UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 April 30, 1996 was:
19,718,236 shares of Class A common stock; and
4,177,434 shares of Class B common stock.
<PAGE>
<TABLE>
INDEX
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 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..........................................................26
Item 6. Exhibits and Reports on Form 8-K...........................................26
SIGNATURES..........................................................................................27
(i)
</TABLE>
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<CAPTION>
(Unaudited)
March 31, December 31,
ASSETS 1996 1995
---------------------------------------------------------- -------- -------
(Amounts in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents (note 2) ............................................. $ 2,069 4,017
------- -------
Receivables:
Trade .................................................................. 23,826 21,737
Other .................................................................. 233 253
------- -------
24,059 21,990
Less allowance for doubtful receivables ........................................ 258 295
------- -------
Net receivables ........................................................ 23,801 21,695
------- -------
Prepaid and other current assets ............................................... 1,891 1,566
Deferred income taxes, net (note 5) ............................................ 763 746
Inventory ...................................................................... 1,025 991
Notes receivable (note 3) ...................................................... 178 167
------- -------
Total current assets ................................................... 29,727 29,182
------- -------
Property and equipment, at cost (notes 4 and 8)
Land ........................................................................... 73 73
Distribution systems ........................................................... 72,814 67,434
Support equipment .............................................................. 14,121 11,610
Property and equipment under capital leases .................................... 2,030 2,030
------- -------
89,038 81,147
Less amortization and accumulated depreciation ................................. 35,551 33,789
------- -------
Net property and equipment in service .................................. 53,487 47,358
Construction in progress ....................................................... 2,155 3,096
------- -------
Net property and equipment ............................................. 55,642 50,454
Notes receivable (note 3) ........................................................ 1,032 904
Other assets, at cost, net of amortization ....................................... 4,194 4,225
------- -------
Total assets ........................................................... $90,595 84,765
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
(1)
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Continued)
<CAPTION>
(Unaudited)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------------------------------------------ ------- -------
(Amounts in thousands)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt (note 4) ........................................ $ 1,751 1,689
Current maturities of obligations under
capital leases (note 8) ........................................................... 250 282
Accounts payable ..................................................................... 16,839 16,861
Accrued payroll and payroll related obligations ...................................... 2,181 2,108
Accrued liabilities .................................................................. 980 1,134
Accrued income taxes (note 5) ........................................................ 1,464 547
Accrued interest ..................................................................... 142 132
Deferred revenues .................................................................... 1,197 1,317
-------- --------
Total current liabilities .................................................... 24,804 24,070
Long-term debt, excluding current maturities (note 4) .................................. 11,111 8,291
Obligations under capital leases, excluding
current maturities .................................................................. 5 26
Obligations under capital leases due to related parties,
excluding current maturities (note 8) ............................................... 725 739
Deferred income taxes, net (note 5) .................................................... 7,034 7,004
Other liabilities ...................................................................... 1,745 1,619
-------- --------
Total liabilities ............................................................ 45,424 41,749
-------- --------
Stockholders' equity (notes 2, 5 and 6): Common stock (no par):
Class A. Authorized
50,000,000 shares; issued and
outstanding 19,681,207 and 19,680,199
shares at March 31, 1996 and December 31,
1995, respectively ........................................................ 13,913 13,912
Class B. Authorized
10,000,000 shares; issued and
outstanding 4,175,434 shares at
March 31, 1996 and December 31, 1995 ...................................... 3,432 3,432
Less cost of 122,611 Class A common
shares held in treasury ............................................................ (389) (389)
Paid-in capital ...................................................................... 4,058 4,041
Retained earnings .................................................................... 24,157 22,020
-------- --------
Total stockholders' equity ................................................... 45,171 43,016
-------- --------
Commitments and contingencies (notes 8 and 10)
Total liabilities and stockholders' equity ................................... $ 90,595 84,765
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
(2)
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
1996 1995
------- -------
(Amounts in thousands
except per share amounts)
<S> <C> <C>
Revenues:
Transmission services (note 7) ............................................... $ 34,308 27,029
Systems sales and service .................................................... 2,925 1,871
Other ........................................................................ 736 793
-------- --------
