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, 1998
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 26, 1999 was approximately
$159,669,544.
The number of shares outstanding of the registrant's common stock as
of February 26, 1999, was:
Class A common stock - 45,949,783 shares; and
Class B common stock - 4,056,252 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 10, 1999 are incorporated by reference into Part III of this
report.
1
GENERAL COMMUNICATION, INC.
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
Glossary................................................................................................................3
Cautionary statement regarding forward looking statements..............................................................10
Part I.................................................................................................................11
Item 1. Business...................................................................................................11
General..........................................................................................................11
Financial information about the Company's industry segments......................................................11
Historical development of the Company's business during the past fiscal year.....................................12
Narrative description of the business done and intended to be done by the Company................................14
Alaska voice, video and data markets.............................................................................15
Long Distance Telecommunication services.......................................................................15
Cable services.................................................................................................21
Local access services..........................................................................................26
Internet services..............................................................................................28
Environmental regulations........................................................................................30
Patents, trademarks, licenses, certificates of public convenience and necessity, and military franchises.........31
Regulation, franchise authorizations and tariffs.................................................................32
Financial information about the Company's foreign and domestic operations and export sales.......................42
Seasonality......................................................................................................42
Customer sponsored research......................................................................................43
Backlog of orders and inventory..................................................................................43
Geographic concentration and Alaska economy......................................................................43
Employees........................................................................................................45
Other............................................................................................................45
Item 2. Properties.................................................................................................45
Item 3. Legal Proceedings..........................................................................................46
Item 4. Submission of matters to a vote of security holders........................................................46
Part II................................................................................................................47
Item 5. Market for the registrant's common equity and related stockholder matters..................................47
Market Information for Common Stock..............................................................................47
Holders..........................................................................................................47
Dividends........................................................................................................47
Item 6. Selected Financial Data....................................................................................48
Item 7. Management's discussion and analysis of financial condition and results of operations......................49
Item 7A. Quantitative and qualitative disclosures about market risk................................................65
Item 8. Consolidated financial statements and supplementary data...................................................66
Item 9. Changes in and disagreements with accountants on accounting and financial disclosure.......................66
Part III...............................................................................................................66
Part IV................................................................................................................99
Item 14. Exhibits, consolidated financial statement schedules, and reports on Form 8-K.............................99
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.
ALASKA UNITED -- Alaska United Fiber System Partnership -- a Alaska partnership
wholly owned by the Company. Alaska United was organized to construct and
operate a new fiber optic cable connecting various locations in Alaska and the
lower 49 states and foreign countries through Seattle, Washington.
APUC -- ALASKA PUBLIC UTILITY COMMISSION -- 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).
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 kilobytes per second to 622 megabits per second. ATM may support
gigabit speeds in the future.
BASIC SERVICE -- The basic service tier includes, at a minimum, all signals of
domestic television broadcast stations provided to any subscriber, any public,
educational, and governmental programming required by the franchise to be
carried on the basic tier, and any additional video programming service added to
the basic tier by the cable operator.
BOC -- BELL SYSTEM OPERATING COMPANY -- A LEC owned by any of the remaining five
Regional Bell Operating Companies, which are holding companies established
following the AT&T Divestiture Decree to serve as parent companies for the BOCs.
BACKBONE -- A centralized high-speed network that interconnects smaller,
independent networks.
BANDWIDTH -- The number of bits of information which can move through a
communications medium in a given amount of time.
BRI -- Basic Rate Interface -- An ISDN offering that allows two 64 kilobytes per
second "B" channels and one 16 kilobytes per second "D" channel to be carried
over one typical single pair of copper wires. 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 kilobytes per second 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 kilobytes per second. New technology
increases the bandwidth of ISDN BRI connections to 230 kilobytes per second.
BROADBAND -- A high-capacity communications circuit/path, usually implying a
speed greater than 1.544 megabits per second.
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.
3
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.
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 which 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 megabits per second (sometimes
called a T-3).
DEDICATED -- Telecommunications lines dedicated or reserved for use by
particular customers.
DIGITAL -- A method of storing, processing and transmitting information through
the use of distinct electronic or optical pulses that represent the binary
digits 0 and 1. Digital transmission and switching technologies employ a
sequence of these pulses to represent information as opposed to the continuously
variable analog signal. The precise digital numbers minimize distortion (such as
graininess or snow in the case of video transmission, or static or other
background distortion in the case of audio transmission).
4
DLC -- Digital Loop Carrier -- A digital transmission system designed for
subscriber loop plant. Multiplexes a plurality of circuits onto very few wires
or onto a single fiber pair.
EQUAL ACCESS -- Connection provided by a LEC permitting a customer to be
automatically connected to the IXC of the customer's choice when the customer
dials "1". Also refers to a generic concept under which the BOCs must provide
access services to AT&T's competitors that are equivalent to those provided to
AT&T.
FCC -- Federal Communications Commission -- A federal regulatory body empowered
to establish and enforce rules and regulations governing public utility
companies and others, such as the Company.
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 megabits per second)
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.
GCC -- GCI Communication Corp., an Alaska corporation and a wholly owned
subsidiary of Holdings
GCI -- General Communication, Inc., an Alaska corporation and the Registrant.
GCI, Inc. -- a wholly owned subsidiary of GCI, an Alaska corporation and issuer
of $180 million of publicly traded bonds.
HOLDINGS -- a wholly owned subsidiary of GCI, Inc., an Alaska corporation and
party to the Company's Senior Holdings Loan.
HSD -- Home Satellite Dish - see DBS.
INBOUND "800" or "888" Service -- A service that assesses long-distance
telephone charges to the called party.
ILEC -- Incumbent Local Exchange Carrier -- with respect to an area, the LEC
that -- (A) on the date of enactment of the Telecommunications Act of 1996,
provided telephone exchange service in such area; and (B)(i) on such date of
enactment, was deemed to be a member of the exchange carrier association
pursuant to section 69.601(b) of the FCC's regulations (47 C.F.R. 69.601(b)); or
(ii) is a person or entity that, on or after such date of enactment, became a
successor or assign of a member described in clause (i).
INTEREXCHANGE -- Communication between two different LATAs.
ISDN -- Integrated Services Digital Network -- A set of standards for
transmission of simultaneous voice, data and video information over fewer
channels than would otherwise be needed, through the use of out-of-band
signalling. The most common ISDN system provides one data and two voice circuits
over a traditional copper wire pair, but can represent as many as 30 channels.
Broadband ISDN extends the ISDN capabilities to services in the Gigabit range.
(See BRI and PRI)
ISP -- Internet Service Provider -- a company providing retail and/or wholesale
Internet services.
INTERNET -- A global collection of interconnected computer networks which use
TCP/IP, a common communications protocol.
IXC -- Interexchange Carrier -- A long-distance carrier providing services
between local exchanges.
5
LAN -- Local Area Network -- The interconnection of computers for the purpose of
sharing files, programs and various devices such as printers and high-speed
modems. LANs may include dedicated computers or file servers that provide a
centralized source of shared files and programs.
LATA -- Local Access And Transport Area -- The approximately 200 geographic
areas defined pursuant to the AT&T Divestiture Decree. The BOCs are generally
prohibited from providing long-distance service between the LATA in which they
provide local exchange services, and any other LATA.
LEC -- Local Exchange Carrier -- A company providing local telephone services.
Each BOC is a LEC.
LINE COSTS -- Primarily includes the sum of access charges and transport
charges.
LMDS -- Local Multipoint Distribution System -- LMDS uses microwave signals
(millimeterwave signals) in the 28 gHz spectrum to transmit voice, video, and
data signals within small cells 3-10 miles in 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.
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 the 48 contiguous states south of or
below Alaska and Hawaii.
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 Megabits per second.
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 Multipoint Distribution Service (MDS) was established by the FCC 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.
6
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 and call pickup. A PBX uses technology similar to that used by a
central office switch (on a smaller scale). (The acronym PBX originally stood
for "Plug Board Exchange.")
POP -- Point of Presence -- The physical access location interface between a LEC
and a IXC network. The point to which the telephone company terminates a
subscriber's circuit for long-distance service or leased line communications.
PRI -- Primary Rate Interface -- An ISDN circuit transmitting at T1 (DS-1) speed
(equivalent to 24 voice-grade channels). One of the channels ("D") is used for
signaling, leaving 23 ("B") channels for data and voice communication.
PRIVATE LINE -- Uses dedicated circuits to connect customer's equipment at both
ends of the line. Does not provide any switching capability (unless supported by
customer premise equipment). Usually includes two local loops and an IXC
circuit.
PRIVATE NETWORK -- A communications network with restricted (controlled) access,
usually made up of private lines (with some PBX switching).
PUBLIC SWITCHED NETWORK -- That portion of a LEC's network available to all
users generally on a shared basis (i.e., not dedicated to a particular user).
Traffic along the public switched network is generally switched at the LEC's
central offices.
7
RBOC -- Regional Bell Operating Company -- Any of the remaining five regional
Bell holding companies which the AT&T Divestiture Decree established to serve as
parent companies for the BOCs.
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 -- Private Securities Litigation Reform Act of 1996.
SENIOR HOLDINGS LOAN -- Holding's $200,000,000 and $50,000,000 credit
facilities. See note 6(b) to the accompanying Notes to Consolidated Financial
Statements included in Part II of this Report.
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.
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 megabits per second to 13.22 Gigabits per
second, effective for ISDN services including ATM.
TCP/IP -- Transmission Control Protocol/Internet Protocol -- A suite of network
protocols that allows computers with different architectures and operating
system software to communicate with other computers on the Internet.
T-1 -- A data communications circuit capable of transmitting data at 1.5
megabits per second.
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 megabits per second or 16 megabits per second.
TRANSPORT CHARGES -- Expenses paid to facilities-based carriers for transmission
between or within LATAs.
8
TRS SERVICES -- Telecommunications Relay Services -- Enables telephone
conversations between people with and without hearing or speech disabilities.
TRS relies on communications assistants ("CA") to relay the content of calls
between users of text telephones ("TTYs") and users of traditional handsets
(voice users). For example, a TTY user may telephone a voice user by calling a
TRS provider where a CA will place the call to the voice user and relay the
conversation by transcribing spoken content for the TTY user and reading text
aloud for the voice user.
WAN -- Wide Area Network -- Remote computer communications system. WANs allow
file sharing among geographically distributed workgroups (typically at higher
cost and slower speed than LANs or MANs). WANs typically use common carriers'
circuits and networks. WANs may serve as a customized communication backbone
that interconnects all of an organization's local networks with communications
trunks that are designed to be appropriate for anticipated communication rates
and volumes between nodes.
WORLD WIDE WEB or WEB -- A collection of computer systems supporting a
communications protocol that permits multi-media presentation of information
over the Internet.
1984 CABLE ACT -- The Cable Communications Policy Act of 1984.
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 can immediately
begin manufacturing, research and development; GTE Corp. can begin providing
interexchange services through its telephone companies nationwide; laws in 27
states that foreclose competition are knocked down; co-carrier status for CLECs
is ratified; and the concept of physical collocation of competitors' facilities
in LECs central offices, which an appeals court rejected, is resurrected.
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 provides that rate
regulation of the cable programming service tier will be phased out altogether
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.
9
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Except for the historical statements and discussions contained herein, certain
statements in this annual report on Form 10-K constitute forward-looking
statements within the meaning of the Securities Reform Act. Any Form 10-K,
Annual Report to Shareholders, Form 10-Q or Form 8-K of the Company may include
forward looking statements. In addition, other written or oral statements which
constitute forward looking statements have been made and may in the future be
made by or on behalf of the Company, including statements concerning future
operating performance, the Company's share of new and existing markets, the
Company's short- and long-term revenue and earnings growth rates, and general
industry growth rates and the Company's performance relative thereto. These
forward looking statements rely on a number of assumptions concerning future
events, including the outcome of litigation, the adoption and implementation of
balanced and effective rules and regulations by the FCC and the state public
regulatory agencies, and the Company's ability to achieve a significant market
penetration in new markets. These forward looking statements are subject to a
number of uncertainties and other factors, many of which are outside the
Company's control, that could cause actual results to differ materially from
such statements.
These statements may be preceded by, followed by, or include the words
"believes," "expects, " "anticipates," or similar expressions. For those
statements, the Company claims protection of the safe-harbor for forward-looking
statements contained in the Securities Reform Act. The reader is cautioned that
important factors, such as the following risks, uncertainties, and other
factors, in addition to those contained elsewhere in this document, could affect
future results of the Company, its long-distance services, local access
services, Internet services, cable services, and wireless services and could
cause those results to differ materially from those expressed in the
forward-looking statements:
- Material adverse changes in the economic conditions in the markets
served by the Company;
- 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;
- The Company's 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 the Company's 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 the Company
being able to do so; the degree to which the Company experiences
material competitive impacts to its traditional service offerings
prior to achieving adequate local service entry; and competitor
responses to the Company's products and services and overall market
acceptance of such products and services;
- The outcome of negotiations with ILECs and state regulatory
arbitrations and approvals with respect to interconnection agreements;
and the ability to purchase unbundled network elements or wholesale
services from ILECs at a price sufficient to permit the profitable
offering of local exchange service at competitive rates;
- Success and market acceptance for new initiatives, many of which are
untested; the level and timing of the growth and profitability of new
initiatives, particularly local access services, Internet (consumer
and business) services and wireless services; start-up costs
associated with entering new markets, including advertising and
promotional efforts; successful deployment of new systems and
applications to support new initiatives; and local conditions and
obstacles;
- Uncertainties inherent in new business strategies, new product
launches and development plans, including local access services,
Internet services, wireless services, digital video services, cable
modem services, and transmission services;
10
- 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 Federal
Communications Commission, the Alaska Public Utilities Commission, and
adverse outcomes from regulatory proceedings;
- The cost of the Company's year 2000 compliance efforts;
- Uncertainties in federal military spending levels and military base
closures in markets in which the Company operates.
- Other risks detailed from time to time in the Company's 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 the Company expressly
disclaims any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained in this document to reflect any
change in the Company's expectations with regard to those statements or any
other change in events, conditions or circumstances on which any such statement
is based. Readers are cautioned not to put undue reliance on such forward
looking statements.
PART I
Item 1. BUSINESS.
General
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 the Company and its services at http://www.gci.com/ and
http://www.alaskaunited.com/. Internet services are hosted by the Company 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.
The Company seeks to become the first significant provider in Alaska of an
integrated package of long-distance, local and wireless telecommunications
services, cable television services and Internet services that would be well
positioned to take advantage of growth opportunities in the communications, data
and entertainment markets.
Financial information about the Company's industry segments
The Company has four reportable segments: long-distance services, cable
services, local access services and Internet services.
A full range of common-carrier long-distance and other telecommunication
services are offered to business, government, other telecommunications companies
and consumer customers, through its networks of fiber optic cables, digital
microwave, and fixed and transportable satellite earth stations. Individually
insignificant business units including Network Solutions, cellular resale and
product sales are included in the "other" industry segment. None of these
business units have ever met the quantitative thresholds for determining
reportable segments.
11
The Company provides cable television services to residential, commercial and
government users in the State of Alaska. The Company's cable systems serve 26
communities and areas in Alaska, including the state's three largest urban
areas, Anchorage, Fairbanks and Juneau. Anchorage cable plant upgrades in 1998
enabled the Company to offer digital cable television services and retail cable
modem service (through its Internet segment) in Anchorage, complementing its
existing service offerings. The Company plans to expand its product offerings as
plant upgrades in other communities in Alaska are completed.
The Company introduced facilities based competitive local exchange services in
Anchorage, Alaska in 1997. The Company has announced plans to provide similar
competitive local exchange services in Alaska's other major population centers,
as access is allowed by the APUC.
The Company began offering wholesale and retail Internet services in 1998.
Deployment of the new undersea fiber optic cable described below will allow the
Company to offer enhanced services with high-bandwidth requirements.
For financial information with respect to industry segments of the Company, see
note 9 of the Notes to Consolidated Financial Statements included in Part II of
this Report.
Historical development of the Company's business during the past fiscal year
Alaska United Project. The Company undertook a major construction project
(referred to as Alaska United) with the goal of significantly increasing its
communications bandwidth to and from locations in Alaska and the lower 49 states
and through interconnection agreements with other carriers, to foreign
locations. After a preliminary route survey was completed and initial cost
components determined, a detailed sea floor survey was commissioned and
completed in 1996. The results of this survey pinpointed the exact route that
the Alaska United fiber would take. The Company entered into a contract with
Tyco Submarine Systems, Ltd. ("TSS"), one of the world's leading submarine cable
vendor which has installed more than 150,000 miles of undersea cable. TSS was
engaged to design, engineer, manufacture and install the undersea cable. The
cable was laid during the period from August to December 1998. Testing occurred
after that and services commenced in late January 1999 for the Anchorage to
Fairbanks segment and early February 1999 for the complete system. With
construction of Alaska United complete, the Company began to transition traffic
from leased satellite, terrestrial and microwave facilities to Alaska United
facilities in early February 1999.
The Alaska United project provides a high capacity fiber optic link between
points in Alaska and the lower 48 states through Seattle, Washington. Alaska
United lands at cable terminal stations in Whittier, Valdez and Juneau, Alaska.
From Whittier, the fiber follows the Alaska railroad, highway, and over-land
rights-of-ways to Anchorage. Between Whittier and Valdez, the Company
constructed a second undersea fiber optic cable. The cable connects in Valdez
with a fiber constructed by Kanas Telecom, Inc. ("Kanas"). The Company exchanged
Dark Fiber with Kanas to obtain facilities from Valdez to Fairbanks. In Juneau
and Seattle, Alaska United connects through terminal stations to the Company's
existing network. The cable terminal stations house the power feed equipment
necessary to power the undersea fiber optic cable system and the SONET equipment
which transports data across the terrestrial network and the undersea fiber
network.
The Alaska United system is 2,331 miles long (1,995 miles undersea and 336 over
land) and has a total design capacity of 10 billion bits per second (22 times
what was currently available). It can route traffic in different directions in
the event of equipment failures, and once paired with the Company's existing
capacity on the North Pacific Cable, users can achieve route diversity to
achieve multiple fiber paths for back-up purposes. It will deliver a minimum of
32,256 simultaneous clear channel voice or data circuits at transmission speeds
of 2.5 billion bits per second. As demand increases, capacity can be quadrupled
to support a minimum of 129,024 simultaneous clear channel voice or data
circuits at speeds of 10 billion bits per second. The only other fiber optic
cable connecting Alaska with the contiguous United States had reached its
capacity limit of 6,048 simultaneous voice or data circuits at transmission
speeds of 420 million bits per second.
12
Financing for the Alaska United undersea fiber project included $75 million
through a separate bank credit agreement dated January 27, 1998 and $50 million
from funds raised through the 1997 issuance of senior notes. See note 6 to the
accompanying Notes to Consolidated Financial Statements included in Part II of
this Report.
Local Access Services. The Company began offering local exchange services in
Anchorage in September 1997 and provided service to approximately 28,300 and
3,300 lines at December 31, 1998 and 1997, respectively.
The Company's local access services face significant competition from the
municipally owned utility Anchorage Telephone Utility ("ATU") and AT&T Alascom,
Inc. In October 1998 the Municipality of Anchorage approved Alaska
Communications Systems, Inc.'s ("ACS") offer to acquire the operations of ATU.
ACS is an entity formed by Fox Paine & Company, LLC ("Fox Paine") and a
management team led by former executives of Pacific Telecom, Inc. ("PTI"). The
sale of ATU was approved by the citizens of the Municipality in April 1998.
Consummation of the transaction is subject to regulatory approval and other
conditions.
Century Telephone Enterprises, Inc. ("CenturyTel") reported in August 1998 that
it entered into a definitive agreement to sell the stock of its Alaska
operations to ALEC Acquisition Corporation ("ALEC"). ALEC is led by former
executives of PTI and Fox Paine. It is anticipated that the transaction will
close in the second quarter 1999, subject to regulatory approvals and customary
closing conditions. CenturyTel acquired the Alaska properties as part of the PTI
acquisition completed in December 1997.
Due to uncertainties surrounding regulatory approvals and possible new
requirements that may be imposed by regulatory authorities, the Company is not
able to determine if the sale of ATU or the CenturyTel properties will have a
material effect on the Company's financial position, results of operations or
liquidity.
PTI, through subsidiary companies, provides local telephone services in
Fairbanks and Juneau, Alaska. Although the PTI subsidiaries are classified as
Rural Telephone Companies under the 1996 Telecom Act, PTI is currently owned by
Century Telephone Company of Louisiana, one of the largest independent telephone
companies in the Nation. PTI subsidiaries' legal status entitles them to an
exemption of certain material interconnection terms of the 1996 Telecom Act,
until such "rural exemption" is lifted by the State of Alaska. The Company
requested that continuation of the "rural exemption" of the PTI subsidiaries
relating to the Fairbanks and Juneau markets be examined. In January 1998, the
APUC denied the Company's 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. Further, in March 1999 the Company received a favorable decision on
its appeal of the APUC decision, and the issues have been remanded to the APUC
for proceedings leading to a decision on or before July 2, 1999. Other
legislative and judicial efforts are also underway to achieve a change in the
APUC ruling. The Company may, however, provide local service on its own
facilities to a limited number of consumers in Juneau and Fairbanks.
The Company believes local access services competition is in the best interests
of consumers and intends to vigorously pursue before the APUC in the remanded
proceedings that the "rural exemption" not be continued for the Fairbanks and
Juneau markets. The Company cannot, however, predict the effect that ongoing or
future regulatory developments might have on competitive local access services
markets in Alaska or on the Company specifically. See Part I, Item 1. Business,
Regulation, Franchise Authority and Tariffs.
Cable Services Expansion. The Company completed an $11.5 million upgrade to its
Anchorage cable infrastructure in 1998 that significantly increased the capacity
and reliability of the system, made it possible to support two-way applications
such as cable modems (as further described below) and digital cable television
programming, and provides the capacity for additional program offerings.
Digital cable television services were offered in Anchorage in 1998, offering
enhanced picture and audio quality, over 100 channels of programs, 40 channels
of digital music, and many channels of premium and pay-per-view products.
13
Internet Services. The Company's statewide SchoolAccess(TM) services (Internet
access and related products and services for Alaska schools) commenced January
1998.
GCI began a limited rollout of its dial-up Internet service in April 1998, which
allowed the Company to test its new state-of-the-art Internet platform. The
Company began its broad based offering in October 1998 and initiated a major
promotion in February 1999. Services were initially offered to residents of
Anchorage, Fairbanks, Kodiak, Juneau, Kenai, Soldotna, Palmer and Wasilla,
Alaska. Other Alaska communities were added over the next several months and
continue to be added. GCI.net service supports 56 kilobit per second dial-up
connections with support for both V.90 and Kflex technologies. The Company
believes its service has one of the best first-try connect rates and the fastest
speeds available of any provider in Alaska. The Company plans to introduce
additional service upgrades and promotional offerings in the future.
The Company began a limited introduction of cable modem services in 1998,
providing high-speed, dedicated access to the Internet.
Satellite Transponders. The Company entered into a purchase and lease-purchase
option agreement in August 1995 for the acquisition of satellite transponders to
meet its long-term satellite capacity requirements. The launch of the satellite
in August 1998 failed. The Company did not assume launch risk and the launch has
been rescheduled for the fourth quarter of 1999. The Company will continue to
lease transponder capacity until the delivery of the transponders on the
replacement satellite.
Rural Equal Access. In 1996 the Company constructed 56 new earth stations in
Western and Northern Alaska. As construction of those DAMA stations were
completed, the Company requested Equal Access from the LECs serving those
communities. Under Federal Communications Commission rules, substantially all
LECs have three years to comply with an equal access request. The three year
time period is expiring for many of those locations and LECs started
implementing the equal access conversion process in late 1998 and will continue
to convert locations though March 1999. As a result, approximately 34 rural
DAMA-served communities will be converted during this period to equal access
enabling the Company's customers to access its network without dialing extra
digits.
PCS and LMDS licenses. The Company began developing plans for PCS wireless
communications service deployment in 1995 and subsequently conducted a technical
trial of its candidate technology. The Company has invested approximately $2.2
million in its PCS license at December 31, 1998. PCS licensees are required to
offer service to at least one-third of their market population within five years
or risk losing their licenses. Service must be extended to two-thirds of the
population within 10 years. The Company invested approximately $275,000 in its
LMDS license in 1998. LMDS licensees are required to provide 'substantial
service' in their service regions within 10 years. The Company is currently
evaluating its wireless strategy and expects to complete such evaluation within
the next six months. The Company expects that its wireless strategy will allow
retention of the PCS and LMDS licenses pursuant to their terms.
Narrative description of the business done and intended to be done by the
Company
General
The Company operates a broadband communications network that permits the
delivery of a seamless integrated bundle of communications, entertainment and
information services. The Company offers a wide array of consumer communications
and entertainment services--including local telephone, long-distance and
wireless communications, cable television, consulting services, network and
desktop computing outsourced services, and dial-up and cable modem Internet
access services at a wide range of speeds--all under the GCI brand name.
The Company's management believes that the size and growth potential of the
voice, video and data market, the increasing deregulation of telecommunication
services, and the increased convergence of telephony, wireless, and cable
services offer the Company considerable opportunities to integrate its
telecommunication, Internet and cable services and expand into communications
markets both within and, longer-term, outside of Alaska. The
14
Company's management expects the rate of growth in industry-wide
telecommunication revenues to continue to increase as the historical dominance
of monopoly providers is challenged as a result of deregulation. Considerable
deregulation has already taken place in the United States as a result of the
1996 Telecom Act with the barriers to competition between long-distance, local
exchange and cable providers being lowered. The Company's management believes
that its acquisition of cable television systems and its development of local
exchange service, Internet services, and wireless services leave it well
positioned to take advantage of deregulated markets.
The Company is one of Alaska's leading providers of telecommunication, Internet
and cable television services and maintains a strong competitive position. There
is active competition in the sale of substantially all products and services
offered by the Company.
For calendar year 1998, the Company estimates that the aggregate
telecommunications, cable television, and Internet markets in Alaska generated
revenues of approximately $931 million. Of this amount, approximately $475
million was attributable to interstate and intrastate long-distance service,
$327 million was attributable to local exchange services, $72 million was
attributed to cable television, $38 million was attributable to wireless
communications services, and $19 million was attributable to Internet services.
Alaska Voice, Video and Data Markets
The Alaskan voice, video and data markets are unique within the United States.
Alaska is physically distant from the rest of the United States and is
characterized by large geographical size and relatively small, dense population
clusters (with the exception of population centers such as Anchorage, Fairbanks
and Juneau). It lacks a well-developed terrestrial transportation
infrastructure, and the majority of Alaska's communities are accessible only by
air or water. As a result, Alaska's telecommunication networks are different
from those found in the lower 49 states.
Alaska today relies extensively on satellite-based long-distance transmission
for intrastate calling between remote communities where investment in a
terrestrial network would be uneconomic or impractical. Also, given the
remoteness of Alaska's communities and lack, in many cases, of major civic
institutions such as hospitals, libraries and universities, Alaskans are
dependent on telecommunications to access the resources and information of large
metropolitan areas in the rest of the U.S. and elsewhere. In addition to
satellite-based communications, the telecommunications infrastructure in Alaska
includes traditional copper wire, digital microwave links between Anchorage and
Fairbanks and Juneau and fiber optic cable. For interstate and international
communication, Alaska is currently connected to the lower 49 states by two
undersea fiber optic cables with a current capacity of 57 DS3s (can be upgraded
to 201 DS3s) and is backed-up by additional satellite capacity.
Fiber optics is the preferred method of carrying Internet, voice, video and data
communications, eliminating the delay commonly found in satellite connections.
Widespread use of high capacity fiber optic facilities will allow expansion of
business, government and educational infrastructure in Alaska.
Long-Distance Services
Industry. With the Communications Act of 1934, telecommunications was
established as a regulated industry. The main objective of this act was to
create an affordable and universal telephone service for the American people. As
a result, AT&T was granted exclusive rights to serve the telecommunications
industry. The next several decades brought significant improvements in
technology. New advances created opportunities for providers of lower-cost
services to enter the market, and in order to facilitate the entry of these new
competitors, regulatory policies were changed. The government stepped into the
market on January 1, 1984, and broke-up AT&T's near monopoly. The government's
objective was to provide for greater competition in the telecommunications
industry, as well as make room for the creation of more diversified products.
The Federal Communications Commission set price caps in 1989 to regulate the
prices that AT&T could charge for their services. Yet, by 1991 the market had
become so much more competitive with regards to both long-distance and local
calls, that the FCC decided to deregulate most of AT&T's services.
15
The United States Congress passed the 1996 Telecom Act that permitted the local
phone companies, the long-distance companies, and the cable service firms to
penetrate each other's market. This has provided the telecommunications industry
with new capabilities resulting in an industry that is more competitive than
ever before. To reduce the burden and facilitate competitive advantages,
companies are merging and acquiring other telecommunication and cable television
firms.
The long-distance telephone services market according to the Standard and Poor's
telecommunication survey is worth over $68 billion. AT&T is the main contributor
to this sum, contributing over 50% of the total revenues. The rest of the share
of the revenues is contributed by MCI WorldCom, Sprint Corp. ("Sprint"), and
over 400 smaller firms. Under new regulations, BOCs and ILECs are able to enter
the long-distance market, providing additional competitive pressures on the
industry. To retain customers, as in the case of the long-distance carriers, and
to win customers for the new competitors, rates may continue to be reduced.
Advancements within the next few years are expected to combine services directed
toward voice communication with other activities such as data sharing, on-screen
collaboration, faxing, and game playing, among many other things.
The Company believes that the telecommunications industry in 1999 will be
significantly impacted by federal and state regulators. Consummation of mergers
between long-distance companies, local access services companies, and cable
television companies is expected continue to blur the distinction between
product lines and competitors. Synergies developed through mergers and
acquisitions and obtaining end-to-end connectivity with customers is expected to
drive profitability and success in penetrating new markets. Industry analysts
believe that successful competitors will be the companies that can minimize
regulatory battles and begin to offer a full suite of integrated services to
their customers, using a network that is largely under their control.
Growth in data is expected to be a key component of continuing industry revenue
growth. ISPs have become major customers and many long-distance companies have
acquired ISPs and web-hosting companies.
General. The Company supplies a full range of common-carrier long-distance and
other telecommunication products and services. The Company operates a
state-of-the-art, competitive telecommunications network employing the latest
digital transmission technology based upon fiber optic and digital microwave
facilities within and between Anchorage, Fairbanks and Juneau, including a
self-constructed and financed digital fiber optic cable and additional owned
capacity on another undersea fiber optic cable, both linking Alaska to the
networks of other carriers in the lower 49 states, and the use of satellite
transmission to remote areas of Alaska (and for certain inter-state traffic as
well). Virtually all switched services are computer controlled, digitally
switched, and interconnected by a packet switched signaling network.
The Company provides interstate and intrastate long-distance services throughout
Alaska using its own facilities or facilities leased from other carriers. The
Company also provides (or joins in providing with other carriers)
telecommunication services to and from Alaska, Hawaii, the lower 48 states, and
many foreign nations and territories.
The Company offers cellular services by reselling other cellular providers'
services. The Company expects to offer wireless services over its own
facilities, and has purchased in FCC auctions PCS and LMDS wireless broadband
licenses covering markets in Alaska. The Company is required by the FCC to
provide adequate broadband PCS service to at least one-third of the population
in its licensed areas within five years of being licensed and two-thirds of the
population in its licensed areas within ten years of being licensed. The Company
is required by the FCC to provide `substantial service' in its service region
within 10 years to retain its LMDS license. The licenses are granted for ten
year terms from the original date of issuance and may be renewed by the Company
by meeting the FCC's renewal criteria and upon compliance with the FCC's renewal
procedures.
16
Products. The Company's 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. The Company's message
toll services include intrastate, interstate and international direct dial,
toll-free 800, 888 and 877 services, 900 services, GCI calling card, debit card,
operator and enhanced conference calling, frame relay, SDN, ISDN technology
based services, as well as termination of northbound toll service for MCI
WorldCom, Sprint and several large resellers who do not have facilities of their
own in Alaska. The Company also provides origination of southbound calling card
and toll-free 800, 888 and 877 toll services for MCI WorldCom and Sprint.
