As filed with the Securities and Exchange Commission on August 14, 2000.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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)
STATE OF ALASKA 92-0072737
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 Denali Street
Suite 1000
Anchorage, Alaska 99503
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (907) 265-5600
Former name, former address and former fiscal year, if changed since last
report
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
The number of shares outstanding of the registrant's classes of common stock,
as of July 31, 2000 was:
48,090,828 shares of Class A common stock; and
3,908,148 shares of Class B common stock.
1
INDEX
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 2000
Page No.
--------
Cautionary Statement Regarding Forward-Looking Statements.................................................3
PART I. FINANCIAL INFORMATION
Item l. Consolidated Balance Sheets as of June 30, 2000
(unaudited) and December 31, 1999..................................................5
Consolidated Statements of Operations for the three
and six months ended June 30, 2000
(unaudited) and 1999 (unaudited)...................................................7
Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 2000
(unaudited) and 1999 (unaudited)...................................................8
Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 (unaudited)
and 1999 (unaudited)...............................................................9
Notes to Interim Condensed Consolidated Financial
Statements.........................................................................10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................33
Item 4. Submission of Matters to a Vote of Securities Holders.................................33
Item 6. Exhibits and Reports on Form 8-K......................................................34
Other items are omitted, as they are not applicable.
SIGNATURES................................................................................................35
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
You should carefully review the information contained in this Quarterly Report,
but should particularly consider any risk factors that we set forth in this
Quarterly Report and in other reports or documents that we file from time to
time with the Securities and Exchange Commission. In this Quarterly 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 Private Securities
Litigation Reform Act of 1995.
- Material adverse changes in the economic conditions in the markets we
serve;
- The efficacy of the rules and regulations to be adopted by the Federal
Communications Commission ("FCC") and state public regulatory agencies to
implement the provisions of the Telecommunications Act of 1996; 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 incumbent local exchange carriers
("ILECs") and state regulatory arbitrations and approvals with respect to
interconnection agreements; and our ability to purchase unbundled network
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
Regulatory Commission of Alaska ("RCA"), and adverse outcomes from
regulatory proceedings;
- 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.
3
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.
4
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
ASSETS 2000 1999
- --------------------------------------------------------------------------- ---------------- ----------------
(Amounts in thousands)
Current assets:
Cash and cash equivalents $ 12,609 13,734
---------------- ----------------
Receivables:
Trade 45,857 48,145
Other 1,302 269
---------------- ----------------
47,159 48,414
Less allowance for doubtful receivables 3,452 2,833
---------------- ----------------
Net receivables 43,707 45,581
---------------- ----------------
Refundable deposit --- 9,100
Prepaid and other current assets 1,851 2,224
Deferred income taxes, net 3,033 2,972
Inventories 4,602 3,754
Property held for sale 10,877 ---
Notes receivable with related parties 478 449
---------------- ----------------
Total current assets 77,157 77,814
---------------- ----------------
Property and equipment in service, net of depreciation 344,789 302,762
Construction in progress 4,287 2,898
---------------- ----------------
Net property and equipment 349,076 305,660
---------------- ----------------
Cable franchise agreements, net of amortization of $18,928,000 and
$16,347,000 at June 30, 2000 and December 31, 1999, respectively 187,564 190,145
Goodwill, net of amortization of $5,321,000 and $4,563,000 at
June 30, 2000 and December 31, 1999, respectively 40,633 41,391
Other intangible assets, net of amortization of $490,000 and
$269,000 at June 30, 2000 and December 31, 1999, respectively 4,379 4,402
Property held for sale 1,550 10,877
Deferred loan and senior notes costs, net of amortization 8,861 8,863
Notes receivable with related parties 2,441 2,067
Other assets, at cost, net of amortization 1,431 1,932
---------------- ----------------
Total other assets 246,859 259,677
---------------- ----------------
Total assets $ 673,092 643,151
================ ================
See accompanying notes to interim condensed consolidated financial statements.
5 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
- -------------------------------------------------------------------------- ---------------- ----------------
(Amounts in thousands)
Current liabilities:
Current maturities of obligations under capital leases $ 1,714 574
Accounts payable 25,674 25,321
Accrued interest 9,256 7,985
Accrued payroll and payroll related obligations 8,323 8,601
Deferred revenue 8,180 8,173
Accrued liabilities 3,938 3,152
Subscriber deposits and other current liabilities 1,547 1,314
---------------- ----------------
Total current liabilities 58,632 55,120
Long-term debt, excluding current maturities 329,400 339,400
Obligations under capital leases, excluding current maturities 47,580 747
Obligations under capital leases due to related party, excluding
current maturities 274 353
Deferred income taxes, net of deferred income tax benefit 25,127 30,861
Other liabilities 4,117 4,210
---------------- ----------------
Total liabilities 465,130 430,691
---------------- ----------------
Preferred stock. $1,000 par value, authorized 1,000,000 shares; issued
outstanding 20,000 shares at March 31, 2000 and December 31, 1999;
and convertible into Class A common stock at $5.55 per share of
Class A common stock, redemption price at March 31, 2000 of $1,080 21,658 19,912
---------------- ----------------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000,000 shares; issued and outstanding
47,951,024 and 46,869,671 shares at June 30, 2000 and
December 31, 1999, respectively 180,582 176,740
Class B. Authorized 10,000,000 shares; issued and outstanding
3,908,148 and 4,048,480 shares at June 30, 2000 and December
31, 1999, respectively; convertible on a share-per-share basis
into Class A common stock 3,303 3,422
Less cost of 357,958 and 347,958 Class A common shares held in
treasury at June 30, 2000 and December 31, 1999, respectively (1,659) (1,607)
Paid-in capital 6,720 6,343
Notes receivable issued upon stock option exercise (2,539) (2,167)
Retained earnings (deficit) (103) 9,817
---------------- ----------------
Total stockholders' equity 186,304 192,548
---------------- ----------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 673,092 643,151
================ ================
See accompanying notes to interim condensed consolidated financial statements.
6
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------------- -------------- --------------- --------------
(Amounts in thousands, except per share amounts)
Revenues $ 71,426 83,659 139,703 144,997
Cost of sales and services 29,637 34,342 59,295 62,212
Selling, general and administrative 25,733 25,236 50,387 48,774
Depreciation and amortization 12,506 11,426 25,594 21,724
-------------- -------------- --------------- --------------
Operating income 3,550 12,655 4,427 12,287
-------------- -------------- --------------- --------------
Interest expense 9,398 8,992 19,412 16,072
Interest income 183 832 358 952
-------------- -------------- --------------- --------------
Interest expense, net 9,215 8,160 19,054 15,120
-------------- -------------- --------------- --------------
Net income (loss) before income taxes and
cumulative effect of a change in
accounting principle (5,665) 4,495 (14,627) (2,833)
Income tax (expense) benefit 2,139 (2,004) 5,603 803
-------------- -------------- --------------- --------------
Net income (loss) before cumulative effect
of a change in accounting principle (3,526) 2,491 (9,024) (2,030)
Cumulative effect of a change in accounting
principle, net of income tax benefit of $245 --- --- --- 344
-------------- -------------- --------------- --------------
Net income (loss) $ (3,526) 2,491 (9,024) (2,374)
============== ============== =============== ==============
Basic and diluted net income (loss) per common
share:
Income (loss) before cumulative effect of a
change in accounting principle $ (.08) .04 (.19) (.04)
Cumulative effect of a change in accounting
principle --- --- --- .01
-------------- -------------- --------------- --------------
Net income (loss) $ (.08) .04 (.19) (.05)
============== ============== =============== ==============
See accompanying notes to interim condensed consolidated financial statements.
