As filed with the Securities and Exchange Commission on May 15, 1997.
===============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-15279
GENERAL COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)
STATE OF ALASKA 92-0072737
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 Denali Street
Suite 1000
Anchorage, Alaska 99503
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (907) 265-5600
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (l) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No .
The number of shares outstanding of the registrant's classes
of common stock, as of April 30, 1997 was:
38,164,553 shares of Class A common stock; and
4,071,490 shares of Class B common stock.
===============================================================================
1
INDEX
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
PAGE NO
-------
PART I. FINANCIAL INFORMATION
Item l. Consolidated Financial Statements..........................................3
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996.......................................................3
Consolidated Statements of Operations for the three
months ended March 31, 1997 and 1996....................................5
Consolidated Statements of Stockholders'
Equity for the three months ended March 31, 1997
and 1996.................................................................6
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996....................................7
Notes to Interim Condensed Consolidated Financial
Statements..............................................................8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................................12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................................19
Item 6. Exhibits and Reports on Form 8-K...........................................19
SIGNATURES..........................................................................................20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
ASSETS 1997 1996
- ------------------------------------------------------------------ ----------------- ------------------
(Amounts in thousands)
Current assets:
Cash and cash equivalents $ 4,730 13,349
Receivables, net of allowance for doubtful
receivables of $776 and $597 28,842 28,768
Prepaid and other current assets 2,288 2,236
Deferred income taxes, net 871 835
Inventories 1,666 1,589
Notes receivable 330 325
------- -------
Total current assets 38,727 47,102
------- -------
Property and equipment in service, net 122,089 115,981
Construction in progress 19,901 20,770
------- -------
Net property and equipment 141,990 136,751
------- -------
Other assets:
Deferred loan costs, net 759 900
Notes receivable 1,344 1,016
Transponder deposit 9,100 9,100
Other assets, at cost, net 1,715 1,546
Intangible assets, net 249,243 250,920
------- -------
Total other assets 262,161 263,482
------- -------
Total assets $ 442,878 447,335
======= =======
See accompanying notes to interim condensed consolidated financial
statements.
3
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- ------------------------------------------------------------------- ----------------- -------------------
(Amounts in thousands)
Current liabilities:
Current maturities of long-term debt $ 31,938 31,969
Current maturities of obligations under capital leases 74 71
Accounts payable 22,320 23,677
Accrued payroll and payroll related obligations 3,679 3,830
Accrued liabilities 4,269 4,173
Accrued interest 351 2,708
Subscriber deposits and deferred revenues 3,444 3,449
------- -------
Total current liabilities 66,075 69,877
Long-term debt, excluding current maturities 180,873 191,273
Obligations under capital leases due to related parties,
excluding current maturities 655 675
Deferred income taxes, net 34,020 33,720
Other liabilities 2,160 2,236
------- -------
Total liabilities 283,783 297,781
------- -------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 50,000,000 shares; issued and outstanding
38,159,468 and 36,586,973 shares at March 31, 1997 and
December 31, 1996, respectively 123,498 113,421
Class B. Authorized 10,000,000 shares; issued and outstanding
4,071,490 and 4,074,028 shares at March 31, 1997 and
December 31, 1996, respectively; convertible on a
share-per-share basis into Class A common stock 3,432 3,432
Less cost of 202,768 and 199,081 Class A common shares held in
treasury at March 31, 1997 and December 31, 1996,
respectively (1,039) (1,010)
Paid-in capital 4,247 4,229
Retained earnings 28,957 29,482
------- -------
Total stockholders' equity 159,095 149,554
------- -------
Commitments and contingencies (note 5)
Total liabilities and stockholders' equity $ 442,878 447,335
======= =======
See accompanying notes to interim condensed consolidated financial statements.
4
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
1997 1996
------------------ ------------------
(Amounts in thousands
except per share amounts)
Revenues:
Telecommunication services $ 39,225 37,969
Cable services 13,656 ---
------ ------
Total revenues 52,881 37,969
Cost of sales and services 27,168 21,302
Selling, general and administrative expenses 16,301 10,833
Depreciation and amortization 6,120 1,887
------ ------
Operating income 3,292 3,947
Interest expense, net 3,949 260
------ ------
Net earnings (loss) before income taxes (657) 3,687
Income tax expense (benefit) (132) 1,550
------ ------
Net earnings (loss) $ (525) 2,137
====== ======
Net earnings (loss) per common share $ (0.01) 0.09
====== ======
Weighted average number of shares of common
stock and common stock equivalents outstanding 43,167 24,854
====== ======
See accompanying notes to interim condensed consolidated financial
statements.