Regulated telephone relay services for the deaf, hard-of-hearing and speech
impaired are provided through the Company's operator service center. The Company
offers its message services to commercial, residential, and government
subscribers. Subscribers may generally cancel service at any time. Toll related
services account for approximately 65.0%, 70.0%, and 86.0% of the Company's
1998, 1997, and 1996 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.
The Company has positioned itself as a price and customer service leader in the
Alaska telecommunication market. Rates charged for the Company's long-distance
services are designed to be equal to or below those for comparable services
provided by its competitors.
In addition to providing communication services, the Company also designs,
sells, services and operates, on behalf of certain customers, dedicated
communication and computer networking equipment and provides field/depot, third
party, technical support, telecommunications consulting and outsourcing services
through its Network Solutions business. The Company also supplies integrated
voice and data communication systems incorporating interstate and intrastate
digital private lines, point-to-point and multipoint private network and small
earth station services. The Company's Network Solutions sales and services
revenue totaled $13.3, $10.2 and $10.8 million in the years ended December 31,
1998, 1997 and 1996, respectively, or approximately 5.4%, 4.5% and 6.6% of total
revenues, respectively. Presently, there are five companies in Alaska that
actively sell and maintain data and voice communication systems.
The Company's ability to integrate telecommunications networks and data
communication equipment has allowed it to maintain its 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. Currently, the Company's telecommunication facilities comprise major
earth stations at Eagle River, Fairbanks, Juneau, Prudhoe Bay, Valdez, Kodiak,
Sitka, Ketchikan, Unalaska 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. 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 colocated. The Ketchikan, Prudhoe Bay,
Valdez, Kodiak, Sitka, Unalaska and Cordova installations consist only of an
earth station. The Company constructed microwave facilities serving the Kenai
Peninsula communities and owns a 49 percent interest in an earth station located
on Adak Island in Alaska. The Company maintains an operator service center in
Wasilla, Alaska. Each of the distribution centers contains electronic switches
to route calls to and from local exchange companies and, in Seattle, to obtain
access to MCI WorldCom, Sprint and other facilities to distribute the Company's
southbound traffic to the remaining 49 states and international destinations.
The Company, using its DAMA facilities, expanded its network to 56 additional
locations within the State of Alaska in 1996. The digital DAMA system allows
calls to be made between remote villages using only one satellite hop thereby
reducing satellite delay and capacity requirements while improving quality. The
Company obtained the necessary APUC and FCC approvals waiving current
prohibitions against construction of competitive facilities in rural Alaska,
allowing for deployment of DAMA technology in 56 sites in rural Alaska
17
on a demonstration basis. Construction and partial deployment occurred in 1996,
with deployment completed in 1997. All sites were operational at December 31,
1998.
As described previously, the Company completed construction and placed into
service in February 1999 a fiber optic cable connecting Anchorage, Whittier,
Valdez, Fairbanks and Juneau, Alaska and Seattle Washington. The Company also
owns a portion of an additional undersea fiber optic cable. The fiber optic
cables allow the Company to carry its Anchorage, Eagle River, Wasilla, Palmer,
Kenai Peninsula, Valdez, Whittier, Glenallen, Fairbanks, and Juneau area traffic
to and from the contiguous lower 48 states over terrestrial circuits,
eliminating the one-quarter second delay associated with satellite circuits. The
Company's preferred routing for this traffic is via undersea fiber optic cable,
which makes available satellite capacity to carry the Company's rural interstate
and intrastate traffic.
The Company employs satellite transmission for rural intrastate traffic and
certain other major routes and uses advanced digital transmission technology
throughout its system. Pursuant to a purchase and lease-purchase option
agreement entered into in August 1995 the Company leases C-band transponders on
Hughes Communications Galaxy, Inc. (now PanAmSat Corporation ("PanAmSat"))
Galaxy IX satellite and has agreed to acquire satellite transponders on PanAmSat
Galaxy XR satellite to meet its long-term satellite capacity requirements. The
Galaxy XR satellite is expected to be placed in service during the fourth
quarter of 1999.
The Company employs advanced transmission technologies to carry as many voice
circuits as possible through a satellite transponder without sacrificing voice
quality. Other technologies such as terrestrial microwave systems, metallic
cable, and fiber optics tend to be favored more for point-to-point applications
where the volume of traffic is substantial. With a sparse population spread over
a wide geographic area, neither terrestrial microwave or fiber optic
transmission technology will be economically feasible in rural Alaska in the
foreseeable future.
Customers. The Company had approximately 82,000, 89,000 and 93,900 active Alaska
subscribers to its message telephone service at December 31, 1998, 1997 and
1996, respectively. Approximately 12,100, 11,500 and 11,000 of these were
business and government users at December 31, 1998, 1997 and 1996, respectively,
and the remainder were residential customers. Reductions in residential customer
counts are primarily attributed to new competitive pressures in Anchorage and
other markets served by the Company. MTS revenues averaged approximately $11.1
million per month during 1998.
Equal access conversions have been completed in all communities served with
Company owned facilities. The Company estimates that it carries over 40% of
business MTS traffic and approximately 35% of residential MTS traffic as a
statewide average for both originating interstate and intrastate traffic.
A summary of switched MTS traffic minutes follows:
Interstate Minutes
---------------------------------------
Combined
Interstate
Inter- and Inter- Intra-
South- North- Calling national national state Total
For Quarter ended bound bound Card Minutes Minutes Minutes Minutes
- ----------------------------------------------------------------------------------------------------------------------
(amounts in thousands)
March 31, 1996 76,369 49,158 6,094 1,890 133,511 28,910 162,421
June 30, 1996 81,753 51,465 6,049 1,964 141,231 30,671 171,902
September 30, 1996 86,094 52,856 6,453 1,896 147,299 31,253 178,552
December 31, 1996 82,255 55,675 7,863 1,774 147,567 30,374 177,941
-----------------------------------------------------------------------------------------
Total 1996 326,471 209,154 26,459 7,524 569,608 121,208 690,816
=========================================================================================
18
Interstate Minutes
---------------------------------------
Combined
Interstate
Inter- and Inter- Intra-
South- North- Calling national national state Total
For Quarter ended bound bound Card Minutes Minutes Minutes Minutes
- ----------------------------------------------------------------------------------------------------------------------
(amounts in thousands)
March 31, 1997 83,284 56,588 8,110 1,741 149,723 32,020 181,743
June 30, 1997 85,933 58,420 7,189 1,795 153,337 34,405 187,742
September 30, 1997 93,510 60,390 5,530 1,842 161,272 34,755 196,027
December 31, 1997 87,657 61,992 5,157 1,703 156,509 31,962 188,471
-----------------------------------------------------------------------------------------
Total 1997 350,384 237,390 25,986 7,081 620,841 133,142 753,983
=========================================================================================
March 31, 1998 86,899 64,116 4,810 1,889 157,714 33,082 190,796
June 30, 1998 93,817 67,296 4,353 1,910 167,376 34,890 202,266
September 30, 1998 103,423 61,690 4,227 1,940 171,280 35,748 207,028
December 31, 1998 90,792 61,514 4,197 1,706 158,209 33,598 191,807
-----------------------------------------------------------------------------------------
Total 1998 374,931 254,616 17,587 7,445 654,579 137,318 791,897
=========================================================================================
All minutes data were taken from the Company's billing statistics reports.
In 1993, the Company entered into a significant business relationship with MCI
(now MCI WorldCom) which includes the following agreements:
- the Company agreed to terminate all Alaska-bound MCI long-distance
traffic and MCI agreed to terminate all of the Company's long-distance
traffic terminating in the lower 49 states excluding Washington,
Oregon and Hawaii;
- MCI licensed certain service marks to the Company for use in Alaska;
- MCI, in connection with providing to the Company credit enhancement to
permit the Company to purchase a portion of an undersea cable linking
Seward, Alaska, with Pacific City, Oregon, leased from the Company all
of the capacity owned by the Company on the undersea fiber optic cable
and the Company leased such capacity back from MCI;
- MCI purchased certain service marks of the Company; and
- the parties agreed to share some communications network resources and
various marketing, engineering and operating resources. The Company
also handles MCI's 800, 888 and 877 traffic originating in Alaska and
terminating in the lower 49 states and handles traffic for MCI's
calling card customers when they are in Alaska. Concurrently with
these agreements, MCI purchased approximately 31% (19.1% as of
December 31, 1998) of GCI's Common Stock and presently controls
nominations to two seats on the Board. In conjunction with the Cable
Acquisition Transactions, MCI purchased an additional two million
shares at a premium to the then current market price for $13 million
or $6.50 per share.
Revenues attributed to MCI WorldCom in 1998, and MCI in 1997 and 1996 totaled
$35.9 million, $34.3 million and $29.2 million, or 14.5%, 15.3% and 17.7% of
total revenues, respectively. The contract was amended in March 1996 extending
its term three years to March 31, 2001. The amendment also reduced the rate in
dollars to be charged by the Company for certain MCI WorldCom traffic for the
period April 1, 1996 through July 1, 1999 and thereafter.
In 1993 the Company entered into a long-term agreement with Sprint, pursuant to
which the Company agreed to terminate all Alaska-bound Sprint long-distance
traffic and Sprint agreed to handle substantially all of the Company's
international traffic. Services provided pursuant to the contract with Sprint
resulted in revenues in
19
1998, 1997 and 1996 of approximately $25.4 million, $24.4 million and $18.8
million, or approximately 10.3%, 10.9% and 11.4% of total revenues,
respectively.
With the contracts and amendment described above, the Company is assured that
MCI WorldCom and Sprint, the Company's two largest customers, will continue to
make use of the Company's service during the extended term. Both MCI WorldCom
and Sprint are major customers of the Company in its long-distance services
industry segment. Loss of one or both of these customers would have a
significant detrimental effect on the Company's revenues and contribution. There
are no other individual customers, the loss of which would have a material
impact on the Company's revenues or gross profit.
Other common carriers traffic routed to the Company for termination in Alaska is
largely dependent on traffic routed to MCI WorldCom and Sprint by their
customers. Pricing pressures, new program offerings and market consolidation
continue to evolve in the markets served by MCI WorldCom and Sprint. If, as a
result, their traffic is reduced, or if their competitors' costs to terminate or
originate traffic in Alaska are reduced, the Company's traffic will also likely
be reduced, and the Company's pricing may be reduced to respond to competitive
pressures. The Company is unable to predict the effect on the Company of such
changes, however given the materiality of other common carriers revenues to the
Company, a significant reduction in traffic or pricing could have a material
adverse effect on the Company's financial position, results of operations and
liquidity.
The Company provided private line and private network communication products and
services, including SchoolAccess(TM) private line facilities, to approximately
1,269 commercial and government accounts in 1998. Approximately 7.9%, 7.1% and
8.5% of total revenues were generated by these products and services during the
years ended December 31, 1998, 1997 and 1996, respectively.
Although the Company has several agreements to facilitate the origination and
termination of international toll traffic, it has 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, perceived quality, reliability and availability. Certain of
the Company's competitors are substantially larger and have greater financial,
technical and marketing resources than the Company. Although the Company
believes it has the human and technical resources to pursue its strategy and
compete effectively in this competitive environment, its success will depend
upon its ability to profitably provide high quality, high value services at
prices generally competitive with, or lower than, those charged by its
competitors.
In the long-distance market, the Company competes against AT&T Alascom, ATU, the
Matanuska Telephone Cooperative, certain smaller rural LEC affiliates, and may
in the future compete against new market entrants. AT&T Alascom, the Company's
principal competitor in long-distance services, has substantially greater
resources than the Company. This competitor's interstate rates are integrated
with those of AT&T Corp. and are regulated in part by the FCC. While the Company
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 served by the Company.
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 the rates and services of the Company. AT&T's and AT&T Alascom's
interstate prices are regulated under a price cap plan whereby their rate of
return is no longer regulated or restricted. Price increases by AT&T and AT&T
Alascom generally improve the Company's ability to raise its prices while price
decreases pressure the Company to follow. The Company believes it has, so far,
successfully adjusted its pricing and marketing strategies to respond to AT&T
and other competitors' pricing practices. However, if competitors significantly
lower their rates, the Company may be forced to reduce its rates, which could
have a material adverse effect on the Company.
20
As allowed under the 1996 Telecom Act, ATU and other LECs entered the interstate
and international long-distance market, and pursuant to APUC authorization,
entered the intrastate long-distance market in 1997. ATU and other LECs resell
other carriers' services in the provision of their interstate and intrastate
long-distance services
A carrier has publicly announced that it has begun construction of fiber optic
facilities connecting points in Alaska to the lower 48 states, with service
expected to commence in 1999. An additional fiber system would provide direct
competition to the Company's provision of service on its owned fiber optic
facilities. The Company believes it can successfully compete with products and
services offered by the competing carrier.
In the wireless communications services market, the Company's PCS business
expects to compete against the cellular subsidiaries of AT&T and ATU in the
Anchorage market and the cellular subsidiaries of PTI and others outside of
Anchorage.
Cable Services
Industry. The programmed video services industry includes traditional broadcast
television, cable television, wireless cable, and DBS systems. 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 expansion to enable
migration to digital programming are expected to have a significant impact on
cable services in the future. The industry is expected to be challenged by
changing federal, state and local regulations, intense competition, and
uncertain technologies and standards.
Acquisitions and mergers are shaping the cable industry in a technological
convergence similar to what is happening in the telecommunications industry.
AT&T has received stockholder and regulatory approvals and closed 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 also negotiating with other cable companies for access to their
lines.
Convergence of TV and the Internet isn't expected to become a widespread
phenomenon until at least 2000. Analysts expect that as many as 5 million cable
subscribers may sign up in 1999 for high-speed cable modems that will give them
access to the Internet. The Company is currently offering such high-speed cable
modem access in the Anchorage area.
Basic cable pricing is expected to be impacted by two forces; possible
reimposition of rate regulations and additional competition from wireless cable
providers. After averaging 3.4% growth for the last five years, industry
analysts project that cable subscriber growth in 1999 may slow to 1.8%, or 66.6
million homes. Industry analysts predict that cable providers may see a 12% hike
in ad revenues, to $6.9 billion.
Direct-broadcast satellite operators increased their subscriptions by
approximately 39% in 1998, to 8.9 million, according to industry analysts. The
industry is expected to add 2.6 million subscribers in 1999. With digital
transmissions and compression, cable operators are better able to offer a
variety and quality of channels to rival DBS, with pay-per-view choices that can
approximate video-on-demand.
21
Digital video is projected to grow significantly over the next three to four
years as cable network upgrade efforts are completed and the cost of digital
set-top technology decreases. Margins related to digital programming are
expected to climb due to the ability to reuse programming at low or no
incremental cost.
Analysts believe data services will be an additional opportunity for cable
providers in the next three to five years and that cable will be the most widely
available, most cost efficient way to access the Internet at very high speeds
and with high video quality. The incremental opportunity for cable from data may
rival that of digital video according to industry analysts. Additional
opportunities are expected in voice-over cable applications that will allow
cable providers to offer local telephone service to cable subscribers.
The market for programmed video services in Alaska includes traditional
broadcast television, cable television, wireless cable, and DBS systems.
Broadcast television stations including network affiliates and independent
stations serve the urban centers in Alaska. Seven, four and two broadcast
stations serve Anchorage, Fairbanks and Juneau, respectively. In addition,
several smaller communities such as Bethel are served by one local television
station. Other rural communities without cable systems receive a single state
sponsored channel of television by a satellite dish and a low power transmitter.
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, 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.
General. As a result of acquisitions completed effective October 31, 1996, the
Company has become Alaska's leading cable television service provider to
residential, commercial and government users in the State of Alaska. The
Company's cable television systems serve 26 communities and areas in Alaska,
including the state's three largest urban areas, Anchorage, Fairbanks, and
Juneau. The state-wide Company cable systems consist of approximately 1,806
miles of installed cable plant having 300 to 550 MHz of channel capacity.
The Company completed a $12.5 million upgrade in 1998 that significantly
increased the capacity and reliability of the Anchorage and Juneau cable
systems. The Company laid more than 200 miles of fiber optic cable in Anchorage
and increased the carrying capacity of 900 miles of cable television line from
450 MHz to 550 MHz.
The result of such 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. The Company completed field testing and deployed its digital converter
cable service in Anchorage in 1998. Digital compression has enabled the Company
to increase the channel capacity of its Anchorage cable communications systems
to more than 100 channels, provide digital audio channels, as well as improve
picture and sound quality.
Products. The programming services offered to subscribers of the Company's cable
television systems differ by system (all information as of December 31, 1998).
Anchorage, Bethel, Kenai and Soldotna systems. Each system offers a basic
service. In addition, Anchorage and Bethel offer a CPS. A NPT is only offered in
the Anchorage cable system. The Anchorage system, which is located in the urban
center for Alaska, is fully addressable, with all optional services scrambled,
aside from the broadcast basic. Kenai, Soldotna, and Bethel had fewer channels,
less service options and less an urban orientation, and use traps for program
control. As a result, these smaller systems do not have access to pay-per-view
services.
22
The composition and rates of the levels of service vary between the systems. The
Anchorage cable system offers a basic service that includes 21 channels. The
Anchorage cable system offers a CPS that includes 29 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 and a CPS of 13 channels for an
additional cost per month. Basic service for the Kenai/Soldotna cable system
consisted of 32 channels. Pay TV services are available either individually or
as part of a value package. Commercial subscribers such as hospitals, hotels and
motels were charged negotiated monthly service fees. Apartment and other
multi-unit dwelling complexes received basic services at a negotiated bulk rate.
Fairbanks, Juneau, Ketchikan and Sitka systems. The programming services
currently offered to subscribers are structured so that each cable system offers
a basic service and a CPS. Each of the cable systems has different basic service
packages at different rates. Fairbanks, the second largest city in Alaska, has a
fully addressable system and offers a 12 channel basic and 33 channel CPS tier.
Three channels of pay-per-view are available to basic and CPS subscribers.
Fairbanks, North Pole, Fort Wainwright, and Eielson Air Force Base are all
served by the Fairbanks headend and have the same lineup. Fort Greely, a remote
military post, is a stand-alone system, which is fully addressable. Fort Greely
has 8 basic channels, a 21 channel CPS tier, and 1 pay-per-view channel
available to all subscribers. The Juneau cable system offers a 13 channel basic
service package and a Tier 1 that includes basic service plus an additional 4
channels. The system also offers a CPS Tier 2 that consists of basic service
plus Tier 1 service and additional 40 channels. The Ketchikan system offers a 9
channel basic service and a CPS Tier 1 that consists of basic service plus 33
additional channels. The system also offers a NPT Tier 2 that consists of basic
service, the CPS Tier 1 and an additional 5 channels. The Sitka system offers an
8 channel basic service. Expanded basic service includes basic service plus 40
additional channels.
The Juneau system was upgraded in 1998. The Ketchikan and Sitka systems are
expected to be upgraded in 2000. The Juneau upgrade consisted of extending the
bandwidth to 550Mhz, activating the reverse and introducing advanced analog set
top boxes. The new set tops allowed Juneau subscribers access to impulse pay per
view including highly secured 24 hour adult products, 30 channels of CD quality
music and a new on screen navigator.
Kodiak, Valdez, Cordova, Petersburg, Wrangell, Kotzebue and Nome systems. These
systems offer up to 30 channels of the most popular basic cable channels, as
well as the major broadcast networks, packaged into three levels of service. In
Nome, Kotzebue and Cordova, basic service consists of three channels, one of
which is a PBS channel. PBS service is also included with the 10 channels of
basic service in Kodiak, 7 in Valdez and 5 each in Wrangell and Petersburg. In
addition, Wrangell and Petersburg have matching line-ups with 30 channel CPS
tiers, 10 channel NPT tiers and 5 channels of premium service. Nome offers a 23
channel CPS Tier 1, 9 channel CPS Tier 2 and 5 channels of premium service.
Kotzebue closely matches Nome with the exception of one less channel in both CPS
Tier 1 and premium offering. In addition to basic service, Cordova offers a 22
channel CPS Tier 1, 10 Channel CPS Tier 2 with 4 premium channels available.
In 1998, system upgrades were completed in Kodiak and Valdez. 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. Nome and Kotzebue systems are
being upgraded with completion expected in March 1999. The upgrade will allow
the launch of additional programming and the shift of Disney from premium to
tier service. The Cordova system is expected to be upgraded in 2000.
Seward system. The Seward cable system was upgraded in 1997. Total channels were
increased to 49, packaged in two levels of service. Basic service was expanded
from 3 to 8 channels. CPS had 30 channels (including basic service) and was
expanded to 44. All of the channels, with the exception of local origination
programming and a single translator channel licensed to the City of Seward, were
received via satellite. In addition there were five channels of premium pay
services. The system is fully addressable. The system provides 12 channels to
300 outlets in a State of Alaska correction facility through a separate receive
and headend site.
23
Homer system. The Homer cable system was upgraded in 1997. Total channels were
increased to 50 packaged into two levels of service. Basic service was expanded
from 8 channels to 12. CPS had 36 channels (including basic service channels)
and was expanded to 45 channels. All of the channels, with the exception of four
local translator channels and local origination programming, are received via
satellite. In addition, five channels of premium pay services are offered. The
system is fully addressable.
Facilities. The Company's cable television businesses are located in Anchorage,
Eagle River, Chugiak, Peters Creek, Kenai, Soldotna, Bethel, Fort Richardson,
Elmendorf Air Force Base, Fairbanks, Fort Wainwright, North Pole, Fort Greely,
Eielson Air Force Base, Juneau, Sitka, Ketchikan, Petersburg, Wrangell, Cordova,
Homer, Sitka, Valdez, Kodiak, Kotzebue, and Nome, Alaska. Company facilities
include cable plant and head-end distribution equipment. Certain of the head-end
distribution centers are colocated with customer service and administrative
offices.
Customers. As of December 31, 1998 the Company cable systems passed
approximately 171,000 homes or approximately 77% of all households in Alaska,
and served approximately 112,000 subscribers. 1998 revenues derived from cable
television services totaled $57.6 million, or 23.4% of total revenues in 1998.
As of December 31, 1997 the Company cable systems passed approximately 167,500
homes or approximately 78% of all households in Alaska, and served approximately
108,000 subscribers. 1997 revenues derived from cable television services
totaled $55.2 million, or 24.7% of total revenues.
Competition. A number of cable operators other than the Company provide cable
service in Alaska. All of these companies are relatively small, with the largest
having fewer than 6,500 subscribers. Cable television systems face competition
from alternative methods of receiving and distributing television signals and
from other sources of news, information and entertainment such as off-air
television broadcast programming, newspapers, movie theaters, live sporting
events, interactive computer services, Internet services and home video
products, including videotape cassette and video disks. The extent to which a
cable television system is competitive depends, in part, upon the cable system's
ability to provide quality programming and other services at competitive prices.
The Company's Fairbanks, Alaska system faces significant competition from
alternative cable television providers. Upgrades to the Company's Fairbanks
facilities, expanded product offerings and increased marketing efforts are
expected to increase market penetration from 45.6% at December 31, 1998. The
Company's average market penetration rate for all systems was 61.4% at December
31, 1998.
The 1996 Telecom Act authorizes LECs and others to provide a wide variety of
video services competitive with services provided by cable systems and to
provide cable services directly to subscribers. Certain LECs in Alaska may seek
to provide video services within their telephone service areas through a variety
of distribution methods. Cable systems could be placed at a competitive
disadvantage if the delivery of video services by LECs becomes widespread since
LECs may not be required, under certain circumstances, to obtain local
franchises to deliver such video services or to comply with the variety of
obligations imposed upon cable systems under such franchises. Issues of
cross-subsidization by LECs of video and telephony services also pose strategic
disadvantages for cable operators seeking to compete with LECs who provide video
services.
The 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. 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.
24
The availability of reasonably-priced HSD earth stations enables individual
households to receive many of the satellite-delivered program services formerly
available only to cable subscribers. Furthermore, the 1992 Cable Act contains
provisions, which the FCC has implemented with regulations, to enhance the
ability of cable competitors to purchase and make available to HSD owners
certain satellite-delivered cable programs at competitive costs.
In recent years, the FCC and the Congress have adopted policies providing a more
favorable operating environment for new and existing technologies that provide,
or have the potential to provide, substantial competition to cable systems.
These technologies include, among others, DBS services that transmit signals by
satellite to receiving facilities located on the premises of subscribers.
Programming is currently available to the owners of DBS facilities through
conventional, medium and high-powered satellites.
DBS systems are expected to use video compression technology to increase the
channel capacity of their systems to provide movies, broadcast stations and
other program services competitive with those of cable systems. The extent to
which DBS systems are competitive with the service provided by cable systems
depends, among other things, on the availability of reception equipment at
reasonable prices and on the ability of DBS operators to provide competitive
programming. DBS services do not currently provide local programming and 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. 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. This could
change in the future as more transponder space becomes available in the western
arc through consolidation of DBS operators.
Cable television systems also compete with wireless program distribution
services such as MMDS providers which use low-power microwave frequencies to
transmit video programming over-the-air to subscribers. There are MMDS operators
who are authorized to provide or are providing broadcast and satellite
programming to subscribers in areas served by several of the Company's cable
systems, including Anchorage, Fairbanks and Juneau. Additionally, the FCC has
allocated frequencies in the 28 gHz band for a new multichannel wireless video
service similar to MMDS. MMDS 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. In 1997 ATU purchased a minority interest in a MMDS
provider that currently provides service in some portions of Anchorage and
Fairbanks. At this time, the MMDS service has not been integrated with ATU's
telecommunications services. The Company is unable to predict whether wireless
video services will have a material impact on its operations.
Other new technologies may become competitive with non-entertainment services
that cable television systems can offer. The FCC has authorized television
broadcast stations to transmit textual and graphic information useful both to
consumers and businesses. The FCC also permits commercial and non-commercial FM
stations to use their subcarrier frequencies to provide non-broadcast services
including data transmissions. The FCC established an over-the-air interactive
video and data service that will permit two-way interaction with commercial and
educational programming along with informational and data services. LECs and
other common carriers also provide facilities for the transmission and
distribution to homes and businesses of interactive computer-based services,
including the Internet, as well as data and other non-video services. The FCC
has conducted spectrum auctions for licenses to provide PCS. PCS will enable
license holders, including cable operators, to provide voice and data services.
The Company acquired a license to provide PCS services in Alaska.
Advances in communications technology as well as changes in the marketplace are
constantly occurring. The Company cannot predict the effect that ongoing or
future developments might have on the telecommunications and cable television
industries or on the Company specifically.
25
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.
Local Access Services
Industry. 1998 was distinguished by a continuing lack of significant progress in
opening the local access market up to competition on an industry-wide basis.
While the most lucrative business customers have benefited from increased choice
and lower prices, residential customers in most areas will have to wait as
long-distance companies and CLECs drive to lower access costs through regulatory
relief, development of their own local access solutions such as telephony over
cable, LMDS wireless access, or the use of third party suppliers.
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
significant growth in local loop services. These opportunities are also laying
the foundation for a restructuring of the newly competitive local loop services
market. Not only are competitors entering the core business of the local
telephone companies, but they are beginning to pursue the fast-growing markets
that previously were closed to them, such as consumer video.
General. The Company's local access services division entered the local services
market in Anchorage in 1997, providing services to residential, commercial, and
government users. The Company can access approximately 93% of Anchorage area
local loops from its collocated remote digital facilities and DLC installations.
The Company has experienced significant difficulty in successfully converting
customers from the ILEC, due to, among other factors, a lack of access to the
ILEC's operational support systems that would allow the Company to access its
customer's information held by the ILEC, lack of adequate state-level
regulations supporting local competition, and disputes with the ILEC over
interpretation of interconnection and arbitration agreements. In spite of strong
demand, in the third and fourth quarters of 1998 the Company delayed active
marketing to residential local service customers in Anchorage. The Company will
continue to pursue resolution of these existing operational and interconnection
issues while continuing to develop alternative methods of local entry.
Products. The Company began offering local exchange services initially in
Anchorage during late September 1997. The Company's DLC system allows it to
offer full featured, switched-based local service products to both residential
and commercial customers. In areas where the Company does not have access to
loop facilities, it offers resale of the ILEC's local service.
The Company offers a number of specially priced package offerings and offers the
only local customer service representatives in Alaska who are available 24 hours
a day. Features offered include 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, and
non-published number.
Facilities. During 1997 the Company installed a host 5ESS switching system.
Additionally the Company collocated six remote facilities beside or within the
ILEC's local switching offices to access unbundled loop network elements and
installed a DLC system beside a smaller, seventh ILEC wire center. These remote
and DLC facilities are interconnected to the host switch via Company-owned
diversely routed fiber optic links. During 1998, the Company expanded its
capacity at each of the remote facilities to allow access to approximately
79,000 Anchorage loops. Additionally, the Company provided its own
facilities-based services to over 80 of
26
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. The Company had approximately 28,300 and 3,300 active lines in
service from Anchorage subscribers to its local access services at December 31,
1998 and 1997, respectively. 1998 and 1997 revenues derived from local access
services totaled $9.9 million and $610,000, respectively, representing
approximately 4.0% and 0.3% of the Company's total revenues in 1998 and 1997,
respectively. Approximately 1,000 additional lines were sold and awaiting
connection at December 31, 1998.
Competition. In the local exchange services market, the Company believes that
the 1996 Telecom Act, judicial decisions, and state legislative and regulatory
developments will increase the likelihood that barriers to local exchange
competition will be substantially reduced or removed. These initiatives include
requirements that LECs negotiate with entities such as the Company to provide
interconnection to the existing local telephone network, to allow the purchase,
at cost-based rates, of access to unbundled network elements, to establish
dialing parity, to obtain access to rights-of-way and to resell services offered
by the ILECs.
LECs in Alaska outside of Anchorage have a "rural exemption" from some of their
obligations until and unless the exemption is examined and not continued by the
APUC. Certain pricing provisions of the FCC's Interconnection Decision
implementing the interconnection portions of the 1996 Telecom Act have been
challenged and were stayed by the U.S. Court of Appeals for the Eighth Circuit,
on a jurisdictional basis. The United States Supreme Court, in February 1999,
upheld the jurisdictional basis of the FCC's decisions, and has remanded the
proceeding back to the Eighth Circuit for further proceedings. In addition the
1996 Telecom Act expressly prohibits any legal barriers to competition in
intrastate or interstate communications service under state and local laws. The
1996 Telecom Act further empowers the FCC, after notice and an opportunity for
comment, to preempt the enforcement of any statute, regulation or legal
requirement that prohibits, or has the effect of prohibiting, the ability of any
entity to provide any intrastate or interstate telecommunications service. See
Part I, Item 1. Business, Regulation, franchise authorizations and tariffs for
more information.
In the local exchange market, the Company will compete against various ILECs
including ATU in Anchorage and PTI in Juneau. PTI acquired the local exchange
portion of the Fairbanks Municipal Utilities System in 1997 and now provides
local exchange services in Fairbanks. The ACS acquisition of ATU is expected to
close in 1999. ACS management includes former executives of PTI. See - Part I,
Item 1. Business, Historical development of the Company's business during the
past fiscal year Local Access Services for more information.
In early 1997 the Company received approval from the APUC to provide local
exchange services throughout ATU's existing service area. The APUC also approved
an interconnection agreement negotiated and arbitrated between the Company and
ATU pursuant to the terms of the 1996 Telecom Act. The Company now offers local
exchange services to substantially all consumers in the ATU service area,
primarily through its own facilities and unbundled local loops leased from ATU.
The Company intends to enter new markets, particularly Juneau and Fairbanks,
with its local access services. Full competitive entry into new markets is
subject to approval by the APUC. See -Regulation, Franchise Authorizations and
Tariffs, Telecommunications Operations for more information.
The 1996 Telecom Act also provides ILECs with new competitive opportunities. The
Company believes that it has certain advantages over these companies in
providing its telecommunications services, including the Company's brand
awareness by Alaskan customers, its facilities based telecommunications network,
and management's 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
alternative providers (such as the Company) unreasonably high fees for
interconnection to the LECs' networks, or significantly lower their retail rates
for
27
local exchange services, the alternative provider's local service business could
be placed at a significant competitive disadvantage.
