As filed with the Securities and Exchange Commission on November 15, 1999.
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 September 30,1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-15279
GENERAL COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)
STATE OF ALASKA 92-0072737
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 Denali Street
Suite 1000
Anchorage, Alaska 99503
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (907) 265-5600
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
The number of shares outstanding of the registrant's classes of common stock, as
of October 31, 1999 was:
46,579,406 shares of Class A common stock;
and 4,048,580 shares of Class B common stock.
1
<PAGE>
<TABLE>
INDEX
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
<CAPTION>
Page No.
--------
<S> <C>
Cautionary Statement Regarding Forward-Looking Statements.................................................3
PART I. FINANCIAL INFORMATION
Item l. Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998..................................................5
Consolidated Statements of Operations for the
three- and nine-month periods ended September 30, 1999
(unaudited) and 1998 (unaudited)...................................................7
Consolidated Statements of Stockholders' Equity
for the nine months ended September 30, 1999
(unaudited) and 1998 (unaudited)...................................................8
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 (unaudited)
and 1998 (unaudited)...............................................................9
Notes to Interim Condensed Consolidated Financial
Statements.........................................................................10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................20
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................41
Item 2. Changes in Securities and Use of Proceeds.............................................41
Item 6. Exhibits and Reports on Form 8-K......................................................41
Other items are omitted as they are not applicable.
SIGNATURES................................................................................................42
</TABLE>
2
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this quarterly report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1996 ("Securities Reform Act"). These statements may be
preceded by, followed by, or include the words "believes," "expects,"
"anticipates," or similar expressions. For those statements, General
Communication, Inc. ("GCI") and its direct and indirect subsidiaries
(collectively, the "Company") claims protection of the safe-harbor for
forward-looking statements contained in the Securities Reform Act. Such
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance and
achievements of the Company, or industry results, to differ materially from
future results, performance or achievements expressed or implied by such
statements. The reader is cautioned that important factors, such as the
following risks, uncertainties, and other factors, in addition to those
contained elsewhere in this document, could affect future results of the
Company, its long-distance telecommunication services, local access services,
Internet services and cable services and could cause those results to differ
materially from those expressed in the forward-looking statements:
- Material adverse changes in the economic conditions in the markets served
by the Company;
- The efficacy of the rules and regulations to be adopted by the Federal
Communications Commission ("FCC") and state public regulatory agencies to
implement the provisions of the 1996 Telecom Act; the outcome of
litigation relative thereto; and the impact of regulatory changes
relating to access reform;
- The Company's responses to competitive products, services and pricing,
including pricing pressures, technological developments, alternative
routing developments, and the ability to offer combined service packages
that include local, cable and Internet services; the extent and pace at
which different competitive environments develop for each segment of the
Company's business; the extent and duration for which competitors are
able to offer combined or full service packages prior to the Company
being able to do so; the degree to which the Company experiences material
competitive impacts to its traditional service offerings prior to
achieving adequate local service entry; and competitor responses to the
Company's products and services and overall market acceptance of such
products and services;
- The outcome of negotiations with Incumbent Local Exchange Carriers
("ILECs") and state regulatory arbitrations and approvals with respect to
interconnection agreements; and the ability to purchase unbundled network
elements or wholesale services from ILECs at a price sufficient to permit
the profitable offering of local exchange service at competitive rates;
- Success and market acceptance for new initiatives, many of which are
untested; the level and timing of the growth and profitability of new
initiatives, particularly local access services, Internet (consumer and
business) services and wireless services; start-up costs associated with
introducing new products and 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 and high
speed digital subscriber line services, and transmission services;
- Rapid technological changes;
(Continued)
3
<PAGE>
CAUTIONARY STATEMENT (continued)
- 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 cost of the Company's Year 2000 compliance efforts;
- Uncertainties in federal military spending levels and military base
closures in markets in which the Company operates; and
- Other risks detailed from time to time in the Company's periodic reports
filed with the Securities and Exchange Commission.
These forward-looking statements (and such risks, uncertainties and other
factors) are made only as of the date of this report and the Company expressly
disclaims any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained in this document to reflect any
change in the Company's expectations with regard to those statements or any
other change in events, conditions or circumstances on which any such statement
is based. Readers are cautioned not to put undue reliance on such forward
looking statements.
4
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Unaudited)
September 30, December 31,
ASSETS 1999 1998
- --------------------------------------------------------------------------- ----------------- -----------------
(Amounts in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,476 12,008
----------------- -----------------
Receivables:
Trade 44,062 38,890
Income taxes --- 4,262
Other 296 412
----------------- -----------------
44,358 43,564
Less allowance for doubtful receivables 2,996 887
----------------- -----------------
Net receivables 41,362 42,677
Prepaid and other current assets 3,519 2,212
Deferred income taxes, net 2,143 1,947
Inventories 2,628 2,467
Notes receivable 536 650
----------------- -----------------
Total current assets 63,664 61,961
----------------- -----------------
Property and equipment in service, net 303,488 199,827
Construction in progress 3,042 118,806
----------------- -----------------
Net property and equipment 306,530 318,633
----------------- -----------------
Other assets:
Cable franchise agreements, net of amortization 192,456 195,308
Other intangible assets, net of amortization 44,154 45,391
Deferred loan and senior notes costs, net of amortization 9,145 9,877
Transponder deposit (note 7) 9,100 9,100
Notes receivable 1,721 1,432
Other assets, at cost, net of amortization (note 7) 13,746 4,414
----------------- -----------------
Total other assets 270,322 265,522
----------------- -----------------
Total assets $ 640,516 646,116
================= =================
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
5 (Continued)
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
<CAPTION>
(Unaudited)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
- --------------------------------------------------------------------------- ------------------ -----------------
(Amounts in thousands)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt (note 3) $ 1,927 1,799
Current maturities of obligations under capital leases 559 511
Accounts payable 23,675 27,550
Accrued interest 3,394 8,072
Accrued payroll and payroll related obligations 6,923 6,555
Accrued liabilities (note 7) 3,934 3,197
Subscriber deposits and deferred revenues 6,868 5,300
------------------ -----------------
Total current liabilities 47,280 52,984
Long-term debt, excluding current maturities (note 3) 339,848 349,858
Obligations under capital leases, including related party obligations,
excluding current maturities 1,249 1,675
Deferred income taxes, net of deferred income tax benefit 32,875 38,275
Other liabilities 3,093 3,317
------------------ -----------------
Total liabilities 424,345 446,109
------------------ -----------------
Preferred stock. Authorized 1,000,000 shares; issued and outstanding
20,000 and 0 shares at September 30, 1999 and December 31, 1998,
respectively; convertible into Class A common stock at $5.55 per
share of Class A common stock (note 4) 19,912 ---
------------------ -----------------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000,000 shares; issued and outstanding
46,579,406 and 45,895,415 shares at September 30, 1999 and
December 31, 1998, respectively 175,316 172,708
Class B. Authorized 10,000,000 shares; issued and outstanding
4,048,580 and 4,060,620 shares at September 30, 1999 and
December 31, 1998, respectively; convertible on a
share-per-share basis into Class A common stock 3,432 3,432
Less cost of 286,554 Class A common shares held in treasury at
September 30, 1999 and December 31, 1998 (1,607) (1,607)
Paid-in capital 5,985 5,609
Notes receivable issued upon stock option exercise (741) (637)
Retained earnings 13,874 20,502
------------------ -----------------
Total stockholders' equity 196,259 200,007
------------------ -----------------
Commitments and contingencies (note 7)
Total liabilities and stockholders' equity $ 640,516 646,116
================== =================
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
6
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------------- -------------- --------------- --------------
(Amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues (note 6) $ 67,340 62,766 212,337 183,859
Cost of sales and services 30,233 29,690 92,445 86,360
Selling, general and administrative 24,442 23,004 73,216 66,881
Depreciation and amortization 10,757 8,342 32,481 25,004
-------------- -------------- --------------- --------------
Operating income 1,908 1,730 14,195 5,614
Interest expense, net 7,610 4,987 22,730 14,698
-------------- -------------- --------------- --------------
Net loss before income taxes and
cumulative effect of a change in
accounting principle (5,702) (3,257) (8,535) (9,084)
Income tax benefit 2,165 1,181 2,968 3,326
-------------- -------------- --------------- --------------
Net loss before cumulative effect of a
change in accounting principle (3,537) (2,076) (5,567) (5,758)
Cumulative effect of a change in accounting
principle, net of income tax benefit of $245 --- --- 344 ---
-------------- -------------- --------------- --------------
Net loss $ (3,537) (2,076) (5,911) (5,758)
============== ============== =============== ==============
Basic loss per common share:
Loss before cumulative effect of a change in
accounting principle $ (.08) (.04) (.13) (.12)
Cumulative effect of a change in accounting
principle --- --- --- ---
-------------- -------------- --------------- --------------
Net loss $ (.08) (.04) (.13) (.12)
============== ============== =============== ==============
Diluted loss per common share:
Loss before cumulative effect of a change in
accounting principle $ (.08) (.04) (.13) (.12)
Cumulative effect of a change in accounting
principle --- --- --- ---
-------------- -------------- --------------- --------------
Net loss $ (.08) (.04) (.13) (.12)
============== ============== =============== ==============
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
7
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<CAPTION>
Class A Notes
Class A Class B Shares Receiv-
(Unaudited) Common Common Held in Paid-in able Retained
(Amounts in thousands) Stock Stock Treasury Capital Issued Earnings
- -------------------------------------------- ------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997 $170,322 3,432 (1,039) 4,425 --- 27,299
Net loss --- --- --- --- --- (5,758)
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 30 --- ---
Shares purchased and held in Treasury --- --- (568) --- --- ---
Shares issued under stock option plan 827 --- --- 239 --- ---
Notes issued upon stock option exercise --- --- --- --- (637)
Stock offering issuance costs (15) --- --- --- --- ---
Shares issued to Employee Stock Purchase
Plan 414 --- --- --- --- ---
------------ ------------- ------------ ------------ ------------ ------------
Balances at September 30, 1998 $171,548 3,432 (1,607) 4,694 (637) 21,541
============ ============= ============ ============ ============ ============
Balances at December 31, 1998 $172,708 3,432 (1,607) 5,609 (637) 20,502
Net loss --- --- --- --- --- (5,911)
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 86 --- ---
Shares issued and issuable under stock
option plan 181 --- --- 210 --- ---
Shares issued under officer stock option
agreements and notes issued upon
officer stock option exercise 38 --- --- --- (104) ---
Shares issued to Employee Stock Purchase
Plan 1,770 --- --- --- --- ---
Warrants issued --- --- --- 80 --- ---
Shares issued upon acquisition of customer
base 619 --- --- --- --- ---
Preferred stock dividends (note 4) --- --- --- --- --- (717)
------------ ------------- ------------ ------------ ------------ ------------
Balances at September 30, 1999 $175,316 3,432 (1,607) 5,985 (741) 13,874
============ ============= ============ ============ ============ ============
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
8
<PAGE>
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(Unaudited)
Nine Months Ended
September 30,
1999 1998
-------------- --------------
(Amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,911) (5,758)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation and amortization 32,481 25,004
Amortization charged to costs of sales and service and
selling, general and administrative 1,339 696
Deferred income tax benefit (3,213) (10)
Deferred compensation and compensatory stock options 501 290
Non-cash cost of sales 3,703 ---
Bad debt expense (recoveries), net of write-offs 2,109 (70)
Employee Stock Purchase Plan expense funded with Class A
common stock issued by General Communication, Inc. 1,770 414
Write-off of unamortized start-up costs 589 ---
Write-off of deferred debt issuance costs upon modification
of Senior Holdings Loan 472 ---
Warrants issued 80 ---
Other noncash income and expense items (63) 127
Change in operating assets and liabilities (note 2) (12,145) (8,667)
-------------- --------------
Net cash provided by operating activities 21,712 12,026
-------------- --------------
Cash flows from investing activities:
Purchases of property and equipment, including construction period
interest (28,627) (130,167)
Restricted cash investment --- 39,406
Purchases of other assets (574) (3,687)
Notes receivable issued (350) (939)
Payments received on notes receivable 263 1,095
-------------- --------------
Net cash used in investing activities (29,288) (94,292)
-------------- --------------
Cash flows from financing activities:
Long-term borrowings - bank debt and leases 13,776 89,219
Repayments of long-term borrowings and capital lease obligations (24,111) (494)
Proceeds from preferred stock issuance 20,000 ---
Stock offering issuance costs (88) (15)
Payment of debt issuance costs and loan commitment fees (648) (1,615)
Note receivable issued (104) ---
Proceeds from common stock issuance 219 190
Purchase of treasury stock --- (568)
-------------- --------------
Net cash provided by financing activities 9,044 86,717
-------------- --------------
Net increase in cash and cash equivalents 1,468 4,451
Cash and cash equivalents at beginning of period 12,008 3,048
-------------- --------------
Cash and cash equivalents at end of period $ 13,476 7,499
============== ==============
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.
