As filed with the Securities and Exchange Commission on May 15, 2001.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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 April 30, 2001 was:
49,093,967 shares of Class A common stock; and
3,896,919 shares of Class B common stock.
1
INDEX
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
Page No.
--------
Cautionary Statement Regarding Forward-Looking Statements.................................................3
PART I. FINANCIAL INFORMATION
Item l. Consolidated Balance Sheets as of March 31, 2001
(unaudited) and December 31, 2000..................................................5
Consolidated Statements of Operations for the
three months ended March 31, 2001
(unaudited) and 2000 (unaudited)...................................................7
Consolidated Statements of Stockholders' Equity
for the three months ended March 31, 2001
(unaudited) and 2000 (unaudited)...................................................8
Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 (unaudited)
and 2000 (unaudited)...............................................................9
Notes to Interim Condensed Consolidated Financial
Statements.........................................................................10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................29
Item 6. Exhibits and Reports on Form 8-K......................................................30
Other items are omitted, as they are not applicable.
SIGNATURES................................................................................................31
2
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Quarterly Report,
but should particularly consider any risk factors that we set forth in this
Quarterly Report and in other reports or documents that we file from time to
time with the Securities and Exchange Commission. In this Quarterly Report, in
addition to historical information, we state our beliefs of future events and of
our future operating results, financial position and cash flows. In some cases,
you can identify those so-called "forward-looking statements" by words such as
"may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of those
words and other comparable words. You should be aware that those statements are
only our predictions and are subject to risks and uncertainties. Actual events
or results may differ materially. In evaluating those statements, you should
specifically consider various factors, including those outlined below. Those
factors may cause our actual results to differ materially from any of our
forward-looking statements. For these statements, we claim the protection of the
safe harbor for forward-looking statements provided by the Private Securities
Litigation Reform Act of 1995.
- Material adverse changes in the economic conditions in the markets we
serve and in general economic conditions;
- 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;
- Our responses to competitive products, services and pricing, including
pricing pressures, technological developments, alternative routing
developments, and the ability to offer combined service packages that
include local, cable and Internet services; the extent and pace at which
different competitive environments develop for each segment of our
business; the extent and duration for which competitors from each segment
of the telecommunications industry are able to offer combined or full
service packages prior to our being able to do so; the degree to which we
experience material competitive impacts to our traditional service
offerings prior to achieving adequate local service entry; and competitor
responses to our products and services and overall market acceptance of
such products and services;
- The outcome of our negotiations with Incumbent Local Exchange Carriers
("ILECs") and state regulatory arbitrations and approvals with respect to
interconnection agreements; and our ability to purchase unbundled network
elements or wholesale services from ILECs at a price sufficient to permit
the profitable offering of local exchange service at competitive rates;
- Success and market acceptance for new initiatives, many of which are
untested; the level and timing of the growth and profitability of new
initiatives, particularly local access services expansion, Internet
(consumer and business) services expansion 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, digital subscriber line services, and transmission services;
- Rapid technological changes;
- Development and financing of telecommunication, local access, wireless,
Internet and cable networks and services;
- Future financial performance, including the availability, terms and
deployment of capital; the impact of regulatory and competitive
developments on capital outlays, and the ability to achieve cost savings
and realize productivity improvements;
- Availability of qualified personnel;
- Changes in, or failure, or inability, to comply with, government
regulations, including, without
3
limitation, regulations of the FCC, the Regulatory Commission of Alaska,
and adverse outcomes from regulatory proceedings;
- Uncertainties in federal military spending levels and military base
closures in markets in which we operate;
- Industry consolidation and mergers;
- Other risks detailed from time to time in our 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 we expressly disclaim
any obligation or undertaking to disseminate any updates or revisions to any
forward-looking statement contained in this document to reflect any change in
our expectations with regard to those statements or any other change in events,
conditions or circumstances on which any such statement is based, except as
required by law. 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)
March 31, December 31,
ASSETS 2001 2000
- --------------------------------------------------------------------------- --------------- ----------------
(Amounts in thousands)
Current assets:
Cash and cash equivalents $ 7,366 5,962
--------------- ----------------
Receivables:
Trade 46,691 49,872
Employee 462 378
--------------- ----------------
47,153 50,250
Less allowance for doubtful receivables 3,408 2,864
--------------- ----------------
Net receivables 43,745 47,386
--------------- ----------------
Prepaid and other current assets 2,413 2,505
Deferred income taxes, net 3,547 3,221
Inventories 5,910 5,717
Property held for sale --- 10,877
Notes receivable with related parties 257 241
--------------- ----------------
Total current assets 63,238 75,909
--------------- ----------------
Property and equipment in service, net of depreciation 347,526 347,802
Construction in progress 12,129 8,097
--------------- ----------------
Net property and equipment 359,655 355,899
--------------- ----------------
Cable franchise agreements, net of amortization of $22,800,000 and $21,509,000
at March 31, 2001 and December 31, 2000, respectively 184,085 184,983
Goodwill, net of amortization of $6,267,000 and $5,952,000 at March 31,
2001 and December 31, 2000, respectively 39,686 40,002
Other intangible assets, net of amortization of $880,000 and $729,000 at
March 31, 2001 and December 31, 2000, respectively 4,443 3,936
Property held for sale 1,550 1,550
Deferred loan and senior notes costs, net of amortization of $4,509,000
and $4,166,000 at March 31, 2001 and December 31, 2000, respectively 8,059 8,402
Notes receivable with related parties 3,289 3,235
Other assets, at cost, net of amortization of $64,000 and $63,000 at March
31, 2001 and December 31, 2000, respectively 9,470 5,091
--------------- ----------------
Total other assets 250,582 247,199
--------------- ----------------
Total assets $ 673,475 679,007
=============== ================
See accompanying notes to interim condensed consolidated financial statements.
5 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
- -------------------------------------------------------------------------- ---------------- ----------------
(Amounts in thousands)
Current liabilities:
Current maturities of obligations under capital leases $ 1,547 1,600
Accounts payable 29,766 29,094
Accrued interest 5,065 9,256
Accrued payroll and payroll related obligations 11,042 10,385
Deferred revenue 9,985 9,477
Accrued liabilities 4,271 4,134
Subscriber deposits and other current liabilities 1,307 1,362
---------------- ----------------
Total current liabilities 62,983 65,308
Long-term debt, excluding current maturities 322,753 334,400
Obligations under capital leases, excluding current maturities 46,506 46,882
Obligations under capital leases due to related party, excluding
current maturities 203 214
Deferred income taxes, net of deferred income tax benefit 23,973 22,057
Other liabilities 4,973 4,077
---------------- ----------------
Total liabilities 461,391 472,938
---------------- ----------------
Preferred stock. $1,000 par value, authorized 1,000,000 shares; issued and
outstanding 20,000 shares at March 31, 2001 and December 31, 2000;
convertible into Class A common stock at $5.55 per share of Class A common
stock, redemption price at March 31, 2001 and December 31, 2000 of $1,035
and $1,014 per share, respectively; $2,677,000 dividends accrued, pending
stock issuance at March 31, 2001 and December 31, 2000 22,589 22,589
---------------- ----------------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000,000 shares; issued and outstanding and
issuable 49,057,117 and 48,642,870 shares at March 31, 2001 and
December 31, 2000, respectively 186,296 182,706
Class B. Authorized 10,000,000 shares; issued and outstanding 3,900,135
and 3,904,038 shares at March 31, 2001 and December 31, 2000,
respectively; convertible on a share-per-share basis into Class A
common stock 3,296 3,299
Less cost of 357,958 Class A common shares held in treasury at March
31, 2001 and December 31, 2000 (1,659) (1,659)
Paid-in capital 7,848 7,368
Notes receivable with related parties issued upon stock option exercise (2,976) (2,976)
Retained deficit (3,310) (5,258)
---------------- ----------------
Total stockholders' equity 189,495 183,480
Commitments and contingencies
---------------- ----------------
Total liabilities and stockholders' equity $ 673,475 679,007
================ ================
See accompanying notes to interim condensed consolidated financial statements.
