As filed with the Securities and Exchange Commission on November 14, 2000.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-15279
GENERAL COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)
STATE OF ALASKA 92-0072737
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 Denali Street
Suite 1000
Anchorage, Alaska 99503
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (907) 265-5600
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
The number of shares outstanding of the registrant's classes of common stock, as
of October 31, 2000 was:
48,374,743 shares of Class A common stock;
and 3,904,870 shares of Class B common stock.
1
<PAGE>
<TABLE>
INDEX
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<CAPTION>
Page No.
--------
<CAPTION>
<S> <C>
Cautionary Statement Regarding Forward-Looking Statements.................................................3
PART I. FINANCIAL INFORMATION
Item l. Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999..................................................5
Consolidated Statements of Operations for the three and
nine months ended September 30, 2000
(unaudited) and 1999 (unaudited)...................................................7
Consolidated Statements of Stockholders' Equity
for the nine months ended September 30, 2000
(unaudited) and 1999 (unaudited)...................................................8
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 (unaudited)
and 1999 (unaudited)...............................................................9
Notes to Interim Condensed Consolidated Financial
Statements.........................................................................10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................34
Item 6. Exhibits and Reports on Form 8-K......................................................34
Other items are omitted, as they are not applicable.
SIGNATURES................................................................................................35
</TABLE>
2
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
You should carefully review the information contained in this Quarterly Report,
but should particularly consider any risk factors that we set forth in this
Quarterly Report and in other reports or documents that we file from time to
time with the Securities and Exchange Commission. In this Quarterly Report, in
addition to historical information, we state our beliefs of future events and of
our future operating results, financial position and cash flows. In some cases,
you can identify those so-called "forward-looking statements" by words such as
"may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of those
words and other comparable words. You should be aware that those statements are
only our predictions and are subject to risks and uncertainties. Actual events
or results may differ materially. In evaluating those statements, you should
specifically consider various factors, including those outlined below. Those
factors may cause our actual results to differ materially from any of our
forward-looking statements. For these statements, we claim the protection of the
safe harbor for forward-looking statements provided by the Private Securities
Litigation Reform Act of 1995.
- Material adverse changes in the economic conditions in the markets we
serve;
- The efficacy of the rules and regulations to be adopted by the Federal
Communications Commission ("FCC") and state public regulatory agencies to
implement the provisions of the Telecommunications Act of 1996; the outcome
of litigation relative thereto; and the impact of regulatory changes
relating to access reform;
- Our responses to competitive products, services and pricing, including
pricing pressures, technological developments, alternative routing
developments, and the ability to offer combined service packages that
include local, cable and Internet services; the extent and pace at which
different competitive environments develop for each segment of our
business; the extent and duration for which competitors from each segment
of the telecommunications industry are able to offer combined or full
service packages prior to our being able to do so; the degree to which we
experience material competitive impacts to our traditional service
offerings prior to achieving adequate local service entry; and competitor
responses to our products and services and overall market acceptance of
such products and services;
- The outcome of our negotiations with incumbent local exchange carriers
("ILECs") and state regulatory arbitrations and approvals and relevant
appeals with respect to interconnection agreements; and our ability to
purchase unbundled network elements or wholesale services from ILECs at a
price sufficient to permit the profitable offering of local exchange
service at competitive rates;
- Success and market acceptance for new initiatives, many of which are
untested; the level and timing of the growth and profitability of new
initiatives, particularly local access services, Internet (consumer and
business) services and wireless services; start-up costs associated with
entering new markets, including advertising and promotional efforts;
successful deployment of new systems and applications to support new
initiatives; and local conditions and obstacles;
- Uncertainties inherent in new business strategies, new product launches and
development plans, including local access services, Internet services,
wireless services, digital video services, cable modem services, and
transmission services;
- Rapid technological changes;
- Development and financing of telecommunication, local access, wireless,
Internet and cable networks and services;
- Future financial performance, including the availability, terms and
deployment of capital; the impact of regulatory and competitive
developments on capital outlays, and the ability to achieve cost savings
and realize productivity improvements;
- Availability of qualified personnel;
- Changes in, or failure, or inability, to comply with, government
regulations, including, without limitation, regulations of the FCC, the
Regulatory Commission of Alaska ("RCA"), and adverse outcomes from
regulatory proceedings;
- Uncertainties in federal military spending levels and military base
closures in markets in which we operate;
- Other risks detailed from time to time in our periodic reports filed with
the Securities and Exchange Commission.
3
<PAGE>
These forward-looking statements (and such risks, uncertainties and other
factors) are made only as of the date of this report and we expressly disclaim
any obligation or undertaking to disseminate any updates or revisions to any
forward-looking statement contained in this document to reflect any change in
our expectations with regard to those statements or any other change in events,
conditions or circumstances on which any such statement is based. Readers are
cautioned not to put undue reliance on such forward-looking statements.
4
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Unaudited)
September 30, December 31,
ASSETS 2000 1999
---------------------------------------------------------------------------------- --------------- -----------------
(Amounts in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,420 13,734
--------------- -----------------
Receivables:
Trade 43,405 48,145
Other 407 269
--------------- -----------------
43,812 48,414
Less allowance for doubtful receivables 3,085 2,833
--------------- -----------------
Net receivables 40,727 45,581
--------------- -----------------
Refundable deposit --- 9,100
Prepaid and other current assets 2,695 2,224
Deferred income taxes, net 1,601 2,972
Inventories 4,985 3,754
Property held for sale 10,877 ---
Notes receivable with related parties 510 449
--------------- -----------------
Total current assets 72,815 77,814
--------------- -----------------
Property and equipment in service, net of depreciation 342,469 302,762
Construction in progress 9,851 2,898
--------------- -----------------
Net property and equipment 352,320 305,660
--------------- -----------------
Cable franchise agreements, net of amortization of $20,219,000 and $16,347,000
at September 30, 2000 and December 31, 1999, respectively 186,273 190,145
Goodwill, net of amortization of $5,639,000 and $4,563,000 at September 30, 2000
and December 31, 1999, respectively 40,317 41,391
Other intangible assets, net of amortization of $599,000 and $269,000 at
September 30, 2000 and December 31, 1999, respectively 4,170 4,402
Property held for sale 1,550 10,877
Deferred loan and senior notes costs, net of amortization 8,528 8,863
Notes receivable with related parties 2,737 2,067
Other assets, at cost, net of amortization 2,728 1,932
--------------- -----------------
Total other assets 246,303 259,677
--------------- -----------------
Total assets $ 671,438 643,151
=============== =================
</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 2000 1999
---------------------------------------------------------------------------------- --------------- -----------------
(Amounts in thousands)
<S> <C> <C>
Current liabilities:
Current maturities of obligations under capital leases $ 1,689 574
Accounts payable 31,025 25,321
Accrued interest 4,873 7,985
Accrued payroll and payroll related obligations 10,427 8,601
Deferred revenue 8,708 8,173
Accrued liabilities 3,823 3,152
Subscriber deposits and other current liabilities 1,430 1,314
--------------- -----------------
Total current liabilities 61,975 55,120
Long-term debt, excluding current maturities 329,400 339,400
Obligations under capital leases, excluding current maturities 47,205 747
Obligations under capital leases due to related party, excluding current
maturities 239 353
Deferred income taxes, net of deferred income tax benefit 22,079 30,861
Other liabilities 4,495 4,210
--------------- -----------------
Total liabilities 465,393 430,691
--------------- -----------------
Preferred stock. $1,000 par value, authorized 1,000,000 shares; issued and
outstanding 20,000 shares at September 30, 2000 and December 31, 1999;
convertible into Class A common stock at $5.55 per share of Class A common
stock, redemption price at September 30, 2000 of $1,036 per share;
$1,746,000 dividends accrued, pending stock issuance 21,658 19,912
--------------- -----------------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000,000 shares; issued and outstanding
47,951,024 and 46,869,671 shares at June 30, 2000 and
December 31, 1999, respectively 180,582 176,740
Class B. Authorized 10,000,000 shares; issued and outstanding
3,908,148 and 4,048,480 shares at June 30, 2000 and December
31, 1999, respectively; convertible on a share-per-share basis
into Class A common stock 3,303 3,422
Less cost of 357,958 and 347,958 Class A common shares held in
treasury at June 30, 2000 and December 31, 1999, respectively (1,659) (1,607)
Paid-in capital 6,720 6,343
Notes receivable issued upon stock option exercise (2,539) (2,167)
Retained earnings (deficit) (103) 9,817
---------------- -----------------
Total stockholders' equity 186,304 192,548
---------------- -----------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 673,092 643,151
================ =================
</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,
2000 1999 2000 1999
-------------- -------------- --------------- --------------
(Amounts in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues $ 75,906 67,340 215,609 212,337
Cost of sales and services 29,948 30,233 89,243 92,445
Selling, general and administrative 27,052 24,442 77,439 73,216
Depreciation and amortization 13,296 10,757 38,890 32,481
-------------- -------------- --------------- --------------
Operating income 5,610 1,908 10,037 14,195
-------------- -------------- --------------- --------------
Interest expense 9,760 8,181 29,172 24,253
Interest income 196 571 554 1,523
-------------- -------------- --------------- --------------
Interest expense, net 9,564 7,610 28,618 22,730
-------------- -------------- --------------- --------------
Net loss before income taxes and
cumulative effect of a change in
accounting principle (3,954) (5,702) (18,581) (8,535)
Income tax benefit 1,602 2,165 7,205 2,968
-------------- -------------- --------------- --------------
Net loss before cumulative effect of a
change in accounting principle (2,352) (3,537) (11,376) (5,567)
Cumulative effect of a change in accounting
principle, net of income tax benefit of $245 --- --- --- 344
-------------- -------------- --------------- --------------
Net loss $ (2,352) (3,537) (11,376) (5,911)
============== ============== =============== ==============
Basic and diluted net loss per common share:
Loss before cumulative effect of a change in
accounting principle $ (.05) (.08) (.25) (.12)
Cumulative effect of a change in accounting
principle --- --- --- .01
-------------- -------------- --------------- --------------
Net loss $ (.05) (.08) (.25) (.13)
============== ============== =============== ==============
</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, 2000 AND 1999
<CAPTION>
Class A Class B Class A Notes Retained
(Unaudited) Common Common Shares Held Paid-in Receivable Earnings
(Amounts in thousands) Stock Stock in Treasury Capital Issued (Deficit)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 --- --- --- --- --- (717)
----------------------------------------------------------------------
Balances at September 30, 1999 $ 175,316 3,432 (1,607) 5,985 (741) 13,874
======================================================================
Balances at December 31, 1999 $ 176,740 3,422 (1,607) 6,343 (2,167) 9,817
Net loss --- --- --- --- --- (11,376)
Tax effect of excess stock
compensation expense for tax
purposes over amounts recognized for
financial reporting purposes --- --- --- 206 --- ---
Class B shares converted to Class A 122 (122) --- --- --- ---
Shares issued and issuable under stock
option plan and notes issued upon
stock option exercises 1,938 --- --- 278 (809) ---
Shares issued upon warrant exercise 425 --- --- --- --- ---
Shares issued and issuable to Employee
Stock Purchase Plan 2,591 --- --- --- --- ---
Purchase of treasury stock --- --- (52) --- --- ---
Preferred stock dividends --- --- --- --- --- (1,362)
----------------------------------------------------------------------
Balances at September 30, 2000 $ 181,816 3,300 (1,659) 6,827 (2,976) (2,921)
======================================================================
</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,
2000 1999
--------------- --------------
(Amounts in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (11,376) (5,911)
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:
Depreciation and amortization 38,890 32,481
Amortization charged to selling, general and administrative 534 1,339
Deferred income tax benefit (7,205) (3,213)
Deferred compensation and compensatory stock options 484 501
Non-cash cost of sales --- 3,703
Bad debt expense, net of write-offs 1,204 2,109
Employee Stock Purchase Plan expense funded with General Communication, Inc.