9
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) General
(a) Business
GCI, an Alaska corporation, was incorporated in 1979. The
Company offers long-distance telephone service between
Anchorage, Fairbanks, Juneau, and other communities in Alaska
and the remaining United States and foreign countries. Cable
television services are offered throughout Alaska and
facilities-based competitive local access services are offered
in Anchorage, Alaska. The Company provides services to certain
common carriers terminating traffic in Alaska and certain other
points in the remaining United States, interstate and
intrastate private line services, Internet services, managed
services to certain commercial customers and sells and services
dedicated communications systems and related equipment. Private
network point-to-point data and voice transmission services
between Alaska, Hawaii and the western contiguous United States
are offered and the Company owns and leases capacity on two
undersea fiber optic cables used in the transmission of
interstate private line, switched message long-distance and
Internet services between Alaska and the remaining United
States and foreign countries.
(b) Organization
The consolidated financial statements include the accounts of
GCI, its wholly-owned subsidiary GCI, Inc., GCI, Inc.'s
wholly-owned subsidiary GCI Holdings, Inc., GCI Holdings,
Inc.'s wholly-owned subsidiaries GCI Communication Corp., GCI
Communication Services, Inc. and GCI Cable, Inc., GCI
Communication Services, Inc.'s wholly-owned subsidiary GCI
Leasing Co., Inc., GCI Transport Company, Inc., GCI Transport
Company, Inc.'s wholly-owned subsidiaries GCI Fiber Co., Inc.
and Fiber Hold Company, Inc. and GCI Fiber Co., Inc.'s and
Fiber Hold Company, Inc.'s wholly owned partnership Alaska
United Fiber System Partnership.
(c) Net Loss Per Common Share
<TABLE>
Net loss used to calculate basic and diluted net loss per share
is net of preferred stock dividends of $428,000 and $717,000
for the three and nine-months ended September 30, 1999,
respectively. Shares used to calculate net loss per common
share consist of the following (amounts in thousands):
<CAPTION>
Three-Months Ended Nine-Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 50,346 49,056 50,179 49,050
============ ============ ============= ============
</TABLE>
10 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
Common equivalent shares outstanding are anti-dilutive for
purposes of calculating the net loss per common share for the
three- and nine-month periods ended September 30, 1999 and 1998
and are not included in the diluted net loss per share
calculation (amounts in thousands).
<CAPTION>
Three-Months Ended Nine-Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Common equivalent shares outstanding 745 298 607 618
============ ============ ============= ============
</TABLE>
<TABLE>
Weighted average shares associated with outstanding stock
options for the three- and nine-month periods ended September
30, 1999 and 1998 have been excluded from the diluted loss per
share calculations because the options' exercise price was
greater than the average market price of the common shares
(amounts in thousands).
<CAPTION>
Three-Months Ended Nine-Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Weighted average shares associated with
outstanding stock options 1,961 2,189 2,228 2,006
============ ============ ============= ============
</TABLE>
(d) Preferred and Common Stock
<TABLE>
Following is the unaudited statement of preferred and common
stock at September 30, 1998 and 1999:
<CAPTION>
Preferred Common Stock
(Shares, in thousands) Stock Class A Class B
------------- ----------------------------
<S> <C> <C> <C>
Balances at December 31, 1997 --- 45,279 4,063
Class B shares converted to Class A --- 1 (1)
Shares issued under stock option plan --- 314 ---
Shares issued to Employee Stock Purchase Plan --- 54 ---
------------- -------------- -------------
Balances at September 30, 1998 --- 45,648 4,062
============= ============== =============
Balances at December 31, 1998 --- 45,895 4,061
Class B shares converted to Class A --- 13 (13)
Shares issued under stock option plan --- 126 ---
Shares issued under officer stock option
agreements --- 50 ---
Shares issued to Employee Stock Purchase Plan --- 395 ---
Shares issued upon acquisition of customer
base --- 100 ---
Shares issued under Preferred Stock Agreement 20 --- ---
------------- -------------- -------------
Balances at September 30, 1999 20 46,579 4,048
============= ============== =============
</TABLE>
11 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(e) Cumulative Effect of a Change in Accounting Principle
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities". SOP 98-5
provides guidance on the financial reporting of start-up costs
and organization costs and requires costs of start-up
activities and organization costs to be expensed as incurred.
SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. Management of the Company
adopted SOP 98-5 in the first quarter of 1999 resulting in the
recognition of a one-time expense of $344,000 (net of income
tax benefit of $245,000) associated with the write-off of
unamortized start-up costs. Pro forma net loss and net loss per
common share for the nine-months ended September 30, 1998
approximate amounts reflected in the accompanying interim
condensed consolidated financial statements.
(f) Reclassifications
Reclassifications have been made to the 1998 financial
statements to make them comparable with the 1999 presentation.
(g) Other
The accompanying unaudited interim condensed consolidated
financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. The
interim condensed consolidated financial statements include the
consolidated accounts of General Communication, 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
nine-month period ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year
ended December 31, 1999. 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, 1998.
12 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
<TABLE>
Changes in operating assets and liabilities consist of (amounts in
thousands):
<CAPTION>
Nine-month periods ended September 30, 1999 1998
------------- ------------
<S> <C> <C>
Increase in trade and other receivables $ (3,765) (7,355)
Decrease in income tax receivable 1,965 552
Increase in prepaid and other current assets (1,232) (294)
Increase in inventory (710) (233)
Increase (decrease) in accounts payable (3,875) 223
Increase (decrease) in accrued liabilities 20 (243)
Increase in accrued payroll and payroll related obligations 368 1,343
Decrease in accrued interest (4,678) (3,633)
Increase in deferred revenues 277 970
Increase (decrease) in other liabilities (515) 3
------------- ------------
$ (12,145) (8,667)
============= ============
</TABLE>
No income taxes were paid during the nine-month periods ended
September 30, 1999 and 1998. Income tax refunds of $1,965,000 and
$3,750,000 were received during the nine-month periods ended
September 30, 1999 and 1998, respectively.
Interest paid totaled $28,652,000 and $25,285,000 during the
nine-month periods ended September 30, 1999 and 1998, respectively.
(3) Long-term Debt
On January 27, 1998, the Company, through Alaska United Fiber System
Partnership ("Alaska United"), closed a $75,000,000 project finance
facility ("Fiber Facility") to construct a fiber optic cable system
connecting Anchorage, Fairbanks, Valdez, Whittier, Juneau and Seattle
(see note 5). Borrowings under the Fiber Facility totaled $71,700,000
at September 30, 1999.
(4) Preferred Stock
The Company issued 20,000 shares of convertible redeemable accreting
preferred stock ("Preferred Stock") on April 30, 1999. Proceeds
totaling $20 million (before payment of costs and expenses of
$88,000) were used for general corporate purposes, to repay
outstanding indebtedness, and to provide additional liquidity. The
Company's amended Senior Holdings Loan facilities limit use of such
proceeds. The Preferred Stock contains a $1,000 per share liquidation
preference, plus accrued but unpaid dividends and fees. Dividends are
payable semi-annually at the rate of 8.5% of the liquidation
preference. Prior to the four-year anniversary following closing,
dividends are payable, at the Company's option, in cash or in
additional fully-paid shares of Preferred Stock. Dividends earned
after the four-year anniversary of closing are payable only in cash.
Dividends totaling $428,000 and $717,000 were accrued for the three
and nine-month periods ending September 30, 1999, respectively.
Mandatory redemption is required 12 years from the date of closing.
The Company may redeem the Preferred Stock after the four-year
anniversary of its issuance, and must redeem the Preferred Stock upon
the occurrence of a triggering event. The holders may convert the
Preferred Stock into Class A common stock of the Company at any time
at a price of $5.55 per share. At any time subsequent to the third
anniversary following closing, and assuming the stock is trading at
no less than two times the conversion price, the Company may require
13 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
immediate conversion. The Preferred Stock, subject to lender
approval, is exchangeable in whole or in part, at the Company's
option, into subordinated debt with terms and conditions comparable
to those governing the Preferred Stock. The Preferred Stock is senior
to all other classes of the Company's equity securities, and has
voting rights equal to that number of shares of common stock into
which it can be converted.
Holders of the Preferred Stock shares will have the right to vote on
all matters presented for vote to the holders of common stock on an
as-converted basis. Additionally, the Preferred Stock offering
requires as long as the Preferred Stock shares remain outstanding and
unconverted, the holders of it will have the right to vote, as a
class, and the Company must obtain the written consent of holders of
a majority (or higher as required by Alaska law) of that stock to
take certain actions, some of which require shareholder approval
necessitating amendment of the Company's Articles of Incorporation.
Following issuance of the Preferred Stock shares, the Company's Board
of Directors ("Board") expanded its size from nine to ten seats. The
new Board member was elected at the June 24, 1999 Board of Directors
meeting. The agreement also provides that the rights of the holders
of Preferred Stock shares relating to the Board seat or observer (as
defined in the Preferred Stock agreement) are to remain effective so
long as any of the Preferred Stock shares remain outstanding.
(5) Fiber Optic Cable System
In early February 1999 the Company completed construction of its
fiber optic cable system with commercial services commencing at that
time. The cities of Anchorage, Juneau and Seattle are connected via a
subsea route. Subsea and terrestrial connections extended the fiber
optic cable to Fairbanks via Whittier and Valdez. The total system
cost was approximately $125 million, portions of which were allocated
to Cost of Sales in April 1999 and to Other Assets in June 1999 (see
note 7).
(6) 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:
Long-distance services. A full range of common-carrier
long-distance services are offered to business, government, other
telecommunications companies and consumer customers, through its
networks of fiber optic cables, digital microwave, and fixed and
transportable satellite earth stations.
Cable services. The Company provides cable television services to
residential, commercial and government users in the State of
Alaska. The Company's cable systems serve 26 communities and
areas in Alaska, including the state's three largest urban areas,
Anchorage, Fairbanks and Juneau. Anchorage and Juneau cable plant
upgrades in 1998 and 1999 enabled the Company to offer digital
cable television services and retail cable modem service (through
its Internet services segment) in Anchorage 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.