6
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
2001 2000
-------------- ----------------
(Amounts in thousands except
per share amounts)
Revenues $ 96,917 68,277
Cost of sales and services 42,086 29,658
Selling, general and administrative expenses 27,850 24,654
Depreciation and amortization expense 13,939 13,088
-------------- ----------------
Operating income 13,042 877
-------------- ----------------
Interest expense 8,883 10,014
Interest income 163 175
-------------- ----------------
Interest expense, net 8,720 9,839
-------------- ----------------
Net income (loss) before income taxes 4,322 (8,962)
Income tax (expense) benefit (1,899) 3,464
-------------- ----------------
Net income (loss) $ 2,423 (5,498)
============== ================
Basic income (loss) per common share $ 0.04 (0.12)
============== ================
Diluted income (loss) per common share $ 0.03 (0.12)
============== ================
See accompanying notes to interim condensed consolidated financial statements.
7
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
Notes
Receivable
Class A Class B Class A Issued to Retained
(Unaudited) Common Common Shares Held Paid-in Related Earnings
(Amounts in thousands) Stock Stock in Treasury Capital Parties (Deficit)
----------------------------------------------------------------------
Balances at December 31, 1999 $ 176,740 3,422 (1,607) 6,343 (2,167) 9,817
Net loss --- --- --- --- --- (5,498)
Tax effect of excess stock
compensation expense for tax
purposes over amounts recognized for
financial reporting purposes --- --- --- 182 --- ---
Class B shares converted to Class A 119 (119) --- --- --- ---
Shares issued under stock option plan 3 --- --- --- --- ---
Shares issued under officer stock
option agreements and notes issued
upon officer stock option exercise 450 --- --- --- (372) ---
Amortization of the excess of GCI
stock market value over stock option
exercise cost on date of stock option
grant --- --- --- 113 --- ---
Shares issued to Employee Stock
Purchase Plan 1,243 --- --- --- --- ---
Preferred stock dividends --- --- --- --- --- (441)
----------------------------------------------------------------------
Balances at March 31, 2000 $ 178,555 3,303 (1,607) 6,638 (2,539) 3,878
======================================================================
Balances at December 31, 2000 $ 182,706 3,299 (1,659) 7,368 (2,976) (5,258)
Net income --- --- --- --- --- 2,423
Tax effect of excess stock
compensation expense for tax
purposes over amounts recognized for
financial reporting purposes --- --- --- 309 --- ---
Class B shares converted to Class A 3 (3) --- --- --- ---
Shares issued under stock option plan 511 --- --- --- --- ---
Amortization of the excess of GCI
stock market value over stock option
exercise cost on date of stock option
grant --- --- --- 171 --- ---
Shares issued to Employee Stock
Purchase Plan 688 --- --- --- --- ---
Acquisition of G.C. Cablevision, Inc.
net assets and customer base 2,388 --- --- --- --- ---
Preferred stock dividends --- --- --- --- --- (475)
----------------------------------------------------------------------
Balances at March 31, 2001 $ 186,296 3,296 (1,659) 7,848 (2,976) (3,310)
======================================================================
See accompanying notes to interim condensed consolidated financial statements.
8
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2001 2000
-------------- --------------
(Amounts in thousands)
Operating activities:
Net income (loss) $ 2,423 (5,498)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 13,939 13,088
Amortization charged to selling, general and administrative 9 323
Deferred income tax (benefit) expense 1,899 (3,464)
Non-cash cost of sale 10,877 ---
Deferred compensation and compensatory stock options 242 165
Bad debt expense, net of write-offs 544 323
Employee Stock Purchase Plan expense funded with issuance of
General Communication, Inc. Class A common stock --- 704
Write-off of capitalized interest --- 1,955
Other noncash income and expense items (84) (62)
Change in operating assets and liabilities 1,393 1,178
-------------- --------------
Net cash provided by operating activities 31,242 8,712
-------------- --------------
Investing activities:
Purchases of property and equipment (13,522) (9,685)
Advances and billings to Kanas Telecom, Inc. (2,716) ---
Purchases of property held for sale --- (1,550)
Payment of deposit (1,200) ---
Purchases of other assets (796) (129)
Notes receivable issued to related parties (121) (735)
Payments received on notes receivable with related parties 146 600
-------------- --------------
Net cash used in investing activities (18,209) (11,499)
-------------- --------------
Financing activities:
Repayments of long-term borrowings and capital lease obligations (12,140) (138)
Payment of debt issuance costs --- (333)
Note receivable with related parties issued upon stock option
exercise --- (372)
Proceeds from common stock issuance 511 453
-------------- --------------
Net cash used by financing activities (11,629) (390)
-------------- --------------
Net increase (decrease) in cash and cash equivalents 1,404 (3,177)
Cash and cash equivalents at beginning of period 5,962 13,734
-------------- --------------
Cash and cash equivalents at end of period $ 7,366 10,557
============== ==============
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
In the following discussion, General Communication, Inc. and its direct
and indirect subsidiaries are referred to as "we," "us" and "our."
(a) Business
General Communication, Inc. ("GCI"), an Alaska corporation, was
incorporated in 1979. We offer the following services:
- Long-distance telephone service between Anchorage, Fairbanks,
Juneau, and other communities in Alaska and the remaining United
States and foreign countries
- Cable television services throughout Alaska
- Facilities-based competitive local access services in Anchorage,
Alaska
- Internet access services
- Termination of traffic in Alaska for certain common carriers
- Private line services
- Managed services to certain commercial customers
- Sales and service of dedicated communications systems and related
equipment
- Private network point-to-point data and voice transmission
services between Alaska and the western contiguous United States
- Lease and sell capacity on two undersea fiber optic cables used
in the transmission of interstate and intrastate private line,
switched message long-distance and Internet services between
Alaska and the remaining United States and foreign countries
(b) Principles of Consolidation
The consolidated financial statements include the accounts of GCI,
GCI's wholly-owned subsidiary GCI, Inc., GCI, Inc.'s wholly-owned
subsidiary GCI Holdings, Inc., GCI Holdings, Inc.'s wholly-owned
subsidiaries GCI Communication Corp., GCI Cable, Inc. and GCI
Transport Co., Inc., GCI Communication Corp.'s wholly-owned
subsidiary Potter View Development Co., Inc., GCI Transport Co.,
Inc.'s wholly-owned subsidiaries GCI Satellite Co., Inc., GCI Fiber
Co., Inc. and Fiber Hold Co., Inc. and GCI Fiber Co., Inc.'s and
Fiber Hold Co., Inc.'s wholly-owned partnership Alaska United Fiber
System Partnership ("Alaska United").
(c) Net Income (Loss) Per Common Share
Net income (loss) used to calculate basic and diluted net income
(loss) per common share is increased (decreased) by preferred stock
dividends of ($475,000) and $441,000 for the three months ended
March 31, 2001 and 2000, respectively. Shares used to calculate net
income (loss) per common share consist of the following (amounts in
thousands):
Three Months Ended
March 31,
2001 2000
----------- -----------
Weighted average common shares outstanding 52,223 50,915
Common equivalent shares outstanding 4,977 ---
----------- -----------
57,200 50,915
=========== ===========
Common equivalent shares outstanding totalling 683,000 are
anti-dilutive for purposes of calculating the net loss per common
share for the three months ended March 31, 2000, and are not
included in the diluted net loss per share calculation
10 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Weighted average shares associated with outstanding stock options
for the three months ended March 31, 2001 and 2000 which have been
excluded from the diluted income (loss) per share calculations
because the options' exercise price was greater than the average
market price of the common shares consist of the following (amounts
in thousands):
Three Months Ended
March 31,
2001 2000
----------- -----------
Weighted average shares associated with
outstanding stock options 158 1,815
=========== ==========
(d) Preferred and Common Stock
Following is the statement of preferred and common stock at March
31, 2001 and 2000 (shares, in thousands):
Preferred Common Stock
Stock Class A Class B
------------- ----------------------------
Balances at December 31, 1999 20 46,870 4,048
Class B shares converted to Class A --- 140 (140)
Shares issued under stock option plan --- 153 ---
Shares issued to Employee Stock Purchase Plan --- 236 ---
------------- -------------- -------------
Balances at March 31, 2000 20 47,399 3,908
============= ============== =============
Balances at December 31, 2000 20 48,643 3,904
Class B shares converted to Class A --- 4 (4)
Shares issued under stock option plan --- 172 ---
Shares issued upon acquisition of G.C.
