FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-15279
GENERAL COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock Class B common stock
(Title of class) (Title of class)
Indicate by check mark whether the registrant (1) 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, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average bid and asked prices of such
stock as of the close of trading on February 28, 2000 was approximately
$215,690,967.
The number of shares outstanding of the registrant's common stock
as of February 29, 2000, was:
Class A common stock - 47,395,894 shares; and
Class B common stock - 3,909,014 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive Proxy Statement to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended,
in connection with the Annual Meeting of Stockholders of the registrant to be
held on June 8, 2000 are incorporated by reference into Part III of this report.
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GENERAL COMMUNICATION, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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Page
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Glossary................................................................................................................3
Cautionary statement regarding forward-looking statements...............................................................9
Part I.................................................................................................................11
Item 1. Business...................................................................................................11
General...........................................................................................................11
Financial information about industry segments.....................................................................11
Historical development of our business during the past fiscal year................................................11
Narrative description of our business.............................................................................15
Environmental regulations.........................................................................................32
Patents, trademarks, licenses, certificates of public convenience and necessity, and military franchises..........32
Regulation, franchise authorizations and tariffs..................................................................33
Financial information about our foreign and domestic operations and export sales..................................44
Seasonality.......................................................................................................44
Customer-sponsored research.......................................................................................44
Backlog of orders and inventory...................................................................................44
Geographic concentration and alaska economy.......................................................................44
Employees.........................................................................................................46
Other.............................................................................................................47
Item 2. Properties................................................................................................47
Item 3. Legal proceedings.........................................................................................49
Item 4. Submission of matters to a vote of security holders.......................................................49
Part II................................................................................................................50
Item 5. Market for the registrant's common equity and related stockholder matters..................................50
Item 6. Selected financial data....................................................................................51
Item 7. Management's discussion and analysis of financial condition and results of operations......................52
Item 7a. Quantitative and qualitative disclosures about market risk.................................................67
Item 8. Consolidated financial statements and supplementary data...................................................68
Item 9. Changes in and disagreements with accountants on accounting and financial disclosure.......................68
Part III...............................................................................................................68
Part IV...............................................................................................................101
Item 14. Exhibits, consolidated financial statement schedules, and reports on form 8-k............................101
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This Annual Report on Form 10-K is for the year ending December 31, 1999. This
Annual Report modifies and supersedes documents filed prior to this Annual
Report. The SEC allows us to "incorporate by reference" information that we file
with them, which means that we can disclose important information to you by
referring you directly to those documents. Information incorporated by reference
is considered to be part of this Annual Report. In addition, information that we
file with the SEC in the future will automatically update and supersede
information contained in this Annual Report.
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GLOSSARY
ACCESS CHARGES -- Expenses incurred by an IXC and paid to LECs for accessing the
local networks of the LECs in order to originate and terminate long-distance
calls and provide the customer connection for private line services.
ALASKA UNITED -- Alaska United Fiber System Partnership -- a Alaska partnership
wholly owned by The Company. Alaska United was organized to construct and
operate a new fiber optic cable connecting various locations in Alaska and the
lower 49 states and foreign countries through Seattle, Washington.
ATM -- Asynchronous Transfer Mode -- An international ISDN high-speed,
high-volume, packet switching transmission protocol standard. ATM uses short,
uniform, 53-byte cells to divide data into efficient, manageable packets for
very fast switching through a high-performance communications network. The
53-byte cells contain 5-byte destination address headers and 48 data bytes. ATM
is the first packet-switched technology designed from the ground up to support
integrated voice, video, and data communication applications. It is well suited
to high-speed WAN transmission bursts. ATM currently accommodates transmission
speeds from 64 kbps to 622 mbps. ATM may support gigabit speeds in the future.
BASIC SERVICE -- The basic service tier includes, at a minimum, all signals of
domestic television broadcast stations provided to any subscriber, any public,
educational, and governmental programming required by the franchise to be
carried on the basic tier, and any additional video programming service added to
the basic tier by the cable operator.
BOC -- BELL SYSTEM OPERATING COMPANY -- A LEC owned by any of the remaining five
Regional Bell Operating Companies, which are holding companies established
following the AT&T Divestiture Decree to serve as parent companies for the BOCs.
BACKBONE -- A centralized high-speed network that interconnects smaller,
independent networks.
BANDWIDTH -- The number of bits of information that can move through a
communications medium in a given amount of time.
BRI -- Basic Rate Interface -- An ISDN offering that allows two 64 kbps "B"
channels and one 16 kbps "D" channel to be carried over one typical single pair
of copper wires. This is the type of service that would be used to connect a
small branch or home office to a remote network. Through the use of Bonding
(bandwidth on Demand) the two 64 kbps channels can be combined to create more
bandwidth as it becomes necessary. For data services such as Internet access,
these channels can be bonded together to provide 2B+D transmission at a rate of
128 kbps. New technology increases the bandwidth of ISDN BRI connections to 230
kbps.
BROADBAND -- A high-capacity communications circuit/path, usually implying a
speed greater than 1.544 mbps.
CAP -- Competitive Access Provider -- A company that provides its customers with
an alternative to the LEC for local transport of private line and special access
telecommunications services.
CENTRAL OFFICES -- The switching centers or central switching facilities of the
LECs.
CLEC -- Competitive Local Exchange Carrier. -- A company that provides its
customers with an alternative to the ILEC for local transport of
telecommunications services, as allowed under the 1996 Telecom Act.
CO-CARRIER STATUS -- A regulatory scheme under which the incumbent LEC is
required to integrate new, competing providers of local exchange service, into
the systems of traffic exchange, inter-carrier compensation, and other
inter-carrier relationships that already exist among LECs in most jurisdictions.
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COLLOCATION -- The ability of a CAP to connect its network to the LEC's central
offices. Physical collocation occurs when a CAP places its network connection
equipment inside the LEC's central offices. Virtual collocation is an
alternative to physical collocation pursuant to which the LEC permits a CAP to
connect its network to the LEC's central offices on comparable terms, even
though the CAP's network connection equipment is not physically located inside
the central offices.
THE COMPANY -- GCI and its direct and indirect subsidiaries, also referred to as
"we," "us" and "our."
COMPRESSION / DECOMPRESSION -- A method of encoding/decoding signals that allows
transmission (or storage) of more information than the media would otherwise be
able to support. Both compression and decompression require processing capacity,
but with many products, the time is not noticeable.
CPS -- a Cable Programming Service -- (also known as CPST, Cable Programming
Service Tier). CPS includes any video programming provided over a cable system,
regardless of service tier, including installation or rental of equipment used
for the receipt of such video programming, other than (1) video programming
carried on the basic service tier, (2) video programming offered on a
pay-per-channel or pay-per-programming basis, or (3) a combination of multiple
channels of pay-per-channel or pay-per-programming basis so long as the combined
service consists of commonly-identified video programming and is not bundled
with any regulated tier of service.
DAMA -- Demand Assigned Multiple Access -- The Company's digital satellite earth
station technology that allow calls to be made between remote villages using
only one satellite hop thereby reducing satellite delay and capacity
requirements while improving quality.
DARK FIBER -- An inactive fiber-optic strand without electronics or optronics.
Dark fiber is not connected to transmitters, receivers and regenerators.
DBS -- Direct Broadcast Satellite -- Subscription television service obtained
from satellite transmissions using frequency bands that are internationally
allocated to the broadcast satellite services. Direct-to-home service such as
DBS has its origins in the large direct-to-home satellite antennas that were
first introduced in the 1970's for the reception of video programming
transmitted via satellite. Because these first-generation direct-to-home
satellites operated in the C-band frequencies at low power, direct-to-home
satellite antennas, or dishes, as they are also known, generally needed to be
seven to ten feet in diameter in order to receive the signals being transmitted.
More recently, licensees have been using the Ku and extended Ku-bands to provide
direct-to-home services enabling subscribers to use a receiving home satellite
dish less than one meter in diameter.
DS-3 -- A data communications circuit that is equivalent to 28 multiplexed T-1
channels capable of transmitting data at 44.736 mbps (sometimes called a T-3).
DEDICATED -- Telecommunications lines dedicated or reserved for use by
particular customers.
DIGITAL -- A method of storing, processing and transmitting information through
the use of distinct electronic or optical pulses that represent the binary
digits 0 and 1. Digital transmission and switching technologies employ a
sequence of these pulses to represent information as opposed to the continuously
variable analog signal. The precise digital numbers minimize distortion (such as
graininess or snow in the case of video transmission, or static or other
background distortion in the case of audio transmission).
DLC -- Digital Loop Carrier -- A digital transmission system designed for
subscriber loop plant. Multiplexes a plurality of circuits onto very few wires
or onto a single fiber pair.
EQUAL ACCESS -- Connection provided by a LEC permitting a customer to be
automatically connected to the IXC of the customer's choice when the customer
dials "1". Also refers to a generic concept under which the BOCs must provide
access services to AT&T's competitors that are equivalent to those provided to
AT&T.
FCC -- Federal Communications Commission -- A federal regulatory body empowered
to establish and enforce rules and regulations governing public utility
companies and others, such as the Company.
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FRAME RELAY -- A wideband (64 kilobits per second to 1.544 mbps) packet-based
data interface standard that transmits bursts of data over WANs. Frame-relay
packets vary in length from 7 to 1024 bytes. Data oriented, it is generally not
used for voice or video.
FTC -- Federal Trade Commission -- A federal regulatory body empowered to
establish and enforce rules and regulations governing companies involved in
trade and commerce.
GCC -- GCI Communication Corp., an Alaska corporation and a wholly owned
subsidiary of Holdings.
GCI -- General Communication, Inc., an Alaska corporation and the Registrant.
GCI, Inc. -- a wholly owned subsidiary of GCI, an Alaska corporation and issuer
of $180 million of publicly traded bonds.
HOLDINGS -- a wholly owned subsidiary of GCI, Inc., an Alaska corporation and
party to The Company's Senior Holdings Loan.
HSD -- Home Satellite Dish - see DBS.
INBOUND "800" or "888" Service -- A service that assesses long-distance
telephone charges to the called party.
ILEC -- Incumbent Local Exchange Carrier -- with respect to an area, the LEC
that -- (A) on the date of enactment of the Telecommunications Act of 1996,
provided telephone exchange service in such area; and (B)(i) on such date of
enactment, was deemed to be a member of the exchange carrier association
pursuant to section 69.601(b) of the FCC's regulations (47 C.F.R. 69.601(b)); or
(ii) is a person or entity that, on or after such date of enactment, became a
successor or assign of a member described in clause (i).
INTEREXCHANGE -- Communication between two different LATAs.
ISDN -- Integrated Services Digital Network -- A set of standards for
transmission of simultaneous voice, data and video information over fewer
channels than would otherwise be needed, through the use of out-of-band
signalling. The most common ISDN system provides one data and two voice circuits
over a traditional copper wire pair, but can represent as many as 30 channels.
Broadband ISDN extends the ISDN capabilities to services in the Gigabit range.
(See BRI and PRI)
ISP -- Internet Service Provider -- a company providing retail and/or wholesale
Internet services.
INTERNET -- A global collection of interconnected computer networks which use
TCP/IP, a common communications protocol.
IXC -- Interexchange Carrier -- A long-distance carrier providing services
between local exchanges.
LAN -- Local Area Network -- The interconnection of computers for the purpose of
sharing files, programs and various devices such as printers and high-speed
modems. LANs may include dedicated computers or file servers that provide a
centralized source of shared files and programs.
LATA -- Local Access And Transport Area -- The approximately 200 geographic
areas defined pursuant to the AT&T Divestiture Decree. The BOCs are generally
prohibited from providing long-distance service between the LATA in which they
provide local exchange services, and any other LATA.
LEC -- Local Exchange Carrier -- A company providing local telephone services.
Each BOC is a LEC.
LINE COSTS -- Primarily includes the sum of access charges and transport
charges.
LMDS -- Local Multipoint Distribution System -- LMDS uses microwave signals
(millimeterwave signals) in the 28 GHz spectrum to transmit voice, video, and
data signals within small cells 3-10 miles in diame-
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ter. LMDS allows license holders to control up to 1.3 GHz of wireless spectrum
in the 28 GHz Ka-band. The 1.3 GHz can be used to carry digital data at speeds
in excess of one gigabit per second. LMDS uses a specific band in the microwave
spectrum, known as millimeter waves or the 28 GHz "Ka-band." More tangibly, if
LMDS were used on a point-to-point basis the beam would be about as wide as a
pencil lead (about a millimeter) and would have a frequency of approximately 28
billion cycles per second. The extremely high frequency used and the need for
point to multipoint transmissions limits the distance that a receiver can be
from a transmitter. This means that LMDS will be a "cellular" technology, based
on multiple, contiguous, or overlapping cells. LMDS is expected to provide
customers with multichannel video programming, telephony, video communications,
and two-way data services. Incumbent LECs and cable companies may not obtain the
in-region 1150 MHz license for three years. Within 10 years, licenses will be
required to provide 'substantial service' in their service regions.
LOCAL EXCHANGE -- A geographic area generally determined by a PUC, in which
calls generally are transmitted without toll charges to the calling or called
party.
LOCAL NUMBER PORTABILITY -- The ability of an end user to change Local Exchange
Carriers while retaining the same telephone number.
LOWER 48 STATES or LOWER 48 -- refers to the 48 contiguous states south of or
below Alaska.
LOWER 49 STATES OR LOWER 49 -- refers to Hawaii and the 48 contiguous states
south of or below Alaska.
MAN -- Metropolitan Area Network -- LANs interconnected within roughly a 50-mile
radius. MANs typically use fiber optic cable to connect various wire LANs.
Transmission speeds may vary from 2 to 100 Mbps.
MDU -- Multiple Dwelling Unit -- MDUs include multiple-family buildings, such as
apartment and condominium complexes.
MMDS -- Multichannel Multipoint Distribution Service - also known as wireless
cable. The FCC established the Multipoint Distribution Service (MDS) in 1972.
Originally the Commission thought MDS would be used primarily to transmit
business data. However, the service became increasingly popular in transmitting
entertainment programming. Unlike conventional broadcast stations whose
transmissions are received universally, MDS programming is designed to reach
only a subscriber based audience. In 1983 the Commission reassigned eight
channels from the Instructional Television Fixed Service (ITFS) to MDS. These
eight channels make up the MMDS. Frequently, MDS and MMDS channels are used in
combination with ITFS channels to provide video entertainment programming to
subscribers.
NARROWBAND -- A voice grade low-capacity communications circuit/path. It usually
implies a speed of 56 kilobits per second or less.
NETWORK SWITCHING CENTER -- A location where installed switching equipment
routes long-distance calls and records information with respect to calls such as
the length of the call and the telephone numbers of the calling and called
parties.
NETWORK SYSTEMS INTEGRATION -- Involves the creation of turnkey
telecommunications networks and systems including: (i) route and site selection;
(ii) rights of way and legal authorizations and/or acquisition; (iii) design and
engineering of the system, including technology and vendor assessment and
selection, determining fiber optic circuit capacity, and establishing
reliability/flexibility standards; and (iv) project and construction management,
including contract negotiations, purchasing and logistics, installation as well
as testing.
NPT -- a New Product Tier -- a cable programming service tier offered to
subscribers at prices set by the cable operator.
OCC -- Other Common Carrier -- A long-distance carrier other than the Company.
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PCS -- Personal Communication Services -- PCS encompasses a range of advanced
wireless mobile technologies and services. It promises to permit communications
to anyone, anyplace and anytime while on the move. The Cellular
Telecommunications Industry Association (CTIA) defines PCS as a "wide range of
wireless mobile technologies, chiefly cellular, paging, cordless, voice,
personal communications networks, mobile data, wireless PBX, specialized mobile
radio, and satellite-based systems." The FCC defines PCS as a "family of mobile
or portable radio communications services that encompasses mobile and ancillary
fixed communications services to individuals and businesses and can be
integrated with a variety of competing networks."
PBX -- Private Branch Exchange -- A customer premise communication switch used
to connect customer telephones (and related equipment) to LEC central office
lines (trunks), and to switch internal calls within the customer's telephone
system. Modern PBXs offer numerous software-controlled features such as call
forwarding and call pickup. A PBX uses technology similar to that used by a
central office switch (on a smaller scale). (The acronym PBX originally stood
for "Plug Board Exchange.")
POP -- Point of Presence -- The physical access location interface between a LEC
and a IXC network. The point to which the telephone company terminates a
subscriber's circuit for long-distance service or leased line communications.
PRI -- Primary Rate Interface -- An ISDN circuit transmitting at T1 (DS-1) speed
(equivalent to 24 voice-grade channels). One of the channels ("D") is used for
signaling, leaving 23 ("B") channels for data and voice communication.
PRIVATE LINE -- Uses dedicated circuits to connect customer's equipment at both
ends of the line. Does not provide any switching capability (unless supported by
customer premise equipment). Usually includes two local loops and an IXC
circuit.
PRIVATE NETWORK -- A communications network with restricted (controlled) access
usually made up of private lines (with some PBX switching).
PUBLIC SWITCHED NETWORK -- That portion of a LEC's network available to all
users generally on a shared basis (i.e., not dedicated to a particular user).
Traffic along the public switched network is generally switched at the LEC's
central offices.
RBOC -- Regional Bell Operating Company -- Any of the remaining five regional
Bell holding companies which the AT&T Divestiture Decree established to serve as
parent companies for the BOCs.
RCA -- REGULATORY COMMISSION OF ALASKA -- A state regulatory body empowered to
establish and enforce rules and regulations governing public utility companies
and others, such as The Company, within the state of Alaska (sometimes referred
to as Public Service Commissions, or PSCs, or Public Utility Commissions, or
PUCs). Previously known as the Alaska Public Utilities Commission (APUC).
RECIPROCAL COMPENSATION -- The same compensation of a new CLEC for termination
of a local call by the BOC on its network, as the new competitor pays the BOC
for termination of local calls on the BOC network.
SCHOOLACCESS(TM) -- The Company's Internet and related services offering to
schools in Alaska. The federal mandate through the 1996 Telecom Act to provide
universal service resulted in schools across Alaska qualifying for varying
levels of discounts to support the provision of Internet services. The Universal
Service Administrative Company through its Schools and Libraries Division
administers this federal program.
SDN -- Software Defined Network -- A switched long-distance service for very
large users with multiple locations. Instead of putting together their own
network, large users can get special usage rates for calls carried on regular
switched long-distance lines.
SECURITIES REFORM ACT - The Private Securities Litigation Reform Act of 1995.
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SENIOR HOLDINGS LOAN -- Holding's $150,000,000 and $50,000,000 credit
facilities. You should see note 5(b) to the accompanying Notes to Consolidated
Financial Statements included in Part II of this Report for more information.
SETTLEMENT RATES -- The rates paid to foreign carriers by United States
international carriers to terminate outbound (from the United States) switched
traffic and by foreign carriers to United States international carriers to
terminate inbound (to the United States) switched traffic.
SLC -- Subscriber Line Charge -- A charge for the telephone line that connects a
local telephone company to the subscriber's telephone system or medium.
SMATV -- Satellite Master Antenna Television -- (also known as "private cable
systems") are multichannel video programming distribution systems that serve
residential, multiple-dwelling units ("MDUs"), and various other buildings and
complexes. A SMATV system typically offers the same type of programming as a
cable system, and the operation of a SMATV system largely resembles that of a
cable system -- a satellite dish receives the programming signals, equipment
processes the signals, and wires distribute the programming to individual
dwelling units. The primary difference between the two is that a SMATV system
typically is an unfranchised, stand-alone system that serves a single building
or complex, or a small number of buildings or complexes in relatively close
proximity to each other.
SONET -- Synchronous Optical Network -- A 1984 standard for optical fiber
transmission on the public network. 52 mbps to 13.22 Gigabits per second,
effective for ISDN services including ATM.
TCP/IP -- Transmission Control Protocol/Internet Protocol -- A suite of network
protocols that allows computers with different architectures and operating
system software to communicate with other computers on the Internet.
T-1 -- A data communications circuit capable of transmitting data at 1.5 mbps.
TARIFF -- The schedule of rates and regulations set by communications common
carriers and filed with the appropriate federal and state regulatory agencies;
the published official list of charges, terms and conditions governing provision
of a specific communications service or facility, which functions in lieu of a
contract between the subscriber or user and the supplier or carrier.
TOKEN RING -- A local area network technology used to interconnect personal
computers, file servers, printers, and other devices. Token Ring LANs typically
operate at either 4 mbps or 16 mbps.
TRANSPORT CHARGES -- Expenses paid to facilities-based carriers for transmission
between or within LATAs.
TRS SERVICES -- Telecommunications Relay Services -- Enables telephone
conversations between people with and without hearing or speech disabilities.
TRS relies on communications assistants ("CA") to relay the content of calls
between users of text telephones ("TTYs") and users of traditional handsets
(voice users). For example, a TTY user may telephone a voice user by calling a
TRS provider where a CA will place the call to the voice user and relay the
conversation by transcribing spoken content for the TTY user and reading text
aloud for the voice user.
WAN -- Wide Area Network - A remote computer communications system. WANs allow
file sharing among geographically distributed workgroups (typically at higher
cost and slower speed than LANs or MANs). WANs typically use common carriers'
circuits and networks. WANs may serve as a customized communication backbone
that interconnects all of an organization's local networks with communications
trunks that are designed to be appropriate for anticipated communication rates
and volumes between nodes.
WORLD WIDE WEB or WEB -- A collection of computer systems supporting a
communications protocol that permits multi-media presentation of information
over the Internet.
1984 CABLE ACT -- The Cable Communications Policy Act of 1984.
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1992 CABLE ACT -- The Cable Television Consumer Protection and Competition Act
of 1992.
1996 TELECOM ACT -- The Telecommunications Act of 1996 - The 1996 Telecom Act
was signed into law February 8, 1996. Under its provisions, BOCs were allowed to
immediately begin manufacturing, research and development; GTE Corp. could begin
providing interexchange services through its telephone companies nationwide;
laws in 27 states that foreclosed competition were knocked down; co-carrier
status for CLECs was ratified; and the physical collocation of competitors'
facilities in LECs central offices was allowed.
The legislation breaks down the old barriers that prevented three groups of
companies, the LECs, including the BOCs, the long-distance carriers, and the
cable TV operators, from competing head-to-head with each other. The Act
requires LECs to let new competitors into their business. It also requires the
LECs to open up their networks to ensure that new market entrants have a fair
chance of competing. The bulk of the legislation is devoted to establishing the
terms under which the LECs, and more specifically the BOCs, must open up their
networks.
The 1996 Telecom Act substantially changed the competitive and regulatory
environment for telecommunications providers by significantly amending the
Communications Act including certain of the rate regulation provisions
previously imposed by the Cable Television Consumer Protection and Competition
Act of 1992 (the "1992 Cable Act"). The 1996 Telecom Act eliminated rate
regulation of the cable programming service tier in 1999. Further, the
regulatory environment will continue to change pending, among other things, the
outcome of legal challenges and FCC rulemaking and enforcement activity in
respect of the 1992 Cable Act and the completion of a significant number of FCC
rulemakings under the 1996 Telecom Act.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
You should carefully review the information contained in this Annual Report, but
should particularly consider any risk factors that we set forth in this Annual
Report and in other reports or documents that we file from time to time with the
SEC. In this Annual Report, in addition to historical information, we state our
beliefs of future events and of our future operating results, financial position
and cash flows. In some cases, you can identify those so-called "forward-looking
statements" by words such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," or "continue"
or the negative of those words and other comparable words. You should be aware
that those statements are only our predictions and are subject to risks and
uncertainties. Actual events or results may differ materially. In evaluating
those statements, you should specifically consider various factors, including
those outlined below. Those factors may cause our actual results to differ
materially from any of our forward-looking statements. For these statements, we
claim the protection of the safe harbor for forward-looking statements provided
by the Securities Reform Act.
- Material adverse changes in the economic conditions in the markets we
serve;
- The efficacy of the rules and regulations to be adopted by the FCC and
state public regulatory agencies to implement the provisions of the 1996
Telecom Act; the outcome of litigation relative thereto; and the impact of
regulatory changes relating to access reform;
- Our responses to competitive products, services and pricing, including
pricing pressures, technological developments, alternative routing
developments, and the ability to offer combined service packages that
include local, cable and Internet services; the extent and pace at which
different competitive environments develop for each segment of our
business; the extent and duration for which competitors from each segment
of the telecommunications industry are able to offer combined or full
service packages prior to our being able to do so; the degree to which we
experience material competitive impacts to our traditional service
offerings prior to achieving adequate local service entry; and competitor
responses to our products and services and overall market acceptance of
such products and services;
- The outcome of our negotiations with ILECs and state regulatory
arbitrations and approvals with respect to interconnection agreements; and
our ability to purchase unbundled network
9
elements or wholesale services from ILECs at a price sufficient to permit
the profitable offering of local exchange service at competitive rates;
- Success and market acceptance for new initiatives, many of which are
untested; the level and timing of the growth and profitability of new
initiatives, particularly local access services, Internet (consumer and
business) services and wireless services; start-up costs associated with
entering new markets, including advertising and promotional efforts;
successful deployment of new systems and applications to support new
initiatives; and local conditions and obstacles;
- Uncertainties inherent in new business strategies, new product launches
and development plans, including local access services, Internet services,
wireless services, digital video services, cable modem services, and
transmission services;
- Rapid technological changes;
- Development and financing of telecommunication, local access, wireless,
Internet and cable networks and services;
- Future financial performance, including the availability, terms and
deployment of capital; the impact of regulatory and competitive
developments on capital outlays, and the ability to achieve cost savings
and realize productivity improvements;
- Availability of qualified personnel;
- Changes in, or failure, or inability, to comply with, government
regulations, including, without limitation, regulations of the FCC, the
RCA, and adverse outcomes from regulatory proceedings;
- The remaining cost of our year 2000 compliance efforts;
- Uncertainties in federal military spending levels and military base
closures in markets in which we operate;
- Other risks detailed from time to time in our periodic reports filed with
the Securities and Exchange Commission.
These forward-looking statements (and such risks, uncertainties and other
factors) are made only as of the date of this report and we expressly disclaim
any obligation or undertaking to disseminate any updates or revisions to any
forward-looking statement contained in this document to reflect any change in
our expectations with regard to those statements or any other change in events,
conditions or circumstances on which any such statement is based. Readers are
cautioned not to put undue reliance on such forward-looking statements.
10
PART I
Item 1. BUSINESS.
General
In this Annual Report, "we," "us" and "our" refer to General Communication, Inc.
and its direct and indirect subsidiaries.
GCI was incorporated in 1979 under the laws of the State of Alaska and has its
principal executive offices at 2550 Denali Street, Suite 1000, Anchorage, AK
99503 (telephone number 907-265-5600). Internet users can access information
about GCI and its services at http://www.GCI.com/ and
http://www.alaskaunited.com/. The Company hosts Internet services at
http://www.GCI.net/.
GCI is primarily a holding company and together with its direct and indirect
subsidiaries, is a diversified telecommunications provider with a leading
position in facilities-based long-distance service in the State of Alaska and is
Alaska's leading cable television and Internet services provider.
We are the first significant provider in Alaska of an integrated package of
long-distance, local and wireless telecommunications services, cable television
services and Internet services and are well positioned to take advantage of
growth opportunities in the communications, data and entertainment markets.
Financial information about industry segments
We have four reportable segments: long-distance services, cable services, local
access services and Internet services.
We offer a full range of common carrier long-distance and other
telecommunication services to business, government, other telecommunications
companies and consumer customers, through our networks of fiber optic cables,
digital microwave, and fixed and transportable satellite earth stations.
Individually insignificant business units including network solutions, cellular
resale and product sales are included in the "other" industry segment. None of
these business units have ever met the quantitative thresholds for determining
reportable segments.
We provide cable television services to residential, commercial and government
users in the State of Alaska. Our cable systems serve 26 communities and areas
in Alaska, including the state's three largest urban areas, Anchorage, Fairbanks
and Juneau. Cable plant upgrades have enabled us to complement existing services
by offering digital cable television services in Anchorage and Fairbanks,
enhanced analog services in Juneau, and retail cable modem service (through our
Internet segment) in Anchorage, Fairbanks and Juneau. We plan to expand our
product offerings as plant upgrades in other communities in Alaska are
completed.
We have provided facilities based competitive local exchange services in
Anchorage since 1997, and plan to provide similar competitive local exchange
services in Alaska's other major population centers. Access to other major
population centers depends on RCA approvals and negotiation and implementation
of interconnection agreements with ILECs.
We have offered wholesale and retail Internet services since 1998. Deployment of
the new undersea fiber optic cable described below has allowed us to offer
enhanced services with high-bandwidth requirements.
You should see Note 10 to our Notes to Consolidated Financial Statements
included in Part II of this Report for information about our operations by
industry segment.
Historical development of our business during the past fiscal year
Alaska United Project. We undertook a major construction project (referred to as
Alaska United) with the goal of significantly increasing our communications
bandwidth to and from locations in Alaska and
11
the lower 49 states and through interconnection agreements with other carriers,
to foreign locations. After a preliminary route survey was completed and initial
cost components determined, we commissioned a detailed sea floor survey that was
completed in 1996. The results of this survey pinpointed the exact route that
the Alaska United fiber would take. We entered into a contract with Tyco
Submarine Systems, Ltd. ("TSS"), one of the world's leading submarine cable
vendors that has installed more than 150,000 miles of undersea cable. TSS was
engaged to design, engineer, manufacture, and install the undersea cable. The
cable was laid during the period from August to December 1998. Testing occurred
after that and services commenced in late January 1999 for our Anchorage to
Fairbanks segment and early February 1999 for the complete system. With
construction of Alaska United complete, we transitioned traffic from leased
satellite, terrestrial and microwave facilities to Alaska United facilities
during the first quarter of 1999.
The Alaska United project provides a high capacity fiber optic link between
points in Alaska and the lower 48 states through Seattle, Washington. Alaska
United lands at our cable terminal stations in Whittier, Valdez and Juneau,
Alaska. From Whittier, the fiber follows the Alaska railroad, highway, and
over-land rights-of-ways to Anchorage. Between Whittier and Valdez, we
constructed a second undersea fiber optic cable. The cable connects in Valdez
with a fiber constructed by Kanas Telecom, Inc. ("Kanas"). We exchanged Dark
Fiber with Kanas to obtain fiber facilities from Valdez to Fairbanks.
Kanas' largest customer filed notice of termination of its contract with Kanas.
Since that time, the ownership structure of Kanas has been reorganized, with MCI
WorldCom, Inc. becoming the principal owner and we now provide operational
support. We continue to use the Kanas fiber facilities to carry our traffic to
and from Fairbanks. We are unable to determine the ultimate resolution of these
issues at this time. However we have alternative network facilities available to
reroute any affected traffic.
In Juneau and Seattle, Alaska United connects through terminal stations to our
existing network. The cable terminal stations house the power feed equipment
necessary to power the undersea fiber optic cable system and the SONET equipment
that transports data across the terrestrial network and the undersea fiber
network.
Our Alaska United system is 2,331 miles long (1,995 miles undersea and 336 over
land) and has a total design capacity of 10 billion bits per second (22 times
what was previously available). It can route traffic in different directions in
the event of equipment failures, and users have route diversity to achieve
multiple fiber paths for back-up purposes when paired with our existing capacity
on the North Pacific Cable. It currently delivers a minimum of 32,256
simultaneous clear channel voice or data circuits at transmission speeds of 2.5
billion bits per second. As demand increases, capacity can be quadrupled to
support a minimum of 129,024 simultaneous clear channel voice or data circuits
at speeds of 10 billion bits per second.
Financing for the Alaska United undersea fiber project included $75 million
through a separate bank credit agreement dated January 27, 1998 and $50 million
from funds obtained through the 1997 issuance of senior notes. You should see
note 5 to the accompanying Notes to Consolidated Financial Statements included
in Part II of this Report for more information.
Satellite Transponders. We entered into a purchase and lease-purchase option
agreement in August 1995 for the acquisition of satellite transponders to meet
our long-term satellite capacity requirements. The launch of the satellite in
August 1998 failed. We did not assume launch risk and the launch was rescheduled
for the first quarter of 2000.
The replacement Galaxy XR satellite was successfully launched January 24, 2000
from Arianespace Space Center in Kourou, French Guiana, and was made available
to us March 5, 2000. We continue to transition our satellite communications
traffic to Galaxy XR, and upon final acceptance, intend to finalize a long-term
lease purchase transaction. We will continue to lease transponder capacity until
all telecommunications traffic is successfully transitioned to the new
satellite. The satellite increases our satellite capacity and provides
long-distance voice, fax, Internet and data traffic capabilities primarily for
our customers in rural Alaska. We will use six C- and one Ku-band transponders
on Galaxy XR once it achieves in-orbit check-
12
out. The seven transponders represent a capital lease investment of
approximately $48 million. Each transponder is capable of carrying a minimum of
1,800 simultaneous voice or data calls.
The Ku-band transponder will be used to carry high-speed Internet traffic to
more than half of Alaska schools, as well as voice and data services to remote
fishing, mining and logging operations. Voice/fax, Internet, telemedicine and
distance education applications will be delivered over both C-band and Ku-band.
Local Access Services. We began offering local exchange services in Anchorage in
September 1997 and provided service to approximately 45,100, 28,300 and 3,300
lines at December 31, 1999, 1998 and 1997, respectively.
Our local access services segment face significant competition from Alaska
Communications Systems, Inc.'s subsidiaries ("ACS") and AT&T Alascom, Inc.
The sale of Anchorage Telephone Utility ("ATU") to ACS, our primary ILEC
competitor, was completed in May 1999. Subsequent to the sale and as a result of
a settlement agreement between us and ACS, our relations have normalized
somewhat with greater cooperation at operational levels resulting in some
improvement in order processing and repair activity interfaces and procedures.
Electronic access to certain of the ILEC's systems, while a scheduled term of
the settlement agreement, has yet to be realized as software development
allowing such access is still under development by ACS. Efforts to complete the
development of software interfaces continued throughout the first quarter of
2000. In the interim ACS has agreed to process our residential and small
business orders in a timelier manner, significantly reducing order delivery
intervals for:
- new and additional lines,
- move orders,
- orders for feature additions or changes, and
- switch orders that move ACS subscribers to our service.
On March 4, 1999, an Alaska Superior Court Judge determined that the APUC (now
RCA) erred in reaching its prior decision to deny our request to provide full
local telephone service in Fairbanks and Juneau, Alaska. This service would be
provided in competition against PTI (now a subsidiary of ACS), the existing
monopoly provider. Among other things, the Court instructed the APUC to
correctly assign the burden of proof to PTI rather than us, and to decide on our
specific requests to provide service in Fairbanks and Juneau based on criteria
established in the 1996 Telecom Act. The Court remanded the case back to the
APUC for proceedings leading to their ruling. On July 1, 1999, the APUC ruled
that the rural exemptions from local competition in Juneau, Fairbanks and North
Pole would not be continued, which allowed us to negotiate for unbundled
elements for the provision of competitive local service in these markets. The
ILEC moved for reconsideration of this decision, and on October 11, 1999 the new
RCA issued an order also allowing the rural exemptions in the Fairbanks and
Juneau markets to expire. The ILEC has appealed these decisions. See Part I,
Item 1. Business, Regulation, franchise authorizations and tariffs for more
information. We believe this decision is important to bring about the benefits
of competition to other communities in Alaska. We are currently in arbitration
with the ILEC for interconnection and unbundled network elements for the
provisioning of competitive local assess services in these markets. We expect
the RCA to approve an interconnection agreement for unbundled elements by
September 2000.
In early 2001 we anticipate we will be competing with ACS subsidiaries in
Fairbanks, Juneau, Fort Wainwright and Eielson Air Force Base (military bases
near Fairbanks), and in North Pole. You should see Part I, Item 1. Business,
Historical development of the Company's business during the past fiscal year -
Local Access Services for more information. We also compete against AT&T in the
Anchorage service area. AT&T offers local exchange service only to residential
customers through total service resale. We expect further competitors in the
Anchorage, Fairbanks and Juneau marketplaces, as Alaska Fiber Star and DSLnet
have filed bonafide requests for interconnection with ACS. The Company expects
competition from these latter entrants in the business customer telephony
access, Internet access, DSL and private line markets. We believe our
long-standing presence in Alaska and the strength of our brand (as well as
ACS's) will make competitive entry difficult for these new entrants.
13
Cable Services Expansion. We completed $7.2 and $11.5 million upgrades to our
cable infrastructure in 1999 and 1998, respectively. These expenditures
significantly increased the capacity and reliability of our systems, making
possible two-way applications such as cable modems (as further described below)
and digital cable television programming, and provided capacity for additional
program offerings.
Digital cable television services were offered in Anchorage in 1998, offering
enhanced picture and audio quality, over 100 channels of programs, 40 channels
of digital music, and many channels of premium and pay-per-view products.
Digital cable service allows us to use digital compression to substantially
increase the capacity of our cable communications systems, improve picture
quality and provide CD quality audio. Digital cable subscriber counts increased
from 1,200 at December 31, 1998 to 5,800 at December 31, 1999.
We introduced cable modem services in 1998, providing high-speed, dedicated
access to the Internet through our coaxial cable network. Cable modem
subscribers increased from 200 at December 31, 1998 to 5,700 at December 31,
1999. We believe our cable modem penetration rate is among the highest in the
nation. Approximately 80 percent of our cable customers are able to receive
cable modem service.
Internet Services. Our statewide SchoolAccess(TM) services (Internet access and
related products and services for Alaska schools) commenced January 1998, with
recent upgrades of 47 sites doubling access speeds to 128 kbps. Schools
utilizing the SchoolAccess(TM) product are increasingly integrating the Internet
into their educational programs. We provided SchoolAccess(TM) and other Internet
services to approximately 257 schools in Alaska at the end of the fourth quarter
of 1999. Our Internet access service is now used by more than half of the
students in the state of Alaska.
We began a limited rollout of our dial-up Internet service in April 1998, which
allowed us to test our new state-of-the-art Internet platform. We began our
broad based offering in October 1998 and initiated major promotions in February
1999. Services were initially offered to residents of Anchorage, Fairbanks,
Kodiak, Juneau, Kenai, Soldotna, Palmer and Wasilla, Alaska. Other Alaska
communities were added over the next several months and continue to be added.
Our GCI.net service supports 56 kbps dial-up connections with support for both
V.90 and Kflex technologies, and supports cable modem services currently
available at speeds up to 512 kbps. We believe our service has one of the best
first-try connect rates and the fastest speeds available of any provider in
Alaska. We plan to introduce additional service upgrades and promotional
offerings in the future. Our dial-up Internet subscribers increased from less
than 7,000 at December 31, 1998 to 44,900 at December 31, 1999.
Rural Equal Access. In 1996 we constructed 56 new earth stations in Western and
Northern Alaska. As construction of those DAMA stations were completed, we
requested Equal Access from the LECs serving those communities. Under Federal
Communications Commission rules, substantially all LECs have three years to
comply with an equal access request. The three-year time period expired for many
of those locations. LECs started implementing the equal access conversion
process in late 1998 and continued to convert locations though March 1999. As a
result, approximately 34 rural DAMA-served communities were converted during
this period to equal access enabling our customers to access our network without
dialing extra digits.