14 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 fiber
optic cable system (see note 5) allows the Company to offer
enhanced services with high-bandwidth requirements.
Services provided by the Company that are included in the "Other"
segment in the tables that follow are managed services, product
sales, cellular telephone services, and the results of insignificant
business units described above which do not meet the quantitative
thresholds for determining reportable segments. None of these
business units have ever met the quantitative thresholds for
determining reportable segments. Also included in the Other segment
is a $19.5 million sale of undersea fiber optic cable system
capacity, and corporate related expenses including marketing,
customer service, management information systems, accounting, legal
and regulatory, human resources and other general and administrative
expenses.
The Company evaluates performance and allocates resources based on
(1) earnings or loss from operations before depreciation,
amortization, net interest expense, income taxes and cumulative
effect of a change in accounting principle, and (2) operating income
or loss. The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting
policies included in the Company's December 31, 1998 annual report on
Form 10-K. 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 nine-months ended September 30, 1999 and
1998 (amounts in thousands):
<CAPTION>
Long- Local
Distance Cable Access Internet
Services Services Services Services Other Total
------------------------------------------------------------------------
1999
----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Intersegment $ 6,283 1,565 2,570 88 --- 10,506
External 119,223 45,189 11,323 6,521 30,081 212,337
------------------------------------------------------------------------
Total revenues $ 125,506 46,754 13,893 6,609 30,081 222,843
========================================================================
Earnings (loss) from operations
before depreciation, amortization,
net interest expense, income taxes
and cumulative effect of a change
in accounting principle $ 45,549 24,555 232 (5,945) (17,227) 47,164
========================================================================
Operating income (loss) $ 33,443 11,386 (2,218) (6,747) (21,181) 14,683
========================================================================
</TABLE>
15 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Long- Local
Distance Cable Access Internet
Services Services Services Services Other Total
------------------------------------------------------------------------
1998
----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Intersegment $ 1,564 1,006 752 --- --- 3,322
External 120,864 42,726 5,806 2,977 11,486 183,859
------------------------------------------------------------------------
Total revenues $ 122,428 43,732 6,558 2,977 11,486 187,181
========================================================================
Earnings (loss) from operations
before depreciation,
amortization, net interest
expense and income taxes $ 45,660 21,855 (3,787) (1,589) (31,456) 30,683
========================================================================
Operating income (loss) $ 38,602 9,659 (5,687) (1,976) (34,919) 5,679
========================================================================
</TABLE>
<TABLE>
A reconciliation of total segment revenues to consolidated revenues
follows:
<CAPTION>
Nine-months ended September 30, 1999 1998
------------- --------------
<S> <C> <C>
Total segment revenues $ 222,843 187,181
Less intersegment revenues eliminated in consolidation (10,506) (3,322)
------------- --------------
Consolidated revenues $ 212,337 183,859
============= ==============
</TABLE>
<TABLE>
A reconciliation of total segment earnings from operations before
depreciation, amortization, net interest expense, income taxes and
cumulative effect of a change in accounting principle to consolidated
net loss before income taxes and cumulative effect of a change in
accounting principle follows:
<CAPTION>
Nine-months ended September 30, 1999 1998
-------------- --------------
<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 $ 47,164 30,683
Less intersegment contribution eliminated in consolidation (488) (65)
-------------- --------------
Consolidated earnings from operations before
depreciation, amortization, net interest expense,
income taxes and cumulative effect of a change in
accounting principle 46,676 30,618
Depreciation and amortization 32,481 25,004
-------------- --------------
Consolidated operating income 14,195 5,614
Interest expense, net (22,730) (14,698)
-------------- --------------
Consolidated net loss before income taxes and
cumulative effect of a change in accounting
principle $ (8,535) (9,084)
============== ==============
</TABLE>
16 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
A reconciliation of total segment operating income to consolidated
net loss before income taxes and cumulative effect of a change in
accounting principle follows:
<CAPTION>
Nine-months ended September 30, 1999 1998
------------- --------------
<S> <C> <C>
Total segment operating income $ 14,683 5,679
Less intersegment contribution eliminated in consolidation (488) (65)
------------- --------------
Consolidated operating income 14,195 5,614
Interest expense, net (22,730) (14,698)
-------------- --------------
Consolidated net loss before income taxes and
cumulative effect of a change in accounting
principle $ (8,535) (9,084)
============= ==============
</TABLE>
(7) Commitments and Contingencies
Future Sale
An agreement was executed effective July 1999 for a second $19.5
million sale of fiber capacity to Alaska Communications Systems. The
agreement requires Alaska Communications Systems to acquire $19.5
million of additional capacity during the 18-month period following
the effective date of the contract. Costs associated with the
capacity to be sold have been classified as Other Assets in the
accompanying interim condensed consolidated financial statements at
September 30, 1999.
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 nine-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 totaling $60,000 was deferred pursuant to the plan
during the nine-month period ended September 30, 1999. No
compensation was deferred during the nine-month period ended
September 30, 1998.
Satellite Transponders
The Company entered into a purchase and lease-purchase option
agreement in August 1995 for the acquisition of satellite
transponders to meet its long-term satellite capacity requirements.
The launch of the satellite is currently scheduled for the first
quarter of 2000. The Company will continue to lease transponder
capacity until the delivery of the new satellite transponders. The
balance payable upon expected delivery of the transponders during the
second quarter of 2000, in addition to the $9.1 million deposit
previously paid, totals approximately $43.5 million.
17 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $585,000 was
accrued at September 30, 1999 to cover estimated unreported losses
based on past experience modified for current trends, and estimated
expenses for investigating and settling claims. Actual losses will
vary from the recorded reserve. While management uses what it
believes is pertinent information and factors in determining the
amount of reserves, future additions to the reserves may be necessary
due to changes in the information and factors used.
Litigation and Disputes
The Company is from time to time involved in various lawsuits, legal
proceedings and regulatory matters that have arisen in the normal
course of business. While the ultimate results of these matters
cannot be predicted with certainty, management does not expect them
to have a material adverse effect on the financial position, results
of operations or liquidity of the Company.
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 September 30,
1999, only the Juneau system is subject to RCA regulation of its
basic service rates. No petition requesting regulation has been filed
for any other system. (The Juneau system serves 8.0% of the Company's
total basic service subscribers at September 30, 1999.) Juneau's
current rates have been approved by the RCA and there are no other
pending filings with the RCA, therefore, there is no refund liability
for basic service at this time.
Year 2000
In 1997, the Company initiated a plan to identify, assess and
remediate Year 2000 issues within each of its significant computer
programs and certain equipment that contain microprocessors. The plan
is addressing the issue of computer programs and embedded computer
chips being unable to distinguish between the year 1900 and the year
2000, if a program or chip uses only two digits rather than four to
define the applicable year. The Company has divided the plan into two
major phases. The first phase, including team formation, inventory
assessment, compliance assessment and risk assessment, were completed
during 1998. The second phase, including resolution/remediation,
validation, contingency planning and sign-off acceptance, was in
progress at September 30, 1999. Systems that have been determined not
to be Year 2000 compliant are being either replaced or reprogrammed,
and thereafter tested for Year 2000 compliance. The conversion of all
critical and service delivery systems is complete. Through September
30, 1999, the Company has expensed $2.0 million for incremental
remediation costs (including replacement software and hardware) and
testing, as set forth in the plan, with remaining incremental
remediation costs and testing in 1999 and 2000 estimated at
approximately $750,000.
18 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company is in the process of identifying and contacting critical
suppliers and customers whose computerized systems interface with the
Company's systems, regarding their plans and progress in addressing
their Year 2000 issues. The Company has received varying information
from such third parties on the state of compliance or expected
compliance. Contingency plans continue to be developed in the event
that any critical supplier or customer is not compliant. The failure
to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities
or operations. Such failures could materially and adversely affect
the Company's operations, liquidity and financial condition. Due to
the general uncertainty inherent in the Year 2000 problem, resulting
in part from the uncertainty of the Year 2000 readiness of
third-party suppliers and customers, the Company is unable to
determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's operations, liquidity or
financial condition.
19
<PAGE>
PART I.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
The following discussion and analysis should be read in conjunction with the
Company's Interim Condensed Consolidated Financial Statements and the notes
thereto. See - Cautionary Statement Regarding Forward-Looking Statements.
OVERVIEW
The Company has experienced significant growth in recent years through strategic
acquisitions, deploying new business lines, and expansion of its existing
businesses. The Company has historically met its cash needs for operations
through its cash flows from operating activities. Cash requirements for
acquisitions and capital expenditures have been provided largely through the
Company's financing activities.
Long-distance services. The Company's 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 96.3% of the Company's total
long-distance services revenues during the third quarter of 1999. Factors that
have the greatest impact on year-to-year changes in long-distance services
revenues include the rate per minute charged to customers and usage volumes,
usually expressed as minutes of use.
Revenues from private line and other data services sales increased 35.9% to $5.8
million during the third quarter of 1999 as compared to the same period of 1998
due primarily to increased system capacity and increasing demand for data
services by Internet service providers ("ISP"), commercial and governmental
customers, and others. Demand for data services to and from the lower 48 states
previously exceeded the available supply capacity, however such demand is
beginning to be filled with uncompressed fiber optic capacity on the Alaska
United fiber system.
The Company's long-distance cost of sales and services has consisted principally
of direct costs of providing services, including local access charges paid to
Local Exchange Carriers ("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 the Company's network (principally the lower
49 states, most of which calls are carried over MCI WorldCom's network, and
international locations, which calls are carried principally over Sprint's
network). During the third quarter of 1999, local access charges accounted for
61.7% of long-distance cost of sales and services, fees paid to other
long-distance carriers represented 22.8%, satellite transponder lease and
undersea fiber maintenance costs represented 13.2%, and other costs represented
2.3% of long-distance cost of sales and services.
The Company's long-distance selling, general, and administrative expenses have
consisted of operating and engineering, customer service, sales and
communications, management information systems, general and administrative, 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, 34.4% during the
third quarter of 1999, represents the cost of the Company's advertising,
promotion and market analysis programs.
20 (Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Long-distance services face significant competition from AT&T Alascom, Inc.,
long-distance resellers, and from local telephone companies that have entered
the long-distance market. The number of active long-distance residential,
commercial and small business customers increased 6.2% at September 30, 1999 as
compared to September 30, 1998, and increased 7.5% as compared to December 31,
1998. The Company believes its approach to developing, pricing, and providing
long-distance services and bundling different business segment services will
continue to allow it to be competitive in providing those services.
Revenues derived from other common carriers decreased 1.3% in the third quarter
of 1999 as compared to the third quarter of 1998 due primarily to reduced rates
charged to such carriers and a change in the mix of wholesale minutes carried
for such customers. The Company 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 contact expires in 2001. Other common carrier traffic routed to the
Company for termination in Alaska is largely dependent on traffic routed to MCI
WorldCom and Sprint by their customers. Pricing pressures, new program offerings
and market consolidation continue to evolve in the markets served by MCI
WorldCom and Sprint. If, as a result, their traffic is reduced, or if their
competitors' costs to terminate or originate traffic in Alaska are reduced, the
Company's traffic will also likely be reduced, and the Company's pricing may be
reduced to respond to competitive pressures. The Company is unable to predict
the effect on the Company of such changes, however given the materiality of
other common carrier revenues to the Company, a significant reduction in traffic
or pricing could have a material adverse effect on the Company's financial
position, results of operations and liquidity. In October 1999 MCI WorldCom and
Sprint announced their intention to merge. The Company is unable to predict the
outcome or the merger's impact on the Company's operations, liquidity or
financial condition.
