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 September 30, 1996
[ ] 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 October 31, 1996 was:
36,578,966 shares of Class A common stock; and
4,082,035 shares of Class B common stock.
<PAGE>
<TABLE>
INDEX
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
<CAPTION>
PAGE NO
-------
<S> <C>
PART I. FINANCIAL INFORMATION
Item l. Consolidated Financial Statements..........................................1
Consolidated Balance Sheets................................................1
Consolidated Statements of Operations......................................3
Consolidated Statements of Stockholders'
Equity...................................................................4
Consolidated Statements of Cash Flows......................................5
Notes to Consolidated Financial Statements.................................6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................................20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................................28
Item 6. Exhibits and Reports on Form 8-K...........................................28
SIGNATURES..........................................................................................29
</TABLE>
(i)
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<CAPTION>
(Unaudited)
September 30, December 31,
ASSETS 1996 1995
------------------------------------------------------- ---- ----
(Amounts in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents (note 2) $ 5,255 4,017
-------- -------
Receivables:
Trade 24,922 21,737
Income taxes (note 5) 591 ---
Other 300 253
-------- -------
25,813 21,990
Less allowance for doubtful receivables 298 295
-------- -------
Net receivables 25,515 21,695
-------- -------
Prepaid and other current assets 2,423 1,566
Inventory 891 991
Deferred income taxes, net (note 5) 878 746
Notes receivable (note 3) 447 167
-------- -------
Total current assets 35,409 29,182
-------- -------
Property and equipment, at cost (notes 4 and 8)
Land 73 73
Distribution systems 74,468 67,434
Support equipment 15,363 11,610
Property and equipment under capital leases 2,030 2,030
-------- -------
91,934 81,147
Less amortization and accumulated depreciation 38,981 33,789
-------- -------
Net property and equipment in service 52,953 47,358
Construction in progress 17,076 3,096
-------- -------
Net property and equipment 70,029 50,454
Notes receivable (note 3) 740 904
Transponder deposit (notes 4 and 10) 7,800 ---
Other assets, at cost, net of amortization 5,769 4,225
-------- -------
Total assets $ 119,747 84,765
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
1 (Continued)
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Continued)
<CAPTION>
(Unaudited)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------------------------------------------------- ---- ----
(Amounts in thousands)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt (note 4) $ 31,929 1,689
Current maturities of obligations under
capital leases (note 8) 144 282
Accounts payable 15,132 16,861
Accrued payroll and payroll related obligations 3,116 2,108
Deferred revenues 1,134 1,317
Accrued liabilities 1,422 1,134
Accrued income taxes (note 5) --- 547
Accrued interest 415 132
-------- -------
Total current liabilities 53,292 24,070
Long-term debt, excluding current maturities (note 4) 5,864 8,291
Obligations under capital leases, excluding
current maturities (note 8) --- 26
Obligations under capital leases due to related parties,
excluding current maturities (note 8) 694 739
Deferred income taxes, net (note 5) 8,841 7,004
Other liabilities 1,858 1,619
-------- -------
Total liabilities 70,549 41,749
-------- -------
Stockholders' equity (notes 2, 5 and 6):
Common stock (no par):
Class A. Authorized 50,000,000
shares; issued and outstanding
19,852,463 and 19,680,199 shares
at September 30, 1996 and December 31,
1995, respectively 14,099 13,912
Class B. Authorized 10,000,000
shares; issued and outstanding
4,085,461 and 4,175,434 shares
at September 30, 1996 and December 31,
1995, respectively 3,432 3,432
Less cost of 199,081 and 122,111 Class A common
stock held in treasury at September 30, 1996 and
December 31, 1995, respectively (1,010) (389)
Paid-in capital 4,229 4,041
Retained earnings 28,448 22,020
-------- -------
Total stockholders' equity 49,198 43,016
-------- -------
Commitments, contingencies and subsequent
event (notes 8, 10 and 11)
Total liabilities and stockholders' equity $ 119,747 84,765
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(Amounts in thousands except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Transmission services (note 7) $ 36,190 31,649 106,729 88,320
Systems sales and service 1,935 1,310 7,291 5,128
Other 539 404 1,812 1,468
-------- -------- -------- --------
Total revenues 38,664 33,363 115,832 94,916
Cost of sales 22,226 18,117 66,350 53,036
-------- -------- -------- --------
Contribution 16,438 15,246 49,482 41,880
-------- -------- -------- --------
Operating costs and expenses:
Operating and engineering 2,515 2,221 7,550 6,349
Sales and communications 3,020 2,578 8,920 6,500
General and administrative 4,098 3,888 12,776 11,674
Legal and regulatory 420 419 1,271 1,227
Bad debt 556 424 1,413 993
Depreciation and amortization 1,812 1,608 5,616 4,733
-------- -------- -------- --------
Total operating costs and expenses 12,421 11,138 37,546 31,476
-------- -------- -------- --------
Operating income 4,017 4,108 11,936 10,404
-------- -------- -------- --------
Other income (expense):
Interest expense (notes 2 and 4) (415) (336) (1,219) (927)
Interest income 146 54 321 174
-------- -------- -------- --------
Total other income (expense) (269) (282) (898) (753)
-------- --------- --------- ---------
Earnings before income taxes 3,748 3,826 11,038 9,651
Income tax expense (notes 2 and 5) 1,608 1,574 4,610 3,955
-------- -------- -------- --------
Net earnings $ 2,140 2,252 6,428 5,696
======== ======== ======== ========
Net earnings per common share (note 1(c)) $ .09 .09 .26 .23
======== =========== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
<CAPTION>
(Unaudited) (Unaudited)
Shares of Class A Class B Class A
Common Stock Common Common Shares Held Paid-in Retained
Class A Class B Stock Stock in Treasury Capital Earnings
------- ------- ----- ----- ----------- ------- --------
(Amounts in thousands) (Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 19,617 4,179 $13,830 3,432 (328) 3,641 14,518
Net earnings --- --- --- --- --- --- 5,696
Class B shares converted to Class A 3 (3) --- --- --- --- ---
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- --- --- 565 ---
Shares acquired pursuant to officer
deferred compensation agreement --- --- --- --- (51) --- ---
Shares issued under stock option plan 20 --- 44 --- --- --- ---
Shares issued under officer stock
option agreements 20 --- --- --- --- 3 ---
------ ----- ------ ----- ------ ------ -------
Balances at September 30, 1995 19,660 4,176 $13,874 3,432 (379) 4,209 20,214
====== ===== ====== ===== ====== ===== ======
Balances at December 31, 1995 19,680 4,176 $13,912 3,432 (389) 4,041 22,020
Net earnings --- --- --- --- --- --- 6,428
Class B shares converted to Class A 90 (90) --- --- --- --- ---
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- --- --- 187 ---
Shares acquired pursuant to officer
deferred compensation agreement --- --- --- --- (621) --- ---
Shares issued under stock option plan 82 --- 187 --- --- --- ---
Shares issued under officer stock
option agreements --- --- --- --- --- 1 ---
------ ----- ------ ----- ------ ------ -------
Balances at September 30, 1996 19,852 4,086 $14,099 3,432 (1,010) 4,229 28,448
====== ===== ====== ===== ====== ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<CAPTION>
(Unaudited)
Nine Months Ended
September 30,
1996 1995
---- ----
(Amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 6,428 5,696
Adjustments to reconcile net earnings
to net cash provided (used) by operating activities:
Depreciation and amortization 5,616 4,733
