FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
ALASKA 92-0072737
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 Denali Street Suite 1000 Anchorage, Alaska 99503
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (907) 265-5600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock Class B common stock
(Title of class) (Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average bid and asked prices of such
stock as of the close of trading on February 28, 2001 was approximately
$267,120,000.
The number of shares outstanding of the registrant's common stock as of
February 28, 2001, was:
Class A common stock - 48,765,081 shares; and
Class B common stock - 3,902,297 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive Proxy Statement to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended,
in connection with the Annual Meeting of Stockholders of the registrant to be
held on June 7, 2001 are incorporated by reference into Part III of this report.
1
GENERAL COMMUNICATION, INC.
2000 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
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Glossary...............................................................................................................3
Cautionary Statement Regarding Forward-Looking Statements.............................................................11
Part I................................................................................................................13
Item 1. Business..................................................................................................13
Item 2. Properties................................................................................................54
Item 3. Legal Proceedings.........................................................................................57
Item 4. Submission of Matters to a Vote of Security Holders.......................................................57
Part II...............................................................................................................58
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................................58
Item 6. Selected Financial Data...................................................................................58
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................60
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................................76
Item 8. Consolidated Financial Statements and Supplementary Data..................................................76
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure......................77
Part III..............................................................................................................77
Part IV..............................................................................................................110
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K...........................110
This Annual Report on Form 10-K is for the year ending December 31, 2000. This
Annual Report modifies and supersedes documents filed prior to this Annual
Report. The SEC allows us to "incorporate by reference" information that we file
with them, which means that we can disclose important information to you by
referring you directly to those documents. Information incorporated by reference
is considered to be part of this Annual Report. In addition, information that we
file with the SEC in the future will automatically update and supersede
information contained in this Annual Report.
2
Glossary
ACCESS CHARGES -- Expenses incurred by an IXC and paid to LECs for accessing the
local networks of the LECs in order to originate and terminate long-distance
calls and provide the customer connection for private line services.
ACS -- Alaska Communications Systems, Inc., previously ALEC Holdings, Inc. --
ACS, one of our competitors, includes acquired properties from Century Telephone
Enterprises, Inc. and the Anchorage Telephone Utility ("ATU"). ATU provided
local telephone and long distance services primarily in Anchorage and cellular
telephone services in Anchorage and other Alaska markets.
ALASKA UNITED -- Alaska United Fiber System Partnership -- an Alaska partnership
wholly owned by The Company. Alaska United was organized to construct and
operate a new fiber optic cable connecting various locations in Alaska and the
lower 49 states and foreign countries through Seattle, Washington.
ATM -- Asynchronous Transfer Mode -- An international ISDN high-speed,
high-volume, packet switching transmission protocol standard. ATM uses short,
uniform, 53-byte cells to divide data into efficient, manageable packets for
very fast switching through a high-performance communications network. The
53-byte cells contain 5-byte destination address headers and 48 data bytes. ATM
is the first packet-switched technology designed from the ground up to support
integrated voice, video, and data communication applications. It is well suited
to high-speed WAN transmission bursts. ATM currently accommodates transmission
speeds from 64 kbps to 622 mbps. ATM may support gigabit speeds in the future.
AT&T -- AT&T Corp. -- Acquired Tele-Communications, Inc. ("TCI") in a 1999
merger; one of our competitors.
AT&T Alascom -- Alascom, Inc. -- a wholly owned subsidiary of AT&T and one of
our competitors.
BASIC SERVICE -- The basic service tier includes, at a minimum, all signals of
domestic television broadcast stations provided to any subscriber, any public,
educational, and governmental programming required by the franchise to be
carried on the basic tier, and any additional video programming service added to
the basic tier by the cable operator.
BOC -- BELL SYSTEM OPERATING COMPANY -- A LEC owned by any of the remaining
Regional Bell Operating Companies, which are holding companies established
following the AT&T Divestiture Decree to serve as parent companies for the BOCs.
BACKBONE -- A centralized high-speed network that interconnects smaller,
independent networks.
BANDWIDTH -- The number of bits of information that can move through a
communications medium in a given amount of time.
BRI -- Basic Rate Interface -- An ISDN offering that allows two 64 kbps "B"
channels and one 16 kbps "D" channel to be carried over one typical single pair
of copper wires. This is the type of service that would be used to connect a
small branch or home office to a remote network. Through the use of Bonding
(bandwidth on Demand) the two 64 kbps channels can be combined to create more
bandwidth as it becomes necessary. For data services such as Internet access,
these channels can be bonded together to provide 2B+D transmission at a rate of
128 kbps. New technology increases the bandwidth of ISDN BRI connections to 230
kbps.
BROADBAND -- A high-capacity communications circuit/path, usually implying a
speed greater than 256 kbps.
3
CAP -- Competitive Access Provider -- A company that provides its customers with
an alternative to the LEC for local transport of private line and special access
telecommunications services.
CENTRAL OFFICES -- The switching centers or central switching facilities of the
LECs.
CLEC -- Competitive Local Exchange Carrier. -- A company that provides its
customers with an alternative to the ILEC for local transport of
telecommunications services, as allowed under the 1996 Telecom Act.
CO-CARRIER STATUS -- A regulatory scheme under which the incumbent LEC is
required to integrate new, competing providers of local exchange service, into
the systems of traffic exchange, inter-carrier compensation, and other
inter-carrier relationships that already exist among LECs in most jurisdictions.
COLLOCATION -- The ability of a CAP to connect its network to the LEC's central
offices. Physical collocation occurs when a CAP places its network connection
equipment inside the LEC's central offices. Virtual collocation is an
alternative to physical collocation pursuant to which the LEC permits a CAP to
connect its network to the LEC's central offices on comparable terms, even
though the CAP's network connection equipment is not physically located inside
the central offices.
THE COMPANY -- GCI and its direct and indirect subsidiaries, also referred to as
"we," "us" and "our."
COMPRESSION / DECOMPRESSION -- A method of encoding/decoding signals that allows
transmission (or storage) of more information than the media would otherwise be
able to support. Both compression and decompression require processing capacity,
but with many products, the time is not noticeable.
CPS -- a Cable Programming Service -- (also known as CPST, Cable Programming
Service Tier). CPS includes any video programming provided over a cable system,
regardless of service tier, including installation or rental of equipment used
for the receipt of such video programming, other than (1) video programming
carried on the basic service tier, (2) video programming offered on a
pay-per-channel or pay-per-programming basis, or (3) a combination of multiple
channels of pay-per-channel or pay-per-programming basis so long as the combined
service consists of commonly-identified video programming and is not bundled
with any regulated tier of service.
DAMA -- Demand Assigned Multiple Access -- The Company's digital satellite earth
station technology that allow calls to be made between remote villages using
only one satellite hop thereby reducing satellite delay and capacity
requirements while improving quality.
DARK FIBER -- An inactive fiber-optic strand without electronics or optronics.
Dark fiber is not connected to transmitters, receivers and regenerators.
DBS -- Direct Broadcast Satellite -- Subscription television service obtained
from satellite transmissions using frequency bands that are internationally
allocated to the broadcast satellite services. Direct-to-home service such as
DBS has its origins in the large direct-to-home satellite antennas that were
first introduced in the 1970's for the reception of video programming
transmitted via satellite. Because these first-generation direct-to-home
satellites operated in the C-band frequencies at low power, direct-to-home
satellite antennas, or dishes, as they are also known, generally needed to be
seven to ten feet in diameter in order to receive the signals being transmitted.
More recently, licensees have been using the Ku and extended Ku-bands to provide
direct-to-home services enabling subscribers to use a receiving home satellite
dish less than one meter in diameter.
DS-3 -- A data communications circuit that is equivalent to 28 multiplexed T-1
channels capable of transmitting data at 44.736 mbps (sometimes called a T-3).
DEDICATED -- Telecommunications lines dedicated or reserved for use by
particular customers.
4
DIGITAL -- A method of storing, processing and transmitting information through
the use of distinct electronic or optical pulses that represent the binary
digits 0 and 1. Digital transmission and switching technologies employ a
sequence of these pulses to represent information as opposed to the continuously
variable analog signal. The precise digital numbers minimize distortion (such as
graininess or snow in the case of video transmission, or static or other
background distortion in the case of audio transmission).
DLC -- Digital Loop Carrier -- A digital transmission system designed for
subscriber loop plant. Multiplexes a plurality of circuits onto very few wires
or onto a single fiber pair.
DSL - Digital Subscriber Line -- Technology that allows Internet access at data
transmission speeds greater than those of modems over conventional telephone
lines.
EQUAL ACCESS -- Connection provided by a LEC permitting a customer to be
automatically connected to the IXC of the customer's choice when the customer
dials "1". Also refers to a generic concept under which the BOCs must provide
access services to AT&T's competitors that are equivalent to those provided to
AT&T.
FCC -- Federal Communications Commission -- A federal regulatory body empowered
to establish and enforce rules and regulations governing public utility
companies and others, such as the Company.
FDDI -- Fiber Distributed Data Interface -- Based on fiber optics, FDDI is a
100-megabit per second LAN technology used to connect computers, printers, and
workstations at very high speeds. FDDI is also used as backbone technology to
interconnect other LANs.
FRAME RELAY -- A wideband (64 kilobits per second to 1.544 mbps) packet-based
data interface standard that transmits bursts of data over WANs. Frame-relay
packets vary in length from 7 to 1024 bytes. Data oriented, it is generally not
used for voice or video.
FTC -- Federal Trade Commission -- A federal regulatory body empowered to
establish and enforce rules and regulations governing companies involved in
trade and commerce.
GCC -- GCI Communication Corp., an Alaska corporation and a wholly owned
subsidiary of Holdings.
GCI -- General Communication, Inc., an Alaska corporation and the Registrant.
GCI, Inc. -- a wholly owned subsidiary of GCI, an Alaska corporation and issuer
of $180 million of publicly traded bonds.
HOLDINGS -- a wholly owned subsidiary of GCI, Inc., an Alaska corporation and
party to The Company's Senior Holdings Loan.
HSD -- Home Satellite Dish - see DBS.
INBOUND "800" or "888" Service -- A service that assesses long-distance
telephone charges to the called party.
ILEC -- Incumbent Local Exchange Carrier -- with respect to an area, the LEC
that -- (A) on the date of enactment of the Telecommunications Act of 1996,
provided telephone exchange service in such area; and (B)(i) on such date of
enactment, was deemed to be a member of the exchange carrier association
pursuant to section 69.601(b) of the FCC's regulations (47 C.F.R. 69.601(b)); or
(ii) is a person or entity that, on or after such date of enactment, became a
successor or assign of a member described in clause (i).
5
INTEREXCHANGE -- Communication between two different LATAs.
ISDN -- Integrated Services Digital Network -- A set of standards for
transmission of simultaneous voice, data and video information over fewer
channels than would otherwise be needed, through the use of out-of-band
signaling. The most common ISDN system provides one data and two voice circuits
over a traditional copper wire pair, but can represent as many as 30 channels.
Broadband ISDN extends the ISDN capabilities to services in the Gigabit range
(see BRI and PRI).
ISP -- Internet Service Provider -- a company providing retail and/or wholesale
Internet services.
INTERNET -- A global collection of interconnected computer networks which use
TCP/IP, a common communications protocol.
IXC -- Interexchange Carrier -- A long-distance carrier providing services
between local exchanges.
KANAS -- Kanas Telecom, Inc. - a corporation owned primarily by WorldCom. Kanas
owns and operates a fiber optic cable system constructed along the trans-Alaska
oil pipeline corridor extending from Prudhoe Bay to Valdez, Alaska.
LAN -- Local Area Network -- The interconnection of computers for the purpose of
sharing files, programs and various devices such as printers and high-speed
modems. LANs may include dedicated computers or file servers that provide a
centralized source of shared files and programs.
LATA -- Local Access And Transport Area -- The approximately 200 geographic
areas defined pursuant to the AT&T Divestiture Decree. The BOCs are generally
prohibited from providing long-distance service between the LATA in which they
provide local exchange services, and any other LATA.
LDAP - Lightweight Directory Access Protocol -- A distributed, hierarchical
directory service access protocol that is used to access repositories of users
and other network related entities
LEC -- Local Exchange Carrier -- A company providing local telephone services.
Each BOC is a LEC.
LINE COSTS -- Primarily includes the sum of access charges and transport
charges.
LMDS -- Local Multipoint Distribution System -- LMDS uses microwave signals
(millimeterwave signals) in the 28 GHz spectrum to transmit voice, video, and
data signals within small cells 3-10 miles in diameter. LMDS allows license
holders to control up to 1.3 GHz of wireless spectrum in the 28 GHz Ka-band. The
1.3 GHz can be used to carry digital data at speeds in excess of one gigabit per
second. LMDS uses a specific band in the microwave spectrum, known as millimeter
waves or the 28 GHz "Ka-band." More tangibly, if LMDS were used on a
point-to-point basis the beam would be about as wide as a pencil lead (about a
millimeter) and would have a frequency of approximately 28 billion cycles per
second. The extremely high frequency used and the need for point to multipoint
transmissions limits the distance that a receiver can be from a transmitter.
This means that LMDS will be a "cellular" technology, based on multiple,
contiguous, or overlapping cells. LMDS is expected to provide customers with
multichannel video programming, telephony, video communications, and two-way
data services. Incumbent LECs and cable companies may not obtain the in-region
1150 MHz license for three years. Within 10 years, licenses will be required to
provide 'substantial service' in their service regions.
LOCAL EXCHANGE -- A geographic area generally determined by a PUC, in which
calls generally are transmitted without toll charges to the calling or called
party.
6
LOCAL NUMBER PORTABILITY -- The ability of an end user to change Local Exchange
Carriers while retaining the same telephone number.
LOWER 48 STATES or LOWER 48 -- refers to the 48 contiguous states south of or
below Alaska.
LOWER 49 STATES OR LOWER 49 -- refers to Hawaii and the 48 contiguous states
south of or below Alaska.
MAN -- Metropolitan Area Network -- LANs interconnected within roughly a 50-mile
radius. MANs typically use fiber optic cable to connect various wire LANs.
Transmission speeds may vary from 2 to 100 Mbps.
MDU -- Multiple Dwelling Unit -- MDUs include multiple-family buildings, such as
apartment and condominium complexes.
MMDS -- Multichannel Multipoint Distribution Service - also known as wireless
cable. The FCC established the Multipoint Distribution Service (MDS) in 1972.
Originally the Commission thought MDS would be used primarily to transmit
business data. However, the service became increasingly popular in transmitting
entertainment programming. Unlike conventional broadcast stations whose
transmissions are received universally, MDS programming is designed to reach
only a subscriber based audience. In 1983 the Commission reassigned eight
channels from the Instructional Television Fixed Service (ITFS) to MDS. These
eight channels make up the MMDS. Frequently, MDS and MMDS channels are used in
combination with ITFS channels to provide video entertainment programming to
subscribers.
NARROWBAND -- A voice grade low-capacity communications circuit/path. It usually
implies a speed of 56 kilobits per second or less.
NETWORK SWITCHING CENTER -- A location where installed switching equipment
routes long-distance calls and records information with respect to calls such as
the length of the call and the telephone numbers of the calling and called
parties.
NETWORK SYSTEMS INTEGRATION -- Involves the creation of turnkey
telecommunications networks and systems including: (i) route and site selection;
(ii) rights of way and legal authorizations and/or acquisition; (iii) design and
engineering of the system, including technology and vendor assessment and
selection, determining fiber optic circuit capacity, and establishing
reliability/flexibility standards; and (iv) project and construction management,
including contract negotiations, purchasing and logistics, installation as well
as testing.
NPT -- a New Product Tier -- a cable programming service tier offered to
subscribers at prices set by the cable operator.
OCC -- Other Common Carrier -- A long-distance carrier other than the Company.
PCS -- Personal Communication Services -- PCS encompasses a range of advanced
wireless mobile technologies and services. It promises to permit communications
to anyone, anyplace and anytime while on the move. The Cellular
Telecommunications Industry Association (CTIA) defines PCS as a "wide range of
wireless mobile technologies, chiefly cellular, paging, cordless, voice,
personal communications networks, mobile data, wireless PBX, specialized mobile
radio, and satellite-based systems." The FCC defines PCS as a "family of mobile
or portable radio communications services that encompasses mobile and ancillary
fixed communications services to individuals and businesses and can be
integrated with a variety of competing networks."
PBX -- Private Branch Exchange -- A customer premise communication switch used
to connect customer telephones (and related equipment) to LEC central office
lines (trunks), and to switch internal calls within the customer's telephone
system. Modern PBXs offer numerous software-controlled features such as call
forwarding
7
and call pickup. A PBX uses technology similar to that used by a central office
switch (on a smaller scale). (The acronym PBX originally stood for "Plug Board
Exchange.")
POP -- Point of Presence -- The physical access location interface between a LEC
and an IXC network. The point to which the telephone company terminates a
subscriber's circuit for long-distance service or leased line communications.
PRI -- Primary Rate Interface -- An ISDN circuit transmitting at T1 (DS-1) speed
(equivalent to 24 voice-grade channels). One of the channels ("D") is used for
signaling, leaving 23 ("B") channels for data and voice communication.
PRIVATE LINE -- Uses dedicated circuits to connect customer's equipment at both
ends of the line. Does not provide any switching capability (unless supported by
customer premise equipment). Usually includes two local loops and an IXC
circuit.
PRIVATE NETWORK -- A communications network with restricted (controlled) access
usually made up of private lines (with some PBX switching).
PTI -- PTI Communications of Alaska, Inc. -- now ACS of Fairbanks, Inc., a
subsidiary of ACS.
PUBLIC SWITCHED NETWORK -- That portion of a LEC's network available to all
users generally on a shared basis (i.e., not dedicated to a particular user).
Traffic along the public switched network is generally switched at the LEC's
central offices.
RBOC -- Regional Bell Operating Company -- Any of the remaining regional Bell
holding companies which the AT&T Divestiture Decree established to serve as
parent companies for the BOCs.
RCA -- REGULATORY COMMISSION OF ALASKA -- A state regulatory body empowered to
establish and enforce rules and regulations governing public utility companies
and others, such as the Company, within the state of Alaska (sometimes referred
to as Public Service Commissions, or PSCs, or Public Utility Commissions, or
PUCs). Previously known as the Alaska Public Utilities Commission (APUC).
RECIPROCAL COMPENSATION -- The same compensation of a new CLEC for termination
of a local call by the BOC on its network, as the new competitor pays the BOC
for termination of local calls on the BOC network.
SCHOOLACCESS(TM) -- The Company's Internet and related services offering to
schools in Alaska. The federal mandate through the 1996 Telecom Act to provide
universal service resulted in schools across Alaska qualifying for varying
levels of discounts to support the provision of Internet services. The Universal
Service Administrative Company through its Schools and Libraries Division
administers this federal program.
SDN -- Software Defined Network -- A switched long-distance service for very
large users with multiple locations. Instead of putting together their own
network, large users can get special usage rates for calls carried on regular
switched long-distance lines.
SECURITIES REFORM ACT - The Private Securities Litigation Reform Act of 1995.
SENIOR HOLDINGS LOAN -- Holding's $150,000,000 and $50,000,000 credit
facilities. You should see note 5(b) to the accompanying Notes to Consolidated
Financial Statements included in Part II of this Report for more information.
8
SETTLEMENT RATES -- The rates paid to foreign carriers by United States
international carriers to terminate outbound (from the United States) switched
traffic and by foreign carriers to United States international carriers to
terminate inbound (to the United States) switched traffic.
SLC -- Subscriber Line Charge -- A charge for the telephone line that connects a
local telephone company to the subscriber's telephone system or medium.
SMATV -- Satellite Master Antenna Television -- (also known as "private cable
systems") are multichannel video programming distribution systems that serve
residential, multiple-dwelling units ("MDUs"), and various other buildings and
complexes. A SMATV system typically offers the same type of programming as a
cable system, and the operation of a SMATV system largely resembles that of a
cable system -- a satellite dish receives the programming signals, equipment
processes the signals, and wires distribute the programming to individual
dwelling units. The primary difference between the two is that a SMATV system
typically is an unfranchised, stand-alone system that serves a single building
or complex, or a small number of buildings or complexes in relatively close
proximity to each other.
SONET -- Synchronous Optical Network -- A 1984 standard for optical fiber
transmission on the public network. 52 mbps to 13.22 Gigabits per second,
effective for ISDN services including ATM.
SPRINT -- Sprint Corporation -- one of our significant customers.
TCP/IP -- Transmission Control Protocol/Internet Protocol -- A suite of network
protocols that allows computers with different architectures and operating
system software to communicate with other computers on the Internet.
T-1 -- A data communications circuit capable of transmitting data at 1.5 mbps.
TARIFF -- The schedule of rates and regulations set by communications common
carriers and filed with the appropriate federal and state regulatory agencies;
the published official list of charges, terms and conditions governing provision
of a specific communications service or facility, which functions in lieu of a
contract between the subscriber or user and the supplier or carrier.
TOKEN RING -- A local area network technology used to interconnect personal
computers, file servers, printers, and other devices. Token Ring LANs typically
operate at either 4 mbps or 16 mbps.
TRANSPORT CHARGES -- Expenses paid to facilities-based carriers for transmission
between or within LATAs.
TRS SERVICES -- Telecommunications Relay Services -- Enables telephone
conversations between people with and without hearing or speech disabilities.
TRS relies on communications assistants ("CA") to relay the content of calls
between users of text telephones ("TTYs") and users of traditional handsets
(voice users). For example, a TTY user may telephone a voice user by calling a
TRS provider where a CA will place the call to the voice user and relay the
conversation by transcribing spoken content for the TTY user and reading text
aloud for the voice user.
VSAT -- Very Small Aperture Terminal -- A portable satellite terminal that
allows connection via a satellite link.
WAN -- Wide Area Network - A remote computer communications system. WANs allow
file sharing among geographically distributed workgroups (typically at higher
cost and slower speed than LANs or MANs). WANs typically use common carriers'
circuits and networks. WANs may serve as a customized communication backbone
that interconnects all of an organization's local networks with communications
trunks that are designed to be appropriate for anticipated communication rates
and volumes between nodes.
9
WORLD WIDE WEB or WEB -- A collection of computer systems supporting a
communications protocol that permits multi-media presentation of information
over the Internet.
WORLDCOM -- WorldCom, Inc. -- owns approximately 18% of our common stock,
presently controls nominations to two seats on our Board, and is one of our
significant customers. Prior to May 1, 2000, the Company was named MCI WorldCom,
Inc.
1984 CABLE ACT -- The Cable Communications Policy Act of 1984.
1992 CABLE ACT -- The Cable Television Consumer Protection and Competition Act
of 1992.
1996 TELECOM ACT -- The Telecommunications Act of 1996 - The 1996 Telecom Act
was signed into law February 8, 1996. Under its provisions, BOCs were allowed to
immediately begin manufacturing, research and development; GTE Corp. could begin
providing interexchange services through its telephone companies nationwide;
laws in 27 states that foreclosed competition were knocked down; co-carrier
status for CLECs was ratified; and the physical collocation of competitors'
facilities in LECs central offices was allowed.
The legislation breaks down the old barriers that prevented three groups of
companies, the LECs, including the BOCs, the long-distance carriers, and the
cable TV operators, from competing head-to-head with each other. The Act
requires LECs to let new competitors into their business. It also requires the
LECs to open up their networks to ensure that new market entrants have a fair
chance of competing. The bulk of the legislation is devoted to establishing the
terms under which the LECs, and more specifically the BOCs, must open up their
networks.
The 1996 Telecom Act substantially changed the competitive and regulatory
environment for telecommunications providers by significantly amending the
Communications Act including certain of the rate regulation provisions
previously imposed by the Cable Television Consumer Protection and Competition
Act of 1992 (the "1992 Cable Act"). The 1996 Telecom Act eliminated rate
regulation of the cable programming service tier in 1999. Further, the
regulatory environment will continue to change pending, among other things, the
outcome of legal challenges and FCC rulemaking and enforcement activity in
respect of the 1992 Cable Act and the completion of a significant number of FCC
rulemakings under the 1996 Telecom Act.
10
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Annual Report, but
should particularly consider any risk factors that we set forth in this Annual
Report and in other reports or documents that we file from time to time with the
SEC. In this Annual Report, in addition to historical information, we state our
beliefs of future events and of our future operating results, financial position
and cash flows. In some cases, you can identify those so-called "forward-looking
statements" by words such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," or "continue"
or the negative of those words and other comparable words. You should be aware
that those statements are only our predictions and are subject to risks and
uncertainties. Actual events or results may differ materially. In evaluating
those statements, you should specifically consider various factors, including
those outlined below. Those factors may cause our actual results to differ
materially from any of our forward-looking statements. For these statements, we
claim the protection of the safe harbor for forward-looking statements provided
by the Securities Reform Act.
- Material adverse changes in the economic conditions in the markets we serve
and in general economic conditions;
- The efficacy of the rules and regulations to be adopted by the FCC and
state public regulatory agencies to implement the provisions of the 1996
Telecom Act; the outcome of litigation relative thereto; and the impact of
regulatory changes relating to access reform;
- Our responses to competitive products, services and pricing, including
pricing pressures, technological developments, alternative routing
developments, and the ability to offer combined service packages that
include local, cable and Internet services; the extent and pace at which
different competitive environments develop for each segment of our
business; the extent and duration for which competitors from each segment
of the telecommunications industry are able to offer combined or full
service packages prior to our being able to do so; the degree to which we
experience material competitive impacts to our traditional service
offerings prior to achieving adequate local service entry; and competitor
responses to our products and services and overall market acceptance of
such products and services;
- The outcome of our negotiations with ILECs and state regulatory
arbitrations and approvals with respect to interconnection agreements; and
our ability to purchase unbundled network 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 expansion, Internet
(consumer and business) services expansion 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, DSL
services, and transmission services;
- Rapid technological changes;
- Development and financing of telecommunication, local access, wireless,
Internet and cable networks and services;
- Future financial performance, including the availability, terms and
deployment of capital; the impact of regulatory and competitive
developments on capital outlays, and the ability to achieve cost savings
and realize productivity improvements;
- Availability of qualified personnel;
- Changes in, or failure, or inability, to comply with, government
regulations, including, without limitation, regulations of the FCC, the
RCA, and adverse outcomes from regulatory proceedings;
11
- Uncertainties in federal military spending levels and military base
closures in markets in which we operate;
- Industry consolidation and mergers;
- Other risks detailed from time to time in our periodic reports filed with
the Securities and Exchange Commission.
These forward-looking statements (and such risks, uncertainties and other
factors) are made only as of the date of this report and we expressly disclaim
any obligation or undertaking to disseminate any updates or revisions to any
forward-looking statement contained in this document to reflect any change in
our expectations with regard to those statements or any other change in events,
conditions or circumstances on which any such statement is based, except as
required by law. Readers are cautioned not to put undue reliance on such
forward-looking statements.
12
Part I
Item 1. Business
General
In this Annual Report, "we," "us" and "our" refer to General Communication, Inc.
and its direct and indirect subsidiaries.
GCI was incorporated in 1979 under the laws of the State of Alaska and has its
principal executive offices at 2550 Denali Street, Suite 1000, Anchorage, AK
99503 (telephone number 907-265-5600). Internet users can access information
about GCI and its services at http://www.GCI.com/ and
http://www.alaskaunited.com/. The Company hosts Internet services at
http://www.GCI.net/.
GCI is primarily a holding company and together with its direct and indirect
subsidiaries, is a diversified telecommunications provider with a leading
position in facilities-based long-distance service in the State of Alaska and is
Alaska's leading cable television and Internet services provider.
We are a significant provider in Alaska of an integrated package of
long-distance, local and wireless telecommunications services, cable television
services and Internet services and are well positioned to take advantage of
growth opportunities in the communications, data and entertainment markets.
Financial Information About Industry Segments
We have four reportable segments: long-distance services, cable services, local
access services and Internet services. For information required by this section,
you should see Part II, Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations. Also refer to Note 9 included in
Part II, Item 8, Consolidated Financial Statements and Supplementary Data.
Historical Development of our Business During the Past Fiscal Year
Properties Expansion
We entered into a purchase and lease-purchase option agreement for the
acquisition of satellite transponders to meet our long-term satellite capacity
requirements. The Galaxy XR satellite was successfully launched January 24, 2000
from Arianespace Space Center in Kourou, French Guiana, and was made available
to us March 5, 2000. We finalized a long-term lease purchase transaction upon
final acceptance of the satellite transponders. The satellite increases our
satellite capacity and provides long-distance voice, fax, Internet and data
traffic capabilities primarily for our customers in rural Alaska. We use six
C-band and one Ku-band transponders on Galaxy XR. The seven transponders
represent a capital lease investment of approximately $48 million. Each
transponder is capable of carrying a minimum of 1,800 simultaneous voice or data
calls.
The Ku-band transponder is used to carry high-speed Internet traffic to 68 rural
Alaska schools, as well as voice and data services to remote fishing, mining and
logging operations. Voice, fax, Internet, telemedicine and distance education
applications are delivered over both C-band and Ku-band.
We announced in February 2001 that an agreement had been reached to acquire from
WorldCom an 85 percent controlling interest in the corporation owning the
800-mile fiber optic cable system that extends from Prudhoe Bay, Alaska to
Valdez, Alaska via Fairbanks. Following execution of a long-term services
contract between Kanas and WorldCom and subject to other terms of the agreement,
we will issue to WorldCom shares of a new series of Class C preferred stock
valued at $10 million. We plan to enhance the system and incorporate its
operation into our operations control systems. These enhancements are expected
to improve our voice, Internet and
13
data services in interior Alaska, as well as third party vendors' services that
utilize capacity on the fiber optic system. We expect to receive the required
RCA approval during the second quarter of 2001.
In connection with the fiber system acquisition agreement, we entered into an
interim services agreement with Alyeska Pipeline Service Company to provide
certain voice, video and data services to support operations of the Trans Alaska
Pipeline System. The parties have drafted a proposed 15-year agreement that will
be submitted to the Board of Directors of both companies for consideration. The
interim agreement provides for provisional services during this review process.
Local Access Services Expansion
We began offering local exchange services in Anchorage in September 1997. We
provided service to approximately 62,100 subscribers at December 31, 2000, a
37.7% increase from December 31, 1999; representing an estimated 32% of the
Anchorage market.
We currently expect to compete with ACS subsidiaries in Fairbanks, Fort
Wainwright and Eielson Air Force Base (military bases near Fairbanks) in
mid-2001, and in Juneau in late 2001 or early 2002. You should see Part I, Item
1. Business, Narrative Description of our Business - Local Access Services, and
Part I, Item 1. Regulation, Franchise Authorities and Tariffs -
Telecommunication Operations for more information. Electronic access to certain
of ACS's support systems is expected to occur beginning in 2001.
We deployed wireless local loop technology in the Anchorage area in 2000 using
frequency available to us through our PCS license (see PCS and LMDS licenses
below). We continue to evaluate the feasibility of an expanded implementation of
wireless local loop technology.
Internet and Broadband Services Expansion
We began offering Internet services in 1998. Our GCI.net service supports 56
kbps dial-up connections with support for both V.90 and Kflex technologies, and
supports cable modem services currently available at speeds up to 1,544 kbps. We
believe our service has one of the best first-try connect rates and the fastest
speeds available of any provider in Alaska. We provided service to approximately
63,000 subscribers at December 31, 2000, a 16.7% increase from December 31,
1999.
A considerable expansion of facilities was made in 2000 to support cable modem
implementation in Anchorage, Fairbanks, North Pole, Eielson Air Force Base, Fort
Wainwright, Fort Richardson and Juneau. Capital investment in four wire centers
in Anchorage was completed in 2000 to support our DSL product called Livewire.
Livewire service is primarily offered to customers in Anchorage not served by
our cable plant. An expansion of dial-up service was completed in 2000 allowing
service delivery to Seward. We enhanced our systems in 2000 to add redundancy to
our e-mail and LDAP platforms.
Our statewide SchoolAccess(TM) services (Internet access and related products
and services for Alaska schools) commenced January 1998, with recent upgrades of
47 sites doubling access speeds to 128 kbps. Schools utilizing the
SchoolAccess(TM) product are increasingly integrating the Internet into their
educational programs. We provided SchoolAccess(TM) and other Internet services
to approximately 175 rural schools and 100 urban schools in Alaska at the end of
2000. Our Internet access service is now used by more than half of the students
in the state of Alaska. We added a content filtering service in 2000 that allows
subscribers to filter objectionable Internet content and scan for e-mail
viruses.
We recently signed agreements with nine school districts comprising 35 schools
located in rural Arizona and New Mexico to deploy our SchoolAccess(TM) services.
We expect service activation in the third quarter of 2001.
We deployed high-speed broadband services in 2000 to four regional heath
corporations in Alaska using an asymmetrical satellite network. This new service
allows remote communities to access health specialists and
14
others in Alaska and elsewhere for consultation and diagnostic services using a
combination of video, voice and data.
We acquired customers from three local ISPs during 2000 that added to our
subscriber counts, and are acquiring assets and customers from an additional
local ISP in 2001 that is expected to add over 3,000 subscribers during the
second quarter.
We announced in February 2001 that we signed an agreement to provide Internet
access to 10 rural Alaska villages in the Northwest Arctic region of Alaska with
dial-up and high-speed Internet access service. We expect the service to
commence in the third quarter of 2001. High-speed Internet services will be
delivered locally in the villages through the ILEC's DSL service or our fixed
wireless service. All long-haul transport will be delivered through our
satellite and associated facilities. Prior to this agreement, villages in the
Northwest Arctic did not have local access to Internet services.
We converted our Internet technical support in early 2001 to an in-house service
that operates 24 hours a day, seven days a week, and added approximately 30 jobs
to the Anchorage economy.
Cable Services Expansion
We continued to upgrade and expand our cable infrastructure in 2000. These
efforts increased the capacity and reliability of our systems, making possible
two-way applications such as cable modems and digital cable television
programming, and provided capacity for additional program offerings.
We began offering digital cable television services in Anchorage and Fairbanks
in 1998 and 2000, respectively, offering enhanced picture and audio quality.
Digital cable service allows us to use digital compression to substantially
increase the capacity of our cable communications systems, improve picture
quality and provide CD quality audio. Digital cable subscriber counts increased
132.8% in 2000 as compared to 1999.
We introduced cable modem services in 1998, providing high-speed, dedicated
access to the Internet through our coaxial cable network. Cable modem subscriber
counts increased 182.5% in 2000 as compared to 1999. Approximately 80 percent of
our cable customers are able to receive cable modem service. Cable modems are
deployed in approximately 9.1% of the homes passed by our cable systems in
markets offering such service, which we believe is well above the national
average.
We launched video-on-demand service to certain of our Anchorage commercial
customers and expect to provide this service to more customers in 2001. We
launched residential pay per view and added new channels in several of our
markets during 2000.
We finalized the acquisition of a local cable system operator's assets in the
Fairbanks area in the first quarter of 2001, adding approximately 1,000
subscribers to our network.
We continue to evaluate technology and the feasibility of using our cable plant
for telephone services.
PCS and LMDS Licenses
We have invested approximately $1.96 million in our PCS license at December 31,
2000. In June 2000 we began providing fixed wireless dial-tone services in
Anchorage over our PCS system, meeting the FCC requirement to offer service to
at least one-third of our market population within five years of being licensed.
We presently offer our fixed wireless service to customers that are not
connected to the ILEC or our physical plant. We plan to offer our fixed wireless
service in certain rural communities in 2001 to support the high-speed Internet
offering described above.
15
We invested approximately $275,000 in our LMDS license in 1998. LMDS licensees
are required to provide 'substantial service' in their service regions within 10
years.
Narrative Description of our Business
General
We operate a broadband communications network that permits the delivery of a
seamless integrated bundle of communications, entertainment and information
services. We offer a wide array of consumer communications and entertainment
services--including local telephone, long-distance and wireless communications,
cable television, consulting services, network and desktop computing outsourced
services, and dial-up and broadband (cable modem and DSL) Internet access
services at a wide range of speeds--all under the GCI brand name.
We believe that the size and growth potential of the voice, video and data
market, the increasing deregulation of telecommunication services, and the
increased convergence of telephony, wireless, and cable services offer us
considerable opportunities to continue to integrate our telecommunication,
Internet and cable services and expand into communications markets both within
and, longer-term, outside of Alaska.
