As filed with the Securities and Exchange Commission on August 14, 1997.
============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-15279
GENERAL COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)
STATE OF ALASKA 92-0072737
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 Denali Street
Suite 1000
Anchorage, Alaska 99503
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (907) 265-5600
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
The number of shares outstanding of the registrant's classes of common
stock, as of August 1, 1997 was:
45,268,680 shares of Class A common stock; and
4,067,253 shares of Class B common stock.
============================================================================
1
<PAGE>
INDEX
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
PAGE NO
-------
<S> <C>
PART I. FINANCIAL INFORMATION
Item l. Consolidated Financial Statements..........................................3
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996.......................................................3
Consolidated Statements of Operations for the three
and six months ended June 30, 1997 and 1996.............................5
Consolidated Statements of Stockholders'
Equity for the six months ended June 30, 1997
and 1996.................................................................6
Consolidated Statements of Cash Flows for the six
months ended June 30, 1997 and 1996.....................................7
Notes to Interim Condensed Consolidated Financial
Statements..............................................................8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................................23
Item 6. Exhibits and Reports on Form 8-K...........................................23
SIGNATURES................................................................................................24
</TABLE>
2
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Unaudited)
June 30, December 31,
ASSETS 1997 1996
- ------------------------------------------------------------------ ---------------- -----------------
(Amounts in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,225 13,349
Receivables, net of allowance for doubtful
receivables of $905 and $597 32,074 28,768
Prepaid and other current assets 2,723 2,236
Deferred income taxes, net 1,047 835
Inventories 3,237 1,589
Notes receivable 588 325
------- -------
Total current assets 46,894 47,102
------- -------
Property and equipment in service, net 133,877 115,981
Construction in progress 15,864 20,770
------- -------
Net property and equipment 149,741 136,751
------- -------
Other assets:
Deferred loan costs, net 689 900
Notes receivable 1,297 1,016
Transponder deposit 9,100 9,100
Other assets, at cost, net 2,113 1,546
Intangible assets, net 247,575 250,920
------- -------
Total other assets 260,774 263,482
------- -------
Total assets $ 457,409 447,335
======= =======
</TABLE>
See accompanying notes to interim condensed consolidated financial
statements.
3
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
<CAPTION>
(Unaudited)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- ------------------------------------------------------------------- --------------- ----------------
(Amounts in thousands)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 1,824 31,969
Current maturities of obligations under capital leases 3 71
Accounts payable 24,937 23,677
Accrued payroll and payroll related obligations 3,039 3,830
Accrued liabilities 5,192 4,173
Accrued interest 2,240 2,708
Subscriber deposits and deferred revenues 3,542 3,449
------- -------
Total current liabilities 40,777 69,877
Long-term debt, excluding current maturities 219,063 191,273
Obligations under capital leases due to related parties,
excluding current maturities 636 675
Deferred income taxes, net 36,389 33,720
Other liabilities 2,125 2,236
------- -------
Total liabilities 298,990 297,781
------- -------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 50,000,000 shares; issued and
outstanding 38,167,109 and 36,586,973 shares at
June 30, 1997 and December 31, 1996, respectively 123,513 113,421
Class B. Authorized 10,000,000 shares; issued and
outstanding 4,068,934 and 4,074,028 shares at June
30, 1997 and December 31, 1996, respectively; convertible
on a share-per-share basis into Class A common stock 3,432 3,432
Less cost of 202,768 and 199,081 Class A common shares
held in treasury at June 30, 1997 and December 31, 1996,
respectively (1,039) (1,010)
Paid-in capital 4,388 4,229
Retained earnings 28,125 29,482
------- -------
Total stockholders' equity 158,419 149,554
------- -------
Commitments and contingencies (note 5)
Total liabilities and stockholders' equity $ 457,409 447,335
======= =======
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
4
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
------ ------ ------ ------
(Amounts in thousands expect per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Telecommunication services $ 42,131 39,199 81,356 77,169
Cable services 14,055 --- 27,711 ---
------ ------ ------- ------
Total revenues 56,186 39,199 109,067 77,169
Cost of sales and services 29,778 22,474 56,946 43,776
Selling, general and administrative
expenses 18,014 10,837 34,315 21,670
Depreciation and amortization 5,608 1,918 11,728 3,805
------- ------ ------- ------
Operating income 2,786 3,970 6,078 7,918
Interest expense, net 4,228 368 8,177 628
------- ------ ------- ------
Net earnings (loss) before income
taxes (1,442) 3,602 (2,099) 7,290
Income tax expense (benefit) (610) 1,452 (742) 3,002
------- ------ ------- ------
Net earnings (loss) $ (832) 2,150 (1,357) 4,288
======= ====== ======= ======
Net earnings (loss) per common
share $ (0.02) 0.09 (0.03) 0.17
======= ====== ======= ======
Weighted average number of shares
of common stock and common
stock equivalents outstanding 43,474 25,134 43,418 25,025
======= ====== ======= ======
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
5
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<CAPTION>
Class A
(Unaudited) Shares of Class A Class B Shares
Common Stock Common Common Held in Paid-in Retained
(Amounts in thousands) Class A Class B Stock Stock Treasury Capital Earnings
------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 19,680 4,176 $ 13,912 3,432 (389) 4,041 22,020
