As filed with the Securities and Exchange Commission on May 15, 2000.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-5890
GCI, INC.
(Exact name of registrant as specified in its charter)
STATE OF ALASKA 91-1820757
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 Denali Street
Suite 1000
Anchorage, Alaska 99503
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (907) 265-5600
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$180,000,000 9.75% Senior Notes due August 2007
1
<PAGE>
<TABLE>
GCI, INC.
A WHOLLY OWNED SUBSIDIARY OF GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
<CAPTION>
Page No.
--------
<S> <C>
Cautionary Statement Regarding Forward-Looking Statements.................................................3
PART I. FINANCIAL INFORMATION
Item l. Consolidated Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999..................................................5
Consolidated Statements of Operations for the
three months ended March 31, 2000
(unaudited) and 1999 (unaudited)...................................................7
Consolidated Statements of Stockholder's Equity
for the three months ended March 31, 2000
(unaudited) and 1999 (unaudited)...................................................8
Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 (unaudited)
and 1999 (unaudited)...............................................................9
Notes to Interim Condensed Consolidated Financial
Statements.........................................................................10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................31
Item 6. Exhibits and Reports on Form 8-K......................................................31
Other items are omitted, as they are not applicable.
SIGNATURES................................................................................................32
</TABLE>
2
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
You should carefully review the information contained in this Quarterly Report,
but should particularly consider any risk factors that we set forth in this
Quarterly Report and in other reports or documents that we file from time to
time with the Securities and Exchange Commission. In this Quarterly Report, in
addition to historical information, we state our beliefs of future events and of
our future operating results, financial position and cash flows. In some cases,
you can identify those so-called "forward-looking statements" by words such as
"may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of those
words and other comparable words. You should be aware that those statements are
only our predictions and are subject to risks and uncertainties. Actual events
or results may differ materially. In evaluating those statements, you should
specifically consider various factors, including those outlined below. Those
factors may cause our actual results to differ materially from any of our
forward-looking statements. For these statements, we claim the protection of the
safe harbor for forward-looking statements provided by the Private Securities
Litigation Reform Act of 1995.
- Material adverse changes in the economic conditions in the markets we
serve;
- The efficacy of the rules and regulations to be adopted by the Federal
Communications Commission ("FCC") and state public regulatory agencies
to implement the provisions of the Telecommunications Act of 1996; the
outcome of litigation relative thereto; and the impact of regulatory
changes relating to access reform;
- Our responses to competitive products, services and pricing, including
pricing pressures, technological developments, alternative routing
developments, and the ability to offer combined service packages that
include local, cable and Internet services; the extent and pace at which
different competitive environments develop for each segment of our
business; the extent and duration for which competitors from each
segment of the telecommunications industry are able to offer combined or
full service packages prior to our being able to do so; the degree to
which we experience material competitive impacts to our traditional
service offerings prior to achieving adequate local service entry; and
competitor responses to our products and services and overall market
acceptance of such products and services;
- The outcome of our negotiations with incumbent local exchange carriers
("ILECs") and state regulatory arbitrations and approvals with respect
to interconnection agreements; and our ability to purchase unbundled
network elements or wholesale services from ILECs at a price sufficient
to permit the profitable offering of local exchange service at
competitive rates;
- Success and market acceptance for new initiatives, many of which are
untested; the level and timing of the growth and profitability of new
initiatives, particularly local access services, Internet (consumer and
business) services and wireless services; start-up costs associated with
entering new markets, including advertising and promotional efforts;
successful deployment of new systems and applications to support new
initiatives; and local conditions and obstacles;
- Uncertainties inherent in new business strategies, new product launches
and development plans, including local access services, Internet
services, wireless services, digital video services, cable modem
services, and transmission services;
- Rapid technological changes;
- Development and financing of telecommunication, local access, wireless,
Internet and cable networks and services;
- Future financial performance, including the availability, terms and
deployment of capital; the impact of regulatory and competitive
developments on capital outlays, and the ability to achieve cost savings
and realize productivity improvements;
- Availability of qualified personnel;
- Changes in, or failure, or inability, to comply with, government
regulations, including, without limitation, regulations of the FCC, the
Regulatory Commission of Alaska ("RCA"), and adverse outcomes from
regulatory proceedings;
- The remaining cost of our year 2000 compliance efforts;
- Uncertainties in federal military spending levels and military base
closures in markets in which we operate;
- Other risks detailed from time to time in our periodic reports filed
with the Securities and Exchange Commission.
3
<PAGE>
These forward-looking statements (and such risks, uncertainties and other
factors) are made only as of the date of this report and we expressly disclaim
any obligation or undertaking to disseminate any updates or revisions to any
forward-looking statement contained in this document to reflect any change in
our expectations with regard to those statements or any other change in events,
conditions or circumstances on which any such statement is based. Readers are
cautioned not to put undue reliance on such forward-looking statements.
4
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
GCI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Unaudited)
March 31, December 31,
ASSETS 2000 1999
- --------------------------------------------------------------------------- ---------------- ----------------
(Amounts in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,557 13,734
---------------- ----------------
Receivables:
Trade 42,557 48,145
Other 317 269
---------------- ----------------
42,874 48,414
Less allowance for doubtful receivables 3,156 2,833
---------------- ----------------
Net receivables 39,718 45,581
---------------- ----------------
Refundable deposit 8,806 9,100
Prepaid and other current assets 2,041 2,224
Deferred income taxes, net 3,489 2,972
Inventories 3,295 3,754
Notes receivable 749 449
---------------- ----------------
Total current assets 68,655 77,814
---------------- ----------------
Property and equipment in service, net of depreciation 346,675 302,762
Construction in progress 3,766 2,898
---------------- ----------------
Net property and equipment 350,441 305,660
---------------- ----------------
Cable franchise agreements, net of amortization of $17,637 and $16,347
at March 31, 2000 and December 31, 1999, respectively 188,855 190,145
Goodwill, net of amortization of $4,863 and $4,563 at March
31, 2000 and December 31, 1999, respectively 41,091 41,391
Other intangible assets, net of amortization of $389 and $269
at March 31, 2000 and December 31, 1999, respectively 4,345 4,402
Property held for sale 12,427 10,877
Deferred loan and senior notes costs, net of amortization 9,176 8,863
Notes receivable 1,988 2,067
Other assets, at cost, net of amortization 2,282 2,500
---------------- ----------------
Total other assets 260,164 260,245
---------------- ----------------
Total assets $ 679,260 643,719
================ ================
See accompanying notes to interim condensed consolidated financial statements. (Continued)
</TABLE>
5
<PAGE>
<TABLE>
GCI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
<CAPTION>
(Unaudited)
March 31, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2000 1999
- -------------------------------------------------------------------------- ---------------- ----------------
(Amounts in thousands)
<S> <C> <C>
Current liabilities:
Current maturities of obligations under capital leases $ 1,738 574
Accounts payable 24,965 25,321
Accrued interest 3,580 7,985
Accrued payroll and payroll related obligations 7,406 8,601
Deferred revenue 7,855 8,173
Accrued liabilities 3,365 3,152
Subscriber deposits and other current liabilities 1,657 1,314
---------------- ----------------
Total current liabilities 50,566 55,120
Long-term debt, excluding current maturities 339,400 339,400
Obligations under capital leases, excluding current maturities 47,655 747
Obligations under capital leases due to related party, excluding
current maturities 316 353
Deferred income taxes, net of deferred income tax benefit 27,732 30,861
Other liabilities 3,284 3,052
---------------- ----------------
Total liabilities 468,953 429,533
---------------- ----------------
Stockholder's equity:
Class A common stock (no par). Authorized 10,000 shares; issued and
outstanding 100 shares at March 31, 2000 and December 31, 1999 206,622 206,622
Paid-in capital 27,690 26,071
Retained deficit (24,005) (18,507)
---------------- ----------------
Total stockholder's equity 210,307 214,186
---------------- ----------------
Commitments and contingencies
Total liabilities and stockholder's equity $ 679,260 643,719
================ ================
See accompanying notes to interim condensed consolidated financial statements.
</TABLE>
6
<PAGE>
<TABLE>
GCI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
2000 1999
---------------- ----------------
(Amounts in thousands except
per share amounts)
<S> <C> <C>
Revenues $ 68,277 61,338
Cost of sales and services 29,658 27,870
Selling, general and administrative expenses 24,654 23,538
Depreciation and amortization expense 13,088 10,298
---------------- ----------------
Operating income (loss) 877 (368)
Interest expense 10,014 7,080
Interest income 175 120
---------------- ----------------
Interest expense, net 9,839 6,960
---------------- ----------------
Net loss before income taxes and cumulative effect of a change
in accounting principle (8,962) (7,328)
Income tax benefit 3,464 2,807
---------------- ----------------
Net loss before cumulative effect of a change in accounting
principle (5,498) (4,521)
Cumulative effect of a change in accounting principle, net of income tax
benefit of $245 --- 344
---------------- ----------------
Net loss $ (5,498) (4,865)
================ ================
Basic loss per common share:
Loss before cumulative effect of a change in accounting principle $ (54,980) (45,210)
Cumulative effect of a change in accounting principle --- 3,440
---------------- ----------------
Net loss $ (54,980) (48,650)
================ ================
Diluted loss per common share:
Loss before cumulative effect of a change in accounting principle $ (54,980) (45,210)
Cumulative effect of a change in accounting principle --- 3,440
---------------- ----------------
Net loss $ (54,980) (48,650)
================ ================
See accompanying notes to interim condensed consolidated financial statements.