Total revenues ....................................................... 37,969 29,693
Cost of sales .................................................................. 21,302 16,762
-------- --------
Contribution ......................................................... 16,667 12,931
-------- --------
Operating costs and expenses:
Operating and engineering .................................................... 2,624 2,158
Sales and communications ..................................................... 3,086 1,917
General and administrative ................................................... 4,285 3,630
Legal and regulatory ......................................................... 441 405
Bad debt ..................................................................... 397 283
Depreciation and amortization ................................................ 1,887 1,580
-------- --------
Total operating costs and expenses ................................... 12,720 9,973
-------- --------
Operating income ..................................................... 3,947 2,958
-------- --------
Other income (expense):
Interest expense (notes 2 and 4) ............................................. (330) (362)
Interest income .............................................................. 70 150
-------- --------
Total other income (expense) ......................................... (260) (212)
-------- --------
Earnings before income taxes ......................................... 3,687 2,746
Income tax expense (note 5) .................................................... 1,550 1,139
-------- --------
Net earnings ......................................................... $ 2,137 1,607
======== ========
Net earnings per common share ........................................ $ .09 .07
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
(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 ........................................ -- -- -- -- -- -- 1,607
Class B shares converted to Class A ................. 1 (1) -- -- -- -- --
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes .......................................... -- -- -- -- -- 11 --
Shares issued under stock option plan ............... 30 -- 45 -- -- -- --
Shares issued and issuable under
officer stock option agreements ................... -- -- -- -- -- 1 --
------- ------- ------- ------- ------- ------- ------
Balances at March 31, 1995 .......................... 19,648 4,178 $13,875 3,432 (328) 3,653 16,125
======= ======= ======= ======= ======= ======= =======
Balances at December 31, 1995 ....................... 19,680 4,176 $13,912 3,432 (389) 4,041 22,020
Net earnings ........................................ -- -- -- -- -- -- 2,137
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes .......................................... -- -- -- -- -- 16 --
Shares issued under stock option plan ............... 1 -- 1 -- -- -- --
Shares issued and issuable under
officer stock option agreements ................... -- -- -- -- -- 1 --
------- ------- ------- ------- ------- ------- -------
Balances at March 31, 1996 .......................... 19,681 4,176 $13,913 3,432 (389) 4,058 24,157
======= ======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
(4)
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
1996 1995
------ ------
(Amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings ......................................................................... $ 2,137 1,607
Adjustments to reconcile net earnings
to net cash provided (used) by operating activities:
Depreciation and amortization .................................................. l,887 1,580
Deferred income tax expense .................................................... 13 278
Deferred compensation and compensatory
stock options ................................................................ 143 81
Bad debt expense, net of write-offs ............................................ (37) (62)
Other noncash income and expense items ......................................... (11) (8)
Change in operating assets and liabilities (note 2) ............................ (1,773) (1,119)
------- -------
Net cash provided by operating activities .................................... 2,359 2,357
------- -------
Cash flows from investing activities:
Purchase of property and equipment ................................................... (6,950) (1,408)
Refund of long-term deposits and purchases of other
assets, net ........................................................................ (45) 755
Notes receivable issued .............................................................. (130) --
Payments received on notes receivable ................................................ 2 90
------- -------
Net cash used by investing activities ........................................ (7,123) (563)
------- -------
Cash flows from financing activities:
Long-term borrowings ................................................................. 3,300 --
Repayments of long-term borrowings and capital
lease obligations .................................................................. (485) (465)
Proceeds from common stock issuance .................................................. 1 45
------- -------
Net cash provided (used) by financing activities ............................. 2,816 (420)
------- -------
Increase (decrease) in cash and cash equivalents ............................. (1,948) 1,374
Cash and cash equivalents at beginning of period ....................................... 4,017 1,649
------- -------
Cash and cash equivalents at end of period ............................................. $ 2,069 3,023
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
(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 three-month period ended
March 31, 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>
(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
March 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Weighted average common
shares outstanding 23,724 23,712
Common equivalent shares
outstanding 1,130 672
------ ------
Shares used in computing primary
earnings per share 24,854 24,384
====== ======
</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 not placed in service at
March 31, 1996 and distribution systems and support equipment not
placed in service at December 31, 1995; management intends to place
this equipment in service during 1996.