Class A common stock issued and issuable 2,115 1,836
Write-off of capitalized interest 1,955 ---
Write-off of unamortized start-up costs --- 589
Write-off of deferred debt issuance costs upon modification of Senior
Holdings Loan --- 472
Warrants issued --- 80
Other noncash income and expense items (251) (63)
Change in operating assets and liabilities 8,650 (12,211)
--------------- --------------
Net cash provided by operating activities 35,000 21,712
--------------- --------------
Cash flows from investing activities:
Purchases of property and equipment, including construction period interest
(33,362) (28,627)
Refund of deposit 8,806 ---
Purchase of property held for sale (1,550) ---
Purchases of other assets (1,385) (574)
Notes receivable issued to related parties (1,022) (454)
Payments received on notes receivable with related parties 617 263
--------------- --------------
Net cash used in investing activities (27,896) (29,392)
--------------- --------------
Cash flows from financing activities:
Long-term borrowings - bank debt --- 13,776
Repayments of long-term borrowings and capital lease obligations (10,714) (24,111)
Proceeds from preferred stock issuance --- 20,000
Preferred stock offering issuance costs --- (88)
Payment of debt issuance costs and loan commitment fees (127) (648)
Proceeds from common stock issuance 1,475 219
Purchase of treasury stock (52) ---
--------------- --------------
Net cash provided (used) by financing activities (9,418) 9,148
--------------- --------------
Net increase (decrease) in cash and cash equivalents (2,314) 1,468
Cash and cash equivalents at beginning of period 13,734 12,008
--------------- --------------
Cash and cash equivalents at end of period $ 11,420 13,476
=============== ==============
</TABLE>
See accompanying notes to interim condensed consolidated financial
statements.
9
<PAGE>
GENERAL COMMUNICATION, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(1) General
In the following discussion, General Communication, Inc. and its direct
and indirect subsidiaries are referred to as "we," "us" and "our."
(a) Business
General Communication, Inc. ("GCI"), an Alaska corporation, was
incorporated in 1979. We offer the following services:
- Long-distance telephone service between Anchorage, Fairbanks,
Juneau, and other communities in Alaska and the remaining
United States and foreign countries
- Cable television services throughout Alaska
- Facilities-based competitive local access services in
Anchorage, Alaska
- Internet access services
- Termination of traffic in Alaska for certain common carriers
- Private line services
- Managed services to certain commercial customers
- Sales and service of dedicated communications systems and
related equipment
- Private network point-to-point data and voice transmission
services between Alaska and the western contiguous United
States
- Own and lease capacity on two undersea fiber optic cables used
in the transmission of interstate and intrastate private line,
switched message long-distance and Internet services between
Alaska and the remaining United States and foreign countries
(b) Principles of Consolidation The consolidated financial statements
include the accounts of GCI, GCI's wholly-owned subsidiary GCI,
Inc., GCI, Inc.'s wholly-owned subsidiary GCI Holdings, Inc., GCI
Holdings, Inc.'s wholly-owned subsidiaries GCI Communication Corp.,
GCI Cable, Inc. and GCI Transport Co., Inc., GCI Transport Co.,
Inc.'s wholly-owned subsidiaries GCI Satellite Co., Inc., GCI Fiber
Co., Inc. and Fiber Hold Company, Inc. and GCI Fiber Co., Inc.'s
and Fiber Hold Company, Inc.'s wholly-owned partnership Alaska
United Fiber System Partnership ("Alaska United"). GCI
Communication Services, Inc. and its wholly owned subsidiary GCI
Leasing Co. were merged into GCI Communication Corp. effective
January 1, 2000. GCI Cable/Fairbanks, Inc. and GCI Cable/Juneau,
Inc. were merged into GCI Cable, Inc. effective January 1, 2000.
All significant intercompany balances and transactions have been
eliminated in consolidation.
(c) Net Loss Per Common Share
<TABLE>
Net loss used to calculate basic and diluted net loss per common
share is increased by preferred stock dividends of $466,000 and
$428,000 for the three months ended September 30, 2000 and 1999,
respectively, and $1,362,000 and $717,000 for the nine months ended
September 30, 2000 and 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,
2000 1999 2000 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 51,790 50,346 51,254 50,179
============ ============ ============= ============
</TABLE>
10 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
<TABLE>
Common equivalent shares outstanding which are anti-dilutive
for purposes of calculating the net loss per common share for
the three months ended September 30, 2000 and 1999 and nine
months ended September 30, 2000 and 1999, are not included in
the diluted net loss per share calculation, and consist of the
following (amounts in thousands):
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Common equivalent shares outstanding
530 745 538 607
============ ============ ============= ============
</TABLE>
<TABLE>
Weighted average shares associated with outstanding stock
options for the three and nine months ended September 30, 2000
and 1999 which have been excluded from the diluted income
(loss) per share calculations because the options' exercise
price was greater than the average market price of the common
shares consist of the following (amounts in thousands):
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Weighted average shares associated with
outstanding stock options 2,483 1,961 2,155 2,228
============ ============ ============= ============
</TABLE>
(d) Preferred and Common Stock
<TABLE>
Following is the statement of preferred and common stock at
September 30, 2000 and 1999 (shares, in thousands):
<CAPTION>
Preferred Common Stock
Stock Class A Class B
------------- ----------------------------
<S> <C> <C> <C>
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
============= ============== =============
Balances at December 31, 1999 20 46,870 4,048
Class B shares converted to Class A --- 143 (143)
Shares issued under stock option plan --- 596 ---
Shares issued and issuable to Employee Stock
Purchase Plan --- 448 ---
Warrant exercise --- 425 ---
------------- -------------- -------------
Balances at September 30, 2000 20 48,482 3,905
============= ============== =============
</TABLE>
11 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(e) Cumulative Effect of a Change in Accounting Principle
The American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities", which provides guidance on the financial
reporting of start-up costs and organization costs and requires
costs of start-up activities and organization costs to be expensed
as incurred. A one-time expense of $344,000 (net of income tax
benefit of $245,000) associated with the write-off of unamortized
start-up costs was recognized in the first quarter of 1999 upon
adoption of SOP 98-5.
(f) Reclassifications
Reclassifications have been made to the 1999 financial statements
to make them comparable with the 2000 presentation.
(g) Other
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. The interim condensed consolidated
financial statements include the consolidated accounts of GCI and
its wholly owned subsidiaries with all significant intercompany
transactions eliminated. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the three-month and nine-month periods ended September
30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. For further
information, refer to the financial statements and footnotes
thereto included in our annual report on Form 10-K for the year
ended December 31, 1999.
<TABLE>
(2) Consolidated Statements of Cash Flows Supplemental Disclosures Changes
in operating assets and liabilities consist of (amounts in thousands):
<CAPTION>
Nine-month periods ended September 30, 2000 1999
------------- ------------
<S> <C> <C>
(Increase) decrease in receivables $ 3,677 (3,765)
Decrease in income tax receivable --- 1,965
Increase in prepaid and other current assets (580) (1,232)
Increase in inventory (1,126) (710)
Increase (decrease) in accounts payable 5,704 (3,875)
Increase (decrease) in accrued liabilities 671 (46)
Increase in accrued payroll and payroll related obligations 2,302 368
Decrease in accrued interest (3,112) (4,678)
Increase (decrease) in subscriber deposits and other current
liabilities 116 (22)
Increase in deferred revenues 535 299
Increase (decrease) in other long-term liabilities 463 (515)
------------- ------------
$ 8,650 (12,211)
============= ============
</TABLE>
We paid no income taxes during the nine-month periods ended September
30, 2000 and 1999. We received income tax refunds of $0 and $1,965,000
during the nine-month periods ended September 30, 2000 and 1999,
respectively.
We paid interest totaling $31,130,000 and $28,652,000 during the
nine-month periods ended September 30, 2000 and 1999, respectively.
We recorded $206,000 and $86,000 during the nine-month periods ended
September 30, 2000 and 1999, respectively, in paid-in capital in
recognition of the income tax effect of excess stock compensation
expense for tax purposes over amounts recognized for financial
reporting purposes.
12 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
During the nine-month periods ended September 30, 2000 and 1999 we
funded the employer matching portion of Employee Stock Purchase Plan
contributions by issuing or committing to issue GCI Class A Common
Stock valued at $2,115,000 and $1,836,000, respectively.
We financed the purchase of satellite transponders pursuant to a
long-term capital lease arrangement with a leasing company during the
nine-month period ended September 30, 2000 at a cost of $48.2 million.
(3) Redeemable Preferred Stock
We issued 20,000 shares of convertible redeemable accreting preferred
stock ("Preferred Stock") on April 30, 1999. Proceeds totaling $20
million (before payment of expenses of $88,000) were used for general
corporate purposes, to repay outstanding indebtedness, and to provide
additional liquidity. Our amended Senior Holdings Loan facilities limit
use of such proceeds. The Preferred Stock contains a $1,000 per share
liquidation preference, plus accrued but unpaid dividends and fees.