Internet Services
Industry. The Internet continues to expand at a significant rate, with the
number of sites almost doubling each year. In February 1998 there were more than
29 million sites on the Internet worldwide, with a projected 90 million
connected by the turn of the century. The signs are that the Internet will
become as commonplace as the TV in a few years. Analysts predict that the amount
of Internet traffic will likely continue to rise as fast as capacity allows for
the foreseeable future. Voice over the Internet may have a major impact on
business and the entire telecommunications industry in the future.
The use of Intranets has significantly increased, with an estimated 60 to 70
percent of US corporations using an Intranet. Current growth rates suggest that
138 million people worldwide will be connected from their desks to an in-house
Intranet by 2001.
An Intranet allows information to be decentralized in an organization. It uses
Internet-compatible standards, available on virtually any computer. An Intranet
is also - by mainframe computer standards - fast and inexpensive to set up. This
adds to its appeal, particularly for larger companies with complex legacy data
systems.
Industry analysts believe that one of the key tools for business advantage over
the next two years will be the Extranet. This is an Intranet (internal, secure,
full of sensitive data) connected to trusted customers and suppliers.
Implementing an Extranet creates the concept of the virtual enterprise, in which
all the organizations in a supply chain integrate their systems and operations.
This concept is not new, but has been achieved in the past using EDI on private
networks. Extranets promise to remove many of the obstacles which 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 sits perfectly in the digital stream so it comes as no surprise that
leading record companies and music retailers are selling direct over the
Internet. According to industry analysts, CD sales to date are small - $47
million in 1997 - but are predicted to grow fast. Technology may turn products
into a service, delivered over the Internet.
Concerns about Internet-based commerce remain. One serious preoccupation is that
an overloaded Internet might crash. However, capacity on the Internet continues
to increase. Technology enables fiber to carry more data, and more cables and
satellite channels are being introduced. In 1995, the world's entire telecom
traffic amounted to a data rate of a terabit a second. Currently, a single
optical fiber strand can carry three times that data.
While more viewers are tuning out television networks, they're logging onto the
Internet. In 1999, 43.9 million American households are expected by industry
analysts to be able to go online, roughly 43% of the country raising
online-shopping revenues by a projected 69%, to $11.9 billion, while advertising
revenues will increase by a projected 62%, to $3.3 billion.
Major court decisions and legislative action are expected to shape the worldwide
Internet in 1999, including
- the impact of the U.S. vs. Microsoft antitrust trial,
- possible recognition that traditional encryption regulation is
obsolete,
- minimum-regulation approaches to information privacy as a new consumer
movement tries to use international privacy law to rein in the
behavior of large corporations in the U.S. economy,
- the potential for continuing increases in inexperienced investors
investing through online brokers and increased instances of investor
losses that lead to arbitration claims against the brokers,
- the impact of more Internet patents preventing others from doing
certain things, such as designing and maintaining certain types of Web
sites,
- the legality of hyperlinking without permission,
28
- pending re-introduction of database legislation in Congress that would
create a new form of intellectual property in databases,
- decisions regarding whether cryptographic source code is First
Amendment speech, and hence exportable, or that no program is covered
by the First Amendment,
- renewed calls by the FBI and others for domestic controls of
obscenity-related cryptography, and
- the development of rating and filtering systems outside the United
States.
General. The Company's 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 the Company to offer
high-speed cable modem Internet access, the first of its kind in Alaska.
Products. The Company currently offers two types of Internet access for
residential use: dial up Internet access and high-speed cable modem Internet
access. The Company's initial residential high-speed cable modem Internet
service offers 256 kilobits per second access speed as compared with up to 56
kilobits per second access through standard copper wire modem access. Free
24-hour customer service and technical support via telephone or online are
provided. The 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.
The Company believes cable modem services will be the next generation of
Internet access. This service is expected to appeal to families, professionals
who work-at-home, educators, those involved in electronic commerce and people
who enjoy interactive computer games. Cable modem access overcomes the
limitations of slower dial-up service and the higher cost of dedicated Internet
services and provides always-available, high-speed access to the Internet. Cable
modems use Company owned coaxial cable that provides cable television service,
instead of the traditional copper wire from the ILEC. Coaxial cable has a much
greater carrying capacity than telephone wire and can be used to simultaneously
deliver both cable television and Internet access services.
The Company currently offers several Internet service packages for commercial
use: Dial up access, frame relay and high-speed cable modem Internet access. The
Company's business high-speed cable modem Internet service offers access speeds
ranging from 128 kilobits per second to 512 kilobits per second, free monthly
data transfers of up to 25 gigabytes and free 24-hour customer service and
technical support. Business services also include dedicated Internet access, a
personalized web page and e-mail addressing.
Significant new marketing campaigns were introduced in February and March 1999
featuring bundled residential and commercial Internet products. Additional
bandwidth was made available to the Company's Internet segment resulting from
completion of the Alaska United Project as previously described. The new
Internet offerings are coupled with the Company's long-distance and local
services offerings and provide free basic Internet services if certain
long-distance or local services plans are selected. Value-added Internet
features are available for additional charges.
The Company provides Internet access for Alaska schools using a platform
including many of the latest advancements in technology. Services are delivered
through a locally available circuit, existing Company lines, 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.
Access to the Internet is provided by the Company using a platform including
many of the latest advancements in technology. The physical platform is
concentrated in Anchorage and is extended into many remote areas of the state.
The Company's Internet platform includes:
- A frame relay trunk connecting the Anchorage POP to an Internet access
point in Seattle.
- Routers on each end of the frame relay trunk to control the flow of
data over the trunk.
29
- The Anchorage POP consists of a main router, a bank of servers that
perform proxy and cache functions, database servers providing
authentication and user demographic data, and access servers for dial
in users.
SchoolAccess(TM) Internet service delivery to over 152 schools in rural Alaska
is accomplished by three variations on primary delivery systems:
- In communities where the Company has terrestrial interconnects or
existing service over regional earth stations, the Company has
configured intermediate distribution POPs. Schools that are within
these service boundaries are connected locally to one of those POPs.
- In communities where the Company has extended telecommunications
services via its DAMA earth station program, SchoolAccess(TM) is
provided via a satellite trunk circuit to an intermediate distribution
POP at the Eagle River Earth Station.
- In communities or remote locations where the Company has 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 POP located in Anchorage.
In all cases, Internet access is delivered to a router located at the service
point. The Company's Internet management platform constantly monitors this
demarcation router; continual communication is maintained with all of the
routers in the network. The availability and quality of service, as well as
statistical information on traffic loading, are continuously monitored for
quality assurance. The management platform has the capability to remotely access
the routers, permitting changes in router configuration without the need to
physically be at the service point.
GCI.net offers a unique combination of innovative network design and aggressive
performance management. The new Internet platform has received a certification
of Cisco Powered Network status, placing it in the top one percent of all
service providers worldwide and the only ISP in Alaska with such designation.
The Company operates and maintains what it believes is the largest, most
reliable, and highest performance Internet network in the State of Alaska.
Customers. The Company had approximately 7,200 active residential subscribers to
its Internet service at February 9, 1999. 1998 revenues derived from Internet
services totaled $4.6 million, representing approximately 1.9% of the Company's
total revenues.
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 the Company
believes it has the human and technical resources to pursue its strategy and
compete effectively in this competitive environment, its success will depend
upon its ability to profitably provide high quality, high value bundled services
at prices generally competitive with, or lower than, those charged by its
competitors.
As of December 31, 1998, the Company competed with more than 25 Alaska based
Internet providers, and competed with other domestic, non-Alaska based providers
that provide national service coverage. Several of the providers have
substantially greater financial, technical and marketing resources than the
Company. The Company has, so far, successfully adjusted its pricing and
marketing strategies to respond to competitors' pricing practices.
Environmental Regulations
The Company and its subsidiaries may undertake activities which, 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
30
prior to the commencement of facility construction. Management believes that
compliance with such regulations has no material effect on the Company's
consolidated operations. The principal effect of Company 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. Company
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 the Company's facilities are on lands leased by
the Company, and, with respect to all of these facilities, the Company is
unaware of any violations of lease terms or federal, state or local regulations
pertaining to preservation or protection of the environment.
The Company's 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. The Company believes its
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 the Company's cable deployment efforts are the US Army Corps of
Engineers, The National Marine Fisheries Service, US Fish & Wildlife, US Coast
Guard, National Oceanic and Atmospheric Administration, Alaska Department of
Natural Resources, and the Alaska Office of the Governor - Governmental
Coordination. The Company is 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, the Company has 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. Management of the
Company does 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
Neither the Company nor its affiliates hold patents, franchises or concessions
for telecommunications services or local access services. The Company holds
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. The Company through its long-distance services
industry segment holds licenses for its satellite and microwave transmission
facilities for provision of its long-distance services. The Company acquired a
license for use of a 30-megahertz block of spectrum for providing PCS services
in Alaska. The PCS license has an initial duration of 10 years. The Company
expects to renew the PCS license for an additional 10-year term under FCC rules.
The Company acquired a LMDS license in 1998 for use of a 150-megahertz block of
spectrum in the 28 gigahertz 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. The
Company's operations may require additional licenses in the future.
Applications for transfer of control of 15 certificates of public convenience
and necessity held by the acquired cable companies to the Company were approved
in an APUC order dated September 23, 1996, with transfers to be effective on
October 31, 1996. Such transfer of control allowed the Company to take control
and operate the cable systems of the acquired cable companies located in Alaska.
The approval of the transfer of the 15 certificates of public convenience and
necessity to the Company by the FCC 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 the Company prior to October 31, 1996.
31
The Company 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 the Company's businesses. Other existing
federal and state regulations are currently the subject of judicial proceedings,
legislative hearings and administrative proposals which could change, in varying
degrees, the manner in which these industries operate. Neither the outcome of
these proceedings nor their impact upon the industries in which the Company
operates or the Company itself can be predicted at this time.
Telecommunications Operations. The following is a summary of federal laws,
regulations and tariffs, and a description of certain state and local laws
pertaining to the telecommunications operations of the Company (long-distance,
local access and wireless).
General. The Company is subject to regulation by the FCC and by the APUC as a
non-dominant provider of long-distance services. Among other regulatory
requirements, the Company is required to file tariffs with the FCC for
interstate and international service, and with the APUC for intrastate service
but such tariffs routinely become effective without intervention by the FCC,
APUC or other third parties since the Company is a non-dominant carrier. The
Company received approval from the APUC in February 1997 to permit the Company
to provide local access services throughout ATU's existing service area.
Military franchise requirements also affect the Company in its provision of
telecommunications and cable television services to military bases.
Because the Company is authorized to offer local access services in Anchorage,
it is regulated as a CLEC by the APUC. In addition, the Company 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, the Company is subject to regulation by the FCC, and
must comply with certain buildout and other conditions of the license, as well
as with the FCC's regulations governing the PCS and LMDS services. On a more
limited basis, the Company may be subject to certain regulatory oversight by the
APUC (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
siting of tower facilities.
1996 Telecom Act and Related Rulings. A key industry development was passage of
the 1996 Telecom Act that was signed into law February 8, 1996. The Act is
intended by Congress to open up the marketplace to competition and has had a
dramatic impact on the telecommunications industry. The legislation breaks down
the old barriers that prevented three groups of companies, the LECs, including
the RBOCs, 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 must open up their networks.
Enactment of the bill affected local exchange service markets almost immediately
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 LECs unbundle
access to their networks may lead to increased price competition. Local exchange
service competition may not take hold immediately because interconnection
arrangements are not in place in most areas.
In August 1996, the FCC adopted rules and regulations, including pricing rules
(the "Pricing Rules") to implement the local competition provisions of the 1996
Telecom Act, including with respect to the terms and
32
conditions of interconnection with LEC networks and the standards governing the
purchase of unbundled network elements and wholesale services from LECs. These
implementing 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.
On July 18, 1997, the United States Court of Appeals for the Eighth Circuit
issued a decision holding that the FCC lacks authority to establish pricing
rules to implement the sections of the local competition provisions of the 1996
Telecom Act applicable to interconnection with LEC networks and the purchase of
unbundled network elements and wholesale services from LECs. Accordingly, the
Court vacated the rules that the FCC had adopted in August 1996, and which had
been stayed by the Court since September 1996. However, since the stay was
issued, most states have used the Pricing Rules as guidelines in establishing
permanent rates, or interim rates that will apply pending the determination of
permanent rates in subsequent state proceedings. Nevertheless, there can be no
assurance that the prices and other conditions established in each state will
provide for effective local service entry and competition or provide the Company
with new market opportunities.
On October 14, 1997, the Eighth Circuit Court of Appeals vacated an FCC Rule
that had prohibited ILECs from separating network elements that are combined in
the LEC's network, except at the request of the competitor purchasing the
elements. This decision increased the difficulty and costs of providing
competitive local access services through the use of unbundled network elements
purchased from the ILECs.
On January 25, 1999, the United States Supreme Court issued a decision reversing
in material part the decisions of the Eighth Circuit, and specifically upholding
the authority of the FCC to establish pricing rules and preventing the
separation of network elements that are already combined. The Supreme Court
remanded the cases to the Eighth circuit for further proceedings consistent with
its decision.
In 1997, the FCC issued important decisions on the structure and level of access
charges and universal service. These decisions will impact the industry in
several ways, including the following:
- An additional subsidy was created to support telecommunications
services for schools, libraries and rural health care providers. All
carriers providing telecommunications services are required to fund
this program, which is capped at $2.7 billion per year. However, LECs
can pass their portion of these costs on to long-distance carriers.
- Per-minute interstate access rates charged by LECs will decline over
time to become cost-based.
- Certain monthly flat-rate charges paid by some local telephone
customers increased beginning in 1998.
- Certain per-minute access charges paid by long-distance companies were
converted to flat monthly charges based on pre-subscribed lines.
- A basis has been established for replacing implicit access subsidies
with an explicit interstate universal service fund beginning in 1999.
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 the Company is difficult to determine, but is not expected to
be material.
Some BOCs have also challenged the 1996 Telecom Act restrictions on their entry
into long-distance markets as unconstitutional. A federal district court in
Wichita Falls, Texas, ruled the restrictions unlawful because they constituted a
legislative act that imposed punishment without a judicial proceeding. The
United States government and others filed appeals of this decision. The federal
district court delayed implementing its decision pending resolution of the
appeals. The Company is unable to predict the outcome of such rulemakings or
litigation or the substantive effect (financial or otherwise) of the 1996
Telecom Act and the rulemakings on the Company.
33
On January 26, 1998, the United States Supreme Court agreed to review the
aforementioned decisions of the Eighth Circuit Court of Appeals. Under the
normal procedures of the Court, arguments were heard and a decision is expected
in 1999.
In February 1999 the U.S. Supreme Court lifted a court order that barred the FCC
from imposing local phone competition rules on the five Bell companies as a
condition for allowing them to offer long-distance service. The decision was
widely expected. The justices, without comment, voided a second Eighth Circuit
Court of Appeals opinion. The lower court had barred the FCC from imposing those
same pricing rules as requirements for approval of long-distance applications.
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. The Eighth Circuit Court of Appeals may rule on this issue in 1999.
On March 4, 1999, an Alaska Superior Court Judge determined that the APUC erred
in reaching its decision to deny the Company's request to provide full local
telephone service in Fairbanks and Juneau, Alaska. This service would be
provided in competition against PTI, the existing monopoly provider. The Court
remanded the case back to the APUC for proceedings leading to a decision on or
before July 2, 1999. Among other things, the Court has instructed the APUC to
correctly assign the burden of proof to PTI rather than the Company, and to
decide on the Company's specific requests to provide service in Fairbanks and
Juneau based on criteria established in the 1996 Telecom Act. The Court stated
that "this must be accomplished cognizant of the intent of the
Telecommunications Act to promote competition in the local market." The Company
believes this decision is important to bring about the benefits of competition
to other communities in Alaska.
Reciprocal Compensation. In response to requests by carriers that the FCC
clarify how local telephone companies should compensate one another for
delivering traffic to Internet service providers, the FCC concluded on February
25, 1999 that long-distance carriers are bound by their existing interconnection
agreements, as interpreted by state commissions, and thus are subject to
reciprocal compensation obligations to the extent provided by such agreements or
as determined by state commissions. The FCC declared that Internet traffic is
jurisdictionally mixed and appears to be largely interstate in nature. But the
decision preserves the rule that exempts the Internet and other information
services from interstate access charges. This means that those consumers who
continue to access the Internet by dialing a seven-digit number will not incur
long-distance charges when they do so. In a notice of proposed rulemaking, the
FCC also asked for comment on proposals governing future carrier-to-carrier
compensation for handling this traffic.
Specifically, the FCC had been asked by parties to determine whether local
telephone companies are entitled to receive reciprocal compensation for
delivering calls to their customers that are information service providers,
particularly ISPs. Generally, new entrants to the local telephone business
contend that calls to ISPs are local traffic and, therefore, subject to
reciprocal compensation. Incumbent local telephone companies, on the other hand,
generally contend that calls to ISPs are beyond the scope of reciprocal
compensation agreements.
The FCC, in its decision, noted that it traditionally has determined the
jurisdictional nature of communications by the end points of the communication.
Accordingly, the FCC concluded that the calls at issue in that proceeding do not
terminate at the ISPs' local servers, but continue to their ultimate
destinations, specifically at websites that are often located in other states or
countries. As a result, the FCC found that, although some Internet traffic is
intrastate, a substantial portion of Internet traffic is interstate and
therefore subject to federal jurisdiction.
This jurisdictional decision does not, however, determine whether calls to ISPs
are subject to reciprocal compensation in any particular instance. The FCC noted
that parties may have agreed that ISP-bound traffic should be subject to
reciprocal compensation, or a state commission, in the exercise of its statutory
authority to arbitrate interconnection disputes, may have imposed reciprocal
compensation obligations for this traffic. In either case, the FCC noted that
carriers are bound by their existing interconnection contracts, as interpreted
by state commissions.
34
The FCC also stated that adopting a federal rule to govern reciprocal
compensation in the future would serve the public interest. As a general matter,
the FCC tentatively concluded that commercial negotiations are the ideal means
of establishing the terms of interconnection contracts, and reciprocal
compensation agreements in particular. The FCC, therefore, asked for comment on
two alternative proposals for implementing such a regime in the future.
The FCC tentatively concluded that inter-carrier compensation for this
interstate traffic should be governed prospectively by interconnection
agreements negotiated and arbitrated under sections 251 and 252 of the Act.
Resolution of failures to reach agreement on inter-carrier compensation for
interstate ISP-bound traffic then would occur through arbitrations conducted by
state commissions, which are appealable to federal district courts. The FCC also
asked for comment on an alternative proposal, under which inter-carrier
compensation would be governed by a set of federal rules, and disputes would be
resolved by federal, state, or third-party arbitrators.
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.
General. The Company is subject to federal and state regulation as a cable
television operator pursuant to the 1984 Cable Act and 1992 Cable Act, both
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.
Rate Regulation. The 1992 Cable Act authorized rate regulation for cable
communications services and equipment in communities that are not subject to
"effective competition," as defined by federal law. Most cable communications
systems are now subject to rate regulation for basic cable service and equipment
by local officials under the oversight of the FCC, which has prescribed detailed
criteria for such rate regulation. The 1992 Cable Act also requires the FCC to
resolve complaints about rates for CPSTs (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 CPST rate complaints
with the FCC and requires the FCC to issue a final order within 90 days after
receipt of CPST 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").
FCC regulations govern rates that may be charged to subscribers for Regulated
Services. The FCC uses a benchmark methodology as the principal method of
regulating rates for Regulated Services. Cable operators are also permitted to
justify rates using a cost-of-service methodology, which contains a rebuttable
presumption of an industry-wide 11.25% after tax rate of return on an operator's
allowable rate base. Franchising authorities are empowered to regulate the rates
charged for monthly basic service, for additional outlets and for the
installation, lease and sale of equipment used by subscribers to receive the
basic cable service tier, such as converter boxes and remote control units. The
FCC's rules require franchising authorities to regulate these rates on the basis
of actual cost plus a reasonable profit, as defined by the FCC. Cable operators
required to reduce rates may also be required to refund overcharges with
interest. The FCC has also adopted comprehensive and restrictive regulations
allowing operators to modify their regulated rates on a quarterly or annual
basis using various methodologies that account for changes in the number of
regulated channels, inflation and increases in certain external costs, such as
franchise and other governmental fees, copyright and retransmission consent
fees, taxes,
35
programming fees and franchise-related obligations. The Company cannot predict
whether the FCC will modify these "going forward" regulations in the future.
The 1996 Telecom Act provides for rate deregulation of CPSTs by March 1999,
although legislation has been proposed to extend the regulatory period.
Deregulation may occur sooner for systems in markets where comparable video
programming services, other than DBS, are offered by local telephone companies,
or their affiliates, or by third parties using the local telephone company's
facilities, or where "effective competition" is established under the 1992 Cable
Act. The 1996 Telecom Act also modifies the uniform rate provision of the 1992
Cable Act by prohibiting regulation of nonpredatory bulk discount rates offered
to subscribers in commercial and residential developments and permits regulated
equipment rates to be computed by aggregating costs of broad categories of
equipment at the franchise, system, regional or company level.
Anti-Buy Through Provisions. The 1992 Cable Act requires cable systems to permit
subscribers to purchase video programming offered by the operator on a per
channel or a per program basis without the necessity of subscribing to any tier
of service, other than the basic cable service tier, unless the system's lack of
addressable converter boxes or other technological limitations does not permit
it to do so. The statutory exemption for cable systems that do not have the
technological capability to offer programming in the manner required by the
statute is available until a system obtains such capability, but not later than
December 2002. The FCC may waive such time periods, if deemed necessary. Many of
the Company's systems do not have the technological capability to offer
programming in the manner required by the statute and thus currently are exempt
from complying with the requirement.
Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast signal
carriage requirements that allow local commercial television broadcast stations
to elect once every three years to require a cable system to carry the station,
subject to certain exceptions, or to negotiate for "retransmission consent" to
carry the station. A cable system generally is required to devote up to
one-third of its activated channel capacity for the carriage of local commercial
television stations whether pursuant to the mandatory carriage or retransmission
consent requirements of the 1992 Cable Act. Local non-commercial television
stations are also given mandatory carriage rights; however, such stations are
not given the option to negotiate retransmission consent for the carriage of
their signals by cable systems. Additionally, cable systems are required to
obtain retransmission consent for all distant commercial television stations
(except for commercial satellite-delivered independent "superstations" such as
WGN), commercial radio stations and certain low-power television stations
carried by such systems. In March 1997, the US Supreme Court upheld the
constitutional validity of the 1992 Cable Act's mandatory signal carriage
requirements. The FCC will conduct a rulemaking in the future to consider the
requirements, if any, for mandatory carriage of digital television signals.
Designated Channels. The Communications Act permits franchising authorities to
require cable operators to set aside certain channels for public, educational
and governmental access programming. The 1984 Cable Act also requires a cable
system with 36 or more channels to designate a portion of its channel capacity
for commercial leased access by third parties to provide programming that may
compete with services offered by the cable operator. The FCC has adopted rules
regulating: (i) the maximum reasonable rate a cable operator may charge for
commercial use of the designated channel capacity; (ii) the terms and conditions
for commercial use of such channels; and (iii) the procedures for the expedited
resolution of disputes concerning rates or commercial use of the designated
channel capacity.
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
colocated MMDS or SMATV systems. The FCC has relaxed its restrictions on
ownership of SMATV systems to permit a cable operator to
36
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. The Company 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 which could make it easier for a
franchising authority to deny renewal. Moreover, even if the franchise is
renewed, the franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal. Similarly, if a franchising
authority's consent is required for the purchase or sale of a cable system or
franchise, such authority may attempt to impose more burdensome or onerous
franchise requirements in connection with a request for such consent.
Historically, franchises have been renewed for cable operators that have
provided satisfactory services and have complied with the terms of their
franchises. The Company believes that it has generally met the terms of its
franchises and has provided quality levels of service. The Company anticipates
that its future franchise renewal prospects generally will be favorable.
Various courts have considered whether franchising authorities have the legal
right to limit the number of franchises awarded within a community and to impose
certain substantive franchise requirements (e. g. access channels, universal
service and other technical requirements). These decisions have been
inconsistent and, until the US Supreme Court rules definitively on the scope of
cable operators' First Amendment protections, the legality of the franchising
process generally and of various specific franchise requirements is likely to be
in a state of flux.
Ownership Limitations. Pursuant to the 1992 Cable Act, the FCC adopted rules
prescribing national subscriber limits and limits on the number of channels that
can be occupied on a cable system by a video programmer in which the operator
has an attributable interest. The effectiveness of these FCC horizontal
ownership limits has been stayed because a federal district court found the
statutory limitation to be unconstitutional. An appeal of that decision has been
consolidated with appeals challenging the FCC's regulatory ownership
restrictions and is pending. The 1996 Telecom Act eliminates the statutory
prohibition on the common ownership, operation or control of a cable system and
a television broadcast station in the same service area and directs the FCC to
review its broadcast-cable ownership restrictions. Pursuant to the mandate of
the 1996 Telecom Act, the FCC eliminated its regulatory restriction on
cross-ownership of cable systems and national broadcasting networks.
37
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.
Pole Attachment. The Communications Act requires the FCC to regulate the rates,
terms and conditions imposed by public utilities for cable systems' use of
utility pole and conduit space unless state authorities can demonstrate that
they adequately regulate pole attachment rates. In the absence of state
regulation, the FCC administers pole attachment rates on a formula basis. In
some cases, utility companies have increased pole attachment fees for cable
systems that have installed fiber optic cables and that are using such cables
for the distribution of non-video services. The FCC has concluded that, in the
absence of state regulation, it has jurisdiction to determine whether utility
companies have justified their demand for additional rental fees and that the
Communications Act does not permit disparate rates based on the type of service
provided over the equipment attached to the utility's pole. The FCC's existing
pole attachment rate formula, which may be modified by a pending rulemaking,
governs charges for utilities for attachments by cable operators providing only
cable services. The 1996 Telecom Act and the FCC's implementing regulations
modify the current pole attachment provisions of the Communications Act by
immediately permitting certain providers of telecommunications services to rely
upon the protections of the current law and by requiring that utilities provide
cable systems and telecommunications carriers with nondiscriminatory access to
any pole, conduit or right-of-way controlled by the utility. The FCC adopted new
regulations to govern the charges for pole attachments used by companies
providing telecommunications services, including cable operators. These new pole
attachment rate regulations will become effective in February 2001. Any
resulting increase in attachment rates will be phased in equal annual increments
over a period of five years, beginning in February 2001. The ultimate impact of
any revised FCC rate formula or of any new pole attachment rate regulations on
the Company cannot be determined at this time.
Other Statutory Provisions. The 1992 Cable Act, the 1996 Telecom Act and FCC
regulations preclude any satellite video programmer affiliated with a cable
company, or with a common carrier providing video programming directly to its
subscribers, from favoring an affiliated company over competitors and requires
such programmers to sell their programming to other multichannel video
distributors. These provisions limit the ability of program suppliers affiliated
with cable companies or with common carriers providing satellite-delivered video
programming directly to their subscribers to offer exclusive programming
arrangements to their affiliates. In December 1997, the FCC initiated a
rulemaking to address a number of possible changes to its program access rules.
Among the issues on which the FCC has sought comment is whether the FCC has
jurisdiction to extend its program access rules to terrestrially-delivered
programming, and if it does have such jurisdiction, whether it should expand the
rules in this fashion. This rulemaking is pending at the FCC.
The 1992 Cable Act requires cable operators to block fully both the video and
audio portion of sexually explicit or indecent programming on channels that are
primarily dedicated to sexually oriented programming or alternatively to carry
such programming only at "safe harbor" time periods currently defined by the FCC
as the hours between 10 p. m. to 6 a. m. 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, obscene or indecent programming, regulation of technical
standards and equipment compatibility.
Other FCC Regulations. The FCC revised its cable inside wiring rules to provide
a more specific procedure for the disposition of internal cable wiring that
belongs to an incumbent cable operator that is forced to terminate its
38
cable services in a MDU building by the building owner. The FCC is also
considering additional rules relating to MDU inside wiring that, if adopted, may
disadvantage incumbent cable operators. The FCC has various rulemaking
proceedings pending that will implement the 1996 Telecom Act; it also has
adopted regulations implementing various provisions of the 1992 Cable Act and
the 1996 Telecom Act that are the subject of petitions requesting
reconsideration of various aspects of its rulemaking proceedings. Other FCC
regulations covering such areas as equal employment opportunity, syndicated
program exclusivity, network program non-duplication, closed captioning of video
programming, registration of cable systems, maintenance of various records and
public inspection files, microwave frequency usage, origination cablecasting and
sponsorship identification, antenna structure notification, marking and
lighting, carriage of local sports broadcast programming, application of rules
governing political broadcasts, limitations on advertising contained in
non-broadcast children's programming, consumer protection and customer service,
indecent programming, programmer access to cable systems, programming
agreements, technical standards, consumer electronics equipment compatibility
and DBS implementation. The FCC has the authority to enforce its regulations
through the imposition of substantial fines, the issuance of cease and desist
orders and/or the imposition of other administrative sanctions, such as the
revocation of FCC licenses needed to operate certain transmission facilities
often used in connection with cable operations.
Other bills and administrative proposals pertaining to cable communications have
previously been introduced in Congress or considered by other governmental
bodies over the past several years. It is probable that further attempts will be
made by Congress and other governmental bodies relating to the regulation of
communications services.
Copyright. Cable communications systems are subject to federal copyright
licensing covering carriage of television and radio broadcast signals. In
exchange for filing certain reports and contributing a percentage of their
revenues to a federal copyright royalty pool, cable operators can obtain blanket
permission to retransmit copyrighted material on broadcast signals. The nature
and amount of future payments for broadcast signal carriage cannot be predicted
at this time. In a report to Congress, the Copyright Office recommended that
Congress make major revisions of both the cable television and satellite
compulsory licenses to make them as simple as possible to administer, to provide
copyright owners with full compensation for the use of their works, and to treat
every multichannel video delivery system the same, except to the extent that
technological differences or differences in the regulatory burdens placed upon
the delivery system justify different copyright treatment. The possible
simplification, modification or elimination of the compulsory copyright license
is the subject of continuing legislative review. The elimination or substantial
modification of the cable compulsory license could adversely affect the
Company's ability to obtain suitable programming and could substantially
increase the cost of programming that remains available for distribution to the
Company's subscribers. The Company cannot predict the outcome of this
legislative activity.
Cable operators distribute programming and advertising that use music controlled
by the two principal major music performing rights organizations, the
Association of Songwriters, Composers, Artists and Producers ("ASCAP") and
Broadcast Music, Inc. ("BMI"). In October 1989, the special rate court of the US
District Court for the Southern District of New York imposed interim rates on
the cable industry's use of ASCAP-controlled music. The same federal district
court established a special rate court for BMI. BMI and cable industry
representatives concluded negotiations for a standard licensing agreement
covering the performance of BMI music contained in advertising and other
information inserted by operators into cable programming and on certain local
access and origination channels carried on cable systems. ASCAP and cable
industry representatives have met to discuss the development of a standard
licensing agreement covering ASCAP-controlled music in local origination and
access channels and pay-per- view programming. Although the Company cannot
predict the ultimate outcome of these industry negotiations or the amount, if
any, of license fees it may be required to pay for past and future use of
ASCAP-controlled music, it does not believe such license fees will be
significant to the Company's financial position, results of operations or
liquidity.
State and Local Regulation. Because a cable communications system uses local
streets and rights-of-way, cable systems are subject to state and local
regulation. Cable communications systems generally are operated pursuant
39
to non-exclusive franchises, permits or licenses granted by a municipality or
other state or local government entity. Franchises generally are granted for
fixed terms and in many cases are terminable if the franchisee fails to comply
with material provisions. The terms and conditions of franchises vary materially
from jurisdiction to jurisdiction. Each franchise generally contains provisions
governing cable service rates, franchise fees, franchise term, system
construction and maintenance obligations, system channel capacity, design and
technical performance, customer service standards, franchise renewal, sale or
transfer of the franchise, territory of the franchisee, indemnification of the
franchising authority, use and occupancy of public streets and types of cable
services provided. The 1992 Cable Act immunizes franchising authorities from
monetary damage awards arising from regulation of cable communications systems
or decisions made on franchise grants, renewals, transfers and amendments.