Net earnings --- --- --- --- --- --- 4,288
Tax effect of excess stock
compensation expense for tax
purposes over amounts recognized
for financial reporting purposes --- --- --- --- --- 85 ---
Class B shares converted to Class A 16 (16)
Shares issued under stock option plan 72 --- 103 --- --- --- ---
Shares issued and issuable under officer
stock option agreements --- --- --- --- --- 1 ---
--------------------------------------------------------------------------
Balances at June 30, 1996 19,768 4,160 $ 14,015 3,432 (389) 4,127 26,308
==========================================================================
Balances at December 31, 1996 36,587 4,074 113,421 3,432 (1,010) 4,229 29,482
Net loss --- --- --- --- --- --- (1,357)
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- --- --- 159 ---
Class B shares converted to Class A 5 (5) --- --- --- --- ---
Shares issued upon conversion of
convertible note (notes 2 and 4) 1,538 --- 9,983 --- --- --- ---
Shares purchased and held in Treasury --- --- --- --- (29) --- ---
Shares issued under stock option plan 37 --- 109 --- --- --- ---
--------------------------------------------------------------------------
Balances at June 30, 1997 38,167 4,069 $123,513 3,432 (1,039) 4,388 28,125
==========================================================================
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
6
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(Unaudited)
Six Months Ended
June 30,
1997 1996
---------------- ----------------
(Amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (1,357) 4,288
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation and amortization 11,728 3,805
Deferred income tax expense 2,457 838
Deferred compensation and compensatory
stock options (111) 189
Bad debt expense, net of write-offs 308 16
Other noncash income and expense items 168 (25)
Change in operating assets and liabilities
(note 2) (4,636) (6,214)
------- --------
Net cash provided by operating activities 8,557 2,897
------- --------
Cash flows from investing activities:
Purchases of property and equipment (21,100) (16,734)
Refunds of long-term deposits and purchases of
other assets (655) (924)
Payment of transponder deposit --- (7,800)
Notes receivable issued (549) (290)
Payments received on notes receivable 5 6
------- --------
Net cash used in investing activities (22,299) (25,742)
------- --------
Cash flows from financing activities:
Long-term borrowings 20,000 21,100
Repayments of long-term borrowings and capital
lease obligations (12,462) (984)
Proceeds from common stock issuance 109 103
Purchase of treasury stock (29) ---
------- --------
Net cash provided by financing activities 7,618 20,219
------- --------
Net decrease in cash and cash equivalents (6,124) (2,626)
Cash and cash equivalents at beginning of period 13,349 4,017
------ --------
Cash and cash equivalents at end of period $ 7,225 1,391
===== ========
</TABLE>
See accompanying notes to interim condensed consolidated financial
statements.
7
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(l) 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 June 30, 1997 are not
necessarily indicative of the results that may be expected for the
year ended December 31, 1997. For further information, refer to the
financial statements and footnotes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 1996.
Reclassifications have been made to the 1996 financial statements to
make them comparable with the 1997 presentation.
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
<TABLE>
Changes in operating assets and liabilities consist of (in
thousands):
<CAPTION>
(Unaudited)
Six-month periods ended June 30, 1997 1996
----------- ----------
(Amounts in thousands)
<S> <C> <C>
Increase in trade and other receivables $ (1,478) (4,074)
Increase in income tax receivable (2,136) (728)
Increase in prepaid and other current
assets (487) (728)
(Increase) decrease in inventory (1,648) 39
Increase (decrease in accounts payable 1,260 (547)
Increase in accrued liabilities 1,019 274
Increase (decrease) in accrued payroll and
payroll related obligations (791) 302
Increase in accrued income taxes --- (547)
Increase (decrease) in accrued interest (468) 77
Increase (decrease) in deferred revenues 93 (282)
-------- --------
$ (4,636) (6,214)
======== =======
</TABLE>
The holders of $10 million of convertible subordinated notes
exercised their conversion rights in January 1997 resulting in the
exchange of such notes for 1,538,457 shares of the Company's Class A
common stock.
8
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Income taxes paid totaled $0 and $3,440,500 during the six-month
periods ended June 30, 1997 and 1996, respectively.
Interest paid totaled $9,649,000 million and $874,000 during the
six-month periods ended June 30, 1997 and 1996, respectively.
The Company recorded $159,000 and $85,000 during the six months ended
June 30, 1997 and 1996, respectively, as paid-in capital in
recognition of the income tax effect of excess stock compensation
expense for tax purposes over amounts recognized for financial
reporting purposes.
(3) Long-term Debt
The Company extended the maturity date of its $62.5 million interim
telephony credit facility during April 1997. The interim facility
matured in July 1997 and was repaid at maturity from proceeds from
the Company's public stock and debt offerings and a new credit
facility. See Note (6).
(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, results of operations or
liquidity of the Company.
9
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Cable Service Rate Deregulation
Beginning in April 1993, the Federal Communications Commission
("FCC") adopted regulations implementing the Cable Television
Consumer Protection and Competition Act of 1992. Included are rules
governing rates charged by cable operators for the basic service
tier, the installation, lease and maintenance of equipment (such as
converter boxes and remote control units) used by subscribers to
receive this tier and for cable programming services other than
programming offered on a per-channel or per-program basis (the
"regulated services"). Generally, the regulations require affected
cable systems to charge rates for regulated services that have been
reduced to prescribed benchmark levels, or alternatively, to support
rates using costs-of-service methodology.