Considerable deregulation has already taken place in the United States as a
result of the 1996 Telecom Act with the barriers to competition between
long-distance, local exchange and cable providers being lowered. We believe our
acquisition of cable television systems and our development of local exchange
service, Internet services, broadband services, and wireless services leave us
well positioned to take advantage of deregulated markets.
We are one of Alaska's leading providers of telecommunication, Internet and
cable television services and maintain a strong competitive position. There is
active competition in the sale of substantially all products and services we
offer.
Alaska Voice, Video and Data Markets
We estimate that the aggregate telecommunications, cable television, and
Internet markets in Alaska generated revenues in 2000 of approximately $1.1
billion. Of this amount, approximately $535 million was attributable to
interstate and intrastate long-distance service, $400 million was attributable
to local exchange services, $82 million was attributed to cable television, and
$83 million was attributable to all other services, including wireless and
Internet services.
The Alaskan voice, video and data markets are unique within the United States.
Alaska is physically distant from the rest of the United States and is generally
characterized by large geographical size and relatively small, dense population
clusters (with the exception of population centers such as Anchorage, Fairbanks
and Juneau). It lacks a well-developed terrestrial transportation
infrastructure, and the majority of Alaska's communities are accessible only by
air or water. As a result, Alaska's telecommunication networks are different
from those found in the lower 49 states.
Alaska continues to rely extensively on satellite-based long-distance
transmission for intrastate calling between remote communities where investment
in a terrestrial network would be uneconomic or impractical. Also, given the
physical isolation of Alaska's communities and lack, in many cases, of major
civic institutions such as hospitals, libraries and universities, Alaskans are
dependent on telecommunications to access the resources and information of large
metropolitan areas in the rest of the U.S. and elsewhere. In addition to
satellite-based communications, the telecommunications infrastructure in Alaska
includes fiber optic cables between Anchorage, Valdez, Fairbanks, Prudhoe Bay,
and Juneau, traditional copper wire, and digital microwave radio on the Kenai
Peninsula and other locations. For interstate and international communication,
Alaska is connected to the Lower 48 states by three fiber optic cables.
Fiber optics is the preferred method of carrying Internet, voice, video and data
communications over long distances, eliminating the delay commonly found in
satellite connections. Widespread use of high capacity fiber
16
optic facilities is expected to allow continued expansion of business,
government and educational infrastructure in Alaska.
Long-Distance Services
Industry
The FCC reports that two percent of all U.S. consumer spending is devoted to
telephone service, with approximately $108 billion derived from toll services in
1999. There were 99.1 million households that had telephone services in 1999, an
increase of 20 million households since 1983. Approximately $33 billion is
derived from Intrastate, $55 billion from Interstate, and $20 billion from
International toll services. Interstate minutes of use quadrupled to 600 billion
minutes from 1983 to 1999, while long distance toll revenues increased 65%, from
$60 billion in 1983 to $99 billion in 1999.
The United States Congress passed the 1996 Telecom Act that permitted the local
phone companies, the long-distance companies, and the cable service firms to
compete in each other's market. Its purpose was to move from a regulated
monopoly model of telecommunications to a deregulatory competitive markets
model. The 1996 Telecom Act has provided the telecommunications industry with
new capabilities resulting in an industry that is more competitive than ever
before.
Many competitors have entered the long-distance services market since AT&T's
divestiture, resulting in a reduction in AT&T's market share from 90% in 1984 to
41% in 1999. The two largest market entrants, WorldCom and Sprint, have obtained
a 33% combined market share through 1999.
Advancements are expected to continue to combine wireline and wireless services
directed toward voice communication with other activities such as data sharing,
on-screen collaboration, faxing, Internet access, and game playing, among many
other things.
We believe that federal and state regulators will continue to impact the
telecommunications industry in 2001. Consummation of mergers between
long-distance companies, local access services companies, and cable television
companies have occurred which blur the distinction between product lines and
competitors. Synergies developed through mergers and acquisitions and obtaining
end-to-end connectivity with customers is expected to drive long-run
profitability and success in penetrating new markets. A number of mergers
received final regulatory approval in 2000 and early 2001. The FCC approved the
Qwest-US West merger in March 2000; the Bell Atlantic-GTE merger in June 2000;
and the AT&T-MEDIAONE merger in June 2000. Finally, the AOL-Time Warner merger
received FCC approval in January 2001.
Profitability has not occurred as quickly as planned, however, leading to AT&T
and WorldCom's announced reorganizations. AT&T announced in 2000 that it intends
to split into four, separately traded companies -- consumer, business, broadband
and wireless -- in an effort to compete more effectively and combat a declining
stock price. WorldCom, also struggling with a declining stock price, announced
in November 2000 that it intends to create two separately traded tracking
stocks: WorldCom which will reflect the performance of its core data, Internet,
hosting and international businesses, and MCI, which will reflect the
performance of its consumer, small business, wholesale long-distance voice and
dial-up Internet access operations. WorldCom reports that it expects to complete
the transaction during the first half of 2001.
Industry analysts believe companies will be successful in the long-term if they
can minimize regulatory battles and offer a full suite of integrated services to
their customers, using a network that is largely under their control.
Growth in data is expected to continue to be a key component of industry revenue
growth. We believe that the data telecommunications business will eventually
rival and perhaps become larger than the traditional voice telephony market.
ISPs have become major customers and many long-distance companies have acquired
ISPs and web-hosting companies.
17
Strategies deploying telephone services by cable operators remains varied.
Currently circuit-switched cable telephony is commercially deployed, and trials
continue for cable-delivered IP telephony. Major cable system operators continue
to evaluate and deploy circuit-switched cable telephony. Others are offering
cable telephony on a limited basis, waiting instead for IP technology to become
widely available before accelerating rollout of telephone services to customers.
Several major system operators are testing IP telephony, while others are
planning such trials. Industry analysts believe that technical obstacles must be
overcome before IP telephony can be commercially deployed.
General
We supply a full range of common carrier long-distance and other
telecommunication products and services. We operate a modern, competitive
telecommunications network employing the latest digital transmission technology
based upon fiber optic and digital microwave facilities within and between
Anchorage, Fairbanks and Juneau, including a self-constructed and financed
digital fiber optic cable and additional owned capacity on another undersea
fiber optic cable, both linking Alaska to the networks of other carriers in the
lower 49 states, and the use of satellite transmission to remote areas of Alaska
(and for certain interstate traffic as well). Virtually all switched services
are computer controlled, digitally switched, and interconnected by a packet
switched SS7 signaling network.
We provide interstate and intrastate long-distance services throughout Alaska
using our own facilities or facilities leased from other carriers. We also
provide (or join in providing with other carriers) telecommunication services to
and from Alaska, Hawaii, the lower 48 states, and many foreign nations and
territories.
We offer cellular services by reselling other cellular providers' services. We
offer wireless local access services over our own facilities, and have purchased
PCS and LMDS wireless broadband licenses in FCC auctions covering markets in
Alaska.
Products
Our long-distance services industry segment is engaged in the transmission of
interstate and intrastate-switched MTS and private line and private network
communication service between the major communities in Alaska, and the remaining
United States and foreign countries. Our message toll services include
intrastate, interstate and international direct dial, toll-free 800, 888, 877
and 866 services, 900 services, GCI calling card, debit card, operator and
enhanced conference calling, frame relay, SDN, ISDN technology based services,
as well as termination of northbound toll service for WorldCom, Sprint and
several large resellers who do not have facilities of their own in Alaska. We
also provide origination of southbound calling card and toll-free 800, 888, 877
and 866 toll services for WorldCom and Sprint. Regulated telephone relay
services for the deaf, hard-of-hearing and speech impaired are provided through
our operator service center in Wasilla, Alaska. We offer our message services to
commercial, residential, and government subscribers. Subscribers may generally
cancel service at any time. Toll, private line and related services account for
approximately 60.4%, 57.0% and 65.5% of our 2000, 1999 and 1998 revenues,
respectively. Private line and private network services utilize voice and data
transmission circuits, dedicated to particular subscribers, which link a device
in one location to another in a different location.
We have positioned ourselves as a price and customer service leader in the
Alaska telecommunication market. Rates charged for our long-distance services
are designed to be equal to or below those for comparable services provided by
our competitors.
In addition to providing communication services, we also design, sell, service
and operate, on behalf of certain customers, dedicated communication and
computer networking equipment and provide field/depot, third party, technical
support, telecommunications consulting and outsourcing services through our
Network Solutions business. We also supply integrated voice and data
communication systems incorporating interstate and intrastate
18
digital private lines, point-to-point and multipoint private network and small
earth station services. Our Network Solutions sales and services revenue totaled
$11.1, $11.3 and $12.1 million in the years ended December 31, 2000, 1999 and
1998, respectively, or approximately 3.8%, 4.0% and 4.9% of total revenues,
respectively. Presently, there are 18 competing companies in Alaska that
actively sell and maintain data and voice communication systems. Twelve are
located in Anchorage, four in Fairbanks and two in Juneau.
Our ability to integrate telecommunications networks and data communication
equipment has allowed us to maintain our market position on the basis of "value
added" support services rather than price competition. These services are
blended with other transport products into unique customer solutions, including
managed services and outsourcing.
Facilities
Our telecommunication facilities include a fiber optic cable connecting
Anchorage, Whittier, Valdez, Fairbanks and Juneau, Alaska and Seattle,
Washington, which was placed into service in February 1999. We also own a
portion of an additional undersea fiber optic cable. The fiber optic cables
allow us to carry our Anchorage, Eagle River, Wasilla, Palmer, Kenai Peninsula,
Valdez, Whittier, Delta Junction, Prudhoe Bay, Glenallen, Fairbanks, and Juneau,
Alaska traffic to and from the contiguous lower 48 states over terrestrial
circuits, eliminating the one-quarter second delay associated with satellite
circuits. We utilize capacity on another fiber optic cable to transport our
traffic from Valdez to Fairbanks, Alaska.
Other facilities include major earth stations at Eagle River, Fairbanks, Juneau,
Prudhoe Bay, Kodiak, Sitka, Ketchikan, Dutch Harbor, Barrow, Bethel, Nome,
Dillingham, Kotzebue, King Salmon, Adak, and Cordova, all in Alaska, and at
Issaquah, Washington, serving the communities in their vicinity. The Eagle River
and Fairbanks earth stations are linked by digital microwave facilities to
distribution centers in Anchorage and Fairbanks, respectively. We completed
construction of a fiber optic cable system from the Anchorage distribution
center to the Eagle River central office in second quarter of 2000. The Issaquah
earth station is connected with the Seattle distribution center by means of
diversely routed fiber optic cable transmission systems, each having the
capability to restore the other in the event of failure. The Juneau earth
station and distribution centers are collocated. We also have digital microwave
facilities serving the Kenai Peninsula communities.
We use our DAMA facilities to serve 56 additional locations throughout Alaska.
The digital DAMA system allows calls to be made between remote villages using
only one satellite hop thereby reducing satellite delay and capacity
requirements while improving quality. We obtained the necessary RCA and FCC
approvals waiving current prohibitions against construction of competitive
facilities in rural Alaska, allowing for deployment of DAMA technology in 56
sites in rural Alaska on a demonstration basis. In addition, over 80 VSAT
facilities provide dedicated Internet access to rural public schools throughout
Alaska.
Our Anchorage, Fairbanks, and Juneau distribution centers contain electronic
switches to route calls to and from local exchange companies and, in Seattle, to
obtain access to WorldCom, Sprint and other facilities to distribute our
southbound traffic to the remaining 49 states and international destinations. In
Anchorage, a Lucent digital host switch is connected with fiber to seven remote
facilities that are co-located in the ILEC's switching centers, to provide both
local and long distance service. An extensive metropolitan area fiber network in
Anchorage supports cable television, Internet and telephony services. The
Anchorage, Fairbanks, and Juneau facilities also include digital access
cross-connect systems, frame relay data switches, Internet platforms, and in
Anchorage, a co-location facility for interconnecting and hosting equipment for
other carriers. We also maintain an operator service center in Wasilla, Alaska.
We completed construction and placed into service in February 1999 a fiber optic
cable connecting Anchorage, Whittier, Valdez, Fairbanks and Juneau, Alaska and
Seattle Washington. We also own a portion of an additional undersea fiber optic
cable. The fiber optic cables allow us to carry our Anchorage, Eagle River,
Wasilla, Palmer, Kenai Peninsula, Valdez, Whittier, Delta Junction, Prudhoe Bay,
Glenallen, Fairbanks, and Juneau area traffic to
19
and from the lower 48 states over terrestrial circuits, eliminating the
one-quarter second delay associated with satellite circuits. Our preferred
routing for this traffic is via undersea fiber optic cable, which makes
available satellite capacity to carry our rural interstate and intrastate
traffic.
We employ satellite transmission for rural intrastate traffic and certain other
major routes. We acquired satellite transponders on PanAmSat Corporation
("PanAmSat") Galaxy XR satellite in March 2000 to meet our long-term satellite
capacity requirements.
We employ advanced digital transmission technologies to carry as many voice
circuits as possible through a satellite transponder without sacrificing voice
quality. Other technologies such as terrestrial microwave systems, metallic
cable, and fiber optics tend to be favored more for point-to-point applications
where the volume of traffic is substantial. With a sparse population spread over
a wide geographic area, neither terrestrial microwave nor fiber optic
transmission technology is considered to be economically feasible in rural
Alaska in the foreseeable future.
Customers
We had approximately 88,600, 90,800 and 82,000 active Alaska subscribers to our
message telephone service at December 31, 2000, 1999 and 1998, respectively.
Approximately 12,200, 12,500 and 12,100 of these were business and government
users at December 31, 2000, 1999 and 1998, respectively, and the remainder were
residential customers. Reductions in our residential, business and government
customer counts were primarily attributed to new competitive pressures in
Anchorage and other markets we serve. MTS revenues (excluding operator services
and private line revenues) averaged approximately $11.8 million per month during
2000.
Equal access conversions have been completed in all communities served with
owned facilities. We estimate that we carry over 45% of business and over 45% of
residential traffic as a statewide average for both originating interstate and
intrastate MTS traffic.
A summary of our switched MTS traffic (in minutes) follows:
Interstate Minutes
---------------------------------------
Combined
Interstate
Inter- and Inter- Intra-
South- North- Calling national national State Total
For Quarter ended bound (1) bound Card Minutes Minutes Minutes Minutes
- ----------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
March 31, 1998 86,899 64,116 4,810 1,889 157,714 33,082 190,796
June 30, 1998 93,817 67,296 4,353 1,910 167,376 34,890 202,266
September 30, 1998 103,423 61,690 4,227 1,940 171,280 35,748 207,028
December 31, 1998 90,792 61,514 4,197 1,706 158,209 33,598 191,807
-----------------------------------------------------------------------------------------
Total 1998 374,931 254,616 17,587 7,445 654,579 137,318 791,897
=========================================================================================
March 31, 1999 94,623 57,039 3,694 1,578 156,934 34,950 191,884
June 30, 1999 128,623 52,954 3,383 1,649 186,609 37,241 223,850
September 30, 1999 146,473 56,577 3,273 1,680 208,003 38,078 246,081
December 31, 1999 137,077 64,823 3,204 1,609 206,713 36,055 242,768
-----------------------------------------------------------------------------------------
Total 1999 506,796 231,393 13,554 6,516 758,259 146,324 904,583
=========================================================================================
20
Interstate Minutes
---------------------------------------
Combined
Interstate
Inter- and Inter- Intra-
South- North- Calling national national State Total
For Quarter ended bound (1) bound Card Minutes Minutes Minutes Minutes
- ----------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
March 31, 2000 143,659 69,678 2,847 1,577 217,761 37,414 255,175
June 30, 2000 149,095 67,754 2,616 1,610 221,075 38,546 259,621
September 30, 2000 157,993 73,802 2,493 1,698 235,986 39,329 275,315
December 31, 2000 129,091 76,202 2,467 1,429 209,189 35,729 244,918
-----------------------------------------------------------------------------------------
Total 2000 579,838 287,436 10,423 6,314 884,011 151,018 1,035,029
=========================================================================================
----------------------------
1 The 1999 and 2000 Interstate Southbound minutes include traffic carried
from Washington to Oregon by the Company on behalf of an OCC customer.
All minutes data were taken from our internal billing statistics reports.
We entered into a significant business relationship with MCI (now WorldCom) in
1993 that included the following agreements, among others.
- - We agreed to terminate all Alaska-bound MCI long-distance traffic and MCI
agreed to terminate all of our long-distance traffic terminating in the
lower 49 states excluding Washington, Oregon and Hawaii.
- - The parties agreed to share some communications network resources and
various marketing, engineering and operating resources. We also carry MCI's
800, 888, 877 and 866 traffic originating in Alaska and terminating in the
lower 49 states and handle traffic for MCI's calling card customers when
they are in Alaska.
Concurrently with these agreements, MCI purchased approximately 31% (18% as of
December 31, 2000) of GCI's Common Stock and presently controls nominations to
two seats on the Board. In conjunction with the acquisition of certain cable
television companies in 1996, MCI purchased an additional two million shares at
a premium to the then current market price for $13 million or $6.50 per share.
Revenues attributed to WorldCom in 2000 and 1999, and MCI in 1998 totaled $53.1
million, $43.7 million and $39.5 million, or 18.1%, 15.6% and 16.0% of total
revenues, respectively. The contract was amended in March 2001 extending its
term five years to March 2006. The amendment reduces the rate to be charged by
us for certain WorldCom traffic over the extended term of the contract.
In 1993 we entered into a long-term agreement with Sprint, pursuant to which we
agreed to terminate all Alaska-bound Sprint long-distance traffic and Sprint
agreed to handle substantially all of our international traffic. Services
provided pursuant to the contract with Sprint resulted in revenues in 2000, 1999
and 1998 of approximately $25.4 million, $23.1 million and $28.7 million, or
approximately 8.7%, 8.3% and 11.6% of total revenues, respectively. The contract
was amended in March 2001 extending its term two years to March 2004. The
amendment reduces the rate to be charged by us for certain Sprint traffic over
the extended term of the contract.
With the contracts and amendment described above, we are assured that WorldCom
and Sprint, our two largest customers, will continue to make use of our services
during the extended term. WorldCom was a major customer of our long-distance
services industry segment through 2000; Sprint met the threshold for
classification as a major customer through 1998. Loss of one or both of these
customers would have a significant detrimental effect on our revenues and
contribution. There are no other individual customers, the loss of which would
have a material impact on our revenues or gross profit.
21
Other common carrier traffic routed to us for termination in Alaska is largely
dependent on traffic routed to our carrier customers by their customers. Pricing
pressures, new program offerings and market consolidation continue to evolve in
the markets served by our carrier customers. If, as a result, their traffic is
reduced, or if their competitors' costs to terminate or originate traffic in
Alaska are reduced, our traffic will also likely be reduced, and we may have to
reduce our pricing to respond to competitive pressures. We are unable to predict
the effect of such changes on our business, however given the materiality of
other common 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.
We provided private line and private network communication products and
services, including SchoolAccess(TM) private line facilities, to approximately
2,040 commercial and government accounts in 2000. These products and services
generated approximately 9.9%, 7.9% and 7.9% of total revenues during the years
ended December 31, 2000, 1999 and 1998, respectively.
Although we have several agreements to facilitate the origination and
termination of international toll traffic, we have neither foreign operations
nor export sales (see Part I, Item 1. Business, Foreign and Domestic Operations
and Export Sales).
Competition
The long-distance industry is intensely competitive, rapidly evolving and
subject to constant technological change. Competition is based upon price and
pricing plans, the types of services offered, customer service, billing
services, performance, perceived quality, reliability and availability. Certain
of our competitors are substantially larger than us and have greater financial,
technical and marketing resources than we have. Although we believe we have the
human and technical resources to pursue our strategy and compete effectively in
this competitive environment, our success will depend upon our ability to
profitably provide high quality, high value services at prices generally
competitive with, or lower than, those charged by our competitors.
In the long-distance market, we compete against AT&T Alascom, ACS, the Matanuska
Telephone Association, certain smaller rural LEC affiliates, and may in the
future compete against new market entrants. AT&T Alascom, our principal
competitor in long-distance services, has substantially greater resources and
access to capital than we have. This competitor's interstate rates are
integrated with those of AT&T Corp. and are regulated in part by the FCC. While
we initially competed based upon offering substantial discounts, those discounts
have been eroded in recent years due to lowering of prices by AT&T Alascom and
entry of other competitors into the long-distance markets we serve.
Under the terms of AT&T's acquisition of Alascom, AT&T Alascom rates and
services must mirror those offered by AT&T, so changes in AT&T prices indirectly
affect our rates and services. AT&T's and AT&T Alascom's interstate prices are
regulated under a price cap plan whereby their rate of return is not regulated
or restricted. Price increases by AT&T and AT&T Alascom generally improve our
ability to raise prices while price decreases pressure us to follow. We believe
we have, so far, successfully adjusted our pricing and marketing strategies to
respond to AT&T and other competitors' pricing practices. However, if
competitors significantly lower their rates, we may be forced to reduce our
rates, which could have a material adverse effect on us.
As allowed under the 1996 Telecom Act, ATU (now ACS) and other LECs entered the
interstate and international long-distance market, and pursuant to RCA
authorization, entered the intrastate long-distance market. ACS and other LECs
generally resell other carriers' services in the provision of their interstate
and intrastate long-distance services
Another carrier completed construction of fiber optic facilities connecting
points in Alaska to the lower 48 states in 1999. The additional fiber system
provides direct competition to services we provide on our owned fiber optic
22
facilities. We believe we are successfully competing with products and services
offered by the other carrier. The fiber system also provides an alternative
routing path for us in case of a major fiber outage in our systems.
In the wireless communications services market, we expect our PCS business to
compete against the cellular subsidiaries of AT&T and ACS and resellers of those
services in Anchorage and other markets. The wireless communications industry
continues to experience significant consolidation. AT&T has acquired wireless
companies and negotiated roaming arrangements that give it a national presence.
Mergers and joint ventures in the industry have created large, well-capitalized
competitors with substantial financial, technical, marketing and other
resources. These competitors may be able to offer nationwide services and plans
more quickly and more economically than we can, and obtain roaming rates that
are more favorable than those that we obtain. We currently resell AT&T analog
and digital cellular services and provide wireless local access services on our
own facilities.
Our long-distance services sales efforts are primarily directed toward
increasing the number of subscribers we serve, selling bundled services, and
generating incremental revenues through product and feature up-sale
opportunities. We sell our long-distance communications services through
telemarketing, direct mail advertising, door-to-door selling, up-selling by our
customer contact personnel, and local media advertising.
Cable Services
Industry
The programmed video services industry includes traditional broadcast
television, cable television, wireless cable, and DBS systems. Technology
convergence may also soon allow programmed video via the Internet but reluctance
to change the current delivery structure will likely limit the availability of
programming in the near term. Cable television providers have added
non-broadcast programming, utilized improved technology to increase channel
capacity and expanded service markets to include more densely populated areas
and those communities in which off-air reception is not problematic. Broadcast
television stations including network affiliates and independent stations
generally serve the urban centers. One or more local television stations may
serve smaller communities. Rural communities may not receive local broadcasting
or have cable systems but may receive direct broadcast programming via a
satellite dish.
In Alaska, cable television was introduced in the 1970s to provide television
signals to communities with few or no available off-air television signals and
to communities with poor reception or other reception difficulties caused by
terrain interference. Since that time, as on the national level, the cable
television providers in Alaska have added non-broadcast programming.
Advancements in technology, facility upgrades and network expansions to enable
migration to digital programming are expected to have a significant impact on
cable services in the future. We expect that changing federal, state and local
regulations, intense competition, and uncertain technologies and standards will
continue to challenge the industry.
Acquisitions, mergers and divestitures are shaping the cable industry in a
technological convergence similar to what is happening in the telecommunications
industry. The FCC reports that the ten largest operators now serve close to 90
percent of all U.S. cable subscribers. AT&T completed its $48 billion takeover
of cable television provider Tele-Communications Inc. in February 1999, gaining
the last mile connection to homeowners with fiber and coaxial cable over which
it is expected to sell online access and Internet phone service. AT&T is
reportedly considering exchanging certain of its cable systems with Comcast and
Cox Communications in exchange for their stakes in Excite@ Home. AT&T must
satisfy certain FCC ownership limitations and may be required to divest of
additional cable systems in the future. See Part I, Item I, Business,
Regulation, Franchise Authorizations and Tariffs - Cable Service for more
information.
23
Analysts estimate that 2000 year-end total cable industry revenue reached $41.7
billion, an estimated 13.6 percent increase over 1999, and that revenue per
subscriber per year reached approximately $616.56, or $51.38 per subscriber per
month. The FCC has reported that multiple service operators charged 5.8% more
for basic and cable service tiers during the 12-month period ending July 1,
2000. The rate increases were equal among competitive and noncompetitive
operators, the FCC noted. Increased programming costs, especially higher sports
rights fees, and system upgrades and equipment cost increases reportedly
accounted for higher cable rates. Rates stayed unchanged on a cost-per-channel
basis, and the cost of basic service rose 2.3%.
Industry analysts believe cable broadband connections will grow from an
estimated 3.5 million at the end of 2000 to 14.7 million at the end of 2005.
During that same period, DSL connections are expected to increase from 1.5
million to 10.5 million.
The FCC reported that the number of cable subscribers continued to grow,
reaching 67.7 million as of June 2000, up about 1.5 percent from the 66.7
million cable subscribers in June 1999. The total number of non-cable
multichannel video programming distributors ("MVPDs") subscribers grew from 14.2
million as of June 1999 to 16.7 million as of June 2000, an increase of 17.6%.
The growth of non-cable MVPD subscribers continues to be primarily attributable
to the growth of DBS that appears to attract former cable subscribers and
consumers not previously subscribing to an MVPD. Between June 1999 and June
2000, the number of DBS subscribers was reported to have grown from 10.1 million
households to almost 13 million households, which is nearly three times the
cable subscriber growth rate. DBS subscribers are reported to represent 15.4
percent of all MVPD subscribers. DBS operators increased their subscriptions in
Alaska to approximately 6% of homes, according to Skytrend reports.
Consumers historically reported that their inability to receive local signals
from DBS operators negatively affected their decision as to whether to subscribe
to DBS. Increased DBS subscribership in 2000 has been attributed, at least in
part, to the authority granted to DBS providers to distribute local broadcast
television stations in their local markets by the Satellite Home Viewer
Improvement Act of 1999 ("SHVIA") enacted on November 29, 1999. Under SHVIA, DBS
operators can offer a programming package more comparable to and competitive
with the services offered by cable operators. Moreover, in the last year, as
required by SHVIA, the FCC has adopted rules for satellite companies with regard
to mandatory carriage of broadcast signals, retransmission consent, and program
exclusivity that closely parallel the requirements for cable service. See Part
I, Item 1. Business, Regulation, Franchise Authorizations and Tariffs - Cable
Services for more information.
The most significant convergence of service offerings continues to be the
pairing of Internet service with other service offerings. There is evidence that
a wide variety of companies throughout the communications industries are
attempting to become providers of multiple services, including data access.
Cable operators continue to expand the broadband infrastructure that permits
them to offer high-speed cable modem Internet access.
Currently, the most popular way to access the Internet over cable is through the
use of a cable modem and personal computer. Virtually all the major multiple
service operators offer Internet access via cable modems in portions of their
nationwide service areas. A small portion of cable Internet access is delivered
through a television receiver rather than a personal computer. Many cable
operators also are planning to integrate telephony and high-speed data access.
Like cable, the DBS industry is developing ways to bring advanced services to
their customers. We are currently offering high-speed cable modem access in
Anchorage, Juneau, Fairbanks, North Pole, Eielson Air Force Base, Fort
Wainwright, Fort Richardson and Valdez.
We expect basic cable to be impacted by two forces: possible reimposition of
rate regulations, and additional competition from wireless cable providers.
After averaging 3.4% growth for the last five years, industry analysts project
that cable subscriber growth in 2001 may slow to 1.3% or 69.3 million homes.
Industry analysts predict that cable providers may see a 3% hike in ad revenues
from 2000 to 2001, to $6.9 billion.
24
Industry analysts project that the number of digital video subscribers may grow
more than 200% over the next four years as cable network upgrade efforts are
completed and the cost of digital set-top technology decreases. Margins related
to digital programming are expected to climb due to the ability to reuse
programming at low or no incremental cost.
Analysts believe data services will be an additional opportunity for cable
providers in the next three to five years and that cable will be the most widely
available, most cost efficient way to access the Internet at very high speeds
and with high video quality. The incremental opportunity for cable from data may
rival that of digital video according to industry analysts. Additional
opportunities are expected in voice over cable applications that will allow
cable providers to offer local telephone service to cable subscribers.
With digital transmissions and compression, cable operators are better able to
offer a variety and quality of channels to rival DBS, with pay-per-view choices
that can approximate video-on-demand ("VOD"). We recently installed a commercial
version of VOD for the Anchorage hotel market and are evaluating the feasibility
of eventually deploying this technology in the residential market. With VOD
service, customers can access a wide selection of movies and other programming
at any time, with digital picture quality. VOD allows customers full VCR
functionality, including the ability to pause, rewind and fast-forward programs.
They can also stop a program and resume watching it several hours later during
the rental period.
The market for programmed video services in Alaska includes traditional
broadcast television, cable television, wireless cable, and DBS systems.
Broadcast television stations including network affiliates and independent
stations serve the urban centers in Alaska. Seven, four and two broadcast
stations serve Anchorage, Fairbanks and Juneau, respectively. In addition,
several smaller communities such as Bethel are served by one local television
station that is typically a PBS affiliate. Other rural communities without cable
systems receive a single state sponsored channel of television by a satellite
dish and a low power transmitter.
General
We are the largest operator of cable systems in Alaska, serving approximately
120,400 residential, commercial and government users. Our cable television
systems serve 31 communities and areas in Alaska, including the state's three
largest urban areas, Anchorage, Fairbanks, and Juneau. Our statewide cable
systems consist of approximately 1851 miles of installed cable plant having 330
to 550 MHz of channel capacity.
We completed system upgrades in 1998, 1999 and 2000, deploying more than 200
miles of fiber optic cable in Anchorage and increased the carrying capacity of
900 miles of cable television plant from 450 MHz to 550 MHz. In 2000 we
completed a $900,000 upgrade in Fairbanks to 450 MHz. The result of these
upgrades is an increase in channel capacity and system reliability, facilitating
the delivery of additional video programming and new services such as enhanced
video, high-speed Internet access and telephony, and the capability to support
two-way applications such as cable modems and digital cable. We began deploying
our digital cable service in Anchorage in 1998. Digital compression has enabled
us to increase the channel capacity of our Anchorage cable communications
systems to more than 170 channels, provide digital audio channels, as well as
improve picture and sound quality.
Products
Programming services offered to our cable television systems subscribers differ
by system (all information as of December 31, 2000).
Anchorage, Bethel, Kenai and Soldotna systems. Each system offers a basic
service. In addition, Anchorage and Bethel offer a CPS. A NPT is only offered in
the Anchorage cable system. The Anchorage system, which is located in the urban
center for Alaska, is fully addressable, with all optional services scrambled,
aside from the broadcast basic. Kenai, Soldotna, and Bethel had fewer channels,
less service options and less an urban orienta-
25
tion, and use traps for program control. As a result, these smaller systems do
not have access to pay-per-view services. The Anchorage system carries digital
service, offering enhanced picture and audio quality, over 100 channels of
programs, 50 channels of digital music, and over 50 channels of premium and
pay-per-view products. We began providing VOD in the Anchorage market in 2000.
The composition and rates of the levels of service vary between the systems. The
Anchorage cable system offers a basic service that includes 19 channels. The
Anchorage cable system offers a CPS that includes 32 channels at an additional
cost. Subscribers, for an additional cost, receive the six-channel NPT service,
which includes TNT, CNN, Discovery, MSNBC, Outdoor Life and the Sci-Fi Channel.
The Bethel cable system offers a basic service of 11 channels and a CPS tier of
24 channels for an additional cost per month. Basic service for the
Kenai/Soldotna cable system consisted of 37 channels. Pay TV services are
available either individually or as part of a value package. Commercial
subscribers such as hospitals, hotels and motels are charged negotiated monthly
service fees. Apartment and other multi-unit dwelling complexes receive basic
services at a negotiated bulk rate.
Fairbanks, Juneau, Ketchikan and Sitka systems. The programming services we
currently offer to subscribers are structured so that each cable system offers a
basic service and a CPS. Each of the cable systems has different basic service
packages at different rates. Fairbanks, the second largest city in Alaska, has a
fully addressable system and offers a 13-channel basic, a 34-channel CPS tier.
Two channels of pay-per-view are available to basic and CPS subscribers.
Fairbanks, North Pole, Fort Wainwright, and Eielson Air Force Base are all
served by the Fairbanks headend and have the same lineup, including digital
service beginning in 2000. Such service includes digital special interest (13
channels), digital music (45 channels), digital premium service (16 channels),
and digital Pay Per View (16 channels). Fort Greely, a remote military post, is
a stand-alone system, which is fully addressable. Fort Greely has 8 basic
channels, a 21 channel CPS tier, and 1 pay-per-view channel available to all
subscribers. The reverse path in the Fairbanks market was activated during the
third quarter of 1999 and we now offer cable modem Internet access.
The Juneau cable system offers an 18-channel basic service package and a CPS
that includes basic service plus an additional 43 channels. The system also
offers an additional 31 channels of digital music and a set-top box with
navigator features. Juneau is currently rolling out digital set-tops in order to
take advantage of digital compression and add premium multiplexes to enhance the
service offering. The Ketchikan system offers a 12 channel basic service and a
preferred level of service that offers an additional 38 channels. The Sitka
system offers a 12 channel basic service. Preferred service includes basic
service plus 36 additional channels. We plan to deploy advanced analog
technology in Sitka in 2001 to further enhance the service offering and offer
advanced navigational features. The Ketchikan, Petersburg and Sitka systems all
launched a digital music service called DMX. This service offers 30 channels of
commercial free music and is offered for $7.95 per month.
The Juneau system was upgraded in 1998. We expect to upgrade the Ketchikan
system in 2002. The Juneau upgrade consisted of extending the bandwidth to
550MHz, activating the reverse and introducing advanced analog set top boxes.
The new set top boxes allow Juneau subscribers to access impulse pay per view
including highly secured 24 hour adult products, 30 channels of CD quality music
and a new on-screen navigator. The next phase, which began in December 2000,
introduces compatible digital technology in Juneau and migrates existing
advanced analog technology into smaller markets of Southeast Alaska.
The Juneau system launched high-speed Internet access in May 1999 via cable
modems. The system ended 2000 with 2,300 high-speed cable modems in service.
Kodiak, Valdez, Cordova, Petersburg, Wrangell, Kotzebue and Nome systems. These
systems offer up to 30 channels of the most popular basic cable channels, as
well as the major broadcast networks, packaged into two or three levels of
service. In Nome, Kotzebue, Kodiak and Cordova, basic service consists of ten or
eleven channels, one of which is a PBS channel. PBS service is also included
with the 8 channels of basic service in Valdez and 11 each in Wrangell and
Petersburg. In addition, Wrangell and Petersburg have matching line-ups with 37
26
additional channels in the preferred level of service, and an additional 5
channels of premium service. Nome and Kotzebue offer a 33 channel CPS and 5
channels of premium service. In addition to basic service, Cordova offers a 20
channel CPS, 10 Channel NPT with 3 premium channels available.
We completed system upgrades in Kodiak and Valdez in 1998. In Kodiak, 6 channels
were added to basic service. The CPS tier added 8 new channels including Disney,
which was formally a premium service. The NPT tier was reduced to 11 channels
with 2 new networks. Premium services were repackaged for better value. The
total available channels are now 47. Valdez added 5 channels to basic service
and expanded the CPS tier with 6 channels including Disney. Although remaining
at 9 channels, 5 new services were added to the NPT tier as traditional services
were migrated into the other tiers. Nome and Kotzebue system upgrades were
completed in March 1999. The upgrade allowed the launch of additional
programming and the shift of Disney from premium to tier service.
Seward system. We upgraded the Seward cable system in 1997. Total channels were
increased to 49, packaged in two levels of service. Basic service was expanded
from 3 to 9 channels. CPS had 30 channels (including basic service) and was
expanded to 40. All of the channels, with the exception of local origination
programming and a single translator channel licensed to the City of Seward, were
received via satellite. In addition there were five channels of premium pay
services. The system is fully addressable and recently launched two channels of
pay per view. The system provides 18 channels to 300 outlets in a State of
Alaska correction facility through a separate headend.