PCS and LMDS licenses. We began developing plans for PCS wireless communications
service deployment in 1995 and subsequently conducted a technical trial of our
candidate technology. We have invested approximately $2.2 million in our PCS
license at December 31, 1999. PCS licensees are required to offer service to at
least one-third of their market population within five years or risk losing
their licenses. Service must be extended to two-thirds of the population within
10 years. We invested approximately $275,000 in our LMDS license in 1998. LMDS
licensees are required to provide 'substantial service' in their service regions
within 10 years. We are in the design/build phase of our wireless implementation
plan that we believe will allow retention of our PCS and LMDS licenses pursuant
to their terms.
At the end of the license period, a renewal application must be filed. We
believe renewal will generally be granted on a routine basis upon showing of
compliance with FCC regulations and continuing service to the public. Licenses
may be revoked and license renewal applications may be denied for cause.
14
Narrative description of our business
General
We operate a broadband communications network that permits the delivery of a
seamless integrated bundle of communications, entertainment and information
services. We offer a wide array of consumer communications and entertainment
services--including local telephone, long-distance and wireless communications,
cable television, consulting services, network and desktop computing outsourced
services, and dial-up and cable modem Internet access services at a wide range
of speeds--all under the GCI brand name.
Our management believes that the size and growth potential of the voice, video
and data market, the increasing deregulation of telecommunication services, and
the increased convergence of telephony, wireless, and cable services offer us
considerable opportunities to integrate our telecommunication, Internet and
cable services and expand into communications markets both within and,
longer-term, outside of Alaska. We expect the rate of growth in industry-wide
telecommunication revenues to continue to increase as the historical dominance
of monopoly providers is challenged as a result of deregulation. Considerable
deregulation has already taken place in the United States as a result of the
1996 Telecom Act with the barriers to competition between long-distance, local
exchange and cable providers being lowered. We believe our acquisition of cable
television systems and our development of local exchange service, Internet
services, and wireless services leave us well positioned to take advantage of
deregulated markets.
We are one of Alaska's leading providers of telecommunication, Internet and
cable television services and maintain a strong competitive position. There is
active competition in the sale of substantially all products and services we
offer.
Alaska Voice, Video and Data Markets
For calendar year 1999, we estimate that the aggregate telecommunications, cable
television, and Internet markets in Alaska generated revenues of approximately
$1 billion. Of this amount, approximately $485 million was attributable to
interstate and intrastate long-distance service, $365 million was attributable
to local exchange services, $75 million was attributed to cable television, and
$75 million was attributable to all other services, including wireless and
Internet services.
The Alaskan voice, video and data markets are unique within the United States.
Alaska is physically distant from the rest of the United States and is
characterized by large geographical size and relatively small, dense population
clusters (with the exception of population centers such as Anchorage, Fairbanks
and Juneau). It lacks a well-developed terrestrial transportation
infrastructure, and the majority of Alaska's communities are accessible only by
air or water. As a result, Alaska's telecommunication networks are different
from those found in the lower 49 states.
Alaska today relies extensively on satellite-based long-distance transmission
for intrastate calling between remote communities where investment in a
terrestrial network would be uneconomic or impractical. Also, given the
remoteness of Alaska's communities and lack, in many cases, of major civic
institutions such as hospitals, libraries and universities, Alaskans are
dependent on telecommunications to access the resources and information of large
metropolitan areas in the rest of the U.S. and elsewhere. In addition to
satellite-based communications, the telecommunications infrastructure in Alaska
includes fiber optic cables between Anchorage, Fairbanks, and Juneau,
traditional copper wire, and digital microwave radio on the Kenai Peninsula and
other locations. For interstate and international communication, Alaska is
connected to the Lower 48 states by three fiber optic cables.
Fiber optics is the preferred method of carrying Internet, voice, video and data
communications, eliminating the delay commonly found in satellite connections.
Widespread use of high capacity fiber optic facilities will allow continued
expansion of business, government and educational infrastructure in Alaska.
Long-Distance Services
Industry. With the Communications Act of 1934, telecommunications was
established as a regulated industry. The main objective of this act was to
create an affordable and universal telephone service for the American people. As
a result, AT&T was granted exclusive rights to serve the telecommunications
industry. The next several decades brought significant improvements in
technology. New advances
15
created opportunities for providers of lower-cost services to enter the market,
and in order to facilitate the entry of these new competitors, regulatory
policies were changed. The government stepped into the market on January 1,
1984, and broke-up AT&T's near monopoly. The government's objective was to
provide for greater competition in the telecommunications industry, as well as
make room for the creation of more diversified products.
The FCC set price caps in 1989 to regulate the prices AT&T could charge for
their services. Yet, by 1991 the market had become so much more competitive with
regards to both long-distance and local calls that the FCC decided to deregulate
most of AT&T's services.
The United States Congress passed the 1996 Telecom Act that permitted the local
phone companies, the long-distance companies, and the cable service firms to
penetrate each other's market. This has provided the telecommunications industry
with new capabilities resulting in an industry that is more competitive than
ever before. To reduce the burden and facilitate competitive advantages,
companies are merging and acquiring other telecommunication and cable television
firms.
The communications market is currently reported to be a $270 billion market in
the U.S. and is expected to grow at over 10% annually for the next five years.
Backbone infrastructure services, inter-city and local wholesale transport
services, and local access services reportedly are among the most rapidly
growing components of the current telecommunications sector with forecast growth
at approximately 18% annually for the next five years. Analysts estimate that
the addressable market for these products and services in the United States to
be $30 billion in 1999, expanding to $80 billion by 2005.
Advancements within the next few years are expected to combine services directed
toward voice communication with other activities such as data sharing, on-screen
collaboration, faxing, Internet access, and game playing, among many other
things.
We believe that federal and state regulators will continue to impact the
telecommunications industry in 2000. Consummation of mergers between
long-distance companies, local access services companies, and cable television
companies is expected continue to blur the distinction between product lines and
competitors. Synergies developed through mergers and acquisitions and obtaining
end-to-end connectivity with customers is expected to drive profitability and
success in penetrating new markets. Industry analysts believe that successful
competitors will be the companies that can minimize regulatory battles and begin
to offer a full suite of integrated services to their customers, using a network
that is largely under their control.
Growth in data is expected to be a key component of continuing industry revenue
growth. We believe that the data telecommunications business will eventually
rival and perhaps become larger than the traditional voice telephony market.
ISPs have become major customers and many long-distance companies have acquired
ISPs and web-hosting companies.
General. We supply a full range of common carrier long-distance and other
telecommunication products and services. We operate a state-of-the-art,
competitive telecommunications network employing the latest digital transmission
technology based upon fiber optic and digital microwave facilities within and
between Anchorage, Fairbanks and Juneau, including a self-constructed and
financed digital fiber optic cable and additional owned capacity on another
undersea fiber optic cable, both linking Alaska to the networks of other
carriers in the lower 49 states, and the use of satellite transmission to remote
areas of Alaska (and for certain inter-state traffic as well). Virtually all
switched services are computer controlled, digitally switched, and
interconnected by a packet switched signaling network.
We provide interstate and intrastate long-distance services throughout Alaska
using our own facilities or facilities leased from other carriers. We also
provide (or join in providing with other carriers) telecommunication services to
and from Alaska, Hawaii, the lower 48 states, and many foreign nations and
territories.
We offer cellular services by reselling other cellular providers' services. We
expect to offer wireless services over our own facilities, and have purchased in
FCC auctions PCS and LMDS wireless broadband licenses covering markets in
Alaska. We are required by the FCC to provide adequate broadband PCS
16
service to at least one-third of the population in our licensed areas within
five years of being licensed and two-thirds of the population in our licensed
areas within ten years of being licensed. We are required by the FCC to provide
`substantial service' in our service region within 10 years to retain our LMDS
license. The licenses are granted for ten-year terms from the original date of
issuance and may be renewed by meeting the FCC's renewal criteria and upon
compliance with the FCC's renewal procedures.
Products. Our long-distance services industry segment is engaged in the
transmission of interstate and intrastate-switched MTS and private line and
private network communication service between the major communities in Alaska,
and the remaining United States and foreign countries. Our message toll services
include intrastate, interstate and international direct dial, toll-free 800, 888
and 877 services, 900 services, GCI calling card, debit card, operator and
enhanced conference calling, frame relay, SDN, ISDN technology based services,
as well as termination of northbound toll service for MCI WorldCom, Sprint and
several large resellers who do not have facilities of their own in Alaska. We
also provide origination of southbound calling card and toll-free 800, 888 and
877 toll services for MCI WorldCom and Sprint. Regulated telephone relay
services for the deaf, hard-of-hearing and speech impaired are provided through
our operator service center in Wasilla, Alaska. We offer our message services to
commercial, residential, and government subscribers. Subscribers may generally
cancel service at any time. Toll related services account for approximately
57.2%, 64.0%, and 69.4% of our 1999, 1998, and 1997 revenues, respectively.
Private line and private network services utilize voice and data transmission
circuits, dedicated to particular subscribers, which link a device in one
location to another in a different location.
We have positioned ourselves as a price and customer service leader in the
Alaska telecommunication market. Rates charged for our long-distance services
are designed to be equal to or below those for comparable services provided by
our competitors.
In addition to providing communication services, we also design, sell, service
and operate, on behalf of certain customers, dedicated communication and
computer networking equipment and provide field/depot, third party, technical
support, telecommunications consulting and outsourcing services through our
Network Solutions business. We also supply integrated voice and data
communication systems incorporating interstate and intrastate digital private
lines, point-to-point and multipoint private network and small earth station
services. Our Network Solutions sales and services revenue totaled $11.3, $12.1
and $10.3 million in the years ended December 31, 1999, 1998 and 1997,
respectively, or approximately 4.0%, 4.9% and 4.6% of total revenues,
respectively. Presently, there are 18 competing companies in Alaska that
actively sell and maintain data and voice communication systems. Twelve are
located in Anchorage, four in Fairbanks and two in Juneau.
Our ability to integrate telecommunications networks and data communication
equipment has allowed us to maintain our market position on the basis of "value
added" support services rather than price competition. These services are
blended with other transport products into unique customer solutions, including
managed services and outsourcing.
Facilities. Our telecommunication facilities include a fiber optic cable
connecting Anchorage, Whittier, Valdez, Fairbanks and Juneau, Alaska and
Seattle, Washington, which was placed into service in February 1999. We also own
a portion of an additional undersea fiber optic cable. The fiber optic cables
allow us to carry our Anchorage, Eagle River, Wasilla, Palmer, Kenai Peninsula,
Valdez, Whittier, Glenallen, Fairbanks, and Juneau, Alaska traffic to and from
the contiguous lower 48 states over terrestrial circuits, eliminating the
one-quarter second delay associated with satellite circuits. The Company's
preferred routing for this traffic is via undersea fiber optic cable, which
makes available satellite capacity to carry the Company's rural interstate and
intrastate traffic.
Other facilities include major earth stations at Eagle River, Fairbanks, Juneau,
Prudhoe Bay, Kodiak, Sitka, Ketchikan, Unalaska, Barrow, Bethel, Nome,
Dillingham, Kotzebue, King Salmon, Adak, and Cordova, all in Alaska, and at
Issaquah, Washington, serving the communities in their vicinity. The Eagle River
and Fairbanks earth stations are linked by digital microwave facilities to
distribution centers in Anchorage and Fairbanks, respectively. We expect to
complete construction of a fiber optic cable system from the Anchorage
distribution center to the Eagle River central office in second quarter of 2000.
The Issaquah earth station is connected with the Seattle distribution center by
means of diversely routed fiber optic cable transmission systems, each having
the capability to restore the other in the event of failure.
17
The Juneau earth station and distribution centers are colocated. We also have
digital microwave facilities serving the Kenai Peninsula communities.
We use our DAMA facilities to serve 56 additional locations throughout Alaska.
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. We obtained the necessary RCA 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. In addition, over 80 very small
aperture terminal ("VSAT") facilities provide dedicated Internet access to rural
public schools throughout Alaska.
Our Anchorage, Fairbanks, and Juneau distribution centers contain electronic
switches to route calls to and from local exchange companies and, in Seattle, to
obtain access to MCI WorldCom, Sprint and other facilities to distribute our
southbound traffic to the remaining 49 states and international destinations. In
Anchorage, a Lucent digital host switch is connected with fiber to six remote
facilities that are co-located in the ILEC's switching centers, to provide both
local and long distance service. An extensive local fiber network in Anchorage
supports both cable television service and telephony services. The Anchorage,
Fairbanks, and Juneau facilities also include digital access cross-connect
systems, frame relay data switches, Internet platforms, and in Anchorage, a
co-location facility for interconnecting and hosting equipment for other
carriers. We also maintain an operator service center in Wasilla, Alaska.
As described previously, we completed construction and placed into service in
February 1999 a fiber optic cable connecting Anchorage, Whittier, Valdez,
Fairbanks and Juneau, Alaska and Seattle Washington. We also own a portion of an
additional undersea fiber optic cable. The fiber optic cables allow us to carry
our Anchorage, Eagle River, Wasilla, Palmer, Kenai Peninsula, Valdez, Whittier,
Glenallen, Fairbanks, and Juneau area traffic to and from the contiguous lower
48 states over terrestrial circuits, eliminating the one-quarter second delay
associated with satellite circuits. Our preferred routing for this traffic is
via undersea fiber optic cable, which makes available satellite capacity to
carry our rural interstate and intrastate traffic.
We employ satellite transmission for rural intrastate traffic and certain other
major routes and use advanced digital transmission technology throughout our
systems. Pursuant to a purchase and lease-purchase option agreement entered into
in August 1995 we lease C-band transponders on Hughes Communications Galaxy,
Inc. (now PanAmSat Corporation ("PanAmSat")) Galaxy IX satellite and have agreed
to acquire satellite transponders on PanAmSat Galaxy XR satellite to meet our
long-term satellite capacity requirements. The Galaxy XR satellite was
successfully launched in January 2000, with services being transitioned from
leased transponders on the Galaxy IX (C-band) and SBS-5 (Ku-band) satellites to
the new satellite during the first quarter of 2000.
We employ advanced transmission technologies to carry as many voice circuits as
possible through a satellite transponder without sacrificing voice quality.
Other technologies such as terrestrial microwave systems, metallic cable, and
fiber optics tend to be favored more for point-to-point applications where the
volume of traffic is substantial. With a sparse population spread over a wide
geographic area, neither terrestrial microwave nor fiber optic transmission
technology is considered to be economically feasible in rural Alaska in the
foreseeable future.
Customers. We had approximately 90,800, 82,000 and 89,000 active Alaska
subscribers to our message telephone service at December 31, 1999, 1998 and
1997, respectively. Approximately 12,500, 12,100 and 11,500 of these were
business and government users at December 31, 1999, 1998 and 1997, respectively,
and the remainders were residential customers. Reductions in our residential
customer counts were primarily attributed to new competitive pressures in
Anchorage and other markets we serve. MTS revenues (excluding operator services
and private line revenues) averaged approximately $10.5 million per month during
1999.
Equal access conversions have been completed in all communities served with
owned facilities. We estimate that we carry over 45% of business and residential
traffic as a statewide average for both originating interstate and intrastate
MTS traffic.
18
<TABLE>
A summary of our switched MTS traffic (in minutes) follows:
<CAPTION>
Interstate Minutes
---------------------------------------
Combined
Interstate
Inter- and Inter- Intra-
South- North- Calling national national state Total
For Quarter ended bound (1) bound Card Minutes Minutes Minutes Minutes
- ----------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
March 31, 1997 83,284 56,588 8,110 1,741 149,723 32,020 181,743
June 30, 1997 85,933 58,420 7,189 1,795 153,337 34,405 187,742
September 30, 1997 93,510 60,390 5,530 1,842 161,272 34,755 196,027
December 31, 1997 87,657 61,992 5,157 1,703 156,509 31,962 188,471
-----------------------------------------------------------------------------------------
Total 1997 350,384 237,390 25,986 7,081 620,841 133,142 753,983
=========================================================================================
March 31, 1998 86,899 64,116 4,810 1,889 157,714 33,082 190,796
June 30, 1998 93,817 67,296 4,353 1,910 167,376 34,890 202,266
September 30, 1998 103,423 61,690 4,227 1,940 171,280 35,748 207,028
December 31, 1998 90,792 61,514 4,197 1,706 158,209 33,598 191,807
-----------------------------------------------------------------------------------------
Total 1998 374,931 254,616 17,587 7,445 654,579 137,318 791,897
=========================================================================================
March 31, 1999 94,623 57,039 3,694 1,578 156,934 34,950 191,884
June 30, 1999 128,623 52,954 3,383 1,649 186,609 37,241 223,850
September 30, 1999 146,473 56,577 3,273 1,680 208,003 38,078 246,081
December 31, 1999 137,077 64,823 3,204 1,609 206,713 36,055 242,768
-----------------------------------------------------------------------------------------
Total 1999 506,796 231,393 13,554 6,516 758,259 146,324 904,583
=========================================================================================
<FN>
- -------------------
1 The 1999 Interstate Southbound minutes include traffic carried from Washington
to Oregon by us on behalf of an OCC.
</FN>
</TABLE>
All minutes data were taken from our internal billing statistics reports.
In 1993, we entered into a significant business relationship with MCI (now MCI
WorldCom) that includes the following agreements.
- We agreed to terminate all Alaska-bound MCI long-distance traffic and MCI
agreed to terminate all of our long-distance traffic terminating in the
lower 49 states excluding Washington, Oregon and Hawaii;
- MCI allowed us to license certain service marks for use in Alaska;
- MCI, in connection with providing to us credit enhancement to permit us to
purchase a portion of an undersea cable linking Seward, Alaska, with
Pacific City, Oregon, leased from us all of the capacity we owned on the
undersea fiber optic cable and we leased such capacity back from MCI;
- MCI purchased certain of our service marks; and
- The parties agreed to share some communications network resources and
various marketing, engineering and operating resources. We also carry
MCI's 800, 888 and 877 traffic originating in Alaska and terminating in
the lower 49 states and handle traffic for MCI's calling card customers
when they are in Alaska. Concurrently with these agreements, MCI purchased
approximately 31% (18.7% as of December 31, 1999) of GCI's Common Stock
and presently controls nominations to two seats on the Board. In
conjunction with the Cable Acquisition Transactions, MCI purchased an
additional two million shares at a premium to the then current market
price for $13 million or $6.50 per share.
19
Revenues attributed to MCI WorldCom in 1999, and MCI in 1998 and 1997 totaled
$40.4 million, $36.0 million and $33.5 million, or 14.5%, 14.6% and 15.0% of
total revenues, respectively. The contract was amended in March 1996 extending
its term three years to March 31, 2001. The amendment also reduced the rate to
be charged by us for certain MCI WorldCom traffic for the period April 1, 1996
through July 1, 1999 and thereafter. The amendment expanded the scope of the
contract to include all of the affiliates of the MCI Worldcom merged companies.
In 1993 we entered into a long-term agreement with Sprint, pursuant to which we
agreed to terminate all Alaska-bound Sprint long-distance traffic and Sprint
agreed to handle substantially all of our international traffic. Services
provided pursuant to the contract with Sprint resulted in revenues in 1999, 1998
and 1997 of approximately $19.8 million, $25.2 million and $23.0 million, or
approximately 7.1%, 10.2% and 10.3% of total revenues, respectively.
The contract was amended in April 1999 extending its term three years to April
2002. The amendment also reduced the rate in dollars we charge for certain
Sprint traffic for the period March 1999 through January 2001 and thereafter.
With the contracts and amendment described above, we are assured that MCI
WorldCom and Sprint, our two largest customers, will continue to make use of our
services during the extended term. Both MCI WorldCom and Sprint are major
customers of our long-distance services industry segment. Loss of one or both of
these customers would have a significant detrimental effect on our revenues and
contribution. There are no other individual customers, the loss of which would
have a material impact on our revenues or gross profit.
Other common carriers traffic routed to us for termination in Alaska is largely
dependent on traffic routed to MCI WorldCom and Sprint by their customers.
Pricing pressures, new program offerings and market consolidation continue to
evolve in the markets served by MCI WorldCom and Sprint. If, as a result, their
traffic is reduced, or if their competitors' costs to terminate or originate
traffic in Alaska are reduced, our traffic will also likely be reduced, and we
may have to reduce our pricing to respond to competitive pressures. We are
unable to predict the effect of such changes on our business, however given the
materiality of other common carriers revenues to us; a significant reduction in
traffic or pricing could have a material adverse effect on our financial
position, results of operations and liquidity.
We provided private line and private network communication products and
services, including SchoolAccess(TM) private line facilities, to approximately
1,673 commercial and government accounts in 1999. These products and services
generated approximately 7.9%, 7.9% and 7.1% of total revenues during the years
ended December 31, 1999, 1998 and 1997, respectively.
Although we have several agreements to facilitate the origination and
termination of international toll traffic, we have neither foreign operations
nor export sales (see Part I, Item 1. Business, Foreign and Domestic Operations
and Export Sales).
Competition. The long-distance industry is intensely competitive, rapidly
evolving and subject to constant technological change. Competition is based upon
price and pricing plans, the types of services offered, customer service,
billing services, performance, perceived quality, reliability and availability.
Certain of our competitors are substantially larger than us and have greater
financial, technical and marketing resources than we have. Although we believe
we have the human and technical resources to pursue our strategy and compete
effectively in this competitive environment, our success will depend upon our
ability to profitably provide high quality, high value services at prices
generally competitive with, or lower than, those charged by our competitors.
In the long-distance market, we compete against AT&T Alascom, ACS, the Matanuska
Telephone Cooperative, certain smaller rural LEC affiliates, and may in the
future compete against new market entrants. AT&T Alascom, our principal
competitor in long-distance services, has substantially greater resources and
access to capital than we have. This competitor's interstate rates are
integrated with those of AT&T Corp. and are regulated in part by the FCC. While
we initially competed based upon offering substantial discounts, those discounts
have been eroded in recent years due to lowering of prices by AT&T Alascom and
entry of other competitors into the long-distance markets we serve. Under the
terms of AT&T's
20
acquisition of Alascom, AT&T Alascom rates and services must mirror those
offered by AT&T, so changes in AT&T prices indirectly affect our rates and
services. AT&T's and AT&T Alascom's interstate prices are regulated under a
price cap plan whereby their rate of return is not regulated or restricted.
Price increases by AT&T and AT&T Alascom generally improve our ability to raise
prices while price decreases pressure us to follow. We believe we have, so far,
successfully adjusted our pricing and marketing strategies to respond to AT&T
and other competitors' pricing practices. However, if competitors significantly
lower their rates, we may be forced to reduce our rates, which could have a
material adverse effect on us.
As allowed under the 1996 Telecom Act, ATU (now ACS) and other LECs entered the
interstate and international long-distance market, and pursuant to RCA
authorization, entered the intrastate long-distance market in 1997. ACS and
other LECs generally resell other carriers' services in the provision of their
interstate and intrastate long-distance services.
Another carrier completed construction of fiber optic facilities connecting
points in Alaska to the lower 48 states in 1999. The additional fiber system
provides direct competition to services we provide on our owned fiber optic
facilities. We believe we can successfully compete with products and services
offered by the competing carrier.
In the wireless communications services market, we expect our PCS business to
compete against the cellular subsidiaries of AT&T and ACS and resellers of those
services in Anchorage and other markets. The wireless communications industry
continues to experience significant consolidation. AT&T has acquired wireless
companies and negotiated roaming arrangements that give it a national presence.
The mergers or joint ventures of Bell Atlantic/GTE/Vodafone AirTouch, MCI
WorldCom/Sprint and SBC/Ameritech will create large, well-capitalized
competitors with substantial financial, technical, marketing and other
resources. These competitors may be able to offer nationwide services and plans
more quickly and more economically than we can, and obtain roaming rates that
are more favorable than those that we obtain.
Our long-distance services sales efforts are primarily directed toward
increasing the number of subscribers we serve, selling bundled services, and
generating incremental revenues through product and feature upsale
opportunities. We sell our long-distance communications services through
telemarketing, direct mail advertising, door-to-door selling, and local media
advertising.
Cable Services
Industry. The programmed video services industry includes traditional broadcast
television, cable television, wireless cable, and DBS systems. Technology
convergence may also soon allow programmed video via the internet but reluctance
to change the current delivery structure will likely limit the availability of
programming in the near term. In the mean time, cable television providers have
added non-broadcast programming, utilized improved technology to increase
channel capacity and expanded service markets to include more densely populated
areas and those communities in which off-air reception is not problematic.
Broadcast television stations including network affiliates and independent
stations generally serve the urban centers. One or more local television
stations may serve smaller communities. Rural communities may not receive local
broadcasting or have cable systems but may receive direct broadcast programming
via a satellite dish.
In Alaska, cable television was introduced in the 1970s to provide television
signals to communities with few or no available off-air television signals and
to communities with poor reception or other reception difficulties caused by
terrain interference. Since that time, as on the national level, the cable
television providers in Alaska have added non-broadcast programming.
Advancements in technology, facility upgrades and network expansions to enable
migration to digital programming are expected to have a significant impact on
cable services in the future. We expect that changing federal, state and local
regulations, intense competition, and uncertain technologies and standards will
challenge the industry.
Acquisitions and mergers are shaping the cable industry in a technological
convergence similar to what is happening in the telecommunications industry.
AT&T completed its $48 billion takeover of cable television provider
Tele-Communications Inc. in February 1999, gaining the last mile connection to
21
homeowners with fiber and coaxial cable over which it is expected to sell online
access and Internet phone service. AT&T is also negotiating with other cable
companies for access to their lines.
Convergence of TV and the Internet isn't expected to become a widespread
phenomenon until after 2000. Analysts expect that as many as 5 million cable
subscribers may sign up in 1999 for high-speed cable modems that will give them
access to the Internet. We are currently offering such high-speed cable modem
access in Anchorage, Fairbanks, and Juneau.
We expect basic cable to be impacted by two forces: possible reimposition of
rate regulations, and additional competition from wireless cable providers.
After averaging 3.4% growth for the last five years, industry analysts project
that cable subscriber growth in 1999 may slow to 1.8%, or 66.6 million homes.
Industry analysts predict that cable providers may see a 12% hike in ad
revenues, to $6.9 billion.
Direct-broadcast satellite operators increased their subscriptions by
approximately 39% in 1998, to 8.9 million, according to industry analysts. The
industry is expected to add 2.6 million subscribers in 1999. With digital
transmissions and compression, cable operators are better able to offer a
variety and quality of channels to rival DBS, with pay-per-view choices that can
approximate video-on-demand.
Digital video is projected to grow significantly over the next three to four
years as cable network upgrade efforts are completed and the cost of digital
set-top technology decreases. Margins related to digital programming are
expected to climb due to the ability to reuse programming at low or no
incremental cost.
Analysts believe data services will be an additional opportunity for cable
providers in the next three to five years and that cable will be the most widely
available, most cost efficient way to access the Internet at very high speeds
and with high video quality. The incremental opportunity for cable from data may
rival that of digital video according to industry analysts. Additional
opportunities are expected in voice-over cable applications that will allow
cable providers to offer local telephone service to cable subscribers.
The market for programmed video services in Alaska includes traditional
broadcast television, cable television, wireless cable, and DBS systems.
Broadcast television stations including network affiliates and independent
stations serve the urban centers in Alaska. Seven, four and two broadcast
stations serve Anchorage, Fairbanks and Juneau, respectively. In addition,
several smaller communities such as Bethel are served by one local television
station that is typically a PBS affiliate. Other rural communities without cable
systems receive a single state sponsored channel of television by a satellite
dish and a low power transmitter.
General. As a result of acquisitions completed effective October 31, 1996, we
have become Alaska's leading cable television service provider to residential,
commercial and government users in the State of Alaska. Our cable television
systems serve 26 communities and areas in Alaska, including the state's three
largest urban areas, Anchorage, Fairbanks, and Juneau. Our statewide cable
systems consist of approximately 1,806 miles of installed cable plant having 330
to 550 MHz of channel capacity.
We completed a $12.5 million upgrade in 1998 that significantly increased the
capacity and reliability of our Anchorage and Juneau cable systems. We deployed
more than 200 miles of fiber optic cable in Anchorage and increased the carrying
capacity of 900 miles of cable television line from 450 MHz to 550 MHz.
The result of these upgrades is an increase in channel capacity and system
reliability, facilitating the delivery of additional video programming and new
services such as enhanced video, high-speed Internet access and telephony, and
the capability to support two-way applications such as cable modems and digital
cable. We completed field-testing and deployed our digital converter cable
service in Anchorage in 1998. Digital compression has enabled us to increase the
channel capacity of our Anchorage cable communications systems to more than 100
channels, provide digital audio channels, as well as improve picture and sound
quality.
Products. Programming services offered to our cable television systems
subscribers differ by system (all information as of December 31, 1999).
22
Anchorage, Bethel, Kenai and Soldotna systems. Each system offers a basic
service. In addition, Anchorage and Bethel offer a CPS. A NPT is only offered in
the Anchorage cable system. The Anchorage system, which is located in the urban
center for Alaska, is fully addressable, with all optional services scrambled,
aside from the broadcast basic. Kenai, Soldotna, and Bethel had fewer channels,
less service options and less an urban orientation, and use traps for program
control. As a result, these smaller systems do not have access to pay-per-view
services.
The composition and rates of the levels of service vary between the systems. The
Anchorage cable system offers a basic service that includes 19 channels. The
Anchorage cable system offers a CPS that includes 32 channels at an additional
cost. Subscribers, for an additional cost, receive the six-channel NPT service,
which includes TNT, CNN, Discovery, MSNBC, Outdoor Life and the Sci-/Fi Channel.
The Bethel cable system offers a basic service of 24 channels and a CPS tier of
11 channels for an additional cost per month. Basic service for the
Kenai/Soldotna cable system consisted of 37 channels. Pay TV services are
available either individually or as part of a value package. Commercial
subscribers such as hospitals, hotels and motels are charged negotiated monthly
service fees. Apartment and other multi-unit dwelling complexes receive basic
services at a negotiated bulk rate.
Fairbanks, Juneau, Ketchikan and Sitka systems. The programming services we
currently offer to subscribers are structured so that each cable system offers a
basic service and a CPS. Each of the cable systems has different basic service
packages at different rates. Fairbanks, the second largest city in Alaska, has a
fully addressable system and offers a 12 channel basic and 35 channel CPS tier.
Three channels of pay-per-view are available to basic and CPS subscribers.
Fairbanks, North Pole, Fort Wainwright, and Eielson Air Force Base are all
served by the Fairbanks headend and have the same lineup. Fort Greely, a remote
military post, is a stand-alone system, which is fully addressable. Fort Greely
has 8 basic channels, a 21 channel CPS tier, and 1 pay-per-view channel
available to all subscribers. The reverse path in the Fairbanks market was
activated during the third quarter of 1999 and we now offer cable modem Internet
access. We expect to offer digital service in Fairbanks during the second
quarter of 2000.
The Juneau cable system offers a 13-channel basic service package and a Tier 1
that includes basic service plus an additional 4 channels. The system also
offers a CPS Tier 2 that consists of basic service plus Tier 1 service and
additional 43 channels. The Ketchikan system offers a 12 channel basic service
and a preferred level of service that offers an additional 38 channels. The
Sitka system offers a 12 channel basic service. Preferred service includes basic
service plus 38 additional channels. The Ketchikan, Sitka, Petersburg and Sitka
systems all launched a digital music service called "DMX." This service offers
30 channels of commercial free music and is offered for $7.95 per month.
The Juneau system was upgraded in 1998. We expect to upgrade the Ketchikan
system in 2000. The Juneau upgrade consisted of extending the bandwidth to
550MHz, activating the reverse and introducing advanced analog set top boxes.
The new set tops allowed Juneau subscribers access to impulse pay per view
including highly secured 24 hour adult products, 30 channels of CD quality music
and a new on screen navigator.
During May of 1999, the Juneau system launched high-speed Internet access
through cable modems. The system ended 1999 with 1,100 high-speed cable modems
installed.
Kodiak, Valdez, Cordova, Petersburg, Wrangell, Kotzebue and Nome systems. These
systems offer up to 30 channels of the most popular basic cable channels, as
well as the major broadcast networks, packaged into three levels of service. In
Nome, Kotzebue and Cordova, basic service consists of three channels, one of
which is a PBS channel. PBS service is also included with the 11 channels of
basic service in Kodiak, 7 in Valdez and 11 each in Wrangell and Petersburg. In
addition, Wrangell and Petersburg have matching line-ups with 39 additional
channels in the preferred level of service, and an additional 5 channels of
premium service. Nome offers a 33 channel CPS Tier 1 and 5 channels of premium
service. Kotzebue closely matches Nome with the exception of one more channel in
the CPS Tier 1 and one less channel in the premium offering. In addition to
basic service, Cordova offers a 20 channel CPS Tier 1, 10 Channel CPS Tier 2
with 3 premium channels available.
We completed system upgrades in Kodiak and Valdez in 1998. In Kodiak, 6 channels
were added to basic service. The CPS tier added 8 new channels including Disney,
which was formally a premium service. The
23
NPT tier was reduced to 11 channels with 2 new networks. Premium services were
repackaged for better value. The total available channels are now 47. Valdez
added 5 channels to basic service and expanded the CPS tier with 6 channels
including Disney. Although remaining at 9 channels, 5 new services were added to
the NPT tier as traditional services were migrated into the other tiers. Nome
and Kotzebue systems upgrades were completed in March 1999. The upgrade will
allow the launch of additional programming and the shift of Disney from premium
to tier service.
Seward system. We upgraded the Seward cable system in 1997. Total channels were
increased to 49, packaged in two levels of service. Basic service was expanded
from 3 to 8 channels. CPS had 30 channels (including basic service) and was
expanded to 44. All of the channels, with the exception of local origination
programming and a single translator channel licensed to the City of Seward, were
received via satellite. In addition there were five channels of premium pay
services. The system is fully addressable. The system provides 12 channels to
300 outlets in a State of Alaska correction facility through a separate headend.
Homer system. We upgraded the Homer cable system in 1997. Total channels were
increased to 50, packaged into two levels of service. Basic service was expanded
from 8 channels to 12. CPS had 36 channels (including basic service channels)
and was expanded to 45 channels. All of the channels, with the exception of four
local translator channels and local origination programming, are received via
satellite. In addition, five channels of premium pay services are offered. The
system is fully addressable.
Facilities. Our cable television businesses are located in Anchorage, Eagle
River, Chugiak, Peters Creek, Kenai, Ridgeway, Soldotna, Bethel, Fort
Richardson, Elmendorf Air Force Base, Fairbanks, Fort Wainwright, North Pole,
Fort Greely, Eielson Air Force Base, Juneau, Sitka, Ketchikan, Petersburg,
Wrangell, Cordova, Homer, Valdez, Kodiak, Kodiak Coast Guard Air Station,
Kotzebue, and Nome, Alaska. Our facilities include cable plant and head-end
distribution equipment. Certain of our head-end distribution centers are
colocated with customer service and administrative offices.
Customers. Our cable systems passed approximately 174,000, 171,000, and 167,500
homes at December 31, 1999, 1998 and 1997, respectively, and served
approximately 116,700, 111,900 and 108,000 subscribers at December 31, 1999,
1998 and 1997, respectively. Revenues derived from cable television services
totaled $61.1 million, 57.6 million, and 55.2 million in 1999, 1998 and 1997,
respectively.
Competition. A number of other cable operators provide cable service in Alaska.
All of these companies are relatively small, with the largest having fewer than
6,500 subscribers. Cable television systems face competition from alternative
methods of receiving and distributing television signals and from other sources
of news, information and entertainment such as off-air television broadcast
programming, newspapers, movie theaters, live sporting events, interactive
computer services, Internet services and home video products, including
videotape cassette and video disks. The extent to which a cable television
system is competitive depends, in part, upon the cable system's ability to
provide quality programming and other services at competitive prices.
Our Fairbanks system faces significant competition from alternative cable
television providers. Upgrades to our Fairbanks facilities, expanded product
offerings and increased marketing efforts are expected to increase market
penetration from 45.6% at December 31, 1999. Our average market penetration rate
for all systems was 61.4% at December 31, 1999.
The 1996 Telecom Act authorizes LECs and others to provide a wide variety of
video services competitive with services provided by cable systems and to
provide cable services directly to subscribers. Certain LECs in Alaska may seek
to provide video services within their telephone service areas through a variety
of distribution methods. Cable systems could be placed at a competitive
disadvantage if the delivery of video services by LECs becomes widespread since
LECs may not be required, under certain circumstances, to obtain local
franchises to deliver such video services or to comply with the variety of
obligations imposed upon cable systems under such franchises. Issues of
cross-subsidization by LECs of video and telephony services also pose strategic
disadvantages for cable operators seeking to compete with LECs who provide video
services.
24
Our Cable Systems face limited additional competition from private SMATV systems
that serve condominiums, apartment and office complexes and private residential
developments. The operators of these SMATV systems often enter into exclusive
agreements with building owners or homeowners' associations. Due to the
widespread availability of reasonably priced earth stations, SMATV systems now
can offer both improved reception of local television stations and many of the
same satellite-delivered program services offered by franchised cable systems.
The ability of the Cable Systems to compete for subscribers in residential and
commercial developments served by SMATV operators is uncertain. We continue to
develop and deploy competitive packages of services (video, data and telephony)
to these residential and commercial developments. The 1996 Telecom Act gives
cable operators greater flexibility with respect to pricing of cable television
services provided to subscribers in multi-dwelling unit residential and
commercial developments. It also broadens the definition of SMATV systems not
subject to regulation as a franchised cable television service.
The availability of reasonably-priced HSD earth stations enables individual
households to receive many of the satellite-delivered program services formerly
available only to cable subscribers. Furthermore, the 1992 Cable Act contains
provisions, which the FCC has implemented with regulations, to enhance the
ability of cable competitors to purchase and make available to HSD owners
certain satellite-delivered cable programs at competitive costs.
In recent years, the FCC and the Congress have adopted policies providing a more
favorable operating environment for new and existing technologies that provide,
or have the potential to provide, substantial competition to cable systems.
These technologies include, among others, DBS services that transmit signals by
satellite to receiving facilities located on the premises of subscribers.
Programming is currently available to the owners of DBS facilities through
conventional, medium and high-powered satellites.
DBS systems are expected to use video compression technology to increase the
channel capacity of their systems to provide movies, broadcast stations and
other program services competitive with those of cable systems. The extent to
which DBS systems are competitive with the service provided by cable systems
depends, among other things, on the availability of reception equipment at
reasonable prices and on the ability of DBS operators to provide competitive
programming. DBS services are slowly adding broadcast stations to their product
offerings beginning with the largest broadcast markets that eliminates the
problem of having to add a second external off-air antenna. DBS signals are
subject to degradation from atmospheric conditions such as rain and snow. The
receipt of DBS signals in Alaska currently has the disadvantage of requiring
subscribers to install larger satellite dishes (generally three to six feet in
diameter) because of the weaker satellite signals currently available in
northern latitudes, particularly in communities surrounding, and north of,
Fairbanks. In addition, existing satellites have a relatively low altitude above
the horizon when viewed from Alaska, making their signals subject to
interference from mountains, buildings and other structures.