The regulated services rates charged by the Company may be reviewed
by the State of Alaska, operating through the Alaska Public Utilities
Commission ("APUC") for basic service, or by the FCC for cable
programming service. Refund liability for basic service rates is
limited to a one year 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 June 30, 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
June 30, 1997.) Juneau's current rates have been approved by the APUC
and there are no other pending filings with the APUC, therefore,
there is no refund liability for basic service at this time.
Complaints by subscribers relating to cable programming service rates
were filed with, and accepted by, the FCC for certain franchise
areas, however, filings made in response to those complaints related
to the period prior to July 15, 1994 were approved by the FCC.
Therefore, the potential liability for cable programming service
refunds would be limited to the period subsequent to July 15, 1994
for these areas. Management of the Company believes that it has
complied in all material respects with the provisions of the FCC
rules and regulations and that the Company is, therefore, not liable
for any refunds. Accordingly, no provision has been made in the
financial statements for any potential refunds. The FCC rules and
regulations are, however, subject to judgmental interpretations, and
the impact of potential rate changes or refunds ordered by the FCC
could cause the Company to make refunds and/or to be in default of
certain debt covenants.
In February 1996, the Telecommunications Act of 1996 was signed into
federal law 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
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(6) Subsequent Events
Undersea Fiber Optic Cable Contract Commitment
The Company signed a contract in July, 1997 for the construction of a
$115 million fiber optic cable connecting the cities of Anchorage,
Juneau and Seattle via a subsea route. Subsea and terrestrial
connections will extend the fiber optic cable to Fairbanks via
Whittier and Valdez. Construction efforts will begin during the late
summer of 1998 with commercial services expected to commence in
December 1998. Pursuant to the contract, the Company paid $8.2
million August 1, 1997 and will pay the remaining balance in
installments through December 1998 based on completion of certain key
milestones. Approximately $50 million of proceeds from the public
offerings described below will be contributed to Alaska United Fiber
System Partnership, a wholly owned partnership recently created to
construct and deploy the fiber optic cable. Additional committed bank
debt will fund the remaining cost of construction and deployment.
Public Offerings and Debt Refinancing
General Communication, Inc. issued 7,000,000 shares of its class A
common stock on August 1, 1997 for $7.25 per share, before deducting
underwriting discounts and commissions. Net proceeds to General
Communication, Inc. totaled $47,959,100.
Concurrently with the stock offering, $180,000,000 of 9.75% senior
notes due 2007 were issued by GCI, Inc., a newly created wholly owned
subsidiary of General Communication, Inc. Net proceeds to GCI, Inc.
after deducting underwriting discounts and commissions totaled
$174,600,000.
The Company, through its subsidiary GCI Holdings, Inc. ("Holdings", a
newly created wholly owned subsidiary of GCI, Inc.) entered into a
new $250,000,000 credit facility effective August 1, 1997 that
matures on June 30, 2005 and bears 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. $57,700,000 was borrowed
under the credit agreement on August 1, 1997.
Net proceeds of the stock and senior note offerings and an initial
draw on the new credit facility were used to reduce borrowings
outstanding under the Company's credit facilities in place as of June
30, 1997 and to provide initial funding for construction of the
undersea fiber optic cable described above. The Company expects to
borrow funds under its new credit facility in the future to fund
capital expenditures and for other general corporate purposes.
11
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
<TABLE>
( 7 ) Supplemental financial information
----------------------------------
(Amounts in thousands)
<CAPTION>
(Unaudited)
------------------------------------------------- ------------
Six-month periods ended June 30, 1997 1996
- ---------------------------------------------- ------------------------------------------------- ------------
Long- Long-
Distance Cable Local Combined Distance
------------------------------------------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunication revenues $ 81,356 --- --- 81,356 77,169
Cable revenues --- 27,711 --- 27,711 ---
------------------------------------------------- ------------
Total revenues 81,356 27,711 --- 109,067 77,169
-------------------------------------------------- ------------
Cost of sales and services:
Distribution costs and costs of
services 50,379 --- 236 50,615 43,776
Programming and copyright
costs --- 6,331 --- 6,331 ---
-------------------------------------------------- ------------
Total cost of sales and services 50,379 6,331 236 56,946 43,776
-------------------------------------------------- ------------
Selling, general and administrative expenses:
Operating and engineering 5,430 --- --- 5,430 5,445
Cable television, including
management fees of $545 --- 9,286 --- 9,286 ---
Sales and communications 6,580 --- 229 6,809 5,848
General and administrative 9,969 --- 779 10,748 8,670
Legal and regulatory 696 --- 204 900 850
Bad debts 936 206 --- 1,142 857
-------------------------------------------------- ------------
Total selling, general and administrative
expenses 23,611 9,492 1,212 34,315 21,670
-------------------------------------------------- ------------
Depreciation and amortization 4,918 6,810 --- 11,728 3,805
-------------------------------------------------- ------------
Operating income (loss) $ 2,448 5,078 (1,448) 6,078 7,918
================================================== ============
</TABLE>
12
<PAGE>
PART I.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Interim Condensed Consolidated Financial Statements and the notes
thereto. As used herein, EBITDA consists of earnings before interest (net),
income taxes, depreciation, amortization and other income (expense). EBITDA is a
measure commonly used in the telecommunications and cable television industries
to analyze companies on the basis of operating performance. It is not a measure
of financial performance under generally accepted accounting principles and
should not be considered as an alternative to net income as a measure of
performance nor as an alternative to cash flow as a measure of liquidity.