Deferred income tax expense 1,892 1,449
Deferred compensation and compensatory
stock options 240 144
Bad debt expense, net of write-offs 3 (124)
Other noncash income and expense items 28 (28)
Change in operating assets and liabilities (note 2) (5,460) (2,655)
-------- -------
Net cash provided by operating activities 8,748 9,215
-------- -------
Cash flows from investing activities:
Purchase of property and equipment (24,767) (4,831)
Payment of transponder deposit (7,800) ---
Refund of long-term deposits and purchases of other
assets, net (1,964) (668)
Notes receivable issued (397) (206)
Payments received on notes receivable 249 109
-------- -------
Net cash used by investing activities (34,679) (5,596)
-------- -------
Cash flows from financing activities:
Long-term borrowings 29,100 ---
Repayments of long-term borrowings and capital lease
obligations (1,496) (2,353)
Purchase of treasury stock (621) ---
Proceeds from common stock issuance 187 44
-------- -------
Net cash provided (used) by financing activities 27,170 (2,309)
-------- -------
Increase in cash and cash equivalents 1,238 1,310
Cash and cash equivalents at beginning of period 4,017 1,649
-------- -------
Cash and cash equivalents at end of period $ 5,255 2,959
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(l) Summary of Significant Accounting Principles
(a) General
General Communication, Inc. ("GCI"), an Alaska corporation, was
incorporated in 1979. GCI Communication Corp. ("GCC") , an Alaska
corporation, is a wholly owned subsidiary of GCI and was incorporated
in 1990. GCI Communication Services, Inc. ("Communication Services"),
an Alaska corporation, is a wholly-owned subsidiary of GCI and was
incorporated in 1992. GCI Leasing Co., Inc. ("Leasing Company"), an
Alaska corporation, is a wholly-owned subsidiary of Communication
Services and was incorporated in 1992. GCI and GCC are engaged in the
transmission of interstate and intrastate private line and switched
message long distance telephone service between Anchorage, Fairbanks,
Juneau, and other communities in Alaska and the remaining United
States and foreign countries. GCC also provides northbound services
to certain common carriers terminating traffic in Alaska and sells
and services dedicated communications systems and related equipment.
Communication Services provides private network point-to-point data
and voice transmission services between Alaska, Hawaii and the
western contiguous United States. Leasing Company owns and leases
capacity on an undersea fiber optic cable used in the transmission of
interstate private line and switched message long distance services
between Alaska and the remaining United States and foreign countries.
The accompanying unaudited 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. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the quarter and nine-month
periods ended September 30, 1996 are not necessarily indicative of
the results that may be expected for the year ended December 31,
1996. 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, 1995.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of GCI,
its wholly-owned subsidiaries GCC, and Communication Services, and
Communication Services wholly owned subsidiary Leasing Company. All
significant intercompany balances and transactions have been
eliminated in consolidation.
6
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(c) Net Earnings Per Common Share
<TABLE>
Primary earnings per common share are determined by dividing net
earnings by the weighted number of common and common equivalent
shares outstanding (amounts in thousands):
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 23,734 23,715 23,700 23,709
Common equivalent shares outstanding 1,356 627 1,147 611
------- ------ ------ ------
Shares used in computing primary earnings
per share 25,090 24,342 24,847 24,320
====== ====== ====== ======
</TABLE>
The difference between shares for primary and fully diluted earnings
per share was not significant in any period presented.
(d) Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments
which are readily convertible into cash.
(e) Inventory
Inventory of merchandise for resale and parts is stated at the lower
of cost or market. Cost is determined using the first-in, first-out
method for parts and the specific identification method for equipment
held for resale.
(f) Property and Equipment
Property and equipment is stated at cost. Construction costs of
transmission facilities are capitalized. Equipment financed under
capital leases is recorded at the lower of fair market value or the
present value of future minimum lease payments. Construction in
progress represents distribution systems and support equipment not
placed in service at September 30, 1996 and December 31, 1995;
management intends to place this equipment in service during 1996 and
1997.
The Company's investment in jointly owned earth station assets on
Adak Island, Alaska is stated at cost and is depreciated on a
straight-line basis over lives ranging from 10 to 12 years. Revenues
derived from customers whose service transits the joint facilities
are recognized based upon the level of service and supporting
facilities that are provided by each owner.
Depreciation and amortization is computed on a straight-line basis
based upon the shorter of the lease term or the estimated useful
lives of the assets ranging from 3 to 20 years for distribution
systems and 5 to 10 years for support equipment. Amortization of
equipment financed under capitalized leases is included in
depreciation expense.
7
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. Gains or losses are recognized at the time
of ordinary retirements, sales or other dispositions of property.
(g) Other Assets
Other assets, excluding deferred loan costs and goodwill, are
recorded at cost and are amortized on a straight-line basis over 2 to
15 years. Deferred loan costs are recorded at cost and are amortized
on a straight-line basis over the life of the associated loan.
The cost of the Company's PCS license has been capitalized as a
long-term other asset and interest has been capitalized in the
December 31, 1995 and September 30, 1996 financial statements. Upon
placing the associated assets into service, the recorded cost of the
license will be amortized over a 40 year period using the straight
line method.
Goodwill totaled approximately $1,209,000 and $1,286,000 at September
30, 1996 and December 31, 1995, respectively, net of amortization of
approximately $774,000 and $697,000, respectively. Goodwill
represents the excess of cost over fair value of net assets acquired
and is being amortized on a straight-line basis over twenty years.
(h) Revenue From Services and Products
Revenues generated from long distance telecommunication services are
recognized when the services are provided. System sales from the sale
of equipment are recognized at the time the equipment is delivered or
installed. Service revenues are derived primarily from maintenance
contracts on equipment and are recognized on a prorated basis over
the term of the contract. Other revenues are recognized when the
service is provided.
(i) Interest Expense
Interest costs incurred during the construction period of significant
capital projects are capitalized. Interest capitalized by the Company
totaled $489,000 and $636,000 during the three-month and nine-month
periods ended September 30, 1996, respectively, and $112,000 during
the year ended December 31, 1995.
(j) Income Taxes
The Company adopted Statement of Financial Accounting Standards No.
109 ("SFAS No. 109"), "Accounting for Income Taxes" in January 1993.
Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable earnings in the years in which
those temporary differences are expected to be recovered or settled.
8
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(k) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(l) Reclassifications
Reclassifications have been made to the 1995 financial statements to
make them comparable with the 1996 presentation.