Two major companies, DirecTV and Echostar, are currently offering nationwide
high-power DBS services. Recent launches by Echostar into more favorable western
arc satellite positions have allowed them to offer service in the lower half of
Alaska with antennas less than one meter in diameter. Recently enacted federal
legislation establishes, among other things, a permanent compulsory copyright
license that permits satellite carriers to retransmit local broadcast television
signals to subscribers who reside inside the local television station's market.
These companies have already begun transmitting local broadcast signals in
certain major televison markets and have announced their intention to expand
this local television broadcast retransmission service to other domestic
markets. With this legislation, satellite carriers become more competitive to
cable communications system operators like us because they are now able to offer
programming which more closely resembles what we offer. We are unable to predict
the effects this legislation and these competitive developments might have on
our business and operations.
Our cable television systems also compete with wireless program distribution
services such as MMDS providers that use low-power microwave frequencies to
transmit video programming over-the-air to subscribers. There are MMDS and
multi-channel UHF operators who are authorized to provide or are providing
broadcast and satellite programming to subscribers in areas served by several of
our cable systems, including Anchorage, Fairbanks and Juneau. Additionally, the
FCC has allocated frequencies in the 28 GHz band for a new multi-channel
wireless video service similar to MMDS. Wireless operations have the
disadvantage of requiring line-of-sight access, making their signals subject to
interference from
25
mountains, buildings and other structures, and are subject to interference from
rain, snow and wind. Recently ACS purchased a controlling interest in a
multi-channel UHF service that currently provides service in some portions of
Anchorage and Fairbanks. Although they have currently stopped installing new
customers, we believe they are preparing to offer digital service in both
markets. MMDS is also offered by Alaska Wireless in Fairbanks and includes a
wireless modem service. WanTV recently sold the Anchorage MMDS license to
Sprint. This service is no longer accepting new customers. We are unable to
predict whether wireless video services will have a material impact on our
operations.
Recently, a number of companies in the lower-49 states, including telephone
companies and ISP's, have asked local, state and federal governments to mandate
that cable communications systems operators provide capacity on their cable
infrastructure so that these companies and others may deliver Internet services
directly to customers over cable facilities. In response, several local
jurisdictions attempted to impose these capacity obligations on several cable
communications operators. Various cable communications companies have initiated
litigation challenging these municipal requirements. In addition, two antitrust
lawsuits have been filed in federal courts alleging that certain cable
communications companies have improperly refused to allow their cable facilities
to be used by certain ISPs to serve their customers. In a 1999 report to
Congress, the FCC declined to institute an administrative proceeding to examine
this issue. We expect that the FCC, Congress, and state and local regulatory
authorities will continue to consider actions in this area.
The deployment of Digital Subscriber Line technology, known as DSL, allows
Internet access to subscribers at data transmission speeds equal to or greater
than that of modems over conventional telephone lines. Numerous companies,
including telephone companies, have introduced DSL service and certain telephone
companies are seeking to provide high-speed broadband services, including
interactive online services, without regard to present service boundaries and
other regulatory restrictions. We are unable to predict the likelihood of
success of competing online services offered by our competitors or what impact
these competitive ventures may have on our business and operations.
Other new technologies may become competitive with non-entertainment services
that cable television systems can offer. The FCC has authorized television
broadcast stations to transmit textual and graphic information useful both to
consumers and businesses. The FCC also permits commercial and non-commercial FM
stations to use their subcarrier frequencies to provide non-broadcast services
including data transmissions. The FCC established an over-the-air interactive
video and data service that will permit two-way interaction with commercial and
educational programming along with informational and data services. LECs and
other common carriers also provide facilities for the transmission and
distribution to homes and businesses of interactive computer-based services,
including the Internet, as well as data and other non-video services. The FCC
has conducted spectrum auctions for licenses to provide PCS. PCS will enable
license holders, including cable operators, to provide voice and data services.
We have acquired a license to provide PCS services in Alaska.
Advances in communications technology as well as changes in the marketplace are
constantly occurring. We cannot predict the effect that ongoing or future
developments might have on the telecommunications and cable television
industries or on us specifically.
Cable television systems generally operate pursuant to franchises granted on a
non-exclusive basis. The 1992 Cable Act gives local franchising authorities
jurisdiction over basic cable service rates and equipment in the absence of
"effective competition," prohibits franchising authorities from unreasonably
denying requests for additional franchises and permits franchising authorities
to operate cable systems. Well-financed businesses from outside the cable
industry (such as the public utilities that own certain of the poles on which
cable is attached) may become competitors for franchises or providers of
competing services.
Our cable services sales efforts are primarily directed toward increasing the
number of subscribers we serve, selling bundled services, and generating
incremental revenues through product and feature upsale opportunities. We sell
our cable services through telemarketing, direct mail advertising, door-to-door
selling, and local media advertising.
26
Local Access Services
Industry. Use of the Internet and expansion in the use of LANs and WANs have
generated an increased demand for access lines. In the home, the growing use of
computers, faxes, and the Internet led to increases in access lines and usage.
The emergence of new services, including digital cellular, personal
communications services, interactive TV, and video dial tone, has created
opportunities for growth in local loop services. These opportunities are also
laying the foundation for a restructuring of the newly competitive local loop
services market.
Emerging from the new competitive landscape are "data CLECs" who offer Internet
access and data services to medium and large size businesses. They obtain
interconnection agreements with ILECs for DSL-qualified unbundled network
element loops. One loop, so qualified and equipped with appropriate access
devices, enables the delivery of high speed (generally less than 768 kbs but
sometimes faster rates), always-connected Internet access, LAN/WAN
interconnectivity, and private line and private network circuits.
Cable telephony is still not prevalent, as the industry struggles with the
quality of service and the increased delay (latency) surrounding deployment of
first generation Voice over Internet Protocol technologies. The cable industry
late in 1999 released its first Packet Cable standards that promise to support
toll quality Internet protocol telephony.
Wireless local loop access technologies (other than fixed rate cellular
telephone service), while developing for international applications, have not
yet developed a significant market presence in the United States.
General. Our local access services division entered the local services market in
Anchorage in 1997, providing services to residential, commercial, and government
users. We can access approximately 93% of Anchorage area local loops from our
collocated remote facilities and DLC installations.
Products. We initially began offering local exchange services in Anchorage
during late September 1997. Our ILEC-collocated remote facilities that access
the ILEC's unbundled network element loops and its DLC systems allows us to
offer full featured, switched-based local service products to both residential
and commercial customers. In areas where we do not have access to loop
facilities, we offer total service resale of the ILEC's local service.
Our package offerings are competitively priced and include popular features,
such as:
- enhanced call waiting, - caller ID,
- caller ID on call waiting, - free caller ID box,
- anonymous call rejection, - call forwarding,
- call forward busy, - call forward no answer,
- enhanced call waiting, - fixed call forwarding,
- follow me call, - intercom service forwarding,
- multi-distinctive ring, - per line blocking,
- selective call forwarding, - selective call acceptance,
- selective call rejection, - selective distinctive alert,
- speed calling, - three way calling,
- voice mail, - inside wire repair plan,
- non-listed number, - non-published number
Facilities. During 1997 we installed a Lucent host switching system (5ESS). We
also collocated six remote facilities beside or within the ILEC's local
switching offices to access unbundled loop network elements and installed a DLC
system beside a smaller, seventh ILEC wire center. These remote and DLC
facilities are interconnected to the host switch via our diversely routed fiber
optic links. During 1998, we expanded our capacity at each of the remote
facilities to allow access to approximately 79,000 Anchorage loops.
Additionally, we provided our own facilities-based services to over 100 of
Anchorage's larger business customers through further expansion and deployment
of SONET fiber transmission facilities, leased and HDSL T-1 facilities, and DLC
facilities.
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Customers. We had approximately 45,100, 28,300 and 3,300 active lines in service
from Anchorage subscribers to our local access services at December 31, 1999,
1998 and 1997, respectively. The 1999 line count consists of approximately
21,300 residential access lines and 23,800 business access lines, including
5,600 Internet service provider access lines. We ended 1999 with significant
market share gains in all market segments, in particular in the business segment
in which access lines increased by 67% and ISP lines increased by 294% as
compared to December 31, 1998. Without an active media presence, we were able to
gain residential market share, growing that market segment by 32% as compared to
1998. We estimate that our overall local access services market share exceeds
25%.
1999, 1998 and 1997 revenues derived from local access services totaled $15.5
million, $9.9 million and $610,000, respectively, representing approximately
5.6%, 4.0% and 0.3% of our total revenues in 1999, 1998 and 1997, respectively.
Approximately 750 additional lines were sold and awaiting connection at December
31, 1999.
Competition. In the local exchange services market, we believe that the 1996
Telecom Act, judicial decisions, and state legislative and regulatory
developments will increase the likelihood that barriers to local exchange
competition will be substantially reduced or removed. These initiatives include
requirements that LECs negotiate with entities such as us to provide
interconnection to the existing local telephone network, to allow the purchase,
at cost-based rates, of access to unbundled network elements, to establish
dialing parity, to obtain access to rights-of-way and to resell services offered
by the ILECs.
LECs in Alaska outside of Anchorage have a "rural exemption" from some of their
obligations until and unless the exemption is examined and not continued by the
RCA. Certain pricing provisions of the FCC's Interconnection Decision
implementing the interconnection portions of the 1996 Telecom Act have been
challenged and were stayed by the U.S. Court of Appeals for the Eighth Circuit,
on a jurisdictional basis. The United States Supreme Court, in February 1999,
upheld the jurisdictional basis of the FCC's decisions, and has remanded the
proceeding back to the Eighth Circuit for further proceedings. In addition the
1996 Telecom Act expressly prohibits any legal barriers to competition in
intrastate or interstate communications service under state and local laws. The
1996 Telecom Act further empowers the FCC, after notice and an opportunity for
comment, to preempt the enforcement of any statute, regulation or legal
requirement that prohibits, or has the effect of prohibiting, the ability of any
entity to provide any intrastate or interstate telecommunications service. You
should see Part I, Item 1. Business, Regulation, franchise authorizations and
tariffs for more information.
In the local exchange market we currently compete with an ACS subsidiary in
Anchorage. In early 2001 we anticipate we will be competing with ACS
subsidiaries in Fairbanks, Juneau, Fort Wainwright and Eielson Air Force Base
(military bases near Fairbanks), and in North Pole. You should see Part I, Item
1. Business, Historical development of the Company's business during the past
fiscal year - Local Access Services for more information. We also compete
against AT&T in the Anchorage service area. AT&T offers local exchange service
only to residential customers through total service resale. We expect further
competitors in the Anchorage, Fairbanks and Juneau marketplaces, as Alaska Fiber
Star and DSLnet have filed bonafide requests for interconnection with ACS. The
Company expects competition from these latter entrants in the business customer
telephony access, Internet access, DSL and private line markets. We believe our
long-standing presence in Alaska and the strength of our brand (as well as
ACS's) will make competitive entry difficult for these new entrants.
We received approval from the RCA in July 1999 to provide local exchange
services in ACS's existing service areas in Fairbanks, Juneau, Ft Wainwright,
Eielson AFB, and North Pole. We are currently involved in arbitration to define
the terms of interconnection with ACS for entry to these markets and are
expecting to conclude those proceedings in the third quarter of 2000. We
continue to offer local exchange services to substantially all consumers in the
Anchorage service area, primarily through our own facilities and unbundled local
loops leased from ACS.
On June 30, 1999, the APUC was repealed by an act passed earlier in the year by
the Alaska State Legislature and was immediately reconstituted as the RCA,
combining the functions of the APUC and certain other oversight functions. The
Governor of the state of Alaska appointed new commissioners as a result of this
restructuring. Established within the commission is a communications carriers
section that is tasked with developing, recommending, and administering policies
and programs with respect to the regulation
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of rates, services, accounting, and facilities of communications common carriers
within the state involving the use of wire, cable, radio, and space satellites.
We believe the new commission is generally more responsive to telecommunications
issues brought to its attention and more supportive of competitive
telecommunication regulatory policy.
The 1996 Telecom Act also provides ILECs with new competitive opportunities. We
believe that we have certain advantages over these companies in providing
telecommunications services, including awareness by Alaskan customers of the GCI
brand-name, our facilities-based telecommunications network, and our prior
experience in, and knowledge of, the Alaskan market. The 1996 Telecom Act
provides that rates charged by ILECs for interconnection to the incumbent
carrier's network are to be nondiscriminatory and based upon the cost of
providing such interconnection, and may include a "reasonable profit," which
terms are subject to interpretation by regulatory authorities. If ILECs charge
us unreasonably high fees for interconnection to their networks, or
significantly lower their retail rates for local exchange services, our local
service business could be placed at a significant competitive disadvantage.
Our local services sales efforts are primarily directed toward increasing the
number of commercial and small business subscribers we serve, selling bundled
services, and generating incremental revenues through product and feature upsale
opportunities. We sell our local services through telemarketing, direct mail
advertising, and door-to-door selling.
Internet Services
Industry. The Internet continues to expand at a significant rate, with the
number of sites almost doubling over the last several years. Industry analysts
estimated that 90 million sites were connected to the Internet worldwide at the
end of 1999. Current trends indicate that in a few years the Internet may become
as commonplace as TV. Analysts predict that the amount of Internet traffic will
likely continue to rise as fast as capacity allows for the foreseeable future.
Voice over the Internet may have a major impact on business and the entire
telecommunications industry in the future.
The use of Intranets has significantly increased, with an estimated 60 to 70
percent of US corporations using an Intranet. Current growth rates suggest that
138 million people worldwide will be connected from their desks to an in-house
Intranet by 2001.
An Intranet allows information to be decentralized in an organization. It uses
Internet-compatible standards, available on virtually any computer. An Intranet
is also, by mainframe computer standards, fast and inexpensive to set up. This
adds to its appeal, particularly for larger companies with complex legacy data
systems.
Industry analysts believe that one of the key tools for business advantage over
the next two years will be the Extranet. This is an Intranet (internal, secure,
full of sensitive data) connected to trusted customers and suppliers.
Implementing an Extranet creates the concept of the virtual enterprise, in which
all the organizations in a supply chain integrate their systems and operations.
This concept is not new, but has been achieved in the past using EDI on private
networks. Extranets promise to remove many of the obstacles that have prevented
firms from sharing their data (stock levels, production schedules, demand
forecasts) with customers and suppliers. However, there are issues of standards,
lack of consumer confidence and security.
Music is ideally suited for the digital world, with leading record companies and
music retailers now selling direct over the Internet. New compression algorithms
and technology (such as MP3) allow consumers to purchase and download music of
their choice to play on their personal computer, handheld device, or CD players.
Technology is beginning to turn products into a service, delivered over the
Internet. We expect this segment of the retail market to expand significantly.
Copyright and related legal concerns are becoming more prevalent due to the ease
in which electronic media can be distributed and copied.
Concerns about Internet-based commerce remain. One serious preoccupation is that
an overloaded Internet might crash. However, capacity on the Internet continues
to increase. Technology enables fiber to carry more data, and more cables and
satellite channels are being introduced. In 1995, the world's entire telecom
traffic amounted to a data rate of a terabit a second. Currently, a single
optical fiber strand
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can carry three times that amount of data with lab research indicating that many
times more capacity will be possible in the future.
Industry analysts expected 43.9 million American households to be able to access
the Internet in 1999, equaling approximately 43% of the country. Online-shopping
revenues were projected to increase in 1999 by 69%, to $11.9 billion, while
advertising revenues were expected to increase by 62%, to $3.3 billion.
We believe major court decisions and legislative action will shape the worldwide
Internet in 2000 and beyond, including:
- The impact of the U.S. vs. Microsoft antitrust trial,
- Possible recognition that traditional encryption regulation is obsolete,
- Minimum-regulation approaches to information privacy as a new consumer
movement tries to use international privacy law to rein in the behavior of
large corporations in the U.S. economy,
- The potential for continuing increases in inexperienced investors
investing through online brokers and increased instances of investor
losses that lead to arbitration claims against the brokers,
- The impact of more Internet patents preventing others from doing certain
things, such as designing and maintaining certain types of Web sites,
- The legality of hyperlinking without permission,
- Pending re-introduction of database legislation in Congress that would
create a new form of intellectual property in databases,
- Decisions regarding whether cryptographic source code is First Amendment
speech, and hence exportable, or that no program is covered by the First
Amendment,
- Renewed calls by the FBI and others for domestic controls of
obscenity-related cryptography, and
- The development of rating and filtering systems outside the United States.
General. Our Internet services division entered the Internet services market in
1998, providing retail services to residential, commercial, and government users
and providing wholesale carrier services to other ISPs. Cable network upgrades
in the Anchorage area have allowed us to offer high-speed cable modem Internet
access, the first of its kind in Alaska.
Products. We currently offer two types of Internet access for residential use:
dial up Internet access and high-speed cable modem Internet access. Our initial
residential high-speed cable modem Internet service offers up to 1024 kbps
access speed as compared with up to 56 kbps access through standard copper wire
modem access. We provide free 24-hour customer service and technical support via
telephone or online. The entry level cable modem service also offers free data
transfer up to five gigabytes per month and can be left connected
24-hours-a-day, 365-days-a-year, allowing for real-time information and e-mail
access. Additional cable modem service packages tailored to both heavy
residential and commercial Internet users are also available.
We believe cable modem services are the next generation of Internet access. This
service is appealing to families, professionals who work-at-home, educators, and
those involved in electronic commerce and people who enjoy interactive computer
games. Cable modem access overcomes the limitations of slower dial-up service
and the higher cost of dedicated Internet services and provides
always-available, high-speed access to the Internet. Cable modems use our
coaxial cable that provides cable television service, instead of the traditional
ILEC copper wire. Coaxial cable has a much greater carrying capacity than
telephone wire and can be used to simultaneously deliver both cable television
and Internet access services.
We currently offer several Internet service packages for commercial use: Dial up
access, T1 and fractional T1 leased line, frame relay and high-speed cable modem
Internet access. Our business high-speed cable modem Internet service offers
access speeds ranging from 256 kbps to 1024 kbps, free monthly data transfers of
up to 25 gigabytes and free 24-hour customer service and technical support.
Business services also include dedicated Internet access, a personalized web
page, domain name services, and e-mail addressing.
We introduced significant new marketing campaigns in February and March 1999
featuring bundled residential and commercial Internet products. Additional
bandwidth was made available to our Internet segment through the Alaska United
Project as previously described. The new Internet offerings are
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coupled with our long-distance and local services offerings and provide free
basic Internet services if certain long-distance or local service plans are
selected. Value-added Internet features are available for additional charges.
We provide Internet access for Alaska schools and health organizations using a
platform including many of the latest advancements in technology. Services are
delivered through a locally available circuit, our existing lines, and/or
satellite earth stations.
Facilities. The Internet is an interconnected global public computer network of
tens of thousands of packet-switched networks using the Internet protocol. The
Internet is effectively a network of networks routing data throughout the world.
We provide access to the Internet using a platform that includes many of the
latest advancements in technology. The physical platform is concentrated in
Anchorage and is extended into many remote areas of the state. Our Internet
platform includes:
- Circuits connecting our Anchorage facilities to an Internet access point
in Seattle through multiple, diversely routed networks.
- Routers on each end of the circuits to control the flow of data.
- Our Anchorage facility consists of a main router, a bank of servers that
perform proxy and cache functions, database servers providing
authentication and user demographic data, and access servers for dial-in
users.
- SchoolAccess(TM) Internet service delivery to over 257 schools in rural
Alaska is accomplished by three variations on primary delivery systems:
- In communities where we have terrestrial interconnects or provide
existing service over regional earth stations, we have configured
intermediate distribution facilities. Schools that are within these
service boundaries are connected locally to one of those facilities.
- In communities where we have extended telecommunications services via
our DAMA earth station program, SchoolAccess(TM) is provided via a
satellite circuit to an intermediate distribution facility at the Eagle
River Earth Station.
- In communities or remote locations where we have not extended
telecommunications services, SchoolAccess(TM) is provided via a
dedicated (usually on premise) DAMA VSAT satellite station. The DAMA
connects to an intermediate distribution facility located in Anchorage.
In all cases, Internet access is delivered to a router located at the service
point. Our Internet management platform constantly monitors this router;
continual communication is maintained with all of the routers in the network.
The availability and quality of service, as well as statistical information on
traffic loading, are continuously monitored for quality assurance. The
management platform has the capability to remotely access the routers,
permitting changes in router configuration without the need to physically be at
the service point.
GCI.net offers a unique combination of innovative network design and aggressive
performance management. The new Internet platform has received a certification
that places it in the top one percent of all service providers worldwide and the
only ISP in Alaska with such designation.
We operate and maintain what we believe is the largest, most reliable, and
highest performance Internet network in the State of Alaska.
Competition. The Internet industry is intensely competitive, rapidly evolving
and subject to constant technological change. Competition is based upon price
and pricing plans, the types of services offered, customer service, billing
services, perceived quality, reliability and availability. Although we believe
we have the human and technical resources to pursue our strategy and compete
effectively in this competitive environment, our success will depend upon our
ability to profitably provide high quality, high value bundled services at
prices generally competitive with, or lower than, those charged by our
competitors.
As of December 31, 1999, we competed with more than 25 Alaska based Internet
providers, and competed with other domestic, non-Alaska based providers that
provide national service coverage. Several of the providers have substantially
greater financial, technical and marketing resources than we have. We have, so
far, successfully adjusted our pricing and marketing strategies to respond to
competitors' pricing practices.
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Customers. We had approximately 48,300 and 7,200 active residential and
commercial Internet subscribers at December 31, 1999 and 1998, respectively.
1999 and 1998 revenues derived from Internet services (including
SchoolAccess(TM)) totaled $9.1 million and $6.1 million, respectively,
representing approximately 3.3% and 2.5% of our total 1999 and 1998 revenues,
respectively.
Our Internet services sales efforts are primarily directed toward increasing the
number of subscribers we serve, selling bundled services, and generating
incremental revenues through product and feature upsale opportunities. We sell
our Internet services through telemarketing, direct mail advertising,
door-to-door selling, and local media advertising.
Environmental Regulations
We may undertake activities that, under certain circumstances may affect the
environment. Accordingly, they are subject to federal, state, and local
regulations designed to preserve or protect the environment. The FCC, the Bureau
of Land Management, the U.S. Forest Service, and the National Park Service are
required by the National Environmental Policy Act of 1969 to consider the
environmental impact prior to the commencement of facility construction. We
believe that compliance with such regulations has no material effect on our
consolidated operations. The principal effect of our facilities on the
environment would be in the form of construction of facilities and networks at
various locations in Alaska and between Alaska and Seattle Washington. Our
facilities have been constructed in accordance with federal, state and local
building codes and zoning regulations whenever and wherever applicable. Some
facilities may be on lands that may be subject to state and federal wetland
regulation.
Uncertainty as to the applicability of environmental regulations is caused in
major part by the federal government's decision to consider a change in the
definition of wetlands. Most of our facilities are on leased property, and, with
respect to all of these facilities, we are unaware of any violations of lease
terms or federal, state or local regulations pertaining to preservation or
protection of the environment.
Our Alaska United project consists, in part, of deploying land-based and
undersea fiber optic cable facilities between Anchorage, Whittier, Valdez, and
Juneau, Alaska, and Seattle, Washington. The engineered route passes over
wetlands and other environmentally sensitive areas. We believe our construction
methods used for buried cable have a very minimal impact on the environment. The
agencies, among others, that are involved in permitting and oversight of our
cable deployment efforts are the US Army Corps of Engineers, The National Marine
Fisheries Service, US Fish & Wildlife, US Coast Guard, National Oceanic and
Atmospheric Administration, Alaska Department of Natural Resources, and the
Alaska Office of the Governor - Governmental Coordination. We are unaware of any
violations of federal, state or local regulations or permits pertaining to
preservation or protection of the environment.
In the course of operating the cable television systems, we have used various
materials defined as hazardous by applicable governmental regulations. These
materials have been used for insect repellent, locate paint and pole treatment,
and as heating fuel, transformer oil, cable cleaner, batteries, and in various
other ways in the operation of those systems. We do not believe that these
materials, when used in accordance with manufacturer instructions, pose an
unreasonable hazard to those who use them or to the environment.
Patents, Trademarks, Licenses, Certificates of Public Convenience and Necessity,
and Military Franchises
We do not hold patents, franchises or concessions for telecommunications
services or local access services. We do hold registered service marks for the
terms SchoolAccess(TM), Free Fridays for Business(TM) and Unlimited
Weekends(TM). The Communications Act of 1934 gives the FCC the authority to
license and regulate the use of the electromagnetic spectrum for radio
communication. We hold licenses through our long-distance services industry
segment for our satellite and microwave transmission facilities for provision of
long-distance services. We acquired a license for use of a 30-MHz block of
spectrum for providing PCS services in Alaska. The PCS license has an initial
duration of 10 years. We expect to renew the PCS license for an additional
10-year term under FCC rules. We acquired a LMDS license in 1998 for use of a
150-MHz block of spectrum in the 28 GHz Ka-band for providing wireless services.
The LMDS license has
32
an initial duration of 10 years. Within 10 years, licensees will be required to
provide 'substantial service' in their service regions. Our operations may
require additional licenses in the future.
Applications for transfer of control of 15 certificates of public convenience
and necessity held by the acquired cable companies were approved in an RCA order
dated September 23, 1996, with transfers to be effective on October 31, 1996.
Such transfer of control allowed us to take control and operate the cable
systems of the acquired cable companies located in Alaska. The approval of the
transfer of these 15 certificates of public convenience and necessity is not
required under federal law, with one area of limited exception. The cable
companies operate in part through the use of several radio-band frequencies
licensed through the FCC. These licenses were transferred to us prior to October
31, 1996.
We obtained consent of the military commanders at the military bases serviced by
the acquired cable systems to the assignment of the respective franchises for
those bases.
Regulation, Franchise Authorizations and Tariffs
The following summary of regulatory developments and legislation does not
purport to describe all present and proposed federal, state, and local
regulation and legislation affecting our businesses. Other existing federal and
state regulations are currently the subject of judicial proceedings, legislative
hearings and administrative proposals that could change, in varying degrees, the
manner in which these industries operate. We cannot predict at this time the
outcome of these proceedings, their impact on the industries in which we
operate, or their impact on us.
Telecommunications Operations. The following is a summary of federal laws,
regulations and tariffs, and a description of certain state and local laws
pertaining to our telecommunications operations (long-distance, local access and
wireless services).
General. We are subject to regulation by the FCC and by the RCA as a
non-dominant provider of long-distance services. We file tariffs with the FCC
for interstate and international long-distance services, and with the RCA for
intrastate service. Such tariffs routinely become effective without intervention
by the FCC, RCA or other third parties since we are a non-dominant carrier. We
received approval from the RCA in February 1997 permitting us to provide local
access services throughout ATU's (now ACS) existing service area. Military
franchise requirements also affect our ability to provide telecommunications and
cable television services to military bases.
The 1996 Telecom Act preempts state statutes and regulations that restrict the
provision of competitive local telecommunications services. State commissions
can, however, impose reasonable terms and conditions upon the provision of
telecommunications service within their respective states. Because we are
authorized to offer local access services in Anchorage, we are regulated as a
CLEC by the RCA. In addition, we will be subject to other regulatory
requirements, including certain requirements imposed by the 1996 Telecom Act on
all LECs, which requirements include permitting resale of LEC services, number
portability, dialing parity, and reciprocal compensation.
As a PCS and LMDS licensee, we are subject to regulation by the FCC, and must
comply with certain buildout and other conditions of the license, as well as
with the FCC's regulations governing the PCS and LMDS services. On a more
limited basis, we may be subject to certain regulatory oversight by the RCA
(e.g., in the areas of consumer protection), although states are not permitted
to regulate the rates of PCS, LMDS and other commercial wireless service
providers. PCS and LMDS licensees may also be subject to regulatory requirements
of local jurisdictions pertaining to, among other things, the location of tower
facilities.
1996 Telecom Act and Related Rulings. A key industry development was passage of
the 1996 Telecom Act. The Act is intended by Congress to open up the marketplace
to competition and has had a dramatic impact on the telecommunications industry.
The intent of the legislation is to break down the barriers that have prevented
three groups of companies, LECs, including RBOCs, long-distance carriers, and
cable TV operators, from competing head-to-head with each other. The Act
requires incumbent LECs to let new competitors into their business. It also
requires incumbent LECs to open up their networks to ensure that
33
new market entrants have a fair chance of competing. The bulk of the legislation
is devoted to establishing the terms under which incumbent LECs must open up
their networks.
Enactment of the bill immediately affected local exchange service markets by
requiring states to authorize local exchange service competition. Competitors,
including resellers, are able to market new bundled service packages to attract
customers. Over the long term, the requirement that incumbent LECs unbundle
access to their networks may lead to increased price competition. Local exchange
service competition has not yet occurred in all markets on a national basis
because interconnection arrangements are not yet in place in many areas. We have
executed an interconnection agreement with ACS for the Anchorage market, and are
arbitrating with ACS to develop agreements for the Juneau and Fairbanks markets.
If we are unable to enter into, or experience a delay in obtaining,
interconnection agreements, this inability or delay may materially and adversely
affect our business and financial prospects.
The 1996 Telecom Act requires the FCC to establish rules and regulations to
implement its local competition provisions. In August 1996, the FCC issued rules
governing interconnection, resale, unbundled network elements, the pricing of
those facilities and services, and the negotiation and arbitration procedures
that would be utilized by states to implement those requirements. These rules
rely on state public utilities commissions to develop the specific rates and
procedures applicable to particular states within the framework prescribed by
the FCC. These rules were vacated in part by a July 1997 ruling of the United
States Court of Appeals for the Eighth Circuit. On January 25, 1999, the United
States Supreme Court issued an opinion upholding the authority of the FCC to
establish rules, including pricing rules, to implement statutory provisions
governing both interstate and intrastate services under the 1996 Telecom Act.
The Court also upheld rules allowing carriers to select provisions from among
different interconnection agreements approved by state commissions for the
carriers' own agreements and a rule allowing carriers to obtain combinations of
unbundled network elements.
The FCC affirmed in a report adopted on April 10, 1998, that Internet service
providers would not be subject to regulation as telecommunications carriers
under the 1996 Telecom Act. They thus will not be subject to universal service
subsidies and other regulations. Further, in August 1998, the FCC proposed new
rules that would allow ILECs to provide their own DSL services through separate
affiliates that are not subject to ILEC regulation. On November 18, 1999, the
FCC decided to require ILECs to share telephone lines with DSL providers, an
action that may foster competition by allowing competitors to offer DSL services
without their customers having to lease a second telephone line. Whether this
development will be implemented in an effective way remains to be seen.
Moreover, it is impossible to predict whether the FCC or Congress may change the
rules under which these services are offered and, if such changes are made, the
extent of the impact of such changes on our business.
The FCC regulates the fees that local telephone companies charge long distance
companies for access to their local networks. These fees are commonly called
access charges.
The FCC is currently considering various proposals, each supported by parts of
both the local and long distance telephone industries that would restructure and
likely reduce access charges. Changes in the access charge structure could
fundamentally change the economics of some aspects of our business.
The Supreme Court vacated an FCC rule setting forth the specific unbundled
network elements that ILECs must make available, finding that the FCC had failed
to apply the appropriate statutory standard. On November 5, 1999, the FCC
responded to the Court's decision by issuing a decision that maintains
competitors' access to a wide variety of unbundled network elements. Six of the
seven unbundled elements the FCC had originally required carriers to provide in
its 1996 order implementing the 1996 Telecom Act remain available to
competitors. These elements are loops, including loops used to provide
high-capacity and advanced telecommunications services; network interface
devices; local circuit switching, subject to restrictions in major urban
markets; dedicated and shared transport; signaling and call-related databases;
and operations support systems. The FCC removed access to operator and directory
assistance service from the list of available unbundled network elements. In
addition, the FCC added to its list certain unbundled network elements that were
not at issue in 1996. These elements include subloops, or portions of loops, and
dark fiber loops and transport. The FCC did not, however, require ILECs to
unbundle facilities used to provide DSL service. The FCC did not decide, but
sought additional information on, the question of whether carriers may combine
certain unbundled network elements to provide special access
34
services to compete with those provided by the ILECs. The ability to obtain
unbundled network elements is an important element of our local access services
business, and we believe that the FCC's actions in this area have generally been
positive. However, we cannot predict the extent to which the existing rules will
be sustained in the face of additional legal action and the scope of the rules
that are yet to be crafted by the FCC.
Recurring and non-recurring charges for telephone lines and other unbundled
network elements may increase based on the rates proposed by the ILECs and
approved by the RCA from time to time, which could have a material adverse
effect on the results of our operations. Moreover, because the cost-based
methodology for determining these rates is still subject to judicial review,
there is great uncertainty about how these rates will be determined in the
future.
ACS, through subsidiary companies, provides local telephone services in
Fairbanks and Juneau, Alaska. The ACS subsidiaries are classified as Rural
Telephone Companies under the 1996 Telecom Act, which entitles them to an
exemption of certain material interconnection terms of the 1996 Telecom Act,
until such "rural exemption" is lifted by the State of Alaska. We requested that
continuation of the "rural exemption" of the ACS subsidiaries relating to the
Fairbanks and Juneau markets be examined. In January 1998, the RCA denied our
request to terminate the rural exemption. The basis of the RCA's decision was
primarily that various rulemaking proceedings (including Universal Service and
access charge reform) must be completed before the exemption would be revoked.
Those rulemaking proceedings have been largely completed.
On March 4, 1999, an Alaska Superior Court Judge determined that the APUC (now
RCA) erred in reaching its decision to deny our request to provide full local
telephone service in Fairbanks and Juneau, Alaska. This service would be
provided in competition against PTI (now ACS), the existing monopoly provider.
Among other things, the Court instructed the APUC to correctly assign the burden
of proof to PTI rather than us, and to decide on our specific requests to
provide service in Fairbanks and Juneau based on criteria established in the
1996 Telecom Act. The Court stated "this must be accomplished cognizant of the
intent of the 1996 Telecom Act to promote competition in the local market." The
Court remanded the case back to the APUC for proceedings leading to their
ruling. On July 1, 1999, the APUC ruled that the rural exemptions from local
competition in Juneau, Fairbanks and North Pole have been terminated, which
allows us to negotiate for unbundled elements for the provision of competitive
local service in these markets. The ILEC appealed this decision, and on October
11, 1999 the RCA issued an order terminating rural exemptions in the Fairbanks
and Juneau markets. We believe this decision is important to bring about the
benefits of competition to other communities in Alaska. We will continue to
negotiate with the ILEC for unbundled network elements for the provisioning of
competitive local assess services in these markets. We expect the RCA to approve
an interconnection agreement for unbundled elements by September 2000.
A number of LECs, long-distance companies and others have appealed some or all
of the FCC's orders. The effective date of the orders has not been delayed, but
the appeals are expected to take a year or more to conclude. The impact of these
FCC decisions on us is difficult to determine. Some BOCs have also challenged
the 1996 Telecom Act restrictions on their entry into long-distance markets as
unconstitutional. We are unable to predict the outcome of such rulemakings or
litigation or the effect (financial or otherwise) of the 1996 Telecom Act and
the rulemakings on us. The BOCs continue to challenge the substance of the FCC
rules, arguing that the rules do not allow them to fully recover the money they
spent building their networks.
Universal Service. In 1997, the FCC issued important decisions on universal
service establishing new funding mechanisms for high-cost, low-income service
areas to ensure that certain subscribers living in rural and high-cost areas, as
well as certain low-income subscribers, continue to have access to
telecommunications and information services at prices reasonably comparable to
those charged for similar services in urban areas.
These mechanisms also are meant to foster the provision of advanced
communications services to schools, libraries and rural health-care facilities.
Under the rules adopted by the FCC to implement these requirements, we and all
other telecommunications providers are required to contribute to a fund to
support
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universal service. The amount that we contribute to the federal universal
service subsidy will be based on our share of specified defined
telecommunications end-user revenues.
The order established significant discounts to be provided to eligible schools
and libraries for all telecommunications services, internal connections and
Internet access. It also established support for rural health care providers so
that they may pay rates comparable to those that urban health care providers pay
for similar services. Industry-wide annual costs of the program, estimated at
approximately $2.3 billion, are to be funded out of the Universal Service Fund.
The fund administrator on the basis of their interstate end-user revenues would
assess local and long distance carriers' contributions to the education and
health care funds. We began contributing to the new funds in 1998 and are
allowed to recover our contributions through increased interstate charges.
Local Regulation. We may be required to obtain local permits for street opening
and construction permits to install and expand fiber optic networks. Local
zoning authorities often regulate our use of towers for microwave and other
telecommunications sites. We also are subject to general regulations concerning
building codes and local licensing. The 1996 Telecom Act requires that fees
charged to telecommunications carriers be applied in a competitively neutral
manner, but there can be no assurance that ILECs and others with whom we will be
competing will bear costs similar to those we will bear in this regard.
Other Laws and Regulations. Although the foregoing discussion provides an
overview of the major regulatory issues that confront our business, this
discussion does not attempt to describe all current and proposed federal, state
and local rules and initiatives affecting the telecommunications industry. Other
federal and state laws and regulations are currently the subject of judicial
proceedings and proposed additional legislation. In addition, some of the FCC's
rules implementing the 1996 Telecom Act will be subject to further judicial
review and could be altered or vacated by courts in the future. We cannot
predict the ultimate outcome of any such further proceedings or legislation.
Cable Services. The following is a summary of federal laws and regulations
materially affecting the growth and operation of the cable services industry and
a description of certain state and local laws affecting our cable services
business.
General. We are subject to federal and state regulation as a cable television
operator pursuant to the 1934 Cable Act, the 1984 Cable Act and the 1992 Cable
Act, as amended by the 1996 Telecom Act. The 1992 Cable Act significantly
expanded the scope of cable television regulation on an industry-wide basis by
imposing rate regulation, carriage requirements for local broadcast stations,
customer service obligations and other requirements. The 1992 Cable Act and the
FCC's rules implementing that Act generally have increased the administrative
and operational expenses and in certain instances required rate reductions for
cable television systems and have resulted in additional regulatory oversight by
the FCC and state or local authorities.
Principal responsibility for implementing the policies of the 1934, 1984 and
1992 Cable Acts and the 1996 Telecom Act is allocated between the FCC and state
or local franchising authorities. The FCC and state regulatory agencies are
required to conduct numerous rulemaking and regulatory proceedings to implement
the 1996 Telecom Act, and such proceedings may materially affect the cable
industry.
Subscriber Rates. The 1992 Cable Act authorized rate regulation for cable
communications services and equipment in communities that are not subject to
"effective competition," as defined by federal law. Most cable communications
systems are now subject to rate regulation for basic cable service and equipment
by local officials under the oversight of the FCC, which has prescribed detailed
criteria for such rate regulation. The 1992 Cable Act also requires the FCC to
resolve complaints about rates for CPS Tiers (other than programming offered on
a per channel or per program basis, which programming is not subject to rate
regulation) and to reduce any such rates found to be unreasonable. The 1996
Telecom Act eliminates the right of individuals to file CPS Tier rate complaints
with the FCC and requires the FCC to issue a final order within 90 days after
receipt of CPS Tier rate complaints filed by any franchising authority. The 1992
Cable Act limits the ability of cable television systems to raise rates for
basic and certain cable programming services (collectively, the "Regulated
Services").