Prior to the four-year anniversary following closing, dividends are
payable semi-annually at the rate of 8.5%, plus accrued but unpaid
dividends, at our option, in cash or in additional fully-paid shares of
Preferred Stock. Dividends earned after the four-year anniversary of
closing are payable semi-annually in cash only. Dividends of $1,746,000
have been accrued at September 30, 2000 and will be paid in additional
fully-paid shares of Preferred Stock. Additional dividends totaling
$774,000, or $36.00 per share, are accrued at September 30, 2000 and
the determination of whether they will be paid in cash or additional
fully-paid shares of Preferred Stock will be made at the next
semi-annual payment date. Mandatory redemption is required 12 years
from the date of closing.
(4) Industry Segments Data
Our reportable segments are business units that offer different
products. The reportable segments are each managed separately because
they manage and offer distinct products with different production and
delivery processes.
We have four reportable segments as follows:
Long-distance services. We offer a full range of common-carrier
long-distance services to commercial, government, other
telecommunications companies and residential customers, through our
networks of fiber optic cables, digital microwave, and fixed and
transportable satellite earth stations and our SchoolAccess(TM)
offering to rural school districts and a similar offering to rural
hospitals and health clinics.
Cable services. We provide cable television services to residential,
commercial and government users in the State of Alaska. Our cable
systems serve 26 communities and areas in Alaska, including the
state's three largest urban areas, Anchorage, Fairbanks and Juneau.
Cable plant upgrades in 1999 and 1998 enabled us to offer digital
cable television services in Anchorage and Fairbanks and retail
cable modem service (through our Internet services segment) in
Anchorage, Fairbanks and Juneau, complementing our existing service
offerings. We plan to expand our product offerings as plant upgrades
are completed in other communities in Alaska.
Local access services. We offer facilities based competitive local
exchange services in Anchorage and plan to provide similar
competitive local exchange services in Alaska's other major
population centers.
Internet services. We began offering wholesale and retail Internet
services in 1998. Deployment of the new undersea fiber optic cable
allowed us to offer enhanced services with high-bandwidth
requirements.
Included in the "Other" segment in the tables that follow are our
managed services, product sales, cellular telephone services, and
management services for Kanas Telecom, Inc., a company that owns and
operates
13 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
a fiber optic cable system constructed along the trans-Alaska oil
pipeline corridor extending from Prudhoe Bay to Valdez, Alaska. None of
these business units have ever met the quantitative thresholds for
determining reportable segments. Also included in the Other segment in
1999 is a $19.5 million sale of undersea fiber optic cable system
capacity, and corporate related expenses including marketing, customer
service, management information systems, accounting, legal and
regulatory, human resources and other general and administrative
expenses.
We evaluate performance and allocate resources based on (1) earnings or
loss from operations before depreciation, amortization, net interest
expense and income taxes, and (2) operating income or loss. The
accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies included in
our annual report on Form 10-K at December 31, 1999. Intersegment sales
are recorded at cost plus an agreed upon intercompany profit.
We earn all revenues through sales of services and products within the
United States of America. All of our long-lived assets are located
within the United States of America.
<TABLE>
Summarized financial information for our reportable segments for the
nine-months ended September 30, 2000 and 1999 follows (amounts in
thousands):
<CAPTION>
Long- Local
Distance Cable Access Internet
Services Services Services Services Other Total
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000
----
Revenues:
Intersegment $ 11,148 1,108 4,885 2,156 --- 19,297
External 136,660 49,298 14,545 5,919 9,187 215,609
------------------------------------------------------------------------
Total revenues $ 147,808 50,406 19,430 8,075 9,187 234,906
========================================================================
Earnings (loss) from operations
before depreciation, amortization,
net interest expense and income
taxes $ 57,775 23,873 2,808 (7,123) (28,167) 49,166
========================================================================
Operating income (loss) $ 39,769 9,967 (596) (8,446) (30,418) 10,276
========================================================================
1999
----
Revenues:
Intersegment $ 6,283 1,565 2,570 88 --- 10,506
External 122,297 45,189 11,323 3,447 30,081 212,337
------------------------------------------------------------------------
Total revenues $ 128,580 46,754 13,893 3,535 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 $ 48,623 24,555 232 (9,019) (17,227) 47,164
========================================================================
Operating income (loss) $ 36,517 11,386 (2,218) (9,821) (21,181) 14,683
========================================================================
</TABLE>
14 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
<TABLE>
A reconciliation of total segment revenues to consolidated revenues
follows:
<CAPTION>
Nine-months ended September 30, 2000 1999
------------- --------------
<S> <C> <C>
Total segment revenues $ 234,906 222,843
Less intersegment revenues eliminated in consolidation (19,297) (10,506)
------------- --------------
Consolidated revenues $ 215,609 212,337
============= ==============
</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, 2000 1999
-------------- --------------
<S> <C> <C>
Total segment earnings from operations before depreciation,
amortization, net interest expense, income taxes and
cumulative effect of a change in accounting principle $ 49,166 47,164
Less intersegment contribution eliminated in consolidation (239) (488)
-------------- --------------
Consolidated earnings from operations before
depreciation, amortization, net interest expense,
income taxes and cumulative effect of a change in
accounting principle 48,927 46,676
Depreciation and amortization 38,890 32,481
-------------- --------------
Consolidated operating income 10,037 14,195
Interest expense, net 28,618 22,730
-------------- --------------
Consolidated net loss before income taxes and
cumulative effect of a change in accounting
principle $ (18,581) (8,535)
============== ==============
</TABLE>
<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:
Nine-months ended September 30, 2000 1999
-------------- -------------
<S> <C> <C>
Total segment operating income $ 10,276 14,683
Less intersegment contribution eliminated in consolidation (239) (488)
-------------- -------------
Consolidated operating income 10,037 14,195
Interest expense, net 28,618 22,730
-------------- -------------
Consolidated net loss before income taxes and
cumulative effect of a change in accounting
principle $ (18,581) (8,535)
============== =============
</TABLE>
(5) Commitments and Contingencies
Satellite Transponders Capital Lease
We entered into a purchase and lease-purchase option agreement in
August 1995 for the acquisition of satellite transponders to meet our
long-term satellite capacity requirements. The satellite was
successfully launched in January 2000 and delivered to us on March 5,
2000. In March 2000 we agreed to finance the satellite transponders
pursuant to a long-term capital lease arrangement with a leasing
company. The base term of the lease is one year from the closing date
15 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
with the option for eight one-year lease term renewals. The capital
lease includes certain covenants requiring maintenance of specific
levels of operating cash flow to indebtedness and limitations on
additional indebtedness.
We took ownership of the satellite transponders on April 1, 2000. The
satellite transponders are recorded at a cost of $48.2 million and will
be depreciated over nine years with a remaining residual value of $14.3
million.
Future Fiber Capacity Sale
We entered into an agreement effective July 1999 for a second $19.5
million sale of fiber capacity. The agreement requires that the buyer
acquire the capacity during the 18-month period following the effective
date of the contract. Costs associated with the capacity to be sold
have been classified as current and non-current Property Held for Sale
in the accompanying interim condensed consolidated financial statements
at September 30, 2000 and December 31, 1999, respectively.
Deferred Compensation Plan
Our non-qualified, unfunded deferred compensation plan provides a means
by which certain employees may elect to defer receipt of designated
percentages or amounts of their compensation and provides a means for
certain other deferrals of compensation. We may, at our discretion,
contribute matching deferrals equal to the rate of matching selected by
us. Participants immediately vest in all elective deferrals and all
income and gain attributable thereto. Matching contributions and all
income and gain attributable thereto vest over a six-year period.
Participants may elect to be paid in either a single lump sum payment
or annual installments over a period not to exceed 10 years. Vested
balances are payable upon termination of employment, unforeseen
emergencies, death and total disability. Participants are our general
creditors with respect to deferred compensation plan benefits.
Compensation deferred pursuant to the plan totaled approximately
$30,000 and $60,000 during the nine-month periods ended September 30,
2000 and 1999, respectively.
Self-Insurance
We are self-insured for losses and liabilities related primarily to
health and welfare claims up to predetermined amounts above which third
party insurance applies. A reserve of $645,000 and $600,000 was
recorded at September 30, 2000 and December 31, 1999, respectively, to
cover estimated reported losses, estimated unreported losses based on
past experience modified for current trends, and estimated expenses for
investigating and settling claims. Actual losses will vary from the
recorded reserve. While management uses what it believes is pertinent
information and factors in determining the amount of reserves, future
additions to the reserves may be necessary due to changes in the
information and factors used.
Litigation and Disputes
We are routinely involved in various lawsuits, billing disputes, legal
proceedings and regulatory matters that have arisen in the normal
course of business. While the ultimate results of these items cannot be
predicted with certainty, management does not expect at this time the
resolution of them to have a material adverse effect on our financial
position, results of operations or liquidity.
Cable Service Rate Reregulation
Effective March 31, 1999, the rates for cable programming services
(service tiers above basic service) are no longer regulated. This
regulation ended pursuant to provisions of the Telecommunications Act
of 1996 and the regulations adopted pursuant thereto by the FCC.
Federal law still permits regulation of basic service rates. However,
Alaska law provides that cable television service is exempt from
regulation by the RCA unless 25% of a system's subscribers request such
regulation by filing a petition with the RCA. At September 30, 2000,
only the Juneau system is subject to RCA regulation of its basic
service rates. No petition requesting regulation has been filed for any
other system. (The Juneau system serves 8.1% of our total basic service
subscribers at September 30, 2000.) On July 27, 2000 the RCA approved
in full a requested rate increase for the Juneau system, to be
effective October 1, 2000.
16 (Continued)
<PAGE>
GENERAL COMMUNICATION, INC.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Asset Purchase
We signed an asset purchase agreement with G.C. Cablevision, Inc. of
Fairbanks, Alaska in October 2000. G.C. Cablevision, Inc. will receive
$2.3 million of cash and GCI Class A common stock valued at $10.00 per
share. The transaction is expected to close by the second quarter of
2001 pending regulatory approvals.
17
<PAGE>
PART I.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In the following discussion, General Communication, Inc. and its direct and
indirect subsidiaries are referred to as "we," "us" and "our."
The following discussion and analysis should be read in conjunction with our
Interim Condensed Consolidated Financial Statements and the notes thereto. See -
Cautionary Statement Regarding Forward-Looking Statements.