Cable services. During the third quarter of 1999, cable television revenues
represented 22.6% of consolidated revenues. The cable systems serve 26
communities and areas in Alaska, including the state's three largest population
centers, Anchorage, Fairbanks and Juneau.
The Company generates cable services revenues from three primary sources: (1)
programming services, including monthly basic or premium subscriptions and
pay-per-view movies or other one-time events, such as sporting events; (2)
equipment rentals or installation; and (3) advertising sales. During the third
quarter of 1999 programming services generated 86.2% of total cable services
revenues, equipment rental and installation fees accounted for 8.8% of such
revenues, advertising sales accounted for 4.5% of such revenues, and other
services accounted for the remaining 0.5% of total cable services revenues. The
primary factors that contribute to year-to-year changes in cable services
revenues are average monthly subscription and pay-per-view rates, the mix among
basic, premium and pay-per-view services, and the average number of subscribers
during a given reporting period.
The cable systems' cost of sales and selling, general and administrative
expenses has consisted principally of programming and copyright expenses, labor,
maintenance and repairs, marketing and advertising and rental expense. During
the third quarter of 1999 programming and copyright expenses represented 42.9%
of total cable cost of sales and selling, general and administrative expenses,
and general and administrative costs represented 51.7% of such total. Marketing
and advertising costs represented approximately 5.4% of such total expenses.
Cable services face competition from alternative methods of receiving and
distributing television signals and from other sources of news, information and
entertainment. The Company believes its cable television services will continue
to be competitive based on providing, at reasonable prices, a greater variety of
21 (Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
programming and other communication services than are available off-air or
through other alternative delivery sources and upon superior technical
performance and customer service.
Local access services. The Company generates 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 the Company transitioned to the "bill and keep" cost settlement method for
termination of traffic on its and other's facilities. Local exchange services
revenues totaled $3.8 million representing 5.7% of consolidated revenues in the
third quarter of 1999. The primary factors that contribute to year-to-year
changes in local access services revenues are the average number of business and
residential subscribers to the Company's services during a given reporting
period and the average monthly rates charged for non-traffic sensitive services.
Operating and engineering expenses represented approximately 8.6% of total local
access services cost of sales and selling, general and administrative expenses
during the third quarter of 1999. Marketing and advertising costs represented
approximately 1.0% of such total expenses, customer service and general and
administrative costs represented approximately 45.3% of such total expenses, and
local access cost of sales represented approximately 45.1% of such total
expenses. The Company expects that it will generate net operating losses from
local exchange services for the year ended December 31, 1999.
The Company's local access services face significant competition in Anchorage
from Alaska Communications Systems and AT&T Alascom, Inc. The Company believes
its approach to developing, pricing, and providing local access services will
allow it to be competitive in providing those services.
Internet services. The Company began offering Internet services in several
markets in Alaska during 1998. The Company generates Internet services revenues
from three primary sources: (1) access product services, including commercial
dedicated access ("DIAS"), ISP DIAS, and retail dial-up service revenues; (2)
SchoolAccess(TM) DIAS and server revenues; and (3) network management services.
Internet services revenues totaled $2.0 million representing 3.0% of total
revenues in the third quarter of 1999. The primary factors that contribute to
year-to-year changes in Internet services revenues are the average number of
subscribers to the Company's services during a given reporting period, the
average monthly subscription rates, and the number of additional premium
features selected.
Operating and general and administrative expenses represented approximately
55.2% of total Internet services cost of sales and selling, general and
administrative expenses during the third quarter of 1999. Internet cost of sales
represented approximately 39.3% of such total expenses and marketing and
advertising represented approximately 5.5% of such total expenses.
Significant new marketing campaigns have been introduced in 1999 featuring
bundled residential and commercial Internet products. Additional bandwidth was
made available to the Company's Internet segment resulting from completion of
the Alaska United undersea fiber optic cable project. The new Internet offerings
are coupled with the Company's 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.
The Company competes with a number of Internet service providers in its markets.
The Company believes its approach to developing, pricing, and providing Internet
services will allow it to be competitive in providing those services.
22 (Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Other services, other expenses and net loss. Telecommunications services
revenues reported in the Other segment as described in note 6 to the
accompanying interim condensed consolidated financial statements include sales
of fiber optic system capacity (see below), corporate network management
contracts, telecommunications equipment sales and service, other miscellaneous
revenues (including revenues from cellular resale services, from prepaid and
debit calling cards sales, and installation and leasing of customers' very small
aperture terminal ("Vsat") equipment).
During the second quarter of 1999 the Company completed a $19.5 million sale of
long-haul capacity in the Alaska United undersea fiber optic cable system
("fiber capacity sale") to Alaska Communications Systems in a cash transaction.
The sale includes both capacity within Alaska, and between Alaska and the lower
49 states. Revenues and cost of sales associated with the capacity sale are
reported in the Other services segment. The Company announced in August 1999
that an agreement pertaining to a second $19.5 million sale of fiber capacity to
Alaska Communications Systems had been executed. The agreement requires Alaska
Communications Systems to acquire additional capacity during the 18-month period
following the effective date of the contract.
Other services segment revenues during the third quarter of 1999 include
telecommunications equipment sales totaling $1.7 million, network solutions and
outsourcing revenues totaling $1.4 million, and cellular resale and other
revenues totaling $778,000.
The Company began developing plans for PCS service deployment in 1995 and
subsequently conducted a technical trial of its candidate technology. The
Company has invested approximately $2.2 million in its PCS license at September
30, 1999. PCS licensees are required to offer service to at least one-third of
their market population within five years or risk losing their licenses. Service
must be extended to two-thirds of the population within 10 years. The Company
continues to evaluate its wireless strategy and expects that such strategy will
allow retention of the PCS license pursuant to its terms.
Depreciation and amortization and interest expense on a consolidated basis is
expected to be higher in 1999 as compared to 1998 resulting primarily from
additional depreciation on 1998 and 1999 capital expenditures, additional
outstanding long-term debt and a reduction in the amount of capitalized
construction period interest following placement of the Alaska United undersea
fiber optic cable into service in early February 1999. As a result, the Company
anticipates recording net losses in 1999.
23 (Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
RESULTS OF OPERATIONS
<TABLE>
The following table sets forth selected Statement of Operations data as a
percentage of total revenues for the periods indicated and the percentage
changes in such data as compared to the corresponding prior year period:
(Underlying data rounded to the nearest thousands)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Percentage Percentage
Change (1) Change (1)
1999 vs. 1999 vs.
(Unaudited) 1999 1998 1998 1999 1998 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues
Long-distance services 63.0% 64.6% 4.6% 56.1% 65.7% (1.4%)
Cable services 22.6% 23.1% 5.1% 21.3% 23.2% 5.8%
Local access services 5.7% 4.4% 40.1% 5.3% 3.2% 95.0%
Internet services 3.0% 2.2% 47.1% 3.1% 2.2% 60.5%
Other services 5.7% 5.7% 6.7% 14.2% 5.7% 189.3%
------------------------------------------------------------------------------
Total revenues 100.0% 100.0% 7.3% 100.0% 100.0% 15.5%
Cost of sales and services 44.9% 47.3% 1.8% 43.5% 47.0% 7.0%
Selling, general and administrative
Expenses 36.3% 36.7% 6.3% 34.5% 36.4% 9.5%
Depreciation and amortization 16.0% 13.3% 28.9% 15.3% 13.6% 29.9%
------------------------------------------------------------------------------
Operating income 2.8% 2.8% 10.3% 6.7% 3.1% 152.8%
Net loss before income taxes and
cumulative effect of a change in
accounting principle (8.5%) (5.2%) (75.1%) (4.0%) (4.9%) 6.0%
Net loss before cumulative effect
of a change in accounting
principle (5.3%) (3.3%) (70.4%) (2.6%) (3.1%) 3.3%
Net loss (5.3%) (3.3%) (70.4%) (2.8%) (3.1%) (2.7%)
<FN>
--------------------------
(1)Percentage change in underlying data.
</FN>
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 ("1999") COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998 ("1998")
Revenues. Total revenues increased 7.3% from $62.8 million in 1998 to $67.3
million in 1999. Long-distance revenues from commercial, residential,
governmental, and other common carrier customers increased 4.6% from $40.6
million in 1998 to $42.4 million in 1999. Long-distance revenues increased due
to a 6.2% increase in the number of active residential, small business and
commercial customers billed from 83,000 at September 30, 1998 to 88,100 at
September 30, 1999, new revenues in 1999 totaling $1.5 million from the lease of
three DS3 circuits on Alaska United facilities within Alaska, and between Alaska
and the
24 (Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
lower 48 states and maintenance charges related to the portion of fiber capacity
purchased by Alaska Communications Systems, a 22.0% increase in interstate
minutes of use to 208.1 million minutes, and a 6.5% increase in intrastate
minutes of use to 38.1 million minutes.
The increase in long-distance revenues was partially offset by a 22.9% reduction
in the Company's average rate per minute on long-distance traffic from $0.166
per minute in 1998 to $0.128 per minute in 1999. Changes in wholesale product
mix and reduced rates on other common carrier traffic (principally MCI WorldCom
and Sprint) offset other common carrier wholesale minutes growth of 31.8%,
resulting in a 1.2% decrease in revenues, from $16.5 million in 1998 to $16.3
million in 1999. The decrease in rates also resulted from the Company's
promotion of and customers' enrollment in new calling plans offering discounted
rates and length of service rebates, such new plans being prompted in part by
the Company's primary long-distance competitor, AT&T Alascom, reducing its rates
and entry of LECs into long-distance markets served by the Company.
Revenues from private line and other data services sales increased 35.9% to $5.8
million during the third quarter of 1999 as compared to the same period of 1998
due primarily to increased system capacity and increasing demand for data
services by ISPs, commercial and governmental customers, and others. Demand for
data services to and from the lower 48 states previously exceeded the available
supply capacity, however such demand is beginning to be filled with uncompressed
fiber optic capacity on the Alaska United fiber system.
Cable revenues increased 5.1% from $14.5 million in 1998 to $15.2 million in
1999. Programming services revenues increased 6.2% to $13.1 million in 1999
resulting from an increase of approximately 5,500 basic subscribers served by
the Company at September 30, 1999 as compared to September 30, 1998, an increase
of $0.79 in average gross revenue per average basic subscriber per month and
increased pay-per-view and premium service revenues. New facility construction
efforts in the summer of 1998 resulted in approximately 1,900 additional homes
passed which contributed to additional subscribers and revenues in 1999. Other
factors included facility upgrades which allowed the introduction of digital
cable services in Anchorage in the fourth quarter of 1998, increased promotional
and advertising efforts in the fourth quarter of 1998 and the first three
quarters of 1999, and increases in basic and premium service rates in certain
locations. Equipment rental and installation revenues increased 19.0% to $1.3
million in 1999 due to increased equipment rentals and installation services
provided by the Cable services industry segment.
Local access services revenues increased 40.1% from $2.7 million in 1998 to $3.8
million in 1999. At September 30, 1999 approximately 41,000 lines were in
service and approximately 1,400 additional lines were awaiting connection.
Internet services revenues (including SchoolAccess(TM) services) increased 47.1%
from $1.4 million in 1998 to $2.0 million in 1999. The Company had approximately
39,000 active residential, commercial and small business retail and wholesale
dial-up subscribers to its Internet service at September 30, 1999.