Cablevision, Inc. net assets and customer
base --- 238 ---
------------- -------------- -------------
Balances at March 31, 2001 20 49,057 3,900
============= ============== =============
(e) Accounting for Derivative Instruments and Hedging Activities
Effective January 1, 2001, we adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"), as amended.
SFAS No. 133 requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value.
Effective January 3, 2001, we entered into an interest rate swap
agreement to convert $50 million of 9.75% fixed rate debt to a
variable interest rate equal to the 90 day Libor rate plus 334
basis points. The interest rate swap terms mirror the underlying
fixed rate debt, except the interest rate swap may be called at no
cost by the issuer on August 1, 2002. Under SFAS No. 133, the
interest rate swap is accounted for as a fair value hedge. We
entered into the transaction to take advantage of the decline in
interest rates. As of March 31, 2001, the amount of change in the
fair value of debt that does not perfectly off-set the change in
the fair value of the interest rate swap is approximately $30,000.
(f) Reclassifications
Reclassifications have been made to the 2000 financial statements
to make them comparable with the 2001 presentation.
11 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(g) Other
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. The interim condensed consolidated
financial statements include the consolidated accounts of GCI and
its wholly owned subsidiaries with all significant intercompany
transactions eliminated. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 2001 are not
necessarily indicative of the results that may be expected for the
year ended December 31, 2001. For further information, refer to the
financial statements and footnotes thereto included in our annual
report on Form 10-K for the year ended December 31, 2000.
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in
thousands):
Three-month periods ended March 31, 2001 2000
------------- ------------
Decrease in receivables $ 3,100 5,540
Decrease in prepaid and other current assets 96 74
(Increase) decrease in inventory (193) 564
Increase (decrease) in accounts payable 672 (356)
Increase in accrued liabilities 824 225
Increase (decrease) in accrued payroll and payroll related obligations 657 (656)
Decrease in accrued interest (4,191) (4,405)
Increase (decrease) in subscriber deposits and other current
liabilities (55) 343
Increase (decrease) in deferred revenues 490 (318)
Increase (decrease) in components of other long-term liabilities
(7) 167
------------- ------------
$ 1,393 1,178
============= ============
We paid no income taxes and received no income tax refunds during the
three-month periods ended March 31, 2001 and 2000.
We paid interest totalling approximately $13,074,000 and $13,265,000
during the three-month periods ended March 31, 2001 and 2000,
respectively.
We recorded $309,000 and $182,000 during the three months ended March 31,
2001 and 2000, respectively, in paid-in capital in recognition of the
income tax effect of excess stock compensation expense for tax purposes
over amounts recognized for financial reporting purposes.
During the three months ended March 31, 2000 we funded the employer
matching portion of Employee Stock Purchase Plan contributions by issuing
GCI Class A common stock valued at $704,000. We purchased such shares on
the open market during the three months ended March 31, 2001.
12 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
We financed the purchase of satellite transponder capacity pursuant to a
long-term capital lease arrangement with a leasing company during the
three month period ended March 31, 2000 at a cost of $48.2 million.
Effective March 31, 2001 we acquired the assets and customer base of G.C.
Cablevision, Inc. The seller received 238,199 unregistered shares of GCI
Class A common stock with a future payment in additional shares
contingent upon certain conditions.
(3) Fiber Capacity Sale
During the three-month period ending March 31, 2001 we completed a $19.5
million sale of long-haul capacity in the Alaska United undersea fiber
optic cable system ("fiber capacity sale") in a cash transaction. The
sale included both capacity within Alaska, and between Alaska and the
lower 48 states. We used the proceeds from the fiber capacity sale to
repay $11.7 million of the Fiber Facility debt and to fund capital
expenditures and working capital.
(4) Industry Segments Data
Our reportable segments are business units that offer different products.
The reportable segments are each managed separately because they manage
and offer distinct products with different production and delivery
processes.
We have four reportable segments as follows:
Long-distance services. We offer a full range of common-carrier
long-distance services to commercial, government, other
telecommunications companies and residential customers, through our
networks of fiber optic cables, digital microwave, and fixed and
transportable satellite earth stations and our SchoolAccess(TM)
offering to rural school districts and a similar offering to rural
hospitals and health clinics.
Cable services. We provide cable television services to residential,
commercial and government users in the State of Alaska. Our cable
systems serve 31 communities and areas in Alaska, including the state's
three largest urban areas, Anchorage, Fairbanks and Juneau. We offer
digital cable television services in Anchorage and Fairbanks and retail
cable modem service (through our Internet services segment) in
Anchorage, Fairbanks, Juneau and Valdez. We plan to provide cable modem
service in the Kenai-Soldotna area in 2002. We plan to expand our
product offerings as plant upgrades are completed in other communities
in Alaska.
Local access services. We offer facilities based competitive local
exchange services in Anchorage and plan to provide similar competitive
local exchange services in Fairbanks during 2001 and Juneau during
2002.
Internet services. We offer wholesale and retail Internet services. We
offer cable modem service in Anchorage, Fairbanks, Juneau and Valdez
and plan to provide cable modem service in the Kenai-Soldotna area in
2002. Our undersea fiber optic cable allows us to offer enhanced
services with high-bandwidth requirements.
Included in the "Other" segment in the tables that follow are our managed
services, product sales, cellular telephone services, and management
services for Kanas Telecom, Inc. ("Kanas"), a related party company that
owns and operates a fiber optic cable system constructed along the
trans-Alaska oil pipeline corridor extending from Prudhoe Bay to Valdez,
Alaska. None of these business units have ever met the quantitative
thresholds for determining reportable segments. Also included in the
Other
13 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
segment are corporate related expenses including marketing, customer
service, management information systems, accounting, legal and
regulatory, human resources and other general and administrative
expenses. In 2001 the Other segment includes revenues and costs
associated with a sale of undersea fiber optic cable system capacity.
We evaluate performance and allocate resources based on (1) earnings or
loss from operations before depreciation, amortization, net interest
expense and income taxes, and (2) operating income or loss. The
accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies in note 1.
Intersegment sales are recorded at cost plus an agreed upon intercompany
profit.
We earn all revenues through sales of services and products within the
United States of America. All of our long-lived assets are located within
the United States of America.
