As filed with the Securities and Exchange Commission on August 16, 1999.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30,1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-15279
GENERAL COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)
STATE OF ALASKA 92-0072737
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 Denali Street
Suite 1000
Anchorage, Alaska 99503
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (907) 265-5600
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
The number of shares outstanding of the registrant's classes of common stock, as
of August 13, 1999 was:
46,235,323 shares of Class A common stock; and
4,051,806 shares of Class B common stock.
1
INDEX
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
Page No.
--------
Cautionary Statement Regarding Forward-Looking Statements.................................................3
PART I. FINANCIAL INFORMATION
Item l. Consolidated Balance Sheets as of June 30, 1999
(unaudited) and December 31, 1998..................................................5
Consolidated Statements of Operations for the
three- and six-month periods ended June 30, 1999
(unaudited) and 1998 (unaudited)...................................................7
Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 1999
(unaudited) and 1998 (unaudited)...................................................8
Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 (unaudited)
and 1998 (unaudited)...............................................................9
Notes to Interim Condensed Consolidated Financial
Statements.........................................................................10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................19
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................39
Item 2. Changes in Securities and Use of Proceeds.............................................39
Item 4. Submission of Matters to a Vote of Security Holders...................................39
Item 6. Exhibits and Reports on Form 8-K......................................................41
Other items are omitted as they are not applicable.
SIGNATURES................................................................................................42
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this quarterly report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1996 ("Securities Reform Act"). These statements may be
preceded by, followed by, or include the words "believes," "expects,"
"anticipates," or similar expressions. For those statements, General
Communication, Inc. ("GCI") and its direct and indirect subsidiaries
(collectively, the "Company") claims protection of the safe-harbor for
forward-looking statements contained in the Securities Reform Act. Such
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance and
achievements of the Company, or industry results, to differ materially from
future results, performance or achievements expressed or implied by such
statements. The reader is cautioned that important factors, such as the
following risks, uncertainties, and other factors, in addition to those
contained elsewhere in this document, could affect future results of the
Company, its long-distance telecommunication services, local access services,
Internet services and cable services and could cause those results to differ
materially from those expressed in the forward-looking statements:
- Material adverse changes in the economic conditions in the markets
served by the Company;
- The efficacy of the rules and regulations to be adopted by the Federal
Communications Commission ("FCC") and state public regulatory agencies
to implement the provisions of the 1996 Telecom Act; the outcome of
litigation relative thereto; and the impact of regulatory changes
relating to access reform;
- The Company's responses to competitive products, services and pricing,
including pricing pressures, technological developments, alternative
routing developments, and the ability to offer combined service packages
that include local, cable and Internet services; the extent and pace at
which different competitive environments develop for each segment of the
Company's business; the extent and duration for which competitors from
each segment of the telecommunications industry are able to offer
combined or full service packages prior to the Company being able to do
so; the degree to which the Company experiences material competitive
impacts to its traditional service offerings prior to achieving adequate
local service entry; and competitor responses to the Company's products
and services and overall market acceptance of such products and
services;
- The outcome of negotiations with Incumbent Local Exchange Carriers
("ILECs") and state regulatory arbitrations and approvals with respect
to interconnection agreements; and the ability to purchase unbundled
network elements or wholesale services from ILECs at a price sufficient
to permit the profitable offering of local exchange service at
competitive rates;
- Success and market acceptance for new initiatives, many of which are
untested; the level and timing of the growth and profitability of new
initiatives, particularly local access services, Internet (consumer and
business) services and wireless services; start-up costs associated with
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;
(Continued)
3
CAUTIONARY STATEMENT (continued)
- Development and financing of telecommunication, local access, wireless,
Internet and cable networks and services;
- Future financial performance, including the availability, terms and
deployment of capital; the impact of regulatory and competitive
developments on capital outlays, and the ability to achieve cost savings
and realize productivity improvements;
- Availability of qualified personnel;
- Changes in, or failure, or inability, to comply with, government
regulations, including, without limitation, regulations of the FCC, the
Regulatory Commission of Alaska (previously the Alaska Public Utilities
Commission), and adverse outcomes from regulatory proceedings;
- The cost of the Company's Year 2000 compliance efforts;
- Uncertainties in federal military spending levels and military base
closures in markets in which the Company operates; and
- Other risks detailed from time to time in the Company's periodic reports
filed with the Securities and Exchange Commission.
These forward-looking statements (and such risks, uncertainties and other
factors) are made only as of the date of this report and the Company expressly
disclaims any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained in this document to reflect any
change in the Company's expectations with regard to those statements or any
other change in events, conditions or circumstances on which any such statement
is based. Readers are cautioned not to put undue reliance on such forward
looking statements.
4
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
ASSETS 1999 1998
- --------------------------------------------------------------------- ----------------- -----------------
(Amounts in thousands)
Current assets:
Cash and cash equivalents $ 19,781 12,008
----------------- -----------------
Receivables:
Trade 43,888 38,890
Income taxes --- 4,262
Other 307 412
----------------- -----------------
44,195 43,564
Less allowance for doubtful receivables 2,483 887
----------------- -----------------
Net receivables 41,712 42,677
Prepaid and other current assets 3,522 2,212
Deferred income taxes, net 5,264 1,947
Inventories 2,382 1,878
Notes receivable 628 650
----------------- -----------------
Total current assets 73,289 61,372
----------------- -----------------
Restricted cash (note 3) 3,978 ---
----------------- -----------------
Property and equipment in service, net 310,957 199,827
Construction in progress 4,464 119,395
----------------- -----------------
Net property and equipment 315,421 319,222
----------------- -----------------
Other assets:
Cable franchise agreements, net of amortization 192,726 195,308
Other intangible assets, net of amortization 44,833 45,391
Deferred loan and senior notes costs, net of amortization 9,303 9,877
Transponder deposit (note 8) 9,100 9,100
Notes receivable 1,614 1,432
Other assets, at cost, net of amortization (note 9) 8,583 4,414
----------------- -----------------
Total other assets 266,159 265,522
----------------- -----------------
Total assets $ 658,847 646,116
================= =================
See accompanying notes to interim condensed consolidated financial statements.
5 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
- --------------------------------------------------------------------- ----------------- -----------------
(Amounts in thousands)
Current liabilities:
Current maturities of long-term debt (note 4) $ 1,891 1,799
Current maturities of obligations under capital leases 543 511
Accounts payable 25,522 27,550
Accrued interest 7,967 8,072
Accrued payroll and payroll related obligations 6,666 6,555
Accrued liabilities 4,491 3,197
Subscriber deposits and deferred revenues 6,805 5,300
----------------- ------------------
Total current liabilities 53,885 52,984
Long-term debt, excluding current maturities (note 4) 343,643 349,858
Obligations under capital leases, including related party
obligations, excluding current maturities 1,394 1,675
Deferred income taxes, net of deferred income tax benefit 38,154 38,275
Other liabilities 3,144 3,317
----------------- ------------------
Total liabilities 440,220 446,109
----------------- -----------------
Preferred stock. Authorized 1,000,000 shares; issued and
outstanding 20,000 and 0 shares at June 30, 1999 and
December 31, 1998, respectively; convertible into
Class A common stock at $5.55 per share of Class A common
stock (note 5) 19,922 ---
----------------- ------------------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000,000 shares; issued and
outstanding 46,232,592 and 45,895,415 shares at
June 30, 1999 and December 31, 1998, respectively 173,904 172,708
Class B. Authorized 10,000,000 shares; issued and
outstanding 4,054,537 and 4,060,620 shares at
June 30, 1999 and December 31, 1998,
respectively; convertible on a share-per-share
basis into Class A common stock 3,432 3,432
Less cost of 286,554 Class A common shares held in
treasury at June 30, 1999 and December 31, 1998 (1,607) (1,607)
Paid-in capital 5,878 5,609
Notes receivable issued upon stock option exercise (741) (637)
Retained earnings 17,839 20,502
----------------- ------------------
Total stockholders' equity 198,705 200,007
----------------- ------------------
Commitments and contingencies (note 8)
Total liabilities and stockholders' equity $ 658,847 646,116
================= ==================
See accompanying notes to interim condensed consolidated financial statements.
6
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------------- -------------- --------------- --------------
(Amounts in thousands, except per share amounts)
Revenues (note 7) $ 83,659 62,941 144,997 121,093
Cost of sales and services 34,342 29,355 62,212 56,670
Selling, general and administrative 25,236 23,543 48,774 43,877
Depreciation and amortization 11,426 8,596 21,724 16,662
-------------- -------------- --------------- --------------
Operating income 12,655 1,447 12,287 3,884
Interest expense, net 8,160 4,767 15,120 9,711
-------------- -------------- --------------- --------------
Net income (loss) before income taxes and
cumulative effect of a change in
accounting principle 4,495 (3,320) (2,833) (5,827)
Income tax expense (benefit) 2,004 (1,254) (803) (2,145)
-------------- -------------- --------------- --------------
Net income (loss) before cumulative effect
of a change in accounting principle 2,491 (2,066) (2,030) (3,682)
Cumulative effect of a change in accounting
principle, net of income tax benefit of $245 --- --- 344 ---
-------------- -------------- --------------- --------------
Net income (loss) $ 2,491 (2,066) (2,374) (3,682)
============== ============== =============== ==============
Basic income (loss) per common share:
Income (loss) before cumulative effect of a
change in accounting principle $ .04 (.04) (.05) (.08)
Cumulative effect of a change in accounting
principle --- --- --- ---
-------------- -------------- --------------- --------------
Net income (loss) $ .04 (.04) (.05) (.08)
============== ============== =============== ==============
Diluted income (loss) per common share:
Income (loss) before cumulative effect of a
change in accounting principle $ .04 (.04) (.05) (.08)
Cumulative effect of a change in accounting
principle --- --- --- ---
-------------- -------------- --------------- --------------
Net income (loss) $ .04 (.04) (.05) (.08)
============== ============== =============== ==============
See accompanying notes to interim condensed consolidated financial statements.
7
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Class A Notes
Class A Class B Shares Receiv-
(Unaudited) Common Common Held in Paid-in able Retained
(Amounts in thousands) Stock Stock Treasury Capital Issued Earnings
- -------------------------------------------- ------------ ------------- ------------ ------------ ------------ ------------
Balances at December 31, 1997 $ 170,322 3,432 (1,039) 4,425 --- 27,299
Net loss --- --- --- --- --- (3,682)
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 20 --- ---
Shares purchased and held in Treasury --- --- (568) --- --- ---
Shares issued under stock option plan 185 --- --- 160 --- ---
Stock offering issuance costs (15) --- --- --- --- ---
------------ ------------- ------------ ------------ ------------ ------------
Balances at June 30, 1998 $ 170,492 3,432 (1,607) 4,605 --- 23,617
============ ============= ============ ============ ============ ============
Balances at December 31, 1998 $ 172,708 3,432 (1,607) 5,609 (637) 20,502
Net loss --- --- --- --- --- (2,374)
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 93 --- ---
Shares issued and issuable under stock
option plan 5 --- --- 109 --- ---
Shares issued under officer stock option
agreements and notes issued upon
officer stock option exercise 38 --- --- --- (104) ---
Shares issued to Employee Stock Purchase
Plan 1,153 --- --- --- --- ---
Warrants issued --- --- --- 67 --- ---
Preferred stock dividends (note 5) --- --- --- --- --- (289)
------------ ------------- ------------ ------------ ------------ ------------
Balances at June 30, 1999 $ 173,904 3,432 (1,607) 5,878 (741) 17,839
============ ============= ============ ============ ============ ============
See accompanying notes to interim condensed consolidated financial statements.