</TABLE>
7
<PAGE>
<TABLE>
GCI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<CAPTION>
Shares of
Class A Class A
(Unaudited) Common Common Paid-in Retained
(Amounts in thousands) Stock Stock Capital Deficit
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1998 100 $ 206,622 2,933 (8,980)
Net loss --- --- --- (4,865)
Contribution from General Communication, Inc. --- --- 50 ---
-----------------------------------------------------------------
Balances at March 31, 1999 100 $ 206,622 2,983 (13,845)
=================================================================
Balances at December 31, 1999 100 $ 206,622 26,071 (18,507)
Net loss --- --- --- (5,498)
Contribution from General Communication, Inc. --- --- 1,619 ---
-----------------------------------------------------------------
Balances at March 31, 2000 100 $ 206,622 27,690 (24,005)
=================================================================
See accompanying notes to interim condensed consolidated financial statements.
</TABLE>
8
<PAGE>
<TABLE>
GCI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
2000 1999
-------------- --------------
(Amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,498) (4,865)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation and amortization 13,088 10,298
Amortization charged to selling, general and administrative 323 430
Deferred income tax (benefit) expense (3,464) (3,052)
Deferred compensation and compensatory stock options 165 172
Bad debt expense, net of write-offs 323 497
Employee Stock Purchase Plan expense funded with Class A
common stock issued and issuable by General Communication,
Inc. 704 577
Write-off of capitalized interest 1,955 ---
Write-off of unamortized start-up costs --- 589
Other noncash income and expense items (62) 74
Change in operating assets and liabilities 1,178 (4,533)
-------------- --------------
Net cash provided by operating activities 8,712 187
-------------- --------------
Cash flows from investing activities:
Purchases of property and equipment, including construction period
interest (9,685) (9,882)
Purchases of property held for sale (1,550) ---
Purchases of other assets (129) (391)
Notes receivable issued (735) (193)
Payments received on notes receivable 600 15
-------------- --------------
Net cash used in investing activities (11,499) (10,451)
-------------- --------------
Cash flows from financing activities:
Long-term borrowings - bank debt --- 4,884
Repayments of long-term borrowings and capital lease obligations (138) (490)
Payment of debt issuance costs (333) (7)
Cash contribution from General Communication, Inc. 81 38
-------------- --------------
Net cash provided (used) by financing activities (390) 4,425
-------------- --------------
Net decrease in cash and cash equivalents (3,177) (5,839)
Cash and cash equivalents at beginning of period 13,734 12,008
-------------- --------------
Cash and cash equivalents at end of period $ 10,557 6,169
============== ==============
See accompanying notes to interim condensed consolidated financial statements.
</TABLE>
9
<PAGE>
GCI, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(1) General
Basis of Presentation
GCI, Inc. was incorporated in 1997 to effect the issuance of senior
notes. GCI, Inc., as a wholly owned subsidiary of General
Communication, Inc. ("GCI"), received through its initial
capitalization all ownership interests in subsidiaries previously
held by GCI.
(a) Business
GCI, Inc. and its direct and indirect subsidiaries (collectively,
the "Company") offer the following services:
- Long-distance telephone service between Anchorage,
Fairbanks, Juneau, and other communities in Alaska and the
remaining United States and foreign countries
- Cable television services throughout Alaska
- Facilities-based competitive local access services in
Anchorage, Alaska
- Internet access services
- Termination of traffic in Alaska for certain common carriers
- Interstate and intrastate private line services
- Managed services to certain commercial customers
- Sales and service of dedicated communications systems and
related equipment
- Private network point-to-point data and voice transmission
services between Alaska and the western contiguous United
States
- Owns and leases capacity on two undersea fiber optic cables
used in the transmission of interstate and intrastate
private line, switched message long-distance and Internet
services between Alaska and the remaining United States and
foreign countries
(b) Principles of Consolidation
The consolidated financial statements include the accounts of
GCI, Inc., GCI, Inc.'s wholly-owned subsidiary GCI Holdings,
Inc., GCI Holdings, Inc.'s wholly-owned subsidiaries GCI
Communication Corp., GCI Cable, Inc. and GCI Transport Company,
Inc., GCI Transport Co., Inc.'s wholly-owned subsidiaries GCI
Satellite Co., Inc., GCI Fiber Co., Inc. and Fiber Hold
Company, Inc. and GCI Fiber Co., Inc.'s and Fiber Hold Company,
Inc.'s wholly-owned partnership Alaska United Fiber System
Partnership ("Alaska United"). GCI Communication Services, Inc.
and its wholly owned subsidiary GCI Leasing Co. were merged
into GCI Communication Corp. effective January 1, 2000. GCI
Cable/Fairbanks, Inc. and GCI Cable/Juneau, Inc. were merged
into GCI Cable, Inc. effective January 1, 2000.
All significant intercompany balances and transactions have
been eliminated in consolidation.
(c) Net Loss Per Common Share
<TABLE>
Shares used to calculate net loss per common share consist of
the following:
<CAPTION>
Three Months Ended
March 31,
2000 1999
----------- ----------
<S> <C> <C>
Weighted average common shares outstanding 100 100
Common equivalent shares outstanding --- ---
----------- ----------
100 100
=========== ==========
</TABLE>
Basic and diluted loss per share calculations for the
three-month periods ended March 31, 2000 and 1999 are based on
GCI, Inc.'s weighted average outstanding shares of common stock
which are not publicly traded. GCI, Inc. has no outstanding
common stock equivalents or weighted average shares associated
with outstanding stock options.
10 (Continued)
<PAGE>
GCI, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(d) Cumulative Effect of a Change in Accounting Principle
The American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities", which provides guidance on the financial
reporting of start-up costs and organization costs and requires
costs of start-up activities and organization costs to be
expensed as incurred. A one-time expense of $344,000 (net of
income tax benefit of $245,000) associated with the write-off
of unamortized start-up costs was recognized in the first
quarter of 1999 upon adoption of SOP 98-5.
(e) Reclassifications
Reclassifications have been made to the 1999 financial
statements to make them comparable with the 2000 presentation.
(f) Other
The accompanying unaudited interim condensed consolidated
financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. The
interim condensed consolidated financial statements include the
consolidated accounts of GCI, Inc. and its wholly owned
subsidiaries (collectively, the "Company") with all significant
intercompany transactions eliminated. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period
ended March 31, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31,
2000. For further information, refer to the financial
statements and footnotes thereto included in the Company's
annual report on Form 10-K for the year ended December 31,
1999.
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
<TABLE>
Changes in operating assets and liabilities consist of (amounts in
thousands):
<CAPTION>
Three-month periods ended March 31, 2000 1999
------------- ------------
<S> <C> <C>
(Increase) decrease in receivables $ 5,540 (96)
(Increase) decrease in prepaid and other current assets 74 (335)
Decrease in inventory 564 267
Decrease in accounts payable (356) (814)
Increase (decrease) in accrued liabilities 225 (112)
Increase (decrease) in accrued payroll and payroll related
obligations (656) 458
Decrease in accrued interest (4,405) (4,378)
Increase (decrease) in subscriber deposits and other current
liabilities 343 (99)
Increase (decrease) in deferred revenues (318) 782
Increase (decrease) in components of other long-term liabilities
167 (206)
------------- ------------
$ 1,178 (4,533)
============= ============
</TABLE>
No income taxes were paid and no income tax refunds were received
during the three-month periods ended March 31, 2000 and 1999.
Interest paid totaled $13,265,000 and $12,890,000 during the
three-month periods ended March 31, 2000 and 1999, respectively.
11 (Continued)
<PAGE>
GCI, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
The Company recorded $182,000 and $8,000 during the three months
ended March 31, 2000 and 1999, respectively, in paid-in capital in
recognition of the income tax effect of excess stock compensation
expense for tax purposes over amounts recognized for financial
reporting purposes.
During the three months ended March 31, 2000 the Company funded the
employer matching portion of Employee Stock Purchase Plan
contributions through GCI's issuance of its Class A Common Stock
valued at $1,243,000. No GCI Class A Common Stock was issued to fund
the employer matching portion of Employee Stock Purchase Plan during
the three months ended March 31, 1999.
The Company financed the purchase of satellite transponders pursuant
to a long-term capital lease arrangement with a leasing company
during the three-month period ended March 31, 2000 at a cost of $48.2
million.
(3) Industry Segments Data
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 is offered to commercial, government,
other telecommunications companies and residential customers,
through its networks of fiber optic cables, digital microwave,
and fixed and transportable satellite earth stations and the
Company's SchoolAccess(TM) offering to rural school districts
and a similar offering to rural hospitals and health clinics.
Cable services. The Company provides cable television services
to residential, commercial and government users in the State
of Alaska. The Company's cable systems serve 26 communities
and areas in Alaska, including the state's three largest urban
areas, Anchorage, Fairbanks and Juneau. Cable plant upgrades
in 1999 and 1998 enabled the Company to offer digital cable
television services in Anchorage and retail cable modem
service (through its Internet services segment) in Anchorage,
Fairbanks and Juneau, complementing its existing service
offerings. The Company plans to expand its product offerings
as plant upgrades are completed in other communities in
Alaska.
Local access services. The Company introduced facilities based
competitive local exchange services in Anchorage in 1997. The
Company plans to provide similar competitive local exchange
services in Alaska's other major population centers.
Internet services. The Company began offering wholesale and
retail Internet services in 1998. Deployment of the new
undersea fiber optic cable allowed the Company to offer
enhanced services with high-bandwidth requirements.
Services provided by the Company that are included in the "Other"
segment in the tables that follow are managed services, product
sales, cellular telephone services, and management services for Kanas
Telecom, Inc., a company that owns and operates a fiber optic cable
system constructed along the trans-Alaska oil pipeline corridor
extending from Prudhoe Bay to Valdez, Alaska, which do not meet the
quantitative thresholds for determining reportable segments. None of
these business units have ever met the quantitative thresholds for
determining reportable segments. Also included in the Other segment
are corporate related expenses including marketing, customer service,
management information systems, accounting, legal and regulatory,
human resources and other general and administrative expenses.
