UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 1996 was:
19,840,463 shares of Class A common stock; and
4,085,461 shares of Class B common stock.
INDEX
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
PAGE NO
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.............................27
Item 6. Exhibits and Reports on Form 8-K..............27
SIGNATURES.............................................................28
(i)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
ASSETS 1996 1995
---------------------------------------- ---- ----
(Amounts in thousands)
Current assets:
Cash and cash equivalents (note 2) ................. $ 1,391 4,017
-------- --------
Receivables:
Trade ...................................... 25,784 21,737
Income taxes (note 5) ...................... 728 --
Other ...................................... 280 253
-------- --------
26,792 21,990
Less allowance for doubtful receivables ............ 311 295
-------- --------
Net receivables ............................ 26,481 21,695
-------- --------
Prepaid and other current assets ................... 2,294 1,566
Deferred income taxes, net (note 5) ................ 813 746
Inventory .......................................... 952 991
Notes receivable (note 3) .......................... 429 167
-------- --------
Total current assets ....................... 32,360 29,182
-------- --------
Property and equipment, at cost (notes 4 and 8)
Land ............................................... 73 73
Distribution systems ............................... 70,772 67,434
Support equipment .................................. 14,822 11,610
Property and equipment under capital leases ........ 2,030 2,030
-------- --------
87,697 81,147
Less amortization and accumulated depreciation ..... 37,316 33,789
-------- --------
Net property and equipment in service ...... 50,381 47,358
Construction in progress ........................... 13,280 3,096
-------- --------
Net property and equipment ................. 63,661 50,454
Notes receivable (note 3) ............................ 947 904
Transponder purchase deposit (notes 4 and 10) ........ 7,800 --
Other assets,
at cost, net of amortization ........... 4,875 4,225
-------- --------
Total assets ............................... $109,643 84,765
======== ========
See accompanying notes to consolidated financial statements.
1
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Continued)
(Unaudited)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------------------------------------------ ---- ----
(Amounts in thousands)
Current liabilities:
Current maturities of long-term debt (note 4) ............... $ 23,890 1,689
Current maturities of obligations under
capital leases (note 8) .................................. 198 282
Accounts payable............................................. 16,314 16,861
Accrued payroll and payroll related obligations ............. 2,410 2,108
Accrued liabilities ......................................... 1,408 1,134
Accrued income taxes (note 5) ............................... -- 547
Accrued interest............................................. 209 132
Deferred revenues ........................................... 1,035 1,317
--------- ---------
Total current liabilities ........................... 45,464 24,070
Long-term debt, excluding current maturities (note 4) ......... 6,343 8,291
Obligations under capital leases, excluding
current maturities (note 8) ................................ 3 26
Obligations under capital leases due to related parties,
excluding current maturities (note 8) ...................... 709 739
Deferred income taxes, net (note 5) ........................... 7,824 7,004
Deferred revenues ............................................. -- --
Other liabilities ............................................. 1,807 1,619
--------- ---------
Total liabilities ................................... 62,150 41,749
--------- ---------
Stockholders' equity (notes 2, 5 and 6): Common stock (no par):
Class A. Authorized 50,000,000 shares;
issued and outstanding 19,768,150
and 19,680,199 shares at June 30, 1996
and December 31, 1995, respectively .............. 14,015 13,912
Class B. Authorized 10,000,000 shares;
issued and outstanding 4,159,657
and 4,175,434 shares at June 30, 1996
and December 31, 1995, respectively .............. 3,432 3,432
Less cost of 122,611 Class A common
shares held in treasury ................................... (389) (389)
Paid-in capital ............................................. 4,127 4,041
Retained earnings ........................................... 26,308 22,020
--------- ---------
Total stockholders' equity .......................... 47,493 43,016
--------- ---------
Commitments and contingencies (notes 8 and 10)
Total liabilities and stockholders' equity .......... $ 109,643 84,765
========= =========
See accompanying notes to consolidated financial statements
2
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
(Amounts in thousands except per share amounts)
Revenues:
Transmission services (note 7) .......................... $ 36,232 29,372 70,540 56,670
Systems sales and service ............................... 2,431 1,947 5,356 3,819
Other ................................................... 536 541 1,273 1,064
-------- -------- -------- --------
Total revenues ..................................... 39,199 31,860 77,169 61,553
Cost of sales .............................................. 22,474 18,140 43,776 34,892