8
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1999 1998
-------------- --------------
(Amounts in thousands)
Cash flows from operating activities:
Net loss $ (2,374) (3,682)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation and amortization 21,724 16,662
Amortization charged to costs of sales and service and
selling, general and administrative 894 299
Deferred income tax (benefit) expense (1,048) 2,091
Deferred compensation and compensatory stock options 417 250
Non-cash cost of sales 3,703 ---
Bad debt expense, net of write-offs 1,596 (12)
Employee Stock Purchase Plan expense funded with Class A
common stock issued by General Communication, Inc. 1,153 ---
Write-off of unamortized start-up costs 589 ---
Write-off of deferred debt issuance costs upon modification
of Senior Holdings Loan 472 ---
Warrants issued 67 ---
Other noncash income and expense items (33) 147
Change in operating assets and liabilities (note 2) (4,660) (10,283)
-------------- --------------
Net cash provided by operating activities 22,500 5,472
-------------- --------------
Cash flows from investing activities:
Purchases of property and equipment, including construction period
interest (23,227) (94,853)
Restricted cash investment (3,978) 39,406
Purchases of other assets (329) (2,767)
Notes receivable issued (261) (200)
Payments received on notes receivable 149 610
-------------- --------------
Net cash used in investing activities (27,646) (57,804)
-------------- --------------
Cash flows from financing activities:
Long-term borrowings - bank debt and leases 13,776 52,382
Repayments of long-term borrowings and capital lease obligations (20,223) (900)
Proceeds from preferred stock issuance 20,000 ---
Stock offering issuance costs (78) (15)
Payment of debt issuance costs and loan commitment fees (495) (1,526)
Note receivable issued (104) ---
Proceeds from common stock issuance 43 185
Purchase of treasury stock --- (568)
-------------- --------------
Net cash provided by financing activities 12,919 49,558
-------------- --------------
Net increase (decrease) in cash and cash equivalents 7,773 (2,774)
Cash and cash equivalents at beginning of period 12,008 3,048
-------------- --------------
Cash and cash equivalents at end of period $ 19,781 274
============== ==============
See accompanying notes to interim condensed consolidated financial statements.
9
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) General
(a) Business
GCI, an Alaska corporation, was incorporated in 1979. The
Company offers long-distance telephone service between
Anchorage, Fairbanks, Juneau, and other communities in Alaska
and the remaining United States and foreign countries. Cable
television services are offered throughout Alaska and
facilities-based competitive local access services are offered
in Anchorage, Alaska. The Company provides services to certain
common carriers terminating traffic in Alaska and certain other
points in the remaining United States, interstate and
intrastate private line services, Internet services, managed
services to certain commercial customers and sells and services
dedicated communications systems and related equipment. Private
network point-to-point data and voice transmission services
between Alaska, Hawaii and the western contiguous United States
are offered and the Company owns and leases capacity on two
undersea fiber optic cables used in the transmission of
interstate private line, switched message long-distance and
Internet services between Alaska and the remaining United
States and foreign countries.
(b) Organization
The consolidated financial statements include the accounts of
GCI, its wholly-owned subsidiary GCI, Inc., GCI, Inc.'s
wholly-owned subsidiary GCI Holdings, Inc., GCI Holdings,
Inc.'s wholly-owned subsidiaries GCI Communication Corp., GCI
Communication Services, Inc. and GCI Cable, Inc., GCI
Communication Services, Inc.'s wholly-owned subsidiary GCI
Leasing Co., Inc., GCI Transport Company, Inc., GCI Transport
Company, Inc.'s wholly-owned subsidiaries GCI Fiber Co., Inc.
and Fiber Hold Company, Inc. and GCI Fiber Co., Inc.'s and
Fiber Hold Company, Inc.'s wholly owned partnership Alaska
United Fiber System Partnership.
(c) Net Income (Loss) Per Common Share
Net income (loss) used to calculate basic and diluted net
income (loss) per share is net of preferred stock dividends of
$289,000 for the three and six-months ended June 30, 1999.
Shares used to calculate net income (loss) per common share
consist of the following (amounts in thousands):
Three-Months Ended Six-Months Ended
June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------- ------------
Weighted average common shares outstanding 49,562 49,056 49,133 49,050
Common equivalent shares outstanding 4,169 --- --- ---
------------ ------------ ------------- ------------
53,731 49,056 49,133 49,050
============ ============ ============= ============
Common equivalent shares outstanding of 4,169,000 are
anti-dilutive for purposes of calculating the net loss per
common share for the six-months ended June 30, 1999 and are not
included in the diluted net loss per share calculation. Common
equivalent shares outstanding of 857,000 are anti-dilutive at
June 30, 1998, and are not included in the diluted net loss per
share calculation for either the three or six-months ended June
30, 1998. Weighted average shares associated with outstanding
stock options totaling 2,456,000 and 3,064,000 at June 30, 1999
and 1998, respectively, have been excluded from the diluted
loss per share calculations
10 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
because the options' exercise price was greater than the
average market price of the common shares.
(d) Preferred and Common Stock
Following is the unaudited statement of preferred and common
stock at June 30, 1998 and 1999 (amounts in thousands):
Shares of Shares of
Preferred Common Stock
Stock Class A Class B
------------- ----------------------------
Balances at December 31, 1997 --- 45,279 4,063
Shares issued under stock option plan --- 64 ---
------------- ----------------------------
Balances at June 30, 1998 --- 45,343 4,063
============= ============================
Balances at December 31, 1998 --- 45,895 4,061
Class B shares converted to Class A --- 7 (7)
Shares issued under stock option plan --- 1 ---
Shares issued under officer stock option
agreements --- 50 ---
Shares issued to Employee Stock Purchase Plan --- 280 ---
Shares issued under Preferred Stock Agreement 20 --- ---
------------- ----------------------------
Balances at June 30, 1999 20 46,233 4,054
============= ============================
(e) Cumulative Effect of a Change in Accounting Principle
In April 1998, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities". SOP 98-5
provides guidance on the financial reporting of start-up costs
and organization costs and requires costs of start-up
activities and organization costs to be expensed as incurred.
SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. Management of the Company
adopted SOP 98-5 in the first quarter of 1999 resulting in the
recognition of a one-time expense of $344,000 (net of income
tax benefit of $245,000) associated with the write-off of
unamortized start-up costs. Pro forma net loss and net loss per
common share for the six-months ended June 30, 1998 approximate
amounts reflected in the accompanying interim condensed
consolidated financial statements.
(f) Reclassifications
Reclassifications have been made to the 1998 financial
statements to make them comparable with the 1999 presentation.
(g) Other
The accompanying unaudited interim condensed consolidated
financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. The
interim condensed consolidated financial statements include the
consolidated accounts of General Communication, Inc. and its
wholly owned subsidiaries (collectively, the "Company") with
11 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
six-month period ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year
ended December 31, 1999. For further information, refer to the
financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended
December 31, 1998.
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in
thousands):
Six-month periods ended June 30, 1999 1998
------------- ------------
Increase in receivables $ (3,702) (7,046)
(Increase) decrease in income tax receivable 1,965 (4,118)
(Increase) decrease in prepaid and other current assets (1,235) 578
Increase in inventory (504) (693)
Decrease in accounts payable (2,028) (1,788)
Increase in accrued liabilities 1,005 138
Increase in accrued payroll and payroll related obligations 111 1,315
Increase (decrease) in accrued interest (105) 800
Increase in deferred revenues 314 542
Decrease in other liabilities (481) (11)
------------- ------------
$ (4,660) (10,283)
============= ============
No income taxes were paid during the six-month periods ended June 30,
1999 and 1998. Income tax refunds of $1,965,000 and $0 were received
during the six-month periods ended June 30, 1999 and 1998,
respectively.
Interest paid totaled $16,239,000 and $13,011,000 during the
six-month periods ended June 30, 1999 and 1998, respectively.
(3) Restricted Cash
In June 1999, the Company completed a sale of fiber optic cable
system capacity constructed by the Company (see note 6). The Fiber
Facility Loan requires a portion of the proceeds to be used to repay
the Fiber Facility Loan. Funds to be used to repay the Fiber Facility
Loan were classified as Restricted Cash at June 30, 1999.
(4) Long-term Debt
On January 27, 1998, the Company, through Alaska United Fiber System
Partnership ("Alaska United"), closed a $75,000,000 project finance
facility ("Fiber Facility") to construct a fiber optic cable system
connecting Anchorage, Fairbanks, Valdez, Whittier, Juneau and Seattle
(see note 6). Borrowings under the Fiber Facility totaled $75,000,000
at June 30, 1999, the maximum amount available under the Fiber
Facility agreement.
12 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) Preferred Stock
The Company issued 20,000 shares of convertible redeemable accreting
preferred stock ("Preferred Stock") on April 30, 1999. Proceeds
totaling $20 million (before payment of costs and expenses of
$78,000) were used for general corporate purposes, to repay
outstanding indebtedness, and to provide additional liquidity. The
Company's amended Senior Holdings Loan facilities limit use of such
proceeds. The Preferred Stock contains a $1,000 per share liquidation
preference, plus accrued but unpaid dividends and fees. Dividends are
payable semi-annually at the rate of 8.5% of the liquidation
preference. Prior to the four-year anniversary following closing,
dividends are payable, at the Company's option, in cash or in
additional fully-paid shares of Preferred Stock. Dividends are
payable only in cash following the four-year anniversary of closing.
Dividends totaling $289,000 were accrued at June 30, 1999. Mandatory
redemption is required 12 years from the date of closing.
The Company may redeem the Preferred Stock after the four-year
anniversary of its issuance, and must redeem the Preferred Stock upon
the occurrence of a triggering event. The holders may convert the
Preferred Stock into Class A common stock of the Company at any time
at a price of $5.55 per share. At any time subsequent to the third
anniversary following closing, and assuming the stock is trading at
no less than two times the conversion price, the Company may require
immediate conversion. The Preferred Stock, subject to lender
approval, is exchangeable in whole or in part, at the Company's
option, into subordinated debt with terms and conditions comparable
to those governing the Preferred Stock. The Preferred Stock is senior
to all other classes of the Company's equity securities, and has
voting rights equal to that number of shares of common stock into
which it can be converted.
Holders of the Preferred Stock shares will have the right to vote on
all matters presented for vote to the holders of common stock on an
as-converted basis. Additionally, the Preferred Stock offering
requires as long as the Preferred Stock shares remain outstanding and
unconverted, the holders of it will have the right to vote, as a
class, and the Company must obtain the written consent of holders of
a majority (or higher as required by Alaska law) of that stock to
take certain actions, some of which require shareholder approval
necessitating amendment of the Company's Articles of Incorporation.
With the issuance of the Preferred Stock shares, the Company's Board
of Directors ("Board") expanded its size from nine to ten seats and
appointed an individual to the new seat to serve until the next
shareholder meeting. At that shareholder meeting, the individual will
be required to stand for election to complete the term of the class
of directors to which the individual is assigned. The Company agreed
to include the individual recommended by those holders on the
subsequent Board slate for election of directors and to actively seek
the election of that individual to the Board. The agreement provides
that, should the holders of common stock of the Company not elect
that individual, the holders of the Preferred Stock Shares will have
the right to appoint an observer at the meetings of the Board. The
agreement also provides that the rights of the holders of Preferred
Stock shares relating to the Board seat or observer are to remain
effective so long as any of the Preferred Stock shares remain
outstanding.
13 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) Fiber Optic Cable System
In February 1999 the Company completed construction of the undersea
portion of a fiber optic cable system connecting the cities of
Anchorage, Juneau and Seattle via a subsea route. Subsea and
terrestrial connections extended the fiber optic cable to Fairbanks
via Whittier and Valdez. The total system cost was approximately $125
million, a portion of which was allocated to cost of sales in April
1999. Construction efforts concluded in early February 1999, with
commercial services commencing at that time.
(7) Industry Segments Data
The Company's reportable segments are business units that offer
different products. The reportable segments are each managed
separately because they manage and offer distinct products with
different production and delivery processes.
The Company has four reportable segments as follows:
Long-distance services. A full range of common-carrier
long-distance services are offered to business, government, other
telecommunications companies and consumer customers, through its
networks of fiber optic cables, digital microwave, and fixed and
transportable satellite earth stations.