The Company evaluates performance and allocates resources based on
(1) earnings or loss from operations before depreciation,
amortization, net interest expense and income taxes, and (2)
operating income or loss. The accounting policies of the reportable
segments are the same as those described in the
12 (Continued)
<PAGE>
GCI, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
summary of significant accounting policies included in the Company's
annual report on Form 10-K at December 31, 1999. 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. All of the Company's long-lived assets
are located within the United States of America.
<TABLE>
Summarized financial information concerning the Company's reportable
segments follows for the quarters ended March 31, 2000 and 1999
(amounts in thousands):
<CAPTION>
Long- Local
Distance Cable Access Internet
Services Services Services Services Other Total
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000
----
Revenues:
Intersegment $ 2,608 368 1,500 546 --- 5,022
External 43,620 15,930 4,520 1,713 2,494 68,277
------------------------------------------------------------------------
Total revenues $ 46,228 16,298 6,020 2,259 2,494 73,299
========================================================================
Earnings (loss) from operations
before depreciation, amortization,
net interest expense, income taxes
and cumulative effect of a change
in accounting principle $ 16,236 7,796 656 (2,375) (8,294) 14,019
========================================================================
Operating income (loss) $ 11,248 3,161 (1,090) (2,777) (9,611) 931
========================================================================
1999
----
Revenues:
Intersegment $ 1,902 613 660 --- --- 3,175
External 38,469 15,062 3,714 1,042 3,051 61,338
------------------------------------------------------------------------
Total revenues $ 40,371 15,675 4,374 1,042 3,051 64,513
========================================================================
Earnings (loss) from operations
before depreciation, amortization,
net interest expense, income taxes
and cumulative effect of a change
in accounting principle $ 13,786 8,673 (230) (2,709) (9,339) 10,181
========================================================================
Operating income (loss) $ 10,215 4,282 (1,040) (2,961) (10,613) (117)
========================================================================
</TABLE>
<TABLE>
A reconciliation of total segment revenues to consolidated revenues
follows:
<CAPTION>
Quarters ended March 31, 2000 1999
------------- --------------
<S> <C> <C>
Total segment revenues $ 73,299 64,513
Less intersegment revenues eliminated in consolidation (5,022) (3,175)
------------- --------------
Consolidated revenues $ 68,277 61,338
============= ==============
</TABLE>
13 (Continued)
<PAGE>
GCI, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
<TABLE>
A reconciliation of total segment earnings from operations before
depreciation, amortization, net interest expense, income taxes and
cumulative effect of a change in accounting principle to consolidated
net loss before income taxes and cumulative effect of a change in
accounting principle follows:
<CAPTION>
Quarters ended March 31, 2000 1999
------------- --------------
<S> <C> <C>
Total segment earnings from operations before depreciation,
amortization, net interest expense, income taxes and
cumulative effect of a change in
accounting principle $ 14,019 10,181
Less intersegment contribution eliminated in consolidation (54) (251)
------------- --------------
Consolidated earnings from operations before
depreciation, amortization, net interest expense,
income taxes and cumulative effect of a change in
accounting principle 13,965 9,930
Depreciation and amortization 13,088 10,298
------------- --------------
Consolidated operating income (loss) 877 (368)
Interest expense, net 9,839 6,960
------------- --------------
Consolidated net loss before income taxes and
cumulative effect of a change in accounting
principle $ (8,962) (7,328)
============= ==============
</TABLE>
<TABLE>
A reconciliation of total segment operating income (loss) to
consolidated net loss before income taxes and cumulative effect of a
change in accounting principle follows:
<CAPTION>
Quarters ended March 31, 2000 1999
------------- --------------
<S> <C> <C>
Total segment operating income (loss) $ 931 (117)
Less intersegment contribution eliminated in consolidation (54) (251)
------------- --------------
Consolidated operating income (loss) 877 (368)
Interest expense, net 9,839 6,960
------------- --------------
Consolidated net loss before income taxes and
cumulative effect of a change in accounting
principle $ (8,962) (7,328)
============= ==============
</TABLE>
(4) Commitments and Contingencies
Satellite Transponders Capital Lease
The Company entered into a purchase and lease-purchase option
agreement in August 1995 for the acquisition of satellite
transponders to meet its long-term satellite capacity requirements.
The satellite was successfully launched in January 2000 and delivered
to the Company on March 5, 2000. In March 2000 the Company agreed to
finance the satellite transponders pursuant to a long-term capital
lease arrangement with a leasing company. The base term of the lease
is one year from the closing date with the option for eight one-year
lease term renewals. The capital lease includes certain covenants
requiring maintenance of specific levels of operating cash flow to
indebtedness and limitations on additional indebtedness. Future
minimum lease payments are as follows (amounts in thousands):
14 (Continued)
<PAGE>
GCI, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
Year ending March 31,
<S> <C>
2001 $ 4,911
2002 6,418
2003 6,465
2004 6,359
2005 9,525
2006 and thereafter 51,577
-------------
Total minimum lease payments 85,255
Less amount representing interest (37,083)
Less current maturities of obligation under capital lease (1,149)
-------------
Long-term obligation under capital lease $ 47,023
=============
</TABLE>
The future minimum lease payments calculation is based upon the
assumption that the capital lease will be renewed at the end of the
one year period, but the Company can terminate the lease at the end
of any of the one year periods through either a purchase payment or a
termination payment.
The Company took ownership of the satellite transponders on April 1,
2000. The satellite transponders are recorded at a cost of $48.2
million. The satellite transponders will be depreciated over nine
years with a remaining residual value of $14.3 million.
Future Fiber Capacity Sale
An agreement was executed effective July 1999 for a second $19.5
million sale of fiber capacity to Alaska Communications Systems. The
agreement requires Alaska Communications Systems to acquire $19.5
million of additional capacity during the 18-month period following
the effective date of the contract. Costs associated with the
capacity to be sold have been classified as Property Held for Sale in
the accompanying interim condensed consolidated financial statements
at March 31, 2000.
Deferred Compensation Plan
The Company's non-qualified, unfunded deferred compensation plan
provides a means by which certain employees may elect to defer
receipt of designated percentages or amounts of their compensation
and provides a means for certain other deferrals of compensation. 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 $0 and $118,000
during the three-month periods ended March 31, 2000 and 1999,
respectively.
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 $615,000 and
$600,000 was recorded at March 31, 2000 and December 31, 1999,
respectively, to cover estimated reported losses, estimated
unreported losses based on past experience modified for current
trends, and estimated expenses for investigating and settling claims.
Actual losses will vary from the recorded reserve. While management
uses what it believes is pertinent information and factors in
determining the amount of reserves, future additions to the reserves
may be necessary due to changes in the information and factors used.
15 (Continued)
<PAGE>
GCI, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Litigation and Disputes
The Company is routinely involved in various lawsuits, billing
disputes, legal proceedings and regulatory matters that have arisen
in the normal course of business. While the ultimate results of these
items cannot be predicted with certainty, management does not expect
at this time the resolution of them to have a material adverse effect
on the Company's financial position, results of operations or its
liquidity.
Cable Service Rate Reregulation
Effective March 31, 1999, the rates for cable programming services
(service tiers above basic service) are no longer regulated. This
regulation ended pursuant to provisions of the Telecommunications Act
of 1996 and the regulations adopted pursuant thereto by the FCC.
Federal law still permits regulation of basic service rates. However,
Alaska law provides that cable television service is exempt from
regulation by the RCA unless 25% of a system's subscribers request
such regulation by filing a petition with the RCA. At March 31, 2000,
only the Juneau system is subject to RCA regulation of its basic
service rates. No petition requesting regulation has been filed for
any other system. (The Juneau system serves 8.0% of the Company's
total basic service subscribers at March 31, 2000.) Juneau's current
rates have been approved by the RCA and there are no other pending
filings with the RCA, therefore, there is no refund liability for
basic service at this time.
Year 2000
The Company initiated a company-wide program in 1998 to ensure that
its date-sensitive information, telephony, cable, Internet and
business systems, and certain other equipment would properly
recognize the Year 2000 as a result of the century change on January
1, 2000. The program focused on the hardware, software, embedded
chips, third-party vendors and suppliers as well as third-party
networks that were associated with the identified systems. The
Company substantially completed the program during third quarter 1999
and its systems did not experience any significant disruptions as a
result of the century change.
Costs related to the Year 2000 issue have been expensed as incurred
and are funded through the Company's operating cash flows. In total,
the Company has expensed cumulative incremental remediation costs
totaling $2.4 million through March 31, 2000, with remaining
incremental remediation costs in 2000 estimated at approximately
$110,000.
The Company did not defer any critical information technology
projects because of its Year 2000 program efforts, which were
addressed primarily through a dedicated team within the Company's
information technology group.
Universal Service Fund Appeal
During the year ended December 31, 1999 the Company recorded revenues
and accounts receivable totaling approximately $1 million from the
Universal Service Fund ("USF") for Internet services provided to
certain rural public school districts in Alaska. The USF refused
payment of the submitted billings, and the Company has appealed that
decision. Management believes the Company's position is sustainable,
however no assurance can be given with respect to the ultimate
outcome of such appeal. If the appeal results in disallowance of the
disputed billings, such loss could have an impact on the Company's
financial position, results of operations and cash flows in the year
the decision is rendered.
16
<PAGE>
PART I.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In the following discussion, GCI, Inc. and its direct and indirect subsidiaries
are referred to as "we," "us" and "our."
The following discussion and analysis should be read in conjunction with our
Interim Condensed Consolidated Financial Statements and the notes thereto. See -
Cautionary Statement Regarding Forward-Looking Statements.
GCI, Inc. was incorporated in 1997 to effect the issuance of Senior Notes as
further described in GCI, Inc.'s annual report on Form 10-K at December 31,
1999. GCI, Inc., a wholly owned subsidiary of GCI, received through its initial
capitalization all ownership interests in subsidiaries previously held by GCI.
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.
OVERVIEW
We have experienced significant growth in recent years through both strategic
acquisitions and growth in our existing businesses. We have historically met our
cash needs for operations through our cash flows from operating activities. Cash
requirements for acquisitions and capital expenditures have been provided
largely through our financing activities.
