000,
$1,227,000 and $1,525,000 during 1996, 1995 and 1994, respectively.
The Company recorded $18,000 and $16,000 for the three months ended March
31, 1997 and 1996, respectively, (unaudited) and $187,000, $397,000 and $371,000
in 1996, 1995 and 1994, respectively, in paid-in capital in recognition of the
income tax effect of excess stock compensation expense for tax purposes over
amounts recognized for financial reporting purposes.
The holders of $10 million of convertible 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.
F-18
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(4) NOTES RECEIVABLE
A summary of notes receivable follows:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(AMOUNTS IN
THOUSANDS)
Note receivable from officer bearing interest at the rate paid by the
Company on its senior indebtedness, secured by GCI Class A common stock,
due on the 90th day after termination of employment or July 30, 1998,
whichever is earlier...................................................... $ 500 500
Note receivable from officer bearing interest at 10%, secured by Company
stock; payable in equal annual installments of $36,513 through August 26,
2004...................................................................... 224 224
Notes receivable from officers and others bearing interest at 7% to 10%,
unsecured and secured by Company common stock, shares of other common
stock and equipment; due on demand and through August 26, 2004............ 488 261
--------- ---------
Total notes receivable..................................................... 1,212 985
Less current portion....................................................... (325) (167)
Plus long-term accrued interest............................................ 129 86
--------- ---------
$ 1,016 904
--------- ---------
--------- ---------
(5) INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31,
----------------------
1996 1995
----------- ---------
(AMOUNTS IN
THOUSANDS)
Certificates of operating rights........................................ $ 206,492 0
Goodwill................................................................ 44,347 1,983
PCS license and related costs........................................... 1,913 1,802
Other intangibles....................................................... 121 439
----------- ---------
252,873 4,224
Less amortization....................................................... 1,953 1,099
----------- ---------
Intangible assets, net.................................................. $ 250,920 3,125
----------- ---------
----------- ---------
F-19
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(6) LONG-TERM DEBT
Long-term debt is summarized as follows:
DECEMBER 31,
----------------------
1996 1995
----------- ---------
(AMOUNTS IN THOUSANDS)
Senior loan (a)...................................................... $ 175,900 $ 0
Credit Agreement (b)................................................. 30,100 1,000
Convertible, subordinated notes (c).................................. 10,000 0
Undersea Fiber and Equipment Loan Agreement (d)...................... 6,886 8,271
Financing Obligation (e)............................................. 356 709
----------- ---------
223,242 9,980
Less current maturities.............................................. 31,969 1,689
----------- ---------
Long-term debt, excluding current maturities......................... $ 191,273 $ 8,291
----------- ---------
----------- ---------
(a) GCI Cable entered into a credit facility totaling $205 million ("Senior
Loan") effective October 31, 1996, associated with the acquisition of the
cable companies. Loans (advances) made pursuant to the Senior Loan mature
on September 30, 2005 or such earlier date as payment of the loans are
due, whether by acceleration or otherwise.
The Senior Loan provides for interest at the bank's prime rate plus
1.875%. At GCI Cable's option, interest on all or a specified portion of
the indebtedness may be fixed for periods ranging from one to six months
based on Eurodollar rates plus 2.875%. Upon the request of GCI Cable and
the approval of the banks, the period of a Eurodollar advance can be
extended beyond six months. The interest rates under the new agreement
are subject to reductions of up to 1.75% per annum if certain financial
tests are met. GCI Cable is required to pay a commitment fee equal to
0.50% per annum on the unused portion of the commitment. In addition, if
the obligations under the Senior Loan are not repaid in full on or before
September 30, 1997, GCI Cable has agreed to pay an additional fee of
$712,500. Interest and fees are payable quarterly.
The Senior Loan facility contains, among others, covenants requiring
maintenance of specific levels of operating cash flow to indebtedness and
to interest expense. The Senior Loan facility includes limitations on
acquisitions and additional indebtedness, and prohibits any direct or
indirect distribution, dividend, redemption or other payment to any
person on account of any general or limited partnership interest in, or
shares of capital stock or other securities of GCI Cable or any of its
subsidiaries. GCI Cable was in compliance with all credit agreement
covenants during the period commencing October 31, 1996 (date of the
Senior Loan) through December 31, 1996.
While GCI Cable may elect at any time to reduce amounts due and available
under the loan agreement, a mandatory prepayment is required each May,
beginning in May 2000, if, for the prior year ended December 31, GCI
Cable's Operating Cash Flow (defined as net income before extraordinary
items and gains and losses on asset sales, plus interest expense,
depreciation, amortization, bank fees, deferred management fees, expenses
and other amounts deferred under the management agreement, income tax
expense and other non-cash expenses) exceeds payments made for cash
interest expense, permanent prepayments of
F-20
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(6) LONG-TERM DEBT (CONTINUED)
principal amounts outstanding under the loan agreement, bank fees, cash
income tax payments, capital expenditures, amounts previously deferred
under the management agreement and capital lease obligations. GCI Cable
is required to make a prepayment in the amount of 50% of such excess.
Additionally, a mandatory prepayment may be required in the event of
asset sales (other than dispositions of obsolete inventory and equipment
in the ordinary course of business) or the issuance of capital stock or
other debt or equity securities. All such mandatory prepayments
permanently reduce the amounts due and available under the loan
commitment.
The loan agreement is collateralized by essentially all of GCI Cable
Inc.'s assets as well as a pledge of GCI Cable's stock by GCI.
In connection with the funding of the loan agreement, GCI Cable Inc. paid
bank fees and other expenses of approximately $764,000, which will be
amortized to interest expense over the life of the agreement.
(b) GCI entered into a new $62.5 million interim telephony credit facility
with its senior lender during April 1996. The interim facility replaced
in its entirety the prior senior facility described in the Company's
December 31, 1995 Form 10-K. The new facility allows the Company to
invest up to $60 million in capital expenditures through the first
quarter of 1997. The Company plans to restructure the facility prior to
its maturity on April 25, 1997. Since the entire facility matures within
the twelve-month period ending December 31, 1997, the outstanding balance
at December 31, 1996 is included in current maturities of long-term debt.
The interim facility provides for interest (7.33% weighted average
interest rate at December 31, 1996), among other options, at LIBOR plus
1.75% to 2.25%, depending on the Company's leverage ratio as defined in
the agreement. A fee of 0.50% per annum is assessed on the unused portion
of the facility.
$3.4 million of the facility has been used to provide a letter of credit
to secure payment of certain access charges associated with the Company's
provision of telecommunications services within the state of Alaska.
The interim facility contains, among others, covenants requiring
maintenance of specific levels of operating cash flow to indebtedness and
to interest expense. The credit agreement includes limitations on
acquisitions and additional indebtedness, and prohibits payment of
dividends, other than stock dividends. The Company was in compliance with
all credit agreement covenants during the period commencing April (date
of the new interim credit facility) through December 31, 1996.
Security for the credit agreement includes a pledge of the stock of GCC
and Communication Services, and a first lien on substantially all of
GCC's assets. GCI and its subsidiaries, Communication Services and
Leasing Company, are liable as guarantors.
The Company extended the maturity date of its $62.5 million interim
telephony credit facility during April 1997. The interim facility matures
in July 1997 and is expected to be extended further or refinanced prior
to that time. Since the facility matures within the twelve-month period
F-21
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(6) LONG-TERM DEBT (CONTINUED)
ending March 31, 1998, the outstanding balance at March 31, 1997 is
included in current maturities of long-term debt (unaudited).
In June, 1993, the Company entered into a two-year interest rate swap
agreement with a bank whereby the rate on $18,200,000 of debt (reduced by
$422,500 per quarter beginning July 1, 1993) was fixed at 4.45% plus
applicable margins. The interest effect of the difference between the
fixed rate and the three-month LIBOR rate was either added to or served
to reduce interest expense depending on the relative interest rates. The
agreement expired June 30, 1995.
(c) GCI issued subordinated notes totaling $10 million in connection with
the acquisitions described in Note 2. The notes bear simple, non
compounding interest at the lowest allowable rate of the Internal Revenue
Service under imputed interest rules in effect at closing. The notes are
subordinated to all of the Company's senior indebtedness. During January
1997, the holders of the GCI subordinated notes exercised a conversion
option which allowed them to exchange their notes for GCI Class A common
shares at a predetermined conversion price of $6.50 per share. As a
result, the former note holders received 1,538,457 shares of GCI Class A
common stock.
(d) On December 31, 1992, Leasing Company entered into a $12,000,000 loan
agreement, of which approximately $9,000,000 of the proceeds were used to
acquire capacity on the undersea fiber optic cable linking Seward, Alaska
and Pacific City, Oregon. Concurrently, Leasing Company leased the
capacity under a ten year all events, take or pay, contract to MCI, who
subleased the capacity back to the Company. The lease and sublease
agreements provide for equivalent terms of 10 years and identical monthly
payments of $200,000. The proceeds of the lease agreement with MCI were
pledged as primary security for the financing. The loan agreement
provides for monthly payments of $170,000 including principal and
interest through the earlier of January 1, 2003, or until repaid. The
loan agreement provides for interest at the prime rate plus one-quarter
percent. Additional collateral includes substantially all of the assets
of Leasing Company including the fiber capacity and a security interest
in all of its outstanding stock. MCI has a second position security
interest in the assets of Leasing Company.
(e) As consideration for MCI's role in enabling Leasing Company to finance
and acquire the undersea fiber optic cable capacity described at note
6(d) above, Leasing Company agreed to pay MCI $2,040,000 in 60 monthly
payments of $34,000. For financial statement reporting purposes, the
obligation has been recorded at its remaining present value, using a
discount rate of 10% per annum. The agreement is secured by a second
position security interest in the assets of Leasing Company.
F-22
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(6) LONG-TERM DEBT (CONTINUED)
As of December 31, 1996 maturities of long-term debt including mandatory
reductions of loan commitments pursuant to the Company's Senior Loan were as
follows (in thousands):
YEAR ENDING DECEMBER 31,
1997............................................................................. $ 31,969
1998............................................................................. 1,647
1999............................................................................. 6,917
2000............................................................................. 4,497
2001............................................................................. 5,125
2002 and thereafter.............................................................. 163,087
-----------
213,242
Subordinated debt converted into GCI Class A common stock in January 1997........ 10,000
-----------
$ 223,242
-----------
-----------
(7) INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 1996,
1995 and 1994 were allocated as follows:
YEARS ENDED
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
Earnings from continuing operations............................ $ 5,228 $ 5,099 $ 4,547
Stockholders' equity, for stock option compensation expense for
tax purposes in excess of amounts recognized for financial
reporting purposes............................................ (187) (397) (371)
--------- --------- ---------
$ 5,041 $ 4,702 $ 4,176
--------- --------- ---------
--------- --------- ---------
F-23
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(7) INCOME TAXES (CONTINUED)
Income tax expense consists of the following:
YEARS ENDED
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
Current tax expense:
Federal taxes................................................ $ 2,292 $ 3,077 $ 2,604
State taxes.................................................. 684 1,005 355
--------- --------- ---------
2,976 4,082 2,959
--------- --------- ---------
Deferred tax expense:
Federal taxes................................................ 1,734 780 816
State taxes.................................................. 518 237 772
--------- --------- ---------
2,252 1,017 1,588
--------- --------- ---------
$ 5,228 $ 5,099 $ 4,547
--------- --------- ---------
--------- --------- ---------
F-24
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(7) INCOME TAXES (CONTINUED)
Total income tax expense differed from the "expected" income tax expense
determined by applying the statutory federal income tax rate of 34% as follows:
YEARS ENDED
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
Expected statutory tax expense................................. $ 4,314 4,284 3,971
State income taxes, net of federal benefit..................... 793 820 742
Income tax effect of goodwill amortization, nondeductible
expenditures and other items, net............................ 55 41 0
Change in valuation allowance.................................. (225) (200) 0
Other.......................................................... 291 154 (166)
--------- --------- ---------
$ 5,228 5,099 4,547
--------- --------- ---------
--------- --------- ---------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below.
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(AMOUNTS IN
THOUSANDS)
Net current deferred tax assets:
Accounts receivable, principally due to allowance for doubtful
accounts............................................................. $ 98 119
Compensated absences, accrued for financial reporting purposes......... 380 400
Workers compensation and self insurance health reserves, principally
due to accrual for financial reporting purposes...................... 243 183
Other.................................................................. 114 133
--------- ---------
Total gross current deferred tax assets.............................. 835 835
Less valuation allowance............................................. 0 89
--------- ---------
Net current deferred tax assets...................................... $ 835 746
--------- ---------
--------- ---------
F-25
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(7) INCOME TAXES (CONTINUED)
DECEMBER 31,
--------------------
1996 1995
--------- ---------
(AMOUNTS IN
THOUSANDS)
Net long-term deferred tax assets:
Net operating loss carryforwards....................................... $ 23,507 0
Deferred compensation expense for financial reporting purposes in
excess of amounts recognized for tax purposes........................ 617 587
Employee stock option compensation expense for financial reporting
purposes in excess of amounts recognized for tax purposes............ 198 206
Sweepstakes award in excess of amounts recognized for tax purposes..... 211 215
Other.................................................................. 197 261
--------- ---------
Total gross long-term deferred tax assets............................ 24,730 1,269
Less valuation allowance............................................. 8,129 136
--------- ---------
Net long-term deferred tax assets.................................... 16,601 1,133
--------- ---------
Net long-term deferred tax liabilities:
Plant and equipment, principally due to differences in depreciation.... 50,163 7,997
Other.................................................................. 158 140
--------- ---------
Total gross long-term deferred tax liabilities....................... 50,321 8,137
--------- ---------
Net combined long-term deferred tax liabilities........................ $ 33,720 7,004
--------- ---------
--------- ---------
In conjunction with the acquisition of the Cable Companies the Company
incurred a net deferred income tax liability of $24,375,000 which is net of
gross deferred tax assets of $23,253,000 and a valuation allowance of
$8,129,000.
The valuation allowance for deferred tax assets was $8,129,000, $225,000 and
$425,000 as of December 31, 1996, 1995 and 1994, respectively.
Tax benefits associated with recorded deferred tax assets, net of valuation
allowances, are considered to be more likely than not realizable through taxable
income earned in carryback years, future reversals of existing taxable temporary
differences, and future taxable income exclusive of reversing temporary
differences and carryforwards. 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 period are reduced.
At December 31, 1996, the Company has tax net operating loss carryforwards
of approximately $58,475,000 which will begin expiring 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. A valuation
allowance of $8,129,000 was recognized to offset the deferred tax assets related
to these carryforwards
F-26
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
due to uncertainty regarding realizability. If realized, the tax benefit for the
carryforwards offset by the valuation allowance will be applied to reduce
goodwill and other non-current intangibles, and then applied to reduce income
tax expense.
The Company's U.S. income tax return for 1993 was selected for examination
by the Internal Revenue Service during 1995. The examination commenced during
the fourth quarter of 1995 and was completed during the second quarter of 1996.
The Company received a no change letter upon completion of the examination.
(8) STOCKHOLDERS' EQUITY
COMMON STOCK
GCI's Class A common stock and Class B common stock are identical in all
respects, except that each share of Class A common stock has one vote per share
and each share of Class B common stock has ten votes per share. In addition,
each share of Class B common stock outstanding is convertible, at the option of
the holder, into one share of Class A common stock.
After the transaction described in Note 2, MCI owns a total of 8,251,509
shares of GCI's Class A and 1,275,791 shares of GCI's Class B common stock which
on a fully diluted basis represented approximately 23% and 31% of the issued and
outstanding shares of the respective class at December 31, 1996.
After the transaction described in Note 2, the owners of the cable
television properties acquired in 1996 own a total of 14,723,077 shares of GCI's
Class A common stock which on a fully diluted basis represented approximately
40% of the issued and outstanding Class A common shares at December 31, 1996.
STOCK WARRANTS
On May 18, 1994 an officer of the Company exercised warrants. In exchange
for $114, the Company issued 160,297 and 74,028 shares of GCI Class A and Class
B common stock, respectively.
Pursuant to the terms of a stock appreciation right granted in 1988, the
Company issued to its former senior lender warrants to acquire 1,021,373 shares
of GCI Class A common stock for $.85669 per share. Warrants to purchase 600,000
shares of Class A common stock were exercised in April and May, 1991, an
additional 168,085 were exercised in September, 1991 and the remaining warrants
to purchase 253,288 shares were exercised in September and October, 1994.
STOCK OPTION PLAN
In December 1986, GCI adopted a Stock Option Plan (the "Option Plan") in
order to provide a special incentive to officers, non-employee directors, and
employees by offering them an opportunity to acquire an equity interest in GCI.
The Option Plan provides for the grant of options for a maximum of 3,200,000
shares of GCI Class A common stock, subject to adjustment upon the occurrence of
stock dividends, stock splits, mergers, consolidations or certain other changes
in corporate structure or capitalization. If an option expires or terminates,
the shares subject to the option will be available for further grants of options
under the Option Plan. The Option Plan is administered by GCI's Board of
Directors or a committee of disinterested persons.
The Option Plan provides that all options granted under the Option Plan must
expire not later than ten years after the date of grant. If at the time an
option is granted the exercise price is less than the
F-27
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(8) STOCKHOLDERS' EQUITY (CONTINUED)
market value of the underlying common stock, the "in the money" amount at the
time of grant is expensed ratably over the vesting period of the option. Options
granted pursuant to the Option Plan are only exercisable if at the time of
exercise the option holder is an employee or non-employee director of GCI.
Information for the years 1994, 1995 and 1996 with respect to the Plan
follows:
WEIGHTED
AVERAGE RANGE OF
EXERCISE EXERCISE
SHARES PRICE PRICES
----------- ----------- --------------
Outstanding at December 31, 1993.................... 1,823,658 $ 2.87 $0.75-$4.00
-----------
Granted........................................... -- --
Exercised......................................... (72,459) $ 2.39 $0.75-$3.00
Forfeited......................................... (21,500) $4.00
-----------
Outstanding at December 31, 1994.................... 1,729,699 $ 2.88 $0.75-$4.00
-----------
Granted........................................... 610,000 $4.00
Exercised......................................... (40,000) $ 2.06 $1.87-$2.25
Forfeited......................................... (11,500) $4.00
-----------
Outstanding at December 31, 1995.................... 2,288,199 $ 3.19 $0.75-$4.00
-----------
Granted........................................... 321,000 $ 5.79 $3.75-$6.50
Exercised......................................... (82,291) $ 2.80 $0.75-$4.00
Forfeited......................................... (79,785) $ 3.11 $0.75-$4.50
-----------
Outstanding at December 31, 1996.................... 2,447,123 $ 3.54 $0.75-$6.50
-----------
-----------
Available for grant at December 31, 1996............ 108,338
-----------
-----------
The options expire at various dates through December 2006. At December 31,
1996 and 1995, the weighted-average remaining contractual lives of options
outstanding were 6.73 and 7.15 years, respectively.