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FCC regulations govern rates that may be charged to subscribers for Regulated
Services. The FCC uses a benchmark methodology as the principal method of
regulating rates for Regulated Services. Cable operators are also permitted to
justify rates using a cost-of-service methodology, which contains a rebuttable
presumption of an industry-wide 11.25% after tax rate of return on an operator's
allowable rate base. Franchising authorities are empowered to regulate the rates
charged for monthly basic service, for additional outlets and for the
installation, lease and sale of equipment used by subscribers to receive the
basic cable service tier, such as converter boxes and remote control units. The
FCC's rules require franchising authorities to regulate these rates on the basis
of actual cost plus a reasonable profit, as defined by the FCC. Cable operators
required to reduce rates may also be required to refund overcharges with
interest. The FCC has also adopted comprehensive and restrictive regulations
allowing operators to modify their regulated rates on a quarterly or annual
basis using various methodologies that account for changes in the number of
regulated channels, inflation and increases in certain external costs, such as
franchise and other governmental fees, copyright and retransmission consent
fees, taxes, programming fees and franchise-related obligations. We cannot
predict whether the FCC will modify these "going forward" regulations in the
future.
Rate regulation of non-basic cable programming service tiers ended after March
31, 1999. The 1996 Telecom Act also modifies the uniform rate provision of the
1992 Cable Act by prohibiting regulation of nonpredatory bulk discount rates
offered to subscribers in commercial and residential developments and permits
regulated equipment rates to be computed by aggregating costs of broad
categories of equipment at the franchise, system, regional or company level.
Anti-Buy Through Provisions. The 1992 Cable Act requires cable systems to permit
subscribers to purchase video programming offered by the operator on a per
channel or a per program basis without the necessity of subscribing to any tier
of service, other than the basic cable service tier, unless the system's lack of
addressable converter boxes or other technological limitations does not permit
it to do so. The statutory exemption for cable systems that do not have the
technological capability to offer programming in the manner required by the
statute is available until a system obtains such capability, but not later than
December 2002. The FCC may waive such time periods, if deemed necessary. Many of
our systems do not have the technological capability to offer programming in the
manner required by the statute and thus currently are exempt from complying with
the requirement.
Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast signal
carriage requirements that allow local commercial television broadcast stations
to elect once every three years to require a cable system to carry the station,
subject to certain exceptions, or to negotiate for "retransmission consent" to
carry the station. A cable system generally is required to devote up to
one-third of its activated channel capacity for the carriage of local commercial
television stations whether pursuant to the mandatory carriage or retransmission
consent requirements of the 1992 Cable Act. Local non-commercial television
stations are also given mandatory carriage rights; however, such stations are
not given the option to negotiate retransmission consent for the carriage of
their signals by cable systems. Additionally, cable systems are required to
obtain retransmission consent for all distant commercial television stations
(except for commercial satellite-delivered independent "superstations" such as
WGN), commercial radio stations and certain low-power television stations
carried by such systems.
The FCC has also initiated an administrative proceeding to consider the
requirements, if any, for the mandatory carriage of digital television signals
offered by local broadcasters. We are unable to predict the outcome of this
proceeding or the impact any new carriage requirements might have on the
operations of our cable systems.
Designated Channels. The Communications Act permits franchising authorities to
require cable operators to set aside certain channels for public, educational
and governmental access programming. The 1984 Cable Act also requires a cable
system with 36 or more channels to designate a portion of its channel capacity
for commercial leased access by third parties to provide programming that may
compete with services offered by the cable operator. The FCC has adopted rules
regulating: (i) the maximum reasonable rate a cable operator may charge for
commercial use of the designated channel capacity; (ii) the terms and conditions
for commercial use of such channels; and (iii) the procedures for the expedited
resolution of disputes concerning rates or commercial use of the designated
channel capacity.
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Franchise Procedures. The 1984 Cable Act affirms the right of franchising
authorities (state or local, depending on the practice in individual states) to
award one or more franchises within their jurisdictions and prohibits
non-grandfathered cable systems from operating without a franchise in such
jurisdictions. The 1992 Cable Act encourages competition with existing cable
systems by (i) allowing municipalities to operate their own cable systems
without franchises; (ii) preventing franchising authorities from granting
exclusive franchises or from unreasonably refusing to award additional
franchises covering an existing cable system's service area; and (iii)
prohibiting (with limited exceptions) the common ownership of cable systems and
collocated MMDS or SMATV systems. The FCC has relaxed its restrictions on
ownership of SMATV systems to permit a cable operator to acquire SMATV systems
in the operator's existing franchise area so long as the programming services
provided through the SMATV system are offered according to the terms and
conditions of the cable operator's local franchise agreement. The 1996 Telecom
Act provides that the cable/SMATV and cable/MMDS cross-ownership rules do not
apply in any franchise area where the operator faces "effective competition" as
defined by federal law.
The Cable Acts also provide that in granting or renewing franchises, local
authorities may establish requirements for cable-related facilities and
equipment, but not for video programming or information services other than in
broad categories. The Cable Acts limit the payment of franchise fees to 5% of
revenues derived from cable operations and permit the cable operator to obtain
modification of franchise requirements by the franchise authority or judicial
action if warranted by changed circumstances. A federal appellate court held
that a cable operator's gross revenue includes all revenue received from
subscribers, without deduction, and overturned an FCC order which had held that
a cable operator's gross revenue does not include money collected from
subscribers that is allocated to pay local franchise fees. We cannot predict the
ultimate resolution of these matters. The 1996 Telecom Act generally prohibits
franchising authorities from (i) imposing requirements in the cable franchising
process that require, prohibit or restrict the provision of telecommunications
services by an operator, (ii) imposing franchise fees on revenues derived by the
operator from providing telecommunications services over its cable system, or
(iii) restricting an operator's use of any type of subscriber equipment or
transmission technology.
The 1984 Cable Act contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. The 1992 Cable Act made
several changes to the renewal process that could make it easier for a
franchising authority to deny renewal. Moreover, even if the franchise is
renewed, the franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal. Similarly, if a franchising
authority's consent is required for the purchase or sale of a cable system or
franchise, such authority may attempt to impose more burdensome or onerous
franchise requirements in connection with a request for such consent.
Historically, franchises have been renewed for cable operators that have
provided satisfactory services and have complied with the terms of their
franchises. We believe that we have generally met the terms of our franchises
and have provided quality levels of service. We anticipate that our future
franchise renewal prospects generally will be favorable.
Various courts have considered whether franchising authorities have the legal
right to limit the number of franchises awarded within a community and to impose
certain substantive franchise requirements (e. g. access channels, universal
service and other technical requirements). These decisions have been
inconsistent and, until the US Supreme Court rules definitively on the scope of
cable operators' First Amendment protections, the legality of the franchising
process generally and of various specific franchise requirements is likely to be
in a state of flux.
Ownership Limitations. Pursuant to the 1992 Cable Act, the FCC adopted rules
prescribing national subscriber limits. While a federal district court has
declared these limitations to be unconstitutional and delayed its enforcement,
the FCC has reconsidered its cable ownership regulations and (i) reaffirmed its
30% nationwide subscriber ownership limit, but maintained its voluntary stay on
enforcement of that regulation pending further court action, (ii) reaffirmed its
subscriber ownership information reporting requirements, and (iii) modified its
attribution rules that identify when the ownership or management by us or third
parties of other communications businesses, including cable systems, television
broadcast stations and local telephone companies, may be imputed to us for
purposes of determining our compliance with the FCC's ownership restrictions.
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Also pending on appeal is a challenge to the statutory and FCC regulatory
limitations on the number of channels that can be occupied on a cable system by
a video programmer in which a cable operator has an attributable ownership
interest. We do not expect the outcome of these judicial and regulatory
proceedings or the impact of any ownership restrictions to have a material
impact on our business and operations.
The 1996 Telecom Act generally prohibits us from owning or operating a SMATV or
wireless cable system in any area where we provide franchised cable service. We
may, however, acquire and operate SMATV systems in our franchised service areas
if the programming and other services provided to SMATV subscribers are offered
according to the terms and conditions of our franchise agreement.
The 1996 Telecom Act eliminated the statutory prohibition on the common
ownership, operation or control of a cable system and a television broadcast
station in the same market. While the FCC has eliminated its regulations that
precluded the cross-ownership of a national broadcasting network and a cable
system, it has not yet completed its review of other regulations that prohibit
the common ownership of other broadcasting interests and cable systems in the
same geographical areas.
LEC Ownership of Cable Systems. The 1996 Telecom Act made far-reaching changes
in the regulation of LECs that provide cable services. The 1996 Telecom Act
eliminated federal legal barriers to competition in the local telephone and
cable communications businesses, preempted legal barriers to competition that
previously existed in state and local laws and regulations, and set basic
standards for relationships between telecommunications providers. The 1996
Telecom Act eliminated the statutory telephone company/cable television
cross-ownership prohibition, thereby allowing LECs to offer video services in
their telephone service areas. LECs may provide service as traditional cable
operators with local franchises or they may opt to provide their programming
over unfranchised "open video systems," subject to certain conditions,
including, but not limited to, setting aside a portion of their channel capacity
for use by unaffiliated program distributors on a non-discriminatory basis. The
1996 Telecom Act generally limits acquisitions and prohibits certain joint
ventures between LECs and cable operators in the same market.
A federal appellate court overturned various parts of the FCC's open video
rules, including the FCC's preemption of local franchising requirements for open
video operators. The FCC has modified its open video rules to comply with the
federal court's decision, but we are unable to predict the impact these rule
modifications may have on our business and operations.
Pole Attachment. The Communications Act requires the FCC to regulate the rates,
terms and conditions imposed by public utilities for cable systems' use of
utility pole and conduit space unless state authorities can demonstrate that
they adequately regulate pole attachment rates. In the absence of state
regulation, the FCC administers pole attachment rates on a formula basis. In
some cases, utility companies have increased pole attachment fees for cable
systems that have installed fiber optic cables and that are using such cables
for the distribution of non-video services.
The FCC has concluded that, in the absence of state regulation, it has
jurisdiction to determine whether utility companies have justified their demand
for additional rental fees and that the Communications Act does not permit
disparate rates based on the type of service provided over the equipment
attached to the utility's pole. The FCC's existing pole attachment rate formula,
which may be modified by a pending rulemaking, governs charges for utilities for
attachments by cable operators providing only cable services. The 1996 Telecom
Act and the FCC's implementing regulations modify the current pole attachment
provisions of the Communications Act by immediately permitting certain providers
of telecommunications services to rely upon the protections of the current law
and by requiring that utilities provide cable systems and telecommunications
carriers with nondiscriminatory access to any pole, conduit or right-of-way
controlled by the utility.
The FCC's current rate formula, which is being reevaluated by the FCC, governs
the maximum rate certain utilities may charge for attachments to their poles and
conduit by cable operators providing only cable services and, until 2001, by
certain companies providing telecommunications services. The FCC also adopted a
second rate formula that will be effective in 2001 and will govern the maximum
rate certain utilities may charge for attachments to their poles and conduit by
companies providing telecommunications services, including cable operators.
Several parties have requested the FCC to reconsider its new regulations and
several parties have challenged the new rules in court. A federal appellate
court recently
39
upheld the constitutionality of the new statutory provision that requires
utilities provide cable systems and telecommunications carriers with
nondiscriminatory access to any pole, conduit or right-of-way controlled by the
utility. We are unable to predict the outcome of the legal challenge to the
FCC's new regulations or the ultimate impact any revised FCC rate formula or any
new pole attachment rate regulations might have on our business and operations.
Other Statutory Provisions. The 1992 Cable Act, the 1996 Telecom Act and FCC
regulations preclude any satellite video programmer affiliated with a cable
company, or with a common carrier providing video programming directly to its
subscribers, from favoring an affiliated company over competitors and requires
such programmers to sell their programming to other multichannel video
distributors. These provisions limit the ability of program suppliers affiliated
with cable companies or with common carriers providing satellite-delivered video
programming directly to their subscribers to offer exclusive programming
arrangements to their affiliates. In December 1997, the FCC initiated a
rulemaking to address a number of possible changes to its program access rules.
Among the issues on which the FCC has sought comment is whether the FCC has
jurisdiction to extend its program access rules to terrestrially delivered
programming, and if it does have such jurisdiction, whether it should expand the
rules in this fashion. This rulemaking is pending at the FCC.
The 1992 Cable Act requires cable operators to block fully both the video and
audio portion of sexually explicit or indecent programming on channels that are
primarily dedicated to sexually oriented programming or alternatively to carry
such programming only at "safe harbor" time periods currently defined by the FCC
as the hours between 10 p. m. to 6 a. m. A three-judge federal district court
determined that this provision was unconstitutional. The United States Supreme
Court is currently reviewing the lower court's ruling. The Communications Act
also includes provisions, among others, concerning horizontal and vertical
ownership of cable systems, customer service, subscriber privacy, marketing
practices, equal employment opportunity, regulation of technical standards and
equipment compatibility.
Other FCC Regulations. The FCC revised its cable inside wiring rules to provide
a more specific procedure for the disposition of internal cable wiring that
belongs to an incumbent cable operator that is forced to terminate its cable
services in a MDU building by the building owner. The FCC is also considering
additional rules relating to MDU inside wiring that, if adopted, may
disadvantage incumbent cable operators. The FCC has various rulemaking
proceedings pending that will implement the 1996 Telecom Act; it also has
adopted regulations implementing various provisions of the 1992 Cable Act and
the 1996 Telecom Act that are the subject of petitions requesting
reconsideration of various aspects of its rulemaking proceedings. Other FCC
regulations covering such areas as equal employment opportunity, syndicated
program exclusivity, network program non-duplication, closed captioning of video
programming, registration of cable systems, maintenance of various records and
public inspection files, microwave frequency usage, origination cablecasting and
sponsorship identification, antenna structure notification, marking and
lighting, carriage of local sports broadcast programming, application of rules
governing political broadcasts, limitations on advertising contained in
non-broadcast children's programming, consumer protection and customer service,
indecent programming, programmer access to cable systems, programming
agreements, technical standards, consumer electronics equipment compatibility
and DBS implementation. The FCC has the authority to enforce its regulations
through the imposition of substantial fines, the issuance of cease and desist
orders and/or the imposition of other administrative sanctions, such as the
revocation of FCC licenses needed to operate certain transmission facilities
often used in connection with cable operations.
The FCC has ongoing rulemaking proceedings that may change its existing rules or
lead to new regulations. We are unable to predict the impact that any further
FCC rule changes may have on our business and operations. Other bills and
administrative proposals pertaining to cable communications have previously been
introduced in Congress or have been considered by other governmental bodies over
the past several years. It is probable that Congress and other governmental
bodies will make further attempts to regulate cable communications services.
Copyright. Cable communications systems are subject to federal copyright
licensing covering carriage of television and radio broadcast signals. In
exchange for filing certain reports and contributing a percentage of their
revenues to a federal copyright royalty pool, cable operators can obtain blanket
permission to retransmit copyrighted material on broadcast signals. The nature
and amount of future payments for
40
broadcast signal carriage cannot be predicted at this time. In a report to
Congress, the Copyright Office recommended that Congress make major revisions of
both the cable television and satellite compulsory licenses to make them as
simple as possible to administer, to provide copyright owners with full
compensation for the use of their works, and to treat every multichannel video
delivery system the same, except to the extent that technological differences or
differences in the regulatory burdens placed upon the delivery system justify
different copyright treatment. The possible simplification, modification or
elimination of the compulsory copyright license is the subject of continuing
legislative review. The elimination or substantial modification of the cable
compulsory license could adversely affect our ability to obtain suitable
programming and could substantially increase the cost of programming that
remains available for distribution to our subscribers. We cannot predict the
outcome of this legislative activity.
Our cable communications systems often utilize music in the programs we provide
to subscribers including local advertising, local origination programming and
pay-per-view events. The right to use this music is controlled by music
performance rights societies who negotiate on behalf of their copyright owners
for license fees covering each performance. The cable industry and one of these
societies have agreed upon a standard licensing agreement covering the
performance of music contained in programs originated by cable operators and in
pay-per-view events. Negotiations on a similar licensing agreement are in
process with another music performance rights organization. Rate courts
established by a federal court exist to determine appropriate copyright coverage
and payments in the event the parties fail to reach a negotiated settlement. We
are unable to predict the outcome of these proceedings or the amount of any
license fees we may be required to pay for the use of music. We do not believe
that the amount of such fees will be significant to our financial position,
results of operations or liquidity.
State and Local Regulation. Because our cable communications systems use local
streets and rights-of-way, our systems are subject to state and local
regulation. Cable communications systems generally are operated pursuant to
non-exclusive franchises, permits or licenses granted by a municipality or other
state or local government entity. Franchises generally are granted for fixed
terms and in many cases are terminable if the franchisee fails to comply with
material provisions. The terms and conditions of franchises vary materially from
jurisdiction to jurisdiction. Each franchise generally contains provisions
governing cable service rates, franchise fees, franchise term, system
construction and maintenance obligations, system channel capacity, design and
technical performance, customer service standards, franchise renewal, sale or
transfer of the franchise, territory of the franchisee, indemnification of the
franchising authority, use and occupancy of public streets and types of cable
services provided. The 1992 Cable Act immunizes franchising authorities from
monetary damage awards arising from regulation of cable communications systems
or decisions made on franchise grants, renewals, transfers and amendments.
Internet Operations. The following is a summary of federal laws, regulations and
tariffs, and a description of certain state and local laws pertaining to our
Internet operations.
With significant growth in Internet activity and commerce over the past several
years the FCC and other regulatory bodies have been challenged to develop new
models that allow them to achieve the public policy goals of competition and
universal service. Many aspects of regulation and coordination of Internet
activities and traffic are evolving and are facing unclear regulatory futures.
Changes in regulations in the future will have a significant impact on ISPs,
Internet commerce and Internet services.
The Internet has been able to grow and develop outside the existing regulatory
structure because the FCC has made conscious decisions to limit the application
of its rules. The federal government's efforts have been directed away from
burdening the Internet with regulation. ISPs and other companies in the Internet
industry have not been required to gain regulatory approval for their actions.
The 1996 Telecom Act adopts such a position. The 1996 Act states that it is the
policy of the United States "to preserve the vibrant and competitive free market
that presently exists for the Internet and other interactive computer services,
unfettered by Federal or State regulation."
Regulatory policy approaches toward the Internet have focused on several areas:
avoiding unnecessary regulation, questioning the applicability of traditional
rules, Internet governance (such as the allocation of domain names),
intellectual property, network reliability, privacy, spectrum policy, standards,
security, and international regulation.
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Government may influence the evolution of the Internet in many ways, including
directly regulating, participating in technical standards development, providing
funding, restricting anti-competitive behavior by dominant firms, facilitating
industry cooperation otherwise prohibited by antitrust laws, promoting new
technologies, encouraging cooperation between private parties, representing the
United States in international intergovernmental bodies, and large-scale
purchasing of services.
There are many ways Internet growth could be negatively impacted which may
require future regulation and oversight. Moving toward proprietary standards or
closed networks would reduce the degree to which new services could leverage the
existing infrastructure. The absence of competition in the ISP market, or the
telecommunications infrastructure market, could reduce incentives for
innovation. Excessive or misguided government intervention could distort the
operation of the marketplace, and lead companies to expend valuable resources
working through the regulatory process. Insufficient government involvement may
also, however, have negative consequences. Some issues may require a degree of
central coordination, even if only to establish the initial terms of a
distributed, locally-controlled system. The end result, in the absence of
collective action, may be an outcome that no one favors. In addition, the
failure of the federal government to identify Internet-related areas that should
not be subject to regulation leaves open opportunities for state, local, or
international bodies to regulate excessively and/or inconsistently.
There is no one entity or organization that governs the Internet. Each
facilities-based network provider that is interconnected with the global
Internet controls operational aspects of their own network. Certain functions,
such as domain name routing and the definition of the TCP/IP protocol, are
coordinated by an array of quasi-governmental, intergovernmental, and
non-governmental bodies. The United States government, in many cases, has handed
over responsibilities to these bodies through contractual or other arrangements.
In other cases, entities have emerged to address areas of need such as the
Internet Society ("ISOC"), a non-profit professional society founded in 1992.
ISOC organizes working groups and conferences, and coordinates some of the
efforts of other Internet administrative bodies. The Internet Engineering Task
Force ("IETF"), an open international body mostly comprised of volunteers, is
primarily responsible for developing Internet standards and protocols. The work
of the IETF is coordinated by the Internet Engineering Steering Group, and the
Internet Architecture Board, which are affiliated with ISOC. The Internet
Assigned Numbers Authority handles Internet addressing matters under a contract
between the Department of Defense and the Information Sciences Institute at the
University of Southern California.
The legal authority of any of these bodies is unclear. Most of the underlying
architecture of the Internet was developed under the auspices, directly or
indirectly, of the United States government. The government has not, however,
defined whether it retains authority over Internet management functions, or
whether these responsibilities have been delegated to the private sector. The
degree to which any existing body can lay claim to representing "the Internet
community" is also unclear. Membership in the existing Internet governance
entities is drawn primarily from the research and technical communities.
The 1996 Telecom Act provides little direct guidance as to whether the FCC has
authority to regulate Internet-based services. Section 223 concerns access by
minors to obscene, harassing, and indecent material over the Internet and other
interactive computer networks, and sections 254, 706, and 714 address mechanisms
to promote the availability of advanced telecommunications services, possibly
including Internet access. Section 230 states a policy goal "to preserve the
vibrant and competitive free market that presently exists for the Internet and
other interactive computer services, unfettered by Federal or State regulation."
None of these sections, however, specifically addresses the FCC's jurisdiction.
Nothing in the 1996 Telecom Act expressly limits the FCC's authority to regulate
services and facilities connected with the Internet, to the extent that they are
covered by more general language in any section of the Act. Moreover, it is not
clear what such a limitation would mean even if it were adopted. The
Communications Act directs the FCC to regulate "interstate and foreign commerce
in communication by wire and radio," and the FCC and state public utility
commissions indisputably regulate the rates and conditions under which ISPs
purchase services and facilities from telephone companies. Given the absence of
clear statutory guidance, the FCC must determine whether or not it has the
authority or the obligation to exercise regulatory jurisdiction over specific
Internet-based activities. The FCC may also decide whether
42
to forebear from regulating certain Internet-based services. Forbearance allows
the FCC to decline to adopt rules that would otherwise be required by statute.
Under section 401 of the 1996 Telecom Act, the FCC must forbear if regulation
would not be necessary to prevent anticompetitive practices and to protect
consumers, and forbearance would be consistent with the public interest.
Finally, the FCC could consider whether to preempt state regulation of Internet
services that would be inconsistent with achievement of federal goals.
The FCC has not attempted to regulate the companies that provide the software
and hardware for Internet telephony, or the access providers that transmit their
data, as common carriers or telecommunications service providers. In March 1996,
America's Carriers Telecommunication Association ("ACTA"), a trade association
primarily comprised of small and medium-size interexchange carriers, filed a
petition with the FCC asking the FCC to regulate Internet telephony. ACTA argues
that providers of software that enables real-time voice communications over the
Internet should be treated as common carriers and subject to the regulatory
requirements of Title II. The FCC has sought comment on ACTA's request. Other
countries are considering similar issues.
The FCC has not considered whether any of the rules that relate to radio and
television broadcasters should also apply to analogous Internet-based services.
The vast majority of Internet traffic today travels over wire facilities, rather
than the radio spectrum. As a policy matter, however, a continuous, live,
generally-available music broadcast over the Internet may appear similar to a
traditional radio broadcast, and the same arguments may be made about streaming
video applications. The FCC will need to consider the underlying policy
principles that, in the language of the Act and in FCC decisions, have formed
the basis for regulation of the television and radio broadcast industries.
The FCC does not regulate the prices charged by ISPs or Internet backbone
providers. However, the vast majority of users connect to the Internet over
facilities of existing telecommunications carriers. Those telecommunications
carriers are subject to varying levels of regulation at both the federal and the
state level. Thus, regulatory decisions exercise a significant influence over
the economics of the Internet market. Economics is expected to drive the
development of both the Internet and of other communications technologies.
Internet access is understood to be an enhanced service under FCC rules;
therefore ISPs are treated as end users, rather than carriers, for purposes of
the FCC's interstate access charge rules. This distinction was created when the
FCC established the access charge system in 1983. Thus, when ISPs purchase lines
from LECs, the ISPs buy those lines under the same tariffs that any business
customer would use -- typically voice grade measured business lines or
23-channel ISDN primary rate interface (PRI). Although these services generally
involve a per-minute usage charge in addition to a monthly fee, the usage charge
is assessed only for outbound calls. ISPs, however, exclusively use these lines
to receive calls from their customers, and thus effectively pay flat monthly
rates. By contrast, IXCs that interconnect with LECs are considered carriers,
and thus are required to pay interstate access charges for the services they
purchase. Most of the access charges that carriers pay are usage-sensitive in
both directions. Thus, IXCs are assessed per-minute charges for both originating
and terminating calls. The FCC concluded in the Local Competition Order that the
rate levels of access charges appear to significantly exceed the incremental
cost of providing these services. The FCC in December 1996 launched a
comprehensive proceeding to reform access charges in a manner consistent with
economic efficiency and the development of local competition.
The revenue effects of Internet usage today depend to a significant extent on
the structure of state tariffs. Internet usage generates less revenue for LECs
in states where flat local service rates have been set low, with compensating
revenues in the form of per-minute intrastate toll charges. Because ISPs only
receive local calls, they do not incur these usage charges. By contrast, in
states where flat charges make up a higher percentage of LEC revenues, ISPs will
have a less significant revenue effect. ISP usage is also affected by the
relative pricing of services such as ISDN Primary Rate Interface (PRI), frame
relay, and fractional T-1 connections, which are alternatives to analog business
lines. Prices for these services, and the price difference on a
per-voice-channel basis between the options available to ISPs, vary widely
across different states. In many cases, tariffs for these and other data
services are based on assumptions that do not reflect the realities of the
Internet access market today. The scope of local calling areas also affects the
architecture of Internet access services. In states with larger unmeasured local
calling areas, ISPs need fewer POPs in order to serve the same customers through
a local call.
43
We are presently unable to determine what the impact of potential Internet
regulatory actions and decisions will be on our liquidity, results of operations
and cash flows.
Financial information about our foreign and domestic operations and export sales
Although we have several agreements to help originate and terminate
international toll traffic, we do not have foreign operations or export sales.
We conduct our operations throughout the western contiguous United States,
Alaska and Hawaii and believe that any subdivision of our operations into
distinct geographic areas would not be meaningful. Revenues associated with
international toll traffic were $4.2 million, $7.0 million and $7.6 million for
the years ended December 31, 1999, 1998 and 1997, respectively.
Seasonality
Our long-distance revenues have historically been highest in the summer months
as a result of temporary population increases attributable to tourism and
increased seasonal economic activity such as construction, commercial fishing,
and oil and gas activities. Our cable television revenues, on the other hand,
are higher in the winter months because consumers tend to watch more television,
and spend more time at home, during these months. Our local service and Internet
operations are not expected to exhibit significant seasonality, with the
exception of SchoolAccess(TM) Internet services that are reduced during the
summer months. Our ability to implement construction projects is also reduced
during the winter months because of cold temperatures, snow and short daylight
hours.
Customer-sponsored research
We have not expended material amounts during the last three fiscal years on
customer-sponsored research activities.
Backlog of Orders and Inventory
As of December 31, 1999 and 1998, our long-distance services segment had a
backlog of equipment sales orders of approximately $101,000 and $202,000,
respectively. The decrease in backlog as of December 31, 1999 can be attributed
primarily to reduced equipment sales activity at the end of the fourth quarter
in 1999 as compared to 1998. Many of our customers delayed equipment orders so
that their systems would be stable at the turn of the century, resulting in
reduced sales activity and order backlog. We expect that all of the orders in
backlog at the end of 1999 will be delivered during 2000.
Geographic Concentration and Alaska Economy
We offer voice and data telecommunication and video services to customers
primarily throughout Alaska. As a result of this geographic concentration,
growth of our business and our operations depend upon economic conditions in
Alaska. The economy of Alaska is dependent upon the natural resource industries,
and in particular oil production, as well as investment earnings, tourism,
government, and United States military spending. Any deterioration in these
markets could have an adverse impact on us. Oil revenues are now the third
largest source of state revenues, following investment income and federal funds.
Alaska's investment earnings will supply 33% of the state's projected revenues
in fiscal 2001, with federal funding comprising 27% of the total and oil
revenues 24% of the total. Much of the investment income and all of the federal
funding is restricted or dedicated for specific purposes, however, leaving oil
revenues as the primary funding source (75%) of general operating expenditures.
The volume of oil transported by the TransAlaska Oil Pipeline System over the
past 20 years has been as high as 2.0 million barrels per day in fiscal 1988.
Production has begun to decline in recent years and is presently down 40% from
the fiscal 1988 level, and down 25% from the fiscal 1997 level. The two largest
producers of oil in Alaska (the primary users of the TransAlaska Oil Pipeline
System) continue to explore, develop and produce new oil fields and to enhance
recovery from existing fields to offset the decline in production from the
Prudhoe Bay field. Both companies have invested large sums of money in
developing and implementing oil recovery techniques at the Prudhoe Bay field and
other nearby fields. The state now forecasts a temporary reversal of the
production rate decline and a slight increase in the production rate during the
period from fiscal 2003 to 2005. This forecasted increase is attributed to new
developments at the Alpine, Liberty and Northstar fields, as well as new
production from Prudhoe Bay and other fields.
44
Market prices for North Slope oil declined to below $10 per barrel in 1998, and
averaged $12.70 in fiscal 1999, well below the average price used by the state
to budget its oil related revenues. The prices have since increased to over $30
per barrel in March 2000, with a year-to-date fiscal 2000 average price per
barrel of $22.78. Over the past decade, the rolling 60-month average price for
North Slope crude oil has been between $16.39 and $17.74 per barrel 95 percent
of the time.
The state's forecast for fiscal 2001 shows the price for North Slope crude
averaging $18.28 and then declining to the low-$18 and high-$17 range for the
next five years. Recent higher prices are largely due to the Organization of
Petroleum Exporting Countries ("OPEC") March 1999 agreement to cut production to
force prices higher. The OPEC agreement called for production cuts from January
1999 levels of a little more than 2 million barrels per day. Although OPEC
trimmed output by about 1.75 million barrels, or nearly 85 percent of targeted
reductions, October 1999 OPEC production has increased by 400,000 barrels per
day. This reduces current compliance to 65 percent of targeted cuts. History
suggests that market forces lead to lower prices when oil sells for more than
$20 per barrel. What is uncertain is when and how fast the correction will
occur. The response of non-OPEC production to higher prices is uncertain. The
production policy of OPEC and its ability to continue to act in concert
represents a key uncertainty in the state's revenue forecast.
The state of Alaska maintains the Constitutional Budget Reserve Fund that is
intended to fund budgetary shortfalls. Based on the state's oil price and
production forecasts, and considering the state's other revenues, the Alaska
Department of Revenue expects the state will need to draw less than $500 million
from the Constitutional Budget Reserve Fund in Fiscal 2000 and about $700
million in Fiscal 2001 to balance the state's budget, down substantially from
the $1 billion fiscal 2000 draw expected in their spring 1999 forecast. If the
state's current projections are realized, the Constitutional Budget Reserve Fund
will be depleted in 2004. If the fund is depleted, aggressive state action will
be necessary to increase revenues and reduce spending in order to balance its
budget. The Governor of the State of Alaska and the Alaska Legislature are
pursuing cost cutting and revenue enhancing measures.
Oil companies and service providers announced cost cutting measures to offset a
portion of the declining oil revenues in 1999, resulting in a reduction of oil
industry jobs of over 1,400. Projects that are underway are reportedly not
affected by the cutbacks, however BP Amoco p.l.c. ("BP" or "BP Amoco") did
notify state officials that it would delay its exploration of the Genesee test
site east of Prudhoe.
Although oil prices have a substantial effect on Alaska's economy, analysts
believe that tourism, air cargo, and service sectors are strong enough to offset
a portion of the expected downturn. These industries have helped offset the
prevailing pattern of oil industry downsizing that has occurred during much of
the last several years. Three other factors that support Alaska's economy are
the healthy national economy, lower interest rates, and low inflation. We expect
construction to remain strong over the next few years. $1.77 billion of federal
money is expected to be distributed to the state of Alaska for highways and
other federally supported projects in fiscal 2000.
Effective March 1997, the State of Alaska passed new legislation relaxing state
oil royalties with respect to marginal oil fields that the oil companies claim
would not be economic to develop otherwise. No assurance can be given that oil
companies doing business in Alaska will be successful in discovering new fields
or further developing existing fields which are economic to develop and produce
oil with access to the pipeline or other means of transport to market, even with
the reduced level of royalties.
BP Amoco announced in April 1999 its intention to purchase ARCO for $26.8
billion. BP Amoco and ARCO together reportedly own approximately 70 percent of
the Alaska North Slope oil fields and the company that operates the Trans-Alaska
Pipeline System.
On February 2, 2000 the FTC voted to fight in federal court to block BP Amoco's
purchase of ARCO citing their concern over:
- the reduction in competition in the sale of Alaska oil to West Coast
independent refineries;
- the reduction in competition in Alaska lease sales, thus reducing state
and federal government revenue from such sales; and
- possible manipulation of futures market prices by the resulting company.
45
On March 15, 2000 BP Amoco and ARCO announced that they have agreed to sell
ARCO's Alaskan businesses to Phillips Petroleum Co. ("Phillips") for $7 billion.
The sale, which is subject to completion of the ARCO combination, is intended to
address FTC anti-trust concerns. BP Amoco reported March 16, 2000 that the
company was at an advanced stage in discussions with the FTC on its proposed
combination with ARCO and was hopeful of a successful outcome "within a matter
of weeks."
BP Amoco and ARCO have reportedly agreed jointly with the FTC, the US West Coast
states and Alaska to suspend litigation - originally scheduled to begin in
California on March 20 - pending the outcome of those negotiations.
The sale to Phillips of all ARCO's Alaskan businesses includes a 21.9 per cent
interest in the Prudhoe Bay oil field and 42.6 per cent of the gas cap, as well
as a range of interests in related fields, a 55 per cent interest in the greater
Kuparuk area and a 78 per cent stake in the Alpine field. The package also
includes 1.1 million net exploration acres, a 22.3 per cent interest in the
Trans-Alaska pipeline, and ARCO's crude oil shipping fleet that includes six
tankers in service and three under construction. The booked reserves being sold
total 1.9 billion barrels of oil equivalent. The $7 billion price for the
Alaskan businesses reportedly is made up of approximately $6.5 billion cash for
the field, pipeline and shipping operations and assets, plus a supplemental
payment of $500 million based on a formula tied to the price of crude oil. There
will also be a payment of some $150 million for crude oil inventories. The
transaction, which is expected to close early in the second quarter and will be
effective retroactive to January 1, 2000, is subject to approval of the Federal
Trade Commission (FTC). The parties are reportedly working with the FTC and the
states of Alaska, California, Oregon and Washington to obtain such approval.
Phillips' current Alaskan operations include a 70 percent interest in the Kenai
LNG plant that has exported LNG to Japan for 30 years; a 100 percent interest in
the North Cook Inlet field; a less than 2 percent interest in the Prudhoe Bay
Unit; a 10 percent interest in the Point Thomson field; interests in several of
the Prudhoe Bay satellites; a small interest in TAPS; and exploration acreage in
NPRA and elsewhere.
Exxon Mobil Corp. ("Exxon") filed a lawsuit March 24, 2000 to stop Phillip's
acquisition of ARCO's Alaska assets. Exxon contends that it has the right of
first refusal to purchase certain of ARCO's Alaska assets. This lawsuit could
delay or block the pending sale of ARCO Alaska, Inc. to Phillips. The FCC is
expected to wait for the outcome of the Exxon lawsuit before rendering its
decision.
We are not able to predict the effect on the State of Alaska's economy or on us
should these acquisitions and sales transactions not be consummated, or should
the expected efficiencies and cost savings not be realized.
Should new discoveries or developments not materialize or the price of oil
return to its prior depressed levels, the long term trend of continued decline
in oil production from the Prudhoe Bay field area is inevitable with a
corresponding adverse impact on the economy of the state, in general, and on
demand for telecommunications and cable television services, and, therefore, on
us, in particular.
We have, since our entry into the telecommunication marketplace, aggressively
marketed our services to seek a larger share of the available market. The
customer base in Alaska is limited, however, with a small population of
approximately 620,000 people. 42% of are located in the Anchorage area, 14% are
located in the Fairbanks area, 5% are located in the Juneau area, and the rest
are spread out over the vast reaches of Alaska. No assurance can be given that
the driving forces in the Alaska economy, and in particular, oil production,
will continue at levels to provide an environment for expanded economic
activity.
Employees
We employed 949 persons as of March 03, 2000, and are not parties to union
contracts with our employees. We believe our future success will depend upon our
continued ability to attract and retain highly skilled and qualified employees.
We believe that relations with our employees are satisfactory.
46
Other
No material portion of our businesses is subject to renegotiation of profits or
termination of contracts at the election of the federal government.
Item 2. PROPERTIES
General.
Our properties do not lend themselves to description by character or location of
principal units. Our investment in property, plant and equipment in our
consolidated operations consisted of the following at December 31:
1999 1998
-------- --------
Telephone distribution systems 64.5% 35.9%
Cable television distribution services 23.1% 22.3%
Support equipment 10.2% 10.5%
Property and equipment under capital leases 0.7% 0.7%
Construction in progress 0.7% 29.8%
Transportation equipment 0.5% 0.5%
Land and buildings 0.3% 0.3%
-------- --------
Total 100.0% 100.0%
======== ========
These properties are divided among our operating segments at December 31, 1999
as follows: long-distance services, 56.7%; cable services, 24.6%; local access
services, 7.5%; Internet services, 4.0%; and other, 7.2%.
These properties consist primarily of switching equipment, satellite earth
stations, fiber-optic networks, microwave radio and cable and wire facilities,
cable head-end equipment, coaxial distribution networks, routers, servers,
transportation equipment, computer equipment and general office equipment.
Substantially all of our properties secure our Senior Holdings Loan and Fiber
Facility. You should see note 5 to the Notes to Consolidated Financial
Statements included in Part II of this Report for further discussion.
Our construction in progress totaled $2.9 million at December 31, 1999,
consisting of telecommunications, cable and Internet projects that were not
complete at December 31, 1999. Construction in progress totaled $119.6 million
at December 31, 1998, of which $114.9 related to Alaska United fiber-optic
facilities connecting Anchorage, Juneau, Fairbanks, Valdez and Whittier, Alaska
to Seattle Washington, and $4.7 related to telecommunications and Internet
projects that were not complete at December 31, 1998.
Central office equipment, buildings, furniture and fixtures and certain
operating and other equipment are insured under a blanket property insurance
program. This program provides substantial limits of coverage against "all
risks" of loss including fire, windstorm, flood, earthquake and other perils not
specifically excluded by the terms of the policies. We currently self-insure all
of our cable and fiber optic outside plant against casualty losses.
Long-Distance Services. We operate a state-of-the-art, competitive
telecommunications network employing the latest digital transmission technology
based upon fiber optic and digital microwave facilities within and between
Anchorage, Fairbanks and Juneau. Our network includes digital fiber optic cables
linking Alaska to the contiguous 48 states and providing access to other
carriers' networks for communications around the world. We use satellite
transmission to remote areas of Alaska and for certain interstate traffic.