Long-distance services. Our provision of interstate and intrastate long-distance
services to residential, commercial and governmental customers and to other
common carriers (principally MCI WorldCom, Inc. ("MCI WorldCom") and Sprint
Corporation ("Sprint")), and provision of private line and leased dedicated
capacity services accounted for 96.4% of our total long-distance services
revenues during the first quarter of 2000. Factors that have the greatest impact
on year-to-year changes in long-distance services revenues include the rate per
minute charged to customers and usage volumes, usually expressed as minutes of
use.
Revenues from private line and other data services sales increased 39.1% to $6.4
million during the first quarter of 2000 as compared to the first quarter of
1999 due primarily to increased system capacity and increasing demand for data
services by Internet service providers ("ISP"), commercial and governmental
customers, and others. Demand for data services to and from the lower 48 states
previously exceeded the available supply of capacity, however such demand is
beginning to be filled with uncompressed fiber optic capacity on the Alaska
United fiber optic cable system.
Our long-distance cost of sales and services has consisted principally of direct
costs of providing services, including local access charges paid to LECs for
originating and terminating long-distance calls in Alaska, and fees paid to
other long-distance carriers to carry calls terminating in areas not served by
our network. Calls terminating in the lower 49 states are carried over MCI
WorldCom's network and calls terminating in international locations are carried
principally over Sprint's network. During the first quarter of 2000, local
access charges accounted for 54.0% of long-distance cost of sales and services,
fees paid to other long-distance carriers represented 28.8%, satellite
transponder lease and undersea fiber maintenance costs represented 11.8%, and
other costs represented 5.4% of long-distance cost of sales and services.
Our long-distance selling, general, and administrative expenses have consisted
of operating and engineering, customer service, sales and communications,
management information systems, general and administrative, and legal and
regulatory expenses. Most of these expenses consist of salaries, wages and
benefits of personnel and certain other indirect costs (such as rent, travel,
utilities, insurance and property taxes). A significant portion of long-distance
selling, general, and administrative expenses, 39.0% during the first quarter of
2000, represents operating and engineering costs.
Long-distance services face significant competition from AT&T Alascom, Inc.,
long-distance resellers, and from local telephone companies that have entered
the long-distance market. The total number of active
17
<PAGE>
long-distance residential, commercial and small business customers increased
7.5% at March 31, 2000 as compared to March 31, 1999, and increased 1.3% as
compared to December 31, 1999. We believe our approach to developing, pricing,
and providing long-distance services and bundling different business segment
services will continue to allow us to be competitive in providing those
services.
Revenues derived from other common carriers increased 11.4% in the first quarter
of 2000 as compared to the first quarter of 1999. The increase is due primarily
to a 54.8% increase in minutes carried for other common carriers offset by a
change in the mix of wholesale minutes carried for such customers, which reduced
the average rate charged 27.8%. We secured contract amendments during the second
quarter of 1999 with MCI WorldCom and Sprint. The amendments provided, among
other things, for a three-year contract term extension for Sprint. The MCI
WorldCom contract expires in 2001. Other common carrier traffic routed to us for
termination in Alaska is largely dependent on traffic routed to MCI WorldCom and
Sprint by their customers. Pricing pressures, new program offerings and market
consolidation continue to evolve in the markets served by MCI WorldCom and
Sprint. If, as a result, their traffic is reduced, or if their competitors'
costs to terminate or originate traffic in Alaska are reduced, our traffic will
also likely be reduced, and our pricing may be reduced to respond to competitive
pressures. We are unable to predict the effect on us of such changes, however
given the materiality of other common carrier revenues to us; a significant
reduction in traffic or pricing could have a material adverse effect on our
financial position, results of operations and liquidity. In October 1999 MCI
WorldCom and Sprint announced their intention to merge, subject to certain
approvals. Shareholders of both companies approved the merger in April 2000.
Both companies anticipate the merger will be approved by the Department of
Justice in the second quarter of 2000, followed by approval by the Federal
Communications Commission, various state government bodies and foreign antitrust
authorities in the third quarter of 2000. Both companies anticipate the merger
will close soon after all approvals are received. We are unable to predict the
outcome or the merger's impact on our operations, liquidity or financial
condition.
Services included in the Other segment as described in note 3 to the
accompanying interim condensed consolidated financial statements are included in
the long-distance services segment for purposes of this Management's Discussion
and Analysis.
Cable services. During the first quarter of 2000, cable television revenues
represented 23.3% of consolidated revenues. The cable systems serve 26
communities and areas in Alaska, including the state's three largest population
centers, Anchorage, Fairbanks and Juneau.
We generate cable services revenues from three primary sources: (1) programming
services, including monthly basic or premium subscriptions and pay-per-view
movies or other one-time events, such as sporting events; (2) equipment rentals
or installation; and (3) advertising sales. During the first quarter of 2000
programming services generated 86.4% of total cable services revenues, equipment
rental and installation fees accounted for 7.4% of such revenues, advertising
sales accounted for 2.6% of such revenues, cable modem services accounted for
2.3% of such revenues and other services accounted for the remaining 1.3% of
total cable services revenues. The primary factors that contribute to
year-to-year changes in cable services revenues are average monthly subscription
and pay-per-view rates, the mix among basic, premium and pay-per-view services,
the average number of subscribers during a given reporting period, and revenues
generated from new product offerings.
The cable systems' cost of sales and selling, general and administrative
expenses have consisted principally of programming and copyright expenses,
labor, maintenance and repairs, marketing and advertising and rental expense.
During the first quarter of 2000 programming and copyright expenses represented
45.6% of total cable cost of sales and selling, general and administrative
expenses, and general and administrative costs represented 47.8% of such total.
Marketing and advertising costs represented approximately 6.6% of such total
expenses.
Cable services face competition from alternative methods of receiving and
distributing television signals and from other sources of news, information and
entertainment. We believe our cable television services will continue to be
competitive by providing, at reasonable prices, a greater variety of programming
and other communication services than are available off-air or through other
alternative delivery sources and upon superior technical performance and
customer service.
18
<PAGE>
Local access services. We generate local access services revenues from three
primary sources: (1) business and residential basic dial tone services; (2)
business private line and special access services; and (3) business and
residential features and other charges, including voice mail, caller ID,
distinctive ring, inside wiring and subscriber line charges. Effective March
1999 we transitioned to the "bill and keep" cost settlement method for
termination of traffic on our facilities and on other's facilities. Local
exchange services revenues totaled $4.5 million representing 6.6% of
consolidated revenues in the first quarter of 2000. The primary factors that
contribute to year-to-year changes in local access services revenues are the
average number of business and residential subscribers to our services during a
given reporting period and the average monthly rates charged for non-traffic
sensitive services.
Operating and engineering expenses represented approximately 3.6% of total local
access services cost of sales and selling, general and administrative expenses
during the first quarter of 2000. Marketing and advertising costs represented
approximately 6.5% of such total expenses, customer service and general and
administrative costs represented approximately 47.4% of such total expenses, and
local access cost of sales represented approximately 42.5% of such total
expenses.
Our local access services segment faces significant competition in Anchorage
from Alaska Communications Systems, Inc. ("ACS") and AT&T Alascom, Inc. We
believe our approach to developing, pricing, and providing local access services
will allow us to be competitive in providing those services.
Internet services. We began offering Internet services in several markets in
Alaska during 1998. We generate Internet services revenues from two primary
sources: (1) access product services, including commercial DIAS, ISP DIAS, and
retail dial-up service revenues, and (2) network management services. Internet
services segment revenues totaled $1.7 million representing 2.5% of total
revenues in the first quarter of 2000. The primary factors that contribute to
year-to-year changes in Internet services revenues are the average number of
subscribers to our services during a given reporting period, the average monthly
subscription rates, and the number and type of additional premium features
selected.
Operating and general and administrative expenses represented approximately
50.0% of total Internet services cost of sales and selling, general and
administrative expenses during the first quarter of 2000. Internet cost of sales
represented approximately 37.7% of such total expenses and marketing and
advertising represented approximately 12.3% of such total expenses.
Marketing campaigns continue to be deployed featuring bundled residential and
commercial Internet products. Additional bandwidth was made available to our
Internet segment resulting from completion of the Alaska United undersea fiber
optic cable project. The new Internet offerings are coupled with our
long-distance and local access services offerings and provide free basic
Internet services or discounted premium Internet services if certain
long-distance or local access services plans are selected. Value-added premium
Internet features are available for additional charges.
We compete with a number of Internet service providers in our markets. We
believe our approach to developing, pricing, and providing Internet services
will allow us to be competitive in providing those services.
Other services, other expenses and net loss. Telecommunications services
revenues reported in the Other segment as described in note 3 to the
accompanying interim condensed consolidated financial statements include
corporate network management contracts, telecommunications equipment sales and
service, management services for Kanas Telecom, Inc., a company that owns and
operates a fiber optic cable system constructed along the trans-Alaska oil
pipeline corridor extending from Prudhoe Bay to Valdez, Alaska, and other
miscellaneous revenues (including revenues from cellular resale services, from
prepaid and debit calling cards sales, and installation and leasing of
customer's very small aperture terminal ("VSAT") equipment).
Other services segment revenues during the first quarter of 2000 include network
solutions and outsourcing revenues totaling $1.6 million, telecommunications
equipment sales totaling $328,000 and cellular resale and other revenues
totaling $539,000.
19
<PAGE>
During the second quarter of 1999 we completed a $19.5 million sale of long-haul
capacity in the Alaska United undersea fiber optic cable system ("fiber capacity
sale") to ACS in a cash transaction. The sale includes both capacity within
Alaska, and between Alaska and the lower 49 states. We announced in July 1999
that an agreement pertaining to a second $19.5 million sale of fiber capacity to
ACS had been executed. The agreement requires ACS to acquire additional capacity
during the 18-month period following the effective date of the contract.