5
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Class A
(Unaudited) Shares of Class A Class B Shares
Common Stock Common Common Held in Paid-in Retained
(Amounts in thousands) Class A Class B Stock Stock Treasury Capital Earnings
------- ------- ----- ----- -------- ------- --------
Balances at December 31, 1995 19,680 4,176 $ 13,912 3,432 (389) 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 1 --- 1 --- --- --- ---
Shares issued and issuable under
officer stock option agreements --- --- --- --- --- 1 ---
----------------------------------------------------------------------------------
Balances at March 31, 1996 19,681 4,176 13,913 3,432 (389) 4,058 24,157
==================================================================================
Balances at December 31, 1996 36,587 4,074 113,421 3,432 (1,010) 4,229 29,482
Net loss --- --- --- --- --- --- (525)
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- --- --- 18 ---
Class B shares converted to Class A 3 (3) --- --- --- --- ---
Shares issued upon conversion of
convertible note (notes 2 and 3) 1,538 --- 9,983 --- --- --- ---
Shares purchased and held in Treasury --- --- --- --- (29) --- ---
Shares issued under stock option plan 31 --- 94 --- --- --- ---
----------------------------------------------------------------------------------
Balances at March 31, 1997 38,159 4,071 $123,498 3,432 (1,039) 4,247 28,957
==================================================================================
See accompanying notes to interim condensed consolidated financial statements.
6
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
1997 1996
---------------- ----------------
(Amounts in thousands)
Cash flows from operating activities:
Net earnings (loss) $ (525) 2,137
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization 5,979 1,887
Amortization of deferred loan costs 141 0
Deferred income tax expense 264 13
Deferred compensation and compensatory stock options (58) 143
Bad debt expense, net of write-offs 179 (37)
Other noncash income and expense items 16 (11)
Change in operating assets and liabilities (note 2) (4,156) (1,773)
-------- -------
Net cash provided by operating activities 1,840 2,359
-------- -------
Cash flows from investing activities:
Purchases of property and equipment (9,529) (6,950)
Purchases of other assets (197) (45)
Notes receivable issued (337) (130)
Payments received on notes receivable 4 2
-------- -------
Net cash used in investing activities (10,059) (7,123)
-------- -------
Cash flows from financing activities:
Long-term borrowings 10,000 3,300
Repayments of long-term borrowings and capital lease obligations (10,448) (485)
Proceeds from common stock issuance 77 1
Purchase of treasury stock (29) 0
-------- -------
Net cash provided (used) by financing activities (400) 2,816
-------- -------
Net increase (decrease) in cash and cash equivalents (8,619) (1,948)
Cash and cash equivalents at beginning of period 13,349 4,017
-------- -------
Cash and cash equivalents at end of period $ 4,730 2,069
======== =======
See accompanying notes to interim condensed consolidated financial
statements.
7
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(l) General
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. The interim condensed consolidated financial
statements include the consolidated accounts of General
Communication, Inc. and its wholly-owned subsidiaries (collectively,
the "Company") with all significant intercompany transactions
eliminated. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair
presentation have been included. Certain prior year information has
been reclassified to conform to the current quarter presentation.
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. For further information, refer to the
financial statements and footnotes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 1996.
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (in
thousands):
(Unaudited)
Three-month periods ended March 31, 1997 1996
----------- ----------
(Amounts in thousands)
(Increase) decrease in trade receivables $ 138 (2,089)
(Increase) decrease in other receivables (391) 20
Increase in prepaid and other current assets (52) (374)
Increase in inventory (77) (34)
Increase in accounts payable (1,357) (22)
Increase (decrease)in accrued liabilities 96 (154)
Increase (decrease) in accrued payroll and
payroll related obligations (151) 73
Increase in accrued income taxes 0 917
Increase (decrease) in accrued interest (2,357) 10
Decrease in deferred revenues (5) (120)
------- -------
$ (4,156) (1,773)
======= =======
The holders of $10 million of convertible subordinated notes
exercised their conversion rights in January 1997 resulting in the
exchange of such notes for 1,538,457 shares of the Company's Class A
common stock.