7
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Class A Class B Class A Notes Retained
(Unaudited) Common Common Shares Held Paid-in Receivable Earnings
(Amounts in thousands) Stock Stock in Treasury Capital Issued (Deficit)
----------------------------------------------------------------------
Balances at December 31, 1998 $ 172,708 3,432 (1,607) 5,609 (637) 20,502
Net loss --- --- --- --- --- (2,374)
Tax effect of excess stock
compensation expense for tax
purposes over amounts recognized for
financial reporting purposes --- --- --- 93 --- ---
Shares issued and issuable under stock
option plan 5 --- --- 109 --- ---
Shares issued under officer stock
option agreements and notes issued
upon officer stock option exercise 38 --- --- --- (104) ---
Shares issued to Employee Stock
Purchase Plan 1,153 --- --- -- --- ---
Warrants issued --- --- --- 67 --- ---
Preferred stock dividends --- --- --- --- --- (289)
----------------------------------------------------------------------
Balances at June 30, 1999 $ 173,904 3,432 (1,607) 5,878 (741) 17,839
======================================================================
Balances at December 31, 1999 $ 176,740 3,422 (1,607) 6,343 (2,167) 9,817
Net loss --- --- --- --- --- (9,024)
Tax effect of excess stock
compensation expense for tax
purposes over amounts recognized for
financial reporting purposes --- --- --- 192 --- ---
Class B shares converted to Class A 119 (119) --- --- --- ---
Shares issued and issuable under stock
option plan 1,406 --- --- 185 --- ---
Shares issued under officer stock
option agreements and notes issued
upon officer stock option exercise 450 --- --- --- (372) ---
Shares issued to Employee Stock
Purchase Plan 1,867 --- --- --- --- ---
Purchase of treasury stock --- --- (52) --- --- ---
Preferred stock dividends --- --- --- --- --- (896)
----------------------------------------------------------------------
Balances at June 30, 2000 $ 180,582 3,303 (1,659) 6,720 (2,539) (103)
======================================================================
See accompanying notes to interim condensed consolidated financial statements.
8
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2000 1999
--------------- --------------
(Amounts in thousands)
Cash flows from operating activities:
Net loss $ (9,024) (2,374)
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:
Depreciation and amortization 25,594 21,724
Amortization charged to selling, general and administrative 495 894
Deferred income tax benefit (5,603) (1,048)
Deferred compensation and compensatory stock options 376 417
Non-cash cost of sales --- 3,703
Bad debt expense, net of write-offs 619 1,596
Employee Stock Purchase Plan expense funded with General Communication, Inc.
Class A common stock issued and issuable 1,391 1,153
Write-off of capitalized interest 1,955 ---
Write-off of unamortized start-up costs --- 589
Write-off of deferred debt issuance costs upon modification of Senior
Holdings Loan --- 472
Warrants issued --- 67
Other noncash income and expense items (160) (33)
Change in operating assets and liabilities 4,217 (4,660)
--------------- --------------
Net cash provided by operating activities 19,860 22,500
--------------- --------------
Cash flows from investing activities:
Purchases of property and equipment, including construction period interest (18,873) (23,227)
Refund of deposit 8,806 ---
Restricted cash investment --- (3,978)
Purchase of property held for sale (1,550) ---
Purchases of other assets (145) (329)
Notes receivable with related parties issued (829) (261)
Payments received on notes receivable with related parties 582 149
--------------- --------------
Net cash used in investing activities (12,009) (27,646)
--------------- --------------
Cash flows from financing activities:
Long-term borrowings - bank debt --- 13,776
Repayments of long-term borrowings and capital lease obligations (10,280) (20,223)
Proceeds from preferred stock issuance --- 20,000
Preferred stock offering issuance costs --- (78)
Payment of debt issuance costs and loan commitment fees (128) (495)
Notes receivable with related parties issued upon stock option exercise (372) (104)
Proceeds from common stock issuance 1,856 43
Purchase of treasury stock (52) ---
--------------- --------------
Net cash provided (used) by financing activities (8,976) 12,919
--------------- --------------
Net increase (decrease) in cash and cash equivalents (1,125) 7,773
Cash and cash equivalents at beginning of period 13,734 12,008
--------------- --------------
Cash and cash equivalents at end of period $ 12,609 19,781
=============== ==============
See accompanying notes to interim condensed consolidated financial statements.
9
GENERAL COMMUNICATION, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(1) General
In the following discussion, General Communication, Inc. and its direct
and indirect subsidiaries are referred to as "we," "us" and "our."
(a) Business
General Communication, Inc. ("GCI"), an Alaska corporation, was
incorporated in 1979. We 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 access services
- Termination of traffic in Alaska for certain common
carriers
- Interstate and intrastate private line services
- Managed services to certain commercial customers
- Sales and service of dedicated communications systems and
related equipment
- Private network point-to-point data and voice transmission
services between Alaska and the western contiguous United
States
- Own and lease capacity on two undersea fiber optic cables
used in the transmission of interstate and intrastate
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, GCI's wholly-owned subsidiary GCI, Inc., GCI, Inc.'s
wholly-owned subsidiary GCI Holdings, Inc., GCI Holdings,
Inc.'s wholly-owned subsidiaries GCI Communication Corp., GCI
Cable, Inc. and GCI Transport Co., Inc., GCI Transport Co.,
Inc.'s wholly-owned subsidiaries GCI Satellite Co., Inc., 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"). GCI
Communication Services, Inc. and its wholly owned subsidiary
GCI Leasing Co. were merged into GCI Communication Corp.
effective January 1, 2000. GCI Cable/Fairbanks, Inc. and GCI
Cable/Juneau, Inc. were merged into GCI Cable, Inc. effective
January 1, 2000.
All significant intercompany balances and transactions have
been eliminated in consolidation.
(c) Net Income (Loss) Per Common Share
Net loss used to calculate basic and diluted net loss per
common share is increased by preferred stock dividends of
$455,000 for the three months ended June 30, 2000 and $896,000
and $289,000 for the six months ended June 30, 2000 and 1999,
respectively. Net income used to calculate basic and diluted
net income per common share is decreased by preferred stock
dividends of $289,000 for the three months ended June 30, 1999.
Shares used to calculate net income (loss) per common share
consist of the following (amounts in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------- ------------
Weighted average common shares outstanding 51,418 49,562 51,341 49,133
Common equivalent shares outstanding --- 4,169 --- ---
------------ ------------ ------------- ------------
51,418 53,731 51,341 49,133
============ ============ ============= ============
Common equivalent shares outstanding which are anti-dilutive
for purposes of calculating the net loss per common share for
the three months ended June 30, 2000 and six months ended June
30,
10 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
2000 and 1999, are not included in the diluted net loss per
share calculation, and consist of the following (amounts in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------- ------------
Common equivalent shares outstanding 450 n/a 559 527
============ ============ ============= ============
Weighted average shares associated with outstanding stock
options for the three and six months ended June 30, 2000 and
1999 which have been excluded from the diluted income (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):
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------- ------------
Weighted average shares associated with
outstanding stock options 2,579 2,107 2,359 2,213
============ ============ ============= ============
(d) Preferred and Common Stock
Following is the statement of preferred and common stock at
June 30, 2000 and 1999 (shares, in thousands):
Preferred Common Stock
Stock Class A Class B
------------- ----------------------------
Balances at December 31, 1998 --- 45,895 4,061
Class B shares converted to Class A --- 7 (7)
Shares issued under stock option plan --- 1 ---
Shares issued under officer stock option
agreements --- 50 ---
Shares issued to Employee Stock Purchase Plan --- 280 ---
Shares issued under Preferred Stock
Agreement 20 --- ---
------------- -------------- -------------
Balances at June 30, 1999 20 46,233 4,054
============= ============== =============
Balances at December 31, 1999 20 46,870 4,048
Class B shares converted to Class A --- 140 (140)
Shares issued under stock option plan --- 181 ---
Shares issued to Employee Stock Purchase Plan --- 335 ---
Warrant exercise --- 425 ---
------------- -------------- -------------
Balances at June 30, 2000 20 47,951 3,908
============= ============== =============
(e) 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. 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 was recognized in the first
quarter of 1999 upon adoption of SOP 98-5.