OVERVIEW
We have experienced significant growth in recent years through expansion and
development of our new and existing businesses and products. We have
historically met our cash needs for operations through our cash flows from
operating activities. Cash requirements for acquisitions and capital
expenditures have been provided largely through our financing activities.
Long-distance services. Our provision of interstate and intrastate long-distance
services to residential, commercial and governmental customers and to other
common carriers (principally WorldCom, Inc. ("WorldCom") and Sprint Corporation
("Sprint")), and provision of private line and leased dedicated capacity
services accounted for 96.7% of our total long-distance services revenues during
the third quarter of 2000. Factors that have the greatest impact on year-to-year
changes in long-distance services revenues include the rate per minute charged
to customers and usage volumes, usually expressed as minutes of use.
Revenues from private line and other data services sales increased 28.2% to $7.4
million during the third quarter of 2000 as compared to the third quarter of
1999 due primarily to increased system capacity and increasing demand for data
services by Internet service providers ("ISP"), commercial and governmental
customers, and others. Demand for data services to and from the lower 48 states
previously exceeded the available supply of capacity, however such demand is
being filled with uncompressed fiber optic capacity on our Alaska United fiber
optic cable system.
Our long-distance cost of sales and services has consisted principally of direct
costs of providing services, including local access charges paid to LECs for
originating and terminating long-distance calls in Alaska, and fees paid to
other long-distance carriers to carry calls terminating in areas not served by
our network. Calls terminating in the lower 49 states are carried over
Worldcom's network and calls terminating in international locations are carried
principally over Sprint's network. During the third quarter of 2000, local
access charges accounted for 67.0% of long-distance cost of sales and services,
fees paid to other long-distance carriers represented 24.1%, satellite
transponder lease and undersea fiber maintenance costs represented 4.5%, and
other costs represented 4.4% of long-distance cost of sales and services.
Our long-distance selling, general, and administrative expenses have consisted
of operating and engineering, customer service, sales and communications,
management information systems, general and administrative, and legal and
regulatory expenses. Most of these expenses consist of salaries, wages and
benefits of personnel and certain other indirect costs (such as rent, travel,
utilities, insurance and property taxes). A significant portion of long-distance
selling, general, and administrative expenses, 40.8% during the third quarter of
2000, represents operating and engineering costs.
Long-distance services face significant competition from AT&T Alascom, Inc.,
long-distance resellers, and from local telephone companies that have entered
the long-distance market. The total number of active long-distance residential,
commercial and small business customers increased 3.4% at September 30, 2000 as
compared to September 30, 1999, and increased 0.3% as compared to December 31,
1999. We believe our approach to developing, pricing, and providing
long-distance services and bundling different business segment services will
continue to allow us to be competitive in providing those services.
18 (Continued)
<PAGE>
Revenues derived from other common carriers increased 20.7% to $19.7 million in
the third quarter of 2000 as compared to the third quarter of 1999. The increase
is due to a 17.6% increase to 185.3 million minutes carried for other common
carriers and a change in the mix of wholesale minutes carried for such
customers, which increased the average rate charged by 2.6%. We secured contract
amendments during the second quarter of 1999 with Worldcom and Sprint. The
amendments provided, among other things, for a three-year contract term
extension for Sprint. The Worldcom contract expires in 2001. Other common
carrier traffic routed to us for termination in Alaska is largely dependent on
traffic routed to Worldcom and Sprint by their customers. Pricing pressures, new
program offerings and market consolidation continue to evolve in the markets
served by Worldcom and Sprint. If, as a result, their traffic is reduced, or if
their competitors' costs to terminate or originate traffic in Alaska are
reduced, our traffic will also likely be reduced, and our pricing may be reduced
to respond to competitive pressures. We are unable to predict the effect on us
of such changes, however given the materiality of other common carrier revenues
to us; a significant reduction in traffic or pricing could have a material
adverse effect on our financial position, results of operations and liquidity.
Cable services. During the third quarter of 2000, cable television revenues
represented 22.0% 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.
In October 2000 we announced the acquisition of G.C. Cablevision, Inc. assets,
with over 900 subscribers in Fairbanks and North Pole, Alaska. The transaction
is expected to close by the second quarter of 2001 following regulatory
approvals.
We generate cable services revenues from three primary sources: (1) programming
services, including monthly basic or premium subscriptions and pay-per-view
movies or other one-time events, such as sporting events; (2) equipment rentals
or installation; and (3) advertising sales. During the third quarter of 2000
programming services generated 78.6% of total cable services revenues, equipment
rental and installation fees accounted for 9.6% of such revenues, cable modem
services accounted for 5.2% of such revenues, advertising sales accounted for
5.3% of such revenues, and other services accounted for the remaining 1.3% of
total cable services revenues. The primary factors that contribute to
year-to-year changes in cable services revenues are average monthly subscription
and pay-per-view rates, the mix among basic, premium and pay-per-view services
and digital and analog services, the average number of subscribers during a
given reporting period, and revenues generated from new product offerings.
The cable systems' cost of sales and selling, general and administrative
expenses have consisted principally of programming and copyright expenses,
labor, maintenance and repairs, marketing and advertising and rental expense.
During the third quarter of 2000 programming and copyright expenses represented
44.6% of total cable cost of sales and selling, general and administrative
expenses, and general and administrative costs represented 50.4% of such total.
Marketing and advertising costs represented approximately 5.0% of such total
expenses.
Cable services face competition from alternative methods of receiving and
distributing television signals and from other sources of news, information and
entertainment. We believe our cable television services will continue to be
competitive by providing, at reasonable prices, a greater variety of programming
and other communication services than are available off-air or through other
alternative delivery sources and upon superior technical performance and
customer service.
Local access services. We generate local access services revenues from three
primary sources: (1) business and residential basic dial tone services; (2)
business private line and special access services; and (3) business and
residential features and other charges, including voice mail, caller ID,
distinctive ring, inside wiring and subscriber line charges. Effective March
1999 we transitioned to the "bill and keep" cost settlement method for
termination of traffic on our facilities and on other's facilities. Local
exchange services revenues totaled $5.2 million representing 6.9% of
consolidated revenues in the third quarter of 2000. The primary factors that
contribute to year-to-year changes in local access services revenues are the
average number of business and residential subscribers to our services during a
given reporting period and the average monthly rates charged for non-traffic
sensitive services.
19 (Continued)
<PAGE>
Operating and engineering expenses represented approximately 3.5% of total local
access services cost of sales and selling, general and administrative expenses
during the third quarter of 2000. Marketing and advertising costs represented
approximately 7.9% of such total expenses, customer service and general and
administrative costs represented approximately 38.3% of such total expenses, and
local access cost of sales represented approximately 50.3% of such total
expenses.
Our local access services segment faces significant competition in Anchorage
from Alaska Communications Systems, Inc. ("ACS") and AT&T Alascom, Inc. We
believe our approach to developing, pricing, and providing local access services
will allow us to be competitive in providing those services.
Internet services. We began offering Internet services in several markets in
Alaska during 1998. We generate Internet services revenues from two primary
sources: (1) access product services, including commercial DIAS, ISP DIAS, and
retail dial-up service revenues, and (2) network management services. Internet
services segment revenues totaled $2.2 million representing 2.9% of total
revenues in the third quarter of 2000. The primary factors that contribute to
year-to-year changes in Internet services revenues are the average number of
subscribers to our services during a given reporting period, the average monthly
subscription rates, and the number and type of additional premium features
selected.
Operating and general and administrative expenses represented approximately
49.4% of total Internet services cost of sales and selling, general and
administrative expenses during the third quarter of 2000. Internet cost of sales
represented approximately 36.9% of such total expenses and marketing and
advertising represented approximately 13.7% of such total expenses.
Marketing campaigns continue to be deployed featuring bundled residential and
commercial Internet products. Additional bandwidth was made available to our
Internet segment resulting from completion of our Alaska United undersea fiber
optic cable project. The new Internet offerings are coupled with our
long-distance and local access services offerings and provide free basic
Internet services or discounted premium Internet services if certain
long-distance or local access services plans are selected. Value-added premium
Internet features are available for additional charges.
We compete with a number of Internet service providers in our markets. We
believe our approach to developing, pricing, and providing Internet services
will allow us to be competitive in providing those services.
Other services, other expenses and net loss. Telecommunications services
revenues reported in the Other segment as described in note 4 to the
accompanying interim condensed consolidated financial statements include
corporate network management contracts, telecommunications equipment sales and
service, management services for Kanas Telecom, Inc., a company that owns and
operates a fiber optic cable system constructed along the trans-Alaska oil
pipeline corridor extending from Prudhoe Bay to Valdez, Alaska, and other
miscellaneous revenues (including revenues from cellular resale services, from
prepaid and debit calling card sales, and installation and leasing of customer's
very small aperture terminal ("VSAT") equipment).
Other services segment revenues during the third quarter of 2000 include network
solutions and outsourcing revenues totaling $2.7 million, communications
equipment sales totaling $210,000 and cellular resale and other revenues
totaling $639,000.
During the second quarter of 1999 we completed a $19.5 million sale of long-haul
capacity in our Alaska United undersea fiber optic cable system ("fiber capacity
sale") in a cash transaction. The sale includes both capacity within Alaska, and
between Alaska and the lower 49 states. We announced in July 1999 that an
agreement pertaining to a second $19.5 million sale of fiber capacity had been
executed. The agreement requires that the buyer acquire additional capacity
during the 18-month period following the effective date of the contract.
We have invested approximately $2.2 million in our PCS license at September 30,
2000. During second quarter 2000 we deployed fixed wireless service in the
Anchorage area. We have incurred expenditures totaling $450,000 in the
deployment at September 30, 2000 and we expect to incur approximately $150,000
in additional expenditures during the remainder of 2000.
20 (Continued)
<PAGE>
Depreciation, amortization and net interest expense on a consolidated basis
increased $4.5 million in the third quarter of 2000 as compared to the third
quarter of 1999 resulting primarily from additional depreciation on 1999 and
2000 capital expenditures, increased interest rates, and additional average
outstanding capital lease obligation balances.
RESULTS OF OPERATIONS
<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)
2000 vs. 2000 vs.