Our long-distance services segment owns properties and facilities including
satellite earth stations, and distribution, transportation and office equipment.
Additionally, in December 1992 we acquired access to capacity on an undersea
fiber optic cable from Seward, Alaska to Pacific City, Oregon. We completed
construction of an additional fiber optic cable facility linking Alaska to
Seattle, Washington in February 1999, which is owned subject to an outstanding
mortgage.
47
We entered into a purchase and lease-purchase option agreement in August 1995
for the acquisition of satellite transponders on the PanAmSat Galaxy XR
satellite to meet our long-term satellite capacity requirements. We intend to
operate the satellite pursuant to a long-term capital lease arrangement with a
leasing company. The purchase and lease-purchase option agreement provides for
the interim lease of transponder capacity on the PanAmSat Galaxy IX satellite
through the delivery of the purchased transponders.
We lease our long-distance services industry segment's executive, corporate and
administrative facilities in Anchorage, Fairbanks and Juneau, Alaska. Our
operating, executive, corporate and administrative properties are in good
condition. We consider our properties suitable and adequate for our present
needs and they are being fully utilized.
Cable Services. The Cable Systems serve 26 communities and areas in Alaska
including Anchorage, Fairbanks and Juneau, the state's three largest urban
areas. As of December 31, 1999 the Cable Systems consisted of approximately
1,825 miles of installed cable plant having between 300 to 550 MHz of channel
capacity. Principal physical assets used in our Cable Systems include central
receiving apparatus, distribution cables, converters, customer service centers
and local business offices.
We lease our Cable Systems customer service and operating facilities in
substantially all locations. We own the receiving and distribution equipment of
each system. In order to keep pace with technological advances, we are
maintaining, periodically upgrading and rebuilding the physical components of
our cable communications systems. Such properties are in good condition. We
consider our properties suitable and adequate for our present and anticipated
future needs.
Local Access Services. We operate a state-of-the-art, competitive local access
telecommunications network employing the latest digital transmission technology
based upon fiber optic facilities within Anchorage. Our outside plant consists
of connecting lines (aerial, underground and buried cable) not on customers'
premises, the majority of which is on or under public roads, highways or
streets, while the remainder is on or under private property. Central office
equipment primarily consists of digital electronic switching equipment and
circuit equipment. Operating equipment consists of motor vehicles and other
equipment.
Substantially all of our local access services' central office equipment,
administrative and business offices, and customer service centers are in leased
facilities. Such properties are in good condition. We consider our properties
suitable and adequate for our present and anticipated future needs.
Internet Services. We operate a state-of-the-art, competitive Internet network
employing the latest available technology. We provide access to the Internet
using a platform that includes many of the latest advancements in technology.
The physical platform is concentrated in Anchorage and is extended into many
remote areas of the state. Our Internet platform includes a trunk connecting the
Anchorage POP to an Internet access point in Seattle through multiple, diversely
routed upstream Internet networks, routers on each end of the frame relay trunk
to control the flow of data over the trunk, and various other routers, servers
and support equipment.
We lease our Internet services industry segment's operating facilities, located
primarily in Anchorage. Such properties are in good condition. We consider our
properties suitable and adequate for our present and anticipated future needs.
Capital Expenditures. Capital expenditures consist primarily of (a) gross
additions to property, plant and equipment having an estimated service life of
one year or more, plus the incidental costs of preparing the asset for its
intended use, and (b) gross additions to capitalized software.
The total investment in property, plant and equipment has increased from $44.2
million at January 1, 1995 to $61.0 million at December 31, 1999, including
construction in progress and not including deductions of accumulated
depreciation. Significant additions to property, plant and equipment will be
required
48
in the future to meet the growing demand for communications, Internet and
entertainment services and to continually modernize and improve such services to
meet competitive demands.
Our capital expenditures for 1995 through 1999 were as follows (in millions):
1995 $ 8.9
1996 $ 38.6
1997 $ 64.6
1998 $ 149.0
1999 $ 36.6
We project capital expenditures of approximately $80 to $85 million for 2000,
consisting of $48 million for satellite transponders, $15 to $17 million for
long-distance services, $7 to $8 million for cable services, $5 to $6 million
for local access services, $4 to $5 million for Internet services, and $1
million for wireless services. A majority of the expenditures will expand,
enhance and modernize our current networks, facilities and operating systems,
and will develop wireless and other businesses.
During 1999, we funded our normal business capital requirements substantially
through internal sources and, to the extent necessary, from external financing
sources. We expect expenditures for 2000 to be financed in the same manner,
except for the new satellite transponders that will be acquired subject to
long-term lease/purchase financing.
Item 3. LEGAL PROCEEDINGS
Except as set forth in this item, neither The Company, its property nor any of
its subsidiaries or their property is a party to or subject to any material
pending legal proceedings. We are parties to various claims and pending
litigation as part of the normal course of business. We are also involved in
several administrative proceedings and filings with the FCC, Department of Labor
and state regulatory authorities. In the opinion of management, the nature and
disposition of these matters are considered routine and arising in the ordinary
course of business which management believes, even if resolved unfavorably to
us, would not have a materially adverse affect on our business or financial
position, results of operations or liquidity.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1999 to a vote of
security holders, through the solicitation of proxies or otherwise
49
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information for Common Stock. Shares of GCI's Class A common stock are
traded on the Nasdaq National Market tier of The Nasdaq Stock Market under the
symbol GNCMA. Shares of GCI's Class B common stock are traded on the
Over-the-Counter market. Each share of Class B common stock is convertible, at
the option of the holder, into one share of Class A common stock. The following
table sets forth the high and low sales price for the above-mentioned common
stock for the periods indicated. Market price data were obtained from the Nasdaq
Stock Market quotation system. The prices, rounded up to the nearest eighth,
represent prices between dealers, do not include retail markups, markdowns, or
commissions, and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Class A Class B
---------------------------------------------------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1998:
First Quarter 8 3/8 6 1/8 8 3/8 6 1/8
Second Quarter 8 5 1/2 8 5 1/2
Third Quarter 6 1/8 2 5/8 6 1/8 2 5/8
Fourth Quarter 5 2 1/2 5 2 1/2
1999:
First Quarter 5 1/4 4 5 1/4 4
Second Quarter 8 4 8 4
Third Quarter 7 4 3/4 7 4 3/4
Fourth Quarter 6 1/4 3 3/4 6 1/4 3 3/4
</TABLE>
Holders. As of December 31, 1999 there were 1,868 holders of record of GCI's
Class A common stock and 562 holders of record of GCI's Class B common stock
(amounts do not include the number of shareholders whose shares are held of
record by brokers, but do include the brokerage house as one shareholder).
Dividends. GCI and GCI, Inc. have never paid cash dividends on their common
stock and have no present intention of doing so. Payment of cash dividends in
the future, if any, will be determined by GCI's Board of Directors in light of
our earnings, financial condition and other relevant considerations. Our
existing bank loan agreements contain provisions that prohibit payment of
dividends, other than stock dividends (you should see note 5 to the Consolidated
Financial Statements included in Part II of this Report for more information).
Stock Transfer Agent And Registrar. ChaseMellon Shareholder Services, L.L.C. is
our stock transfer agent and registrar.
50
Item 6. SELECTED FINANCIAL DATA
<TABLE>
The following table presents selected historical information relating to
financial condition and results of operations over the past five years.
<CAPTION>
Years ended December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Amounts in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues (1) $ 279,179 246,795 223,809 164,894 129,279
Net earnings (loss) before income taxes,
extraordinary item and cumulative effect of
a change in accounting principle (2) $ (14,866) (10,920) (2,235) 12,690 12,601
Loss on early extinguishment of debt, net of
income tax benefit of $180 $ 0 0 521 0 0
Cumulative effect of a change in accounting
principal, net of income tax benefit of $245 $ 344 0 0 0 0
Net earnings (loss) $ (9,527) (6,797) (2,183) 7,462 7,502
Basic net earnings (loss) per common share $ (0.21) (0.14) (0.05) 0.28 0.32
Diluted net earnings (loss) per common share $ (0.21) (0.14) (0.05) 0.27 0.31
Total assets (3) $ 643,151 649,445 545,302 447,335 84,765
Long-term debt, including current portion (3) $ 339,400 351,657 250,084 223,242 9,980
Obligations under capital leases, including
current portion $ 1,674 2,186 1,188 746 1,047
Total stockholders' equity (3, 4) $ 192,548 200,007 204,439 149,554 43,016
Dividends declared per Common share (5) $ 0.00 0.00 0.00 0.00 0.00
<FN>
--------------------
1 The 1997 revenue increase is primarily attributed to reporting 12
months of cable television service revenues as compared to two months
reported in 1996.
2 Our net losses in 1999, 1998 and 1997 are primarily attributed to
additional depreciation, amortization and interest expense resulting
from the cable company acquisitions in October 1996 and startup losses
from our entry into local access services and Internet services
markets.
3 Increases in our total assets, long-term debt and stockholders' equity
in 1996 as compared to 1995 result in part from the cable company
acquisitions and MCI (now MCI WorldCom) stock issuance described in
note 8 to the Notes to Consolidated Financial Statements included in
Part II of this Report. Increases in assets and long-term debt in 1998
as compared to 1997 result primarily from our construction of a
fiber-optic system connecting points in Alaska with Seattle Washington
as further described in note 9 to the accompanying Notes to
Consolidated Financial Statements included in Part II of this Report.
4 The 1997 increase in stockholders' equity is primarily attributed to
our equity offering in August 1997, described in note 7 to the
accompanying Notes to Consolidated Financial Statements included in
Part II of this Report.
5 We have never paid a cash dividend on our common stock and do not
anticipate paying dividends in the foreseeable future. We intend to
retain our earnings, if any, for the development of our business.
Payment of cash dividends in the future, if any, will be determined by
the board of directors in light of our earnings, financial condition,
credit agreements and other relevant considerations. Our existing bank
loan agreements contain provisions that prohibit payment of dividends,
other than stock dividends, as further described in note 5 to the Notes
to Consolidated Financial Statements included in Part II of this
Report.
</FN>
</TABLE>
51
Item 7. Management's discussion and analysis of financial condition and results
of operations
In the following discussion, General Communication, Inc. and its direct and
indirect subsidiaries are referred to as "we," "us" and "our."
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the notes thereto. See -
Cautionary Statement Regarding Forward-Looking Statements.
OVERVIEW
We have experienced significant growth in recent years through strategic
acquisitions, deploying new business lines, and expansion of our existing
businesses. We have historically met our cash needs for operations through our
cash flows from operating activities. Cash requirements for acquisitions and
capital expenditures have been provided largely through our financing
activities.
Long-distance services. Our provision of interstate and intrastate long-distance
services to residential, commercial and governmental customers and to other
common carriers (principally MCI WorldCom, Inc. ("MCI WorldCom") and Sprint
Corporation ("Sprint")), and provision of private line and leased dedicated
capacity services accounted for 97.0% of our total long-distance services
revenues during 1999. Factors that have the greatest impact on year-to-year
changes in long-distance services revenues include the rate per minute charged
to customers and usage volumes, usually expressed as minutes of use.
Revenues from private line and other data services sales increased 13.4% to
$22.0 million during 1999 as compared to 1998 due primarily to increased system
capacity and increasing demand for data services by Internet service providers
("ISP"), commercial and governmental customers, and others. Demand for data
services to and from the lower 48 states previously exceeded the available
supply capacity, however such demand is beginning to be filled with uncompressed
fiber optic capacity on the Alaska United fiber optic cable system.
Our long-distance cost of sales and services has consisted principally of direct
costs of providing services, including local access charges paid to LECs for
originating and terminating long-distance calls in Alaska, and fees paid to
other long-distance carriers to carry calls terminating in areas not served by
our network (principally the lower 49 states, most of which calls are carried
over MCI WorldCom's network, and international locations, which calls are
carried principally over Sprint's network). During 1999, local access charges
accounted for 52.7% of long-distance cost of sales and services, fees paid to
other long-distance carriers represented 30.9%, satellite transponder lease and
undersea fiber maintenance costs represented 12.8%, and other costs represented
3.6% of long-distance cost of sales and services.
Our long-distance selling, general, and administrative expenses have consisted
of operating and engineering, customer service, sales and communications,
management information systems, general and administrative, and legal and
regulatory expenses. Most of these expenses consist of salaries, wages and
benefits of personnel and certain other indirect costs (such as rent, travel,
utilities, insurance and property taxes). A significant portion of long-distance
selling, general, and administrative expenses, 28.5% during 1999, represents the
cost of our advertising, promotion and market analysis programs.
Long-distance services face significant competition from AT&T Alascom, Inc.,
long-distance resellers, and from local telephone companies that have entered
the long-distance market. The number of active long-distance residential,
commercial and small business customers increased 10.7% at December 31, 1999 as
compared to December 31, 1998. We believe our approach to developing, pricing,
and providing long-distance services and bundling different business segment
services will continue to allow us to be competitive in providing those
services.
Revenues derived from other common carriers increased 0.2% in 1999 as compared
to 1998. The low rate of growth is due primarily to reduced rates charged to
such carriers and a change in the mix of wholesale minutes carried for such
customers. We secured contract amendments during the second quarter of 1999 with
MCI WorldCom and Sprint. The amendments provided, among other things, for a
three-year
52
contract term extension for Sprint. The MCI WorldCom contract expires in 2001.
Other common carrier traffic routed to us for termination in Alaska is largely
dependent on traffic routed to MCI WorldCom and Sprint by their customers.
Pricing pressures, new program offerings and market consolidation continue to
evolve in the markets served by MCI WorldCom and Sprint. If, as a result, their
traffic is reduced, or if their competitors' costs to terminate or originate
traffic in Alaska are reduced, our traffic will also likely be reduced, and our
pricing may be reduced to respond to competitive pressures. We are unable to
predict the effect on us of such changes, however given the materiality of other
common carrier revenues to us, a significant reduction in traffic or pricing
could have a material adverse effect on our financial position, results of
operations and liquidity. In October 1999 MCI WorldCom and Sprint announced
their intention to merge, subject to certain approvals. Both companies
anticipate the merger will close in the second half of 2000. We are unable to
predict the outcome or the merger's impact on our operations, liquidity or
financial condition.
Cable services. During 1999, cable television revenues represented 21.9% of
consolidated revenues. The cable systems serve 26 communities and areas in
Alaska, including the state's three largest population centers, Anchorage,
Fairbanks and Juneau.
We generate cable services revenues from three primary sources: (1) programming
services, including monthly basic or premium subscriptions and pay-per-view
movies or other one-time events, such as sporting events; (2) equipment rentals
or installation; and (3) advertising sales. During 1999 programming services
generated 85.5% of total cable services revenues, equipment rental and
installation fees accounted for 8.8% of such revenues, advertising sales
accounted for 4.6% of such revenues, and other services accounted for the
remaining 1.1% of total cable services revenues. The primary factors that
contribute to year-to-year changes in cable services revenues are average
monthly subscription and pay-per-view rates, the mix among basic, premium and
pay-per-view services, and the average number of subscribers during a given
reporting period.
The cable systems' cost of sales and selling, general and administrative
expenses has consisted principally of programming and copyright expenses, labor,
maintenance and repairs, marketing and advertising and rental expense. During
1999 programming and copyright expenses represented 32.6% of total cable cost of
sales and selling, general and administrative expenses, and general and
administrative costs represented 47.3% of such total. Marketing and advertising
costs represented approximately 7.9% of such total expenses.
Cable services face competition from alternative methods of receiving and
distributing television signals and from other sources of news, information and
entertainment. We believe our cable television services will continue to be
competitive based on providing, at reasonable prices, a greater variety of
programming and other communication services than are available off-air or
through other alternative delivery sources and upon superior technical
performance and customer service.
Local access services. We generate local access services revenues from three
primary sources: (1) business and residential basic dial tone services; (2)
business private line and special access services; and (3) business and
residential features and other charges, including voice mail, caller ID,
distinctive ring, inside wiring and subscriber line charges. Effective March
1999 we transitioned to the "bill and keep" cost settlement method for
termination of traffic on our facilities and on other's facilities. Local
exchange services revenues totaled $15.5 million representing 5.6% of
consolidated revenues in 1999. The primary factors that contribute to
year-to-year changes in local access services revenues are the average number of
business and residential subscribers to our services during a given reporting
period and the average monthly rates charged for non-traffic sensitive services.
Operating and engineering expenses represented approximately 5.9% of total local
access services cost of sales and selling, general and administrative expenses
during 1999. Marketing and advertising costs represented approximately 5.3% of
such total expenses, customer service and general and administrative costs
represented approximately 48.7% of such total expenses, and local access cost of
sales represented approximately 40.1% of such total expenses.
53
Our local access services face significant competition in Anchorage from ACS and
AT&T Alascom, Inc. We believe our approach to developing, pricing, and providing
local access services will allow us to be competitive in providing those
services.
Internet services. We began offering Internet services in several markets in
Alaska during 1998. We generate Internet services revenues from three primary
sources: (1) access product services, including commercial dedicated access
("DIAS"), ISP DIAS, and retail dial-up service revenues; (2) SchoolAccess(TM)
DIAS and server revenues; and (3) network management services. Internet services
revenues totaled $9.1 million representing 3.3% of total revenues in 1999. The
primary factors that contribute to year-to-year changes in Internet services
revenues are the average number of subscribers to our services during a given
reporting period, the average monthly subscription rates, and the number of
additional premium features selected.
Operating and general and administrative expenses represented approximately
56.7% of total Internet services cost of sales and selling, general and
administrative expenses during 1999. Internet cost of sales represented
approximately 37.4% of such total expenses and marketing and advertising
represented approximately 5.9% of such total expenses.
Significant new marketing campaigns have been introduced in 1999 featuring
bundled residential and commercial Internet products. Additional bandwidth was
made available to our Internet segment resulting from completion of the Alaska
United undersea fiber optic cable project. The new Internet offerings are
coupled with our long-distance and local access services offerings and provide
free basic Internet services or discounted premium Internet services if certain
long-distance or local access services plans are selected. Value-added premium
Internet features are available for additional charges.
We compete with a number of Internet service providers in our markets. We
believe our approach to developing, pricing, and providing Internet services
will allow us to be competitive in providing those services.
Other services, other expenses and net loss. Telecommunications services
revenues reported in the Other segment as described in note 10 to the
accompanying consolidated financial statements include sales of fiber optic
system capacity (see below), corporate network management contracts,
telecommunications equipment sales and service, other miscellaneous revenues
(including revenues from cellular resale services, from prepaid and debit
calling cards sales, and installation and leasing of customer's VSAT equipment).
During the second quarter of 1999 we completed a $19.5 million sale of long-haul
capacity in the Alaska United undersea fiber optic cable system ("fiber capacity
sale") to ACS in a cash transaction. The sale includes both capacity within
Alaska, and between Alaska and the lower 49 states. We announced in July 1999
that an agreement pertaining to a second $19.5 million sale of fiber capacity to
ACS had been executed. The agreement requires ACS to acquire additional capacity
during the 18-month period following the effective date of the contract.
In addition to the fiber capacity sale of $19.5 million, Other services segment
revenues during 1999 include network solutions and outsourcing revenues totaling
$5.7 million, telecommunications equipment sales totaling $5.5 million and
cellular resale and other revenues totaling $2.9 million.
We began developing plans for deploying PCS services in 1995 and subsequently
conducted a technical trial of our candidate technology. We have invested
approximately $2.2 million in our PCS license at December 31, 1999. PCS
licensees are required to offer service to at least one-third of their market
population within five years or risk losing their licenses. Service must be
extended to two-thirds of the population within 10 years. We are in the
design/build phase of our wireless implementation plan that will allow retention
of the PCS license pursuant to its terms.
Depreciation, amortization and interest expense on a consolidated basis
increased $21.5 million in 1999 as compared to 1998 resulting primarily from
additional depreciation on 1998 and 1999 capital expenditures, additional
average outstanding long-term debt and a reduction in the amount of capitalized
construction period interest following placement of the Alaska United undersea
fiber optic cable system into service in early February 1999.
54
RESULTS OF OPERATIONS
<TABLE>
The following table sets forth selected Statement of Operations data as a
percentage of total revenues for the periods indicated (underlying data rounded
to the nearest thousands):
<CAPTION>
Year Ended December 31, Percentage Change
----------------------- -----------------
1999 1998
vs. vs.
1999 1998 1997 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Long-distance services 57.2% 64.0% 69.4% 1.2% 1.7%
Cable services 21.9% 23.3% 24.6% 6.1% 4.5%
Local access services 5.6% 4.0% 0.3% 56.9% 1,524.3%
Internet services 3.3% 1.9% 0.1% 98.6% 2,422.5%
Other services 12.0% 6.8% 5.6% 100.6% 33.3%
------------------------------------------------------------------
Total revenues 100.0% 100.0% 100.0% 13.1% 10.3%
Cost of sales and services 43.9% 47.0% 49.6% 5.5% 4.5%
Selling, general and administrative expenses 35.2% 36.4% 32.9% 9.4% 22.1%
Depreciation and amortization 15.3% 13.0% 10.6% 33.2% 34.8%
------------------------------------------------------------------
Operating income 5.6% 3.6% 6.9% 78.1% (42.5%)
Net loss before income taxes,
extraordinary item and cumulative
change in an accounting principle (5.3%) (4.4%) (1.0%) 36.1% 388.6%
Net loss before extraordinary item and
cumulative change in an accounting
principle (3.3%) (2.8%) (0.7%) 35.1% 309.0%
Net loss (3.4%) (2.8%) (1.0%) 40.2% 211.4%
Other Operating Data:
Cable services operating income (1) 14.7% 12.4% 18.9% 26.2% (31.7%)
Local access services operating loss (2) (47.8%) (112.2%) (581.8%) (33.2%) 213.3%
Internet services operating (loss)
income (3) (4.7%) 0.1% (45.1%) (8,700.0%) (106.1%)
<FN>
- -----------------------------------------------
1 Computed as a percentage of total cable services revenues.
2 Computed as a percentage of total local access services revenues.
3 Computed as a percentage of total Internet services revenues.
</FN>
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.
Revenues. Total revenues increased 13.1% from $246.8 million in 1998 to $279.2
million in 1999. Long-distance revenues from commercial, residential,
governmental, and other common carrier customers increased 1.1% from $157.9
million in 1998 to $159.7 million in 1999. The increase in long-distance
revenues was due to the following:
- An increase of 10.7% in the number of active residential, small business and
commercial customers billed from 82,000 at December 31, 1998 to 90,800 at
December 31, 1999,
- An increase of 14.4% in total minutes of use to 905.0 million minutes,
- An increase of 13.4% in private line and private network transmission
services revenues from $19.4 million in 1998 to $22.0 million in 1999 due to
an increased number of customers and
- New revenues in 1999 totaling $4.8 million from the lease of three DS3
circuits on Alaska United facilities within Alaska, and between Alaska and
the lower 49 states and maintenance charges related to the portion of fiber
capacity purchased by ACS.
55
The increase in long-distance revenue was offset by an 18.8% reduction in our
average rate per minute on long-distance traffic from $0.168 per minute in 1998
to $0.136 per minute in 1999. The decrease in rates resulted from our promotion
of and customers' enrollment in calling plans offering discounted rates and
length of service rebates, such plans being prompted in part by our primary
long-distance competitor, AT&T Alascom, reducing its rates, and the entry of
LECs into long-distance markets served by us. Changes in wholesale product mix
and reduced rates on other common carrier traffic (principally MCI WorldCom and
Sprint) offset other common carrier minutes growth of 24.9% resulting in a 0.3%
increase in revenues, from $61.3 million in 1998 to $61.5 million in 1999.
Common carrier minute growth is attributable, in part, to a new category of
wholesale minutes carried on the Company's network.
Cable revenues increased 6.1% from $57.6 million in 1998 to $61.1 million in
1999. Programming services revenues increased 5.8% to $52.3 million in 1999
resulting from an increase of approximately 4,800 basic subscribers served by
us, an increase of $1.31 in average gross revenue per average basic subscriber
per month and increased pay-per-view and premium service revenues. New facility
construction efforts in the summer of 1999 resulted in approximately 2,800
additional homes passed which contributed to additional subscribers and revenues
in 1999. Other factors include the launch of digital cable services in late 1998
with an associated marketing and sales effort starting in July 1999 and the
introduction of a customer offering requiring a year commitment in exchange for
a discounted price that reduced customer churn. Equipment rental and
installation revenues increased 18.9% to $5.4 million in 1999 due to an increase
in subscribers to our digital service and associated converters that are billed
at premium rates.
Local access services revenues increased 56.6% from $9.9 million in 1998 to
$15.5 million in 1999. Approximately 45,000 lines were in service and 750
additional lines were awaiting connection at December 31, 1999.
Internet services revenues (including SchoolAccess(TM) services) increased 98.6%
from $4.6 million in 1998 to $9.1 million in 1999. We had approximately 48,000
and 5,700 active residential, commercial and small business retail and wholesale
dial-up and cable modem subscribers to our Internet service at December 31, 1999
and 1998, respectively.
Other services revenues increased 100.6% from $15.8 million in 1998 to $33.6
million in 1999. The 1999 increase was largely due to the fiber capacity sale as
previously described.
Cost of sales and services. Cost of sales and services totaled $116.1 million in
1998 and $122.5 million in 1999. As a percentage of total revenues, cost of
sales and services decreased from 47.0% in 1998 to 43.9% in 1999. The decrease
in cost of sales and services as a percentage of revenues is primarily
attributed to the impact of the fiber capacity sale and changes in our product
mix due to continuing development of new product lines and growth of existing
product lines (local access services, data services and Internet). The overall
margin improvement was partially offset by increased cable services cost of
sales as a percentage of cable services revenues. Cable cost of sales increased
more than cable revenues increased in 1999.
Long-distance cost of sales and services increased from $79.3 million in 1998 to
$81.0 million in 1999. Long-distance cost of sales as a percentage of
long-distance revenues increased from 50.2% in 1998 to 50.7% in 1999 primarily
due to a decrease in the average rate per minute billed to customers without a
comparable decrease in access charges paid by us, and a non-recurring refund
received in the second quarter of 1998 totaling approximately $1.1 million from
a local exchange carrier in respect of its earnings that exceeded regulatory
requirements. Offsetting the 1999 increase as compared to 1998 are reductions in
access costs due to our distribution and termination of our traffic on our own
local services network instead of paying other carriers to distribute and
terminate our traffic. We expect increased cost savings as traffic carried on
our own facilities continues to grow. Additional capacity between Alaska and the
lower 48 states now available on the Alaska United fiber optic cable system has
allowed us to carry significant additional amounts of data services traffic on
our own facilities rather than paying other carriers for leased capacity.
Cable cost of sales and services as a percentage of revenues, which is less as a
percentage of revenues than are long-distance, local access and Internet
services cost of sales and services, increased from 23.3% in 1998 to 25.3% in
1999. Cable services rate increases did not keep pace with increases in
programming and
56
copyright costs in 1999. Programming costs increased on most of
our cable services offerings, and we incurred additional costs on new
programming introduced in 1998 and 1999.
Local access services cost of sales and services totaled 50.8% and 61.7% as a
percentage of 1999 and 1998 local access services revenues, respectively.
Internet services cost of sales and services totaled 34.6% and 74.1% as a
percentage of the 1999 and 1998 Internet services revenues, respectively. Our
local access operations commenced in 1997 and Internet services operations
commenced in 1998. Fluctuations in cost of sales and services as a percentage of
revenues are expected to continue to occur as these product lines develop and
mature.
The decrease in 1998 and 1999 other services cost of sales and services as a
percentage of other services revenue from 82.5% to 44.5%, respectively, is
primarily due to the fiber capacity sale as previously described.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 9.4% from $89.8 million in 1998 to $98.3
million in 1999. The 1999 increase resulted from:
- Increased costs associated with operations and maintenance of the Alaska
United fiber optic cable system that was placed into service in early
February 1999. 1999 costs totaled $3.6 million as compared to $1.1 million
in 1998.
- Internet services operating, engineering, sales, customer service and
administrative cost increases, from $715,000 in 1998 as compared to $5.3
million in 1999. We gradually introduced our Internet services through the
third quarter of 1998 and began aggressive advertising efforts in the fourth
quarter of 1998. Increased costs were necessary to provide the operations,
engineering, customer service and support infrastructure necessary to
accommodate expected growth in our Internet services customer base.
- Increased allowance for doubtful accounts receivable.
- Accrual of a Company-wide success sharing bonus totaling $1.6 million in
1999. Success sharing is a bonus paid to all employees when our earnings
before interest, depreciation, amortization and taxes reach new highs.
- A reduction in long-distance services capitalized labor due to completion of
the fiber optic cable system construction effort.
Partially offsetting these increases were a $1.1 million reduction in cable
general and administrative costs and a $1.0 million reduction in long-distance
marketing and sales costs in 1999 as compared to 1998.
Selling, general and administrative expenses, as a percentage of total revenues,
decreased from 36.4% in 1998 to 35.2% in 1999 primarily as a result of
significant revenues derived from the fiber capacity sale without a
proportionate increase in selling, general and administrative expenses.
Depreciation and amortization. Depreciation and amortization expense increased
33.2% from $32.0 million in 1998 to $42.7 million in 1999. The increase is
attributable to our $58.4 million investment in equipment and facilities placed
into service during 1998 for which a full year of depreciation was recorded
during 1999, the Alaska United undersea fiber optic cable system placed into
service in the first quarter of 1999 for which 11 months of depreciation was
recorded during 1999, and the $36.6 million investment in equipment and
facilities during 1999 for which a partial year of depreciation was recorded in
1999.
Interest expense, net. Interest expense, net of interest income, increased 54.6%
from $19.8 million in 1998 to $30.6 million in 1999. This increase resulted
primarily from increases in our average outstanding indebtedness resulting
primarily from construction of new long-distance and Internet facilities,
expansion and upgrades of cable television facilities, investment in local
access services equipment and facilities, and slightly higher interest rates on
outstanding indebtedness. During 1998 interest expense was offset in part by
capitalized construction period interest. The amount of interest capitalized in
1999 decreased significantly due to the completion of the Alaska United undersea
fiber optic cable system in early February 1999. We charged to interest expense
$470,000 of deferred financing costs in the second quarter of 1999 resulting
from the amendment to the Holdings Loan Facilities amendment that reduced our
borrowing capacity (see Liquidity and Capital Resources).
57
Income tax benefit. Income tax benefit increased from $4.1 million in 1998 to
$5.7 million in 1999 due to an increased net loss before income taxes and
cumulative effect of a change in accounting principle in 1999 as compared to
1998. Our effective income tax rate increased from 37.8% in 1998 to 38.2% in
1999 due to the proportional amount of items that are nondeductible for income
tax purposes.
At December 31, 1999, we have (1) tax net operating loss carryforwards of
approximately $88.0 million that will begin expiring in 2008 if not utilized,
and (2) alternative minimum tax credit carryforwards of approximately $2.5
million available to offset regular income taxes payable in future years. Our
utilization of remaining net operating loss carryforwards is subject to certain
limitations pursuant to Internal Revenue Code section 382.
Tax benefits associated with recorded deferred tax assets 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. We estimate that our effective income tax rate
for financial statement purposes will be approximately 38% in 2000. We expect
that our operations will generate net income before income taxes during the
carryforward periods to allow utilization of loss carryforwards for which no
allowance has been established.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.
Revenues. Total revenues increased 10.3% from $223.8 million in 1997 to $246.8
million in 1998. Long-distance transmission revenues from commercial,
residential, governmental, and other common carrier customers increased 1.7%
from $155.3 million in 1997 to $157.9 million in 1998. This increase reflected a
5.5% increase in total minutes of use to 791.3 million minutes. Long-distance
revenue growth in 1998 was largely due to a 8.5% increase in revenues from other
common carriers (principally MCI WorldCom and Sprint), from $56.5 million in
1997 to $61.3 million in 1998. Private line and private network transmission
services revenues increased 22.0%, from $15.9 million in 1997 to $19.4 million
in 1998.
The long-distance transmission revenue increases described above were offset in
part by a 5.1% reduction in our average rate per minute on long-distance traffic
from $0.177 per minute in 1997 to $0.168 per minute in 1998. The decrease in
rates resulted from our promotion of and customers' enrollment in new calling
plans offering discounted rates and length of service rebates, such new plans
being prompted in part by our primary long-distance competitor, AT&T Alascom,
reducing its rates and entry of LECs into long-distance markets served by us.
Operator services revenues decreased 14.3% from $7.0 million in 1997 to $6.0
million in 1998. Traffic carried by our operator service center decreased in
part from increased usage of prepaid calling cards and cellular telephones by
tourists visiting the state of Alaska.
Cable revenues increased 4.3% from $55.2 million in 1997 to $57.6 million in
1998. Programming services revenues increased 3.1% to $49.4 million in 1998
resulting from an increase of 3,900 basic subscribers served and an increase of
$0.47 in revenue per average basic subscriber, per month. New facility
construction efforts in 1998 resulted in additional homes passed which
contributed to additional subscribers and revenues. Other factors included
facility upgrades, which allowed the introduction of digital cable services in
Anchorage, increased promotional, and advertising efforts and increases in basic
and premium service rates in certain areas. Advertising sales revenues increased
31.9% to $2.9 million in 1998 due to increased promotion of our advertising and
ad insertion capabilities. Equipment rental and installation revenues increased
6.2% to $4.5 million in 1998 due to increased equipment rentals and installation
services provided by us. Offsetting these increases were reductions in
pay-per-view and premium service revenues.
Local access services revenues increased from $610,000 in 1997 to $9.9 million
in 1998. 1998 revenues reflect a full 12 months of local services operations and
growth as compared to start-up operations in 1997. At December 31, 1998
approximately 28,000 lines were in service and approximately 1,000 additional
lines were awaiting connection.
58
Internet services revenues increased from $182,000 in 1997 to $4.6 million in
1998. 1998 revenues reflect a full 12 months of Internet services operations and
growth as compared to start-up operations in 1997. We had approximately 7,200
active residential subscribers to our Internet service at February 9, 1999.
Other services revenues increased 33.3% from $12.6 million in 1997 to $16.8
million in 1998. The 1998 increase was due to increased product and cellular
service sales.
Cost of sales and services. Cost of sales and services totaled $111.1 million in
1997 and $116.1 million in 1998. As a percentage of total revenues, cost of
sales and services decreased from 49.6% in 1997 to 47.0% in 1998. The decrease
in cost of sales and services as a percentage of revenues is primarily
attributed to changes in our product mix due to the addition of new product
lines for a full year of operations (local access services and Internet
services), and reduced long-distance cost of sales as a percentage of
long-distance revenues. The margin improvement was partially offset by increased
cable services cost of sales as a percentage of cable services revenues.
The decrease in long-distance cost of sales and services as a percentage of
revenues is primarily attributed to: 1) a refund received in the first quarter
of 1998 totaling approximately $1.1 million from a LEC in respect of its
earnings that exceeded regulatory requirements, 2) reductions in access charges
paid by us to other carriers for distribution of our traffic, and 3) avoidance
of access charges resulting from our distribution and termination of our traffic
on our own network instead of paying other carriers to distribute and terminate
our traffic.
Cable cost of sales and services as a percentage of revenues is less as a
percentage of revenues than are long-distance, local access and Internet
services cost of sales and services. Cable services rate increases did not keep
pace with increases in programming and copyright costs in 1998. Programming
costs increased on most of our offerings and we incurred additional costs on new
programming introduced in 1998.
Local access services cost of sales and services totaled 61.7% and 43.8% as a
percentage of 1998 and 1997 local access services revenues, respectively.
Internet services cost of sales and services totaled 74.1% and 132.4% as a
percentage of 1998 and 1997 Internet services revenues, respectively. Our local
access and Internet services operations commenced in 1997. Fluctuations in cost
of sales and services as a percentage of revenues are expected to occur as
start-up products develop into mature product lines.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 22.1% from $73.6 million in 1997 to $89.8
million in 1998, and, as a percentage of revenues, increased from 32.9% in 1997
to 36.4% in 1998. This increase resulted from:
- Local access services operating, engineering, sales, customer service and
administrative cost increases, from $3.4 million in 1997 as compared to
$12.3 million in 1998. We initiated local access services in September 1997.
The increase was necessary to provide the operations, engineering, customer
service and support infrastructure necessary to accommodate expected growth
in our local access services customer base.
- Increased long-distance general and administrative expenses of $2.1 million
in 1998 due to increased personnel and other costs in customer service,
engineering, operations, accounting, human resources, legal and regulatory,
and management information services. Increased customer service expenses
were associated with support of increased sales volumes and expenditures
necessary to integrate customer service operations across product lines.
- Increased long-distance sales, advertising, telemarketing, carrier
relations, business development and rural services costs totaling $15.3
million in 1997 compared to $17.6 million in 1998. Increased selling costs
were associated with the introduction of various marketing plans and other
proprietary rate plans and cross promotion of products and services.
- Cable services operating, engineering, sales, customer service and
administrative cost increases, from $18.4 million in 1997 as compared to
$19.8 million in 1998. The increase was primarily incurred to promote and
market our cable services.
- Internet services operating, engineering, sales, customer service and
administrative cost increases, from $23,000 in 1997 as compared to $715,000
in 1998. We initiated our Internet services in 1998. The increase was
necessary to provide the operations, engineering, customer service and
59
support infrastructure necessary to accommodate expected growth in our
Internet services customer base.
- Operating, engineering, marketing and administrative costs associated with
the construction of the fiber optic cable by Alaska United totaled $1.1
million in 1998. No costs directly associated with the fiber optic cable
operations were incurred in 1997.
Depreciation and amortization. Depreciation and amortization expense increased
34.8% from $23.8 million in 1997 to $32.0 million in 1998. The increase is
attributable to our $64.6 million of facilities placed into service during 1997
for which a full year of depreciation was recorded during the year ending
December 31, 1998 and the $58.4 million of facilities placed into service in
1998 for which a partial year of depreciation was recorded during 1998 on
equipment and facilities placed into service in 1998.
Interest expense, net. Interest expense, net of interest income, increased 12.5%
from $17.6 million in 1997 to $19.8 million in 1998. This increase resulted
primarily from increases in our average outstanding indebtedness resulting
primarily from construction of new long-distance and Internet facilities,
expansion and upgrades of cable television facilities, and investment in local
access services equipment and facilities. Such increases were offset in part by
increases in the amount of interest capitalized during 1998.
Income tax benefit. Income tax benefit increased from $600,000 in 1997 to $4.1
million in 1998 due to us incurring a larger net loss before income taxes and
extraordinary item in 1998 as compared to 1997. Our effective income tax rate
increased from 25.6% in 1997 to 37.8% in 1998 due to the net loss and the
proportional amount of items that are nondeductible for income tax purposes.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
<TABLE>
The following chart provides selected unaudited statement of operations data
from our quarterly results of operations during 1999 and 1998.