Depreciation and amortization is computed on a straight-line basis
based upon the shorter of the lease term or the estimated useful
lives of the assets ranging from 3 to 20 years for distribution
systems and 5 to 10 years for support equipment. Amortization of
equipment financed under capitalized leases is included in
depreciation expense.
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. Gains or losses are recognized at the time
of ordinary retirements, sales or other dispositions of property.
(7)
<PAGE>
(g) Marketable Securities
Effective January 1, 1994, GCI and subsidiaries ("the Company")
adopted Statement of Financial Accounting Standards No. 115 ("SFAS
No. 115"), "Accounting for Certain Investments in Debt and Equity
Securities". Under SFAS No. 115, securities when purchased, are
classified in either the trading account securities portfolio, the
securities available for sale portfolio, or the securities held to
maturity portfolio. Securities are classified as trading account
securities when the intent is profit maximization through market
appreciation and resale. Securities are classified as available for
sale when management intends to hold the securities for an indefinite
period of time. Securities are classified as held to maturity when it
is management's intent to hold these securities until maturity.
Unrealized gains or losses on securities available for sale are
excluded from earnings and reported as a net amount in a separate
component of stockholders' equity. There was no cumulative effect on
the financial statements from the adoption of SFAS No. 115.
Securities available for sale are stated at fair market value which
approximates cost.
(h) 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.
Goodwill totaled approximately $1,260,000 and $1,286,000 at March 31,
1996 and December 31, 1995, respectively, net of amortization of
approximately $723,000 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.
(i) 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.
(j) Interest Expense
Interest costs incurred during the construction period of significant
capital projects are capitalized. Interest capitalized by the Company
totaled $87,000 during the three month period ended March 31, 1996
and $112,000 during the year ended December 31, 1995.
(k) 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>
(l) 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.
(m) 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 includes 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)
Three-month period ended March 31, 1996 1995
------ ------
<S> <C> <C>
(Increase) decrease in trade receivables .............................................. $(2,089) 2,174
(Increase) decrease in other receivables .............................................. 20 (18)
Increase in prepaid and other
current assets ....................................................................... (374) (19)
(Increase) decrease in inventory ...................................................... (34) 71
Decrease in accounts payable .......................................................... (22) (2,177)
Increase (decrease) in accrued payroll
and payroll related obligations ...................................................... 73 (1,846)
Increase (decrease) in accrued liabilities ............................................ (154) 29
Increase in accrued income taxes ...................................................... 917 649
Increase (decrease) in accrued interest ............................................... 10 (21)
Increase (decrease) in deferred revenue ............................................... (120) 39
------- ------
$(1,773) (1,119)
======= ======
</TABLE>
Income taxes paid totaled approximately $633,000 and $212,000 during
the quarters ended March 31, 1996 and 1995, respectively.
Interest paid totaled approximately $407,000 and $383,000 during the
quarters ended March 31, 1996 and 1995, respectively.
The Company recorded $16,000 and $11,000 during the quarters ended
March 31, 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>
(3) Notes Receivable
<TABLE>
A summary of notes receivable follows:
<CAPTION>
(Unaudited)
March 31, 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 September 20, 1996 through
August 26, 2004. 389 261
------ ------
Total notes receivable 1,113 985
Less current portion (178) (167)
Plus long-term accrued interest 97 86
------ ------
$ 1,032 904
====== ======
</TABLE>
(10)
<PAGE>
(4) Long-term Debt
<TABLE>
Long-term debt is summarized as follows:
<CAPTION>
(Unaudited)
March 31, December 31,
1996 1995
---- ----
(Amounts in thousands)
<S> <C> <C>
Credit Agreement (a) $ 4,300 1,000
Undersea Fiber and Equipment
Loan Agreement (b) 7,938 8,271
Financing Obligation (c) 624 709
------ ------
12,862 9,980
Less current maturities 1,751 1,689
------ ------
Long-term debt, excluding
current maturities $11,111 8,291
====== ======
</TABLE>
(a) GCI completed a refinancing of its senior indebtedness on
May 14, 1993. The facility was amended on October 31, 1995
to provide financing for the initial letter of credit and
subsequent down payment required pursuant to the terms of
the Company's transponder purchase agreement with Hughes
Communications Galaxy IX, Inc. ("Hughes"). The facility was
comprised of two components, the first of which was a
$15,750,000 reducing revolver requiring payments or
reductions of $650,000 per quarter through December 31,
1996, and $812,500 thereafter through its expiration on
December 31, 1997. $2.65 million of this component had 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. $1.5 million of this portion of the facility was
available for additional borrowings at March 31, 1996. The
other component totaled $10.08 million, and was used to
provide a $9.1 million letter of credit to Hughes. The
letter of credit was expected to be drawn down by Hughes
after delivery of transponder capacity scheduled for June of
1996.