(Unaudited) 2000 1999 1999 2000 1999 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues
Long-distance services 63.5% 64.3% 11.3% 63.4% 57.6% 11.7%
Cable services 22.0% 22.6% 9.8% 22.9% 21.3% 9.1%
Local access services 6.9% 5.7% 36.2% 6.7% 5.3% 28.5%
Internet services 2.9% 1.7% 90.1% 2.7% 1.6% 71.7%
Other services 4.7% 5.7% (6.8%) 4.3% 14.2% (69.5%)
-----------------------------------------------------------------------
Total revenues 100.0% 100.0% 12.7% 100.0% 100.0% 1.5%
Cost of sales and services 39.5% 44.9% (1.0%) 41.4% 43.5% (3.5%)
Selling, general and administrative
Expenses 35.6% 36.3% 10.7% 35.9% 34.5% 5.8%
Depreciation and amortization 17.5% 16.0% 23.6% 18.0% 15.3% 19.7%
-----------------------------------------------------------------------
Operating income 7.4% 2.8% 272.0% 4.7% 6.7% (29.3%)
Net loss before income taxes and
cumulative effect of a change in
accounting principle (5.2%) (8.5%) (30.7%) (8.6%) (4.0%) 117.7%
Net loss before cumulative effect
of a change in accounting
principle (3.1%) (5.3%) (33.5%) (5.3%) (2.6%) 104.4%
Net loss (3.1%) (5.3%) (33.5%) (5.3%) (2.8%) 92.5%
Other Operating Data (2):
Cable services operating income (3) 12.2% 11.7% 14.4% 12.9% 14.4% (2.1%)
Local services operating loss (4) (27.4%) (46.7%) (20.0%) (46.1%) (51.0%) 16.1%
Internet services operating loss (5) (44.7%) (120.9%) (29.8%) (62.8%) (100.8%) 7.0%
<FN>
--------------------------
(1)Percentage change in underlying data.
(2)Includes customer service, marketing and advertising costs.
(3)Computed as a percentage of total cable services revenues.
(4)Computed as a percentage of total local services revenues.
(5)Computed as a percentage of total Internet services revenues.
</FN>
</TABLE>
21 (Continued)
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 ("2000") COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999 ("1999")
Revenues. Total revenues increased 12.8% from $67.3 million in 1999 to $75.9
million in 2000.
Long-distance revenues from commercial, residential, governmental, and other
common carrier customers increased 11.4% to $48.2 million in 2000. The
long-distance revenue increase in 2000 was largely due to the following:
- An increase of 3.4% in the number of active residential, small business
and commercial customers billed from 88,100 at September 30, 1999 to
91,100 at September 30, 2000
- An increase of 9.7% in total minutes of use to 270.1 million minutes
- An increase of 28.2% in private line and private network transmission
services revenues to $7.4 million in 2000 due to an increased number of
customers
- An increase of 20.7% in revenues from other common carriers (principally
WorldCom and Sprint) to $19.7 million in 2000
Long-distance revenue increases were offset by a 4.7% reduction in our average
rate per minute on long-distance traffic from $0.128 per minute in 1999 to
$0.122 per minute in 2000. Decreased rates are attributed to our promotion of
and customers' enrollment in calling plans offering discounted rates and length
of service rebates, such plans being prompted in part by our primary
long-distance competitor, AT&T Alascom, reducing its rates, and the entry of
LECs into long-distance markets served by us.
Cable revenues increased 9.8% to $16.7 million in 2000. Programming services
revenues increased 1.0% to $13.1 million in 2000 resulting from an increase of
approximately 3,900 basic subscribers served and increased pay-per-view and
premium service revenues. New facility construction efforts in the last three
months of 1999 and first nine months of 2000 resulted in approximately 3,800
additional homes passed which contributed to additional subscribers and revenues
in 2000. Programming services revenue per average basic subscriber per month
increased $3.02, or 7.1%, from 1999 to 2000 due to rate increases in certain
markets and continued growth of new premium products, including the increase in
digital subscribers from 4,100 at September 30, 1999 to 11,000 at September 30,
2000. The cable segment's share of cable modem revenue increased $774,000 to
$871,000 in 2000 after the introduction of such services in the first quarter of
1999.
Local access services revenues increased 36.2% in 2000 to $5.2 million. At
September 30, 2000 approximately 57,900 lines were in service and approximately
1,000 additional lines were awaiting connection as compared to approximately
40,600 lines in service and approximately 1,400 additional lines awaiting
connection at September 30, 1999.
Internet services revenues increased 90.1% to $2.2 million in 2000 primarily due
to growth in the number of customers served. We have approximately 59,000 active
residential, commercial and small business retail dial-up Internet subscribers
at September 30, 2000 as compared to approximately 38,900 at September 30, 1999.
Cost of sales and services. Cost of sales and services totaled $30.2 million in
1999 and $29.9 million in 2000. As a percentage of total revenues, cost of sales
and services decreased from 44.9% in 1999 to 39.5% in 2000.
Long-distance cost of sales and services decreased from $20.9 million in 1999 to
$19.6 million in 2000. Long-distance cost of sales as a percentage of
long-distance revenues decreased from 48.3% in 1999 to 40.6% in 2000 primarily
due to the effect of reassigning traffic carried by satellite transponders from
leased to owned capacity and reductions in access costs due to distribution and
termination of our traffic on our own local services network instead of paying
other carriers to distribute and terminate our traffic. Offsetting the 2000
decrease as compared to 1999 is a decrease in the average rate per minute billed
to customers without a comparable decrease in access charges paid by us. We
expect increased cost savings as traffic carried on our own facilities continues
to grow. Additional capacity between Alaska and the lower 48 states now
available on our Alaska United fiber optic cable system has allowed us to carry
significant additional amounts of data services traffic on our own facilities
rather than paying other carriers for leased capacity.
22 (Continued)
<PAGE>
Cable cost of sales and services as a percentage of cable revenues, which is
less as a percentage of revenues than are long-distance, local access and
Internet services cost of sales and services, increased from 25.6% in 1999 to
26.8% in 2000. Cable services rate increases did not keep pace with increases in
programming and copyright costs in 2000. Programming costs increased for most of
our cable services offerings, and we incurred additional costs on new
programming introduced in 1999 and 2000.
Local access services cost of sales and services as a percentage of local access
services revenues decreased from 56.9% in 1999 to 56.0% in 2000.
Internet services cost of sales and services increased $165,000 from 1999 to
2000. Internet services costs of sales as a percentage of Internet services
revenues totaled 76.9% and 48.0% in 1999 and 2000, respectively. The decrease of
Internet services costs of sales as a percentage of Internet services revenues
is primarily due to a $1.0 million increase in Internet's portion of cable modem
revenue. As Internet revenues have increased, economies of scale and more
efficient network utilization have also resulted in reduced Internet cost of
sales and services as a percentage of Internet revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 10.7% to $27.1 million in 2000. Selling,
general and administrative expenses, as a percentage of total revenues,
decreased from 36.3% in 1999 to 35.6% in 2000. The 2000 increase resulted from
increased levels of effort necessary to support revenue growth and additional
provision for uncollectible accounts.
Depreciation and amortization. Depreciation and amortization expense increased
23.6% to $13.3 million in 2000. The increase is attributable to our $36.6
million investment in equipment and facilities placed into service during 1999
for which a full year of depreciation will be recorded during the year ended
December 31, 2000, the acquisition of a satellite transponder asset (as
discussed in note 5 to the interim condensed consolidated financial statements)
for which depreciation began in 2000 and the $33.4 million investment in other
equipment and facilities during 2000 for which a partial year of depreciation
will be recorded during 2000.
Interest expense, net. Interest expense, net of interest income, increased 25.7%
to $9.6 million in 2000. This increase resulted primarily from increases in our
average outstanding indebtedness resulting primarily from the capital lease of
satellite transponder capacity, construction of new long-distance and Internet
facilities, expansion and upgrades of cable television facilities, investment in
local access services equipment and facilities, and higher interest rates on
outstanding indebtedness.
Income tax benefit. Income tax benefit decreased from $2.2 million in 1999 to
$1.6 million in 2000 due to a decreased net loss before income taxes in 2000 as
compared to 1999. Our effective income tax rate increased from 38.0% in 1999 to
40.5% in 2000 due to the decreased net loss and the proportional amount of items
that are nondeductible for income tax purposes.
At September 30, 2000, we have (1) tax net operating loss carryforwards of
approximately $119.3 million that will begin expiring in 2008 if not utilized,
and (2) alternative minimum tax credit carryforwards of approximately $2.5
million available to offset regular income taxes payable in future years. Our
utilization of remaining net operating loss carryforwards is subject to certain
limitations pursuant to Internal Revenue Code section 382.
Tax benefits associated with recorded deferred tax assets are considered to be
more likely than not realizable through future reversals of existing taxable
temporary differences and future taxable income exclusive of reversing temporary
differences and carryforwards. The amount of deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced. We estimate that our
effective income tax rate for financial statement purposes will be approximately
39% in 2000.
23 (Continued)
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 ("2000") COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999 ("1999")
Revenues. Total revenues increased 1.5% from $212.3 million in 1999 to $215.6
million in 2000. Excluding $19.5 million of fiber capacity sale revenues in
1999, total revenues increased 11.9% in 2000.
Long-distance revenues from commercial, residential, governmental, and other
common carrier customers increased 11.7% to $136.7 million in 2000. The
long-distance revenue increase in 2000 was largely due to the following:
- An increase of 3.4% in the number of active residential, small business
and commercial customers billed from 88,100 at September 30, 1999 to
91,100 at September 30, 2000
- An increase of 18.3% in total minutes of use to 783.1 million minutes
- An increase of 25.0% in private line and private network transmission
services revenues to $20.2 million in 2000 due to an increased number of
customers
- An increase of 16.9% in revenues from other common carriers (principally
WorldCom and Sprint) to $53.8 million in 2000
Long-distance revenue increases were offset by a 14.2% reduction in our average
rate per minute on long-distance traffic from $0.141 per minute in 1999 to
$0.121 per minute in 2000. The decrease in rates resulted primarily from a new
category of wholesale minutes carried on our network at a reduced rate per
minute. Decreased rates are also attributed to our promotion of and customers'
enrollment in calling plans offering discounted rates and length of service
rebates, such plans being prompted in part by our primary long-distance
competitor, AT&T Alascom, reducing its rates, and the entry of LECs into
long-distance markets served by us.