<CAPTION>
(Amounts in thousands, except per share amounts)
-------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
----
Revenues:
Long-distance services $ 37,542 39,272 42,409 40,499 159,722
Cable services $ 15,062 14,909 15,218 15,957 61,146
Local access services $ 3,714 3,764 3,845 4,220 15,543
Internet services $ 1,969 2,534 2,018 2,599 9,120
Other services $ 3,051 23,180 3,850 3,567 33,648
-------------------------------------------------------------
Total revenues $ 61,338 83,659 67,340 66,842 279,179
Operating income (loss) $ (368) 12,655 1,908 1,555 15,750
Net income (loss) before income taxes and
cumulative effect of a change in
accounting principle $ (7,328) 4,495 (5,702) (6,331) (14,866)
Net income (loss) before cumulative effect
of a change in accounting principle $ (4,521) 2,491 (3,537) (3,616) (9,183)
Net income (loss) $ (4,865) 2,491 (3,537) (3,616) (9,527)
Basic income (loss) per common share:
Net income (loss) before cumulative
effect of a change in accounting
principle $ (0.09) 0.04 (0.08) (0.08) (0.20)
Cumulative effect of a change in
accounting principle $ (0.01) --- --- --- (0.01)
-------------------------------------------------------------
Net income (loss) $ (0.10) 0.04 (0.08) (0.08) (0.21)
=============================================================
</TABLE>
60
<TABLE>
<CAPTION>
(Amounts in thousands, except per share amounts)
-------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Diluted income (loss) per common share:
Net income (loss) before cumulative
effect of a change in accounting
principle (1) $ (0.09) 0.04 (0.08) (0.08) (0.20)
Cumulative effect of a change in
accounting principle $ (0.01) --- --- --- (0.01)
-------------------------------------------------------------
Net income (loss) (1) $ (0.10) 0.04 (0.08) (0.08) (0.21)
=============================================================
1998
----
Revenues:
Long-distance services $ 38,651 41,366 40,847 36,486 157,350
Cable services $ 14,201 14,041 14,484 14,914 57,640
Local access services $ 1,013 2,049 2,744 4,102 9,908
Internet services $ 903 1,014 1,060 1,614 4,591
Other services $ 3,384 4,471 3,631 5,820 17,306
-------------------------------------------------------------
Total revenues $ 58,152 62,941 62,766 62,936 246,795
Operating income $ 2,437 1,447 1,730 3,230 8,844
Net loss $ (1,616) (2,066) (2,076) (1,039) (6,797)
Basic loss per common share (1) $ (0.03) (0.04) (0.04) (0.02) (0.14)
Diluted loss per common share (1) $ (0.03) (0.04) (0.04) (0.02) (0.14)
<FN>
--------------
1 Due to rounding, the sum of quarterly loss per common share amounts may
not agree to year-to-date loss per common share amounts.
</FN>
</TABLE>
Revenues. Total revenues for the quarter ended December 31, 1999 ("fourth
quarter") were $66.8 million, representing a 0.7% decrease from total revenues
in the quarter ended September 30, 1999 ("third quarter") of $67.3 million. The
decrease in total revenues resulted from decreased revenues from sales to other
common carriers (principally MCI WorldCom and Sprint) due to a 1.5% decrease in
minutes carried, a 4.4% reduction in the long-distance average rate per minute
and a 1.8% reduction in non-OCC minutes of traffic carried. Revenues from other
common carriers (principally MCI WorldCom and Sprint) totaled $15.4 million in
the fourth quarter and $16.3 million in the third quarter. Partially offsetting
this decrease was an increase in cable services revenues to $16.0 million in the
fourth quarter from $15.2 million in the third quarter and an increase in
Internet services revenues to $2.6 million in the fourth quarter from $2.0
million in the third quarter.
Long-distance revenues have historically been highest in the summer months as a
result of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial fishing, and oil and
gas activities. Cable television revenues, on the other hand, are higher in the
winter months because consumers spend more time at home and tend to watch more
television during these months. Local service operations are not expected to
exhibit significant seasonality. Internet access services are expected to
reflect seasonality trends similar to the cable television segment. Our ability
to implement construction projects is also hampered during the winter months
because of cold temperatures, snow and short daylight hours.
Cost of sales and services. Cost of sales and services decreased 0.7% from $30.2
million in the third quarter to $30.0 million in the fourth quarter. As a
percentage of revenues, third and fourth quarter cost of sales and services
totaled 44.9%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $600,000 in the fourth quarter as compared to
the third quarter. As a percentage of revenues, fourth quarter selling, general
and administrative expenses were 37.5% as compared to 36.3% for the third
quarter. The fourth quarter increase as a percentage of sales is primarily a
result of a $700,000 increase
61
in expenses associated with a Company-wide success sharing program. Success
sharing is a bonus paid to all employees when our earnings before interest,
depreciation, amortization and taxes reach new highs.
Net loss. We reported a net loss of $3.6 million for the fourth quarter as
compared to a net loss of $3.5 million for the third quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities totaled $33.3 million in 1999, net of
changes in the components of working capital. Additional sources of cash
included preferred stock issuance proceeds totaling $20.0 million in 1999, and
long-term borrowings of $13.8 million and $103.2 million in 1999 and 1998,
respectively. Our expenditures for property and equipment, including
construction in progress, totaled $36.6 million and $149.0 million in 1999 and
1998, respectively. Our uses of cash during 1999 also included repayment of
$26.6 million of long-term borrowings and capital lease obligations.
Net receivables increased $1.9 million from December 31, 1998 to December 31,
1999 due to a $5.9 million increase in trade receivables primarily from the
long-distance, cable and local access services product lines and our Internet
SchoolAccess(TM) service offering. Partially offsetting the above described
increase were income tax refunds received totaling $2.0 million and an increase
in the allowance for doubtful accounts of $1.9 million.
Working capital totaled $22.7 million at December 31, 1999, a $13.5 million
increase from working capital of $9.2 million as of December 31, 1998. The
increase in working capital is primarily attributed to:
- Recording the $9.1 million Transponder Deposit as a Refundable Deposit upon
signing a commitment letter for a long-term capital lease of transponder
capacity on the new satellite. We had previously expected to draw down our
senior credit facility to purchase the transponder capacity. The Transponder
Deposit will be refunded when the lease is consummated in 2000.
- Increased net receivables as discussed above.
- Decreased current maturities of long-term debt of $1.8 million due to the
payoff of the undersea fiber and equipment loan.
- Reduced levels of capital expenditures and accruals in 1999 as compared to
1998.
The above increases are off-set by a decrease in the current deferred income
taxes of $1.3 million from December 31, 1998 to December 31, 1999 and an
increase of $2.0 million in accrued payroll and payroll related obligations due
to the accrual of a Company-wide success sharing bonus.
The Holdings $200,000,000 ($150,000,000 as amended) and $50,000,000 credit
facilities mature June 30, 2005. The Holdings Loan facilities were amended in
April 1999 (see below) and bear interest, as amended, at either Libor plus 1.00%
to 2.50%, depending on the leverage ratio of Holdings and certain of its
subsidiaries, or at the greater of the prime rate or the federal funds effective
rate (as defined) plus 0.05%, in each case plus an additional 0.00% to 1.375%,
depending on the leverage ratio of Holdings and certain of its subsidiaries.
$87.7 million and $106.7 million were drawn on the credit facilities as of
December 31, 1999 and 1998, respectively.
On April 13, 1999, we amended the Holdings credit facilities. These amendments
contained, among other things, provisions for payment of a one-time amendment
fee of 0.25% of the aggregate commitment, an increase in the commitment fee by
0.125% per annum on the unused portion of the commitment, and an increase in the
interest rate of 0.25%. The amended facilities reduce the aggregate commitment
by $50 million to $200 million, and limit capital expenditures to $35 million in
1999 and $35 million in 2000 with no limits thereafter (excluding amounts paid
for the Alaska United fiber optic cable system). Pursuant to the Financial
Accounting Standards Board Emerging Issues Task Force Issue 98-14, "Debtor's
Accounting for Changes in Line-of-Credit or Revolving Debt Arrangements," we
recorded as additional interest expense $470,000 of deferred financing costs in
the second quarter of 1999 resulting from the reduced borrowing capacity. In
connection with the April 1999 amendment, we agreed to pay all fees and expenses
of our lenders, including an amendment fee of 0.25% of the aggregate commitment,
totaling $530,000.
62
Holding's credit facilities and GCI, Inc.'s senior notes contain restrictions on
our operations and activities, including requirements that we comply with
certain financial covenants and financial ratios. Under the amended Holding's
credit facility, Holdings may not permit the ratio of senior debt to annualized
operating cash flow (as defined) of Holdings and certain of its subsidiaries to
exceed 3.0 to 1.0 through December 31, 1999, total debt to annualized operating
cash flow to exceed 6.25 to 1.00 through March 31, 2000, and annualized
operating cash flow to interest expense to be less than 1.5 to 1.0 through
September 30, 1999 and 1.75 to 1.0 from October 1, 1999 through December 31,
1999. Each of the foregoing ratios decreases in specified increments during the
life of the credit facility. The credit facility requires Holdings to maintain a
ratio of annualized operating cash flow to debt service of Holdings and certain
of its subsidiaries of at least 1.25 to 1.0, and annualized operating cash flow
to fixed charges of at least 1.0 to 1.0 (which adjusts to 1.05 to 1.0 in April,
2003 and thereafter). The senior notes impose a requirement that the leverage
ratio of GCI, Inc. and certain of its subsidiaries not exceed 7.5 to 1.0 prior
to December 31, 1999 and 6.0 to 1.0 thereafter, subject to the ability of GCI,
Inc. and certain of its subsidiaries to incur specified permitted indebtedness
without regard to such ratios.
On January 27, 1998 Alaska United closed a $75 million project finance facility
("Fiber Facility") to construct a fiber optic cable system connecting Anchorage,
Fairbanks, Valdez, Whittier, Juneau and Seattle. At December 31, 1999 $71.7
million was borrowed under the facility. The Fiber Facility is a 10-year term
loan that is interest only for the first 5 years. The facility can be extended
an additional two years at any time between the second and fifth anniversary of
closing the facility if we can demonstrate projected revenues from certain
capacity commitments will be sufficient to pay all operating costs, interest,
and principal installments based on the extended maturity. The Fiber Facility
bears interest at either Libor plus 3.0%, or at the lender's prime rate plus
1.75%. The interest rate will decline to Libor plus 2.5%-2.75%, or, at our
option, the lender's prime rate plus 1.25%-1.5% after the project completion
date and when the loan balance is $60 million or less.
The Fiber Facility contains, among others, covenants requiring certain
intercompany loans and advances in order to maintain specific levels of cash
flow necessary to pay operating costs, interest and principal installments. All
of Alaska United's assets, as well as a pledge of the partnership interests'
owning Alaska United, collateralize the Fiber Facility. Construction of the
fiber facility was completed and the facility was placed into service on
February 4, 1999. The project was completed on budget.
We will use approximately one-half of the Alaska United system capacity in
addition to our existing owned and leased facilities to carry our own traffic.
One of our large commercial customers signed agreements in the first quarter of
1999 for the immediate lease of three DS3 circuits on Alaska United facilities
within Alaska, and between Alaska and the lower 48 states. The lease agreements
provide for three-year terms, with renewal options for additional terms. In the
second quarter of 1999 we completed a sale of capacity in the Alaska United
system to ACS in a $19.5 million cash transaction. The sale includes both
capacity within Alaska, and between Alaska and the lower 48 states. An agreement
was executed in July 1999 for a second $19.5 million sale of fiber capacity to
ACS. We continue to pursue opportunities for sale or lease of additional
capacity on our system.
Our expenditures for property and equipment, including construction in progress,
totaled $36.6 million and $149.0 million during 1999 and 1998, respectively.
Planned capital expenditures over the next five years include those necessary
for continued expansion of our long-distance, local exchange and Internet
facilities, the development and construction of a PCS network and continued
upgrades to our cable television plant. Sources of funds for these planned
capital expenditures are expected to include internally generated cash flows and
borrowings under our credit facilities.
Our ability to invest in discretionary capital and other projects will depend
upon our future cash flows and access to borrowings under our credit facilities.
Management anticipates that cash flow generated by us and our borrowings under
our credit facilities will be sufficient to fund capital expenditures and our
working capital requirements. Should cash flows be insufficient to support
additional borrowings, such investment in capital expenditures will likely be
reduced.
We entered into a purchase and lease-purchase option agreement in August 1995
for the acquisition of satellite transponders to meet our long-term satellite
capacity requirements. The satellite was successfully launched in January 2000
and delivered to us on March 5, 2000. In March 2000 we agreed to finance the
63
satellite transponders pursuant to a long-term capital lease arrangement with a
leasing company. We will continue to lease transponder capacity on the PanAmSat
Galaxy IX satellite until our communications traffic is successfully
transitioned to the new satellite transponders.
We issued 20,000 shares of convertible redeemable accreting preferred stock
("Preferred Stock") on April 30, 1999. Proceeds totaling $20 million (before
payment of expenses) were used for general corporate purposes, to repay
outstanding indebtedness, and to provide additional liquidity. Prior to the
four-year anniversary following closing, dividends are payable semi-annually at
the rate of 8.5%, plus accrued but unpaid dividends, at the Company's option, in
cash or in additional fully-paid shares of Preferred Stock. Dividends earned
after the four-year anniversary of closing are payable semi-annually at the rate
of 17%, plus accrued but unpaid dividends, in cash only. Dividends totaling
$1,158,000 were accrued for the year ended December 31, 1999. Mandatory
redemption is required 12 years from the date of closing.
The long-distance, local access, cable, Internet and wireless services
industries are experiencing increasing competition and rapid technological
changes. Our future results of operations will be affected by our ability to
react to changes in the competitive environment and by our ability to fund and
implement new technologies. We are unable to determine how competition,
technological changes and our net operating losses will affect our ability to
obtain financing.
We believe that we will be able to meet our current and long-term liquidity and
capital requirements, including fixed charges and Preferred Stock dividends,
through our cash flows from operating activities, existing cash, cash
equivalents, short-term investments, credit facilities, and other external
financing and equity sources.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". Among other
provisions, it requires that entities recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. Gains and losses resulting from changes in the fair
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The effective date of
this standard was delayed via the issuance of SFAS No. 137. The effective date
for SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though
earlier adoption is encouraged and retroactive application is prohibited. This
means that we must adopt the standard no later than January 1, 2001. We do not
expect the adoption of this standard to have a material impact on results of
operations, financial position or cash flows.
ALASKA ECONOMY
We offer voice and data telecommunication and video services to customers
primarily throughout Alaska. As a result of this geographic concentration,
growth of our business and our operations depend upon economic conditions in
Alaska. The economy of Alaska is dependent upon the natural resource industries,
and in particular oil production, as well as investment earnings, tourism,
government, and United States military spending. Any deterioration in these
markets could have an adverse impact on us. Oil revenues are now the third
largest source of state revenues, following investment income and federal funds.
Alaska's investment earnings will supply 33% of the state's projected revenues
in fiscal 2001, with federal funding comprising 27% of the total and oil
revenues 24% of the total. Much of the investment income and all of the federal
funding is restricted or dedicated for specific purposes, however, leaving oil
revenues as the primary funding source (75%) of general operating expenditures.
The volume of oil transported by the TransAlaska Oil Pipeline System ("TAPS")
over the past 20 years has been as high as 2.0 million barrels per day in fiscal
1988. Production has begun to decline in recent years and is presently down 40%
from the fiscal 1988 level, and down 25% from the fiscal 1997 level. The two
largest producers of oil in Alaska (the primary users of the TAPS) continue to
explore, develop and produce new oil fields and to enhance recovery from
existing fields to offset the decline in production from the Prudhoe Bay field.
Both companies have invested large sums of money in developing and implementing
oil recovery techniques at the Prudhoe Bay field and other nearby fields. The
state now forecasts a temporary reversal of the production rate decline and a
slight increase in the production rate during the
64
period from fiscal 2003 to 2005. This forecasted increase is attributed to new
developments at the Alpine, Liberty and Northstar fields, as well as new
production from Prudhoe Bay and other fields.
Market prices for North Slope oil declined to below $10 per barrel in 1998, and
averaged $12.70 in fiscal 1999, well below the average price used by the state
to budget its oil related revenues. The prices have since increased to over $30
per barrel in March 2000, with a year-to-date fiscal 2000 average price per
barrel of $22.78. Over the past decade, the rolling 60-month average price for
North Slope crude oil has been between $16.39 and $17.74 per barrel 95 percent
of the time.
The state's forecast for fiscal 2001 shows the price for North Slope crude
averaging $18.28 and then declining to the low-$18 and high-$17 range for the
next five years. Recent higher prices are largely due to the OPEC March 1999
agreement to cut production to force prices higher. The OPEC agreement called
for production cuts from January 1999 levels of a little more than 2 million
barrels per day. Although OPEC trimmed output by about 1.75 million barrels, or
nearly 85 percent of targeted reductions, October 1999 OPEC production has
increased by 400,000 barrels per day. This reduces current compliance to 65
percent of targeted cuts. History suggests that market forces lead to lower
prices when oil sells for more than $20 per barrel. What is uncertain is when
and how fast the correction will occur. The response of non-OPEC production to
higher prices is uncertain. The production policy of OPEC and its ability to
continue to act in concert represents a key uncertainty in the state's revenue
forecast.
The state of Alaska maintains the Constitutional Budget Reserve Fund that is
intended to fund budgetary shortfalls. Based on the state's oil price and
production forecasts, and considering the state's other revenues, the Alaska
Department of Revenue expects the state will need to draw less than $500 million
from the Constitutional Budget Reserve Fund in Fiscal 2000 and about $700
million in Fiscal 2001 to balance the state's budget, down substantially from
the $1 billion fiscal 2000 draw expected in their spring 1999 forecast. If the
state's current projections are realized, the Constitutional Budget Reserve Fund
will be depleted in 2004. If the fund is depleted, aggressive state action will
be necessary to increase revenues and reduce spending in order to balance its
budget. The Governor of the state of Alaska and the Alaska Legislature are
pursuing cost cutting and revenue enhancing measures.
Oil companies and service providers announced cost cutting measures to offset a
portion of the declining oil revenues in 1999, resulting in a reduction of oil
industry jobs of over 1,400. Projects that are underway are reportedly not
affected by the cutbacks, however BP Amoco did notify state officials that it
would delay its exploration of the Genesee test site east of Prudhoe.
Although oil prices have a substantial effect on Alaska's economy, analysts
believe that tourism, air cargo, and service sectors are strong enough to offset
a portion of the expected downturn. These industries have helped offset the
prevailing pattern of oil industry downsizing that has occurred during much of
the last several years. Three other factors that support Alaska's economy are
the healthy national economy, lower interest rates, and low inflation. We expect
construction to remain strong over the next few years. $1.77 billion of federal
money is expected to be distributed to the State of Alaska for highways and
other federally supported projects in fiscal 2000.
Effective March 1997, the State of Alaska passed new legislation relaxing state
oil royalties with respect to marginal oil fields that the oil companies claim
would not be economic to develop otherwise. No assurance can be given that oil
companies doing business in Alaska will be successful in discovering new fields
or further developing existing fields which are economic to develop and produce
oil with access to the pipeline or other means of transport to market, even with
the reduced level of royalties.
BP Amoco announced in April 1999 its intention to purchase ARCO for $26.8
billion. BP Amoco and ARCO together reportedly own approximately 70 percent of
the Alaska North Slope oil fields and the company that operates the TAPS.
On February 2, 2000 the FTC voted to fight in federal court to block BP Amoco's
purchase of ARCO citing their concern over:
- the reduction in competition in the sale of Alaska oil to West Coast
independent refineries;
- the reduction in competition in Alaska lease sales, thus reducing state and
federal government revenue from such sales; and
65
- possible manipulation of futures market prices by the resulting company.
On March 15, 2000 BP Amoco and ARCO announced that they have agreed to sell
ARCO's Alaskan businesses to Phillips Petroleum Co. ("Phillips") for
approximately $7 billion. The sale, which is subject to completion of the ARCO
combination, is intended to address FTC anti-trust concerns. BP Amoco reported
March 16, 2000 that the company was at an advanced stage in discussions with the
FTC on its proposed combination with ARCO and was hopeful of a successful
outcome "within a matter of weeks."
BP Amoco and ARCO have reportedly agreed jointly with the FTC, the US West Coast
states and Alaska to suspend litigation - originally scheduled to begin in
California on March 20 - pending the outcome of those negotiations.
The sale to Phillips of all ARCO's Alaskan businesses includes a 21.9 per cent
interest in the Prudhoe Bay oil field and 42.6 per cent of the gas cap, as well
as a range of interests in related fields, a 55 per cent interest in the greater
Kuparuk area and a 78 per cent stake in the Alpine field. The package also
includes 1.1 million net exploration acres, a 22.3 per cent interest in the
Trans-Alaska pipeline, and ARCO's crude oil shipping fleet that includes six
tankers in service and three under construction. The booked reserves being sold
total 1.9 billion barrels of oil equivalent. The approximately $7 billion price
for the Alaskan businesses reportedly is made up of approximately $6.5 billion
cash for the field, pipeline and shipping operations and assets, plus a
supplemental payment of $500 million based on a formula tied to the price of
crude oil. There will also be a payment of some $150 million for crude oil
inventories. The transaction, which is expected to close early in the second
quarter and will be effective retroactive to Jan. 1, 2000, is subject to
approval of the FTC. The parties are reportedly working with the FTC and the
states of Alaska, California, Oregon and Washington to obtain such approval.
Phillips' current Alaskan operations include a 70 percent interest in the Kenai
liquefied natural gas plant that has exported its products to Japan for 30
years; a 100 percent interest in the North Cook Inlet field; a less than 2
percent interest in the Prudhoe Bay Unit; a 10 percent interest in the Point
Thomson field; interests in several of the Prudhoe Bay satellites; a small
interest in TAPS; and exploration acreage in the National Petroleum Reserve
Alaska and elsewhere.
Exxon Mobil Corp. ("Exxon") filed a lawsuit Friday March 24, 2000 to stop
Phillip's acquisition of ARCO's Alaska assets. Exxon contends that it has the
right of first refusal to purchase certain of ARCO's Alaska assets. This lawsuit
could delay the pending sale of ARCO Alaska, Inc. to Phillips. The FCC is
expected to wait for the outcome of the Exxon lawsuit before rendering its
decision.
Should new discoveries or developments not materialize or the price of oil
return to its prior depressed levels, the long term trend of continued decline
in oil production from the Prudhoe Bay field area is inevitable with a
corresponding adverse impact on the economy of the state, in general, and on
demand for telecommunications and cable television services, and, therefore, on
us, in particular.
We have, since our entry into the telecommunication marketplace, aggressively
marketed our services to seek a larger share of the available market. The
customer base in Alaska is limited, however, with a small population of
approximately 620,000 people. 42% of are located in the Anchorage area, 14% are
located in the Fairbanks area, 5% are located in the Juneau area, and the rest
are spread out over the vast reaches of Alaska. No assurance can be given that
the driving forces in the Alaska economy, and in particular, oil production,
will continue at levels to provide an environment for expanded economic
activity.
No assurance can be given that oil companies doing business in Alaska will be
successful in discovering new fields or further developing existing fields which
are economic to develop and produce oil with access to the pipeline or other
means of transport to market, even with the reduced level of royalties. The
Company is not able to predict the effect of changes in the price and production
volumes of North Slope oil or the acquisition of ARCO by BP Amoco and Phillips
on Alaska's economy or on the Company. You should see Part I, Item 1. Business,
Geographic Concentration and Alaska Economy for more information.
66
SEASONALITY
Long-distance revenues have historically been highest in the summer months as a
result of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial fishing, and oil and
gas activities. Cable television revenues, on the other hand, are higher in the
winter months because consumers tend to watch more television, and spend more
time at home, during these months. Our local access services revenues are not
expected to exhibit significant seasonality. Our Internet access services are
expected to reflect seasonality trends similar to the cable television segment.
Our ability to implement construction projects is reduced during the winter
months because of cold temperatures, snow and short daylight hours.
YEAR 2000 COSTS
We initiated a company-wide program in 1998 to ensure that our date-sensitive
information, telephony, cable, Internet and business systems, and certain other
equipment would properly recognize the Year 2000 as a result of the century
change on January 1, 2000. The program focused on the hardware, software,
embedded chips, third-party vendors and suppliers as well as third-party
networks that were associated with the identified systems. We substantially
completed the program during third quarter 1999, and our systems did not
experience any significant disruptions as a result of the century change. In
total, we have expensed incremental remediation costs totaling $2.3 million
through December 31, 1999, with remaining incremental remediation costs in 2000
estimated at approximately $400,000.
We did not defer any critical information technology projects because of our
Year 2000 program efforts, which were addressed primarily through a dedicated
team within our information technology group.
REGULATORY DEVELOPMENTS
You should see Part I, Item 1 Business, Regulation, Franchise Authorizations and
Tariffs for more information about regulatory developments affecting us.
INFLATION
We do not believe that inflation has a significant effect on our operations.
Item 7A. Quantitative and qualitative disclosures about market risk
We are exposed to various types of market risk in the normal course of business,
including the impact of interest rate changes. We do not hold derivatives for
trading purposes.
Our Senior Holdings Loan carries interest rate risk. Amounts borrowed under this
Agreement bear interest at Libor plus 1.0% to 2.5%, depending on the leverage
ratio of Holdings and certain of its subsidiaries, or at the greater of the
prime rate or the federal funds effective rate (as defined) plus 0.05%, in each
case plus an additional 0.0% to 1.375%, depending on the leverage ratio of
Holdings and certain of its subsidiaries. Should the Libor rate, the lenders'
base rate or the leverage ratios change, our interest expense will increase or
decrease accordingly. As of December 31, 1999, we have borrowed $87.7 million
subject to interest rate risk. On this amount, a 1% increase in the interest
rate would cost us $877,000 in additional gross interest cost on an annualized
basis.
Our Fiber Facility carries interest rate risk. Amounts borrowed under this
Agreement bear interest at Libor plus 3.0%, or at our choice, the lender's prime
rate plus 1.75%. The interest rate will decline to Libor plus 2.5%-2.75%, or at
our choice, the lender's prime rate plus 1.25%-1.5% when the loan balance is $60
million or less. Should the Libor rate, the lenders' base rate or the leverage
ratios change, our interest expense will increase or decrease accordingly. As of
December 31, 1999, we have borrowed $71.7 million subject to interest rate risk.
On this amount, a 1% increase in the interest rate would cost us $717,000 in
additional gross interest cost on an annualized basis.
67
Item 8. Consolidated financial statements and supplementary data
Our consolidated financial statements are filed under this Item, beginning on
Page 69. The financial statement schedules required under Regulation S-X are
filed pursuant to Item 14 of this Report.
Item 9. Changes in and disagreements with accountants on accounting and
financial disclosure.
None.
PART III
Incorporated herein by reference from our Proxy Statement for our 2000 Annual
Shareholders' meeting.
68
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
General Communication, Inc.:
We have audited the accompanying consolidated balance sheets of General
Communication, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of General
Communication, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/
KPMG LLP
Anchorage, Alaska
March 10, 2000
69
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<CAPTION>
December 31,
ASSETS 1999 1998
- --------------------------------------------------------------------------------- ----------- -----------
(Amounts in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,734 12,008
----------- -----------
Receivables:
Trade 48,145 42,219
Income taxes --- 1,965
Other 269 412
----------- -----------
48,414 44,596
Less allowance for doubtful receivables 2,833 887
----------- -----------
Net receivables 45,581 43,709
----------- -----------
Prepaid and other current assets 2,224 2,023
Deferred income taxes, net 2,972 4,244
Inventories 3,754 2,838
Notes receivable 449 650
Refundable deposit 9,100 ---
----------- -----------
Total current assets 77,814 65,472
----------- -----------
Property and equipment in service, at cost:
Land and buildings 1,199 1,109
Telephony distribution systems 269,117 144,045
Cable television distribution systems 96,620 89,736
Support equipment 42,576 42,056
Transportation equipment 2,259 2,183
Property and equipment under capital leases 2,819 2,819
----------- -----------
414,590 281,948
Less accumulated depreciation 111,828 82,972
----------- -----------
Net property and equipment in service 302,762 198,976
Construction in progress 2,898 119,645
----------- -----------
Net property and equipment 305,660 318,621
----------- -----------
Cable franchise agreements, net of amortization of $16,347 and $11,184 at
December 31, 1999 and 1998, respectively 190,145 195,308
Goodwill, net of amortization of $4,563 and $3,362 at December 31,
1999 and 1998, respectively 41,391 42,592
Other intangible assets, net of amortization of $269 and $95 at
December 31, 1999 and 1998, respectively 4,402 3,282
Deferred loan and Senior Notes costs, net of amortization 8,863 9,877
Transponder deposit --- 9,100
Notes receivable 2,067 1,432
Other assets, at cost, net of amortization 12,809 3,761
----------- -----------
Total other assets 259,677 265,352
----------- -----------
Total assets $ 643,151 649,445
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
70
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Continued)
<CAPTION>
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
- -------------------------------------------------------------------------------- ------------ -----------
(Amounts in thousands)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ --- 1,799
Current maturities of obligations under capital leases 574 511
Accounts payable 25,321 27,550
Accrued interest 7,985 8,072
Accrued payroll and payroll related obligations 8,601 6,555
Deferred revenue 8,173 6,371
Accrued liabilities 3,152 3,197
Subscriber deposits and other current liabilities 1,314 2,258
----------- -----------
Total current liabilities 55,120 56,313
Long-term debt, excluding current maturities 339,400 349,858
Obligations under capital leases, excluding
current maturities 747 1,189
Obligations under capital leases due to related party, excluding current
maturities 353 486
Deferred income taxes, net of deferred income tax benefit 30,861 38,275
Other liabilities 4,210 3,317
----------- -----------
Total liabilities 430,691 449,438
----------- -----------
Preferred stock. $1,000 par value, authorized 1,000,000 shares; issued
and outstanding 20,000 and 0 shares at December 31, 1999 and 1998,
respectively; convertible into Class A common stock at $5.55 per share
of Class A common stock, redemption price at December 31, 1999 of $1,058 19,912 ---
----------- -----------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000,000 shares; issued and outstanding
46,869,671 and 45,895,415 shares at December 31, 1999 and 1998,
respectively 176,740 172,708
Class B. Authorized 10,000,000 shares; issued and outstanding
4,048,480 and 4,060,620 shares at December 31, 1999 and
1998, respectively; convertible on a share-per-share basis
into Class A common stock 3,422 3,432
Less cost of 347,958 Class A common shares held in treasury at
December 31, 1999 and 1998 (1,607) (1,607)
Paid-in capital 6,343 5,609
Notes receivable issued upon stock option exercise (2,167) (637)
Retained earnings 9,817 20,502
----------- -----------
Total stockholders' equity 192,548 200,007
----------- -----------
Commitments and contingencies
Total liabilities and stockholders' equity $ 643,151 649,445
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
71
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
------------- ------------ -------------
(Amounts in thousands except per share amounts)
<S> <C> <C> <C>
Revenues $ 279,179 246,795 223,809
Cost of sales and services 122,467 116,073 111,077
Selling, general and administrative expenses 98,282 89,833 73,583
Depreciation and amortization expense 42,680 32,045 23,767
------------- ------------ -------------
Operating income 15,750 8,844 15,382
Interest expense, net 30,616 19,764 17,617
------------- ------------ -------------
Net loss before income taxes, extraordinary item and
cumulative effect of a change in accounting principle (14,866) (10,920) (2,235)
Income tax benefit (5,683) (4,123) (573)
------------- ------------ -------------
Net loss before extraordinary item and cumulative effect
of a change in accounting principle (9,183) (6,797) (1,662)
Loss on early extinguishment of debt, net of income tax
benefit of $180 --- --- 521
Cumulative effect of a change in accounting principle,
net of income tax benefit of $245 344 --- ---
------------- ------------ -------------
Net loss $ (9,527) (6,797) (2,183)
============= ============ =============
Basic loss per common share:
Net loss before extraordinary item and cumulative effect of
a change in accounting principle $ (0.20) (0.14) (0.04)
Extraordinary item 0.00 0.00 (0.01)
Cumulative effect of a change in accounting principle (0.01) 0.00 0.00
------------- ------------ -------------
Net loss $ (0.21) (0.14) (0.05)
============= ============ =============
Diluted loss per common share:
Net loss before extraordinary item and cumulative effect of
a change in accounting principle $ (0.20) (0.14) (0.04)
Extraordinary item 0.00 0.00 (0.01)
Cumulative effect of a change in accounting principle (0.01) 0.00 0.00
------------- ------------ -------------
Net loss $ (0.21) (0.14) (0.05)
============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
72
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
<CAPTION>
Class A
Class A Class B Shares Notes
Common Common Held in Paid-in Receivable Retained
(Amounts in thousands) Stock Stock Treasury Capital Issued Earnings
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1996
$113,421 3,432 (1,010) 4,229 --- 29,482
Net loss --- --- --- --- --- (2,183)
Tax effect of excess stock compensation expense for tax
purposes over amounts recognized for financial
reporting purposes --- --- --- 65 --- ---
Shares issued upon public offering, net of issuance costs
of $4,024 46,726 --- --- --- --- ---
Shares issued upon conversion of convertible note net of
fees of $16 9,983 --- --- --- --- ---
Shares acquired pursuant to officer deferred compensation
agreement --- --- (29) --- --- ---
Shares issued under stock option plan 192 --- --- 63 --- ---
Shares issued and issuable under officer stock option
agreements --- --- --- 68 --- ---
--------------------------------------------------------------------
Balances at December 31, 1997 170,322 3,432 (1,039) 4,425 --- 27,299
Net loss --- --- --- --- --- (6,797)
Tax effect of excess stock compensation expense for tax
purposes over amounts recognized for financial
reporting purposes --- --- --- 157 --- ---
Shares purchased and held in Treasury --- --- (568) --- --- ---
Shares issued under stock option plan and notes issued
upon stock option exercise 827 --- --- 319 (637) ---
Shares issued to Employee Stock Purchase Plan 1,574 --- --- --- --- ---
Warrants issued --- --- --- 708 --- ---
Stock offering issuance costs (15) --- --- --- --- ---
--------------------------------------------------------------------
Balances at December 31, 1998 172,708 3,432 (1,607) 5,609 (637) 20,502
Net loss --- --- --- --- --- (9,527)
Tax effect of excess stock compensation expense for tax
purposes over amounts recognized for financial
reporting purposes --- --- --- 211 --- ---
Conversion of Class B to Class A 10 (10) --- --- --- ---
Shares issued and issuable under stock option plan and
notes issued upon stock option exercise 1,595 --- --- 431 (1,389) ---
Shares issued under officer stock option agreement and
note issued upon stock option exercise 38 --- --- --- (141) ---
Shares issued to Employee Stock Purchase Plan 1,770 --- --- --- --- ---
Warrants issued --- --- --- 92 --- ---
Shares issued upon acquisition of customer base 619 --- --- --- --- ---
Preferred stock dividends --- --- --- --- --- (1,158)
--------------------------------------------------------------------
Balances at December 31, 1999 $176,740 3,422 (1,607) 6,343 (2,167) 9,817
====================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
73
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
------------- ----------- ------------
(Amounts in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (9,527) (6,797) (2,183)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 42,680 32,045 23,767
Amortization charged to costs of sales and service and selling,
general and administrative 1,770 1,147 47
Deferred income tax (benefit) expense (5,928) (744) 4,410
Deferred compensation and compensatory stock options 675 376 477
Non-cash cost of sales 3,703 --- ---
Bad debt expense (recovery), net of write-offs 1,946 (183) 473
Employee Stock Purchase Plan expense funded with Class A common
stock issued and issuable by General Communication, Inc. 2,448 2,278 ---
Write-off of unamortized start-up costs 589 --- ---
Write-off of deferred debt issuance costs upon modification of
Senior Holdings Loan 472 --- ---
Loss on early extinguishment of debt --- --- 701
Warrants issued 42 --- ---
Other noncash income and expense items (114) 154 (54)
Change in operating assets and liabilities (5,413) (5,347) 3,202
------------- ------------- ------------
Net cash provided by operating activities 33,343 22,929 30,840
------------- ------------- ------------
Cash flows from investing activities:
Acquisition of business, net of cash acquired --- --- (547)
Purchases of property and equipment, including construction period
interest (36,573) (148,973) (64,644)
Restricted cash investment --- 39,406 (39,406)
Purchases of other assets and intangible assets (1,236) (4,287) (1,339)
Payment of undersea fiber optic cable deposit --- --- (9,094)
Notes receivable issued (952) (1,715) (698)
Payments received on notes receivable 653 1,769 32
------------- ------------- ------------
Net cash used in investing activities (38,108) (113,800) (115,696)
------------- ------------- ------------
Cash flows from financing activities:
Long-term borrowings - senior notes --- --- 180,000
Long-term borrowings - bank debt 13,776 103,224 88,305
Repayments of long-term borrowings and capital lease obligations (26,620) (2,017) (231,021)
Proceeds from equity offering 20,000 --- 50,750
Proceeds from common stock issuance 103 190 192
Payment of debt and stock issuance costs (768) (1,706) (13,642)
Proceeds from warrant issuance --- 708 ---
Purchase of treasury stock --- (568) (29)
------------- ------------- ------------
Net cash provided by financing activities 6,491 99,831 74,555
------------- ------------- ------------
Net increase (decrease) in cash and cash equivalents 1,726 8,960 (10,301)
Cash and cash equivalents at beginning of year 12,008 3,048 13,349
------------- ------------- ------------
Cash and cash equivalents at end of year $ 13,734 12,008 3,048
============= ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
74
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(l) Business and Summary of Significant Accounting Principles
(a) Business
General Communication, Inc. ("GCI"), an Alaska corporation, was
incorporated in 1979. GCI and its direct and indirect
subsidiaries (collectively, the "Company") offer the following
services:
- Long-distance telephone service between Anchorage, Fairbanks,
Juneau, and other communities in Alaska and the remaining
United States and foreign countries,
- Cable television services throughout Alaska,
- Facilities-based competitive local access services in
Anchorage, Alaska,
- Internet services,
- Termination of traffic in Alaska for certain common carriers,
- Interstate and intrastate private line services,
- Managed services to certain commercial customers,
- Sales and services of dedicated communications systems and
related equipment,
- Private network point-to-point data and voice transmission
services between Alaska, Hawaii and the western contiguous
United States are offered and
- Owns and leases capacity on two undersea fiber optic cables
used in the transmission of interstate private line, switched
message long-distance and Internet services between Alaska
and the remaining United States and foreign countries.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of
GCI, its wholly-owned subsidiary GCI, Inc., GCI, Inc.'s
wholly-owned subsidiary GCI Holdings, Inc., GCI Holding Inc.'s
wholly-owned subsidiaries GCI Communication Corp., GCI
Communication Services, Inc. and GCI Cable, Inc., GCI
Communication Services, Inc.'s wholly-owned subsidiary GCI
Leasing Co., Inc., GCI Transport Company, Inc., GCI Transport
Co., Inc.'s wholly-owned subsidiaries GCI Fiber Co., Inc. and
Fiber Hold Company, Inc. and GCI Fiber Co., Inc.'s and Fiber Hold
Company, Inc.'s wholly-owned partnership Alaska United Fiber
System Partnership ("Alaska United"). All significant
intercompany balances and transactions have been eliminated in
consolidation.