At December 31, 1996 and 1995, the number of options exercisable was
1,275,903 and 986,999, respectively, and the weighted-average exercise price of
those options was $2.85 and $2.56, respectively.
The per share weighted-average fair value of stock options granted during
1996 was $3.50 for compensatory options and $2.28 for non-compensatory options;
for 1995, the per share weighted-average fair value of non-compensatory stock
options granted was $1.62. The amounts were determined as of the options' grant
dates using a qualified binomial option-pricing model with the following
weighted-average assumptions: 1996--risk-free interest rate of 6.3% and an
expected life of eight years; 1995--risk-free interest rate of 6.25% and an
expected life of eight years.
F-28
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(8) STOCKHOLDERS' EQUITY (CONTINUED)
Had compensation cost for the Company's 1995 and 1996 grants for stock-based
compensation plans been determined consistent with SFAS 123, the Company's net
income and net income per common share would approximate the pro forma amounts
below (in millions except per share data):
AS REPORTED PRO FORMA
----------- -----------
1995:
Net earnings........................................................ $ 7,502 $ 7,438
Net earnings per common share....................................... $ 0.31 $ 0.30
1996:
Net earnings........................................................ $ 7,462 $ 7,322
Net earnings per common share....................................... $ 0.27 $ 0.26
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS 123 is not reflected in the pro forma net income amounts presented
above because compensation cost is reflected over the options' vesting period of
5 years and compensation cost for options granted prior to January 1, 1995 is
not considered.
STOCK OPTIONS NOT PURSUANT TO A PLAN
In June 1989, an officer was granted options to acquire 100,000 Class A
common shares at $.75 per share. The options vested in equal annual increments
over a five-year period and expire February, 1999.
The Company entered into an incentive agreement in June 1989 with an officer
providing for the acquisition of 85,190 remaining shares of Class A common stock
of the Company for $.001 per share exercisable through June 16, 1997. The shares
under the incentive agreement vested in equal annual increments over a
three-year period.
CLASS A COMMON SHARES HELD IN TREASURY
The Company acquired 105,111 shares of its Class A common stock in 1989 for
approximately $328,000 to fund a deferred bonus agreement with an officer of the
Company. The agreement provides that the balance is payable after the later of
a) termination of employment or b) six months after the effective date of the
agreement. In September 1995 and July 1996, the Company acquired a total of
93,970 additional shares of Class A common stock for approximately $672,000 to
fund additional deferred compensation agreements for two of its officers.
EMPLOYEE STOCK PURCHASE PLAN
In December 1986, GCI adopted an Employee Stock Purchase Plan (the "Plan")
qualified under Section 401 of the Internal Revenue Code of 1986 (the "Code").
The Plan provides for acquisition of the Company's Class A and Class B common
stock at market value. The Plan permits each employee of GCI and affiliated
companies who has completed one year of service to elect to participate in the
Plan. Eligible employees may elect to reduce their compensation in any even
dollar amount up to 10% of such compensation up to a maximum of $9,500 in 1996;
they may contribute up to 10% of their compensation with after-tax dollars, or
they may elect a combination of salary reductions and after-tax contributions.
F-29
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(8) STOCKHOLDERS' EQUITY (CONTINUED)
GCI may match employee salary reductions and after tax contributions in any
amount, elected by GCI each year, but not more than 10% of any one employee's
compensation will be matched in any year. The combination of salary reductions,
after tax contributions and GCI matching contributions cannot exceed 25% of any
employee's compensation (determined after salary reduction) for any year. GCI's
contributions vest over six years. Prior to July 1, 1995 employee and GCI
contributions were invested in GCI common stock and employee contributions
received up to 100% matching, as determined by the Company each year, in GCI
common stock. Beginning July 1, 1995 employee contributions may be invested in
GCI common stock, MCI common stock, Tele-Communications, Inc. common stock or
various mutual funds. Such employee contributions invested in GCI common stock
receive up to 100% matching, as determined by the Company each year, in GCI
common stock. Employee contributions invested in other than GCI common stock
receive up to 50% matching, as determined by the Company each year, in GCI
common stock. The Company's matching contributions allocated to participant
accounts totaled approximately $1,013,000, $864,000 and $792,000 for the years
ended December 31, 1996, 1995, and 1994, respectively. The Plan may, at its
discretion, purchase shares of common stock from the Company at market value or
may purchase GCI common stock on the open market.
(9) INDUSTRY SEGMENTS DATA
The Company is engaged in the provision or sale of services and products in
three principal industries: (1) long-distance telecommunication services
("long-distance services"), (2) cable television services, and, on a
pre-operating basis, (3) local telecommunication services ("local services").
DECEMBER 31,
---------------------------------
1996 1995 1994
----------- --------- ---------
(AMOUNTS IN THOUSANDS)
Net sales
Long-distance services................................. $ 155,419 129,279 116,981
Cable television services.............................. 9,475 0 0
----------- --------- ---------
Total net sales...................................... $ 164,894 129,279 116,981
----------- --------- ---------
----------- --------- ---------
Operating income
Long-distance services................................. $ 15,083 13,504 12,997
Cable television services.............................. 2,196 0 0
Local services......................................... (870) 0 0
----------- --------- ---------
Total operating income............................... $ 16,409 13,504 12,997
----------- --------- ---------
----------- --------- ---------
Identifiable assets
Long-distance services................................. $ 133,780 81,377 72,744
Cable television services.............................. 62,039 0 0
----------- --------- ---------
Total identifiable assets............................ $ 195,819 81,377 72,744
----------- --------- ---------
----------- --------- ---------
Capital expenditures
Long-distance services................................. $ 37,793 8,938 10,604
Cable television services.............................. 849 0 0
----------- --------- ---------
Total capital expenditures........................... $ 38,642 8,938 10,604
----------- --------- ---------
----------- --------- ---------
F-30
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(9) INDUSTRY SEGMENTS DATA (CONTINUED)
DECEMBER 31,
---------------------------------
1996 1995 1994
----------- --------- ---------
(AMOUNTS IN THOUSANDS)
Depreciation and amortization expense
Long-distance services................................. $ 7,189 5,993 6,639
Cable television services.............................. 2,220 0 0
----------- --------- ---------
Total depreciation and amortization expense.......... $ 9,409 5,993 6,639
----------- --------- ---------
----------- --------- ---------
Reclassifications have been made to 1995 and 1994 data to make them
comparable with the 1996 presentation. Intersegment sales approximate market and
are not significant. Identifiable assets are assets associated with a specific
industry segment. Revenues derived from leasing operations are allocated to the
message and data transmission services segment. Long-distance services includes
equipment sales and service which were previously reported as a separate
segment.
The Company provides message telephone service to MCI and Sprint, major
customers (see Note 10). The Company earned revenues pursuant to a contract with
Sprint totaling approximately $18,781,000, $14,885,000 and $12,412,000 for the
years ended December 31, 1996, 1995 and 1994 respectively. Amounts receivable
from Sprint totaled $1,683,000 and $2,362,000 at December 31, 1996 and 1995,
respectively.
(10) RELATED PARTY TRANSACTIONS
Pursuant to the terms of a contract with MCI, a major shareholder of the
Company (see note 8), the Company earned revenues of approximately $29,208,000,
$23,939,000 and $19,512,000 for the years ended December 31, 1996, 1995 and
1994, respectively. Amounts receivable from MCI totaled $5,252,000 and
$4,256,000 at December 31, 1996 and 1995, respectively. The Company paid MCI for
distribution of its traffic in the lower 49 states totaling approximately
$12,224,000, $12,556,000 and $10,252,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
The Company entered into a long-term capital lease agreement in 1991 with
the wife of the Company's president for property occupied by the Company. The
lease is guaranteed by the Company. The lease term is 15 years with monthly
payments increasing in $800 increments at each two year anniversary of the
lease. Monthly lease costs will increase to $16,800 effective October 1997. If
the owner sells the premises prior to the end of the tenth year of the lease,
the owner will rebate to the Company one-half of the net sales price received in
excess of $900,000. If the property is not sold prior to the tenth year of the
lease, the owner will pay the Company the greater of one-half of the appreciated
value of the property over $900,000, or $500,000. The leased asset was
capitalized in 1991 at the owner's cost of $900,000 and the related obligation
was recorded in the accompanying financial statements.
The Cable Company is a party to a Management Agreement with Prime II
Management, L.P. ("PMLP"). Certain of the Prime sellers are affiliated with
PMLP. The Management Agreement expires on October 31, 2005, however, it will be
terminated earlier upon loss of a license to operate the systems, sale of the
systems, breach of contract, or upon exercise of an option to terminate the
Management Agreement by PMLP or GCI Cable any time after October 31, 1998. Under
the terms of the Management Agreement, PMLP manages the operations of the
acquired cable television systems for fees of
F-31
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(10) RELATED PARTY TRANSACTIONS (CONTINUED)
$1,000,000 in the first year, $750,000 in the second year, and $500,000
thereafter (unless the agreement is terminated as outlined above) and
reimbursement for certain expenses. The fees and reimbursed expenses are payable
on a monthly basis. Under the terms of the bank loan agreement (Note 6), the
Cable Company must defer payment of management fees if it fails to meet certain
financial ratio covenants. Any deferred fees bear interest at a rate of 17.5%
per annum. In connection with the agreement, the Cable Company incurred
approximately $197,000 in management fees and reimbursable expenses for the
period ended December 31, 1996.
(11) LEASES
The Company leases business offices, has entered into site lease agreements
and uses certain equipment and satellite transponder capacity pursuant to
operating lease arrangements. Rental costs under such arrangements amounted to
approximately $7,364,000, $4,353,000 and $4,258,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
A summary of future minimum lease payments for all leases as of December 31,
1996 follows:
YEAR ENDING DECEMBER 31: OPERATING CAPITAL
- ----------------------------------------------------------------------- ----------- ---------
(AMOUNTS IN THOUSANDS)
1997................................................................... $ 10,772 $ 194
1998................................................................... 8,211 202
1999................................................................... 4,990 204
2000................................................................... 3,283 211
2001................................................................... 1,870 214
2002 and thereafter.................................................... 2,568 1,265
----------- ---------
Total minimum lease payments......................................... $ 31,694 $ 2,290
----------- ---------
----------- ---------
Less amount representing interest.................................... (1,544)
Less current maturities of obligations under capital leases............ (71)
---------
Subtotal--long-term obligations under capital leases................... 675
Less long-term obligations under capital leases due to related parties,
excluding current maturities......................................... (675)
---------
Long-term obligations under capital leases, excluding current
maturities........................................................... $ 0
---------
---------
The leases generally provide that the Company pay the taxes, insurance and
maintenance expenses related to the leased assets.
It is expected that in the normal course of business, leases that expire
will be renewed or replaced by leases on other properties.
F-32
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(12) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Standards No. 107, "Disclosures about Fair Value of
Financial Instruments" ("SFAS No. 107") requires disclosure of the fair value of
financial instruments for which it is practicable to estimate that value. SFAS
No. 107 specifically excludes certain items from its disclosure requirements.
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced sale or liquidation. The carrying amounts at December 31, 1996 and
1995 for the Company's financial assets and liabilities approximate their fair
values.
(13) 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. 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. Participant elective deferrals attributed to current
services, interest earnings, vested Company contributions and vested matching
contributions are accrued and are reflected in accrued payroll and payroll
related obligations. Compensation deferred pursuant to the plan totaled $222,000
and $340,000 as of December 31, 1996 and 1995, 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 in 1998 is dependent upon a number of factors. The Company does
not expect the remaining balance payable at delivery to exceed $41 million.
SELF-INSURANCE
The Company is self-insured for losses and liabilities related primarily to
health and welfare claims up to predetermined amounts above which third party
insurance applies. A reserve of $450,000 was recorded at December 31, 1996 to
cover estimated reported losses, estimated unreported losses based on past
experience modified for current trends, and estimated expenses for investigating
and settling claims. Actual losses will vary from the recorded reserve. While
management uses what it believes is pertinent information and factors in
determining the amount of reserves, future additions to the reserves may be
necessary due to changes in the information and factors used.
F-33
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(13) COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION
The Company is involved in various lawsuits and legal proceedings which 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 Company's financial position, results of
operations or liquidity.
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 petition with the APUC. At December 31, 1996, the
State of Alaska has rate regulation authority over the Juneau system's basic
service rates. (The Juneau system serves 9% of the Company's total basic service
subscribers at December 31, 1996.) 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,
PCOA's 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
which 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.
F-34
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(14) SUPPLEMENTARY FINANCIAL DATA
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 1996 and 1995.
FIRST SECOND THIRD FOURTH TOTAL
1996 QUARTER QUARTER QUARTER QUARTER YEAR
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Total revenues............................................. $ 37,969 37,199 38,664 51,062 164,894
Net earnings............................................... $ 2,137 2,150 2,140 1,035 7,462
Net earnings per share..................................... $ 0.09 0.09 0.09 0.02 0.27
FIRST SECOND THIRD FOURTH TOTAL
1995 QUARTER QUARTER QUARTER QUARTER YEAR
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Total revenues............................................. $ 29,693 31,860 33,363 34,363 129,279
Net earnings............................................... $ 1,607 1,836 2,252 1,807 7,502
Net earnings per share..................................... $ 0.07 0.08 0.09 0.07 0.31
(15) SUPPLEMENTAL FINANCIAL INFORMATION
THREE-MONTHS ENDED MARCH 31, 1997
----------------------------------------------
LONG--
(UNAUDITED) DISTANCE CABLE LOCAL COMBINED
--------- --------- ----------- -----------
(AMOUNTS IN THOUSANDS)
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
Selling, general and administrative expenses:
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........................................... 4,887 -- 369 5,256
Legal and regulatory................................................. 351 -- 97 448
Bad debts............................................................ 426 97 -- 523
Depreciation and amortization.......................................... 2,623 3,497 -- 6,120
--------- --------- --- -----------
Operating income (loss).......................................... $ 1,398 2,528 (634) 3,292
--------- --------- --- -----------
--------- --------- --- -----------
F-35
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION RELATING TO INTERIM PERIODS IS UNAUDITED)
(15) SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED)
1996 1995 1994
---------------------------------------------- --------- ---------
LONG- LONG- LONG-
DISTANCE CABLE LOCAL COMBINED DISTANCE DISTANCE
--------- --------- ----------- ----------- --------- ---------
(AMOUNTS
IN THOUSANDS)
Revenues:
Telecommunication revenues......... $ 155,419 0 0 155,419 129,279 116,981
Cable revenues..................... 0 9,475 0 9,475 0 0
--------- --------- --- ----------- --------- ---------
Total revenues................... 155,419 9,475 0 164,894 129,279 116,981
--------- --------- --- ----------- --------- ---------
Cost of sales and services:
Distribution costs and costs of
services......................... 90,597 0 0 90,597 72,091 63,877
Programming and copyright costs.... 0 2,067 0 2,067 0 0
--------- --------- --- ----------- --------- ---------
Total cost of sales and
services....................... 90,597 2,067 0 92,664 72,091 63,877
Selling, general and administrative
expenses:
Operating and engineering.......... 9,095 0 92 9,187 9,182 7,607
Cable television, including
management fees of $197.......... 0 2,992 0 2,992 0 0
Sales and communications........... 13,013 0 28 13,041 9,865 7,040
General and administrative......... 17,349 0 316 17,665 15,645 16,658
Legal and regulatory............... 1,357 0 434 1,791 1,540 1,334
Bad debts.......................... 1,736 0 0 1,736 1,459 829
Depreciation and amortization...... 7,189 2,220 0 9,409 5,993 6,639
--------- --------- --- ----------- --------- ---------
Operating income (loss).......... $ 15,083 2,196 (870) 16,409 13,504 12,997
--------- --------- --- ----------- --------- ---------
--------- --------- --- ----------- --------- ---------
F-36
REPORT OF INDEPENDENT AUDITORS
To the Partners
Prime Cable of Alaska, L.P.
We have audited the accompanying balance sheets of Prime Cable of Alaska,
L.P. (the Partnership) as of December 31, 1995 and 1994, and the related
statements of operations, changes in partners' capital deficiency, and cash
flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Prime Cable of Alaska, L.P.
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Austin, Texas
March 18, 1996, except for the
last paragraph of Note 7, as to
which the date is September 9, 1996
F-37
PRIME CABLE OF ALASKA, L.P.
BALANCE SHEETS
ASSETS (NOTE 6)
(UNAUDITED) (UNAUDITED) DECEMBER 31,
SEPTEMBER 30, JUNE 30, ----------------------
1996 1996 1995 1994
-------------- ------------ ---------- ----------
(IN THOUSANDS)
Cash and cash equivalents................................. $ -- $ 803 $ 9,477 $ 8,375
Accounts receivable, net (Note 4)......................... 1,059 956 1,221 1,204
Prepaid expenses.......................................... 142 196 166 227
Inventories............................................... 815 854 833 324
Property, plant and equipment, at cost:
Cable television distribution systems................... 72,578 69,695 68,090 63,819
Transportation equipment................................ 901 910 848 775
Furniture and fixtures.................................. 2,372 2,306 1,864 1,760
Land and buildings...................................... 494 487 487 487
-------------- ------------ ---------- ----------
76,345 73,398 71,289 66,841
Less accumulated depreciation........................... (47,612) (45,770) (42,114) (34,975)
-------------- ------------ ---------- ----------
Net property, plant and equipment..................... 28,733 27,628 29,175 31,866
Intangible assets, net (Note 5)........................... 26,055 28,397 33,080 42,447
Deferred debt issuance costs, net......................... 2,197 2,209 125 832
Other assets.............................................. 349 181 64 28
-------------- ------------ ---------- ----------
Total assets.......................................... $ 59,350 $ 61,224 $ 74,141 $ 85,303
-------------- ------------ ---------- ----------
-------------- ------------ ---------- ----------
LIABILITIES AND PARTNERS' CAPITAL DEFICIENCY
Accounts payable.......................................... $ 2,297 $ 583 $ 773 $ 809
Accounts payable, affiliates.............................. 1,620 907 186 124
Accrued interest.......................................... 2,217 2,061 1,368 1,311
Other accrued expenses.................................... 1,764 2,086 1,639 1,656
Subscriber deposits and unearned income................... 2,093 2,060 2,043 1,796
Term debt (Note 6)........................................ 102,000 103,000 82,565 84,065
Subordinated debt (Note 7)................................ 4,320 4,320 34,041 27,689
-------------- ------------ ---------- ----------
Total liabilities..................................... 116,311 115,017 122,615 117,450
-------------- ------------ ---------- ----------
Commitments and Contingencies (Notes 7 and 9)
Partners' capital deficiency (Note 7):
General partners........................................ 9,000 9,000 9,000 9,000
Limited partners........................................ 36,000 36,000 36,000 36,000
Accumulated deficit....................................... (101,961) (98,793) (93,474) (77,147)
-------------- ------------ ---------- ----------
Total partners' capital deficiency.................... (56,961) (53,793) (48,474) (32,147)
-------------- ------------ ---------- ----------
Total liabilities and partners' capital deficiency.... $ 59,350 $ 61,224 $ 74,141 $ 85,303
-------------- ------------ ---------- ----------
-------------- ------------ ---------- ----------
The accompanying notes are an integral
part of the financial statements.