Other services revenues increased 6.7% from $3.6 million in 1998 to $3.9 million
in 1999.
Cost of sales and services. Cost of sales and services totaled $29.7 million in
1998 and $30.2 million in 1999. As a percentage of total revenues, cost of sales
and services decreased from 47.3% in 1998 to 44.9% in 1999. The decrease in cost
of sales and services as a percentage of revenues is primarily attributed to the
changes in the Company's product mix due to continuing development of new
product lines and growth of existing product lines (local access services,
long-distance data services and Internet). The margin
25 (Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
improvement was partially offset by increased cable services cost of sales as a
percentage of cable services revenues.
Long-distance cost of sales as a percentage of long-distance revenues decreased
from 51.2% in 1998 to 47.1% in 1999. The decrease is primarily attributed to
reductions in access costs due to avoidance of access charges resulting from the
Company's distribution and termination of its traffic on its own network instead
of paying other carriers to distribute and terminate its traffic. The Company
expects to realize additional cost savings as traffic carried on its own local
services facilities grows. Additional capacity between Alaska and the lower 49
states now available on the Alaska United fiber system has allowed the Company
to carry significant additional amounts of data services traffic on its own
facilities rather than paying other carriers for leased capacity. Partially
offsetting the 1999 decrease as compared to 1998 are decreases in the average
rate per minute billed to customers without a comparable decrease in access
charges paid by the Company.
Cable cost of sales and services as a percentage of revenues is generally less
than are long-distance, local access and Internet services cost of sales and
services as a percentage of revenues. Cable services rate increases did not keep
pace with increases in programming and copyright costs in 1999. Programming
costs increased on most of the Company's offerings and the Company incurred
additional costs on new programming introduced in 1998 and 1999. Changes in the
product mix provided to customers also impacts cable cost of sales and services
as a percentage of revenues.
Local access services cost of sales and services totaled 56.9% and 60.5% as a
percentage of 1999 and 1998 local access services revenues, respectively.
Internet services cost of sales and services totaled 43.9% and 41.3% as a
percentage of the 1999 and 1998 Internet services revenues, respectively. The
Company's local access operations commenced in 1997 and Internet services
operations commenced in 1998. Fluctuations in cost of sales and services as a
percentage of revenues are expected to occur as new product lines continue to
develop and mature.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 6.3% from $23.0 million in 1998 to $24.4
million in 1999. The 1999 increase resulted from:
- Increased costs associated with operations and maintenance of the Alaska
United fiber optic cable system that was placed into service in early
February 1999. 1999 costs totaled $1.1 million as compared to $37,000 in
1998.
- Internet services operating, engineering, sales, customer service and
administrative cost increases, from $154,000 in 1998 as compared to $1.4
million in 1999. The Company gradually introduced its Internet services
through the third quarter of 1998 and increased advertising efforts in
the fourth quarter of 1998 and the first three quarters of 1999. The
increase in costs was necessary to provide the operations, engineering,
customer service and support infrastructure necessary to accommodate
expected growth in the Company's Internet services customer base.
- Increased allowance for doubtful accounts receivable.
The 1999 increase in selling, general and administrative expenses is partially
offset by decreases in local access services operating, engineering, sales,
customer service and administrative costs, from $3.4 million in 1998 to $2.6
million in 1999. Additional costs were necessary in 1998 to process the
significant number of conversions and new installations due to the high demand
for the Company's local access services. The Company has been able to provide
the necessary operating, engineering, customer service and administrative costs
more efficiently in 1999, resulting in cost reductions.
26 (Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Consolidated selling, general and administrative expenses, as a percentage of
consolidated revenues, decreased from 36.7% in 1998 to 36.3% in 1999.
Depreciation and amortization. Depreciation and amortization expense increased
28.9% from $8.3 million in 1998 to $10.8 million in 1999. The increase is
attributable to the Company's $58.4 million investment in equipment and
facilities placed into service during 1998 for which a full year of depreciation
will be recorded during 1999, the Alaska United undersea fiber optic cable
system placed into service in the first quarter of 1999 for which 11 months of
depreciation will be recorded during 1999, and the $28.6 million investment in
equipment and facilities during the first three quarters of 1999 for which a
partial year of depreciation will be recorded in 1999.
Interest expense, net. Interest expense, net of interest income, increased 52.0%
from $5.0 million in 1998 to $7.6 million in 1999. This increase resulted
primarily from increases in the Company's average outstanding indebtedness
associated with construction of new long-distance and Internet facilities,
expansion and upgrades of cable television facilities, investment in local
access services equipment and facilities, and slightly higher interest rates on
outstanding indebtedness. During 1998 interest expense was offset in part by
capitalized construction period interest. During 1999 the Company experienced a
significant reduction in the amount of construction period interest capitalized
due to the completion of the Alaska United undersea fiber optic cable system
that was placed into service in early February 1999.
Income tax benefit. Income tax benefit totaled $1.2 million in 1998 and $2.2
million in 1999. The increase in income tax benefit in 1999 was due to an
increase in net loss before income taxes and cumulative effect of a change in
accounting principle in 1999 as compared to 1998. The Company's effective income
tax rate increased from 36.3% in 1998 to 38.0% in 1999 due to the proportional
amount of items that are nondeductible for income tax purposes.
NINE MONTHS ENDED SEPTEMBER 30, 1999 ("1999") COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998 ("1998")
Revenues. Total revenues increased 15.5% from $183.9 million in 1998 to $212.3
million in 1999. Long-distance revenues from commercial, residential,
governmental, and other common carrier customers decreased 1.4% from $120.9
million in 1998 to $119.2 million in 1999. Long-distance revenues decreased
notwithstanding a 7.5% increase in the number of active residential, small
business and commercial customers billed from 82,000 at December 31, 1998 to
88,100 at September 30, 1999, a 10.3% increase in total minutes of use to 661.7
million minutes, and new revenues in 1999 totaling $3.2 million from the lease
of three DS3 circuits on Alaska United facilities within Alaska, and between
Alaska and the lower 49 states and maintenance charges related to the portion of
fiber capacity purchased by Alaska Communications Systems.
The long-distance revenue decrease was primarily due to a 16.6% reduction in the
Company's average rate per minute on long-distance traffic from $0.169 per
minute in 1998 to $0.141 per minute in 1999. The decrease in rates resulted from
the Company's promotion of and customers' enrollment in new calling plans
offering discounted rates and length of service rebates, such new plans being
prompted in part by the Company's primary long-distance competitor, AT&T
Alascom, reducing its rates, and the entry of LECs into long-distance markets
served by the Company. Changes in wholesale product mix and reduced rates on
other common carrier traffic (principally MCI WorldCom and Sprint) offset other
common carrier minutes growth of 18.3% resulting in a 1.3% decrease in revenues,
from $46.7 million in 1998 to $46.1 million in 1999.
27 (Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Cable revenues increased 5.8% from $42.7 million in 1998 to $45.2 million in
1999. Programming services revenues increased 5.3% to $38.7 million in 1999
resulting from an increase of approximately 5,500 basic subscribers served by
the Company, an increase of $1.4 in average gross revenue per average basic
subscriber per month and increased pay-per-view and premium service revenues.
New facility construction efforts in the summer of 1998 resulted in
approximately 1,900 additional homes passed which contributed to additional
subscribers and revenues in 1999. Other factors included facility upgrades which
allowed the introduction of digital cable services in Anchorage in the fourth
quarter of 1998, increased promotional and advertising efforts in the fourth
quarter of 1998 and the first three quarters of 1999, and increases in basic and
premium service rates in certain locations in the second and third quarter of
1998. Equipment rental and installation revenues increased 19.7% to $3.9 million
in 1999 due to increased equipment rentals and installation services provided by
the Cable services industry segment.
Local access services revenues increased 95.0% from $5.8 million in 1998 to
$11.3 million in 1999. At September 30, 1999 approximately 41,000 lines were in
service and approximately 1,400 additional lines were awaiting connection.
Internet services revenues (including SchoolAccess(TM) services) increased 60.5%
from $4.1 million in 1998 to $6.5 million in 1999. The Company had approximately
39,000 active residential, commercial and small business retail and wholesale
dial-up subscribers to its Internet service at September 30, 1999.
Other services revenues increased 189.3% from $10.4 million in 1998 to $30.1
million in 1999. The 1999 increase was largely due to the fiber capacity sale as
previously described.
Cost of sales and services. Cost of sales and services totaled $86.4 million in
1998 and $92.4 million in 1999. As a percentage of total revenues, cost of sales
and services decreased from 47.0% in 1998 to 43.5% in 1999. The decrease in cost
of sales and services as a percentage of revenues is primarily attributed to the
impact of the fiber capacity sale and changes in the Company's product mix due
to continuing development of new product lines and growth of existing product
lines (local access services, data services and Internet). The overall margin
improvement was partially offset by increased cable services cost of sales as a
percentage of cable services revenues.
Long-distance cost of sales and services increased from $60.4 million in 1998 to
$60.7 million in 1999. Increases in the long-distance cost of sales as a
percentage of long-distance revenues from 50.0% in 1998 to 52.4% in 1999 are
primarily attributed to the decrease in the average rate per minute billed to
customers without a comparable decrease in access charges paid by the Company,
and a non-recurring refund received in the second quarter of 1998 totaling
approximately $1.1 million from a local exchange carrier in respect of its
earnings that exceeded regulatory requirements. Offsetting the 1999 increase as
compared to 1998 are reductions in access costs due to avoidance of access
charges resulting from the Company's distribution and termination of its traffic
on its own local services network instead of paying other carriers to distribute
and terminate its traffic. The Company expects increased cost savings as traffic
carried on its own facilities continues to grow. Additional capacity between
Alaska and the lower 48 states now available on the Alaska United fiber system
has allowed the Company to carry significant additional amounts of data services
traffic on its own facilities rather than paying other carriers for leased
capacity.
Cable cost of sales and services as a percentage of revenues is less as a
percentage of revenues than are long-distance, local access and Internet
services cost of sales and services. Cable services rate increases did not keep
pace with increases in programming and copyright costs in 1999. Programming
costs increased on most of the Company's offerings and the Company incurred
additional costs on new programming introduced in 1998 and 1999.
28 (Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Local access services cost of sales and services totaled 52.1% and 65.1% as a
percentage of 1999 and 1998 local access services revenues, respectively.
Internet services cost of sales and services totaled 33.9% and 67.9% as a
percentage of the 1999 and 1998 Internet services revenues, respectively. The
Company's local access operations commenced in 1997 and Internet services
operations commenced in 1998. Fluctuations in cost of sales and services as a
percentage of revenues are expected to continue to occur as new product lines
develop and mature.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 9.5% from $66.9 million in 1998 to $73.2
million in 1999. The 1999 increase resulted from:
- Increased costs associated with operations and maintenance of the Alaska
United fiber optic cable system that was placed into service in early
February 1999. 1999 costs totaled $3.0 million as compared to $107,000 in
1998.
- Internet services operating, engineering, sales, customer service and
administrative cost increases, from $379,000 in 1998 as compared to $3.9
million in 1999. The Company gradually introduced its Internet services
through the third quarter of 1998 and increased advertising efforts in
the fourth quarter of 1998 and first three quarters of 1999. Increased
costs were necessary to provide the operations, engineering, customer
service and support infrastructure necessary to accommodate expected
growth in the Company's Internet services customer base.