Summarized financial information for our reportable segments for the
three month periods ended March 31, 2001 and 2000 follows (amounts in
thousands):
Long- Local
Distance Cable Access Internet
Services Services Services Services Other Total
------------------------------------------------------------------------
2001
Revenues:
Intersegment $ 4,835 377 1,635 1,210 203 8,260
External 46,236 18,046 5,958 2,619 24,058 96,917
------------------------------------------------------------------------
Total revenues $ 51,071 18,423 7,593 3,829 24,261 105,177
========================================================================
Earnings (loss) from operations
before depreciation,
amortization, net interest
expense and income taxes $ 18,884 9,210 2,079 (2,263) (697) 27,213
========================================================================
Operating income (loss) $ 14,737 5,760 1,272 (2,876) (5,619) 13,274
========================================================================
2000
Revenues:
Intersegment $ 2,608 368 1,500 546 --- 5,022
External 43,620 15,930 4,520 1,713 2,494 68,277
------------------------------------------------------------------------
Total revenues $ 46,228 16,298 6,020 2,259 2,494 73,299
========================================================================
Earnings (loss) from operations
before depreciation,
amortization, net interest
expense and income taxes $ 16,236 7,796 656 (2,375) (8,294) 14,019
========================================================================
Operating income (loss) $ 11,248 3,161 (1,090) (2,777) (9,611) 931
========================================================================
14 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
A reconciliation of total segment revenues to consolidated revenues
follows:
Quarters ended March 31, 2001 2000
------------- --------------
Total segment revenues $ 105,177 73,299
Less intersegment revenues eliminated in consolidation (8,260) (5,022)
------------- --------------
Consolidated revenues $ 96,917 68,277
============= ==============
A reconciliation of total segment earnings from operations before
depreciation, amortization, net interest expense and income taxes to
consolidated net income (loss) before income taxes follows:
Quarters ended March 31, 2001 2000
-------------- --------------
Total segment earnings from operations before
depreciation, amortization, net interest expense and
income taxes $ 27,213 14,019
Less intersegment contribution eliminated in consolidation (232) (54)
-------------- --------------
Consolidated earnings from operations before
depreciation, amortization, net interest expense
and income taxes 26,981 13,965
Depreciation and amortization 13,939 13,088
-------------- --------------
Consolidated operating income 13,042 877
Interest expense, net 8,720 9,839
-------------- --------------
Consolidated net income (loss) before income taxes $ 4,322 (8,962)
============== ==============
A reconciliation of total segment operating income to consolidated net
income (loss) before income taxes follows:
Quarters ended March 31, 2001 2000
-------------- -------------
Total segment operating income $ 13,274 931
Less intersegment contribution eliminated in consolidation (232) (54)
-------------- -------------
Consolidated operating income 13,042 877
Interest expense, net 8,720 9,839
-------------- -------------
Consolidated net income (loss) before income taxes $ 4,322 (8,962)
============== =============
(5) Commitments and Contingencies
Acquisition
We have agreed to acquire from WorldCom, a related party, its 85%
controlling interest in Kanas, which owns the 800-mile fiber optic cable
system that extends from Prudhoe Bay, Alaska to Valdez, Alaska via
Fairbanks. Under terms of the agreement, we will issue to WorldCom shares
of a new series of GCI Class C preferred stock valued at $10 million. The
stock will be convertible at $12 per share into GCI Class A common stock.
The new series will be non-voting and pays a 6% per annum quarterly cash
dividend. The corporation owning the fiber optic system will be operated
as GCI Fiber Communication Co., Inc. We expect regulatory approval of
this acquisition during the second quarter
15 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
of 2001. We have agreed to manage the operations of Kanas and to fund its
operations and working capital requirements prior to closing. The
acquisition is contingent upon certain conditions precedent to closing.
At March 31, 2001 we have made advances to and provided services to Kanas
totalling approximately $6.3 million which are classified as Other
Assets.
Kanas has entered into an interim services agreement with Alyeska
Pipeline Service Company ("Alyeska Pipeline") to provide certain voice,
video and data services to support operations of the Trans Alaska
Pipeline System that is operated by Alyeska Pipeline. A fifteen-year
agreement has been drafted and has been submitted to each company's Board
of Directors for approval. The interim agreement provides for provisional
services during this review process.
Litigation and Disputes
We are routinely involved in various lawsuits, billing disputes, legal
proceedings and regulatory matters that have arisen in the normal course
of business. While the ultimate results of these items cannot be
predicted with certainty, we do not expect at this time the resolution of
them to have a material adverse effect on our financial position, results
of operations or our liquidity.
16
PART I.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
In the following discussion, General Communication, Inc. and its direct and
indirect subsidiaries are referred to as "we," "us" and "our."
The following discussion and analysis should be read in conjunction with our
Interim Condensed Consolidated Financial Statements and the notes thereto. See -
Cautionary Statement Regarding Forward-Looking Statements.
Overview
We have experienced significant growth in recent years through strategic
acquisitions, deploying new business lines and expansion of our existing
businesses. We have historically met our cash needs for operations and
maintenance capital expenditures through our cash flows from operating
activities. Cash requirements for acquisitions and other capital expenditures
have been provided largely through our financing activities.
Long-Distance Services
During the first quarter of 2001 long-distance services revenue represented
47.7% of consolidated revenues. Our provision of interstate and intrastate
long-distance services to residential, commercial and governmental customers and
to other common carriers (principally WorldCom and Sprint), and provision of
private line and leased dedicated capacity services accounted for 95.1% of our
total long-distance services revenues during the first quarter of 2001. Factors
that have the greatest impact on year-to-year changes in long-distance services
revenues include the rate per minute charged to customers, usage volumes
expressed as minutes of use, and the number of private line and leased dedicated
service products in use.
Revenues from private line and other data services sales increased 44.5% to $9.3
million during the first quarter of 2001 as compared to the first quarter of
2000 due primarily to increasing demand for our data services by commercial and
governmental customers.
We introduced a broadband product offering to hospitals and health clinics in
2000, supplementing broadband revenues derived from our SchoolAccess(TM)
offering to rural school districts. Total broadband revenues increased 60.8% to
$2.6 million during the first quarter of 2001 as compared to the first quarter
of 2000. We will provide SchoolAccess(TM) services to nine school districts in
Arizona and New Mexico beginning July 2001.
Our long-distance cost of sales and services has consisted principally of direct
costs of providing services, including local access charges paid to Local
Exchange Carriers ("LECs") for originating and terminating long-distance calls
in Alaska, and fees paid to other long-distance carriers to carry calls
terminating in areas not served by our network (principally the lower 49 states,
most of which calls are carried over WorldCom's network, and international
locations, which calls are carried principally over Sprint's network). During
the first quarter of 2001, local access charges accounted for 68.5% of
long-distance cost of sales and services, fees paid to other long-distance
carriers represented 25.3%, satellite transponder lease and undersea fiber
maintenance costs represented 3.4%, and other costs represented 2.8% of
long-distance cost of sales and services.
17
Our long-distance selling, general, and administrative expenses have consisted
of operating and engineering, customer service, sales and communications,
management information systems, general and administrative, and legal and
regulatory expenses. Most of these expenses consist of salaries, wages and
benefits of personnel and certain other indirect costs (such as rent, travel,
utilities, insurance and property taxes). A significant portion of long-distance
selling, general, and administrative expenses, 37.1% during the first quarter of
2001, represents operating and engineering costs.
Long-distance services face significant competition from AT&T Alascom, Inc.,
long-distance resellers, and from local telephone companies that have entered
the long-distance market. We believe our approach to developing, pricing, and
providing long-distance services and bundling different business segment
services will continue to allow us to be competitive in providing those
services.
Revenues derived from other common carriers increased 7.6% to $17.9 million
during the first quarter of 2001 as compared to the first quarter of 2000. The
average rate charged other common carriers increased 13.2% due to a certain
category of wholesale minutes no longer carried for such customers. The increase
in the average rate was off-set by a 5.0% decrease in the total minutes carried
for such customers. In conjunction with our intent to purchase a controlling
interest in Kanas (see note 5 to the accompanying Notes to Interim Condensed
Consolidated Financial Statements) we negotiated a contract amendment with
WorldCom in March 2001. The amendment extends the contract term for five years
to March 2006 and reduces the rate to be charged by us for certain WorldCom
traffic over the extended term of the contract. The Sprint contract was also
amended in March 2001 extending its term two years to March 2004 with two
one-year automatic extensions to March 2006. The amendment reduces the rate to
be charged by us for certain Sprint traffic over the extended term of the
contract.
Other common carrier traffic routed to us for termination in Alaska is largely
dependent on traffic routed to WorldCom and Sprint by their customers. Pricing
pressures, new program offerings and market consolidation continue to evolve in
the markets served by WorldCom and Sprint. If, as a result, their traffic is
reduced, or if their competitors' costs to terminate or originate traffic in
Alaska are reduced, our traffic will also likely be reduced, and our pricing may
be reduced to respond to competitive pressures. We are unable to predict the
effect on us of such changes, however given the materiality of other common
carrier revenues to us, a significant reduction in traffic or pricing could have
a material adverse effect on our financial position, results of operations and
liquidity.