Cable revenues increased 9.1% to $49.3 million in 2000. Programming services
revenues increased 5.5% to $40.9 million in 2000 resulting from an increase of
approximately 3,900 basic subscribers served and increased pay-per-view and
premium service revenues. New facility construction efforts in the last three
months of 1999 and first nine months of 2000 resulted in approximately 3,800
additional homes passed which contributed to additional subscribers and revenues
in 2000. Programming services revenue per average basic subscriber per month
increased $2.85, or 6.7%, from 1999 to 2000 due to rate increases in certain
markets and continued growth of new premium products including the increase in
digital subscribers from 4,100 at September 30, 1999 to 11,000 at September 30,
2000. The cable segment's share of cable modem revenue increased $1.3 million to
$1.6 million in 2000 after the introduction of cable modem services in the first
quarter of 1999.
Local access services revenues increased 28.5% in 2000 to $14.6 million. At
September 30, 2000 approximately 57,900 lines were in service and approximately
1,000 additional lines were awaiting connection as compared to approximately
40,600 lines in service and approximately 1,400 additional lines awaiting
connection at September 30, 1999.
Internet services revenues increased from $3.5 million in 1999 to $5.9 million
in 2000 primarily due to growth in the number of customers served. We have
approximately 59,000 active residential, commercial and small business retail
dial-up Internet subscribers at September 30, 2000 as compared to approximately
38,900 at September 30, 1999.
Cost of sales and services. Cost of sales and services totaled $92.4 million in
1999 and $89.2 million in 2000. As a percentage of total revenues, cost of sales
and services decreased from 43.5% in 1999 to 41.4% in 2000.
Long-distance cost of sales and services decreased from $62.9 million in 1999 to
$59.4 million in 2000. Long-distance cost of sales as a percentage of
long-distance revenues decreased from 51.4% in 1999 to 43.5% in 2000 primarily
due to reassigning traffic carried by satellite transponders from leased to
owned capacity and reductions in access costs due to distribution and
termination of our traffic on our own local services network instead of paying
other carriers to distribute and terminate our traffic. Offsetting the 2000
decrease as compared to 1999 is a decrease in the average rate per minute billed
to customers without a comparable decrease in access charges paid by us. We
expect increased cost savings as traffic carried on our own facilities
24 (Continued)
<PAGE>
continues to grow. Additional capacity between Alaska and the lower 48 states
now available on our Alaska United fiber optic cable system has allowed us to
carry significant additional amounts of data services traffic on our own
facilities rather than paying other carriers for leased capacity.
Cable cost of sales and services as a percentage of cable revenues, which is
less as a percentage of revenues than are long-distance, local access and
Internet services cost of sales and services, increased from 25.1% in 1999 to
26.7% in 2000. Cable services rate increases did not keep pace with increases in
programming and copyright costs in 2000. Programming costs increased for most of
our cable services offerings, and we incurred additional costs on new
programming introduced in 1999 and 2000.
Local access services cost of sales and services as a percentage of local access
services revenues increased from 52.1% in 1999 to 57.2% in 2000 primarily due to
accruals recorded for disputed billings.
Internet services cost of sales and services increased $950,000 from 1999 to
2000. Internet services costs of sales as a percentage of Internet services
revenues totaled 64.1% and 53.3% in 1999 and 2000, respectively. The decrease in
Internet services costs of sales as a percentage of Internet services revenues
is primarily due to a $2.4 million increase in Internet's portion of cable modem
revenue. As Internet revenues have increased, economies of scale and more
efficient network utilization have also resulted in reduced Internet cost of
sales and services as a percentage of Internet revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 5.8% to $77.4 million in 2000. The 2000
increase resulted from:
- Internet services operating, engineering, sales, customer service and
administrative cost increases from $3.9 million in 1999 to $5.3 million in
2000. Increased costs were necessary to provide the operations,
engineering, customer service and support infrastructure necessary to
accommodate expected growth in our Internet services customer base.
- An increase in the accrual of a Company-wide success sharing bonus of
$730,000 in 2000. Success sharing is a bonus paid to all employees when
our earnings before interest, depreciation, amortization and taxes reach
new highs.
- Reduced long-distance services capitalized labor due to completion of the
fiber optic cable system construction effort.
The increases above are off-set by a $1.8 million decrease in advertising
expense.
Selling, general and administrative expenses, as a percentage of total revenues,
increased from 34.5% in 1999 to 35.9% in 2000 primarily as a result of the
impact of the 1999 fiber capacity sale.
Depreciation and amortization. Depreciation and amortization expense increased
19.7% to $38.9 million in 2000. The increase is attributable to our $36.6
million investment in equipment and facilities placed into service during 1999
for which a full year of depreciation will be recorded during the year ended
December 31, 2000, the acquisition of a satellite transponder asset (as
discussed in note 5 to the interim condensed consolidated financial statements)
for which depreciation began in the second quarter of 2000, the $33.4 million
investment in other equipment and facilities during 2000 for which a partial
year of depreciation will be recorded during 2000, and a charge of $1.7 million
in first quarter resulting from a change in the estimated remaining lives of
assets that will be replaced in the future.
Interest expense, net. Interest expense, net of interest income, increased 25.9%
to $28.6 million in 2000. This increase resulted primarily from a charge of $2.0
million to interest expense in first quarter to write-off previously capitalized
interest expense, increases in our average outstanding indebtedness resulting
primarily from the capital lease of satellite transponder capacity, construction
of new long-distance and Internet facilities, expansion and upgrades of cable
television facilities, investment in local access services equipment and
facilities, and higher interest rates on outstanding indebtedness. We charged
$470,000 of deferred financing costs to interest expense in 1999 resulting from
the amendment to the Holdings Loan Facilities which reduced borrowing capacity
(see Liquidity and Capital Resources).
Income tax benefit. Income tax benefit increased from $3.0 million in 1999 to
$7.2 million in 2000 due to an increased net loss before income taxes in 2000 as
compared to 1999. Our effective income tax rate increased from 34.8% in 1999 to
38.8% in 2000 due to the increased net loss and the proportional amount of items
that are nondeductible for income tax purposes.
25 (Continued)
<PAGE>
At September 30, 2000, we have (1) tax net operating loss carryforwards of
approximately $119.3 million that will begin expiring in 2008 if not utilized,
and (2) alternative minimum tax credit carryforwards of approximately $2.5
million available to offset regular income taxes payable in future years. Our
utilization of remaining net operating loss carryforwards is subject to certain
limitations pursuant to Internal Revenue Code section 382.
Tax benefits associated with recorded deferred tax assets are considered to be
more likely than not realizable through future reversals of existing taxable
temporary differences and future taxable income exclusive of reversing temporary
differences and carryforwards. The amount of deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced. We estimate that our
effective income tax rate for financial statement purposes will be approximately
39% in 2000.
26 (Continued)
<PAGE>
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
<TABLE>
The following chart provides selected unaudited statement of operations data
from our quarterly results of operations during 2000 and 1999:
<CAPTION>
(Amounts in thousands, except per share amounts)
-------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000
----
Revenues:
Long-distance services $ 43,620 44,855 48,185 136,660
Cable services $ 15,930 16,660 16,708 49,298
Local access services $ 4,520 4,789 5,236 14,545
Internet services $ 1,713 2,018 2,188 5,919
Other services $ 2,494 3,104 3,589 9,187
-------------------------------------------------------------
Total revenues $ 68,277 71,426 75,906 215,609
Operating income $ 877 3,550 5,610 10,037
Net loss before income taxes $ (8,962) (5,665) (3,954) (18,581)
Net loss $ (5,498) (3,526) (2,352) (11,376)
Basic and diluted net loss per common
share $ (0.12) (.08) (.05) (0.25)
1999
Revenues:
Long-distance services $ 38,469 40,697 43,276 41,601 164,043
Cable services $ 15,062 14,909 15,218 15,957 61,146
Local access services $ 3,714 3,764 3,845 4,220 15,543
Internet services $ 1,042 1,109 1,151 1,497 4,799
Other services $ 3,051 23,180 3,850 3,567 33,648
-------------------------------------------------------------
Total revenues $ 61,338 83,659 67,340 66,842 279,179
Operating income (loss) $ (368) 12,655 1,908 1,555 15,750
Net income (loss) before income taxes and
cumulative effect of a change in
accounting principle $ (7,328) 4,495 (5,702) (6,331) (14,866)
Net income (loss) before cumulative effect
of a change in accounting principle $ (4,521) 2,491 (3,537) (3,616) (9,183)
Net income (loss) $ (4,865) 2,491 (3,537) (3,616) (9,527)
Basic and diluted net income (loss) per
common share:
Net income (loss) before cumulative
effect of a change in accounting
principle (1) $ (0.09) 0.04 (0.08) (0.08) (0.20)
Cumulative effect of a change in
accounting principle $ 0.01 --- --- --- 0.01
-------------------------------------------------------------
Net income (loss) (1) $ (0.10) 0.04 (0.08) (0.08) (0.21)
=============================================================
<FN>
1 Due to rounding, the sum of quarterly loss per common share amounts does
not agree to year-to-date loss per common share amounts.
</FN>
</TABLE>
Revenues. Total revenues for the quarter ended September 30, 2000 ("third
quarter") were $75.9 million, representing a 6.3% increase from $71.4 million
for the quarter ended June 30, 2000 ("second quarter"). The third quarter
increase resulted from a 7.4% increase in long-distance services revenue to
$48.2 million in third quarter primarily due to a 12.2% increase in revenues
from other common carriers to $19.7 million and a 10.4% increase in private line
revenues to $7.4 million. Long distance minutes increased 4.9% to 270.1 million
minutes, due to a 8.7% increase in OCC minutes (principally Worldcom and Sprint)
off-set by a 2.7%
27 (Continued)
<PAGE>
decrease in non-OCC minutes of traffic carried. The long-distance average rate
per minute was $.121 and $.122 in the second and third quarters, respectively.
Long-distance revenues have historically been highest in the summer months as a
result of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial fishing, and oil and
gas activities. Cable television revenues, on the other hand, are higher in the
winter months because consumers spend more time at home and tend to watch more
television during these months. Local service and Internet access services are
not expected to exhibit significant seasonality. Our ability to implement
construction projects is also hampered during the winter months because of cold
temperatures, snow and short daylight hours.
Cost of sales and services. Cost of sales and services increased from $29.6
million in the second quarter to $29.9 million in the third quarter. As a
percentage of revenues, second and third quarter cost of sales and services
totaled 41.5% and 39.5%, respectively. The decrease in the cost of sales and
services as a percentage of revenues is primarily due to reductions in access
costs due to distribution and termination of our traffic on our own local
services network instead of paying other carriers to distribute and terminate
our traffic.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.3 million in the third quarter as compared
to the second quarter. As a percentage of revenues, third quarter selling,
general and administrative expenses were 35.6% as compared to 36.0% for the
second quarter. The third quarter decrease as a percentage of sales is primarily
a result of increased revenues in third quarter without a corresponding
proportional increase in support costs.