Homer system. We upgraded the Homer cable system in 1997. Total channels were
increased to 50, packaged into two levels of service. Basic service was expanded
from 8 channels to 12. CPS had 36 channels (including basic service channels)
and was expanded to 46 channels. All of the channels, with the exception of four
local translator channels and local origination programming, are received via
satellite. In addition, five channels of premium pay services are offered. The
system is fully addressable and recently launched two channels of pay per view.
Facilities
Our cable television businesses are located in Anchorage, Bethel, Chugiak,
Cordova, Douglas, Eagle River, Eielson AFB, Elmendorf AFB, Fairbanks, Fort
Greely, Fort Richardson, Fort Wainwright, Homer, Juneau, Kachemak, Kenai,
Ketchikan, Kodiak, Kodiak Coast Guard Air Station, Kotzebue, Mount Edgecombe,
Nome, North Pole, Petersburg, Peters Creek, Saxman, Seward, Sitka, Soldotna,
Ward Cove, and Wrangell Alaska. Our facilities include cable plant and head-end
distribution equipment. Certain of our head-end distribution centers are
co-located with customer service, sales and administrative offices.
Customers
Our cable systems passed approximately 177,000, 174,000 and 171,000 homes at
December 31, 2000, 1999 and 1998, respectively, and served approximately
120,400, 116,700 and 111,900 subscribers at December 31, 2000, 1999 and 1998,
respectively. Revenues derived from cable television services totaled $67.9
million, $61.1 million and $57.6 million in 2000, 1999 and 1998, respectively.
Competition
A number of other cable operators provide cable service in Alaska. All of these
companies are relatively small, with the largest having fewer than 7,500
subscribers. Cable television systems face competition from alternative methods
of receiving and distributing television signals and from other sources of news,
information and entertainment such as off-air television broadcast programming,
newspapers, movie theaters, live sporting events, interactive computer services,
Internet services and home video products, including videotape cassette and
video disks. The extent to which a cable television system is competitive
depends, in part, upon the cable system's ability to provide quality programming
and other services at competitive prices.
27
Our Fairbanks system faces significant competition from alternative service
providers. The 2000 upgrade to our Fairbanks facilities, expanded product
offerings and increased marketing efforts are expected to increase market
penetration from 47.4% at December 31, 2000 (45.6% at December 31, 1999). Our
average market penetration rate for all systems was 62.2% at December 31, 2000.
The 1996 Telecom Act authorizes LECs and others to provide a wide variety of
video services competitive with services provided by cable systems and to
provide cable services directly to subscribers. Certain LECs in Alaska may seek
to provide video services within their telephone service areas through a variety
of distribution methods. Cable systems could be placed at a competitive
disadvantage if the delivery of video services by LECs becomes widespread since
LECs may not be required, under certain circumstances, to obtain specific
Certificates of Public Convenience to deliver such video services or to comply
with the variety of obligations imposed upon cable systems under such
certificates. Issues of cross-subsidization by LECs of video and telephony
services also pose strategic disadvantages for cable operators seeking to
compete with LECs who provide video services.
Our Cable Systems face limited additional competition from private SMATV systems
that serve condominiums, apartment and office complexes and private residential
developments. The operators of these SMATV systems often enter into exclusive
agreements with building owners or homeowners' associations. Due to the
widespread availability of reasonably priced earth stations, SMATV systems now
can offer both improved reception of local television stations and many of the
same satellite-delivered program services offered by franchised cable systems.
The ability of the Cable Systems to compete for subscribers in residential and
commercial developments served by SMATV operators is uncertain. We continue to
develop and deploy competitive packages of services (video, data and telephony)
to these residential and commercial developments. The 1996 Telecom Act gives
cable operators greater flexibility with respect to pricing of cable television
services provided to subscribers in multi-dwelling unit residential and
commercial developments. It also broadens the definition of SMATV systems not
subject to regulation as a franchised cable television service.
The availability of reasonably-priced direct-to-home earth stations enables
individual households to receive many of the satellite-delivered program
services formerly available only to cable subscribers. Furthermore, the 1992
Cable Act contains provisions, which the FCC has implemented with regulations,
to enhance the ability of cable competitors to purchase and make available to
direct-to-home owners certain satellite-delivered cable programs at competitive
costs.
In recent years, the FCC and the Congress have adopted policies providing a more
favorable operating environment for new and existing technologies that provide,
or have the potential to provide, substantial competition to cable systems.
These technologies include, among others, DBS services that transmit signals by
satellite to receiving facilities located on the premises of subscribers.
Programming is currently available to the owners of DBS facilities through
conventional, medium and high-powered satellites.
DBS systems are using video compression technology to increase the channel
capacity of their systems to provide movies, broadcast stations and other
program services competitive with those of cable systems. The extent to which
DBS systems are competitive with the service provided by cable systems depends,
among other things, on the availability of reception equipment at reasonable
prices and on the ability of DBS operators to provide competitive programming.
DBS services are slowly adding broadcast stations to their product offerings
beginning with the largest broadcast markets eliminating the problem of having
to add a second external off-air antenna. DBS signals are subject to degradation
from atmospheric conditions such as rain and snow. The receipt of DBS signals in
Alaska currently has the disadvantage of requiring subscribers to install larger
satellite dishes (generally three to six feet in diameter) because of the weaker
satellite signals currently available in northern latitudes, particularly in
communities surrounding, and north of, Fairbanks. In addition, existing
satellites have a relatively low altitude above the horizon when viewed from
Alaska, making their signals subject to interference from mountains, buildings
and other structures. A limited service using smaller satellite dishes is made
available by
28
focusing transponder signal strength toward Alaska. This "Alaska" package is
similar to a "Hawaii" package offering but if more than a limited number of
channels are desired an upgrade in dish size is currently required.
Two major companies, DirecTV and Echostar, are currently offering nationwide
high-power DBS services. Echostar has placed certain of its satellites in more
favorable western arc positions that allow them to offer service in the lower
half of Alaska with antennas less than one meter in diameter. Recently enacted
federal legislation establishes, among other things, a permanent compulsory
copyright license that permits satellite carriers to retransmit local broadcast
television signals to subscribers who reside inside the local television
station's market. These companies have already begun transmitting local
broadcast signals in certain major television markets and have announced their
intention to expand this local television broadcast retransmission service to
other domestic markets. With this legislation, satellite carriers become more
competitive to cable communications system operators like us because they are
now able to offer programming which more closely resembles what we offer. We are
unable to predict the effects this legislation and these competitive
developments might have on our business and operations.
Our cable television systems also compete with wireless program distribution
services such as MMDS providers that use low-power microwave frequencies to
transmit video programming over-the-air to subscribers. There are MMDS and
multi-channel UHF operators who are authorized to provide or are providing
broadcast and satellite programming to subscribers in areas served by several of
our cable systems, including Anchorage, Fairbanks and Juneau. Additionally, the
FCC has allocated frequencies in the 28 GHz band for multi-channel wireless
video service similar to MMDS. Wireless operations have the disadvantage of
requiring line-of-sight access, making their signals subject to interference
from mountains, buildings and other structures, and are subject to interference
from rain, snow and wind. ACS owns a controlling interest in a multi-channel UHF
service that currently provides service in some portions of Anchorage and
Fairbanks. MMDS is also offered by Alaska Wireless in Fairbanks and includes a
wireless modem service. WanTV sold the Anchorage MMDS license to Sprint. This
service is no longer accepting new customers. We are unable to predict whether
wireless video services will have a material impact on our operations.
Recently, a number of companies in the lower-49 states, including telephone
companies and ISP's, have asked local, state and federal governments to mandate
that cable communications systems operators provide capacity on their cable
infrastructure so that these companies and others may deliver Internet services
directly to customers over cable facilities. See Part I, Item 1, Business,
Regulation, Franchise Authorizations and Tariffs - Cable Services for more
information.
The deployment of DSL allows Internet access to subscribers at data transmission
speeds equal to or greater than that of modems over conventional telephone
lines. Numerous companies, including telephone companies, have introduced DSL
service and certain telephone companies are seeking to provide high-speed
broadband services, including interactive online services, without regard to
present service boundaries and other regulatory restrictions.
Other new technologies may become competitive with non-entertainment services
that cable television systems can offer. The FCC has authorized television
broadcast stations to transmit textual and graphic information useful both to
consumers and businesses. The FCC also permits commercial and non-commercial FM
stations to use their subcarrier frequencies to provide non-broadcast services
including data transmissions. The FCC established an over-the-air interactive
video and data service that will permit two-way interaction with commercial and
educational programming along with informational and data services. LECs and
other common carriers also provide facilities for the transmission and
distribution to homes and businesses of interactive computer-based services,
including the Internet, as well as data and other non-video services. The FCC
has conducted spectrum auctions for licenses to provide PCS. PCS will enable
license holders, including cable operators, to provide voice and data services.
We own a license to provide PCS services in Alaska.
29
Advances in communications technology as well as changes in the marketplace are
constantly occurring. We cannot predict the effect that ongoing or future
developments might have on the telecommunications and cable television
industries or on us specifically.
Cable television systems generally operate pursuant to franchises granted on a
non-exclusive basis. The 1992 Cable Act gives local franchising authorities
jurisdiction over basic cable service rates and equipment in the absence of
"effective competition," prohibits franchising authorities from unreasonably
denying requests for additional franchises and permits franchising authorities
to operate cable systems. Well-financed businesses from outside the cable
industry (such as the public utilities that own certain of the poles on which
cable is attached) may become competitors for franchises or providers of
competing services.
Our cable services sales efforts are primarily directed toward increasing the
number of subscribers we serve, selling bundled services, and generating
incremental revenues through product and feature up-sale opportunities. We sell
our cable services through telemarketing, direct mail advertising, door-to-door
selling, up-selling by our customer contact personnel, and local media
advertising.
Local Access Services
Industry
Use of the Internet and expansion in the use of LANs and WANs have generated an
increased demand for access lines. In the home, the growing use of computers,
faxes, and the Internet led to increases in access lines and usage. The
emergence of new services, including digital cellular, personal communications
services, interactive TV, and video dial tone, has created opportunities for
growth in local loop services. These new services are fundamentally
restructuring the competitive local loop services market.
Emerging from the new competitive landscape are CLECs who offer Internet access
and data services to medium and large size businesses. They obtain
interconnection agreements with ILECs for DSL-qualified unbundled network
element loops. One loop, so qualified and equipped with appropriate access
devices, enables the delivery of high speed (generally less than 768 kbps but
sometimes faster rates), always-connected Internet access, LAN/WAN
interconnectivity, and private line and private network circuits.
Cable telephony is still not prevalent, as the industry struggles with the
quality of service and the increased delay surrounding deployment of first
generation Voice over Internet Protocol technologies. The cable industry late in
1999 released its first Packet Cable standards that promise to support toll
quality Internet protocol telephony.
Wireless local loop access technologies (other than fixed rate cellular
telephone service), while developing for international applications, have not
yet developed a significant market presence in the United States. AT&T Wireless'
fixed wireless plan, called Project Angel - is being test-marketed in the
Anchorage area. Initially conceived as AT&T's proprietary strategy for bypassing
local phone carriers, industry analysts believe AT&T has reconfigured it to
primarily deliver always-on high-speed Internet access at 512 kbps where the
carrier lacks cable system facilities in markets such as Anchorage. AT&T plans
to offer service in Houston and Los Angeles, and add about 10 additional markets
to the four it already has launched: Dallas, Houston, San Diego and Anchorage.
CLECs reported providing 12.7 million local service lines at June 30, 2000,
approximately 6.7% of the lines in service nationwide, an increase of 53% from
8.3 million lines at the end of 1999. CLECs are reported to provide
approximately one-third of end-user lines over their own loop facilities. CLEC
revenues were reported increasing from $3.5 billion in 1998 to $6.3 billion in
1999. ILECs were reported to have provided 5.7 million resale lines and 3
million unbundled network element loops nationwide at June 30, 2000.
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General
Our local access services division entered the local services market in
Anchorage in 1997, providing services to residential, commercial, and government
users. We can access approximately 93% of Anchorage area local loops from our
collocated remote facilities and DLC installations.
Products
Our collocated remote facilities access the ILEC's unbundled network element
loops and its DLC systems, allowing us to offer full featured, switched-based
local service products to both residential and commercial customers. In areas
where we do not have access to Anchorage ILEC loop facilities, we offer service
using our fixed wireless facilities or total service resale of the ILEC's local
service.
Our package offerings are competitively priced and include popular features,
such as the following.
- Enhanced call waiting - Caller ID
- Caller ID on call waiting - Free caller ID box
- Anonymous call rejection - Call forwarding
- Call forward busy - Call forward no answer
- Enhanced call waiting - Fixed call forwarding
- Follow me call - Intercom service forwarding
- Multi-distinctive ring - Per line blocking
- Selective call forwarding - Selective call acceptance
- Selective call rejection - Selective distinctive alert
- Speed calling - Three way calling
- Voice mail - Inside wire repair plan
- Non-listed number - Non-published number
Facilities
We utilize a Lucent host switching system (5ESS), have collocated six remote
facilities beside or within the ILEC's local switching offices to access
unbundled loop network elements, and have installed a DLC system beside a
smaller, seventh ILEC wire center. Remote and DLC facilities are interconnected
to the host switch via our diversely routed fiber optic links. Our expanded
capacity at each of the remote facilities allows us access to approximately
79,000 Anchorage loops. Additionally, we provided our own facilities-based
services to over 100 of Anchorage's larger business customers through further
expansion and deployment of SONET fiber transmission facilities, leased and HDSL
T-1 facilities, and DLC facilities.
Customers
We had approximately 62,100, 45,100 and 28,300 active lines in service from
Anchorage subscribers to our local access services at December 31, 2000, 1999
and 1998, respectively. The 2000 line count consists of approximately 30,800
residential access lines and 31,300 business access lines, including 6,100
Internet service provider access lines. We ended 2000 with market share gains in
all market segments, in particular in the business segment in which access lines
increased 8% and ISP lines increased 27% as compared to December 31, 1999.
Without an active media presence, we were able to gain residential market share,
growing that market segment 28% as compared to 1999. We estimate that our
overall local access services market share exceeds 31%, in excess of the
national average penetration of approximately 7% as reported by the FCC.
Revenues derived from local access services in 2000, 1999 and 1998 totaled $20.2
million, $15.5 million and $9.9 million, respectively, representing
approximately 6.9%, 5.6% and 4.0% of our total revenues in 2000, 1999 and 1998,
respectively. Approximately 800 additional lines were sold and awaiting
connection at December 31, 2000.
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Competition
We believe that the 1996 Telecom Act, judicial decisions, and state legislative
and regulatory developments will increase the likelihood that barriers to local
exchange competition will continue to be reduced or removed. These initiatives
include requirements that LECs negotiate with companies such as us to provide
interconnection to the existing local telephone network, to allow the purchase,
at cost-based rates, of access to unbundled network elements, to establish
dialing parity, to obtain access to rights-of-way and to resell services offered
by the ILECs.
The 1996 Telecom Act also provides ILECs with new competitive opportunities. We
believe that we have certain advantages over these companies in providing
telecommunications services, including awareness by Alaskan customers of the GCI
brand-name, our facilities-based telecommunications network, and our prior
experience in, and knowledge of, the Alaskan market. The 1996 Telecom Act
provides that rates charged by ILECs for interconnection to the incumbent
carrier's network are to be nondiscriminatory and based upon the cost of
providing such interconnection, and may include a "reasonable profit," which
terms are subject to interpretation by regulatory authorities. If ILECs charge
us unreasonably high fees for interconnection to their networks, or
significantly lower their retail rates for local exchange services, our local
service business could be placed at a significant competitive disadvantage.
In the local exchange market we currently compete with an ACS subsidiary in
Anchorage. We also compete against AT&T in the Anchorage service area. AT&T
offers local exchange service only to residential customers through total
service resale and AT&T Wireless' fixed wireless local loop services. We
received approval from the RCA in July 1999 to provide local exchange services
in ACS's existing service areas in Fairbanks, Juneau, Ft Wainwright, and Eielson
AFB. We completed arbitration to define the terms of interconnection with ACS
for entry to these markets and interconnection agreements with ACS were approved
in October 2000. In mid 2001 we anticipate we will be competing with ACS
subsidiaries in Fairbanks, Fort Wainwright and Eielson Air Force Base (military
bases near Fairbanks), North Pole, and in Juneau in late 2001 or early 2002. You
should see Part I, Item 1. Business, Regulation, Franchise Authorizations and
Tariffs - Telecommunications Operations for more information.
We expect further competitors in the Anchorage, Fairbanks and Juneau
marketplaces, as AFS has negotiated interconnection agreements with ACS and AFS
and DSLnet have received certification for various markets. The Company expects
competition from these latter entrants in the business customer telephony
access, Internet access, DSL and private line markets. We believe our
long-standing presence in Alaska and the strength of our brand (as well as
ACS's) will make competitive entry difficult for these new entrants.
We continue to offer local exchange services to substantially all consumers in
the Anchorage service area, primarily through our own facilities and unbundled
local loops leased from ACS. We are currently involved in arbitration to revise
the interim interconnection rates and the terms in the existing interconnection
agreement with ACS for the Anchorage service area.
Our local services sales efforts continue to focus on increasing the number of
commercial and small business subscribers we serve, selling bundled services,
and generating incremental revenues through product and feature up-sale
opportunities. We sell our local services through telemarketing, direct mail
advertising, up selling by our customer contact personnel, and door-to-door
selling.
Internet Services
Industry
The Internet continues to expand at a significant rate, with the number of sites
almost doubling over the last several years. The FCC estimates that the
percentage of U.S. households with computers increased from 38.6% in 1997 to
51.0% in 2000, and that the percentage of U.S. households with Internet access
increased from 18.6% in 1997 to 41.5% in 2000.
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The FCC reports that 56 percent of the U.S. population had Internet access as of
November 2000. Current trends indicate that in a few years the Internet may
become as commonplace as TV. Analysts predict that the amount of Internet
traffic will likely continue to rise as fast as capacity allows for the
foreseeable future. Voice over the Internet may have a major impact on business
and the entire telecommunications industry in the future. Industry analysts
estimate that there will be more than 20 million installed cable modem customers
in North America by year-end 2004, up from 1.8 million at the end of 1999. The
FCC reports that high-speed lines (greater than 200 kbps in at least one
direction) increased 57% during the first half of 2000 to a total of 4.3 million
lines in service, as compared to 2.8 million lines at the end of 1999. Most
American households still access the Internet using analog telephone dial-up
modems at speeds of less than 56 kbps. As of year-end 1999, industry analysts
estimated that 98.2 percent of all Internet households were accessing the
Internet using dial-up modems. Telephone dial-up is projected to remain the
principal means of accessing the Internet until about 2004, when it is expected
that only 49.7 percent of Internet households will use dial-up access, with the
remaining 50.3 percent accessing the Internet through high-speed broadband
facilities.
Although wireless and satellite broadband technologies continue to be deployed,
DSL technologies remain the most significant competitors to Internet over cable.
ADSL, the most widely used form of DSL, offers data speeds from between 1.5 Mbps
and 6.1 Mbps, less than cable's maximum speed of 27 Mbps. Currently, the number
of DSL subscribers is significantly less than the number of cable broadband
subscribers. By June 2000, there were reported to be 820,000 DSL subscribers
compared to more than 2.3 million cable modem Internet access subscribers. The
rollout of DSL and other broadband technologies is accelerating, with an
estimated 1.7 million DSL subscribers at year-end 2000.
An Intranet allows information to be decentralized in an organization. It uses
Internet-compatible standards, available on virtually any computer. An Intranet
is also, by mainframe computer standards, fast and inexpensive to set up. This
adds to its appeal, particularly for larger companies with complex legacy data
systems. The use of Intranets has significantly increased, with an estimated 60
to 70 percent of US corporations using an Intranet. Current growth rates suggest
that 138 million people worldwide may be connected from their desks to an
in-house Intranet in 2001.
An Extranet is similar to an Intranet (internal, secure, full of sensitive
data), however it connects trusted customers and suppliers. Industry analysts
believe that the use of Extranets will continue to accelerate. Implementing an
Extranet creates the concept of the virtual enterprise, in which all the
organizations in a supply chain integrate their systems and operations. This
concept is not new, but has been achieved in the past using EDI on private
networks. Extranets promise to remove many of the obstacles that have prevented
firms from sharing their data (stock levels, production schedules, demand
forecasts) with customers and suppliers. However, there are issues of standards,
lack of consumer confidence and security.
Music is ideally suited for the digital world, with leading record companies and
music retailers now selling direct over the Internet. New compression algorithms
and technology (such as MP3) allow consumers to purchase and download music of
their choice to play on their personal computer, handheld device, or CD players.
Technology is beginning to turn products into a service, delivered over the
Internet. We expect this segment of the retail market to expand significantly.
Copyright and related legal concerns are significant due to the ease in which
electronic media can be distributed and copied.
Concerns about Internet-based commerce are diminishing. One serious
preoccupation is that an overloaded Internet might crash. However, capacity on
the Internet continues to increase. Technology enables fiber to carry more data,
and more cables and satellite channels are being introduced. Industry analysts
estimated that in 1995, the world's entire telecom traffic amounted to a data
rate of a terabit a second. Currently, a single optical fiber strand can carry
three times that amount of data with lab research indicating that many times
more capacity will be possible in the future.
33
We believe major court decisions and legislative action will shape the worldwide
Internet in 2001 and beyond, including:
- The impact of the U.S. vs. Microsoft antitrust trial,
- The impact of the Napster copyright litigation,
- Possible recognition that traditional encryption regulation is obsolete,
- Minimum-regulation approaches to information privacy as a new consumer
movement tries to use international privacy law to rein in the behavior of
large corporations in the U.S. economy,
- The potential for continuing increases in inexperienced investors investing
through online brokers and increased instances of investor losses that lead
to arbitration claims against the brokers,
- The impact of more Internet patents preventing others from doing certain
things, such as designing and maintaining certain types of Web sites,
- The legality of hyperlinking without permission,
- Potential legislation in Congress that would create a new form of
intellectual property in databases,
- Decisions regarding whether cryptographic source code is First Amendment
speech, and hence exportable, or that no program is covered by the First
Amendment,
- Continuing calls for domestic controls of obscenity-related cryptography,
and
- The development of rating and filtering systems outside the United States.
General
Our Internet services division entered the Internet services market in 1998,
providing retail services to residential, commercial, and government users and
providing wholesale carrier services to other ISPs. Cable network upgrades in
the Anchorage area have allowed us to offer high-speed cable modem Internet
access, the first of its kind in Alaska. We were the first provider in Anchorage
to offer commercially available DSL products.
Products
We currently offer two types of Internet access for residential use: dial up
Internet access and high-speed cable modem Internet access. Our residential
high-speed cable modem Internet service offers up to 1,544 kbps access speed as
compared with up to 56 kbps access through standard copper wire dial up modem
access. We provide free 24-hour customer service and technical support via
telephone or online. The entry level cable modem service also offers free data
transfer up to five gigabytes per month and can be left connected
24-hours-a-day, 365-days-a-year, allowing for real-time information and e-mail
access. We also offer a low price upgrade to double the bandwidth of the
entry-level service. In 2000, we saw a 20% take rate of this service. This is
evidence of the continuing demand for higher speed access. Additional cable
modem service packages tailored to both heavy residential and commercial
Internet users are also available.
Cable modem services appeal to small businesses, families, professionals who
work-at-home, educators, those involved in electronic commerce, and those who
enjoy interactive computer games. Cable modem access overcomes the limitations
of slower dial-up service and the higher cost of dedicated Internet services and
provides always-available, high-speed access to the Internet. Cable modems use
our coaxial cable plant that provides cable television service, instead of the
traditional ILEC copper wire. Coaxial cable has a much greater carrying capacity
than telephone wire and can be used to simultaneously deliver both cable
television (analog or digital) and Internet access services.
We currently offer several Internet service packages for commercial use: dial-up
access, DSL, T1 and fractional T1 leased line, frame relay and high-speed cable
modem Internet access. Our business high-speed cable modem Internet service
offers access speeds ranging from 256 kbps to 1,544 kbps, free monthly data
transfers of up to 25 gigabytes and free 24-hour customer service and technical
support. Our DSL offering can support speeds of up to 768 kbps over the same
copper line used for phone service. We expect higher speeds to be made available
in 2001. Business services also include a personalized web page, domain name
services, and e-mail addressing.
34
We also provide dedicated access Internet service to commercial and public
organizations in Alaska. We offer a premium service and currently support many
of the largest organizations in the state such as the State of Alaska and the
Anchorage School District. We have hundreds of other enterprise customers, both
large and small, using this service.
Bandwidth is made available to our Internet segment through our Alaska United
undersea fiber cable and our Galaxy XR transponders as previously described. Our
Internet offerings are coupled with our long-distance and local services
offerings and provide free basic Internet services if certain long-distance or
local service plans are selected. Value-added Internet features are available
for additional charges.
We provide Internet access for schools and health organizations using a platform
including many of the latest advancements in technology. Services are delivered
through a locally available circuit, our existing lines, and/or satellite earth
stations.
Facilities
The Internet is an interconnected global public computer network of tens of
thousands of packet-switched networks using the Internet protocol. The Internet
is effectively a network of networks routing data throughout the world. We
provide access to the Internet using a platform that includes many of the latest
advancements in technology. The physical platform is concentrated in Anchorage
and is extended into many remote areas of the state. Our Internet platform
includes:
- Circuits connecting our Anchorage facilities to multiple Internet access
points in Seattle through multiple, diversely routed networks.
- Multiple routers on each end of the circuits to control the flow of data
and to provide resiliency.
- Our Anchorage facility consists of routers, a bank of servers that perform
support and application functions, database servers providing
authentication and user demographic data, layered 2 gigabit switch fabrics
for intercommunications and broadband services (cable modem and DSL), and
access servers for dial-in users.
- SchoolAccess(TM)Internet service delivery to over 257 schools in rural
Alaska is accomplished by three variations on primary delivery systems:
- In communities where we have terrestrial interconnects or provide
existing service over regional earth stations, we have configured
intermediate distribution facilities. Schools that are within these
service boundaries are connected locally to one of those facilities.
- In communities where we have extended telecommunications services via
our DAMA earth station program, SchoolAccess(TM) is provided via a
satellite circuit to an intermediate distribution facility at the Eagle
River Earth Station.
- In communities or remote locations where we have not extended
telecommunications services, SchoolAccess(TM) is provided via a
dedicated (usually on premise) DAMA VSAT satellite station. The DAMA
connects to an intermediate distribution facility located in Anchorage.
In all dedicated access cases, Internet access is delivered to a router located
at the service point. Our Internet management platform constantly monitors this
router; continual communication is maintained with all of the routers in the
network. The availability and quality of service, as well as statistical
information on traffic loading, are continuously monitored for quality
assurance. The management platform has the capability to remotely access
routers, permitting changes in router configuration without the need to
physically be at the service point. This management platform allows us to offer
outsourced network monitoring and management services to commercial businesses.
Many of the largest commercial networks in the State of Alaska use this service.
GCI.net offers a unique combination of innovative network design and aggressive
performance management. Our Internet platform has received a certification that
places it in the top one percent of all service providers world-
35
wide and the only ISP in Alaska with such designation. We operate and maintain
what we believe is the largest, most reliable, and highest performance Internet
network in the State of Alaska.
Customers
We had approximately 62,500, 48,300 and 7,200 active residential and commercial
dial-up Internet subscribers at December 31, 2000, 1999 and 1998, respectively.
We had approximately 16,100, 5,700 and 200 active residential and commercial
cable modem Internet subscribers at December 31, 2000, 1999 and 1998,
respectively. Revenues derived from Internet services totaled $8.4 million, $4.8
million and $1.7 million, in 2000, 1999 and 1998, respectively, representing
approximately 2.9%, 1.7% and 0.7% of our total revenues in 2000, 1999 and 1998,
respectively.
Our Internet services sales efforts are primarily directed toward increasing the
number of subscribers we serve, selling bundled services, and generating
incremental revenues through product and feature upsale opportunities. We sell
our Internet services through telemarketing, direct mail advertising,
door-to-door selling, up-selling by our customer contact and technical support
personnel, and local media advertising.
Competition
The Internet industry is intensely competitive, rapidly evolving and subject to
constant technological change. Competition is based upon price and pricing
plans, the types of services offered, customer service, billing services,
perceived quality, reliability and availability. Although we believe we have the
human and technical resources to pursue our strategy and compete effectively in
this competitive environment, our success will depend upon our ability to
profitably provide high quality, high value bundled services at prices generally
competitive with, or lower than, those charged by our competitors.
As of December 31, 2000, we competed with more than 10 Alaska based Internet
providers, and competed with other domestic, non-Alaska based providers that
provide national service coverage. Several of the non-Alaskan based providers
have substantially greater financial, technical and marketing resources than we
have. We have, so far, successfully adjusted our pricing and marketing
strategies to respond to competitors' pricing practices.
Environmental Regulations
We may undertake activities that, under certain circumstances may affect the
environment. Accordingly, they are subject to federal, state, and local
regulations designed to preserve or protect the environment. The FCC, the Bureau
of Land Management, the U.S. Forest Service, and the National Park Service are
required by the National Environmental Policy Act of 1969 to consider the
environmental impact prior to the commencement of facility construction. We
believe that compliance with such regulations has no material effect on our
consolidated operations. The principal effect of our facilities on the
environment would be in the form of construction of facilities and networks at
various locations in Alaska and between Alaska and Seattle Washington. Our
facilities have been constructed in accordance with federal, state and local
building codes and zoning regulations whenever and wherever applicable. Some
facilities may be on lands that may be subject to state and federal wetland
regulation.
Uncertainty as to the applicability of environmental regulations is caused in
major part by the federal government's decision to consider a change in the
definition of wetlands. Most of our facilities are on leased property, and, with
respect to all of these facilities, we are unaware of any violations of lease
terms or federal, state or local regulations pertaining to preservation or
protection of the environment.
Our Alaska United project consists, in part, of deploying land-based and
undersea fiber optic cable facilities between Anchorage, Whittier, Valdez, and
Juneau, Alaska, and Seattle, Washington. The engineered route passes over
wetlands and other environmentally sensitive areas. We believe our construction
methods used for buried cable have a very minimal impact on the environment. The
agencies, among others, that are involved in permitting and oversight of our
cable deployment efforts are the US Army Corps of Engineers, The National Marine
Fisheries Service, US Fish & Wildlife, US Coast Guard, National Oceanic and
Atmospheric Administration,
36
Alaska Department of Natural Resources, and the Alaska Office of the Governor -
Governmental Coordination. We are unaware of any violations of federal, state or
local regulations or permits pertaining to preservation or protection of the
environment.
In the course of operating the cable television systems, we have used various
materials defined as hazardous by applicable governmental regulations. These
materials have been used for insect repellent, locate paint and pole treatment,
and as heating fuel, transformer oil, cable cleaner, batteries, and in various
other ways in the operation of those systems. We do not believe that these
materials, when used in accordance with manufacturer instructions, pose an
unreasonable hazard to those who use them or to the environment.
Patents, Trademarks, Licenses, Certificates of Public Convenience and Necessity,
and Military Franchises
We do not hold patents, franchises or concessions for telecommunications
services or local access services. We do hold registered service marks for the
terms SchoolAccess(TM), Free Fridays for Business(TM) and Unlimited
Weekends(TM). The Communications Act of 1934 gives the FCC the authority to
license and regulate the use of the electromagnetic spectrum for radio
communication. We hold licenses through our long-distance services industry
segment for our satellite and microwave transmission facilities for provision of
long-distance services.
We acquired a license for use of a 30-MHz block of spectrum for providing PCS
services in Alaska. We are required by the FCC to provide adequate broadband PCS
service to at least two-thirds of the population in our licensed areas within
ten years of being licensed. The PCS license has an initial duration of 10
years. At the end of the license period, a renewal application must be filed. We
believe renewal will generally be granted on a routine basis upon showing of
compliance with FCC regulations and continuing service to the public. Licenses
may be revoked and license renewal applications may be denied for cause. We
expect to renew the PCS license for an additional 10-year term under FCC rules.
We acquired a LMDS license in 1998 for use of a 150-MHz block of spectrum in the
28 GHz Ka-band for providing wireless services. The LMDS license has an initial
duration of 10 years. Within 10 years, licensees will be required to provide
'substantial service' in their service regions. Our operations may require
additional licenses in the future.
Earth stations are licensed generally for 10 years. The FCC also issues a single
blanket license for a large number of technically identical earth stations
(e.g., VSATs).
Applications for transfer of control of 15 certificates of public convenience
and necessity held by the acquired cable companies were approved in an RCA order
dated September 23, 1996, with transfers to be effective on October 31, 1996.
Such transfer of control allowed us to take control and operate the cable
systems of the acquired cable companies located in Alaska. The approval of the
transfer of these 15 certificates of public convenience and necessity is not
required under federal law, with one area of limited exception. The cable
companies operate in part through the use of several radio-band frequencies
licensed through the FCC. These licenses were transferred to us prior to October
31, 1996.
We obtained consent of the military commanders at the military bases serviced by
the acquired cable systems to the assignment of the respective franchises for
those bases.
Regulation, Franchise Authorizations and Tariffs
The following summary of regulatory developments and legislation does not
purport to describe all present and proposed federal, state, and local
regulation and legislation affecting our businesses. Other existing federal and
state regulations are currently the subject of judicial proceedings, legislative
hearings and administrative proposals that could change, in varying degrees, the
manner in which these industries operate. We cannot predict at this time the
outcome of these proceedings, their impact on the industries in which we
operate, or their impact on us.
37
Telecommunications Operations.
The following is a summary of federal laws, regulations and tariffs, and a
description of certain state and local laws pertaining to our telecommunications
operations (long-distance, local access and wireless services).
General. We are subject to regulation by the FCC and by the RCA as a
non-dominant provider of long-distance services. We file tariffs with the FCC
for interstate and international long-distance services, and with the RCA for
intrastate service. Such tariffs routinely become effective without intervention
by the FCC, RCA or other third parties since we are a non-dominant carrier. We
received approval from the RCA in February 1997 permitting us to provide local
access services throughout ATU's (now ACS) existing Anchorage service area.
Military franchise requirements also affect our ability to provide
telecommunications and cable television services to military bases.
On June 30, 1999, the APUC was repealed by an act passed earlier in the year by
the Alaska State Legislature and was immediately reconstituted as the RCA,
combining the functions of the APUC and certain other oversight functions. The
Governor of the state of Alaska appointed new commissioners as a result of this
restructuring. Established within the commission is a communications carriers
section that is tasked with developing, recommending, and administering policies
and programs with respect to the regulation of rates, services, accounting, and
facilities of communications common carriers within the state involving the use
of wire, cable, radio, and space satellites. We believe the new commission is
generally more responsive to telecommunications issues brought to its attention
and more supportive of competitive telecommunication regulatory policy.
The 1996 Telecom Act preempts state statutes and regulations that restrict the
provision of competitive local telecommunications services. State commissions
can, however, impose reasonable terms and conditions upon the provision of
telecommunications service within their respective states. Because we are
authorized to offer local access services in Anchorage, we are regulated as a
CLEC by the RCA. In addition, we will be subject to other regulatory
requirements, including certain requirements imposed by the 1996 Telecom Act on
all LECs, which requirements include permitting resale of LEC services, number
portability, dialing parity, and reciprocal compensation.
As a PCS and LMDS licensee, we are subject to regulation by the FCC, and must
comply with certain build-out and other conditions of the license, as well as
with the FCC's regulations governing the PCS and LMDS services. On a more
limited basis, we may be subject to certain regulatory oversight by the RCA
(e.g., in the areas of consumer protection), although states are not permitted
to regulate the rates of PCS, LMDS and other commercial wireless service
providers. PCS and LMDS licensees may also be subject to regulatory requirements
of local jurisdictions pertaining to, among other things, the location of tower
facilities.