We began developing plans for deploying PCS services in 1995 and subsequently
conducted a technical trial of our candidate technology. We have invested
approximately $2.2 million in our PCS license at March 31, 2000. PCS licensees
are required to offer service to at least one-third of their market population
within five years or risk losing their licenses. Service must be extended to
two-thirds of the population within 10 years. We are in the build phase of our
wireless implementation plan that will allow retention of the PCS license
pursuant to its terms. We expect to incur approximately $1.0 million in 2000 to
deploy fixed wireless service in the Anchorage area.
Depreciation, amortization and interest expense on a consolidated basis
increased $5.7 million in the first quarter of 2000 as compared to the first
quarter of 1999 resulting primarily from additional depreciation on 1999 and
2000 capital expenditures, additional average outstanding long-term debt, a $2.0
million charge to interest expense to write-off previously capitalized interest
expense, a reduction in the amount of capitalized construction period interest
following placement of the Alaska United undersea fiber optic cable system into
service in early February 1999, and a charge of $1.7 million in 2000 resulting
from a change in the estimated remaining lives of assets that will be replaced
in the future.
RESULTS OF OPERATIONS
The following table sets forth selected Statement of Operations data as a
percentage of total revenues for the periods indicated and the percentage
changes in such data as compared to the corresponding prior year period:
<TABLE>
(Underlying data rounded to the nearest thousands)
<CAPTION>
Percentage
Three Months Ended Change
March 31, 2000 vs.
(Unaudited) 2000 1999 1999
---- ---- ----
<S> <C> <C> <C>
Statement of Operations Data:
Revenues
Long-distance services 63.9% 62.7% 13.4%
Cable services 23.3% 24.6% 5.8%
Local access services 6.6% 6.0% 21.7%
Internet services 2.5% 1.7% 64.4%
Other services 3.7% 5.0% (15.0%)
-----------------------------------------
Total revenues 100.0% 100.0% 11.3%
Cost of sales and services 43.4% 45.4% 6.4%
Selling, general and administrative
expenses 36.1% 38.4% 4.7%
Depreciation and amortization 19.2% 16.8% 27.1%
-----------------------------------------
Operating income (loss) 1.3% (0.6%) 338.3%
Net loss before income taxes
and cumulative effect of a
change in accounting principle (13.1%) (11.9%) (22.3%)
Net loss before cumulative
effect of a change in
accounting principle (8.1%) (7.4%) (21.6%)
Net loss (8.1%) (7.9%) (13.0%)
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Percentage
Three Months Ended Change
March 31, 2000 vs.
(Unaudited) 2000 1999 1999
---- ---- ----
<S> <C> <C> <C>
Other Operating Data (1):
Cable operating income (2) 11.9% 17.3% (26.9%)
Local operating loss (3) (64.4%) (57.4%) (36.6%)
Internet operating loss (4) (89.6%) (87.5%) (68.3%)
<FN>
- --------------------------
(1) Includes customer service, marketing and advertising costs.
(2) Computed as a percentage of total cable services revenues.
(3) Computed as a percentage of total local access services revenues.
(4) Computed as a percentage of total Internet services revenues.
</FN>
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 ("2000") COMPARED TO THREE MONTHS ENDED MARCH
31, 1999 ("1999")
Revenues. Total revenues increased 11.3% from $61.3 million in 1999 to $68.3
million in 2000. Long-distance revenues from commercial, residential,
governmental, and other common carrier customers increased 13.4% from $38.5
million in 1999 to $43.6 million in 2000. The long-distance revenue increase in
2000 was largely due to the following:
- An increase of 7.5% in the number of active residential, small business
and commercial customers billed from 85,600 at March 31, 1999 to 92,000
at March 31, 2000
- An increase of 33.2% in total minutes of use to 255.2 million minutes
- An increase of 39.1% in private line and private network transmission
services revenues from $4.6 million in 1999 to $6.4 million in 2000 due
to an increased number of customers
- An increase in revenues from the lease of three DS3 circuits on Alaska
United facilities within Alaska, and between Alaska and the lower 48
states from $575,000 in 1999 to $1.6 million in 2000
- An increase of 11.4% in revenues from other common carriers (principally
MCI WorldCom and Sprint), from $14.9 million in 1999 to $16.6 million in
2000
Long-distance revenue increases were offset by a 24.8% reduction in our average
rate per minute on long-distance traffic from $0.161 per minute in 1999 to
$0.121 per minute in 2000. The decrease in rates resulted primarily from a new
category of wholesale minutes carried on our network at a reduced rate per
minute. Decreased rates are also attributed to our promotion of and customers'
enrollment in calling plans offering discounted rates and length of service
rebates, such plans being prompted in part by our primary long-distance
competitor, AT&T Alascom, reducing its rates, and the entry of LECs into
long-distance markets served by us.
Cable revenues increased 5.8% from $15.1 million in 1999 to $15.9 million in
2000. Programming services revenues increased 6.6% to $13.8 million in 2000
resulting from an increase of approximately 5,000 basic subscribers served by
the Company and increased pay-per-view and premium service revenues. New
facility construction efforts in the summer of 1999 resulted in approximately
3,500 additional homes passed which contributed to additional subscribers and
revenues in 2000. Other factors include the launch of digital cable services in
late 1998 with an associated marketing and sales effort starting in July 1999,
and the introduction of a customer offering requiring a year commitment in
exchange for a discounted price that reduced customer churn. The revenue per
average basic subscriber per month decreased $0.63 from 1999 to 2000 due to the
introduction of a customer offering requiring a year commitment in exchange for
a discounted price. Cable modem revenue increased $316,000 to $364,000 in 2000
due to the introduction of cable modem services in the first quarter of 1999.
Local access services revenues increased 21.7% in 2000 from $3.7 million in 1999
to $4.5 million. At March 31, 2000 approximately 50,000 lines were in service
and approximately 1,700 additional lines were awaiting connection as compared to
approximately 32,000 lines in service and approximately 1,800 additional lines
awaiting connection at March 31, 1999.
21
<PAGE>
Internet services revenues increased from $1.0 million in 1999 to $1.7 million
in 2000 primarily due to growth in the number of customers served. The Company
had approximately 50,900 active residential, commercial and small business
retail dial-up subscribers to its Internet service at March 31, 2000 as compared
to approximately 21,500 at March 31, 1999.
Cost of sales and services. Cost of sales and services totaled $27.9 million in
1999 and $29.7 million in 2000. As a percentage of total revenues, cost of sales
and services decreased from 45.4% in 1999 to 43.4% in 2000. The decrease in cost
of sales and services as a percentage of revenues is primarily attributed to
changes in our product mix due to the growth of the local access services and
Internet services product lines. The overall margin improvement was partially
offset by increased cable services cost of sales as a percentage of cable
services revenues.
Long-distance cost of sales and services increased from $19.7 million in 1999 to
$19.9 million in 2000. Long-distance cost of sales as a percentage of
long-distance revenues decreased from 52.2% in 1999 to 45.7% in 2000 primarily
due to reductions in access costs due to our distribution and termination of our
traffic on our own local services network instead of paying other carriers to
distribute and terminate our traffic. Offsetting the 2000 decrease as compared
to 1999 is a decrease in the average rate per minute billed to customers without
a comparable decrease in access charges paid by us. We expect increased cost
savings as traffic carried on our own facilities continues to grow. Additional
capacity between Alaska and the lower 48 states now available on the Alaska
United fiber optic cable system has allowed us to carry significant additional
amounts of data services traffic on our own facilities rather than paying other
carriers for leased capacity.
Long-distance services cost of sales as a percentage of long-distance services
revenues is expected to decrease in 2000 as we transfer traffic carried by
satellite transponders from leased to owned capacity.
Cable cost of sales and services as a percentage of revenues, which is less as a
percentage of revenues than are long-distance, local access and Internet
services cost of sales and services, increased from 24.7% in 1999 to 26.9% in
2000. Cable services rate increases did not keep pace with increases in
programming and copyright costs in 2000. Programming costs increased on most of
our cable services offerings, and we incurred additional costs on new
programming introduced in 1999 and 2000.
Local access services cost of sales and services totaled 53.5% and 52.5% as a
percentage of 2000 and 1999 local access services revenues, respectively.
Internet services cost of sales and services totaled 62.6% and 39.8% as a
percentage of 2000 and 1999 Internet services revenues, respectively. The
increase in Internet services costs of sales and services from 1999 to 2000 is
due to the effect of the Internet offering which provides free basic Internet
services or discounted premium Internet services if certain long-distance or
local access services plans are selected. This Internet offering results in
increased costs of sales and services for the Internet services segment with the
associated revenue recognized by either the long-distance services or local
access services segments.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 4.7% from $23.5 million in 1999 to $24.7
million in 2000. The 2000 increase resulted from:
- Internet services operating, engineering, sales, customer service and
administrative cost increases, from $1.3 million in 1999 as compared to
$1.8 million in 2000. Increased costs were necessary to provide the
operations, engineering, customer service and support infrastructure
necessary to accommodate expected growth in our Internet services
customer base.
- A reduction in long-distance services capitalized labor due to
completion of the fiber optic cable system construction effort.
Selling, general and administrative expenses, as a percentage of total revenues,
decreased from 38.4% in 1999 to 36.1% in 2000 primarily as a result of revenues
from new product lines growing faster than support costs.
Depreciation and amortization. Depreciation and amortization expense increased
27.1% from $10.3 million in 1999 to $13.1 million in 2000. The increase is
attributable to our $36.6 million investment in equipment and facilities placed
into service during 1999 for which a full year of depreciation will be recorded
during the year ended December 31, 2000, the Alaska United undersea fiber optic
cable system placed into
22
<PAGE>
service in the first quarter of 1999 for which two months of depreciation was
recorded during the first quarter of 1999 and three months of depreciation was
recorded in 2000, the $9.9 million investment in equipment and facilities (net
of the satellite transponder asset discussed in note 4 to the interim condensed
consolidated financial statements) during 2000 for which a partial year of
depreciation will be recorded during 2000, and a charge of $1.7 million in 2000
resulting from a change in the estimated remaining lives of assets that will be
replaced in the future.