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
For purposes of the Statement of Cash Flows, the Company's cash
equivalents include cash and all invested assets with original
maturities of less than three months.
<TABLE>
Changes in operating assets and liabilities consist of (amounts in
thousands):
<CAPTION>
(Unaudited)
Nine-month period ended September 30, 1996 1995
---- ----
<S> <C> <C>
Increase in trade receivables $ (3,185) (1,729)
Increase in income tax receivables (591) ---
Increase in other receivables (47) (68)
Increase in prepaid and other
current assets (857) (1,451)
(Increase) decrease in inventory 100 (1)
Increase (decrease) in accounts payable (1,729) 2,431
Increase (decrease) in accrued payroll
and payroll related obligations 1,008 (2,192)
Increase in accrued liabilities 288 262
Decrease in accrued income taxes (547) (11)
Increase in accrued interest 283 13
Increase (decrease) in deferred revenue (183) 91
------- --------
$ (5,460) (2,655)
======= =========
</TABLE>
Income taxes paid totaled approximately $3,856,000 and $2,517,000
during the nine-month periods ended September 30, 1996 and 1995,
respectively.
Interest paid totaled approximately $1,572,000 and $914,000 during
the nine-month periods ended September 30, 1996 and 1995,
respectively.
The Company recorded $187,000 and $565,000 during the nine-month
periods ended September 30, 1996 and 1995, 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.
9
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Notes Receivable
<TABLE>
A summary of notes receivable follows:
<CAPTION>
(Unaudited)
September 30, December 31,
1996 1995
---- ----
(Amounts in thousands)
<S> <C> <C>
Note receivable from officer bearing interest
at the rate paid by the Company on its
senior indebtedness, secured by GCI Class A
common stock, due on the 90th day after
termination of employment or July 30, 1998,
whichever is earlier. $ 500 500
Note receivable from officer bearing interest
at 10%, secured by Company stock; payable
in equal annual installments of $36,513 through
August 26, 2004. 224 224
Notes receivable from officers and others bearing
interest at 7% to 10%, unsecured and secured by
Company common stock, shares of other common
stock and equipment; due on demand and
through August 26, 2004. 345 261
----- ----
Total notes receivable 1,069 985
Less current portion (447) (167)
Plus long-term accrued interest 118 86
----- -----
$ 740 904
===== =====
</TABLE>
10
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Long-term Debt
<TABLE>
Long-term debt is summarized as follows:
<CAPTION>
(Unaudited)
September 30, December 31,
1996 1995
---- ----
(Amounts in thousands)
<S> <C> <C>
Credit Agreement (a) $ 30,100 1,000
Undersea Fiber and Equipment
Loan Agreement (b) 7,245 8,271
Financing Obligation (c) 448 709
------- ------
37,793 9,980
Less current maturities 31,929 1,689
------- ------
Long-term debt, excluding
current maturities $ 5,864 8,291
======= ======
</TABLE>
(a) The Company entered into a new $62.5 million interim credit
facility with its senior lender during April 1996. The
interim facility replaced in its entirety the prior senior
facility described in the Company's December 31, 1995 Form
10-K. The new facility allows the Company to invest up to
$60 million in capital expenditures through the first
quarter of 1997. The Company expects to restructure the
facility prior to its maturity on April 25, 1997. Since the
entire facility matures within the twelve-month period
ending September 30, 1997, the outstanding balance at
September 30, 1996 is included in current maturities of
long-term debt.
The interim facility will allow the Company to pursue
certain of its immediate priorities while it continues to
refine other strategic initiatives and related financial
requirements.
The interim facility provides for interest (7.345% weighted
average interest rate at September 30, 1996), among other
options, at LIBOR plus one and three quarters to two and one
quarter percent, depending on the Company's leverage ratio
as defined in the agreement. A fee of 0.50% per annum is
assessed on the unused portion of the facility.
$3.4 million of the facility has been used to provide a
letter of credit to secure payment of certain access charges
associated with the Company's provision of
telecommunications services within the state of Alaska.
The interim facility contains, among others, covenants
requiring maintenance of specific levels of operating cash
flow to indebtedness and to interest expense. The credit
agreement includes limitations on acquisitions and
additional indebtedness, and prohibits payment of dividends,
other than stock dividends. The Company was in compliance
with all credit agreement covenants during the period
commencing April (date of the new interim credit facility)
through September 30, 1996.
11
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Security for the credit agreement includes a pledge of the
stock of GCC and Communication Services, and a first lien on
substantially all of GCC's assets. GCI and its subsidiaries,
Communication Services and Leasing Company, are liable as
guarantors.
In June, 1993, the Company entered into a two-year interest
rate swap agreement with a bank whereby the rate on
$18,200,000 of debt (reduced by $422,500 per quarter
beginning July 1, 1993) was fixed at 4.45 percent plus
applicable margins. The interest effect of the difference
between the fixed rate and the three-month LIBOR rate was
either added to or served to reduce interest expense
depending on the relative interest rates. The agreement
expired June 30, 1995.
(b) On December 31, 1992, Leasing Company entered into a
$12,000,000 loan agreement, of which approximately
$9,000,000 of the proceeds were used to acquire capacity on
the undersea fiber optic cable linking Seward, Alaska and
Pacific City, Oregon. Concurrently, Leasing Company leased
the capacity under a ten year all events, take or pay,
contract to MCI, who subleased the capacity back to the
Company. The lease and sublease agreements provide for
equivalent terms of 10 years and identical monthly payments
of $200,000. The proceeds of the lease agreement with MCI
were pledged as primary security for the financing. The loan
agreement provides for monthly payments of $170,000
including principal and interest through the earlier of
January 1, 2003, or until repaid. The loan agreement
provides for interest at the prime rate plus one-quarter
percent. Additional collateral includes substantially all of
the assets of Leasing Company including the fiber capacity
and a security interest in all of its outstanding stock. MCI
has a second position security interest in the assets of
Leasing Company.
(c) As consideration for MCI's role in enabling Leasing Company
to finance and acquire the undersea fiber optic cable
capacity described at note 4(b) above, Leasing Company
agreed to pay MCI $2,040,000 in sixty monthly payments of
$34,000. For financial statement reporting purposes, the
obligation has been recorded at its remaining present value,
using a discount rate of 10% per annum. The agreement is
secured by a second position security interest in the assets
of Leasing Company.