F-38
PRIME CABLE OF ALASKA, L.P.
STATEMENTS OF OPERATIONS
(UNAUDITED) (UNAUDITED)
NINE MONTHS SIX MONTHS YEARS
ENDED SEPTEMBER 30, ENDED JUNE 30, ENDED DECEMBER 31,
-------------------- ---------------------- ----------------------
1996 1995 1996 1995 1995 1994
--------- --------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Revenues................................ $ 25,770 $ 24,223 $ 17,276 $ 16,100 $ 32,594 $ 30,599
Operating expenses:
Cable television system expenses...... 13,253 12,296 8,668 8,150 16,264 14,911
Management fees and expenses (Note
9).................................. 1,423 1,255 924 817 1,674 1,671
Depreciation and amortization......... 12,637 12,353 8,410 8,208 16,487 16,944
Provision for inventory
obsolescence........................ -- -- -- -- -- 35
--------- --------- ---------- ---------- ---------- ----------
Loss from operations.................... (1,543) (1,681) (726) (1,075) (1,831) (2,962)
Interest income......................... 135 331 131 207 460 285
Interest expense........................ (7,106) (7,999) (4,736) (5,349) (14,960) (9,035)
Gain (loss) on disposal of assets....... 27 4 12 4 4 (15)
--------- --------- ---------- ---------- ---------- ----------
Net loss................................ $ (8,487) $ (9,345) $ (5,319) $ (6,213) $ (16,327) $ (11,727)
--------- --------- ---------- ---------- ---------- ----------
--------- --------- ---------- ---------- ---------- ----------
The accompanying notes are an integral
part of the financial statements.
F-39
PRIME CABLE OF ALASKA, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL DEFICIENCY
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
---------- ----------- ----------
(IN THOUSANDS)
Balances, January 1, 1994..................................................... $ (20,420) $ -- $ (20,420)
Net loss for the year ended December 31, 1994............................... (11,727) -- (11,727)
---------- ----- ----------
Balances, December 31, 1994................................................... (32,147) -- (32,147)
Net loss.................................................................... (16,327) -- (16,327)
---------- ----- ----------
Balances, December 31, 1995................................................... (48,474) -- (48,474)
Net loss (unaudited)........................................................ (8,487) -- (8,487)
---------- ----- ----------
Balances, September 30, 1996 (unaudited)...................................... $ (56,961) $ -- $ (56,961)
---------- ----- ----------
---------- ----- ----------
The accompanying notes are an integral
part of the financial statements.
F-40
PRIME CABLE OF ALASKA L.P.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS (UNAUDITED)
ENDED SEPTEMBER 30, SIX MONTHS YEARS ENDED
ENDED JUNE 30, DECEMBER 31,
-------------------- -------------------- --------------------
1996 1995 1996 1995 1995 1994
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $ (8,487) $ (9,345) $ (5,319) $ (6,213) $ (16,327) $ (11,727)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization.................. 12,637 12,353 8,410 8,208 16,487 16,944
Amortization of deferred debt issuance costs... 208 530 170 352 708 500
Deferred interest on subordinated debt......... 401 1,501 401 985 6,352 1,802
Provision for inventory obsolescence........... -- -- -- -- -- 35
(Gain) loss on disposal of assets.............. (27) (4) (12) (4) (4) 15
--------- --------- --------- --------- --------- ---------
4,732 5,035 3,650 3,328 7,216 7,569
Net decrease (increase) in accounts receivable,
prepaid expenses and other assets.............. (99) 221 118 338 8 (355)
Net increase (decrease) in accounts payable,
accounts payable-affiliates, accrued interest,
other accrued expenses, and subscriber deposits
and unearned income............................ 3,982 (160) 1,688 (14) 313 1,236
--------- --------- --------- --------- --------- ---------
Net cash provided by operating activities........ 8,615 5,096 5,456 3,652 7,537 8,450
--------- --------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment and
inventories.................................... (5,154) (3,742) (2,201) (2,821) (4,988) (4,021)
Proceeds from sale of assets..................... 29 54 12 54 54 10
--------- --------- --------- --------- --------- ---------
Net cash used in investing activities............ (5,125) (3,688) (2,189) (2,767) (4,934) (4,011)
--------- --------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank debt borrowings............... 106,500 -- 105,000 -- -- --
Repayment of term debt........................... (87,065) (1,500) (84,565) -- (1,500) (4,330)
Prepayment of subordinated debt.................. (30,122) -- (30,122) -- -- --
Increase in deferred debt issuance cost.......... (2,280) -- (2,254) -- (1) (646)
--------- --------- --------- --------- --------- ---------
Net cash used in financing activities............ (12,967) (1,500) (11,941) -- (1,501) (4,976)
--------- --------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... (9,477) (92) (8,674) 885 1,102 (537)
Cash and cash equivalents, beginning of period... 9,477 8,375 9,477 8,375 8,375 8,912
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents, end of period......... $ -- $ 8,283 $ 803 $ 9,260 $ 9,477 $ 8,375
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash interest paid............................... $ 5,648 $ 5,943 $ 3,472 $ 3,912 $ 7,843 $ 6,330
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
The accompanying notes are an integral
part of the financial statements.
F-41
PRIME CABLE OF ALASKA, L.P.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Prime Cable of Alaska, L.P. (the "Partnership"), a Delaware limited
partnership, was formed on January 30, 1989 to acquire and operate cable
television systems serving the municipality of Anchorage and its environs, Fort
Richardson, Elmendorf Air Force Base, the city of Bethel and its environs, and
the city of Kenai and the Kenai Peninsula Borough, all in the state of Alaska
(the "Alaska Systems"). The Partnership was capitalized with contributions
totaling $9,000,000 from the general partners, Prime Cable Fund I, Inc., Prime
Cable Fund II, Inc. and Prime Cable Fund III, Inc., and contributions from the
limited partners, Alaska Cable Inc. ("Alaska Cable"), Prime Cable Growth
Partners, L.P. and Prime Venture I Holdings, L.P. in the amounts of $23,000,000,
$11,000,000 and $2,000,000, respectively.
The partnership agreement calls for losses to be allocated 97% to the
general partners and 3% to the limited partners until the general partners'
capital accounts have been reduced to zero. Thereafter, losses are allocated
entirely to the limited partners until sufficient losses have been allocated to
reduce limited partner capital accounts to zero. Finally, remaining losses are
allocated to the general partners.
Profits will be allocated first to those partners with capital account
deficits, in proportion to their respective deficit balances. Second, profits
will be allocated to all partners based on respective capital contributions
until the capital accounts have been restored to the amount of each partner's
capital contribution less any distributions. Profits in excess of capital
contributions less distributions remaining from the sale of all, or
substantially all, of the assets of the Partnership will be allocated to the
partners in proportion to their respective capital contributions after first
being reduced by amounts paid to the corporate limited partner and to the
subordinate debt holders as described in Note 7.
As of June 30, 1995 certain shareholders of Alaska Cable can require the
sale of the Partnership for any reason.
The Partnership has a $10 investment, representing a .165% limited
partnership capital interest in Prime Video, L.P. ("PVLP"). PVLP was organized
to acquire, develop and operate Blockbuster Video Superstores, and has 19 stores
in operation at December 31, 1995. The Partnership's investment is accounted for
using the cost method, the results of which do not differ significantly from the
equity method. Through December 1995, the Partnership has received distributions
totaling $7,000 from PVLP.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are carried at the lower of cost (weighted average unit cost) or
market.
PROPERTY, PLANT AND EQUIPMENT
Depreciation is computed by the straight-line method over the estimated
useful lives of the assets. The composite method and a ten year life are used
for cable television distribution systems. Under the composite method, proceeds
from the retirement of cable television distribution system assets are credited
to the allowance for depreciation. Gains or losses on disposition of property,
plant and equipment (other than cable television distribution systems) are
credited or charged to income. Maintenance and repairs are charged to expense as
incurred. Expenditures for major renewals and betterments are capitalized.
F-42
PRIME CABLE OF ALASKA, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Excess cost over net assets acquired arising from the acquisition of cable
television systems is being amortized by the straight line method over ten
years. Other intangible assets, including subscriber lists and a Certificate of
Operating Rights, are being amortized by the straight line method over their
useful lives ranging from ten to eleven years.
It is the Partnership's policy to value intangible assets at the lower of
unamortized cost or fair value. Management reviews the valuation and
amortization of intangible assets on a periodic basis, taking into consideration
any events or circumstances which might result in diminished fair value.
DEFERRED DEBT ISSUANCE COSTS
Debt issuance costs are deferred and amortized by the straight-line method,
which approximates the interest method, over the term of the related debt.
REVENUE RECOGNITION
Revenues are generally billed in advance and are recognized as the cable
service is provided.
ADVERTISING EXPENSE
The Partnership expenses advertising costs as incurred. Advertising
expenses, net of reimbursements, were approximately $660,000 and $674,000 for
1995 and 1994, respectively.
INCOME TAXES
The Partnership as an entity pays no income taxes, although it is required
to file federal and state income tax returns for informational purposes only.
All income or loss "flows through" to the individual partners in the manner
specified in the partnership agreement.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Partnership to
concentrations of credit risk are primarily cash, temporary investments, and
accounts receivable. Excess cash is invested in high quality short-term liquid
money instruments issued by highly-rated financial institutions. At December 31,
1995, substantially all of the Partnership's cash balances were invested in
short-term liquid money instruments. Though limited to one geographical area,
the concentration of credit risk with respect to the Partnership's receivables
is minimized due to the large number of customers, individually small balances,
short payment terms and required deposits.
STATEMENTS OF CASH FLOWS
For purposes of the Statements of Cash Flows, the Partnership considers all
highly liquid investments with a maturity of three months or less, when
acquired, to be cash equivalents.
F-43
PRIME CABLE OF ALASKA, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. ACQUISITION OF CABLE TELEVISION SYSTEMS
On June 30, 1989, the Partnership acquired the Alaska Systems for an
aggregate purchase price including acquisition expenses of $143,843,000. For
financial statement purposes, the acquisition was accounted for using the
purchase method with the acquisition cost allocated to the tangible and
identifiable intangible assets based upon current fair market values. The
allocation resulted in an excess of cost over net assets acquired of
$24,204,000.
On October 1, 1989, the cable television system in the Eaglewood subdivision
of Anchorage was acquired by the Partnership for $541,000, including acquisition
expenses. The acquisition was accounted for as a purchase transaction with the
acquisition cost allocated to the tangible and identifiable intangible assets of
the system based upon current fair market values. This allocation resulted in an
excess of cost over net assets acquired of $217,000.
4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following (thousands of dollars):
DECEMBER 31,
--------------------
1995 1994
--------- ---------
Accounts receivable, trade............................................... $ 1,333 $ 1,402
Accounts receivable, other............................................... 117 69
Less allowance for doubtful accounts..................................... (229) (267)
--------- ---------
Accounts receivable, net of allowance.................................... $ 1,221 $ 1,204
--------- ---------
--------- ---------
F-44
PRIME CABLE OF ALASKA, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INTANGIBLE ASSETS
Intangible assets consisted of the following (thousands of dollars):
DECEMBER 31,
----------------------
1995 1994
---------- ----------
Subscriber list...................................................... $ 34,821 $ 34,821
Certificate of Operating Rights...................................... 29,019 29,019
Excess of acquisition costs over net assets acquired................. 24,421 24,421
Other intangibles.................................................... 5,775 5,775
---------- ----------
94,036 94,036
Less accumulated amortization........................................ (60,956) (51,589)
---------- ----------
Intangible assets, net............................................... $ 33,080 $ 42,447
---------- ----------
---------- ----------
6. BANK DEBT
Bank debt consisted of the following (thousands of dollars):
DECEMBER 31,
--------------------
1995 1994
--------- ---------
Bank credit agreement:
Tranche A Note....................................................... $ 65,065 $ 66,565
Tranche B Note....................................................... 17,500 17,500
--------- ---------
$ 82,565 $ 84,065
--------- ---------
--------- ---------
The rates of interest on amounts outstanding under the bank loan agreement
at December 31, 1995 were fixed under three-month Eurodollar contracts at 7.2%
and 7.9% for the Tranche A Note and the Tranche B Note, respectively.
On March 7, 1996, the Partnership consummated a new bank loan agreement
using the proceeds to pay off all amounts outstanding under the previous bank
credit agreement and subordinated notes (Note 7). The Partnership has
$125,000,000 available under the new loan agreement, with borrowings bearing
interest at the bank's prime rate plus 2%. At the Partnership's option, all or a
specified portion of the indebtedness may be fixed for periods ranging from one
month to one year based on Eurodollar rates plus 3%. The interest rates under
the new agreement are subject to reductions of up to 1.75% per annum if certain
financial tests are met. The Partnership is required to pay a commitment fee
equal to .5% per annum on the unused portion of the commitment, and an agency
fee of $50,000 per year. Interest and fees are payable quarterly.
F-45
PRIME CABLE OF ALASKA, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. BANK DEBT (CONTINUED)
Beginning June 30, 1998, the loan commitment is reduced at the end of each
calendar quarter through March 31, 2005 as follows:
QUARTERLY REDUCTION
OF LOAN COMMITMENT
---------------------
1998......................................................... $ 4,166,667
1999......................................................... $ 3,125,000
2000......................................................... $ 3,125,000
2001......................................................... $ 3,125,000
2002......................................................... $ 4,687,500
2003......................................................... $ 4,687,500
2004......................................................... $ 6,250,000
2005......................................................... $ 12,500,000
While the Partnership may elect to reduce amounts due and available under
the loan agreement through prepayments of not less than $1,000,000, a mandatory
prepayment is required each May, beginning in May 1999, if, for the prior year
ended December 31, the Partnership's Operating Cash Flow (defined as net income
before extraordinary items and gains and losses on asset sales, plus interest
expense, depreciation, amortization, bank fees, deferred management fees,
expenses and other amounts deferred under the management agreement (Note 8),
income tax expense, partnership expenses not to exceed $75,000 per annum, and
other non-cash expenses) exceeds payments made for cash interest expense,
permanent prepayments of principal amounts outstanding under the loan agreement,
bank fees, cash income tax payments, capital expenditures, amounts previously
deferred under the management agreement, and capital lease obligations. The
Partnership is required to make a prepayment in the amount of 50% of such
excess. Additionally, a mandatory prepayment may be required in the event of
asset sales (other than dispositions of obsolete inventory and equipment in the
ordinary course of business), the issuance of partnership interests or other
debt or equity securities, or in the event of certain changes in ownership of
the Partnership. All such mandatory prepayments permanently reduce the amounts
due and available under the loan commitment.
The loan agreement is collateralized by essentially all of the Partnership's
assets, the general partners' interests in the Partnership, and a pledge by PMLP
of its rights under the management agreement. The loan agreement imposes
numerous requirements and restrictions, including limitations on indebtedness,
payments, purchases and capital expenditures. In addition, certain financial
ratios must be maintained.
In connection with the initial funding under the March 7, 1996 loan
agreement, the Partnership paid bank fees of approximately $2,144,000, which
will be amortized to interest expense over the life of the agreement. Additional
bank fees equal to .5% of the commitment are due upon the occurrence of certain
changes in ownership of the Partnership, but in no event later than September 7,
1997.
F-46
PRIME CABLE OF ALASKA, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SUBORDINATED DEBT
Subordinated debt consisted of the following (thousands of dollars):
DECEMBER 31,
--------------------
1995 1994
--------- ---------
Subordinated notes:
Original principal amount outstanding.................................. $ 20,000 $ 20,000
Deferred interest...................................................... 14,041 7,689
--------- ---------
$ 34,041 $ 27,689
--------- ---------
--------- ---------
On June 30, 1989, the Partnership entered into an investment agreement to
issue subordinated notes with an original principal amount of $20,000,000. The
notes bear interest at 12.25%, with 7.25% payable quarterly and the remainder
deferred. Interest deferred each quarter bears interest at 12.25% and is payable
at maturity.
On March 7, 1996, the Partnership used $30,387,000 in proceeds from the bank
loan agreement (Note 6) to prepay in full the amounts outstanding under the
subordinated notes. The investment agreement remained in force.
Under the investment agreement, the subordinated debt holders also were
issued profit participation rights entitling them to receive the Profit
Participation Amount (defined as 13.6284% multiplied by the excess of the fair
market value of the Partnership over the sum of (1) the $45,000,000 original
equity contributed to the Partnership, reduced by distributions, plus (2) the
amount of the tax allocation to the corporate limited partner which provides the
corporate limited partner an after-tax return equivalent to the other limited
partners). The holders of profit participation rights have right of first
refusal on a portion of the issuance of additional partnership interests by the
Partnership.
The holders of the profit participation rights may elect at any time to put
all or any portion of their rights to the Partnership. In the event that the
Partnership is unable to purchase their rights, the holders can require the
liquidation of the Partnership. At any time after June 30, 1996, but prior to
June 30, 1998, the Partnership may, by notice to the holders, require them to
sell all or any portion of their profit participation rights to the Partnership.
Under the put and call agreements, the purchase price of the rights shall be
based on the Profit Participation Amount multiplied by the percentage of rights
sold. Any payments to the holders of the profit participation rights are
subordinate to payment of amounts due under the new March 7, 1996 bank loan
agreement (Note 6).
At each balance sheet date, management of the Partnership estimates fair
market value of the Partnership to determine the Profit Participation Amount.
Based upon such estimates, the Partnership recorded a liability of $4,320,000 to
the holders of the profit participation rights in 1995. This amount was charged
to interest expense and recorded as additional deferred interest on the
subordinated debt in the financial statements for 1995, which have been restated
to include this expense and liability. Such amount will be paid upon the sale of
the partnership interests (see Note 9).
F-47
PRIME CABLE OF ALASKA, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
LEASE ARRANGEMENTS
The Partnership, as an integral part of its operations, has entered into
operating lease contracts for microwave service, pole use and office space. The
approximate minimum aggregate rentals under such leases (exclusive of minimum
pole rentals of approximately $142,000 per year) at December 31, 1995, are as
follows: 1996, $462,000; 1997, $454,000; 1998, $451,000; 1999, $471,000; 2000,
$486,000 and $332,000 thereafter. Rent expense was $571,000, $556,000, and
$460,000, for the years ended December 31, 1995, 1994 and 1993, respectively.