11 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(f) Reclassifications
Reclassifications have been made to the 1999 financial
statements to make them comparable with the 2000 presentation.
(g) Other
The accompanying unaudited interim condensed consolidated
financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. The
interim condensed consolidated financial statements include the
consolidated accounts of GCI and its wholly owned subsidiaries
with all significant intercompany transactions eliminated. In
the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the
three-month and six-month periods ended June 30, 2000 are not
necessarily indicative of the results that may be expected for
the year ended December 31, 2000. For further information,
refer to the financial statements and footnotes thereto
included in our annual report on Form 10-K for the year ended
December 31, 1999.
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in
thousands):
Six-month periods ended June 30, 2000 1999
------------- ------------
(Increase) decrease in receivables $ 1,282 (3,702)
Decrease in income tax receivable --- 1,965
(Increase) decrease in prepaid and other current assets 264 (1,235)
Increase in inventory (743) (504)
Increase (decrease) in accounts payable 353 (2,028)
Increase in accrued liabilities 786 1,005
Increase in accrued payroll and payroll related obligations 198 111
Increase (decrease) in accrued interest 1,271 (105)
Increase in subscriber deposits and other current liabilities 232 411
Increase (decrease) in deferred revenues 7 (97)
Increase (decrease) in other long-term liabilities 567 (481)
------------- ------------
$ 4,217 (4,660)
============= ============
We paid no income taxes during the six-month periods ended June 30,
2000 and 1999. We received income tax refunds of $0 and $1,965,000
during the six-month periods ended June 30, 2000 and 1999,
respectively.
We paid interest totaling $16,987,000 and $16,239,000 during the
six-month periods ended June 30, 2000 and 1999, respectively.
We recorded $192,000 and $93,000 during the six-month periods ended
June 30, 2000 and 1999, 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 six-month periods ended June 30, 2000 and 1999 we funded
the employer matching portion of Employee Stock Purchase Plan
contributions by issuing GCI Class A Common Stock valued at
$1,406,000 and $1,153,000, respectively.
We financed the purchase of satellite transponders pursuant to a
long-term capital lease arrangement with a leasing company during the
six-month period ended June 30, 2000 at a cost of $48.2 million.
12 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(3) Redeemable Preferred Stock
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 of $88,000) were used for general
corporate purposes, to repay outstanding indebtedness, and to provide
additional liquidity. Our amended Senior Holdings Loan facilities
limit use of such proceeds. 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 our 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 in cash only.
Dividends of $1,746,000 have been accrued at June 30, 2000 and will
be paid in additional fully-paid shares of Preferred Stock.
Additional dividends totaling $309,000, or $15.00 per share, are
accrued at June 30, 2000 and the determination of whether they will
be paid in cash or additional fully-paid shares of Preferred Stock
will be made at the next semi-annual payment date. Mandatory
redemption is required 12 years from the date of closing.
(4) Industry Segments Data
Our 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.
We have four reportable segments as follows:
Long-distance services. We offer a full range of
common-carrier long-distance services to commercial,
government, other telecommunications companies and residential
customers, through our networks of fiber optic cables, digital
microwave, and fixed and transportable satellite earth
stations and our SchoolAccess(TM) offering to rural school
districts and a similar offering to rural hospitals and health
clinics.
Cable services. 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 in 1999
and 1998 enabled us to offer digital cable television services
in Anchorage and retail cable modem service (through our
Internet services segment) in Anchorage, Fairbanks and Juneau,
complementing our existing service offerings. We plan to
expand our product offerings as plant upgrades are completed
in other communities in Alaska.
Local access services. We offer facilities based competitive
local exchange services in Anchorage and plan to provide
similar competitive local exchange services in Alaska's other
major population centers.
Internet services. We began offering wholesale and retail
Internet services in 1998. Deployment of the new undersea
fiber optic cable allowed us to offer enhanced services with
high-bandwidth requirements.
Included in the "Other" segment in the tables that follow are our
managed services, product sales, cellular telephone services, and
management services for Kanas Telecom, Inc., a company that owns and
operates a fiber optic cable system constructed along the
trans-Alaska oil pipeline corridor extending from Prudhoe Bay to
Valdez, Alaska. None of these business units have ever met the
quantitative thresholds for determining reportable segments. Also
included in the Other segment in 1999 is a $19.5 million sale of
undersea fiber optic cable system capacity, and corporate related
expenses including marketing, customer service, management
information systems, accounting, legal and regulatory, human
resources and other general and administrative expenses.
We evaluate performance and allocate 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
13 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
significant accounting policies included in our annual report on Form
10-K at December 31, 1999. Intersegment sales are recorded at cost
plus an agreed upon intercompany profit.
We earn all revenues through sales of services and products within
the United States of America. All of our long-lived assets are
located within the United States of America.
Summarized financial information for our reportable segments follows
for the six months ended June 30, 2000 and 1999 follows (amounts in
thousands):
Long- Local
Distance Cable Access Internet
Services Services Services Services Other Total
------------------------------------------------------------------------
2000
----
Revenues:
Intersegment $ 6,742 739 3,146 1,281 --- 11,908
External 88,475 32,590 9,309 3,731 5,598 139,703
------------------------------------------------------------------------
Total revenues $ 95,217 33,329 12,455 5,012 5,598 151,611
========================================================================
Earnings (loss) from operations
before depreciation, amortization,
net interest expense and income
taxes $ 34,382 16,143 1,320 (4,706) (17,006) 30,133
========================================================================
Operating income (loss) $ 23,299 6,872 (1,246) (5,548) (18,835) 4,539
========================================================================
1999
----
Revenues:
Intersegment $ 4,124 1,159 1,422 --- --- 6,705
External 79,187 29,971 7,478 2,151 26,210 144,997
------------------------------------------------------------------------
Total revenues $ 83,311 31,130 8,900 2,151 26,210 151,702
========================================================================
Earnings (loss) from operations
before depreciation, amortization,
net interest expense, income taxes
and cumulative effect of a change
in accounting principle $ 27,540 17,188 (166) (3,557) (6,599) 34,406
========================================================================
Operating income (loss) $ 21,950 8,408 (2,763) (4,088) (10,825) 12,682
========================================================================
A reconciliation of total segment revenues to consolidated revenues
follows:
Six-months ended June 30, 2000 1999
------------- --------------
Total segment revenues $ 151,611 151,702
Less intersegment revenues eliminated in consolidation (11,908) (6,705)
------------- --------------
Consolidated revenues $ 139,703 144,997
============= ==============
14 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
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:
Six-months ended June 30, 2000 1999
-------------- --------------
Total segment earnings from operations before depreciation,
amortization, net interest expense, income taxes and
cumulative effect of a change in
accounting principle $ 30,133 34,406
Less intersegment contribution eliminated in consolidation (112) (395)
-------------- --------------
Consolidated earnings from operations before
depreciation, amortization, net interest expense,
income taxes and cumulative effect of a change in
accounting principle 30,021 34,011
Depreciation and amortization 25,594 21,724
-------------- --------------
Consolidated operating income 4,427 12,287
Interest expense, net 19,054 15,120
-------------- --------------
Consolidated net loss before income taxes and
cumulative effect of a change in accounting
principle $ (14,627) (2,833)
============== ==============
A reconciliation of total segment operating income to consolidated
net loss before income taxes and cumulative effect of a change in
accounting principle follows:
Six-months ended June 30, 2000 1999
-------------- -------------
Total segment operating income $ 4,539 12,682
Less intersegment contribution eliminated in consolidation
(112) (395)
-------------- -------------
Consolidated operating income 4,427 12,287
Interest expense, net 19,054 15,120
-------------- -------------
Consolidated net loss before income taxes and
cumulative effect of a change in accounting
principle $ (14,627) (2,833)
============== =============
(5) Commitments and Contingencies
Satellite Transponders Capital Lease
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 satellite transponders
pursuant to a long-term capital lease arrangement with a leasing
company. The base term of the lease is one year from the closing date
with the option for eight one-year lease term renewals. The capital
lease includes certain covenants requiring maintenance of specific
levels of operating cash flow to indebtedness and limitations on
additional indebtedness.