Income taxes paid totaled $0 and $633,000 during the quarters ended
March 31, 1997 and 1996, respectively.
Interest paid totaled $6.3 million and $407,000 during the quarters
ended March 31, 1997 and 1996, respectively.
8
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company recorded $18,000 and $16,000 during the quarters ended
March 31, 1997 and 1996, respectively, as paid-in capital in
recognition of the income tax effect of excess stock compensation
expense for tax purposes over amounts recognized for financial
reporting purposes.
(3) Long-term Debt
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 ending March 31, 1998, the outstanding balance at
March 31, 1997 is included in current maturities of long-term debt.
(4) Stockholders' Equity
During January 1997, holders of $10 million of convertible
subordinated notes exercised their conversion rights which allowed
them to exchange their notes for GCI Class A common shares at a
conversion price of $6.50 per share. As a result, the note holders
were issued a total of 1,538,457 shares of GCI Class A common stock.
(5) Commitments and Contingencies
Satellite Transponders
The Company entered into a purchase and lease-purchase option
agreement in August 1995 for the acquisition of satellite
transponders to meet its long-term satellite capacity requirements.
The balance payable upon expected delivery of the transponders in
1998 is dependent upon a number of factors. The Company does not
expect the remaining balance payable at delivery to exceed $41
million.
Litigation
The Company is involved in various lawsuits and legal proceedings
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 financial position of the Company.
Cable Service Rate Reregulation
Beginning in April 1993, the Federal Communications Commission
("FCC") adopted regulations implementing the Cable Television
Consumer Protection and Competition Act of 1992 ("The Cable Act of
1992"). Included are rules governing rates charged by cable operators
for the basic service tier, the installation, lease and maintenance
of equipment (such as converter boxes and remote control units) used
by subscribers to receive this tier and for cable programming
services other than programming offered on a per-channel or
per-program basis (the "regulated services"). Generally, the
regulations require affected cable systems to charge rates for
regulated services that have been reduced to prescribed benchmark
levels, or alternatively, to support rates using costs-of-service
methodology.
9
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 March 31, 1997, 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
March 31, 1997.) Juneau's current rates have been approved by the
APUC and there are no other pending filings with the APUC, therefore,
there is no refund liability for basic service at this time.
Complaints by subscribers relating to cable programming service rates
were filed with, and accepted by, the FCC for certain franchise
areas, however, filings made in response to those complaints related
to the period prior to July 15, 1994 were approved by the FCC.
Therefore, the potential liability for cable programming service
refunds would be limited to the period subsequent to July 15, 1994
for these areas. Management of the Company believes that it has
complied in all material respects with the provisions of the FCC
rules and regulations and that the Company is, therefore, not liable
for any refunds. Accordingly, no provision has been made in the
financial statements for any potential refunds. The FCC rules and
regulations are, however, subject to judgmental interpretations, and
the impact of potential rate changes or refunds ordered by the FCC
could cause the Company to make refunds and/or to be in default of
certain debt covenants.
In February 1996, 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.
10
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) Supplemental financial information
(Amounts in thousands)
(Unaudited)
------------------------------------------------- ------------
Three-month periods ended March 31, 1997 1996
------------------------------------------------- ------------
Long- Long-
Distance Cable Local Combined Distance
------------------------------------------------- ------------
Revenues:
Telecommunication revenues $ 39,225 --- --- 39,225 37,969
Cable revenues --- 13,656 --- 13,656 ---
------------------------------------------------- ------------
Total revenues 39,225 13,656 --- 52,881 37,969
------------------------------------------------- ------------
Cost of sales and services:
Distribution costs and costs of
services 23,884 --- 118 24,002 21,302
Programming and copyright costs --- 3,166 --- 3,166 ---
------------------------------------------------- ------------
Total cost of sales and services 23,884 3,166 118 27,168 21,302
Selling, general and administrative
expenses:
Operating and engineering 2,792 --- --- 2,792 2,624
Cable television, including
management fees of $273 --- 4,368 --- 4,368 ---
Sales and communications 2,864 --- 50 2,914 3,086
General and administrative 4,887 --- 369 5,256 4,285
Legal and regulatory 351 --- 97 448 441
Bad debts 426 97 --- 523 397
Depreciation and amortization 2,623 3,497 --- 6,120 1,887
------------------------------------------------- ------------
Operating income (loss) $ 1,398 2,528 (634) 3,292 3,947
================================================= ============
11
PART I.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's consolidated results of operations and financial condition. The
discussion should be read in conjunction with the Consolidated Financial
Statements and notes thereto.