The Credit agreement provided for interest (7.625% at March
31, 1996), among other options, at LIBOR plus two and
one-quarter to two and three-quarters percent depending on
the Company's leverage ratio as defined in the Agreement. A
fee of .50% per annum was assessed on the unused portion of
the facility.
The Company entered into a new $62.5 million interim credit
facility with its senior lender during April of 1996. The
interim facility replaced in its entirety, the facility
described above. The new facility will allow the Company to
invest up to $60 million in capital expenditures during the
next year. 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.
The interim facility provides for interest, among other
options, at LIBOR plus one and three quarters to two and one
quarter percent, depending on the Company's
(11)
<PAGE>
leverage ratio as defined in the agreement. A fee of .50%
per annum is assessed on the unused portion of the facility.
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 May 14, 1993 (date of the initial refinancing)
through March 31, 1996.
Security for the credit agreement includes a pledge of the
stock of GCC and Communication Services, and a first lien on
substantially all of GCC's assets. GCI and its subsidiaries,
Communication Services and Leasing Company, are liable as
guarantors.
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 5(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.
(12)
<PAGE>
As of March 31, 1996 maturities of long-term debt were as follows (in
thousands):
Year ending
March 31,
1997 $ 1,751
1998 6,138
1999 1,681
2000 1,830
2001 1,462
2002 and thereafter ---
--------
$ 12,862
========
(5) Income Taxes
<TABLE>
Total income tax expense (benefit) for the quarters ended March 31,
1996 and 1995 were allocated as follows (amounts in thousands):
<CAPTION>
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Earnings from continuing operations $1,550 1,139
Stockholders' equity, for stock option
compensation expense for tax purposes
in excess of amounts recognized for
financial reporting purposes (16) (11)
----- -----
$1,534 1,128
===== =====
</TABLE>
<TABLE>
Income tax expense for the quarters ended March 31, 1996 and 1995
consists of the following (amounts in thousands):
<CAPTION>
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Current tax expense:
Federal taxes $1,180 641
State taxes 357 220
----- -----
1,537 861
----- -----
Deferred tax expense:
Federal taxes 10 120
State taxes 3 158
----- -----
13 278
----- -----
$1,550 1,139
===== =====
</TABLE>
(13)
<PAGE>
<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 quarters ended March 31, 1996 and 1995 as follows
(amounts in thousands):
<CAPTION>
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
"Expected" statutory tax expense $1,290 961
State income taxes, net of federal benefit 236 175
Income tax effect of goodwill
amortization, nondeductible
expenditures and other items, net 24 3
----- -----
$1,550 1,139
===== =====
</TABLE>
<TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at March 31, 1996 and December 31, 1995 are presented
below (amounts in thousands).