(c) Net Loss Per Common Share
<TABLE>
Net loss used to calculate basic and diluted net loss per common
share is increased by preferred stock dividends of $1,158,000 for
the year ended December 31, 1999. Shares used to calculate net
loss per common share consist of the following (amounts in
thousands):
<CAPTION>
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Weighted average common shares outstanding 50,326 49,186 44,924
=========== ========== ===========
</TABLE>
<TABLE>
Common equivalent shares outstanding which are anti-dilutive for
purposes of calculating the net loss per common share for the
years ended December 31, 1999, 1998 and 1997 and are not included
in the diluted net loss per share calculation consist of the
following (amounts in thousands):
<CAPTION>
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Common equivalent shares outstanding 587 521 816
=========== ========== ===========
</TABLE>
75
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
<TABLE>
Weighted average shares associated with outstanding stock options
for the years ended December 31, 1999, 1998 and 1997 which have
been excluded from the diluted loss per share calculations
because the options' exercise price was greater than the average
market price of the common shares consist of the following
(amounts in thousands):
<CAPTION>
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Weighted average shares associated with outstanding stock
options 2,182 2,071 1,073
=========== ========== ===========
</TABLE>
(d) Preferred and Common Stock
<TABLE>
Following is the statement of preferred and common stock at
December 31, 1999, 1998 and 1997:
<CAPTION>
Preferred Common Stock
(Shares, in thousands) Stock Class A Class B
------------- ----------------------------
<S> <C> <C> <C>
Balances at December 31, 1996 --- 36,587 4,074
Class B shares converted to Class A --- 11 (11)
Shares issued upon public offering --- 7,000 ---
Shares issued upon conversion of convertible
note --- 1,538 ---
Shares issued under stock option plan --- 57 ---
Shares issued and issuable under officer
stock option agreements --- 86 ---
------------- -------------- -------------
Balances at December 31, 1997 --- 45,279 4,063
Class B shares converted to Class A --- 2 (2)
Shares issued under stock option plan --- 315 ---
Shares issued to Employee Stock Purchase Plan --- 299 ---
------------- -------------- -------------
Balances at December 31, 1998 --- 45,895 4,061
Class B shares converted to Class A --- 13 (13)
Shares issued under stock option plan --- 417 ---
Shares issued under officer stock option
agreements --- 50 ---
Shares issued to Employee Stock Purchase Plan --- 395 ---
Shares issued upon acquisition of customer
base --- 100 ---
Shares issued under Preferred Stock Agreement 20 --- ---
------------- -------------- -------------
Balances at December 31, 1999 20 46,870 4,048
============= ============== =============
</TABLE>
(e) Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments
that are readily convertible into cash.
(f) Inventories
Inventory of merchandise for resale and parts is stated at the
lower of cost or market. Cost is determined using the average
cost method.
76
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(g) Property and Equipment
Property and equipment is stated at cost. Construction costs of
facilities are capitalized. Equipment financed under capital
leases is recorded at the lower of fair market value or the
present value of future minimum lease payments. Construction in
progress represents distribution systems and support equipment
not placed in service on December 31, 1999; management intends to
place this equipment in service during 2000.
Depreciation is computed on a straight-line basis based upon the
shorter of the estimated useful lives of the assets or the lease
term, if applicable, in the following ranges:
Asset Category Asset Lives
--------------------------------------------- --------------
Telephony distribution systems 12-20 years
Cable television distribution systems 10 years
Support equipment 5-10 years
Transportation equipment 5 years
Property and equipment under capital leases 5-15 years
Repairs and maintenance are charged to expense as incurred.
Expenditures for major renewals and betterments are capitalized.
Gains or losses are recognized at the time of ordinary
retirements, sales or other dispositions of property.
(h) Intangible Assets
Intangible assets are valued at unamortized cost. Management
reviews the valuation and amortization of intangible assets on a
periodic basis, taking into consideration any events or
circumstances that might indicate diminished value. The
assessment of the recoverability is based on whether the asset
can be recovered through undiscounted future cash flows.
Cable franchise agreements represent certain perpetual operating
rights to provide cable services and are being amortized on a
straight-line basis over 40 years.
Goodwill represents the excess of cost over fair value of net
assets acquired and is being amortized on a straight-line basis
over periods of 20 to 40 years.
The cost of the Company's PCS license and related financing costs
have been capitalized as an intangible asset. Once the associated
assets are placed into service, the recorded cost of the license
and related financing costs will begin being amortized over a
40-year period using the straight-line method.
(i) Deferred Loan and Senior Notes Costs
Debt and Senior Notes issuance costs are deferred and amortized
using the straight-line method, which approximates the interest
method, over the term of the related debt and notes. Through
January 1999 (the end of the construction period of the undersea
fiber optic cable) issuance costs were amortized to Construction
in Progress (see note 9). Commencing February 1999 (the month the
fiber optic cable was placed in service) the issuance costs are
being amortized to amortization expense.
(j) Other Assets
Other assets are recorded at cost and are amortized on a
straight-line basis over periods of 2-20 years.
77
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(k) Revenue from Services and Products
Revenues generated from long-distance and managed services are
recognized when the services are provided. Revenues from the sale
of equipment are recognized at the time the equipment is
delivered or installed. Technical services revenues are derived
primarily from maintenance contracts on equipment and are
recognized on a prorated basis over the term of the contract.
Cable television, local service, Internet service and private
line telecommunication revenues are billed in advance and are
recognized as the associated service is provided. Other revenues
are recognized when the service is provided.
(l) Research and Development and Advertising Expense
The Company expenses advertising and research and development
costs as incurred. Advertising expenses were approximately
$4,574,000, $5,028,000 and $2,897,000 for the years ended 1999,
1998 and 1997, respectively. The Company had no research and
development costs for the years ended December 31, 1999, 1998 and
1997.
(m) Interest Expense
Interest costs incurred during the construction period of
significant capital projects are capitalized. Interest costs
capitalized by the Company totaled $1,260,000, $7,764,000, and
$1,886,000 during the years ended December 31, 1999, 1998 and
1997.
(n) Cumulative Effect of a Change in Accounting Principle
The American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities", which provides guidance on the financial
reporting of start-up costs and organization costs and requires
costs of start-up activities and organization costs to be
expensed as incurred. SOP 98-5 is effective for financial
statements for fiscal years beginning after December 15, 1998.
Management of the Company adopted SOP 98-5 in the first quarter
of 1999 resulting in the recognition of a one-time expense of
$344,000 (net of income tax benefit of $245,000) associated with
the write-off of unamortized start-up costs. Pro forma net loss
and net loss per common share for the years ended December 31,
1998 and 1997 approximate amounts reflected in the accompanying
consolidated financial statements.
(o) Income Taxes
Income taxes are accounted for using the asset and liability
method. Deferred tax assets and liabilities are recognized for
their 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. Deferred tax
assets are recognized to the extent that the benefits are more
likely to be realized than not.
(p) Stock Option Plan
The Company accounts for its stock option plan in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense is recorded on the
date of grant only if the current market price of the underlying
stock exceeds the exercise price. The Company has adopted SFAS
123, "Accounting for Stock-Based Compensation," ("SFAS 123")
which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro
forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS 123 had been applied.
The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS 123.
78
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(q) 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.
(r) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily cash and cash
equivalents and accounts receivable. Excess cash is invested in
high quality short-term liquid money instruments issued by highly
rated financial institutions. At December 31, 1999 and 1998,
substantially all of the Company's cash and cash equivalents were
invested in short-term liquid money instruments. The Company's
customers are located primarily throughout Alaska. As a result of
this geographic concentration, the Company's growth and
operations depend upon economic conditions in Alaska. The economy
of Alaska is dependent upon the natural resources industries, and
in particular oil production, as well as tourism, government, and
United States military spending. Though limited to one
geographical area, the concentration of credit risk with respect
to the Company's receivables is minimized due to the large number
of customers, individually small balances, short payment terms
and deposit requirements for certain product lines.
(s) Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," 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.
(t) Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," requires that
long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(u) Year 2000 Costs
The Company charged incremental Year 2000 assessment and
remediation costs to expense as incurred.
(v) Reclassifications
Reclassifications have been made to the 1997 and 1998 financial
statements to make them comparable with the 1999 presentation.
(2) Acquisition
Effective December 2, 1997, the Company purchased all of the outstanding
shares of Astrolabe Group, Inc. The $1,324,000 purchase was accounted
for using the purchase method. The purchase price consisted of a payment
of $600,000 and the issuance of options to purchase 100,000 shares of
GCI's Class A common stock for $.01 per share, expiring December 2,
2007. Options were exercised for 10,000 shares in 1999.
79
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(3) Consolidated Statements of Cash Flows Supplemental Disclosures
<TABLE>
Changes in operating assets and liabilities consist of (amounts in
thousands):
<CAPTION>
Year ended December 31, 1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
Increase in accounts receivable $ (5,783) (9,054) (1,540)
(Increase) decrease in income tax receivable 1,965 490 (3,726)
(Increase) decrease in prepaid and other current assets (235) 388 (274)
(Increase) decrease in inventories (767) 286 (575)
Increase (decrease) in accounts payable (2,229) 2,585 1,050
Increase (decrease) in accrued liabilities (95) (1,914) 938
Increase in accrued payroll and payroll related
obligations 1,368 171 1,850
Increase (decrease) in accrued income taxes --- (111) 111
Increase in deferred revenue 1,802 1,128 528
Increase (decrease) in accrued interest (87) 423 4,941
Increase in subscriber deposits and other current
liabilities (944) 274 (79)
Decrease in components of other long-term liabilities (408) (13) (22)
------------ ------------ -------------
$ (5,413) (5,347) 3,202
============ ============ =============
</TABLE>
The acquisition of a business in the year ended December 31, 1997 (see
note 2), net of cash acquired consists of (amounts in thousands):
Fair value of assets acquired, net of
liabilities assumed $ 1,259
Deferred credit (712)
------------
Net cash used to acquire businesses $ 547
============
The holders of $10 million of convertible subordinated notes exercised
their conversion rights in January 1997 resulting in the exchange of
such notes for 1,538,457 shares of the Company's Class A common stock.
Net income tax refunds received totaled $1,965,000, $4,243,000 and
$1,546,000 during the years ended 1999, 1998 and 1997, respectively.
Interest paid totaled approximately $32,900,000, $29,630,000 and
$17,709,000 during the years ended 1999, 1998 and 1997, respectively.
The Company recorded $211,000, $157,000 and $65,000 during the years
ended 1999, 1998 and 1997, respectively, in 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.
During the years ended December 31, 1999 and 1998 the Company funded the
employer matching portion of Employee Stock Purchase Plan contributions
by issuing GCI Class A Common Stock valued at $1,770,000 and $1,574,000,
respectively.
80
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(4) Notes Receivable
<TABLE>
Notes receivable consist of the following (amounts in thousands):
<CAPTION>
December 31,
-----------------------------
1999 1998
--------------- -------------
<S> <C> <C>
Notes receivable from officers bearing interest up to 9% or at
the rate paid by the Company on its senior indebtedness,
unsecured and secured by personal residences
and Company common stock, due through December 1, 2004 $ 3,349 1,851
Notes receivable from others bearing interest up to 8.25% or at
the rate paid by the Company on its senior indebtedness,
unsecured and secured by property and
equipment; due through December 31, 2004 942 613
Interest receivable 392 256
--------------- -------------
Total notes receivable 4,683 2,719
Less notes receivable issued upon stock option exercise,
classified as a component of stockholders' equity 2,167 637
Less current portion, including current interest receivable 449 650
--------------- -------------
Long-term portion, including long-term interest receivable $ 2,067 1,432
=============== =============
</TABLE>
(5) Long-term Debt
<TABLE>
Long-term debt consists of the following (amounts in thousands):
<CAPTION>
December 31,
----------------------------
1999 1998
------------- --------------
<S> <C> <C>
Senior Notes (a) $ 180,000 180,000
Senior Holdings Loan (b) 87,700 106,700
Fiber Facility (c) 71,700 61,224
Undersea Fiber and Equipment Loan Agreement (d) --- 3,733
------------- --------------
339,400 351,657
Less current maturities --- 1,799
------------- --------------
Long-term debt, excluding current maturities $ 339,400 349,858
============= ==============
</TABLE>
(a) On August 1, 1997 GCI, Inc. issued $180,000,000 of 9.75% senior
notes due 2007 ("Senior Notes"). The Senior Notes were issued at
face value. Net proceeds to GCI, Inc. after deducting
underwriting discounts and commissions totaled $174,600,000.
Issuance costs of $6,496,000 are being amortized to amortization
expense over the term of the Senior Notes.
The Senior Notes are not redeemable prior to August 1, 2002.
After August 1, 2002 the Senior Notes are redeemable at the
option of GCI, Inc. under certain conditions and at stated
redemption prices. The Senior Notes include limitations on
additional indebtedness and prohibit payment of dividends,
payments for the purchase, redemption, acquisition or retirement
of GCI, Inc.'s stock, payments for early retirement of debt
subordinate to the note, liens on property, and asset sales
(excluding sales of Alaska United assets). GCI, Inc. was in
compliance with all covenants during the year ending December 31,
1999. The Senior Notes are unsecured obligations of the Company.
81
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Net proceeds from the stock (see note 8) and Senior Note
offerings and initial draws on the new Senior Holdings Loan (see
note 5(b)) facilities were used to repay borrowings outstanding
under the Company's then existing credit facilities and to
provide initial funding for construction of the Alaska United
undersea fiber optic cable (see notes 5(c) and 9).
(b) The GCI Holdings, Inc., $200,000,000 ($150,000,000 as amended)
and $50,000,000 credit facilities ("Senior Holdings Loan") mature
on June 30, 2005. The Senior Holdings Loan facilities were
amended in April 1999 (see below) and bear interest, as amended,
at either Libor plus 1.00% to 2.50%, depending on the leverage
ratio of Holdings and certain of its subsidiaries, or at the
greater of the prime rate or the federal funds effective rate (as
defined) plus 0.05%, in each case plus an additional 0.00% to
1.375%, depending on the leverage ratio of Holdings and certain
of its subsidiaries. Borrowings under the Senior Holdings Loan
facilities totaled $87,700,000 and $106,700,000 at December 31,
1999 and 1998, respectively. The Company is required to pay a
commitment fee equal to 0.50% per annum on the unused portion of
the commitment. Commitment fee expense on the Senior Holdings
Loan totaled $533,000, $512,000 and $240,000 during the years
ended December 31, 1999, 1998 and 1997, respectively.
On April 13, 1999, the Company amended its Holdings credit
facilities. These amendments contained, among other things,
provisions for payment of a one-time amendment fee of 0.25% of
the aggregate commitment, an increase in the commitment fee by
0.125% per annum on the unused portion of the commitment, and an
increase in the interest rate of 0.25%. The amended facilities
reduce the aggregate commitment by $50 million to $200 million,
and limit capital expenditures to $35 million in 1999 and $35
million in 2000 with no limits thereafter (excluding amounts paid
for the Alaska United fiber optic cable system (see note 9) and
to be paid for purchased satellite transponder facilities, (see
note 13)). During the year ended December 31, 1999 the Company's
capital expenditures net of amounts paid for the Alaska United
fiber optic cable system were $25.4 million. Pursuant to the
Financial Accounting Standards Board Emerging Issues Task Force
Issue 98-14, "Debtor's Accounting for Changes in Line-of-Credit
or Revolving Debt Arrangements," the Company recorded as
additional interest expense $472,000 of deferred financing costs
in the second quarter of 1999 resulting from the reduced
borrowing capacity. In connection with the April 1999 amendment,
the Company agreed to pay all fees and expenses of its lenders,
including an amendment fee of 0.25% of the aggregate commitment,
totaling $530,000.
Proceeds of $19 million from the Preferred Stock issuance (see
note 7) were used to reduce the Senior Holdings Loan outstanding
indebtedness.
<TABLE>
While Holdings may elect at any time to reduce amounts due and
available under the Senior Holdings Loan facilities, a mandatory
prepayment is required each quarter if the outstanding borrowings
at the following dates of payment exceed the allowable borrowings
using the following percentages:
<CAPTION>
Percentage of
Reduction of
Outstanding
Date Range of Quarterly Payments Facilities
-------------------------------------------------------- -------------------
<S> <C>
September 30, 2000 through December 31, 2001 3.750%
March 31, 2002 through December 31, 2003 5.000%
March 31, 2004 through December 31, 2004 5.625%
March 31, 2005 7.500%
July 31, 2005 7.500% and all remaining
outstanding balances
</TABLE>
82
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
The facilities contain, among others, covenants requiring
maintenance of specific levels of operating cash flow to
indebtedness and to interest expense, and limitations on
acquisitions and additional indebtedness. The facilities prohibit
any direct or indirect distribution, dividend, redemption or
other payment to any person on account of any general or limited
partnership interest in, or shares of capital stock or other
securities of Holdings or any of its subsidiaries. Holdings was
in compliance with all Senior Holdings Loan facilities covenants
during the year ended December 31, 1999.
Essentially all of Holdings' assets as well as a pledge of
Holdings' stock by GCI, Inc. collateralize the Senior Holdings
Loan facilities.
$3.4 million of the Senior Holdings Loan facilities have 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.
In connection with the funding of the Senior Holdings Loan
facilities, Holdings paid bank fees and other expenses of
approximately $3,033,000 that are being amortized to amortization
expense over the life of the agreement.
(c) On January 27, 1998, the Company, through Alaska United, closed a
$75,000,000 project finance facility ("Fiber Facility") to
construct a fiber optic cable system connecting Anchorage,
Fairbanks, Valdez, Whittier, Juneau and Seattle as further
described in note 9. Borrowings under the Fiber Facility totaled
$71,700,000 and $61,224,000 at December 31, 1999 and 1998,
respectively. The Fiber Facility bears interest at either Libor
plus 3.0%, or at the Company's choice, the lender's prime rate
plus 1.75%. The interest rate will decline to Libor plus
2.5%-2.75%, or at the Company's choice, the lender's prime rate
plus 1.25%-1.5% when the loan balance is $60,000,000 or less. The
Fiber Facility is a 10-year term loan that is interest only for
the first 5 years. The facility can be extended to a 12-year term
loan at any time between the second and fifth anniversary of
closing the facility if the Company can demonstrate projected
revenues from certain capacity commitments will be sufficient to
pay all operating costs, and interest and principal installments
based on the extended maturity.
The Fiber Facility contains, among others, covenants requiring
certain intercompany loans and advances in order to maintain
specific levels of cash flow necessary to pay operating costs and
interest and principal installments. Alaska United was in
compliance with all covenants during the year ended December 31,
1999.
All of Alaska United's assets, as well as a pledge of the
partnership interests' owning Alaska United, collateralize the
Fiber Facility.
In connection with the funding of the Fiber Facility, Alaska
United paid bank fees and other expenses of $2,183,000 that are
being amortized over the life of the agreement. Through January
1999 (the end of the construction period of the undersea fiber
optic cable system) issuance costs were amortized to Construction
in Progress. Commencing February 1999 (the month the fiber optic
cable was placed in service) the issuance costs are being
amortized to amortization expense.
(d) On December 31, 1992, Leasing Company entered into a $12,000,000
loan agreement ("Undersea Fiber and Equipment Loan Agreement"),
of which approximately $9,000,000 of the proceeds were used to
acquire capacity on the undersea fiber optic cable system linking
Seward, Alaska and Pacific City, Oregon. Concurrently, Leasing
Company leased the capacity under a ten year all events, take or
pay, contract with MCI (now MCI WorldCom), 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
83
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
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 less 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. The obligation was
fully paid and the lease and sublease were cancelled at December
31, 1999.
(e) GCI Cable entered into a credit facility totaling $205,000,000
effective October 31, 1996, associated with the acquisition of
the Cable Companies described in the Company's annual report on
Form 10-K for the year ended December 31, 1998. In August 1997,
the Senior GCI Cable Loan was repaid using proceeds from the
Senior Notes (see note 5(a)) and the Senior Holdings Loan (see
note 5(b)).
In connection with the funding of the loan agreement, GCI Cable,
Inc. paid bank fees and other expenses of approximately $764,000
in 1996. The unamortized portion of these bank fees and other
expenses (net of income tax benefit of $180,000) was recognized
as an extraordinary loss on the early extinguishment of debt in
1997.
(f) The Company entered into a $62,500,000 interim telephony credit
facility with its senior lender during April 1996. In August
1997, the Credit Agreement was repaid using proceeds from the
Senior Notes (see note 5(a)) and the Senior GCI Holdings Loan
(see note 5(b)).
(g) GCI issued convertible subordinated notes totaling $10,000,000 in
connection with the acquisition of the Cable Companies described
in the Company's annual report on Form 10-K for the year ended
December 31, 1998. During January 1997, the holders of the GCI
subordinated notes exercised a conversion option that allowed
them to exchange their notes for GCI Class A common shares at a
predetermined conversion price of $6.50 per share. As a result,
the former note holders received 1,538,457 shares of GCI Class A
common stock.
(h) As consideration for MCI's (now MCI WorldCom) role in enabling
Leasing Company to finance and acquire the undersea fiber optic
cable capacity described at note 5(d) above, Leasing Company
agreed to pay MCI $2,040,000 in sixty monthly payments of
$34,000. For financial statement reporting purposes, the
obligation was recorded at its remaining present value, using a
discount rate of 10% per annum. The agreement was secured by a
second position security interest in the assets of Leasing
Company. The obligation was fully paid at December 31, 1997.
As of December 31, 1999 maturities of long-term debt were as follows
(amounts in thousands):
Year ending December 31,
2000 $ ---
2001 ---
2002 ---
2003 26,986
2004 59,286
2005 and thereafter 253,128
-----------
$ 339,400
===========
84
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(6) Income Taxes
<TABLE>
Total income tax benefit was allocated as follows (amounts in
thousands):
<CAPTION>
Years ended December 31,
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
Loss from continuing operations $ (5,928) (4,123) (573)
Cumulative effect 245 --- ---
Extraordinary item --- --- (180)
---------- ----------- ----------
(5,683) (4,123) (753)
Stockholders' equity, for stock option compensation
expense for tax purposes in excess of amounts
recognized for financial reporting purposes (211) (157) (65)
---------- ----------- ----------
$ (5,894) (4,280) (818)
========== =========== ==========
</TABLE>
<TABLE>
Income tax benefit consists of the following (amounts in thousands):
<CAPTION>
Years ended December 31,
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
Current tax benefit:
Federal taxes $ --- (2,858) (4,333)
State taxes --- (521) (830)
---------- ----------- ----------
--- (3,379) (5,163)
---------- ----------- ----------
Deferred tax benefit:
Federal taxes (4,808) (629) 3,800
State taxes (876) (115) 610
---------- ----------- ----------
(5,683) (744) 4,410
---------- ----------- ----------
$ (5,683) (4,123) (753)
========== =========== ==========
</TABLE>
<TABLE>
Total income tax benefit differed from the "expected" income tax benefit
determined by applying the statutory federal income tax rate of 34% as
follows (amounts in thousands):
<CAPTION>
Years ended December 31,
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
"Expected" statutory tax benefit $ (6,496) (3,713) (997)
State income taxes, net of federal benefit (649) (594) (181)
Income tax effect of goodwill amortization,
nondeductible expenditures and other items, net 469 441 107
Other 993 (257) 318
---------- ----------- ----------
$ (5,683) (4,123) (753)
========== =========== ==========
</TABLE>
85
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
<TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are presented below (amounts in thousands):
<CAPTION>
December 31,
1999 1998
-------------- -------------
<S> <C> <C>
Net current deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts $ 715 354
Compensated absences, accrued for financial reporting
purposes 1,154 804
Workers compensation and self insurance health reserves,
principally due to accrual for financial reporting
purposes 327 244
Other 776 545
-------------- -------------
Total current deferred tax assets $ 2,972 1,947
============== =============
Net long-term deferred tax assets:
Net operating loss carryforwards $ 35,486 20,871
Alternative minimum tax credits 2,502 2,081
Deferred compensation expense for financial reporting
purposes in excess of amounts recognized for tax
purposes 973 1,027
Employee stock option compensation expense for financial
reporting purposes in excess of amounts recognized for
tax purposes 47 327
Sweepstakes award in excess of amounts recognized for tax
purposes 197 201
Other 555 99
-------------- -------------
Total long-term deferred tax assets 39,760 24,606
-------------- -------------
Net long-term deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation 62,007 56,244
Amortizable assets 6,889 4,784
Costs recognized for tax purposes in excess of amounts
recognized for book purposes 1,319 1,319
Other 406 534
-------------- -------------
Total gross long-term deferred tax liabilities 70,621 62,881
-------------- -------------
Net combined long-term deferred tax liabilities $ 30,861 38,275
============== =============
</TABLE>
In conjunction with the 1996 Cable Companies acquisition, the Company
incurred a net deferred income tax liability of $24.4 million and
acquired net operating losses totaling $57.6 million. The Company
determined that approximately $20 million of the acquired net operating
losses would not be utilized for income tax purposes, and elected with
its December 31, 1996 income tax returns to forego utilization of such
acquired losses under Internal Revenue Code section 1.1502-32(b)(4).
Deferred tax assets were not recorded associated with the foregone
losses and, accordingly, no valuation allowance was provided. At
December 31, 1999, the Company has (1) tax net operating loss
carryforwards of approximately $88.0 million that will begin expiring in
2008 if not utilized, and (2) alternative minimum tax credit
carryforwards of approximately $2.5 million available to offset regular
income taxes payable in future years. The Company's utilization of
remaining acquired net operating loss carryforwards is subject to annual
limitations pursuant to Internal Revenue Code section 382 which could
reduce or defer the utilization of these losses.
86
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Tax benefits associated with recorded deferred tax assets 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.
(7) Redeemable Preferred Stock
The Company issued 20,000 shares of convertible redeemable accreting
preferred stock ("Preferred Stock") on April 30, 1999. Proceeds totaling
$20 million (before payment of expenses of $88,000) were used for
general corporate purposes, to repay outstanding indebtedness, and to
provide additional liquidity. The Company's amended Senior Holdings Loan
facilities limit use of such proceeds (see note 5(b)). The Preferred
Stock contains a $1,000 per share liquidation preference, plus accrued
but unpaid dividends and fees. Prior to the four-year anniversary
following closing, dividends are payable semi-annually at the rate of
8.5%, plus accrued but unpaid dividends, at the Company's option, in
cash or in additional fully-paid shares of Preferred Stock. Dividends
earned after the four-year anniversary of closing are payable
semi-annually at the rate of 17%, plus accrued but unpaid dividends, in
cash only. Dividends totaling $1,158,000, or $57.90 per share, were
accrued for the year ended December 31, 1999. Mandatory redemption is
required 12 years from the date of closing.
The Company may redeem the Preferred Stock after the four-year
anniversary of its issuance, and must redeem the Preferred Stock upon
the occurrence of a triggering event (as defined). The holders may
convert the Preferred Stock into Class A common stock of the Company at
any time at a price of $5.55 per share. At any time subsequent to the
third anniversary following closing, and assuming the stock is trading
at no less than two times the conversion price, the Company may require
immediate conversion. The Preferred Stock, subject to lender approval,
is exchangeable in whole or in part, at the Company's option, into
subordinated debt with terms and conditions comparable to those
governing the Preferred Stock. The Preferred Stock is senior to all
other classes of the Company's equity securities, and has voting rights
equal to that number of shares of common stock into which it can be
converted.
Holders of the Preferred Stock shares will have the right to vote on all
matters presented for vote to the holders of common stock on an
as-converted basis. Additionally, as long as the Preferred Stock shares
remain outstanding and unconverted, the Preferred Stock holders will
have the right to vote, as a class, and the Company must obtain the
written consent of holders of a majority (or higher as required by
Alaska law) of that stock to take certain actions, some of which require
shareholder approval necessitating amendment of the Company's Articles
of Incorporation.
Following issuance of the Preferred Stock shares, the Company's Board of
Directors ("Board") expanded its size from nine to ten seats. The new
Board member was elected at the June 24, 1999 Board meeting. The
agreement also provides that the rights of the holders of Preferred
Stock shares relating to the Board seat or observer (as defined in the
Preferred Stock agreement) are to remain effective so long as any of the
Preferred Stock shares remain outstanding.
(8) 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 WorldCom owns a total of 8,251,509 shares of GCI's Class A and
1,275,791 shares of GCI's Class B common stock that represent
approximately 18 and 32 percent of the issued and outstanding shares of
the respective class at December 31, 1999 and 1998, respectively.
87
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
After the transaction described in note 2, the owners of the cable
television properties acquired in 1996 owned a total of 14,723,077
shares of GCI's Class A common stock representing approximately 40
percent of the issued and outstanding Class A common shares at December
31, 1996. The holders of the GCI subordinated notes exercised a
conversion option in January 1997. As a result the noteholders received
1,538,457 shares of GCI's Class A common stock, some of which were sold
to others in 1999.
GCI issued 7,000,000 shares of its Class A common stock on August 1,
1997 for $7.25 per share, before deducting underwriting discounts and
commissions. Net proceeds to GCI totaled $47,959,000. Other costs
associated with the stock issuance totaled $1,233,000.
Stock Option Plan
In December 1986, GCI adopted a Stock Option Plan (the "Option Plan") in
order to provide a special incentive to the Company's officers,
non-employee directors, and employees by offering them an opportunity to
acquire an equity interest in GCI. The Option Plan, as amended in 1999,
provides for the grant of options for a maximum of 7,200,000 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 Committee of
GCI's Board of Directors administers 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. If at the
time an option is granted the exercise price is less than the market
value of the underlying common stock, the "in the money" amount at the
time of grant is expensed ratably over the vesting period of the option.
Options granted pursuant to the Option Plan are only exercisable if at
the time of exercise the option holder is an employee or non-employee
director of GCI.
<TABLE>
Information for the years 1997, 1998 and 1999 with respect to the Option
Plan follows:
<CAPTION>
Weighted
Average Range of
Shares Exercise Price Exercise Prices
------------- --------------- ------------------
<S> <C> <C> <C>
Outstanding at December 31, 1996 2,453,217 $3.54 $0.75-$6.50
Granted 1,047,000 $6.36 $0.01-$7.63
Exercised (57,285) $3.37 $0.75-$4.00
Forfeited (72,032) $4.82 $0.75-$6.50
-------------
Outstanding at December 31, 1997 3,370,900 $4.39 $0.01-$7.63
Granted 1,145,034 $6.40 $3.25-$7.25
Exercised (264,600) $2.98 $1.00-$4.00
Forfeited (181,000) $6.49 $4.00-$7.00
-------------
Outstanding at December 31, 1998 4,070,334 $4.95 $0.01-$7.63
Granted 865,796 $4.57 $3.25-$6.00
Exercised (416,365) $3.83 $0.01-$6.00
Forfeited (165,050) $6.03 $0.01-$7.63
-------------
Outstanding at December 31, 1999 4,354,715 $4.94 $0.01-$7.63
=============
Available for grant at December 31, 1999 1,462,496
=============
</TABLE>
88
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Stock Options Not Pursuant to a Plan
In June 1989, an officer 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, expiring in February 1999. Options
to acquire 50,000 shares were exercised during 1998, and options to
acquire the remaining 50,000 shares were exercised in 1999 prior to
their expiration.
The Company entered into an incentive agreement in June 1989 with an
officer providing for the acquisition of 85,190 remaining shares of
Class A common stock of the Company for $.001 per share exercisable
through June 1997. The shares under the incentive agreement vested in
equal annual increments over a three-year period and were exercised in
June 1997.
Stock Warrants Not Pursuant to a Plan
The Company entered into a warrant agreement in December 1998 with Prime
II Management, L.P. ("PMLP"). In lieu of cash payments for services
under the amended Management Agreement, PMLP agreed to accept a stock
warrant which provides for the purchase of 425,000 shares of GCI class A
common stock, with immediate vesting at the option date and an exercise
price of $3.25 per share. The warrant expires December 2003.
The Company entered into a warrant agreement in exchange for services in
December 1998 with certain of its legal counsel which provides for the
purchase of 16,667 shares of GCI class A common stock, vesting in
December 1999, with an exercise price of $3.00 per share, and expiring
December 2003.
The Company entered into a warrant agreement in exchange for services in
June 1999 with certain of its legal counsel which provides for the
purchase of 25,000 shares of GCI class A common stock, vesting over
three years ending December 2001, with an exercise price of $3.00 per
share, and expiring December 2003.
SFAS 123 Disclosures
The Company's stock options and warrants expire at various dates through
October 2009. At December 31, 1999, 1998 and 1997, the weighted-average
remaining contractual lives of options outstanding were 6.14, 6.54 and
6.65 years, respectively.
At December 31, 1999, 1998 and 1997, the number of exercisable shares
under option was 2,509,756, 2,252,130, and 1,759,015, respectively, and
the weighted-average exercise price of those options was $3.91, $3.45
and $3.01, respectively.
The per share weighted-average fair value of stock options granted
during 1999 was $4.14 per share for compensatory and $2.85 for
non-compensatory options; for 1998 was $4.08 per share for compensatory
and non-compensatory options; and for 1997, $6.71 per share for
compensatory options and $6.50 per share for non-compensatory options.
The amounts were determined as of the options' grant dates using a
qualified Black-Scholes option-pricing model with the following
weighted-average assumptions: 1999 - risk-free interest rate of 6.66%,
volatility of 0.6455 and an expected life of 5.7 years; 1998 - risk-free
interest rate of 4.75%, volatility of 0.6951 and an expected life of 5.7
years; and 1997 - risk-free interest rate of 5.46%, volatility of 1.8558
and an expected life of 5.5 years.
89
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
<TABLE>
Summary information about the Company's stock options and warrants
outstanding at December 31, 1999:
<CAPTION>
Options and Warrants Outstanding Options and Warrants Exercisable
----------------------------------------------------------------------- --------------------------------------
Weighted
Average
Number Remaining Weighted Number
Range of Exercise outstanding as Contractual Average Exercisable as Weighted Average
Prices of 12/31/99 Life Exercise Price of 12/31/99 Exercise Price
----------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
$0.01 - $1.75 335,860 3.46 $1.31 293,335 $1.49
$3.00 - $3.00 803,667 2.56 $3.00 787,000 $3.00
$3.25 - $3.25 696,505 6.13 $3.25 467,805 $3.25
$3.75 - $3.75 4,000 6.09 $3.75 4,000 $3.75
$4.00 - $4.00 527,100 4.96 $4.00 321,100 $4.00
$4.50 - $5.00 364,950 9.11 $4.97 22,000 $4.55
$6.00 - $6.00 592,500 8.15 $6.00 177,000 $6.00
$6.50 - $6.94 470,800 7.77 $6.57 135,150 $6.54
$7.00 - $7.00 646,000 7.26 $7.00 220,366 $7.00
$7.25 - $7.63 380,000 7.77 $7.39 82,000 $7.53
------------------------------------------------- --------------------------------------
$0.01 - $7.63 4,821,382 6.14 $4.78 2,509,756 $3.91
================================================= ======================================
</TABLE>
<TABLE>
Had compensation cost for the Company's 1997, 1998 and 1999 grants for
stock-based compensation plans been determined consistent with SFAS 123,
the Company's net income (loss) and net income (loss) per common share
would approximate the pro forma amounts below (in thousands except per
share data):
<CAPTION>
As Reported Pro Forma
----------------- -----------------
<S> <C> <C>
1997:
Net loss $(2,183) (3,387)
Basic net earnings per common share $ (0.05) (0.08)
Diluted net earnings per common share $ (0.05) (0.08)
1998:
Net loss $(6,797) (8,697)
Basic net loss per common share $ (0.14) (0.18)
Diluted net loss per common share $ (0.14) (0.18)
1999:
Net loss $(9,527) (11,714)
Basic net loss per common share $ (0.21) (0.26)
Diluted net loss per common share $ (0.21) (0.26)
</TABLE>
Pro forma net income (loss) reflects options granted in 1999, 1998 and
1997. Therefore, the full impact of calculating compensation cost for
stock options under SFAS 123 is not reflected in the pro forma net
income amounts presented above since compensation cost is reflected over
the options' vesting period of generally 5 years and compensation cost
for options granted prior to January 1, 1995 is not considered.
Class A Common Shares Held in Treasury
The Company acquired 105,000 shares of its Class A common stock in 1989
for approximately $328,000 to fund a deferred bonus agreement with an
officer of the Company. The agreement provides that the balance is
payable after the later of termination of employment or six months after
90
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
the effective date of the agreement. In 1995, 1996 and 1997, the Company
acquired a total of 98,000 additional shares of Class A common stock for
approximately $711,000 to fund additional deferred compensation
agreements for two of its officers. In 1998 the Company acquired a total
of 145,000 additional shares of Class A common stock for approximately
$568,000 to fund additional deferred compensation agreements for three
of its officers.
Employee Stock Purchase Plan
In December 1986, the Company 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 GCI's Class A
and Class B common stock at market value. The Plan permits each employee
of the Company 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 $10,000 in 1999; 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.
The Company may match employee salary reductions and after tax
contributions in any amount, elected by GCI's Board 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 matching contributions cannot exceed 25 percent of any
employee's compensation (determined after salary reduction) for any
year. Matching contributions vest over six years. Employee contributions
may be invested in GCI common stock, MCI WorldCom common stock, AT&T
common stock, TCI Satellite Entertainment, Inc. common stock or various
mutual funds. Tele-Communications, Inc. ("TCI") common stock was
previously offered to employees as an investment choice but TCI's merger
with AT&T in March 1999 resulted in the conversion of TCI shares of
common stock into AT&T shares of common stock. TCI Satellite
Entertainment, Inc. was not included in the TCI and AT&T merger,
therefore its stock was not converted. Alternative investment choices
may be offered by the Plan commencing as early as the third quarter of
2000.
Employee contributions invested in GCI common stock receive up to 100%
matching, as determined by GCI's Board each year, in GCI common stock.
Employee contributions invested in other than GCI common stock receive up
to 50% matching, as determined by the GCI's Board each year, in GCI
common stock. The Company's matching contributions allocated to
participant accounts totaled approximately $2,448,000, $2,278,000 and
$1,800,000 for the years ended December 31, 1999, 1998, and 1997,
respectively. The Plan may, at its discretion, purchase shares of GCI
common stock from GCI at market value or may purchase GCI's common stock
on the open market. In 1998 and 1999 the Company funded employer-matching
contributions through the issuance of new shares of GCI common stock
rather than market purchases and expects to continue to do so in 2000.
(9) Fiber Optic Cable System
In early February 1999 the Company completed construction of its fiber
optic cable system with commercial services commencing at that time. The
cities of Anchorage, Juneau and Seattle are connected via a subsea route.
Subsea and terrestrial connections extended the fiber optic cable to
Fairbanks via Whittier and Valdez. The total system cost was
approximately $125 million, portions of which were allocated to Cost of
Sales and to Other Assets in 1999 (see note 13) in connection with the
sale of fiber capacity.
(10) Industry Segments Data
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information."
The Company's reportable segments are business units that offer different
products. The reportable segments are each managed separately because
they manage and offer distinct products with different production and
delivery processes.
91
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
The Company has four reportable segments as follows:
Long-distance services. A full range of common-carrier long-distance
services is offered to commercial, government, other telecommunications
companies and residential customers, through its networks of fiber
optic cables, digital microwave, and fixed and transportable satellite
earth stations.
Cable services. The Company provides cable television services to
residential, commercial and government users in the State of Alaska.