Net loss. We reported a net loss of $2.4 million for the third quarter as
compared to a net loss of $3.5 million for the second quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities totaled $35.0 million in the nine-month
period ended September 30, 2000 ("2000") as compared to $21.7 million in the
nine-month period ended September 30, 1999 ("1999"), net of changes in the
components of working capital. Other sources of cash during 2000 include the
refund of a $8.8 million deposit. Our expenditures for property and equipment,
including construction in progress, totaled $33.4 million and $28.6 million in
2000 and 1999, respectively. Other uses of cash during 2000 included repayment
of $10.7 million of long-term borrowings and capital lease obligations and
purchases of $2.9 million of property held for sale and other assets.
Receivables decreased $3.7 million from December 31, 1999 to September 30, 2000
primarily due to decreased OCC trade receivables.
Working capital totaled $10.8 million at September 30, 2000, a $11.9 million
decrease from working capital of $22.7 million as of December 31, 1999. The
decrease in working capital is primarily attributed to our use of current assets
to purchase long-term capital assets and repay long-term debt.
The Holdings $200,000,000 ($150,000,000 as amended) and $50,000,000 credit
facilities mature June 30, 2005. The Holdings Loan facilities were amended in
April 1999 (see below) and bear interest, as amended, at either Libor plus 1.00%
to 2.50%, depending on the leverage ratio of Holdings and certain of its
subsidiaries, or at the greater of the prime rate or the federal funds effective
rate (as defined) plus 0.05%, in each case plus an additional 0.00% to 1.375%,
depending on the leverage ratio of Holdings and certain of its subsidiaries.
$77.7 million and $87.7 million were drawn on the credit facilities as of
September 30, 2000 and December 31, 1999, respectively.
On April 13, 1999, we amended the Holdings credit facilities. These amendments
contained, among other things, provisions for payment of a one-time amendment
fee of 0.25% of the aggregate commitment, an increase in the commitment fee by
0.125% per annum on the unused portion of the commitment, and an increase in the
interest rate of 0.25%. The amended facilities reduce the aggregate commitment
by $50 million to $200 million, and limit capital expenditures to $35 million in
1999 and $35 million in 2000 (excluding a carryforward of unused capacity from
1999) with no limits thereafter (excluding capital expenditures by certain
subsidiaries and the capital lease of the
28 (Continued)
<PAGE>
satellite transponder asset). Pursuant to the Financial Accounting Standards
Board Emerging Issues Task Force Issue 98-14, "Debtor's Accounting for Changes
in Line-of-Credit or Revolving Debt Arrangements," we recorded as additional
interest expense $470,000 of deferred financing costs in the second quarter of
1999 resulting from the reduced borrowing capacity. In connection with the April
1999 amendment, we agreed to pay all fees and expenses of our lenders, including
an amendment fee of 0.25% of the aggregate commitment, totaling $530,000.
Holding's credit facilities and GCI, Inc.'s senior notes contain restrictions on
our operations and activities, including requirements that we comply with
certain financial covenants and financial ratios. Under the amended Holding's
credit facility, Holdings may not permit the ratio of senior debt to annualized
operating cash flow (as defined) of Holdings and certain of its subsidiaries to
exceed 2.75 to 1.0 through September 30, 2000 and 2.50 to 1.0 from October 1,
2000 to December 31, 2000, total debt to annualized cash flow to exceed 5.50
times, and annualized operating cash flow to interest expense to be less than
2.0 to 1.0 from April 1, 2000 and thereafter. Certain of the foregoing ratios
decrease in specified increments during the life of the credit facility. The
credit facility requires Holdings to maintain a ratio of annualized operating
cash flow to debt service of Holdings and certain of its subsidiaries of at
least 1.25 to 1.0, and annualized operating cash flow to fixed charges of at
least 1.0 to 1.0 effective January 1, 2001 (which adjusts to 1.05 to 1.0 in
April, 2003 and thereafter). The senior notes impose a requirement that the
leverage ratio of GCI, Inc. and certain of its subsidiaries not exceed 6.0 to
1.0 on an incurrence basis, subject to the ability of GCI, Inc. and certain of
its subsidiaries to incur specified permitted indebtedness without regard to
such ratios.
On January 27, 1998 Alaska United closed a $75 million project finance facility
("Fiber Facility") to construct a fiber optic cable system connecting Anchorage,
Fairbanks, Valdez, Whittier, Juneau and Seattle. At September 30, 2000 and
December 31, 1999 $71.7 million was borrowed under the facility. The Fiber
Facility is a 10-year term loan that is interest only for the first 5 years. The
facility can be extended an additional two years at any time between the second
and fifth anniversary of closing the facility if we can demonstrate projected
revenues from certain capacity commitments will be sufficient to pay all
operating costs, interest, and principal installments based on the extended
maturity. The Fiber Facility bears interest at either Libor plus 3.0%, or at the
lender's prime rate plus 1.75%. The interest rate will decline to Libor plus
2.5%-2.75%, or, at our option, the lender's prime rate plus 1.25%-1.5% after the
project completion date and when the loan balance is $60 million or less.
The Fiber Facility contains, among others, covenants requiring certain
intercompany loans and advances in order to maintain specific levels of cash
flow necessary to pay operating costs, interest and principal installments. All
of Alaska United's assets, as well as a pledge of the partnership interests'
owning Alaska United, collateralize the Fiber Facility.
We expect to use approximately one-half of the Alaska United system capacity in
addition to our existing owned and leased facilities to carry our own traffic.
One of our large commercial customers signed agreements in the first quarter of
1999 for the lease of three DS3 circuits on Alaska United facilities within
Alaska, and between Alaska and the lower 48 states. The lease agreements provide
for three-year terms, with renewal options for additional terms. In the second
quarter of 1999 we completed a sale of capacity in our Alaska United system in a
$19.5 million cash transaction. The sale included both capacity within Alaska,
and between Alaska and the lower 48 states. An agreement was executed in July
1999 for a second $19.5 million sale of fiber capacity. The agreement requires
that the buyer acquire additional capacity during the 18-month period following
the effective date of the contract. We continue to pursue opportunities for sale
or lease of additional capacity on our system.
We entered into a purchase and lease-purchase option agreement in August 1995
for the acquisition of satellite transponders to meet our long-term satellite
capacity requirements. The satellite was successfully launched in January 2000
and delivered to us on March 5, 2000. In March 2000 we agreed to finance the
satellite transponders pursuant to a long-term capital lease arrangement with a
leasing company. At September 30, 2000 $47.9 million was financed under this
capital lease. The base term of the lease is one year from the closing date with
the option for eight one-year lease term renewals. The capital lease includes
certain covenants requiring maintenance of specific levels of operating cash
flow to indebtedness and limitations on additional indebtedness.
29 (Continued)
<PAGE>
Our expenditures for property and equipment, including construction in progress,
totaled $33.4 million and $28.6 million during 2000 and 1999, respectively.
Planned capital expenditures over the next five years include those necessary
for continued expansion of our long-distance, local exchange and Internet
facilities, continuing development of our PCS network and upgrades to our cable
television plant. Sources of funds for these planned capital expenditures are
expected to include internally generated cash flows and borrowings under our
credit facilities.
Our ability to invest in discretionary capital and other projects will depend
upon our future cash flows and access to borrowings under our credit facilities.
Management anticipates that cash flow generated by us and our borrowings under
our credit facilities will be sufficient to fund capital expenditures and our
working capital requirements. Should cash flows be insufficient to support
additional borrowings, such investment in capital expenditures will likely be
reduced.
We issued 20,000 shares of convertible redeemable accreting preferred stock
("Preferred Stock") on April 30, 1999. Proceeds totaling $20 million (before
payment of expenses) were used for general corporate purposes, to repay
outstanding indebtedness, and to provide additional liquidity. Prior to the
four-year anniversary following closing, dividends are payable semi-annually at
the rate of 8.5%, plus accrued but unpaid dividends, at our option, in cash or
in additional fully-paid shares of Preferred Stock. Dividends earned after the
four-year anniversary of closing are payable semi-annually in cash only.
Dividends of $1,746,000 have been accrued at September 30, 2000 and will be paid
in additional fully-paid shares of Preferred Stock. Additional dividends
totaling $774,000, or $36.00 per share, are accrued at September 30, 2000 and
the determination of whether they will be paid in cash or additional fully-paid
shares of Preferred Stock will be made at the next semi-annual payment date.
Mandatory redemption is required 12 years from the date of closing.
The long-distance, local access, cable, Internet and wireless services
industries are experiencing increasing competition and rapid technological
changes. Our future results of operations will be affected by our ability to
react to changes in the competitive environment and by our ability to fund and
implement new technologies. We are unable to determine how competition,
technological changes and our net operating losses will affect our ability to
obtain financing.
We believe that we will be able to meet our current and long-term liquidity and
capital requirements, including fixed charges and Preferred Stock dividends,
through our cash flows from operating activities, existing cash, cash
equivalents, short-term investments, credit facilities, and other external
financing and equity sources.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133. In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". Among
other provisions, SFAS No. 133, as amended by SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities and Amendment of
SFAS No. 133", requires that entities recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. Gains and losses resulting from changes in the fair
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The effective date of
this standard was delayed via the issuance of SFAS No. 137. The effective date
for SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though
earlier adoption is encouraged and retroactive application is prohibited. This
means that we must adopt the standard no later than January 1, 2001. We do not
expect the adoption of this standard to have a material impact on our results of
operations, financial position or cash flows.
SEC Staff Accounting Bulletin No. 101. SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements", summarizes certain of the SEC
staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. This bulletin is effective October 1, 2000,
we believe the adoption will not have a material impact on our results of
operations, financial position or cash flows.
30 (Continued)
<PAGE>
YEAR 2000 COSTS
We did not defer any critical information technology projects because of our
Year 2000 program efforts. At September 30, 2000 we have no remaining
incremental remediation costs.
ALASKA ECONOMY
We offer voice and data telecommunication and video services to customers
primarily throughout Alaska. As a result of this geographic concentration,
growth of our business and of our operations depend upon economic conditions in
Alaska. The economy of Alaska is dependent upon the natural resource industries,
and in particular oil production, as well as investment earnings, tourism,
government, and United States military spending. Any deterioration in these
markets could have an adverse impact on us. Oil revenues are now the third
largest source of state revenues, following investment income and federal funds.