<CAPTION>
March 31, December 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Net current deferred tax assets:
Accounts receivable, principally due to allowance for
for doubtful accounts $ 115 119
Compensated absences, accrued for financial reporting purposes 408 400
Workers compensation and self insurance health reserves,
principally due to accrual for financial reporting purposes 181 183
Other 148 133
----- ------
Total gross current deferred tax assets 852 835
Less valuation allowance ( 89) ( 89)
----- ------
Net current deferred tax assets $ 763 746
===== ======
Net long-term deferred tax assets:
Deferred compensation expense for financial
reporting purposes in excess of amounts recognized
for tax purposes $ 616 587
Employee stock option compensation expense for financial
reporting purposes in excess of amounts recognized
for tax purposes 200 206
Capital loss carryforwards 23 23
Other 593 453
----- ------
Total gross long-term deferred tax assets 1,432 1,269
Less valuation allowance ( 136) ( 136)
----- ------
Net long-term deferred tax assets 1,296 1,133
----- ------
Net long-term deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation 8,152 7,997
Other 178 140
----- ------
Total gross long-term deferred tax liabilities 8,330 8,137
----- ------
Net combined long-term deferred tax liabilities $7,034 7,004
===== ======
</TABLE>
(14)
<PAGE>
The valuation allowance for deferred tax assets was $225,000 as of
March 31, 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.
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. Management
believes this examination will not adversely affect the consolidated
financial statements.
(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
represented approximately 31 and 30 percent of the issued and
outstanding shares of the respective class.
Stock Warrants
On May 18, 1994 an officer of the Company exercised warrants. In
exchange for $114, the Company issued 160,297 and 74,028 shares of
GCI Class A and Class B common stock, respectively.
Pursuant to the terms of a stock appreciation right granted in 1988,
the Company issued to a former senior lender warrants to acquire
1,021,373 shares of GCI Class A common stock for $.85669 per share.
Warrants to purchase 600,000 shares of Class A common stock were
exercised in April and May, 1991, an additional 168,085 were
exercised in September, 1991 and the remaining warrants to purchase
253,288 shares were exercised in September and October, 1994.
(15)
<PAGE>
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. 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.
<TABLE>
Information for the periods ended March 31, 1996 and 1995 with
respect to the Plan follows:
<CAPTION>
Shares Option Price
------ ------------
<S> <C> <C>
Outstanding at December 31, 1994 1,729,699 $0.75-$4.00
Granted --- ---
Exercised (20,000) $2.25
Forfeited (11,500) $4.00
---------
Outstanding at March 31, 1995 1,698,199 $0.75-$4.00
=========
Outstanding at December 31, 1995 2,288,199 $0.75-$4.00
Granted 61,000 $3.75-$4.50
Exercised (16,008) $0.75-$1.75
Forfeited (43,291) $0.75-$4.00
---------
Outstanding at March 31, 1996 2,289,900 $0.75-$4.50
=========
Available for grant at March 31, 1996 331,844
=========
Exercisable at March 31, 1996 934,300
=========
</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.
(16)
<PAGE>
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, the Company acquired an additional
17,500 shares of Class A common stock for approximately $61,000 to
fund additional deferred compensation agreements for two of its
officers, including Mr. Duncan.
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.
Beginning July 1, 1995 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
$227,000 and $301,000 for the quarters ended March 31, 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 $6.4 million and
$5.1 million for the three-month periods ended March 31,
(17)
<PAGE>
1996 and 1995, respectively. The Company earned revenues pursuant to
a contract with Sprint totaling approximately $4.3 million and $3.4
million for the three-month periods ended March 31, 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 $1,202,000 and $1,055,000
for the quarters ended March 31, 1996 and 1995, respectively.
The Company entered into a long-term capital lease agreement in 1991
with the wife of the Company's president for property occupied by the
Company. The lease term is 15 years with monthly payments of $14,400,
increasing in $800 increments at each two year anniversary of the
lease. Monthly lease costs increased to $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
March 31, 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 delivery of the transponders as early as the fourth
quarter of 1997 are dependent upon a number of factors. The Company
does not expect the down payment to exceed $10.1 million and the
remaining balance payable at delivery to exceed $46 million.
In March 1996 the Company announced that it had signed letters of
intent to acquire three Alaska cable companies that offer cable
television service to more than 101,000 subscribers serving 74
percent of households throughout the state of Alaska. The Company
intends to acquire
(18)
<PAGE>
Prime Cable of Alaska, Alaska Cablevision, Inc. of Kirkland,
Washington and Alaskan Cable Network. Prime Cable operates the
state's largest cable television system including stations in
Anchorage, Bethel, Kenai and Soldotna, Alaska. Alaska Cablevision
owns and operates cable stations in Petersburg, Wrangell, Cordova,
Valdez, Kodiak, Homer, Seward, Nome and Kotzebue, Alaska. Alaskan
Cable Network operates stations in Fairbanks, Juneau, Ketchikan and
Sitka, Alaska. This acquisition is 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. Upon closing and after all approvals are obtained, the cable
companies will be consolidated into a single organization owned by
the Company.