-------- -------- -------- --------
Contribution ....................................... 16,725 13,720 33,393 26,661
-------- -------- -------- --------
Operating costs and expenses:
Operating and engineering ............................... 2,820 1,971 5,445 4,129
Sales and communications ................................ 2,761 2,002 5,848 3,921
General and administrative .............................. 4,386 4,160 8,670 7,775
Legal and regulatory .................................... 410 403 850 808
Bad debt ................................................ 460 287 857 569
Depreciation and amortization ........................... 1,918 1,560 3,805 3,164
-------- -------- -------- --------
Total operating costs and expenses ................. 12,755 10,383 25,475 20,366
-------- -------- -------- --------
Operating income ................................... 3,970 3,337 7,918 6,295
-------- -------- -------- --------
Other income (expense):
Interest expense (notes 2 and 4) ........................ (473) (321) (804) (592)
Interest income ......................................... 105 61 176 120
-------- -------- -------- --------
Total other income (expense) ....................... (368) (260) (628) (472)
-------- -------- -------- --------
Earnings before income taxes ....................... 3,602 3,077 7,290 5,823
Income tax expense (notes 2 and 5) ......................... 1,452 1,241 3,002 2,380
-------- -------- -------- --------
Net earnings ....................................... $ 2,150 1,836 4,288 3,443
======== ======== ======== ========
Net earnings per common share (note 1(c)) .................. $ .09 .08 .17 .14
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
3
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(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)
Balances at December 31, 1994 ...................... 19,617 4,179 $13,830 3,432 (328) 3,641 14,518
Net earnings ....................................... -- -- -- -- -- -- 3,443
Class B shares converted to Class A ................ 2 (2) -- -- -- -- --
Tax effect of excess stock compensation
expense for tax purposes under amounts
recognized for financial reporting
purposes ......................................... -- -- -- -- -- (3) --
Shares issued under stock option plan .............. 20 -- 44 -- -- -- --
Shares issued under officer stock
option agreements ................................ 20 -- -- -- -- 3 --
------- ------- ------- ------- ------- ------- -------
Balances at June 30, 1995 .......................... 19,659 4,177 $13,874 3,432 (328) 3,641 17,961
======= ======= ======= ======= ======= ======= =======
Balances at December 31, 1995 ...................... 19,680 4,176 $13,912 3,432 (389) 4,041 22,020
Net earnings ....................................... -- -- -- -- -- -- 4,288
Class B shares converted to Class A ................ 16 (16) -- -- -- -- --
Tax effect of excess stock compensation
expense for tax purposes under amounts
recognized for financial reporting
purposes ......................................... -- -- -- -- -- 85 --
Shares issued under stock option plan .............. 72 -- 103 -- -- -- --
Shares issued under officer stock
option agreements ................................ -- -- -- -- -- 1 --
------- ------- ------- ------- ------- ------- -------
Balances at June 30, 1996 .......................... 19,768 4,160 $14,015 3,432 (389) 4,127 26,308
======= ======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
4
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
1996 1995
---- ----
(Amounts in thousands)
Cash flows from operating activities:
Net earnings ............................................ $ 4,288 3,443
Adjustments to reconcile net earnings
to net cash provided (used) by operating activities:
Depreciation and amortization ..................... 3,805 3,164
Deferred income tax expense ....................... 838 452
Deferred compensation and compensatory
stock options ................................... 189 124
Bad debt expense, net of write-offs ............... 16 (46)
Other noncash income and expense items ............ (25) (18)
Change in operating assets and liabilities (note 2) (6,214) (3,733)
-------- --------
Net cash provided by operating activities ....... 2,897 3,386
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ...................... (16,734) (3,270)
Refund of long-term deposits and purchases of other
assets, net ........................................... (924) (500)
Payment of transponder deposit .......................... (7,800) --
Notes receivable issued ................................. (290) (86)
Payments received on notes receivable ................... 6 105
-------- --------
Net cash used by investing activities ........... (25,742) (3,751)
-------- --------
Cash flows from financing activities:
Long-term borrowings .................................... 21,100 --
Repayments of long-term borrowings and capital
lease obligations ..................................... (984) (903)
Proceeds from common stock issuance ..................... 103 47
-------- --------
Net cash provided (used) by financing activities 20,219 (856)
-------- --------
Decrease in cash and cash equivalents ........... (2,626) (1,221)
Cash and cash equivalents at beginning of period .......... 4,017 1,649
-------- --------
Cash and cash equivalents at end of period ................ $ 1,391 428
======== ========
See accompanying notes to consolidated financial statements.