Cable Services
During the first quarter of 2001, cable television revenues represented 18.6% of
consolidated revenues. The cable systems serve 31 communities and areas in
Alaska, including the state's three largest population centers, Anchorage,
Fairbanks and Juneau.
On March 31, 2001 we acquired the assets and customer base of G.C. Cablevision,
Inc., with approximately 1,000 subscribers in Fairbanks and North Pole, Alaska.
We expect revenues associated with this transaction to reach $600,000 during the
year ended December 31, 2001.
We generate cable services revenues from four primary sources: (1) digital and
analog 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; (3) advertising sales; and (4) cable modem
services (shared with our Internet services segment). During the first quarter
of 2001 programming services generated 81.1% of total cable services revenues,
equipment rental and installation fees accounted for 9.8% of such revenues,
cable modem services accounted for 5.3% of such revenues, advertising sales
accounted for 2.7% of such revenues, and other services accounted for the
remaining 1.1% 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
18
services and digital and analog services, the average number of cable television
and cable modem subscribers during a given reporting period, and revenues
generated from new product offerings.
The cable systems' cost of sales and selling, general and administrative
expenses have consisted principally of programming and copyright expenses,
labor, maintenance and repairs, marketing and advertising and equipment rental
expense. During the first quarter of 2001 programming and copyright expenses
represented 49.4% of total cable cost of sales and selling, general and
administrative expenses, and general and administrative costs represented 42.8%
of such total. Marketing and advertising costs represented approximately 7.8% of
such total expenses.
Cable services face competition from alternative methods of receiving and
distributing television signals and from other sources of news, information and
entertainment. We believe our cable television services will continue to be
competitive by providing, at reasonable prices, a greater variety of programming
and other communication services than are available off-air or through other
alternative delivery sources and upon superior technical performance and
customer service.
Local Access Services
We generate local access services revenues from three primary sources: (1)
business and residential basic dial tone services; (2) business private line and
special access services; and (3) business and residential features and other
charges, including voice mail, caller ID, distinctive ring, inside wiring and
subscriber line charges. Local exchange services revenues totaled $6.0 million
in the first quarter of 2001 representing 6.2% of consolidated revenues. The
primary factors that contribute to year-to-year changes in local access services
revenues are the average number of business and residential subscribers to our
services during a given reporting period, the average monthly rates charged for
non-traffic sensitive services and the number and type of additional premium
features selected.
Local access cost of sales represented approximately 51.9% of total local access
services cost of sales and selling, general and administrative expenses during
the first quarter of 2001. General and administrative and customer service costs
represented approximately 37.6% of such total expenses, marketing and
advertising costs represented approximately 8.5% of such total expenses, and
operating and engineering expenses represented approximately 2.0% of such total
expenses.
Our local access services segment faces significant competition in Anchorage
from the ILEC Alaska Communications Systems, Inc. ("ACS") and AT&T Alascom, Inc.
We believe our approach to developing, pricing, and providing local access
services and bundling different business segment services will allow us to be
competitive in providing those services.
Internet Services
We generate Internet services revenues from three primary sources: (1) access
product services, including commercial, Internet service provider, and retail
dial-up access; (2) network management services; and (3) cable modem services (a
portion of cable modem revenue is also recognized by our cable services
segment). Internet services segment revenues totaled $2.6 million representing
2.7% of total revenues in the first quarter of 2001. The primary factors that
contribute to year-to-year changes in Internet services revenues are the average
number of subscribers to our services during a given reporting period, the
average monthly subscription rates, and the number and type of additional
premium features selected.
Operating and general and administrative expenses represented approximately
45.8% of total Internet services cost of sales and selling, general and
administrative expenses during the first quarter of 2001. Internet cost of sales
represented approximately 38.3% of such total expenses and marketing and
advertising represented approximately 15.9% of such total expenses.
19
Marketing campaigns continue to be deployed targeting residential and commercial
customers featuring bundled Internet products. Our Internet offerings are
coupled with our long-distance and local access services offerings and provide
free basic Internet services or discounted premium Internet services if certain
long-distance or local access services plans are selected. Value-added premium
Internet features are available for additional charges.
We compete with a number of Internet service providers in our markets. We
believe our approach to developing, pricing, and providing Internet services
allows us to be competitive in providing those services.
Other Services and Other Expenses
Telecommunications services revenues reported in the Other segment as described
in note 4 in the accompanying Notes to Interim Condensed Consolidated Financial
Statements include sales of undersea fiber optic system capacity (see below),
corporate network management contracts, telecommunications equipment sales and
service, management services for Kanas, and other miscellaneous revenues
(including revenues from cellular resale services, prepaid and debit calling
card sales, and installation and leasing of customer's very small aperture
terminal ("VSAT") equipment).
During the first quarter of 2001 we completed a $19.5 million fiber capacity
sale in a cash transaction.
Other services segment revenues represented 24.8% of total revenues in 2001 and
included the fiber capacity sale described above, network solutions and
outsourcing revenues totalling $3.6 million, communications equipment sales,
cellular resale and other revenues totalling $1.0 million.
Depreciation, amortization and net interest expense on a consolidated basis
decreased $268,000 in the first quarter of 2001 as compared to 2000 resulting
primarily from decreased interest rates on variable rate debt, decreased average
outstanding long-term debt balances, a $2.0 million charge to interest expense
in 2000 to write-off previously capitalized interest expense, and a $1.7 million
charge to depreciation expense in 2000 resulting from a change in the estimated
remaining lives of assets that were replaced. The decrease was partially off-set
by increased average outstanding capital lease obligation balances and
additional depreciation on 2000 and 2001 capital expenditures.
20
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)
Percentage
Three Months Ended Change
March 31, 2001 vs.
(Unaudited) 2001 2000 2000
---- ---- ----
Statement of Operations Data:
Revenues
Long-distance services 47.7% 63.9% 6.0%
Cable services 18.6% 23.3% 13.3%
Local access services 6.1% 6.6% 31.8%
Internet services 2.7% 2.5% 52.9%
Other services 24.9% 3.7% 864.6%
-----------------------------------------
Total revenues 100.0% 100.0% 41.9%
Cost of sales and services 43.4% 43.4% 41.9%
Selling, general and administrative
expenses 28.7% 36.1% 13.0%
Depreciation and amortization 14.4% 19.2% 6.5%
-----------------------------------------
Operating income 13.5% 1.3% 1,387.1%
Net income (loss) before income
taxes 4.5% (13.1%) 148.2%
Net income (loss) 2.5% (8.1%) 144.1%
Other Operating Data (1):
Cable operating income (2) 31.9% 11.9% 82.2%
Local operating income (loss) (3) 21.3% (64.4%) 216.7%
Internet operating loss (4) (109.8%) (89.6%) (3.6%)
<FN>
--------------------------
(1) Includes customer service, marketing and advertising costs.
(2) Computed as a percentage of total cable services revenues.
(3) Computed as a percentage of total local access services revenues.
(4) Computed as a percentage of total Internet services revenues.
</FN>
THREE MONTHS ENDED MARCH 31, 2001 ("2001") COMPARED TO THREE MONTHS ENDED MARCH
31, 2000 ("2000")
Revenues
Total revenues increased 41.9% from $68.3 million in 2000 to $96.9 million in
2001. Excluding the fiber optic cable capacity sale in 2001 as previously
described, total revenues increased 13.3%.
Long-distance revenues from residential, commercial, governmental, and other
common carrier customers increased 6.0% to $46.2 million in 2001. The increase
was largely due to the following:
- An increase of 44.5% in private line and private network transmission
services revenues to $9.3 million in 2001 due to an increased number of
leased circuits in service,
21
- An increase of 7.6% in revenues from other common carriers (principally
WorldCom and Sprint) to $17.9 million in 2001, and
- An increase of 60.8% to $2.6 million in 2001 revenues from our
SchoolAccess(TM) offering to rural school districts and our packaged
telecommunications offering to rural hospitals and health clinics. Our
SchoolAccess(TM) product was provided to 154 schools at March 31, 2001, a
4.8% increase from March 31, 2000.