OVERVIEW
The Company has historically reported revenues principally from the provision of
interstate and intrastate long distance telecommunications services to
residential, commercial and governmental customers and to other common carriers
(principally MCI Telecommunications, Inc. ("MCI") and U.S. Sprint ("Sprint")).
These services accounted for approximately 93.5% of the Company's
telecommunications services revenues during the first six months of 1997. The
balance of telecommunications services revenues have been attributable to
corporate network management contracts, telecommunications equipment sales and
service and other miscellaneous revenues (including revenues from prepaid and
debit calling cards, the installation and leasing of customers' VSAT equipment
and fees charged to MCI and Sprint for certain billing services). Factors that
have the greatest impact on year-to-year changes in telecommunications services
revenues include the rate per minute charged to customers and usage volumes,
usually expressed as minutes of use. These factors in turn depend in part upon
economic conditions in Alaska. The economy of Alaska is dependent upon the
natural resource industries, in particular oil production, as well as tourism,
government and United States military spending.
The Company's telecommunications cost of sales and services has consisted
principally of the direct costs of providing services, including local access
charges paid to local exchange carriers ("LECs") for the origination and
termination of long distance calls in Alaska, fees paid to other long distance
carriers to carry calls that terminate in areas not served by the Company's
network (principally the lower 49 states, most of which calls are carried over
MCI's network, and international locations, which calls are carried principally
over Sprint's network), and the cost of equipment sold to the Company's
customers. During the first six months of 1997, local access charges accounted
for 45.6% of telecommunications cost of sales and services, fees paid to other
long distance carriers represented 37.0%, satellite transponder lease and
undersea fiber maintenance costs represented 8.4%, and telecommunications
equipment accounted for 3.4% 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,
management information systems, general and administrative, legal and regulatory
expenses. Most of these expenses consist of salaries, wages and benefits of
personnel and certain other indirect costs (such as rent, travel, utilities and
certain equipment costs). A significant portion of telecommunications selling,
general, and administrative expenses, 27.9% during the six
13
<PAGE>
months ended June 30, 1997, represents the cost of the Company's advertising,
promotion and market analysis programs.
Following the cable system acquisitions effective October 31, 1996, the Company
now reports a significant level of revenues and EBITDA from the provision of
cable services. During the first six months of 1997, cable revenues and EBITDA
represented 25.4% and 66.8%, respectively, of consolidated revenues and EBITDA.
The cable systems serve 21 communities and areas in Alaska, including the
state's three largest population centers, Anchorage, Fairbanks and Juneau.
The Company generates cable services revenues from three primary sources: (1)
programming services, including monthly basic or premium subscriptions and
pay-per-view movies or other one-time events, such as sporting events; (2)
equipment rentals or installation; and (3) advertising sales. During the six
months ended June 30, 1997 programming services generated 85.9% of total cable
services revenues, equipment rental and installation fees accounted for 8.0% of
such revenues, advertising sales accounted for 3.7% of such revenues, and other
services accounted for the remaining 2.4% of total cable services revenues. The
primary factors that contribute to year-to-year changes in cable services
revenues are average monthly subscription and pay-per-view rates, the mix among
basic, premium and pay-per-view services, and the average number of subscribers
during a given reporting period.
The cable systems' operating, selling, general and administrative expenses have
consisted principally of programming and copyright expenses, labor, maintenance
and repairs, marketing and advertising, rental expense, property taxes and
depreciation and amortization. In the first six months of 1997 programming and
copyright expenses represented approximately 27.8% of total cable operating
expenses. Marketing and advertising costs represented approximately 1.8% of such
total expenses and depreciation and amortization represented 30.1% of such
expenses. The Company anticipates that depreciation and amortization and
interest expense on a consolidated basis will be substantially higher in 1997 as
compared to 1996 resulting primarily from the cable company acquisitions. As a
result, the Company anticipates recording a net loss in 1997.
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 will generate moderately negative
EBITDA from local exchange services during this time period.
In 1995 the Company began developing plans for PCS wireless communications
service deployment and is currently evaluating various technologies for a
proposed PCS network. The Company expects to launch PCS service in Anchorage as
early as 1999.
14
<PAGE>
<TABLE>
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:
<CAPTION>
Percentage Change
Six Months Three Months
Six Months Ended Three Months Ended 1997 vs. 1997 vs.
June 30, June 30, Six Months Three Months
1996 1997 1996 1997 1996 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues
Telecommunications services 100.0% 74.6% 100.0% 75.0% 5.4% 7.5%
Cable services 0.0% 25.4% 0.0% 25.0% --- ---
---------------------------------------------------------------------------
Total revenues 100.0% 100.0% 100.0% 100.0% 41.3% 43.3%
Cost of sales and services 56.7% 52.2% 57.3% 53.0% 30.1% 32.5%
Selling, general and
administrative expenses 28.1% 31.5% 27.6% 32.1% 58.4% 66.2%
Depreciation and amortization 4.9% 10.8% 4.9% 10.0% 208.2% 192.4%
---------------------------------------------------------------------------
Operating income 10.3% 5.6% 10.1% 5.0% -23.2% -29.8%
Net earnings (loss) before
income taxes 9.4% -1.9% 9.2% -2.6% -128.8% -140.0%
Net earnings (loss) 5.6% -1.2% 5.5% -1.5% -131.6% -138.7%
Other Operating Data:
Cable operating income (1) 0.0% 18.3% 0.0% 18.1% NA NA
Cable EBITDA (1) 0.0% 42.9% 0.0% 41.7% NA NA
Consolidated EBITDA 15.2% 16.3% 15.0% 14.9% 51.9% 42.6%
<FN>
- --------------------------------------
(1) Computed as a percentage of total cable services revenues.