We took ownership of the satellite transponders on April 1, 2000. The
satellite transponders are recorded at a cost of $48.2 million and
will be depreciated over nine years with a remaining residual value
of $14.3 million.
15 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Future Fiber Capacity Sale
We entered into an agreement effective July 1999 for a second $19.5
million sale of fiber capacity. The agreement requires that the buyer
acquire the 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 Property Held for Sale in the
accompanying interim condensed consolidated financial statements at
June 30, 2000.
Deferred Compensation Plan
Our non-qualified, unfunded deferred compensation plan provides a
means by which certain employees may elect to defer receipt of
designated percentages or amounts of their compensation and provides
a means for certain other deferrals of compensation. We may, at our
discretion, contribute matching deferrals equal to the rate of
matching selected by us. 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 our general creditors with respect to deferred
compensation plan benefits. Compensation deferred pursuant to the
plan totaled approximately $30,000 and $60,000 during the six-month
periods ended June 30, 2000 and 1999, respectively.
Self-Insurance
We are 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 $630,000 and $600,000 was
recorded at June 30, 2000 and December 31, 1999, 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
We are routinely 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
our financial position, results of operations or 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 June 30, 2000,
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 7.9% of our total basic
service subscribers at June 30, 2000.) On July 27, 2000 the RCA
approved in full a requested rate increase for the Juneau system, to
be effective October 1, 2000.
16
PART I.
ITEM 2.
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 our
Interim Condensed Consolidated Financial Statements and the notes thereto. See -
Cautionary Statement Regarding Forward-Looking Statements.
OVERVIEW
We have experienced significant growth in recent years through expansion and
development of our new and existing businesses and products. 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 WorldCom, Inc. ("WorldCom") and Sprint Corporation
("Sprint")), and provision of private line and leased dedicated capacity
services accounted for 97.1% of our total long-distance services revenues during
the second quarter of 2000. 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 15.6% to $6.7
million during the second quarter of 2000 as compared to the second quarter of
1999 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 of capacity, however such demand is
beginning to be filled with uncompressed fiber optic capacity on our 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. Calls terminating in the lower 49 states are carried over
Worldcom's network and calls terminating in international locations are carried
principally over Sprint's network. During the second quarter of 2000, local
access charges accounted for 66.4% of long-distance cost of sales and services,
fees paid to other long-distance carriers represented 28.2%, satellite
transponder lease and undersea fiber maintenance costs represented 4.6%, and
other costs represented 0.8% 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, 37.3% during the second quarter
of 2000, represents operating and engineering costs.
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 total number of active long-distance residential,
commercial and small business customers increased 5.6% at June 30, 2000 as
compared to June 30, 1999, and increased 2.5% as compared to December 31, 1999.
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.
17 (Continued)
Revenues derived from other common carriers increased 17.3% to $17.5 million in
the second quarter of 2000 as compared to the second quarter of 1999. The
increase is due primarily to a 24.7% increase to 170.1 million minutes carried
for other common carriers offset by a change in the mix of wholesale minutes
carried for such customers, which reduced the average rate charged 6.0%. We
secured contract amendments during the second quarter of 1999 with Worldcom and
Sprint. The amendments provided, among other things, for a three-year contract
term extension for Sprint. The Worldcom contract expires in 2001. Other common
carrier traffic routed to us for termination in Alaska is largely dependent on
traffic routed to Worldcom and Sprint by their customers. Pricing pressures, new
program offerings and market consolidation continue to evolve in the markets
served by 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.
Services included in the Other segment as described in note 4 to the
accompanying interim condensed consolidated financial statements are included in
the long-distance services segment for purposes of this Management's Discussion
and Analysis.
Cable services. During the second quarter of 2000, cable television revenues
represented 23.3% 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 the second quarter of 2000
programming services generated 85.4% of total cable services revenues, equipment
rental and installation fees accounted for 8.1% of such revenues, advertising
sales accounted for 3.6% of such revenues, cable modem services accounted for
2.1% of such revenues and other services accounted for the remaining 0.8% 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,
the average number of subscribers during a given reporting period, and revenues
generated from new product offerings.
The cable systems' cost of sales and selling, general and administrative
expenses have consisted principally of programming and copyright expenses,
labor, maintenance and repairs, marketing and advertising and rental expense.
During the second quarter of 2000 programming and copyright expenses represented
45.5% of total cable cost of sales and selling, general and administrative
expenses, and general and administrative costs represented 48.9% of such total.
Marketing and advertising costs represented approximately 5.7% 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 by 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 $4.8 million representing 6.7% of
consolidated revenues in the second quarter of 2000. 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.
18 (Continued)
Operating and engineering expenses represented approximately 3.6% of total local
access services cost of sales and selling, general and administrative expenses
during the second quarter of 2000. Marketing and advertising costs represented
approximately 7.4% of such total expenses, customer service and general and
administrative costs represented approximately 42.1% of such total expenses, and
local access cost of sales represented approximately 46.9% of such total
expenses.
Our local access services segment faces significant competition in Anchorage
from Alaska Communications Systems, Inc. ("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 two primary
sources: (1) access product services, including commercial DIAS, ISP DIAS, and
retail dial-up service revenues, and (2) network management services. Internet
services segment revenues totaled $2.0 million representing 2.8% of total
revenues in the second quarter of 2000. 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 and type of additional premium features
selected.
Operating and general and administrative expenses represented approximately
50.2% of total Internet services cost of sales and selling, general and
administrative expenses during the second quarter of 2000. Internet cost of
sales represented approximately 37.1% of such total expenses and marketing and
advertising represented approximately 12.7% of such total expenses.
Marketing campaigns continue to be deployed featuring bundled residential and
commercial Internet products. Additional bandwidth was made available to our
Internet segment resulting from completion of our 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 4 to the
accompanying interim condensed consolidated financial statements include
corporate network management contracts, telecommunications equipment sales and
service, management services for Kanas Telecom, Inc., a company that owns and
operates a fiber optic cable system constructed along the trans-Alaska oil
pipeline corridor extending from Prudhoe Bay to Valdez, Alaska, and other
miscellaneous revenues (including revenues from cellular resale services, from
prepaid and debit calling cards sales, and installation and leasing of
customer's very small aperture terminal ("VSAT") equipment).
Other services segment revenues during the second quarter of 2000 include
network solutions and outsourcing revenues totaling $2.1 million, communications
equipment sales totaling $371,000 and cellular resale and other revenues
totaling $670,000.
During the second quarter of 1999 we completed a $19.5 million sale of long-haul
capacity in our Alaska United undersea fiber optic cable system ("fiber capacity
sale") 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 had been
executed. The agreement requires that the buyer acquire additional capacity
during the 18-month period following the effective date of the contract.
We have invested approximately $2.2 million in our PCS license at June 30, 2000.
During second quarter 2000 we deployed fixed wireless service in the Anchorage
area. We have incurred expenditures totaling $315,000 in the deployment at June
30, 2000 and we expect to incur approximately $200,000 in additional
expenditures during the remainder of 2000.
19 (Continued)
Depreciation, amortization and net interest expense on a consolidated basis
increased $2.1 million in the second quarter of 2000 as compared to the second
quarter of 1999 resulting primarily from additional depreciation on 1999 and
2000 capital expenditures, increased interest rates, and additional average
outstanding capital lease obligation balances.
RESULTS OF OPERATIONS
The following table sets forth selected Statement of Operations data as a
percentage of total revenues for the periods indicated and the percentage
changes in such data as compared to the corresponding prior year period:
(Underlying data rounded to the nearest thousands)
Three Months Ended Six Months Ended
June 30, June 30,
Percentage Percentage
Change (1) Change(1)
2000 vs. 2000 vs.