5
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 six-month
periods ended June 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
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(c) Net Earnings Per Common Share
Primary earnings per common share are determined by dividing net
earnings by the weighted number of common and common equivalent
shares outstanding (amounts in thousands):
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
(Unaudited) (Unaudited)
Weighted average common shares outstanding 23,787 23,727 23,759 23,721
Common equivalent shares outstanding 1,347 692 1,266 655
------ ------ ------ ------
Shares used in computing primary earnings
per share 25,134 24,419 25,025 24,376
====== ====== ====== ======
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
June 30, 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 (continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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.
Goodwill totaled approximately $1,235,000 and $1,286,000 at June 30,
1996 and December 31, 1995, respectively, net of amortization of
approximately $748,000 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 $147,000 and $82,000 during the six-month and three-month
periods ended June 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.
(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.
8 (continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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.
Changes in operating assets and liabilities consist of (amounts in
thousands):
(Unaudited)
Six-month period ended June 30, 1996 1995
---- ----
Increase in trade receivables ............................. $(4,047) (3,055)
Increase in income taxes receivable ....................... (728) --
Increase in other receivables ............................. (27) (50)
Increase in prepaid and other
current assets .......................................... (728) (319)
Decrease in inventory ..................................... 39 20
Increase (decrease) in accounts payable ................... (547) 1,324
Increase (decrease) in accrued payroll
and payroll related obligations ......................... 302 (2,061)
Increase in accrued liabilities ........................... 274 152
Decrease in accrued income taxes .......................... (547) (30)
Increase in accrued interest .............................. 77 22
Increase (decrease) in deferred revenue.................... (282) 264
------- -------
$(6,214) (3,733)
======= =======
Income taxes paid totaled approximately $3,440,500 and $1,957,000
during the six-month periods ended June 30, 1996 and 1995,
respectively.
Interest paid totaled approximately $874,000 and $570,000 during the
six-month periods ended June 30, 1996 and 1995, respectively.
The Company recorded $85,000 during the six-month period ended June
30, 1996 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 (continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Notes Receivable
A summary of notes receivable follows:
(Unaudited)
June 30, December 31,
1996 1995
---- ----
(Amounts in thousands)
Note receivable from officer bearing interest at the rate paid by the
Company on its senior indebtedness, secured by GCI Class A common
stock, due on the 90th day after termination of employment or July
30, 1998, whichever is earlier. $ 500 500
Note receivable from officer bearing interest at 10%, secured by
Company stock; payable in equal annual installments of $36,513
through August 26, 2004. 224 224
Notes receivable from officers and others bearing interest at 7% to
10%, unsecured and secured by Company common stock, shares of other
common stock and equipment; due September 20, 1996
through August 26, 2004. 545 261
------ ------
Total notes receivable 1,269 985
Less current portion (429) (167)
Plus long-term accrued interest 107 86
------ -------
$ 947 904
====== ======
10 (continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Long-term Debt
Long-term debt is summarized as follows:
(Unaudited)
June 30, December 31,
1996 1995
---- ----
(Amounts in thousands)
Credit Agreement (a) $ 22,100 1,000
Undersea Fiber and Equipment
Loan Agreement (b) 7,595 8,271
Financing Obligation (c) 538 709
-------- ------
30,233 9,980
Less current maturities 23,890 1,689
-------- ------
Long-term debt, excluding
current maturities $ 6,343 8,291
======== ======
(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 June 30, 1997, the outstanding balance at June 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 (7.25% at June
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.