</FN>
</TABLE>
THREE MONTHS ENDED JUNE 30, 1997 ("1997") COMPARED TO THREE MONTHS ENDED JUNE
30, 1996 ("1996")
REVENUES. Total revenues increased 43.4% from $39.2 million in 1996 to $56.2
million in 1997. Long distance transmission revenues from commercial,
residential, governmental, and other common carrier customers increased 9.2%
from $36.0 in 1996 to $39.3 million in 1997. This increase in revenues resulted
in part from a 8.4% increase in minutes of interstate and international traffic
carried, which traffic totaled 153.0 million minutes during the quarter, and a
10.8% increase in minutes of intrastate traffic, which traffic totaled 33.9
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 16.5% from $12.1 million in 1996 to $14.1 million in
1997. Private line and private network transmission revenues increased 5.1% from
$3.9 million in 1996 to $4.1 million in 1997. The Company reported six months of
cable services revenues in 1997 following its
15
<PAGE>
acquisition of the cable systems effective October 31, 1996. There was little
change in the number of subscribers or the number of homes passed by the cable
systems during the three-month period ended June 30, 1997. Anchorage area basic
rates were increased approximately 4.4% in April 1997 to reduce margin
compression resulting from increasing programming costs.
The increases in telecommunication services revenues were offset in part by a
2.7% reduction in the Company's average revenue per minute on long distance
traffic from $0.183 per minute for the second quarter of 1996 to $0.178 per
minute for the same period of 1997. The decrease in the average revenue per
minute resulted from the Company's promotion of, and customers' acceptance of
new calling plans offering discounted rates and length of service rebates,
offset in part by an increase in calling card rates commencing May 1997.
COST OF SALES AND SERVICES. Cost of sales and services totaled $22.5 million in
1996 and $29.8 million in 1997. Of this increase, $3.2 million resulted from
cable services programming and copyright charges incurred during 1997.
Transmission access and distribution costs, which represent cost of sales for
transmission services, increased 16.5% from $20.6 million in 1996 to $24.0
million in 1997 and amounted to approximately 57.1 percent and 60.9 percent of
transmission revenues in 1996 and 1997, respectively. The increase in
distribution costs as a percentage of transmission revenues results primarily
from reduced average rate per minute billed to customers in 1997 as compared to
1996 without an offsetting reduction in the rate per minute billed to the
Company for access and termination services. Additionally, 1996 costs were
reduced by a refund received in the second quarter of 1996 totaling
approximately $530,000 from the National Exchange Carriers Association in
respect of earnings which exceeded regulatory requirements. 1996 transmission
access and distribution costs excluding this refund were 58.6% of transmission
services revenues. Changes in distribution costs as a percentage of revenues
will also occur as the Company's traffic mix changes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 66.7% from $10.8 million in 1996 to $18.0
million in 1997, and, as a percentage of total revenues, increased from 27.6% in
1996 to 32.1% in 1997. Selling, general and administrative expenses increased as
a result of (1) increased sales, advertising and telemarketing costs which
totaled $2.8 million in 1996 as compared to $3.9 million in 1997; (2) bad debt
expense totaling $460,000 in 1996 compared to $619,000 in 1997 (directly
associated with increased revenues); and (3) increased costs totaling $850,000
in 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 $5.0 million in
1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$3.7 million from $1.9 million in 1996 to $5.6 million in 1997. Of this
increase, $3.3 million resulted from the Company's acquisition of the cable
systems effective October 31, 1996, with the balance of the increase
attributable to the Company's $38.6 million investment in facilities during 1996
for which a full year of depreciation will be recorded during the year ending
December 31, 1997.
INTEREST EXPENSE, NET. Interest expense, net of interest income, increased from
$368,000 in 1996 to $4.2 million in 1997. This increase resulted primarily from
increases in the Company's average outstanding indebtedness incurred in
connection with its acquisition of the cable systems and investment in new
facilities during 1996, offset in part by increases in the amount of interest
capitalized during 1997.
16
<PAGE>
INCOME TAX EXPENSE. Income tax expense decreased from $1.5 million in 1996 to a
benefit of $610,000 in 1997 due to the Company incurring a net loss before
income taxes in 1997 as compared to net earnings in 1996.
SIX MONTHS ENDED JUNE 30, 1997 ("1997") COMPARED TO SIX MONTHS ENDED JUNE 30,
1996 ("1996")
REVENUES. Total revenues increased 41.3% from $77.2 million in 1996 as compared
to $109.1 million in 1997. Long distance transmission revenues from commercial,
residential, other common carriers and governmental customers increased 7.8%
from $70.1 million in 1996 to $75.6 million in 1997. This increase reflected a
10.1% increase in interstate and international minutes of use to 302 million
minutes and a 10.1% increase in intrastate minutes of use to 65.5 million
minutes. Approximately $4.8 million of the long distance transmission revenue
growth in 1997 was due to a 21.1% increase in revenues from other common
carriers (principally MCI and Sprint), from $22.8 million in 1996 to $27.6
million in 1997. Revenue growth in 1997 was also due to (1) a 4.1% increase in
private line and private network transmission services revenues, from $7.3
million in 1996 to $7.6 million in 1997; and (2) reporting six months' of cable
services revenues in 1997 following the Company's acquisition of the cable
systems effective October 31, 1996.