MANAGEMENT AGREEMENT
The Partnership is a party to a management agreement with PMLP, an affiliate
of the general partners. Under the terms of the management agreement, PMLP
manages all aspects of the daily operations of the cable television systems. In
consideration for its services to the Partnership, PMLP receives annual fees
equal to 5% of the gross revenues of the Partnership and is reimbursed for
certain expenses incurred in connection with the services provided. Under the
terms of the March 7, 1996 bank loan agreement (Note 6), the Partnership will
defer payment of the 5% fees until October 1, 1996. The deferred fees bear
interest at a rate of 17.5% per annum, and may be paid to PMLP upon the
achievement of certain financial ratios. In addition, the terms of the bank loan
agreement restrict payments to PMLP in the event of a default under the credit
agreement.
In connection with the agreement, the Partnership incurred $1,674,000,
$1,671,000, and $1,542,000, in management fees and reimbursable expenses for the
years ended December 31, 1995, 1994 and 1993, respectively.
EMPLOYEE BENEFIT PLAN
The Partnership participates with other affiliated entities in a defined
contribution pension plan covering substantially all full-time employees who
have completed one year of service. The plan is subject to the provisions of
Internal Revenue Code Sec. 401(k). Contributions by the Partnership are
determined as a percent of each participating employee's contributions and are
at the discretion of the plan's sponsor, PMLP. Partnership contributions totaled
$33,000, $29,000, and $21,000, for fiscal years 1995, 1994 and 1993,
respectively.
LITIGATION
The Partnership is involved in various lawsuits and legal proceedings which
have arisen in the normal course of business, including the following: Two
former employees filed separate lawsuits related to the Partnership's employment
practices, with claims for damages aggregating approximately $650,000, with one
action including an unspecified claim for punitive damages. Two suits have been
filed against the Partnership related to automobile accidents, one making damage
claims aggregating approximately $550,000, the other claiming damages in an
unspecified amount. However, any damages ultimately assessed or settlements
negotiated under these two automobile accident claims will be paid by the
Partnership's insurance carrier. 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 or results of operations of
the Partnership, and therefore no provision for liability has been made in the
financial statements.
F-48
PRIME CABLE OF ALASKA, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CABLE SERVICE RATE REREGULATION
On April 1, 1993, the Federal Communications Commission ("FCC") adopted
rules governing rates charged by cable operators for the basic service tier of
channels, 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"). To comply with the
regulations, the Partnership implemented various subscriber service and rate
changes effective September 1, 1993. These changes resulted in a reduction of
total monthly revenue of approximately 6%.
On March 30, 1994, the FCC released revisions to its April 1, 1993 rate
regulations. The revisions required cable operators to implement additional rate
rollbacks using complex benchmark calculations, or alternatively, to justify
higher rates based on a cost-of-service showing. The Partnership elected to file
cost-of-service showings with the FCC where required. Management of the
Partnership believes that rates in effect at March 1994 were supportable under
the cost-of-service rules, and therefore, no rate rollbacks were implemented in
connection with the 1994 FCC revisions. Subsequent rate adjustments have been
made utilizing cost-of-service methodology with adjustments as provided by FCC
rules.
The regulated services rates charged by the Partnership may be reviewed by
the State of Alaska under certain conditions (for basic service) or the FCC (for
cable programming service). Refund liability for basic service rates is limited
to a one-year period. In order for the State of Alaska to exercise rate
regulation authority over the Partnership's basic service rates, 25% of the
Alaska Systems' subscribers must request such regulation by filing a petition
with the State of Alaska. At December 31, 1995, the State of Alaska does not
have rate regulation authority over the Partnership's basic service rates, and
therefore there is no refund liability for basic service at this time. Refund
liability for cable programming service rates may be calculated from the date a
complaint alleging an unreasonable rate for cable programming service is filed
with the FCC until the rate reduction is implemented. Complaints by subscribers
have been filed with, and accepted by, the FCC for certain franchise areas.
However, the Partnership's filings made in response to those complaints related
to the period prior to July 15, 1994 have been 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
Partnership believes that the potential for any refund liability for cable
programming service is remote, and therefore no provision has been made in the
financial statements for such refunds.
Management of the Partnership believes that it has complied in all material
respects with the provisions of the FCC rules and regulations and that the
Partnership 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 Partnership to make refunds and/ or to be in default on certain debt
covenants.
In February 1996, a telecommunications bill was signed into federal law
which significantly 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. The impact of the new bill cannot be determined at this
time, but it is not expected to have a significant adverse impact on the
financial position or results of operations of the Partnership.
F-49
PRIME CABLE OF ALASKA, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENT
The Partners of the Partnership have signed a letter of intent to sell the
Partnership to General Communication, Inc. (GCI). GCI is a telecommunications
company providing long distance services in Alaska. A definitive agreement is
expected to be signed in the second quarter of 1996. Under the terms of the
letter of intent, the non-corporate partners would sell their partnership
interests, the shareholders of the corporate partners would exchange their
corporate shares, and the holders of the profit participation rights (see Note
7) would receive settlement of the Profit Participation Amount, all for a total
consideration of 11.8 million shares of GCI common stock.
F-50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION FOR PRIME CABLE
Prime management's discussion of the financial condition of Prime must be
addressed in the context of regulatory changes in the form of the 1996 Telecom
Act, the 1992 Cable Act, and the Communications Act discussed elsewhere in this
Prospectus.
TWO YEARS ENDED DECEMBER 31, 1995
As of December 31, 1995, the Prime Cable passed more than 106,000 homes and
served more than 53,000 residential subscribers and 12,000 non-standard
residential and business connections, including individual dwelling units in
apartment complexes and hotels which are billed under bulk billing arrangements.
Prime had approximately 63,000 subscriptions to premium service units.
RESULTS OF OPERATIONS. Revenues totaled $32.6 million and $30.6 million
during the years ended December 31, 1995 and 1994 respectively. The 6.5% growth
in 1995 as compared to 1994 resulted primarily from increases in the number of
subscribers, primarily as a result of additional homes passed and increases in
the number of subscriptions for services. Approximately $356,000 of the growth
in 1995 revenues was due to increases in regulated service rates implemented in
January, 1995. Average monthly revenue per account was approximately $40.17 and
$39.92 in 1995 and 1994, respectively, representing an increase of approximately
0.6%. Revenues were primarily generated from subscription fees, installation
charges, and subscriber cable equipment rentals.
Cable television system expenses, representing costs directly attributable
to providing cable services to customers, increased 9.1% in 1995 as compared to
1994. The increases result from increased business activity resulting from the
growth in the number of subscribers and increased programming costs.
Prime pays management fees plus associated reimbursable expenses under the
present Prime management agreement with its manager. The management fee is based
on a percentage of gross revenues. Management fees and reimbursable expenses for
the each of the years ended December 31, 1995 and 1994 were $1.7 million.
EBITDA as a percentage of revenues decreased from 45.7% to 45.0% during the
year ended December 31, 1995 compared to the corresponding period of 1994. The
decrease was primarily caused by an increase in cable television system expenses
that on a percentage basis exceeded the corresponding increase in revenues.
Depreciation and amortization expense was $16.5 million and $16.9 million
for the years ended December 31, 1995 and 1994, respectively. The 1995 decrease
as compared to 1994 resulted from certain tangible and intangible assets
becoming fully amortized.
Interest expense was $15.0 million and $9.0 million for the years ended
December 31, 1995 and 1994, respectively. The increases, except for that
described below, were primarily attributable to increases in interest rates
throughout the period and amortization of additional deferred loan costs related
to amendments of Prime's prior agreement. Approximately $4.4 million of the 1995
increase results from accrual of the December 31, 1995 profit participation
amount (equity participation interest) as further described in Note 7 to Prime's
accompanying December 31, 1995 financial statements.
Prime, as a partnership entity, pays no income taxes, although it is
required to file federal and state income tax returns for informational purposes
only. All income or loss "flows through" to the individual partners.
Certain of Prime's expenses, such as those for wages and benefits, equipment
repair and replacement, and billing and marketing generally increase with
inflation.
F-51
LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operating activities
decreased $913,000 to $7.54 million for the year ended December 31, 1995
compared to the corresponding period of 1994 resulting primarily from increases
in interest expense.
Cash used in investing activities increased $923,000 to $4.93 million for
the year ended December 31, 1995 compared to the corresponding period of 1994,
primarily due to expenditures related to plant upgrades in 1995.
Cash used in financing activities decreased from $4.98 million to $1.5
million for the year ended December 31, 1995 compared to the corresponding
period of 1994 related primarily to reduced debt repayment in 1995 as compared
to 1994.
Prime's primary need for capital has been to finance plant extensions,
rebuilds and upgrades and to add addressable converters to certain cable
systems. Prime spent $5.0 million during 1995 on capital expenditures.
On March 7, 1996, Prime consummated the bank credit agreement using the
proceeds to pay off all amounts outstanding under the previous bank credit
agreement and subordinated notes. Prime has up to $125 million available under
the commitment in the new loan agreement, with available borrowing levels based
on debt to operating cash flow ratios as specified in the loan agreement.
Borrowings bear interest at the bank's prime rate plus 2%.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
As of June 30, 1996, the Prime Cable passed more than 107,000 homes and
served more than 52,000 residential subscribers and 12,000 non-standard
residential and business connections, including individual dwellings units in
apartment complexes and hotels which are billed under bulk billing arrangements.
Prime had approximately 51,000 subscriptions to premium service units.
RESULTS OF OPERATIONS. Revenues totaled $17.3 million for the six months
ended June 30, 1996, and $16.1 million for the six months ended June 30, 1995.
The 7.3% growth for the six months results primarily from increases in the
number of subscribers as a result of additional homes passed and increases in
the number of subscriptions for services as well as a rate increase implemented
effective December 15, 1995. Average monthly revenue per account was
approximately $42.17 and $40.67 for the six months ended June 30, 1996 and 1995,
respectively. This represents an increase of approximately 3.7% for the six
months ended June 30, 1996 compared to the corresponding periods of 1995.
Revenues were primarily generated from subscription fees, installation charges,
and subscriber cable equipment rentals.
Cable television system expenses, representing costs directly attributable
to providing cable services to customers, increased 6.4% for the six months
ended June 30, 1996 compared to the corresponding periods of 1995. This resulted
from increased business activity attributed to growth in the number of
subscribers and increased programming costs.
Prime paid management fees plus associated reimbursable expenses under a
management agreement. Management fees and reimbursable expenses were $924,000
and $817,000 for the six months ended June 30, 1996 and 1995, respectively.
EBITDA increased to 44.5% from 44.3% for the 6 months ended June 30, 1996
compared to the corresponding period of 1995. The increases were primarily
caused by an increase in cable television system gross margin resulting from the
December 15, 1995 rate increase to subscribers.
Depreciation and amortization expense was $8.4 million and $8.2 million for
the six months ended June 30, 1996 and 1995, respectively. The increase results
from additional purchases of property, plant and equipment.
F-52
Interest expense totaled $4.7 million and $5.4 million for the six months
ended June 30, 1996 and 1995, respectively. The 1996 decrease was primarily
attributable to lower total borrowings and lower effective interest rates in
1996 compared to 1995.
Prime, as a partnership entity, pays no income taxes although it is required
to file federal and state income tax returns for informational purposes only.
All income or loss "flow through" to the individual partners.
Certain of Prime's expenses, such as those for wages and benefits, equipment
repair and replacement and billing and marketing generally increase with
inflation.
LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operating activities
increased $1.8 million for the six months ended June 30, 1996, compared to the
corresponding period of 1995. The increase results primarily from a timing
difference in the payment of interest expense, the deferral of payment of
management fees and from increased revenues attributable to increased subscriber
counts and a December 15, 1995 rate increase.
Cash used in investing activities decreased $578,000 to $2.2 million for the
six months ended June 30, 1996, compared to the corresponding period of 1995.
The decrease results primarily from decreased capital expenditures related to
improvements to the cable television system and decreases in the purchase of
addressable converters.
Cash used in financing activities totaled $11.9 million for the six months
ended June 30, 1996 resulting from the repayment of current debt and previously
outstanding debts and payments of deferred debt issuance costs in excess of the
initial draw on the bank credit agreement.
Prime's primary need for capital has been to finance plant extensions,
rebuilds and upgrades and to add addressable converters to certain cable
systems. Prime spent $2.2 million during the first six months of 1996 on capital
expenditures.
The bank credit agreement was consummated in March, 1996. Prime has up to
$125 million available under the commitment in the new loan agreement, with
available borrowing levels based on debt to operating cash flow ratios as
specified in the loan agreement. Based on Prime's operating cash flow for the
quarter ending June 30, 1996, Prime could have borrowed up to approximately
$112.3 million without being in default at June 30, 1996. Borrowings bear
interest at the bank's prime rate plus 2%.
F-53
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Alaskan Cable Network
We have audited the accompanying combined balance sheets of the Alaskan
Cable Network (see Note 1) as of December 31, 1995 and 1994, and the related
combined statements of income, shareholder's equity and cash flows for each of
the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Alaskan Cable
Network at December 31, 1995 and 1994, and the combined results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
Woodland Hills, California
February 9, 1996 except for
Note 13, as to which the date is
March 14, 1996
F-54
ALASKAN CABLE NETWORK
COMBINED BALANCE SHEETS
ASSETS
(UNAUDITED) DECEMBER 31,
JUNE 30, --------------------
1996 1995 1994
------------ --------- ---------
(IN THOUSANDS)
Cash and cash equivalents................................................... $ 1,015 $ 3,905 $ 6,153
Trade accounts receivable, less allowance for doubtful accounts of $102 in
1996, $95 in 1995, $82 in 1994............................................ 1,402 1,537 1,366
Property, plant and equipment, net.......................................... 10,909 12,144 14,161
Intangible assets, net...................................................... 5,244 6,908 10,027
Due from affiliates......................................................... 639 -- 1,673
------------ --------- ---------
Total Assets................................................................ $ 19,209 $ 24,494 $ 33,380
------------ --------- ---------
------------ --------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY
Line of credit.............................................................. $ 3,000 $ 8,000 $ --
Accounts payable............................................................ 305 615 390
Accrued compensation and benefits........................................... 425 331 381
Other accrued liabilities................................................... 885 775 1,445
Deferred revenue............................................................ 1,152 1,211 1,128
Due to affiliates........................................................... -- 64 --
------------ --------- ---------
Total liabilities........................................................... 5,767 10,996 3,344
------------ --------- ---------
Commitments and contingencies
Shareholder's equity:
Common Stock.............................................................. 3 3 3
Additional paid-in-capital................................................ 14,458 14,478 31,936
Accumulated deficit....................................................... (1,019) (983) (1,903)
------------ --------- ---------
Total shareholder's equity.................................................. 13,442 13,498 30,036
------------ --------- ---------
Total liabilities and shareholder's equity.................................. $ 19,209 $ 24,494 $ 33,380
------------ --------- ---------
------------ --------- ---------
See accompanying notes.
F-55
ALASKAN CABLE NETWORK
COMBINED STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDED YEARS ENDED,
JUNE 30, DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Cable television service revenue.......................... $ 7,442 $ 7,224 $ 14,515 $ 13,883 $ 14,142
Operating expenses:
Cost of revenues........................................ 2,485 2,374 4,702 4,467 4,350
Selling, general and administrative..................... 1,515 1,450 3,005 2,808 3,063
Depreciation and amortization........................... 3,113 3,034 6,176 6,092 6,362
--------- --------- --------- --------- ---------
Income from operations.................................... 329 366 632 516 367
Other income (expense):
Loss on disposal of assets.............................. (6) (2) -- -- (2,687)
Interest income, net.................................... (374) 55 80 235 46
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative effect of
change in accounting principle.......................... (51) 419 712 751 (2,274)
Benefit (provision) for income taxes...................... 15 16 208 (9) 622
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle.......................... (36) 435 920 742 (1,652)
Cumulative effect of change in accounting principle....... -- -- -- -- (622)
--------- --------- --------- --------- ---------
Net income (loss)......................................... $ (36) $ 435 $ 920 $ 742 $ (2,274)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
See accompanying notes.
F-56
ALASKAN CABLE NETWORK
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
----------- ---------- ------------- ----------
(IN THOUSANDS)
Balance at December 31, 1992.................................. $ 3 $ 32,161 $ (371) $ 31,793
Dividends paid................................................ -- (112) -- (112)
Net income, year ended December 31, 1993...................... -- -- (2,274) (2,274)
----- ---------- ------------- ----------
Balance at December 31, 1993.................................. 3 32,049 (2,645) 29,407
Decrease in paid-in-capital................................... -- (113) -- (113)
Net income, year ended December 31, 1994...................... -- -- 742 742
----- ---------- ------------- ----------
Balance at December 31, 1994.................................. 3 31,936 (1,903) 30,036
Dividend to JKCI.............................................. -- (18,195) -- (18,195)
Net income.................................................... -- -- 920 920
----- ---------- ------------- ----------
Capital Contribution by JKCI.................................. -- 737 -- 737
----- ---------- ------------- ----------
Balance at December 31, 1995.................................. 3 14,478 (983) 13,498
----- ---------- ------------- ----------
Net loss (unaudited).......................................... -- -- (36) (36)
Decrease in additional paid-in capital (unaudited)............ -- (20) -- (20)
----- ---------- ------------- ----------
Balance at June 30, 1996 (unaudited).......................... $ 3 $ 14,458 $ (1,019) $ 13,442
----- ---------- ------------- ----------
----- ---------- ------------- ----------
See accompanying notes.
F-57
ALASKAN CABLE NETWORK
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
-------------------- --------------------------------
1996 1995 1995 1994 1993
--------- --------- ---------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss)...................................... $ (36) $ 435 $ 920 $ 742 $ (2,274)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision (credit) for uncollectible accounts
receivable......................................... 7 14 13 (13) 55
Loss on disposal of assets........................... 6 2 20 39 2,687
Depreciation and amortization........................ 3,113 3,034 6,176 6,092 6,362
Changes in operating assets and liabilities:
Trade accounts receivable.......................... 128 13 (184) (11) 160
Intangible and other assets........................ (4) 155 (146) (206) 3
Accounts payable................................... (310) (86) 225 (219) (44)
Accrued compensation and benefits and other accrued
liabilities...................................... 204 61 17 (156) 414
Deferred revenue................................... (59) 15 83 11 (36)
--------- --------- ---------- --------- ---------
Net cash provided by operating activities.............. 3,049 3,643 7,124 6,279 7,327
INVESTING ACTIVITIES
Additions to property, plant and equipment............. (216) (275) (914) (1,170) (6,005)
--------- --------- ---------- --------- ---------
Net cash used in investing activities.................. (216) (275) (914) (1,170) (6,005)
FINANCING ACTIVITIES
Borrowings on line of credit........................... 6,000 -- 8,000 -- --
Repayment of line of credit............................ (11,000) -- -- -- --
Change in due from affiliates.......................... (703) 1,628 1,737 (1,673) --
Decrease in paid-in-capital............................ (20) -- -- (113) --
Dividends paid to Jack Kent Cooke Incorporated......... -- (9,700) (18,195) -- (112)
--------- --------- ---------- --------- ---------
Net cash used in financing activities.................. (5,723) (8,072) (8,458) (1,786) (112)
--------- --------- ---------- --------- ---------
Net increase (decrease) in cash and cash equivalents... (2,890) (4,704) (2,248) 3,323 1,210
Cash and cash equivalents at beginning of period....... 3,905 6,153 6,153 2,830 1,620
--------- --------- ---------- --------- ---------
Cash and cash equivalents at end of period............. $ 1,015 $ 1,449 $ 3,905 $ 6,153 $ 2,830
--------- --------- ---------- --------- ---------
--------- --------- ---------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest........................................... $ -- $ -- $ -- $ -- $ --
Income taxes....................................... $ -- $ -- $ 3 $ 45 $ --
Supplemental disclosure of noncash financing
activities:
In 1995, JKCI forgave $737 of liabilities owed by the
Company
See accompanying notes.