Long-distance revenue increases were offset by the following:
- A decrease of 5.3% in total minutes of use to 241.6 million minutes
primarily due to a certain category of wholesale minutes no longer carried
for other common carriers,
- A 5.7% decrease in our average rate per minute on long-distance traffic to
$0.117 per minute in 2001 attributed to our promotion of and customers'
enrollment in calling plans offering discounted rates and length of service
rebates, such plans being prompted in part by our long-distance competitors
reducing their rates, off-set by an increase in the average rate per minute
on minutes carried for other common carriers due to a certain category of
wholesale minutes no longer carried, and
- A decrease of 5.0% in the number of active residential, small business and
commercial customers billed to 87,400 at March 31, 2001 primarily due to a
competitor's offering allowing customers to place unlimited intrastate and
interstate calls for a flat monthly fee. The competitor announced March 29,
2001 that it will discontinue the unlimited minutes offering.
Cable revenues increased 13.3% to $18.0 million in 2001. Programming services
revenues increased 6.3% to $14.6 million in 2001 resulting from an increase of
approximately 3,500 basic subscribers served to approximately 121,000 (of which
approximately 1,000 basic subscribers were acquired from G.C. Cablevision, Inc.
on March 31, 2001), an increase of $0.82 or 1.7% in average gross revenue per
average basic subscriber per month due to rate increases in several cable
systems in February 2001, and increased pay-per-view, premium, and digital
service revenues. New facility construction efforts in 2000 resulted in
approximately 2,400 additional homes passed which contributed to additional
subscribers and revenues in 2001. Digital subscriber counts increased 137.3% to
17,300 at March 31, 2001 as compared to March 31, 2000. The cable services
segment's share of cable modem revenue (offered through our Internet services
segment) increased $600,000 to $1.0 million in 2001.
Local access services revenues increased 31.8% in 2001 to $6.0 million. At March
31, 2001 approximately 65,000 lines were in service and approximately 700
additional lines were awaiting connection as compared to approximately 50,000
lines in service and approximately 1,700 additional lines awaiting connection at
March 31, 2000.
Internet services revenues increased 52.9% to $2.6 million in 2001 primarily due
to growth in the average number of customers served. We had approximately 65,000
active residential, commercial and small business retail dial-up Internet
subscribers at March 31, 2001 as compared to approximately 56,000 at March 31,
2000. We had approximately 18,500 active residential, commercial and small
business retail cable modem subscribers at March 31, 2001 as compared to
approximately 8,700 at March 31, 2000.
The increase in other services revenues from $2.5 million in 2000 to $24.1
million in 2001 is primarily due to the $19.5 million fiber capacity sale in
2001 as previously described and increased revenues from management services
provided to Kanas.
22
Cost of Sales and Services
Cost of sales and services totaled $42.1 million in 2001 and $29.7 million in
2000. As a percentage of total revenues, cost of sales and services were 43.4%
in 2001 and 2000. Excluding the fiber capacity sale in 2001, cost of sales and
services as a percentage of total revenues decreased from 43.4% in 2000 to 40.3%
in 2001.
Long-distance cost of sales and services decreased from $19.9 million in 2000 to
$18.2 million in 2001. Long-distance cost of sales as a percentage of
long-distance revenues decreased from 45.7% in 2000 to 39.4% in 2001 primarily
due to the effect of reassigning traffic carried by satellite transponders and
fiber optic cable from leased to owned capacity and reductions in access costs
due to distribution and termination of our traffic on our own local services
network instead of paying other carriers to distribute and terminate our
traffic. Offsetting the 2001 decrease as compared to 2000 is a decrease in the
average rate per minute billed to customers without a comparable decrease in
access charges paid by us. We expect cost savings to occur when traffic carried
on our own facilities grows.
Cable cost of sales and services as a percentage of cable revenues, which is
less as a percentage of revenues than are long-distance, local access and
Internet services cost of sales and services, increased from 26.9% in 2000 to
27.4% in 2001. Cable services rate increases did not keep pace with increases in
programming costs in 2001. Programming costs increased for most of our cable
services offerings, and we incurred additional costs on new programming
introduced in 2000 and 2001.
Local access services cost of sales and services as a percentage of local access
services revenues decreased from 53.5% in 2000 to 52.7% in 2001 primarily due to
the fluctuations in cost of sales and services as a percentage of revenues
inherent in this segment as it develops.
Internet services cost of sales and services increased 8.4% to $1.2 million in
2001. Internet services costs of sales as a percentage of Internet services
revenues totaled 62.6% and 44.4% in 2000 and 2001, respectively. The Internet
services costs of sales decrease as a percentage of Internet services revenues
is primarily due to a $1.1 million increase in Internet's portion of cable modem
revenue which generally has higher margins than do other Internet products. As
Internet revenues increase, economies of scale and more efficient network
utilization result in reduced Internet cost of sales and services as a
percentage of Internet revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 13.0% to $27.9 million in
2001 and, as a percentage of total revenues, decreased from 36.1% in 2000 to
28.7% in 2001. Excluding the fiber capacity sale in 2001, selling, general and
administrative expenses, as a percentage of total revenues, decreased from 36.1%
in 2000 to 34.3% in 2001.
Depreciation and Amortization
Depreciation and amortization expense increased 6.5% to $13.9 million in 2001.
The increase is attributable to our $48.9 million investment in equipment and
facilities placed into service during 2000 for which a full year of depreciation
will be recorded during the year ended December 31, 2001, the acquisition of a
$48.2 million satellite transponder asset for which depreciation began in second
quarter 2000, and the $13.5 million investment in other equipment and facilities
during the first quarter of 2001 for which a partial year of depreciation will
be recorded during 2001. Additionally, $1.7 million was charged to depreciation
expense in 2000 resulting from a change in the estimated remaining lives of
assets that were replaced.
Interest Expense, Net
Interest expense, net of interest income, decreased 11.4% to $8.7 million in
2001. This decrease resulted primarily from a $2.0 million charge to interest
expense in 2000 to write-off previously capitalized interest expense, decreased
interest rates in 2001 on our variable rate debt, the effect of an interest rate
swap agreement described below, and decreased average outstanding long-term debt
balances. Partially offsetting
23
these decreases was an increase in our average outstanding capital lease
obligation balances resulting from the lease of satellite transponder capacity.
On January 3, 2001 we entered into an interest rate swap agreement to convert
$50 million in 9.75% fixed rate debt to a variable interest rate equal to the 90
day Libor rate plus 334 basis points. The differential to be paid or received is
recorded as an increase or decrease in interest expense in the consolidated
statements of operations in the period in which it is recognized. The agreement
extends through August 1, 2007 and is cancelable at the option of the
counterparty beginning August 1, 2002. We are exposed to credit losses from
counterparty nonperformance, but do not anticipate any such losses from our
agreement.
Income Tax Benefit (Expense)
Income tax benefit (expense) was $3.5 million in 2000 and ($1.9) million in
2001. The change was due to net income before income taxes in 2001 as compared
to net loss before income taxes in 2000. Our effective income tax rate increased
from 38.7% in 2000 to 43.9% in 2001 due to the effect of items that are
nondeductible for income tax purposes.
At March 31, 2001, we have (1) tax net operating loss carryforwards of
approximately $101.0 million that will begin expiring in 2008 if not utilized,
and (2) alternative minimum tax credit carryforwards of approximately $2.5
million available to offset regular income taxes payable in future years. Our
utilization of remaining net operating loss carryforwards is subject to certain
limitations pursuant to Internal Revenue Code section 382.
Tax benefits associated with recorded deferred tax assets are considered to be
more likely than not realizable through future reversals of existing taxable
temporary differences and future taxable income exclusive of reversing temporary
differences and carryforwards. The amount of deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced. We estimate that our
effective income tax rate for financial statement purposes will be approximately
41% in 2001.