The above increases in revenues were offset in part by a 3.8% reduction in the
Company's average revenue per minute on long distance traffic from $0.183 per
minute in 1996 to $0.176 per minute in 1997. The decrease in revenues per minute
resulted from the Company's promotion of and customers' enrollment in new
calling plans offering discounted rates and length of service rebates. Systems
sales and services revenues decreased 13.0% from $5.4 million in 1996 to $4.7
million in 1997, primarily due to fewer larger dollar equipment sales in 1997 as
compared to 1996.
COST OF SALES AND SERVICES. Cost of sales and services was $43.8 million in 1996
and $56.9 million in 1997. As a percentage of total revenues, cost of sales and
services decreased from 56.7% in 1996 to 52.2% in 1997. The decrease in cost of
sales and services as a percentage of revenues during 1997 as compared to 1996
resulted primarily from the addition of cable television operations commencing
October 31, 1996 which has proportionately lower cost of sales and services as a
percentage of revenues than does telecommunication operations.
Transmission access and distribution costs increased 14.8% from $39.8 million in
1996 to $45.7 million in 1997 and amounted to approximately 56.7% and 60.4% of
transmission revenues in 1996 and 1997, respectively. The increase in
distribution costs as a percentage of transmission revenues results primarily
from reduced average rate per minute billed to customers in 1997 as compared to
1996 without an offsetting reduction in the rate per minute billed to the
Company for access and termination services. Additionally, 1996 costs were
reduced by refunds received in the first and second quarters totaling
approximately $960,000 from a local exchange carrier and the National Exchange
Carriers Association in respect of earnings by them which exceeded regulatory
requirements. 1996 transmission access and distribution costs excluding these
refunds were 58.1% of transmission services revenues. Changes in distribution
costs as a percentage of revenues will also occur as the Company's traffic mix
changes. Increases in cost of products sold and network services cost of sales
as a proportion of the associated revenues also contributed to the increase in
1997 costs as compared to 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 58.1% from $21.7 million in 1996 to $34.3
million in 1997. As a percentage of total revenues, selling, general and
administrative expenses increased from 28.1% in 1996 to 31.5% in 1997. Selling,
general and administrative expenses increased as a result of increased sales and
customer service
17
<PAGE>
volumes, additional bad debt expense totaling $1.1 million in 1997 compared to
$857,000 in 1996 (directly associated with increased revenues), and increased
sales, advertising and telemarketing costs totaling $6.8 million in 1997
compared to $5.8 million in 1996, due to the introduction of new services,
various marketing plans and other proprietary rate plans. Additionally, selling,
general and administrative expenses increased in 1997 due to an increase of
approximately $2.2 million in engineering, operations, accounting, human
resources, legal and regulatory, and management information services expenses.
Such costs were associated with the development and introduction, or planned
introduction, of new products and services including local services, cable
television services, rural message and data telephone services, PCS services,
and Internet services. Cable services selling, general and administrative costs
totaled $9.5 million in 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
207.9% from $3.8 million in 1996 to $11.7 million in 1997. 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 from
$628,000 in 1996 to $8.2 million in 1997. This increase resulted primarily from
increases in the Company's average outstanding indebtedness resulting primarily
from its acquisition of the cable systems and construction of new facilities in
rural Alaska, offset in part by increases in the amount of interest capitalized
during 1997.
INCOME TAX EXPENSE. Income tax expense decreased from $3.0 million in 1996 to a
benefit of $742,000 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 41.2% in 1996 to 35.4% in 1997 due to
the net loss and the proportional amount of items that are nondeductible for
income tax purposes.
As a result of its acquisition of the cable systems, the Company acquired net
operating loss carryforwards ("NOL carryforwards") for income tax purposes
totaling $58.5 million which begin to expire in 2004 if not utilized. However,
the Company's utilization of these NOL carryforwards is subject to certain
limitations pursuant to Section 382 of the Internal Revenue Code. Because of the
limitation on the NOL carryforwards, the Company established an $8.1 million
valuation allowance to offset the gross amount of the deferred tax asset. The
amount of the valuation allowance was based on an estimate of the amount of the
NOL carryforwards that will not be utilized, and the effective income tax rate.
The amount of deferred tax asset considered realizable, however, could be
reduced if estimates of future taxable income during the carryforward periods
are reduced.