F-58
ALASKAN CABLE NETWORK
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined financial statements of the Alaskan Cable Network (ACN or the
Company) include the operations of cable television systems of Alaskan Cable
Network/Fairbanks, Inc., Alaskan Cable Network/Juneau, Inc. and Alaskan Cable
Network/Ketchikan, Sitka, Inc. for the years ended December 31, 1995, 1994 and
1993. Each of the entities comprising ACN is wholly-owned by Jack Kent Cooke
Incorporated (JKCI). Prior to April 30, 1992, these companies were wholly-owned
subsidiaries of Cooke Media Group Inc. (CMG), a wholly owned subsidiary of JKCI.
In connection with an agreement with an unrelated party for the sale of CMG and
certain other JKCI operations, the cable television systems comprising ACN were
transferred to JKCI. This transaction was accounted for as a transfer among
companies under common control, and therefore, was recorded at CMG's historical
cost basis.
Cable television operations generate revenue through the use of property and
equipment and, therefore, have few current assets, as the expression is defined
in terms of a one-year operating cycle. Accordingly, the Company does not
identify current assets and current liabilities separately in the accompanying
combined balance sheets.
The Company's operations are regulated by the Federal Communications
Commission and certain other state and local authorities.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) 109, "Accounting for Income Taxes". The
Company adopted the provisions of the new standard in its financial statements
on January 1, 1993. The cumulative effect as of January 1, 1993, due to the
adoption of SFAS No. 109, was an expense for income taxes of $622,000 for the
year ended December 31, 1993.
Under SFAS 109, the liability method is used in accounting for income taxes.
Under this method, deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts,
and the tax bases of existing assets and liabilities. Under SFAS No. 109, the
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. Prior to the adoption of SFAS No. 109,
income tax expense was determined using the deferred method. Under the deferred
method, deferred taxes were recognized using the tax rate applicable to the year
of calculation and were not adjusted for subsequent changes in tax rates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with initial maturities
of three months or less when acquired as cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company derives its revenues from thousands of customers located
principally in four cities in Alaska. None of the individual customer accounts
receivable balances are material. Customers are billed monthly, 15 days in
advance of the beginning of the service period. Invoices are generally due at
the
F-59
ALASKAN CABLE NETWORK
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
beginning of the service period. The Company generally does not require
collateral and losses on uncollectible receivables have been within management's
expectations.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. Depreciation and
amortization is provided on the straight-line method over the estimated useful
lives, which are generally as follows:
Buildings and improvements.......................... 19 to 40 years
Cable television systems............................ 8 to 10 years
Machinery and equipment............................. 8 to 10 years
INTANGIBLE AND OTHER ASSETS
Intangible assets are recorded at cost and are amortized using the
straight-line method over their estimated useful lives, principally 7 to 12
years. The cost in excess of fair value of net assets of purchased businesses is
amortized using the straight-line method over forty years. The carrying value of
the cost in excess of fair value of net assets of purchased businesses is
reviewed if the facts and circumstances suggest that it may be impaired. If this
review indicates the cost in excess of fair value of the net assets of purchased
businesses will not be recoverable, as determined based on the undiscounted cash
flows of the entity acquired over the remaining amortization period, the
Company's carrying value of this asset is reduced by the estimated shortfalls of
cash flows.
REVENUE RECOGNITION
Revenues are generally billed in advance and are deferred until cable
service is provided.
ESTIMATES USED IN THE PREPARATION OF THE COMBINED FINANCIAL STATEMENTS
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results inevitably will differ from those estimates
and such differences may be material to the financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform to the 1995 presentation.
F-60
ALASKAN CABLE NETWORK
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
DECEMBER 31,
------------------------
1995 1994
----------- -----------
Land................................................................ $ 20 $ 20
Buildings and improvements.......................................... 294 270
Cable television systems............................................ 27,354 26,743
Machinery and equipment............................................. 1,399 1,399
Construction in progress............................................ 637 441
----------- -----------
29,704 28,873
Less accumulated depreciation....................................... (17,560) (14,712)
----------- -----------
$ 12,144 $ 14,161
----------- -----------
----------- -----------
The Company recorded depreciation expense of $2,911,000, $2,871,000 and
$3,040,000 in 1995, 1994 and 1993, respectively.
4. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following (in thousands):
DECEMBER 31,
----------------------
1995 1994
---------- ----------
Subscriber lists..................................................... $ 26,666 $ 26,666
Franchise rights..................................................... 5,609 5,609
Cost in excess of fair value of purchased businesses (goodwill)...... 2,209 2,209
Other assets......................................................... 1,334 1,188
---------- ----------
35,818 35,672
Less accumulated amortization........................................ (28,910) (25,645)
---------- ----------
$ 6,908 $ 10,027
---------- ----------
---------- ----------
5. LINE OF CREDIT
On June 27, 1995, the Company entered into a $30 million line of credit
agreement with a bank. Borrowings under the line of credit are collateralized by
all of the Company's common stock and bear interest, at the Company's option, at
the prime rate or the interbank offered rate plus 1% (7.5% at December 31,
1995). If the aggregated borrowings exceed $25 million, the interest rate, at
the Company's option, on the amount in excess of $25 million is based on the
prime rate plus .75% or the interbank offered rate plus 2%. The line of credit
agreement expires on June 30, 1997. There were $8 million in borrowings
outstanding under this agreement at December 31, 1995.
F-61
ALASKAN CABLE NETWORK
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
5. LINE OF CREDIT (CONTINUED)
The line of credit agreement places certain restrictions on the Company,
including limitations on liens, disposition of assets, loans, investments,
capital expenditures, and requires compliance with certain financial covenants.
6. INCOME TAXES
The Company utilizes the liability method to account for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Temporary differences arise primarily from differences in depreciation and
amortization for financial statement and income tax purposes, and unused net
operating loss carryforwards.
Significant components of the Company's deferred tax liabilities and assets
are as follows (in thousands):
DECEMBER 31,
--------------------
1995 1994
--------- ---------
Deferred tax liabilities:
Depreciation and amortization......................................... $ -- $ 377
Deferred tax assets:
Net operating loss carryforwards...................................... 2,085 2,679
Depreciation and amortization......................................... 434 --
Accrued sick leave pay................................................ 49 48
Accrued vacation pay.................................................. 39 37
Allowance for loss on receivables..................................... 35 35
Tax credit carryforward............................................... 19 19
--------- ---------
Total deferred tax assets............................................. 2,661 2,818
Valuation allowance for deferred tax assets........................... (2,661) (2,441)
--------- ---------
Net deferred tax assets................................................. -- 377
--------- ---------
Net deferred taxes...................................................... $ -- $ --
--------- ---------
--------- ---------
Management has determined, based on the Company's historical operating
results, the potential impact of deregulation in the cable television industry,
and the ability of other JKCI entities to utilize the Company's net operating
loss carryforwards, that it is more likely than not that the deferred tax asset
will not be realized prior to expiration. The Company will continue to assess
the need for a valuation allowance based on future operating results and facts
and circumstances at the time.
F-62
ALASKAN CABLE NETWORK
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
6. INCOME TAXES (CONTINUED)
The reconciliation of income tax computed at the U.S. federal statutory tax
rate to the provision (benefit) for income taxes for the years ended December 31
is as follows:
1995 1994 1993
----------- ----------- -----------
U.S. federal income tax rate......................... 34.0% 34.0% (34.0)%
State income tax refunds, net of federal tax
benefit............................................ (29.0) -- --
Benefit of alternative minimum tax loss
carryforwards...................................... -- (36.0) --
Benefit of net operating loss carryforwards.......... (72.0) -- --
Forgiveness of debt income........................... 35.0 -- --
Amortization of cost in excess of fair value of net
assets of purchased businesses..................... 3.0 3.0 1.0
Alternative minimum tax.............................. -- (1.0) --
Reduction of taxes provided in prior years........... -- (1.0) --
Net operating losses not providing current tax
benefit............................................ -- -- 6.0
Other--net........................................... -- 2.0 --
----- ----- -----
(29.0)% 1.0% (27.0)%
----- ----- -----
----- ----- -----
At December 31, 1995, the company has unused net operating loss
carryforwards for federal and state income tax purposes of approximately $4.5
million and $5.9 million, respectively. The federal and state net operating loss
carryforwards expire in years 2006 through 2009.
A consolidated federal tax return is filed by JKCI. The Company has a tax
sharing arrangement with JKCI requiring that the Company provide for income
taxes as if it were a separate taxable entity. Under the arrangement, the
Company will receive benefit for its operating losses only in years when it has
taxable income. Such benefit will be reduced to the extent that the Company's
operating losses have been utilized by affiliated companies in the consolidated
tax return. Management believes the recorded provision (benefit) for income
taxes is not materially different than the amounts that would be recorded if the
Company were a stand-alone entity.
7. RETIREMENT PLANS
An affiliate of the Company sponsors a 401(k) savings plan (the Plan) which
covers most non-union full-time employees of the Company, who may elect to
contribute from 2% to 16% of their compensation to the Plan. The Company
recognized expenses for matching contributions in the amount of $24,000, $16,000
and $18,000 in 1995, 1994 and 1993, respectively.
The company contributes to a union-sponsored defined benefit pension plan.
Such contribution expense totaled $130,000, $123,000 and $135,000 for the years
ended December 31, 1995, 1994 and 1993, respectively.
F-63
ALASKAN CABLE NETWORK
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
8. SHAREHOLDER'S EQUITY
Common Stock consists of the following:
$1.00 par value, shares authorized, issued and outstanding:
Alaskan Cable Network, Inc.................................. 200 shares
Alaskan Cable Network/Fairbanks, Inc........................ 1,000 shares
Alaskan Cable Network/Juneau Holdings, Inc.................. 200 shares
Alaskan Cable Network/Ketchikan-Sitka, Inc.................. 1,000 shares
Alaskan Cable Network/Juneau, Inc........................... 540.5 shares
The accumulated deficit reflects the Company's operating results subsequent
to the sale of the cable television systems to JKCI discussed in Note 1.
9. ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Advertising costs
were $113,000, $98,000 and $131,000 for the years ended December 31, 1995, 1994
and 1993, respectively, and were recorded as part of selling, general and
administrative expenses.
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain facilities and equipment primarily under
operating leases which expire on various dates through 2001. Future minimum
rental payments as of December 31, 1995 under noncancellable operating leases
are as follows (in thousands):
1996......................................................... $ 127
1997......................................................... 99
1998......................................................... 71
1999......................................................... 64
2000......................................................... 21
Thereafter................................................... 9
---------
$ 391
---------
---------
Rent expense was $433,000, $391,000 and $373,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
F-64
ALASKAN CABLE NETWORK
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CABLE SERVICE RATE REREGULATION
On April 1, 1993 the Federal Communications Commission ("FCC") adopted rules
governing rates charged by cable operators for the basic service tier of
channels, 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"). To comply with the
regulations, the Company implemented various subscriber service and rate changes
effective September 1, 1993. These changes resulted in a reduction of total
monthly revenue of approximately 10.5%.
On March 30, 1994, the FCC released revisions to its April 1, 1993 rate
regulations. The revisions required cable operators to implement additional rate
rollbacks using complex benchmark calculations, or alternatively, to justify
higher rates based on a cost-of-service showing. The Company elected to file
cost-of-service showings with the FCC where required. Management of the Company
believes that rates in effect at March 1994 were supportable under the
cost-of-service rules, and therefore, no rate rollbacks were implemented in
connection with the 1994 FCC revisions. Subsequent rate adjustments have been
made utilizing cost-of-service methodology with adjustments as provided by FCC
rules.
The regulated service rates charged by the Company may be reviewed by the
State of Alaska under certain conditions (for basic service) or the FCC (for
cable programming service). Refund liability for basic service rates is limited
to a one-year period. In order for the State of Alaska to exercise rate
regulation authority over the Company's basic service rates, 25% of each
systems' subscribers must request such regulation by filing a petition with the
State of Alaska. In July 1990, the Alaskan Public Utilities Commission
instituted rate regulation over the Juneau operations for their basic cable
service and installation. At December 31, 1995, the State of Alaska does not
have rate regulation authority over the other three locations comprising the
Alaskan Cable Network over their basic service rates, and therefore there is no
refund liability for basic service at this time. Furthermore, since the rate
regulation at the Juneau facility began in 1990, no refund liability exists for
this location as of December 31, 1995. Refund liability for cable programming
service rates may be calculated from the date a complaint alleging an
unreasonable rate for cable programming service is filed with the FCC until the
rate reduction is implemented. There have been no complaints filed with the FCC
for these certain franchise 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.
In February 1996, a telecommunications bill was signed into federal law
which significantly 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. The impact of the new bill cannot be determined at this
time, but it is not expected to have a significant adverse impact on the
financial position or results of operations of the Company.
F-65
ALASKAN CABLE NETWORK
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, based in part on
the opinion of the Company's legal counsel, the amount of ultimate liability
with respect to these actions will not materially affect the financial position
or results of operations of the Company.
11. RELATED PARTY TRANSACTION
The Company makes advances to/borrows from an affiliate at interest rates of
6.97% per annum during 1995, ranging from 3.91% to 5.49% per annum during 1994,
and ranging from 3.88% to 4.28% per annum during 1993. Net interest income
related to these advances was $7,000, $127,000 and $16,000 for the years ended
December 31, 1995, 1994 and 1993, respectively. Such advances/borrowings are
payable on demand.
Certain executive officers of JKCI and Tower Media Inc., an affiliate of the
Company, perform services for the Company. No allocations to the Company were
made for such services performed by JKCI, as the amounts were immaterial, during
1995, 1994 and 1993. Management fees of $225,000, $233,000 and $202,000 for
1995, 1994 and 1993, respectively, were paid to Tower Media Inc. for accounting
and administrative services rendered on behalf of the Company. The Company
believes the management fees paid to Tower Media Inc. are at least as favorable
as the cost of similar services from unrelated third parties. JKCI administers a
health insurance plan for the Company's employees at JKCI's cost. The Company
then reimburses JKCI for the cost of the service provided.
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS; The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
LINE OF CREDIT; The carrying amounts of the Company's borrowings under
its line of credit agreement approximate their fair value as a result of the
variable interest rate that is adjusted monthly.
DUE FROM AFFILIATES; The carrying amount of the due from (to)
affiliates approximates its fair value as a result of being payable on
demand and the immateriality of the outstanding borrowings.
13. SUBSEQUENT EVENT
On March 14, 1996, the Company signed a letter of intent to sell all of its
assets to General Communication, Inc. The selling price is in excess of the net
book value of the Company's assets at December 31, 1995. The closing of the sale
is subject to the execution of a definitive Asset Purchase Agreement and may be
subject to regulatory approval.
F-66
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION FOR ALASKAN CABLE
Alaskan Cable management's discussion of the financial condition of Alaskan
Cable must be addressed in the context of regulatory changes in the form of the
1996 Telecom Act, the 1992 Cable Act, and the Communications Act discussed
elsewhere in this Prospectus.
THREE YEARS ENDED DECEMBER 31, 1995
As of December 31, 1995, Alaskan Cable's cable systems passed more than
42,300 homes and served more than 25,900 residential subscribers. Alaskan Cable
had approximately 15,780 subscriptions to premium service units.
RESULTS OF OPERATIONS. Revenues totaled $14.5 million, $13.9 million and
$14.1 million during the years ended December 31, 1995,1994 and 1993,
respectively. The 4.6% growth in 1995 as compared to 1994 resulted primarily
from increases in regulated service rates implemented January 1, 1995. The 1.8%
decrease in 1994 as compared to 1993 resulted primarily from the subscriber rate
reductions implemented September 1, 1993. Average monthly revenue per account
was approximately $48.00, $45.75 and $47.75 in 1995, 1994 and 1993,
respectively, representing an increase (decrease) of approximately 4.9% and
(4.2%) in 1995 and 1994, respectively. Revenues were primarily generated from
subscription fees, installation charges, and subscriber cable equipment rentals.
Direct operating expenses, representing costs directly attributable to
providing cable services to customers, increased 5.3% in 1995 as compared to
1994 and increased 2.7% in 1994 as compared to 1993. The increases result from
increased business activity resulting from the growth in the number of
subscribers and increased programming costs.
EBITDA as a percentage of revenues decreased from 47.6% to 46.9% during the
year ended December 31, 1995 compared to the corresponding period of 1994. The
decrease was primarily caused by an increase in cost of revenues and selling,
general and administrative expenses that on a percentage basis exceeded the
corresponding increase in revenues. EBITDA as a percentage of revenues increased
from 28.6% to 47.6% during the year ended December 31, 1994 compared to the
corresponding period of 1993. The increase was primarily caused by a loss on
disposal of assets in 1993 offset by a net decrease in cost of revenues,
selling, general and administrative expenses, depreciation and amortization
expenses that on a percentage basis exceeded the corresponding decrease in
revenues as affected by the approximate 10.5% rate reduction described above.
Depreciation and amortization expense was $6.2 million, $6.1 million and
$6.4 million for the years ended December 31, 1995, 1994 and 1993, respectively.
The 1995 increase as compared to 1994 results from continued cable television
build-out expenditures, and the amortization of line of credit deferred loan
expenses. The 1994 decrease as compared to 1993 results from disposal of old
cable television systems in 1993 whose original construction costs were higher
than the expenditures made to rebuild the system.
Income tax (provision) benefit totaled $208,000, ($9,000) and $622,000 in
1995, 1994 and 1993, respectively, resulting from the application of statutory
income tax rates to net earnings or loss before income taxes. Alaskan Cable
experienced income (loss) before income taxes and cumulative effect of change in
accounting principle of $712,000, $751,000 and ($2,274,000) for the years ended
December 31, 1995, 1994, and 1993, respectively.