The interim facility provides a remaining $1.3 million
letter of credit required pursuant to the terms of the
Company's transponder purchase agreement with Hughes
Communications Galaxy, Inc. ("Hughes"). The letter of credit
will be drawn down by Hughes if the Company exercises an
option during 1996 to acquire additional transponder
capacity. $2.65 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
11 (continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 June 30, 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 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 June 30, 1996 maturities of long-term debt were as
follows (in thousands):
Year ending
June 30,
1997 $ 23,890
1998 1,776
1999 1,718
2000 1,869
2001 980
2002 and thereafter ---
--------
$ 30,233
========
12 (continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Income Taxes
Total income tax expense (benefit) for the six-month periods ended
June 30, 1996 and 1995 were allocated as follows (amounts in
thousands):
1996 1995
---- ----
(Unaudited)
Earnings from continuing operations $3,002 2,380
Stockholders' equity, for stock option
compensation expense for tax purposes
in (excess of) less than amounts recognized
for financial reporting purposes (85) 3
----- ------
$2,917 2,383
===== ======
Income tax expense for the six-month periods ended June 30, 1996 and 1995 consists of the following
(amounts in thousands):
1996 1995
---- ----
(Unaudited)
Current tax expense:
Federal taxes $1,673 1,440
State taxes 491 488
----- -----
2,164 1,928
----- -----
Deferred tax expense:
Federal taxes 641 368
State taxes 197 84
----- -----
838 452
----- -----
$3,002 2,380
===== =====
Total income tax expense differed from the "expected" income tax
expense determined by applying the statutory federal income tax rate
of 35% for the six-month periods ended June 30, 1996 and 1995 as
follows (amounts in thousands):
1996 1995
---- ----
(Unaudited)
"Expected" statutory tax expense $2,551 1,980
State income taxes, net of federal benefit 447 377
Income tax effect of goodwill
amortization, nondeductible
expenditures and other items, net 4 23
----- -----
$3,002 2,380
===== =====
13 (continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at June 30, 1996 and December 31, 1995 are presented
below (amounts in thousands).
June 30, December 31,
1996 1995
---- ----
(Unaudited)
Net current deferred tax assets:
Accounts receivable, principally due to allowance for
for doubtful accounts ..................................... $ 123 119
Compensated absences, accrued for financial reporting purposes 419 400
Workers compensation and self insurance health reserves,
principally due to accrual for financial reporting purposes 199 183
Other ........................................................ 163 133
------ ------
Total gross current deferred tax assets ............... 904 835
Less valuation allowance .............................. (91) (89)
------ ------
Net current deferred tax assets ....................... $ 813 746
====== ======
Net long-term deferred tax assets:
Deferred compensation expense for financial
reporting purposes in excess of amounts recognized
for tax purposes .......................................... $ 646 587
Sweepstakes expense for financial reporting purposes
in excess of amounts recognized for tax purposes .......... 225 215
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 ........................................................ 247 238
------ ------
Total gross long-term deferred tax assets ............. 1,340 1,269
Less valuation allowance .............................. (134) (136)
------ ------
Net long-term deferred tax assets ..................... 1,206 1,133
------ ------
Net long-term deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation .............................................. 8,879 7,997
Other ........................................................ 151 140
------ ------
Total gross long-term deferred tax liabilities ........ 9,030 8,137
------ ------
Net combined long-term deferred tax liabilities ....... $7,824 7,004
====== ======
The valuation allowance for deferred tax assets was $225,000 as of
June 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 (continued)
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
represented approximately 32 and 31 percent of the issued and
outstanding shares of the respective class.
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.
15 (continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Information for the periods ended June 30, 1996 and 1995 with respect
to the Plan follows:
Shares Option Price
------ ------------
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 June 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 (72,174) $0.75-$4.00
Forfeited (43,291) $0.75-$4.00
---------
Outstanding at June 30, 1996 2,233,734 $0.75-$4.50
=========
Available for grant at June 30, 1996 331,844
=========
Exercisable at June 30, 1996 1,010,834
=========
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, 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.