As of September 30, 1996 maturities of long-term debt were as follows
(in thousands):
Year ending
September 30,
-------------
(unaudited)
1997 $ 31,929
1998 1,712
1999 1,755
2000 1,910
2001 487
2002 and thereafter ---
-------
$ 37,793
=======
12
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Income Taxes
<TABLE>
Total income tax expense (benefit) for the nine-month periods ended
September 30, 1996 and 1995 were allocated as follows (amounts in
thousands):
<CAPTION>
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Earnings from continuing operations $4,610 3,955
Stockholders' equity, for stock option
compensation expense for tax purposes
in excess of amounts recognized
for financial reporting purposes (187) (565)
----- ------
$4,423 3,390
===== ======
</TABLE>
<TABLE>
Income tax expense for the nine-month periods ended September 30,
1996 and 1995 consists of the following (amounts in thousands):
<CAPTION>
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Current tax expense:
Federal taxes $1,960 1,775
State taxes 758 731
----- -----
2,718 2,506
----- -----
Deferred tax expense:
Federal taxes 1,591 1,298
State taxes 301 151
----- -----
1,892 1,449
----- -----
$4,610 3,955
===== =====
</TABLE>
<TABLE>
Total income tax expense differed from the "expected" income tax
expense determined by applying the statutory federal income tax rate
of 35% for the nine-month periods ended September 30, 1996 and 1995
as follows (amounts in thousands):
<CAPTION>
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
"Expected" statutory tax expense $3,863 3,378
State income taxes, net of federal benefit 688 582
Income tax effect of goodwill
amortization, nondeductible
expenditures and other items, net 59 (5)
----- -----
$4,610 3,955
===== =====
</TABLE>
13
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at September 30, 1996 and December 31, 1995 are presented
below (amounts in thousands).
<CAPTION>
September 30, December 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Net current deferred tax assets:
Accounts receivable, principally due to allowance for
for doubtful accounts $ 120 119
Compensated absences, accrued for financial reporting purposes 434 400
Workers compensation and self insurance health reserves,
principally due to accrual for financial reporting purposes 230 183
Other 184 133
------ ------
Total gross current deferred tax assets 968 835
Less valuation allowance ( 90) ( 89)
------ ------
Net current deferred tax assets $ 878 746
====== ======
Net long-term deferred tax assets:
Deferred compensation expense for financial
reporting purposes in excess of amounts recognized
for tax purposes $ 731 587
Sweepstakes expense for financial reporting purposes
in excess of amounts recognized for tax purposes 244 215
Employee stock option compensation expense for financial
reporting purposes in excess of amounts recognized
for tax purposes 199 206
Capital loss carryforwards 23 23
Other 248 238
------ ------
Total gross long-term deferred tax assets 1,445 1,269
Less valuation allowance ( 135) ( 136)
------ ------
Net long-term deferred tax assets 1,310 1,133
------ ------
Net long-term deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation 9,301 7,997
Software development expense for tax purposes in
excess of amounts recognized for financial reporting
purposes 541 ---
Other 309 140
------ ------
Total gross long-term deferred tax liabilities 10,151 8,137
------ ------
Net combined long-term deferred tax liabilities $ 8,841 7,004
====== ======
</TABLE>
The valuation allowance for deferred tax assets was $225,000 as of
September 30, 1996 and December 31, 1995.
Tax benefits associated with recorded deferred tax assets, net of
valuation allowances, are considered to be more likely than not
realizable through taxable income earned in carryback years, future
reversals of existing taxable temporary differences, and future
taxable income exclusive of reversing temporary differences and
carryforwards. The amount of deferred tax asset considered
realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
14
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company's U.S. income tax return for 1993 was selected for
examination by the Internal Revenue Service during 1995. The
examination commenced during the fourth quarter of 1995 and was
completed during the second quarter of 1996. The Company received a
no change letter upon completion of the examination.
(6) Stockholders' Equity
Common Stock
GCI's Class A common stock and Class B common stock are identical in
all respects, except that each share of Class A common stock has one
vote per share and each share of Class B common stock has ten votes
per share. In addition, each share of Class B common stock
outstanding is convertible, at the option of the holder, into one
share of Class A common stock.
MCI owns a total of 6,251,509 shares of GCI's Class A and 1,275,791
shares of GCI's Class B common stock which on a fully diluted basis
represents approximately 31 percent of the issued and outstanding
shares of each of the classes.
Stock Option Plan
In December 1986, GCI adopted a Stock Option Plan (the "Option Plan")
in order to provide a special incentive to officers, non-employee
directors, and employees by offering them an opportunity to acquire
an equity interest in GCI. The Option Plan provides for the grant of
options for a maximum of 3,200,000 shares of GCI Class A common
stock, subject to adjustment upon the occurrence of stock dividends,
stock splits, mergers, consolidations or certain other changes in
corporate structure or capitalization. If an option expires or
terminates, the shares subject to the option will be available for
further grants of options under the Option Plan. The Option Plan is
administered by GCI's Board of Directors or a committee of
disinterested persons.
Employees of GCI (including officers and directors), employees of
affiliated companies and non-employee directors of GCI are eligible
to participate in the Option Plan. The Option Plan provides that all
options granted under the Option Plan must expire not later than ten
years after the date of grant. The exercise price may be less than,
equal to, or greater than the fair market value of the shares on the
date of grant. If at the time an option is granted the exercise price
is less than the market value of the underlying common stock, the "in
the money" amount at the time of grant is expensed ratably over the
vesting period of the option. Options granted pursuant to the Option
Plan are only exercisable if at the time of exercise the option
holder is an employee or non-employee director of GCI.
15
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
Information for the periods ended September 30, 1996 and 1995 with
respect to the Plan follows (unaudited):
<CAPTION>
Shares Option Price
------ ------------
<S> <C> <C>
Outstanding at December 31, 1994 1,729,699 $0.75-$4.00
Granted 400,000 $4.00
Exercised (20,000) $2.25
Forfeited (11,500) $4.00
---------
Outstanding at September 30, 1995 2,098,199 $0.75-$4.00
=========
Outstanding at December 31, 1995 2,288,199 $0.75-$4.00
Granted 61,000 $3.75-$4.50
Exercised (82,291) $0.75-$4.00
Forfeited (78,291) $0.75-$4.50
---------
Outstanding at September 30, 1996 2,188,617 $0.75-$4.50
=========
Available for grant at September 30, 1996 366,844
=========
Exercisable at September 30, 1996 1,006,397
=========
</TABLE>
The options expire at various dates through February 2006.
Stock Options Not Pursuant to a Plan
In June 1989, officer John Lowber was granted options to acquire
100,000 Class A common shares at $.75 per share. The options vested
in equal annual increments over a five-year period and expire
February, 1999.
The Company entered into an incentive agreement in June 1989 with Mr.
Behnke, an officer of the Company. The incentive agreement provides
for the acquisition of 85,190 remaining shares of Class A common
stock of the Company for $.001 per share exercisable through June 16,
1997. The shares under the incentive agreement vested in equal annual
increments over a three-year period.
Class A Common Shares Held in Treasury
The Company acquired 105,111 shares of its Class A common stock in
1989 for approximately $328,000 to fund a deferred bonus agreement
with Mr. Duncan, an officer of the Company. The agreement provides
that the balance is payable after the later of a) termination of
employment or b) six months after the effective date of the
agreement. In September 1995 and July 1996, the Company acquired a
total of 93,970 additional shares of Class A common stock for
approximately $672,000 to fund additional deferred compensation
agreements for two of its officers, including Mr. Duncan.