Interest expense, net. Interest expense, net of interest income, increased 40.0%
from $7.0 million in 1999 to $9.8 million in 2000. This increase resulted
primarily from a charge of $2.0 million to interest expense in 2000 to write-off
previously capitalized interest expense, increases in our average outstanding
indebtedness resulting primarily from construction of new long-distance and
Internet facilities, expansion and upgrades of cable television facilities,
investment in local access services equipment and facilities, and slightly
higher interest rates on outstanding indebtedness. During 1999 interest expense
was offset in part by one month of capitalized construction period interest
attributed to the Alaska United undersea fiber optic cable system.
Income tax benefit. GCI, Inc., as a wholly owned subsidiary and member of the
GCI controlled group of corporations, files its income tax returns as part of
the consolidated group of corporations under GCI. Accordingly, the following
discussions of income tax expense and net operating loss carryforwards reflect
the consolidated group's activity and balances.
Income tax benefit increased from $2.8 million in 1999 to $3.5 million in 2000
due to an increased net loss before income taxes and cumulative effect of a
change in accounting principle in 2000 as compared to 1999. Our effective income
tax rate increased from 38.3% in 1999 to 38.7% in 2000 due to the proportional
amount of items that are nondeductible for income tax purposes.
At March 31, 2000, we have (1) tax net operating loss carryforwards of
approximately $108.7 million that will begin expiring in 2008 if not utilized,
and (2) alternative minimum tax credit carryforwards of approximately $2.5
million available to offset regular income taxes payable in future years. Our
utilization of remaining net operating loss carryforwards is subject to certain
limitations pursuant to Internal Revenue Code section 382.
Tax benefits associated with recorded deferred tax assets are considered to be
more likely than not realizable through taxable income earned in carryback
years, future reversals of existing taxable temporary differences, and future
taxable income exclusive of reversing temporary differences and carryforwards.
The amount of deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced. We estimate that our effective income tax rate
for financial statement purposes will be approximately 38% in 2000.
23
<PAGE>
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
<TABLE>
The following chart provides selected unaudited statement of operations data
from the Company's quarterly results of operations during 2000 and 1999:
<CAPTION>
(Amounts in thousands, except per share amounts)
-------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000
----
Revenues:
Long-distance services $ 43,620 43,620
Cable services $ 15,930 15,930
Local access services $ 4,520 4,520
Internet services $ 1,713 1,713
Other services $ 2,494 2,494
-------------------------------------------------------------
Total revenues $ 68,277 68,277
Operating income $ 877 877
Net loss before income taxes $ (8,962) (8,962)
Net loss $ (5,498) (5,498)
Basic loss per common share $ (54,980) (54,980)
Diluted loss per common share $ (54,980) (54,980)
1999
----
Revenues:
Long-distance services $ 38,469 40,697 43,276 41,601 164,043
Cable services $ 15,062 14,909 15,218 15,957 61,146
Local access services $ 3,714 3,764 3,845 4,220 15,543
Internet services $ 1,042 1,109 1,151 1,497 4,799
Other services $ 3,051 23,180 3,850 3,567 33,648
-------------------------------------------------------------
Total revenues $ 61,338 83,659 67,340 66,842 279,179
Operating income (loss) $ (368) 12,655 1,908 1,555 15,750
Net income (loss) before income taxes and
cumulative effect of a change in
accounting principle $ (7,328) 4,495 (5,702) (6,331) (14,866)
Net income (loss) before cumulative effect
of a change in accounting principle $ (4,521) 2,491 (3,537) (3,616) (9,183)
Net income (loss) $ (4,865) 2,491 (3,537) (3,616) (9,527)
Basic income (loss) per common share:
Net income (loss) before cumulative
effect of a change in accounting
principle $ (45,210) 24,910 (35,370) (36,160) (91,830)
Cumulative effect of a change in
accounting principle $ (3,440) --- --- --- (3,440)
-------------------------------------------------------------
Net income (loss) $ (48,650) 24,910 (35,370) (36,160) (95,270)
=============================================================
Diluted income (loss) per common share:
Net income (loss) before cumulative
effect of a change in accounting
principle $ (45,210) 24,910 (35,370) (36,160) (91,830)
Cumulative effect of a change in
accounting principle $ (3,440) --- --- --- (3,440)
-------------------------------------------------------------
Net income (loss) $ (48,650) 24,910 (35,370) (36,160) (95,270)
=============================================================
</TABLE>
Revenues. Total revenues for the quarter ended March 31, 2000 ("first quarter")
were $68.3 million, representing a 2.2% increase from $66.8 million for the
quarter ended December 31, 1999 ("fourth quarter"). The first quarter increase
resulted from an 8.1% increase in revenues from other common carriers to $16.6
million, and a 9.7% increase in private line revenues to $6.4 million. Long
distance minutes increased 33.2% to 255.2 million minutes, due to a 7.2%
increase in other common carrier ("OCC") minutes (principally MCI WorldCom and
Sprint) and a 2.1% increase in non-OCC minutes of traffic carried. Partially
offsetting revenue increases attributed to minutes growth was a 1.6% reduction
in the long-distance average rate per minute to $.121 in first quarter.
24
<PAGE>
Long-distance revenues have historically been highest in the summer months as a
result of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial fishing, and oil and
gas activities. Cable television revenues, on the other hand, are higher in the
winter months because consumers spend more time at home and tend to watch more
television during these months. Local service operations are not expected to
exhibit significant seasonality. Internet access services are expected to
reflect seasonality trends similar to the cable television segment. Our ability
to implement construction projects is also hampered during the winter months
because of cold temperatures, snow and short daylight hours.
Cost of sales and services. Cost of sales and services decreased 1.0% from $30.0
million in the fourth quarter to $29.7 million in the first quarter. As a
percentage of revenues, first and fourth quarter cost of sales and services
totaled 43.4% and 44.9%, respectively. The decrease in the cost of sales and
services as a percentage of revenues is primarily due to the transfer of our
traffic from a satellite leased under an operating lease to a satellite owned by
us and financed via a capital lease and avoidance of access charges resulting
from distribution and termination of our traffic on our own network instead of
paying other carriers to distribute and terminate our traffic.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $400,000 in the first quarter as compared to
the fourth quarter. As a percentage of revenues, first quarter selling, general
and administrative expenses were 36.1% as compared to 37.5% for the fourth
quarter. The first quarter decrease as a percentage of sales is primarily a
result of a $700,000 increase in expenses associated with a Company-wide success
sharing program in the fourth quarter. Success sharing is a bonus paid to all
employees when our earnings before interest, depreciation, amortization and
taxes reach new highs.
Net loss. We reported a net loss of $5.5 million for the first quarter as
compared to a net loss of $3.6 million for the fourth quarter. The increase in
the net loss is primarily due to a charge of $2.0 million to interest expense in
2000 to write-off previously capitalized interest expense and a charge of $1.7
million in 2000 resulting from a change in the estimated remaining lives of
assets that will be replaced in the future.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities totaled $8.7 million in the first quarter
of 2000 ("2000") as compared to $187,000 in the first quarter of 1999 ("1999"),
net of changes in the components of working capital. Our expenditures for
property and equipment, including construction in progress, totaled $9.7 million
and $9.9 million in 2000 and 1999, respectively. Our uses of cash during 2000
also included purchases of $1.6 million of property held for sale.
Net receivables decreased $5.9 million from December 31, 1999 to March 31, 2000
due to a $5.0 million decrease in trade receivables primarily from an OCC.
Working capital totaled $18.1 million at March 31, 2000, a $4.6 million decrease
from working capital of $22.7 million as of December 31, 1999. The decrease in
working capital is primarily attributed to the investment of current assets in
long-term capital assets.
The Holdings $200,000,000 ($150,000,000 as amended) and $50,000,000 credit
facilities mature June 30, 2005. The Holdings Loan facilities were amended in
April 1999 (see below) and bear interest, as amended, at either Libor plus 1.00%
to 2.50%, depending on the leverage ratio of Holdings and certain of its
subsidiaries, or at the greater of the prime rate or the federal funds effective
rate (as defined) plus 0.05%, in each case plus an additional 0.00% to 1.375%,
depending on the leverage ratio of Holdings and certain of its subsidiaries.
$87.7 million were drawn on the credit facilities as of March 31, 2000 and
December 31, 1999, respectively.
On April 13, 1999, we amended the Holdings credit facilities. These amendments
contained, among other things, provisions for payment of a one-time amendment
fee of 0.25% of the aggregate commitment, an increase in the commitment fee by
0.125% per annum on the unused portion of the commitment, and an increase in the
interest rate of 0.25%. The amended facilities reduce the aggregate commitment
by $50 million to $200 million, and limit capital expenditures to $35 million in
1999 and $35 million in 2000 with
25
<PAGE>
no limits thereafter (excluding amounts paid for the Alaska United fiber optic
cable system and purchase of the satellite transponder asset). Pursuant to the
Financial Accounting Standards Board Emerging Issues Task Force Issue 98-14,
"Debtor's Accounting for Changes in Line-of-Credit or Revolving Debt
Arrangements," we recorded as additional interest expense $470,000 of deferred
financing costs in the second quarter of 1999 resulting from the reduced
borrowing capacity. In connection with the April 1999 amendment, we agreed to
pay all fees and expenses of our lenders, including an amendment fee of 0.25% of
the aggregate commitment, totaling $530,000.