Cable services. The Company provides cable television services to
residential, commercial and government users in the State of
Alaska. The Company's cable systems serve 26 communities and
areas in Alaska, including the state's three largest urban areas,
Anchorage, Fairbanks and Juneau. Anchorage and Juneau cable plant
upgrades in 1998 and 1999 enabled the Company to offer digital
cable television services and retail cable modem service (through
its Internet services segment) in Anchorage and Juneau,
complementing its existing service offerings. The Company plans
to expand its product offerings as plant upgrades are completed
in other communities in Alaska.
Local access services. The Company introduced facilities based
competitive local exchange services in Anchorage in 1997. The
Company has announced plans to ultimately provide similar
competitive local exchange services in Alaska's other major
population centers, as access is allowed by the Regulatory
Commission of Alaska ("RCA").
Internet services. The Company began offering wholesale and
retail Internet services in 1998. Deployment of the new undersea
fiber optic cable system (see note 6) allows the Company to offer
enhanced services with high-bandwidth requirements.
Services provided by the Company that are included in the "Other"
segment in the tables that follow are managed services, product
sales, and cellular telephone services. Included in the Other segment
are the results of insignificant business units described above which
do meet the quantitative thresholds for determining reportable
segments. None of these business units have ever met the quantitative
thresholds for determining reportable segments. Also included in the
Other segment is a $19.5 million sale of undersea fiber optic cable
system capacity, and corporate related expenses including marketing,
customer service, management information systems, accounting, legal
and regulatory, human resources and other general and administrative
expenses.
The Company evaluates performance and allocates resources based on
(1) earnings or loss from operations before depreciation,
amortization, net interest expense, income taxes and cumulative
14 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
effect of a change in accounting principle, and (2) operating income
or loss. The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting
policies included in the Company's December 31, 1998 annual report on
Form 10-K. Intersegment sales are recorded at cost plus an agreed
upon intercompany profit.
All revenues are earned through sales of services and products within
the United States of America. All of the Company's long-lived assets
are located within the United States of America.
Summarized financial information concerning the Company's reportable
segments follows for the six-months ended June 30, 1999 and 1998
(amounts in thousands):
Long- Local
Distance Cable Access Internet
Services Services Services Services Other Total
------------------------------------------------------------------------
1999
----
Revenues:
Intersegment $ 4,124 1,159 1,422 --- --- 6,705
External 75,656 31,129 7,478 4,503 26,231 144,997
------------------------------------------------------------------------
Total revenues $ 79,780 32,288 8,900 4,503 26,231 151,702
========================================================================
Earnings (loss) from operations
before depreciation, amortization,
net interest expense, income
taxes and cumulative effect of a
change in accounting principle $ 26,370 18,346 (166) (3,559) (6,585) 34,406
========================================================================
Operating income (loss) $ 20,780 9,566 (2,763) (4,090) (10,811) 12,682
========================================================================
1998
----
Revenues:
Intersegment $ 314 692 355 --- --- 1,361
External 80,017 28,242 3,062 1,917 7,855 121,093
------------------------------------------------------------------------
Total revenues $ 80,331 28,934 3,417 1,917 7,855 122,454
========================================================================
Earnings (loss) from operations
before depreciation,
amortization, net interest
expense and income taxes $ 30,346 14,224 (2,611) (835) (20,513) 20,611
========================================================================
Operating income (loss) $ 26,860 6,363 (3,911) (1,005) (24,358) 3,949
========================================================================
A reconciliation of total segment revenues to consolidated revenues
follows:
Six-months ended June 30, 1999 1998
------------- --------------
Total segment revenues $ 151,702 122,454
Less intersegment revenues eliminated in consolidation (6,705) (1,361)
------------- --------------
Consolidated revenues $ 144,997 121,093
============= ==============
15 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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:
Six-months ended June 30, 1999 1998
-------------- --------------
Total segment earnings from operations before
depreciation, amortization, net interest expense,
income taxes and cumulative effect of a change in
accounting principle $ 34,406 20,611
Less intersegment contribution eliminated in consolidation (395) (65)
-------------- --------------
Consolidated earnings from operations before
depreciation, amortization, net interest expense,
income taxes and cumulative effect of a change in
accounting principle 34,011 20,546
Depreciation and amortization 21,724 16,662
-------------- --------------
Consolidated operating income 12,287 3,884
Interest expense, net (15,120) (9,711)
-------------- --------------
Consolidated net loss before income taxes and
cumulative effect of a change in accounting
principle $ (2,833) (5,827)
============== ==============
A reconciliation of total segment operating income to consolidated
net loss before income taxes and cumulative effect of a change in
accounting principle follows:
Six-months ended June 30, 1999 1998
------------- --------------
Total segment operating income (loss) $ 12,682 3,949
Less intersegment contribution eliminated in consolidation (395) (65)
------------- --------------
Consolidated operating income 12,287 3,884
Interest expense, net (15,120) (9,711)
------------- --------------
Consolidated net loss before income taxes and
cumulative effect of a change in accounting
principle $ (2,833) (5,827)
============= ==============
(8) Commitments and Contingencies
Deferred Compensation Plan
The Company's non-qualified, unfunded deferred compensation plan
provides a means by which certain employees may elect to defer
receipt of designated percentages or amounts of their compensation
and provides a means for certain other deferrals of compensation. The
Company may, at its discretion, contribute matching deferrals equal
to the rate of matching selected by the Company. Participants
immediately vest in all elective deferrals and all income and gain
attributable thereto. Matching contributions and all income and gain
attributable thereto vest over a six-year period. Participants may
elect to be paid in either a single lump sum payment or annual
installments over a period not to exceed 10 years. Vested balances
are payable upon termination of employment, unforeseen emergencies,
death and total disability. Participants are general
16 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
creditors of the Company with respect to deferred compensation plan
benefits. No compensation was deferred pursuant to the plan during
the six-month periods ended June 30, 1999 and 1998.
Satellite Transponders
The Company entered into a purchase and lease-purchase option
agreement in August 1995 for the acquisition of satellite
transponders to meet its long-term satellite capacity requirements.
The launch of the satellite in August 1998 failed. The Company did
not assume launch risk and the launch has been rescheduled for the
second quarter of 2000. The Company will continue to lease
transponder capacity until the delivery of the transponders on the
replacement satellite. The balance payable upon expected delivery of
the transponders during the second quarter of 2000, in addition to
the $9.1 million deposit previously paid, totals approximately $43.5
million.
Self-Insurance
The Company is self-insured for losses and liabilities related
primarily to health and welfare claims up to predetermined amounts
above which third party insurance applies. A reserve of $570,000 was
recorded at June 30, 1999 to cover estimated unreported losses based
on past experience modified for current trends, and estimated
expenses for investigating and settling claims. Actual losses will
vary from the recorded reserve. While management uses what it
believes is pertinent information and factors in determining the
amount of reserves, future additions to the reserves may be necessary
due to changes in the information and factors used.
Litigation and Disputes
The Company is from time to time involved in various lawsuits, legal
proceedings and regulatory matters that have arisen in the normal
course of business. While the ultimate results of these matters
cannot be predicted with certainty, management does not expect them
to have a material adverse effect on the financial position, results
of operations or liquidity of the Company.
Cable Service Rate Reregulation
Effective March 31, 1999, the rates for cable programming services
(service tiers above basic service) are no longer regulated. This
regulation ended pursuant to provisions of the Telecommunications Act
of 1996 and the regulations adopted pursuant thereto by the FCC.
Federal law still permits regulation of basic service rates. However,
Alaska law provides that cable television service is exempt from
regulation by the RCA unless 25% of a system's subscribers request
such regulation by filing a petition with the RCA. At June 30, 1999,
only the Juneau system is subject to RCA regulation of its basic
service rates. No petition requesting regulation has been filed for
any other system. (The Juneau system serves 8.0% of the Company's
total basic service subscribers at June 30, 1999.) Juneau's current
rates have been approved by the RCA and there are no other pending
filings with the RCA, therefore, there is no refund liability for
basic service at this time.
17 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Year 2000
In 1997, the Company initiated a plan to identify, assess and
remediate Year 2000 issues within each of its significant computer
programs and certain equipment which contain micro-processors. The
plan is addressing the issue of computer programs and embedded
computer chips being unable to distinguish between the year 1900 and
the year 2000, if a program or chip uses only two digits rather than
four to define the applicable year. The Company has divided the plan
into two major phases. The first phase, including team formation,
inventory assessment, compliance assessment and risk assessment, were
completed during 1998. The second phase, including
resolution/remediation, validation, contingency planning and sign-off
acceptance, was in progress at June 30, 1999. Systems which have been
determined not to be Year 2000 compliant are being either replaced or
reprogrammed, and thereafter tested for Year 2000 compliance. The
conversion of all critical and service delivery systems is complete.
The current budget for the total cost of remediation (including
replacement software and hardware) and testing, as set forth in the
plan, is approximately $4.0 million.
The Company is in the process of identifying and contacting critical
suppliers and customers whose computerized systems interface with the
Company's systems, regarding their plans and progress in addressing
their Year 2000 issues. The Company has received varying information
from such third parties on the state of compliance or expected
compliance. Contingency plans continue to be developed in the event
that any critical supplier or customer is not compliant. The failure
to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities
or operations. Such failures could materially and adversely affect
the Company's operations, liquidity and financial condition. Due to
the general uncertainty inherent in the Year 2000 problem, resulting
in part from the uncertainty of the Year 2000 readiness of
third-party suppliers and customers, the Company is unable to
determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's operations, liquidity or
financial condition.
(9) Subsequent Event
The Company announced in August 1999 that an agreement pertaining to
a second $19.5 million sale of fiber capacity to Alaska
Communications Systems had been executed. The agreement requires
Alaska Communications Systems to acquire $19.5 million of additional
capacity during the 18-month period following the effective date of
the contract. Costs associated with the capacity to be sold have been
classified as Other assets in the accompanying interim condensed
consolidated financial statements at June 30, 1999.
18
PART I.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
The following discussion and analysis should be read in conjunction with the
Company's Interim Condensed Consolidated Financial Statements and the notes
thereto. See - Cautionary Statement Regarding Forward-Looking Statements.
OVERVIEW
The Company has experienced significant growth in recent years through strategic
acquisitions, deploying new business lines, and expansion of its existing
businesses. The Company has historically met its cash needs for operations
through its cash flows from operating activities. Cash requirements for
acquisitions and capital expenditures have been provided largely through the
Company's financing activities.
Long-distance services. The Company's provision of interstate and intrastate
long-distance services to residential, commercial and governmental customers and
to other common carriers (principally MCI WorldCom, Inc. ("MCI WorldCom") and
Sprint Corp. ("Sprint")), and provision of private line and leased dedicated
capacity services accounted for 82.4% and 17.6%, respectively, of the Company's
total long-distance services revenues during the second quarter of 1999. Factors
that have the greatest impact on year-to-year changes in long-distance services
revenues include the rate per minute charged to customers and usage volumes,
usually expressed as minutes of use.
The Company's long-distance cost of sales and services has consisted principally
of the direct costs of providing services, including local access charges paid
to Local Exchange Carriers ("LECs") for the origination and termination of
long-distance calls in Alaska, and fees paid to other long-distance carriers to
carry calls that terminate in areas not served by the Company's network
(principally the lower 49 states, most of which calls are carried over MCI
WorldCom's network, and international locations, which calls are carried
principally over Sprint's network). During the second quarter of 1999, local
access charges accounted for 56.7% of long-distance cost of sales and services,
fees paid to other long-distance carriers represented 28.8%, satellite
transponder lease and undersea fiber maintenance costs represented 12.1%, and
other costs represented 2.4% of long-distance cost of sales and services.
The Company's long-distance selling, general, and administrative expenses have
consisted of operating and engineering, customer service, sales and
communications, management information systems, general and administrative, and
legal and regulatory expenses. Most of these expenses consist of salaries, wages
and benefits of personnel and certain other indirect costs (such as rent,
travel, utilities, insurance and property taxes). A significant portion of
long-distance selling, general, and administrative expenses, 27.0% during the
second quarter of 1999, represents the cost of the Company's advertising,
promotion and market analysis programs.