(Unaudited) 2000 1999 1999 2000 1999 1999
---- ---- ---- ---- ---- ----
Revenues
Long-distance services 62.8% 48.7% 10.2% 63.3% 54.6% 11.7%
Cable services 23.3% 17.8% 11.7% 23.3% 20.7% 8.7%
Local access services 6.7% 4.5% 27.2% 6.7% 5.1% 24.5%
Internet services 2.8% 1.3% 82.0% 2.7% 1.5% 73.5%
Other services 4.4% 27.7% (86.6%) 4.0% 18.1% (78.6%)
-----------------------------------------------------------------------
Total revenues 100.0% 100.0% (14.6%) 100.0% 100.0% (3.7%)
Cost of sales and services 41.5% 41.1% (13.7%) 42.4% 42.9% (4.7%)
Selling, general and administrative
expenses 36.0% 30.2% 2.0% 36.1% 33.6% 3.3%
Depreciation and amortization 17.5% 13.6% 9.5% 18.3% 15.0% 17.8%
-----------------------------------------------------------------------
Operating income 5.0% 15.1% (71.9%) 3.2% 8.5% (64.0%)
Net income (loss) before income
taxes and cumulative effect of a
change in accounting principle (7.9%) 5.4% (226.0%) (10.5%) (2.0%) 416.3%
Net income (loss) before
cumulative effect of a change in
accounting principle (4.9%) 3.0% (241.5%) (6.5%) (1.4%) 344.6%
Net income (loss) (4.9%) 3.0% (241.5%) (6.5%) (1.6%) 280.1%
Other Operating Data (2):
Cable services operating income (3) 22.3% 27.7% (10.1%) 21.1% 28.1% (18.3%)
Local services operating loss (4) (3.3%) (45.7%) (90.9%) (13.4%) (36.9%) (54.9%)
Internet services operating loss (5) (137.3%) (101.6%) 145.9% (148.7%) (190.1%) 35.7%
--------------------------
(1)Percentage change in underlying data.
(2)Includes customer service, marketing and advertising costs.
(3)Computed as a percentage of total cable services revenues.
(4)Computed as a percentage of total local services revenues.
(5)Computed as a percentage of total Internet services revenues.
20 (Continued)
THREE MONTHS ENDED JUNE 30, 2000 ("2000") COMPARED TO THREE MONTHS ENDED JUNE
30, 1999 ("1999")
Revenues. Total revenues decreased 14.6% from $83.7 million in 1999 to $71.4
million in 2000. The decrease is due to the $19.5 million fiber capacity sale in
1999 as previously described. Excluding the 1999 fiber capacity sale revenue,
total revenues grew $7.2 million, or 11.2%, in 2000 as compared to 1999.
Long-distance revenues from commercial, residential, governmental, and other
common carrier customers increased 10.2% to $44.9 million in 2000. The
long-distance revenue increase in 2000 was largely due to the following:
- An increase of 5.7% in the number of active residential, small business
and commercial customers billed from 88,100 at June 30, 1999 to 93,100 at
June 30, 2000
- An increase of 14.9% in total minutes of use to 257.2 million minutes
- An increase of 15.5% in private line and private network transmission
services revenues from $5.8 million in 1999 to $6.7 million in 2000 due to
an increased number of customers
- An increase of 17.4% in revenues from other common carriers (principally
Worldcom and Sprint), from $14.9 million in 1999 to $17.5 million in 2000
Long-distance revenue increases were offset by a 11.7% reduction in our average
rate per minute on long-distance traffic from $0.137 per minute in 1999 to
$0.121 per minute in 2000. The decrease in rates resulted primarily from a new
category of wholesale minutes carried on our network at a reduced rate per
minute. Decreased rates are also attributed to 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.
Cable revenues increased 11.7% to $16.7 million in 2000. Programming services
revenues increased 14.2% to $14.2 million in 2000 resulting from an increase of
approximately 4,500 basic subscribers served and increased pay-per-view and
premium service revenues. New facility construction efforts during the last half
of 1999 and the first half of 2000 resulted in approximately 3,700 additional
homes passed at June 30, 2000 which contributed to additional subscribers and
revenues in 2000. Revenue per average basic subscriber per month increased
$4.22, or 11.4%, from 1999 to 2000 due to rate increases in certain markets and
continued growth of new premium products, such as the 300.6% increase in digital
subscribers to 8,900 in 2000. The cable segment's share of cable modem revenue
increased $198,000 to $341,000 in 2000 after the introduction of such services
in the first quarter of 1999.
Local access services revenues increased 27.2% in 2000 to $4.8 million. At June
30, 2000 approximately 54,600 lines were in service and approximately 1,400
additional lines were awaiting connection as compared to approximately 38,000
lines in service and approximately 1,800 additional lines awaiting connection at
June 30, 1999.
Internet services revenues increased from $1.6 million in 1999 to $2.0 million
in 2000 primarily due to growth in the number of customers served. We have
approximately 59,000 active residential, commercial and small business retail
dial-up Internet subscribers at June 30, 2000 as compared to approximately
32,200 at June 30, 1999.
Cost of sales and services. Cost of sales and services totaled $34.3 million in
1999 and $29.6 million in 2000. As a percentage of total revenues, cost of sales
and services increased from 41.1% in 1999 to 41.5% in 2000. The increase in cost
of sales and services as a percentage of revenues is primarily attributed to the
impact of the fiber capacity sale, increased cable services cost of sales as a
percentage of cable services revenues and changes in our product mix due to the
growth of the local access services and Internet services product lines.
Off-setting these increases was a decrease in costs resulting from reassigning
long-distance and other traffic from leased to owned satellite facilities.
Long-distance cost of sales and services decreased from $21.1 million in 1999 to
$19.4 million in 2000. Long-distance cost of sales as a percentage of
long-distance revenues decreased from 52.6% in 1999 to 43.2% in 2000 primarily
due to the effect of reassigning traffic carried by satellite transponders from
leased to owned
21 (Continued)
capacity and reductions in access costs due to distribution and termination of
our traffic on our own local services network instead of paying other carriers
to distribute and terminate our traffic. Offsetting the 2000 decrease as
compared to 1999 is a decrease in the average rate per minute billed to
customers without a comparable decrease in access charges paid by us. 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 our 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 cable 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 25.1% in 1999 to
26.2% in 2000. Cable services rate increases did not keep pace with increases in
programming and copyright costs in 2000. Programming costs increased for most of
our cable services offerings, and we incurred additional costs on new
programming introduced in 1999 and 2000.
Local access services cost of sales and services as a percentage of local access
services revenues increased from 46.8% in 1999 to 61.9% in 2000 primarily due to
accruals recorded for disputed billings.
Internet services cost of sales and services increased $124,000 from 1999 to
2000. Internet services costs of sales as a percentage of Internet services
revenues totaled 56.6% and 51.2% in 1999 and 2000, respectively. The Internet
services costs of sales decrease as a percentage of Internet services revenues
is primarily due to a $830,000 increase in Internet's portion of cable modem
revenue. As Internet revenues have increased, economies of scale and more
efficient network utilization have resulted in reduced Internet cost of sales
and services as a percentage of Internet revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 2.0% to $25.7 million in 2000. In 2000 we
accrued a Company-wide success sharing bonus totaling $800,000. Success sharing
is a bonus paid to all employees when our earnings before interest,
depreciation, amortization and taxes reach new highs. No accrual was recorded in
the three-month period ended June 30, 1999. The effect of the success sharing
accrual was off-set by a $840,000 decrease in advertising expense. Selling,
general and administrative expenses, as a percentage of total revenues,
increased from 30.2% in 1999 to 36.0% in 2000 primarily as a result of the fiber
capacity sale.