Holding's credit facilities and GCI, Inc.'s senior notes contain restrictions on
our operations and activities, including requirements that we comply with
certain financial covenants and financial ratios. Under the amended Holding's
credit facility, Holdings may not permit the ratio of senior debt to annualized
operating cash flow (as defined) of Holdings and certain of its subsidiaries to
exceed 2.75 to 1.0 through September 30, 2000 and 2.50 to 1.0 from October 1,
2000 to December 31, 2000, total debt to annualized operating cash flow to
exceed 6.25 to 1.00 through March 31, 2000, and annualized operating cash flow
to interest expense to be less than 1.75 to 1.0 through March 31, 2000 and 2.0
to 1.0 from April 1, 2000 and thereafter. 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
effective January 1, 2001 (which adjusts to 1.05 to 1.0 in April, 2003 and
thereafter). The senior notes impose a requirement that the leverage ratio of
GCI, Inc. and certain of its subsidiaries not exceed 6.0 to 1.0 on an incurrence
basis, subject to the ability of GCI, Inc. and certain of its subsidiaries to
incur specified permitted indebtedness without regard to such ratios.
On January 27, 1998 Alaska United closed a $75 million project finance facility
("Fiber Facility") to construct a fiber optic cable system connecting Anchorage,
Fairbanks, Valdez, Whittier, Juneau and Seattle. At March 31, 2000 $71.7 million
was borrowed under the facility. The Fiber Facility is a 10-year term loan that
is interest only for the first 5 years. The facility can be extended an
additional two years at any time between the second and fifth anniversary of
closing the facility if we can demonstrate projected revenues from certain
capacity commitments will be sufficient to pay all operating costs, interest,
and principal installments based on the extended maturity. The Fiber Facility
bears interest at either Libor plus 3.0%, or at the lender's prime rate plus
1.75%. The interest rate will decline to Libor plus 2.5%-2.75%, or, at our
option, the lender's prime rate plus 1.25%-1.5% after the project completion
date and when the loan balance is $60 million or less.
The Fiber Facility contains, among others, covenants requiring certain
intercompany loans and advances in order to maintain specific levels of cash
flow necessary to pay operating costs, interest and principal installments. All
of Alaska United's assets, as well as a pledge of the partnership interests'
owning Alaska United, collateralize the Fiber Facility. Construction of the
fiber facility was completed and the facility was placed into service on
February 4, 1999. The project was completed on budget.
We will use approximately one-half of the Alaska United system capacity in
addition to our existing owned and leased facilities to carry our own traffic.
One of our large commercial customers signed agreements in the first quarter of
1999 for the immediate lease of three DS3 circuits on Alaska United facilities
within Alaska, and between Alaska and the lower 48 states. The lease agreements
provide for three-year terms, with renewal options for additional terms. In the
second quarter of 1999 we completed a sale of capacity in the Alaska United
system to ACS in a $19.5 million cash transaction. The sale includes both
capacity within Alaska, and between Alaska and the lower 48 states. An agreement
was executed in July 1999 for a second $19.5 million sale of fiber capacity to
ACS. The agreement requires ACS to acquire additional capacity during the
18-month period following the effective date of the contract. We continue to
pursue opportunities for sale or lease of additional capacity on our system.
We entered into a purchase and lease-purchase option agreement in August 1995
for the acquisition of satellite transponders to meet our long-term satellite
capacity requirements. The satellite was successfully launched in January 2000
and delivered to us on March 5, 2000. In March 2000 we agreed to finance the
satellite transponders pursuant to a long-term capital lease arrangement with a
leasing company. At March 31, 2000 $48.2 million was financed under this capital
lease. The base term of the lease is one year from the closing date with the
option for eight one-year lease term renewals. The capital lease includes
certain covenants requiring maintenance of specific levels of operating cash
flow to indebtedness and limitations on additional indebtedness.
26
<PAGE>
Our expenditures for property and equipment, including construction in progress,
totaled $57.9 million and $9.9 million during 2000 and 1999, respectively.
Planned capital expenditures over the next five years include those necessary
for continued expansion of our long-distance, local exchange and Internet
facilities, the development and construction of a PCS network and continued
upgrades to our cable television plant. Sources of funds for these planned
capital expenditures are expected to include internally generated cash flows and
borrowings under our credit facilities.
Our ability to invest in discretionary capital and other projects will depend
upon our future cash flows and access to borrowings under our credit facilities.
Management anticipates that cash flow generated by us and our borrowings under
our credit facilities will be sufficient to fund capital expenditures and our
working capital requirements. Should cash flows be insufficient to support
additional borrowings, such investment in capital expenditures will likely be
reduced.
GCI issued 20,000 shares of convertible redeemable accreting Preferred Stock on
April 30, 1999. Proceeds totaling $20 million (before payment of expenses) were
contributed to GCI, Inc. and were used for general corporate purposes, to repay
outstanding indebtedness, and to provide additional liquidity.
The long-distance, local access, cable, Internet and wireless services
industries are experiencing increasing competition and rapid technological
changes. Our future results of operations will be affected by our ability to
react to changes in the competitive environment and by our ability to fund and
implement new technologies. We are unable to determine how competition,
technological changes and our net operating losses will affect our ability to
obtain financing.
We believe that we will be able to meet our current and long-term liquidity and
capital requirements, including fixed charges, through our cash flows from
operating activities, existing cash, cash equivalents, short-term investments,
credit facilities, and other external financing and equity sources.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133. In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". Among
other provisions, it requires that entities recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. Gains and losses resulting from changes in the fair
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The effective date of
this standard was delayed via the issuance of SFAS No. 137. The effective date
for SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though
earlier adoption is encouraged and retroactive application is prohibited. This
means that we must adopt the standard no later than January 1, 2001. We do not
expect the adoption of this standard to have a material impact on our results of
operations, financial position or cash flows.
FASB Interpretation No. 44. In March 2000, the Financial Accounting Standards
Board issued FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation". This interpretation clarifies the application of
APB Opinion No. 25, "Accounting for Stock Issued to Employees", for certain
issues including the definition of employee for purposes of applying APB Opinion
No. 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award and the accounting for an
exchange of stock compensation awards in a business combination. This
interpretation is effective July 1, 2000, but certain conclusions in the
interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying it are
recognized on a prospective basis from July 1, 2000. We do not expect the
adoption of this standard to have a material impact on our results of
operations, financial position or cash flows.
YEAR 2000 COSTS
We initiated a company-wide program in 1998 to ensure that our date-sensitive
information, telephony, cable, Internet and business systems, and certain other
equipment would properly recognize the Year 2000
27
<PAGE>
as a result of the century change on January 1, 2000. The program focused on the
hardware, software, embedded chips, third-party vendors and suppliers as well as
third-party networks that were associated with the identified systems. The
program was substantially completed during third quarter 1999, and our systems
did not experience any significant disruptions as a result of the century
change. In total, we have expensed cumulative incremental remediation costs
totaling $2.4 million through March 31, 2000, with remaining incremental
remediation costs in 2000 estimated at approximately $110,000.
We did not defer any critical information technology projects because of our
Year 2000 program efforts, which were addressed primarily through a dedicated
team within our information technology group.
ALASKA ECONOMY
We offer voice and data telecommunication and video services to customers
primarily throughout Alaska. As a result of this geographic concentration,
growth of our business and of our operations depend upon economic conditions in
Alaska. The economy of Alaska is dependent upon the natural resource industries,
and in particular oil production, as well as investment earnings, tourism,
government, and United States military spending. Any deterioration in these
markets could have an adverse impact on us. Oil revenues are now the third
largest source of state revenues, following investment income and federal funds.
Alaska's investment earnings will supply 33% of the state's projected revenues
in fiscal 2001, with federal funding comprising 27% and oil revenues 24% of the
total. Much of the investment income and all of the federal funding is
restricted or dedicated for specific purposes, however, leaving oil revenues as
the primary funding source (75%) of general operating expenditures.
The volume of oil transported by the TransAlaska Oil Pipeline System ("TAPS")
over the past 20 years has been as high as 2.0 million barrels per day in fiscal
1988. Production has begun to decline in recent years and is presently down 40%
from the fiscal 1988 level, and down 25% from the fiscal 1997 level. The two
largest producers of oil in Alaska (the primary users of the TAPS) continue to
explore, develop and produce new oil fields and to enhance recovery from
existing fields to offset the decline in production from the Prudhoe Bay field.
Both companies have invested large sums of money in developing and implementing
oil recovery techniques at the Prudhoe Bay field and other nearby fields. The
state now forecasts a temporary reversal of the production rate decline and a
slight increase in the production rate during the period from fiscal 2003 to
2005. This forecasted increase is attributed to new developments at the Alpine,
Liberty and Northstar fields, as well as new production from Prudhoe Bay and
other fields.
Market prices for North Slope oil declined to below $10 per barrel in 1998, and
averaged $12.70 in fiscal 1999, well below the average price used by the state
to budget its oil related revenues. The prices have since increased to a 10-year
high of $32.30 on March 7, 2000, with a year-to-date fiscal 2000 average price
per barrel of $22.84. Over the past decade, the rolling 60-month average price
for North Slope crude oil has been between $16.39 and $17.74 per barrel 95
percent of the time.
The state's spring 2000 forecast for fiscal 2001 shows the price for North Slope
crude averaging $22.76 and then declining to $19.42 in fiscal 2002 and $18.53
over the following few years. Recent higher prices are largely due to the OPEC
March 1999 agreement to cut production to force prices higher. The OPEC
agreement called for production cuts from January 1999 levels of a little more
than 2 million barrels per day. At its March 27, 2000 meeting, nine of the
eleven OPEC members agreed to increase production quotas by a total of 1.452
million barrels per day. Iran did not agree to an official quota but has been
quoted as saying it would increase production sufficient to maintain its market
share. Iraq is not subject to an OPEC quota. Based on estimates of current
production, the new production quotas for the nine members would represent about
a 450,000 barrels per day increase. History suggests that market forces lead to
lower prices when oil sells for more than $20 per barrel. What is uncertain is
when and how fast the correction will occur. The response of non-OPEC production
to higher prices is uncertain. The production policy of OPEC and its ability to
continue to act in concert represents a key uncertainty in the state's revenue
forecast.