Long-distance services face significant competition from AT&T Alascom, Inc.,
long-distance resellers, and from local telephone companies that have entered
the long-distance market. The number of active long-distance residential,
commercial and small business customers increased 1.5% at June 30, 1999 as
compared to June 30, 1998, and increased 7.5% as compared to December 31, 1998.
The Company believes its approach to developing, pricing, and providing
long-distance services and bundling different business segment services will
continue to allow it to be competitive in providing those services.
19 (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Revenues derived from other common carriers decreased 5.4% in the second quarter
of 1999 as compared to the second quarter of 1998 due primarily to reduced rates
charged to such carriers and a change in the mix of wholesale minutes carried
for such customers. The Company secured contract amendments during the second
quarter of 1999 with MCI WorldCom and Sprint which provided, among other things,
for three year contract term extensions. Other common carrier traffic routed to
the Company for termination in Alaska is largely dependent on traffic routed to
MCI WorldCom and Sprint by their customers. Pricing pressures, new program
offerings and market consolidation continue to evolve in the markets served by
MCI WorldCom and Sprint. If, as a result, their traffic is reduced, or if their
competitors' costs to terminate or originate traffic in Alaska are reduced, the
Company's traffic will also likely be reduced, and the Company's pricing may be
reduced to respond to competitive pressures. The Company is unable to predict
the effect on the Company of such changes, however given the materiality of
other common carrier revenues to the Company, a significant reduction in traffic
or pricing could have a material adverse effect on the Company's financial
position, results of operations and liquidity.
Cable services. During the second quarter of 1999, cable television revenues
represented 17.8% of consolidated revenues. The cable systems serve 26
communities and areas in Alaska, including the state's three largest population
centers, Anchorage, Fairbanks and Juneau.
The Company generates cable services revenues from three primary sources: (1)
programming services, including monthly basic or premium subscriptions and
pay-per-view movies or other one-time events, such as sporting events; (2)
equipment rentals or installation; and (3) advertising sales. During the second
quarter of 1999 programming services generated 84.5% of total cable services
revenues, equipment rental and installation fees accounted for 8.8% of such
revenues, advertising sales accounted for 5.0% of such revenues, and other
services accounted for the remaining 1.7% of total cable services revenues. The
primary factors that contribute to year-to-year changes in cable services
revenues are average monthly subscription and pay-per-view rates, the mix among
basic, premium and pay-per-view services, and the average number of subscribers
during a given reporting period.
The cable systems' cost of sales and selling, general and administrative
expenses have consisted principally of programming and copyright expenses,
labor, maintenance and repairs, marketing and advertising and rental expense.
During the second quarter of 1999 programming and copyright expenses represented
43.9% of total cable cost of sales and selling, general and administrative
expenses, and general and administrative costs represented 39.8% of such total.
Marketing and advertising costs represented approximately 16.3% of such total
expenses.
Cable services face competition from alternative methods of receiving and
distributing television signals and from other sources of news, information and
entertainment. The Company believes its cable television services will continue
to be competitive based on providing, at reasonable prices, a greater variety of
programming and other communication services than are available off-air or
through other alternative delivery sources and upon superior technical
performance and customer service.
20 (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Local access services. The Company generates local access services revenues from
four primary sources: (1) business and residential basic dial tone services; (2)
business private line and special access services; and (3) business and
residential features and other charges, including voice mail, caller ID,
distinctive ring, inside wiring and subscriber line charges. Effective March
1999 the Company transitioned to the "bill and keep" cost settlement method for
termination of traffic on its and other's facilities. Local exchange services
revenues totaled $3.8 million representing 4.5% of consolidated revenues in the
second quarter of 1999. The primary factors that contribute to year-to-year
changes in local access services revenues are the average number of business and
residential subscribers to the Company's services during a given reporting
period and the average monthly rates charged for non-traffic sensitive services.
Operating and engineering expenses represented approximately 4.6% of total local
access services cost of sales and selling, general and administrative expenses
during the second quarter of 1999. Marketing and advertising costs represented
approximately 7.6% of such total expenses, customer service and general and
administrative costs represented approximately 51.0% of such total expenses, and
local access cost of sales represented approximately 36.8% of such total
expenses. The Company expects that it will generate net operating losses from
local exchange services for the year ended December 31, 1999.
The Company's local access services face significant competition in Anchorage
from Alaska Communications Systems and AT&T Alascom, Inc. The Company believes
its approach to developing, pricing, and providing local access services will
allow it to be competitive in providing those services.
Internet services. The Company began offering Internet services in several
markets in Alaska during 1998. The Company generates Internet services revenues
from three primary sources: (1) access product services, including commercial
dedicated access ("DIAS"), Internet service provider ("ISP") DIAS, and retail
dial-up service revenues; (2) SchoolAccess(TM) DIAS and server revenues; and (3)
network management services. Internet services revenues totaled $2.5 million
representing 3.0% of total revenues in the second quarter of 1999. The primary
factors that contribute to year-to-year changes in Internet services revenues
are the average number of subscribers to the Company's services during a given
reporting period, the average monthly subscription rates, and the number of
additional premium features selected.
Operating and general and administrative expenses represented approximately
47.6% of total Internet services cost of sales and selling, general and
administrative expenses during the second quarter of 1999. Internet cost of
sales represented approximately 42.2% of such total expenses and marketing and
advertising represented approximately 10.2% of such total expenses.
Significant new marketing campaigns were introduced in the first two quarters of
1999 featuring bundled residential and commercial Internet products. Additional
bandwidth was made available to the Company's Internet segment resulting from
completion of the Alaska United undersea fiber optic cable project. The new
Internet offerings are coupled with the Company's long-distance and local
services offerings and provide free basic Internet services or discounted
premium Internet services if certain long-distance or local services plans are
selected. Value-added premium Internet features are available for additional
charges.
The Company competes with a number of Internet service providers in its markets.
The Company believes its approach to developing, pricing, and providing Internet
services will allow it to be competitive in providing those services.
Other services, other expenses and net loss. Telecommunications services
revenues reported in the Other segment as described in note 7 to the
accompanying interim condensed consolidated financial statements include sales
of fiber optic system capacity (see below), corporate network management
contracts,
21 (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
telecommunications equipment sales and service, other miscellaneous revenues
(including revenues from cellular resale services, from prepaid and debit
calling cards sales, and installation and leasing of customers' very small
aperture terminal ("Vsat") equipment).
During the second quarter of 1999 the Company completed a $19.5 million sale of
long-haul capacity in the Alaska United undersea fiber optic cable system
("fiber capacity sale") to Alaska Communications Systems in a cash transaction.
The sale includes both capacity within Alaska, and between Alaska and the lower
48 states. Revenues and cost of sales associated with the capacity sale are
reported in the Other services segment. The Company announced in August 1999
that an agreement pertaining to a second $19.5 million sale of fiber capacity to
Alaska Communications Systems had been executed. The agreement requires Alaska
Communications Systems to acquire $19.5 million of additional capacity during
the 18-month period following the effective date of the contract.
Other services segment revenues during the second quarter of 1999 include the
fiber capacity sale proceeds, telecommunications equipment sales totaling $2.1
million, network solutions and outsourcing revenues totaling $930,000, and
cellular resale and other revenues totaling $750,000.
The Company began developing plans for PCS service deployment in 1995 and
subsequently conducted a technical trial of its candidate technology. The
Company has invested approximately $2.2 million in its PCS license at June 30,
1999. PCS licensees are required to offer service to at least one-third of their
market population within five years or risk losing their licenses. Service must
be extended to two-thirds of the population within 10 years. The Company
continues to reevaluate its wireless strategy and expects that such strategy
will allow retention of the PCS license pursuant to its terms.
Depreciation and amortization and interest expense on a consolidated basis is
expected to be higher in 1999 as compared to 1998 resulting primarily from
additional depreciation on 1998 and 1999 capital expenditures, additional
outstanding long-term debt and a reduction in the amount of capitalized
construction period interest following placement of the Alaska United undersea
fiber optic cable into service in early February 1999. As a result, the Company
anticipates recording net losses in 1999.
22 (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
RESULTS OF OPERATIONS
The following table sets forth selected Statement of Operations data as a
percentage of total revenues for the periods indicated and the percentage
changes in such data as compared to the corresponding prior year period:
(Underlying data rounded to the nearest thousands)
Three Months Ended June 30, Six Months Ended June 30,
Percentage Percentage
Change (1) Change (1)
1999 vs. 1999 vs.
(Unaudited) 1999 1998 1998 1999 1998 1998
---- ---- ---- ---- ---- ----
Revenues
Long-distance services 46.8% 65.8% (5.3%) 52.9% 66.3% (4.4%)
Cable services 17.8% 22.2% 6.4% 20.7% 23.3% 6.4%
Local access services 4.6% 3.2% 90.0% 5.2% 2.6% 141.9%
Internet services 3.0% 2.4% 66.7% 3.1% 2.2% 66.7%
Other services 27.8% 6.4% 482.5% 18.1% 5.6% 285.3%
------------------------------------------------------------------------------
Total revenues 100.0% 100.0% 32.9% 100.0% 100.0% 19.7%
Cost of sales and services 41.1% 46.6% 16.7% 42.9% 46.8% 9.7%
Selling, general and administrative
Expenses 29.1% 37.3% 3.7% 33.6% 36.3% 10.9%
Depreciation and amortization 13.7% 13.7% 33.5% 15.0% 13.8% 29.8%
------------------------------------------------------------------------------
Operating income (loss) 16.2% 2.4% 812.3% 8.5% 3.1% 215.8%
Net income (loss) before income
taxes and cumulative effect of a
change in accounting principle 5.4% (5.3%) 237.4% (2.1%) (4.8%) (50.7%)
Net income (loss) before
cumulative effect of a change in
accounting principle 3.0% (3.3%) 220.6% (1.4%) (3.1%) (44.3%)
Net income (loss) 3.0% (3.3%) 220.6% (1.6%) (3.1%) (36.0%)
--------------------------
(1)Percentage change in underlying data.
THREE MONTHS ENDED JUNE 30, 1999 ("1999") COMPARED TO THREE MONTHS ENDED
JUNE 30, 1998 ("1998")
Revenues. Total revenues increased 32.9% from $62.9 million in 1998 to
$83.7 million in 1999. Long-distance revenues from commercial,
residential, governmental, and other common carrier customers decreased
5.3% from $41.4 million in 1998 to $39.2 million in 1999. Long-distance
revenues decreased notwithstanding a 1.4% increase in the number of active
residential, small business and commercial customers billed from 86,900 at
June 30, 1998 to 88,100 at June 30, 1999, new revenues in 1999 totaling
$1.1 million from the lease of three DS3 circuits on Alaska United
facilities within Alaska, and between
23 (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Alaska and the lower 48 states, a 11.5% increase in interstate minutes of
use to 186.4 million minutes, and a 6.5% increase in intrastate minutes of
use to 37.4 million minutes.
The decrease in long-distance revenues was primarily due to a 18.9%
reduction in the Company's average rate per minute on long-distance
traffic from $0.169 per minute in 1998 to $0.137 per minute in 1999.
Changes in wholesale product mix and reduced rates on other common carrier
traffic (principally MCI WorldCom and Sprint) offset other common carrier
wholesale minutes growth of 16.8%, resulting in a 7.0% decrease in
revenues, from $15.8 million in 1998 to $14.7 million in 1999. The
decrease in rates also resulted from the Company's promotion of and
customers' enrollment in new calling plans offering discounted rates and
length of service rebates, such new plans being prompted in part by the
Company's primary long-distance competitor, AT&T Alascom, reducing its
rates and entry of LECs into long-distance markets served by the Company.