Factors Affecting Future Performance
Future operating results of the Company will depend upon many factors and
will be subject to various risks and uncertainties, including those set forth in
this section of Form 10-Q. The information contained in Form 10-Q includes
forward looking statements regarding the Company and the Cable Companies' future
performance. Future results of the Company may differ materially from any
forward looking statements due to such risks and uncertainties.
Overview
The Company has historically reported revenues principally from the
provision of interstate and intrastate long distance telecommunication services
to residential, commercial and governmental customers and to other common
carriers (principally MCI Telecommunications Corporation ("MCI") and U. S.
Sprint ("Sprint")). These services accounted for 92.6% of the Company's
telecommunication revenues and 68.7% of the Company's total revenues during the
first quarter of 1997. Commencing with the acquisition of cable television
assets and companies ("Cable Systems") effective October 31, 1996, the Company
now reports revenues from cable television services which accounted for 25.8% of
the Company's total revenues during the period. The balance of the Company's
telecommunications 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 telecommunication revenues include the rate
per minute charged to customers and usage volumes, usually expressed as minutes
of use. Factors that have the greatest impact on year-to-year changes in cable
television revenues include the rate per subscriber and the number of
subscribers.
The Company's telecommunication cost of sales and services consists
principally of the direct costs of providing services, including local access
charges paid to local exchange carriers for the origination and termination of
long distance calls in Alaska, fees paid to other long distance carriers to
carry calls that terminate in areas not served by the Company's network
(principally the lower 49 states, most of which calls are carried over MCI's
network, and international locations, which calls are carried principally over
Sprint's network), and the cost of equipment sold to the Company's customers.
During the first quarter of 1997, local access charges accounted for 45.7% of
the telecommunication 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 telecommunication cost of sales. The Company's cable
television cost of sales and services has consisted principally of the direct
costs of providing services, including programming and copyright charges.
12
The Company's selling, general, and administrative expenses consists of
operating and engineering, service, sales and marketing, general and
administrative and legal and regulatory expenses. Most of these expenses consist
of salaries, wages and benefits of personnel and certain other indirect costs
(such as rent, travel, utilities and certain equipment costs). A significant
portion of selling, general, and administrative expenses, 17.9% in the first
quarter of 1997, represents the cost of the Company's sales, advertising and
promotion programs.
The Company expects to commence offering local exchange services initially
in Anchorage during the second half of 1997, and expects that local services
will represent less than 2.0% of revenues in 1997 and less than 8.0% in 1998.
The Company expects that it may generate moderately negative EBITDA from local
services during this time period. EBITDA is an acronym representing earnings
before interest, taxes, depreciation and amortization. As a measure of a
company's ability to generate cash flows, EBITDA should be considered in
addition to, but not as a substitute for, or superior to, other measures of
financial performance reported in accordance with generally accepted accounting
principles. EBITDA, also known as operating cash flow, is often used by analysts
when evaluating companies in the telecommunications and cable television
industries.
The Company began developing plans for PCS wireless communications
service deployment in 1995 and is currently evaluating alternative technologies
for its proposed PCS network. The Company expects to launch its PCS service as
early as 1999.
13
Results of Operations
The following table sets forth selected Statement of Operations data as a
percentage of total revenues for the periods indicated:
Quarter Ended March 31, Percentage
----------------------- Change
1997
vs.