Internet Operations. The following is a summary of federal laws, regulations and
tariffs, and a description of certain state and local laws pertaining to the
Internet operations of the Company.
With significant growth in Internet activity and commerce over the past several
years the FCC and other regulatory bodies have been challenged to develop new
models that allow them to achieve the public policy goals of competition and
universal service. Many aspects of regulation and coordination of Internet
activities and traffic are evolving and are facing unclear regulatory futures.
Changes in regulations in the future will have a significant impact on ISPs,
Internet commerce and Internet services.
The Internet has been able to grow and develop outside the existing regulatory
structure because the FCC has made conscious decisions to limit the application
of its rules. The federal government's efforts have been directed away from
burdening the Internet with regulation. ISPs and other companies in the Internet
industry have not been required to gain regulatory approval for their actions.
The 1996 Telecom Act adopts such a position. The 1996 Act states that it is the
policy of the United States "to preserve the vibrant and competitive free market
that presently exists for the Internet and other interactive computer services,
unfettered by Federal or State regulation."
Regulatory policy approaches toward the Internet have focused on several areas:
avoiding unnecessary regulation, questioning the applicability of traditional
rules, Internet governance (such as the allocation of domain names),
intellectual property, network reliability, privacy, spectrum policy, standards,
security, and international regulation.
Government may influence the evolution of the Internet in many ways, including
directly regulating, participating in technical standards development, providing
funding, restricting anti-competitive behavior by dominant firms, facilitating
industry cooperation otherwise prohibited by antitrust laws, promoting new
technologies, encouraging cooperation between private parties, representing the
United States in international intergovernmental bodies, and large-scale
purchasing of services.
There are many ways Internet growth could be negatively impacted which may
require future regulation and oversight. Moving toward proprietary standards or
closed networks would reduce the degree to which new services could leverage the
existing infrastructure. The absence of competition in the ISP market, or the
telecommunications infrastructure market, could reduce incentives for
innovation. Excessive or misguided government intervention could distort the
operation of the marketplace, and lead companies to expend valuable resources
working through the regulatory process. Insufficient government involvement may
also, however, have negative consequences. Some issues may require a degree of
central coordination, even if only to establish the initial terms of a
distributed, locally-controlled system. The end result, in the absence of
collective action, may be an outcome that no one favors. In addition, the
failure of the federal government to identify Internet-related areas that should
not be subject to regulation leaves open opportunities for state, local, or
international bodies to regulate excessively and/or inconsistently.
There is no one entity or organization that governs the Internet. Each
facilities-based network provider that is interconnected with the global
Internet controls operational aspects of their own network. Certain functions,
40
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. Internet standards and
protocols are developed primarily by the Internet Engineering Task Force
("IETF"), an open international body mostly comprised of volunteers. The work of
the IETF is coordinated by the Internet Engineering Steering Group, and the
Internet Architecture Board, which are affiliated with ISOC. The Internet
Assigned Numbers Authority handles Internet addressing matters under a contract
between the Department of Defense and the Information Sciences Institute at the
University of Southern California.
The legal authority of any of these bodies is unclear. Most of the underlying
architecture of the Internet was developed under the auspices, directly or
indirectly, of the United States government. The government has not, however,
defined whether it retains authority over Internet management functions, or
whether these responsibilities have been delegated to the private sector. The
degree to which any existing body can lay claim to representing "the Internet
community" is also unclear. Membership in the existing Internet governance
entities is drawn primarily from the research and technical communities.
The 1996 Telecom Act provides little direct guidance as to whether the FCC has
authority to regulate Internet-based services. Section 223 concerns access by
minors to obscene, harassing, and indecent material over the Internet and other
interactive computer networks, and sections 254, 706, and 714 address mechanisms
to promote the availability of advanced telecommunications services, possibly
including Internet access. Section 230 states a policy goal "to preserve the
vibrant and competitive free market that presently exists for the Internet and
other interactive computer services, unfettered by Federal or State regulation."
None of these sections, however, specifically addresses the FCC's jurisdiction.
Nothing in the 1996 Telecom Act expressly limits the FCC's authority to regulate
services and facilities connected with the Internet, to the extent that they are
covered by more general language in any section of the Act. Moreover, it is not
clear what such a limitation would mean even if it were adopted. The
Communications Act directs the FCC to regulate "interstate and foreign commerce
in communication by wire and radio," and the FCC and state public utility
commissions indisputably regulate the rates and conditions under which ISPs
purchase services and facilities from telephone companies. Given the absence of
clear statutory guidance, the FCC must determine whether or not it has the
authority or the obligation to exercise regulatory jurisdiction over specific
Internet-based activities. The FCC may also decide whether to forebear from
regulating certain Internet-based services. Forbearance allows the FCC to
decline to adopt rules that would otherwise be required by statute. Under
section 401 of the 1996 Telecom Act, the FCC must forbear if regulation would
not be necessary to prevent anticompetitive practices and to protect consumers,
and forbearance would be consistent with the public interest. Finally, the FCC
could consider whether to preempt state regulation of Internet services that
would be inconsistent with achievement of federal goals.
The FCC has not attempted to regulate the companies that provide the software
and hardware for Internet telephony, or the access providers that transmit their
data, as common carriers or telecommunications service providers. In March 1996,
America's Carriers Telecommunication Association ("ACTA"), a trade association
primarily comprised of small and medium-size interexchange carriers, filed a
petition with the FCC asking the FCC to regulate Internet telephony. ACTA argues
that providers of software that enables real-time voice communications over the
Internet should be treated as common carriers and subject to the regulatory
requirements of Title II. The FCC has sought comment on ACTA's request. Other
countries are considering similar issues.
The FCC has not considered whether any of the rules that relate to radio and
television broadcasters should also apply to analogous Internet-based services.
The vast majority of Internet traffic today travels over wire facilities,
41
rather than the radio spectrum. As a policy matter, however, a continuous, live,
generally-available music broadcast over the Internet may appear similar to a
traditional radio broadcast, and the same arguments may be made about streaming
video applications. The FCC will need to consider the underlying policy
principles that, in the language of the Act and in FCC decisions, have formed
the basis for regulation of the television and radio broadcast industries.
The FCC does not regulate the prices charged by ISPs or Internet backbone
providers. However, the vast majority of users connect to the Internet over
facilities of existing telecommunications carriers. Those telecommunications
carriers are subject to varying levels of regulation at both the federal and the
state level. Thus, regulatory decisions exercise a significant influence over
the economics of the Internet market. Economics is expected to drive the
development of both the Internet and of other communications technologies.
Internet access is understood to be an enhanced service under FCC rules,
therefore ISPs are treated as end users, rather than carriers, for purposes of
the FCC's interstate access charge rules. This distinction, created when the FCC
established the access charge system in 1983, is often referred to as the "ESP
exemption." Thus, when ISPs purchase lines from LECs, the ISPs buy those lines
under the same tariffs that any business customer would use -- typically voice
grade measured business lines or 23 channel ISDN primary rate interface (PRI).
Although these services generally involve a per-minute usage charge in addition
to a monthly fee, the usage charge is assessed only for outbound calls. ISPs,
however, exclusively use these lines to receive calls from their customers, and
thus effectively pay flat monthly rates. By contrast, IXCs that interconnect
with LECs are considered carriers, and thus are required to pay interstate
access charges for the services they purchase. Most of the access charges that
carriers pay are usage-sensitive in both directions. Thus, IXCs are assessed
per-minute charges for both originating and terminating calls. The FCC concluded
in the Local Competition Order that the rate levels of access charges appear to
significantly exceed the incremental cost of providing these services. The FCC
in December 1996 launched a comprehensive proceeding to reform access charges in
a manner consistent with economic efficiency and the development of local
competition.
The revenue effects of Internet usage today depend to a significant extent on
the structure of state tariffs. Internet usage generates less revenue for LECs
in states where flat local service rates have been set low, with compensating
revenues in the form of per-minute intrastate toll charges. Because ISPs only
receive local calls, they do not incur these usage charges. By contrast, in
states where flat charges make up a higher percentage of LEC revenues, ISPs will
have a less significant revenue effect. ISP usage is also affected by the
relative pricing of services such as ISDN Primary Rate Interface (PRI), frame
relay, and fractional T-1 connections, which are alternatives to analog business
lines. The prices for these services, and the price difference on a
per-voice-channel basis between the options available to ISPs, varies widely
across different states. In many cases, tariffs for these and other data
services are based on assumptions that do not reflect the realities of the
Internet access market today. The scope of local calling areas also affects the
architecture of Internet access services. In states with larger unmeasured local
calling areas, ISPs need fewer POPs in order to serve the same customers through
a local call.
The Company is presently unable to determine what the impact of potential
Internet regulatory actions and decisions will be on the Company's liquidity,
results of operations and cash flows.
Financial information about the Company's foreign and domestic operations and
export sales
Although the Company has several agreements to facilitate the origination and
termination of international toll traffic, it has neither foreign operations nor
export sales. The Company conducts operations throughout the western contiguous
United States, Alaska and Hawaii and believes that any subdivision of its
operations into distinct geographic areas would not be meaningful. Revenues
associated with international toll traffic were $7.0 million, $7.6 million and
$8.3 million for the years ended December 31, 1998, 1997 and 1996, respectively.
Seasonality
Long-distance revenues have historically been highest in the summer months as a
result of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial
42
fishing, and oil and gas activities. Cable television revenues, on the other
hand, are higher in the winter months because consumers tend to watch more
television, and spend more time at home, during these months. Local service and
Internet operations are not expected to exhibit significant seasonality. The
Company's ability to implement construction projects is also reduced during the
winter months because of cold temperatures, snow and short daylight hours.
Customer-sponsored research
The Company has not expended material amounts during the last three fiscal years
on customer-sponsored research activities.
Backlog of Orders and Inventory
As of December 31, 1998 and 1997, the Company's long-distance services segment
had a backlog of equipment sales orders of approximately $202,000 and $104,000,
respectively. The increase in backlog as of December 31, 1998 can be attributed
primarily to sales growth in 1998 as compared to 1997. The Company expects that
all of the orders in backlog at the end of 1998 will be delivered during 1999.
Geographic Concentration and Alaska Economy
The Company offers voice and data telecommunication and video services to
customers primarily throughout Alaska. As a result of this geographic
concentration, the Company's growth and operations depend upon economic
conditions in Alaska. The economy of Alaska is dependent upon the natural
resource industries, and in particular oil production, as well as tourism,
government, and United States military spending. Any deterioration in these
markets could have an adverse impact on the Company. Almost $4 of every $10
produced in Alaska comes from the oil industry. 73 percent ($1.5 billion) of
core Alaska state treasury receipts came from the oil industry in 1998 through
production taxes, ad valorem taxes, corporate income taxes, royalties and lease
payments.
The volume of oil transported by the TransAlaska Oil Pipeline System over the
past 20 years has been as high as 2.0 million barrels per day in 1988.
Production has begun to decline in recent years and is presently down 40% from
the 1988 levels. The two largest producers of oil in Alaska (the primary users
of the TransAlaska Oil Pipeline System) continue to explore, develop and produce
new oil fields and to enhance recovery from existing fields to offset the
decline in production from the Prudhoe Bay field. Both companies have invested
large sums of money in developing and implementing oil recovery techniques at
the Prudhoe Bay field and other nearby fields.
Market prices for North Slope oil declined to below $10 per barrel in 1998, well
below the average price used by the State of Alaska to budget its oil related
revenues. Oil companies and service providers have announced cost cutting
measures to offset a portion of the declining revenues. Oil company and related
oil field service company layoffs reportedly will result in a reduction of oil
industry jobs by at least 39 percent in 1999.
BP Alaska Exploration ("BP") announced that it would cut costs in Alaska by 30
percent, including layoffs of approximately 600 employees and other cost-cutting
measures such as decreased production and delayed exploration efforts. Projects
that are underway are reportedly not affected by the cutbacks, however BP did
notify state officials that it would delay its exploration of the Genesee test
site east of Prudhoe.
Atlantic Richfield Company ("ARCO") announced that it would cut 80 Alaska jobs,
which reportedly amounts to five percent of its workforce in the state. ARCO has
also indicated that the cost cuts will not affect the development of the Alpine
field west of Prudhoe Bay.
BP Amoco announced in April 1999 its intention to purchase ARCO for $26.8
billion. BP Amoco and ARCO together reportedly hold approximately 75 percent of
the ownership of the Alaska North Slope oil fields and in the company that
operates the Trans-Alaska Pipeline System. Alaska law stipulates that no single
company can hold drilling leases to more than 500,000 onshore state-owned acres.
43
The BP Amoco-ARCO combination would control about 860,000 acres, however the
companies have reportedly said they will give up 360,000 acres to comply with
Alaska laws. Realignment of operations following the acquisition reportedly will
result in the layoff of 400 personnel in Alaska. The Company is not able to
predict the effect of the acquisition of ARCO by BP Amoco on Alaska's economy or
on the Company.
The effects of low oil prices will impact the state of Alaska's economy, and is
expected to particularly hurt state and local government and oil service
companies. As much as half of the drilling fleet that worked on the slope in
1998 could be idle during 1999. Oil field service and drilling contractors cut
operating costs to adjust for decreasing production and exploration. The
Company, as an outsourcing services provider to the oil industry, reduced its
outsourcing work force by 8 employees in February 1999.
The state of Alaska December 1998 forecast for future oil production and state
revenues indicates that analysts do not expect oil prices to recover for
approximately two years. As a result, the Alaska Department of Revenue forecast
anticipates that production will fall from 1.28 million barrels a day in Fiscal
Year 1998 to 1.18 million in Fiscal Year 1999.
Since actual revenues to the state of Alaska are expected to fall significantly
short of budgeted revenues, (an estimated $1.04 billion deficit for the coming
budget year), the Governor of the state of Alaska has announced his intention to
implement cost-cutting and revenue enhancing measures. The state of Alaska
maintains surplus accounts that are intended to fund budgetary shortfalls and
would be expected to fund a portion of the revenue shortfall.
Although the depressed oil prices are expected to have a substantial effect on
Alaska's economy, analysts believe that tourism, air cargo, and service sectors
are strong enough to offset a portion of the downturn. These industries have
helped offset the prevailing pattern of oil industry downsizing that has
occurred during much of the last several years. Three other factors that support
Alaska's economy are the healthy national economy, low interest rates, and low
inflation. Construction is expected to remain strong over the next few years;
$315 million of federal money is expected to be distributed to the state of
Alaska for highways and other federally supported projects.
Effective March 1997, the State of Alaska passed new legislation relaxing state
oil royalties with respect to marginal oil fields that the oil companies claim
would not be economic to develop otherwise. No assurance can be given that oil
companies doing business in Alaska will be successful in discovering new fields
or further developing existing fields which are economic to develop and produce
oil with access to the pipeline or other means of transport to market, even with
the reduced level of royalties.
Should oil companies not be successful in these discoveries or developments, or
the price of oil remain at its current 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 the Company, in particular. The Company is not able to
predict the effect of declining production and prices on the State of Alaska's
economy or on the Company.
The Company has, since its entry into the telecommunication marketplace
aggressively marketed its services to seek a larger share of the available
market. However, with a small population of approximately 600,000 people,
one-half of whom are located in the Anchorage area and the rest of whom are
spread out over the vast reaches of Alaska, the customer base in Alaska is
limited. 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.
44
Employees
The Company and its direct and indirect subsidiaries employ approximately 972
persons as of February 19, 1999. The Company and its subsidiaries are not
parties to any union contracts with their employees. The Company believes that
its future success will depend upon its continued ability to attract and retain
highly skilled and qualified employees. The Company believes that its relations
with its employees are satisfactory.
Other
No material portion of the businesses of the Company is subject to renegotiation
of profits or termination of contracts at the election of the federal
government.
Item 2. PROPERTIES
General. The Company's property, plant and equipment in service totaled $282.8
million at December 31, 1998, of which $148.0 relates to long-distance services,
$95.6 relates to cable services, $27.9 relates to local access services, and
$11.3 relates to Internet services. 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 the Company's
properties secure its Senior Holdings Loan and Fiber Facility. See note 6 to the
Notes to Consolidated Financial Statements included in Part II of this Report
for further discussion.
The Company's construction in progress totaled $119.6 million at December 31,
1998, of which $114.9 relates to Alaska United fiber-optic facilities connecting
Anchorage, Juneau, Fairbanks, Valdez and Whittier, Alaska to Seattle Washington,
and $4.7 relates to telecommunications and Internet construction projects that
were not complete at December 31, 1998.
Long-Distance Services. The Company operates a state-of-the-art, competitive
telecommunications network employing the latest digital transmission technology
based upon fiber optic and digital microwave facilities within and between
Anchorage, Fairbanks and Juneau. The Company's 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. The Company uses
satellite transmission to remote areas of Alaska and for certain interstate
traffic.
The Company's long-distance services segment owns properties and facilities
including satellite earth stations, and distribution, transportation and office
equipment. Additionally, the Company acquired in December 1992, access to
capacity on an undersea fiber optic cable from Seward, Alaska to Pacific City,
Oregon. The undersea fiber optic cable capacity is owned subject to an
outstanding mortgage. The Company 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.
The Company 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 its long-term satellite capacity requirements. The balance
payable upon expected delivery of the transponders during the fourth quarter of
1999 in addition to the $9.1 million deposit previously paid totals
approximately $43.5 million. The Company's remaining commitment will likely be
funded from its Senior Holdings Loan. The purchase and lease-purchase option
agreement provides for the interim lease of transponder capacity on the PanAmSat
Galaxy IX satellite through the delivery of the purchased transponders.
The Company leases its long-distance services industry segment's executive,
corporate and administrative facilities in Anchorage, Fairbanks and Juneau,
Alaska. The Company's operating, executive, corporate and administrative
properties are in good condition. The Company considers its properties suitable
and adequate for its present needs and are being fully utilized.
45
Cable Services. The Cable Systems serve 26 communities and areas in Alaska
including Anchorage, Fairbanks and Juneau, the state's three largest urban
areas. As of December 31, 1998 the Cable Systems consisted of approximately
1,806 miles of installed cable plant having between 300 to 550 MHz of channel
capacity. The Company leases its cable services industry segment's operating
facilities in substantially all locations. Such properties are in good
condition. The Company considers its properties suitable and adequate for its
present and anticipated future needs.
Local Access Services. The Company operates a state-of-the-art, competitive
local access telecommunications network employing the latest digital
transmission technology based upon fiber optic facilities within Anchorage. The
Company leases its local access services industry segment's operating facilities
in Anchorage. Such properties are in good condition. The Company considers its
properties suitable and adequate for its present and anticipated future needs.
Internet Services. The Company operates a state-of-the-art, competitive Internet
network employing the latest available technology. The Company leases its
Internet services industry segment's operating facilities, located primarily in
Anchorage. Such properties are in good condition. The Company considers its
properties suitable and adequate for its present and anticipated future needs.
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. The Company and its subsidiaries are parties to
various claims and pending litigation as part of the normal course of business.
The Company is also involved in several administrative proceedings and filings
with the FCC, Department of Labor and state regulatory authorities. In the
opinion of management, except as noted below, 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 the Company,
would not have a materially adverse affect on the Company's business or its
financial position, results of operations or liquidity.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Date of meeting - June 4, 1998
Nature of meeting - 1998 annual meeting of shareholders
(b) Election of Directors:
Names of directors elected at the meeting:
Donne F. Fisher Votes: 54,009,905 For; 1,367,485 Withheld
William P. Glasgow Votes: 54,990,085 For; 387,305 Withheld
James M. Schneider Votes: 55,105,849 For; 271,541 Withheld
Names of directors whose term of office continued after the meeting:
Carter F. Page
Ronald A. Duncan
Robert M. Walp
Jeffrey C. Garvey
John W. Gerdelman
Donald T. Lynch
Larry E. Romrell
46
(c) Not applicable.
(d) Not applicable.
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. The following table sets forth the high and low sales
price for the above-mentioned common stock for the periods indicated. 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
---- --- ---- ---
1997:
First Quarter 8 1/8 6 8 1/8 6
Second Quarter 8 5/8 6 1/4 8 5/8 6 1/4
Third Quarter 9 1/4 6 1/2 9 1/4 6 1/2
Fourth Quarter 8 1/8 6 3/8 8 1/8 6 3/8
1998:
First Quarter 8 3/8 6 1/8 8 3/8 6 1/8
Second Quarter 8 5 1/2 8 5 1/2
Third Quarter 6 1/8 2 5/8 6 1/8 2 5/8
Fourth Quarter 5 2 1/2 5 2 1/2
Holders. As of December 31, 1998 there were 1,873 holders of record of GCI's
Class A common stock and 626 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
the Company's earnings, financial condition and other relevant considerations.
The Company's existing bank loan agreements contain provisions that prohibit
payment of dividends, other than stock dividends (see note 6 to the Consolidated
Financial Statements included in Part II of this Report).
47
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.
Years ended December 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Amounts in thousands except per share amounts)
Revenues (1) $ 246,795 223,809 164,894 129,279 116,981
Net earnings (loss) before income taxes and
extraordinary item (2) $ (10,920) (2,235) 12,690 12,601 11,681
Loss on early extinguishment of debt, net of
income tax benefit of $180 $ 0 521 0 0 0
Net earnings (loss) $ (6,797) (2,183) 7,462 7,502 7,134
Basic net earnings (loss) per common share $ (0.14) (0.05) 0.28 0.32 0.30
Diluted net earnings (loss) per common share $ (0.14) (0.05) 0.27 0.31 0.30
Total assets (3) $ 646,116 545,302 447,335 84,765 74,249
Long-term debt, including current portion (3) $ 351,657 250,084 223,242 9,980 12,554
Obligations under capital leases, including
current portion $ 2,186 1,188 746 1,047 1,297
Total stockholders' equity (3, 4) $ 200,007 204,439 149,554 43,016 35,093
Dividends declared per Common share (5) $ 0.00 0.00 0.00 0.00 0.00
1 The 1997 revenue increase is primarily attributed to the Company's
reporting 12 months of cable television service revenues as compared
to two months reported in 1996.
2 The Company's net losses in 1998 and 1997 are primarily attributed to
additional depreciation, amortization and interest expense resulting
from the cable company acquisitions in October 1996 and startup losses
from the Company's entry into local access services and Internet
services markets.
3 Increases in the Company's total assets, long-term debt and
stockholders' equity in 1996 as compared to 1995 result in part from
the cable company acquisitions and MCI (now MCI WorldCom) stock
issuance described in notes 2 and 8 to the Notes to Consolidated
Financial Statements included in Part II of this Report. Increases in
assets and long-term debt in 1998 as compared to 1997 result primarily
from the Company's construction of a fiber-optic system connecting
points in Alaska with Seattle Washington as further described in note
11 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
the Company's equity offering in August 1997, described in note 8 to
the accompanying Notes to Consolidated Financial Statements included
in Part II of this Report.
5 The Company has never paid a cash dividend on its common stock and
does not anticipate paying any dividends in the foreseeable future.
The Company intends to retain its earnings, if any, for the
development of its business. Payment of cash dividends in the future,
if any, will be determined by the board of directors of the Company in
light of the Company's earnings, financial condition, credit
agreements and other relevant considerations. The Company's existing
bank loan agreements contain provisions that prohibit payment of
dividends, other than stock dividends, as further described in note 6
to the Notes to Consolidated Financial Statements included in Part II
of this Report.
48
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the notes thereto and other
financial data appearing elsewhere in this Report on Form 10-K. See -Cautionary
Statement Regarding Forward-Looking Statements.
Overview
The Company has experienced significant growth in recent years through both
strategic acquisitions and growth in its existing businesses. The Company has
historically met its cash needs for operations through its cash flows from
operating activities. Cash requirements for acquisitions and capital
expenditures have been provided through the Company's financing activities, as
well as its existing cash and cash equivalents.
Long-distance services. The Company has historically reported revenues
principally from the provision of interstate and intrastate long-distance
services to residential, commercial and governmental customers and to other
common carriers (principally MCI, now MCI WorldCom, and Sprint). These services
accounted for approximately 91.9% of the Company's long-distance services
revenues during 1998. Factors that have the greatest impact on year-to-year
changes in telecommunications services revenues include the rate per minute
charged to customers and usage volumes, usually expressed as minutes of use.
These factors in turn depend in part upon economic conditions in Alaska. The
economy of Alaska is dependent upon the natural resource industries, in
particular oil production, as well as tourism, government and United States
military spending.
The Company's telecommunication cost of sales and services has consisted
principally of the direct costs of providing services, including local access
charges paid to LECs for the origination and termination of long-distance calls
in Alaska, fees paid to other long-distance carriers to carry calls that
terminate in areas not served by the Company's network (principally the lower 49
states, most of which calls are carried over MCI's network, and international
locations, which calls are carried principally over Sprint's network), and the
cost of equipment sold to the Company's customers. During 1998, local access
charges accounted for 42.6% of telecommunications cost of sales and services,
fees paid to other long-distance carriers represented 33.2%, satellite
transponder lease and undersea fiber maintenance costs represented 10.0%,
telecommunications equipment accounted for 4.8%, and network solutions and
outsourcing costs represented 7.0% of telecommunications cost of sales and
services.
The Company's long-distance selling, general, and administrative expenses have
consisted of operating and engineering, customer service, sales and
communications, management information systems, general and administrative,
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, 30.9% during 1998,
represents the cost of the Company's advertising, promotion and market analysis
programs.
Long-distance telecommunication services face significant competition from AT&T
Alascom, Inc., long-distance resellers, and from local telephone companies that
have entered the long-distance market. The number of active long-distance
customers billed by the Company has decreased approximately 7.9% during 1998.
Gains in the number of commercial and small business customers billed were more
than offset by a reduction in the number of residential customers billed.
Increased usage volumes and traffic carried for other common carriers have
generally offset usage reductions attributed to the decrease in the number of
active residential customers billed. The Company believes its approach to
developing, pricing, and providing long-distance services and bundling different
business segment services will continue to allow it to be competitive in
providing those services.
Other common carrier traffic routed to the Company for termination in Alaska is
largely dependent on traffic routed to MCI WorldCom and Sprint by their
customers. Pricing pressures, new program offerings and
49
market consolidation continue to evolve in the markets served by MCI WorldCom
and Sprint. If, as a result, their traffic is reduced, or if their competitors'
costs to terminate or originate traffic in Alaska are reduced, the Company's
traffic will also likely be reduced, and the Company's pricing may be reduced to
respond to competitive pressures. The Company is unable to predict the effect on
the Company of such changes, however given the materiality of other common
carrier revenues to the Company, a significant reduction in traffic or pricing
could have a material adverse effect on the Company's financial position,
results of operations and liquidity.
Services included in the Other segment as described in note 9 to the
accompanying consolidated financial statements are included in the Long-Distance
Services segment for purposes of this Management's Discussion and Analysis.
See Part I, Item 1. Business, Long-distance Services, Competition for additional
information regarding long-distance services competition.
Cable services. Following the cable system acquisitions effective October 31,
1996, the Company now reports a significant level of revenues from the provision
of cable services. During 1998, cable revenues represented 23.4% of consolidated
revenues. The cable systems serve 26 communities and areas in Alaska, including
the state's three largest population centers, Anchorage, Fairbanks and Juneau.
The Company generates cable services revenues from three primary sources: (1)
programming services, including monthly basic or premium subscriptions and
pay-per-view movies or other one-time events, such as sporting events; (2)
equipment rentals or installation; and (3) advertising sales. During 1998
programming services generated 85.7% of total cable services revenues, equipment
rental and installation fees accounted for 7.9% of such revenues, advertising
sales accounted for 5.0% of such revenues, and other services accounted for the
remaining 1.4% of total cable services revenues. The primary factors that
contribute to year-to-year changes in cable services revenues are average
monthly subscription and pay-per-view rates, the mix among basic, premium and
pay-per-view services, and the average number of subscribers during a given
reporting period.
The cable systems' cost of sales and selling, general and administrative
expenses have consisted principally of programming and copyright expenses,
labor, maintenance and repairs, marketing and advertising, rental expense, and
property taxes. During 1998 programming and copyright expenses represented
approximately 40.1% of total cable cost of sales and selling, general and
administrative expenses. Marketing and advertising costs represented
approximately 9.5% 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. The Company believes its cable television services will continue
to be competitive based on providing, at reasonable prices, a greater variety of
programming and other communication services than are available off-air or
through other alternative delivery sources and upon superior technical
performance and customer service. See Part I, Item 1. Business, Cable Services,
Competition for additional information regarding cable services competition.
Local access services. The Company began offering local exchange services in
Anchorage during late September 1997. The Company generates local access
services revenues from four primary sources: (1) business and residential basic
dial tone revenues; (2) business private line and special access revenues; (3)
reciprocal access revenues from the incumbent LEC; and (4) business and
residential feature and other charges, including voice mail, caller ID,
distinctive ring, inside wiring and subscriber line charges. Local exchange
services revenues totaled $9.9 million representing 4.0% of total revenues in
1998. The primary factors that contribute to year-to-year changes in local
access services revenues are the average number of business and residential
subscribers during a given reporting period and the average monthly rates
charged for non-traffic sensitive services.
50
Operating and engineering expenses represented approximately 8.8% of total local
access services cost of sales and selling, general and administrative expenses
during 1998. Marketing and advertising costs represented approximately 4.7% of
such total expenses, customer service and general and administrative costs
represented approximately 53.4% of such total expenses, and local access cost of
sales represented approximately 33.1% of such total expenses. The Company
expects that it will generate operating losses from local exchange services
during 1999.
The Company's local access services face significant competition from ATU and
AT&T Alascom, Inc. The Company believes its approach to developing, pricing, and
providing local access services will continue to allow it to be competitive in
providing those services. See Part I, Item 1. Business, Local Access Services,
Competition and Part I, Item 1. Business, Historical development of the
Company's business during the past fiscal year, Local Access Services for
additional information regarding local access services competition.
Internet services. The Company began offering Internet services in several
markets in Alaska during 1998. The Company generates Internet services revenues
from three primary sources: (1) access product services, including commercial
DIAS, ISP DIAS, and retail dial-up service revenues; (2) SchoolAccess(TM) DIAS
and server revenues; and (3) network management services. Internet services
revenues totaled $4.6 million representing 1.9% of total revenues in 1998. The
primary factors that contribute to year-to-year changes in Internet services
revenues are average monthly subscription rates, the number of customers
selecting added features, and the average number of subscribers during a given
reporting period.
Operating and general and administrative expenses represented approximately
17.4% of total Internet services cost of sales and selling, general and
administrative expenses during 1998.
Significant new marketing campaigns were introduced in February and March 1999
featuring bundled residential and commercial Internet products. Additional
bandwidth was made available to the Company's Internet segment resulting from
completion of the Alaska United Project. The new Internet offerings are coupled
with the Company's long-distance and local services offerings and provide free
basic Internet services if certain long-distance or local services plans are
selected. Value-added Internet features are available for additional charges.
The Company competes with a number of Internet service providers in its markets.
The Company believes its approach to developing, pricing, and providing Internet
services will continue to allow it to be competitive in providing those
services. See Part I., Item 1. Business, Internet Services, Competition for
information regarding Internet services competition.
Other services, other expenses and net loss. Telecommunications services
revenues reported in the "Other" segment have been attributable to corporate
network management contracts, telecommunications equipment sales and service,
other miscellaneous revenues (including revenues from prepaid and debit calling
cards, the installation and leasing of customers' very small aperture terminal
("Vsat") equipment, and fees charged to MCI WorldCom and Sprint for certain
billing services), and costs associated with PCS wireless communications
services. The Company began developing plans for PCS service deployment in 1995
and subsequently conducted a technical trial of its candidate technology. The
Company has invested approximately $2.1 million in its PCS license at December
31, 1998. PCS licensees are required to offer service to at least one-third of
their market population within five years or risk losing their licenses. Service
must be extended to two-thirds of the population within 10 years. The Company is
currently reevaluating its wireless strategy and expects to complete such
reevaluation within the next six months. The Company expects that its wireless
strategy will allow retention of the PCS license pursuant to its terms.