Cable revenues increased 6.4% from $14.0 million in 1998 to $14.9 million
in 1999. Programming services revenues increased 2.3% to $12.6 million in
1999 resulting from an increase of approximately 5,200 basic subscribers
served by the Company at June 30, 1999 as compared to June 30, 1998, an
increase of $1.77 in revenue per average basic subscriber per month and
increased pay-per-view and premium service revenues. New facility
construction efforts in the summer of 1998 resulted in approximately 2,700
additional homes passed which contributed to additional subscribers and
revenues in 1999. Other factors included facility upgrades which allowed
the introduction of digital cable services in Anchorage in the fourth
quarter of 1998, increased promotional and advertising efforts in the
fourth quarter of 1998 and the first two quarters of 1999, and increases
in basic and premium service rates in certain locations. Equipment rental
and installation revenues increased 20.5% to $1.3 million in 1999 due to
increased equipment rentals and installation services provided by the
Cable services industry segment.
Local access services revenues increased 90.0% from $2.0 million in 1998
to $3.8 million in 1999. At June 30, 1999 approximately 38,000 lines were
in service and approximately 1,800 additional lines were awaiting
connection.
Internet services revenues (including SchoolAccess(TM) services) increased
66.7% from $1.5 million in 1998 to $2.5 million in 1999. The Company had
approximately 32,000 active residential, commercial and small business
retail and wholesale dial-up subscribers to its Internet service at June
30, 1999.
Other services revenues increased 482.5% from $4.0 million in 1998 to
$23.3 million in 1999. The 1999 increase was due to the fiber capacity
sale as previously described.
Cost of sales and services. Cost of sales and services totaled $29.4
million in 1998 and $34.3 million in 1999. As a percentage of total
revenues, cost of sales and services decreased from 46.6% in 1998 to 41.0%
in 1999. The decrease in cost of sales and services as a percentage of
revenues is primarily attributed to the impact of the fiber capacity sale
and changes in the Company's product mix due to continuing development of
new product lines (local access services and Internet). The overall margin
improvement was partially offset by increased long-distance cost of sales
as a percentage of long-distance revenues and increased cable services
cost of sales as a percentage of cable services revenues.
Long-distance cost of sales as a percentage of long-distance revenues
increased from 48.0% in 1998 to 53.8% in 1999. The increase is primarily
attributed to the decrease in the average rate per minute billed to
customers without a comparable decrease in access charges paid by the
Company. Partially offsetting the 1999 increase as compared to 1998 are
reductions in access costs due to avoidance of access charges resulting
from the Company's distribution and termination of its traffic on its own
network instead of paying
24 (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
other carriers to distribute and terminate its traffic. The Company
expects to realize additional cost savings as traffic carried on its own
local services facilities grows.
Cable cost of sales and services as a percentage of revenues are generally
less than are long-distance, local access and Internet services cost of
sales and services as a percentage of revenues. Cable services rate
increases did not keep pace with increases in programming and copyright
costs in 1999. Programming costs increased on most of the Company's
offerings and the Company incurred additional costs on new programming
introduced in 1998 and 1999. Changes in the product mix provided to
customers also impacts cable cost of sales and services as a percentage of
revenues.
Local access services cost of sales and services totaled 46.8% and 60.9%
as a percentage of 1999 and 1998 local access services revenues,
respectively. Internet services cost of sales and services totaled 35.9%
and 117.1% as a percentage of the 1999 and 1998 Internet services
revenues, respectively. The Company's local access operations commenced in
1997 and Internet services operations commenced in 1998. Fluctuations in
cost of sales and services as a percentage of revenues are expected to
occur as new product lines continue to develop and mature.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 7.2% from $23.5 million in 1998 to $25.2
million in 1999. The 1999 increase resulted from:
- Increased costs associated with operations and maintenance of the
Alaska United fiber optic cable system that was placed into service
in early February, 1999. 1999 costs totaled $871,000 as compared to
$49,000 in 1998.
- Internet services operating, engineering, sales, customer service and
administrative cost increases, from $129,000 in 1998 as compared to
$1.2 million in 1999. The Company gradually introduced its Internet
services through the third quarter of 1998 and increased advertising
efforts in the fourth quarter of 1998 and first and second quarters
of 1999. The increase in costs was necessary to provide the
operations, engineering, customer service and support infrastructure
necessary to accommodate expected growth in the Company's Internet
services customer base.
- Increased allowance for doubtful accounts receivable.
Selling, general and administrative expenses, as a percentage of revenues,
decreased from 37.4% in 1998 to 30.2% in 1999 primarily as a result of the
significant revenues derived from the fiber capacity sale without a
proportionate increase in selling, general and administrative expenses.
Depreciation and amortization. Depreciation and amortization expense
increased 32.6% from $8.6 million in 1998 to $11.4 million in 1999. The
increase is attributable to the Company's $58.4 million investment in
equipment and facilities placed into service during 1998 for which a full
year of depreciation will be recorded during 1999, the Alaska United
undersea fiber optic cable system placed into service in the first quarter
of 1999 for which 11 months of depreciation will be recorded during 1999,
and the $23.2 million investment in equipment and facilities during the
first two quarters of 1999 for which a partial year of depreciation will
be recorded in 1999.
Interest expense, net. Interest expense, net of interest income, increased
70.8% from $4.8 million in 1998 to $8.2 million in 1999. This increase
resulted primarily from increases in the Company's average outstanding
indebtedness associated with construction of new long-distance and
Internet facilities, expansion and upgrades of cable television
facilities, and investment in local access services equipment and
facilities. During 1998 interest expense was offset in part by capitalized
construction period interest. During 1999 the Company experienced a
significant reduction in the amount of construction period interest
capitalized due to
25 (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
the completion of the Alaska United undersea fiber optic cable system
which was placed into service in early February 1999. The Company charged
to interest expense $470,000 of deferred financing costs in the second
quarter of 1999 resulting from the amendment to the Holdings Loan
Facilities which reduced borrowing capacity (see Liquidity and Capital
Resources).
Income tax expense (benefit). Income tax expense (benefit) totaled ($1.3)
million in 1998 and $2.0 million in 1999. The increase in income tax
expense in 1999 was due to an increase in net income before income taxes
and cumulative effect of a change in accounting principle in 1999 as
compared to 1998. The Company's effective income tax rate increased from
37.8% in 1998 to 44.6% in 1999 due to the increased net income and the
proportional amount of items that are nondeductible for income tax
purposes.
SIX MONTHS ENDED JUNE 30, 1999 ("1999") COMPARED TO SIX MONTHS ENDED
JUNE 30, 1998 ("1998")
Revenues. Total revenues increased 19.7% from $121.1 million in 1998 to
$145.0 million in 1999. Long-distance revenues from commercial,
residential, governmental, and other common carrier customers decreased
4.4% from $80.3 million in 1998 to $76.8 million in 1999. Long-distance
revenues decreased notwithstanding a 7.4% increase in the number of active
residential, small business and commercial customers billed from 82,000 at
December 31, 1998 to 88,100 at June 30, 1999, a 5.5% increase in total
minutes of use to 415.4 million minutes, and new revenues in 1999 totaling
$1.7 million from the lease of three DS3 circuits on Alaska United
facilities within Alaska, and between Alaska and the lower 48 states.
The long-distance revenue decrease was primarily due to a 13.4% reduction
in the Company's average rate per minute on long-distance traffic from
$0.171 per minute in 1998 to $0.148 per minute in 1999. The decrease in
rates resulted from the Company's promotion of and customers' enrollment
in new calling plans offering discounted rates and length of service
rebates, such new plans being prompted in part by the Company's primary
long-distance competitor, AT&T Alascom, reducing its rates, and the entry
of LECs into long-distance markets served by the Company. Changes in
wholesale product mix and reduced rates on other common carrier traffic
(principally MCI WorldCom and Sprint) offset other common carrier minutes
growth of 10.2% resulting in a 1.3% decrease in revenues, from $30.2
million in 1998 to $29.8 million in 1999.
Cable revenues increased 6.4% from $28.2 million in 1998 to $30.0 million
in 1999. Programming services revenues increased 4.8% to $25.6 million in
1999 resulting from an increase of approximately 5,200 basic subscribers
served by the Company, an increase of $2.03 in revenue per average basic
subscriber per month and increased pay-per-view and premium service
revenues. New facility construction efforts in the summer of 1998 resulted
in approximately 2,700 additional homes passed which contributed to
additional subscribers and revenues in 1999. Other factors included
facility upgrades which allowed the introduction of digital cable services
in Anchorage in the fourth quarter of 1998, increased promotional and
advertising efforts in the fourth quarter of 1998 and the first and second
quarters of 1999, and increases in basic and premium service rates in
certain locations in the second quarter of 1998. Advertising sales
revenues increased 10.2% to $1.4 million in 1999 due to increased
promotion of the Company's advertising and state-wide ad insertion
capabilities. Equipment rental and installation revenues increased 20.0%
to $2.6 million in 1999 due to increased equipment rentals and
installation services provided by the Cable services industry segment.
Local access services revenues increased 141.9% from $3.1 million in 1998
to $7.5 million in 1999. At June 30, 1999 approximately 38,000 lines were
in service and approximately 1,800 additional lines were awaiting
connection.
26 (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Internet services revenues (including SchoolAccess(TM) services) increased
66.7% from $2.7 million in 1998 to $4.5 million in 1999. The Company had
approximately 32,000 active residential, commercial and small business
retail and wholesale dial-up subscribers to its Internet service at June
30, 1999.
Other services revenues increased 285.3% from $6.8 million in 1998 to
$26.2 million in 1999. The 1999 increase was largely due to the fiber
capacity sale as previously described.
Cost of sales and services. Cost of sales and services totaled $56.7
million in 1998 and $62.2 million in 1999. As a percentage of total
revenues, cost of sales and services decreased from 46.8% in 1998 to 42.9%
in 1999. The decrease in cost of sales and services as a percentage of
revenues is primarily attributed to the impact of the fiber capacity sale
and changes in the Company's product mix due to continuing development of
new product lines (local access services and Internet). The overall margin
improvement was partially offset by increased long-distance cost of sales
as a percentage of long-distance revenues and increased cable services
cost of sales as a percentage of cable services revenues.
The increase in long-distance cost of sales and services as a percentage
of revenues is primarily attributed to the decrease in the average rate
per minute billed to customers without a comparable decrease in access
charges paid by the Company, and a non-recurring refund received in the
second quarter of 1998 totaling approximately $1.1 million from a local
exchange carrier in respect of its earnings that exceeded regulatory
requirements. Partially offsetting the 1999 increase as compared to 1998
are reductions in access costs due to avoidance of access charges
resulting from the Company's distribution and termination of its traffic
on its own local services network instead of paying other carriers to
distribute and terminate its traffic. The Company expects increased cost
savings as traffic carried on its own facilities continues to grow.
Cable cost of sales and services as a percentage of revenues is less as a
percentage of revenues than are long-distance, local access and Internet
services cost of sales and services. Cable services rate increases did not
keep pace with increases in programming and copyright costs in 1999.
Programming costs increased on most of the Company's offerings and the
Company incurred additional costs on new programming introduced in 1998
and 1999.
Local access services cost of sales and services totaled 50.0% and 69.3%
as a percentage of 1999 and 1998 local access services revenues,
respectively. Internet services cost of sales and services totaled 29.4%
and 81.4% as a percentage of the 1999 and 1998 Internet services revenues,
respectively. The Company's local access operations commenced in 1997 and
Internet services operations commenced in 1998. Fluctuations in cost of
sales and services as a percentage of revenues are expected to continue to
occur as new product lines develop and mature.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 11.2% from $43.9 million in 1998 to
$48.8 million in 1999. The 1999 increase resulted from:
- Increased costs associated with operations and maintenance of the
Alaska United fiber optic cable system that was placed into service
in early February, 1999. 1999 costs totaled $1.9 million as compared
to $70,000 in 1998.
- Internet services operating, engineering, sales, customer service and
administrative cost increases, from $225,000 in 1998 as compared to
$2.5 million in 1999. The Company gradually introduced its Internet
services through the third quarter of 1998 and increased advertising
efforts in the fourth quarter of 1998 and first and second quarters
of 1999. Increased costs were necessary to provide the operations,
engineering, customer service and support infrastructure necessary to
accommodate expected growth in the Company's Internet services
customer base.