In light of Alaskan Cable's history of losses prior to 1994, the potential
negative impact of recent deregulation in the cable television industry, and the
ability of other Jack Kent Cooke Incorporated entities to utilize Alaskan
Cable's net operating loss carryforwards, management established a valuation
allowance for $2.7 million as of December 31, 1995.
F-67
Alaskan Cable adopted Statement of Financial Accounting Standards No. 109
("SFAS No. 109"), Accounting for Income Taxes on January 1, 1993. The cumulative
effect adjustment recorded in 1993 due to adoption of SFAS 109 totaled $622,000.
Certain of Alaskan Cable's expenses, such as those for wages and benefits,
equipment repair and replacement, and billing and marketing generally increase
with inflation.
LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operating activities
increased $800,000 to $7.1 million for the year ended December 31, 1995 compared
to the corresponding period of 1994 resulting primarily from increased net
income of $178,000 and $444,000 resulting from a $225,000 increase in accounts
payable in 1995 compared to a $219,000 decrease in 1994. Cash provided by
operating activities decreased $1.0 million to $6.3 million for the year ended
December 31, 1994 compared to the corresponding period of 1993. The decrease
resulted primarily from cash used for the acquisition of other assets and
payments of accrued liabilities.
Cash used in investing activities decreased $256,000 to $914,000 for the
year ended December 31, 1995 compared to the corresponding period of 1994. Cash
used in investing activities decreased $4.8 million to $1.2 million for the year
ended December 31, 1994 compared to the corresponding period of 1993. Both
decreases result primarily from reduced capital expenditures related to
purchases of property, plant and equipment.
Cash used in financing activities increased from $1.8 million to $8.5
million for the year ended December 31, 1995 compared to the corresponding
period of 1994 related primarily to the excess of dividends paid over borrowings
in 1995 as compared to 1994. Cash used in financing activities increased from
$112,000 to $1.8 million for the year ended December 31, 1994 compared to the
corresponding period of 1993 primarily due to increased loans to affiliates.
Alaskan Cable's primary need for capital has been to finance plant
extensions, rebuilds and upgrades and to add addressable converters to certain
cable systems. Alaskan Cable spent $914,000 during 1995 on capital expenditures,
and currently intends to spend approximately $400,000 in 1996 for capital
expenditures, including $70,000 to extend its plant to new service areas.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
As of June 30, 1996, Alaskan Cable's systems passed more than 42,720 homes
and served more than 25,426 residential subscribers. Alaskan Cable had
approximately 20,310 subscriptions to premium service units.
RESULTS OF OPERATIONS. Revenues totaled $7.4 million and $7.2 million
during the six-month periods ended June 30, 1996 and 1995, respectively. The
revenue growth in 1996 as compared to 1995 resulted primarily from rate
increases for services. Average monthly revenue per account for the six months
ended June 30, 1996 and 1995, was approximately $48.83 and $46.17, respectively,
representing increases of 5.8%. Revenues were primarily generated from
subscription fees, installation charges, and subscriber cable equipment rentals.
Direct operating expenses, representing costs directly attributable to
providing cable services to customers, increased 4.7% for the six-month period
ended June 30, 1996 compared to the corresponding period of 1995. 1996 increases
resulted from increased business activity from increased services and increased
programming costs. Selling, general and administrative operating expenses
increased 4.5% for the six-month period ended June 30, 1996 compared to the
corresponding period of 1995. 1996 increases resulted from increased business
activity from increased services.
Depreciation and amortization expense totaled $3.1 million and $3.0 million
for the six-month periods ended June 30, 1996 and 1995, respectively. The 1996
increases as compared to 1995 is primarily the result of the amortization of
deferred loan expenses pertaining to the line of credit reflected in the first
six months of 1996.
F-68
LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operating activities
decreased $594,000 to $3,049,000 for the six-month period ended June 30, 1996
compared to the corresponding period of 1995 resulting from decreased net income
of $471,000 and a net use of cash resulting from changes in operating assets and
liabilities in 1996 as compared to 1995.
Cash used in investing activities decreased from $275,000 to $216,000 for
the six-month period ended June 30, 1996 compared to the corresponding period of
1995 resulting from reduced capital expenditures for property, plant and
equipment in 1996 as compared to 1995.
Cash used in financing activities decreased from $8.1 million to $5.7
million for the six-month period ended June 30, 1996 compared to the
corresponding period of 1995. For 1996, increases in cash from line of credit
borrowings in 1996 totaling $6.0 million were offset by repayments of line of
credit borrowings totaling $11.0 million. For 1995, dividends paid of $9.7
million were offset by reduced loan repayments from affiliates of $2.3 million.
Alaskan Cable's primary need for capital has been to finance plant
extensions, rebuilds and upgrades and to add addressable converters to certain
cable systems.
EBITDA as a percentage of revenues decreased from 47.1% to 46.2% during the
six-month period ended June 30, 1996 compared to the corresponding period of
1995. The 1996 decrease was primarily caused by increases in cost of revenues
and selling, general and administrative expenses that on a percentage basis
exceeded the corresponding increase in revenues.
Income from operations before net interest income (expense) and income taxes
totaled $109,000 and $194,000 for the quarters ended June 30, 1996 and 1995,
respectively and totaled $329,000 and $366,000 for the six-month periods ended
June 30, 1996 and 1995, respectively. The 1996 decreases as compared to 1995
were due primarily to increased operating expenses that on a percentage basis
exceeded the corresponding increase in revenues.
Certain of Alaskan Cable's expenses, such as those for wages and benefits,
equipment repair and replacement, and billing and marketing generally increase
with inflation.
F-69
REPORT OF INDEPENDENT AUDITORS
To The Stockholders
Alaska Cablevision, Inc.
Kirkland, Washington
We have audited the accompanying balance sheets of Alaska Cablevision, Inc. as
of December 31, 1995 and 1994, and the related statements of income,
stockholder's equity and cash flows for each of the years in the three-year
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alaska Cablevision, Inc. at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1995 in
conformity with generally accepted accounting principles.
/s/ CARL & CARLSEN
February 27, 1996
Seattle, Washington
F-70
ALASKA CABLEVISION, INC.
BALANCE SHEETS
ASSETS
(UNAUDITED) DECEMBER 31,
JUNE 30, ------------------------------
1996 1995 1994
-------------- -------------- --------------
Cash............................................................ $ 614,411 $ 525,734 $ 118,856
Subscriber receivables.......................................... 100,157 113,651 102,740
Advances to affiliates.......................................... 70,650 5,846 1,475
Other receivables............................................... 3,443 8,406 127,381
Prepaid assets.................................................. 49,984 34,196 24,510
Property, plant and equipment, less accumulated depreciation of
$8,296,801 (1996), $8,635,146 (1995) and $8,464,628 (1994).... 2,496,739 2,493,956 2,138,843
Excess of cost over fair value of net tangible assets of systems
purchased, less amortization of $363,150 (1996), $401,602
(1995) and $388,785 (1994).................................... 111,110 123,927 149,562
-------------- -------------- --------------
$ 3,446,494 $ 3,305,716 $ 2,663,367
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable................................................ $ 205,737 $ 99,458 125,801
Accrued interest................................................ 57,810 53,659 37,718
Accrued taxes and expenses...................................... 191,404 320,755 246,517
Deferred revenues............................................... 23,882 27,193 26,999
Loans payable to bank........................................... 3,695,079 3,695,079 3,421,629
Note payable to stockholder..................................... 300,000 300,000 300,000
Notes payable to former stockholders............................ 1,563,887 1,673,155 1,879,888
-------------- -------------- --------------
Total liabilities............................................. 6,037,799 6,169,299 6,038,552
-------------- -------------- --------------
Stockholders' Deficit
Common stock ($1.00 par value), including consideration paid
in excess of stated value. Authorized 20,000 shares; issued
and outstanding 10,000 at June 30, 1996 and December 31,
1995, and 1994. ............................................ 12,624 12,624 12,624
Treasury stock, 3,400 and 3,000 shares at June 30, 1996 and
December 31, 1995, respectively............................. (4,500,000) (4,500,000) (4,500,000)
Retained earnings............................................. 1,896,071 1,623,793 1,112,191
-------------- -------------- --------------
Total stockholders' deficit................................... (2,591,305) (2,863,583) (3,375,185)
-------------- -------------- --------------
Commitments and contingencies
$ 3,446,494 $ 3,305,716 $ 2,663,367
-------------- -------------- --------------
-------------- -------------- --------------
See accompanying notes.
F-71
ALASKA CABLEVISION, INC.
STATEMENTS OF INCOME
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
---------------------------- -------------------------------------------
1996 1995 1995 1994 1993
------------- ------------- ------------- ------------- -------------
Revenues
Cable television fees............... $ 3,006,745 $ 2,969,030 $ 5,920,057 $ 5,708,842 $ 5,660,189
------------- ------------- ------------- ------------- -------------
Operating Expenses
Salaries and wages.................. 451,898 392,373 840,031 917,223 786,391
Payroll taxes and employee
benefits.......................... 102,658 97,656 216,597 210,962 181,521
Program fees........................ 491,789 475,923 950,778 908,770 821,037
Copyright fees...................... 20,818 22,845 40,345 38,874 28,515
Maintenance, parts and supplies..... 44,768 50,236 114,318 134,893 116,740
Bad debts........................... 23,115 12,461 45,201 33,376 32,320
Insurance........................... 18,320 16,589 34,175 27,258 29,867
Business and property taxes......... 15,876 24,479 25,481 24,511 8,567
Rentals............................. 84,921 72,126 144,292 135,674 129,521
Travel.............................. 8,026 23,433 54,505 82,790 42,161
Telephone and utilities............. 65,494 61,468 127,535 109,123 112,939
Vehicle expense..................... 22,002 18,915 44,322 40,433 40,858
Computer services................... 23,556 23,189 46,298 41,358 45,110
Postage and freight................. 21,701 22,055 47,543 42,259 46,551
Office expense...................... 28,480 27,463 58,200 56,611 49,013
Advertising and sales expense....... 34,679 21,948 66,262 63,306 56,276
Other operating expenses (net)...... 770 664 (2,906) 35,570 24,162
Depreciation and amortization....... 236,907 209,998 420,001 313,615 435,113
Corporate administration............ 239,413 246,295 483,801 276,190 291,454
Management fees (Note 6)............ 183,944 217,227 400,075 571,357 567,017
------------- ------------- ------------- ------------- -------------
2,119,135 2,037,343 4,156,854 4,064,153 3,845,133
------------- ------------- ------------- ------------- -------------
Operating income.................. 887,610 931,687 1,763,203 1,644,689 1,815,056
------------- ------------- ------------- ------------- -------------
Other Income (Expense)
Interest expense.................... (202,998) (269,923) (485,508) (418,301) (468,240)
Interest income..................... 3,372 22 -- 13,446 6,105
Income (loss) from disposition of
assets............................ -- -- 7,431 (47,532) (33,135)
Other (net)......................... (42,118) -- (79,475) -- (1,739)
------------- ------------- ------------- ------------- -------------
(241,744) (259,901) (557,552) (452,387) (497,009)
------------- ------------- ------------- ------------- -------------
Net income............................ $ 645,866 $ 661,786 $ 1,205,651 $ 1,192,302 $ 1,318,047
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net income per common share........... $ 97.86 $ 94.54 $ 172.24 $ 170.33 $ 188.29
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
See accompanying notes.
F-72
ALASKA CABLEVISION, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON RETAINED
STOCK TREASURY STOCK EARNINGS
--------- -------------- -------------
Balance, December 31, 1993............................................. 12,624 (4,500,000) 570,778
Net income, year ended December 31, 1994............................... -- -- 1,192,302
Distributions to stockholders.......................................... -- -- (650,889)
--------- -------------- -------------
Balance, December 31, 1994............................................. 12,624 (4,500,000) 1,112,191
Net income............................................................. -- -- 1,205,651
Distributions to stockholders.......................................... -- -- (694,049)
--------- -------------- -------------
Balance, December 31, 1995............................................. $ 12,624 $ (4,500,000) $ 1,623,793
Net income (unaudited)................................................. -- -- 645,866
Distributions to stockholders.......................................... -- -- (373,588)
--------- -------------- -------------
Balance, June 30, 1996 (unaudited)..................................... $ 12,624 $ (4,500,000) $ 1,896,071
--------- -------------- -------------
--------- -------------- -------------
See accompanying notes.
F-73
ALASKA CABLEVISION, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
YEARS ENDED DECEMBER 31,
---------------------------- ----------------------------------------------
1996 1995 1995 1994 1993
------------ -------------- -------------- -------------- --------------
Cash Flows From Operating Activities
Net income............................... $ 645,866 $ 661,786 $ 1,205,651 $ 1,192,302 $ 1,318,047
Noncash items included in net income
Depreciation and amortization.......... 236,907 209,998 420,001 313,615 435,113
(Gain) loss from disposition of
assets............................... -- -- (7,431) 47,532 33,135
Net increase in advances to
affiliates........................... (64,804) (49,851) (4,371) 382,241 (267,771)
Net decrease in subscriber receivables,
other receivables and prepaid
assets............................... 2,669 105,827 98,378 (16,093) (13,965)
Net increase (decrease) in payables,
accrued expenses and deferred
revenues............................. (18,921) 36,452 64,030 56,365 (9,390)
------------ -------------- -------------- -------------- --------------
Net cash provided by operating
activities......................... 801,717 964,212 1,776,258 1,975,962 1,495,169
------------ -------------- -------------- -------------- --------------
Cash Flows From Investing Activities
Additions to property, plant and
equipment.............................. (226,872) (441,255) (757,062) (1,118,183) (337,164)
Proceeds from sale of assets............. -- -- 15,014 9,038 2,795
------------ -------------- -------------- -------------- --------------
Net cash used by investing
activities......................... (226,872) (441,255) (742,048) (1,109,145) (334,369)
------------ -------------- -------------- -------------- --------------
Cash Flows From Financing Activities
Proceeds from senior debt borrowings..... -- 3,695,079 3,695,079 -- --
Increase (decrease) in loans due to
affiliate.............................. -- (3,421,629) (3,421,629) 46,102 (256,923)
Repayment on notes due to former
stockholders........................... (109,269) (101,446) (206,733) (191,928) (178,184)
Repayment on other borrowings............ (3,311) (1,447) -- -- (1,932)
Distributions to stockholders............ (373,588) (348,027) (694,049) (650,889) (736,100)
------------ -------------- -------------- -------------- --------------
Net cash used by financing
activities......................... (486,168) (177,470) (627,332) (796,715) (1,173,139)
------------ -------------- -------------- -------------- --------------
Net increase in cash....................... 88,677 345,487 406,878 70,102 (12,339)
Cash Balance
Beginning of period...................... 525,734 118,856 118,856 48,754 61,093
------------ -------------- -------------- -------------- --------------
End of period............................ $ 614,411 $ 464,343 $ 525,734 $ 118,856 $ 48,754
------------ -------------- -------------- -------------- --------------
------------ -------------- -------------- -------------- --------------
Supplemental Information
Interest paid............................ $ 248,700 $ 288,544 $ 469,567 $ 421,793 $ 471,541
------------ -------------- -------------- -------------- --------------
------------ -------------- -------------- -------------- --------------
See accompanying notes.
F-74
ALASKA CABLEVISION, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) AFFILIATION--The Company is affiliated with Rock Associates, Inc.
through common ownership and management.
(b) FINANCIAL STATEMENT PRESENTATION--The accompanying balance sheet is
presented in an unclassified format as allowed in the Statement of Position on
Accounting by Cable Television Companies issued by the American Institute of
Certified Public Accountants. Revenues of cable television systems are derived
through use of plant and equipment and have few assets that can be defined in
terms of a one-year operating cycle. Management believes this format is the most
meaningful presentation of its financial position.
(c) OPERATIONS--The Company is engaged in providing cable television to
various communities located in the State of Alaska.
(d) REVENUE RECOGNITION--Revenues billed in advance for cable services are
deferred and recorded as income in the month in which the services are rendered.
(e) INCOME TAXES--The Company, with the consent of its shareholders, has
elected to have its income reported directly by the shareholders under
provisions of Sub-chapter S of the Internal Revenue Code.
(f) PLANT AND EQUIPMENT--Depreciation is computed substantially on the
straight-line basis for financial statement purposes over the estimated useful
lives of the assets:
Cable distribution systems........................ 7 - 10 years
Headend and satellite receiving equipment......... 7 - 10 years
Buildings......................................... 10 - 31 years
Transportation equipment.......................... 3 - 7 years
Other equipment and fixtures...................... 5 - 10 years
Maintenance and repairs are charged to expense as incurred.
(g) INTANGIBLE ASSETS--The excess cost over fair value of net tangible
assets of systems acquired is primarily assignable as cost of franchise rights,
and is being amortized on a straight-line method over their respective expected
useful lives, but none in excess of twenty years. The carrying value of the cost
in excess of fair value of net assets of purchased business is reviewed if the
facts and circumstances suggest that it may be impaired. If this review
indicates the cost in excess of fair value of the net assets of purchased
businesses will not be recoverable, as determined based on the undiscounted cash
flows of the entity acquired over the remaining amortization period, the
Company's carrying value of this asset is reduced by the estimated shortfalls of
cash flows.
(h) EMPLOYEE BENEFITS PLAN--The Company has adopted a profit sharing and
employee savings plan under Section 401(K) of the Internal Revenue Code. This
plan allows eligible employees to defer up to 15% of their compensation on a
pre-tax basis through contributions to the savings plan. The Company contributed
$.50 in 1995, 1994 and 1993 for every dollar the employees contributed up to 5%
of compensation, which amounted to $14,117, $10,253 and $11,848 respectively.
(i) USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
F-75
ALASKA CABLEVISION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 2--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost, and categorized as follows:
DECEMBER 31,
------------------------------
1995 1994
-------------- --------------
Buildings, including leasehold improvements.................. $ 194,578 $ 157,778
Cable distribution systems, including connect drops and
converters................................................. 7,188,764 6,900,036
Headend and satellite equipment.............................. 2,734,119 2,649,779
Transportation equipment..................................... 346,507 322,047
Other equipment and fixtures................................. 494,616 406,010
-------------- --------------
$ 10,958,584 $ 10,435,650
-------------- --------------
-------------- --------------
NOTE 3--LOANS PAYABLE TO BANK
Rock Associates, Inc. owed Provident National Bank and The Bank of
California, N.A. the combined amount of $36,260,000 as of December 31, 1994.
These combined borrowings, covered by a Term Loan Agreement, were collateralized
principally by the capital stock and assets of Rock Associates, Inc. and its
affiliates (see Note 1). Rock Associates, Inc. in turn loaned the Company
portions of the bank borrowings. Note payable to stockholder was also
subordinated in favor of Rock Associates, Inc.'s liability to the banks. This
debt was paid in full on February 28, 1995.
At December 31, 1995, loans payable to bank were covered by a Senior
Reducing Revolving Credit Loan Agreement between Rock Associates, Inc. and
Alaska Cablevision, Inc., co-borrowers, and PNC Bank, National Association.