24
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The following chart provides selected unaudited statement of operations data
from our quarterly results of operations during 2001 and 2000:
(Amounts in thousands, except per share amounts)
-------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------
2001
----
Revenues:
Long-distance services $ 46,236 46,236
Cable services 18,046 18,046
Local access services 5,958 5,958
Internet services 2,619 2,619
Other services 24,058 24,058
-------------------------------------------------------------
Total revenues 96,917 96,917
Operating income 13,042 13,042
Net loss before income taxes 4,322 4,322
Net income 2,423 2,423
Basic net income per common share 0.04 0.04
Diluted net income per common share 0.03 0.03
2000
----
Revenues:
Long-distance services $ 43,620 44,855 48,185 46,016 182,676
Cable services 15,930 16,660 16,708 18,600 67,898
Local access services 4,520 4,789 5,236 5,660 20,205
Internet services 1,713 2,018 2,188 2,506 8,425
Other services 2,494 3,104 3,589 4,214 13,401
-------------------------------------------------------------
Total revenues 68,277 71,426 75,906 76,996 292,605
Operating income 877 3,550 5,610 5,966 16,003
Net loss before income taxes (8,962) (5,665) (3,954) (3,068) (21,649)
Net loss (5,498) (3,526) (2,352) (1,858) (13,234)
Basic and diluted net loss per common
share (0.12) (0.08) (0.05) (0.04) (0.29)
Revenues
Total revenues for the quarter ended March 31, 2001 ("first quarter") were $96.9
million, representing a 25.9% increase from $77.0 million for the quarter ended
December 31, 2000 ("fourth quarter"). Excluding the first quarter fiber capacity
sale, total revenues increased 0.5%.
Cost Of Sales and Services
Cost of sales and services increased from $30.5 million in the fourth quarter to
$42.1 million in the first quarter. As a percentage of revenues, first and
fourth quarter cost of sales and services totaled 43.4% and 39.6%, respectively.
Excluding the fiber capacity sale in first quarter, cost of sales and services
increased to 40.3% as a percentage of revenues in first quarter. The increase is
due to a decrease in the average rate per minute billed to customers without a
comparable decrease in access charges paid by us, and increased programming
costs for cable products without a corresponding revenue increase. Off-setting
the first quarter increase is the effect of reductions in access costs due to
distribution and termination of our traffic on our own local services network
instead of paying other carriers to distribute and terminate our traffic. We
expect cost savings to continue as traffic carried on our own facilities grows.
25
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $400,000 in the first
quarter as compared to the fourth quarter. As a percentage of revenues, first
quarter selling, general and administrative expenses were 28.7% as compared to
35.7% for the fourth quarter. Excluding the fiber capacity sale in the first
quarter, selling, general and administrative expenses were 34.3% as a percentage
of revenues in the first quarter.
Net Income (Loss)
We reported net income of $2.4 million for the first quarter as compared to a
net loss of ($1.9) million for the fourth quarter. The increase is primarily due
to the fiber capacity sale in the first quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities totaled $31.2 million in the three-month
period ended March 31, 2001 ("2001") as compared to $8.7 million in the
three-month period ended March 31, 2000 ("2000"), net of changes in the
components of working capital. The increase in 2001 is primarily due to the
fiber capacity sale in 2001. Expenditures for property and equipment, including
construction in progress, totaled $13.5 million in 2001. Other uses of cash
during 2001 included repayment of $12.1 million of long-term borrowings and
capital lease obligations, advances to Kanas and payments on Kanas' behalf of
approximately $1.2 million (see note 5 to the accompanying Notes to Interim
Condensed Consolidated Financial Statements), and payment of a $1.2 million
equipment lease deposit.
Receivables decreased $3.1 million from December 31, 2000 to March 31, 2001
primarily due to a decrease in other common carrier trade receivables.
Working capital totaled $255,000 at March 31, 2001, a $10.3 million decrease
from working capital of $10.6 million as of December 31, 2000. The decrease is
primarily attributed to our use of proceeds from the fiber capacity sale to
purchase long-term capital assets and repay long-term debt.
On October 25, 2000 and March 23, 2001 we amended the Holdings $150,000,000 and
$50,000,000 credit facilities. The October amendment is contingent upon closing
the acquisition of a controlling interest in Kanas (see note 5 to the
accompanying Notes to Interim Condensed Consolidated Financial Statements). The
amendments contain, among other things, provision for payment of a one-time
amendment fee of $192,500, changes in certain financial covenants and ratios,
and a limit of $70 million for 2001 capital expenditures (excluding capital
expenditures by certain subsidiaries).
Upon the effectiveness of these amendments, Holdings may not permit the ratio of
senior debt to annualized operating cash flow (as defined) of Holdings and
certain of its subsidiaries to exceed 2.50 to 1.0 from October 1, 2000 to
September 30, 2003 and must maintain a ratio of annualized operating cash flow
to fixed charges of at least 1.0 to 1.0 effective January 1, 2002 (which adjusts
to 1.05 to 1.0 in April, 2003 and thereafter).
We were in compliance with all loan covenants at March 31, 2001.
Our expenditures for property and equipment, including construction in progress,
totaled $13.5 million and $9.7 million during the first quarter of 2001 and
2000, respectively. Planned capital expenditures over the next five years
include those necessary for continued expansion of our long-distance, local
exchange and Internet facilities, continuing development of our PCS network and
upgrades to our cable television plant.
Dividends earned on our convertible redeemable accreting preferred stock
("Preferred Stock") payable at the semi-annual payment date of April 30, 2001
will be paid in a cash payment of $960,000. The determination
26
of whether additional dividends will be paid in cash or additional fully-paid
shares of Preferred Stock is made at each semi-annual payment date through the
four-year anniversary of the April 30, 1999 closing. Dividends earned after the
four-year anniversary of closing are payable semi-annually in cash only.
The long-distance, local access, cable, Internet and wireless services
industries are experiencing increasing competition and rapid technological
changes. Our future results of operations will be affected by our ability to
react to changes in the competitive environment and by our ability to fund and
implement new technologies. We are unable to determine how competition,
technological changes and our net losses (excluding the effect of the fiber
capacity sale) will affect our ability to obtain financing.
We believe that we will be able to meet our current and long-term liquidity and
capital requirements, including fixed charges and Preferred Stock dividends,
through our cash flows from operating activities, existing cash, cash
equivalents, short-term investments, credit facilities, and other external
financing and equity sources. Should cash flows be insufficient to support
additional borrowings, capital expenditures will likely be reduced.
The Alaska Economy
We offer voice and data telecommunication and video services to customers
primarily throughout Alaska. As a result of this geographic concentration,
growth of our business and of our operations depends upon economic conditions in
Alaska. The economy of Alaska is dependent upon the natural resource industries,
and in particular oil production, as well as investment earnings, tourism,
government, and United States military spending. Any deterioration in these
markets could have an adverse impact on us. In fiscal 2000 oil revenues were the
second largest source of state revenues, following investment income. In fiscal
2001 the state forecasts that Alaska's oil revenues and federal funding will
supply 43% and 35% of the state's projected revenues. Investment earning will
supply only 0.2% of the state's projected revenues in fiscal 2001 due to the
recent decline in stock market investments. All of the federal funding is
dedicated for specific purposes, however, leaving oil revenues as the primary
funding source of general operating expenditures.
The volume of oil transported by the TransAlaska Oil Pipeline System ("TAPS")
over the past 20 years has been as high as 2.0 million barrels per day in fiscal
1988. Production has been declining over the last several years and the state
forecasts an average of 1.0 million barrels per day in fiscal 2001. The state
continues to forecast a temporary reversal of the production rate decline in
fiscal 2002-2006 due to new developments at the Alpine, Nanuq, Northstar and
Meltwater fields and new Prudhoe Bay satellite production.