27 (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
- Local access services operating, engineering, sales, customer service
and administrative cost increased from $5.4 million in 1998 to $6.1
million in 1999. The Company initiated local access services in
September 1997. The increase was necessary to provide the operations,
engineering, customer service and support infrastructure necessary to
accommodate the growth in the Company's local access services
customer base.
- Increased allowance for doubtful accounts receivable.
Partially offsetting these increases was a $2.1 million reduction in
long-distance sales, advertising, telemarketing, carrier relations,
business development, rural services, and general and administrative costs
in 1999 as compared to 1998.
Selling, general and administrative expenses, as a percentage of revenues,
decreased from 36.2% in 1998 to 33.6% in 1999 primarily as a result of
significant revenues derived from the fiber capacity sale without a
proportionate increase in selling, general and administrative expenses.
Depreciation and amortization. Depreciation and amortization expense
increased 30.4% from $16.7 million in 1998 to $21.7 million in 1999. The
increase is attributable to the Company's $58.4 million investment in
equipment and facilities placed into service during 1998 for which a full
year of depreciation will be recorded during 1999, the Alaska United
undersea fiber optic cable system placed into service in the first quarter
of 1999 for which 11 months of depreciation will be recorded during 1999,
and the $23.2 million investment in equipment and facilities during the
first two quarters of 1999 for which a partial year of depreciation will
be recorded in 1999.
Interest expense, net. Interest expense, net of interest income, increased
55.7% from $9.7 million in 1998 to $15.1 million in 1999. This increase
resulted primarily from increases in the Company's average outstanding
indebtedness resulting primarily from construction of new long-distance
and Internet facilities, expansion and upgrades of cable television
facilities, and investment in local access services equipment and
facilities. During 1998 interest expense was offset in part by capitalized
construction period interest. During 1999 the Company experienced a
significant reduction in the amount of construction period interest
capitalized due to the completion of the Alaska United undersea fiber
optic cable which was placed into service in early February 1999. The
Company charged to interest expense $470,000 of deferred financing costs
in the second quarter of 1999 resulting from the amendment to the Holdings
Loan Facilities which reduced borrowing capacity (see Liquidity and
Capital Resources).
Income tax benefit. Income tax benefit decreased from $2.1 million in 1998
to $803,000 in 1999 due to a reduced net loss before income taxes and
cumulative effect of a change in accounting principle in 1999 as compared
to 1998. The Company's effective income tax rate decreased from 36.8% in
1998 to 28.3% in 1999 due to the decreased net loss and the proportional
amount of items that are nondeductible for income tax purposes.
In conjunction with the 1996 Cable Companies acquisition, the Company
incurred a net deferred income tax liability of $24.4 million and acquired
net operating losses totaling $57.6 million. The Company determined that
approximately $20 million of the acquired net operating losses would not
be utilized for income tax purposes, and elected with its December 31,
1996 income tax returns to forego utilization of such acquired losses
under Internal Revenue Code section 1.1502-32(b)(4). Deferred tax assets
were not recorded associated with the foregone losses and, accordingly, no
valuation allowance was provided. At June 30, 1999, the Company has (1)
tax net operating loss carryforwards of approximately $70.0 million that
will begin expiring in 2008 if not utilized, and (2) alternative minimum
tax credit carryforwards of approximately $2.0 million available to offset
regular income taxes payable in future years. The Company's utilization of
28 (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
remaining net operating loss carryforwards is subject to certain
limitations pursuant to Internal Revenue Code section 382.
Tax benefits associated with recorded deferred tax assets are considered
to be more likely than not realizable through taxable income earned in
carryback years, future reversals of existing taxable temporary
differences, and future taxable income exclusive of reversing temporary
differences and carryforwards. The amount of deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of
future taxable income during the carryforward period are reduced. The
Company estimates that its effective income tax rate for financial
statement purposes will be approximately 38% in 1999. The Company expects
that its operations will generate net income before income taxes during
the carryforward periods to allow utilization of loss carryforwards for
which no allowance has been established.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The following chart provides selected unaudited statement of operations
data from the Company's quarterly results of operations during 1999 and
1998:
First Second Third Fourth Total
(Unaudited) Quarter Quarter Quarter Quarter Year
-----------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
1999
----
Revenues:
Long-distance services $ 37,656 39,158 76,814
Cable services 15,062 14,909 29,971
Local access services 3,714 3,764 7,478
Internet services 1,969 2,534 4,503
Other services 2,937 23,294 26,231
-----------------------------------------------------------------------
Total revenues 61,338 83,659 144,997
Operating income (loss) (368) 12,655 12,287
Net income (loss) before income taxes and
cumulative effect of a change in
accounting principle (7,328) 4,495 (2,833)
Net income (loss) before cumulative effect
of a change in accounting principle
(4,521) 2,491 (2,030)
Net income (loss) $ (4,865) 2,491 (2,374)
=======================================================================
Basic net income (loss) per share:
Net income (loss) before cumulative
effect of a change in accounting
principle $ (0.10) 0.04 (0.05)
Cumulative effect of a change in
accounting principle --- --- ---
-----------------------------------------------------------------------
Net income (loss) $ (0.10) 0.04 (0.05)
=======================================================================
29 (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
First Second Third Fourth Total
(Unaudited) Quarter Quarter Quarter Quarter Year
-----------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Diluted net income (loss) per share:
Net income (loss) before cumulative
effect of a change in accounting
principle $ (0.10) 0.04 (0.05)
Cumulative effect of a change in
accounting principle --- --- ---
-----------------------------------------------------------------------
Net income (loss) $ (0.10) 0.04 (0.05)
=======================================================================
1998
----
Revenues:
Long-distance services $ 38,894 41,387 39,645 36,716 156,642
Cable services 14,201 14,041 14,484 14,914 57,640
Local access services 1,014 2,048 2,744 4,102 9,908
Internet services 1,209 1,511 1,354 2,002 6,076
Other services 2,834 3,954 4,539 5,202 16,529
-----------------------------------------------------------------------
Total revenues 58,152 62,941 62,766 62,936 246,795
Operating income 2,437 1,447 1,730 3,230 8,844
Net loss $ (1,616) (2,066) (2,076) (1,039) (6,797)
=======================================================================
Basic net loss per share $ (0.03) (0.04) (0.04) (0.02) (0.14)
=======================================================================
Diluted net loss per share $ (0.03) (0.04) (0.04) (0.02) (0.14)
=======================================================================
Revenues. Total revenues for the quarter ended June 30, 1999 ("second quarter of
1999") were $83.7 million, representing a 36.5% increase from total revenues in
the quarter ended March 31, 1999 ("first quarter of 1999") of $61.3 million. The
increase in total revenues resulted from a $19.5 million fiber capacity sale in
the second quarter of 1999 and increased Internet services revenues in the
second quarter of 1999. Partially offsetting this increase were reduced revenues
associated with a 15.1% reduction in the long-distance average rate per minute,
notwithstanding a 2.9% increase in the number of active long-distance
residential, small business and commercial customers billed from 85,600 at March
31, 1999 to 88,100 at June 30, 1999, and a 16.8% increase in total minutes of
traffic carried. Revenues from other common carriers (principally MCI WorldCom
and Sprint) totaled $14.9 million in each of the first and second quarters of
1999.
The relatively flat growth in local services revenues in the second quarter of
1999 as compared to the first quarter of 1999 was attributable in part to
discontinuing the billing of reciprocal compensation in February 1999 on non-GCI
local services minutes terminated on the Company's network.
Long-distance revenues have historically been highest in the summer months as a
result of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial fishing, and oil and
gas activities. Cable television revenues, on the other hand, are higher in the
winter months because consumers spend more time at home and tend to watch more
television during these months. Local service operations are not expected to
exhibit significant seasonality. The Company's ability to implement construction
projects is also 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 22.9% from
$27.9 million in the first quarter of 1999 to $34.3 million in the second
quarter of 1999. The increase resulted primarily from costs
30 (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
associated with the fiber capacity sale in the second quarter of 1999. As a
percentage of revenues, second quarter of 1999 cost of sales and services was
41.0% as compared to 45.4% for the first quarter of 1999. The decrease in the
cost of sales and services as a percentage of revenues is primarily due
increased margin on the fiber capacity sale as compared to margin on other
products and services sold. The decrease in cost of sales and services as a
percentage of revenues is also attributed to growth of the Company's new product
lines and avoidance of access charges resulting from the Company's distribution
and termination of its traffic on its own network instead of paying other
carriers to distribute and terminate its traffic.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.7 million in the second quarter of 1999 as
compared to the first quarter of 1999. As a percentage of revenues, second
quarter of 1999 selling, general and administrative expenses were 30.2% as
compared to 38.4% for the first quarter of 1999. The 1999 decrease as a
percentage of sales is primarily a result of significant revenues derived from
the fiber capacity sale without a proportionate increase in selling, general and
administrative expenses.
Net income (loss). The Company reported a net income of $2.5 million for the
second quarter of 1999 as compared to a net loss of ($4.9) million for the first
quarter of 1999. The increase in net income is primarily attributed to the fiber
capacity sale. Offsetting this increase were additional expenses attributed to
increased depreciation and interest incurred during the second quarter of 1999
as compared to the first quarter of 1999 due to the placement of the Alaska
United undersea fiber optic cable into service in early February 1999. During
the first quarter of 1999, capitalized construction period interest served to
reduce interest expense. Interest capitalization ceased when the Alaska United
undersea fiber optic cable was placed into service. The Company charged to
interest expense $470,000 of deferred financing costs in the second quarter of
1999 resulting from the amendment to the Holdings Loan Facilities which reduced
borrowing capacity (see Liquidity and Capital Resources).
LIQUIDITY AND CAPITAL RESOURCES
The first two quarters of 1999 ("1999") cash flows from operating activities
totaled $22.5 million, net of changes in the components of working capital.
Additional sources of cash during 1999 included preferred stock issuance
proceeds totaling $20 million and long-term borrowings of $13.8 million.
Expenditures for property and equipment, including construction in progress,
totaled $23.2 million and $94.9 million in 1999 and the first two quarters of
1998 ("1998"), respectively. Uses of cash during 1999 also included repayment of
$20.2 million of long-term borrowings and capital lease obligations.
Net receivables decreased $965,000 from December 31, 1998 to June 30, 1999. The
decrease resulted from a $2.0 million reclassification of income taxes
receivable to a long-term deferred tax asset as the Company has utilized all net
operating losses against income taxes paid in prior periods, therefore
refundable amounts are now recorded as a long-term deferred tax asset and will
be realized as future taxable income is generated. The deferred tax
reclassification and an additional provision of allowances for doubtful
receivables were partially offset by increases in trade receivable balances.
Working capital totaled $19.4 million at June 30, 1999, a $11.0 million increase
from the working capital of $8.4 million as of December 31, 1998. The increase
in working capital is primarily attributed to receipt of proceeds of the fiber
capacity sale and preferred stock sale in the second quarter of 1999. $4.0
million of the proceeds are reflected as long-term restricted cash and are not
included in June 30, 1999 working capital.
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,
31 (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
at either Libor plus 1.00% to 2.50%, depending on the leverage ratio of Holdings
and certain of its subsidiaries, or at the greater of the prime rate or the
federal funds effective rate (as defined) plus 0.05%, in each case plus an
additional 0.00% to 1.375%, depending on the leverage ratio of Holdings and
certain of its subsidiaries. $87.7 million and $106.7 million were drawn on the
credit facilities as of June 30, 1999 and December 31, 1998, respectively.
On April 13, 1999, the Company amended its Holdings credit facilities. These
amendments contained, among other things, provisions for payment of a one-time
amendment fee of 0.25% of the aggregate commitment, an increase in the
commitment fee by 0.125% per annum on the unused portion of the commitment, and
an increase in the interest rate of 0.25%. The amended facilities reduce the
aggregate commitment by $50 million to $200 million, and limit capital
expenditures to $35 million in 1999 and $35 million in 2000 with no limits
thereafter (excluding amounts to be paid for purchased satellite transponder
facilities). The amended facilities contemplated that Holdings receive $20
million in proceeds from a GCI preferred stock issuance by May 31, 1999 (see
below). Pursuant to the Financial Accounting Standards Board Emerging Issues
Task Force Issue 98-14, "Debtor's Accounting for Changes in Line-of-Credit or
Revolving Debt Arrangements," the Company recorded as additional interest
expense $470,000 of deferred financing costs in the second quarter of 1999
resulting from the reductions in borrowing capacity.