Proceeds of the new loan agreement dated February 28, 1995, were used primarily
to refinance existing senior debt and to provide funds for cable plant
expansion.
Subject to various terms and conditions, including minimum required
quarterly annualized cash flow ratios to aggregate bank debt, the bank will lend
up to $6,400,000 on a revolving loan basis until December 31, 1997. Interest is
payable quarterly at either of two floating rates of interest. The first rate
will be the higher of the bank's prime rate or the Federal Funds rate plus 1/2%.
The second rate will be LIBOR rate plus 1 1/2%. The balance of loans payable to
bank is due at maturity, which is December 31, 1997.
Borrowings under the loan agreement are collateralized principally by the
capital stock and assets of the co-borrowers. Note payable to stockholder is
subordinated in favor of the Company's liability to the bank.
NOTE 4--NOTES PAYABLE TO FORMER STOCKHOLDERS
The notes due to former shareholders of Alaska Cablevision, Inc. originally
totaling $1,650,000 call for quarterly installments of $73,625 including
interest at 7 1/2% per annum. These notes are due in full on
F-76
ALASKA CABLEVISION, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--NOTES PAYABLE TO FORMER STOCKHOLDERS (CONTINUED)
January 1, 1997. Notes totaling $600,000 are due August 30, 1996, repayable in
quarterly installments of interest only at 9% per annum. All notes are
subordinated to senior bank debt.
NOTE 5--NOTE PAYABLE TO STOCKHOLDER
The note due to stockholder is a demand note with interest payable quarterly
at a rate equal to the weighted average rate paid by Alaska Cablevision, Inc. on
its senior bank debt. The note is subordinated to senior bank debt.
NOTE 6--RELATED PARTY TRANSACTION
As described in Note 1, Rock Associates, Inc. provides significant services
to the Company. By agreement, the charge for overall management services is
presently based on a percentage of the Company's operating revenues. The
management fee percentage was 6%-10%, 10% and 10% for the year ended December
31, 1995, 1994 and 1993, respectively. In 1994 and 1993 Rock Associates, Inc.
also provided administration support to the Company. Corporate administration
charges are actual costs incurred. In 1995 all administration was performed by
the Company.
NOTE 7--FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. The fair value of the Company's
assets, which are primarily cash and accounts receivable, and the Company's
liabilities approximate their carrying value. The fair value of any off-balance
sheet commitments is immaterial.
NOTE 8--COMMITMENTS AND CONTINGENCIES
Minimum annual rental commitments at December 31, 1995 under operating
leases are approximately as follows:
Year Ended December 31:
1996................................................... $ 99,000
1997................................................... $ 73,000
1998................................................... $ 45,000
1999................................................... $ 42,000
2000................................................... $ 43,000
Thereafter............................................. $ 160,000
NOTE 9--SUBSEQUENT EVENT
On March 14, 1996, the Company entered into a letter of intent to sell its
operating assets to General Communication, Inc. The total sales price is
$26,650,000, of which $16,650,000 is payable in cash at closing and $10,000,000
is payable in convertible subordinated debt. The sale is expected to close by
the end of 1996.
F-77
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION FOR ALASKA CABLEVISION
Alaska Cablevision management's discussion of the financial condition of
Alaska Cablevision must be addressed in the context of regulatory changes in the
form of the 1996 Telecom Act, the 1992 Cable Act, and the Communications Act
discussed elsewhere in this Prospectus.
THREE YEARS ENDED DECEMBER 31, 1995
As of December 31, 1995, Alaska Cablevision's cable systems passed more than
10,860 homes and served more than 7,735 residential subscribers and over 100
business subscribers. Alaska Cablevision had approximately 7,875 residential
subscriptions to premium service units.
RESULTS OF OPERATIONS. Revenues totaled $5.9 million, $5.7 million and $5.7
million during the years ended December 31, 1995, 1994 and 1993, respectively.
The 3.7% growth in 1995 as compared to 1994 resulted primarily from modest
incremental growth in the number of subscribers and increases in regulated
service rates. Approximately $171,000 of the growth in 1995 revenues was due to
increases in regulated service rates implemented November 1, 1994 and November
1, 1995. The 0.9% increase in 1994 as compared to 1993 resulted primarily from
additional revenues resulting from a 4.6% increase in the number of subscribers
offset by the subscriber rate reductions implemented in September 1993 and July
1994. Average monthly revenue per account was approximately $60.83, $61.17 and
$64.75 in 1995, 1994 and 1993, respectively, representing decreases of
approximately 0.6% and 5.5% in 1995 and 1994, respectively. Revenues were
primarily generated from subscription fees, installation charges, and subscriber
cable equipment rentals and advertising revenues.
Programming and copyright costs directly attributable to providing cable
services to customers increased 4.6% in 1995 as compared to 1994 and increased
11.5% in 1994 as compared to 1993. The increases result from increased business
activity from growth in the number of subscribers, increased program offerings
and increased programming rates.
Depreciation and amortization expense was $420,000, $314,000 and $435,000
for the years ended December 31, 1995, 1994 and 1993, respectively. The 1995
increase as compared to 1994 results from additional depreciation resulting from
increased capital expenditures in 1995 and 1994. The 1994 decrease as compared
to 1993 result from certain tangible and intangible assets becoming fully
amortized.
EBITDA as a percentage of revenues increased from 34.3% to 36.9% during the
year ended December 31, 1995 compared to the corresponding period of 1994. The
increase is primarily a result of a reduction in management fees charged by Rock
Associates, Inc. from $571,000 to $400,000. EBITDA as a percentage of revenues
decreased from 39% to 34.3% during the year ended December 31, 1994 compared to
the corresponding period of 1993. The decrease was primarily caused by an
increase in programming costs and operating expenses that on a percentage basis
exceeded the corresponding increase in revenues.
Certain of Alaska Cablevision's expenses, such as those for wages and
benefits, equipment repair and replacement, and billing and marketing generally
increase with inflation.
LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operating activities
decreased approximately $200,000 to $1.8 million for the year ended December 31,
1995 compared to the corresponding period of 1994 resulting primarily from the
net effect of the following: (1) the decrease (receipt) of advances to
affiliates in 1994; (2) the decrease (receipt) of other receivables in 1995; and
(3) the increase in operating income in 1995. Cash provided by operating
activities increased $500,000 to $2.0 million for the year ended December 31,
1994 compared to the corresponding period of 1993. The increase resulted
primarily from the net effect of the following: (1) a decrease in advances to
affiliates in 1994 as compared
F-78
to an increase in 1993; (2) an increase in accounts payable and accrued expenses
in 1994 compared to 1993; and (3) a decrease in operating income from 1993 to
1994.
Cash used in investing activities decreased $367,000 to $742,000 for the
year ended December 31, 1995 compared to the corresponding period of 1994. The
1995 decrease results primarily from reduced capital expenditures related to
purchases of property, plant and equipment. Cash used in investing activities
increased $775,000 to $1.1 million for the year ended December 31, 1994 compared
to the corresponding period of 1993. The 1994 increase results primarily from
increased capital expenditures related to purchases of property, plant and
equipment.
Cash used in financing activities decreased from $797,000 to $627,000 for
the year ended December 31, 1995 compared to the corresponding period of 1994.
The 1995 decrease resulted from $3.7 million of borrowings from Alaska
Cablevision's new senior revolving credit loan agreement which was used to
payoff $3.6 million in loans from affiliates and notes due to former
stockholders. Cash used in financing activities decreased from $1.2 million to
$797,000 for the year ended December 31, 1994 compared to the corresponding
period of 1993 related primarily to a net decrease in the pay-down of loans from
affiliates and reduced stockholder distributions of .
Alaska Cablevision's primary need for capital has been to finance plant
rebuilds and upgrades, channel additions and service vehicles. Alaska
Cablevision spent $757,000 during 1995 on capital expenditures. The recorded
cost of assets disposed of totaled approximately $234,000, $583,000 and $501,000
in 1995, 1994 and 1993, respectively. 1995 disposals resulted from the
replacement of vehicles and upgraded plant and headend equipment. 1994 and 1993
disposals resulted primarily from the write-off of converters and inside the
home cable wiring resulting from certain provisions of the 1992 Cable Act
affecting the pricing of converter rentals and ownership of inside the home
cable wiring.
On February 28, 1995, Alaska Cablevision and Rock Associates, Inc., as
co-borrowers, entered into a new $6.4 million senior reducing revolving credit
loan agreement with a bank. Borrowings under the agreement are collateralized by
all of Alaska Cablevision's common stock and assets and bear interest, at Alaska
Cablevision's option, at (1) the higher of the bank's prime rate or the federal
funds rate plus 1/2%, or (2) the LIBOR rate plus 1-1/2%. The agreement expires
December 31, 1997.
SIX-MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
As of June 30, 1996, Alaska Cablevision's cable systems passed more than
11,000 homes and served more than 7,500 residential subscribers and over 1,500
business subscribers. Alaska Cablevision had approximately 7,650 residential
subscriptions to premium service units.
RESULTS OF OPERATIONS. Revenues totaled $3.0 million during each of the
six-month periods ended June 30, 1996 and 1995. Average monthly revenue per
account was approximately $62.00 and $61.17 during the six-month periods ended
June 30, 1996 and 1995, respectively, representing an increase of approximately
1.4%. Revenues were primarily generated from subscription fees, installation
charges, and subscriber cable equipment rentals and advertising revenues.
Programming and copyright costs increased 2.5% during the six-month period
ended June 30, 1996 compared to the corresponding period of 1995 due to
increased business activity from growth in the number of subscribers, increased
program offerings and increased programming rates.
Depreciation and amortization expense was approximately $237,000 and
$210,000 for the six-month periods ended June 30, 1996 and 1995, respectively.
The increase in the six-month period ended June 30, 1996 as compared to the same
period of 1995 results from additional depreciation resulting from capital
expenditures during 1996 and a full year of depreciation in 1996 on 1995 capital
expenditures as compared to a partial year of depreciation in 1995.
F-79
EBITDA as a percentage of revenues decreased from 38.5% to 37.4% during the
six-month period ended June 30, 1996 compared to the corresponding period of
1995. The decrease is primarily a result of expenses associated with the sale of
Alaska Cablevision's assets as described below and an increase in programming
costs and operating expenses that on a percentage basis exceeded the
corresponding increase in revenues.
Certain of Alaska Cablevision's expenses, such as those for wages and
benefits, equipment repair and replacement, and billing and marketing generally
increase with inflation.
LIQUIDITY AND CAPITAL RESOURCES. Sources of cash during the first six
months of 1996 included Alaska Cablevision's operating activities which
generated positive cash flow of $802,000 net of changes in the components of
working capital. Cash provided by operating activities decreased $162,000 for
the six-month period ended June 30, 1996 compared to the corresponding period of
1995 resulting primarily from the net effect of the decrease (receipt) of
subscriber receivables, other receivables and prepaid assets in 1995 and the
decrease (payment) of payables, accrued expenses and deferred revenues in 1996.
Cash used in investing activities decreased $214,000 to $227,000 for the
six-month period ended June 30, 1996 compared to the corresponding period of
1995. The 1995 decrease results primarily from reduced capital expenditures
related to purchases of property, plant and equipment.
Cash used in financing activities totaled $486,000 and $177,000 during the
six-month periods ended June 30, 1996 and 1995, respectively. Uses of cash in
1996 resulted primarily from repayment on notes due to former stockholders of
$109,000 and distributions to stockholders of $374,000. Uses of cash in 1995
resulted primarily from repayment on notes due to former stockholders of
$101,000 and distributions to stockholders of $348,000. Proceeds from a new
senior revolving credit loan agreement totaling $3.7 million were used in 1995
to payoff $3.4 million in loans from affiliates.
Alaska Cablevision's primary need for capital has been to finance plant
rebuilds and upgrades, channel additions and service vehicles. Alaska
Cablevision spent $227,000 during for the six-month period ended June 30, 1996
on capital expenditures. The recorded cost of assets disposed of totaled
approximately $54,000 for the six-month period ended June 30, 1996 resulting
from the replacement of vehicles and corporate office equipment.
On February 28, 1995, Alaska Cablevision and Rock Associates, Inc., as
co-borrowers, entered into a new $6.4 million senior reducing revolving credit
loan agreement with a bank. Borrowings under the agreement are collateralized by
all of Alaska Cablevision's common stock and assets and bear interest, at Alaska
Cablevision's option, at (1) the higher of the bank's prime rate or the federal
funds rate plus 1/2%, or (2) the LIBOR rate plus 1-1/2%. The agreement expires
December 31, 1997.
F-80
PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
GENERAL. The following unaudited pro forma combined statement of operations
has been prepared to reflect the acquisition of the cable systems by the
Company. The results of operations for McCaw/Rock Homer and McCaw/Rock Seward
have not been included as they are not significant to the acquisition. The
acquisition was accounted for using the purchase method of accounting.
The unaudited pro forma combined statement of operations for the year ending
December 31, 1996 gives effect to the acquisition as if it occurred as of the
beginning of the year presented and combines (1) the Company's historical income
for the year ended December 31, 1996, and (2) cable operations which consist of
Prime's, Alaska Cablevision's and Alaskan Cable's historical statements of
operations for the ten months ended October 31, 1996.
The unaudited pro forma combined condensed statement of operations does not
purport to represent what the Company's results of operations would actually
have been had the acquisition occurred at the beginning of the year presented,
or to project any future results of operations of the Company. The pro forma
adjustments are based on available information and upon assumptions that the
Company's management believes are reasonable under the circumstances. These
adjustments are directly attributable to the acquisition indicated and are
expected to have a continuing impact on the results of operations of the
Company.
The pro forma combined statement of operations should be read in conjunction
with the historical financial statements and notes thereto of the Company,
Prime, Alaska Cablevision, and Alaskan Cable.
F-81
GENERAL COMMUNICATION, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
($ IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
CABLE
(10 MONTHS ENDED PRO FORMA PRO FORMA
COMPANY OCTOBER 31, 1996) ADJUSTMENTS AMOUNTS
----------- ------------------ ------------- -----------
Telecommunciation services........................... $ 155,419 0 0 155,419
Cable services....................................... 9,475 45,868 0 55,343
----------- ------- ------------- -----------
Total revenues................................... 164,894 45,868 0 210,762
Cost of sales and services........................... 92,664 11,516 0 104,180
Selling, general and administrative expenses (1)..... 46,412 14,106 (1,362) 59,156
Depreciation and amortization (2).................... 9,409 19,785 (8,641) 20,553
----------- ------- ------------- -----------
Operating income................................. 16,409 461 10,003 26,873
Interest expense, net (3)............................ 3,719 8,422 3,370 15,511
Other income (expense)............................... 0 33 0 33
----------- ------- ------------- -----------
Net earnings (loss) before income taxes.......... 12,690 (7,928) 6,633 11,395
Income tax expense (4)............................... 5,228 (27) (560) 4,695
----------- ------- ------------- -----------
Net earnings (loss).............................. $ 7,462 (7,955) 7,193 6,700
----------- ------- ------------- -----------
----------- ------- ------------- -----------
Earnings per share common share.................. 0.16
-----------
-----------
Weighted average shares 41,604
-----------
-----------
EBITDA (5) 47,427
-----------
-----------
ADJUSTMENTS.
The pro forma adjustments to the unaudited pro forma combined statement of
operations for the year ended December 31, 1996 are as follows:
(1) Pursuant to the Prime Management Agreement, Prime has agreed to oversee,
manage and supervise the development and operation of the Cable Systems. The
Company has agreed to pay Prime $1.0 million for these services in year one
of the agreement. Accordingly, the historical management fees are eliminated
from selling, general and administrative expenses and $1.0 million of
management fees included.
(2) Represents adjustments to depreciation and amortization expense resulting
from the adjusted carrying values, and lives of tangible and intangible
assets. Goodwill, certificates of operating rights and PCS license are being
amortized over 40 years.
(3) Elimination of historical interest expense incurred by the Cable Systems
with interest accrued on GCI Cable debt of $175.9 million as if it was
outstanding for the entire year at 8.12%.
(4) Income tax expense is computed using the Company's consolidated effective
tax rate for 1996 of 41.2%
(5) EBITDA consists of earnings before interest (net), income taxes,
depreciation, amortization and other income (expense).
F-82
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING SHAREHOLDERS OR THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS
PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION.
--------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary................................ 3
Risk Factors...................................... 13
The Company....................................... 22
Use of Proceeds................................... 25
Dilution.......................................... 26
Capitalization.................................... 27
Price Range of Common Stock and Dividend Policy... 28
Selected Consolidated Financial Data.............. 29
Selected Cable Company Financial Data............. 31
Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 33
Business.......................................... 44
Management........................................ 76
Certain Transactions.............................. 86
Principal and Selling Shareholders................ 90
Description of Credit Facilities and Notes........ 94
Description of Capital Stock...................... 96
Shares Eligible for Future Sale................... 99
Underwriting...................................... 100
Legal Matters..................................... 101
Experts........................................... 101
Available Information............................. 102
Incorporation by Reference........................ 102
Glossary.......................................... 103
Index to Financial Statements..................... F-1
13,800,000 SHARES
GENERAL COMMUNICATION, INC.
CLASS A COMMON STOCK
(NO PAR VALUE)
[LOGO]
SALOMON BROTHERS INC
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SCHRODER & CO. INC.
PROSPECTUS
DATED , 1997
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
All of the expenses of the offering of the Class A Common Stock are to be
borne by the Company. These expenses will include the following, subject to
future contingencies:
Accounting Fees*.............................................. $
Costs of Printing*............................................ $
Legal Fees*................................................... $
Registration/Filing Fees
Securities Act of 1933...................................... $ 32,611.65
Blue Sky Compliance*........................................ $
NASD Filing Fee............................................... $ 11,261.84
Nasdaq Application Fee........................................ $
Transfer Agent and Registrar Fees............................. $
Miscellaneous*................................................ $
-----------
TOTAL $
-----------
-----------
- ------------------------
* Estimates
The Company intends to pay all expenses of registration, issuance and
distribution, excluding Underwriters' discounts and commissions, with respect to
the shares being sold by the Selling Shareholders.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Restated Articles of Incorporation provide for the
indemnification to the full extent permitted by, and in the manner permissible
under, the laws of the State of Alaska and any other applicable laws, of any
person who is made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative, or investigative, other than an action
by or in the right of the Company, by reason of the fact that he or she is or
was a director, officer, employee or agent of the Company or is or was serving
at the request of the Company as an officer, director, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise. The
Restated Articles of Incorporation provide that these requirements are deemed to
be a contract between the Company and each director and officer who serves in
such capacity at any time while those requirements of the Articles are in
effect. The Company had not as of the date of this Prospectus entered into any
express agreement with its officers and directors setting forth these terms of
indemnification. In addition to providing indemnification for non derivative
actions that is similar to the indemnification in the Restated Articles, the
Company's revised Bylaws further provide for indemnification of any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the Company to procure a
judgment in its favor by reason of or arising from the fact that the person is
or was a director, officer, employee, or agent of the Company, or is or was
serving at the request of the Company as a director, officer, employee, or agent
of another enterprise.