Depreciation and amortization and interest expense on a consolidated basis is
expected to be higher in 1999 as compared to 1998 resulting primarily from
additional depreciation on 1998 and 1999 capital expenditures and additional
outstanding long-term debt. As a result, the Company anticipates recording net
losses in 1999.
51
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
----------------------- -----------------
1998 1997
vs. vs.
1998 1997 1996 1997 1996
---- ---- ---- ---- ----
Statement of Operations Data:
Revenues:
Long-distance services 70.7% 75.0% 94.3% 4.1% 8.0%
Cable services 23.4% 24.6% 5.7% 4.5% 482.2%
Local services 4.0% 0.3% --- 1,524.3% NA
Internet services 1.9% 0.1% --- 2,422.5% NA
----------------------------------------------------------------
Total revenues 100.0% 100.0% 100.0% 10.3% 35.7%
Cost of sales and services 47.0% 49.6% 56.2% 4.5% 19.9%
Selling, general and administrative
expenses 36.1% 32.9% 28.1% 21.2% 58.5%
Depreciation and amortization 13.0% 10.6% 5.7% 34.8% 152.6%
----------------------------------------------------------------
Operating income 3.9% 6.9% 10.0% (37.9%) (6.1%)
Net earnings (loss) before income
taxes (4.4%) (1.0%) 7.7% (388.6%) (117.6%)
Net earnings (loss) (2.8%) (1.0%) 4.5% (211.4%) (129.3%)
Other Operating Data:
Cable operating income (1) 12.4% 18.9% 23.2% (31.7%) 374.6%
Local operating loss (2) (112.2%) (581.8%) NA (213.3%) 307.9%
Internet operating (loss) income (3) 0.1% (13.4%) NA 106.1% NA
- -----------------------------------------------
(1) Computed as a percentage of total cable services revenues.
(2) Computed as a percentage of total local services revenues.
(3) Computed as a percentage of total Internet services revenues.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.
Revenues. Total revenues increased 10.3% from $223.8 million in 1997 to $246.8
million in 1998. Long-distance transmission revenues from commercial,
residential, governmental, and other common carrier customers increased 2.6%
from $156.6 million in 1997 to $160.6 million in 1998. This increase reflected a
5.3% increase in interstate minutes of use to 654.0 million minutes and a 4.6%
increase in intrastate minutes of use to 137.3 million minutes. Long-distance
revenue growth in 1998 was largely due to a 4.4% increase in revenues from other
common carriers (principally MCI WorldCom and Sprint), from $58.7 million in
1997 to $61.3 million in 1998. Private line and private network transmission
services revenues increased 22.0%, from $15.9 million in 1997 to $19.4 million
in 1998.
The above increases in long-distance transmission revenues were offset in part
by a 5.1% reduction in the Company's average rate per minute on long-distance
traffic from $0.177 per minute in 1997 to $0.168 per minute in 1998. The
decrease in rates resulted from the Company's promotion of and customers'
enrollment in new calling plans offering discounted rates and length of service
rebates, such new plans being prompted in part by the Company's primary
long-distance competitor, AT&T Alascom, reducing its rates and entry of LECs
into long-distance markets served by the Company. Operator services revenues
decreased 14.3% from $7.0 million in 1997 to $6.0 million in 1998. Traffic
carried by the Company's operator service center
52
decreased in part from increased usage of prepaid calling cards and cellular
telephones by tourists visiting the state of Alaska.
Systems sales and services revenues (included in long-distance segment revenues)
increased 30.7% from $10.2 million in 1997 to $13.3 million in 1998, primarily
due to an increase in the number of large equipment sales transactions in 1998
as compared to 1997 and increased revenues derived from outsourcing services.
Cable revenues increased 4.5% from $55.2 million in 1997 to $57.6 million in
1998. Programming services revenues increased 3.1% to $49.4 million in 1998
resulting from an increase of 3,900 basic subscribers served by the Company and
an increase of $0.47 in revenue per average basic subscriber, per month. New
facility construction efforts in 1998 resulted in additional homes passed which
contributed to additional subscribers and revenues. Other factors included
facility upgrades which allowed the introduction of digital cable services in
Anchorage, increased promotional and advertising efforts and increases in basic
and premium service rates in certain areas. Advertising sales revenues increased
31.9% to $2.9 million in 1998 due to increased promotion of the Company's
advertising and ad insertion capabilities. Equipment rental and installation
revenues increased 6.2% to $4.5 million in 1998 due to increased equipment
rentals and installation services provided by the Company. Offsetting these
increases were reductions in pay-per-view and premium service revenues.
Local access services revenues increased from $610,000 in 1997 to $9.9 million
in 1998. 1998 revenues reflect a full 12 months of local services operations and
growth as compared to start-up operations in 1997. At December 31, 1998
approximately 28,000 lines were in service and approximately 1,000 additional
lines were awaiting connection.
Internet services revenues increased from $182,000 in 1997 to $4.6 million in
1998. 1998 revenues reflect a full 12 months of Internet services operations and
growth as compared to start-up operations in 1997. The Company had approximately
7,200 active residential subscribers to its Internet service at February 9,
1999.
Cost of sales and services. Cost of sales and services totaled $111.1 million in
1997 and $116.1 million in 1998. As a percentage of total revenues, cost of
sales and services decreased from 49.6% in 1997 to 47.0% in 1998. The decrease
in cost of sales and services as a percentage of revenues is primarily
attributed to changes in the Company's product mix due to the addition of new
product lines for a full year of operations (local access services and
Internet), and reduced long-distance cost of sales as a percentage of
long-distance revenues. The margin improvement was partially offset by increased
cable services cost of sales as a percentage of cable services revenues.
The decrease in long-distance cost of sales and services as a percentage of
revenues is primarily attributed to: 1) a refund received in the first quarter
of 1998 totaling approximately $1.1 million from a LEC in respect of its
earnings that exceeded regulatory requirements, 2) reductions in access charges
paid by the Company to other carriers for distribution of its traffic, and 3)
avoidance of access charges resulting from the Company's distribution and
termination of its traffic on its own network instead of paying other carriers
to distribute and terminate its traffic. The Company expects margins to widen as
increasing amounts of traffic are carried on its own facilities.
Cable cost of sales and services as a percentage of revenues is less as a
percentage of revenues than are long-distance, local access and Internet
services cost of sales and services. Cable services rate increases did not keep
pace with increases in programming and copyright costs in 1998. Programming
costs increased on most of the Company's offerings and the Company incurred
additional costs on new programming introduced in 1998.
Local access services cost of sales and services totaled 61.7% and 43.8% as a
percentage of 1998 and 1997 local access services revenues, respectively.
Internet services cost of sales and services totaled 74.1% and 132.4% as a
percentage of 1998 and 1997 Internet services revenues, respectively. The
Company's local
53
access and Internet services operations commenced in 1997. Fluctuations in cost
of sales and services as a percentage of revenues are expected to occur as
start-up products develop into mature product lines.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 22.0% from $73.6 million in 1997 to $89.8
million in 1998, and, as a percentage of revenues, increased from 32.9% in 1997
to 36.4% in 1998. This increase resulted from:
- Local access services operating, engineering, sales, customer service
and administrative cost increases, from $3.4 million in 1997 as
compared to $12.3 million in 1998. The Company initiated local access
services in September 1997. The increase was necessary to provide the
operations, engineering, customer service and support infrastructure
necessary to accommodate expected growth in the Company's local access
services customer base.
- Increased long-distance general and administrative expenses of $3.2
million in 1998 due to increased personnel and other costs in customer
service, engineering, operations, accounting, human resources, legal
and regulatory, and management information services. Increased
customer service expenses were associated with support of increased
sales volumes and expenditures necessary to integrate customer service
operations across product lines.
- Increased long-distance sales, advertising, telemarketing, carrier
relations, business development and rural services costs totaling
$15.3 million in 1997 compared to $17.6 million in 1998. Increased
selling costs were associated with the introduction of various
marketing plans and other proprietary rate plans and cross promotion
of products and services.
- Cable services operating, engineering, sales, customer service and
administrative cost increases, from $18.8 million in 1997 as compared
to $19.8 million in 1998. The increase was primarily incurred to
promote and market the Company's cable services.
- Internet services operating, engineering, sales, customer service and
administrative cost increases, from $27,000 in 1997 as compared to
$715,000 in 1998. The Company initiated its Internet services in 1998.
The increase was necessary to provide the operations, engineering,
customer service and support infrastructure necessary to accommodate
expected growth in the Company's Internet services customer base.
Depreciation and amortization. Depreciation and amortization expense increased
34.5% from $23.8 million in 1997 to $32.0 million in 1998. The increase is
attributable to the Company's $64.6 million of facilities placed into service
during 1997 for which a full year of depreciation was recorded during the year
ending December 31, 1998 and the $58.4 million of facilities placed into service
in 1998 for which a partial year of depreciation was recorded during 1998 on
equipment and facilities placed into service in 1998.
Interest expense, net. Interest expense, net of interest income, increased 12.5%
from $17.6 million in 1997 to $19.8 million in 1998. This increase resulted
primarily from increases in the Company's average outstanding indebtedness
resulting primarily from construction of new long-distance and Internet
facilities, expansion and upgrades of cable television facilities, and
investment in local access services equipment and facilities. Such increases
were offset in part by increases in the amount of interest capitalized during
1998.
Income tax benefit. Income tax benefit increased from $0.6 million in 1997 to
$4.1 million in 1998 due to the Company incurring a larger net loss before
income taxes and extraordinary item in 1998 as compared to 1997. The Company's
effective income tax rate increased from 25.6% in 1997 to 37.8% in 1998 due to
the net loss and the proportional amount of items that are nondeductible for
income tax purposes.
In conjunction with the 1996 Cable Companies acquisition, the Company incurred a
net deferred income tax liability of $24.4 million and acquired net operating
losses totaling $57.6 million. The Company determined that approximately $20
million of the acquired net operating losses would not be utilized for income
tax purposes, and elected with its December 31, 1996 income tax returns to
forego utilization of such acquired losses under Internal Revenue Code section
1.1502-32(b)(4). Deferred tax assets were not recorded associated with the
foregone losses and, accordingly, no valuation allowance was provided. At
December
54
31, 1998, the Company has (1) tax net operating loss carryforwards of
approximately $51.0 million that will begin expiring in 2008 if not utilized,
and (2) alternative minimum tax credit carryforwards of approximately $2.0
million available to offset regular income taxes payable in future years. The
Company's utilization of remaining net operating loss carryforwards is subject
to certain limitations pursuant to Internal Revenue Code section 382.
Tax benefits associated with recorded deferred tax assets are considered to be
more likely than not realizable through taxable income earned in carryback
years, future reversals of existing taxable temporary differences, and future
taxable income exclusive of reversing temporary differences and carryforwards.
The amount of deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced. The Company estimates that its effective income
tax rate for financial statement purposes will be approximately 38% in 1999. The
Company expects that its operations will generate net income before income taxes
during the carryforward periods to allow utilization of loss carryforwards for
which no allowance has been established.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
Revenues. Total revenues increased 35.7% from $164.9 million in 1996 to $223.8
million in 1997. The Company reported two months' of cable services revenues in
1996 following its acquisition of the Cable Systems effective October 31, 1996.
Cable revenues increased $45.7 million to $55.2 million resulting from 12
months' of activity being recorded in 1997. Long-distance transmission revenues
from commercial, residential, governmental, and other common carrier customers
increased 9.8% from $142.6 million in 1996 to $156.6 million in 1997. This
increase reflected a 9.0% increase in interstate minutes of use to 620.8 million
minutes and a 9.8% increase in intrastate minutes of use to 133.1 million
minutes. Long-distance revenue growth in 1997 was largely due to a 22.3%
increase in revenues from other common carriers (principally MCI and Sprint),
from $48.0 million in 1996 to $58.7 million in 1997 and a 12.7% increase in
private line and private network transmission services revenues, from $14.1
million in 1996 to $15.9 million in 1997.
The above increases in revenues were affected in part by a 1.1% reduction in the
Company's average rate per minute on long-distance traffic from $0.179 per
minute in 1996 to $0.177 per minute in 1997. The decrease in rates resulted from
the Company's promotion of and customers' enrollment in new calling plans
offering discounted rates and length of service rebates, such new plans being
prompted in part by the Company's primary long-distance competitor, AT&T
Alascom, reducing its rates and entry of LECs into long-distance markets served
by the Company. Systems sales and services revenues decreased 6.4% from $10.9
million in 1996 to $10.2 million in 1997, primarily due to a reduced number of
large equipment sales transactions in 1997 as compared to 1996. Other
long-distance revenues decreased $0.7 million to $1.1 million due primarily to
reduced revenues from short term Vsat leases.
Cost of sales and services. Cost of sales and services totaled $92.7 million in
1996 and $111.1 million in 1997. As a percentage of total revenues, cost of
sales and services decreased from 56.2% in 1996 to 49.6% in 1997. The decrease
in cost of sales and services as a percentage of revenues is primarily
attributed to changes in the Company's product mix. The Company reported 12
months of cable operations in 1997 as compared to two months in 1996. Cable cost
of sales and services as a percentage of sales are less than long-distance and
local services cost of sales and services as a percentage of sales. The increase
in cable revenues as a percentage of total revenues (5.8% in 1996 to 24.7% in
1997) resulted in an overall decrease in the Company's cost of sales and
services as a percentage of sales.
Additionally, cost of sales and services as a percentage of revenues were
affected in part by reductions in the rate per minute billed to the Company for
the local access and interstate termination services it obtains from third
parties. Decreases in 1997 cost of sales and services as compared to 1996 were
offset in part by refunds in the first two quarters of 1996 aggregating
approximately $960,000 from a LEC and the National Exchange Carriers Association
in respect of earnings by them that exceeded regulatory requirements.
55
Local access services cost of sales and services totaled 43.8% as a percentage
of 1997 local access services revenues. Internet services cost of sales and
services totaled 132.4% as a percentage of 1997 Internet services revenues. The
Company's local access and Internet services operations commenced in 1997.
Fluctuations in cost of sales and services as a percentage of revenues are
expected to occur as start-up products develop into mature product lines.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 58.6% from $46.4 million in 1996 to $73.6
million in 1997, and, as a percentage of revenues, increased from 28.1% in 1996
to 32.9% in 1997. This increase resulted from:
- The Company's reporting 12 months' of cable television selling,
general and administrative expenses in 1997 ($18.8 million) as
compared to two months' in 1996 ($3.0 million).
- Operating, engineering, sales, customer service and administrative
costs totaling $4.1 million as compared to $870,000 in 1996 associated
with the Company's local services segment which initiated service in
September 1997.
- Increased telecommunication general and administrative expenses of
$5.1 million in 1997 due to increased personnel and other costs in
customer service, engineering, operations, accounting, human
resources, legal and regulatory, and management information services.
Cost increases were associated with the development, introduction, or
planned introduction, and support of new products and services
including cable television services, rural message and data telephone
services, PCS services, and Internet services. Increased customer
service expenses were associated with support of increased sales
volumes and expenditures necessary to integrate customer service
operations across product lines.
- Bad debt expense totaling $3.0 million for 1997 compared to $1.7
million in 1996 (directly associated with increased revenues).
- Increased long-distance segment sales, advertising, telemarketing,
carrier relations, business development and rural services costs
totaling $13.0 million in 1996 compared to $15.3 million in 1997.
Increased selling costs were associated with the introduction of
various marketing plans and other proprietary rate plans and cross
promotion of products and services.
Depreciation and amortization. Depreciation and amortization expense increased
153.2% from $9.4 million in 1996 to $23.8 million in 1997. Of this increase,
$13.3 million resulted from the Company's acquisition of the cable systems
effective October 31, 1996, with the balance of the increase attributable to the
Company's $38.6 million investment in facilities during 1996 for which a full
year of depreciation was recorded during the year ending December 31, 1997 and
the 1997 investment of $73.7 million in facilities for which a partial year of
depreciation was recorded during 1997.
Interest expense, net. Interest expense, net of interest income, increased
375.7% from $3.7 million in 1996 to $17.6 million in 1997. This increase
resulted primarily from increases in the Company's average outstanding
indebtedness resulting primarily from its acquisition of the Cable Systems,
construction of new facilities in rural Alaska, expansion and upgrades of cable
television facilities, and investment in local services equipment and
facilities. Such increases were offset in part by increases in the amount of
interest capitalized during 1997.
Loss on extinguishment of debt. The Company recorded a net loss on
extinguishment of debt of $521,000 in 1997 resulting from refinancing its
previously outstanding Senior Credit Facility effective August 1, 1997. The loss
resulted from the write-off of unamortized deferred debt issuance costs. The
loss is reported in the accompanying Consolidated Financial Statements net of an
income tax benefit of $180,000.
Income tax expense. Income tax expense decreased from $5.2 million in 1996 to a
benefit of $0.6 million in 1997 due to the Company incurring a net loss before
income taxes and extraordinary item in 1997 as compared to net earnings in 1996.
The Company's effective income tax rate decreased from 41.2% in 1996
56
to 25.6% in 1997 due to the net loss and the proportional amount of items that
are nondeductible for income tax purposes.
SEASONALITY; FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The following chart provides selected unaudited statement of operations data
from the Company's quarterly results of operations during 1998 and 1997:
(Amounts in thousands, except per share amounts)
-------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------
1998
----
Revenues
Long-distance services $ 42,034 45,838 44,478 42,306 174,656
Cable services $ 14,201 14,041 14,484 14,914 57,640
Local access services $ 1,014 2,048 2,744 4,102 9,908
Internet services $ 903 1,014 1,060 1,614 4,591
-------------------------------------------------------------
Total revenues $ 58,152 62,941 62,766 62,936 246,795
Operating income $ 2,437 1,447 1,730 3,230 8,844
Net income (loss) $ (1,616) (2,066) (2,076) (1,039) (6,797)
Basic EPS $ (0.03) (0.04) (0.04) (0.02) (0.14)
Diluted EPS $ (0.03) (0.04) (0.04) (0.02) (0.14)
1997
----
Revenues
Telecommunications services $ 39,201 42,097 44,378 42,176 167,852
Cable services $ 13,656 14,055 13,294 14,160 55,165
Local access services $ --- --- 255 355 610
Internet services $ 24 34 29 95 182
-------------------------------------------------------------
Total revenues $ 52,881 56,186 57,956 56,786 223,809
Operating income $ 3,292 2,786 3,786 5,518 15,382
Loss on debt extinguishment $ --- --- 433 88 521
Net income (loss) $ (525) (832) (928) 102 (2,183)
Basic extraordinary item per share $ --- --- (0.01) --- (0.01)
Diluted extraordinary item per share $ --- --- (0.01) --- (0.01)
Basic net loss per share $ (0.01) (0.02) (0.02) --- (0.05)
Diluted net loss per share $ (0.01) (0.02) (0.02) --- (0.05)
Total revenues for the quarter ended December 31, 1998 ("fourth quarter") were
$62.9 million, representing a 0.2% increase from total revenues in the third
quarter of 1998 ("third quarter") of $62.8 million. Increased new business line
revenues (local access services and Internet services) were offset by decreased
long-distance services revenues. The decrease in long-distance services revenues
resulted in part from a 7.4% decrease in minutes of traffic carried during the
fourth quarter (approximately 15.3 million minutes) as compared to the third
quarter and a decrease in the average rate per minute billed during the fourth
quarter (approximately $0.004) as compared to the third quarter (a 2.2%
decrease). Entry of two LECs into the Anchorage area long-distance market
contributed to the reductions in revenue and minutes of use. Partially
offsetting this decrease was an increase in cable services revenues to $14.9
million in the fourth quarter from $14.5 million in the third quarter. As
further described below, cable revenues are generally higher during the winter
months as compared to the summer months.
Cost of sales and services for the third and fourth quarters were consistent at
approximately $29.7 million. As a percentage of revenues, fourth quarter cost of
sales and services was 47.2% as compared to 47.3 % for the third quarter.
57
Selling, general and administrative expenses for the third and fourth quarters
were consistent at approximately $23.0 million. As a percentage of sales, fourth
quarter selling, general and administrative expenses were 36.5% as compared to
36.7 % for the third quarter.
The Company reported a net loss of $1.1 million for the fourth quarter as
compared to a net loss of $2.1 million during the third quarter. The reduced net
loss was primarily attributable to reduced depreciation expense during the
fourth quarter as compared to the third quarter. The Company forecasts annual
capital expenditures and computes depreciation expense during the year based on
such forecasts. The actual amount of capital additions placed into service in
1998 was less than the estimates used to compute depreciation expense during
prior quarters of 1998, resulting in reduced depreciation expense in the fourth
quarter.
Long-distance revenues have historically been highest in the summer months as a
result of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial fishing, and oil and
gas activities. Cable television revenues, on the other hand, are higher in the
winter months because consumers spend more time at home and tend to watch more
television during these months. Local service operations are not expected to
exhibit significant seasonality. The Company's ability to implement construction
projects is also reduced during the winter months because of cold temperatures,
snow and short daylight hours.
LIQUIDITY AND CAPITAL RESOURCES
The Company's 1998 cash flows from operating activities totaled $21.8 million,
net of changes in the components of working capital. Additional sources of cash
during 1998 included long-term borrowings of $103.2 million, release to the
Company of $39.4 million of cash restricted to fund capital expenditures,
repayments of notes receivable totaling $1.8 million, proceeds from GCI's
issuance of a stock warrant totaling $708,000, and class A common stock issuance
proceeds totaling $190,000. The Company's expenditures for property and
equipment, including construction in progress, totaled $149.0 million and $64.6
million in 1998 and 1997, respectively. Uses of cash during 1998 included
repayment of $2.0 million of long-term borrowings and capital lease obligations,
purchases of other assets totaling $3.1 million, payment of deferred debt and
stock issuance costs totaling $1.7 million, an increase in notes receivable of
$1.7 million, and purchase of GCI's common stock to fund deferred compensation
agreements totaling $568,000.
Net receivables increased $8.7 million from December 31, 1997 to December 31,
1998 resulting from increased revenues in 1998 as compared to 1997, and from
receivables associated with the Company's provision of its SchoolAccess(TM)
services which totaled $4.5 million at December 31, 1998. The Company is
processing reimbursement requests for each of the schools utilizing its
SchoolAccess(TM) services for funding from the new federal School and Libraries
Corporation. The Company expects payment of outstanding balances during the
second and third quarters of 1999.
Working capital totaled $8.3 million at December 31, 1998, a $13.3 million
increase from the working capital deficit of $5.0 million as of December 31,
1997. The increase in working capital is primarily attributed to increased cash
balances from 1998 operating activities including increases in trade accounts
receivable, and cash obtained through the Company's credit agreements, stock
option and stock warrant transactions.
The Holdings $200,000,000 ($150,000,000 as amended) and $50,000,000 credit
facilities mature June 30, 2005. The Holdings Loan facilities were amended in
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.
$106.7 million and $64.7 million were drawn on the credit facilities as of
December 31, 1998 and 1997,
58
respectively. Amounts drawn on the credit agreements during 1998 were used to
fund property and equipment expansions and upgrades and provided working capital
necessary for new product lines (local access services and Internet services).
On April 13, 1999, the Company obtained amendments from its lenders that are
parties to its Holdings credit facilities (see note 6 to the Accompanying Notes
to Consolidated Financial Statements). These amendments contain, among other
things, provisions for payment of a one-time amendment fee of 0.25% of the
aggregate commitment, an increase in the commitment fee by 0.125% per annum on
the unused portion of the commitment, and an increase in the interest rate by
0.25%. The amended facilities reduce the aggregate commitment by $50 million to
$200 million, and limit capital expenditures to $35 million in 1999, $35 million
in 2000 with no limits thereafter (excluding amounts to be paid for purchased
satellite transponder facilities). The amended facilities require that Holdings
receive $20 million in proceeds from a GCI preferred stock issuance by May 31,
1999 (see below).
The amended Holding's credit facilities and GCI, Inc.'s public notes (see note 6
to the accompanying Notes to Consolidated Financial Statements) contain
restrictions on the operations and activities of the Company, including
requirements that the Company 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 of Holdings
and certain of its subsidiaries to exceed 3.5 to 1.0 through March 31, 1999 (3.0
to 1.0 from April 1, 1999 through December 31, 1999), total debt to annualized
operating cash flow to exceed 7.0 to 1.0 from closing of the amendments to June
30, 1999 (6.25 to 1.00 from July 1, 1999 through March 31, 2000), and annualized
operating cash flow to interest expense to exceed 1.5 to 1.0 from closing of the
amendments to September 30, 1999 (1.75 to 1.0 from October 1, 1999 through March
31, 2000). Each of the foregoing ratios decreases in specified increments during
the life of the credit facility. The credit facility requires Holdings to
maintain a ratio of annualized operating cash flow to debt service of Holdings
and certain of its subsidiaries of at least 1.25 to 1.0, and annualized
operating cash flow to fixed charges of at least 1.0 to 1.0 (which adjusts to
1.05 to 1.0 in April, 2003 and thereafter). The public notes impose a
requirement that the leverage ratio of GCI, Inc. and certain of its subsidiaries
will not exceed 7.5 to 1.0 prior to December 31, 1999 and 6.0 to 1.0 thereafter,
subject to the ability of GCI, Inc. and certain of its subsidiaries to incur
specified permitted indebtedness without regard to such ratios.
On January 27, 1998 Alaska United closed a $75 million project finance facility
("Fiber Facility") to construct a fiber optic cable system connecting Anchorage,
Fairbanks, Valdez, Whittier, Juneau and Seattle (see note 11 to the accompanying
Notes to Consolidated Financial Statements). The Fiber Facility provides up to
$75 million in construction financing and 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 the Company's option, the lender's prime rate
plus 1.25%-1.5% after the project completion date and when the loan balance is
$40,000,000-60,000,000 or less. Alaska United is required to pay a commitment
fee equal to 0.375% per annum on the unused portion of the commitment. $61.2
million was borrowed under the facility at December 31, 1998. 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 the Company 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 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.
Additional covenants pertain to the timely completion of certain project
construction milestones. The Fiber Facility also contains a guarantee that
requires, among other terms and conditions, Alaska United complete the project
by the completion date and pay any non-budgeted costs of the project. All of
Alaska United's assets, as well as a pledge of the partnership interests' owning
Alaska United, collateralize the Fiber Facility. Construction of the fiber
facility was completed and the facility was placed into service on February 4,
1999. The project was completed on-budget.
59
The Company will use approximately half the capacity of the Alaska United
project to carry its own traffic, in addition to its existing owned and leased
facilities. One of the Company's large commercial customers signed agreements in
February and March 1999 for the immediate lease of three DS3 circuits on Alaska
United facilities within Alaska, and between Alaska and the lower 48 states. The
lease agreements provide for three year terms, with renewal options for
additional terms. The Company continues to pursue opportunities to lease
capacity on its system.
The Company's expenditures for property and equipment, including construction in
progress, totaled $149.0 million and $65.5 million during 1998 and 1997,
respectively. The Company anticipates that its capital expenditures in 1999 may
total as much as $68.5 million, including approximately $43.5 million for
satellite transponders. Planned capital expenditures over the next five years
include those necessary for continued expansion of the Company's long-distance,
local exchange and Internet facilities, the development and construction of a
PCS network, and continued upgrades to its cable television plant. Sources of
funds for these planned capital expenditures are expected to include internally
generated cash flows and borrowings under the Company's credit facilities
described above.
The Company's ability to invest in discretionary capital and other projects will
depend upon its future cash flows and access to borrowings under its credit
facilities. Management anticipates that cash flow generated by the Company and
borrowings under its credit facilities will be sufficient to fund capital
expenditures and its working capital requirements. Should cash flows be
insufficient to support additional borrowings, such investment in capital
expenditures will likely be reduced.
The Company entered into a purchase and lease-purchase option agreement in
August 1995 for the acquisition of satellite transponders to meet its long-term
satellite capacity requirements. The launch of the satellite in August 1998
failed. The Company did not assume launch risk and the launch has been
rescheduled for the fourth quarter of 1999. The Company will continue to lease
transponder capacity until the delivery of the transponders on the replacement
satellite. The balance payable upon expected delivery of the transponders during
the fourth quarter of 1999 in addition to the $9.1 million deposit previously
paid totals approximately $43.5 million.
On April 2, 1999 the Company received commitments for the issuance of 20,000
shares of convertible redeemable accreting preferred stock ("Preferred Stock").
Proceeds totaling $20 million (before payment of costs and expenses) will be
used for general corporate purposes and to provide additional liquidity. The
Company's amended Senior Holdings Loan facilities limit use of such proceeds
(see note 6 to the accompanying Notes to Consolidated Financial Statements). The
Preferred Stock contains a $1,000 per share liquidation preference, plus accrued
but unpaid dividends and fees. Dividends will be payable semi-annually at the
rate of 8.5% of the liquidation preference. Prior to the five-year anniversary
following closing, dividends are payable, at the Company's option, in cash or in
additional fully-paid shares of Preferred Stock. Dividends are payable only in
cash following the five-year anniversary of closing. Mandatory redemption is
required 12 years from the date of closing. The Company and Holders of the
Preferred Stock will have the right after the four-year anniversary of closing
(or occurrence of a triggering event, as defined) to convert the stated value,
in whole or in part, into registered shares of GCI class A common stock. The
conversion price will be the lesser of $6.00 or 120% of the average closing
price of GCI's class A common stock for the 10 trading days prior to closing.
At any time subsequent to the third anniversary following closing, and assuming
the stock is trading at two times the conversion price, the Company may require
immediate conversion at a price equal to two times the conversion price. The
Preferred Stock, subject to lender approval, will be exchangeable in whole or in
part, at the Company's option, into subordinated debt with terms and conditions
comparable to those governing the Preferred Stock. The Preferred Stock will be
senior to all other classes of the Company's equity securities, and will have
voting rights equal to that number of shares of common stock into which it can
be
60
converted. The holders of the Preferred Stock will, as a class, be entitled to
elect one GCI director. Closing is expected to take place prior to April 30,
1999.
The long-distance services, local access services, cable services, Internet
services and wireless services industries are experiencing increasing
competition and rapid technological changes. The Company's future results of
operations will be affected by its ability to react to changes in the
competitive environment and by its ability to implement new technologies. The
Company is unable to determine how competition, technological changes and its
net operating losses will affect its ability to obtain financing.
The Company believes that it will be able to meet its current and long-term
liquidity and capital requirements, including fixed charges, through its cash
flows from operating activities, existing cash, cash equivalents, short-term
investments, credit facilities, and other external financing and equity sources.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Accounting Standards Board issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," effective for years
beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments imbedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge criteria are met. Special accounting for
qualifying hedges allow a derivative's gains or 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. Management of the Company expects that adoption of
SFAS No. 133 will not have a material impact on the Company's year-end 2000
financial statements.
In April 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position ("SOP") 98-5, "Reporting on the costs of Start-Up
Activities". SOP 98-5 provides guidance on the financial reporting of start-up
costs and organization costs and requires costs of start-up activities and
organization costs to be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998.
Management of the Company expects that the adoption of SOP 98-5 will result in a
one-time expense of approximately $365,000 (net of income tax effect) in the
first quarter of 1999 associated with the write-off of unamortized start-up
costs.
Alaska Economy
The Company offers telecommunication and video services to customers primarily
throughout Alaska. As a result of this geographic concentration, the Company's
growth and operations depend upon economic conditions in Alaska. The economy of
Alaska is dependent upon the natural resource industries, and in particular oil
production, as well as tourism, government, and United States military spending.
Any deterioration in these markets could have an adverse impact on the Company.
Oil revenues over the past several years have contributed in excess of 75% of
the revenues from all segments of the Alaska economy and are expected to account
for 73% in 1999.