Holding's credit facilities and GCI, Inc.'s senior notes contain restrictions on
the operations and activities of the Company, including requirements that the
Company comply with certain financial covenants and financial ratios. Under the
amended Holding's credit facility, Holdings may not permit the ratio of senior
debt to annualized operating cash flow (as defined) of Holdings and certain of
its subsidiaries to exceed 3.0 to 1.0 through December 31, 1999, total debt to
annualized operating cash flow to exceed 7.0 to 1.0 through June 30, 1999 (6.25
to 1.00 from July 1, 1999 through March 31, 2000), and annualized operating cash
flow to interest expense to exceed 1.5 to 1.0 through September 30, 1999 (1.75
to 1.0 from October 1, 1999 through December 31, 1999). Each of the foregoing
ratios decreases in specified increments during the life of the credit facility.
The credit facility requires Holdings to maintain a ratio of annualized
operating cash flow to debt service of Holdings and certain of its subsidiaries
of at least 1.25 to 1.0, and annualized operating cash flow to fixed charges of
at least 1.0 to 1.0 (which adjusts to 1.05 to 1.0 in April, 2003 and
thereafter). The senior notes impose a requirement that the leverage ratio of
GCI, Inc. and certain of its subsidiaries not exceed 7.5 to 1.0 prior to
December 31, 1999 and 6.0 to 1.0 thereafter, subject to the ability of GCI, Inc.
and certain of its subsidiaries to incur specified permitted indebtedness
without regard to such ratios.
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. $75 million was borrowed under
the facility at June 30, 1999. The Fiber Facility is a 10-year term loan that is
interest only for the first 5 years. The facility can be extended an additional
two years at any time between the second and fifth anniversary of closing the
facility if the Company can demonstrate projected revenues from certain capacity
commitments will be sufficient to pay all operating costs, interest, and
principal installments based on the extended maturity. The Fiber Facility bears
interest at either Libor plus 3.0%, or at the lender's prime rate plus 1.75%.
The interest rate will decline to Libor plus 2.5%-2.75%, or, at the Company's
option, the lender's prime rate plus 1.25%-1.5% after the project completion
date and when the loan balance is $60,000,000 or less.
The Fiber Facility contains, among others, covenants requiring certain
intercompany loans and advances in order to maintain specific levels of cash
flow necessary to pay operating costs, interest and principal installments. All
of Alaska United's assets, as well as a pledge of the partnership interests'
owning Alaska
32 (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
United, collateralize the Fiber Facility. Construction of the fiber facility was
completed and the facility was placed into service on February 4, 1999. The
project was completed on-budget.
The Company will use approximately one-half of the Alaska United system capacity
in addition to its existing owned and leased facilities to carry its own
traffic. One of the Company's large commercial customers signed agreements in
February and March 1999 for the immediate lease of three DS3 circuits on Alaska
United facilities within Alaska, and between Alaska and the lower 48 states. The
lease agreements provide for three year terms, with renewal options for
additional terms. The Company continues to pursue opportunities to lease
additional capacity on its system.
The Company completed a sale of capacity in the Alaska United system to Alaska
Communications Systems in a $19.5 million cash transaction. The sale includes
both capacity within Alaska, and between Alaska and the lower 48 states. The
Company announced in August 1999 that a second $19.5 million sale of fiber
capacity to Alaska Communications Systems had been consummated and continues to
pursue opportunities for sale of additional capacity on its system.
The Company's expenditures for property and equipment, including construction in
progress, totaled $23.2 million and $94.9 million during 1999 and 1998,
respectively. The Company anticipates that its capital expenditures in 1999 may
total as much as $35 million. Planned capital expenditures over the next five
years include those necessary for continued expansion of the Company's
long-distance, local exchange and Internet facilities, the development and
construction of a PCS network, and continued upgrades to its cable television
plant, and approximately $43.5 million for satellite transponders. Sources of
funds for these planned capital expenditures are expected to include internally
generated cash flows and borrowings under the Company's credit facilities.
The Company's ability to invest in discretionary capital and other projects will
depend upon its future cash flows and access to borrowings under its credit
facilities. Management anticipates that cash flow generated by the Company and
borrowings under its credit facilities will be sufficient to fund capital
expenditures and its working capital requirements. Should cash flows be
insufficient to support additional borrowings, such investment in capital
expenditures will likely be reduced.
The Company entered into a purchase and lease-purchase option agreement in
August 1995 for the acquisition of satellite transponders to meet its long-term
satellite capacity requirements. The launch of the satellite in August 1998
failed. The Company did not assume launch risk and the launch has been
rescheduled for the second quarter of 2000. The Company will continue to lease
transponder capacity until the delivery of the transponders on the replacement
satellite. The balance payable upon expected delivery of the transponders during
the second quarter of 2000, in addition to the $9.1 million deposit previously
paid, totals approximately $43.5 million.
The Company issued 20,000 shares of convertible redeemable accreting preferred
stock ("Preferred Stock") on April 30, 1999. Proceeds totaling $20 million
(before payment of costs and expenses) were used for general corporate purposes,
to repay outstanding indebtedness, and to provide additional liquidity.
The long-distance, local access, cable, Internet and wireless services
industries are experiencing increasing competition and rapid technological
changes. The Company's future results of operations will be affected by its
ability to react to changes in the competitive environment and by its ability to
fund and implement new technologies. The Company is unable to determine how
competition, technological changes and its net operating losses will affect its
ability to obtain financing.
33 (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
The Company believes that it will be able to meet its current and long-term
liquidity and capital requirements, including fixed charges, through its cash
flows from operating activities, existing cash, cash equivalents, short-term
investments, credit facilities, and other external financing and equity sources.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133. In June 1998, the Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective for
years beginning after June 15, 1999. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments imbedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge criteria are met. Special accounting
for qualifying hedges allow a derivative's gains or losses to offset related
results on the hedged item in the income statement and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. Management of the Company expects that adoption
of SFAS No. 133 will not have a material impact on the Company's year-end 2000
financial statements.
YEAR 2000 COSTS
Many financial information and operational systems in use today may not be able
to interpret dates after December 31, 1999 because such systems allow only two
digits to indicate the year in a date. As a result, such systems are unable to
distinguish January 1, 2000 from January 1, 1900, which could have adverse
consequences on the operations of an entity and the integrity of information
processing. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a shut down in a
company's operations, a temporary inability to process transactions, send
invoices or engage in similar normal business activities. This potential problem
is referred to as the "Year 2000" or "Y2K" issue.
State of readiness. The Company has undertaken various initiatives to evaluate
the Year 2000 readiness of the products and services sold by the Company
("Products"), the information technology systems used in the Company's
operations ("IT Systems"), its non-IT systems, such as power to its facilities,
HVAC systems, building security, voice mail and other systems, as well as the
readiness of its customers and suppliers. The Company has identified eight Year
2000 target areas that cover the entire scope of the Company's business and has
internally established teams committed to completing an 8-step Compliance
Validation Process ("CVP") for each target area with respect to critical and
service delivery systems. Each team is expected to fully complete this process
on or before September 1, 1999. The table below identifies the Company's target
areas as well as the 8-step CVP with its expected timeline. Team activity is
currently focused towards the process of completing Phase 2.
34 (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
----------------------------------------------- ----------------------------------------------------------------
Year 2000 Target Areas Compliance Validation Process
----------------------------------------------- ----------------------------------------------------------------
1. Business Computer Systems PHASE 1
2. Technical Infrastructure 1. Team Formation Completed 1st quarter 1997
3. End-User Computing 2. Inventory Assessment Completed 4th quarter 1998
4. Switching and Head-end Equipment 3. Compliance Assessment Completed 4th quarter 1998
5. Logistics 4. Risk Assessment Completed 4th quarter 1998
6. Facilities ------------------------------- --------------------------------
7. Customers PHASE 2
8. Suppliers/Key Service Providers 5. Resolution/Remediation Completed 2nd quarter 1999
6. Validation Expected completion 3rd
quarter 1999
7. Contingency Plan Expected completion 3rd
quarter 1999
8. Sign-Off Acceptance Expected completion 4th
quarter 1999
----------------------------------------------- ------------------------------- --------------------------------
In 1997, the Company established a corporate-wide Year 2000 task force to
address Y2K issues. This effort is comprehensive and encompasses software,
hardware, electronic data interchange, networks, PC's, facilities, embedded
chips, century certification, supplier and customer readiness, contingency
planning, and domestic and international operations. The Company has tested,
replaced or upgraded all of its critical business applications and systems. The
Company has prioritized its third-party relationships as critical, severe or
sustainable, has completed the assessment phase for third parties, has requested
a Y2K contract warranty in many new key contracts and is developing contingency
plans for critical third parties, including key customers, suppliers and other
service providers. An assessment of its key customers showed that no significant
impact to the Company is expected due to customer Y2K problems. The Company
continues to evaluate other telecommunication companies which purchase the
Company's services.
With respect to the Company's relationships with third parties, the Company
relies both domestically and internationally upon various vendors, governmental
agencies, utility companies, telecommunications service companies, delivery
service companies and other service providers. Although these service providers
are outside the Company's control, the Company has mailed letters to those with
whom it believes its relationships are material and has verbally communicated
with some of its strategic customers to determine the extent to which interfaces
with such entities are vulnerable to Year 2000 issues and whether products and
services purchased from or by such entities are Year 2000 ready.
Over 400 companies have been contacted directly by mail, by telephone, through
on-site visits or through inquiry of their Y2K Internet web sites to determine
their state of readiness. Responses vary from confirmation that the supply of
products or services provided to the Company will continue without interruption
or delay through the year 2000, to providing their plans for making their
products or service delivery systems Y2K compliant. The Company is currently
evaluating the sufficiency of the responses received from these third parties.
The Company intends to complete follow-up activities, including but not limited
to site surveys, phone surveys and mailings, with significant vendors and
service providers as part of the Phase 2 validation.
Costs to address year 2000 issues. Costs related to the Y2K issue are expensed
as incurred and are funded through the Company's operating cash flows and its
credit agreements. Through June 30, 1999, the Company has expensed incremental
remediation costs totaling $1.9 million, with remaining incremental
35 (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
remediation costs estimated at approximately $2.1 million. Management must
balance the requirements for funding discretionary capital expenditures with
required year 2000 efforts given its limited resources. The Company has not
deferred any critical information technology projects because of its Year 2000
program efforts, which are being addressed primarily through a dedicated team
within the Company's information technology group.
Time and cost estimates are based on currently available information and could
be affected by the ability to correct all relevant computer codes and equipment,
and the Y2K readiness of the Company's business partners, among other factors.
At this time, the Company does not possess information necessary to estimate the
potential financial impact of Year 2000 compliance issues relating to its
vendors, customers and other third parties.
Risk of year 2000 issues. If necessary modifications and conversions by the
Company are not made on a timely basis, or if key third parties are not Y2K
ready, Y2K problems could have a material adverse effect on the Company's
financial condition, results of operations and liquidity. However, the Company
is focusing on identifying and addressing all aspects of its operations that may
be affected by the Year 2000 issue and is addressing the most critical
applications first.
Although the Company considers them unlikely, the Company believes that the
following several situations, not in any particular order, make up the Company's
worst case Year 2000 scenarios:
- Disruption of Electrical Power Supplies Resulting from Extended Regional
Power Failure(s). The Company's major switching and information systems
are protected by emergency standby electrical generators in the event of
short-term power outages. If electrical supplies from regional electric
utilities are disrupted for longer periods of time, the Company may be
required to power-down its electronic switching, head-end and computer
equipment. The Company is closely monitoring electrical utilities that
provide service to the Company for their Year 2000 readiness. Based on
their progress reports and completion of assessments, the Company
believes that there will be no significant impact on its operations in
the major communities served by the Company. Many of the electrical
companies serving smaller rural communities employ equipment that is
manual or controlled by non date-effecting equipment, however they may
experience outages if they do not receive fuel from their suppliers.