The Bylaws provide that, unless otherwise ordered by a court,
indemnification will only be made by the Company upon a determination by (i) a
majority of the disinterested directors of the Board, (ii) a majority vote of
shareholders or (iii) independent legal counsel that such indemnification is
proper because the person to be indemnified met the applicable standard of
conduct. The Bylaws also provide, in accordance with Alaska law, that
indemnification will not be made by the Company in respect of any
II-1
claim, issue, or matter as to which the person has been adjudged to be liable
for negligence or misconduct in the performance of the person's duty to the
Company, except to the extent that the court in which the action or suit was
brought determines upon application that, despite the adjudication of liability,
in view of all circumstances of the case, the person is fairly and reasonably
entitled to indemnification for such expenses that the court considers proper.
The Bylaws also provide that to the extent a director, officer, employee, or
agent of the Company has been successful in his or her defense of an action for
which he or she is entitled to indemnification, that person will be indemnified
against expenses and attorney fees actually and reasonably incurred in
connection with the defense. The Bylaws also provide that the Company may
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee, or agent of the Company or who is or was serving at
the request of the Company as a director, officer, employee or agent of another
enterprise against any liability asserted against that person and incurred by
that person in any such capacity, or arising out of that status, whether or not
the Company would have the power to indemnify that person against such liability
under provisions of the Bylaws.
ITEM 16. EXHIBITS.
See Exhibit Index and Financial Statement Schedules at the end of this
Registration Statement.
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(2) The undersigned Registrant hereby undertakes insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(3) The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the Municipality of Anchorage, State of Alaska, on July 7, 1997.
GENERAL COMMUNICATION, INC.
(Registrant)
By: /s/ JOHN M. LOWBER
-----------------------------------------
John M. Lowber
SENIOR VICE PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------------------------------ --------------------------------------- ----------------
* Director, Chief Executive Officer and
------------------------------------------- President (Principal Executive July 7, 1997
Ronald A. Duncan Officer)
/s/ JOHN M. LOWBER
------------------------------------------- Chief Financial Officer July 7, 1997
John M. Lowber (Principal Financial Officer)
*
------------------------------------------- Chief Accounting Officer July 7, 1997
Alfred J. Walker (Principal Accounting Officer)
*
------------------------------------------- Chairman of the Board July 7, 1997
Carter F. Page and Director
*
------------------------------------------- Vice Chairman of the Board July 7, 1997
Robert M. Walp and Director
*
------------------------------------------- Director July 7, 1997
Donne F. Fisher
*
------------------------------------------- Director July 7, 1997
John W. Gerdelman
------------------------------------------- Director
Larry E. Romrell
*
------------------------------------------- Director July 7, 1997
James M. Schneider
*
------------------------------------------- Director July 7, 1997
Jeffery C. Garvey
*
------------------------------------------- Director July 7, 1997
William P. Glasgow
*
------------------------------------------- Director July 7, 1997
Donald Lynch
* By: /s/ John M. Lowber, Attorney-in-Fact
II-3
SCHEDULE VIII
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
ADDITIONS DEDUCTIONS
-------------------------- -------------
BALANCE AT CHARGED TO WRITE-OFFS
BEGINNING OF PROFIT AND NET OF BALANCE AT
DESCRIPTION YEAR LOSS OTHER RECOVERIES END OF YEAR
- ---------------------------------------------------- ------------- ------------- ----------- ------------- -------------
(AMOUNTS IN THOUSANDS)
Year ended December 31, 1996:
Allowance for doubtful receivables................ $ 295 1,736 354(1) 1,788 597
----- ----- --- ----- ---
----- ----- --- ----- ---
Year ended December 31, 1995:
Allowance for doubtful receivables................ $ 409 1,459 -- 1,573 295
----- ----- --- ----- ---
----- ----- --- ----- ---
Year ended December 31, 1994:
Allowance for doubtful receivables................ $ 721 829 -- 1,141 409
----- ----- --- ----- ---
----- ----- --- ----- ---
- ------------------------
(1) Allowance for doubtful receivables acquired pursuant to the Cable Company
acquisitions described in footnote (2) to the Company's consolidated
financial statements.
S-1
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- --------- -----------------------------------------------------------------------------------------------
1.1 Underwriting Agreement
3.1 Restated Articles of Incorporation of the Company(1)
3.2 Bylaws of the Company(1)
4.1 Form of Indenture relating to the Notes (including Form of Note)
5.1 Opinion of Wohlforth, Argetsinger, Johnson & Brecht, A Professional Corporation
9.1 Voting Agreement dated October 31, 1996, among Prime II Management L.P., as agent for the
Voting Prime Sellers, MCI Telecommunications Corporation, Ronald A. Duncan, Robert M. Walp and
TCI GCI, Inc.(12)
10.1 Credit Facility*
10.2 Registration Rights Agreement, dated as of January 18, 1991, between General Communication,
Inc. and WestMarc Communications, Inc.(2)
10.3 Employee stock option agreements issued to individuals Spradling, O'Hara, Strid, Behnke,
Lewkowski and Snyder(3)
10.4 Registration Rights Agreement, dated October 31, 1996, between General Communication, Inc. and
the Prime Sellers(12)
10.5 Registration Rights Agreement, dated October 31, 1996, between General Communication, Inc., and
Alaskan Cable Network/Fairbanks, Inc. ("ACNFI"), Alaskan Cable Network/Juneau, Inc. ("ACNJI"),
Alaskan Cable Network/Ketchikan-Sitka, Inc. ("ACNKSI") and Jack Kent Cooke, Inc.(12)
10.6 Registration Rights Agreement, dated October 31, 1996, between General Communication, Inc., and
the owners of Alaska Cablevision, Inc.(12)
10.7 Lease agreement between GCI Communication Services, Inc. and National Bank of Alaska Leasing
Corporation dated January 15, 1992(4)
10.8 Westin Building Lease(5)
10.9 Duncan and Hughes Deferred Bonus Agreements (6)
10.10 Compensation Agreement between General Communication, Inc. and William C. Behnke dated January
1, 1997
10.11 Order approving Application for a Certificate of Public Convenience and Necessity to operate as
a Telecommunications (Intrastate Interexchange Carrier) Public Utility within Alaska(3)
10.12 1986 Stock Option Plan, as amended(14)
10.13 Loan agreement between National Bank of Alaska and GCI Leasing Co., Inc. dated December 31,
1992(4)
10.14 Pledge and Security Agreement between National Bank of Alaska and GCI Communication Services,
Inc. dated December 31, 1992(4)
10.15 Lease Agreement between MCI Telecommunications Corporation and GCI Leasing Co., Inc. dated
December 31, 1992(4)
10.16 Sublease Agreement between MCI Telecommunications Corporation and General Communication, Inc.
dated December 31, 1992(4)
10.17 Assistance Agreement between MCI Telecommunications Corporation and GCI Leasing Co., Inc. dated
December 31, 1992(4)
10.18 Letter of intent between MCI Telecommunications Corporation and General Communication, Inc.
dated December 31, 1992(7)
10.19 MCI Carrier Agreement between MCI Telecommunications Corporation and General Communication,
Inc. dated January 1, 1993(8)
10.20 Contract for Alaska Access Services Agreement between MCI Telecommunications Corporation and
General Communication, Inc. dated January 1, 1993(8)
10.21 Promissory Note Agreement between General Communication, Inc. and Ronald A. Duncan, dated
August 13, 1993(9)
10.22 Deferred Compensation Agreement between General Communication, Inc. and Ronald A. Duncan, dated
August 13, 1993(9)
10.23 Pledge Agreement between General Communication, Inc. and Ronald A. Duncan, dated August 13,
1993(9)
10.24 Revised Qualified Employee Stock Purchase Plan of General Communication, Inc.(10)
10.25 Summary Plan Description pertaining to the Revised Qualified Employee Stock Purchase Plan of
General Communication, Inc.(10)
10.26 The GCI Special Non-Qualified Deferred Compensation Plan(11)
10.27 Transponder Purchase Agreement for Galaxy X between Hughes Communications Galaxy, Inc. and GCI
Communication Corp.(11)
10.28 Equipment Purchase Agreement between GCI Communication Corporation and Scientific-Atlanta,
Inc.(11)
10.29 Management Agreement, between Prime II Management, L.P., and GCI Cable, Inc., dated October 31,
1996(12)
10.30 Third Amended and Restated Credit Agreement, dated as of October 31, 1996, between GCI
Communication Corp., and NationsBank of Texas, N.A.(13)
10.31 Loan Agreement among GCI Cable, Inc., as Borrower; Toronto-Dominion (Texas), Inc., et al., as
of October 31, 1996(13)
10.32 Licenses(5)
214 Authorization
International Resale Authorization
Digital Electronic Message Service Authorization
Fairbanks Earth Station License
Fairbanks (Esro) Construction Permit for P-T-P
Microwave Service
Fairbanks (Polaris) Construction Permit for P-T-P
Microwave Service
Anchorage Earth Station Construction Permit
License for Eagle River P-T-P Microwave Service
License for Juneau Earth Station
Issaquah Earth Station Construction Permit
10.33 ATU Interconnection Agreement between GCI Communication Corp. and Municipality of Anchorage
executed January 15, 1997
10.34 First Amendment to Third Amended and Restated Credit Agreement entered into among GCI
Communication Corp., NationsBank of Texas, N.A., Toronto Dominion (Texas), Inc., Credit
Lyonnais New York Branch, and National Bank of Alaska(15)
10.35 Second Amendment to the Third Amended and Restated Credit Agreement entered into among GCI
Communication Corp., NationsBank of Texas, N.A., Toronto Dominion (Texas), Inc., Credit
Lyonnais New York Branch, and NationsBank of Alaska.*
10.36 Securities Purchase and Sale Agreement, dated May 2, 1996, among General Communication, Inc.,
and the Prime Sellers(12)
10.37 Agreement and Plan of Merger of ACI with and into GCI Cable, Inc., dated October 31, 1996(12)
10.38 Certificate of Merger Merging ACI into GCI Cable, Inc. (filed in Delaware on October 31,
1996)(12)
10.39 Articles of Merger between GCI Cable, Inc., and ACI (filed in Delaware on October 31, 1996)(12)
10.40 Agreement and Plan of Merger of PCFI with and into GCI Cable, Inc., dated October 31, 1996(12)
10.41 Certificate of Merger Merging PCFI into GCI Cable, Inc. (filed in Delaware on October 31,
1996)(12)
10.42 Articles of Merger between GCI Cable and PCFI (for filing in Alaska)(12)
10.43 Asset Purchase Agreement, dated April 15, 1996, among General Communication, Inc., ACNFI, ACNJI
and ACNKSI(12)
10.44 Asset Purchase Agreement, dated May 10, 1996, among General Communication, Inc., and Alaska
Cablevision, Inc.(12)
10.45 Asset Purchase Agreement, dated May 10, 1996, among General Communication, Inc., and McCaw/Rock
Homer Cable System, J.V.(12)
10.46 Asset Purchase Agreement, dated May 10, 1996, between General Communication, Inc., and
McCaw/Rock Seward Cable System, J.V.(12)
10.47 Amendment No. 1 to Securities Purchase and Sale Agreement, dated October 31, 1996, among
General Communication, Inc., and the Prime Sellers Agent(13)
10.48 First Amendment to Asset Purchase Agreement, dated October 30, 1996, among General
Communication, Inc., ACNFI, ACNJI and ACNKSI(13)
10.49 Amendment to Revised Qualified Employee Stock Purchase Plan of General Communication, Inc.
10.50 Form of Agreement Waiving Right to Exercise Stock Options
10.51 Order Approving Arbitrated Interconnection Agreement as Resolved and Modified by Order
U-96-89(8) dated January 14, 1997
10.52 First Amendment to Loan Agreement among GCI Cable, Inc., as Borrower, and Toronto-Dominion
(Texas), Inc., et al., as of October 31, 1996*
10.53 Amendment to the MCI Carrier Agreement executed April 20, 1994
10.54 Amendment No. 1 to MCI Carrier Agreement executed July 26, 1994(16)
10.55 MCI Carrier Addendum--MCI 800 DAL Service effective February 1, 1994(16)
10.56 Third Amendment to MCI Carrier Agreement dated as of October 1, 1994(16)
10.57 Fourth Amendment to MCI Carrier Agreement dated as of September 25, 1995(16)
10.58 Fifth Amendment to the MCI Carrier Agreement executed April 19, 1996
10.59 Sixth Amendment to MCI Carrier Agreement dated as of March 1, 1996(16)
10.60 Seventh Amendment to MCI Carrier Agreement dated November 27, 1996*
10.61 First Amendment to Contract for Alaska Access Services between General Communication, Inc. and
MCI Telecommunications Corporation dated April 1, 1996*
10.62 Letter of Intent between General Communication, Inc. and MCI Telecorp dated August 6, 1993
10.63 Service Mark License Agreement between MCI Communications Corporation and General
Communication, Inc. dated April 13, 1994
10.64 Radio Station Authorization (Personal Communications Service License), Issue Date June 23, 1995
10.65 Framework Agreement between National Bank of Alaska (NBA) and General Communication, Inc. dated
October 31, 1995(17)
10.66 1997 Call-Off Contract between National Bank of Alaska (NBA) and General Communication, Inc.
(GCI) dated November 1, 1996*
10.67 Contract No. 92MR067A Telecommunications Services between BP Exploration (Alaska), Inc. and GCI
Network Systems dated April 1, 1992*
10.68 Amendment No. 01 to BP Exploration (Alaska) Inc. Contract No. 92MRO67A*
10.69 Amendment No. 02 to BP Exploration (Alaska) Inc. Contract No. 92MRO67A*
10.70 Amendment No. 03 to BP Exploration (Alaska) Inc. Contract No. 92MRO67A effective August 1,
1996*
10.71 Lease Agreement dated September 30, 1991 between RDB Company and General Communication, Inc.(3)
10.72 Certificate of Public Convenience and Necessity No. 436 for Telecommunications Service (Relay
Services)
10.73 Order Approving Transfer Upon Closing, Subject to Conditions, and Requiring Filings dated
September 23, 1996
10.74 Order Granting Extension of Time and Clarifying Order dated October 21, 1996
10.75 Contract for Alaska Access Services among General Communication, Inc. and GCI Communication
Corp., and Sprint Communications Company L.P. dated June 1, 1993*
10.76 First Amendment to Contract for Alaska Access Services between General Communication, Inc. and
Sprint Communications Company L.P. dated as of August 7, 1996*
10.77 Employment and Deferred Compensation Agreement between General Communication, Inc. and John M.
Lowber dated July 1982
10.78 Deferred Compensation Agreement between GCI Communication Corp. and Dana L. Tindall dated
August 15, 1994
10.79 Transponder Lease Agreement between General Communication Incorporated and Hughes
Communications Satellite Services, Inc., executed August 8, 1989(9)
10.80 Addendum to Galaxy X Transponder Purchase Agreement between GCI Communication Corp. and Hughes
Communications Galaxy, Inc. dated August 24, 1995
10.81 Order Approving Application, Subject to Conditions; Requiring Filing; and Approving Proposed
Tariff on an Inception Basis, dated February 4, 1997
10.82 Resale Solutions Switched Services Agreement between Sprint Communications Company L.P. and GCI
Communications, Inc. dated May 31, 1996*
10.83 Commitment Letter from Credit Lyonnais New York Branch, NationsBank of Texas, N.A. and TD
Securities (USA) Inc. for Fiber Facility dated as of July 3, 1997
10.84 Commitment Letter from NationsBank for Credit Facility dated July 2, 1997
11.1 Statement Re Computation of Earnings Per Share
21.1 Subsidiaries of the Company**
23.1 Consent of KPMG Peat Marwick LLP (Accountant for Company)
23.2 Consent of Ernst & Young LLP (Accountants for Prime for 1994 and 1995 and accountants for
Alaskan Cable for 1993, 1994 and 1995
23.3 Consent of Carl & Carlsen (Accountant for Alaska Cablevision)
23.4 Consent of Wohlforth, Argetsinger, Johnson & Brecht, A Professional Corporation (included as
part of Exhibit 5.1)
23.5 Consent of Sherman & Howard L.L.C.
24.1 Power of Attorney (included with the signature page to the Registration Statement)
99.1 Additional Exhibits
The Articles of Incorporation of GCI Communication Corp.(2)
The By-laws of GCI Communication Corp.(2)
The Articles of Incorporation of GCI Communication Services, Inc.(4)
The By-laws of GCI Communication Services, Inc.(4)
The By-laws of GCI Leasing Co., Inc.(4)
The Articles of Incorporation of GCI Leasing Co., Inc.(4)
99.2 The By-Laws of GCI Cable, Inc.(14)
99.3 The Articles of Incorporation of GCI Cable, Inc.(14)
99.4 The By-Laws of GCI Cable / Fairbanks, Inc.(14)
99.5 The Articles of Incorporation of GCI Cable / Fairbanks, Inc.(14)
99.6 The By-laws of GCI Cable / Juneau, Inc.(14)
99.7 The Articles of Incorporation of GCI Cable / Juneau, Inc.(14)
99.8 The By-laws of GCI Cable Holdings, Inc.(14)
99.9 The Articles of Incorporation of GCI Cable Holdings, Inc.(14)
99.10 The By-laws of GCI, Inc.***
99.11 The Articles of Incorporation of GCI, Inc.**
99.12 The By-laws of GCI Holdings, Inc.***
99.13 The Articles of Incorporation of GCI Holdings, Inc.***
- ------------------------
* To be filed by amendment.
** Previously filed.
*** Revised and Refiled Herewith.
(1) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the period ended March 31, 1994.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1990.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1991.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
(5) Incorporated by reference to the Company's Registration Statement on Form 10
(File No. 0-15279), mailed to the Securities and Exchange commission on
December 30, 1986.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1989.
(7) Incorporated by reference to the Company's Current Report on Form 8-K dated
January 13, 1993.
(8) Incorporated by reference to the Company's Current Report on Form 8-K dated
June 4, 1993.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(12) Incorporated by reference to the Company's Annual Report on Form S-4
Registration Statement dated October 4, 1996.
(13) Incorporated by reference to the Company's Current Report on Form 8-K dated
November 13, 1996.
(14) Incorporated by reference to the Company's Annual Report on Form 10K for
the year ended December 31, 1996.
(15) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1997.
(16) Incorporated by reference to the Company's Current Report on Form 8-K dated
March 14, 1996, filed March 28, 1996.
(17) Incorporated by reference to the Company's Amendment to Annual Report on
Form 10-K/A (Amendment No. 1) dated December 31, 1995.