- Increased allowance for doubtful accounts receivable.
Partially offsetting these increases was a $2.2 million reduction in
long-distance general and administrative costs in 1999 as compared to 1998.
Selling, general and administrative expenses, as a percentage of revenues,
decreased from 36.4% in 1998 to 34.5% in 1999 primarily as a result of
significant revenues derived from the fiber capacity sale without a
proportionate increase in selling, general and administrative expenses.
Depreciation and amortization. Depreciation and amortization expense increased
29.9% from $25.0 million in 1998 to $32.5 million in 1999. The increase is
attributable to the Company's $58.4 million investment in equipment and
facilities placed into service during 1998 for which a full year of depreciation
will be recorded during 1999, the Alaska United undersea fiber optic cable
system placed into service in the first quarter of 1999 for which 11 months of
depreciation will be recorded during 1999, and the $28.6 million investment in
equipment and facilities during the first three quarters of 1999 for which a
partial year of depreciation will be recorded in 1999.
Interest expense, net. Interest expense, net of interest income, increased 54.4%
from $14.7 million in 1998 to $22.7 million in 1999. This increase resulted
primarily from increases in the Company's average outstanding indebtedness
resulting primarily from construction of new long-distance and Internet
facilities, expansion and upgrades of cable television facilities, investment in
local access services equipment and facilities, and slightly higher interest
rates on outstanding indebtedness. During 1998 interest expense was offset in
part by capitalized construction period interest. During 1999 the Company
experienced a significant reduction in the amount of construction period
interest capitalized due to the completion of the Alaska United undersea fiber
optic cable that was placed into service in early February 1999. The Company
charged to interest expense $470,000 of deferred financing costs in the second
quarter of 1999 resulting from the amendment to the Holdings Loan Facilities
which reduced borrowing capacity (see Liquidity and Capital Resources).
29 (Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Income tax benefit. Income tax benefit decreased from $3.3 million in 1998 to
$3.0 million in 1999 due to a reduced net loss before income taxes and
cumulative effect of a change in accounting principle in 1999 as compared to
1998. The Company's effective income tax rate decreased from 36.6% in 1998 to
34.8% in 1999 due to the decreased net loss and the proportional amount of items
that are nondeductible for income tax purposes.
At September 30, 1999, the Company has (1) tax net operating loss carryforwards
of approximately $66.0 million that will begin expiring in 2008 if not utilized,
and (2) alternative minimum tax credit carryforwards of approximately $2.0
million available to offset regular income taxes payable in future years. The
Company's utilization of remaining net operating loss carryforwards is subject
to certain limitations pursuant to Internal Revenue Code section 382.
Tax benefits associated with recorded deferred tax assets are considered to be
more likely than not realizable through taxable income earned in carryback
years, future reversals of existing taxable temporary differences, and future
taxable income exclusive of reversing temporary differences and carryforwards.
The amount of deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced. The Company estimates that its effective income
tax rate for financial statement purposes will be approximately 34% in 1999. The
Company expects that its operations will generate net income before income taxes
during the carryforward periods to allow utilization of loss carryforwards for
which no allowance has been established.
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 1999 and 1998:
<CAPTION>
First Second Third Fourth Total
(Unaudited) Quarter Quarter Quarter Quarter Year
-----------------------------------------------------------------------
1999 (Dollars in thousands, except per share amounts)
----
<S> <C> <C> <C> <C>
Revenues:
Long-distance services $ 37,568 39,158 42,497 119,223
Cable services 15,062 14,909 15,218 45,189
Local access services 3,714 3,764 3,845 11,323
Internet services 1,969 2,534 2,018 6,521
Other services 3,025 23,294 3,762 30,081
-----------------------------------------------------------------------
Total revenues 61,338 83,659 67,340 212,337
Operating income (loss) (368) 12,655 1,908 14,195
Net income (loss) before income taxes and
cumulative effect of a change in
accounting principle (7,328) 4,495 (5,702) (8,535)
Net income (loss) before cumulative effect
of a change in accounting principle (4,521) 2,491 (3,537) (5,567)
Net income (loss) $ (4,865) 2,491 (3,537) (5,911)
=======================================================================
30 (Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
<CAPTION>
First Second Third Fourth Total
(Unaudited) Quarter Quarter Quarter Quarter Year
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic net income (loss) per share:
Net income (loss) before cumulative
effect of a change in accounting
principle $ (0.10) 0.04 (0.08) (0.13)
Cumulative effect of a change in
accounting principle --- --- --- ---
-----------------------------------------------------------------------
Net income (loss) $ (0.10) 0.04 (0.08) (0.13)
=======================================================================
Diluted net income (loss) per share:
Net income (loss) before cumulative
effect of a change in accounting
principle $ (0.10) 0.04 (0.08) (0.13)
Cumulative effect of a change in
accounting principle --- --- --- ---
-----------------------------------------------------------------------
Net income (loss) $ (0.10) 0.04 (0.08) (0.13)
=======================================================================
1998
----
Revenues:
Long-distance services $ 38,651 41,366 40,847 36,486 157,350
Cable services 14,201 14,041 14,484 14,914 57,640
Local access services 1,013 2,049 2,744 4,102 9,908
Internet services 903 1,014 1,060 1,614 4,591
Other services 3,384 4,471 3,631 5,820 17,306
-----------------------------------------------------------------------
Total revenues 58,152 62,941 62,766 62,936 246,795
Operating income 2,437 1,447 1,730 3,230 8,844
Net loss $ (1,616) (2,066) (2,076) (1,039) (6,797)
=======================================================================
Basic net loss per share $ (0.03) (0.04) (0.04) (0.02) (0.14)
=======================================================================
Diluted net loss per share $ (0.03) (0.04) (0.04) (0.02) (0.14)
=======================================================================
</TABLE>
Revenues. Total revenues for the quarter ended September 30, 1999 ("third
quarter of 1999") were $67.3 million, representing a 19.6% decrease from total
revenues in the quarter ended June 30, 1999 ("second quarter of 1999") of $83.7
million. The decrease in total revenues resulted from a $19.5 million fiber
capacity sale in the second quarter of 1999, reduced revenues associated with a
6.2% reduction in the long-distance average rate per minute, notwithstanding a
10.0% increase in total minutes of traffic carried. Partially offsetting this
decrease were increased revenues from sales to other common carriers
(principally MCI WorldCom and Sprint) due to a 15.5% increase in minutes carried
for other common carriers. Revenues from other common carriers (principally MCI
WorldCom and Sprint) totaled $16.3 million in the third quarter of 1999 and
$14.9 million in the second quarter of 1999.
Long-distance revenues have historically been highest in the summer months as a
result of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial fishing, and oil and
gas activities. Cable television revenues, on the other hand, are higher in the
winter months because consumers spend more time at home and tend to watch more
television during these months. Local service operations are not expected to
exhibit significant seasonality. The Company's Internet access services are
expected to reflect seasonality trends similar to the cable television segment.
31 (Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
The Company's 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 12.0% from
$34.3 million in the second quarter of 1999 to $30.2 million in the third
quarter of 1999. The decrease resulted primarily from costs associated with the
fiber capacity sale in the second quarter of 1999. As a percentage of revenues,
second quarter of 1999 cost of sales and services was 41.1% as compared to 44.9%
for the third quarter of 1999. The increase in the cost of sales and services as
a percentage of revenues is primarily due to increased margin on the fiber
capacity sale as compared to margin on other products and services sold.
Partially offsetting this overall increase was a decrease in cost of sales and
services as a percentage of revenues attributed to growth of the Company's new
product lines, changes in product mix, and avoidance of access charges and
leased lines for data services traffic resulting from the Company's distribution
and termination of its traffic on its own network instead of paying other
carriers to distribute and terminate its traffic.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $800,000 in the third quarter of 1999 as
compared to the second quarter of 1999. As a percentage of revenues, third
quarter of 1999 selling, general and administrative expenses were 36.3% as
compared to 30.2% for the second quarter of 1999. The third quarter 1999
increase as a percentage of sales is primarily a result of significant revenues
derived from the fiber capacity sale without a proportionate increase in
selling, general and administrative expenses in the second quarter of 1999.
Net income (loss). The Company reported a net loss of ($3.5) million for the
third quarter of 1999 as compared to a net income of $2.5 million for the second
quarter of 1999. The decrease in net income is primarily attributed to the fiber
capacity sale in the second quarter of 1999. The decrease is partially offset by
a charge to interest expense of $470,000 of deferred financing costs in the
second quarter of 1999 resulting from the amendment to the Holdings Loan
Facilities which reduced borrowing capacity (see Liquidity and Capital
Resources).
LIQUIDITY AND CAPITAL RESOURCES
The first three quarters of 1999 ("1999") cash flows from operating activities
totaled $21.7 million, net of changes in the components of working capital.
Additional sources of cash during 1999 included preferred stock issuance
proceeds totaling $20 million and long-term borrowings of $13.8 million.
Expenditures for property and equipment, including construction in progress,
totaled $28.6 million and $130.2 million in 1999 and the first three quarters of
1998 ("1998"), respectively. Uses of cash during 1999 also included repayment of
$24.1 million of long-term borrowings and capital lease obligations.
Net receivables decreased $1.3 million from December 31, 1998 to September 30,
1999. The decrease is due to:
- Income tax refunds received totaling $2.0 million.
- A $2.0 million reclassification of income taxes receivable to a long-term
deferred tax asset since the Company has utilized all net operating
losses against income taxes paid in prior periods. Refundable amounts are
now recorded as a long-term deferred tax assets and will be realized as
future taxable income is generated.
- An increase in the allowance for doubtful accounts of $2.1 million.
32 (Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Partially offsetting the above described decreases was a $5.2 million increase
in trade receivables primarily from the long-distance, cable and local access
services product lines and the Company's Internet SchoolAccess(TM) service
offering.
Working capital totaled $16.4 million at September 30, 1999, a $7.4 million
increase from working capital of $9.0 million as of December 31, 1998. The
increase in working capital is primarily attributed to:
- Decreased net receivables as discussed above.
- Increased prepaid and other current assets of $1.3 million due to the
timing of certain payments made by the Company.
- Decreased accounts payable of $3.9 million due to one large outstanding
invoice due at December 31, 1998 related to a product sale completed in
1998 and reduced levels of capital expenditures and accruals in 1999 as
compared to 1998.
- Decreased accrued interest of $4.7 million due to the timing of interest
payments.
The Holdings $200,000,000 ($150,000,000 as amended) and $50,000,000 credit
facilities mature June 30, 2005. The Holdings Loan facilities were amended in
April 1999 (see below) and bear interest, as amended, at either Libor plus 1.00%
to 2.50%, depending on the leverage ratio of Holdings and certain of its
subsidiaries, or at the greater of the prime rate or the federal funds effective
rate (as defined) plus 0.05%, in each case plus an additional 0.00% to 1.375%,
depending on the leverage ratio of Holdings and certain of its subsidiaries.
$87.7 million and $106.7 million were drawn on the credit facilities as of
September 30, 1999 and December 31, 1998, respectively.
