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. INDEX GENERAL COMMUNICATION, INC. FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 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..........................................................26 Item 6. Exhibits and Reports on Form 8-K...........................................26 SIGNATURES..........................................................................................27 (i)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES Consolidated Balance Sheets
(Unaudited) March 31, December 31, ASSETS 1996 1995 ---------------------------------------------------------- -------- ------- (Amounts in thousands) 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.
(1) GENERAL COMMUNICATION, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Continued)
(Unaudited) March 31, December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 ------------------------------------------------ ------- ------- (Amounts in thousands) 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.
(2) GENERAL COMMUNICATION, INC. AND SUBSIDIARIES Consolidated Statements of Operations
(Unaudited) Three Months Ended March 31, 1996 1995 ------- ------- (Amounts in thousands except per share amounts) 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.
(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 ........................................ -- -- -- -- -- -- 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.
(4) GENERAL COMMUNICATION, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows
(Unaudited) Three Months Ended March 31, 1996 1995 ------ ------ (Amounts in thousands) 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.
(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 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) (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 March 31, 1996 1995 ---- ---- (Unaudited) 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 ====== ======
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) (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) (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. Changes in operating assets and liabilities consist of (amounts in thousands):
(Unaudited) Three-month period ended March 31, 1996 1995 ------ ------ (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) ======= ======
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) (3) Notes Receivable A summary of notes receivable follows:
(Unaudited) March 31, 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. 389 261 ------ ------ Total notes receivable 1,113 985 Less current portion (178) (167) Plus long-term accrued interest 97 86 ------ ------ $ 1,032 904 ====== ======
(10) (4) Long-term Debt Long-term debt is summarized as follows:
(Unaudited) March 31, December 31, 1996 1995 ---- ---- (Amounts in thousands) 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 ====== ======
(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) 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) 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 Total income tax expense (benefit) for the quarters ended March 31, 1996 and 1995 were allocated as follows (amounts in thousands):
1996 1995 ---- ---- (Unaudited) 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 ===== =====
Income tax expense for the quarters ended March 31, 1996 and 1995 consists of the following (amounts in thousands):
1996 1995 ---- ---- (Unaudited) 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 ===== =====
(13) 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):
1996 1995 ---- ---- (Unaudited) "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 ===== =====
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).
March 31, December 31, 1996 1995 ---- ---- (Unaudited) 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 ===== ======
(14) 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) 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. Information for the periods ended March 31, 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 --- --- 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 =========
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) 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) 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) 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) 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) 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) 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) 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) 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) 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) 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) 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)