16 (continued)
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 $254,000 and
$208,000 for the quarters ended June 30, 1996 and 1995, respectively,
and $482,000 and $509,000 for the six-month periods ended June 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 $7.4 million and
$6.0 million for the quarters ended June 30, 1996 and 1995,
respectively, and approximately $13.8 million and $11.1 million for
the six-month periods ended June 30, 1996 and 1995, respectively. The
Company earned revenues pursuant to a contract with Sprint totaling
approximately $4.7 million and $3.6 million for the quarters ended
June 30, 1996 and 1995, respectively, and $9.0 million and $7.0
million for the six-month periods ended June 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 $1,570,000 and $1,111,000
for the quarters ended June 30, 1996 and 1995, respectively, and
$2,772,000 and $2,166,000 for the six-month periods ended June 30,
1996 and 1995, respectively.
17 (continued)
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 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
June 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 June 30, 1996) 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 six Alaska cable companies that offer cable
television service to more than 101,000 subscribers with facilities
passing 74 percent of households throughout the state of Alaska. The
Company intends to acquire Prime Cable of Alaska, Alaska Cablevision,
Inc. of Kirkland, Washington, McCaw/Rock Seward Cable System,
McCaw/Rock Homer Cable System, and Alaskan Cable companies, composed
of three corporations. Prime Cable 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. 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
18 (continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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
one or more organizations owned by the Company.
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 certain of the owners of the 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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED
JUNE 30, 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 $2.6 million from
December 31, 1995 to June 30, 1996. Sources of cash in 1996 included
the Company's operating activities which generated positive cash flow
of $2.9 million net of changes in the components of working capital,
and long-term borrowings of $21.1 million. Uses of cash during 1996
included repayment of $984,000 of long-term borrowings and capital
lease obligations, investment of $16.7 million in distribution and
support equipment and systems, payment of loan fees totaling
$439,000, expenditures associated with the cable company acquisitions
totaling approximately $240,000, payment of $7.8 million as a
transponder purchase deposit, and investment in other assets.
Net receivables increased $4.8 million from December 31, 1995 to June
30, 1996 resulting from: 1) increased MTS sales in 1996 as compared
to 1995, 2) amounts billed in late May and June 1996 to a customer
pursuant to a new network services contract, 3) increased amounts due
from other common carriers attributed to growth in their traffic
carried by the Company, 4) increased private line sales activity in
1996 as compared to 1995, and 5) recording refundable income taxes at
June 30, 1996.
Working capital (current assets less current liabilities) totaled
($13.1) million (deficit) and $5.1 million at June 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
June 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 June 30, 1996 totaled $9.0 million, a
$3.9 million increase from December 31, 1995. Working capital
generated by operations and proceeds from borrowings exceeded
expenditures for property and equipment and repayment of borrowings
and capital lease obligations resulting in the $3.9 million increase
at June 30, 1996 as compared to December 31, 1995.
Cash flow from operating activities, as depicted in the Consolidated
Statements of Cash Flows, decreased $4.2 million in 1995 as compared
1994. Cash flow generated from operating activities was reduced by
payment of current obligations. Cash flow from operating activities
increased $6.8 million during 1994 as compared to 1993 primarily as a
result of revenue growth and decreased distribution costs as a
percentage of revenues as further described below.
The Company's expenditures for property and equipment totaled $16.7
million and $3.3 million during the first two 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.
20 (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995
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
$9.1 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 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 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 $12.2 million through June 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.
21 (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995
The Company announced March 15, 1996 that it has signed letters of
intent to acquire six 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, McCaw/Rock Seward Cable
System, McCaw/Rock Homer Cable System, and Alaskan Cable companies,
composed of three corporations. Prime Cable 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. 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 certain of the owners of the 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, McCaw/Rock
Seward Cable System, McCaw/Rock Homer Cable System, and Alaskan Cable
Companies transactions. Definitive agreements for the MCI transaction
are expected to be executed in August 1996. The Company has applied
to the APUC to transfer the franchises of the cable companies. Once
all regulatory approvals are granted, and all remaining contingencies
are resolved, the cable companies will be consolidated into one or
more organizations 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 $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 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
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 services
during the first 6 months of 1996 was $0.183 as compared to $0.188
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.