Depreciation and amortization. Depreciation and amortization expense increased
9.5% to $12.5 million in 2000. The increase is attributable to our $36.6 million
investment in equipment and facilities placed into service during 1999 for which
a full year of depreciation will be recorded during the year ended December 31,
2000, the acquisition of a satellite transponder asset (as discussed in note 5
to the interim condensed consolidated financial statements) for which
depreciation began in 2000 and the $18.9 million investment in other equipment
and facilities during 2000 for which a partial year of depreciation will be
recorded during 2000.
Interest expense, net. Interest expense, net of interest income, increased 12.2%
to $9.2 million in 2000. This increase resulted primarily from increases in our
average outstanding indebtedness resulting primarily from the capital lease of
satellite transponder capacity, construction of new long-distance and Internet
facilities, expansion and upgrades of cable television facilities, investment in
local access services equipment and facilities, and higher interest rates on
outstanding indebtedness. We charged $470,000 of deferred financing costs to
interest expense in the second quarter of 1999 resulting from the amendment to
the Holdings Loan Facilities which reduced borrowing capacity (see Liquidity and
Capital Resources).
Income tax (expense) benefit. Income tax (expense) benefit decreased from ($2.0)
million in 1999 to $2.1 million in 2000 due to an increased net loss before
income taxes in 2000 as compared to 1999. Our effective income tax rate
decreased from 44.6% in 1999 to 37.8% in 2000 due to the increased net loss and
the proportional amount of items that are nondeductible for income tax purposes.
At June 30, 2000, we have (1) tax net operating loss carryforwards of
approximately $105.8 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.
22 (Continued)
Tax benefits associated with recorded deferred tax assets are considered to be
more likely than not realizable through 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.
SIX MONTHS ENDED JUNE 30, 2000 ("2000") COMPARED TO SIX MONTHS ENDED JUNE 30,
1999 ("1999")
Revenues. Total revenues decreased 3.7% from $145.0 million in 1999 to $139.7
million in 2000. The decrease is due to the $19.5 million fiber capacity sale in
1999 as previously described. Excluding the 1999 fiber capacity sale revenue,
total revenues grew $14.2 million, or 11.3%, in 2000 as compared to 1999.
Long-distance revenues from commercial, residential, governmental, and other
common carrier customers increased 11.7% to $88.5 million in 2000. The
long-distance revenue increase in 2000 was largely due to the following:
- An increase of 5.6% in the number of active residential, small business
and commercial customers billed from 88,100 at June 30, 1999 to 93,000 at
June 30, 2000
- An increase of 23.4% in total minutes of use to 512.5 million minutes
- An increase of 23.1% in private line and private network transmission
services revenues from $10.4 million in 1999 to $12.8 million in 2000 due
to an increased number of customers
- An increase of 14.4% in revenues from other common carriers (principally
Worldcom and Sprint), from $29.8 million in 1999 to $34.1 million in 2000
Long-distance revenue increases were offset by a 18.2% reduction in our average
rate per minute on long-distance traffic from $0.148 per minute in 1999 to
$0.121 per minute in 2000. The decrease in rates resulted primarily from a new
category of wholesale minutes carried on our network at a reduced rate per
minute. Decreased rates are also attributed to 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.
Cable revenues increased 8.7% to $32.6 million in 2000. Programming services
revenues increased 9.5% to $28.0 million in 2000 resulting from an increase of
approximately 4,500 basic subscribers served and increased pay-per-view and
premium service revenues. New facility construction efforts in the last half of
1999 and first half of 2000 resulted in approximately 3,700 additional homes
passed which contributed to additional subscribers and revenues in 2000. Revenue
per average basic subscriber per month increased $4.22, or 11.4%, from 1999 to
2000 due to rate increases in certain markets and continued growth of new
premium products, such as the 300.6% increase in digital subscribers to 8,900 in
2000. The cable segment's share of cable modem revenue increased $562,000 to
$705,000 in 2000 after the introduction of cable modem services in the first
quarter of 1999.
Local access services revenues increased 24.5% in 2000 to $9.3 million. At June
30, 2000 approximately 54,600 lines were in service and approximately 1,400
additional lines were awaiting connection as compared to approximately 38,000
lines in service and approximately 1,800 additional lines awaiting connection at
June 30, 1999.
Internet services revenues increased from $2.2 million in 1999 to $3.7 million
in 2000 primarily due to growth in the number of customers served. We have
approximately 59,000 active residential, commercial and small business retail
dial-up Internet subscribers at June 30, 2000 as compared to approximately
32,200 at June 30, 1999.
Cost of sales and services. Cost of sales and services totaled $62.2 million in
1999 and $59.3 million in 2000. As a percentage of total revenues, cost of sales
and services decreased from 42.9% in 1999 to 42.4% in 2000. The decrease in cost
of sales and services as a percentage of revenues is primarily due to the effect
of reassigning long-distance traffic carried by satellite transponders from
leased to owned capacity off-set by the
23 (Continued)
impact of the fiber capacity sale, increased cable services cost of sales as a
percentage of cable services revenues and changes in our product mix due to the
growth of the local access services and Internet services product lines.
Long-distance cost of sales and services decreased from $40.7 million in 1999 to
$39.9 million in 2000. Long-distance cost of sales as a percentage of
long-distance revenues decreased from 51.4% in 1999 to 45.1% in 2000 primarily
due to reassigning traffic carried by satellite transponders from leased to
owned capacity and reductions in access costs due to distribution and
termination of our traffic on our own local services network instead of paying
other carriers to distribute and terminate our traffic. Offsetting the 2000
decrease as compared to 1999 is a decrease in the average rate per minute billed
to customers without a comparable decrease in access charges paid by us. 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 our 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 cable 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 24.9% in 1999 to
26.6% in 2000. Cable services rate increases did not keep pace with increases in
programming and copyright costs in 2000. Programming costs increased for most of
our cable services offerings, and we incurred additional costs on new
programming introduced in 1999 and 2000.
Local access services cost of sales and services as a percentage of local access
services revenues increased from 49.7% in 1999 to 57.8% in 2000 primarily due to
accruals recorded for disputed billings.
Internet services cost of sales and services increased $782,000 from 1999 to
2000. Internet services costs of sales as a percentage of Internet services
revenues totaled 61.6% and 56.5% in 1999 and 2000, respectively. The decrease of
Internet services costs of sales as a percentage of Internet services revenues
is primarily due to a $1.4 million increase in Internet's portion of cable modem
revenue. As Internet revenues have increased, economies of scale and more
efficient network utilization have resulted in reduced Internet cost of sales
and services as a percentage of Internet revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 3.3% to $50.4 million in 2000. The 2000
increase resulted from:
- Internet services operating, engineering, sales, customer service and
administrative cost increases from $2.5 million in 1999 to $3.5 million in
2000. 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.
- Accrual of a Company-wide success sharing bonus totaling $800,000 in 2000.
Success sharing is a bonus paid to all employees when our earnings before
interest, depreciation, amortization and taxes reach new highs. No accrual
was recorded in the six-month period ended June 30, 1999.
- Reduced long-distance services capitalized labor due to completion of the
fiber optic cable system construction effort.
The increases above are off-set by a $1.3 million decrease in advertising
expense and a $720,000 decrease in bad debt expense.
Selling, general and administrative expenses, as a percentage of total revenues,
increased from 33.6% in 1999 to 36.1% in 2000 primarily as a result of the fiber
capacity sale.
Depreciation and amortization. Depreciation and amortization expense increased
17.8% to $25.6 million in 2000. The increase is attributable to our $36.6
million investment in equipment and facilities placed into service during 1999
for which a full year of depreciation will be recorded during the year ended
December 31, 2000, the acquisition of a satellite transponder asset (as
discussed in note 5 to the interim condensed consolidated financial statements)
for which depreciation began in the second quarter of 2000, the $18.9 million
investment in other equipment and facilities during 2000 for which a partial
year of depreciation will be recorded during 2000, and a charge of $1.7 million
in first quarter resulting from a change in the estimated remaining lives of
assets that will be replaced in the future.