1996 Telecom Act and Related Rulings. A key industry development was passage of
the 1996 Telecom Act. The Act was intended by Congress to open up the
marketplace to competition and has had a dramatic impact on the
telecommunications industry. The intent of the legislation was to break down the
barriers that have prevented three groups of companies, LECs, including RBOCs,
long-distance carriers, and cable TV operators, from competing head-to-head with
each other. The Act expressly prohibits any legal barriers to competition in
intrastate or interstate communications service under state and local laws, and
empowers the FCC, after notice and an opportunity for comment, to preempt the
enforcement of any statute, regulation or legal requirement that prohibits, or
has the effect of prohibiting, the ability of any entity to provide any
intrastate or interstate telecommunications service. The Act requires incumbent
LECs to let new competitors into their business. It also requires incumbent LECs
to open up their networks to ensure that new market entrants have a fair chance
of competing. The bulk of the legislation is devoted to establishing the terms
under which incumbent LECs must open up their networks.
The FCC's Common Carrier Bureau has focused in recent years on adopting
market-opening and universal service rules for the local exchange and long
distance markets. The Common Carrier Bureau has also focused on review of
applications by BOCs to provide long distance service as well as review of
telecommunications com-
38
pany mergers. In addition, they continue to consider regulatory reforms that
could occur as competition in the provision of telecommunications services
develops.
Enactment of the bill immediately affected local exchange service markets by
requiring states to authorize local exchange service competition. Competitors,
including resellers, are able to market new bundled service packages to attract
customers. Over the long term, the requirement that incumbent LECs unbundle
access to their networks may lead to increased price competition. Local exchange
service competition has not yet occurred in all markets on a national basis
because interconnection arrangements are not yet in place in many areas. We have
executed interconnection agreements with ACS for the Anchorage, Juneau and
Fairbanks markets.
The 1996 Telecom Act requires the FCC to establish rules and regulations to
implement its local competition provisions. In August 1996, the FCC issued rules
governing interconnection, resale, unbundled network elements, the pricing of
those facilities and services, and the negotiation and arbitration procedures
that would be utilized by states to implement those requirements. These rules
rely on state public utilities commissions to develop the specific rates and
procedures applicable to particular states within the framework prescribed by
the FCC. These rules were vacated in part by a July 1997 ruling of the United
States Court of Appeals for the Eighth Circuit. On January 25, 1999, the United
States Supreme Court issued an opinion upholding the authority of the FCC to
establish rules, including pricing rules, to implement statutory provisions
governing both interstate and intrastate services under the 1996 Telecom Act and
remanded the proceeding back to the Eighth Circuit for further proceedings. The
Supreme Court also upheld rules allowing carriers to select provisions from
among different interconnection agreements approved by state commissions for the
carriers' own agreements and a rule allowing carriers to obtain combinations of
unbundled network elements. On remand, the Eighth Circuit overturned various
interconnection and pricing portions of the FCC regulations under the 1996
Telecom Act, but stayed the application of its pricing decision pending review
by the Supreme Court of the United States. The Supreme Court has granted
certiorari on the pricing provisions and will be considering the case in its
upcoming term.
The 1996 Telecom Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services, including cable
television, notwithstanding the Public Utility Holding Company Act. Electric
utilities must establish separate subsidiaries, known as "exempt
telecommunications companies" and must apply to the FCC for operating authority.
Like telephone companies, electric utilities have substantial resources at their
disposal, and could be formidable competitors to traditional cable systems.
Several such utilities have been granted broad authority by the FCC to engage in
activities that could include the provision of video programming.
A number of LECs, long-distance companies and others have appealed some or all
of the FCC's orders. The effective date of the orders has not been delayed, but
the appeals are expected to take a year or more to conclude. The impact of these
FCC decisions on us is difficult to determine. Some BOCs have also challenged
the 1996 Telecom Act restrictions on their entry into long-distance markets as
unconstitutional. We are unable to predict the outcome of such rulemakings or
litigation or the effect (financial or otherwise) of the 1996 Telecom Act and
the rulemakings on us. The BOCs continue to challenge the substance of the FCC
rules, arguing that the rules do not allow them to fully recover the money they
spent building their networks.
Critics are becoming increasingly vocal asking Congress to modify if not
altogether rework the 1996 Telecom Act, citing a lack of competition in the
local phone and broadband sectors. There is a lack of consensus on what changes
are needed, however, or who is to blame for the Act's perceived failures. The
strongest momentum appears to be in support of loosening regulations on BOCs so
they can better compete in broadband, a move CLECs say could diminish local
phone competition.
Rural Exemption. ACS, through subsidiary companies, provides local telephone
services in Fairbanks and Juneau, Alaska. The ACS subsidiaries are classified as
Rural Telephone Companies under the 1996 Telecom Act,
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which entitles them to an exemption of certain material interconnection terms of
the 1996 Telecom Act, until and unless such "rural exemption" is examined and
not continued by the RCA. We requested that continuation of the rural exemption
of the ACS subsidiaries relating to the Fairbanks and Juneau markets be
examined. In January 1998, the APUC denied our request to terminate the rural
exemption. The basis of the APUC's decision was primarily that various
rulemaking proceedings (including universal service and access charge reform)
must be completed before the exemption would be revoked. Those rulemaking
proceedings have been largely completed.
On March 4, 1999, an Alaska Superior Court Judge determined that the APUC erred
in reaching its decision to deny our request to provide full local telephone
service in Fairbanks and Juneau, Alaska. This service would be provided in
competition against Pacific Telecom, Inc. ("PTI," now a subsidiary of ACS), the
existing monopoly provider. Among other things, the Court instructed the APUC to
correctly assign the burden of proof to PTI rather than us, and to decide on our
specific requests to provide service in Fairbanks and Juneau based on criteria
established in the 1996 Telecom Act. The Court stated "this must be accomplished
cognizant of the intent of the 1996 Telecom Act to promote competition in the
local market." The Court remanded the case back to the APUC for proceedings
leading to their ruling.
On July 1, 1999, the APUC ruled that the rural exemptions from local competition
in Juneau, Fairbanks and North Pole would not be continued, which allowed us to
negotiate for unbundled elements for the provision of competitive local service
in these markets. ACS requested reconsideration of this decision, and on October
11, 1999 the RCA issued an order terminating rural exemptions in the Fairbanks
and Juneau markets. ACS has appealed these decisions.
We believe this decision is important to bring about the benefits of competition
to other communities in Alaska. We continued to negotiate with ACS for unbundled
network elements for the provisioning of competitive local assess services in
these markets, arbitrated the rates and terms and the RCA approved
interconnection agreements for unbundled elements in October 2000.
Internet Service Providers Regulated as Telecommunications Carriers. The FCC
affirmed in a report adopted on April 10, 1998, that Internet service providers
would not be subject to regulation as telecommunications carriers under the 1996
Telecom Act. They thus will not be subject to universal service subsidies and
other regulations. Further, in August 1998, the FCC proposed new rules that
would allow ILECs to provide their own DSL services through separate affiliates
that are not subject to ILEC regulation. On November 18, 1999, the FCC decided
to require ILECs to share telephone lines with DSL providers, an action that may
foster competition by allowing competitors to offer DSL services without their
customers having to lease a second telephone line. Whether this development will
be implemented in an effective way remains to be seen. Moreover, it is
impossible to predict whether the FCC or Congress may change the rules under
which these services are offered and, if such changes are made, the extent of
the impact of such changes on our business.
Access Fees. The FCC regulates the fees that local telephone companies charge
long distance companies for access to their local networks. The FCC is
considering various proposals that would restructure and could reduce access
charges. Changes in the access charge structure could fundamentally change the
economics of some aspects of our business.
Access to Unbundled Network Elements. The Supreme Court vacated an FCC rule
setting forth the specific unbundled network elements that ILECs must make
available, finding that the FCC had failed to apply the appropriate statutory
standard. On November 5, 1999, the FCC responded to the Court's decision by
issuing a decision that maintains competitors' access to a wide variety of
unbundled network elements. Six of the seven unbundled elements the FCC had
originally required carriers to provide in its 1996 order implementing the 1996
Telecom Act remain available to competitors. These elements are loops, including
loops used to provide high-capacity and advanced telecommunications services;
network interface devices; local circuit switching, subject to restrictions in
major urban markets; dedicated and shared transport; signaling and call-related
databases; and
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operations support systems. The FCC removed access to operator and directory
assistance service from the list of available unbundled network elements. In
addition, the FCC added to its list certain unbundled network elements that were
not at issue in 1996. These elements include subloops, or portions of loops, and
dark fiber loops and transport. The FCC did not, however, require ILECs to
unbundle facilities used to provide DSL service. The FCC did not decide, but
sought additional information on, the question of whether carriers may combine
certain unbundled network elements to provide special access services to compete
with those provided by the ILECs. The ability to obtain unbundled network
elements is an important element of our local access services business, and we
believe that the FCC's actions in this area have generally been positive.
However, we cannot predict the extent to which the existing rules will be
sustained in the face of additional legal action and the scope of the rules that
are yet to be determined by the FCC.
Recurring and non-recurring charges for telephone lines and other unbundled
network elements may increase based on the rates proposed by the ILECs and
approved by the RCA from time to time, which could have an adverse effect on the
results of our operations. We are currently involved in arbitration to revise
the interim interconnection rates and the terms in the existing interconnection
agreement with ACS for the Anchorage service area. Moreover, because the
cost-based methodology for determining these rates is still subject to judicial
review, we are uncertain about how these rates will be determined in the future.
Universal Service. In 1997, the FCC issued important decisions on universal
service establishing new funding mechanisms for high-cost, low-income service
areas to ensure that certain subscribers living in rural and high-cost areas, as
well as certain low-income subscribers, continue to have access to
telecommunications and information services at prices reasonably comparable to
those charged for similar services in urban areas.
These mechanisms also are meant to foster the provision of advanced
communications services to schools, libraries and rural health-care facilities.
Under the rules adopted by the FCC to implement these requirements, we and all
other telecommunications providers are required to contribute to a fund to
support universal service. The amount that we contribute to the federal
universal service subsidy will be based on our share of specified defined
telecommunications end-user revenues.
The order established significant discounts to be provided to eligible schools
and libraries for all telecommunications services, internal connections and
Internet access. It also established support for rural health care providers so
that they may pay rates comparable to those that urban health care providers pay
for similar services. The FCC estimates that program-year 2001 costs to be
funded out of the Universal Service Fund will total approximately $1.35 billion.
The fund administrator, on the basis of their interstate end-user revenues,
assesses local and long distance carriers' contributions to the education and
health care funds. The 2001 quarterly contribution factor is $0.066827. We began
contributing to the new funds in 1998 and are allowed to recover our
contributions through increased interstate charges.
Local Regulation. We may be required to obtain local permits for street opening
and construction permits to install and expand fiber optic networks. Local
zoning authorities often regulate our use of towers for microwave and other
telecommunications sites. We also are subject to general regulations concerning
building codes and local licensing. The 1996 Telecom Act requires that fees
charged to telecommunications carriers be applied in a competitively neutral
manner, but there can be no assurance that ILECs and others with whom we will be
competing will bear costs similar to those we will bear in this regard.
Other Laws and Regulations. Although the foregoing discussion provides an
overview of the major regulatory issues that confront our business, this
discussion does not attempt to describe all current and proposed federal, state
and local rules and initiatives affecting the telecommunications industry. Other
federal and state laws and regulations are currently the subject of judicial
proceedings and proposed additional legislation. In addition, some of the FCC's
rules implementing the 1996 Telecom Act will be subject to further judicial
review and could
41
be altered or vacated by courts in the future. We cannot predict the ultimate
outcome of any such further proceedings or legislation.
Cable Services
The following is a summary of federal laws and regulations materially affecting
the growth and operation of the cable services industry and a description of
certain state and local laws affecting our cable services business.
General. The FCC, some state governments and most local governments extensively
regulate the operation of a cable system. We are subject to federal and state
regulation as a cable television operator pursuant to the 1934 Cable Act, the
1984 Cable Act and the 1992 Cable Act, as amended by the 1996 Telecom Act. The
1992 Cable Act significantly expanded the scope of cable television regulation
on an industry-wide basis by imposing rate regulation, carriage requirements for
local broadcast stations, customer service obligations and other requirements.
The 1992 Cable Act and the FCC's rules implementing that Act generally have
increased the administrative and operational expenses and in certain instances
required rate reductions for cable television systems and have resulted in
additional regulatory oversight by the FCC and state or local authorities.
Principal responsibility for implementing the policies of the 1934, 1984 and
1992 Cable Acts and the 1996 Telecom Act is allocated between the FCC and state
or local franchising authorities. The FCC and state regulatory agencies are
required to conduct numerous rulemaking and regulatory proceedings to implement
the 1996 Telecom Act, and such proceedings may materially affect the cable
industry.
The FCC has the authority to enforce its regulations through the imposition of
substantial fines, the issuance of cease and desist orders and/or the imposition
of other administrative sanctions, such as the revocation of FCC licenses needed
to operate certain transmission facilities used in connection with cable
operations. The 1996 Telecom Act removed barriers to competition in the cable
television market as well as the local telephone market. Among other things, it
also reduced the scope of cable rate regulation and encourages additional
competition in the video programming industry by allowing local telephone
companies to provide video programming in their own telephone service areas.
The 1996 Telecom Act required the FCC to undertake a number of rulemakings.
Moreover, Congress and the FCC have frequently revisited the subject of cable
regulation. Future legislative and regulatory changes could adversely affect our
operations, and there have been calls in Congress and at the FCC to maintain or
even tighten cable regulation in the absence of widespread effective
competition.
Subscriber Rates. The 1992 Cable Act authorized rate regulation for cable
communications services and equipment in communities that are not subject to
"effective competition," as defined by federal law, which limited the ability of
cable companies to increase subscriber fees. Most cable communications systems
are now subject to rate regulation by local officials for basic cable service,
which typically contains local broadcast stations and public, educational, and
government access channels. Such local regulation is subject to the oversight of
the FCC, which has prescribed detailed criteria for such rate regulation. Before
a local franchising authority begins basic service rate regulation, it must
certify to the FCC that it will follow applicable federal rules. Many local
franchising authorities have voluntarily declined to exercise their authority to
regulate basic service rates. Local franchising authorities also have primary
responsibility for regulating cable equipment rates. Under federal law, charges
for various types of cable equipment must be unbundled from each other and from
monthly charges for programming services. The 1992 Cable Act permits communities
to certify and regulate rates at any time, so that it is possible that
localities served by our systems may choose to certify and regulate basic rates
in the future.
The 1992 Cable Act also requires the FCC to resolve complaints about rates for
CPS tiers (other than programming offered on a per channel or per program basis,
which programming is not subject to rate regulation) and to reduce any such
rates found to be unreasonable. The 1996 Telecom Act eliminates the right of
individuals to file CPS tier rate complaints with the FCC and requires the FCC
to issue a final order within 90 days after receipt of
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CPS tier rate complaints filed by any franchising authority. The 1992 Cable Act
limits the ability of cable television systems to raise rates for basic and
certain cable programming services (collectively, the "Regulated Services").
Under the 1996 Telecom Act, the FCC's authority to regulate CPS tier rates
sunset on March 31, 1999. The FCC has taken the position that it will still
adjudicate pending cable programming service tier complaints but will strictly
limit its review, and possible refund orders, to the time period predating the
sunset date. The elimination of cable programming service tier regulation
affords us greater pricing flexibility.
FCC regulations govern rates that may be charged to subscribers for Regulated
Services. The FCC uses a benchmark methodology as the principal method of
regulating rates for Regulated Services. Cable operators are also permitted to
justify rates using a cost-of-service methodology, which contains a rebuttable
presumption of an industry-wide 11.25% after tax rate of return on an operator's
allowable rate base. Cost-of-service regulation is a traditional form of rate
regulation, under which a company is allowed to recover its costs of providing
the regulated service, plus a reasonable profit. Franchising authorities are
empowered to regulate the rates charged for monthly basic service, for
additional outlets and for the installation, lease and sale of equipment used by
subscribers to receive the basic cable service tier, such as converter boxes and
remote control units. The FCC's rules require franchising authorities to
regulate these rates on the basis of actual cost plus a reasonable profit, as
defined by the FCC. Cable operators required to reduce rates may also be
required to refund overcharges with interest. The FCC has also adopted
comprehensive and restrictive regulations allowing operators to modify their
regulated rates on a quarterly or annual basis using various methodologies that
account for changes in the number of regulated channels, inflation and increases
in certain external costs, such as franchise and other governmental fees,
copyright and retransmission consent fees, taxes, programming fees and
franchise-related obligations. We cannot predict whether the FCC will modify
these "going forward" regulations in the future.
Rate regulation of non-basic cable programming service tiers ended after March
31, 1999. The 1996 Telecom Act also modifies the uniform rate provision of the
1992 Cable Act by prohibiting regulation of non-predatory bulk discount rates
offered to subscribers in commercial and residential developments and permits
regulated equipment rates to be computed by aggregating costs of broad
categories of equipment at the franchise, system, regional or company level.
Anti-Buy Through Provisions. The 1992 Cable Act requires cable systems to permit
subscribers to purchase video programming offered by the operator on a per
channel or a per program basis without the necessity of subscribing to any tier
of service, other than the basic cable service tier, unless the system's lack of
addressable converter boxes or other technological limitations does not permit
it to do so. The statutory exemption for cable systems that do not have the
technological capability to offer programming in the manner required by the
statute is available until a system obtains such capability, but not later than
December 2002. The FCC may waive such time periods, if deemed necessary. Many of
our systems do not have the technological capability to offer programming in the
manner required by the statute and thus currently are exempt from complying with
the requirement.
Cable Entry Into Telecommunications. The 1996 Telecom Act creates a more
favorable environment for us to provide telecommunications services beyond
traditional video delivery. It provides that no state or local laws or
regulations may prohibit or have the effect of prohibiting any entity from
providing any interstate or intrastate telecommunications service. A cable
operator is authorized under the 1996 Telecom Act to provide telecommunications
services without obtaining a separate local franchise. States are authorized,
however, to impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality, and consumer protection.
State and local governments also retain their authority to manage the public
rights-of-way and may require reasonable, competitively neutral compensation for
management of the public rights-of-way when cable operators provide
telecommunications service.
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Internet Service. Although there is at present no significant federal regulation
of cable system delivery of Internet services, and the FCC has issued several
reports finding no immediate need to impose such regulation, this situation may
change as cable systems expand their broadband delivery of Internet services. In
particular, proposals have been advanced at the FCC and Congress that would
require cable operators to provide access to unaffiliated Internet service
providers and online service providers. The FCC recently rejected a petition by
certain Internet service providers attempting to use existing modes of access
that are commercially leased to gain access to cable system delivery. Some
states and local franchising authorities are considering the imposition of
mandatory Internet access requirements as part of cable franchise renewals or
transfers and a few local jurisdictions have adopted these requirements. The
Federal Trade Commission and the FCC recently imposed certain "open-access"
requirements on Time Warner and AOL in connection with their merger, but those
requirements are not applicable to other cable operators.
In June 2000, the Federal Court of Appeals for the Ninth Circuit rejected an
attempt by the City of Portland, Oregon to impose mandatory Internet access
requirements on the local cable operator. In reversing a contrary ruling by the
lower court, the Ninth Circuit court held that Internet service was not a cable
service, and therefore could not be subject to local cable franchising. At the
same time, the Court suggested that at least the transport component of
broadband Internet service could be subject to regulation as a
"telecommunications" service. Although regulation of this form of
telecommunications service would presumably be reserved for the FCC (which has
so far resisted requests for active regulation), some states may argue that they
are entitled to impose "open-access" requirements pursuant to their authority
over intrastate telecommunications. In addition, some local governments may
argue that a cable operator must secure a local telecommunications franchise
before providing Internet service.
In response to the Ninth Circuit decision, the FCC has initiated a new
proceeding to determine what regulatory treatment, if any, should be accorded to
cable modem service and the cable modem platform used in providing this service.
More specifically, the Notice seeks comment on the parameters the Commission
should use in determining the appropriate level of access to cable networks for
the provision of high-speed data services. The Ninth Circuit decision is the
leading case on cable-delivered Internet service at this point, but the Federal
District Court for the Eastern District of Virginia reached a similar result in
a May 2000 ruling, concluding that broadband Internet service was a cable
service, but that multiple provisions of the Telecommunications Act preempted
local regulation. A Federal district court in Florida recently addressed a
similar "open-access" requirement in a local franchise and struck down the
requirement as unconstitutional. There are other instances where "open-access"
requirements have been imposed and judicial challenges are pending.
If regulators are allowed to impose Internet access requirements on cable
operators, it could burden the capacity of cable systems and complicate our own
plans for providing expanded Internet access services. These access obligations
could adversely impact our profitability and discourage system upgrades and the
introduction of new products and services.
LEC Ownership of Cable Systems. The 1996 Telecom Act made far-reaching changes
in the regulation of LECs that provide cable services. The 1996 Telecom Act
eliminated federal legal barriers to competition in the local telephone and
cable communications businesses, preempted legal barriers to competition that
previously existed in state and local laws and regulations, and set basic
standards for relationships between telecommunications providers. The 1996
Telecom Act eliminated the statutory telephone company/cable television
cross-ownership prohibition, thereby allowing LECs to offer video services in
their telephone service areas. LECs may provide service as traditional cable
operators with local franchises or they may opt to provide their programming
over unfranchised "open video systems," subject to certain conditions,
including, but not limited to, setting aside a portion of their channel capacity
for use by unaffiliated program distributors on a non-discriminatory basis. The
1996 Telecom Act generally limits acquisitions and prohibits certain joint
ventures between LECs and cable operators in the same market.
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A federal appellate court overturned various parts of the FCC's open video
rules, including the FCC's preemption of local franchising requirements for open
video operators. The FCC has modified its open video rules to comply with the
federal court's decision. It is unclear what effect this ruling will have on the
entities pursuing open video system operation.
Although local exchange carriers and cable operators can now expand their
offerings across traditional service boundaries, the general prohibition remains
on local exchange carrier buyouts of co-located cable systems. Co-located cable
systems are cable systems serving an overlapping territory. Cable operator
buyouts of co-located local exchange carrier systems, and joint ventures between
cable operators and local exchange carriers in the same market are also
prohibited. The 1996 Telecom Act provides a few limited exceptions to this
buyout prohibition, including a carefully circumscribed "rural exemption." The
1996 Telecom Act also provides the FCC with the limited authority to grant
waivers of the buyout prohibition.
Ownership Limitations. Pursuant to the 1992 Cable Act, the FCC adopted rules
prescribing national subscriber limits. While a federal district court has
declared these limitations to be unconstitutional and delayed its enforcement,
the FCC has reconsidered its cable ownership regulations and (i) reaffirmed its
30% nationwide subscriber ownership limit, but maintained its voluntary stay on
enforcement of that regulation pending further court action, (ii) reaffirmed its
subscriber ownership information reporting requirements, and (iii) modified its
attribution rules that identify when the ownership or management by us or third
parties of other communications businesses, including cable systems, television
broadcast stations and local telephone companies, may be imputed to us for
purposes of determining our compliance with the FCC's ownership restrictions.
Also pending on appeal is a challenge to the statutory and FCC regulatory
limitations on the number of channels that can be occupied on a cable system by
a video programmer in which a cable operator has an attributable ownership
interest. We do not expect the outcome of these judicial and regulatory
proceedings or the impact of any ownership restrictions to have a material
impact on our business and operations.
The 1996 Telecom Act generally prohibits us from owning or operating a SMATV or
wireless cable system in any area where we provide franchised cable service. We
may, however, acquire and operate SMATV systems in our franchised service areas
if the programming and other services provided to SMATV subscribers are offered
according to the terms and conditions of our franchise agreement.
The 1996 Telecom Act eliminated the statutory prohibition on the common
ownership, operation or control of a cable system and a television broadcast
station in the same market. While the FCC has eliminated its regulations that
precluded the cross-ownership of a national broadcasting network and a cable
system, it has not yet completed its review of other regulations that prohibit
the common ownership of other broadcasting interests and cable systems in the
same geographical areas.
Pursuant to the 1992 Cable Act, the FCC adopted rules precluding a cable system
from devoting more than 40% of its activated channel capacity to the carriage of
affiliated national video program services. Also pursuant to the 1992 Cable Act,
the FCC has adopted rules that preclude any cable operator from serving more
than 30% of all U.S. domestic multichannel video subscribers, including cable
and direct broadcast satellite subscribers. The D.C. District Court of Appeals
upheld this statutory restriction, and the FCC has now ruled that AT&T must
divest certain properties to come into compliance. The FCC's implementation of
ownership restrictions is currently subject to judicial review.
The FCC recently voted to suspend the timetable for AT&T to reduce its 42
percent share of the cable market to below the 30 percent cap which was required
as a condition of the agency's approval of AT&T's acquisition of MediaOne Group.
The U.S. Court of Appeals for the District of Columbia ruled that the 30 percent
cap was arbitrary and unconstitutional. As a result, the FCC ordered that both
the interim March 20, 2001 deadline and the final compliance deadline of May 19,
2001 are suspended pending further order of the FCC. The suspension
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gives the FCC an opportunity to determine the relationship, if any, between the
court's decisions on the ownership rules, imposed to promote competition in the
cable industry, and conditions on AT&T.
Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast signal
carriage requirements that allow local commercial television broadcast stations
to elect once every three years to require a cable system to carry the station,
subject to certain exceptions, or to negotiate for "retransmission consent" to
carry the station. Broadcast signal carriage is the transmission of broadcast
television signals over a cable system to cable customers. A cable system
generally is required to devote up to one-third of its activated channel
capacity for the carriage of local commercial television stations whether
pursuant to the mandatory carriage or retransmission consent requirements of the
1992 Cable Act. Local non-commercial television stations are also given
mandatory carriage rights; however, such stations are not given the option to
negotiate retransmission consent for the carriage of their signals by cable
systems. Additionally, cable systems are required to obtain retransmission
consent for all distant commercial television stations (except for commercial
satellite-delivered independent "superstations" such as WGN), commercial radio
stations and certain low-power television stations carried by such systems.
Must carry requests can dilute the appeal of a cable system's programming
offerings because a cable system with limited channel capacity may be required
to forego carriage of popular channels in favor of less popular broadcast
stations electing must carry. Retransmission consent demands may require
substantial payments or other concessions.
The FCC tentatively decided against imposition of dual digital and analog must
carry in a January 2001 ruling. The ruling resolved a number of technical and
legal matters, and clarifies that a digital-only TV station, commercial or
non-commercial, can immediately assert its right to carriage on a local cable
system. The FCC also said that a TV station that returns its analog spectrum and
converts to digital operations must be carried by local cable systems. At the
same time, however, it initiated further fact gathering that ultimately could
lead to a reconsideration of the tentative conclusion.
We are unable to predict the outcome of this proceeding or the impact any new
carriage requirements might have on the operations of our cable systems.
Designated Access Channels. The Communications Act permits local franchising
authorities to require cable operators to set aside certain channels for public,
educational and governmental access programming. The 1984 Cable Act also
requires cable systems to designate a portion of their channel capacity, up to
15% in some cases, for commercial leased access by unaffiliated third parties to
provide programming that may compete with services offered by the cable
operator. The FCC has adopted rules regulating the terms, conditions and maximum
rates a cable operator may charge for commercial leased access use. The FCC
recently rejected a request that unaffiliated Internet service providers be
found eligible for commercial leased access.
Access to Programming. To spur the development of independent cable programmers
and competition to incumbent cable operators, the 1992 Cable Act imposed
restrictions on the dealings between cable operators and cable programmers. Of
special significance from a competitive business posture, the 1992 Cable Act
precludes video programmers affiliated with cable companies from favoring their
cable operators over new competitors and requires such programmers to sell their
programming to other multichannel video distributors. This provision limits the
ability of vertically integrated cable programmers to offer exclusive
programming arrangements to cable companies. This prohibition is scheduled to
expire in October 2002, unless the FCC determines that an extension is necessary
to protect competition and diversity. There also has been interest expressed in
further restricting the marketing practices of cable programmers, including
subjecting programmers who are not affiliated with cable operators to all of the
existing program access requirements, and subjecting terrestrially delivered
programming to the program access requirements. Terrestrially delivered
programming is programming delivered other than by satellite. Pursuant to the
Satellite Home Viewer Improvement Act, the FCC has adopted regulations governing
46
retransmission consent negotiations between broadcasters and all multichannel
video programming distributors, including cable and DBS.
Inside Wiring; Subscriber Access. In an order issued in 1997, the FCC
established rules that require an incumbent cable operator upon expiration of a
multiple dwelling unit service contract to sell, abandon, or remove "home run"
wiring that was installed by the cable operator in a multiple dwelling unit
building. These inside wiring rules are expected to assist building owners in
their attempts to replace existing cable operators with new programming
providers who are willing to pay the building owner a higher fee, where such a
fee is permissible. The FCC has also proposed abrogating all exclusive multiple
dwelling unit service agreements held by incumbent operators, but allowing such
contracts when held by new entrants. In another proceeding, the FCC has
preempted restrictions on the deployment of private antennas on rental property
within the exclusive use of a tenant, such as balconies and patios. This FCC
ruling may limit the extent to which we along with multiple dwelling unit owners
may enforce certain aspects of multiple dwelling unit agreements which otherwise
prohibit, for example, placement of digital broadcast satellite receiver
antennae in multiple dwelling unit areas under the exclusive occupancy of a
renter. These developments may make it even more difficult for us to provide
service in multiple dwelling unit complexes.
Franchise Procedures. The 1984 Cable Act affirms the right of franchising
authorities (state or local, depending on the practice in individual states) to
award one or more franchises within their jurisdictions and prohibits
non-grandfathered cable systems from operating without a franchise in such
jurisdictions. The 1992 Cable Act encourages competition with existing cable
systems by (i) allowing municipalities to operate their own cable systems
without franchises; (ii) preventing franchising authorities from granting
exclusive franchises or from unreasonably refusing to award additional
franchises covering an existing cable system's service area; and (iii)
prohibiting (with limited exceptions) the common ownership of cable systems and
collocated MMDS or SMATV systems. The FCC has relaxed its restrictions on
ownership of SMATV systems to permit a cable operator to acquire SMATV systems
in the operator's existing franchise area so long as the programming services
provided through the SMATV system are offered according to the terms and
conditions of the cable operator's local franchise agreement. The 1996 Telecom
Act provides that the cable/SMATV and cable/MMDS cross-ownership rules do not
apply in any franchise area where the operator faces "effective competition" as
defined by federal law.
The Cable Acts also provide that in granting or renewing franchises, local
authorities may establish requirements for cable-related facilities and
equipment, but not for video programming or information services other than in
broad categories. The Cable Acts limit the payment of franchise fees to 5% of
revenues derived from cable operations and permit the cable operator to obtain
modification of franchise requirements by the franchise authority or judicial
action if warranted by changed circumstances. A federal appellate court held
that a cable operator's gross revenue includes all revenue received from
subscribers, without deduction, and overturned an FCC order which had held that
a cable operator's gross revenue does not include money collected from
subscribers that is allocated to pay local franchise fees. We cannot predict the
ultimate resolution of these matters. The 1996 Telecom Act generally prohibits
franchising authorities from (i) imposing requirements in the cable franchising
process that require, prohibit or restrict the provision of telecommunications
services by an operator, (ii) imposing franchise fees on revenues derived by the
operator from providing telecommunications services over its cable system, or
(iii) restricting an operator's use of any type of subscriber equipment or
transmission technology.
The 1984 Cable Act contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. The 1992 Cable Act made
several changes to the renewal process that could make it easier for a
franchising authority to deny renewal. Moreover, even if the franchise is
renewed, the franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal. Similarly, if a franchising
authority's consent is required for the purchase or sale of a cable system or
franchise, such authority may attempt to impose more burdensome or onerous
franchise requirements in connection with a request for such consent.
Historically, franchises have been
47
renewed for cable operators that have provided satisfactory services and have
complied with the terms of their franchises. We believe that we have generally
met the terms of our franchises and have provided quality levels of service. We
anticipate that our future franchise renewal prospects generally will be
favorable.
Various courts have considered whether franchising authorities have the legal
right to limit the number of franchises awarded within a community and to impose
certain substantive franchise requirements (e.g. access channels, universal
service and other technical requirements). These decisions have been
inconsistent and, until the US Supreme Court rules definitively on the scope of
cable operators' First Amendment protections, the legality of the franchising
process generally and of various specific franchise requirements is likely to be
in a state of flux.
Pole Attachment. The Communications Act requires the FCC to regulate the rates,
terms and conditions imposed by public utilities for cable systems' use of
utility pole and conduit space unless state authorities can demonstrate that
they adequately regulate pole attachment rates. In the absence of state
regulation, the FCC administers pole attachment rates on a formula basis.
The FCC has concluded that, in the absence of state regulation, it has
jurisdiction to determine whether utility companies have justified their demand
for additional rental fees and that the Communications Act does not permit
disparate rates based on the type of service provided over the equipment
attached to the utility's pole. The FCC's existing pole attachment rate formula,
which may be modified by a pending rulemaking, governs charges for utilities for
attachments by cable operators providing only cable services. The 1996 Telecom
Act and the FCC's implementing regulations modify the current pole attachment
provisions of the Communications Act by immediately permitting certain providers
of telecommunications services to rely upon the protections of the current law
and by requiring that utilities provide cable systems and telecommunications
carriers with nondiscriminatory access to any pole, conduit or right-of-way
controlled by the utility.
The FCC's new rate formula, effective in 2001, will govern the maximum rate
certain utilities may charge for attachments to their poles and conduit by
companies providing telecommunications services, including cable operators.
Several parties have requested the FCC to reconsider its new regulations and
several parties have challenged the new rules in court. A federal appellate
court recently upheld the constitutionality of the statutory provision that
requires utilities provide cable systems and telecommunications carriers with
nondiscriminatory access to any pole, conduit or right-of-way controlled by the
utility.
The favorable pole attachment rates afforded cable operators under federal law
can be gradually increased by utility companies owning the poles, beginning in
2001, if the operator provides telecommunications service, as well as cable
service, over its plant. The FCC clarified that a cable operator's favorable
pole rates are not endangered by the provision of Internet access, but a recent
decision by the 11th Circuit Court of Appeals disagreed and suggested that
Internet traffic is neither cable service nor telecommunications service and
might leave cable attachments that carry Internet traffic ineligible for Pole
Attachment Act protections. This decision could lead to substantial increases in
pole attachment rates. The cable industry sought review by the United States
Supreme Court, which is now reviewing the decision, and the Eleventh Circuit
mandate has been stayed pending Supreme Court action.
We are unable to predict the outcome of the legal challenge to the FCC's
regulations or the ultimate impact any revised FCC rate formula or any new pole
attachment rate regulations might have on our business and operations.
Copyright. Cable television systems are subject to federal copyright licensing
covering carriage of television and radio broadcast signals. In exchange for
filing certain reports and contributing a percentage of their revenues to a
federal copyright royalty pool, that varies depending on the size of the system,
the number of distant broadcast television signals carried, and the location of
the cable system, cable operators can obtain blanket permission to retransmit
copyrighted material included in broadcast signals. The U.S. copyright office
recently adopted an
48
industry agreement providing for a modest increase in the copyright royalty
rates. The possible modification or elimination of this compulsory copyright
license is the subject of continuing legislative review and could adversely
affect our ability to obtain desired broadcast programming. We cannot predict
the outcome of this legislative activity. Copyright clearances for nonbroadcast
programming services are arranged through private negotiations.
Cable operators distribute locally originated programming and advertising that
use music controlled by the two principal major music performing rights
organizations, the American Society of Composers, Authors and Publishers and
Broadcast Music, Inc. The cable industry has had a long series of negotiations
and adjudications with both organizations. A prior voluntarily negotiated
agreement with Broadcast Music has now expired, and is subject to further
proceedings. The governing rate court recently set retroactive and prospective
cable industry rates for American Society of Composers music based on the
previously negotiated Broadcast Music rate. Although we cannot predict the
ultimate outcome of these industry proceedings or the amount of any license fees
we may be required to pay for past and future use of association-controlled
music, we do not believe such license fees will be significant to our business
and operations.
Other Statutory and FCC Provisions. The 1992 Cable Act requires cable operators
to block fully both the video and audio portion of sexually explicit or indecent
programming on channels that are primarily dedicated to sexually oriented
programming or alternatively to carry such programming only at "safe harbor"
time periods currently defined by the FCC as the hours between 10 p. m. to 6 a.
m. A three-judge federal district court determined that this provision was
unconstitutional. The United States Supreme Court is currently reviewing the
lower court's ruling. The Communications Act also includes provisions, among
others, concerning horizontal and vertical ownership of cable systems, customer
service, subscriber privacy, marketing practices, equal employment opportunity,
regulation of technical standards and equipment compatibility.