The Company's cable systems serve 26 communities and areas in Alaska,
including the state's three largest urban areas, Anchorage, Fairbanks
and Juneau. Cable plant upgrades in 1999 and 1998 enabled the Company
to offer digital cable television services in Anchorage and retail
cable modem service (through its Internet services segment) in
Anchorage, Fairbanks and Juneau, complementing its existing service
offerings. The Company plans to expand its product offerings as plant
upgrades are completed in other communities in Alaska.
Local access services. The Company introduced facilities based
competitive local exchange services in Anchorage in 1997. The Company
plans to provide similar competitive local exchange services in
Alaska's other major population centers.
Internet services. The Company began offering wholesale and retail
Internet services in 1998. Deployment of the new undersea fiber optic
cable (see note 9) allowed the Company to offer enhanced services with
high-bandwidth requirements.
Services provided by the Company that are included in the "Other" segment
in the tables that follow are managed services, product sales, cellular
telephone services, and the results of insignificant business units
described above which do not meet the quantitative thresholds for
determining reportable segments. None of these business units have ever met
the quantitative thresholds for determining reportable segments. Also
included in the Other segment is a $19.5 million sale of undersea fiber
optic cable system capacity in 1999, and corporate related expenses
including marketing, customer service, management information systems,
accounting, legal and regulatory, human resources and other general and
administrative expenses.
The Company evaluates performance and allocates resources based on (1)
earnings or loss from operations before depreciation, amortization, net
interest expense and income taxes, and (2) operating income or loss. The
accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies included in
note 1. Intersegment sales are recorded at cost plus an agreed upon
intercompany profit.
All revenues are earned through sales of services and products within the
United States of America ("USA"). All of the Company's long-lived assets
are located within the USA.
<TABLE>
Summarized financial information concerning the Company's reportable
segments follows (amounts in thousands):
<CAPTION>
Long- Local
Distance Cable Access Internet
Services Services Services Services Other Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
----
Revenues:
Intersegment $ 8,518 1,942 3,937 207 --- 14,604
External 159,722 61,146 15,543 9,120 33,648 279,179
--------------------------------------------------------------------------
Total revenues 168,240 63,088 19,480 9,327 33,648 293,783
--------------------------------------------------------------------------
Cost of sales and services:
Intersegment 3,430 --- 1,255 9,369 --- 14,054
External 80,970 15,478 7,892 3,151 14,976 122,467
--------------------------------------------------------------------------
Total cost of sales and services 84,400 15,478 9,147 12,520 14,976 136,521
--------------------------------------------------------------------------
</TABLE>
92
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Long- Local
Distance Cable Access Internet
Services Services Services Services Other Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Contribution:
Intersegment 5,088 1,942 2,682 (9,162) --- 550
External 78,752 45,668 7,651 5,969 18,672 156,712
--------------------------------------------------------------------------
Total contribution 83,840 47,610 10,333 (3,193) 18,672 157,262
Selling, general and administrative
expenses 22,789 15,092 9,269 4,531 46,601 98,282
--------------------------------------------------------------------------
Earnings (loss) from operations before
depreciation, amortization, net
interest expense, income taxes and
cumulative effect of a change in
accounting principle 61,051 32,518 1,064 (7,724) (27,929) 58,980
Depreciation and amortization 16,270 17,626 3,281 1,128 4,375 42,680
--------------------------------------------------------------------------
Operating income (loss) $ 44,781 14,892 (2,217) (8,852) (32,304) 16,300
==========================================================================
Total assets $219,806 310,421 28,364 20,311 64,249 643,151
==========================================================================
Capital expenditures $ 17,626 7,186 3,207 5,991 2,563 36,573
==========================================================================
1998
----
Revenues:
Intersegment $ 2,716 1,330 1,284 --- --- 5,330
External 157,350 57,640 9,908 6,082 15,815 246,795
--------------------------------------------------------------------------
Total revenues 160,066 58,970 11,192 6,082 15,815 252,125
--------------------------------------------------------------------------
Cost of sales and services:
Intersegment 1,284 --- 1,254 2,727 --- 5,265
External 79,323 13,407 6,113 3,402 13,828 116,073
--------------------------------------------------------------------------
Total cost of sales and services 80,607 13,407 7,367 6,129 13,828 121,338
--------------------------------------------------------------------------
Contribution:
Intersegment 1,432 1,330 30 (2,727) --- 65
External 78,027 44,233 3,795 2,680 1,987 130,722
--------------------------------------------------------------------------
Total contribution 79,459 45,563 3,825 (47) 1,987 130,787
Selling, general and administrative
expenses 21,019 15,630 8,477 782 43,925 89,833
--------------------------------------------------------------------------
Earnings (loss) from operations before
depreciation, amortization, net
interest expense and income taxes 58,440 29,933 (4,652) (829) (41,938) 40,954
Depreciation and amortization 6,976 17,281 2,597 501 4,690 32,045
--------------------------------------------------------------------------
Operating income (loss) $ 51,464 12,652 (7,249) (1,330) (46,628) 8,909
==========================================================================
Total assets $231,727 320,305 31,062 16,535 49,816 649,445
==========================================================================
Capital expenditures $110,177 20,727 8,104 3,836 6,129 148,973
==========================================================================
</TABLE>
93
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Long- Local
Distance Cable Access Internet
Services Services Services Services Other Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
----
Revenues:
Intersegment $ --- 516 --- --- 172 688
External 154,681 55,165 610 182 13,171 223,809
--------------------------------------------------------------------------
Total revenues 154,681 55,681 610 182 13,343 224,497
--------------------------------------------------------------------------
Cost of sales and services:
Intersegment --- --- 472 --- --- 472
External 86,346 12,610 739 241 11,141 111,077
--------------------------------------------------------------------------
Total cost of sales and services 86,346 12,610 1,211 241 11,141 111,549
--------------------------------------------------------------------------
Contribution:
Intersegment --- 516 (472) --- 172 216
External 68,335 42,555 (129) (59) 2,030 112,732
--------------------------------------------------------------------------
Total contribution 68,335 43,071 (601) (59) 2,202 112,948
Selling, general and administrative
expenses 18,724 18,812 2,802 26 33,219 73,583
--------------------------------------------------------------------------
Earnings (loss) from operations before
depreciation, amortization, net
interest expense, income taxes and
extraordinary item 49,611 24,259 (3,403) (85) (31,017) 39,365
Depreciation and amortization 6,676 13,320 525 3 3,243 23,767
--------------------------------------------------------------------------
Operating income (loss) $ 42,935 10,939 (3,928) (88) (34,260) 15,598
==========================================================================
Total assets $161,968 311,643 20,357 8,510 42,824 545,302
==========================================================================
Capital expenditures $ 23,107 18,199 9,379 7,496 6,463 64,644
==========================================================================
</TABLE>
---------------
Long-distance services, local access service and Internet services are
billed utilizing a unified accounts receivable system and are not
reported separately by business segment. All such accounts receivable
are included above in the long-distance services segment for all
periods presented.
<TABLE>
A reconciliation of total segment revenues to consolidated revenues
follows:
<CAPTION>
Years ended December 31, 1999 1998 1997
--------------- --------------- --------------
<S> <C> <C> <C>
Total segment revenues $ 293,783 252,125 224,497
Less intersegment revenues eliminated in consolidation (14,604) (5,330) (688)
--------------- --------------- --------------
Consolidated revenues $ 279,179 246,795 223,809
=============== =============== ==============
</TABLE>
<TABLE>
A reconciliation of total segment earnings from operations before
depreciation, amortization, net interest expense, income taxes and
cumulative effect of a change in accounting principle to consolidated
net loss before income taxes and cumulative effect of a change in
accounting principle follows:
94
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
<CAPTION>
Years ended December 31, 1999 1998 1997
-------------- ---------------- --------------
<S> <C> <C> <C>
Total segment earnings from operations before depreciation,
amortization, net interest expense, income taxes,
extraordinary item and cumulative effect of a change in
accounting principle $ 58,980 40,954 39,365
Less intersegment contribution eliminated in consolidation (550) (65) (216)
-------------- ---------------- --------------
Consolidated earnings from operations before depreciation,
amortization, net interest expense, income taxes,
extraordinary item and cumulative effect of a change in
accounting principle 58,430 40,889 39,149
Depreciation and amortization 42,680 32,045 23,767
-------------- ---------------- --------------
Consolidated operating income 15,750 8,844 15,382
Interest expense, net (30,616) (19,764) (17,617)
-------------- ---------------- --------------
Consolidated net loss before income taxes, extraordinary
item and cumulative effect of a change in accounting
principle $ (14,866) (10,920) (2,235)
============== ================ ==============
</TABLE>
<TABLE>
A reconciliation of total segment operating income to consolidated net
loss before income taxes and extraordinary item follows:
<CAPTION>
Years ended December 31, 1999 1998 1997
--------------- --------------- --------------
<S> <C> <C> <C>
Total segment operating income $ 16,300 8,909 15,598
Less intersegment contribution eliminated in consolidation (550) (65) (216)
--------------- --------------- --------------
Consolidated operating income 15,750 8,844 15,382
Interest expense, net (30,616) (19,764) (17,617)
--------------- --------------- --------------
Consolidated net loss before income taxes, extraordinary
item and cumulative effect of a change in accounting
principle $ (14,866) (10,920) (2,235)
=============== =============== ==============
</TABLE>
The Company provides message telephone service to MCI WorldCom (see note
12) and Sprint, major customers. The Company earned revenues, net of
discounts, included in the long-distance segment, pursuant to a contract
with Sprint totaling approximately $19,770,000, $25,244,000 and
$22,956,000 for the years ended December 31, 1999, 1998 and 1997
respectively. As a percentage of total revenues, Sprint revenues totaled
7.1%, 10.2% and 10.3% for the years ended December 31, 1999, 1998 and
1997 respectively.
(11) Fair Value of Financial Instruments
<TABLE>
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1999 and
1998. The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
95
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
<CAPTION>
(Amounts in thousands) 1999 1998
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------- -------------------------
<S> <C> <C> <C> <C>
Short-term assets $ 68,864 68,864 56,367 56,367
Notes receivable $ 2,067 2,067 1,432 1,432
Short-term liabilities $ 35,194 35,194 40,190 40,190
Long-term debt and capital lease
obligations $340,500 356,214 351,533 380,153
</TABLE>
The following methods and assumptions were used to estimate fair values:
Short-term assets: The fair values of cash and cash equivalents, net
receivables, notes receivable and refundable deposit approximate
their carrying values due to the short-term nature of these financial
instruments.
Notes receivable: The carrying value of notes receivable is estimated
to approximate fair values. Although there are no quoted market
prices available for these instruments, the fair value estimates were
based on the change in interest rates and risk related interest rate
spreads since the notes origination dates.
Short-term liabilities: The fair values of current maturities of
long-term debt and capital lease obligations, accounts payable,
accrued interest, and subscriber deposits approximate their carrying
value due to the short-term nature of these financial instruments.
Long-term debt and capital lease obligations: The fair value of
long-term debt is based primarily on discounting the future cash
flows of each instrument at rates currently offered to the Company
for similar debt instruments of comparable maturities by the
Company's bankers.
(12) Related Party Transactions
Pursuant to the terms of a contract with MCI WorldCom, a major
shareholder of GCI (see note 8), the Company earned revenues, net of
discounts, of approximately $40,450,000, $35,991,000 and $33,962,000 for
the years ended December 31, 1999, 1998 and 1997, respectively. As a
percentage of total revenues, MCI WorldCom revenues totaled 14.5%, 14.6%
and 15.2% for the years ended December 31, 1999, 1998 and 1997
respectively. Amounts receivable, net of accounts payable, from MCI
WorldCom totaled $9,111,000 and $4,836,000 at December 31, 1999 and
1998, respectively. The Company paid MCI WorldCom for distribution of
its traffic in the lower 49 states amounts totaling approximately
$10,623,000, $12,639,000 and $14,319,000 for the years ended December
31, 1999, 1998 and 1997, 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 Company guarantees the lease. The lease term is 15 years
with monthly payments increasing in $800 increments at each two-year
anniversary of the lease. Monthly lease costs will increase to $18,400
effective October 2001. 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.
96
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
GCI Cable, Inc. ("GCI Cable") is a party to a Management Agreement with
PMLP. Certain of the Prime sellers are affiliated with PMLP. The
Management Agreement began on November 1, 1996 and expires on October
31, 2005, however, it can be terminated earlier upon loss of a license
to operate the systems, sale of the systems, breach of contract, or upon
exercise of an option to terminate the Management Agreement by PMLP or
GCI Cable any time after October 31, 2000. The agreement was amended
December 15, 1998.
Under the terms of the amended Management Agreement, PMLP performs
certain services for GCI Cable and will be compensated as follows:
November 01, 1996 through October 31, 1997 $1,000,000
November 01, 1997 through December 31, 1997 $ 125,000
January 01, 1998 through January 31, 1999 Warrant to purchase
425,000 shares of
GCI stock
February 01, 1999 through October 31, 1999 $ 200,000
November 01, 1999 through October 31, 2000 $ 400,000
(plus reimbursement for certain expenses)
In connection with the agreement, GCI Cable received services valued at
approximately $334,000, $752,000 and $1,040,000 including reimbursable
expenses for the periods ended December 31, 1999, 1998 and 1997,
respectively.
(13) Commitments and Contingencies
Leases
The Company as Lessee. 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 $13,678,000,
$11,609,000 and $11,574,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
<TABLE>
A summary of future minimum lease payments for all leases as of December
31, 1999 follows:
<CAPTION>
Year ending December 31: Operating Capital
------------- -------------
(Amounts in thousands)
<S> <C> <C>
2000 $ 7,498 732
2001 4,051 114
2002 2,608 478
2003 2,454 373
2004 1,277 230
2005 and thereafter 6,607 413
------------- -------------
Total minimum lease payments $ 24,495 2,340
=============
Less amount representing interest (666)
Less current maturities of obligations under capital leases (574)
-------------
Subtotal - long-term obligations under capital leases 1,100
Less long-term obligations under capital leases due to
related party, excluding current maturities (353)
-------------
Long-term obligations under capital leases, excluding
related party, excluding current maturities $ 747
=============
</TABLE>
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, except for satellite transponder
capacity, leases that expire will be renewed or replaced by leases on
other properties.
97
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
The Company as Lessor. In 1999 the Company signed agreements with a
large commercial customer for the lease of three DS3 circuits on Alaska
United facilities within Alaska, and between Alaska and the lower 48
states. The lease agreements are for three years with renewal options. A
summary of minimum future operating lease rentals follows:
Year ending December 31,
2000 $ 4,733
2001 4,733
2002 919
--------
Total minimum lease rentals $ 10,385
========
Future Fiber Capacity Sale
An agreement was executed effective July 1999 for a second $19.5 million
sale of fiber capacity to Alaska Communications Systems. The agreement
requires Alaska Communications Systems to acquire $19.5 million of
additional capacity during the 18-month period following the effective
date of the contract. Costs associated with the capacity to be sold have
been classified as Other Assets in the accompanying consolidated
financial statements at December 31, 1999.
Deferred Compensation Plan
During 1995, the Company adopted a non-qualified, unfunded deferred
compensation plan to provide a means by which certain employees may
elect to defer receipt of designated percentages or amounts of their
compensation and to provide a means for certain other deferrals of
compensation. The Company may, at its discretion, contribute matching
deferrals equal to the rate of matching selected by the Company.
Participants immediately vest in all elective deferrals and all income
and gain attributable thereto. Matching contributions and all income and
gain attributable thereto vest over a six-year period. Participants may
elect to be paid in either a single lump sum payment or annual
installments over a period not to exceed 10 years. Vested balances are
payable upon termination of employment, unforeseen emergencies, death
and total disability. Participants are general creditors of the Company
with respect to deferred compensation plan benefits. Compensation
deferred pursuant to the plan totaled approximately $60,000, $117,000
and $58,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Satellite Transponders
The Company entered into a purchase and lease-purchase option agreement
in August 1995 for the acquisition of satellite transponders to meet its
long-term satellite capacity requirements. The satellite was
successfully launched in January 2000 and delivered to the Company on
March 5, 2000. The Company intends to finance the satellite transponders
pursuant to a long-term capital lease agreement with a leasing company.
The Company will continue to lease transponder capacity on the PanAmSat
Galaxy IX satellite until its communications traffic is successfully
transitioned to the new satellite transponders.
98
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Self-Insurance
The Company is self-insured for losses and liabilities related primarily
to health and welfare claims up to predetermined amounts above which
third party insurance applies. A reserve of $600,000 and $545,000 was
recorded at December 31, 1999 and 1998, respectively, to cover estimated
reported losses, estimated unreported losses based on past experience
modified for current trends, and estimated expenses for investigating
and settling claims. Actual losses will vary from the recorded reserve.
While management uses what it believes is pertinent information and
factors in determining the amount of reserves, future additions to the
reserves may be necessary due to changes in the information and factors
used.
Litigation and Disputes
The Company is involved in various lawsuits, billing disputes, legal
proceedings and regulatory matters that have arisen in the normal course
of business. While the ultimate results of these items cannot be
predicted with certainty, management does not expect at this time the
resolution of them to have a material adverse effect on the Company's
financial position, results of operations or its liquidity.
Cable Service Rate Reregulation
Effective March 31, 1999, the rates for cable programming services
(service tiers above basic service) are no longer regulated. This
regulation ended pursuant to provisions of the Telecommunications Act of
1996 and the regulations adopted pursuant thereto by the FCC. Federal
law still permits regulation of basic service rates. However, Alaska law
provides that cable television service is exempt from regulation by the
RCA unless 25% of a system's subscribers request such regulation by
filing a petition with the RCA. At December 31, 1999, only the Juneau
system is subject to RCA regulation of its basic service rates. No
petition requesting regulation has been filed for any other system. (The
Juneau system serves 8.0% of the Company's total basic service
subscribers at December 31, 1999.) Juneau's current rates have been
approved by the RCA and there are no other pending filings with the RCA,
therefore, there is no refund liability for basic service at this time.
Year 2000
The Company initiated a company-wide program in 1998 to ensure that our
date-sensitive information, telephony, cable, Internet and business
systems, and certain other equipment would properly recognize the Year
2000 as a result of the century change on January 1, 2000. The program
focused on the hardware, software, embedded chips, third-party vendors
and suppliers as well as third-party networks that were associated with
the identified systems. The Company substantially completed the program
during third quarter 1999 and its systems did not experience any
significant disruptions as a result of the century change.
99
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Costs related to the Year 2000 issue have been expensed as incurred and
are funded through the Company's operating cash flows. In total, the
Company has expensed incremental remediation costs totaling $2.3 million
through December 31, 1999, with remaining incremental remediation costs
in 2000 estimated at approximately $400,000.
The Company did not defer any critical information technology projects
because of its Year 2000 program efforts, which were addressed primarily
through a dedicated team within the Company's information technology
group.
Universal Service Fund Appeal
During the year ended December 31, 1999 the Company recorded revenues
and accounts receivable totaling approximately $1 million from the
Universal Service Fund ("USF") for Internet services provided to certain
rural public school districts in Alaska. The USF refused payment of the
submitted billings, and the Company has appealed that decision.
Management believes the Company's position is sustainable, however no
assurance can be given with respect to the ultimate outcome of such
appeal. If the appeal results in disallowance of the disputed billings,
such loss could have an impact on the Company's financial position,
results of operations and cash flows in the year the decision is
rendered.
(14) Supplementary Financial Data
<TABLE>
The following is a summary of unaudited quarterly results of operations
for the years ended December 31, 1999 and 1998 (amounts in thousands,
except per share amounts):
<CAPTION>
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
1999
----
Total revenues $ 61,338 83,659 67,340 66,842 279,179
Net earnings (loss) $ (4,865) 2,491 (3,537) (3,616) (9,527)
Basic earnings (loss) per common share:
Net earnings (loss) before cumulative
effect of a change in accounting
principle (1) $ (0.09) 0.04 (0.08) (0.08) (0.20)
Cumulative effect of a change in
accounting principle $ (0.01) --- --- --- (0.01)
------------ ----------- ------------ ----------- ------------
Net earnings (loss) (1) $ (0.10) 0.04 (0.08) (0.08) (0.21)
============ =========== ============ =========== ============
Diluted earnings (loss) per common share:
Net earnings (loss) before cumulative
effect of a change in accounting
principle (1) $ (0.09) 0.04 (0.08) (0.08) (0.20)
Cumulative effect of a change in
accounting principle $ (0.01) --- --- --- (0.01)
------------ ----------- ------------ ----------- ------------
Net earnings (loss) (1) $ (0.10) 0.04 (0.08) (0.08) (0.21)
============ =========== ============ =========== ============
1998
----
Total revenues $ 58,152 62,941 62,766 62,936 246,795
Net loss $ (1,616) (2,066) (2,076) (1,039) (6,797)
Basic net loss per common share (1) $ (0.03) (0.04) (0.04) (0.02) (0.14)
Diluted net loss per common share (1) $ (0.03) (0.04) (0.04) (0.02) (0.14)
<FN>
------------
1 Due to rounding, the sum of quarterly loss per common share amounts
may not agree to year-to-date loss per common share amounts.
</FN>
</TABLE>
100
PART IV
Item 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
(a)(l) Consolidated Financial Statements
Included in Part II of this Report:
Independent Auditor's Report..............................................................69
Consolidated Balance Sheets, December 31, 1999 and 1998...................................70 -- 71
Consolidated Statements of Operations,
Years ended December 31, 1999, 1998 and 1997...........................................72
Consolidated Statements of Stockholders' Equity,
Years ended December 31, 1999, 1998 and 1997...........................................73
Consolidated Statements of Cash Flows,
Years ended December 31, 1999, 1998 and 1997...........................................74
Notes to Consolidated Financial Statements................................................75 -- 100
(a)(2) Consolidated Financial Statement Schedules
Included in Part IV of this Report:
Independent Auditors' Report..............................................................107
Schedule VIII - Valuation and Qualifying Accounts,
Years ended December 31, 1999, 1998 and 1997...........................................108
</TABLE>
Other schedules are omitted, as they are not required or are not applicable, or
the required information is shown in the applicable financial statements or
notes thereto.
101
(b) Exhibits
<TABLE>
Listed below are the exhibits that are filed as a part of this Report
(according to the number assigned to them in Item 601 of Regulation
S-K):
<CAPTION>
Exhibit No. Description
----------------------------------------------------------------------------------------------------------------
<S> <C>
3.1 Restated Articles of Incorporation of The Company dated August 16, 1993. (23)
3.2 Amended and Restated Bylaws of The Company dated January 28, 2000 *
4.1 1997 Amendment No. 1 to Voting Agreement dated October 31, 1996, among Prime II Management
L.P., as agent for the Voting Prime Sellers, MCI Telecommunications Corporation, Ronald
A. Duncan, Robert M. Walp and TCI GCI, Inc. (23)
10.1 Employee stock option agreements issued to individuals Spradling, Strid, Behnke, and
Lewkowski (3)
10.3 Westin Building Lease (5)
10.4 Duncan and Hughes Deferred Bonus Agreements (6)
10.5 Compensation Agreement between General Communication, Inc. and William C. Behnke dated
January 1, 1997 (19)
10.6 Order approving Application for a Certificate of Public Convenience and Necessity to
operate as a Telecommunications (Intrastate Interexchange Carrier) Public Utility
within Alaska (3)
10.7 1986 Stock Option Plan, as amended (21)
10.8 Loan agreement between National Bank of Alaska and GCI Leasing Co., Inc. dated December
31, 1992 (4)
10.13 MCI Carrier Agreement between MCI Telecommunications Corporation and General
Communication, Inc. dated January 1, 1993 (8)
10.14 Contract for Alaska Access Services Agreement between MCI Telecommunications Corporation
and General Communication, Inc. dated January 1, 1993 (8)
10.15 Promissory Note Agreement between General Communication, Inc. and Ronald A. Duncan, dated
August 13, 1993 (9)
10.16 Deferred Compensation Agreement between General Communication, Inc. and Ronald A. Duncan,
dated August 13, 1993 (9)
10.17 Pledge Agreement between General Communication, Inc. and Ronald A. Duncan, dated August
13, 1993 (9)
10.19 Summary Plan Description pertaining to the Revised Qualified Employee Stock Purchase Plan
of General Communication, Inc. (10)
10.20 The GCI Special Non-Qualified Deferred Compensation Plan (11)
10.21 Transponder Purchase Agreement for Galaxy X between Hughes Communications Galaxy, Inc. and
GCI Communication Corp. (11)
10.23 Management Agreement, between Prime II Management, L.P., and GCI Cable, Inc., dated
October 31, 1996 (12)
10.25 Licenses: (5)
10.25.1 214 Authorization
10.25.2 International Resale Authorization
10.25.3 Digital Electronic Message Service Authorization
10.25.4 Fairbanks Earth Station License
10.25.5 Fairbanks (Esro) Construction Permit for P-T-P Microwave Service
10.25.6 Fairbanks (Polaris) Construction Permit for P-T-P Microwave Service
10.25.7 Anchorage Earth Station Construction Permit
10.25.8 License for Eagle River P-T-P Microwave Service
10.25.9 License for Juneau Earth Station
10.25.10 Issaquah Earth Station Construction Permit
10.26 ATU Interconnection Agreement between GCI Communication Corp. and Municipality of
Anchorage, executed January 15, 1997 (18)
10.29 Asset Purchase Agreement, dated April 15, 1996, among General Communication, Inc., ACNFI,
ACNJI and ACNKSI (12)
</TABLE>
102
<TABLE>
<CAPTION>
Exhibit No. Description
----------------------------------------------------------------------------------------------------------------
<S> <C>
10.30 Asset Purchase Agreement, dated May 10, 1996, among General Communication, Inc., and
Alaska Cablevision, Inc. (12)
10.31 Asset Purchase Agreement, dated May 10, 1996, among General Communication, Inc., and
McCaw/Rock Homer Cable System, J.V. (12)
10.32 Asset Purchase Agreement, dated May 10, 1996, between General Communication, Inc., and
McCaw/Rock Seward Cable System, J.V. (12)
10.33 Amendment No. 1 to Securities Purchase and Sale Agreement, dated October 31, 1996, among
General Communication, Inc., and the Prime Sellers Agent (13)
10.34 First Amendment to Asset Purchase Agreement, dated October 30, 1996, among General
Communication, Inc., ACNFI, ACNJI and ACNKSI (13)
10.36 Order Approving Arbitrated Interconnection Agreement as Resolved and Modified by Order
U-96-89(8) dated January 14, 1997 (18)
10.37 Amendment to the MCI Carrier Agreement executed April 20, 1994 (18)
10.38 Amendment No. 1 to MCI Carrier Agreement executed July 26, 1994 (16)
10.39 MCI Carrier Addendum--MCI 800 DAL Service effective February 1, 1994 (16)
10.40 Third Amendment to MCI Carrier Agreement dated as of October 1, 1994 (16)
10.41 Fourth Amendment to MCI Carrier Agreement dated as of September 25, 1995 (16)
10.42 Fifth Amendment to the MCI Carrier Agreement executed April 19, 1996 (18)
10.43 Sixth Amendment to MCI Carrier Agreement dated as of March 1, 1996 (16)
10.44 Seventh Amendment to MCI Carrier Agreement dated November 27, 1996 (20)
10.45 First Amendment to Contract for Alaska Access Services between General Communication, Inc.
and MCI Telecommunications Corporation dated April 1, 1996 (20)
10.46 Service Mark License Agreement between MCI Communications Corporation and General
Communication, Inc. dated April 13, 1994 (19)
10.47 Radio Station Authorization (Personal Communications Service License), Issue Date June
23, 1995 (19)
10.48 Framework Agreement between National Bank of Alaska (NBA) and General Communication,
Inc. dated October 31, 1995 (17)
10.49 1997 Call-Off Contract between National Bank of Alaska (NBA) and General Communication,
Inc. (GCI) dated November 1, 1996 (20)
10.50 Contract No. 92MR067A Telecommunications Services between BP Exploration (Alaska), Inc.
and GCI Network Systems dated April 1, 1992 (20)
10.51 Amendment No. 03 to BP Exploration (Alaska) Inc. Contract No. 92MRO67A effective August
1, 1996 (20)
10.52 Lease Agreement dated September 30, 1991 between RDB Company and General Communication,
Inc. (3)
10.53 Certificate of Public Convenience and Necessity No. 436 for Telecommunications Service
(Relay Services) (19)
10.54 Order Approving Transfer Upon Closing, Subject to Conditions, and Requiring Filings
dated September 23, 1996 (19)
10.55 Order Granting Extension of Time and Clarifying Order dated October 21, 1996 (19)
10.56 Contract for Alaska Access Services among General Communication, Inc. and GCI
Communication Corp., and Sprint Communications Company L.P. dated June 1, 1993 (20)
10.57 First Amendment to Contract for Alaska Access Services between General Communication,
Inc. and Sprint Communications Company L.P. dated as of August 7, 1996 (20)
10.58 Employment and Deferred Compensation Agreement between General Communication, Inc. and
John M. Lowber dated July 1992 (19)
10.59 Deferred Compensation Agreement between GCI Communication Corp. and Dana L. Tindall
dated August 15, 1994 (19)
10.60 Transponder Lease Agreement between General Communication Incorporated and Hughes
Communications Satellite Services, Inc., executed August 8, 1989 (9)
10.61 Addendum to Galaxy X Transponder Purchase Agreement between GCI Communi-
</TABLE>
103
<TABLE>
<CAPTION>
Exhibit No. Description
----------------------------------------------------------------------------------------------------------------
<S> <C>
cation Corp. and Hughes Communications Galaxy, Inc.
dated August 24, 1995 (19)
10.62 Order Approving Application, Subject to Conditions; Requiring Filing; and Approving
Proposed Tariff on an Inception Basis, dated February 4, 1997 (19)
10.63 Resale Solutions Switched Services Agreement between Sprint Communications Company L.P.
and GCI Communications, Inc. dated May 31, 1996 (20)
10.64 Commitment Letter from Credit Lyonnais New York Branch, NationsBank of Texas, N.A. and
TD Securities (USA) Inc. for Fiber Facility dated as of July 3, 1997 (19)
10.65 Commitment Letter from NationsBank for Credit Facility dated July 2, 1997 (19)
10.66 Supply Contract Between Submarine Systems International Ltd. And GCI Communication Corp.
dated as of July 11, 1997. (23)
10.67 Supply Contract Between Tyco Submarine Systems Ltd. And Alaska United Fiber System
Partnership Contract Variation No. 1 dated as of December 1, 1997. (23)
10.68 $200,000,000 Amended and Restated Credit Agreement between GCI Holdings, Inc. and
NationsBank of Texas, N.A., as administrative agent, Credit Lyonnais New York Branch,
as documentation agent, and TD Securities (USA), Inc. as syndication agent, dated as
of November 14, 1997. (23)
10.69 $50,000,000 Amended and Restated Credit Agreement between GCI Holdings, Inc. and
NationsBank of Texas, N.A., as administrative agent, Credit Lyonnais New York Branch,
as documentation agent, and TD Securities (USA), Inc. as syndication agent, dated as
of November 14, 1997. (23)
10.70 Credit and Security Agreement Dated as of January 27, 1998 among Alaska United Fiber
System Partnership as Borrower and The Lenders Referred to Herein and Credit Lyonnais
New York Branch as Administrative Agent and NationsBank of Texas, N.A. as Syndication
Agent and TD Securities (USA), Inc. as Documentation Agent. (24)
10.71 Third Amendment to Contract for Alaska Access Services between General Communication,
Inc. and MCI Telecommunications Corporation dated February 27, 1998 (25)
10.72 Consent and First Amendment to Credit Agreements dated November 14, 1997 (26)
10.73 Second Amendment to $200,000,000 Amended and Restated Credit Agreement (26)
10.74 Second Amendment to $50,000,000 Amended and Restated Credit Agreement (26)
10.75 Third Amendment to $200,000,000 Amended and Restated Credit Agreement (26)
10.76 Third Amendment to $50,000,000 Amended and Restated Credit Agreement (26)
10.77 General Communication, Inc. Preferred Stock Purchase Agreement (26)
10.78 Qualified Employee Stock Purchase Plan of General Communication, Inc., as amended and restated
January 01, 2000 *
10.79 Statement of Stock Designation (Series B) (26)
10.80 Fourth Amendment to Contract for Alaska Access Services between General Communication,
Inc. and its wholly owned subsidiary GCI Communication Corp., and MCI WorldCom. (27)
10.81 Fifth Amendment to Contract for Alaska Access Services between General Communication,
Inc. and its wholly owned subsidiary GCI Communication Corp., and Sprint
Communications Company L.P. (27)
21.1 Subsidiaries of the Registrant (23)
23.1 Consent of KPMG LLP (Accountant for Company) *
27.1 Financial Data Schedule *
99 Additional Exhibits:
99.1 The Articles of Incorporation of GCI Communication Corp. (2)
99.2 The Bylaws of GCI Communication Corp. (2)
99.3 The Articles of Incorporation of GCI Communication Services, Inc. (4)
99.4 The Bylaws of GCI Communication Services, Inc. (4)
99.5 The Articles of Incorporation of GCI Leasing Co., Inc. (4)
</TABLE>
104
<TABLE>
<CAPTION>
Exhibit No. Description
----------------------------------------------------------------------------------------------------------------
<S> <C>
99.6 The Bylaws of GCI Leasing Co., Inc. (4)
99.7 The Bylaws of GCI Cable, Inc. (14)
99.8 The Articles of Incorporation of GCI Cable, Inc. (14)
99.9 The Bylaws of GCI Cable / Fairbanks, Inc. (14)
99.10 The Articles of Incorporation of GCI Cable / Fairbanks, Inc. (14)
99.11 The Bylaws of GCI Cable / Juneau, Inc. (14)
99.12 The Articles of Incorporation of GCI Cable / Juneau, Inc. (14)
99.13 The Bylaws of GCI Cable Holdings, Inc. (14)
99.14 The Articles of Incorporation of GCI Cable Holdings, Inc. (14)
99.15 The Bylaws of GCI Holdings, Inc. (19)
99.16 The Articles of Incorporation of GCI Holdings, Inc. (19)
99.17 The Articles of Incorporation of GCI, Inc. (18)
99.18 The Bylaws of GCI, Inc. (18)
99.19 The Bylaws of GCI Transport, Inc. (23)
99.20 The Articles of Incorporation of GCI Transport, Inc. (23)
99.21 The Bylaws of Fiber Hold Co., Inc. (23)
99.22 The Articles of Incorporation of Fiber Hold Co., Inc. (23)
99.23 The Bylaws of GCI Fiber Co., Inc. (23)
99.24 The Articles of Incorporation of GCI Fiber Co., Inc. (23)
99.25 The Bylaws of GCI Satellite Co., Inc. (23)
99.26 The Articles of Incorporation of GCI Satellite Co., Inc. (23)
99.27 The Partnership Agreement of Alaska United Fiber System (23)
<FN>
-------------------------
* Filed herewith.
2 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1990
3 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1991
4 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1992
5 Incorporated by reference to The Company's Registration Statement on Form 10 (File No.
0-15279), mailed to the Securities and Exchange Commission on December 30, 1986
6 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1989.
8 Incorporated by reference to The Company's Current Report on Form 8-K dated June 4, 1993.
9 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1993.
10 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
11 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
12 Incorporated by reference to The Company's Form S-4 Registration Statement dated October
4, 1996.
13 Incorporated by reference to The Company's Current Report on Form 8-K dated November 13,
1996.
14 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
105
16 Incorporated by reference to The Company's Current Report on Form 8-K dated March 14,
1996, filed March 28, 1996.
17 Incorporated by reference to The Company's Amendment to Annual Report dated December 31,
1995 on Form 10-K/A as amended on August 6, 1996.
18 Incorporated by reference to The Company's Form S-3 Registration Statement (File No.
333-28001) dated May 29, 1997.
19 Incorporated by reference to The Company's Amendment No. 1 to Form S-3/A Registration
Statement (File No. 333-28001) dated July 8, 1997.
20 Incorporated by reference to The Company's Amendment No. 2 to Form S-3/A Registration
Statement (File No. 333-28001) dated July 21, 1997.
21 Incorporated by reference to The Company's Amendment No. 3 to Form S-3/A Registration
Statement (File No. 333-28001) dated July 22, 1997.
23 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
24 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1998.
25 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
26 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period
ended March 31, 1999.
27 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1999.
</FN>
</TABLE>
(c) Reports on Form 8-K
None.
106
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
General Communication, Inc.:
Under date of March 10, 2000, we reported on the consolidated balance sheets of
General Communication, Inc. and Subsidiaries ("Company") as of December 31, 1999
and 1998 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1999, which are included in the Company's 1999 Annual Report on
Form 10-K. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedule in the consolidated financial statements, which is listed in
the index in Item 14(a)(2) of the Company's 1999 Annual Report on Form 10-K.
This consolidated financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
consolidated financial statement schedule based on our audits.
In our opinion this consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects the information set forth therein.
/s/
KPMG LLP
Anchorage, Alaska
March 10, 2000
107
<TABLE>
Schedule VIII
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1999, 1998 and 1997
<CAPTION>
Additions Deductions
--------- ----------
Balance at Charged to Write-offs
beginning of profit and net of Balance at
Description year loss Other recoveries end of year
----------------------------------------------- -------------- ------------ ----------- -------------- ------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful receivables, year ended:
December 31, 1999: $ 887 4,224 --- 2,278 2,833
============== ============ =========== ============== ============
December 31, 1998: $ 1,070 2,795 --- 2,978 887
============== ============ =========== ============== ============
December 31, 1997: $ 597 3,025 --- 2,552 1,070
============== ============ =========== ============== ============
</TABLE>
108
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Ronald A. Duncan
Ronald A. Duncan, President
(Chief Executive Officer)
Date: March 24, 2000
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<CAPTION>
Signature Title Date
- -------------------------------------- ------------------------------------------ -------------------
<S> <C> <C>
/s/ Carter F. Page Chairman of Board and Director March 24, 2000
- -------------------------------------- -------------------
Carter F. Page
/s/ Robert M. Walp Vice Chairman of Board and Director March 24, 2000
- -------------------------------------- -------------------
Robert M. Walp
/s/ Ronald A. Duncan President and Director March 24, 2000
- -------------------------------------- (Principal Executive Officer) -------------------
Ronald A. Duncan
/s/ Ronald R. Beaumont Director March 24, 2000
- -------------------------------------- -------------------
Ronald R. Beaumont
/s/ Donne F. Fisher Director March 24, 2000
- -------------------------------------- -------------------
Donne F. Fisher
Director
- -------------------------------------- -------------------
William P. Glasgow
/s/ Stephen R. Mooney Director March 24, 2000
- -------------------------------------- -------------------
Stephen R. Mooney
Director
- -------------------------------------- -------------------
Larry E. Romrell
Director
- -------------------------------------- -------------------
James M. Schneider
/s/ Christopher J. Shipman Director March 24, 2000
- -------------------------------------- -------------------
Christopher J. Shipman
/s/ John M. Lowber Senior Vice President, Chief Financial March 24, 2000
- -------------------------------------- Officer, Secretary and Treasurer -------------------
John M. Lowber (Principal Financial Officer)
/s/ Alfred J. Walker Vice President, Chief Accounting March 24, 2000
- -------------------------------------- Officer -------------------
Alfred J. Walker (Principal Accounting Officer)
</TABLE>
109