The total purchase price is $280.7 million. According to terms of the
letters of intent, GCI will issue 16.3 million shares of Class A
Common stock to the owners of the three cable companies valued at
$105.7 million. The balance of the purchase is expected to be
provided by approximately $175 million of bank financing. Additional
capital will be provided from the sale of 2 million shares of GCI's
Class A Common Stock to MCI Telecommunications Corporation for $6.50
per share. As of May 10, 1996, definitive purchase and sale
agreements with the owners of the cable companies had been executed.
The more significant remaining contingencies which must be resolved
include execution of definitive agreements with MCI, approval of the
transactions and transfer of licenses by the Alaska Public Utilities
Commission ("APUC") and the Federal Communications Commission
("FCC"), and approval of the transactions by the Company's
shareholders and senior lender and the cable companies' shareholders,
partners and lenders.
Management is confident that once the contingencies are resolved, the
transactions will be financed through modification or assumption of
an existing or negotiation of a new bank credit facility. Although
the Company has held discussions with existing lenders regarding such
a facility, no agreement exists concerning the amounts or terms of
such a facility.
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.
(19)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
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 decrease
in the Company's cash and cash equivalents of $1.9 million from 1995
to 1996. Sources of cash in 1996 included the Company's operating
activities which generated positive cash flow of $2.4 million net of
changes in the components of working capital, and long-term
borrowings of $3.3 million. Uses of cash during 1996 included
repayment of $485,000 of long-term borrowings and capital lease
obligations and investment of $6.95 million in distribution and
support equipment and systems.
Net receivables increased $2.1 million from 1995 to 1996 resulting
from increased sales and amounts billed in March 1996 for a
nonrecurring equipment sales contract.
Working capital (current assets less current liabilities) totaled
$4.9 million and $5.1 million at March 31, 1996 and December 31,
1995, respectively. Expenditures for property and equipment and
repayment of long-term borrowings and capital lease obligations
exceeded working capital generated by operations resulting in the
$200,000 decrease at March 31, 1996 as compared to December 31, 1995.
The Company's expenditures for property and equipment totaled $6.95
million and $1.41 million during the first quarter 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 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 delivery of the transponders as early as the fourth
quarter of 1997 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
$10.1 million and the remaining balance payable coinciding with a
staged delivery to exceed $46 million. The Company amended its
existing senior credit facility to provide a letter of credit to
accommodate 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
(20)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
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 1996 and service to be
offered as early as 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 occur in 1996, with services expected to be provided during the
fourth quarter of 1996. Construction and deployment costs are
expected to total $18 to $20 million, and are expected to be funded
through a combination of cash generated from operations and bank
financing. 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.
The Company announced March 15, 1996 that it has signed letters of
intent to acquire three Alaska cable companies that offer cable
television service to more than 101,000 subscribers serving 74
percent of households throughout the state of Alaska. The Company
intends to acquire Prime Cable of Alaska, and the assets of Alaska
Cablevision, Inc. of Kirkland, Washington and of Alaskan Cable
Network. Prime Cable operates the state's largest cable television
system including stations in Anchorage, Bethel, Kenai and Soldotna,
Alaska. Alaska Cablevision owns and operates cable stations in
Petersburg, Wrangell, Cordova, Valdez, Kodiak, Homer, Seward, Nome
and Kotzebue, Alaska. Alaskan Cable Network operates stations in
Fairbanks, Juneau, Ketchikan and Sitka, Alaska. This acquisition is
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 is
expected to provide a platform for developing new customer products
and services over the next several years.