The FCC has various rulemaking proceedings pending that will implement the 1996
Telecom Act; it also has adopted regulations implementing various provisions of
the 1992 Cable Act and the 1996 Telecom Act that are the subject of petitions
requesting reconsideration of various aspects of its rulemaking proceedings. The
FCC has the authority to enforce its regulations through the imposition of
substantial fines, the issuance of cease and desist orders and/or the imposition
of other administrative sanctions, such as the revocation of FCC licenses needed
to operate certain transmission facilities often used in connection with cable
operations.
Other Regulations of the FCC. In addition to the FCC regulations noted above,
there are other regulations of the FCC covering such areas as the following.
- Equal employment opportunity
- Subscriber privacy
- Programming practices, including, among other things
- Syndicated program exclusivity, which is a FCC rule which requires a
cable system to delete particular programming offered by a distant
broadcast signal carried on the system which duplicates the programming
for which a local broadcast station has secured exclusive distribution
rights
- Network program nonduplication
- Local sports blackouts
- Indecent programming
- Lottery programming
- Political programming
- Sponsorship identification
- Children's programming advertisements
- Closed captioning
- Registration of cable systems and facilities licensing
- Maintenance of various records and public inspection files
49
- Aeronautical frequency usage
- Lockbox availability
- Antenna structure notification
- Tower marking and lighting
- Consumer protection and customer service standards
- Technical standards
- Consumer electronics equipment compatibility
- Emergency alert systems
The FCC recently ruled that cable customers must be allowed to purchase cable
converters from third parties and established a multi-year phase-in during which
security functions, which would remain in the operator's exclusive control,
would be unbundled from basic converter functions, which could then be satisfied
by third party vendors. The first phase implementation date was July 1, 2000.
Compliance was technically and operationally difficult in our locations, so we
and several other cable operators filed a request at the FCC that the
requirement be waived in those systems. The request resulted in a temporary
deferral of the compliance deadline for those systems.
The FCC recently initiated an inquiry to determine whether the cable industry's
future provision of interactive services should be subject to regulations
ensuring equal access and competition among service vendors. The inquiry, which
grew out of the Commission's review of the AOL-Time Warner merger, is in its
earliest stages, but is yet another expression of regulatory concern regarding
control over cable capacity.
The FCC has ongoing rulemaking proceedings that may change its existing rules or
lead to new regulations. We are unable to predict the impact that any further
FCC rule changes may have on our business and operations. Other bills and
administrative proposals pertaining to cable communications have previously been
introduced in Congress or have been considered by other governmental bodies over
the past several years. It is probable that Congress and other governmental
bodies will make further attempts to regulate cable communications services.
State and Local Regulation. Because our cable communications systems use local
streets and rights-of-way, our systems are subject to state and local
regulation. Cable communications systems generally are operated pursuant to
franchises, permits or licenses granted by a municipality or other state or
local government entity. Federal law prohibits local franchising authorities
from granting exclusive franchises or from unreasonably refusing to award
additional franchises. Franchises generally are granted for fixed terms and in
many cases are terminable if the franchisee fails to comply with material
provisions. The terms and conditions of franchises vary materially from
jurisdiction to jurisdiction. Each franchise generally contains provisions
governing cable service rates, franchise fees, franchise term, system
construction and maintenance obligations, system channel capacity, design and
technical performance, customer service standards, franchise renewal, sale or
transfer of the franchise, territory of the franchisee, indemnification of the
franchising authority, use and occupancy of public streets and types of cable
services provided. The 1992 Cable Act immunizes franchising authorities from
monetary damage awards arising from regulation of cable communications systems
or decisions made on franchise grants, renewals, transfers and amendments. The
1996 Telecom Act provides that franchising fees are limited to an operator's
cable-related revenues and do not apply to revenues that a cable operator
derives from providing new telecommunications services.
Internet Operations
The following is a summary of federal laws, regulations and tariffs, and a
description of certain state and local laws pertaining to our Internet
operations.
General. With significant growth in Internet activity and commerce over the past
several years the FCC and other regulatory bodies have been challenged to
develop new models that allow them to achieve the public policy goals of
competition and universal service. Many aspects of regulation and coordination
of Internet activities and
50
traffic are evolving and are facing unclear regulatory futures. Changes in
regulations in the future will have a significant impact on ISPs, Internet
commerce and Internet services.
The Internet has been able to grow and develop outside the existing regulatory
structure because the FCC has made conscious decisions to limit the application
of its rules. The federal government's efforts have been directed away from
burdening the Internet with regulation. ISPs and other companies in the Internet
industry have not been required to gain regulatory approval for their actions.
The 1996 Telecom Act adopts such a position. The 1996 Act states that it is the
policy of the United States "to preserve the vibrant and competitive free market
that presently exists for the Internet and other interactive computer services,
unfettered by Federal or State regulation."
Regulatory policy approaches toward the Internet have focused on several areas:
avoiding unnecessary regulation, questioning the applicability of traditional
rules, Internet governance (such as the allocation of domain names),
intellectual property, network reliability, privacy, spectrum policy, standards,
security, and international regulation.
Government may influence the evolution of the Internet in many ways, including
directly regulating, participating in technical standards development, providing
funding, restricting anti-competitive behavior by dominant firms, facilitating
industry cooperation otherwise prohibited by antitrust laws, promoting new
technologies, encouraging cooperation between private parties, representing the
United States in international intergovernmental bodies, and large-scale
purchasing of services.
There are many ways Internet growth could be negatively impacted which may
require future regulation and oversight. Moving toward proprietary standards or
closed networks would reduce the degree to which new services could leverage the
existing infrastructure. The absence of competition in the ISP market, or the
telecommunications infrastructure market, could reduce incentives for
innovation. Excessive or misguided government intervention could distort the
operation of the marketplace, and lead companies to expend valuable resources
working through the regulatory process. Insufficient government involvement may
also, however, have negative consequences. Some issues may require a degree of
central coordination, even if only to establish the initial terms of a
distributed, locally-controlled system. The end result, in the absence of
collective action, may be an outcome that no one favors. In addition, the
failure of the federal government to identify Internet-related areas that should
not be subject to regulation leaves open opportunities for state, local, or
international bodies to regulate excessively and/or inconsistently.
Internet Governance and Standards. There is no one entity or organization that
governs the Internet. Each facilities-based network provider that is
interconnected with the global Internet controls operational aspects of their
own network. Certain functions, such as domain name routing and the definition
of the TCP/IP protocol, are coordinated by an array of quasi-governmental,
intergovernmental, and non-governmental bodies. The United States government, in
many cases, has handed over responsibilities to these bodies through contractual
or other arrangements.
In other cases, entities have emerged to address areas of need such as the
Internet Society ("ISOC"), a non-profit professional society founded in 1992.
ISOC organizes working groups and conferences, and coordinates some of the
efforts of other Internet administrative bodies. The Internet Engineering Task
Force ("IETF"), an open international body mostly comprised of volunteers, is
primarily responsible for developing Internet standards and protocols. The work
of the IETF is coordinated by the Internet Engineering Steering Group, and the
Internet Architecture Board, which are affiliated with ISOC. The Internet
Assigned Numbers Authority handles Internet addressing matters under a contract
between the Department of Defense and the Information Sciences Institute at the
University of Southern California.
51
The legal authority of any of these bodies is unclear. Most of the underlying
architecture of the Internet was developed under the auspices, directly or
indirectly, of the United States government. The government has not, however,
defined whether it retains authority over Internet management functions, or
whether these responsibilities have been delegated to the private sector. The
degree to which any existing body can lay claim to representing "the Internet
community" is also unclear. Membership in the existing Internet governance
entities is drawn primarily from the research and technical communities.
1996 Telecom Act. The 1996 Telecom Act provides little direct guidance as to
whether the FCC has authority to regulate Internet-based services. Section 223
concerns access by minors to obscene, harassing, and indecent material over the
Internet and other interactive computer networks, and sections 254, 706, and 714
address mechanisms to promote the availability of advanced telecommunications
services, possibly including Internet access. None of these sections, however,
specifically addresses the FCC's jurisdiction.
Nothing in the 1996 Telecom Act expressly limits the FCC's authority to regulate
services and facilities connected with the Internet, to the extent that they are
covered by more general language in any section of the Act. Moreover, it is not
clear what such a limitation would mean even if it were adopted. The
Communications Act directs the FCC to regulate "interstate and foreign commerce
in communication by wire and radio," and the FCC and state public utility
commissions indisputably regulate the rates and conditions under which ISPs
purchase services and facilities from telephone companies. Given the absence of
clear statutory guidance, the FCC must determine whether or not it has the
authority or the obligation to exercise regulatory jurisdiction over specific
Internet-based activities. The FCC may also decide whether to forebear from
regulating certain Internet-based services. Forbearance allows the FCC to
decline to adopt rules that would otherwise be required by statute. Under
section 401 of the 1996 Telecom Act, the FCC must forbear if regulation would
not be necessary to prevent anticompetitive practices and to protect consumers,
and forbearance would be consistent with the public interest. Finally, the FCC
could consider whether to preempt state regulation of Internet services that
would be inconsistent with achievement of federal goals.
FCC Regulations. The FCC has not attempted to regulate the companies that
provide the software and hardware for Internet telephony, or the access
providers that transmit their data, as common carriers or telecommunications
service providers. In March 1996, America's Carriers Telecommunication
Association ("ACTA"), a trade association primarily comprised of small and
medium-size interexchange carriers, filed a petition with the FCC asking the FCC
to regulate Internet telephony. ACTA argues that providers of software that
enables real-time voice communications over the Internet should be treated as
common carriers and subject to the regulatory requirements of Title II. The FCC
has sought comment on ACTA's request. Other countries are considering similar
issues.
The FCC has not considered whether any of the rules that relate to radio and
television broadcasters should also apply to analogous Internet-based services.
The vast majority of Internet traffic today travels over wire facilities, rather
than the radio spectrum. As a policy matter, however, a continuous, live,
generally-available music broadcast over the Internet may appear similar to a
traditional radio broadcast, and the same arguments may be made about streaming
video applications. The FCC will need to consider the underlying policy
principles that, in the language of the Act and in FCC decisions, have formed
the basis for regulation of the television and radio broadcast industries.
The FCC does not regulate the prices charged by ISPs or Internet backbone
providers. However, the vast majority of users connect to the Internet over
facilities of existing telecommunications carriers. Those telecommunications
carriers are subject to varying levels of regulation at both the federal and the
state level. Thus, regulatory decisions exercise a significant influence over
the economics of the Internet market. Economics is expected to drive the
development of both the Internet and of other communications technologies.
52
Internet access is understood to be an enhanced service under FCC rules;
therefore ISPs are treated as end users, rather than carriers, for purposes of
the FCC's interstate access charge rules. This distinction was created when the
FCC established the access charge system in 1983. Thus, when ISPs purchase lines
from LECs, the ISPs buy those lines under the same tariffs that any business
customer would use -- typically voice grade measured business lines or
23-channel ISDN primary rate interface (PRI). Although these services generally
involve a per-minute usage charge in addition to a monthly fee, the usage charge
is assessed only for outbound calls. ISPs, however, exclusively use these lines
to receive calls from their customers, and thus effectively pay flat monthly
rates. By contrast, IXCs that interconnect with LECs are considered carriers,
and thus are required to pay interstate access charges for the services they
purchase. Most of the access charges that carriers pay are usage-sensitive in
both directions. Thus, IXCs are assessed per-minute charges for both originating
and terminating calls. The FCC concluded in the Local Competition Order that the
rate levels of access charges appear to significantly exceed the incremental
cost of providing these services. The FCC in December 1996 launched a
comprehensive proceeding to reform access charges in a manner consistent with
economic efficiency and the development of local competition.
State and Local Regulations. The revenue effects of Internet usage today depend
to a significant extent on the structure of state and local tariffs. Internet
usage generates less revenue for LECs in states and jurisdictions where flat
local service rates have been set low, with compensating revenues in the form of
per-minute intrastate toll charges. Because ISPs only receive local calls, they
do not incur these usage charges. By contrast, in states and jurisdictions where
flat charges make up a higher percentage of LEC revenues, ISPs will have a less
significant revenue effect. ISP usage is also affected by the relative pricing
of services such as ISDN Primary Rate Interface (PRI), frame relay, and
fractional T-1 connections, which are alternatives to analog business lines.
Prices for these services, and the price difference on a per-voice-channel basis
between the options available to ISPs, vary widely across different states and
jurisdictions. In many cases, tariffs for these and other data services are
based on assumptions that do not reflect the realities of the Internet access
market today. The scope of local calling areas also affects the architecture of
Internet access services. In states and jurisdictions with larger unmeasured
local calling areas, ISPs need fewer POPs in order to serve the same customers
through a local call.
We are presently unable to determine what the impact of potential Internet
regulatory actions and decisions will be on our liquidity, results of operations
and cash flows.
Financial Information about our Foreign and Domestic Operations and Export Sales
Although we have several agreements to help originate and terminate
international toll traffic, we do not have foreign operations or export sales.
We conduct our operations throughout the western contiguous United States,
Alaska and Hawaii and believe that any subdivision of our operations into
distinct geographic areas would not be meaningful. Revenues associated with
international toll traffic were $3.8 million, $5.5 million and $7.0 million for
the years ended December 31, 2000, 1999, and 1998, respectively.
Seasonality
Our long-distance revenues have historically been highest in the summer months
as a result of temporary population increases attributable to tourism and
increased seasonal economic activity such as construction, commercial fishing,
and oil and gas activities. Our cable television revenues, on the other hand,
are higher in the winter months because consumers tend to watch more television,
and spend more time at home, during these months. Our local service and Internet
operations are not expected to exhibit significant seasonality, with the
exception of SchoolAccess(TM) Internet services that are reduced during the
summer months. Our ability to implement construction projects is also reduced
during the winter months because of cold temperatures, snow and short daylight
hours.
Customer-Sponsored Research
We have not expended material amounts during the last three fiscal years on
customer-sponsored research activities.
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Backlog of Orders and Inventory
As of December 31, 2000 and 1999, our long-distance services segment had a
backlog of equipment sales and private line orders of approximately $1,570,000
and $830,000, respectively. Approximately $1.0 million of the 2000 backlog
represents recurring monthly charges for private line and telemedicine services.
The increase in backlog as of December 31, 2000 can be attributed to a
combination of increased equipment sales activity at the end of the fourth
quarter in 2000 as compared to 1999 and increased private line circuit orders
pending at December 31, 2000 as compared to 1999. Many of our customers delayed
equipment orders so that their systems would be stable at the turn of the
century, resulting in reduced sales activity and order backlog at December 31,
1999. We expect that all of the equipment sales and private line orders in
backlog at the end of 2000 will be delivered during 2001.
We entered into an agreement effective July 1999 for a $19.5 million sale of
fiber capacity that was completed in January 2001 (see note 14 to the
Consolidated Financial Statements included in Part II of this Report for more
information).
Geographic Concentration and Alaska Economy
We offer voice and data telecommunication and video services to customers
primarily throughout Alaska. As a result of this geographic concentration,
growth of our business and our operations depend upon economic conditions in
Alaska. The economy of Alaska is dependent upon the natural resource industries,
and in particular oil production, as well as investment earnings, tourism,
government, and United States military spending. Any deterioration in these
markets could have an adverse impact on us. Oil revenues are now the third
largest source of state revenues, following investment income and federal funds.
You should see Part II, Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations for more information about the effect of
geographic concentration and the Alaska Economy on us.
Employees
We employed 1,092 persons as of March 14, 2001, and are not parties to union
contracts with our employees. We believe our future success will depend upon our
continued ability to attract and retain highly skilled and qualified employees.
We believe that relations with our employees are satisfactory.
Other
No material portion of our businesses is subject to renegotiation of profits or
termination of contracts at the election of the federal government.
Item 2. Properties
General
Our properties do not lend themselves to description by character or location of
principal units. Our investment in property, plant and equipment in our
consolidated operations consisted of the following at December 31:
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2000 1999
------ ------
Telephone distribution systems 58.0% 64.5%
Cable television distribution systems 21.1% 23.1%
Support equipment 8.1% 10.2%
Property and equipment under capital leases 10.0% 0.7%
Construction in progress 1.4% 0.7%
Transportation equipment 0.8% 0.5%
Land and buildings 0.6% 0.3%
--------------------
Total 100.0% 100.0%
====================
These properties are divided among our operating segments at December 31, 2000
as follows: long-distance services, 58.3%; cable services, 22.5%; local access
services, 6.5%; Internet services, 4.9%; and other, 7.8%.
These properties consist primarily of switching equipment, satellite earth
stations, fiber-optic networks, microwave radio and cable and wire facilities,
cable head-end equipment, coaxial distribution networks, routers, servers,
transportation equipment, computer equipment and general office equipment.
Substantially all of our properties secure our Senior Holdings Loan and Fiber
Facility. You should see note 4 to the Notes to Consolidated Financial
Statements included in Part II of this Report for further discussion.
Our construction in progress totaled $8.1 million at December 31, 2000,
consisting of telecommunications, Internet and support systems projects that
were incomplete at December 31, 2000. Our construction in progress totaled $2.9
million at December 31, 1999, consisting of telecommunications, cable and
Internet projects that were incomplete at December 31, 1999.
Central office equipment, buildings, furniture and fixtures and certain
operating and other equipment are insured under a blanket property insurance
program. This program provides substantial limits of coverage against "all
risks" of loss including fire, windstorm, flood, earthquake and other perils not
specifically excluded by the terms of the policies. We currently self-insure all
of our cable and fiber optic outside plant against casualty losses.
Long-Distance Services
We operate a modern, competitive telecommunications network employing the latest
digital transmission technology based upon fiber optic and digital microwave
facilities within and between Anchorage, Fairbanks and Juneau. Our network
includes digital fiber optic cables linking Alaska to the contiguous 48 states
and providing access to other carriers' networks for communications around the
world. We use satellite transmission to remote areas of Alaska and for certain
interstate and intrastate traffic.
Our long-distance services segment owns properties and facilities including
satellite earth stations, and distribution, transportation and office equipment.
Additionally, in December 1992 we acquired access to capacity on an undersea
fiber optic cable from Seward, Alaska to Pacific City, Oregon. We completed
construction of an additional fiber optic cable facility linking Alaska to
Seattle, Washington in February 1999, which is owned subject to an outstanding
mortgage.
We entered into a purchase and lease-purchase option agreement in August 1995
for the acquisition of satellite transponders on the PanAmSat Galaxy XR
satellite to meet our long-term satellite capacity requirements. We operate the
satellite pursuant to a long-term capital lease arrangement with a leasing
company. The purchase and lease-purchase option agreement provided for the
interim lease of transponder capacity on the PanAmSat Galaxy IX satellite
through the delivery of the purchased transponders on Galaxy XR in March 2000.
55
We lease our long-distance services industry segment's executive, corporate and
administrative facilities in Anchorage, Fairbanks and Juneau, Alaska. Our
operating, executive, corporate and administrative properties are in good
condition. We consider our properties suitable and adequate for our present
needs and they are being fully utilized.
Cable Services
The Cable Systems serve 31 communities and areas in Alaska including Anchorage,
Fairbanks and Juneau, the state's three largest urban areas. As of December 31,
2000 the Cable Systems consisted of approximately 1,851 miles of installed cable
plant having between 300 to 550 MHz of channel capacity. Our principal physical
assets consist of a cable television distribution plant and equipment, including
signal receiving, encoding and decoding devices, headend reception facilities,
distribution systems and customer drop equipment for each of our cable
television systems.
Our cable television plant and related equipment are generally attached to
utility poles under pole rental agreements with local public utilities and
telephone companies, and in certain locations are buried in underground ducts or
trenches. We own or lease real property for signal reception sites and business
offices in many of the communities served by our systems and for our principal
executive offices.
We own the receiving and distribution equipment of each system. In order to keep
pace with technological advances, we are maintaining, periodically upgrading and
rebuilding the physical components of our cable communications systems. Such
properties are in good condition. We own all of our service vehicles. We
consider our properties suitable and adequate for our present and anticipated
future needs.
Local Access Services
We operate a modern, competitive local access telecommunications network
employing the latest digital transmission technology based upon fiber optic
facilities within Anchorage. Our outside plant consists of connecting lines
(aerial, underground and buried cable) not on customers' premises, the majority
of which is on or under public roads, highways or streets, while the remainder
is on or under private property. Central office equipment primarily consists of
digital electronic switching equipment and circuit equipment. Operating
equipment consists of motor vehicles and other equipment.
Substantially all of our local access services' central office equipment,
administrative and business offices, and customer service centers are in leased
facilities. Such properties are in good condition. We consider our properties
suitable and adequate for our present and anticipated future needs.
Internet Services
We operate a modern, competitive Internet network employing the latest available
technology. We provide access to the Internet using a platform that includes
many of the latest advancements in technology. The physical platform is
concentrated in Anchorage and is extended into many remote areas of the state.
Our Internet platform includes a trunk connecting the Anchorage POP to Internet
access points in Seattle through multiple, diversely routed upstream Internet
networks, and various other routers, servers and support equipment.
We lease our Internet services industry segment's operating facilities, located
primarily in Anchorage. Such properties are in good condition. We consider our
properties suitable and adequate for our present and anticipated future needs.
Capital Expenditures
Capital expenditures consist primarily of (a) gross additions to property, plant
and equipment having an estimated service life of one year or more, plus the
incidental costs of preparing the asset for its intended use, and (b) gross
additions to capitalized software.
56
The total investment in property, plant and equipment has increased from $178.2
million at January 1, 1996 to $507.9 million at December 31, 2000, including
construction in progress and not including deductions of accumulated
depreciation. Significant additions to property, plant and equipment will be
required in the future to meet the growing demand for communications, Internet
and entertainment services and to continually modernize and improve such
services to meet competitive demands.
Our capital expenditures for 1996 through 2000 were as follows (in millions):
1996 $ 38.6
1997 $ 64.6
1998 $149.0
1999 $ 36.6
2000 $ 48.9
We project capital expenditures of approximately $45 to $51 million for 2001,
consisting of $25 to $27 million for long-distance services, $10 to $11 million
for cable services, $4 to $5 million for local access services, $5 to $6 million
for Internet services, and $1 to $2 million for wireless services. A majority of
the expenditures will expand, enhance and modernize our current networks,
facilities and operating systems, and will develop wireless and other
businesses.
During 2000, we funded our normal business capital requirements substantially
through internal sources and, to the extent necessary, from external financing
sources. We expect expenditures for 2001 to be financed in the same manner.
Insurance
We have insurance to cover risks incurred in the ordinary course of business,
including general liability, property coverage, business interruption and
workers' compensation insurance in amounts typical of similar operators in our
industry and with reputable insurance providers. As is typical in the cable
industry, we do not insure our outside plant. We believe our insurance coverage
is adequate.
Item 3. Legal Proceedings
Except as set forth in this item, neither the Company, its property nor any of
its subsidiaries or their property is a party to or subject to any material
pending legal proceedings. We are parties to various claims and pending
litigation as part of the normal course of business. We are also involved in
several administrative proceedings and filings with the FCC, Department of Labor
and state regulatory authorities. In the opinion of management, the nature and
disposition of these matters are considered routine and arising in the ordinary
course of business which management believes, even if resolved unfavorably to
us, would not have a materially adverse affect on our business or financial
position, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of 2000 to a vote of
security holders, through the solicitation of proxies or otherwise
57
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Market Information for Common Stock
Shares of GCI's Class A common stock are traded on the Nasdaq National Market
tier of The Nasdaq Stock Market under the symbol GNCMA. Shares of GCI's Class B
common stock are traded on the Over-the-Counter market. Each share of Class B
common stock is convertible, at the option of the holder, into one share of
Class A common stock. The following table sets forth the high and low sales
price for the above-mentioned common stock for the periods indicated. Market
price data were obtained from the Nasdaq Stock Market quotation system. The
prices, rounded up to the nearest eighth, represent prices between dealers, do
not include retail markups, markdowns, or commissions, and do not necessarily
represent actual transactions.
Class A Class B
---------------------------------------------------------------
High Low High Low
1999:
First Quarter 5 1/4 4 5 1/4 4
Second Quarter 8 4 8 4
Third Quarter 7 4 3/4 7 4 3/4
Fourth Quarter 6 1/4 3 3/4 6 1/4 3 3/4
2000:
First Quarter 7 7/8 4 7 7/8 4
Second Quarter 5 7/8 4 3/8 5 7/8 4 3/8
Third Quarter 8 1/8 4 5/8 8 1/8 4 5/8
Fourth Quarter 8 4 7/8 8 4 7/8
Holders
As of December 31, 2000 there were 1,819 holders of record of GCI's Class A
common stock and 530 holders of record of GCI's Class B common stock (amounts do
not include the number of shareholders whose shares are held of record by
brokers, but do include the brokerage house as one shareholder).
Dividends
GCI and GCI, Inc. have never paid cash dividends on their common stock and have
no present intention of doing so. Payment of cash dividends in the future, if
any, will be determined by GCI's Board of Directors in light of our earnings,
financial condition and other relevant considerations. Our existing bank loan
agreements contain provisions that prohibit payment of dividends, other than
stock dividends (you should see note 4 to the Consolidated Financial Statements
included in Part II of this Report for more information).
Stock Transfer Agent and Registrar
Mellon Investor Services LLC is our stock transfer agent and registrar.
Item 6. Selected Financial Data
The following table presents selected historical information relating to
financial condition and results of operations over the past five years.
58
Years ended December 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Amounts in thousands except per share amounts)
Revenues (1) $292,605 279,179 246,795 223,809 164,894
Net earnings (loss) before income taxes,
extraordinary item and cumulative effect of a
change in accounting principle (2) $(21,649) (14,866) (10,920) (2,235) 12,690
Loss on early extinguishment of debt, net of
income tax benefit of $180 $ 0 0 0 521 0
Cumulative effect of a change in accounting
principal, net of income tax benefit of $245 $ 0 344 0 0 0
Net earnings (loss) (13,234) (9,527) (6,797) (2,183) 7,462
Basic net earnings (loss) per common share $ (0.29) (0.21) (0.14) (0.05) 0.28
Diluted net earnings (loss) per common share $ (0.29) (0.21) (0.14) (0.05) 0.27
Total assets (3) $679,007 643,151 649,445 545,302 447,335
Long-term debt, including current portion (3) $334,400 339,400 351,657 250,084 223,242
Obligations under capital leases, including
current portion (5) $ 48,696 1,674 2,186 1,188 746
Total stockholders' equity (4) $183,480 192,548 200,007 204,439 149,554
Dividends declared per Common share (6) $ 0.00 0.00 0.00 0.00 0.00
---------------------
1 The 1997 revenue increase is primarily attributed to reporting 12
months of cable television service revenues as compared to two months
reported in 1996.
2 Our net losses in 2000, 1999, 1998 and 1997 are primarily attributed to
additional depreciation, amortization and interest expense resulting
from the cable company acquisitions in October 1996. Net losses in
1999, 1998 and 1997 are also attributed to startup losses from our
entry into local access services and Internet services markets. Net
losses in 2000 are also attributed to additional interest expense
resulting from our capital lease of satellite transponders in 2000 as
further described in footnote 5 below.
3 Increases in assets and long-term debt in 1998 as compared to 1997
result primarily from our construction of a fiber-optic system
connecting points in Alaska with Seattle Washington as further
described in note 8 to the accompanying Notes to Consolidated Financial
Statements included in Part II of this Report.
4 The 1997 increase in stockholders' equity is primarily attributed to
our equity offering in August 1997.
5 We entered into a capital lease with a leasing company in March 2000
for the use of satellite transponders, as further described in note 12
to the accompanying Notes to Consolidated Financial Statements included
in Part II of this Report.
6 We have never paid a cash dividend on our common stock and do not
anticipate paying dividends in the foreseeable future. We intend to
retain our earnings, if any, for the development of our business.
Payment of cash dividends in the future, if any, will be determined by
the board of directors in light of our earnings, financial condition,
credit agreements and other relevant considerations. Our existing bank
loan agreements contain provisions that prohibit payment of dividends,
other than stock dividends, as further described in note 4 to the Notes
to Consolidated Financial Statements included in Part II of this
Report.
59
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In the following discussion, General Communication, Inc. and its direct and
indirect subsidiaries are referred to as "we," "us" and "our."
The following discussion and analysis should be read in conjunction with our
Consolidated Financial Statements and the notes thereto. See - Cautionary
Statement Regarding Forward-Looking Statements.
Overview
We have experienced significant growth in recent years through strategic
acquisitions, deploying new business lines, and expansion of our existing
businesses. We have historically met our cash needs for operations and
maintenance capital expenditures through our cash flows from operating
activities. Cash requirements for acquisitions and other capital expenditures
have been provided largely through our financing activities.
Long-Distance Services
During 2000 long-distance services revenue represented 62.4% of consolidated
revenues. Our provision of interstate and intrastate long-distance services to
residential, commercial and governmental customers and to other common carriers
(principally WorldCom and Sprint), and provision of private line and leased
dedicated capacity services accounted for 96.7% of our total long-distance
services revenues during 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 31.6% to
$29.0 million during 2000 as compared to 1999 due primarily to our increased
system capacity and increasing demand for our data services by Internet service
providers ("ISP"), commercial and governmental customers, and others.
We introduced a broadband product offering to hospitals and health clinics in
2000, supplementing broadband revenues derived from our SchoolAccess(TM)
offering to rural school districts. Total broadband revenues increased 98.8% to
$8.6 million in 2000.
Our long-distance cost of sales and services has consisted principally of direct
costs of providing services, including local access charges paid to LECs for
originating and terminating long-distance calls in Alaska, and fees paid to
other long-distance carriers to carry calls terminating in areas not served by
our network (principally the lower 49 states, most of which calls are carried
over WorldCom's network, and international locations, which calls are carried
principally over Sprint's network). During 2000, local access charges accounted
for 68.7% of long-distance cost of sales and services, fees paid to other
long-distance carriers represented 23.6%, satellite transponder lease and
undersea fiber maintenance costs represented 6.5%, and other costs represented
1.2% 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, 39.0% during 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 decreased 2.4% to 88,700 at December 31,
2000 as compared to December 31, 1999 primarily due to a competitor's offering
allowing customers to place unlimited
60
intrastate and interstate calls for a flat monthly fee. We believe our approach
to developing, pricing, and providing long-distance services and bundling
different business segment services will continue to allow us to be competitive
in providing those services.
Revenues derived from other common carriers increased 16.9% to $71.8 million in
2000 as compared to 1999. The increase is due to a 22.6% increase to 682.5
million minutes carried for other common carriers offset by a change in the mix
of wholesale minutes carried for such customers, which decreased the average
rate charged by 4.7%. In conjunction with the purchase of Kanas (see note 14 to
the accompanying Notes to Consolidated Financial Statements included in Part II
of this Report) we negotiated a contract amendment with WorldCom in March 2001.
The amendment extends the contract term for five years to March 2006 and reduces
the rate to be charged by us for certain WorldCom traffic over the extended term
of the contract. The Sprint contract was also amended in March 2001 extending
its term two years to March 2004. The amendment reduces the rate to be charged
by us for certain Sprint traffic over the extended term of the contract.
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.
Cable Services
During 2000, cable television revenues represented 23.2% of consolidated
revenues. The cable systems serve 31 communities and areas in Alaska, including
the state's three largest population centers, Anchorage, Fairbanks and Juneau.
In October 2000 we announced we had agreed to acquire the assets of G.C.
Cablevision, Inc., with over 900 subscribers in Fairbanks and North Pole,
Alaska. The transaction closed in March 2001 following regulatory approvals.
We generate cable services revenues from four 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; (3) advertising sales; and (4) cable modem services (shared
with our Internet services segment). During 2000 programming services generated
82.1% of total cable services revenues, equipment rental and installation fees
accounted for 9.4% of such revenues, advertising sales accounted for 4.0% of
such revenues, cable modem services accounted for 3.5% of such revenues, and
other services accounted for the remaining 1.0% of total cable services
revenues. The primary factors that contribute to year-to-year changes in cable
services revenues are average monthly subscription and pay-per-view rates, the
mix among basic, premium and pay-per-view services and digital and analog
services, the average number of cable television and cable modem 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 2000 programming and copyright expenses represented 45.2% of total cable
cost of sales and selling, general and administrative expenses, and general and
administrative costs represented 48.6% of such total. Marketing and advertising
costs represented approximately 6.2% 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 con-
61
tinue 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 $20.2 million
representing 6.9% of consolidated revenues in 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.
Local access cost of sales represented approximately 46.6% of total local access
services cost of sales and selling, general and administrative expenses during
2000. General and administrative and customer service costs represented
approximately 42.1% of such total expenses, marketing and advertising costs
represented approximately 7.8% of such total expenses, and operating and
engineering expenses represented approximately 3.5% 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
and bundling different business segment services will allow us to be competitive
in providing those services.
Internet Services
We began offering Internet services in several markets in Alaska during 1998. We
generate Internet services revenues from three primary sources: (1) access
product services, including commercial DIAS, ISP DIAS, and retail dial-up
service revenues; (2) network management services; and (3) cable modem services
(a portion of cable modem revenue is recognized by the cable services segment).
Internet services segment revenues totaled $8.4 million representing 2.9% of
total revenues in 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
49.1% of total Internet services cost of sales and selling, general and
administrative expenses during 2000. Internet cost of sales represented
approximately 37.6% of such total expenses and marketing and advertising
represented approximately 13.3% 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 in 1999. Our 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.
62
Other Services, Other Expenses and Net Loss
Telecommunications services revenues reported in the Other segment as described
in note 9 to the accompanying 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 card sales, and installation and leasing of customer's
very small aperture terminal ("VSAT") equipment).
Other services segment revenues represented 4.6% of total revenues in 2000 and
included network solutions and outsourcing revenues totaling $9.2 million,
communications equipment sales totaling $1.9 million and cellular resale and
other revenues totaling $2.3 million.
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 included both capacity within Alaska, and
between Alaska and the lower 49 states. We entered into an agreement effective
July 1999 for a second $19.5 million sale of fiber capacity which was completed
in January 2001.
We have invested approximately $1.9 million in our PCS license at December 31,
2000. We incurred expenditures totaling $560,000 deploying fixed wireless
service in the Anchorage area in 2000 and expect to incur approximately $460,000
in additional expenditures during 2001.
Depreciation, amortization and net interest expense on a consolidated basis
increased $16.8 million in 2000 as compared to 1999 resulting primarily from
additional depreciation on 1999 and 2000 capital expenditures, increased
interest rates on variable rate debt, additional average outstanding capital
lease obligation balances, a $2.0 million charge to interest expense to
write-off previously capitalized interest expense, and $1.7 million of
additional depreciation in 2000 resulting from a change in the estimated
remaining lives of assets that will be replaced in the future. In 1999 interest
expense was offset in part by one month of capitalized construction period
interest attributed to the Alaska United undersea fiber optic cable system and
we charged to interest expense $470,000 of deferred financing costs resulting
from a Holdings Loan Facilities amendment that reduced our borrowing capacity.
Results of Operations
The following table sets forth selected Statement of Operations data as a
percentage of total revenues for the periods indicated (underlying data rounded
to the nearest thousands):
Year Ended December 31, Percentage Change(1)
----------------------- -------------------
2000 1999
vs. vs.
2000 1999 1998 1999 1998
---- ---- ---- ---- ----
Statement of Operations Data:
Revenues:
Long-distance services 62.4% 58.8% 65.5% 11.4% 1.4%
Cable services 23.2% 21.9% 23.3% 11.0% 6.1%
Local access services 6.9% 5.6% 4.0% 30.0% 56.9%
Internet services 2.9% 1.7% 1.0% 75.6% 182.5%
Other services 4.6% 12.0% 6.2% (60.2%) 112.8%
------------------------------------------------------------------
Total revenues 100.0% 100.0% 100.0% 4.8% 13.1%
63
Year Ended December 31, Percentage Change(1)
----------------------- -------------------
2000 1999
vs. vs.