The volume of oil transported by the TransAlaska Oil Pipeline System over the
past 20 years has been as high as 2.0 million barrels per day in 1988. Over the
past several years, it has begun to decline. Market prices for North Slope oil
declined to below $10 per barrel in 1998, well below the average price per
barrel used by the State of Alaska to budget its oil related revenues. Oil
companies and service providers have announced cost cutting measures to offset a
portion of the declining revenues. Oil company and related oil field service
company layoffs reportedly will result in a reduction of oil industry jobs by at
least 39 percent in 1999.
61
The effects of low oil prices will impact the state of Alaska's economy, and is
expected to particularly hurt state and local government and oil service
companies. As much as half of the drilling fleet that worked on the slope in
1998 could be idle during 1999. Oil field service and drilling contractors cut
operating costs to adjust for decreasing production and exploration. The
Company, as an outsourcing services provider to the oil industry, reduced its
outsourcing work force by 8 employees in February 1999.
Since oil revenues to the state of Alaska are expected to fall significantly
short of budgeted revenues, (estimated at $1.04 billion for the coming budget
year), the Governor of the state of Alaska has announced his intention to
implement cost-cutting and revenue enhancing measures. The State of Alaska
maintains surplus accounts that are intended to fund budgetary shortfalls and
would be expected to fund a portion of the revenue shortfall.
BP Amoco announced in April 1999 its intention to purchase ARCO for $26.8
billion. BP Amoco and ARCO together reportedly hold approximately 75 percent of
the ownership of the Alaska North Slope oil fields and in the company that
operates the Trans-Alaska Pipeline System. Alaska law stipulates that no single
company can hold drilling leases to more than 500,000 onshore state-owned acres.
The BP Amoco-ARCO combination would control about 860,000 acres, however the
companies have reportedly said they will give up 360,000 acres to comply with
Alaska laws. Realignment of operations following the acquisition reportedly will
result in the layoff of 400 positions in Alaska.
No assurance can be given that oil companies doing business in Alaska will be
successful in discovering new fields or further developing existing fields which
are economic to develop and produce oil with access to the pipeline or other
means of transport to market, even with the reduced level of royalties. The
Company is not able to predict the effect of declines in the price of North
Slope oil or the acquisition of ARCO by BP Amoco on Alaska's economy or on the
Company. See Part I, Item 1. Business, Geographic Concentration and Alaska
Economy.
Seasonality
Long-distance revenues have historically been highest in the summer months as a
result of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial fishing, and oil and
gas activities. Cable television revenues, on the other hand, are higher in the
winter months because consumers tend to watch more television, and spend more
time at home, during these months. The Company's local access services revenues
are not expected to exhibit significant seasonality. The Company's Internet
access services are expected to reflect seasonality trends similar to the cable
television segment. The Company's ability to implement construction projects is
reduced during the winter months because of cold temperatures, snow and short
daylight hours.
Year 2000 Costs
Many financial information and operational systems in use today may not be able
to interpret dates after December 31, 1999 because such systems allow only two
digits to indicate the year in a date. As a result, such systems are unable to
distinguish January 1, 2000 from January 1, 1900, which could have adverse
consequences on the operations of an entity and the integrity of information
processing. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a shut down in a
company's operations, a temporary inability to process transactions, send
invoices or engage in similar normal business activities. This potential problem
is referred to as the "Year 2000" or "Y2K" issue.
State of readiness. The Company has undertaken various initiatives to evaluate
the Year 2000 readiness of the products and services sold by the Company
("Products"), the information technology systems used in the Company's
operations ("IT Systems"), its non-IT systems, such as power to its facilities,
HVAC systems, building security, voice mail and other systems, as well as the
readiness of its customers and suppliers. The
62
Company has identified eight Year 2000 target areas that cover the entire scope
of the Company's business and has internally established teams committed to
completing an 8-step Compliance Validation Process ("CVP") for each target area.
Each team is expected to fully complete this process on or before September 1,
1999. The table below identifies the Company's target areas as well as the
8-step CVP with its expected timeline. Team activity is currently focused
towards the process of completing Phase 2.
----------------------------------------------- ---------------------------------------------------------------------
Year 2000 Target Areas Compliance Validation Process
----------------------------------------------- ---------------------------------------------------------------------
1. Business Computer Systems PHASE 1
2. Technical Infrastructure 1. Team Formation Completed 1st quarter 1997
3. End-User Computing 2. Inventory Assessment Completed 4th quarter 1998
4. Switching and Head-end Equipment 3. Compliance Assessment Completed 4th quarter 1998
5. Logistics 4. Risk Assessment Completed 4th quarter 1998
6. Facilities
7. Customers ------------------------------- -------------------------------------
8. Suppliers/Key Service Providers PHASE 2
5. Resolution/Remediation Expected completion 2nd quarter 1999
6. Validation Expected completion 3rd quarter 1999
7. Contingency Plan Expected completion 3rd quarter 1999
8. Sign-Off Acceptance Expected completion 4th quarter 1999
----------------------------------------------- ------------------------------- -------------------------------------
In 1997, the Company established a corporate-wide Year 2000 task force to
address Y2K issues. This effort is comprehensive and encompasses software,
hardware, electronic data interchange, networks, PC's, facilities, embedded
chips, century certification, supplier and customer readiness, contingency
planning, and domestic and international operations. The Company is currently on
schedule and is more than 50% complete as of December 31, 1998. The Company has
tested, replaced or upgraded most of its critical business applications and
systems and has begun the century testing phase for these critical technology
systems. The target date to repair or replace the remaining critical business
information systems is June 30, 1999. The Company is assessing its telephone and
cable systems and equipment and the target date to complete equipment and
facilities efforts is also June 30, 1999. The Company has prioritized its
third-party relationships as critical, severe or sustainable, has completed the
assessment phase for third parties (except for assessment of its key customers
which is scheduled to be complete in March 1999), has requested a Y2K contract
warranty in many new key contracts and is developing contingency plans for
critical third parties, including key customers, suppliers and other service
providers.
With respect to the Company's relationships with third parties, the Company
relies both domestically and internationally upon various vendors, governmental
agencies, utility companies, telecommunications service companies, delivery
service companies and other service providers. Although these service providers
are outside the Company's control, the Company has mailed letters to those with
whom it believes its relationships are material and has verbally communicated
with some of its strategic customers to determine the extent to which interfaces
with such entities are vulnerable to Year 2000 issues and whether products and
services purchased from or by such entities are Year 2000 ready.
Over 400 companies have been contacted directly by mail, by telephone, through
on-site visits or through inquiry of their Y2K Internet web sites to determine
their state of readiness. Responses vary from confirmation that the supply of
products or services provided to the Company will continue without interruption
or delay through the year 2000, to providing their plans for making their
products or service delivery systems Y2K compliant. The Company is currently
evaluating the sufficiency of the responses received from these third parties.
The Company intends to complete follow-up activities, including but not limited
to site surveys, phone surveys and mailings, with significant vendors and
service providers as part of the Phase 2 validation.
63
Costs to address year 2000 issues. Costs related to the Y2K issue are expensed
as incurred and are funded through the Company's operating cash flows and its
credit agreements. Through December 31, 1998, the Company has expensed
incremental remediation costs totaling $1.1 million, with remaining incremental
remediation costs estimated at approximately $2.9 million. Management must
balance the requirements for funding discretionary capital expenditures with
required year 2000 efforts given its limited resources. The Company has not
deferred any critical information technology projects because of its Year 2000
program efforts, which are being addressed primarily through a dedicated team
within the Company's information technology group.
Time and cost estimates are based on currently available information and could
be affected by the ability to correct all relevant computer codes and equipment,
and the Y2K readiness of the Company's business partners, among other factors.
At this time, the Company does not possess information necessary to estimate the
potential financial impact of Year 2000 compliance issues relating to its
vendors, customers and other third parties.
Risk of year 2000 issues. If necessary modifications and conversions by the
Company are not made on a timely basis, or if key third parties are not Y2K
ready, Y2K problems could have a material adverse effect on the Company's
financial condition, results of operations and liquidity. However, the Company
is focusing on identifying and addressing all aspects of its operations that may
be affected by the Year 2000 issue and is addressing the most critical
applications first.
Although the Company considers them unlikely, the Company believes that the
following several situations, not in any particular order, make up the Company's
most reasonably likely worst case Year 2000 scenarios:
- Disruption of electrical power supplies resulting from extended
regional power failure(s). The Company's major switching and
information systems are protected by emergency standby electrical
generators in the event of short-term power outages. If electrical
supplies from regional electric utilities are disrupted for longer
periods of time, the Company may be required to power-down its
electronic switching, head-end and computer equipment. The Company is
closely monitoring electrical utilities that provide service to the
Company for their Year 2000 readiness. Based on their progress reports
and completion of assessments, the Company believes that there will be
no significant impact on its operations in the major communities
served by the Company. Many of the electrical companies serving
smaller rural communities employ equipment that is manual or
controlled by non date-effecting equipment, however they may
experience outages if they do not receive fuel from their suppliers.
- Disruption of a Significant Customer's Ability to Accept Products or
Pay Invoices. The Company's significant customers are large,
well-informed customers, mostly in the telecommunications and oil and
gas industries, who are disclosing information to their vendors that
indicates they are well along the path toward Year 2000 compliance.
These customers have demonstrated their awareness of the Year 2000
issue by issuing requirements of their suppliers and indicating the
stages of identification and remediation which they consider adequate
for progressive calendar quarters leading up to the century mark. The
Company's significant customers, moreover, are substantial companies
that the Company believes would be able to make adjustments in their
processes as required to cause timely payment of invoices.
- Disruption of Supplies and Materials. In early 1998 the Company began
an ongoing process of surveying its vendors with regard to their Year
2000 readiness and is now in the process of assessing and cataloging
their responses to the survey. The Company is hopeful of receiving
adequate responses from remaining critical vendors and many
non-critical vendors within the first two quarters of 1999. The
Company expects to work with vendors that show a need for assistance
or that provide inadequate responses, and in many cases expects that
survey results will be refined significantly by such work. Where
ultimate survey results show that the need arises, the Company will
arrange for back-up vendors before the changeover date. Supplies and
materials necessary for invoicing and other
64
functions will be acquired in bulk prior to December 31, 1999 to
provide an adequate inventory to bridge up to three months of vendor
supply chain disruptions.
- Disruption of the Company's administrative and billing IT systems. The
Company is proceeding with a scheduled upgrade of its current
financial software systems to state-of-the-art systems and such
process has required Year 2000 compliance in the various invitations
for proposals. Year 2000 testing is occurring as upgrades proceed and,
in addition, will occur after all upgrades are completed at the end of
the first quarter of 1999. The Company's billing and information
systems continue to be assessed and remediated. System processes have
been prioritized so that critical date-sensitive systems and
functionality are remediated first. Non-critical systems and
functionality are remediated following critical systems. The Company's
efforts are proceeding on-target and on-budget. Accordingly, the
Company believes that, after assessment and remediation, if any
disruptions do occur, such will be dealt with promptly and will be no
more severe with respect to correction or impact than would be an
unexpected billing or information system error.
- Disruption of the Company's Non-IT Systems. The Company continues to
conduct a comprehensive assessment of all non-IT systems, including
among other things its switching and head-end systems and operations,
with respect to both embedded processors and obvious computer control.
For some systems, upgrades are already scheduled and it is expected
that the Phase 1 assessments will highlight by the end of the second
quarter of 1999 any further remediation needs. Considering the nature
of the equipment and systems involved, the Company expects that the
timing of assessment to be such that it will be able to complete any
remediation efforts on a reasonably short schedule, and in any case
before arrival of the Year 2000. The Company also believes that, after
such assessment and remediation, if any disruptions do occur, such
will be dealt with promptly and will be no more severe with respect to
correction or impact than would be an unexpected breakdown of
well-maintained equipment.
- De-Listing of Company as a Vendor to Certain Customers. Several of the
Company's principal customers have required updated reports in the
form of answers to extensive multiple-choice surveys on the Company's
Year 2000 compliance efforts. According to these customers, failure to
reply to the readiness survey would have led to de-listing as a
service supplier at the present time, resulting in possible current
inability to bid on procurements requiring service delivery in the
future. The Company has responded to these reports on a timely basis.
The Company has not been de-listed as a supplier to any customers.
Several significant customers have scheduled monitoring meetings
during 1999.
Contingency plans. The Company is in the process of developing specific
contingency plans for potential Year 2000 disruptions. The aforementioned 8-step
Compliance Validation Process includes contingency planning by each team and
such plans, as developed, will be carefully reviewed by the Company. The Company
is developing contingency plans for its most critical areas, but details of such
plans will depend on the Company's final assessment of the problem as well as
the evaluation and success of its remediation efforts. Future disclosures will
include contingency plans as they become available.
REGULATORY DEVELOPMENTS
See Part I, Item 1 Business., Regulation, Franchise Authorizations and Tariffs
for regulatory developments affecting the Company.
Inflation
The Company does not believe that inflation has a significant effect on its
operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's Senior Holdings Loan described in note 6 to the financial
statements as well as in Management's Discussion and Analysis carries interest
rate risk. Amounts borrowed under this Agreement bear interest at either Libor
plus 0.75% to 2.25%, depending on the leverage ratio of Holdings and certain of
65
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
1.125%, depending on the leverage ratio of Holdings and certain of its
subsidiaries. Should the lenders' base rate or the leverage ratios change, the
Company's interest expense will increase or decrease accordingly. As of December
31, 1998, the Company had borrowed $106.7 million subject to interest rate risk.
On this amount, a 1% increase in the interest rate would cost the Company
$1,067,000 in additional gross interest cost on an annual basis.
The Company's Fiber Facility described in note 6 to the financial statements as
well as in Management's Discussion and Analysis carries interest rate risk.
Amounts borrowed under this Agreement bear interest at either Libor plus 3.0%,
or at the Company's choice, the lender's prime rate plus 1.75%. The interest
rate will decline to Libor plus 2.5%-2.75%, or at the Company's choice, the
lender's prime rate plus 1.25%-1.5% after the project completion date and when
the loan balance is $60,000,000 or less. Should the lenders' base rate or the
leverage ratios change, the Company's interest expense will increase or decrease
accordingly. As of December 31, 1998, the Company had borrowed $61.2 million
subject to interest rate risk. On this amount, a 1% increase in the interest
rate would cost the Company $612,000 in additional gross interest cost on an
annual basis.
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are filed under this Item,
beginning on Page 67. The financial statement schedules required under
Regulation S-X are filed pursuant to Item 14 of this Report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Incorporated herein by reference from the Company's Proxy Statement for its 1999
Annual Shareholders' meeting.
66
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, 1998 and 1997, 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, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of General
Communication, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/
KPMG LLP
Anchorage, Alaska
March 26, 1999, except for notes 6 and 12, which are dated as of April 13, 1999
67
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
ASSETS 1998 1997
- --------------------------------------------------------------------------------- ----------- -----------
(Amounts in thousands)
Current assets:
Cash and cash equivalents $ 12,008 3,048
----------- -----------
Receivables:
Trade 38,890 29,599
Income taxes (note 7) 4,262 4,752
Other 412 649
----------- -----------
43,564 35,000
Less allowance for doubtful receivables 887 1,070
----------- -----------
Net receivables 42,677 33,930
----------- -----------
Prepaid and other current assets 2,132 2,520
Deferred income taxes, net (note 7) 1,947 1,675
Inventories 1,878 2,164
Notes receivable (note 4) 650 897
----------- -----------
Total current assets 61,292 44,234
----------- -----------
Restricted cash (note 11) --- 39,406
----------- -----------
Property and equipment in service, at cost (notes 6, 9, 10, and 11):
Land and buildings 1,109 981
Telephony distribution systems 144,896 116,016
Cable television distribution systems 89,736 69,445
Support equipment 42,056 32,596
Transportation equipment 2,183 2,643
Property and equipment under capital leases 2,819 2,718
----------- -----------
282,799 224,399
Less accumulated depreciation 82,972 58,406
----------- -----------
Net property and equipment in service 199,827 165,993
Construction in progress 119,645 18,513
----------- -----------
Net property and equipment 319,472 184,506
----------- -----------
Cable franchise agreements, net of amortization of $11,184 and $6,022 at
December 31, 1998 and 1997, respectively (note 2) 195,308 200,470
Other intangible assets, net of amortization (notes 2 and 5) 45,874 46,064
Deferred loan and Senior Notes costs, net of amortization 9,877 9,379
Transponder deposit (note 11) 9,100 9,100
Undersea fiber optic cable deposit (note 11) --- 9,094
Notes receivable (note 4) 1,432 1,331
Other assets, at cost, net of amortization 3,761 1,718
----------- -----------
Total other assets 265,352 277,156
----------- -----------
Total assets $ 646,116 545,302
=========== ===========
See accompanying notes to consolidated financial statements.
(Continued)
68
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Continued)
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- --------------------------------------------------------------------------------- ----------- -----------
(Amounts in Thousands)
Current liabilities:
Current maturities of long-term debt (note 6) $ 1,799 1,634
Current maturities of obligations under capital leases (notes 10
and 11) 511 198
Accounts payable 27,550 24,965
Accrued interest 8,072 7,649
Accrued payroll and payroll related obligations 6,555 5,680
Accrued liabilities 3,197 5,111
Subscriber deposits and deferred revenues 5,300 3,898
Accrued income taxes (note 7) --- 111
----------- -----------
Total current liabilities 52,984 49,246
Long-term debt, excluding current maturities (note 6) 349,858 248,450
Obligations under capital leases, excluding
current maturities (note 11) 1,189 400
Obligations under capital leases due to related party, excluding
current maturities (notes 10 and 11) 486 590
Deferred income taxes, net of deferred income tax benefit (note 7) 38,275 38,904
Other liabilities 3,317 3,273
----------- -----------
Total liabilities 446,109 340,863
----------- -----------
Stockholders' equity (notes 2, 3, 6, 7 and 8): Common stock (no par):
Class A. Authorized 100,000,000 shares; issued and outstanding
45,895,415 and 45,279,045 shares at December 31, 1998 and
1997, respectively 172,708 170,322
Class B. Authorized 10,000,000 shares; issued and outstanding 4,060,620
and 4,062,892 shares at December 31, 1998 and 1997, respectively;
convertible on a share-per-share basis into
Class A common stock 3,432 3,432
Less cost of 347,958 and 202,768 Class A common shares held in treasury
at December 31, 1998 and 1997, respectively (1,607) (1,039)
Paid-in capital 5,609 4,425
Notes receivable issued upon stock option exercise (note 4) (637) ---
Retained earnings 20,502 27,299
----------- -----------
Total stockholders' equity 200,007 204,439
----------- -----------
Commitments and contingencies (notes 10, 11 and 12)
Total liabilities and stockholders' equity $ 646,116 545,302
=========== ===========
See accompanying notes to consolidated financial statements.
69
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------- ------------ -------------
(Amounts in thousands except per share amounts)
Revenues (notes 9 and 10) $ 246,795 223,809 164,894
Cost of sales and services 116,073 111,077 92,664
Selling, general and administrative expenses 89,833 73,583 46,412
Depreciation and amortization expense (note 9) 32,045 23,767 9,409
------------- ------------ -------------
Operating income (note 9) 8,844 15,382 16,409
Interest expense, net (notes 3 and 6) 19,764 17,617 3,719
------------- ------------ -------------
Net earnings (loss) before income taxes and
extraordinary item (10,920) (2,235) 12,690
Income tax expense (benefit) (notes 3 and 7) (4,123) (573) 5,228
------------- ------------ -------------
Net earnings (loss) before extraordinary loss on early
extinguishment of debt (6,797) (1,662) 7,462
Loss on early extinguishment of debt, net of income tax
benefit of $180 (note 6) --- 521 ---
------------- ------------ -------------
Net earnings (loss) $ (6,797) (2,183) 7,462
============= ============ =============
Basic earnings (loss) per common share:
Net earnings (loss) before extraordinary loss $ (0.14) (0.04) 0.28
Extraordinary loss 0.00 (0.01) 0.00
------------- ------------ -------------
Net earnings (loss) $ (0.14) (0.05) 0.28
============= ============ =============
Diluted earnings (loss) per common share:
Net earnings (loss) before extraordinary loss $ (0.14) (0.04) 0.27
Extraordinary loss 0.00 (0.01) 0.00
------------- ------------ -------------
Net earnings (loss) $ (0.14) (0.05) 0.27
============= ============ =============
See accompanying notes to consolidated financial statements.
70
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
Class A Notes
Shares of Class A Class B Shares Receiv-
Common Stock Common Common Held in Paid-in able Retained
(Amounts in thousands) Class A Class B Stock Stock Treasury Capital Issued Earnings
-------------------------------------------------------------------------------
Balances at December 31, 1995 19,680 4,176 $13,912 3,432 (389) 4,041 --- 22,020
Net earnings --- --- --- --- --- --- --- 7,462
Class B shares converted to Class A shares 102 (102) --- --- --- --- --- ---
Tax effect of excess stock compensation expense
for tax purposes over amounts recognized for
financial reporting purposes (note 7) --- --- --- --- --- 187 --- ---
Shares issued to MCI (notes 2 and 8) 2,000 --- 13,000 --- --- --- --- ---
Shares issued pursuant to acquisitions, net of
costs totaling $432 (note 2) 14,723 --- 86,278 --- --- --- --- ---
Shares purchased and held in Treasury --- --- --- --- (621) --- --- ---
Shares issued under stock option plan 82 --- 231 --- --- --- --- ---
Shares issued and issuable under officer stock
option agreements --- --- --- --- --- 1 --- ---
-------------------------------------------------------------------------------
Balances at December 31, 1996 36,587 4,074 113,421 3,432 (1,010) 4,229 --- 29,482
Net loss --- --- --- --- --- --- --- (2,183)
Class B shares converted to Class A shares 11 (11) --- --- --- --- --- ---
Tax effect of excess stock compensation expense
for tax purposes over amounts recognized for
financial reporting purposes (note 7) --- --- --- --- --- 65 --- ---
Shares issued upon public offering, net of
issuance costs of $4,024 (note 8) 7,000 --- 46,726 --- --- --- --- ---
Shares issued upon conversion of convertible note
net of fees of $16 (notes 2 and 8) 1,538 --- 9,983 --- --- --- --- ---
Shares acquired pursuant to officer deferred
compensation agreement --- --- --- --- (29) --- --- ---
Shares issued under stock option plan 57 --- 192 --- --- 63 --- ---
Shares issued and issuable under officer stock
option agreements 86 --- --- --- --- 68 --- ---
-------------------------------------------------------------------------------
Balances at December 31, 1997 45,279 4,063 170,322 3,432 (1,039) 4,425 --- 27,299
Net loss --- --- --- --- --- --- --- (6,797)
Class B shares converted to Class A shares 2 (2) --- --- --- --- --- ---
Tax effect of excess stock compensation expense
for tax purposes over amounts recognized for
financial reporting purposes (note 7) --- --- --- --- --- 157 --- ---
Shares purchased and held in Treasury --- --- --- --- (568) --- --- ---
Shares issued under stock option plan (note 8) 315 --- 827 --- --- 319 --- ---
Notes issued upon stock option exercise (note 4) --- --- --- --- --- --- (637) ---
Shares issued to Employee Stock Purchase Plan 299 --- 1,574 --- --- --- --- ---
Warrants issued (note 8) --- --- --- --- --- 708 --- ---
Stock offering issuance costs --- --- (15) --- --- --- --- ---
-------------------------------------------------------------------------------
Balances at December 31, 1998 45,895 4,061 $172,708 3,432 (1,607) 5,609 (637) 20,502
===============================================================================
See accompanying notes to consolidated financial statements.
71
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------- ----------- ------------
(Amounts in thousands)
Cash flows from operating activities:
Net earnings (loss) $ (6,797) (2,183) 7,462
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization 32,045 23,767 9,409
Deferred income tax (benefit) expense (744) 4,410 2,252
Employee Stock Purchase Plan expense funded with stock 1,574 --- ---
Deferred compensation and compensatory stock options 376 477 507
Disposals of property and equipment 62 71 30
Loss on early extinguishment of debt --- 701 ---
Bad debt expense (recovery), net of write-offs (183) 473 (34)
Other noncash income and expense items 92 (125) (42)
Change in operating assets and liabilities (note 3) (4,643) 3,202 2,724
------------- ------------- ------------
Net cash provided by operating activities 21,782 30,793 22,308
------------- ------------- ------------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (notes 2 and 3) --- (547) (72,818)
Purchases of property and equipment, including construction period
interest (148,973) (64,644) (38,642)
Restricted cash investment 39,406 (39,406) ---
Purchases of other assets and intangible assets (3,140) (1,292) (10,959)
Payment of undersea fiber optic cable deposit --- (9,094) ---
Notes receivable issued (1,715) (698) (515)
Payments received on notes receivable 1,769 32 288
------------- ------------- ------------
Net cash used in investing activities (112,653) (115,649) (122,646)
------------- ------------- ------------
Cash flows from financing activities:
Long-term borrowings - senior notes --- 180,000 ---
Long-term borrowings - bank debt 103,224 88,305 208,000
Repayments of long-term borrowings and capital lease obligations (2,017) (231,021) (5,039)
Retirement of bank debt assumed --- --- (105,200)
Proceeds from equity offering --- 50,750 ---
Proceeds from common stock issuance 190 192 13,231
Payment of debt and stock issuance costs (1,706) (13,642) (701)
Proceeds from warrant issuance 708 --- ---
Purchase of treasury stock (568) (29) (621)
------------- ------------- ------------
Net cash provided by financing activities 99,831 74,555 109,670
------------- ------------- ------------
Net increase (decrease) in cash and cash equivalents 8,960 (10,301) 9,332
Cash and cash equivalents at beginning of year 3,048 13,349 4,017
------------- ------------- ------------
Cash and cash equivalents at end of year $ 12,008 3,048 13,349
============= ============= ============
See accompanying notes to consolidated financial statements.
72
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(l) Organization and Summary of Significant Accounting Principles
(a) Organization and Business
General Communication, Inc. ("GCI"), an Alaska corporation, was
incorporated in 1979. GCI and its direct and indirect
subsidiaries (collectively, the "Company") offer long-distance
telephone service between Anchorage, Fairbanks, Juneau, and other
communities in Alaska and the remaining United States and foreign
countries. Cable television services are offered throughout
Alaska and facilities-based competitive local access services are
offered in Anchorage, Alaska. The Company provides services to
certain common carriers terminating traffic in Alaska, interstate
and intrastate private line services, Internet services, managed
services to certain commercial customers and sells and services
dedicated communications systems and related equipment. Private
network point-to-point data and voice transmission services
between Alaska, Hawaii and the western contiguous United States
are offered and the Company owns and leases capacity on two
undersea fiber optic cables used in the transmission of
interstate private line, switched message long-distance and
Internet services between Alaska and the remaining United States
and foreign countries.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of
GCI, its wholly-owned subsidiary GCI, Inc, GCI, Inc.'s
wholly-owned subsidiary GCI Holdings, Inc., GCI Holding Inc.'s
wholly-owned subsidiaries GCI Communication Corp., GCI
Communication Services, Inc. and GCI Cable, Inc., GCI
Communication Services' wholly-owned subsidiary GCI Leasing Co.,
Inc., GCI Transport Company, Inc., GCI Transport Co., Inc.'s
wholly-owned subsidiaries GCI Fiber Co., Inc. and Fiber Hold
Company, Inc. and GCI Fiber Co., Inc.'s and Fiber Hold Company,
Inc.'s wholly owned partnership Alaska United Fiber System
Partnership. All significant intercompany balances and
transactions have been eliminated in consolidation.
(c) Earnings (Loss) Per Common Share
The Company follows the provisions of SFAS No. 128, "Earnings per
Share." Basic earnings (loss) per share is calculated by dividing
income (loss) available to common shareholders by the weighted
average common shares outstanding. Diluted EPS includes the
effect of all potentially dilutive securities, such as options
and convertible preferred stock. Shares used to calculate
earnings (loss) per share consist of the following (amounts in
thousands):
1998 1997 1996
----------- ---------- ----------
Weighted average common shares outstanding 49,186 44,924 26,498
Common equivalent shares outstanding --- --- 802
----------- ---------- ----------
49,186 44,924 27,300
=========== ========== ==========
Common equivalent shares outstanding of 521,000 and 816,000 are
anti-dilutive at December 31, 1998 and 1997, respectively, and
are not included in the diluted net earnings (loss) per share
calculation. Weighted average shares associated with outstanding
stock options totaling 2,071,000, 1,073,000 and 35,000 at
December 31, 1998, 1997 and 1996, respectively, have been
excluded from the diluted earnings (loss) per share calculations
because the options' exercise price was greater than the average
market price of the common shares.
(d) Cash and Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments
that are readily convertible into cash.
73 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(e) Inventories
Inventory of merchandise for resale and parts is stated at the
lower of cost or market. Cost is determined using the first-in,
first-out method for parts and either the first-in, first-out
method or the specific identification method for equipment held
for resale.
(f) Property and Equipment
Telecommunications Property and Equipment
Telecommunications 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 telecommunications
distribution systems and support equipment not placed in service
on December 31, 1998; management intends to place this equipment
in service during 1999.
Telecommunications equipment 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,
ranging from 5 to 24 years for buildings, telecommunications
distribution equipment (including switches and earth stations),
support equipment, transportation equipment and property and
equipment under capital lease. Maintenance and repairs 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.
Cable Television Property and Equipment
Cable television property and equipment is stated at cost. Cable
television equipment depreciation is computed on a straight-line
basis over the estimated useful lives of the assets ranging from
5 to 10 years for cable distribution facilities, head-end
systems, converters, support equipment and transportation
equipment. Maintenance and repairs 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.
(g) 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 which might indicate diminished value. The
assessment of the recoverability is based on whether the asset
can be recovered through undiscounted future cash flows.
Cable franchise agreements represent certain perpetual operating
rights to provide cable services and are being amortized on a
straight-line basis over 40 years.
Goodwill represents the excess of cost over fair value of net
assets acquired and is being amortized on a straight-line basis
over periods of 20 to 40 years.
The cost of the Company's PCS license and related financing costs
have been capitalized as an intangible asset. Once the associated
assets are placed into service, the recorded cost of the license
and related financing costs will begin being amortized over a
40-year period using the straight-line method.
74 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(h) 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. Amortization
of issuance costs for the Alaska United Fiber Facility (see note
6) are charged to Construction in Progress during the
construction period of the undersea fiber optic cable (see note
11).
(i) Other Assets
Other assets are recorded at cost and are amortized on a
straight-line basis over periods of 2-10 years.
(j) Revenue from Services and Products
Revenues generated from long-distance 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. Service 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 generally billed in advance and
are recognized as the associated service is provided. Other
revenues are recognized when the service is provided.
(k) Research and Development and Advertising Expense
The Company expenses advertising and research and development
costs as incurred. Advertising expenses were approximately
$5,028,000, $2,897,000 and $2,411,000 for the years ended 1998,
1997 and 1996, respectively.
(l) Interest Expense
Interest costs incurred during the construction period of
significant capital projects are capitalized. Interest costs
capitalized by the Company totaled $7,764,000, $1,886,000, and
$1,034,000 during the years ended December 31, 1998, 1997 and
1996.
(m) 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.
(n) Stock Option Plan
The Company accounts for its stock option plan in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded
on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996,
the Company adopted SFAS 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") which permits entities to recognize
as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS 123
also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method
defined in SFAS 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS 123.
75 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(o) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(p) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily cash and cash
equivalents and accounts receivable. Excess cash is invested in
high quality short-term liquid money instruments issued by highly
rated financial institutions. At December 31, 1998, substantially
all of the Company's cash and cash equivalents were invested in
short-term liquid money instruments. The Company's customers are
located primarily throughout Alaska. As a result of this
geographic concentration, the Company's growth and operations
depend upon economic conditions in Alaska. The economy of Alaska
is dependent upon the natural resources industries, and in
particular oil production, as well as tourism, government, and
United States military spending. Though limited to one
geographical area, the concentration of credit risk with respect
to the Company's receivables is minimized due to the large number
of customers, individually small balances, short payment terms
and deposit requirements by certain product lines.
(q) 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. The carrying amounts at December 31,
1998 and 1997 for the Company's financial assets and liabilities
approximate their fair values.