The total purchase price is $280.7 million. According to terms of the
agreements, GCI will issue 16.3 million shares of Class A Common
stock to the owners of the three cable companies valued at $105.7
million. The balance of the purchase is expected to be provided by
approximately $175 million of bank financing. Additional capital will
be provided from the sale of 2 million shares of GCI's Class A Common
Stock to MCI Telecommunications Corporation for $6.50 per share.
Definitive agreements have been executed for the Prime Cable of
Alaska, Alaska Cablevision, Inc. of Kirkland, Washington and Alaskan
Cable Network transactions. Definitive agreements for the MCI
transaction are expected to be executed in May 1996 at which time GCI
will apply to the APUC to transfer the licenses of the cable
companies. Once all
(21)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
regulatory approvals are granted, the cable companies will be
consolidated into a single organization owned by the Company.
The Company entered into a new $62.5 million interim credit facility
with its senior lender during April of 1996. The new facility will
allow the Company to invest up to $50 million in capital expenditures
during the next year. 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. 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
Quarter ended March 31, 1996 ("1996"), compared with quarter ended
March 31, 1995 ("1995").
The Company's message data and transmission services industry segment
provides 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 during
1996 and 1995 was 18.8(cent), respectively.
Total revenues for 1996 were $37.97 million, a 27.9 percent increase
over 1995 revenues of $29.69 million. Revenue growth is attributed to
six fundamental factors, as follows:
(1) Growth in interstate telecommunication services which resulted in
billable minutes of traffic carried totaling 133.3 and 105.2 million
minutes in 1996 and 1995, respectively, or 82.2 and 83.6 percent of
total 1996 and 1995 minutes, respectively.
(2) Provision of intrastate telecommunication services which resulted
in billable minutes of traffic carried totaling 28.8 and 20.6 million
minutes in 1996 and 1995, respectively, or 17.8 and 16.4 percent of
total 1996 and 1995 minutes, respectively.
(3) Increases in revenues derived from other common carriers ("OCC")
including MCI and Sprint. OCC traffic accounted for $10.7 million or
28.2 percent, and $8.5 million or 28.6 percent of total revenues in
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. 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 26.4 percent to $3.40
million in 1996 as compared to $2.69 million 1995.
(5) Increased revenues associated with product sales, which increased
116.1 percent to $1.50 million in 1996 as compared to $0.70 million
in 1995.
(6) Increased revenues associated with network services revenues,
which increased 20.3 percent to $1.42 million in 1996 as compared to
$1.18 million in 1995.
Transmission access and distribution costs, which represent cost of
sales for transmission services, amounted to approximately 56.5
percent and 58.2 percent of transmission revenues during 1996 and
1995, respectively. The decrease in distribution costs as a
percentage of transmission revenues during 1996 as compared to 1995
results primarily from recording a refundable amount in the first
quarter of 1996 of approximately $430,000 for a local exchange
carrier's excess earnings in 1993 and 1994. Changes in distribution
costs as a
(22)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
percentage of revenues will 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 28.9 percent during 1996 as compared to 1995
resulting from increased telecommunications revenues at a consistent
average rate per minute, increased revenues derived from equipment
sales and network services, and a reduction in distribution costs as
previously described.
Total operating costs and expenses as a percentage of revenues
decreased from 33.59 percent in 1995 to 33.50 percent in 1996 and
increased 27.5 percent from $9.973 million in 1995 to $12.720 million
in 1996. This increase is primarily due to (1) increased personnel
costs in sales, customer service, engineering, operations and
management information services related to the introduction of new
products and services, and increased sales and customer service
volumes; and (2) increased sales, advertising and telemarketing costs
due to the introduction of the Company's Great Rate and other
proprietary rate plans. In general, the Company has dedicated
additional resources in certain areas 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 28% to $5.8 million in 1996
from $4.5 million in 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 decreased 8.8 percent during 1996 as compared to
1995. The decrease in interest expense results primarily from
reduction in the Company's average outstanding indebtedness and an
increase in the amount of interest capitalized during 1996.
Income tax expense totaled $1.550 million and $1.139 million in 1996
and 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 Alaska economy is supported in large part by the oil and gas
industry. Several oil and gas companies announced workforce
reductions in 1994 and 1995. The Company is unable to predict if or
when future workforce reductions may take place.