<TABLE>
SEASONALITY; FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The following chart provides selected unaudited statement of operations data
from the Company's quarterly results of operations during 1996 and 1997:
<CAPTION>
(Dollars in thousands, except per share amounts)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-----------------------------------------------------------
1996
<S> <C> <C> <C> <C> <C>
Revenues
Telecommunications services $ 37,969 39,199 38,664 39,587 155,419
Cable services --- --- --- 9,475 9,475
-----------------------------------------------------------
Total revenues 37,969 39,199 38,664 49,062 164,894
Operating income 3,947 3,970 4,017 4,475 16,409
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net earnings (loss) $ 2,137 2,150 2,140 1,035 7,462
===========================================================
Net earnings (loss) 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
1997
Revenues
Telecommunications services $ 39,225 42,131
Cable services 13,656 14,055
------------------------
Total revenues 52,881 56,186
Operating income 3,292 2,786
Net earnings (loss) $ (525) (832)
========================
Net earnings (loss) per share $ (0.01) (0.02)
========================
Cable EBITDA $ 6,025 5,863
Consolidated EBITDA $ 9,412 8,394
</TABLE>
Total revenues in the quarter ended June 30, 1997 were $56.2 million,
representing a 6.2% increase over total revenues in the first quarter of 1997 of
$52.9 million. This increase in revenues resulted in part from (1) by a 7.4%
increase in telecommunications services revenues to $42.1 million in the second
quarter of 1997 from $39.2 million during the first quarter of 1997. This
increase is attributable in part to the increase in minutes of traffic carried
during the second quarter of 1997 of approximately 6.0 million minutes as
compared to the first quarter of 1997 (a 3.3% increase), (2) an increase in the
average rate per minute billed during the second quarter of 1997 of
approximately $0.005 as compared to the first quarter of 1997 (a 2.9% increase),
and (3) an increase in cable services revenues to $14.1 million in the second
quarter of 1997 from $13.7 million in the first quarter of 1997.
Operating expenses increased during the second quarter of 1997 as compared to
the first quarter of 1997 principally as a result of (1) turn-up costs,
including rent and utilities, of the Company's new rural DAMA satellite
earth-station facilities, and (2) personnel, sales, engineering, operations,
management information systems, accounting, human resources, legal and
regulatory expenses associated with the development and introduction, or planned
introduction, of new products and services including local services, PCS
services and Internet services.
The Company expects that its EBITDA and EBITDA margins during 1997 may improve
due to (1) cable service rate increases beginning in April 1997, and (2) revenue
generation from the Company's rural telephony expansion and new service and
product offerings to offset expenses already generated by these
19
<PAGE>
endeavors. The Company reported a net loss of $832,000 for the second quarter of
1997 as compared to net loss of $525,000 during the first quarter of 1997. The
net loss was attributable to (1) increased sales and marketing costs and
pre-operating costs for local services incurred during the second quarter of
1997 as compared to the first quarter of 1997, (2) increased interest expense,
and (3) margin compression as previously described.
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 PRONOUNCEMENTS
Financial Accounting Standards No. 128, Earnings Per Share, supersedes APB
Opinion No. 15, Earnings Per Share, and specifies the computation, presentation,
and disclosure requirements for earnings per share ("EPS") for entities with
publicly held common stock or common stock equivalents. The statement replaces
Primary EPS and Fully Diluted EPS with Basic EPS and Diluted EPS, respectively.
Basic EPS, unlike Primary EPS, excludes all dilution while Diluted EPS, like
Fully Diluted EPS, reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
Due to an immaterial difference between Primary and Fully Diluted EPS, the
Company has historically only presented a single EPS. The Company in the future
will present both Basic and Diluted EPS for income (loss) from continuing
operations and net income (loss). The statement is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
After adoption, all prior period EPS data will be restated. The adoption of the
new statement will have minimal effect on the Company's EPS.
In February 1997, the Accounting Standards Board issued SFAS No. 129, Disclosure
Of Information About Capital Structure. SFAS No. 129 consolidates the existing
guidance in authoritative literature relating to a company's capital structure.
SFAS No. 129 is effective for financial statements for periods ending after
December 15, 1997. Capital structure disclosures required by this standard
include liquidation preferences of preferred stock, information about the
pertinent rights and privileges of the outstanding equity securities, and the
redemption amounts for all issues of capital stock that are redeemable at fixed
or determinable prices on fixed or determinable dates. Management of the Company
does not expect that adoption of SFAS No. 129 will have a material impact on the
Company's financial statement disclosures.
In June 1997, the Accounting Standards Board issued SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Statement 130 is applicable to all entities that
provide a full set of financial statements consisting of a statement of
financial position, results of operations and cash flows. SFAS No. 130 is
effective for interim and annual periods beginning after December 15, 1997.
Management of the Company does not expect that adoption of SFAS No. 130 will
have a material impact on the Company's financial statement disclosures.
In June 1997, the Accounting Standards Board issued SFAS No. 131, Financial
Reporting for Segments of a Business Enterprise which applies to all public
business enterprises. SFAS No. 131 specifies the computation, presentation, and
disclosure requirements for business segment information. SFAS No. 131
20
<PAGE>
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, but retains the requirement to report information about major
customers. It amends SFAS No. 94, Consolidation of All Majority-Owned
Subsidiaries, to remove the special disclosure requirements for previously
unconsolidated subsidiaries. Statement 131 is effective for financial statements
for periods beginning after December 15, 1997. Management of the Company does
not expect that adoption of SFAS No. 131 will have a material impact on the
Company's financial statement disclosures.
LIQUIDITY AND CAPITAL RESOURCES
The Company reported cash flows from operating activities during the six months
ended June 30, 1997 of $8.6 million, net of changes in the components of working
capital. Additional sources of cash during the six months ended June 30, 1997
included long-term borrowings of $20.0 million. The Company's expenditures for
property and equipment, including construction in progress, totaled $16.7
million and $21.1 million during the six months ended June 30, 1996 and 1997,
respectively. Uses of cash during the first two quarters of 1997 included
repayment of $12.5 million of long-term borrowings and capital lease obligations
and an increase in notes receivable of $549,000.