On April 13, 1999, the Company amended its Holdings credit facilities. These
amendments contained, among other things, provisions for payment of a one-time
amendment fee of 0.25% of the aggregate commitment, an increase in the
commitment fee by 0.125% per annum on the unused portion of the commitment, and
an increase in the interest rate of 0.25%. The amended facilities reduce the
aggregate commitment by $50 million to $200 million, and limit capital
expenditures to $35 million in 1999 and $35 million in 2000 with no limits
thereafter (excluding amounts to be paid for purchased satellite transponder
facilities). The amended facilities contemplated that Holdings receive $20
million in proceeds from a GCI preferred stock issuance by May 31, 1999 (see
below). Pursuant to the Financial Accounting Standards Board Emerging Issues
Task Force Issue 98-14, "Debtor's Accounting for Changes in Line-of-Credit or
Revolving Debt Arrangements," the Company recorded as additional interest
expense $470,000 of deferred financing costs in the second quarter of 1999
resulting from the reduced borrowing capacity.
Holding's credit facilities and GCI, Inc.'s senior notes contain restrictions on
the operations and activities of the Company, including requirements that the
Company comply with certain financial covenants and financial ratios. Under the
amended Holding's credit facility, Holdings may not permit the ratio of senior
debt to annualized operating cash flow (as defined) of Holdings and certain of
its subsidiaries to exceed 3.0 to 1.0 through December 31, 1999, total debt to
annualized operating cash flow to exceed 6.25 to 1.00 through March 31, 2000,
and annualized operating cash flow to interest expense to be less than 1.5 to
1.0 through September 30, 1999 (1.75 to 1.0 from October 1, 1999 through
December 31, 1999). Each of the foregoing ratios decreases in specified
increments during the life of the credit facility. The credit facility requires
Holdings to maintain a ratio of annualized operating cash flow to debt service
of Holdings and certain of its subsidiaries of at least 1.25 to 1.0, and
annualized operating cash flow to fixed charges of at least 1.0 to 1.0 (which
adjusts to 1.05 to 1.0 in April, 2003 and thereafter). The senior notes impose a
requirement that the leverage ratio of GCI, Inc. and certain of its subsidiaries
not exceed 7.5 to 1.0 prior to December 31, 1999 and 6.0 to 1.0 thereafter,
subject to the ability of GCI, Inc. and certain of its subsidiaries to incur
specified permitted indebtedness without regard to such ratios.
33 (Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
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. $71.7 million was borrowed
under the facility at September 30, 1999. The Fiber Facility is a 10-year term
loan that is interest only for the first 5 years. The facility can be extended
an additional two years at any time between the second and fifth anniversary of
closing the facility if the Company can demonstrate projected revenues from
certain capacity commitments will be sufficient to pay all operating costs,
interest, and principal installments based on the extended maturity. The Fiber
Facility bears interest at either Libor plus 3.0%, or at the lender's prime rate
plus 1.75%. The interest rate will decline to Libor plus 2.5%-2.75%, or, at the
Company's option, the lender's prime rate plus 1.25%-1.5% after the project
completion date and when the loan balance is $60,000,000 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.
The Company will use approximately one-half of the Alaska United system capacity
in addition to its existing owned and leased facilities to carry its own
traffic. One of the Company's large commercial customers signed agreements in
February and March 1999 for the immediate lease of three DS3 circuits on Alaska
United facilities within Alaska, and between Alaska and the lower 48 states. The
lease agreements provide for three-year terms, with renewal options for
additional terms. The Company continues to pursue opportunities to lease
additional capacity on its system.
The Company completed a sale of capacity in the Alaska United system to Alaska
Communications Systems 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 August 1999 for a second $19.5 million sale of fiber
capacity to Alaska Communications Systems. The Company continues to pursue
opportunities for sale of additional capacity on its system.
The Company's expenditures for property and equipment, including construction in
progress, totaled $28.6 million and $130.2 million during 1999 and 1998,
respectively. The Company anticipates that its capital expenditures in 1999 may
total as much as $35 million. Planned capital expenditures over the next five
years include those necessary for continued expansion of the Company's
long-distance, local exchange and Internet facilities, the development and
construction of a PCS network, and continued upgrades to its cable television
plant, and approximately $43.5 million for satellite transponders. Sources of
funds for these planned capital expenditures are expected to include internally
generated cash flows and borrowings under the Company's credit facilities.
The Company's ability to invest in discretionary capital and other projects will
depend upon its future cash flows and access to borrowings under its credit
facilities. Management anticipates that cash flow generated by the Company and
borrowings under its credit facilities will be sufficient to fund capital
expenditures and its working capital requirements. Should cash flows be
insufficient to support additional borrowings, such investment in capital
expenditures will likely be reduced.
The Company entered into a purchase and lease-purchase option agreement in
August 1995 for the acquisition of satellite transponders to meet its long-term
satellite capacity requirements. The launch of the satellite in August 1998
failed. The Company did not assume launch risk and the launch has been
rescheduled for the first quarter of 2000. The Company will continue to lease
transponder capacity until the
34 (Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
delivery of the transponders on the replacement satellite. The balance payable
upon expected delivery of the transponders during the second quarter of 2000, in
addition to the $9.1 million deposit previously paid, totals approximately $43.5
million.
The Company issued 20,000 shares of convertible redeemable accreting preferred
stock ("Preferred Stock") on April 30, 1999. Proceeds totaling $20 million
(before payment of costs and expenses) 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. The Company's future results of operations will be affected by its
ability to react to changes in the competitive environment and by its ability to
fund and implement new technologies. The Company is unable to determine how
competition, technological changes and its net operating losses will affect its
ability to obtain financing.
The Company believes that it will be able to meet its current and long-term
liquidity and capital requirements, including fixed charges, through its cash
flows from operating activities, existing cash, cash equivalents, short-term
investments, credit facilities, and other external financing and equity sources.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133 and SFAS No. 137. In June 1998, the Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," effective for years beginning after June 15, 1999. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments imbedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge criteria are met. Special accounting for qualifying hedges allow a
derivative's gains or losses to offset related results on the hedged item in the
income statement and requires that a company must formally document, designate
and assess the effectiveness of transactions that receive hedge accounting. In
August 1999, the Accounting Standards Board issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities Deferral of the Effective Date of
FASB Statement No. 133." SFAS No. 137 extends the implementation date of SFAS
No. 133 and gives additional guidance regarding the recognition in the balance
sheet of an embedded derivative. Management of the Company expects that adoption
of SFAS No. 133 and SFAS No. 137 will not have a material impact on the
Company's interim and year-end 2001 financial statements.
YEAR 2000 COSTS
Many financial information and operational systems in use today may not be able
to interpret dates after December 31, 1999 because such systems allow only two
digits to indicate the year in a date. As a result, such systems are unable to
distinguish January 1, 2000 from January 1, 1900, which could have adverse
consequences on the operations of an entity and the integrity of information
processing. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a shut down in a
company's operations, a temporary inability to process transactions, send
invoices or engage in similar normal business activities. This potential problem
is referred to as the "Year 2000" or "Y2K" issue.
State of readiness. The Company has undertaken various initiatives to evaluate
the Year 2000 readiness of the products and services sold by the Company
("Products"), the information technology systems used in the Company's
operations ("IT Systems"), its non-IT systems, such as power to its facilities,
HVAC systems, building security, voice mail and other systems, as well as the
readiness of its customers and suppliers. The
35 (Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Company has identified eight Year 2000 target areas that cover the entire scope
of the Company's business and has internally established teams which completed
an 8-step Compliance Validation Process ("CVP") for each target area with
respect to critical and service delivery systems. The table below identifies the
Company's target areas as well as the 8-step CVP with its expected timeline.
Team activity is currently focused towards the process of completing Phase 2.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
Year 2000 Target Areas Compliance Validation Process
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Business Computer Systems PHASE 1
2. Technical Infrastructure 1. Team Formation Completed 1st quarter 1997
3. End-User Computing 2. Inventory Assessment Completed 4th quarter 1998
4. Switching and Head-end Equipment 3. Compliance Assessment Completed 4th quarter 1998
5. Logistics 4. Risk Assessment Completed 4th quarter 1998
6. Facilities ----------------------------------------------------------------
7. Customers PHASE 2
8. Suppliers/Key Service Providers 5. Resolution/Remediation Completed 2nd quarter 1999
6. Validation Completed 3rd quarter 1999
7. Contingency Plan Completed 3rd quarter 1999
8. Sign-Off Acceptance Expected completion 4th
quarter 1999
----------------------------------------------------------------------------------------------------------------
</TABLE>
In 1997, the Company established a corporate-wide Year 2000 task force to
address Y2K issues. This effort is comprehensive and encompasses software,
hardware, electronic data interchange, networks, PC's, facilities, embedded
chips, century certification, supplier and customer readiness, contingency
planning, and domestic and international operations. The Company has tested,
replaced or upgraded all of its critical business applications and systems. The
Company has prioritized its third-party relationships as critical, severe or
sustainable, has completed the assessment phase for third parties, has requested
a Y2K contract warranty in many new key contracts and is developing contingency
plans for critical third parties, including key customers, suppliers and other
service providers. An assessment of its key customers showed that no significant
impact to the Company is expected due to customer Y2K problems. The Company
continues to evaluate other telecommunication companies that purchase the
Company's services.
With respect to the Company's relationships with third parties, the Company
relies both domestically and internationally upon various vendors, governmental
agencies, utility companies, telecommunications service companies, delivery
service companies and other service providers. Although these service providers
are outside the Company's control, the Company has contacted those with whom it
believes its relationships are material and has verbally communicated with some
of its strategic customers to determine the extent to which interfaces with such
entities are vulnerable to Year 2000 issues and whether products and services
purchased from or by such entities are Year 2000 ready.
Over 400 companies have been contacted directly by mail, by telephone, through
on-site visits or through inquiry of their Y2K Internet web sites to determine
their state of readiness. Responses vary from confirmation that the supply of
products or services provided to the Company will continue without interruption
or delay through the year 2000, to providing their plans for making their
products or service delivery systems Y2K compliant. The Company is currently
evaluating the sufficiency of the responses received from these third parties.
The Company intends to complete follow-up activities, including but not limited
to site surveys, phone surveys and mailings, with significant vendors and
service providers as part of the Phase 2 sign-off acceptance.
36 (Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Costs to address year 2000 issues. Costs related to the Y2K issue are expensed
as incurred and are funded through the Company's operating cash flows and its
credit agreements. Through September 30, 1999, the Company has expensed
incremental remediation costs totaling $2.0 million, with remaining incremental
remediation costs in 1999 and 2000 estimated at approximately $750,000.
Management must balance the requirements for funding discretionary capital
expenditures with required year 2000 efforts given its limited resources. The
Company has not deferred any critical information technology projects because of
its Year 2000 program efforts, which are being addressed primarily through a
dedicated team within the Company's information technology group.
Time and cost estimates are based on currently available information and could
be affected by the ability to correct all relevant computer codes and equipment,
and the Y2K readiness of the Company's business partners, among other factors.
At this time, the Company does not possess information necessary to estimate the
potential financial impact of Year 2000 compliance issues relating to its
vendors, customers and other third parties.
Risk of year 2000 issues. If necessary modifications and conversions by the
Company are not made on a timely basis, or if key third parties are not Y2K
ready, Y2K problems could have a material adverse effect on the Company's
financial condition, results of operations and liquidity. However, the Company
believes it has identified and addressed all aspects of its operations that may
be affected by the Year 2000 issue and has addressed the most critical
applications first.