Total revenues for the first six months of 1996 were $77.2 million, a
25.3 percent increase over total revenues for the same period of 1995
of $61.6 million. Total revenues for the second quarter of 1996 were
$39.2 million, a 22.9 percent increase over total revenues for
22 (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995
the same period of 1995 of $31.9 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 141 million and 112
million minutes in the second quarter of 1996 and 1995, respectively,
or 82 and 83 percent of total 1996 and 1995 minutes, respectively,
and billable minutes of traffic carried totaling 275 million and 218
million minutes in the first six months of 1996 and 1995,
respectively, or 83 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 22
million minutes in the second quarter of 1996 and 1995, respectively,
or 18 and 17 percent of total 1996 and total 1995 minutes,
respectively, and billable minutes of traffic carried totaling 60
million and 43 million minutes in the first six months of 1996 and
1995, respectively, or 17 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 $12 million or
31% and $10 million or 31% of total revenues in the second quarter of
1996 and 1995, respectively. OCC traffic accounted for $23 million or
29% and $18 million or 29% of total revenues in the first six 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 39 percent to $3.9
million in the second quarter of 1996 as compared to $2.8 million in
the same period of 1995, and increased 33 percent to $7.3 million in
the first six months of 1996 as compared to $5.5 million in the same
period of 1995.
(5) Increased revenues associated with network services revenues,
which increased 94 percent to $1.3 million in the second quarter of
1996 as compared to $650,000 in the same period of 1995, and
increased 47 percent to $2.7 million in the first six months of 1996
as compared to $1.8 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 will be provided during the transition period
expected to be 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 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 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
23 (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995
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 58 percent of transmission revenues during the second quarter of
1996 and 1995, respectively, and amounted to approximately 57 percent
and 60 percent of transmission revenues during the first six months
of 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 refundable amounts 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 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 22 percent during the second quarter of 1996
as compared to the same period of 1995 and increased 25 percent
during the fist six 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 32.6 percent in the second quarter of 1995 to 32.5
percent in the same period of 1996 and increased 22.9 percent from
$10.4 million in the second quarter of 1995 to $12.8 million in the
same period of 1996. Total operating costs and expenses as a
percentage of revenues remained constant at 33% in the second quarter
of 1996 as compared to the same period of 1995 and increased 25.1
percent from $20.4 million in the first six months of 1995 to $25.5
million in the same period of 1996. Both increases in aggregate costs
are primarily due to (1) increased personnel costs in sales, customer
service, credit, 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, Great Dividend 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 20% to $5.9 million in the
second quarter of 1996 from $4.9 million in the same period of 1995,
and increased approximately 24% to $11.7 million in the first six
months of 1996 from $9.5 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
24 (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995
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 47 percent to $473,000 during the second
quarter of 1996 as compared to $321,000 during the same period of
1995, and increased 36 percent to $804,000 during the fist six months
of 1996 as compared to $592,000 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 $1.5 million and $1.2 million in the
second quarter of 1996 and the same period of 1995, respectively, and
totaled $3.0 million and $2.4 million in the first six 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 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
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
25 (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995
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 for 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 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.
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.
26
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 June 30,
1996 - None
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL COMMUNICATION, INC.
August 7, 1996 By: /s/ Ronald A. Duncan
(Date) Ronald A. Duncan,
President and Director
(Principal Executive
Officer)
August 7, 1996 By: /s/ John M. Lowber
(Date) John M. Lowber,
Senior Vice President
and Chief Financial
Officer
(Principal Financial
Officer)
August 7, 1996 By: /s/ Alfred J. Walker
(Date) Alfred J. Walker,
Vice President and
Chief Accounting
Officer
(Principal Accounting
Officer)
28