16
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Employee Stock Purchase Plan
In December 1986, GCI adopted an Employee Stock Purchase Plan (the
"Plan") qualified under Section 401 of the Internal Revenue Code of
1986 (the "Code"). The Plan provides for acquisition of the Company's
Class A and Class B common stock at market value. The Plan permits
each employee of GCI and affiliated companies who has completed one
year of service to elect to participate in the Plan. Eligible
employees may elect to reduce their compensation in any even dollar
amount up to 10 percent of such compensation up to a maximum of
$9,500 in 1996; they may contribute up to 10 percent of their
compensation with after-tax dollars, or they may elect a combination
of salary reductions and after-tax contributions.
GCI may match employee salary reductions and after tax contributions
in any amount, elected by GCI each year, but not more than 10 percent
of any one employee's compensation will be matched in any year. The
combination of salary reductions, after tax contributions and GCI
matching contributions cannot exceed 25 percent of any employee's
compensation (determined after salary reduction) for any year. GCI's
contributions vest over six years. Prior to July 1, 1995 employee and
GCI contributions were invested in GCI common stock and employee
contributions received up to 100% matching, as determined by the
Company each year, in GCI common stock. Beginning July 1, 1995
employee contributions may be invested in GCI, MCI, or
Tele-Communications, Inc. common stock or in various mutual funds.
Such employee contributions invested in GCI common stock receive up
to 100% matching, as determined by the Company each year, in GCI
common stock. Employee contributions invested in other than GCI
common stock receive up to 50% matching, as determined by the Company
each year, in GCI common stock. The Company's matching contributions
allocated to participant accounts totaled approximately $257,000 and
$203,000 for the quarters ended September 30, 1996 and 1995,
respectively, and $738,000 and $712,000 for the nine-month periods
ended September 30, 1996 and 1995, respectively. The Plan may, at its
discretion, purchase shares of common stock from the Company at
market value or may purchase GCI common stock on the open market.
(7) Sales to Major Customers
The Company provides message telephone service to MCI and U.S. Sprint
("Sprint"), major customers. Pursuant to the terms of a contract with
MCI, the Company earned revenues of approximately $8.0 million and
$6.7 million for the quarters ended September 30, 1996 and 1995,
respectively, and approximately $21.9 million and $17.8 million for
the nine-month periods ended September 30, 1996 and 1995,
respectively. The Company earned revenues pursuant to a contract with
Sprint totaling approximately $4.9 million and $4.0 million for the
quarters ended September 30, 1996 and 1995, respectively, and $13.4
million and $11.0 million for the nine-month periods ended September
30, 1996 and 1995, respectively.
(8) Leases
The Company leases business offices, has entered into site lease
agreements and uses certain equipment and satellite transponder
capacity pursuant to operating lease arrangements. Rental costs under
such arrangements amounted to approximately $1,632,000 and $1,102,000
for the quarters ended September 30, 1996 and 1995, respectively, and
$4,404,000 and $3,268,000 for the nine-month periods ended September
30, 1996 and 1995, respectively.
17
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company entered into a long-term capital lease agreement in 1991
with the wife of the Company's president for property occupied by the
Company. The lease term is 15 years with monthly payments increasing
in $800 increments at each two year anniversary of the lease. Monthly
lease costs totaled $16,000 effective October 1995 and will increase
to $16,800 effective October 1997. If the owner sells the premises
prior to the end of the tenth year of the lease, the owner will
rebate to the Company one-half of the net sales price received in
excess of $900,000. If the property is not sold prior to the tenth
year of the lease, the owner will pay the Company the greater of
one-half of the appreciated value of the property over $900,000, or
$500,000. The leased asset was capitalized in 1991 at the owner's
cost of $900,000 and the related obligation was recorded in the
accompanying financial statements.
The leases generally provide that the Company pay the taxes,
insurance and maintenance expenses related to the leased assets.
It is expected that in the normal course of business, leases that
expire will be renewed or replaced by leases on other properties.
(9) Disclosure about Fair Value of Financial Instruments
Statement of Financial Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("SFAS No. 107") requires disclosure
of the fair value of financial instruments for which it is
practicable to estimate that value. SFAS No. 107 specifically
excludes certain items from its disclosure requirements. The fair
value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. The carrying amounts at
September 30, 1996 and December 31, 1995 for the Company's financial
assets and liabilities approximate their fair values.
(10) Commitments and Contingencies
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 of the down payment required in 1996 and the balance
payable upon expected delivery of the transponders in 1998 are
dependent upon a number of factors. The Company does not expect the
down payment to exceed $9.1 million (of which $7.8 million had been
paid as of September 30, 1996) and the remaining balance payable at
delivery to exceed $37 million.
In the normal course of the Company's operations, it and GCC are
involved in various legal and regulatory matters before the FCC and
the APUC. While the Company does not anticipate that the ultimate
disposition of such matters will result in abrupt changes in the
competitive structure of the Alaska market or of the business of the
Company, no assurances can be given that such changes will not occur
and that such changes would not be materially adverse to GCI.
(11) Subsequent Event
Effective October 31, 1996, following shareholder and regulatory
approvals, the Company completed the acquisition of seven Alaska
cable companies that offer cable television service to more than
105,000 basic subscribers with facilities passing 74 percent of
households throughout the state of Alaska. Under the terms of the
transactions, to be accounted for using
18
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
the purchase method, the final purchase price was $285.7 million,
which was the aggregate value for all the cable systems and included
certain transaction and financing costs. The purchase price for the
net assets of Alaskan Cable Network was $70 million ($51 million in
cash and 2,923,077 shares of Class A stock); the price for the net
assets of Alaska Cablevision, Inc. was $31 million ($21 million in
cash and $10 million in notes convertible into approximately
1,538,000 shares of Class A stock); and, for Prime Cable of Alaska,
LP ("Prime"), 11,800,000 shares of Class A stock and assumption of
Prime's long-term debt. Financing for the transactions resulted from
borrowings under a new $205 million bank credit facility and from
additional capital provided from the sale of 2 million shares of
GCI's Class A common stock to MCI Telecommunications Corporation for
$6.50 per share.
Prime operates the state's largest cable television system including
stations in Anchorage, Bethel, Kenai and Soldotna, Alaska. Alaska
Cablevision, Inc. owns and operates cable stations in Petersburg,
Wrangell, Cordova, Valdez, Kodiak, Nome and Kotzebue, Alaska.
McCaw/Rock Seward Cable System operates stations in Seward, Alaska.
McCaw/Rock Homer Cable System operates stations in Homer, Alaska.
Alaskan Cable companies operate stations in Fairbanks, Juneau,
Ketchikan and Sitka, Alaska.
The final closing required approval of the Alaska Public Utilities
Commission (APUC), which was granted on September 23, 1996. The APUC
approval included several conditions placed on the transfer, such as
continuing the existing conditions requiring provision of public
access channels and requiring the cable operations to file annual
income and operating statements.
Pro forma revenue, net income and net income per share for the
nine-month periods ended September 30, 1996 and 1995 will be provided
through a timely filed amendment to Form 10-Q.
19
<PAGE>
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.