Alaska's oil revenues and investment earnings will each supply 32% of the
state's projected revenues in fiscal 2001, with federal funding comprising 25%
of the total. Much of the investment income and all of the federal funding is
restricted or dedicated for specific purposes, however, leaving oil revenues as
the primary funding source (85%) of general operating expenditures.
The volume of oil transported by the TransAlaska Oil Pipeline System ("TAPS")
over the past 20 years has been as high as 2.0 million barrels per day in fiscal
1988. Production has begun to decline in recent years and is presently down 40%
from the fiscal 1988 level, and down 25% from the fiscal 1997 level. The two
largest producers of oil in Alaska (the primary users of the TAPS) continue to
explore, develop and produce new oil fields and to enhance recovery from
existing fields to offset the decline in production from the Prudhoe Bay field.
Both companies have invested large sums of money in developing and implementing
oil recovery techniques at the Prudhoe Bay field and other nearby fields. The
state now forecasts a temporary reversal of the production rate decline and a
slight increase in the production rate in 2005. This forecasted increase is
attributed to new developments at the Alpine, Liberty and Northstar fields, as
well as new production from Prudhoe Bay and other fields.
Market prices for North Slope oil declined to below $10 per barrel in 1998, and
averaged $12.70 in fiscal 1999, well below the average price used by the state
to budget its oil related revenues. The prices have since increased to a 10-year
high of $35.62 on September 20, 2000, with a fiscal 2000 average price per
barrel of $30.10.
The October 2000 update to the state's spring 2000 forecast for fiscal 2001
forecasts the price for North Slope crude to average $29.30 per barrel despite
promises from OPEC to increase output and releases of emergency crude stocks
from the U.S. Strategic Petroleum Reserve. Oil prices are forecasted to decline
to $22.32 in fiscal 2002 and $18.53 over the following few years. Recent higher
prices are largely due to the March 1999 OPEC agreement to cut production to
force prices higher. The OPEC agreement called for production cuts from January
1999 levels of a little more than 2 million barrels per day. At its March 27,
2000 meeting, nine of the eleven OPEC members agreed to increase production
quotas by a total of 1.452 million barrels per day. Iran did not agree to an
official quota but has been quoted as saying it would increase production
sufficient to maintain its market share. Iraq is not subject to an OPEC quota.
Based on estimates of current production, the new production quotas for the nine
members would represent about a 450,000 barrels per day increase. OPEC members
increased production quotas by an additional 500,000 barrels per day as of
October 31, 2000. History suggests that market forces lead to lower prices when
oil sells for more than $20 per barrel. What is uncertain is when and how fast
the correction will occur. The response of non-OPEC production to higher prices
is uncertain. The production policy of OPEC and its ability to continue to act
in concert represents a key uncertainty in the state's revenue forecast.
The state of Alaska maintains the Constitutional Budget Reserve Fund that is
intended to fund budgetary shortfalls. The state withdrew $256 million from the
Constitutional Budget Reserve Fund in fiscal 2000 and, based on the state's oil
price and production forecasts, and considering the state's other revenues, the
Alaska Department of Revenue expects to draw about $122 million in fiscal 2001
to balance the state's budget, down substantially from the $413 million fiscal
2001 draw expected in their spring 2000 forecast. If the state's current
projections are realized, the Constitutional Budget Reserve Fund will be
depleted in 2004. If the fund is depleted, aggressive state action will be
necessary to increase revenues and reduce spending in order
31 (Continued)
<PAGE>
to balance its budget. The Governor of the state of Alaska and the Alaska
Legislature are pursuing cost cutting and revenue enhancing measures.
Oil companies and service providers announced cost cutting measures to offset a
portion of the declining oil revenues in 1999, resulting in a reduction of oil
industry jobs of over 1,400. Projects that are underway are reportedly not
affected by the cutbacks, however BP (previously BP Amoco) did notify state
officials that it would delay its exploration of the Genesee test site east of
Prudhoe.
Tourism, air cargo, and service sectors have helped offset the prevailing
pattern of oil industry downsizing that has occurred during much of the last
several years. Two other factors that support Alaska's economy are the healthy
national economy and low inflation. Economists expect construction to remain
strong over the next few years. $1.69 billion of federal money is expected to be
distributed to the State of Alaska for highways and other federally supported
projects in fiscal 2001.
Should new discoveries or developments not materialize or the price of oil
return to its prior depressed levels, the long term trend of continued decline
in oil production from the Prudhoe Bay field area is inevitable with a
corresponding adverse impact on the economy of the state, in general, and on
demand for telecommunications and cable television services, and, therefore, on
us, in particular.
BP and Atlantic Richfield Company ("ARCO") announced April 13, 2000 that they
received clearance from the Federal Trade Commission for the combination of
their companies, which was completed April 18, 2000.
BP, Exxon Mobil Corporation ("ExxonMobil"), ARCO and Phillips Petroleum
("Phillips") announced April 13, 2000 that they reached an agreement to resolve
outstanding issues relating to the ownership and operation of the Prudhoe Bay
and Point Thomson Units in Alaska. The agreement reportedly is intended to
optimize operations, reduce costs and facilitate new oil and gas development in
the state of Alaska. The agreement aligns the respective equity interests of BP
Exploration (Alaska), ExxonMobil and Phillips in the Prudhoe Bay Unit, and
provides for a single operator at that unit. In addition, the agreement resolves
issues relating to North Slope preferential rights and field operatorship. The
companies stated that the agreement will not only help ensure the efficient and
long-term production of the fields, but will also facilitate future Alaska
development, including gas commercialization.
The aligned oil and gas interests among the major owners will be 26.7% for BP
Exploration (Alaska), 36.8% for ExxonMobil and 36.5% for Phillips. BP
Exploration (Alaska), current operator of the Western Operating Area in the
Prudhoe Bay Unit, will become the single operator. ExxonMobil and BP Exploration
(Alaska) Inc. have also agreed to work towards alignment in the Point Thomson
field area with respective interests of 45% for BP Exploration and 55% for
ExxonMobil.
Phillips became a major new operator of the North Slope Kuparuk and Alpine
fields, following Federal Trade Commission approval and final closing of the
ARCO Alaska acquisition August 1, 2000.
We have, since our entry into the telecommunication marketplace, aggressively
marketed our services to seek a larger share of the available market. The
customer base in Alaska is limited, however, with a population of approximately
620,000 people. 42% of the State's population are located in the Anchorage area,
14% are located in the Fairbanks area, 5% are located in the Juneau area, and
the rest are spread out over the vast reaches of Alaska. No assurance can be
given that the driving forces in the Alaska economy, and in particular, oil
production, will continue at levels to provide an environment for expanded
economic activity.
Effective March 1997, the State of Alaska passed new legislation relaxing state
oil royalties with respect to marginal oil fields that the oil companies claim
would not be economic to develop otherwise. No assurance can be given that oil
companies doing business in Alaska will be successful in discovering new fields
or further developing existing fields which are economic to develop and produce
oil with access to the pipeline or other means of transport to market, even with
the reduced level of royalties. We are not able to predict the effect of changes
in the price and production volumes of North Slope oil or the acquisition of
ARCO by BP and Phillips on Alaska's economy or on us.
32 (Continued)
<PAGE>
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. Local service and Internet access services
are not expected to exhibit significant seasonality. Our ability to implement
construction projects is reduced during the winter months because of cold
temperatures, snow and short daylight hours.
INFLATION
We do not believe that inflation has a significant effect on our operations.
33
<PAGE>
PART I.
ITEM 3. QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various types of market risk in the normal course of business,
including the impact of interest rate changes. We do not hold derivatives for
trading purposes.
Our Senior Holdings Loan carries interest rate risk. Amounts borrowed under this
Agreement bear interest at either Libor plus 1.0% to 2.5%, depending on the
leverage ratio of Holdings and certain of its subsidiaries, or at the greater of
the prime rate or the federal funds effective rate (as defined) plus 0.05%, in
each case plus an additional 0.0% to 1.375%, depending on the leverage ratio of
Holdings and certain of its subsidiaries. Should the Libor rate, the lenders'
base rate or the leverage ratios change, our interest expense will increase or
decrease accordingly. As of September 30, 2000, we have borrowed $77.7 million
subject to interest rate risk. On this amount, a 1% increase in the interest
rate would cost us $777,000 in additional gross interest cost on an annualized
basis.
Our Fiber Facility carries interest rate risk. Amounts borrowed under this
Agreement bear interest at either Libor plus 3.0%, or at our choice, the
lender's prime rate plus 1.75%. The interest rate will decline to Libor plus
2.5%-2.75%, or at our choice, the lender's prime rate plus 1.25%-1.5% after the
project completion date and when the loan balance is $60,000,000 or less. Should
the Libor rate, the lenders' base rate or the leverage ratios change, our
interest expense will increase or decrease accordingly. As of September 30,
2000, we have borrowed $71.7 million subject to interest rate risk. On this
amount, a 1% increase in the interest rate would cost us $717,000 in additional
gross interest cost on an annualized basis.
Our Satellite Transponder Capital Lease carries interest rate risk. Amounts
borrowed under this Agreement bear interest at Libor plus 3.25%. Should the
Libor rate change, our interest expense will increase or decrease accordingly.
As of September 30, 2000, we have borrowed $47.9 million subject to interest
rate risk. On this amount, a 1% increase in the interest rate would cost us
$479,000 in additional gross interest cost on an annualized basis.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding pending legal proceedings to which we are a party is
included in Note 5 of Notes to Interim Condensed Consolidated Financial
Statements and is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule *
(b) Reports on Form 8-K filed during the quarter ended
September 30, 2000 - None
---------------------
* Filed herewith.
34
<PAGE>
<TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL COMMUNICATION, INC.
<CAPTION>
Signature Title Date
-------------------------------------- -------------------------------------------- ------------------
<S> <C> <C>
/s/ President and Director November 10, 2000
-------------------------------------- (Principal Executive Officer) ------------------
Ronald A. Duncan
/s/ Senior Vice President, Chief Financial November 10, 2000
-------------------------------------- Officer, Secretary and Treasurer ------------------
John M. Lowber (Principal Financial Officer)
/s/ Vice President, Chief Accounting November 10, 2000
-------------------------------------- Officer ------------------
Alfred J. Walker (Principal Accounting Officer)
</TABLE>
35