Although the Company considers them unlikely, the Company believes that the
following several situations, not in any particular order, make up the Company's
worst-case Year 2000 scenarios:
- Disruption of Electrical Power Supplies Resulting from Extended Regional
Power Failure(s). The Company's major switching and information systems
are protected by emergency standby electrical generators in the event of
short-term power outages. If electrical supplies from regional electric
utilities are disrupted for longer periods of time, the Company may be
required to power-down its electronic switching, head-end and computer
equipment. The Company is closely monitoring electrical utilities that
provide service to the Company for their Year 2000 readiness. Based on
their progress reports and completion of assessments, the Company
believes that there will be no significant impact on its operations in
the major communities served by the Company. Many of the electrical
companies serving smaller rural communities employ equipment that is
manual or controlled by non date-effecting equipment, however they may
experience outages if they do not receive fuel from their suppliers.
- Disruption of a Significant Customer's Ability to Accept Products or Pay
Invoices. The Company's significant customers are large, well-informed
customers, mostly in the telecommunications and oil and gas industries,
who are disclosing information to their vendors that indicates they are
well along the path toward Year 2000 compliance. These customers have
demonstrated their awareness of the Year 2000 issue by issuing
requirements of their suppliers and indicating the stages of
identification and remediation which they consider adequate for
progressive calendar quarters leading up to the century mark. The
Company's significant customers, moreover, are substantial companies that
the Company believes would be able to make adjustments in their processes
as required to cause timely payment of invoices.
- Disruption of Supplies and Materials. In early 1998 the Company began an
ongoing process of surveying its vendors with regard to their Year 2000
readiness and is now in the process of finalizing its assessment of
responses to the survey. The Company expects to work with vendors that
show a need for assistance or that provide inadequate responses, and in
many cases expects that survey results
37 (Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
will be refined significantly by such work. Where ultimate survey results
show that the need arises, the Company will arrange for back-up vendors
before the changeover date. Supplies and materials necessary for
invoicing and other functions have been ordered and will be on hand in
bulk prior to December 31, 1999 to provide an adequate inventory to
bridge up to three months of vendor supply chain disruptions.
- Disruption of the Company's Administrative and Billing IT Systems. The
Company has completed an upgrade of its current financial software
systems to state-of-the-art systems and such process has required Year
2000 compliance in the various invitations for proposals. Year 2000
testing is occurring as upgrades proceed. The Company's billing and
information systems have been assessed and remediation is substantially
complete. System processes have been prioritized so that critical
date-sensitive systems and functionality were remediated first.
Non-critical systems and functionality are remediated following critical
systems. The Company's efforts are proceeding on-target and on budget.
Accordingly, the Company believes that, after assessment and remediation,
if any disruptions do occur, such will be dealt with promptly and will be
no more severe with respect to correction or impact than would be an
unexpected billing or information system error.
- Disruption of the Company's Non-IT Systems. The Company continues to
conduct a comprehensive assessment of all non-IT systems, including among
other things its switching and head-end systems and operations, with
respect to both embedded processors and obvious computer control. The
Company has completed its assessment activities and is in the process of
completing remediation efforts. The Company believes that, after such
assessment and remediation, if any disruptions do occur, such will be
dealt with promptly and will be no more severe with respect to correction
or impact than would be an unexpected breakdown of well-maintained
equipment.
- De-Listing of Company as a Vendor to Certain Customers. Several of the
Company's principal customers have required updated reports in the form
of answers to extensive multiple-choice surveys on the Company's Year
2000 compliance efforts. According to these customers, failure to reply
to the readiness survey would have led to de-listing as a service
supplier at the present time, resulting in possible disqualification to
bid on procurements requiring service delivery in the future. The Company
has responded to these reports on a timely basis. The Company has not
been disqualified as a supplier to any customers. Several significant
customers have scheduled monitoring meetings during 1999.
Contingency plans. The Company has completed development of specific contingency
plans for potential Year 2000 disruptions. The aforementioned 8-step Compliance
Validation Process includes contingency planning by each team and such plans are
being carefully reviewed and tested by the Company.
ALASKA ECONOMY
The Company offers telecommunication and video services to customers primarily
throughout Alaska. As a result of this geographic concentration, the Company's
growth and operations depend upon economic conditions in Alaska. The economy of
Alaska is dependent upon the natural resource industries, and in particular oil
production, as well as tourism, fisheries, government, and United States
military spending. Any deterioration in these markets could have an adverse
impact on the Company. Oil revenues over the past several years have contributed
in excess of 75% of the revenues from all segments of the Alaska economy and are
expected to account for 73% in 1999.
The volume of oil transported by the TransAlaska Oil Pipeline System over the
past 20 years has been as high as 2.0 million barrels per day in 1988. Over the
past several years, it has begun to decline. Market prices for North Slope oil
declined to below $9 per barrel in 1998, well below the average price per barrel
used by the State of Alaska to budget its oil related revenues.
38 (Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Oil companies and service providers have implemented cost cutting measures to
offset a portion of the declining revenues. Oil company and related oil field
service company layoffs reportedly will result in a reduction of oil industry
jobs by at least 39 percent by the end of 1999. Reduced oil revenues will impact
the state of Alaska's economy, and is expected to particularly hurt state and
local government and oil service companies. Oil field service and drilling
contractors are expected to cut operating costs to adjust for decreasing
production and exploration.
Oil prices have increased to over $22 per barrel in November 1999, reducing the
amount of funds needed to balance the state of Alaska's expected budget
shortfall from an estimated $1 billion to $500 million. The State of Alaska
maintains budget reserve accounts that are intended to fund budgetary shortfalls
and may fund a portion of the revenue shortfall. The Governor of the state of
Alaska and the state legislature have implemented cost cutting and revenue
enhancing measures to reduce the amount of budget reserve funds that will be
necessary to balance the state budget.
The Alaska Department of Revenue predicts that oil production and revenue will
stabilize for a period of time as new oil fields currently being developed are
placed into production. State revenue forecasts, based on increased average oil
prices and stabilizing production levels, indicate that the state's budget
reserve account could last three years longer than previous estimated, to 2005.
BP Amoco announced in April 1999 its intention to purchase ARCO for $26.8
billion. BP Amoco and ARCO together reportedly own approximately 70 percent of
the Alaska North Slope oil fields and the company that operates the Trans-Alaska
Pipeline System. Concerns have been expressed about the impact of this specific
transaction and oil company consolidation in general on the oil and gas industry
in Alaska, and in turn on the economy of Alaska. Concerns include reduced
competition in an industry that is the largest source of revenues to the state
of Alaska, and foreign ownership of a significant amount of United States oil
production facilities and reserves. North Slope oil feeds most of the refineries
on the West Coast, which are set up to process that particular grade of crude.
Regulators are concerned that the new company could charge higher prices because
of its control of much of the supply. Realignment of operations following the
acquisition reportedly will result in eliminating up to 400 positions in Alaska.
The State of Alaska and BP Amoco reached an agreement in November 1999 to:
- sell interests in North Slope properties of not less than 175,000 barrels
of working interest oil per day, primarily in the Kuparuk field, together
with associated infrastructure and a proportionate amount of the
Trans-Alaska Pipeline System;
- transfer operatorships of the Kuparuk and Alpine fields; and
- sell or relinquish 620,000 acres of state and federal explorations
leases.
In addition, BP Amoco agreed to purchase oil from small producers using a
pre-arranged price formula, and to sell some of its tankers. Other provisions
would benefit the state of Alaska specifically, including a pledge to donate 0.2
percent of production to Alaska entities, with 30 percent of that figure --
currently about $6 million a year -- going to the state university system. BP
Amoco also pledged to hire qualified Alaskans when they are available for jobs,
encourage contractors to do the same, and to fabricate production facilities in
the state of Alaska where feasible.
The terms of the agreement reportedly will allow BP Amoco to retain
approximately three quarters of the value of ARCO's Alaskan assets. BP Amoco
would retain control of the Prudhoe Bay field. Currently, only BP
39 (Continued)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Amoco and ARCO serve as operators of North Slope fields. The asset sales
reportedly would have minimal impact on the $1 billion of savings worldwide that
BP Amoco has projected would result from the merger.
No assurance can be given that oil companies doing business in Alaska will be
successful in discovering new fields or further developing existing fields which
are economic to develop and produce oil with access to the pipeline or other
means of transport to market, even with the reduced level of royalties. The
Company is not able to predict the effect of changes in the price and production
volumes of North Slope oil or the acquisition of ARCO by BP Amoco on Alaska's
economy or on the Company.
SEASONALITY
Long-distance revenues have historically been highest in the summer months as a
result of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial fishing, and oil and
gas activities. Cable television revenues, on the other hand, are higher in the
winter months because consumers tend to watch more television, and spend more
time at home, during these months. The Company's local access services revenues
are not expected to exhibit significant seasonality. The Company's Internet
access services are expected to reflect seasonality trends similar to the cable
television segment. The Company's ability to implement construction projects is
reduced during the winter months because of cold temperatures, snow and short
daylight hours.
INFLATION
The Company does not believe that inflation has a significant effect on its
operations.
40
<PAGE>
PART I.
ITEM 3. QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK
The Company's Senior Holdings Loan carries interest rate risk. Amounts borrowed
under this Agreement bear interest at Libor plus 1.0% to 2.5%, depending on the
leverage ratio of Holdings and certain of its subsidiaries, or at the greater of
the prime rate or the federal funds effective rate (as defined) plus 0.05%, in
each case plus an additional 0.0% to 1.375%, depending on the leverage ratio of
Holdings and certain of its subsidiaries. Should the Libor rate, the lenders'
base rate or the leverage ratios change, the Company's interest expense will
increase or decrease accordingly. As of September 30, 1999, 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 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 September 30, 1999, 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding pending legal proceedings to which the Company is a party
is included in Note 7 of Notes to Interim Condensed Consolidated Financial
Statements and is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Information regarding changes in securities and use of proceeds 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) Exhibit 27 - Financial Data Schedule *
(b) Reports on Form 8-K filed during the quarter ended September
30, 1999 - None
---------------------
* Filed herewith.
41
<PAGE>
SIGNATURES
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL COMMUNICATION, INC.
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------------------------- -------------------
<S> <C> <C>
/s/ President and Director November 12, 1999
- -------------------------------------- (Principal Executive Officer) ------------------
Ronald A. Duncan
/s/ Senior Vice President, Chief Financial November 12, 1999
- -------------------------------------- Officer, Secretary and Treasurer ------------------
John M. Lowber (Principal Financial Officer)
/s/ Vice President, Chief Accounting November 12, 1999
- -------------------------------------- Officer ------------------
Alfred J. Walker (Principal Accounting Officer)
</TABLE>
42
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
INTERIM CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTH
PERIOD ENDED SEPTEMBER 30, 1999 AND THE INTERIM CONDENSED CONSOLIDATED
BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000808461
<NAME> GENERAL COMMUNICATION, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 13,476
<SECURITIES> 0
<RECEIVABLES> 44,358
<ALLOWANCES> 2,996
<INVENTORY> 2,628
<CURRENT-ASSETS> 63,664
<PP&E> 410,144
<DEPRECIATION> 103,614
<TOTAL-ASSETS> 640,516
<CURRENT-LIABILITIES> 47,280
<BONDS> 343,583
19,912
0
<COMMON> 182,385
<OTHER-SE> 13,874
<TOTAL-LIABILITY-AND-EQUITY> 640,516
<SALES> 0
<TOTAL-REVENUES> 212,337
<CGS> 0
<TOTAL-COSTS> 92,445
<OTHER-EXPENSES> 102,350
<LOSS-PROVISION> 3,347
<INTEREST-EXPENSE> 23,186
<INCOME-PRETAX> (8,535)
<INCOME-TAX> (2,968)
<INCOME-CONTINUING> (5,567)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 344
<NET-INCOME> (5,911)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