Net receivables increased $3.3 million from December 31, 1996 to June 30, 1997
resulting from: (1) increased MTS revenues in 1997 as compared to 1996; (2)
increased amounts due from other common carriers attributed to growth in their
traffic carried by the Company; and (3) increased private line sales activity in
1997 as compared to 1996.
The Company reported a working capital deficit of $22.8 million as of December
31, 1996. The Company's then existing credit facility matured within the
following twelve-month period resulting in the outstanding balance as of
December 31, 1996 being included in current maturities of long-term debt. Except
for the classification of the Company's senior indebtedness as current, working
capital at December 31, 1996 totaled $4.6 million. Working capital at June 30,
1997 totaled $6.1 million, a $1.5 million increase from working capital
recomputed at December 31, 1996.
General Communication, Inc. issued 7.0 million shares of its class A common
stock on August 1, 1997 for $7.25 per share, before deducting underwriting
discounts and commissions. Net proceeds to General Communication, Inc. totaled
$47,959,100. Concurrently with the stock offering, $180.0 million of 9.75%
senior notes due 2007 were issued to the public by GCI, Inc., a newly created
wholly owned subsidiary of General Communication, Inc. Net proceeds to GCI, Inc.
after deducting underwriting discounts and commissions totaled $174,600,000.
Concurrently with the public offerings described above, GCI Holdings, Inc.
("Holdings", a newly created wholly-owned subsidiary of GCI, Inc.) entered into
a new $250,000,000 credit facility effective August 1, 1997. The new facility
matures June 30, 2005 and bears 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. $57,700,000
was drawn on the credit facility on August 1, 1997.
The new credit facility and the public notes impose restrictions on the
operations and activities of the Company, including requirements that the
Company comply with certain financial covenants and financial ratios. Under the
credit facility, Holdings may not permit the ratio of senior debt to annualized
operating cash flow of Holdings and 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.
21
<PAGE>
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 (post-closing), $90.0 million, and $65.0 million in 1997, 1998 and
1999, respectively. The public notes impose a requirement that the leverage
ratio of GCI, Inc. and 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 proceeds from the public offerings and new credit facility were used to
retire amounts owing under the Company's existing credit agreements, fund $50
million in capital for use in constructing an undersea fiberoptic cable, and for
working capital requirements.
The Company anticipates that its capital expenditures in 1997 may total as much
as $135 million. Planned capital expenditures over the next five years include
$240.0 million to $260.0 million to fund expansion of long distance facilities,
(including approximately $40.0 million for satellite transponders and
approximately $115.0 million for new undersea fiber optic cable facilities which
will be financed by GCI Transport Co. Inc., a newly created subsidiary of GCI
Holdings, Inc.) between $140.0 million and $160.0 million to fund development,
construction and operating costs of its local exchange and PCS networks and
businesses; and between $65.0 million and $85.0 million to upgrade its cable
television plant and to purchase equipment for new cable television services.
Sources of funds for these planned capital expenditures include net proceeds of
the public offerings described above, internally generated cash flows and
borrowings under the Company's new credit facility described above and its
separate committed financing for GCI Transport Co., Inc., all of which funds
will be necessary to complete the Company's planned capital expenditures.
Management expects that cash flow generated by the Company and funds provided by
its public offerings and credit facilities will be sufficient to meet its
planned capital expenditures and working capital requirements. The Company's
ability to invest in discretionary capital and other projects will depend upon
its future cash flows and access to borrowings under its credit facilities.
INFLATION
The Company does not believe that inflation has a significant effect on its
operations.
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Information regarding pending legal proceedings to which the Company
is a party is included in Note 5 of Notes to Interim Condensed
Consolidated Financial Statements and is incorporated herein by
reference.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended
June 30, 1997 - None
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL COMMUNICATION, INC.
August 14, 1997 By: /s/ Ronald A. Duncan
(Date) Ronald A. Duncan, President and Director
(Principal Executive Officer)
August 14, 1997 By: /s/ John M. Lowber
(Date) John M. Lowber, Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
August 14, 1997 By: /s/ Alfred J. Walker
(Date) Alfred J. Walker, Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
INTERIM CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE
30, 1997 AND THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000808461
<NAME> GENERAL COMMUNICATION, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,225
<SECURITIES> 0
<RECEIVABLES> 32,979
<ALLOWANCES> 905
<INVENTORY> 3,237
<CURRENT-ASSETS> 46,894
<PP&E> 199,347
<DEPRECIATION> 49,606
<TOTAL-ASSETS> 457,409
<CURRENT-LIABILITIES> 40,777
<BONDS> 219,699
0
0
<COMMON> 126,945
<OTHER-SE> 32,513
<TOTAL-LIABILITY-AND-EQUITY> 457,409
<SALES> 0
<TOTAL-REVENUES> 109,067
<CGS> 0
<TOTAL-COSTS> 56,946
<OTHER-EXPENSES> 44,901
<LOSS-PROVISION> 1,142
<INTEREST-EXPENSE> 8,482
<INCOME-PRETAX> (2,099)
<INCOME-TAX> (742)
<INCOME-CONTINUING> (1,357)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,357)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