Liquidity and Capital Resources
The Company's liquidity (ability to generate adequate amounts of cash
to meet the Company's need for cash) was affected by a net increase
in the Company's cash and cash equivalents of $1.2 million from
December 31, 1995 to September 30, 1996. Sources of cash in 1996
included the Company's operating activities which generated positive
cash flow of $8.7 million net of changes in the components of working
capital, long-term borrowings of $29.1 million, and payments on notes
receivable of $249,000. Uses of cash during 1996 included investment
of $24.8 million in distribution and support equipment and systems,
payment of a $7.8 million transponder purchase deposit, repayment of
$1.5 million of long-term borrowings and capital lease obligations,
purchase $621,000 of treasury stock to fund a deferred compensation
agreement, payment of loan fees totaling $439,000, expenditures
associated with the cable company acquisitions totaling approximately
$589,000, and investment in other assets.
Net receivables increased $3.8 million from December 31, 1995 to
September 30, 1996 resulting from: 1) increased MTS sales in 1996 as
compared to 1995, 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 1996 as compared to 1995,
and 4) recording refundable income taxes at September 30, 1996.
Working capital (current assets less current liabilities) totaled
($17.9) million (deficit) and $5.1 million at September 30, 1996 and
December 31, 1995, respectively. As disclosed in Note 4 to the
accompanying Consolidated Financial Statements, the Company expects
to restructure its senior credit facility prior to its maturity on
April 25, 1997. Since the entire facility matures within the
twelve-month period ending June 30, 1997, the outstanding balance at
September 30, 1996 is included in current maturities of long-term
debt. Except for the classification of the Company's senior
indebtedness as current, working capital at September 30, 1996
totaled $12.2 million, a $7.1 million increase from December 31,
1995. Working capital generated by operations and proceeds from
borrowings exceeded expenditures for property and equipment, payment
of a transponder deposit, and repayment of borrowings and capital
lease obligations resulting in the $7.1 million increase at September
30, 1996 as compared to December 31, 1995.
Cash flow from operating activities, as depicted in the Consolidated
Statements of Cash Flows, decreased $467,000 in the first nine months
of 1996 as compared to the same period of 1995. Cash flow increases
resulting from revenue growth as further described below were offset
by an increase in trade receivables and payment of current
obligations, resulting in the net decrease in 1996.
The Company's expenditures for property and equipment, including
construction in progress, totaled $24.8 million and $4.8 million
during the first three quarters of 1996 and 1995, respectively.
Management's capital expenditures plan for 1996 includes
approximately $30 to $50 million in capital necessary to pursue
strategic initiatives, to maintain the network and to enhance
transmission capacity to meet projected traffic demands.
The two wideband transponders the Company owned reached the end of
their expected useful life in August, 1994, at which time the Company
leased replacement capacity. The
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
existing leased capacity is expected to meet the Company's
requirements until such time that capacity is available pursuant to
the terms of a new long-term agreement described below.
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 of the down payment required in 1996 and the balance
payable upon expected delivery of the transponders in 1998 are
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 down payment to exceed
$9.1 million (of which $7.8 million was paid at September 30, 1996)
and the remaining balance payable on delivery to exceed $37 million.
The Company amended its existing senior credit facility to provide
for the required down payment in 1996 and expects to further amend or
refinance its credit agreement to fund its remaining commitment.
The Company continues to evaluate the most effective means to
integrate its telecommunications network with that of MCI. Such
integration will require capital expenditures by the Company in an
amount yet to be determined. Any investment in such capital
expenditures is expected to be recovered by increased revenues from
expanded service offerings and reductions in costs resulting from
integration of the networks.
The FCC concluded an auction of spectrum to be used for the provision
of PCS in March, 1995. The Company was named by the FCC as the high
bidder for one of the two 30 megahertz blocks of spectrum, with
Alaska statewide coverage. Acquisition of the license for a cost of
$1.65 million will allow GCI to introduce new PCS services in Alaska.
The Company began developing plans for PCS deployment in 1995 with
limited technology service trials planned for the fourth quarter of
1996 and early 1997 with service offerings expected as early as late
1997 or 1998. Expenditures for PCS deployment could total $50 to $100
million over the next 10 year period. The estimated cost for PCS
deployment is expected to be funded through income from operations
and additional debt and perhaps, equity financing. The Company's
ability to deploy PCS services will be dependent on its available
resources.
The Company obtained necessary APUC and FCC approvals waiving current
prohibitions against construction of competitive facilities in rural
Alaska, allowing for deployment of DAMA technology in 56 sites in
rural Alaska on a demonstration basis. Construction and deployment
will be completed in the fourth quarter of 1996, with services
expected to be provided at that time. Construction and deployment
costs are expected to total $18 to $20 million, and are being funded
through a combination of cash generated from operations and bank
financing. The Company's expenditures for DAMA construction and
deployment totaled approximately $14.8 million through September 30,
1996. Existing satellite technology relies on fixed channel
assignments to a central hub. The Company's new DAMA communication
technology assigns satellite capacity on an as needed basis. The
digital DAMA system allows calls to be made between remote villages
using only one satellite hop thereby reducing satellite delay and
capacity requirements while improving quality. A four-module
demonstration system was constructed in 1994 and was integrated into
the Company's telecommunication network in 1995.
Effective October 31, 1996, following shareholder and regulatory
approvals, the Company completed the acquisition of seven Alaska
cable companies that offer cable television service to more than
105,000 basic subscribers with facilities passing 74 percent of
households throughout the state of Alaska. Under the terms of the
transactions, to be accounted for using the purchase method, the
final purchase price was $285.7 million, which was the aggregate
value for all the cable systems and included certain transaction and
financing costs. The
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
purchase price for the net assets of Alaskan Cable Network was $70
million ($51 million in cash and 2,923,077 shares of Class A stock);
the price for the net assets of Alaska Cablevision, Inc. was $31
million ($21 million in cash and $10 million in notes convertible
into approximately 1,538,000 shares of Class A stock); and, for Prime
Cable of Alaska, LP ("Prime"), 11,800,000 shares of Class A stock and
assumption of Prime's long-term debt. Financing for the transactions
resulted from borrowings under a new $205 million bank credit
facility and from additional capital provided from the sale of 2
million shares of GCI's Class A common stock to MCI
Telecommunications Corporation for $6.50 per share.
Prime operates the state's largest cable television system including
stations in Anchorage, Bethel, Kenai and Soldotna, Alaska. Alaska
Cablevision, Inc. owns and operates cable stations in Petersburg,
Wrangell, Cordova, Valdez, Kodiak, Nome and Kotzebue, Alaska.
McCaw/Rock Seward Cable System operates stations in Seward, Alaska.
McCaw/Rock Homer Cable System operates stations in Homer, Alaska.
Alaskan Cable companies operate stations in Fairbanks, Juneau,
Ketchikan and Sitka, Alaska.