The state of Alaska maintains the Constitutional Budget Reserve Fund that is
intended to fund budgetary shortfalls. Based on the state's oil price and
production forecasts, and considering the state's other revenues, the Alaska
Department of Revenue expects the state will need to draw $305 million from the
Constitutional Budget Reserve Fund in Fiscal 2000 and about $413 million in
Fiscal 2001 to balance the state's budget, down substantially from the $500
million fiscal 2000 draw expected in their fall 1999 forecast. If the state's
28
<PAGE>
current projections are realized, the Constitutional Budget Reserve Fund will be
depleted in 2004. If the fund is depleted, aggressive state action will be
necessary to increase revenues and reduce spending in order to balance its
budget. The Governor of the state of Alaska and the Alaska Legislature are
pursuing cost cutting and revenue enhancing measures.
Oil companies and service providers announced cost cutting measures to offset a
portion of the declining oil revenues in 1999, resulting in a reduction of oil
industry jobs of over 1,400. Projects that are underway are reportedly not
affected by the cutbacks, however BP Amoco did notify state officials that it
would delay its exploration of the Genesee test site east of Prudhoe.
Although oil prices have a substantial effect on Alaska's economy, analysts
believe that tourism, air cargo, and service sectors are strong enough to offset
a portion of the expected downturn. These industries have helped offset the
prevailing pattern of oil industry downsizing that has occurred during much of
the last several years. Three other factors that support Alaska's economy are
the healthy national economy, lower interest rates, and low inflation. We expect
construction to remain strong over the next few years. $1.77 billion of federal
money is expected to be distributed to the State of Alaska for highways and
other federally supported projects in fiscal 2000.
Effective March 1997, the State of Alaska passed new legislation relaxing state
oil royalties with respect to marginal oil fields that the oil companies claim
would not be economic to develop otherwise. No assurance can be given that oil
companies doing business in Alaska will be successful in discovering new fields
or further developing existing fields which are economic to develop and produce
oil with access to the pipeline or other means of transport to market, even with
the reduced level of royalties.
BP Amoco announced in April 1999 its intention to purchase ARCO for $26.8
billion. BP Amoco and ARCO together reportedly own approximately 70 percent of
the Alaska North Slope oil fields and the company that operates the TAPS.
On February 2, 2000 the FTC voted to fight in federal court to block BP Amoco's
purchase of ARCO citing their concern over:
- the reduction in competition in the sale of Alaska oil to West Coast
independent refineries;
- the reduction in competition in Alaska lease sales, thus reducing state
and federal government revenue from such sales; and
- possible manipulation of futures market prices by the resulting company.
On March 15, 2000 BP Amoco and ARCO announced that they agreed to sell ARCO's
Alaskan businesses to Phillips Petroleum Co. ("Phillips") to address FTC
anti-trust concerns. The sale to Phillips of all ARCO's Alaskan businesses
includes a 21.9 per cent interest in the Prudhoe Bay oil field and 42.6 per cent
of the gas cap, as well as a range of interests in related fields, a 55 per cent
interest in the greater Kuparuk area and a 78 per cent stake in the Alpine
field. The package also includes 1.1 million net exploration acres, a 22.3 per
cent interest in the Trans-Alaska pipeline, and ARCO's crude oil shipping fleet
that includes six tankers in service and three under construction. The booked
reserves being sold total 1.9 billion barrels of oil equivalent.
Phillips' previously existing Alaskan operations include a 70 percent interest
in the Kenai liquefied natural gas plant that has exported its products to Japan
for 30 years; a 100 percent interest in the North Cook Inlet field; a less than
2 percent interest in the Prudhoe Bay Unit; a 10 percent interest in the Point
Thomson field; interests in several of the Prudhoe Bay satellites; a small
interest in TAPS; and exploration acreage in the National Petroleum Reserve
Alaska and elsewhere.
On April 26, 2000 Phillips announced the completion of its acquisition of ARCO's
Alaskan businesses. The transaction has received Federal Trade Commission
approval and is effective retroactive to January 1, 2000. Phillips reportedly
will pay BP Amoco $6.5 billion in cash and up to an additional $500 million
based on a formula tied to the price of crude oil. April 26th marked the first
of two closings and included all of the producing assets. A second closing on
certain pipeline and marine assets is pending regulatory approval and expiration
of preferential rights.
Should new discoveries or developments not materialize or the price of oil
return to its prior depressed levels, the long term trend of continued decline
in oil production from the Prudhoe Bay field area is inevitable with a
29
<PAGE>
corresponding adverse impact on the economy of the state, in general, and on
demand for telecommunications and cable television services, and, therefore, on
us, in particular.
We have, since our entry into the telecommunication marketplace, aggressively
marketed our services to seek a larger share of the available market. The
customer base in Alaska is limited, however, with a population of approximately
620,000 people. 42% of the State's population are located in the Anchorage area,
14% are located in the Fairbanks area, 5% are located in the Juneau area, and
the rest are spread out over the vast reaches of Alaska. No assurance can be
given that the driving forces in the Alaska economy, and in particular, oil
production, will continue at levels to provide an environment for expanded
economic activity.
No assurance can be given that oil companies doing business in Alaska will be
successful in discovering new fields or further developing existing fields which
are economic to develop and produce oil with access to the pipeline or other
means of transport to market, even with the reduced level of royalties. We are
not able to predict the effect of changes in the price and production volumes of
North Slope oil or the acquisition of ARCO by BP Amoco and Phillips on Alaska's
economy or on us.
SEASONALITY
Long-distance revenues have historically been highest in the summer months as a
result of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial fishing, and oil and
gas activities. Cable television revenues, on the other hand, are higher in the
winter months because consumers tend to watch more television, and spend more
time at home, during these months. Our local access services revenues are not
expected to exhibit significant seasonality. Our Internet access services are
expected to reflect seasonality trends similar to the cable television segment.
Our ability to implement construction projects is reduced during the winter
months because of cold temperatures, snow and short daylight hours.
INFLATION
We do not believe that inflation has a significant effect on our operations.
PART I.
ITEM 3. QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various types of market risk in the normal course of
business, including the impact of interest rate changes. The Company does not
hold derivatives for trading purposes.
The Company's Senior Holdings Loan carries interest rate risk. Amounts borrowed
under this Agreement bear interest at either Libor plus 1.0% to 2.5%, depending
on the leverage ratio of Holdings and certain of its subsidiaries, or at the
greater of the prime rate or the federal funds effective rate (as defined) plus
0.05%, in each case plus an additional 0.0% to 1.375%, depending on the leverage
ratio of Holdings and certain of its subsidiaries. Should the Libor rate, the
lenders' base rate or the leverage ratios change, the Company's interest expense
will increase or decrease accordingly. As of March 31, 2000, the Company had
borrowed $87.7 million subject to interest rate risk. On this amount, a 1%
increase in the interest rate would cost the Company $877,000 in additional
gross interest cost on an annualized basis.
The Company's Fiber Facility 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 Libor rate, the lenders' base rate or the
leverage ratios change, the Company's interest expense will increase or decrease
accordingly. As of March 31, 2000, the Company had borrowed $71.7 million
subject to interest rate risk. On this amount, a 1% increase in the interest
rate would cost the Company $717,000 in additional gross interest cost on an
annualized basis.
The Company's Satellite Transponder Capital Lease carries interest rate risk.
Amounts borrowed under this Agreement bear interest at Libor plus 3.25%. Should
the Libor rate change, the Company's interest expense
30
<PAGE>
will increase or decrease accordingly. As of March 31, 2000, the Company had
borrowed $48.2 million subject to interest rate risk. On this amount, a 1%
increase in the interest rate would cost the Company $482,000 in additional
gross interest cost on an annualized basis.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding pending legal proceedings to which the Company is a party
is included in Note 4 of Notes to Interim Condensed Consolidated Financial
Statements and is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule *
(b) Reports on Form 8-K filed during the quarter ended March 31,
2000 - None
---------------------
* Filed herewith.
31
<PAGE>
<TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GCI, INC.
Signature Title Date
- -------------------------------------- ------------------------------------------ -------------------
<S> <C> <C>
/s/ President and Director May 12, 2000
- -------------------------------------- (Principal Executive Officer) -------------------
Ronald A. Duncan
/s/ Vice President and Director May 12, 2000
- -------------------------------------- -------------------
G. Wilson Hughes
/s/ Secretary, Treasurer and Director May 12, 2000
- -------------------------------------- (Principal Financial and Accounting -------------------
John M. Lowber Officer)
</TABLE>
32
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
INTERIM CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTH
PERIOD ENDED MARCH 31, 2000 AND THE INTERIM CONDENSED CONSOLIDATED
BALANCE SHEET AS OF MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000075679
<NAME> GCI, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 10,557
<SECURITIES> 0
<RECEIVABLES> 42,874
<ALLOWANCES> 3,156
<INVENTORY> 3,295
<CURRENT-ASSETS> 68,655
<PP&E> 470,402
<DEPRECIATION> 119,961
<TOTAL-ASSETS> 679,260
<CURRENT-LIABILITIES> 50,566
<BONDS> 387,371
0
0
<COMMON> 234,312
<OTHER-SE> (24,005)
<TOTAL-LIABILITY-AND-EQUITY> 679,260
<SALES> 0
<TOTAL-REVENUES> 68,277
<CGS> 0
<TOTAL-COSTS> 29,658
<OTHER-EXPENSES> 36,844
<LOSS-PROVISION> 898
<INTEREST-EXPENSE> 10,014
<INCOME-PRETAX> (8,962)
<INCOME-TAX> (3,464)
<INCOME-CONTINUING> (5,498)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,498)
<EPS-BASIC> (54,980)
<EPS-DILUTED> (54,980)
</TABLE>