2000 1999 1998 1999 1998
---- ---- ---- ---- ----
Cost of sales and services 40.9% 43.9% 47.0% (2.2%) 5.5%
Selling, general and administrative expenses 35.8% 35.2% 36.4% 6.8% 9.4%
Depreciation and amortization 17.8% 15.3% 13.0% 21.8% 33.2%
------------------------------------------------------------------
Operating income 5.5% 5.6% 3.6% 1.6% 78.1%
Net loss before income taxes and
cumulative change in an accounting
principle (7.4%) (5.3%) (4.4%) 45.6% 36.1%
Net loss before cumulative change in an
accounting principle (4.5%) (3.3%) (2.8%) 44.1% 35.1%
Net loss (4.5%) (3.4%) (2.8%) 38.9% 40.2%
Other Operating Data (2):
Cable services operating income (3) 21.5% 24.4% 22.0% (1.8%) 17.7%
Local services operating loss (4) 4.9% (14.3%) (73.2%) (144.8%) (69.4%)
Internet services operating loss (5) (136.4%) (204.5%) (228.8%) 17.0% 152.4%
--------------------------
(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.
Year Ended December 31, 2000 ("2000") Compared To Year Ended December 31, 1999
("1999").
Revenues
Total revenues increased 4.8% from $279.2 million in 1999 to $292.6 million in
2000. Excluding the undersea fiber optic cable capacity sale in 1999 (see
below), total revenues increased 12.7% in 2000.
Long-distance revenues from residential, commercial, governmental, and other
common carrier customers increased 11.4% to $182.7 million in 2000. The
long-distance revenue increase in 2000 was largely due to the following:
- An increase of 14.4% in total minutes of use to 1,035.4 million minutes,
- An increase of 31.6% in private line and private network transmission
services revenues to $29.0 million in 2000 due to an increased number of
customers,
- An increase of 16.9% in revenues from other common carriers (principally
WorldCom and Sprint) to $71.8 million in 2000, and
- An increase of 98.8% to $8.6 million in 2000 revenues from our
SchoolAccess(TM) offering to rural school districts and a new offering to
rural hospitals and health clinics. Our SchoolAccess(TM) product was
provided to 155 schools at December 31, 2000, a 25% increase from 1999.
Long-distance revenue increases were offset by the following:
- A decrease of 2.3% in the number of active residential, small business and
commercial customers billed from 90,800 at December 31, 1999 to 88,700 at
December 31, 2000 primarily due to a competitor's offering allowing
customers to place unlimited intrastate and interstate calls for a flat
monthly fee, and
- A 10.3% decrease in our average rate per minute on long-distance traffic
from $0.136 per minute in 1999 to $0.122 per minute in 2000 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
64
long-distance competitor, AT&T Alascom, reducing its rates, entry of LECs
into long-distance markets served by us, and to a change in the mix of
wholesale minutes carried for other common carriers.
Cable revenues increased 11.0% to $67.9 million in 2000. Programming services
revenues increased 6.6% to $55.7 million in 2000 resulting from an increase of
approximately 3,600 basic subscribers served to approximately 120,400 and
increased pay-per-view and premium service revenues. New facility construction
efforts in 2000 resulted in approximately 3,400 additional homes passed which
contributed to additional subscribers and revenues in 2000. Programming services
revenue per average basic subscriber per month increased $0.12, or 0.3%. Digital
subscribers increased 131.7% to 13,500 at December 31, 2000. The cable segment's
share of cable modem revenue (offered through our Internet services segment)
increased $2.0 million to $2.4 million in 2000 after the introduction of such
services in the first quarter of 1999.
Local access services revenues increased 30.0% in 2000 to $20.2 million. At
December 31, 2000 approximately 62,000 lines were in service and approximately
800 additional lines were awaiting connection as compared to approximately
45,000 lines in service and approximately 750 additional lines awaiting
connection at December 31, 1999.
Internet services revenues increased 75.6% to $8.4 million in 2000 primarily due
to growth in the average number of customers served. We had approximately 62,600
active residential, commercial and small business retail dial-up Internet
subscribers at December 31, 2000 as compared to approximately 48,000 at December
31, 1999. We had approximately 16,000 active residential, commercial and small
business retail cable modem subscribers at December 31, 2000 as compared to
approximately 5,700 at December 31, 1999.
The decrease in other services revenues from $33.6 million in 1999 to $13.4
million in 2000 is primarily due to the $19.5 million fiber capacity sale in
1999 as previously disclosed.
Cost of Sales and Services
Cost of sales and services totaled $119.7 million in 2000 and $122.5 million in
1999. As a percentage of total revenues, cost of sales and services decreased
from 43.9% in 1999 to 40.9% in 2000.
Long-distance cost of sales and services decreased from $81.0 million in 1999 to
$76.6 million in 2000. Long-distance cost of sales as a percentage of
long-distance revenues decreased from 49.4% in 1999 to 41.9% in 2000 primarily
due to the effect of reassigning traffic carried by satellite transponders and
fiber optic cable 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.
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 25.3% in 1999 to
26.3% 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 50.8% in 1999 to 53.3% in 2000 primarily due to
the fluctuations in cost of sales and services as a percentage of revenues
inherent in this segment as it develops.
Internet services cost of sales and services increased $1.2 million to $4.4
million from 1999 to 2000. Internet services costs of sales as a percentage of
Internet services revenues totaled 65.7% and 52.1% in 1999 and 2000,
65
respectively. The Internet services costs of sales decrease as a percentage of
Internet services revenues is primarily due to a $2.6 million increase in
Internet's portion of cable modem revenue which generally have higher margins
than do other Internet products. As Internet revenues have increased, economies
of scale and more efficient network utilization have also 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 6.8% to $104.9 million in
2000. Selling, general and administrative expenses, as a percentage of total
revenues, increased from 35.2% in 1999 to 35.8% in 2000.
Depreciation and Amortization
Depreciation and amortization expense increased 21.8% to $52.0 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
was recorded during the year ended December 31, 2000, the acquisition of a
satellite transponder asset (see note 12 included in Part II, Item 8,
Consolidated Financial Statements and Supplementary Data) for which depreciation
began in 2000 and the $48.9 million investment in other equipment and facilities
during 2000 for which a partial year of depreciation was recorded during 2000,
and a charge of $1.7 million in 2000 resulting from a change in the estimated
remaining lives of assets that will be replaced in the future.
Interest Expense, Net
Interest expense, net of interest income, increased 24.6% to $38.1 million in
2000. This increase resulted primarily from increases in our average outstanding
indebtedness resulting primarily from the capital lease of satellite transponder
capacity, higher interest rates on our variable rate debt, and a charge of $2.0
million to interest expense in 2000 to write-off previously capitalized interest
expense. The increase was partially offset by principal payments of $11.2
million in 2000. In 1999 interest expense was offset in part by one month of
capitalized construction period interest attributed to the Alaska United
undersea fiber optic cable system and we charged to interest expense $470,000 of
deferred financing costs resulting from a Holdings Loan Facilities amendment
that reduced our borrowing capacity.
Income Tax Benefit
Income tax benefit increased from $5.7 million in 1999 to $8.4 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 38.2% in 1999 to 38.9% in 2000 due
to the increased net loss and the proportional amount of items that are
nondeductible for income tax purposes.
At December 31, 2000, we have (1) tax net operating loss carryforwards of
approximately $103.6 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 2001.
66
Year Ended December 31, 1999 ("1999") Compared to Year Ended December 31, 1998
("1998")
Revenues
Total revenues increased 13.1% from $246.8 million in 1998 to $279.2 million in
1999. Long-distance revenues from residential, commercial, governmental, and
other common carrier customers increased 1.4% to $164.0 million in 1999. The
increase in long-distance revenues was due to the following:
- An increase in the number of active residential, small business and
commercial customers billed from 82,000 at December 31, 1998 to 90,800 at
December 31, 1999,
- An increase of 14.4% in total minutes of use to 905.0 million minutes,
- An increase of 13.4% in private line and private network transmission
services revenues to $22.0 million in 1999 due to an increased number of
customers and
- New revenues in 1999 totaling $4.8 million from the lease of three DS3
circuits on Alaska United facilities within Alaska, and between Alaska and
the lower 49 states and maintenance charges related to the portion of fiber
capacity purchased by ACS.
The increase in long-distance revenue was offset by a 19.0% reduction in our
average rate per minute on long-distance traffic from $0.168 per minute in 1998
to $0.136 per minute in 1999. The decrease in rates resulted from our promotion
of and customers' enrollment in calling plans offering discounted rates and
length of service rebates, such plans being prompted in part by our primary
long-distance competitor, AT&T Alascom, reducing its rates, and the entry of
LECs into long-distance markets served by us. Changes in wholesale product mix
and reduced rates on other common carrier traffic (principally WorldCom and
Sprint) offset other common carrier minutes growth of 24.9% resulting in a 0.3%
increase in revenues to $61.5 million in 1999. Common carrier minute growth was
attributable, in part, to a new category of wholesale minutes carried on our
network.
Cable revenues increased 6.1% to $61.1 million in 1999. Programming services
revenues increased 7.5% to $52.3 million in 1999 resulting from an increase of
approximately 4,800 basic subscribers served by us to approximately 116,800, an
increase of $1.31 in average gross revenue per average basic subscriber per
month and increased pay-per-view and premium service revenues. New facility
construction efforts in the summer of 1999 resulted in approximately 2,800
additional homes passed which contributed to additional subscribers and revenues
in 1999. Other factors include the launch of digital cable services in late 1998
with an associated marketing and sales effort starting in July 1999 and the
introduction of a customer offering requiring a year commitment in exchange for
a discounted price that reduced customer churn. Equipment rental and
installation revenues increased 18.9% to $5.4 million in 1999 due to an increase
in subscribers to our digital service and associated converters that are billed
at premium rates.
Local access services revenues increased 56.9% to $15.5 million in 1999.
Approximately 45,000 lines were in service and 750 additional lines were
awaiting connection at December 31, 1999.
Internet services revenues increased 182.5% to $4.8 million in 1999. We had
approximately 48,000 active residential, commercial and small business retail
dial-up Internet subscribers at December 31, 1999 as compared to approximately
7,200 at February 9, 1999. We had approximately 5,700 active residential,
commercial and small business retail cable modem subscribers at December 31,
1999 after launching this service offering in the second quarter of 1999.
Other services revenues increased 112.8% to $33.6 million in 1999. The 1999
increase was largely due to the fiber capacity sale as previously described.
Cost of Sales and Services
Cost of sales and services totaled $116.1 million in 1998 and $122.5 million in
1999. As a percentage of total revenues, cost of sales and services decreased
from 47.0% in 1998 to 43.9% in 1999. The decrease in cost of
67
sales and services as a percentage of revenues is primarily attributed to the
impact of the fiber capacity sale and changes in our product mix due to
continuing development of new product lines and growth of existing product lines
(local access services, data services and Internet). The overall margin
improvement was partially offset by increased cable services cost of sales as a
percentage of cable services revenues. Cable cost of sales increased more than
cable revenues increased in 1999.
Long-distance cost of sales and services increased from $79.3 million in 1998 to
$81.0 million in 1999. Long-distance cost of sales as a percentage of
long-distance revenues increased from 49.0% in 1998 to 49.4% in 1999 primarily
due to a decrease in the average rate per minute billed to customers without a
comparable decrease in access charges paid by us, and a non-recurring refund
received in the second quarter of 1998 totaling approximately $1.1 million from
a local exchange carrier in respect of its earnings that exceeded regulatory
requirements. Offsetting the 1999 increase as compared to 1998 are reductions in
access costs due to our distribution and termination of our traffic on our own
local services network instead of paying other carriers to distribute and
terminate our traffic.
Cable cost of sales and services as a percentage of revenues, which is less as a
percentage of revenues than are long-distance, local access and Internet
services cost of sales and services, increased from 23.3% in 1998 to 25.3% in
1999. Cable services rate increases did not keep pace with increases in
programming and copyright costs in 1999. Programming costs increased on most of
our cable services offerings, and we incurred additional costs on new
programming introduced in 1998 and 1999.
Local access services cost of sales and services totaled 50.8% and 61.7% as a
percentage of 1999 and 1998 local access services revenues, respectively.
Internet services cost of sales and services totaled 65.7% and 200.2% as a
percentage of the 1999 and 1998 Internet services revenues, respectively. Our
local access operations commenced in 1997 and Internet services operations
commenced in 1998.
The decrease in 1998 and 1999 other services cost of sales and services as a
percentage of other services revenue from 87.4% to 44.5%, respectively, is
primarily due to the fiber capacity sale as previously described.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 9.4% to $98.3 million in
1999. The 1999 increase resulted from:
- Increased costs associated with operations and maintenance of the Alaska
United fiber optic cable system that was placed into service in early
February 1999. 1999 costs totaled $3.6 million as compared to $1.1 million
in 1998.
- Internet services operating, engineering, sales, customer service and
administrative cost increases, from $715,000 in 1998 as compared to $5.3
million in 1999. We gradually introduced our Internet services through the
third quarter of 1998 and began aggressive advertising efforts in the
fourth quarter of 1998. Increased costs were necessary to provide the
operations, engineering, customer service and support infrastructure
necessary to accommodate expected growth in our Internet services customer
base.
- Increased allowance for doubtful accounts receivable.
- Accrual of a Company-wide success-sharing bonus totaling $1.6 million in
1999. Success sharing is a bonus paid to all employees when our earnings
before interest, depreciation, amortization and taxes reach new highs.
- A reduction in long-distance services capitalized labor due to completion
of the fiber optic cable system construction effort.
Partially offsetting these increases were a $1.1 million reduction in cable
service's general and administrative costs and a $1.0 million reduction in
long-distance marketing and sales costs in 1999 as compared to 1998.
68
Selling, general and administrative expenses, as a percentage of total revenues,
decreased from 36.4% in 1998 to 35.2% in 1999 primarily as a result of
significant revenues derived from the fiber capacity sale without a
proportionate increase in selling, general and administrative expenses.
Depreciation and Amortization
Depreciation and amortization expense increased 33.2% to $42.7 million in 1999.
The increase is attributable to our $58.4 million investment in equipment and
facilities placed into service during 1998 for which a full year of depreciation
was recorded during 1999, the Alaska United undersea fiber optic cable system
placed into service in the first quarter of 1999 for which 11 months of
depreciation was recorded during 1999, and the $36.6 million investment in
equipment and facilities during 1999 for which a partial year of depreciation
was recorded in 1999.
Interest Expense, Net
Interest expense, net of interest income, increased 54.9% to $30.6 million in
1999. This increase resulted primarily from increases in our average outstanding
indebtedness resulting primarily from construction of new long-distance and
Internet facilities, expansion and upgrades of cable television facilities,
investment in local access services equipment and facilities, and slightly
higher interest rates on outstanding indebtedness. During 1998 interest expense
was offset in part by capitalized construction period interest. The amount of
interest capitalized in 1999 decreased significantly due to the completion of
the Alaska United undersea fiber optic cable system in early February 1999. We
charged to interest expense $470,000 of deferred financing costs in the second
quarter of 1999 resulting from the amendment to the Holdings Loan Facilities
that reduced our borrowing capacity (see Liquidity and Capital Resources).
Income Tax Benefit
Income tax benefit increased from $4.1 million in 1998 to $5.7 million in 1999
due to an increased net loss before income taxes and cumulative effect of a
change in accounting principle in 1999 as compared to 1998. Our effective income
tax rate increased from 37.8% in 1998 to 38.2% in 1999 due to the proportional
amount of items that are nondeductible for income tax purposes.
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 48,185 46,016 182,676
Cable services $ 15,930 16,660 16,708 18,600 67,898
Local access services $ 4,520 4,789 5,236 5,660 20,205
Internet services $ 1,713 2,018 2,188 2,506 8,425
Other services $ 2,494 3,104 3,589 4,214 13,401
-------------------------------------------------------------
Total revenues $ 68,277 71,426 75,906 76,996 292,605
Operating income $ 877 3,550 5,610 5,966 16,003
Net loss before income taxes $ (8,962) (5,665) (3,954) (3,068) (21,649)
Net loss $ (5,498) (3,526) (2,352) (1,858) (13,234)
Basic and diluted net loss per common share $ (0.12) (0.08) (0.05) (0.04) (0.29)
69
(Amounts in thousands, except per share amounts)
-------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------
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 December 31, 2000 ("fourth quarter") were
$77.0 million, representing a 1.4% increase from $75.9 million for the quarter
ended September 30, 2000 ("third quarter"). The fourth quarter increase resulted
from a 11.3% increase in cable services revenue to $18.6 million in fourth
quarter primarily resulting from an increase of approximately 2,100 basic
subscribers served to 120,400 and increased pay-per-view and premium service
revenues. The fourth quarter increase was offset by a decrease in long-distance
revenues of 4.5% to $46.0 million resulting primarily from the following:
- Revenues from other common carriers decreased 8.4% to $18.0 million due to
a 14.5% decrease in southbound minutes carried for other common carriers.
The decrease in southbound minutes is largely due to seasonality.
- Long distance minutes decreased 8.4% to 252.3 million minutes, due to a
13.5% decrease in OCC minutes (principally WorldCom and Sprint) to 160.2
million minutes offset by a 2.2% increase in non-OCC minutes of traffic
carried to 92.0 million minutes.
The long-distance revenue decreases described above were partially offset by an
18.3% increase in private line revenues to $8.8 million. The long-distance
average rate per minute was $.121 in the third and fourth quarters.
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 and Internet access services are
not expected to exhibit significant seasonality. Our ability to implement
construction projects is also hampered during the winter months because of cold
temperatures, snow and short daylight hours.
70
Cost Of Sales and Services
Cost of sales and services increased from $29.9 million in the third quarter to
$30.5 million in the fourth quarter. As a percentage of revenues, third and
fourth quarter cost of sales and services totaled 39.6% and 39.5%, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $400,000 in the fourth
quarter as compared to the third quarter. As a percentage of revenues, fourth
quarter selling, general and administrative expenses were 35.7% as compared to
35.6% for the third quarter.
Net loss
We reported a net loss of $1.9 million for the fourth quarter as compared to a
net loss of $2.4 million for the third quarter.
Liquidity and Capital Resources
Cash flows from operating activities totaled $41.4 million in 2000 as compared
to $33.3 million in 1999, net of changes in the components of working capital.
Other sources of cash during 2000 include the refund of a $9.1 million deposit
pursuant to a capital lease transaction, long-term borrowings of $5.0 million
and $1.7 million in proceeds from common stock issuances. Our expenditures for
property and equipment, including construction in progress, totaled $48.9
million in 2000. Other uses of cash during 2000 included repayment of $11.2
million of long-term borrowings and capital lease obligations, purchases of $1.6
million of property held for sale, and payment of approximately $3.0 million of
costs incurred by Kanas Telecom, Inc. (see note 11 included in Part II, Item 8,
Consolidated Financial Statements and Supplementary Data).
Receivables increased $3.5 million from December 31, 1999 to December 31, 2000
primarily due to an increase in OCC trade receivables.
Working capital totaled $10.6 million at December 31, 2000, a $12.1 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 $150,000,000 and $50,000,000 credit facilities mature June 30, 2005
and bear interest at either Libor plus 1.00% to 2.50%, depending on the leverage
ratio of Holdings and certain of its subsidiaries, or at the greater of the
prime rate or the federal funds effective rate (as defined) plus 0.05%, in each
case plus an additional 0.00% to 1.375%, depending on the leverage ratio of
Holdings and certain of its subsidiaries. $82.7 million and $87.7 million were
drawn on the credit facilities as of December 31, 2000 and 1999, respectively.
At December 31, 2000 $102.3 million of the credit facilities were available to
us for our operating and capital requirements.
On April 13, 1999, we amended the Holdings credit facilities. 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 associated with reduced borrowing
capacity resulting from the amendment. 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.
On October 25, 2000 we further amended the Holdings credit facilities. These
amendments are contingent upon closing the acquisition of a controlling interest
in Kanas Telecom, Inc. (see note 11 included in Part II, Item 8, Consolidated
Financial Statements and Supplementary Data) and contain, among other things,
provisions for
71
payment of a one-time amendment fee of $192,500, changes in certain financial
covenants and ratios, and a limit of $70 million for 2001 capital expenditures
(excluding capital expenditures by certain subsidiaries).
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 2.50 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, 2002 (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.
Upon the effectiveness of the October 25, 2000 and March 23, 2001 amendments,
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 2.50 to
1.0 from October 1, 2000 to September 30, 2003 and must maintain a ratio of
annualized operating cash flow to fixed charges of at least 1.0 to 1.0 effective
January 1, 2002 (which adjusts to 1.05 to 1.0 in April, 2003 and thereafter).
On January 27, 1998 Alaska United closed a $75 million project finance facility
("Fiber Facility") to construct a fiber optic cable system connecting Anchorage,
Fairbanks, Valdez, Whittier, Juneau and Seattle. At December 31, 2000 and 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.
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 1999 for the 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 2000 we signed additional agreements
with WorldCom for the lease of two DS3 circuits between Alaska and the lower 48
states. The lease agreements provide for five-year 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 included both capacity within Alaska, and
between Alaska and the lower 48 states. An agreement executed in July 1999 for a
second $19.5 million sale of fiber capacity was completed in January 2001. 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 transpond-
72
ers pursuant to a long-term capital lease arrangement with a leasing company. At
December 31, 2000 $47.6 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 $48.9 million and $36.6 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, continuing development of our PCS network and upgrades to our cable
television plant.
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 $2,677,000 have been accrued at December 31, 2000 and will be paid
in additional fully paid shares of Preferred Stock. Additional dividends
totaling $332,000, or $14.00 per share, are accrued at December 31, 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. Should cash flows be insufficient to support
additional borrowings, such investment in capital expenditures will likely be
reduced.
New Accounting Standard
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. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. The effective date of this standard was delayed via the
issuance of SFAS No. 137. The effective date for SFAS No. 133 is now for fiscal
years beginning after June 15, 2000, though earlier adoption is encouraged and
retroactive application is prohibited. This means that we must adopt the
standard no later than January 1, 2001.
In January 2001, we entered into an interest rate swap agreement that converts
$50 million of the $180 million 9.75% fixed rate bonds to variable rate debt
based on Libor plus a margin. This transaction will be accounted for as a fair
value hedge and accordingly the fair value of the swap and the $50 million of
bonds will be reflected
73
on the balance sheet. We do not believe implementation of SFAS No. 133 will have
a significant effect on our results of operations
Geographic Concentration and The 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 depends 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. In fiscal 2000 oil revenues were the
third largest source of state revenues, following investment income and federal
funding. Alaska's investment earnings will supply 35% of the state's projected
revenues in fiscal 2001, with oil revenues and federal funding comprising 34%
and 17%, respectively, 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 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 been declining over the last several years and averaged 1.0
million barrels per day in fiscal 2000. 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 2002. This forecasted increase is attributed to new
developments at the Alpine field, satellite fields in Prudhoe Bay, Kuparuk and
other satellite fields, plus Northstar, Fiord, Liberty and further development
of viscous or heavy oil. The Alaska Department of Revenue estimates that
production from proven reserves will comprise 3.8% of Alaska's total oil
production in fiscal 2001, rising to 13.3% of the total in fiscal 2002 and then
climbing to 25.3% in fiscal 2008.
Market prices for North Slope oil 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 $35.62 on September 19, 2000, with a
fiscal 2000 average price per barrel of $30.10. The closing price per barrel was
$24.01 on March 16, 2001.
In December 2000 the state forecasted the price for North Slope crude oil to
average $30.17 per barrel based on the average price per barrel of $30.24 during
the last six months of 2000, futures market prices through June 30, 2001, and
oil industry expectations that prices will begin to increase as winter weather
drives up demand and as political concerns in the Middle East continue to worry
oil buyers. Oil prices are forecasted to decline to $24.28 in fiscal 2002,
$22.06 in fiscal 2003, and just above $17.00 over the following few years.
Recent higher prices are largely due to a low inventory. The Organization of
Petroleum Exporting Countries ("OPEC") increased production by 3.5 million
barrels per day in January 2000 and increased production another 500,000 barrels
per day in October 2000. At its January 17, 2001 meeting OPEC agreed to decrease
production quotas by 1.5 million barrels per day effective February 1, 2001.
OPEC announced in March 2001 its intention to decrease production by an
additional 4% or approximately 1 million barrels per day to halt the recent
decrease in oil prices. Iraq has withheld crude oil from the market since
December 2000 because of a pricing dispute with the United Nations. The impact
of OPEC's production decreases could be diminished if Iraq resumes its 2.8
million barrels a day production. History suggests that market forces lead to
lower prices when oil sells for more than $20 per barrel. Weather and political
upheaval in the Middle East can also have a dramatic effect on crude oil demand
and supply. The production policy of OPEC and its ability to continue to act in
concert represents a key uncertainty in the state's revenue forecast.
74
The state of Alaska maintains the Constitutional Budget Reserve Fund that is
intended to fund budgetary shortfalls. If the state's current projections are
realized, the Constitutional Budget Reserve Fund will be depleted in 2006. If
the fund is depleted, aggressive state action will be necessary to increase
revenues and reduce spending in order to balance the budget. The Governor of the
state of Alaska and the Alaska Legislature continue to pursue cost cutting and
revenue enhancing measures.
Tourism, air cargo, and service sectors have helped offset the prevailing
pattern of oil industry downsizing that has occurred during much of the last
several years. $1.8 billion of federal money is expected to be distributed to
the State of Alaska for highways and other federally supported projects in
fiscal 2001.
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.
The recent increase in residential and commercial natural gas prices and
shortages in California, in particular, have resulted in a renewed effort to
allow exploration and development in the Arctic National Wildlife Refuge.
Additionally, deploying a natural gas pipeline from Alaska's North Slope to the
lower 48 states has been proposed to supplement natural gas supplies. The
economic viability of a natural gas pipeline improves as the price of natural
gas increases and as demand intensifies. Either project could have a significant
positive impact on the state of Alaska's revenues and the Alaska economy.
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
627,000 people. 42% of the State's population is located in the Municipality of
Anchorage, 13% is located in the Fairbanks North Star Borough, and 5% is located
in the City and Borough of Juneau. 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 a reduced level of royalties. We are not
able to predict the effect of changes in the price and production volumes of
North Slope oil on Alaska's economy or on us.
Seasonality
Our long-distance revenues have historically been highest in the summer months
as a result of temporary population increases attributable to tourism and
increased seasonal economic activity such as construction, commercial fishing,
and oil and gas activities. Our cable television revenues, on the other hand,
are higher in the winter months because consumers tend to watch more television,
and spend more time at home, during these months. Our local service and Internet
operations are not expected to exhibit significant seasonality, with the
exception of SchoolAccess(TM) Internet services that are reduced during the
summer months. Our ability to implement construction projects is also reduced
during the winter months because of cold temperatures, snow and short daylight
hours.
Year 2000 Costs
We did not defer any critical information technology projects because of our
Year 2000 program efforts. At December 31, 2000 we have no remaining incremental
remediation costs.
75
Regulatory Developments
You should see Part I, Item 1 Business, Regulation, Franchise Authorizations and
Tariffs for more information about regulatory developments affecting us.
Inflation
We do not believe that inflation has a significant effect on our operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various types of market risk in the normal course of business,
including the impact of interest rate changes. We do not hold derivatives for
trading purposes.
Our Senior Holdings Loan carries interest rate risk. Amounts borrowed under this
Agreement bear interest at 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 December 31, 2000, we have borrowed $82.7 million
subject to interest rate risk. On this amount, a 1% increase in the interest
rate would cost us $827,000 in additional gross interest cost on an annualized
basis.
On January 3, 2001 we entered into an interest rate swap agreement to convert
$50 million in 9.75% fixed rate debt to a variable interest rate equal to the 90
day Libor rate plus 334 basis points (see note 14 included in Part II, Item 8,
Consolidated Financial Statements and Supplementary Data for more information).
The swap agreement carries interest rate risk. Should the Libor rate change, our
interest expense will increase or decrease accordingly. A 1% change in the
variable interest rate will change the annualized benefit of the swap by
$500,000. As of March 28, 2001, the interest rate spread between the fixed and
swapped variable rate is 1.51%, an annualized reduction in interest expense of
approximately $755,000.
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 December 31, 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 December 31, 2000, we have borrowed $47.6 million subject to interest rate
risk. On this amount, a 1% increase in the interest rate would cost us $476,000
in additional gross interest cost on an annualized basis.
Item 8. Consolidated Financial Statements and Supplementary Data
Our consolidated financial statements are filed under this Item, beginning on
Page 78. The financial statement schedules required under Regulation S-X are
filed pursuant to Item 14 of this Report.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
76
Part III
Incorporated herein by reference from our Proxy Statement for our 2001 Annual
Shareholders' meeting.
77
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
General Communication, Inc.:
We have audited the accompanying consolidated balance sheets of General
Communication, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2000.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of General
Communication, Inc. and Subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/
KPMG LLP
Anchorage, Alaska
March 7, 2001, except for note 13,
which is dated as of March 23, 2001
78
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 2000 1999
- --------------------------------------------------------------------------------- ----------- -----------
(Amounts in thousands)
Current assets:
Cash and cash equivalents $ 5,962 13,734
----------- -----------
Receivables:
Trade 49,872 48,145
Employee 378 269
----------- -----------
50,250 48,414
Less allowance for doubtful receivables 2,864 2,833
----------- -----------
Net receivables 47,386 45,581
----------- -----------
Refundable deposit --- 9,100
Prepaid and other current assets 2,505 2,224
Deferred income taxes, net 3,221 2,972
Inventories 5,717 3,754
Property held for sale 10,877 ---
Notes receivable with related parties 241 449
----------- -----------
Total current assets 75,909 77,814
----------- -----------
Property and equipment in service, at cost:
Land and buildings 3,051 1,199
Telephony distribution systems 294,300 269,117
Cable television distribution systems 106,953 96,620
Support equipment 40,831 42,576
Transportation equipment 3,867 2,259
Property and equipment under capital leases 50,771 2,819
----------- -----------
499,773 414,590
Less accumulated depreciation 151,971 111,828
----------- -----------
Net property and equipment in service 347,802 302,762
Construction in progress 8,097 2,898
----------- -----------
Net property and equipment 355,899 305,660
----------- -----------
Cable franchise agreements, net of amortization of $21,509,000 and $16,347,000
at December 31, 2000 and 1999, respectively 184,983 190,145
Goodwill, net of amortization of $5,952,000 and $4,563,000 at
December 31, 2000 and 1999, respectively 40,002 41,391
Other intangible assets, net of amortization of $729,000 and
$313,000 at December 31, 2000 and 1999, respectively 3,936 4,433
Property held for sale 1,550 10,877
Deferred loan and senior notes costs, net of amortization of $4,166,000 and
$2,849,000 at December 31, 2000 and 1999, respectively 8,402 8,863
Notes receivable with related parties 3,235 2,067
Other assets, at cost, net of amortization of $63,000 and $3,409,000
at December 31, 2000 and 1999, respectively 5,091 1,901
----------- -----------
Total other assets 247,199 259,677
----------- -----------
Total assets $ 679,007 643,151
=========== ===========
See accompanying notes to consolidated financial statements.
79 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
- --------------------------------------------------------------------------------- ----------- -----------
(Amounts in thousands)
Current liabilities:
Current maturities of obligations under capital leases $ 1,600 574
Accounts payable 29,094 25,321
Accrued interest 9,256 7,985
Accrued payroll and payroll related obligations 10,385 8,601
Deferred revenue 10,351 8,173
Accrued liabilities 4,134 3,152
Subscriber deposits and other current liabilities 488 1,314
----------- -----------
Total current liabilities 65,308 55,120
Long-term debt, excluding current maturities 334,400 339,400
Obligations under capital leases, excluding current maturities 46,882 747
Obligations under capital leases due to related party, excluding current
maturities 214 353
Deferred income taxes, net of deferred income tax benefit 22,057 30,861
Other liabilities 4,077 4,210
----------- -----------
Total liabilities 472,938 430,691
----------- -----------
Preferred stock. $1,000 par value, authorized 1,000,000 shares; issued
and outstanding 20,000 shares at December 31, 2000 and 1999;
convertible into Class A common stock at $5.55 per share of Class A
common stock, redemption price at December 31, 2000 and 1999 of
$1,014 and $1,058, respectively; $2,677,000 and $1,158,000
dividends accrued, pending stock
issuance at December 31, 2000 and 1999, respectively 22,589 19,912
----------- -----------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000,000 shares; issued and outstanding
48,642,870 and 46,869,671 shares at December 31, 2000 and 1999,
respectively 182,706 176,740
Class B. Authorized 10,000,000 shares; issued and outstanding
3,904,038 and 4,048,480 shares at December 31, 2000 and
1999, respectively; convertible on a share-per-share basis
into Class A common stock 3,299 3,422
Less cost of 357,958 and 347,958 Class A common shares held in
treasury at December 31, 2000 and 1999, respectively (1,659) (1,607)
Paid-in capital 7,368 6,343
Notes receivable with related parties issued upon stock option exercise (2,976) (2,167)
Retained earnings (deficit) (5,258) 9,817
----------- -----------
Total stockholders' equity 183,480 192,548
----------- -----------
Commitments and contingencies
Total liabilities and stockholders' equity $ 679,007 643,151
=========== ===========
See accompanying notes to consolidated financial statements.
80
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------- ------------ -------------
(Amounts in thousands except per share amounts)
Revenues $ 292,605 279,179 246,795
Cost of sales and services 119,712 122,467 116,073
Selling, general and administrative expenses 104,918 98,282 89,833
Depreciation and amortization expense 51,972 42,680 32,045
------------- ------------ -------------
Operating income 16,003 15,750 8,844
------------- ------------ -------------
Interest expense 38,845 31,237 20,679
Interest income 702 621 915
------------- ------------ -------------
Interest expense, net 38,143 30,616 19,764
Gain on sale of property and equipment 491 --- ---
------------- ------------ -------------
Net loss before income taxes and cumulative effect of a
change in accounting principle (21,649) (14,866) (10,920)
Income tax benefit (8,415) (5,683) (4,123)
------------- ------------ -------------
Net loss before cumulative effect of a change in
accounting principle (13,234) (9,183) (6,797)
Cumulative effect of a change in accounting principle,
net of income tax benefit of $245 --- 344 ---
------------- ------------ -------------
Net loss $ (13,234) (9,527) (6,797)
============= ============ =============
Basic and diluted net loss per common share:
Loss before cumulative effect of a change in accounting
principle $ (0.29) (0.20) (0.14)
Cumulative effect of a change in accounting principle 0.00 (0.01) 0.00
------------- ------------ -------------
Net loss $ (0.29) (0.21) (0.14)
============= ============ =============
See accompanying notes to consolidated financial statements.
81
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
years ended December 31, 2000, 1999 and 1998
Notes
Class A Receivable
Class A Class B Shares Issued to Retained
Common Common Held in Paid-in Related Earnings
(Amounts in thousands) Stock Stock Treasury Capital Parties (Deficit)
--------------------------------------------------------------------
Balances at December 31, 1997 $170,322 3,432 (1,039) 4,425 --- 27,299
Net loss --- --- --- --- --- (6,797)
Tax effect of excess stock compensation expense for tax
purposes over amounts recognized for financial
reporting purposes --- --- --- 157 --- ---
Purchase of treasury stock --- --- (568) --- --- ---
Shares issued under stock option plan and notes issued
upon stock option exercise 827 --- --- 319 (637) ---
Shares issued to Employee Stock Purchase Plan 1,574 --- --- --- --- ---
Warrants issued --- --- --- 708 --- ---
Stock offering issuance costs (15) --- --- --- --- ---
--------------------------------------------------------------------
Balances at December 31, 1998 172,708 3,432 (1,607) 5,609 (637) 20,502
Net loss --- --- --- --- --- (9,527)
Tax effect of excess stock compensation expense for tax
purposes over amounts recognized for financial
reporting purposes --- --- --- 211 --- ---
Class B shares converted to Class A 10 (10) --- --- --- ---
Shares issued under stock option plan and notes issued
upon stock option exercise 1,595 --- --- 431 (1,389) ---
Shares issued under officer stock option agreement and
note issued upon stock option exercise 38 --- --- --- (141) ---
Shares issued to Employee Stock Purchase Plan 1,770 --- --- --- --- ---
Warrants issued --- --- --- 92 --- ---
Shares issued upon acquisition of customer base 619 --- --- --- --- ---
Preferred stock dividends --- --- --- --- --- (1,158)
--------------------------------------------------------------------
Balances at December 31, 1999 176,740 3,422 (1,607) 6,343 (2,167) 9,817
Net loss --- --- --- --- --- (13,234)
Tax effect of excess stock compensation expense for tax
purposes over amounts recognized for financial
reporting purposes --- --- --- 640 --- ---
Class B shares converted to Class A 123 (123) --- --- --- ---
Shares issued and issuable under stock option plan and
notes issued upon stock option exercises 1,213 --- --- 385 (809) ---
Shares issued upon warrant exercise 1,381 --- --- --- --- ---
Shares issued to Employee Stock Purchase Plan 3,249 --- --- --- --- ---
Purchase of treasury stock --- --- (52) --- --- ---
Preferred stock dividends --- --- --- --- --- (1,841)
--------------------------------------------------------------------
Balances at December 31, 2000 $182,706 3,299 (1,659) 7,368 (2,976) (5,258)
====================================================================
See accompanying notes to consolidated financial statements.