The final closing required approval of the Alaska Public Utilities
Commission (APUC), which was granted on September 23, 1996. The APUC
approval included several conditions placed on the transfer, such as
continuing the existing conditions requiring provision of public
access channels and requiring the cable operations to file annual
income and operating statements.
These transactions are expected to allow the Company to integrate
cable services to bring more information not only to more customers,
but in a manner that is quicker, more efficient and more cost
effective than ever before. The purchase will facilitate
consolidation of the cable operations and will provide a platform for
developing new customer products and services over the next several
years.
The Company entered into a new $62.5 million interim credit facility
with its senior lender during April 1996. The new facility will allow
the Company to invest up to $60 million in capital expenditures
during the one-year term of the facility. The Company expects to
restructure the facility prior to its maturity on April 25, 1997. The
interim facility will allow the Company to pursue certain of its
immediate priorities while it continues to refine other strategic
initiatives and related financial requirements. Additional capacity
of approximately $25 million on the new $205 million bank credit
facility, depending on cable company performance, will be available
to upgrade and expand certain cable facilities and equipment.
The Company's ability to continue to invest in discretionary capital
and other projects will depend upon its future cash flows and access
to necessary debt and/or equity financing.
Results of Operations
The Company's message data and transmission services industry segment
includes the provision of interstate and intrastate long distance
telephone service to all communities within the state of Alaska
through use of its facilities and interconnect agreements with other
carriers. The Company's average rate per minute for message
transmission services during the first 9 months of 1996 was
18.8(cent) as compared to 19.2(cent) for the same period in 1995. The
decrease in the average rate per minute results from the Company's
promotion of and customers' enrollment in new calling plans offering
discounted rates and length of service rebates.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Total revenues for the first nine months of 1996 were $115.8 million,
a 22.0 percent increase over total revenues for the same period of
1995 of $94.9 million. Total revenues for the third quarter of 1996
were $38.7 million, a 15.9 percent increase over total revenues for
the same period of 1995 of $33.4 million.
Revenue growth is attributed to five fundamental factors, as follows:
(1) Growth in interstate telecommunication services which resulted
in billable minutes of traffic carried totaling 147 million
and 121 million minutes in the third quarter of 1996 and 1995,
respectively, or 83 and 84 percent of total 1996 and 1995
minutes, respectively, and billable minutes of traffic carried
totaling 422 million and 338 million minutes in the first nine
months of 1996 and 1995, respectively, or 82 and 84 percent of
total 1996 and 1995 minutes, respectively.
(2) Provision of intrastate telecommunication services which
resulted in billable minutes of traffic carried totaling 31
million and 23 million minutes in the third quarter of 1996
and 1995, respectively, or 17 and 16 percent of total 1996 and
total 1995 minutes, respectively, and billable minutes of
traffic carried totaling 91 million and 67 million minutes in
the first nine months of 1996 and 1995, respectively, or 18
and 16 percent of total 1996 and 1995 minutes, respectively.
Interstate and intrastate minutes and revenue growth are primarily
the result of the Company's customer acquisition program which
commenced during the third quarter of 1995.
(3) Increases in revenues derived from other common carriers
("OCC") including MCI and Sprint. OCC traffic accounted for
$13 million or 33% and $11 million or 32% of total revenues in
the third quarter of 1996 and 1995, respectively. OCC traffic
accounted for $36 million or 31% and $29 million or 30% of
total revenues in the first nine months of 1996 and 1995,
respectively. Both MCI and Sprint are major customers of the
Company. Loss of one or both of these customers would have a
significant detrimental effect on revenues and on
contribution. Except as described in (5) below, there are no
other individual customers, the loss of which would have a
material impact on the Company's revenues or gross profit.
(4) Increased revenues associated with private line and private
network transmission services, which increased 15 percent to
$3.3 million in the third quarter of 1996 as compared to $2.9
million in the same period of 1995, and increased 27 percent
to $10.6 million in the first nine months of 1996 as compared
to $8.4 million in the same period of 1995.
(5) Increased revenues associated with network services revenues,
which increased 46 percent to $1.1 million in the third
quarter of 1996 as compared to $750,000 in the same period of
1995, and increased 47 percent to $3.8 million in the first
nine months of 1996 as compared to $2.6 million in the same
period of 1995. Revenue growth is primarily attributed to the
commencement of telecommunication services offered to National
Bank of Alaska during the second quarter of 1996 pursuant to a
six year contract. The following services were provided during
the transition period that was completed in the third quarter
of 1996: 1) branch deployment, 2) upgrade of existing local
area network environments, and 3) wide area network
deployment. The Company will continue to provide operation and
management services after the transition period throughout the
remainder of the contract term. Transition services are
billable based on the scope-of-work. Recurring operation and
management services are billable as incurred and are subject
to targeted cost ceilings. National Bank of
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Alaska is a national bank and the largest financial
institution in the State of Alaska. It provides banking and
financial services and operates over 50 branch offices in both
urban and bush areas throughout the state, the largest network
of bank branch offices in the state. The Company considers the
agreement with National Bank of Alaska significant in that it
offers the Company the opportunity to provide
telecommunication services to a highly visible customer
throughout the state over an extended period of time.
Transmission access and distribution costs, which represent cost of
sales for transmission services, amounted to approximately 57 percent
and 55 percent of transmission revenues during the third quarter of
1996 and 1995, respectively, and amounted to approximately 57 percent
of transmission revenues during each of the first nine month periods
of 1996 and 1995. The increase in distribution costs as a percentage
of transmission revenues during 1996 as compared to 1995 results
primarily from reduced average rate per minute billed to customers in
1996 as compared to 1995 without an offsetting reduction in the rate
per minute billed to the Company for access and termination services,
offset in part by refunds in the first two quarters of 1996 totaling
approximately $960,000 for a local exchange carrier and National
Exchange Carrier Association excess earnings in 1993 and 1994.
Changes in distribution costs as a percentage of revenues will also
occur as the Company's traffic mix changes. The Company is unable to
predict if or when access charge rates will change in the future and
the impact of such changes on the Company's distribution costs.
Contribution increased 8 percent during the third quarter of 1996 as
compared to the same period of 1995 and increased 18 percent during
the fist nine months of 1996 as compared to the same period of 1995.
Increases in both periods resulted from increased revenues derived
from private line and network services, increased OCC revenues billed
at a consistent average rate per minute, and reductions in
distribution costs as previously described. Such increases were
offset, in part, by a reduced average rate per minute earned on
interstate and intrastate telecommunication services.
Total operating costs and expenses as a percentage of revenues
decreased from 33 percent in the third quarter of 1995 to 32 percent
in the same period of 1996 and increased 12 percent from $11.1
million in the third quarter of 1995 to $12.4 million in the same
period of 1996.
Total operating costs and expenses as a percentage of revenues
decreased from 33 percent in the nine-month period ending September
30, 1995 to 32 percent in the same period of 1996 and increased 19
percent from $31.5 million in the first nine months of 1995 to $37.5
million in the same period of 1996.