(r) Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
The Company adopted the provisions of SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," on January 1, 1996. This Statement 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. Adoption of this Statement did not
have a material impact on the Company's financial position,
results of operations, or liquidity.
(s) New Accounting Pronouncements
In June 1998, the Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities,"
effective for years beginning after June 15, 1999. SFAS No. 133
establishes accounting and reporting standards requiring that
every derivative instrument, including certain derivative
instruments imbedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge criteria are met. Special accounting for
qualifying hedges allow a derivative's gains or 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. Management of the Company expects that
76 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
adoption of SFAS No. 133 will not have a material impact on the
Company's year-end 2000 financial statements.
In April 1998, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position ("SOP") 98-5,
"Reporting on the costs of Start-Up Activities". SOP 98-5
provides guidance on the financial reporting of start-up costs
and organization costs and requires costs of start-up activities
and organization costs to be expensed as incurred. SOP 98-5 is
effective for financial statements for fiscal years beginning
after December 15, 1998. Management of the Company expects that
the adoption of SOP 98-5 will result in a one-time expense of
approximately $365,000 (net of income tax effect) in the first
quarter of 1999 associated with the write-off of unamortized
start-up costs.
(t) Year 2000 Costs
The Company charges incremental Y2K assessment and remediation
costs to expense as incurred.
(u) Reclassifications
Reclassifications have been made to the 1996 and 1997 financial
statements to make them comparable with the 1998 presentation.
(2) Acquisitions
Cable Television Systems
Effective October 31, 1996, following shareholder and regulatory
approvals, the Company completed the acquisition of seven Alaska cable
television companies ("Cable Systems"). Under the terms of the
transactions, accounted for using the purchase method, the final
purchase price was $280.1 million, which was the aggregate value for all
the Cable Systems and included certain transaction and financing costs.
The purchase price included issuance of 14.7 million shares of GCI's
Class A common stock and cash, debt assumption and issuance of
subordinated notes. Financing for the transactions was obtained through
borrowings under a new $205 million bank credit facility and from
additional capital provided from the sale of two million shares of GCI's
Class A common stock to MCI (now MCI WorldCom) for $6.50 per share.
Acquisition costs totaling $304.4 million were allocated to tangible and
identifiable intangible assets and liabilities based upon fair market
values. Approximately $206.5 million was allocated to the franchise
agreements and approximately $42.4 was allocated to goodwill.
Various tax attributes of the Cable Systems gave rise to a deferred tax
liability (see note 7) of $24.4 million recorded by the Company as a
result of the acquisition.
During January 1997, holders of the GCI subordinated notes exercised a
conversion option which allowed them to exchange their notes for GCI
Class A common shares at a predetermined conversion price of $6.50 per
share. As a result, the note holders received a total of 1,538,457
shares of GCI Class A common stock.
The final closing required approval of the Alaska Public Utilities
Commission ("APUC"), which was granted on September 23, 1996. The APUC
approval included several conditions placed on the transfer, such as
continuing the existing conditions requiring provision of public access
channels and requiring the cable operations to file annual income and
operating statements.
Astrolabe Group, Inc.
Effective December 2, 1997, the Company purchased all of the outstanding
shares of Astrolabe Group, Inc. The $1,324,000 purchase was accounted
for using the purchase method. The purchase price consisted of a
77 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
payment of $600,000 and the issuance of options to purchase 100,000
shares of GCI's Class A common stock for $.01 per share.
(3) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in
thousands):
Year ended December 31, 1998 1997 1996
------------ ------------ -------------
(Increase) in accounts receivable $ (9,054) (1,540) (4,738)
(Increase) decrease in income tax receivable 490 (3,726) (1,026)
(Increase) decrease in prepaid and other current assets 388 (274) (467)
(Increase) decrease in inventories 286 (575) 412
Increase in accounts payable 2,585 1,050 5,517
Increase (decrease) in accrued liabilities (1,914) 938 914
Increase in accrued payroll and payroll related
obligations 875 1,850 1,723
Increase (decrease) in accrued income taxes (111) 111 (547)
Increase in accrued interest 423 4,941 2,188
Increase (decrease) in subscriber deposits and
deferred revenues 1,402 449 (4)
(Decrease) in components of other liabilities (13) (22) (1,248)
------------ ------------ -------------
$ (4,643) 3,202 2,724
============ ============ =============
Acquisitions of businesses, net of cash acquired consists of (amounts in
thousands):
Year ended December 31, 1997 1996
----------------------------
Fair value of assets acquired, net of liabilities assumed $ 1,259 304,441
Bank debt and net working capital deficit assumed --- (110,538)
Common stock issued to sellers --- (86,710)
Convertible, subordinated debt issued to sellers --- (10,000)
Net deferred income tax liability --- (24,375)
Deferred credit (712) ---
------------ ------------
Net cash used to acquire businesses $ 547 72,818
============ ============
No acquisitions occurred in 1998.
The holders of $10 million of convertible subordinated notes exercised
their conversion rights in January 1997 resulting in the exchange of
such notes for 1,538,457 shares of the Company's Class A common stock.
Net income tax refunds received totaled $4,243,000 and $1,546,000 during
the years ended 1998 and 1997, respectively, and income taxes paid
totaled $4,361,000 during the year ended 1996.
Interest paid totaled approximately $29,630,000, $17,709,000 and
$4,572,000 during the years ended 1998, 1997 and 1996, respectively.
78 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
The Company recorded $157,000, $65,000 and $187,000 during the years
ended 1998, 1997 and 1996, 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 year ended December 31, 1998 the Company funded the employer
matching portion of Employee Stock Purchase Plan contributions by
issuing GCI Class A Common Stock valued at $1,574,000.
(4) Notes Receivable
Notes receivable consist of the following (amounts in thousands):
December 31,
---------------------------
1998 1997
---------------------------
Note receivable from officer bearing interest at the rate paid by the
Company on its senior indebtedness, unsecured, due on November 1,
2002 $ 600 ---
Note receivable from officer bearing interest at the rate paid by the
Company on its senior indebtedness, secured by GCI Class A common
stock, due on the 90th day after termination of employment or July
30, 1998, whichever is earlier --- 500
Note receivable from officer bearing interest at the rate paid by the
Company on its senior indebtedness, partially secured by GCI Class
A and Class B common stock, due on December 31, 2001 350 ---
Note receivable from officer bearing interest at 10%, secured by
Company stock; due in full on August 26, 2004 224 224
Notes receivable from officers and others bearing interest up to 10%
or at the rate paid by the Company on its senior indebtedness,
unsecured and secured by Company common stock, shares of other
common stock, property and equipment; due through August 26, 2004 1,289 1,155
Interest receivable 256 349
---------------------------
Total notes receivable 2,719 2,228
Less notes receivable issued upon stock option exercise,
classified as a component of stockholders' equity 637 ---
Less current portion, including current interest receivable 650 897
---------------------------
Long-term portion, including long-term interest receivable $ 1,432 1,331
===========================
79 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
(5) Other Intangible Assets
Other intangible assets consist of the following (amounts in thousands):
December 31,
-----------------------------
1998 1997
-----------------------------
Goodwill $ 45,954 45,922
PCS license and related costs 2,196 2,051
Other intangibles 1,181 260
-----------------------------
49,331 48,233
Less accumulated amortization 3,457 2,169
-----------------------------
Other intangible assets, net of amortization $ 45,874 46,064
=============================
(6) Long-term Debt
Long-term debt consists of the following (amounts in thousands):
December 31,
----------------------------
1998 1997
----------------------------
Senior notes (a) $ 180,000 180,000
Senior Holdings Loan (b) 106,700 64,700
Fiber Facility (c) 61,224 ---
Undersea Fiber and Equipment Loan Agreement (d) 3,733 5,384
----------------------------
351,657 250,084
Less current maturities 1,799 1,634
----------------------------
Long-term debt, excluding current maturities $ 349,858 248,450
============================
(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 $5,576,000 are being amortized to amortization
expense over the term of the Senior Notes.
The Senior Notes are not redeemable prior to August 1, 2002.
After August 1, 2002 the Senior Notes are redeemable at the
option of GCI, Inc. under certain conditions and at stated
redemption prices. The Senior Notes include limitations on
additional indebtedness and prohibit payment of dividends,
payments for the purchase, redemption, acquisition or retirement
of GCI, Inc.'s stock, payments for early retirement of debt
subordinate to the note, liens on property, and asset sales. GCI,
Inc. was in compliance with all covenants during the year ending
December 31, 1998. The Senior Notes are unsecured obligations of
the Company.
Net proceeds from the stock (see note 8) and Senior Note
offerings and initial draws on the new Senior Holdings Loan (see
note 6(b)) facilities were used to repay borrowings outstanding
under the Company's then existing credit facilities and to
provide initial funding for construction of the Alaska United
undersea fiber optic cable (see notes 6 (c) and 11).
(b) The Company, through Holdings, entered into $200,000,000
($150,000,000 as amended) and $50,000,000 credit facilities
("Senior Holdings Loan") effective August 1, 1997 that mature on
June 30, 2005. The Senior Holdings Loan facilities, as amended
effective April 13, 1999, bear interest at either
80 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Libor plus 1.00% to 2.50%, depending on the leverage ratio of
Holdings and certain of its subsidiaries, or at the greater of
the prime rate or the federal funds effective rate (as defined)
plus 0.05%, in each case plus an additional 0.00% to 1.375%,
depending on the leverage ratio of Holdings and certain of its
subsidiaries. Borrowings under the Senior Holdings Loan
facilities totaled $106,700,000 and $64,700,000 at December 31,
1998 and 1997, respectively. The Company is required to pay a
commitment fee equal to 0.50% per annum on the unused portion of
the commitment. Commitment fee expense on the Senior Holdings
Loan totaled $512,000 and $240,000 during the years ended
December 31, 1998 and 1997, respectively.
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:
Percentage of
Reduction of
Outstanding
Date Range of Quarterly Payments Facilities
-------------------------------------------------------- -------------------
September 30, 2000 through December 31, 2001 3.750%
March 31, 2002 through December 31, 2003 5.000%
March 31, 2004 through December 31, 2004 5.625%
March 31, 2005 7.500%
July 31, 2005 7.500% and all remaining outstanding
balances
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. The amended
facilities require that Holdings receive $20 million in proceeds
from a GCI preferred stock issuance by May 31, 1999 (see note
12). Holdings was in compliance with all Senior Holdings Loan
facilities covenants during the year ended December 31, 1998.
The Senior Holdings Loan facilities are collateralized by
essentially all of Holdings' assets as well as a pledge of
Holdings' stock by GCI, Inc.
$3.4 million of the Senior Holdings Loan facilities have been
used to provide a letter of credit to secure payment of certain
access charges associated with the Company's provision of
telecommunications services within the State of Alaska.
In connection with the funding of the Senior Holdings Loan
facilities, Holdings paid bank fees and other expenses of
approximately $2,972,000, which is being amortized to
amortization expense over the life of the agreement.
In connection with the April 13, 1999 amendment, the Company
agreed to pay all fees and expenses of its lenders, including an
amendment fee of 0.25% of the aggregate commitment.
(c) On January 27, 1998, the Company, through Alaska United, closed a
$75,000,000 project finance facility ("Fiber Facility") to
construct a fiber optic cable system connecting Anchorage,
Fairbanks,
81 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Valdez, Whittier, Juneau and Seattle as further described in note
11. Borrowings under the Fiber Facility totaled $61,224,000 at
December 31, 1998. The Fiber Facility provides up to $75 million
in construction financing and bears interest at either Libor plus
3.0%, or at the Company's choice, the lender's prime rate plus
1.75%. The interest rate will decline to Libor plus 2.5%-2.75%,
or at the Company's choice, the lender's prime rate plus
1.25%-1.5% when the loan balance is $60,000,000 or less.
Borrowings under the Fiber Facility totaled $61,224,000 at
December 31, 1998. Alaska United is required to pay a commitment
fee equal to 0.375% per annum on the unused portion of the
commitment. The Fiber Facility is a 10-year term loan that is
interest only for the first 5 years. The facility can be extended
to a 12 year term loan at any time between the second and fifth
anniversary of closing the facility if the Company can
demonstrate projected revenues from certain capacity commitments
will be sufficient to pay all operating costs, and interest and
principal installments based on the extended maturity.
The Fiber Facility contains, among others, covenants requiring
certain intercompany loans and advances in order to maintain
specific levels of cash flow necessary to pay operating costs and
interest and principal installments. Additional covenants pertain
to the timely completion of certain project construction
milestones. The Fiber Facility also contains a guarantee that
requires, among other terms and conditions, Alaska United
complete the project by the completion date (April 1, 1999) and
pay any non-budgeted costs of the project. Alaska United was in
compliance with all covenants during the period commencing
January 27, 1998 (date of the Fiber Facility) through December
31, 1998.
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 $2,019,000 which are
being amortized to Construction in Progress during the
construction period of the undersea fiber optic cable. When the
fiber optic cable is place in service the issuance costs will be
amortized to amortization expense over the life of the agreement.
(d) On December 31, 1992, Leasing Company entered into a $12,000,000
loan agreement ("Undersea Fiber and Equipment Loan Agreement"),
of which approximately $9,000,000 of the proceeds were used to
acquire capacity on the undersea fiber optic cable linking
Seward, Alaska and Pacific City, Oregon. Concurrently, Leasing
Company leased the capacity under a ten year all events, take or
pay, contract with MCI (now MCI WorldCom), who subleased the
capacity back to the Company. The lease and sublease agreements
provide for equivalent terms of 10 years and identical monthly
payments of $200,000. The proceeds of the lease agreement with
MCI were pledged as primary security for the financing. The loan
agreement provides for monthly payments of $170,000 including
principal and interest through the earlier of January 1, 2003, or
until repaid. The loan agreement provides for interest at the
prime rate less one-quarter percent. Additional collateral
includes substantially all of the assets of Leasing Company
including the fiber capacity and a security interest in all of
its outstanding stock. MCI as a second position security interest
in the assets of Leasing Company.
(e) GCI Cable entered into a credit facility totaling $205,000,000
effective October 31, 1996, associated with the acquisition of
the Cable Companies as described in note 2. In August 1997, the
Senior GCI Cable Loan was repaid using proceeds from the Senior
Notes (see note 6(a)) and the Senior Holdings Loan (see note
6(b)).
In connection with the funding of the loan agreement, GCI Cable,
Inc. paid bank fees and other expenses of approximately $764,000
in 1996. The unamortized portion of these bank fees and other
82 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
expenses (net of income tax benefit of $180,000) was recognized
as an extraordinary loss on the early extinguishment of debt in
1997.
(f) The Company entered into a $62,500,000 interim telephony credit
facility with its senior lender during April 1996. In August
1997, the Credit Agreement was repaid using proceeds from the
Senior Notes (see note 6(a)) and the Senior GCI Holdings Loan
(see note 6(b)).
(g) GCI issued convertible subordinated notes totaling $10,000,000 in
connection with the cable acquisitions described in note 2.
During January 1997, the holders of the GCI subordinated notes
exercised a conversion option which allowed them to exchange
their notes for GCI Class A common shares at a predetermined
conversion price of $6.50 per share. As a result, the former note
holders received 1,538,457 shares of GCI Class A common stock.
(h) As consideration for MCI's (now MCI WorldCom) role in enabling
Leasing Company to finance and acquire the undersea fiber optic
cable capacity described at note 6(d) above, Leasing Company
agreed to pay MCI $2,040,000 in sixty monthly payments of
$34,000. For financial statement reporting purposes, the
obligation was recorded at its remaining present value, using a
discount rate of 10% per annum. The agreement was secured by a
second position security interest in the assets of Leasing
Company. The obligation was fully paid at December 31, 1997.
As of December 31, 1998 maturities of long-term debt were as follows
(amounts in thousands):
Year ending December 31,
1999 $ 1,799
2000 1,934
2001 ---
2002 ---
2003 12,950
2004 and thereafter 334,974
--------------
$ 351,657
==============
(7) Income Taxes
Total income tax expense (benefit) was allocated as follows:
Years ended
December 31,
---------------------------------
1998 1997 1996
---------------------------------
(Amounts in thousands)
Earnings (loss) from continuing operations $ (4,123) (573) 5,228
Extraordinary item --- (180) ---
---------------------------------
(4,123) (753) 5,228
Stockholders' equity, for stock option
compensation expense for tax purposes in
excess of amounts recognized for financial
reporting purposes (157) (65) (187)
---------------------------------
$ (4,280) (818) 5,041
=================================
83 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Income tax expense (benefit) consists of the following:
Years ended
December 31,
---------------------------------
1998 1997 1996
---------------------------------
(Amounts in thousands)
Current tax expense (benefit):
Federal taxes $ (2,858) (4,333) 2,292
State taxes (521) (830) 684
---------------------------------
(3,379) (5,163) 2,976
---------------------------------
Deferred tax expense (benefit):
Federal taxes (629) 3,800 1,734
State taxes (115) 610 518
---------------------------------
(744) 4,410 2,252
---------------------------------
$ (4,123) (753) 5,228
=================================
Total income tax expense (benefit) differed from the "expected" income
tax expense (benefit) determined by applying the statutory federal
income tax rate of 34% as follows:
Years ended
December 31,
---------------------------------------
1998 1997 1996
---------------------------------------
(Amounts in thousands)
"Expected" statutory tax expense (benefit) $ (3,713) (997) 4,314
State income taxes, net of federal benefit (594) (181) 793
Income tax effect of goodwill amortization, nondeductible
expenditures and other items, net 441 107 55
Change in valuation allowance --- --- (225)
Other (257) 318 291
---------------------------------------
$ (4,123) (753) 5,228
=======================================
84 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are presented below.
December 31,
--------------------------
1998 1997
--------------------------
(Amounts in thousands)
Net current deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts $ 354 430
Compensated absences, accrued for financial reporting
purposes 804 566
Workers compensation and self insurance health
reserves, principally due to accrual for financial
reporting purposes 244 266
Other 545 413
--------------------------
Total gross current deferred tax assets 1,947 1,675
Less valuation allowance --- ---
--------------------------
Net current deferred tax assets $ 1,947 1,675
==========================
Net long-term deferred tax assets:
Net operating loss carryforwards $ 20,871 15,378
Alternative minimum tax credits 2,081 751
Deferred compensation expense for financial reporting
purposes in excess of amounts recognized for tax
purposes 1,027 966
Employee stock option compensation expense for
financial reporting purposes in excess of amounts
recognized for tax purposes 327 198
Sweepstakes award in excess of amounts recognized for
tax purposes 201 206
Other 99 75
--------------------------
Total long-term deferred tax assets 24,606 17,574
--------------------------
Net long-term deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation 56,244 51,643
Amortizable assets 4,784 3,898
Costs recognized for tax purposes in excess of amounts
recognized for book purposes 1,319 ---
Other 534 937
--------------------------
Total gross long-term deferred tax liabilities 62,881 56,478
--------------------------
Net combined long-term deferred tax liabilities
$ 38,275 38,904
==========================
In conjunction with the 1996 Cable Companies acquisition, the Company
incurred a net deferred income tax liability of $24.4 million and
acquired net operating losses totaling $57.6 million. The Company
determined that approximately $20 million of the acquired net operating
losses would not be utilized for income tax
85 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
purposes, and elected with its December 31, 1996 income tax returns to
forego utilization of such acquired losses under Internal Revenue Code
section 1.1502-32(b)(4). Deferred tax assets were not recorded
associated with the foregone losses and, accordingly, no valuation
allowance was provided. At December 31, 1998, the Company has (1) tax
net operating loss carryforwards of approximately $51.0 million that
will begin expiring in 2008 if not utilized, and (2) alternative minimum
tax credit carryforwards of approximately $2.0 million available to
offset regular income taxes payable in future years. The Company's
utilization of remaining acquired net operating loss carryforwards is
subject to annual limitations pursuant to Internal Revenue Code section
382 which could reduce or defer the utilization of these losses.
Tax benefits associated with recorded deferred tax assets are considered
to be more likely than not realizable through taxable income earned in
carryback years, future reversals of existing taxable temporary
differences, and future taxable income exclusive of reversing temporary
differences and carryforwards. The amount of deferred tax asset
considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are
reduced.
(8) Stockholders' Equity
Common Stock
GCI's Class A common stock and Class B common stock are identical in all
respects, except that each share of Class A common stock has one vote
per share and each share of Class B common stock has ten votes per
share. In addition, each share of Class B common stock outstanding is
convertible, at the option of the holder, into one share of Class A
common stock.
After the transaction described in note 2, MCI (now MCI WorldCom) owns a
total of 8,251,509 shares of GCI's Class A and 1,275,791 shares of GCI's
Class B common stock which represent approximately 18 and 31 percent of
the issued and outstanding shares of the respective class at December
31, 1998 and 1997, respectively.
After the transaction described in note 2, the owners of the cable
television properties acquired in 1996 owned a total of 14,723,077
shares of GCI's Class A common stock representing approximately 40
percent of the issued and outstanding Class A common shares at December
31, 1996. The holders of the GCI subordinated notes exercised a
conversion option in January 1997. As a result the noteholders received
1,538,457 shares of GCI's Class A common stock.
GCI issued 7,000,000 shares of its Class A common stock on August 1,
1997 for $7.25 per share, before deducting underwriting discounts and
commissions. Net proceeds to GCI totaled $47,959,000. Other costs
associated with the stock issuance totaled $1,233,000.
Stock Option Plan
In December 1986, GCI adopted a Stock Option Plan (the "Option Plan") in
order to provide a special incentive to the Company's officers,
non-employee directors, and employees by offering them an opportunity to
acquire an equity interest in GCI. The Option Plan, as amended in 1998,
provides for the grant of options for a maximum of 5,700,000 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
86 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
underlying common stock, the "in the money" amount at the time of grant
is expensed ratably over the vesting period of the option. Options
granted pursuant to the Option Plan are only exercisable if at the time
of exercise the option holder is an employee or non-employee director of
GCI.
Information for the years 1996, 1997 and 1998 with respect to the Option
Plan follows:
Weighted
Average
Exercise Range of
Shares Price Exercise Prices
--------------- ------------- ------------------
Outstanding at December 31, 1995 2,288,199 $3.19 $0.75-$4.00
Granted 321,000 $5.79 $3.75-$6.50
Exercised (82,291) $2.80 $0.75-$4.00
Forfeited (79,785) $3.11 $0.75-$4.50
---------------
Outstanding at December 31, 1996 2,447,123 $3.54 $0.75-$6.50
Granted 1,051,000 $6.36 $0.01-$7.63
Exercised (57,285) $3.37 $0.75-$4.00
Forfeited (65,938) $4.82 $0.75-$6.50
---------------
Outstanding at December 31, 1997 3,374,900 $4.39 $0.01-$7.63
Granted 1,150,459 $6.38 $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 4,079,759 $4.95 $0.01-$7.63
===============
Available for grant at December
31, 1998 657,817
===============
Stock Options Not Pursuant to a Plan
In June 1989, an officer was granted options to acquire 100,000 Class A
common shares at $.75 per share. The options vested in equal annual
increments over a five-year period, expiring in February 1999. Options
to acquire 50,000 shares were exercised during 1998.
The Company entered into an incentive agreement in June 1989 with an
officer providing for the acquisition of 85,190 remaining shares of
Class A common stock of the Company for $.001 per share exercisable
through June 1997. The shares under the incentive agreement vested in
equal annual increments over a three-year period and were exercised in
June 1997.
Stock Warrants Not Pursuant to a Plan
The Company entered into a warrant agreement in December 1998 with Prime
II Management, L.P. ("PMLP"). In lieu of cash payments for services
under the amended Management Agreement, PMLP agreed to accept a stock
warrant which provides for the purchase of 425,000 shares of GCI class A
common stock, with immediate vesting at the option date and an exercise
price of $3.25 per share. The warrant expires December 2003.
87 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
The Company entered into a warrant agreement in exchange for services in
December 1998 with certain of its legal counsel which provides for the
purchase of 16,667 shares of GCI class A common stock, vesting in
December 1999, with an exercise price of $3.00 per share, and expiring
December 2003.
SFAS 123 Disclosures
The Company's stock options and warrants expire at various dates through
December 2008. At December 31, 1998, 1997 and 1996, the weighted-average
remaining contractual lives of options outstanding were 6.71, 6.82 and
6.73 years, respectively.
At December 31, 1998, 1997 and 1996, the number of exercisable shares
under option was 1,827,130, 1,664,015 and 1,275,903, respectively, and
the weighted-average exercise price of those options was $3.49, $3.15
and $2.85, respectively.
The per share weighted-average fair value of stock options granted
during 1998 was $4.08 for compensatory and non-compensatory options; for
1997, $6.71 per share for compensatory options and $6.50 per share for
non-compensatory options; and for 1996, $6.94 per share for compensatory
options and $4.40 per share for non-compensatory options. The amounts
were determined as of the options' grant dates using a qualified
Black-Scholes option-pricing model with the following weighted-average
assumptions: 1998 - risk-free interest rate of 4.75%, volatility of
0.6951 and an expected life of 5.7 years; 1997 - risk-free interest rate
of 5.46%, volatility of 1.8558 and an expected life of 5.5 years; and
1996 - risk-free interest rate of 5.48%, volatility of 1.8558 and an
expected life of 5.7 years.
Summary information about the Company's stock options and warrants
outstanding at December 31, 1998:
Options and Warrants Outstanding Options and Warrants Exercisable
----------------------------------------------------------------------- -------------------------------------
Weighted
Number Average
outstanding Remaining Weighted Number Weighted
Range of Exercise as of Contractual Average Exercisable as Average Exercise
Prices 12/31/98 Life Exercise Price of 12/31/98 Price
----------------------------------------------------------------------- -------------------------------------
$0.01 - $1.75 406,000 4.15 $1.17 336,000 $1.41
$3.00 - $3.00 778,667 3.52 $3.00 762,000 $3.00
$3.25 - $3.75 79,459 9.71 $3.28 3,330 $3.75
$4.00 - $4.00 792,300 5.84 $4.00 445,300 $4.00
$4.50 - $4.50 20,000 7.09 $4.50 20,000 $4.50
$6.00 - $6.00 459,500 8.78 $6.00 91,000 $6.00
$6.50 - $6.50 430,500 8.73 $6.50 38,500 $6.50
$6.63 - $6.94 115,000 9.08 $6.84 0 $0.00
$7.00 - $7.00 671,000 8.31 $7.00 88,000 $7.00
$7.25 - $7.63 390,000 8.77 $7.39 43,000 $7.54
------------------------------------------------- -------------------------------------
$0.01 - $7.63 4,142,426 6.71 $4.89 1,827,130 $3.49
================================================= =====================================
88 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Had compensation cost for the Company's 1996, 1997 and 1998 grants for
stock-based compensation plans been determined consistent with SFAS 123,
the Company's net income (loss) and net income (loss) per common share
would approximate the pro forma amounts below (in thousands except per
share data):
As Reported Pro Forma
-----------------------------------
1996:
Net earnings $ 7,462 7,212
Basic net earnings per common share $ 0.28 0.27
Diluted net earnings per common share $ 0.27 0.26
1997:
Net loss $(2,183) (3,387)
Basic net loss per common share $ (0.05) (0.08)
Diluted net loss per common share $ (0.05) (0.08)
1998:
Net loss $(6,797) (8,697)
Basic net loss per common share $ (0.14) (0.18)
Diluted net loss per common share $ (0.14) (0.18)
Pro forma net income (loss) reflects options granted in 1998, 1997 and
1996. Therefore, the full impact of calculating compensation cost for
stock options under SFAS 123 is not reflected in the pro forma net
income amounts presented above since compensation cost is reflected over
the options' vesting period of generally 5 years and compensation cost
for options granted prior to January 1, 1995 is not considered.
Class A Common Shares Held in Treasury
The Company acquired 105,111 shares of its Class A common stock in 1989
for approximately $328,000 to fund a deferred bonus agreement with an
officer of the Company. The agreement provides that the balance is
payable after the later of termination of employment or six months after
the effective date of the agreement. In September 1995, July 1996 and
March 1997, the Company acquired a total of 97,657 additional shares of
Class A common stock for approximately $711,000 to fund additional
deferred compensation agreements for two of its officers. In April and
May, 1998, the Company acquired a total of 145,000 additional shares of
Class A common stock for approximately $568,000 to fund additional
deferred compensation agreements for three of its officers.
Employee Stock Purchase Plan
In December 1986, GCI adopted an Employee Stock Purchase Plan (the
"Plan") qualified under Section 401 of the Internal Revenue Code of 1986
(the "Code"). The Plan provides for acquisition of GCI's Class A and
Class B common stock at market value. The Plan permits each employee of
GCI and affiliated companies who has completed one year of service to
elect to participate in the Plan. Eligible employees may elect to reduce
their compensation in any even dollar amount up to 10 percent of such
compensation up to a maximum of $10,000 in 1998; they may contribute up
to 10 percent of their compensation with after-tax dollars, or they may
elect a combination of salary reductions and after-tax contributions.
The Company may match employee salary reductions and after tax
contributions in any amount, elected by GCI's board of directors each
year, but not more than 10 percent of any one employee's compensation
will be matched in any year. The combination of salary reductions, after
tax contributions and matching contributions cannot exceed 25 percent of
any employee's compensation (determined after salary reduction) for any
year. Matching contributions vest over six years. Employee contributions
may be invested in GCI common stock, MCI WorldCom common stock,
Tele-Communications, Inc. ("TCI") common stock or various
89 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
mutual funds. AT&T's recent acquisition of TCI will result in the
conversion of TCI shares of common stock into AT&T shares of common
stock. Alternative investment choices may be offered by the Plan
commencing as early as the third or fourth quarter of 1999. Employee
contributions invested in GCI common stock receive up to 100% matching,
as determined by GCI's board of directors 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 of
directors each year, in GCI common stock. The Company's matching
contributions allocated to participant accounts totaled approximately
$2,278,000, $1,800,000 and $1,013,000 for the years ended December 31,
1998, 1997, and 1996, 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 the Company
funded employer matching contributions through the issuance of new
shares of GCI common stock rather than market purchases and expects to
continue to do so in 1999.
(9) Industry Segments Data
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", in 1998 which changes the way the
Company reports information about its operating segments. The
information for 1997 and 1996 has been restated from the prior year's
presentation in order to conform to the 1998 presentation.
The Company's reportable segments are business units that offer
different products. The reportable segments are each managed separately
because they manage and offer distinct products with different
production and delivery processes.
The Company has four reportable segments as follows:
Long-distance services. A full range of common-carrier long-distance
services are offered to business, government, other telecommunications
companies and consumer customers, through its networks of fiber optic
cables, digital microwave, and fixed and transportable satellite earth
stations.
Cable services. The Company provides cable television services to
residential, commercial and government users in the State of Alaska.
The Company's cable systems serve 26 communities and areas in Alaska,
including the state's three largest urban areas, Anchorage, Fairbanks
and Juneau. Anchorage cable plant upgrades in 1998 enabled the Company
to offer digital cable television services and retail cable modem
service (through its Internet Services segment) in Anchorage,
complementing its existing service offerings. The Company plans to
expand its product offerings as plant upgrades are completed in other
communities in Alaska.
Local access services. The Company introduced facilities based
competitive local exchange services in Anchorage in 1997. The Company
has announced plans to ultimately provide similar competitive local
exchange services in Alaska's other major population centers, as access
is allowed by the APUC.
Internet services. The Company began offering wholesale and retail
Internet services in 1998. Deployment of the new undersea fiber optic
cable (see note 11) will allow the Company to offer enhanced services
with high-bandwidth requirements.
Other services. Services provided by the Company that are included in
the other segment are managed services, product sales and cellular
telephone services. Included in the other segment are the results of
insignificant business units described above which do meet the
quantitative thresholds for determining reportable segments. None of
these business units have ever met the quantitative thresholds for
determining reportable segments. Also included in the other segment are
corporate related expenses, including marketing,
90 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
customer service, management information systems, accounting, legal and
regulatory, human resources and other general and administrative
expenses.