The Alaska economy is also supported by the United States armed
services and the United States Coast Guard which maintain bases in
Anchorage, Fairbanks, Adak, Kodiak, and other communities in Alaska.
The military presence in the state of Alaska provides a significant
(23)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
source of revenues to the economy of the state. The Company provides
message telephone services in a variety of ways to the United States
government and its armed forces personnel. The Company provides
private lines for secured point-to-point data and voice transmission
services and long distance services individually to military
personnel.
A reduction in federal military spending or closure of a major
facility in Alaska would have a substantial adverse impact on the
state and would both directly and indirectly affect the Company. A
reduction in the number of military personnel served by the Company
and a reduction in the number of private lines required by the armed
forces would have a direct effect on revenues. Indirect effects would
include a reduction of services provided across the state in support
of the military community and as a result, a reduction in the number
of customers served by the Company and volume of traffic carried.
The loss of jobs and associated revenues attributed to oil and gas
industry and military workforce reductions is not expected to have an
immediate material effect on the Company's operations. No assurance
can be given that funding for existing military installations in
Alaska will not be adversely affected by reprioritization of needs
for military installations or federal budget cuts in the future.
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 recently filed
with the APUC for authorization to provide local service in the
Anchorage area and have requested negotiations with the Anchorage
Telephone Utility ("ATU") for interconnection and the resale of local
service. Additionally, ATU has indicated that it intends to enter the
long distance market by the end of 1996.
The Act is expected to require the Federal Communications Commission
to begin 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 actions of the federal-state
joint board or ATU's possible entry into the long distance market.
In October 1994, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial
Instruments" ("SFAS No. 119"). SFAS No. 119 requires disclosures
regarding amount, nature and terms of derivative financial
instruments, for instance futures, forward, swap and option contracts
and other instruments with similar characteristics. The Company
anticipates that the adoption of SFAS No. 119 in 1996 will not have a
material effect on its consolidated financial statements.
(24)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" ("SFAS No. 121"). This statement sets forth new
standards for determining when long-lived assets are impaired and
requires such impaired assets to be written down to fair value. The
Company anticipates that the adoption of SFAS No. 121 in 1996 will
not have a material effect on its consolidated financial statements.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 establishes
financial accounting and reporting standards for stock-based employee
compensation plans. Those plans include all arrangements by which
employees receive shares of stock or other equity instruments of the
employer or the employer incurs liabilities to employees in amounts
based on the price of the employer's stock. This statement also
applies to transactions in which an entity issues its equity
instruments to acquire goods or services from nonemployees. The
Company anticipates that the adoption of SFAS No. 123 in 1996 will
not have a material effect on its consolidated financial statements.
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.
(25)
<PAGE>
II. OTHER INFORMATION
(l) Legal Proceedings
No reportable events have occurred which would require modification
of the discussion under Item 3--Legal Proceedings contained in the
Company's Report on Form 10-K for the Year Ended December 31, 1995.
(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 March 31,
1996.
Form 8-K filed with the Securities and Exchange Commission
on March 28, 1996:
On March 14, 1996 the Company entered into four non-binding
letters of intent to acquire several Alaskan cable companies
that offer cable television service to more than 101,000
subscribers serving approximately 74 percent of households
throughout the state. The Company proposed to raise a
portion of the capital for these acquisitions through a sale
of additional stock to MCI Telecommunications Corporation
("MCI"). The Company entered into a non-binding letter of
intent with MCI on that proposed sale. The Company has in
addition amended two carrier agreements with MCI.
(26)
<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.
May 8, 1996 By: /s/ Ronald A. Duncan
(Date) Ronald A. Duncan, President and Director
(Principal Executive Officer)
May 8, 1996 By: /s/ John M. Lowber
(Date) John M. Lowber, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
May 8, 1996 By: /s/ Alfred J. Walker
(Date) Alfred J. Walker, Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
(27)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
INTERIM CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH
31, 1996 AND THE CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000808461
<NAME> GENERAL COMMUNICATION, INC.
<MULTIPLIER> 1,000
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<FISCAL-YEAR-END> DEC-31-1996
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