82
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
years ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------- ------------- ------------
(Amounts in thousands)
Cash flows from operating activities:
Net loss $ (13,234) (9,527) (6,797)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 51,972 42,680 32,045
Amortization charged to selling, general and administrative
expense 554 1,770 1,147
Deferred income tax benefit (8,415) (5,928) (744)
Deferred compensation and compensatory stock options 982 675 376
Non-cash cost of sales --- 3,703 ---
Bad debt expense (recovery), net of write-offs 983 1,946 (183)
Employee Stock Purchase Plan expense funded with General
Communication, Inc. Class A common stock issued and issuable 2,773 2,448 2,278
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 --- 42 ---
Gain on sale of property and equipment (491) --- ---
Other noncash income and expense items 356 (114) 154
Change in operating assets and liabilities 3,942 (5,413) (5,347)
------------- ------------- ------------
Net cash provided by operating activities 41,377 33,343 22,929
------------- ------------- ------------
Cash flows from investing activities:
Purchases of property and equipment, including construction period
interest (48,896) (36,573) (148,973)
Proceeds from sale of property and equipment 802 --- ---
Restricted cash investment --- --- 39,406
Refund of deposit pursuant to capital lease transaction 9,100 --- ---
Purchase of property held for sale (1,550) --- ---
Purchases of other assets and intangible assets (2,957) (1,236) (4,287)
Notes receivable issued to related parties (971) (952) (1,715)
Payments received on notes receivable with related parties 455 653 1,769
------------- ------------- ------------
Net cash used in investing activities (44,017) (38,108) (113,800)
------------- ------------- ------------
Cash flows from financing activities:
Long-term borrowings - bank debt 5,000 13,776 103,224
Repayments of long-term borrowings and capital lease obligations (11,151) (26,620) (2,017)
Proceeds from preferred stock issuance --- 20,000 ---
Proceeds from common stock issuance 1,706 103 190
Payment of debt and stock issuance costs (635) (768) (1,706)
Proceeds from warrant issuance --- --- 708
Purchase of treasury stock (52) --- (568)
------------- ------------- ------------
Net cash provided by (used in) financing activities (5,132) 6,491 99,831
------------- ------------- ------------
Net increase (decrease) in cash and cash equivalents (7,772) 1,726 8,960
Cash and cash equivalents at beginning of year 13,734 12,008 3,048
------------- ------------- ------------
Cash and cash equivalents at end of year $ 5,962 13,734 12,008
============= ============= ============
See accompanying notes to consolidated financial statements.
83
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(l) Business and Summary of Significant Accounting Principles
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 o Termination of traffic in Alaska
for certain common carriers
- Private line services o 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
- 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.
(c) Net Loss Per Common Share
Net loss used to calculate basic and diluted net loss per common
share is increased by preferred stock dividends of $1,841,000 and
$1,158,000 for the years ended December 31, 2000 and 1999,
respectively. Shares used to calculate net loss per common share
consist of the following (amounts in thousands):
2000 1999 1998
----------- ---------- -----------
Weighted average common shares outstanding 51,444 50,326 49,186
=========== ========== ===========
84 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Common equivalent shares outstanding which are anti-dilutive for
purposes of calculating the net loss per common share for the
years ended December 31, 2000, 1999 and 1998 and are not included
in the diluted net loss per share calculation consist of the
following (amounts in thousands):
2000 1999 1998
----------- ---------- -----------
Common equivalent shares outstanding 527 587 521
=========== ========== ===========
Weighted average shares associated with outstanding stock options
for the years ended December 31, 2000, 1999 and 1998 which have
been excluded from the diluted loss per share calculations
because the options' exercise price was greater than the average
market price of the common shares consist of the following
(amounts in thousands):
2000 1999 1998
----------- ---------- -----------
Weighted average shares associated with outstanding stock
options 2,231 2,182 2,071
=========== ========== ===========
(d) Preferred and Common Stock
Following is the statement of preferred and common stock at
December 31, 2000, 1999 and 1998 (shares, in thousands):
Preferred Common Stock
Stock Class A Class B
------------- ----------------------------
Balances at December 31, 1997 --- 45,279 4,063
Class B shares converted to Class A --- 2 (2)
Shares issued under stock option plan --- 315 ---
Shares issued to Employee Stock Purchase Plan --- 299 ---
------------- -------------- -------------
Balances at December 31, 1998 --- 45,895 4,061
Class B shares converted to Class A --- 13 (13)
Shares issued under stock option plan --- 417 ---
Shares issued under officer stock option
agreements --- 50 ---
Shares issued to Employee Stock Purchase Plan --- 395 ---
Shares issued upon acquisition of customer
base --- 100 ---
Shares issued under Preferred Stock Agreement 20 --- ---
------------- -------------- -------------
Balances at December 31, 1999 20 46,870 4,048
Class B shares converted to Class A --- 144 (144)
Shares issued under stock option plan --- 513 ---
Shares issued and issuable to Employee Stock
Purchase Plan --- 691 ---
Warrant exercise --- 425 ---
------------- -------------- -------------
Balances at December 31, 2000 20 48,643 3,904
============= ============== =============
85 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(e) Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments
that are readily convertible into cash.
(f) Inventories
Inventory of merchandise for resale and parts is stated at the
lower of cost or market. Cost is determined using the average
cost method.
(g) Property and Equipment
Property and equipment is stated at cost. Construction costs of
facilities are capitalized. Equipment financed under capital
leases is recorded at the lower of fair market value or the
present value of future minimum lease payments. Construction in
progress represents distribution systems and support equipment
not placed in service on December 31, 2000; management intends to
place this equipment in service during 2001.
Depreciation is computed on a straight-line basis based upon the
shorter of the estimated useful lives of the assets or the lease
term, if applicable, in the following ranges:
Asset Category Asset Lives
----------------------------------------------------- --------------
Telephony distribution systems 12-20 years
Cable television distribution systems 10 years
Support equipment 3-5 years
Transportation equipment 5-10 years
Property and equipment under capital leases 5-12 years
Repairs and maintenance are charged to expense as incurred.
Expenditures for major renewals and betterments are capitalized.
Gains or losses are recognized at the time of ordinary
retirements, sales or other dispositions of property.
(h) Intangible Assets
Intangible assets are valued at unamortized cost. Management
reviews the valuation and amortization of intangible assets on a
periodic basis, taking into consideration any events or
circumstances that might indicate diminished value. The
assessment of the recoverability is based on whether the asset
can be recovered through undiscounted future cash flows.
Cable franchise agreements represent certain perpetual operating
rights to provide cable services and are being amortized on a
straight-line basis over 40 years.
Goodwill represents the excess of cost over fair value of net
assets acquired and is being amortized on a straight-line basis
over periods of 10 to 40 years.
The cost of the PCS license and related financing costs were
capitalized as an intangible asset. The associated assets were
placed into service during 2000 and the recorded cost of the
license and related financing costs are being amortized over a
40-year period using the straight-line method.
(i) Deferred Loan and Senior Notes Costs
Debt and Senior Notes issuance costs are deferred and amortized
using the straight-line method, which approximates the interest
method, over the term of the related debt and notes. Through
January 1999 (the end of the construction period of the undersea
fiber optic cable) issuance costs were partially amortized to
Construction in Progress (see note 8). Commencing February 1999
(the month the fiber optic cable was placed in service) the
86 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
issuance costs are being fully amortized to amortization expense.
(j) Other Assets
Other assets are recorded at cost and are amortized on a
straight-line basis over periods of 2-15 years.
(k) Revenue from Services and Products
Revenues generated from long-distance and managed services are
recognized when the services are provided. Revenues from the sale
of equipment are recognized at the time the equipment is
delivered or installed. Technical services revenues are derived
primarily from maintenance contracts on equipment and are
recognized on a prorated basis over the term of the contract.
Cable television, local service, Internet service and private
line telecommunication revenues are billed in advance and are
recognized as the associated service is provided. Other revenues
are recognized when the service is provided.
(l) Research and Development and Advertising Expense
We expense advertising and research and development costs as
incurred. Advertising expenses were approximately $3,438,000,
$4,574,000 and $5,028,000 for the years ended December 31, 2000,
1999 and 1998, respectively. We had no research and development
costs for the years ended December 31, 2000, 1999 and 1998.
(m) Interest Expense
Interest costs incurred during the construction period of
significant capital projects are capitalized. Interest costs
capitalized totaled $1,260,000, and $7,764,000 during the years
ended December 31, 1999 and 1998. No interest was capitalized
during the year ended December 31, 2000.
(n) Cumulative Effect of a Change in Accounting Principle
The American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities", which provides guidance on the financial
reporting of start-up costs and organization costs and requires
costs of start-up activities and organization costs to be
expensed as incurred. 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.
(o) Income Taxes
Income taxes are accounted for using the asset and liability
method. Deferred tax assets and liabilities are recognized for
their future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable earnings in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax
assets are recognized to the extent that the benefits are more
likely to be realized than not.
(p) Stock Option Plan
We account for our stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense is recorded on the
date of grant only if the current market price of the underlying
stock exceeds the exercise price. We have adopted SFAS 123,
"Accounting for Stock-Based Compensation", ("SFAS 123") which
permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS
87 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
123 also allows entities to continue to apply the provisions of
APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method
defined in SFAS 123 had been applied. We have elected to continue
to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions of SFAS 123.
(q) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(r) Concentrations of Credit Risk
Financial instruments that potentially subject us to
concentrations of credit risk are primarily cash and cash
equivalents and accounts receivable. Excess cash is invested in
high quality short-term liquid money instruments issued by highly
rated financial institutions. At December 31, 2000 and 1999,
substantially all of our cash and cash equivalents were invested
in short-term liquid money instruments. Our customers are located
primarily throughout Alaska. As a result of this geographic
concentration, our growth and operations depend upon economic
conditions in Alaska. The economy of Alaska is dependent upon the
natural resources industries, and in particular oil production,
as well as tourism, government, and United States military
spending. Though limited to one geographical area, the
concentration of credit risk with respect to our receivables is
minimized due to the large number of customers, individually
small balances, short payment terms and deposit requirements for
certain product lines.
(s) Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," requires disclosure of the fair value of financial
instruments for which it is practicable to estimate that value.
SFAS No. 107 specifically excludes certain items from its
disclosure requirements. The fair value of a financial instrument
is the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a
forced sale or liquidation.
(t) Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," requires that
long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(u) Year 2000 Costs
We charged incremental Year 2000 assessment and remediation costs
to expense as incurred.
(v) Reclassifications
Reclassifications have been made to the 1999 financial statements
to make them comparable with the 2000 presentation.
88 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in
thousands):
Year ended December 31, 2000 1999 1998
------------ ------------ -------------
Increase in accounts receivable $ (3,451) (5,783) (9,054)
Decrease in income tax receivable --- 1,965 490
(Increase) decrease in prepaid and other current assets (390) (235) 388
(Increase) decrease in inventories (1,963) (767) 286
Increase (decrease) in accounts payable 3,773 (2,229) 2,585
Increase (decrease) in accrued liabilities 982 (95) (1,914)
Increase in accrued payroll and payroll related
obligations 2,260 1,368 171
Decrease in accrued income taxes --- --- (111)
Increase in deferred revenue 2,178 1,802 1,128
Increase (decrease) in accrued interest 1,271 (87) 423
Increase (decrease) in subscriber deposits and other
current liabilities (826) (944) 274
Increase (decrease) in components of other long-term
liabilities 108 (408) (13)
------------ ------------ -------------
$ 3,942 (5,413) (5,347)
============ ============ =============
We paid no income taxes during the years ended December 31, 2000, 1999
and 1998. Net income tax refunds received totaled $0, $1,965,000 and
$4,243,000 during the years ended December 31, 2000, 1999 and 1998,
respectively.
We paid interest totaling approximately $36,223,000, $32,900,000 and
$29,630,000 during the years ended December 31, 2000, 1999 and 1998,
respectively.
We recorded $640,000, $211,000 and $157,000 during the years ended
December 31, 2000, 1999 and 1998, respectively, in paid-in capital in
recognition of the income tax effect of excess stock compensation
expense for tax purposes over amounts recognized for financial reporting
purposes.
During the years ended December 31, 2000, 1999 and 1998 we funded the
employer matching portion of Employee Stock Purchase Plan contributions
by issuing or committing to issue GCI Class A common stock valued at
$2,773,000, $2,448,000 and $2,278,000, respectively.
We financed the purchase of satellite transponder capacity pursuant to a
long-term capital lease arrangement with a leasing company during the
year ended December 31, 2000 at a cost of $48.2 million (see note 12).
89 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(3) Notes Receivable with Related Parties
Notes receivable with related parties consist of the following (amounts
in thousands):
December 31,
2000 1999
------------- --------------
Notes receivable from officers bearing interest up to 9.0% or at
the rate paid by us on our senior indebtedness, unsecured and
secured by personal residences, a life insurance policy and GCI
common stock, due through
December 31, 2004 $ 5,456 3,349
Notes receivable from other related parties bearing interest up
to 9.0% or at the rate paid by us on our senior indebtedness,
unsecured and secured by property and
equipment, due through February 1, 2004 212 942
Interest receivable 784 392
------------- --------------
Total notes receivable with related parties 6,452 4,683
Less notes receivable with related parties issued upon
stock option exercise, classified as a component of
stockholders' equity 2,976 2,167
Less current portion, including current interest receivable 241 449
------------- --------------
Long-term portion, including long-term interest receivable $ 3,235 2,067
============= ==============
(4) Long-term Debt
Long-term debt consists of the following (amounts in thousands):
December 31,
2000 1999
------------- --------------
Senior Notes (a) $ 180,000 180,000
Senior Holdings Loan (b) 82,700 87,700
Fiber Facility (c) 71,700 71,700
------------- --------------
Long-term debt, excluding current maturities $ 334,400 339,400
============= ==============
(a) On August 1, 1997 GCI, Inc. issued $180,000,000 of 9.75% senior
notes due 2007 ("Senior Notes"). The Senior Notes were issued at
face value. Net proceeds to GCI, Inc. after deducting
underwriting discounts and commissions totaled $174,600,000.
Issuance costs of $6,496,000 are being amortized to amortization
expense over the term of the Senior Notes.
The Senior Notes are not redeemable prior to August 1, 2002.
After August 1, 2002 the Senior Notes are redeemable at the
option of GCI, Inc. under certain conditions and at stated
redemption prices. The Senior Notes include limitations on
additional indebtedness and prohibit payment of dividends,
payments for the purchase, redemption, acquisition or retirement
of GCI, Inc.'s stock, payments for early retirement of debt
subordinate to the notes, liens on property, and asset sales
(excluding sales of Alaska United assets). GCI, Inc. was in
compliance with all covenants during the year ending 2000. The
Senior Notes are unsecured obligations.
90 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Net proceeds from the 1997 stock and Senior Note offerings and
initial draws on the Senior Holdings Loan (see note 4(b))
facilities were used to repay borrowings outstanding under our
then existing credit facilities and to provide initial funding
for construction of the Alaska United undersea fiber optic cable
system (see notes 4(c) and 8).
(b) The GCI Holdings, Inc., $150,000,000 and $50,000,000 credit
facilities ("Senior Holdings Loan") mature on June 30, 2005. The
Senior Holdings Loan facilities were amended in April 1999 (see
below) and bear interest, as amended, at either Libor plus 1.00%
to 2.50%, depending on the leverage ratio of Holdings and certain
of its subsidiaries, or at the greater of the prime rate or the
federal funds effective rate (as defined) plus 0.05%, in each
case plus an additional 0.00% to 1.375%, depending on the
leverage ratio of Holdings and certain of its subsidiaries. We
are required to pay a commitment fee equal to 0.50% per annum on
the unused portion of the commitment. Commitment fee expense on
the Senior Holdings Loan totaled $570,000, $533,000 and $512,000
during the years ended December 31, 2000, 1999 and 1998,
respectively.
On April 13, 1999, we amended our Holdings credit facilities. The
amended facilities limited capital expenditures to $35 million in
2000 (excluding a carryforward of unused capacity from 1999) with
no limits thereafter (excluding capital expenditures by certain
subsidiaries and the capital lease of the satellite transponder
asset (see note 12)). During the years ended December 31, 2000
and 1999 our capital expenditures net of amounts paid for the
capital lease of the satellite transponder asset and the Alaska
United fiber optic cable system were $48.9 million and $25.4
million, respectively. 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
$472,000 of deferred financing costs in the second quarter of
1999 associated with reduced borrowing capacity resulting from
the amendment.
On October 25, 2000 we further amended the Holdings credit
facilities. These amendments are contingent upon closing the
acquisition of a controlling interest in Kanas Telecom, Inc. (see
note 11) and contain, among other things, provisions for payment
of a one-time amendment fee of $192,500, changes in certain
financial covenants and ratios and a limit of $70 million for
2001 capital expenditures (excluding capital expenditures by
certain subsidiaries). Upon the acquisition of Kanas Telecom,
Inc. and the enactment of this amendment, 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
2.50 to 1.0 from October 1, 2000 to September 30, 2003 and the
ratio of annualized operating cash flow to fixed charges must
equal at least 1.0 to 1.0 effective January 1, 2002 (which
adjusts to 1.05 to 1.0 in April, 2003 and thereafter).
$19 million from the Preferred Stock issuance proceeds (see note
6) were used to reduce outstanding indebtedness under the Senior
Holdings Loan.
While Holdings may elect at any time to reduce amounts due and
available under the Senior Holdings Loan facilities, a mandatory
prepayment is required each quarter if the outstanding borrowings
at the following dates of payment exceed the allowable borrowings
using the following percentages:
91 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Percentage of
Reduction of
Outstanding
Date Range of Quarterly Payments Facilities
--------------------------------------------------------------
January 1, 2001 through December 31, 2001 3.750%
March 31, 2002 through December 31, 2003 5.000%
March 31, 2004 through December 31, 2004 5.625%
March 31, 2005 7.500%
July 31, 2005 7.500% and all
remaining
outstanding
balances
The facilities contain, among others, covenants requiring
maintenance of specific levels of operating cash flow to
indebtedness and to interest expense, and limitations on
acquisitions and additional indebtedness. The facilities prohibit
any direct or indirect distribution, dividend, redemption or
other payment to any person on account of any general or limited
partnership interest in, or shares of capital stock or other
securities of Holdings or any of its subsidiaries. Holdings was
in compliance with all Senior Holdings Loan facilities covenants
during the year ended December 31, 2000.
Substantially all of Holdings' assets as well as a pledge of
Holdings' stock by GCI, Inc. collateralize the Senior Holdings
Loan facilities.
$3.4 million of the Senior Holdings Loan facilities have been
used to provide a letter of credit to secure payment of certain
access charges associated with our provision of
telecommunications services within the State of Alaska.
In connection with the initial funding and amendments of the
Senior Holdings Loan facilities, Holdings paid bank fees and
other expenses in 1997, 1998 and 1999 of approximately $3,263,000
that are being amortized to amortization expense over the life of
the agreement.
(c) 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. 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% 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 and
interest and principal installments. Alaska United was in
compliance with all covenants during the year ended 2000.
All of Alaska United's assets, as well as a pledge of the
partnership interests' owning Alaska United, collateralize the
Fiber Facility.
In connection with the funding of the Fiber Facility, Alaska
United paid bank fees and other expenses of $2,183,000 that are
being amortized over the life of the agreement. Through January
1999 (the end of the construction period of the undersea fiber
optic cable system) bank fees and costs
92 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
were amortized to Construction in Progress. Commencing February
1999 (the month the fiber optic cable was placed in service) the
bank fees and costs are being amortized to amortization expense.
(d) On December 31, 1992, we entered into a $12,000,000 loan
agreement ("Undersea Fiber and Equipment Loan Agreement"), of
which approximately $9,000,000 of the proceeds were used to
acquire capacity on the undersea fiber optic cable system linking
Seward, Alaska and Pacific City, Oregon. Concurrently, we leased
the capacity under a ten-year all events, take or pay, contract
with WorldCom, who subleased the capacity back to us. The
obligation was fully paid and the lease and sublease were
cancelled at December 31, 1999.
As of December 31, 2000 maturities of long-term debt were as follows
(amounts in thousands):
Years ending December 31,
2001 $ ---
2002 ---
2003 21,786
2004 48,036
2005 55,735
2006 and thereafter 208,843
-----------
$ 334,400
===========
(5) Income Taxes
Total income tax benefit was allocated as follows (amounts in
thousands):
Years ended December 31,
2000 1999 1998
------------ ----------- ----------
Net loss from continuing operations $ (8,415) (5,928) (4,123)
Cumulative effect of a change in accounting principle --- 245 ---
------------ ----------- ----------
(8,415) (5,683) (4,123)
Tax effect of excess stock compensation expense for
tax purposes over amounts recognized for financial
reporting purposes in Stockholders' Equity (640) (211) (157)
------------ ----------- ----------
$ (9,055) (5,894) (4,280)
============ =========== ==========
Income tax benefit consists of the following (amounts in thousands):
Years ended December 31,
2000 1999 1998
------------ ---------- -----------
Current tax benefit:
Federal taxes $ --- --- (2,858)
State taxes --- --- (521)
------------ ---------- -----------
Total current tax benefit --- --- (3,379)
------------ ---------- -----------
93 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Years ended December 31,
2000 1999 1998
------------ ---------- -----------
Deferred tax benefit:
Federal taxes (6,494) (4,807) (629)
State taxes (1,921) (876) (115)
------------ ---------- -----------
Total deferred tax benefit (8,415) (5,683) (744)
------------ ---------- -----------
Total tax benefit $ (8,415) (5,683) (4,123)
============ ========== ===========
Total income tax benefit differed from the "expected" income tax benefit
determined by applying the statutory federal income tax rate of 34% as
follows (amounts in thousands):
Years ended December 31,
2000 1999 1998
------------ ---------- -----------
"Expected" statutory tax benefit $ (7,361) (5,054) (3,713)
State income taxes, net of federal benefit (1,268) (649) (594)
Income tax effect of goodwill amortization,
nondeductible expenditures and other items, net 399 469 441
Other (185) (449) (257)
------------ ---------- -----------
$ (8,415) (5,683) (4,123)
============ ========== ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2000 and 1999 are presented below (amounts in thousands):
December 31,
2000 1999
-------------- -------------
Current deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts $ 539 715
Compensated absences, accrued for financial reporting
purposes 1,305 1,154
Inventory expense for financial reporting purposes in
excess of amounts recognized for tax purposes 892 634
Workers compensation and self insurance health reserves,
principally due to accrual for financial reporting
purposes 341 327
Other 144 142
-------------- -------------
Total current deferred tax assets $ 3,221 2,972
============== =============
94 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
December 31,
2000 1999
-------------- -------------
Long-term deferred tax assets:
Net operating loss carryforwards $ 51,052 35,486
Alternative minimum tax credits 2,502 2,502
Lease expense for financial reporting purposes in excess
of amounts recognized for tax purposes 857 ---
Deferred compensation expense for financial reporting
purposes in excess of amounts recognized for tax
purposes 979 973
Employee stock option compensation expense for financial
reporting purposes in excess of (less than) amounts
recognized for tax purposes (579) 47
Sweepstakes award in excess of amounts recognized for tax
purposes 193 197
Other 397 555
-------------- -------------
Total long-term deferred tax assets 55,401 39,760
-------------- -------------
Long-term deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation 67,108 62,007
Amortizable assets 9,017 6,889
Costs recognized for tax purposes in excess of amounts
recognized for book purposes 1,319 1,319
Other 14 406
-------------- -------------
Total gross long-term deferred tax liabilities 77,458 70,621
-------------- -------------
Net combined long-term deferred tax liabilities $ 22,057 30,861
============== =============
In conjunction with the 1996 Cable Companies acquisition, we incurred a
net deferred income tax liability of $24.4 million and acquired net
operating losses totaling $57.6 million. We determined that
approximately $20 million of the acquired net operating losses would not
be utilized for income tax purposes, and elected with our December 31,
1996 income tax returns to forego utilization of such acquired losses
under Internal Revenue Code section 1.1502-32(b)(4). Deferred tax assets
were not recorded associated with the foregone losses and, accordingly,
no valuation allowance was provided. At December 31, 2000, we have (1)
tax net operating loss carryforwards of approximately $103.6 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 acquired net operating loss carryforwards is subject to
annual limitations pursuant to Internal Revenue Code section 382 which
could reduce or defer the utilization of these losses.
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, future taxable income exclusive
of reversing temporary differences and carryforwards, and tax planning
strategies. 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.
95 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(6) 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) 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 $2,677,000 and $1,158,000 were accrued at December 31, 2000 and 1999,
respectively, and will be paid in additional fully paid shares of
Preferred Stock. Additional dividends totaling $322,000, or $14.00 per
share, are accrued at December 31, 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.
(7) Stockholders' Equity
Common Stock
GCI's Class A common stock and Class B common stock are identical in all
respects, except that each share of Class A common stock has one vote
per share and each share of Class B common stock has ten votes per
share. In addition, each share of Class B common stock outstanding is
convertible, at the option of the holder, into one share of Class A
common stock.
WorldCom owns a total of 8,251,509 shares of GCI's Class A common stock
that represents approximately 17 and 18 percent of the issued and
outstanding shares at December 31, 2000 and 1999, respectively. WorldCom
owns a total of 1,275,791 shares of GCI's Class B common stock that
represents approximately 33 and 32 percent of the issued and outstanding
shares at December 31, 2000 and 1999, respectively.
Stock Option Plan
In December 1986, GCI adopted a Stock Option Plan (the "Option Plan") in
order to provide a special incentive to our officers, non-employee
directors, and employees by offering them an opportunity to acquire an
equity interest in GCI. The Option Plan, as amended in 1999, provides
for the grant of options for a maximum of 8,700,000 shares of GCI Class
A common stock, subject to adjustment upon the occurrence of stock
dividends, stock splits, mergers, consolidations or certain other
changes in corporate structure or capitalization. If an option expires
or terminates, the shares subject to the option will be available for
further grants of options under the Option Plan. The Option Committee of
GCI's Board of Directors administers the Option Plan.
The Option Plan provides that all options granted under the Option Plan
must expire not later than ten years after the date of grant. If at the
time an option is granted the exercise price is less than the market
value of the underlying common stock, the "in the money" amount at the
time of grant is expensed ratably over the vesting period of the option.
Options granted pursuant to the Option Plan are only exercisable if at
the time of exercise the option holder is our employee, non-employee
director, or a consultant or advisor working on our behalf.
96 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Information for the years 1998, 1999 and 2000 with respect to the Option
Plan follows:
Weighted
Average Range of Exercise
Shares Exercise Price Prices
------------- --------------- ------------------
Outstanding at December 31, 1997 3,370,900 $4.39 $0.01-$7.63
Granted 1,145,034 $6.40 $3.25-$7.25
Exercised (264,600) $2.98 $1.00-$4.00
Forfeited (181,000) $6.49 $4.00-$7.00
-------------
Outstanding at December 31, 1998 4,070,334 $4.95 $0.01-$7.63
Granted 865,796 $4.57 $3.25-$6.00
Exercised (416,365) $3.83 $0.01-$6.00
Forfeited (165,050) $6.03 $0.01-$7.63
-------------
Outstanding at December 31, 1999 4,354,715 $4.94 $0.01-$7.63
Granted 1,970,599 $5.96 $3.00-$7.50
Exercised (513,289) $2.37 $0.01-$6.50
Forfeited (398,460) $5.18 $0.01-$7.63
-------------
Outstanding at December 31, 2000 5,413,565 $5.54
=============
Available for grant at December 31, 2000 1,390,357
=============
Stock Options Not Pursuant to a Plan
In June 1989, an officer was granted options to acquire 100,000 GCI
Class A common shares at $.75 per share. The options vested in equal
annual increments over a five-year period, expiring in February 1999.
Options to acquire 50,000 shares were exercised during 1998, and options
to acquire the remaining 50,000 shares were exercised in 1999 prior to
their expiration.
Stock Warrants Not Pursuant to a Plan
We entered into a warrant agreement in December 1998 with Prime II
Management, L.P. ("PMLP"). In lieu of cash payments for services under
the amended Management Agreement, PMLP agreed to accept a stock warrant
which provided for the purchase of 425,000 shares of GCI Class A common
stock, with immediate vesting at the option date and an exercise price
of $3.25 per share. The warrant was exercised in 2000.
We entered into a warrant agreement in exchange for services in December
1998 with certain of our legal counsel which provides for the purchase
of 16,667 shares of GCI Class A common stock, vesting in December 1999,
with an exercise price of $3.00 per share, and expiring December 2003.
We entered into a warrant agreement in exchange for services in June
1999 with certain of our legal counsel which provides for the purchase
of 25,000 shares of GCI Class A common stock, vesting through December
2001, with an exercise price of $3.00 per share, and expiring December
2003.
SFAS 123 Disclosures
Our stock options and warrants expire at various dates through November
2010. At December 31, 2000, 1999 and 1998, the weighted-average
remaining contractual lives of options outstanding were 6.88, 6.14 and
6.54 years, respectively.
97 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
At December 31, 2000, 1999 and 1998, the number of exercisable shares
under option was 2,350,334, 2,509,756 and 2,252,130, respectively, and
the weighted-average exercise price of those options was $4.78, $3.91
and $3.45, respectively.
The per share weighted-average fair value of stock options granted
during 2000 was $4.07 per share for compensatory and $2.71 for
non-compensatory options; for 1999 was $4.14 per share for compensatory
and $2.85 for non-compensatory options; and for 1998 was $4.08 per share
for compensatory and non-compensatory options. The amounts were
determined as of the options' grant dates using a qualified
Black-Scholes option-pricing model with the following weighted-average
assumptions: 2000 - risk-free interest rate of 4.987%, volatility of
0.6203 and an expected life of 5.82 years; 1999 - risk-free interest
rate of 6.66%, volatility of 0.6455 and an expected life of 5.7 years;
and 1998 - risk-free interest rate of 4.75%, volatility of 0.6951 and an
expected life of 5.7 years.
Summary information about our stock options and warrants outstanding at
December 31, 2000:
Options and Warrants Outstanding Options and Warrants Exercisable
----------------------------------------------------------------------- --------------------------------------
Weighted
Average
Number Remaining Weighted Number
Range of Exercise outstanding as Contractual Average Exercisable as Weighted Average
Prices of 12/31/00 Life Exercise Price of 12/31/00 Exercise Price
----------------------------------------------------------------------- --------------------------------------
$0.01-$0.01 40,820 6.92 $0.01 26,980 $0.01
$3.00-$3.00 613,667 1.53 $3.00 605,333 $3.00
$3.25-$4.00 989,485 6.31 $3.65 664,466 $3.80
$4.50-$5.00 386,450 8.75 $4.97 77,490 $4.87
$6.00-$6.00 651,450 7.57 $6.00 287,500 $6.00
$6.50-$6.50 1,572,900 8.66 $6.50 169,000 $6.50
$6.63-$6.94 80,000 7.08 $6.80 28,000 $6.83
$7.00-$7.00 626,000 6.23 $7.00 373,565 $7.00
$7.25-$7.50 451,000 7.51 $7.39 91,000 $7.50
$7.63-$7.63 45,000 6.83 $7.63 27,000 $7.63
------------------------------------------------- --------------------------------------
$0.01-$7.63 5,456,772 6.88 $5.52 2,350,334 $4.78
================================================= ======================================
Had compensation cost for our 2000, 1999 and 1998 grants for stock-based
compensation plans been determined consistent with SFAS 123, our net
loss and net loss per common share would approximate the pro forma
amounts below (in thousands except per share data):
As Reported Pro Forma
----------------- -----------------
2000:
Net loss $(13,234) $(15,646)
Basic and diluted net loss per common share $ (0.29) $ (0.34)
1999:
Net loss $ (9,527) $(11,714)
Basic and diluted net loss per common share $ (0.21) $ (0.26)
1998:
Net loss $ (6,797) $ (8,697)
Basic and diluted net loss per common share $ (0.14) $ (0.18)
98 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Pro forma net loss reflects options granted in 1996 through 2000.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS 123 is not reflected in the pro forma net income
amounts presented above since compensation cost is reflected over the
options' vesting period of generally 5 years and compensation cost for
options granted prior to January 1, 1996 is not considered.
Class A Common Shares Held in Treasury
In 1998 we acquired a total of 145,000 additional shares of GCI Class A
common stock for approximately $568,000 to fund deferred compensation
agreements for three of our officers.
In 2000 we acquired a total of 10,000 shares of GCI Class A common stock
for approximately $52,000 to fund deferred compensation agreements for
an officer.
Employee Stock Purchase Plan
In December 1986, we adopted an Employee Stock Purchase Plan (the
"Plan") qualified under Section 401 of the Internal Revenue Code of 1986
(the "Code"). The Plan provides for acquisition of GCI's Class A and
Class B common stock at market value. The Plan permits each employee who
has completed one year of service to elect to participate in the Plan.
Eligible employees may elect to reduce their compensation in any even
dollar amount up to 10 percent of such compensation up to a maximum of
$10,500 in 2000; they may contribute up to 10 percent of their
compensation with after-tax dollars, or they may elect a combination of
salary reductions and after-tax contributions.
We may match employee salary reductions and after tax contributions in
any amount, elected by GCI's Board each year, but not more than 10
percent of any one employee's compensation will be matched in any year.
The combination of salary reductions, after tax contributions and
matching contributions cannot exceed 25 percent of any employee's
compensation (determined after salary reduction) for any year. Matching
contributions vest over six years. Employee contributions may be
invested in GCI common stock, WorldCom common stock, AT&T common stock
or various mutual funds. TCI common stock was previously offered to
employees as an investment choice however TCI's merger with AT&T in
March 1999 resulted in the conversion of TCI shares of common stock into
AT&T shares of common stock.
Employee contributions invested in GCI common stock receive up to 100%
matching, as determined by GCI's Board each year, in GCI common stock.
Employee contributions invested in other than GCI common stock receive
up to 50% matching, as determined by the GCI's Board each year, in GCI
common stock. Our matching contributions allocated to participant
accounts totaled approximately $2,773,000, $2,448,000 and $2,278,000 for
the years ended December 31, 2000, 1999, and 1998, respectively. The
Plan may, at its discretion, purchase shares of GCI common stock from
GCI at market value or may purchase GCI's common stock on the open
market. In 1998, 1999 and 2000 we funded our employer-matching
contributions through the issuance of new shares of GCI common stock
rather than market purchases. We expect to purchase such shares on the
open market in 2001.
Effective July 1, 2000, we transferred all of the Plan assets to
Merrill, Lynch, Pierce, Fenner and Smith, Incorporated who became the
Plan's new recordkeeper and trustee.
(8) Fiber Optic Cable System
In early February 1999 we completed construction of our fiber optic
cable system with commercial services commencing at that time. The
cities of Anchorage, Juneau and Seattle are connected via a subsea
route. Subsea and terrestrial connections extended the fiber optic cable
to Fairbanks via Whittier and Valdez. The total system cost was
approximately $125 million, portions of which were allocated to current
Property
99 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Held for Sale in 2000 in connection with the future fiber capacity sale
(see note 12) and to Cost of Sales and non-current Property Held for
Sale in 1999 in connection with the 1999 sale of fiber capacity.
(9) 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 31 communities and areas in Alaska, including the state's
three largest urban areas, Anchorage, Fairbanks and Juneau. Cable plant
upgrades in 2000, 1999 and 1998 enabled us to offer digital cable
television services in Anchorage and Fairbanks and retail cable modem
service (through our Internet services segment) in Anchorage,
Fairbanks, Juneau and Valdez 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 Fairbanks and Juneau during 2001, and
perhaps 2002.