Increases in aggregate operating costs and expenses for both periods
are primarily due to following four factors:
(1) Increased personnel and other costs totaling approximately
$1.5 million for the nine-month period ending September 30,
1996 in sales and customer service, credit, engineering,
operations and management information services. Such costs
are associated with the development and introduction of new
products and services including local services, cable
television services, rural message and data telephone
services, PCS services, and internet services.
(2) Increased sales and customer service volumes.
(3) Additional bad debt expense directly associated with
increased revenues.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(4) Increased sales, advertising and telemarketing costs due to
the introducation of the Company's Great Rate, Great Dividend
and other proprietary rate plans.
In general, the Company has dedicated additional resources in certain
areas and product lines to pursue longer term opportunities. It must
balance the desire to pursue such opportunities with the need to
continue to improve current performance.
Continuing legal and regulatory costs are, in large part, associated
with regulatory matters involving the FCC, the APUC, and the Alaska
Legislature.
EBITDA (earnings before interest, taxes, depreciation and
amortization), increased approximately 2% to $5.8 million in the
third quarter of 1996 from $5.7 million in the same period of 1995,
and increased approximately 16% to $17.6 million in the first nine
months of 1996 from $15.1 million in the same period of 1995. EBITDA,
a measure of the Company's ability to generate cash flows, 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 industry.
Interest expense increased 24 percent to $415,000 during the third
quarter of 1996 as compared to $336,000 during the same period of
1995, and increased 31 percent to $1,219,000 during the fist nine
months of 1996 as compared to $927,000 during the same period of
1995. The increases in interest expense in both periods result
primarily from increases in the Company's average outstanding
indebtedness, offset in part by increases in the amount of interest
capitalized during 1996.
Income tax expense totaled approximately $1.6 million in each of the
third quarter periods of 1996 and 1995, respectively, and totaled
$4.6 million and $4.0 million in the first nine months of 1996 and
the same period of 1995, respectively, resulting from the application
of statutory income tax rates to net earnings before income taxes.
The Company has capital loss carryovers totaling approximately
$56,000 which expire in 1997. Tax benefits associated with recorded
deferred tax assets, net of valuation allowances, are considered to
be more likely than not realizable through taxable income earned in
carryback years, future reversals of existing taxable temporary
differences, and future taxable income exclusive of reversing
temporary differences and carryforwards.
The Company offers a broad spectrum of telecommunication services to
residential, commercial and governmental 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, and 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 the 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 2.1 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
1996. The volume of oil transported by that pipeline is expected to
decrease to 1.0 million barrels per day within a few years, based
upon present developed oil fields using the pipeline for transport.
The trend of continued decline is inevitable, short of new recovery
techniques and discovery and development of other oil fields with
access to the present pipeline. The probability of discovery of such
oil reserves sufficient to maintain oil production at present-day
levels will
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
be challenging at best. No assurance can be given that such
production levels can be maintained. With the decline of oil
production, all segments of the Alaska economy will be affected. The
Company has, since its entry into the telecommunication marketplace
aggressively marketed its services to seek a larger share of the
available market. However, with a small population of approximately
600,000 people, one-half of whom are located in the Anchorage area
and the rest of whom are spread out over the vast reaches of Alaska,
the customer base in Alaska is limited. No assurance can be given
that the driving forces in the Alaska economy, and in particular, oil
production, will continue at levels to provide an environment for
expanded economic activity, let alone a stable economy and demand for
telecommunication services. The loss of jobs and associated revenues
attributed to potential oil and gas industry workforce reductions is
not expected to have an immediate material effect on the Company's
operations.
The Telecommunications Act of 1996 ("Act") was signed into law Feb.
8, 1996. Under the provisions of the Act, Bell Operating Companies
can immediately begin manufacturing, research and development; GTE
Corp. can begin providing interexchange services through its
telephone companies nationwide; laws in 27 states that foreclose
competition are knocked down; co-carrier status for competitive local
exchange carriers is ratified; and the concept of "physical
collocation" of competitors' facilities in Local Exchange Carriers
central offices, which an appeals court rejected, is resurrected.
As allowed by the Act, the Company and AT&T Alascom filed with the
APUC in 1996 for authorization to provide local service in the
Anchorage area and requested negotiations with the Anchorage
Telephone Utility ("ATU") for interconnection and the resale of local
service. The Company, in July 1996, has further requested arbitration
by the APUC of the interconnection and resale issues with ATU.
Additionally, ATU has indicated that it intends to enter the long
distance market by the end of 1996. ATU applied to the APUC during
June, 1996 and subsequently received approval to provide intrastate
service through the purchase of long-distance service at wholesale
rates from the Company and AT&T Alascom and then resell the service
back to Anchorage customers at retail rates.
The Act requires the Federal Communications Commission to open no
fewer than 50 rulemaking proceedings. The legislation calls for the
establishment of a new federal-state joint board on universal service
within 30 days of enactment. That board will have to develop
proposals to revamp the universal service subsidy system that has
evolved over the years which could be among the most far-reaching
provisions of the Act.
The Company is unable to determine the impact on its operations of
the Act, the rulemaking proceedings, the arbitration proceedings, the
actions of the federal-state joint board or ATU's possible entry into
the long distance market.
In June 1996, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS No. 125"). SFAS No. 125 establishes financial
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. SFAS No. 125
requires the recognition of financial assets and servicing assets, if
any, that are controlled by the Company, the derecognition of
financial assets, if any, when control is surrendered, and the
derecognition of liabilities, if any, when control has been
surrendered in the transfer of financial assets. The Company
anticipates that the adoption of SFAS No. 125 in 1997 will not have a
material effect on its consolidated financial statements.
26
<PAGE>
The Company generally has experienced increased costs in recent years
due to the effect of inflation on the cost of labor, material and
supplies, and plant and equipment. A portion of the increased labor
and material and supplies costs directly affects income through
increased maintenance and operating costs. The cumulative impact of
inflation over a number of years has resulted in higher depreciation
expense and increased costs for current replacement of productive
facilities. However, operating efficiencies have partially offset
this impact, as have price increases, although the latter have
generally not been adequate to cover increased costs due to
inflation. Competition and other market factors limit the Company's
ability to price services and products based upon inflation's effect
on costs.
27
<PAGE>
II. OTHER INFORMATION
(l) Legal Proceedings
Information regarding pending legal proceedings to which the Company
is a party is included in Note 10 of Notes to Consolidated Financial
Statements and is incorporated herein by reference.
(6) Exhibits and Reports on Form 8-K
(a) Exhibit 27- Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended
September 30, 1996 - None
28
<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.
November 13, 1996 By: /s/ Ronald A. Duncan
(Date) Ronald A. Duncan, President and
Director
(Principal Executive Officer)
November 13, 1996 By: /s/ John M. Lowber
(Date) John M. Lowber, Senior Vice
President and Chief Financial
Officer
(Principal Financial Officer)
November 13, 1996 By: /s/ Alfred J. Walker
(Date) Alfred J. Walker, Vice President and
Chief Accounting Officer
(Principal Accounting
Officer)
29