The Company evaluates performance and allocates resources based on (1)
profit or loss from operations before depreciation, amortization, interest
and income taxes, and (2) operating income or loss. The accounting policies
of the reportable segments are the same as those described in the summary
of significant accounting policies included in note 1. Intersegment sales
are recorded at cost plus an agreed upon intercompany profit.
All revenues are earned through sales of services and products within the
United States of America ("USA"). All of the Company's long-lived assets
are located within the USA.
Summarized financial information concerning the Company's reportable
segments follows (amounts in thousands):
Long- Local
Distance Cable Access Internet
Services Services Services Services Other Total
--------------------------------------------------------------------------
1998
----
Revenues:
Intersegment $ 2,716 1,330 1,284 --- --- 5,330
External 157,350 57,640 9,908 4,591 17,306 246,795
--------------------------------------------------------------------------
Total revenues 160,066 58,970 11,192 4,591 17,306 252,125
--------------------------------------------------------------------------
Cost of sales and services:
Intersegment 1,284 --- 1,254 2,727 --- 5,265
External 79,323 13,407 6,113 3,402 13,828 116,073
--------------------------------------------------------------------------
Total cost of sales and services 80,607 13,407 7,367 6,129 13,828 121,338
--------------------------------------------------------------------------
Contribution:
Intersegment 1,432 1,330 30 (2,727) --- 65
External 78,027 44,233 3,795 1,189 3,478 130,722
--------------------------------------------------------------------------
Total contribution 79,459 45,563 3,825 (1,538) 3,478 130,787
Selling, general and administrative
expenses 21,019 15,630 8,477 782 43,926 89,833
--------------------------------------------------------------------------
58,440 29,933 (4,652) (2,320) (40,448) 40,954
Depreciation and amortization 6,976 17,281 2,597 501 4,690 32,045
--------------------------------------------------------------------------
Operating income (loss) $ 51,464 12,652 (7,249) (2,821) (45,138) 8,909
==========================================================================
Total assets $231,727 316,976 31,062 16,535 49,816 646,116
==========================================================================
Capital expenditures $110,177 20,727 8,104 3,836 6,129 148,973
==========================================================================
91 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Long- Local
Distance Cable Access Internet
Services Services Services Services Other Total
--------------------------------------------------------------------------
1997
Revenues:
Intersegment $ --- 516 --- --- 172 688
External 154,681 55,165 610 182 13,171 223,809
--------------------------------------------------------------------------
Total revenues 154,681 55,681 610 182 13,343 224,497
--------------------------------------------------------------------------
Cost of sales and services:
Intersegment --- --- 472 --- --- 472
External 86,346 12,610 739 241 11,141 111,077
--------------------------------------------------------------------------
Total cost of sales and services 86,346 12,610 1,211 241 11,141 111,549
--------------------------------------------------------------------------
Contribution:
Intersegment --- 516 (472) --- 172 216
External 68,335 42,555 (129) (59) 2,030 112,732
--------------------------------------------------------------------------
Total contribution 68,335 43,071 (601) (59) 2,202 112,948
Selling, general and administrative
expenses 18,724 18,812 2,802 26 33,219 73,583
--------------------------------------------------------------------------
49,611 24,259 (3,403) (85) (31,017) 39,365
Depreciation and amortization 6,676 13,320 525 3 3,243 23,767
--------------------------------------------------------------------------
Operating income (loss) $ 42,935 10,939 (3,928) (88) (34,260) 15,598
==========================================================================
Total assets $161,968 311,643 20,357 8,510 42,824 545,302
==========================================================================
Capital expenditures $ 23,107 18,199 9,379 7,496 6,463 64,644
==========================================================================
1996
Revenues:
Intersegment $ --- 40 --- --- --- 40
External 141,374 9,475 --- --- 14,045 164,894
--------------------------------------------------------------------------
Total revenues 141,374 9,515 --- --- 14,045 164,934
--------------------------------------------------------------------------
Cost of sales and services:
Intersegment 40 --- --- --- --- 40
External 80,193 2,067 --- --- 10,404 92,664
--------------------------------------------------------------------------
Total cost of sales and services 80,233 2,067 --- --- 10,404 92,704
--------------------------------------------------------------------------
Contribution:
Intersegment (40) 40 --- --- --- ---
External 61,181 7,408 --- --- 3,641 72,230
--------------------------------------------------------------------------
Total contribution 61,141 7,448 --- --- 3,641 72,230
92 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
Long- Local
Distance Cable Access Internet
Services Services Services Services Other Total
--------------------------------------------------------------------------
Selling, general and administrative
expenses 15,442 2,992 842 --- 27,136 46,412
--------------------------------------------------------------------------
45,699 4,456 (842) --- (23,495) 25,818
Depreciation and amortization 5,025 2,220 --- --- 2,164 9,409
--------------------------------------------------------------------------
Operating income (loss) $ 40,674 2,236 (842) --- (25,659) 16,409
==========================================================================
Total assets $102,739 306,743 3,475 154 34,224 447,335
==========================================================================
Capital expenditures $ 27,765 909 3,475 154 6,339 38,642
==========================================================================
-----------------------
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:
Years ended December 31, 1998 1997 1996
-----------------------------------------------
Total segment revenues $ 252,125 224,497 164,934
Less intersegment revenues eliminated in consolidation (5,330) (688) (40)
-----------------------------------------------
Consolidated revenues $ 246,795 223,809 164,894
===============================================
A reconciliation of total segment operating income to consolidated net
income (loss) before income taxes and extraordinary item follows:
Years ended December 31, 1998 1997 1996
-----------------------------------------------
Total segment operating income $ 8,909 15,598 16,409
Less intersegment contribution eliminated in consolidation (65) (216) ---
-----------------------------------------------
Consolidated operating income 8,844 15,382 16,409
Interest expense, net (19,764) (17,617) (3,719)
-----------------------------------------------
Consolidated net income (loss) before income taxes and
extraordinary item $ (10,920) (2,235) 12,690
===============================================
The Company provides message telephone service to MCI WorldCom (see note
10) and Sprint, major customers. The Company earned revenues, included
in the long-distance segment, pursuant to a contract with Sprint
totaling approximately $25,398,000, $24,357,000 and $18,781,000 for the
years ended December 31, 1998, 1997 and 1996 respectively. As a
percentage of total revenues, Sprint revenues totaled 10.3%, 10.9% and
11.4% for the years ended December 31, 1998, 1997 and 1996 respectively.
(10) Related Party Transactions
Pursuant to the terms of a contract with MCI WorldCom, a major
shareholder of GCI (see note 8), the Company earned revenues of
approximately $35,892,000, $34,315,000 and $29,208,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. As a percentage of
total revenues, MCI WorldCom revenues totaled 14.5%, 15.3% and 17.7% for
the years ended December 31, 1998, 1997 and 1996 respectively. Amounts
receivable, net of accounts payable, from MCI WorldCom totaled
$4,836,000 and
93 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
$3,933,000 at December 31, 1998 and 1997, respectively. The Company paid
MCI WorldCom for distribution of its traffic in the lower 49 states
amounts totaling approximately $12,639,000, $14,319,000 and $12,224,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company entered into a long-term capital lease agreement in 1991
with the wife of the Company's president for property occupied by the
Company. The lease is guaranteed by the Company. 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
$17,600 effective October 1999. If the owner sells the premises prior to
the end of the tenth year of the lease, the owner will rebate to the
Company one-half of the net sales price received in excess of $900,000.
If the property is not sold prior to the tenth year of the lease, the
owner will pay the Company the greater of one-half of the appreciated
value of the property over $900,000, or $500,000. The leased asset was
capitalized in 1991 at the owner's cost of $900,000 and the related
obligation was recorded in the accompanying financial statements.
GCI Cable, Inc. ("GCI Cable") is a party to a Management Agreement with
Prime II Management, L.P. ("PMLP"). Certain of the Prime sellers are
affiliated with PMLP. The Management Agreement began on November 1, 1996
and expires on October 31, 2005, however, it can be terminated earlier
upon loss of a license to operate the systems, sale of the systems,
breach of contract, or upon exercise of an option to terminate the
Management Agreement by PMLP or GCI Cable any time after October 31,
2000. The agreement was amended December 15, 1998.
Under the terms of the amended Management Agreement, PMLP performs
certain services for GCI Cable and will be compensated as follows:
November 01, 1996 through October 31, 1997 $1,000,000
November 01, 1997 through December 31, 1997 $ 125,000
January 01, 1998 through January 31, 1999 Warrant to purchase
425,000 shares of GCI
stock
February 01, 1999 through October 31, 1999 $ 200,000
November 01, 1999 through October 31, 2000 $ 400,000
(plus reimbursement for certain expenses)
In connection with the agreement, GCI Cable received services valued at
approximately $752,000, $1,040,000 and $197,000 including reimbursable
expenses for the periods ended December 31, 1998, 1997 and 1996,
respectively.
(11) Commitments and Contingencies
Leases
The Company as Lessee. The Company leases business offices, has entered
into site lease agreements and uses certain equipment and satellite
transponder capacity pursuant to operating lease arrangements. Rental
costs under such arrangements amounted to approximately $11,609,000,
$11,574,000 and $7,364,000 for the years ended December 31, 1998, 1997
and 1996, respectively.
94 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
A summary of future minimum lease payments for all leases as of December
31, 1998 follows:
Year ending December 31: Operating Capital
---------------------------
(Amounts in thousands)
1999 $ 13,388 771
2000 5,549 767
2001 3,937 1,127
2002 2,377 466
2003 2,204 381
2004 and thereafter 3,093 643
---------------------------
Total minimum lease payments $ 30,548 4,155
=============
Less amount representing interest (1,969)
Less current maturities of obligations under capital
leases (511)
-------------
Subtotal - long-term obligations under capital leases 1,675
Less long-term obligations under capital leases due to
related party, excluding current maturities (486)
-------------
Long-term obligations under capital leases, excluding
related party, excluding current maturities $ 1,189
=============
The leases generally provide that the Company pay the taxes, insurance
and maintenance expenses related to the leased assets. It is expected
that in the normal course of business, except for satellite transponder
capacity, leases that expire will be renewed or replaced by leases on
other properties.
The Company as Lessor. Subsequent to December 31, 1998, the Company
signed agreements with a large commercial customer for the immediate
lease of three DS3 circuits on Alaska United facilities within Alaska,
and between Alaska and the lower 48 states. The lease agreements provide
for three year terms, with renewal options for additional terms.
Deferred Compensation Plan
During 1995, the Company adopted a non-qualified, unfunded deferred
compensation plan to provide a means by which certain employees may
elect to defer receipt of designated percentages or amounts of their
compensation and to provide a means for certain other deferrals of
compensation. The Company may, at its discretion, contribute matching
deferrals equal to the rate of matching selected by the Company.
Participants immediately vest in all elective deferrals and all income
and gain attributable thereto. Matching contributions and all income and
gain attributable thereto vest over a six-year period. Participants may
elect to be paid in either a single lump sum payment or annual
installments over a period not to exceed 10 years. Vested balances are
payable upon termination of employment, unforeseen emergencies, death
and total disability. Participants are general creditors of the Company
with respect to deferred compensation plan benefits. Compensation
deferred pursuant to the plan totaled approximately $117,000, $58,000
and $167,000 as of December 31, 1998, 1997 and 1996, respectively.
Satellite Transponders
The Company entered into a purchase and lease-purchase option agreement
in August 1995 for the acquisition of satellite transponders to meet its
long-term satellite capacity requirements. The launch of the satellite
in August 1998 failed. The Company did not assume launch risk and the
launch has been rescheduled for the
95 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
fourth quarter of 1999. The Company will continue to lease transponder
capacity until delivery of the transponders on the replacement
satellite. The balance payable upon expected delivery of the
transponders during the fourth quarter of 1999 in addition to the $9.1
million deposit previously paid totals approximately $43.5 million.
Self-Insurance
The Company is self-insured for losses and liabilities related primarily
to health and welfare claims up to predetermined amounts above which
third party insurance applies. A reserve of $545,000 was recorded at
December 31, 1998 to cover estimated reported losses, estimated
unreported losses based on past experience modified for current trends,
and estimated expenses for investigating and settling claims. Actual
losses will vary from the recorded reserve. While management uses what
it believes is pertinent information and factors in determining the
amount of reserves, future additions to the reserves may be necessary
due to changes in the information and factors used.
Litigation
The Company is involved in various disputes, lawsuits, legal proceedings
and regulatory matters that have arisen in the normal course of
business. While the ultimate results of these items cannot be predicted
with certainty, management does not expect at this time the resolution
of them to have a material adverse effect on the Company's financial
position, results of operations or liquidity.
Cable Service Rate Reregulation
Beginning in April 1993, the Federal Communications Commission ("FCC")
adopted regulations implementing the Cable Television Consumer
Protection and Competition Act of 1992 ("The Cable Act of 1992").
Included are rules governing rates charged by cable operators for the
basic service tier, the installation, lease and maintenance of equipment
(such as converter boxes and remote control units) used by subscribers
to receive this tier and for cable programming services other than
programming offered on a per-channel or per-program basis (the
"regulated services"). Generally, the regulations require affected cable
systems to charge rates for regulated services that have been reduced to
prescribed benchmark levels, or alternatively, to support rates using
costs-of-service methodology.
Until March 31, 1999, the regulated services rates charged by the
Company may be reviewed by the State of Alaska, operating through the
APUC for basic service, or by the FCC for cable programming service.
Refund liability for basic service rates is limited to a one-year
period. Refund liability for cable programming service rates may be
calculated from the date a complaint is filed with the FCC until the
rate reduction is implemented. Beginning March 31, 1999, the rates for
cable programming services (service tiers above basic service) will no
longer be regulated. Only regulation of basic rates, initially through
the APUC, will remain.
In order for the State of Alaska to exercise rate regulation authority
over the Company's basic service rates, 25% of a systems' subscribers
must request such regulation by filing a petition with the APUC. At
December 31, 1998, the State of Alaska has rate regulation authority
over the Juneau system's basic service rates. (The Juneau system serves
8.3% of the Company's total basic service subscribers at December 31,
1998.) Juneau's current rates have been approved by the APUC and there
are no other pending filings with the APUC, therefore, there is no
refund liability for basic service at this time.
Undersea Fiber Optic Cable Contract Commitment
The Company signed a contract in July 1997 for construction of the
undersea portion of a fiber optic cable system connecting the cities of
Anchorage, Juneau, and Seattle via a subsea route. The total system is
expected to cost approximately $125 million. Subsea and terrestrial
connections extended the fiber optic cable to Fairbanks via Whittier and
Valdez. Construction efforts began in September 1998 and were completed
in early February 1999. Commercial services commenced in February 1999.
Pursuant to the
96 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
contract, the Company paid $77.2 million and $9.1
million during the years ended December 31, 1998 and 1997, respectively,
and will pay the remaining balance in installments through April 1999.
Approximately $39.4 million of proceeds from the public offerings (see
note 8), net of the $9.1 million paid in 1997, were contributed to
Alaska United. The use of such proceeds was restricted to funding the
construction and deployment of the fiber optic cable system and was
reported as Restricted Cash at December 31, 1997 in the accompanying
Consolidated Financial Statements. The restricted cash was released to
Alaska United in 1998 to fund construction and deployment efforts. In
January 1998, the Company secured up to $75 million in bank financing to
fund the remaining cost of construction and deployment, of which $61.2
million was outstanding at December 31, 1998 (see note 6 (c)).
Year 2000
In 1997, the Company initiated a plan to identify, assess and remediate
Year 2000 issues within each of its significant computer programs and
certain equipment which contain micro-processors. The plan is addressing
the issue of computer programs and embedded computer chips being unable
to distinguish between the year 1900 and the year 2000, if a program or
chip uses only two digits rather than four to define the applicable
year. The Company has divided the plan into two major phases. The first
phase, including team formation, inventory assessment, compliance
assessment and risk assessment, were completed during 1998. The second
phase, including resolution/remediation, validation, contingency
planning and sign-off acceptance, was in progress at December 31, 1998.
Systems which have been determined not to be Year 2000 compliant are
being either replaced or reprogrammed, and thereafter tested for Year
2000 compliance. The plan anticipates that by mid-1999 the conversion,
implementation and testing phases will be completed. The current budget
for the total cost of remediation (including replacement software and
hardware) and testing, as set forth in the plan, is approximately $4.0
million.
The Company is in the process of identifying and contacting critical
suppliers and customers whose computerized systems interface with the
Company's systems, regarding their plans and progress in addressing
their Year 2000 issues. The Company has received varying information
from such third parties on the state of compliance or expected
compliance. Contingency plans are being developed in the event that any
critical supplier or customer is not compliant.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the
Company's operations, liquidity and financial condition. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in part
from the uncertainty of the Year 2000 readiness of third-party suppliers
and customers, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material impact on
the Company's operations, liquidity or financial condition.
(12) Subsequent Event
On April 2, 1999 the Company received commitments for the issuance of
20,000 shares of convertible redeemable accreting preferred stock
("Preferred Stock"). Proceeds totaling $20 million (before payment of
costs and expenses) will be used for general corporate purposes and to
provide additional liquidity. The Company's amended Senior Holdings Loan
facilities limit use of such proceeds (see note 6). The Preferred Stock
contains a $1,000 per share liquidation preference, plus accrued but
unpaid dividends and fees. Dividends will be payable semi-annually at
the rate of 8.5% of the liquidation preference. Prior to the five-year
anniversary following closing, dividends are payable, at the Company's
option, in cash or in additional fully-paid shares of Preferred Stock.
Dividends are payable only in cash following the five-year anniversary
of closing. Mandatory redemption is required 12 years from the date of
closing.
97 (Continued)
GENERAL COMMUNICATION, INC.
Notes to Consolidated Financial Statements
The Company and Holders of the Preferred Stock will have the right after
the four-year anniversary of closing (or occurrence of a triggering
event, as defined) to convert the stated value, in whole or in part,
into registered shares of GCI class A common stock. The conversion price
will be the lesser of $6.00 or 120% of the average closing price of
GCI's class A common stock for the 10 trading days prior to closing.
At any time subsequent to the third anniversary following closing, and
assuming the stock is trading at two times the conversion price, the
Company may require immediate conversion at a price equal to two times
the conversion price. The Preferred Stock, subject to lender approval,
will be exchangeable in whole or in part, at the Company's option, into
subordinated debt with terms and conditions comparable to those
governing the Preferred Stock. The Preferred Stock will be senior to all
other classes of the Company's equity securities, and will have voting
rights equal to that number of shares of common stock into which it can
be converted. The holders of the Preferred Stock will, as a class, be
entitled to elect one GCI director. Closing is expected to take place
prior to April 30, 1999.
(13) Supplementary Financial Data
The following is a summary of unaudited quarterly results of operations
for the years ended December 31, 1998 and 1997.
(Amounts in thousands, except per share amounts)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
1998
----
Total revenues $ 58,152 62,941 62,766 62,936 246,795
Net loss $ (1,616) (2,066) (2,076) (1,039) (6,797)
Basic net loss per common share $ (0.03) (0.04) (0.04) (0.02) (0.14)
Diluted net loss per common share $ (0.03) (0.04) (0.04) (0.02) (0.14)
1997
----
Total revenues $ 52,881 56,186 57,956 56,786 223,809
Net earnings (loss) $ (525) (832) (928) 102 (2,183)
Basic loss per common share:
Net loss before extraordinary item $ (0.01) (0.02) (0.01) --- (0.04)
Extraordinary loss $ --- --- (0.01) --- (0.01)
Net loss $ (0.01) (0.02) (0.02) --- (0.05)
Diluted loss per common share:
Net loss before extraordinary item $ (0.01) (0.02) (0.01) --- (0.04)
Extraordinary loss $ --- --- (0.01) --- (0.01)
Net loss $ (0.01) (0.02) (0.02) --- (0.05)
98
PART IV
Item 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page No.
--------
(a)(l) Consolidated Financial Statements
Included in Part II of this Report:
Independent Auditor's Report..............................................................67
Consolidated Balance Sheets, December 31, 1998 and 1997...................................68 -- 69
Consolidated Statements of Operations,
Years ended December 31, 1998, 1997 and 1996...........................................70
Consolidated Statements of Stockholders' Equity,
Years ended December 31, 1998, 1997 and 1996...........................................71
Consolidated Statements of Cash Flows,
Years ended December 31, 1998, 1997 and 1996...........................................72
Notes to Consolidated Financial Statements................................................73 -- 98
(a)(2) Consolidated Financial Statement Schedules
Included in Part IV of this Report:
Independent Auditors' Report..............................................................106
Schedule VIII - Valuation and Qualifying Accounts,
Years ended December 31, 1998, 1997 and 1996...........................................107
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.
99
(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 August 16, 1993. (23)
3.2 Bylaws of the Company (1)
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, O'Hara, Strid, Behnke,
Lewkowski and Snyder (3)
10.2 Lease agreement between GCI Communication Services, Inc. and National Bank of Alaska
Leasing Corporation dated January 15, 1992 (4)
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)
10.9 Pledge and Security Agreement between National Bank of Alaska and GCI Communication
Services, Inc. dated December 31, 1992 (4)
10.10 Lease Agreement between MCI Telecommunications Corporation and GCI Leasing Co., Inc.
dated December 31, 1992 (4)
10.11 Sublease Agreement between MCI Telecommunications Corporation and General Communication,
Inc. dated December 31, 1992 (4)
10.12 Financial Assistance Agreement between MCI Telecommunications Corporation 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)
10.18 Revised Qualified Employee Stock Purchase Plan of General Communication, Inc. (10)
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)
100
Exhibit No. Description
------------------------------------------------------------------------------------------------------------
10.21 Transponder Purchase Agreement for Galaxy X between Hughes Communications Galaxy, Inc.
and GCI Communication Corp. (11)
10.22 Equipment Purchase Agreement between GCI Communication Corporation and
Scientific-Atlanta, Inc. (11)
10.23 Management Agreement, between Prime II Management, L.P., and GCI Cable, Inc., dated
October 31, 1996 (12)
10.24 Third Amended and Restated Credit Agreement, dated as of October 31, 1996, between GCI
Communication Corp., and NationsBank of Texas, N.A. (13)
10.25 Licenses: (5)
10.25.1 214 Authorization
10.25.2 International Resale Authorization
10.25.3 Digital Electronic Message Service Authorization
10.25.4 Fairbanks Earth Station License
10.25.5 Fairbanks (Esro) Construction Permit for P-T-P Microwave Service
10.25.6 Fairbanks (Polaris) Construction Permit for P-T-P Microwave Service
10.25.7 Anchorage Earth Station Construction Permit
10.25.8 License for Eagle River P-T-P Microwave Service
10.25.9 License for Juneau Earth Station
10.25.10 Issaquah Earth Station Construction Permit
10.26 ATU Interconnection Agreement between GCI Communication Corp. and Municipality of
Anchorage, executed January 15, 1997 (18)
10.27 First Amendment to Third Amended and Restated Credit Agreement entered into among GCI
Communication Corp., NationsBank of Texas, N.A., Toronto Dominion (Texas), Inc.,
Credit Lyonnais New York Branch, and National Bank of Alaska (15)
10.28 Second Amendment to Third Amended and Restated Credit Agreement entered into among GCI
Communication Corp., NationsBank of Texas, N.A., Toronto Dominion (Texas), Inc.,
Credit Lyonnais New York Branch, and National Bank of Alaska (20)
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)
10.35 Amendment to Revised Qualified Employee Stock Purchase Plan of General Communication,
Inc. (18)
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)
101
Exhibit No. Description
------------------------------------------------------------------------------------------------------------
10.42 Fifth Amendment to the MCI Carrier Agreement executed April 19, 1996 (18)
10.43 Sixth Amendment to MCI Carrier Agreement dated as of March 1, 1996 (16)
10.44 Seventh Amendment to MCI Carrier Agreement dated November 27, 1996 (20)
10.45 First Amendment to Contract for Alaska Access Services between General Communication,
Inc. and MCI Telecommunications Corporation dated April 1, 1996 (20)
10.46 Service Mark License Agreement between MCI Communications Corporation and General
Communication, Inc. dated April 13, 1994 (19)
10.47 Radio Station Authorization (Personal Communications Service License), Issue Date June
23, 1995 (19)
10.48 Framework Agreement between National Bank of Alaska (NBA) and General Communication,
Inc. dated October 31, 1995 (17)
10.49 1997 Call-Off Contract between National Bank of Alaska (NBA) and General Communication,
Inc. (GCI) dated November 1, 1996 (20)
10.50 Contract No. 92MR067A Telecommunications Services between BP Exploration (Alaska), Inc.
and GCI Network Systems dated April 1, 1992 (20)
10.51 Amendment No. 03 to BP Exploration (Alaska) Inc. Contract No. 92MRO67A effective August
1, 1996 (20)
10.52 Lease Agreement dated September 30, 1991 between RDB Company and General Communication,
Inc. (3)
10.53 Certificate of Public Convenience and Necessity No. 436 for Telecommunications Service
(Relay Services) (19)
10.54 Order Approving Transfer Upon Closing, Subject to Conditions, and Requiring Filings
dated September 23, 1996 (19)
10.55 Order Granting Extension of Time and Clarifying Order dated October 21, 1996 (19)
10.56 Contract for Alaska Access Services among General Communication, Inc. and GCI
Communication Corp., and Sprint Communications Company L.P. dated June 1, 1993 (20)
10.57 First Amendment to Contract for Alaska Access Services between General Communication,
Inc. and Sprint Communications Company L.P. dated as of August 7, 1996 (20)
10.58 Employment and Deferred Compensation Agreement between General Communication, Inc. and
John M. Lowber dated July 1992 (19)
10.59 Deferred Compensation Agreement between GCI Communication Corp. and Dana L. Tindall
dated August 15, 1994 (19)
10.60 Transponder Lease Agreement between General Communication Incorporated and Hughes
Communications Satellite Services, Inc., executed August 8, 1989 (9)
10.61 Addendum to Galaxy X Transponder Purchase Agreement between GCI 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)
102
Exhibit No. Description
------------------------------------------------------------------------------------------------------------
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 * See note
21.1 Subsidiaries of the Registrant (23)
23.1 Consent of KPMG LLP (Accountant for Company) *
27.1 Financial Data Schedule *
99 Additional Exhibits:
99.1 The Articles of Incorporation of GCI Communication Corp. (2)
99.2 The By-laws of GCI Communication Corp. (2)
99.3 The Articles of Incorporation of GCI Communication Services, Inc. (4)
99.4 The By-laws of GCI Communication Services, Inc. (4)
99.5 The Articles of Incorporation of GCI Leasing Co., Inc. (4)
99.6 The By-laws of GCI Leasing Co., Inc. (4)
99.7 The By-laws of GCI Cable, Inc. (14)
99.8 The Articles of Incorporation of GCI Cable, Inc. (14)
99.9 The By-laws of GCI Cable / Fairbanks, Inc. (14)
99.10 The Articles of Incorporation of GCI Cable / Fairbanks, Inc. (14)
99.11 The By-laws of GCI Cable / Juneau, Inc. (14)
99.12 The Articles of Incorporation of GCI Cable / Juneau, Inc. (14)
99.13 The By-laws of GCI Cable Holdings, Inc. (14)
99.14 The Articles of Incorporation of GCI Cable Holdings, Inc. (14)
99.15 The By-laws 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 By-laws of GCI Transport, Inc. (23)
99.20 The Articles of Incorporation of GCI Transport, Inc. (23)
99.21 The By-laws of Fiber Hold Co., Inc. (23)
99.22 The Articles of Incorporation of Fiber Hold Co., Inc. (23)
99.23 The By-laws of GCI Fiber Co., Inc. (23)
99.24 The Articles of Incorporation of GCI Fiber Co., Inc. (23)
99.25 The By-laws of GCI Satellite Co., Inc. (23)
99.26 The Articles of Incorporation of GCI Satellite Co., Inc. (23)
103
Exhibit No. Description
------------------------------------------------------------------------------------------------------------
99.27 The Partnership Agreement of Alaska United Fiber System (23)
-------------------------
* Filed herewith.
Note Certain information has been redacted from Exhibit
10.71 which the Company desires to keep undisclosed
and a copy of the unredacted document has been filed
separately with the Securities and Exchange
Commission.
1 Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period
ended March 31, 1994
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.
7 Incorporated by reference to the Company's Current Report on Form 8-K dated January 13,
1993.
8 Incorporated by reference to the Company's Current Report on Form 8-K dated June 4, 1993.
9 Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993.
10 Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
11 Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
12 Incorporated by reference to the Company's Form S-4 Registration Statement dated October
4, 1996.
13 Incorporated by reference to the Company's Current Report on Form 8-K dated November 13,
1996.
14 Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
15 Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period
ended March 31, 1997.
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 herein by reference to the Company's Form S-3 Registration Statement (File
No. 333-28001) dated May 29, 1997.
19 Incorporated herein 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 herein by reference to the Company's Amendment No. 2 to Form S-3/A
Registration Statement (File No. 333-28001) dated July 21, 1997.
104
21 Incorporated herein by reference to the Company's Amendment No. 3 to Form S-3/A
Registration Statement (File No. 333-28001) dated July 22, 1997.
22 Incorporated herein by reference to the Company's Form S-8 POS Registration Statement
(File No. 33-60222) dated February 20, 1998.
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.
(c) Reports on Form 8-K
None.
105
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
General Communication, Inc.:
Under date of March 26, 1999, we reported on the consolidated balance sheets of
General Communication, Inc. and Subsidiaries ("Company") as of December 31, 1998
and 1997 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, 1998, which are included in the Company's 1998 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 1998 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 26, 1999
106
Schedule VIII
-------------
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1998, 1997 and 1996
Additions Deductions
-------------------- ----------
Balance at Charged Write-offs Balance
beginning to profit net of at end
Description of year and loss Other recoveries of year
- ----------------------------------------------- ---------- --------- ----- ---------- -------
(Amounts in thousands)
Year ended December 31, 1998:
Allowance for doubtful
receivables $1,070 2,795 --- 2,978 887
===== ====== ===== ====== ======
Year ended December 31, 1997:
Allowance for doubtful
receivables $ 597 3,025 --- 2,552 1,070
===== ====== ===== ====== =======
Year ended December 31, 1996:
Allowance for doubtful
receivables $ 295 1,736 354 (1) 1,788 597
===== ===== ===== ====== =====
(1) Allowance for doubtful receivables acquired pursuant to the Cable Company
acquisitions described in Note 2 to the Company's consolidated financial
statements.
107
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
GENERAL COMMUNICATION, INC.
By: /s/ Ronald A. Duncan
Ronald A. Duncan, President
(Chief Executive Officer)
Date: March 24, 1999
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
- -------------------------------------- ------------------------------------------ -------------------
/s/ Carter F. Page Chairman of Board and Director March 19, 1999
- -------------------------------------- -------------------
Carter F. Page
/s/ Robert M. Walp Vice Chairman of Board and Director March 24, 1999
- -------------------------------------- -------------------
Robert M. Walp
/s/ Ronald A. Duncan President and Director March 24, 1999
- -------------------------------------- (Principal Executive Officer) -------------------
Ronald A. Duncan
/s/ Ronald R. Beaumont Director March 19, 1999
- -------------------------------------- -------------------
Ronald R. Beaumont
/s/ Donne F. Fisher Director March 24, 1999
- -------------------------------------- -------------------
Donne F. Fisher
/s/ William P. Glasgow Director March 24, 1999
- -------------------------------------- -------------------
William P. Glasgow
/s/ Stephen R. Mooney Director March 18, 1999
- -------------------------------------- -------------------
Stephen R. Mooney
/s/ Larry E. Romrell Director March 24, 1999
- -------------------------------------- -------------------
Larry E. Romrell
(Continued)
108
SIGNATURES
(Continued)
Signature Title Date
- -------------------------------------- ------------------------------------------ -------------------
/s/ James M. Schneider Director March 24, 1999
- -------------------------------------- -------------------
James M. Schneider
/s/ John M. Lowber Senior Vice President, Chief Financial March 24, 1999
- -------------------------------------- Officer, Secretary and Treasurer -------------------
John M. Lowber (Principal Financial Officer)
/s/ Alfred J. Walker Vice President, Chief Accounting March 24, 1999
- -------------------------------------- Officer -------------------
Alfred J. Walker (Principal Accounting Officer)
109