Internet services. We began offering wholesale and retail Internet
services in 1998. Deploying our undersea fiber optic cable has 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 significant accounting policies in note 1.
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.
100 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Summarized financial information for our reportable segments for the
years ended December 31, 2000, 1999 and 1998 follows (amounts in
thousands):
Long- Local
Distance Cable Access Internet
Services Services Services Services Other Total
-----------------------------------------------------------------------
2000
Revenues:
Intersegment $ 15,750 1,493 6,675 3,173 123 27,214
External 182,676 67,898 20,205 8,425 13,401 292,605
-----------------------------------------------------------------------
Total revenues 198,426 69,391 26,880 11,598 13,524 319,819
-----------------------------------------------------------------------
Cost of sales and services:
Intersegment 13,554 --- 1,401 11,692 123 26,770
External 76,568 17,821 10,768 4,389 10,166 119,712
-----------------------------------------------------------------------
Total cost of sales and services 90,122 17,821 12,169 16,081 10,289 146,482
-----------------------------------------------------------------------
Contribution:
Intersegment 2,196 1,493 5,274 (8,519) --- 444
External 106,108 50,077 9,437 4,036 3,235 172,893
-----------------------------------------------------------------------
Total contribution 108,304 51,570 14,711 (4,483) 3,235 173,337
Selling, general and administrative
expenses 31,139 17,997 9,343 5,090 41,349 104,918
-----------------------------------------------------------------------
Earnings (loss) from operations before
depreciation, amortization, net
interest expense, income taxes and
cumulative effect of a change in
accounting principle 77,165 33,573 5,368 (9,573) (38,114) 68,419
Depreciation and amortization 20,817 18,942 4,375 1,915 5,923 51,972
-----------------------------------------------------------------------
Operating income (loss) $ 56,348 14,631 993 (11,488) (44,037) 16,447
=======================================================================
Total assets $257,913 304,094 24,827 22,768 69,405 679,007
=======================================================================
Capital expenditures $ 15,577 11,661 3,430 7,902 10,326 48,896
=======================================================================
1999
Revenues:
Intersegment $ 5,243 1,942 3,937 207 --- 11,329
External 164,043 61,146 15,543 4,799 33,648 279,179
-----------------------------------------------------------------------
Total revenues 169,286 63,088 19,480 5,006 33,648 290,508
-----------------------------------------------------------------------
Cost of sales and services:
Intersegment 3,430 --- 1,255 6,094 --- 10,779
External 80,970 15,478 7,892 3,151 14,976 122,467
-----------------------------------------------------------------------
Total cost of sales and services 84,400 15,478 9,147 9,245 14,976 133,246
-----------------------------------------------------------------------
Contribution:
Intersegment 1,813 1,942 2,682 (5,887) --- 550
External 83,073 45,668 7,651 1,648 18,672 156,712
-----------------------------------------------------------------------
Total contribution 84,886 47,610 10,333 (4,239) 18,672 157,262
Selling, general and administrative
expenses 22,872 15,092 9,269 4,448 46,601 98,282
-----------------------------------------------------------------------
101 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Long- Local
Distance Cable Access Internet
Services Services Services Services Other Total
-----------------------------------------------------------------------
Earnings (loss) from operations before
depreciation, amortization, net
interest expense, income taxes and
cumulative effect of a change in
accounting principle 62,014 32,518 1,064 (8,687) (27,929) 58,980
Depreciation and amortization 16,270 17,626 3,281 1,128 4,375 42,680
-----------------------------------------------------------------------
Operating income (loss) $ 45,744 14,892 (2,217) (9,815) (32,304) 16,300
=======================================================================
Total assets $223,941 310,421 28,364 16,176 64,249 643,151
=======================================================================
Capital expenditures $ 17,626 7,186 3,207 5,991 2,563 36,573
=======================================================================
1998
Revenues:
Intersegment $ 891 1,330 1,284 --- --- 3,505
External 161,733 57,640 9,908 1,699 15,815 246,795
-----------------------------------------------------------------------
Total revenues 162,624 58,970 11,192 1,699 15,815 250,300
-----------------------------------------------------------------------
Cost of sales and services:
Intersegment 1,284 --- 1,254 902 --- 3,440
External 79,323 13,407 6,113 3,402 13,828 116,073
-----------------------------------------------------------------------
Total cost of sales and services 80,607 13,407 7,367 4,304 13,828 119,513
-----------------------------------------------------------------------
Contribution:
Intersegment (393) 1,330 30 (902) --- 65
External 82,410 44,233 3,795 (1,703) 1,987 130,722
-----------------------------------------------------------------------
Total contribution 82,017 45,563 3,825 (2,605) 1,987 130,787
Selling, general and administrative
expenses 21,019 15,630 8,477 782 43,925 89,833
-----------------------------------------------------------------------
Earnings (loss) from operations before
depreciation, amortization, net
interest expense and income taxes 60,998 29,933 (4,652) (3,387) (41,938) 40,954
Depreciation and amortization 6,976 17,281 2,597 501 4,690 32,045
-----------------------------------------------------------------------
Operating income (loss) $ 54,022 12,652 (7,249) (3,888) (46,628) 8,909
=======================================================================
Total assets $236,310 320,305 31,062 11,952 49,816 649,445
=======================================================================
Capital expenditures $110,177 20,727 8,104 3,836 6,129 148,973
=======================================================================
-----------------
Long-distance services, local access service and Internet services are
billed utilizing a unified accounts receivable system and are not
reported separately by business segment. All such accounts receivable
are included above in the long-distance services segment for all periods
presented.
A reconciliation of total segment revenues to consolidated revenues
follows (amounts in thousands):
Years ended December 31, 2000 1999 1998
--------------- --------------- ------------
Total segment revenues $ 319,819 290,508 250,300
Less intersegment revenues eliminated in consolidation 27,214 11,329 3,505
--------------- --------------- ------------
Consolidated revenues $ 292,605 279,179 246,795
=============== =============== ============
102 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
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 (amounts in thousands):
Years ended December 31, 2000 1999 1998
-------------- ---------------- ------------
Total segment earnings from operations before depreciation,
amortization, net interest expense, income taxes and
cumulative effect of a change in accounting principle $ 68,419 58,980 40,954
Less intersegment contribution eliminated in consolidation 444 550 65
-------------- ---------------- ------------
Consolidated earnings from operations before depreciation,
amortization, net interest expense, income taxes and
cumulativeeffect of a change in accounting principle 67,975 58,430 40,889
Less depreciation and amortization expense 51,972 42,680 32,045
-------------- ---------------- ------------
Consolidated operating income 16,003 15,750 8,844
Less interest expense, net 38,143 30,616 19,764
Plus gain on sale of property and equipment 491 --- ---
-------------- ---------------- ------------
Consolidated net loss before income taxes and cumulative
effect of a change in accounting principle $ (21,649) (14,866) (10,920)
============== ================ ============
A reconciliation of total segment operating income to consolidated net
loss before income taxes and cumulative effect of a change in accounting
principle follows (amounts in thousands):
Years ended December 31, 2000 1999 1998
--------------- --------------- ------------
Total segment operating income $ 16,447 16,300 8,909
Less intersegment contribution eliminated in consolidation 444 550 65
--------------- --------------- ------------
Consolidated operating income 16,003 15,750 8,844
Less interest expense, net 38,143 30,616 19,764
Plus gain on sale of property and equipment 491 --- ---
--------------- --------------- ------------
Consolidated net loss before income taxes and cumulative
effect of a change in accounting principle $ (21,649) (14,866) (10,920)
=============== =============== ============
We provide long-distance services to WorldCom (see note 11) and Sprint,
major customers. We earned revenues from Sprint, net of discounts,
included in the long-distance segment, totaling approximately
$28,672,000 for the year ended December 31, 1998. As a percentage of
total revenues, Sprint revenues totaled 11.6% for the year ended
December 31, 1998. Sprint was not a major customer for segment
disclosure purposes for the years ended December 31, 2000 and 1999.
103 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(10) Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The carrying amounts and estimated fair values of our financial
instruments at December 31, 2000 and 1999 follows (amounts in
thousands):
2000 1999
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------- -------------------------
Short-term assets $ 53,589 53,589 68,864 68,864
Notes receivable $ 3,235 3,235 2,067 2,067
Short-term liabilities $ 40,438 40,438 35,194 35,194
Long-term debt and capital lease
obligations $ 381,496 396,976 340,500 356,214
The following methods and assumptions were used to estimate fair values:
Short-term assets: The fair values of cash and cash equivalents, net
receivables, notes receivable and refundable deposit approximate
their carrying values due to the short-term nature of these financial
instruments.
Notes receivable: The carrying value of notes receivable is estimated
to approximate fair values. Although there are no quoted market
prices available for these instruments, the fair value estimates were
based on the change in interest rates and risk related interest rate
spreads since the notes origination dates.
Short-term liabilities: The fair values of current maturities of
long-term debt and capital lease obligations, accounts payable,
accrued interest, and subscriber deposits approximate their carrying
value due to the short-term nature of these financial instruments.
Long-term debt and capital lease obligations: The fair value of
long-term debt is based primarily on discounting the future cash
flows of each instrument at rates currently offered to us for similar
debt instruments of comparable maturities by our bankers.
(11) Related Party Transactions
We earned revenues from WorldCom, a major shareholder of GCI (see note
7), net of discounts, of approximately $53,065,000, $43,676,000 and
$39,473,000 for the years ended December 31, 2000, 1999 and 1998,
respectively. As a percentage of total revenues, WorldCom revenues
totaled 18.1%, 15.6% and 16.0% for the years ended December 31, 2000,
1999 and 1998, respectively. Amounts receivable, net of accounts
payable, from WorldCom totaled $10,453,000 and $9,111,000 at December
31, 2000 and 1999, respectively. We paid WorldCom for distribution of
our traffic in the lower 49 states amounts totaling approximately
$11,201,000, $10,623,000 and $12,639,000 for the years ended December
31, 2000, 1999 and 1998, respectively.
We entered into a long-term capital lease agreement in 1991 with the
wife of our president for property occupied by us. We guarantee the
lease. The lease term is 15 years with monthly payments increasing in
$800 increments at each two-year anniversary of the lease. Monthly lease
costs will increase to $18,400 effective October 2001. If the owner
sells the premises prior to the end of the tenth year of the lease, the
owner will rebate to us one-half of the net sales price received in
excess of $900,000. If the property is not sold prior to the tenth year
of the lease, the owner will pay us the greater of one-half of the
appreciated
104 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
value of the property over $900,000, or $500,000. The leased asset was
capitalized in 1991 at the owner's cost of $900,000 and the related
obligation was recorded in the accompanying financial statements.
GCI Cable, Inc. ("GCI Cable") was a party to a Management Agreement with
PMLP that began in 1996. We mutually agreed to terminate the agreement
in 2000. In connection with the agreement, GCI Cable received services
valued at approximately $239,000, $334,000 and $752,000 including
reimbursable expenses for the periods ended December 31, 2000, 1999 and
1998, respectively.
We provide management services to Kanas Telecom, Inc. ("Kanas"), 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. Subsequent to December 31, 2000 we agreed to acquire
an 85% controlling interest in Kanas (see note 14). During the year
ended December 31, 2000 we earned revenues of approximately $690,000 for
management services and long-distance services provided to Kanas. We
paid approximately $744,000 to Kanas for the lease and maintenance of
one DS3 of fiber optic cable capacity during the year ended December 31,
2000. We advanced approximately $3.0 million to Kanas in 2000 to
partially fund its operations. Accounts receivable from Kanas were
approximately $3.7 million at December 31, 2000 and are classified as
Other Assets.
In January 2001 we entered into an aircraft operating lease agreement
with a company owned by the Company's president. The lease is
month-to-month, may be terminated at any time upon one hundred and
twenty days written notice, and contains a monthly lease rate of
$40,000. Upon signing the lease the lessor was granted an option to
purchase 250,000 shares of GCI Class A common stock at $6.50 per share.
At January 22, 2001 83,333 shares under the option agreement are
exercisable, the remaining 166,667 shares become exercisable at a rate
of approximately 11,000 per month beginning February 22, 2001. We paid a
deposit of $1.5 million in connection with the lease. The deposit will
be repaid to us upon the earlier of (1) thirty-six months from the
initial date of the lease, (2) six months after the agreement
terminates, or (3) nine months after the date of a termination notice.
(12) Commitments and Contingencies
Leases
Operating Leases as Lessee. We lease business offices, have entered into
site lease agreements and use satellite transponder capacity and certain
equipment pursuant to operating lease arrangements. Rental costs under
such arrangements amounted to approximately $8,152,000, $13,678,000 and
$11, 609,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
Satellite Transponder Capacity 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 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 began operating 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. At December 31, 2000 $47.6 million was financed under this
capital lease.
105 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
A summary of future minimum lease payments for all leases as of December
31, 2000 follows (amounts in thousands):
Years ending December 31: Operating Capital
------------ -------------
2001 $ 6,738 6,956
2002 4,485 6,771
2003 3,958 6,673
2004 2,352 8,632
2005 1,856 10,426
2006 and thereafter 8,322 29,363
------------ -------------
Total minimum lease payments $ 27,711 68,821
============
Less amount representing interest (20,125)
Less current maturities of obligations under capital leases (1,600)
-------------
Subtotal - long-term obligations under capital leases 47,096
Less long-term obligations under capital leases due to
related party, excluding current maturities (214)
-------------
Long-term obligations under capital leases, excluding
related party, excluding current maturities $ 46,882
=============
The leases generally provide that we pay the taxes, insurance and
maintenance expenses related to the leased assets. We expect that in the
normal course of business leases that expire will be renewed or replaced
by leases on other properties.
Operating Leases as Lessor. In 1999 we signed agreements with a large
commercial customer for the lease of three DS3 circuits on Alaska United
facilities within Alaska, and between Alaska and the lower 48 states.
The lease agreements are for three years with renewal options.
In 2000 we signed additional agreements with WorldCom (see note 11) for
the lease of two DS3 circuits within Alaska, and between Alaska and the
lower 48 states. The lease agreements are for five years.
A summary of minimum future operating lease rentals follows (amounts in
thousands):
Years ending December 31,
2001 $ 8,526
2002 4,903
2003 3,984
2004 3,984
2005 3,984
--------
Total minimum lease rentals $ 25,381
========
Deferred Compensation Plan
During 1995, we adopted a non-qualified, unfunded deferred compensation
plan to provide a means by which certain employees may elect to defer
receipt of designated percentages or amounts of their compensation and
to provide a means for certain other deferrals of compensation. 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
106 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
lump sum payment or annual installments over a period not to exceed 10
years. Vested balances are payable upon termination of employment,
unforeseen emergencies, death and total disability. Participants are
general creditors of us with respect to deferred compensation plan
benefits. Compensation deferred pursuant to the plan totaled
approximately $0, $60,000 and $117,000 for the years ended December 31,
2000, 1999 and 1998, 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 $660,000 and $600,000 was recorded
at December 31, 2000 and 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 we use what we believe 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 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, we do 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 December 31, 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 8.0% of our total basic service subscribers at
December 31, 2000.) On July 27, 2000 the RCA approved in full a
requested rate increase for the Juneau system, which was effective
October 1, 2000.
Asset Purchase
We signed an agreement with G.C. Cablevision, Inc. of Fairbanks, Alaska
on October 10, 2000 to acquire its assets and customer base. G.C.
Cablevision, Inc. will receive 238,199 unregistered shares of GCI Class
A common stock with a future payment in additional shares contingent
upon certain conditions. The transaction closed as of March 31, 2001
following regulatory approvals. The GCI common stock was issued
effective March 31, 2001.
(13) Amended Credit Facilities
The GCI Holdings, Inc. $150 million and $50 million credit facilities
were amended March 23, 2001. The amendments provide that Holdings must
maintain a ratio of annualized operating cash flow to fixed charges of
at least 1.0 to 1.0 effective January 1, 2002 (which adjusts to 1.05 to
1.0 in April 2003 and thereafter).
107 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(14) Subsequent Events
Acquisition We have agreed to acquire from WorldCom, a related party
(see note 11), its 85% controlling interest in Kanas, (see note 11),
which owns the 800-mile fiber optic cable system that extends from
Prudhoe Bay, Alaska to Valdez, Alaska via Fairbanks. Under terms of the
agreement, we will issue to WorldCom shares of a new series of GCI Class
C preferred stock valued at $10 million. The stock will be convertible
at $12 per share into GCI Class A common stock. The new series will be
non-voting and pays a 6% per annum quarterly cash dividend. The
corporation owning the fiber optic system will be operated as GCI Fiber
Communication Co. We expect regulatory approval of this acquisition
during the second quarter of 2001. We have agreed to manage the
operations of Kanas and to fund its operations and working capital
requirements prior to closing. The acquisition is contingent upon
certain conditions precedent to closing.
Kanas has entered into an interim services agreement with Alyeska
Pipeline Service Company ("Alyeska Pipeline") to provide certain voice,
video and data services to support operations of the Trans Alaska
Pipeline System that is operated by Alyeska Pipeline. A fifteen-year
agreement has been drafted and has been submitted to each company's
Board of Directors for approval. The interim agreement provides for
provisional services during this review process.
Fiber Capacity Sale
We entered into an agreement effective July 1999 for a second $19.5
million sale of fiber capacity that was completed in January 2001. Costs
associated with the capacity have been classified as current and
non-current Property Held for Sale in the accompanying consolidated
financial statements at December 31, 2000 and 1999, respectively.
Interest Rate Swap
On January 3, 2001 we entered into an interest rate swap agreement to
convert $50 million in 9.75% fixed rate debt to a variable interest rate
equal to the 90 day Libor rate plus 334 basis points. The differential
to be paid or received is recorded as an increase or decrease in
interest expense in the consolidated statements of operations in the
period in which it is recognized. The agreement extends through August
1, 2007 and is cancelable at the option of the counterparty beginning
August 1, 2002. We are exposed to credit losses from counterparty
nonperformance, but do not anticipate any losses from our agreement.
108 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(15) Supplementary Financial Data
The following is a summary of unaudited quarterly results of operations
for the years ended December 31, 2000 and 1999 (amounts in thousands,
except per share amounts):
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------------ ----------- ------------ ----------- ------------
2000
Total revenues $ 68,277 71,426 75,906 76,996 292,605
Net loss $ (5,498) (3,526) (2,352) (1,858) (13,234)
Basic and diluted net loss per common share $ (0.12) (0.08) (0.05) (0.04) (0.29)
1999
Total revenues $ 61,338 83,659 67,340 66,842 279,179
Net earnings (loss) $ (4,865) 2,491 (3,537) (3,616) (9,527)
Basic and diluted net earnings (loss) per
common share:
Net earnings (loss) before cumulative
effect of a change in accounting
principle (1) $ (0.09) 0.04 (0.08) (0.08) (0.20)
Cumulative effect of a change in
accounting principle $ (0.01) --- --- --- (0.01)
------------ ----------- ------------ ----------- ------------
Net earnings (loss) (1) $ (0.10) 0.04 (0.08) (0.08) (0.21)
============ =========== ============ =========== ============
-----------------
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.
109
Part IV
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K
(a)(l) Consolidated Financial Statements Page No.
--------
Included in Part II of this Report:
Independent Auditor's Report 78
Consolidated Balance Sheets, December 31, 2000 and 1999 79 -- 80
Consolidated Statements of Operations,
Years ended December 31, 2000, 1999 and 1998 81
Consolidated Statements of Stockholders' Equity,
Years ended December 31, 2000, 1999 and 1998 82
Consolidated Statements of Cash Flows,
Years ended December 31, 2000, 1999 and 1998 83
Notes to Consolidated Financial Statements 84 -- 109
(a)(2) Consolidated Financial Statement Schedules
Included in Part IV of this Report:
Independent Auditors' Report 116
Schedule VIII - Valuation and Qualifying Accounts,
Years ended December 31, 2000, 1999 and 1998 117
Other schedules are omitted, as they are not required or are not
applicable, or the required information is shown in the applicable
financial statements or notes thereto.
110
(b) Exhibits
Listed below are the exhibits that are filed as a part of this Report
(according to the number assigned to them in Item 601 of Regulation
S-K):
Exhibit No. Description
----------------------------------------------------------------------------------------------------------------
3.1 Restated Articles of Incorporation of the Company dated December 18, 2000 *
3.2 Amended and Restated Bylaws of the Company dated January 28, 2000 (28)
4.1 1997 Amendment No. 1 to Voting Agreement dated October 31, 1996, among Prime II Management
L.P., as agent for the Voting Prime Sellers, MCI Telecommunications Corporation, Ronald
A. Duncan, Robert M. Walp and TCI GCI, Inc. (23)
10.1 Employee stock option agreements issued to individuals Spradling, Strid, Behnke, and
Lewkowski (3)
10.3 Westin Building Lease (5)
10.4 Duncan and Hughes Deferred Bonus Agreements (6)
10.5 Compensation Agreement between General Communication, Inc. and William C. Behnke dated
January 1, 1997 (19)
10.6 Order approving Application for a Certificate of Public Convenience and Necessity to
operate as a Telecommunications (Intrastate Interexchange Carrier) Public Utility
within Alaska (3)
10.7 1986 Stock Option Plan, as amended (21)
10.8 Loan agreement between National Bank of Alaska and GCI Leasing Co., Inc. dated December
31, 1992 (4)
10.13 MCI Carrier Agreement between MCI Telecommunications Corporation and General
Communication, Inc. dated January 1, 1993 (8)
10.14 Contract for Alaska Access Services Agreement between MCI Telecommunications Corporation
and General Communication, Inc. dated January 1, 1993 (8)
10.15 Promissory Note Agreement between General Communication, Inc. and Ronald A. Duncan, dated
August 13, 1993 (9)
10.16 Deferred Compensation Agreement between General Communication, Inc. and Ronald A. Duncan,
dated August 13, 1993 (9)
10.17 Pledge Agreement between General Communication, Inc. and Ronald A. Duncan, dated August
13, 1993 (9)
10.19 Summary Plan Description pertaining to the Revised Qualified Employee Stock Purchase Plan
of General Communication, Inc. (10)
10.20 The GCI Special Non-Qualified Deferred Compensation Plan (11)
10.21 Transponder Purchase Agreement for Galaxy X between Hughes Communications Galaxy, Inc. and
GCI Communication Corp. (11)
10.23 Management Agreement, between Prime II Management, L.P., and GCI Cable, Inc., dated
October 31, 1996 (12)
10.25 Licenses: (5)
10.25.1 214 Authorization
10.25.2 International Resale Authorization
10.25.3 Digital Electronic Message Service Authorization
10.25.4 Fairbanks Earth Station License
10.25.5 Fairbanks (Esro) Construction Permit for P-T-P Microwave Service
10.25.6 Fairbanks (Polaris) Construction Permit for P-T-P Microwave Service
10.25.7 Anchorage Earth Station Construction Permit
10.25.8 License for Eagle River P-T-P Microwave Service
10.25.9 License for Juneau Earth Station
10.25.10 Issaquah Earth Station Construction Permit
10.26 ATU Interconnection Agreement between GCI Communication Corp. and Municipality of
Anchorage, executed January 15, 1997 (18)
111
Exhibit No. Description
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10.29 Asset Purchase Agreement, dated April 15, 1996, among General Communication, Inc., ACNFI,
ACNJI and ACNKSI (12)
10.30 Asset Purchase Agreement, dated May 10, 1996, among General Communication, Inc., and
Alaska Cablevision, Inc. (12)
10.31 Asset Purchase Agreement, dated May 10, 1996, among General Communication, Inc., and
McCaw/Rock Homer Cable System, J.V. (12)
10.32 Asset Purchase Agreement, dated May 10, 1996, between General Communication, Inc., and
McCaw/Rock Seward Cable System, J.V. (12)
10.33 Amendment No. 1 to Securities Purchase and Sale Agreement, dated October 31, 1996, among
General Communication, Inc., and the Prime Sellers Agent (13)
10.34 First Amendment to Asset Purchase Agreement, dated October 30, 1996, among General
Communication, Inc., ACNFI, ACNJI and ACNKSI (13)
10.36 Order Approving Arbitrated Interconnection Agreement as Resolved and Modified by Order
U-96-89(8) dated January 14, 1997 (18)
10.37 Amendment to the MCI Carrier Agreement executed April 20, 1994 (18)
10.38 Amendment No. 1 to MCI Carrier Agreement executed July 26, 1994 (16)
10.39 MCI Carrier Addendum--MCI 800 DAL Service effective February 1, 1994 (16)
10.40 Third Amendment to MCI Carrier Agreement dated as of October 1, 1994 (16)
10.41 Fourth Amendment to MCI Carrier Agreement dated as of September 25, 1995 (16)
10.42 Fifth Amendment to the MCI Carrier Agreement executed April 19, 1996 (18)
10.43 Sixth Amendment to MCI Carrier Agreement dated as of March 1, 1996 (16)
10.44 Seventh Amendment to MCI Carrier Agreement dated November 27, 1996 (20)
10.45 First Amendment to Contract for Alaska Access Services between General Communication, Inc.
and MCI Telecommunications Corporation dated April 1, 1996 (20)
10.46 Service Mark License Agreement between MCI Communications Corporation and General
Communication, Inc. dated April 13, 1994 (19)
10.47 Radio Station Authorization (Personal Communications Service License), Issue Date June
23, 1995 (19)
10.48 Framework Agreement between National Bank of Alaska (NBA) and General Communication,
Inc. dated October 31, 1995 (17)
10.49 1997 Call-Off Contract between National Bank of Alaska (NBA) and General Communication,
Inc. (GCI) dated November 1, 1996 (20)
10.50 Contract No. 92MR067A Telecommunications Services between BP Exploration (Alaska), Inc.
and GCI Network Systems dated April 1, 1992 (20)
10.51 Amendment No. 03 to BP Exploration (Alaska) Inc. Contract No. 92MRO67A effective August
1, 1996 (20)
10.52 Lease Agreement dated September 30, 1991 between RDB Company and General Communication,
Inc. (3)
10.53 Certificate of Public Convenience and Necessity No. 436 for Telecommunications Service
(Relay Services) (19)
10.54 Order Approving Transfer Upon Closing, Subject to Conditions, and Requiring Filings
dated September 23, 1996 (19)
10.55 Order Granting Extension of Time and Clarifying Order dated October 21, 1996 (19)
10.56 Contract for Alaska Access Services among General Communication, Inc. and GCI
Communication Corp., and Sprint Communications Company L.P. dated June 1, 1993 (20)
10.57 First Amendment to Contract for Alaska Access Services between General Communication,
Inc. and Sprint Communications Company L.P. dated as of August 7, 1996 (20)
10.58 Employment and Deferred Compensation Agreement between General Communication, Inc. and
John M. Lowber dated July 1992 (19)
10.59 Deferred Compensation Agreement between GCI Communication Corp. and Dana
112
Exhibit No. Description
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L. Tindall dated August 15, 1994 (19)
10.60 Transponder Lease Agreement between General Communication Incorporated and Hughes
Communications Satellite Services, Inc., executed August 8, 1989 (9)
10.61 Addendum to Galaxy X Transponder Purchase Agreement between GCI Communication Corp. and
Hughes Communications Galaxy, Inc. dated August 24, 1995 (19)
10.62 Order Approving Application, Subject to Conditions; Requiring Filing; and Approving
Proposed Tariff on an Inception Basis, dated February 4, 1997 (19)
10.63 Resale Solutions Switched Services Agreement between Sprint Communications Company L.P.
and GCI Communications, Inc. dated May 31, 1996 (20)
10.64 Commitment Letter from Credit Lyonnais New York Branch, NationsBank of Texas, N.A. and
TD Securities (USA) Inc. for Fiber Facility dated as of July 3, 1997 (19)
10.65 Commitment Letter from NationsBank for Credit Facility dated July 2, 1997 (19)
10.66 Supply Contract Between Submarine Systems International Ltd. And GCI Communication Corp.
dated as of July 11, 1997. (23)
10.67 Supply Contract Between Tyco Submarine Systems Ltd. And Alaska United Fiber System
Partnership Contract Variation No. 1 dated as of December 1, 1997. (23)
10.68 $200,000,000 Amended and Restated Credit Agreement between GCI Holdings, Inc. and
NationsBank of Texas, N.A., as administrative agent, Credit Lyonnais New York Branch,
as documentation agent, and TD Securities (USA), Inc. as syndication agent, dated as
of November 14, 1997. (23)
10.69 $50,000,000 Amended and Restated Credit Agreement between GCI Holdings, Inc. and
NationsBank of Texas, N.A., as administrative agent, Credit Lyonnais New York Branch,
as documentation agent, and TD Securities (USA), Inc. as syndication agent, dated as
of November 14, 1997. (23)
10.70 Credit and Security Agreement Dated as of January 27, 1998 among Alaska United Fiber
System Partnership as Borrower and The Lenders Referred to Herein and Credit Lyonnais
New York Branch as Administrative Agent and NationsBank of Texas, N.A. as Syndication
Agent and TD Securities (USA), Inc. as Documentation Agent. (24)
10.71 Third Amendment to Contract for Alaska Access Services between General Communication,
Inc. and MCI Telecommunications Corporation dated February 27, 1998 (25)
10.72 Consent and First Amendment to Credit Agreements dated November 14, 1997 (26)
10.73 Second Amendment to $200,000,000 Amended and Restated Credit Agreement (26)
10.74 Second Amendment to $50,000,000 Amended and Restated Credit Agreement (26)
10.75 Third Amendment to $200,000,000 Amended and Restated Credit Agreement (26)
10.76 Third Amendment to $50,000,000 Amended and Restated Credit Agreement (26)
10.77 General Communication, Inc. Preferred Stock Purchase Agreement (26)
10.78 Qualified Employee Stock Purchase Plan of General Communication, Inc., as amended and restated
January 01, 2000 (28)
10.79 Statement of Stock Designation (Series B) (26)
10.80 Fourth Amendment to Contract for Alaska Access Services between General Communication,
Inc. and its wholly owned subsidiary GCI Communication Corp., and MCI WorldCom. (27)
10.81 Fifth Amendment to Contract for Alaska Access Services between General Communication,
Inc. and its wholly owned subsidiary GCI Communication Corp., and Sprint
Communications Company L.P. (27)
10.82 Lease Intended for Security between GCI Satellite Co., Inc. and General Electric Capital
Corporation (29)
113
Exhibit No. Description
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10.83 Fourth Amendment to $50,000,000 Amended and Restated Credit Agreements *
10.84 Fourth Amendment to $200,000,000 Amended and Restated Credit Agreement *
10.85 Fifth Amendment to $50,000,000 Amended and Restated Credit Agreements *
10.86 Fifth Amendment to $200,000,000 Amended and Restated Credit Agreement *
10.87 Sixth Amendment to $50,000,000 Amended and Restated Credit Agreements *
10.88 Sixth Amendment to $200,000,000 Amended and Restated Credit Agreements *
21.1 Subsidiaries of the Registrant *
23.1 Consent of KPMG LLP (Accountant for Company) *
99 Additional Exhibits:
99.1 The Articles of Incorporation of GCI Communication Corp. (2)
99.2 The Bylaws of GCI Communication Corp. (2)
99.7 The Bylaws of GCI Cable, Inc. (14)
99.8 The Articles of Incorporation of GCI Cable, Inc. (14)
99.15 The Bylaws of GCI Holdings, Inc. (19)
99.16 The Articles of Incorporation of GCI Holdings, Inc. (19)
99.17 The Articles of Incorporation of GCI, Inc. (18)
99.18 The Bylaws of GCI, Inc. (18)
99.19 The Bylaws of GCI Transport, Inc. (23)
99.20 The Articles of Incorporation of GCI Transport, Inc. (23)
99.21 The Bylaws of Fiber Hold Co., Inc. (23)
99.22 The Articles of Incorporation of Fiber Hold Co., Inc. (23)
99.23 The Bylaws of GCI Fiber Co., Inc. (23)
99.24 The Articles of Incorporation of GCI Fiber Co., Inc. (23)
99.25 The Bylaws of GCI Satellite Co., Inc. (23)
99.26 The Articles of Incorporation of GCI Satellite Co., Inc. (23)
99.27 The Partnership Agreement of Alaska United Fiber System (23)
-------------------------
* Filed herewith.
2 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1990
3 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1991
4 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1992
5 Incorporated by reference to The Company's Registration Statement on Form 10 (File No.
0-15279), mailed to the Securities and Exchange Commission on December 30, 1986
6 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1989.
8 Incorporated by reference to The Company's Current Report on Form 8-K dated June 4, 1993.
9 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1993.
10 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
11 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
114
Exhibit No. Description
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12 Incorporated by reference to The Company's Form S-4 Registration Statement dated October
4, 1996.
13 Incorporated by reference to The Company's Current Report on Form 8-K dated November 13,
1996.
14 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
16 Incorporated by reference to The Company's Current Report on Form 8-K dated March 14,
1996, filed March 28, 1996.
17 Incorporated by reference to The Company's Amendment to Annual Report dated December 31,
1995 on Form 10-K/A as amended on August 6, 1996.
18 Incorporated by reference to The Company's Form S-3 Registration Statement (File No.
333-28001) dated May 29, 1997.
19 Incorporated by reference to The Company's Amendment No. 1 to Form S-3/A Registration
Statement (File No. 333-28001) dated July 8, 1997.
20 Incorporated by reference to The Company's Amendment No. 2 to Form S-3/A Registration
Statement (File No. 333-28001) dated July 21, 1997.
21 Incorporated by reference to The Company's Amendment No. 3 to Form S-3/A Registration
Statement (File No. 333-28001) dated July 22, 1997.
23 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
24 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1998.
25 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
26 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period
ended March 31, 1999.
27 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period
ended June 30, 1999.
28 Incorporated by reference to The Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
29 Incorporated by reference to The Company's Quarterly Report on Form 10-Q for the period
ended June 30, 2000.
(c) Reports on Form 8-K
None.
115
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
General Communication, Inc.:
Under date of March 7, 2001, we reported on the consolidated balance sheets of
General Communication, Inc. and Subsidiaries ("Company") as of December 31, 2000
and 1999 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 2000, which are included in the Company's 2000 Annual Report on
Form 10-K. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedule in the consolidated financial statements, which is listed in
the index in Item 14(a)(2) of the Company's 2000 Annual Report on Form 10-K.
This consolidated financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
consolidated financial statement schedule based on our audits.
In our opinion this consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects the information set forth therein.
/s/
KPMG LLP
Anchorage, Alaska
March 30, 2001
116
Schedule VIII
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 2000, 1999 and 1998
Additions Deductions
---------------------- ------------------------
Balance at Charged to Write-offs Balance
beginning profit and net of at end of
Description of year loss Other recoveries year
- ------------------------------------------------------- ------------- ------------ --------- ------------- -----------
(Amounts in thousands)
Allowance for doubtful receivables, year ended:
December 31, 2000 $ 2,833 5,546 --- 5,515 2,864
============= ============ ========= ============= ===========
December 31, 1999 $ 887 4,224 --- 2,278 2,833
============= ============ ========= ============= ===========
December 31, 1998 $ 1,070 2,795 --- 2,978 887
============= ============ ========= ============= ===========
117
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
GENERAL COMMUNICATION, INC.
By: /s/
Ronald A. Duncan, President
(Chief Executive Officer)
Date: March 23, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Signature Title Date
- -------------------------------------- ------------------------------------------ -------------------
Chairman of Board and Director
Carter F. Page
/s/ Ronald A. Duncan President and Director March 23, 2001
Ronald A. Duncan (Principal Executive Officer)
/s/ Robert M. Walp Vice Chairman of Board and Director March 23, 2001
Robert M. Walp
/s/ Ronald R. Beaumont Director March 28, 2001
Ronald R. Beaumont
Director
Stephen M. Brett
/s/ Donne F. Fisher Director March 23, 2001
Donne F. Fisher
/s/ William P. Glasgow Director March 23, 2001
William P. Glasgow
/s/ Paul S. Lattanzio Director March 23, 2001
Paul S. Lattanzio
/s/ Stephen R. Mooney Director March 23, 2001
Stephen R. Mooney
/s/ James M. Schneider Director March 23, 2001
James M. Schneider
/s/ John M. Lowber Senior Vice President, Chief Financial March 23, 2001
John M. Lowber Officer, Secretary and Treasurer
(Principal Financial Officer)
/s/ Alfred J. Walker Vice President, Chief Accounting March 23, 2001
Alfred J. Walker Officer
(Principal Accounting Officer)
118