1996 1997 1996
---- ---- ----
Statement of Operations Data:
Revenues
Telecommunication services 100.0% 74.2% 3.3%
Cable services.................. --- 25.8% ---
Total revenues..................... 100.0% 100.0% 39.2%
Cost of sales and services...... 56.1% 51.4% 27.5%
Selling, general and
administrative expenses...... 28.5% 30.8% 50.5%
Depreciation and
amortization................. 5.0% 11.6% 224.3%
Operating income................... 10.4% 6.2% (16.6%)
Net earnings (loss) before income
taxes........................... 9.7% (1.2%) ---
Net earnings (loss) ............... 5.6% (1.0%) ---
Other Financial Data:
Cable operating income (1)......... --- 18.5% ---
Cable EBITDA (1) (2).............. --- 46.1% ---
Consolidated EBITDA (2)............ 15.4% 18.3% 66.0%
(1) Computed as a percentage of total cable services revenues.
(2) Computed before deducting management fees.
14
Quarter Ended March 31, 1997 ("1997") Compared to Quarter Ended March 31, 1996
("1996").
Revenues
Total revenues increased 39.2% from $38.0 million in 1996 to $52.9 million
in 1997. Long distance transmission revenues from commercial, residential,
governmental, and other common carrier customers increased 6.5% from $34.1
million in 1996 to $36.3 million in 1997. This increase in revenues resulted in
part from a 12% increase in minutes of interstate traffic carried, which traffic
totaled 149.3 million minutes and a 9.4% increase in 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 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 in
1996 to $13.4 million in 1997. System sales and network service revenues
decreased 20.7% from $2.9 million in 1996 to $2.3 million in 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 in 1996 to $3.6 million in 1997. The Company reported three
months of cable services revenues in 1997 following its acquisition of the Cable
Systems effective October 31, 1996. The Company estimates that its facilities
pass approximately 162,700 homes in Alaska and that it has 104,423 basic
subscribers as of March 31, 1997. There was little change in the number of
subscribers, the rates charged those subscribers, and 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 rate per minute on long distance
traffic from $.184 per minute in 1996 to $.173 per minute in 1997. The decrease
in the average rate per minute resulted from the Company's promotion of and
customer's widespread 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 in 1996 and $27.2 million
in 1997. $3.2 million of this increase 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 in 1996 to $21.7
million in 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 in 1996 to $16.3 million in 1997, and, as a percentage of revenues,
increased from 28.5% in 1996 to 30.7% in 1997. Selling, general and
administrative expenses increased as a result of increased sales and customer
service volumes, and was offset by a reduction in sales, advertising and
telemarketing costs which totaled $3.1 million in 1996 as compared to $2.9
million in 1997. Bad debt expense totaling $523,000 for 1997 compared to
$397,000 in 1996 (directly associated with increased revenues). Selling, general
and administrative expenses also increased in 1997 due to increased personnel
and other 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 services, PCS
services, and Internet services. Cable services selling, general and
administrative
15
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 in 1996 to $6.1 million in 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 million
investment in facilities during 1996.
Interest Expense, Net
Interest expense, net of interest income, increased from $260,000 in 1996
to $3.9 million in 1997. This increase resulted primarily from increases in the
Company's average outstanding indebtedness resulting primarily from its
acquisition of the Cable Systems and 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 in 1996 to a benefit of
$132,000 in 1997 due to the Company incurring a net loss before income taxes in
1997 as compared to net earnings in 1996. The Company's effective income tax
rate decreased from 42.0% in 1996 to 20.1% in 1997 due to the net loss and the
proportional amount of items that are nondeductible for tax purposes.
As a result of its acquisition of the Cable Systems described further
below, the Company acquired net operating loss carryforwards for income tax
purposes totaling $58.5 million which begin to expire in 2004 if not utilized.
The Company's utilization of these carryforwards is subject to certain
limitations pursuant to section 382 of the Internal Revenue Code. A valuation
allowance of $8.1 million was established to offset the deferred tax assets
related to these carryforwards due to uncertainty regarding realizability. The
amount of deferred tax asset considered realizable, however, could be reduced if
estimates of future taxable income during the carryforward periods are reduced.