24 (Continued)
Interest expense, net. Interest expense, net of interest income, increased 26.5%
from $15.1 million in 1999 to $19.1 million in 2000. This increase resulted
primarily from a charge of $2.0 million to interest expense in first quarter to
write-off previously capitalized interest expense, increases in our average
outstanding indebtedness resulting primarily from the capital lease of satellite
transponder capacity, construction of new long-distance and Internet facilities,
expansion and upgrades of cable television facilities, investment in local
access services equipment and facilities, and higher interest rates on
outstanding indebtedness. We charged $470,000 of deferred financing costs to
interest expense in the second quarter of 1999 resulting from the amendment to
the Holdings Loan Facilities which reduced borrowing capacity (see Liquidity and
Capital Resources).
Income tax benefit. Income tax benefit increased from $803,000 in 1999 to $5.6
million in 2000 due to an increased net loss before income taxes in 2000 as
compared to 1999. Our effective income tax rate increased from 28.3% in 1999 to
38.3% in 2000 due to the increased net loss and the proportional amount of items
that are nondeductible for income tax purposes.
At June 30, 2000, we have (1) tax net operating loss carryforwards of
approximately $105.8 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 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.
25 (Continued)
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The following chart provides selected unaudited statement of operations data
from our quarterly results of operations during 2000 and 1999:
(Amounts in thousands, except per share amounts)
-------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------
2000
----
Revenues:
Long-distance services $ 43,620 44,855 88,475
Cable services $ 15,930 16,660 32,590
Local access services $ 4,520 4,789 9,309
Internet services $ 1,713 2,018 3,731
Other services $ 2,494 3,104 5,598
-------------------------------------------------------------
Total revenues $ 68,277 71,426 139,703
Operating income $ 877 3,550 4,427
Net loss before income taxes $ (8,962) (5,665) (14,627)
Net loss $ (5,498) (3,526) (9,024)
Basic and diluted net loss per
common share (1) $ (0.12) (.08) (0.19)
1999
----
Revenues:
Long-distance services $ 38,469 40,697 43,276 41,601 164,043
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 $ 1,042 1,109 1,151 1,497 4,799
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 and diluted net 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)
=============================================================
--------------------------
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.
Revenues. Total revenues for the quarter ended June 30, 2000 ("second quarter")
were $71.4 million, representing a 4.5% increase from $68.3 million for the
quarter ended March 31, 2000 ("first quarter"). The second quarter increase
resulted from:
- A 2.8% increase in long-distance services revenue to $44.9 million in
second quarter primarily due to a 4.9% increase in revenues from other
common carriers to $17.5 million, and a 9.4% increase in private line
revenues to $6.7 million. Long distance minutes increased 1.0% to 257.2
million minutes, due to a
26 (Continued)
2.2% increase in OCC minutes (principally Worldcom and Sprint) off-set by
a 2.0% decrease in non-OCC minutes of traffic carried. The long-distance
average rate per minute was $.121 in the first and second quarters.
- A 4.6% increase in cable services revenue to $16.7 million in second
quarter due to 3.3% increase in programming services revenues to $14.2
million generated from new product offerings and a 44.9% increase in
advertising sales to $605,000.
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 from $29.7
million in the first quarter to $29.6 million in the second quarter. As a
percentage of revenues, second and first quarter cost of sales and services
totaled 41.5% and 43.4%, respectively. The decrease in the cost of sales and
services as a percentage of revenues is primarily due to the transfer of our
traffic from a satellite leased under an operating lease to a satellite owned by
us and financed via a capital lease, and avoidance of access charges resulting
from distribution and termination of our traffic on our own network instead of
paying other carriers to distribute and terminate our traffic.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.1 million in the second quarter as compared
to the first quarter. As a percentage of revenues, second quarter selling,
general and administrative expenses were 36.0% as compared to 36.1% for the
first quarter. The second quarter decrease as a percentage of sales is primarily
a result of increased revenues in second quarter without a corresponding
proportional increase in support costs off-set by a $800,000 increase in
expenses associated with an accrual for the Company-wide success sharing program
in the second quarter. Success sharing is a bonus paid to all employees when our
earnings before interest, depreciation, amortization and taxes reach new highs.
No such accrual was made in the first quarter.
Net loss. We reported a net loss of $3.5 million for the second quarter as
compared to a net loss of $5.5 million for the first quarter. The decrease in
the net loss is primarily due to a non-recurring charge of $2.0 million to
interest expense in first quarter to write-off previously capitalized interest
expense and a non-recurring charge of $1.7 million in the first quarter
resulting from a change in the estimated remaining lives of assets that will be
replaced in the future.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities totaled $19.9 million in the six-month
period ended June 30, 2000 ("2000") as compared to $22.5 million in the
six-month period ended June 30, 1999 ("1999"), net of changes in the components
of working capital. Other sources of cash during 2000 include the refund of a
$8.8 million deposit. Our expenditures for property and equipment, including
construction in progress, totaled $18.9 million and $23.2 million in 2000 and
1999, respectively. Other uses of cash during 2000 included repayment of $10.3
million of long-term borrowings and capital lease obligations and purchases of
$1.6 million of property held for sale.
Net receivables decreased $1.9 million from December 31, 1999 to June 30, 2000
primarily due to decreased OCC trade receivables.
Working capital totaled $18.5 million at June 30, 2000, a $4.2 million decrease
from working capital of $22.7 million as of December 31, 1999. The decrease in
working capital is primarily attributed to our use of current assets to purchase
long-term capital assets and repay long-term debt.
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
27 (Continued)
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. $77.7 million and $87.7 million were drawn on the
credit facilities as of June 30, 2000 and December 31, 1999, 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 and the capital lease of the
satellite transponder asset). 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.
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 2.75 to 1.0 through September 30, 2000 and 2.50 to 1.0 from October 1,
2000 to December 31, 2000, total debt to annualized cash flow to exceed 5.50
times, and annualized operating cash flow to interest expense to be less than
2.0 to 1.0 from April 1, 2000 and thereafter. Certain of the foregoing ratios
decrease 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 effective January 1, 2001 (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 6.0 to
1.0 on an incurrence basis, 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 June 30, 2000 and 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 expect to 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 our Alaska United
system 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. The
agreement requires that the buyer acquire additional capacity
28 (Continued)
during the 18-month period following the effective date of the contract. We
continue to pursue opportunities for sale or lease of additional capacity on our
system.
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
satellite transponders pursuant to a long-term capital lease arrangement with a
leasing company. At June 30, 2000 $48.2 million was financed under this capital
lease. The base term of the lease is one year from the closing date with the
option for eight one-year lease term renewals. The capital lease includes
certain covenants requiring maintenance of specific levels of operating cash
flow to indebtedness and limitations on additional indebtedness.
Our expenditures for property and equipment, including construction in progress,
totaled $9.8 million and $23.2 million during 2000 and 1999, 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 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 our 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 in cash only.
Dividends of $1,746,000 have been accrued at June 30, 2000 and will be paid in
additional fully-paid shares of Preferred Stock. Additional dividends totaling
$309,000, or $15.00 per share, are accrued at June 30, 2000 and the
determination of whether they will be paid in cash or additional fully-paid
shares of Preferred Stock will be made at the next semi-annual payment date.
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
SFAS No. 133. In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". Among
other provisions, SFAS No. 133, as amended by SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities and Amendment of
SFAS No. 133", 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
29 (Continued)
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 our results of
operations, financial position or cash flows.