- Disruption of a Significant Customer's Ability to Accept Products or Pay
Invoices. The Company's significant customers are large, well-informed
customers, mostly in the telecommunications and oil and gas industries,
who are disclosing information to their vendors that indicates they are
well along the path toward Year 2000 compliance. These customers have
demonstrated their awareness of the Year 2000 issue by issuing
requirements of their suppliers and indicating the stages of
identification and remediation which they consider adequate for
progressive calendar quarters leading up to the century mark. The
Company's significant customers, moreover, are substantial companies
that the Company believes would be able to make adjustments in their
processes as required to cause timely payment of invoices.
- Disruption of Supplies and Materials. In early 1998 the Company began an
ongoing process of surveying its vendors with regard to their Year 2000
readiness and is now in the process of assessing and cataloging their
responses to the survey. The Company expects to work with vendors that
show a need for assistance or that provide inadequate responses, and in
many cases expects that survey results will be refined significantly by
such work. Where ultimate survey results show that the need arises, the
Company will arrange for back-up vendors before the changeover date.
Supplies and materials necessary for invoicing and other functions will
be acquired in bulk prior to December 31, 1999 to provide an adequate
inventory to bridge up to three months of vendor supply chain
disruptions.
36 (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
- Disruption of the Company's Administrative and Billing IT Systems. The
Company has completed an upgrade of its current financial software
systems to state-of-the-art systems and such process has required Year
2000 compliance in the various invitations for proposals. Year 2000
testing is occurring as upgrades proceed. The Company's billing and
information systems continue to be assessed and remediated. System
processes have been prioritized so that critical date-sensitive systems
and functionality are remediated first. Non-critical systems and
functionality are remediated following critical systems. The Company's
efforts are proceeding on-target and on-budget. Accordingly, the Company
believes that, after assessment and remediation, if any disruptions do
occur, such will be dealt with promptly and will be no more severe with
respect to correction or impact than would be an unexpected billing or
information system error.
- Disruption of the Company's Non-IT Systems. The Company continues to
conduct a comprehensive assessment of all non-IT systems, including
among other things its switching and head-end systems and operations,
with respect to both embedded processors and obvious computer control.
Considering the nature of the equipment and systems involved, the
Company expects that the timing of assessment to be such that it will be
able to complete any remediation efforts on a reasonably short schedule,
and in any case before arrival of the Year 2000. The Company also
believes that, after such assessment and remediation, if any disruptions
do occur, such will be dealt with promptly and will be no more severe
with respect to correction or impact than would be an unexpected
breakdown of well-maintained equipment.
- De-Listing of Company as a Vendor to Certain Customers. Several of the
Company's principal customers have required updated reports in the form
of answers to extensive multiple-choice surveys on the Company's Year
2000 compliance efforts. According to these customers, failure to reply
to the readiness survey would have led to de-listing as a service
supplier at the present time, resulting in possible disqualification to
bid on procurements requiring service delivery in the future. The
Company has responded to these reports on a timely basis. The Company
has not been disqualified as a supplier to any customers Several
significant customers have scheduled monitoring meetings during 1999.
Contingency plans. The Company is in the process of developing specific
contingency plans for potential Year 2000 disruptions. The aforementioned 8-step
Compliance Validation Process includes contingency planning by each team and
such plans, as developed, will be carefully reviewed by the Company. The Company
is developing contingency plans for its most critical areas and is targeting
3Q99 for completion of all contingency plans. Future disclosures will include
contingency plans as they become available.
ALASKA ECONOMY
The Company offers telecommunication and video services to customers primarily
throughout Alaska. As a result of this geographic concentration, the Company's
growth and operations depend upon economic conditions in Alaska. The economy of
Alaska is dependent upon the natural resource industries, and in particular oil
production, as well as tourism, fisheries, government, and United States
military spending. Any deterioration in these markets could have an adverse
impact on the Company. Oil revenues over the past several years have contributed
in excess of 75% of the revenues from all segments of the Alaska economy and are
expected to account for 73% in 1999.
The volume of oil transported by the TransAlaska Oil Pipeline System over the
past 20 years has been as high as 2.0 million barrels per day in 1988. Over the
past several years, it has begun to decline. Market prices for North Slope oil
declined to below $9 per barrel in 1998, well below the average price per barrel
used by the State of Alaska to budget its oil related revenues.
37 (Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Oil companies and service providers have announced cost cutting measures to
offset a portion of the declining revenues. Oil company and related oil field
service company layoffs reportedly will result in a reduction of oil industry
jobs by at least 39 percent in 1999. Oil prices have recovered to over $20 per
barrel in August, however state revenue forecasts continue to reflect decreased
oil related revenues due primarily to declining production. The effects of low
oil prices will impact the state of Alaska's economy, and is expected to
particularly hurt state and local government and oil service companies. As much
as half of the drilling fleet that worked on the slope in 1998 could be idle
during 1999. Oil field service and drilling contractors cut operating costs to
adjust for decreasing production and exploration.
Since oil revenues to the state of Alaska are expected to fall significantly
short of budgeted revenues, the Governor of the state of Alaska and the state
legislature have implemented cost-cutting and revenue enhancing measures. The
State of Alaska maintains surplus accounts that are intended to fund budgetary
shortfalls and may fund a portion of the revenue shortfall if approved by a
majority of the citizens of the state.
BP Amoco announced in April 1999 its intention to purchase ARCO for $26.8
billion. BP Amoco and ARCO together reportedly hold approximately 75 percent of
the ownership of the Alaska North Slope oil fields and in the company that
operates the Trans-Alaska Pipeline System. Concerns have been expressed about
the impact of this specific transaction and oil company consolidation in general
on the oil and gas industry in Alaska, and in turn on the economy of Alaska.
Concerns include reduced competition in an industry that is the largest source
of revenues to the state of Alaska, and foreign ownership of a significant
amount of United States oil production facilities and reserves. Alaska law
stipulates that no single company can hold drilling leases to more than 500,000
onshore state-owned acres. The BP Amoco-ARCO combination would control about
860,000 acres, however the companies have reportedly said they will give up
360,000 acres to comply with Alaska laws. Realignment of operations following
the acquisition reportedly will result in the layoff of 400 positions in Alaska.
No assurance can be given that oil companies doing business in Alaska will be
successful in discovering new fields or further developing existing fields which
are economic to develop and produce oil with access to the pipeline or other
means of transport to market, even with the reduced level of royalties. The
Company is not able to predict the effect of declines in the price of North
Slope oil or the acquisition of ARCO by BP Amoco on Alaska's economy or on the
Company.
SEASONALITY
Long-distance revenues have historically been highest in the summer months as a
result of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial fishing, and oil and
gas activities. Cable television revenues, on the other hand, are higher in the
winter months because consumers tend to watch more television, and spend more
time at home, during these months. The Company's local access services revenues
are not expected to exhibit significant seasonality. The Company's Internet
access services are expected to reflect seasonality trends similar to the cable
television segment. The Company's ability to implement construction projects is
reduced during the winter months because of cold temperatures, snow and short
daylight hours.
INFLATION
The Company does not believe that inflation has a significant effect on its
operations.
38
PART I.
ITEM 3. QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK
The Company's Senior Holdings Loan carries interest rate risk. Amounts borrowed
under this Agreement bear interest at either Libor plus 1.0% to 2.5%, depending
on the leverage ratio of Holdings and certain of its subsidiaries, or at the
greater of the prime rate or the federal funds effective rate (as defined) plus
0.05%, in each case plus an additional 0.0% to 1.375%, depending on the leverage
ratio of Holdings and certain of its subsidiaries. Should the Libor rate, the
lenders' base rate or the leverage ratios change, the Company's interest expense
will increase or decrease accordingly. As of June 30, 1999, the Company had
borrowed $87.7 million subject to interest rate risk. On this amount, a 1%
increase in the interest rate would cost the Company $877,000 in additional
gross interest cost on an annualized basis.
The Company's Fiber Facility carries interest rate risk. Amounts borrowed under
this Agreement bear interest at either Libor plus 3.0%, or at the Company's
choice, the lender's prime rate plus 1.75%. The interest rate will decline to
Libor plus 2.5%-2.75%, or at the Company's choice, the lender's prime rate plus
1.25%-1.5% after the project completion date and when the loan balance is
$60,000,000 or less. Should the Libor rate, the lenders' base rate or the
leverage ratios change, the Company's interest expense will increase or decrease
accordingly. As of June 30, 1999, the Company had borrowed $75 million subject
to interest rate risk. On this amount, a 1% increase in the interest rate would
cost the Company $750,000 in additional gross interest cost on an annualized
basis.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding pending legal proceedings to which the Company is a party
is included in Note 8 of Notes to Interim Condensed Consolidated Financial
Statements and is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Information regarding changes in securities and use of proceeds is included in
Note 5 of Notes to Interim Condensed Consolidated Financial Statements and is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Date of the meeting: June 10, 1999
Purpose of meeting: Annual shareholders meeting
(b) Name of each director elected at the meeting and the name
of each other director whose term of office as a director
continued after the meeting:
Name Votes for Votes withheld
----------------------------------- ----------------- -----------------
Ronald R. Beaumont 71,988,205 544,772
Stephen R. Mooney 71,987,082 545,895
Carter F. Page 72,012,929 520,048
Robert M. Walp 71,973,030 559,947
39
Directors, in addition to those listed above, whose
term of office as director continued after the
meeting:
Ronald A. Duncan
Donne F. Fisher
William P. Glasgow
Larry E. Romrell
James M. Schneider
(c) Other matters voted upon:
Amendment to the Company's Revised 1986 Stock Option
Plan to increase the number of shares of the
Company's common stock allocated to the plan by 1.5
million shares of Class A common stock and ratifying
an administrative amendment to the plan approved by
the Board of Directors changing the basic eligibility
criterion for an individual to be seated and to serve
on the Option Committee, which administers the plan,
from that of a disinterested director to that of a
"non-employee director" as the term is defined in the
plan.
Votes
-----
For: 66,064,364
Against: 3,229,075
Abstain: 3,239,538
Result: Passed
Amendment to the Company's Restated Articles of
Incorporation generally relating to the terms under
which the Company's board of directors may approve
issuance of Company preferred stock, and ratifying
action by the board canceling and otherwise deleting
a statement of stock designation as issued and filed
with the State of Alaska and relating to a 1991 offer
of preferred stock which is no longer outstanding.
Votes
-----
For: 52,176,540
Against: 7,278,750
Abstain: 3,230,839
Result: Did not pass as the requisite simple
majority vote by class of common stock was
not achieved.
(d) Not applicable
40
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10.80 - Fourth Amendment to Contract for Alaska
Access Services between General
Communication, Inc. and its wholly owned
subsidiary GCI Communication Corp., and
MCI WorldCom. *
Exhibit 10.81 - Fifth Amendment to Contract for Alaska
Access Services between General
Communication, Inc. and its wholly owned
subsidiary GCI Communication Corp., and
Sprint Communications Company L.P. *
Exhibit 27 - Financial Data Schedule *
(b) Reports on Form 8-K filed during the quarter ended June 30,
1999 - None
---------------------
* Filed herewith.
Note - Certain information has been redacted from Exhibits 10.80 and
10.81 which the Company desires to keep undisclosed and a copy of the
unredacted documents will be filed separately with the Securities and
Exchange Commission.
41
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.
Signature Title Date
- -------------------------------------- -------------------------------------------- -------------------
/s/ President and Director August 12, 1999
- -------------------------------------- (Principal Executive Officer) ------------------
Ronald A. Duncan
/s/ Senior Vice President, Chief Financial August 12, 1999
- -------------------------------------- Officer, Secretary and Treasurer ------------------
John M. Lowber (Principal Financial Officer)
/s/ Vice President, Chief Accounting August 12, 1999
- -------------------------------------- Officer ------------------
Alfred J. Walker (Principal Accounting Officer)
42