Liquidity and Capital Resources
The Company reported cash flows from operating activities in 1997 of $1.8
million net of changes in the components of working capital. Additional sources
of cash in 1997 included long-term borrowings of $10 million. The Company issued
subordinated notes in 1996 totaling $10 million as a portion of the
consideration for the acquisition of the Cable Systems. The notes were converted
in accordance with their terms into approximately 1.5 million shares of the
Company's Class A Common Stock in January 1997.
The Company's expenditures for property and equipment, including
construction in progress, totaled $9.5 million and $7.0 million during 1997 and
1996, respectively. The Company's capital expenditures plan for 1997 includes
approximately $65 to $70 million in capital necessary to pursue its business
plans, to maintain the network and to enhance transmission capacity to meet
projected traffic demands. Planned capital expenditures over the next five years
include $245 million to $265 million for long-distance network expansion, $140
million to $160 million for facilities and equipment necessary to commence
providing local exchange and PCS services, and $65 million to $85 million for
upgrades to the Cable Systems. Sources of funds for these planned capital
expenditures will likely include internally generated cash flows, borrowings
under the Company's credit facilities, and additional debt and equity offerings.
Sufficient additional financing has not been arranged as of May 14, 1997 for
total planned capital expenditures. To the extent that the necessary financing
is not obtained, certain of the Company's capital expenditures will be postponed
until such financing is obtained.
16
Other uses of cash during 1997 included repayment of $10.4 million of
long-term borrowings and capital lease obligations and issuance of $337,000 of
notes receivables.
Net receivables increased $5.0 million from March 31, 1996 to March 31,
1997 resulting from: (1) increased message telephone service revenues in 1997 as
compared to 1996; (2) increased amounts due from other common carriers
attributed to growth in their traffic carried by the Company; (3) increased
private line sales activity in 1997 as compared to 1996; and (4) increases in
receivables resulting from the cable company acquisitions.
The Company reported a working capital deficit of $27.3 million as of
March 31, 1997 as compared to a working capital deficit of $22.8 million at
December 31, 1996. As disclosed in Note 3 to the accompanying Interim Condensed
Consolidated Financial Statements, during April 1997 the Company extended the
maturity of its telephony senior 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. The Company expects to further extend or refinance its senior
credit facility prior to its due date.
The Company entered into a purchase and lease-purchase option agreement in
August 1995 for the acquisition of satellite transponders to meet its long-term
satellite capacity requirements. The amount payable upon expected delivery of
the transponders in 1998 is dependent upon a number of factors including the
number of transponders required and the timing of their delivery and
acquisition. The Company does not expect the remaining balance payable on
delivery to exceed $41 million.
Alaska Economy
The Company offers telecommunication and video 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. 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 Company. Oil revenues over the past several years have contributed
in excess of 75% of unrestricted state government revenues from all segments of
the Alaska economy. 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 present developed oil
fields using the pipeline for transport.
The two largest producers of oil in Alaska independently resolved in 1996
to pursue exploration, development and production activities within Alaska. Both
producers have invested large sums of money in oil recovery technology and
development to enhance oil recovery in marginal oil fields. Effective March 1997
the State of Alaska passed new legislation relaxing state oil royalties on
marginal oil fields to facilitate development of such marginal oil fields. No
assurance can be given that oil companies will be successful in discovering new
oil fields, further developing existing oil fields, or increasing yields in
marginal oil fields. If the oil companies are not successful, continued decline
in oil production is likely in the future. This decline would adversely affect
the state and demand for telecommunications and cable television services.
17
Seasonality
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.
Inflation
The Company does not believe that inflation has a significant effect on
its operations.
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.
18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Information regarding pending legal proceedings to which the Company
is a party is included in Note 5 of Notes to Interim Condensed
Consolidated Financial Statements and is incorporated herein by
reference.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10.1 - 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.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended March 31,
1997 - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL COMMUNICATION, INC.
May 14, 1997 By: /s/ Ronald A. Duncan
(Date) Ronald A. Duncan, President
and Director
(Principal Executive
Officer)
May 14, 1997 By: /s/ John M. Lowber
(Date) John M. Lowber, Senior Vice
President and Chief
Financial Officer
(Principal Financial
Officer)
May 14, 1997 By: /s/ Alfred J. Walker
(Date) Alfred J. Walker, Vice
President and Chief
Accounting Officer
(Principal Accounting
Officer)