FASB Interpretation No. 44. In March 2000, the Financial Accounting Standards
Board issued FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation". This interpretation clarifies the application of
APB Opinion No. 25, "Accounting for Stock Issued to Employees", for certain
issues including the definition of employee for purposes of applying APB Opinion
No. 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award and the accounting for an
exchange of stock compensation awards in a business combination. This
interpretation is effective July 1, 2000, but certain conclusions in the
interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying it are
recognized on a prospective basis from July 1, 2000. We do not expect the
adoption of this standard to have a material impact on our results of
operations, financial position or cash flows.
SEC Staff Accounting Bulletin No. 101. SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements", summarizes certain of the SEC
staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. This bulletin is effective October 1, 2000,
we believe the adoption will not have a material impact on our results of
operations, financial position or cash flows.
Year 2000 Costs
We did not defer any critical information technology projects because of our
Year 2000 program efforts. At June 30, 2000 we have an estimated $200,000 in
remaining incremental remediation costs.
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 of 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 34% of the state's projected revenues
in fiscal 2001, with federal funding comprising 25% and oil revenues 27% 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 in 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 a 10-year
high of $32.30 on March 7, 2000, with a fiscal 2000 average price per barrel of
$23.27.
The July 2000 update to the state's spring 2000 forecast for fiscal 2001
forecasts the price for North Slope crude averaging $26.77 and then declining to
$22.32 in fiscal 2002 and $18.53 over the following few years. Recent higher
prices are largely due to the March 1999 OPEC agreement to cut production to
force prices
30 (Continued)
higher. The OPEC agreement called for production cuts from January 1999 levels
of a little more than 2 million barrels per day. At its March 27, 2000 meeting,
nine of the eleven OPEC members agreed to increase production quotas by a total
of 1.452 million barrels per day. Iran did not agree to an official quota but
has been quoted as saying it would increase production sufficient to maintain
its market share. Iraq is not subject to an OPEC quota. Based on estimates of
current production, the new production quotas for the nine members would
represent about a 450,000 barrels per day increase. At its June 21, 2000
meeting, OPEC members agreed to increase production quotas by an additional
500,000 barrels per day. 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. The state withdrew $256 million from the
Constitutional Budget Reserve Fund in fiscal 2000 and, based on the state's oil
price and production forecasts, and considering the state's other revenues, the
Alaska Department of Revenue expects to draw about $122 million in fiscal 2001
to balance the state's budget, down substantially from the $413 million fiscal
2001 draw expected in their spring 2000 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 (previously 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. Two other factors that support Alaska's economy are the
healthy national economy and low inflation. Economists expect construction to
remain strong over the next few years. $1.69 billion of federal money is
expected to be distributed to the State of Alaska for highways and other
federally supported projects in fiscal 2001.
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.
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.
BP and Atlantic Richfield Company ("ARCO") announced April 13, 2000 that they
received clearance from the Federal Trade Commission for the combination of
their companies, which was completed April 18, 2000.
BP, Exxon Mobil Corporation ("ExxonMobil"), ARCO and Phillips Petroleum
("Phillips") announced April 13, 2000 that they reached an agreement to resolve
outstanding issues relating to the ownership and operation of the Prudhoe Bay
and Point Thomson Units in Alaska. The agreement reportedly is intended to
optimize operations, reduce costs and facilitate new oil and gas development in
the state of Alaska. The agreement aligns the respective equity interests of BP
Exploration (Alaska), ExxonMobil and Phillips in the Prudhoe Bay Unit, and
provides for a single operator at that unit. In addition, the agreement resolves
issues relating to North Slope preferential rights and field operatorship. The
companies stated that the agreement will not only help ensure the efficient and
long-term production of the fields, but will also facilitate future Alaska
development, including gas commercialization.
31 (Continued)
The aligned oil and gas interests among the major owners will be 26.7% for BP
Exploration (Alaska), 36.8% for ExxonMobil and 36.5% for Phillips. BP
Exploration (Alaska), current operator of the Western Operating Area in the
Prudhoe Bay Unit, will become the single operator. ExxonMobil and BP Exploration
(Alaska) Inc. have also agreed to work towards alignment in the Point Thomson
field area with respective interests of 45% for BP Exploration and 55% for
ExxonMobil.
Phillips became a major new operator of the North Slope Kuparuk and Alpine
fields, following Federal Trade Commission approval and final closing of the
ARCO Alaska acquisition August 1, 2000.
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 population of approximately
620,000 people. 42% of the State's population 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. We are
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 and Phillips on Alaska's
economy or on us.
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.
INFLATION
We do not believe that inflation has a significant effect on our operations.
32
PART I.
ITEM 3. QUANTITATIVE AND QUALITIATIVE 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 either 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 June 30, 2000, we have borrowed $77.7 million
subject to interest rate risk. On this amount, a 1% increase in the interest
rate would cost us $777,000 in additional gross interest cost on an annualized
basis.
Our Fiber Facility carries interest rate risk. Amounts borrowed under this
Agreement bear interest at either 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% after the
project completion date and when the loan balance is $60,000,000 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 June 30, 2000, 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.
Our Satellite Transponder Capital Lease carries interest rate risk. Amounts
borrowed under this Agreement bear interest at Libor plus 3.25%. Should the
Libor rate change, our interest expense will increase or decrease accordingly.
As of June 30, 2000, we have borrowed $48.2 million subject to interest rate
risk. On this amount, a 1% increase in the interest rate would cost us $482,000
in additional gross interest cost on an annualized basis.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding pending legal proceedings to which we are a party is
included in Note 5 of Notes to Interim Condensed Consolidated Financial
Statements and is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Date of the meeting: June 8, 2000
Purpose of meeting: Annual shareholders meeting
(b) Name of each director elected at the meeting and the name of
each other director whose term of office as a director
continued after the meeting:
Name Votes for Votes withheld
---------------------- --------------- --------------
Ronald A. Duncan 71,459,435 6,517,100
Paul S. Lattanzio 73,440,440 4,536,095
Stephen R. Mooney 73,440,689 4,535,846
Larry E. Romrell 71,198,901 6,777,634
Directors, in addition to those listed above, whose term of
office as director continued after the meeting:
Ronald R. Beaumont
Donne F. Fisher
William P. Glasgow
Carter F. Page
James M. Schneider
Robert M. Walp
33
(c) Other matters voted upon:
Amendment to the Company's Revised 1986 Stock Option Plan to
increase the number of shares of the Company's common stock
allocated to the plan by 1.5 million shares of Class A
common stock, ratifying an amendment to the plan deleting
the exceptions to Board of Director authority to amend the
Stock Option Plan without shareholder approval and adding a
new exception to that authority, and approval of several
administrative amendments to the plan approved by the Board
of Directors.
Votes
-----
For: 77,991,849
Against: 6,232,045
Abstain: 75,389
Result: Passed
Amendments to the Company's Restated Articles of
Incorporation generally relating to the terms under which
the Company's board of directors may approve issuance of
Company preferred stock, and approving action by the board
canceling and otherwise deleting a statement of stock
designation as issued and filed with the State of Alaska and
relating to a 1991 offer of preferred stock which is no
longer outstanding.
Votes
-----
For: 62,177,486
Against: 10,859,570
Abstain: 119,970
Result: Passed
(d) Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10.82 - Lease Intended for Security between GCI
Satellite Co., Inc. and General Electric Capital
Corporation *
Exhibit 27 - Financial Data Schedule *
(b) Reports on Form 8-K filed during the quarter ended
June 30, 2000 - None
---------------------
* Filed herewith.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL COMMUNICATION, INC.
Signature Title Date
- -------------------------------------- -------------------------------------------- ------------------
/s/ President and Director August 10, 2000
- -------------------------------------- (Principal Executive Officer) ------------------
Ronald A. Duncan
/s/ Senior Vice President, Chief Financial August 10, 2000
- -------------------------------------- Officer, Secretary and Treasurer ------------------
John M. Lowber (Principal Financial Officer)
/s/ Vice President, Chief Accounting August 10, 2000
- -------------------------------------- Officer ------------------
Alfred J. Walker (Principal Accounting Officer)
35