Market prices for North Slope oil averaged $30.10 in fiscal 2000 and is
forecasted to average $27.61 in fiscal 2001. The state forecasts the average
price of North Slope oil to decline to $22.35 in fiscal 2002 and $20.97 in
fiscal 2003. The closing price per barrel was $28.00 on April 30, 2001.
The state believes the crude oil demand growth will slow in 2001 and 2002 as the
result of slower economic growth and in response to the higher energy prices of
the past two years. The state also believes that much of the current volatility
in oil prices revolves around the issue of whether or not the Organization of
Petroleum Exporting Countries ("OPEC") will take steps to cut back production
even more as the market enters the slack period between the end of the winter
heating fuel market and the beginning of the summer gasoline-dominated driving
market. The production policy of OPEC and its ability to continue to act in
concert represents a key uncertainty in the state's revenue forecast.
The state of Alaska maintains the Constitutional Budget Reserve Fund that is
intended to fund budgetary shortfalls. If the state's current projections are
realized, the Constitutional Budget Reserve Fund will be depleted in 2005. If
the fund is depleted, aggressive state action will be necessary to increase
revenues and
27
reduce spending in order to balance the budget. The Governor of the state of
Alaska and the Alaska Legislature continue to pursue cost cutting and revenue
enhancing measures.
Tourism, air cargo, and service sectors have helped offset the prevailing
pattern of oil industry downsizing that has occurred during much of the last
several years. Funds from federal sources of $1.8 billion are expected to be
distributed to the state of Alaska for highways and other federally supported
projects in fiscal 2001.
Should new oil discoveries or developments not materialize or the price of oil
return to its prior depressed levels, the long term trend of continued decline
in oil production from the Prudhoe Bay field area is inevitable with a
corresponding adverse impact on the economy of the state, in general, and on
demand for telecommunications and cable television services, and, therefore, on
us, in particular.
The recent increase in residential and commercial natural gas prices and
shortages in California, in particular, have resulted in a renewed effort to
allow exploration and development in the Arctic National Wildlife Refuge.
Additionally, deploying a natural gas pipeline from Alaska's North Slope to the
lower 48 states has been proposed to supplement natural gas supplies. The
economic viability of a natural gas pipeline improves as the price of natural
gas increases and as demand intensifies. Either project could have a positive
impact on the state of Alaska's revenues and the Alaska economy.
We have, since our entry into the telecommunication marketplace, aggressively
marketed our services to seek a larger share of the available market. The
customer base in Alaska is limited, however, with a population of approximately
627,000 people. 42% of the State's population is located in the Municipality of
Anchorage, 13% is located in the Fairbanks North Star Borough, and 5% is located
in the City and Borough of Juneau. The rest are spread out over the vast reaches
of Alaska. No assurance can be given that the driving forces in the Alaska
economy, and in particular, oil production, will continue at levels to provide
an environment for expanded economic activity.
No assurance can be given that oil companies doing business in Alaska will be
successful in discovering new fields or further developing existing fields which
are economic to develop and produce oil with access to the pipeline or other
means of transport to market, even with a reduced level of royalties. We are not
able to predict the effect of changes in the price and production volumes of
North Slope oil on Alaska's economy or on us.
Seasonality
Our 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. Our cable television revenues, on the other hand,
are higher in the winter months because consumers tend to watch more television,
and spend more time at home, during these months. Our local service and Internet
operations are not expected to exhibit significant seasonality, with the
exception of SchoolAccess(TM) Internet services that are reduced during the
summer months. Our ability to implement construction projects is also reduced
during the winter months because of cold temperatures, snow and short daylight
hours.
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PART I.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various types of market risk in the normal course of business,
including the impact of interest rate changes. We do not hold derivatives for
trading purposes.
Our Senior Holdings Loan carries interest rate risk. Amounts borrowed under this
Agreement bear interest at either Libor plus 1.0% to 2.5%, depending on the
leverage ratio of Holdings and certain of its subsidiaries, or at the greater of
the prime rate or the federal funds effective rate (as defined) plus 0.05%, in
each case plus an additional 0.0% to 1.375%, depending on the leverage ratio of
Holdings and certain of its subsidiaries. Should the Libor rate, the lenders'
base rate or the leverage ratios change, our interest expense will increase or
decrease accordingly. As of March 31, 2001, we have borrowed $82.7 million
subject to interest rate risk. On this amount, a 1% increase in the interest
rate would cost us $827,000 in additional gross interest cost on an annualized
basis.
On January 3, 2001 we entered into an interest rate swap agreement to convert
$50 million in 9.75% fixed rate debt to a variable interest rate equal to the 90
day Libor rate plus 334 basis points. The swap agreement carries interest rate
risk. Should the Libor rate change, our interest expense will increase or
decrease accordingly. A 1% change in the variable interest rate will change the
annualized benefit of the swap by $500,000. As of March 31, 2001, the interest
rate spread between the fixed and swapped variable rate is 0.885%, an annualized
reduction in interest expense of approximately $442,500. As of May 1, 2001, the
interest rate spread between the fixed and swapped variable rate is 2.096%, an
annualized reduction in interest expense of approximately $1,048,000.
Our Fiber Facility carries interest rate risk. Amounts borrowed under this
Agreement bear interest at either Libor plus 3.0%, or at our choice, the
lender's prime rate plus 1.75%. The interest rate will decline to Libor plus
2.5%-2.75%, or at our choice, the lender's prime rate plus 1.25%-1.5% after the
project completion date and when the loan balance is $60,000,000 or less. Should
the Libor rate, the lenders' base rate or the leverage ratios change, our
interest expense will increase or decrease accordingly. As of March 31, 2001, we
have borrowed $60.0 million subject to interest rate risk. On this amount, a 1%
increase in the interest rate would cost us $600,000 in additional gross
interest cost on an annualized basis.
Our Satellite Transponder Capital Lease carries interest rate risk. Amounts
borrowed under this Agreement bear interest at Libor plus 3.25%. Should the
Libor rate change, our interest expense will increase or decrease accordingly.
As of December 31, 2000, we have borrowed $47.3 million subject to interest rate
risk. On this amount, a 1% increase in the interest rate would cost us $473,000
in additional gross interest cost on an annualized basis.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding pending legal proceedings to which we are a party is
included in note 5 to the Interim Condensed Consolidated Financial Statements
and is incorporated herein by reference.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10.89 - Fifth Amendment to Contract for Alaska
Access Services between General Communication, Inc. and
its wholly owned subsidiary GCI Communication Corp., and
MCI WorldCom Network Services, Inc., formerly known as
MCI Telecommunications Corporation dated August 7, 2000 *
Exhibit 10.90 - Sixth Amendment to Contract for Alaska
Access Services between General Communication, Inc. and
its wholly owned subsidiary GCI Communication Corp., and
MCI WorldCom Network Services, Inc., formerly known as
MCI Telecommunications Corporation dated February 14,
2001 *
Exhibit 10.91 - Seventh Amendment to Contract for Alaska
Access Services between General Communication, Inc. and
its wholly owned subsidiary GCI Communication Corp., and
MCI WorldCom Network Services, Inc., formerly known as
MCI Telecommunications Corporation dated March 8, 2001 *
Exhibit 10.92 - Sixth 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. dated March 9, 2001 *
(b) Reports on Form 8-K filed during the quarter ended
March 31, 2001 - None
---------------------
* Filed herewith, certain information has been redacted from
this document which we desire to keep undisclosed and a copy of
the unredacted document will be filed separately with the
Securities and Exchange Commission.
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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 May 10, 2001
- -------------------------------------- (Principal Executive Officer) ------------------
Ronald A. Duncan
/s/ Senior Vice President, Chief Financial May 10, 2001
- -------------------------------------- Officer, Secretary and Treasurer ------------------
John M. Lowber (Principal Financial Officer)
/s/ Vice President, Chief Accounting May 10, 2001
- -------------------------------------- Officer ------------------
Alfred J. Walker (Principal Accounting Officer)
31