As filed with the Securities and Exchange Commission on August 14, 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 June 30, 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 July 30, 2001 was:
49,625,647 shares of Class A common stock; and
3,893,583 shares of Class B common stock.
1
INDEX
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
Page No.
--------
Cautionary Statement Regarding Forward-Looking Statements.................................................3
PART I. FINANCIAL INFORMATION
Item l. Consolidated Balance Sheets as of June 30, 2001
(unaudited) and December 31, 2000..................................................5
Consolidated Statements of Operations for the
three and six months ended June 30, 2001
(unaudited) and 2000 (unaudited)...................................................7
Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 2001
(unaudited) and 2000 (unaudited)...................................................8
Consolidated Statements of Cash Flows for the six
months ended June 30, 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...................................................19
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................34
Item 4. Submission of Matters to a Vote of Security Holders...................................34
Item 6. Exhibits and Reports on Form 8-K......................................................35
Other items are omitted, as they are not applicable.
SIGNATURES................................................................................................36
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 Telecommunications Act of 1996; the outcome
of litigation relative thereto; and the impact of regulatory changes
relating to access reform;
- Our responses to competitive products, services and pricing, including
pricing pressures, technological developments, alternative routing
developments, and the ability to offer combined service packages that
include local, cable and Internet services; the extent and pace at which
different competitive environments develop for each segment of our
business; the extent and duration for which competitors from each segment
of the telecommunications industry are able to offer combined or full
service packages prior to our being able to do so; the degree to which we
experience material competitive impacts to our traditional service
offerings prior to achieving adequate local service entry; and competitor
responses to our products and services and overall market acceptance of
such products and services;
- The outcome of our negotiations with Incumbent Local Exchange Carriers
("ILECs") and state regulatory arbitrations and approvals with respect to
interconnection agreements; and our ability to purchase unbundled network
elements or wholesale services from ILECs at a price sufficient to permit
the profitable offering of local exchange service at competitive rates;
- Success and market acceptance for new initiatives, many of which are
untested; the level and timing of the growth and profitability of new
initiatives, particularly local access services 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;
3
- Changes in, or failure, or inability, to comply with, government
regulations, including, without 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)
June 30, December 31,
ASSETS 2001 2000
- --------------------------------------------------------------------------- --------------- ----------------
(Amounts in thousands)
Current assets:
Cash and cash equivalents $ 4,583 5,962
--------------- ----------------
Receivables:
Trade 57,063 49,872
Employee and other 693 378
--------------- ----------------
57,756 50,250
Less allowance for doubtful receivables 4,715 2,864
--------------- ----------------
Net receivables 53,041 47,386
--------------- ----------------
Prepaid and other current assets 2,479 2,505
Deferred income taxes, net 4,664 3,221
Inventories 4,736 5,717
Property held for sale --- 10,877
Notes receivable with related parties 264 241
--------------- ----------------
Total current assets 69,767 75,909
--------------- ----------------
Property and equipment in service, net of depreciation 375,434 347,802
Construction in progress 7,349 8,097
--------------- ----------------
Net property and equipment 382,783 355,899
--------------- ----------------
Cable franchise agreements, net of amortization of $24,095,000 and
$21,509,000 at June 30, 2001 and December 31, 2000, respectively 182,799 184,983
Goodwill, net of amortization of $6,583,000 and $5,952,000 at June 30,
2001 and December 31, 2000, respectively 39,196 40,002
Other intangible assets, net of amortization of $951,000 and $729,000 at
June 30, 2001 and December 31, 2000, respectively 4,126 3,936
Property held for sale 1,555 1,550
Deferred loan and senior notes costs, net of amortization of $4,857,000
and $4,166,000 at June 30, 2001 and December 31, 2000, respectively 7,792 8,402
Notes receivable with related parties 2,722 3,235
Other assets, at cost, net of amortization of $66,000 and $63,000 at June
30, 2001 and December 31, 2000, respectively 3,056 5,091
--------------- ----------------
Total other assets 241,246 247,199
--------------- ----------------
Total assets $ 693,796 679,007
=============== ================
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 2001 2000
- -------------------------------------------------------------------------- ---------------- ----------------
(Amounts in thousands)
Current liabilities:
Current maturities of obligations under capital leases $ 1,570 1,600
Accounts payable 31,820 29,094
Accrued payroll and payroll related obligations 11,309 10,385
Deferred revenue 10,509 9,477
Accrued interest 9,681 9,256
Accrued liabilities 5,459 4,134
Subscriber deposits and other current liabilities 1,247 1,362
---------------- ----------------
Total current liabilities 71,595 65,308
Long-term debt, excluding current maturities 322,700 334,400
Obligations under capital leases, excluding current maturities 46,105 46,882
Obligations under capital leases due to related party, excluding
current maturities 179 214
Deferred income taxes, net of deferred income tax benefit 24,453 22,057
Other liabilities 4,455 4,077
---------------- ----------------
Total liabilities 469,487 472,938
---------------- ----------------
Redeemable preferred stocks 32,572 22,589
---------------- ----------------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000,000 shares; issued and outstanding and
issuable 49,359,989 and 48,642,870 shares at June 30, 2001 and
December 31, 2000, respectively 187,180 182,706
Class B. Authorized 10,000,000 shares; issued and outstanding 3,895,183
3,904,038 shares at June 30, 2001 and December 31, 2000, respectively;
and convertible on a share-per-share basis into Class A common stock 3,292 3,299
Less cost of 357,958 Class A common shares held in treasury at June
30, 2001 and December 31, 2000 (1,659) (1,659)
Paid-in capital 8,826 7,368
Notes receivable with related parties issued upon stock option exercise (2,288) (2,976)
Retained deficit (3,614) (5,258)
---------------- ----------------
Total stockholders' equity 191,737 183,480
Commitments and contingencies
---------------- ----------------
Total liabilities and stockholders' equity $ 693,796 679,007
================ ================
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,
2001 2000 2001 2000
-------------- -------------- --------------- --------------
(Amounts in thousands, except per share amounts)
Revenues $ 85,535 71,426 182,452 139,703
Cost of sales and services 33,831 29,637 75,917 59,295
Selling, general and administrative expenses 29,593 25,733 57,443 50,387
Depreciation and amortization expense 13,700 12,506 27,639 25,594
-------------- -------------- --------------- --------------
Operating income 8,411 3,550 21,453 4,427
-------------- -------------- --------------- --------------
Interest expense 8,074 9,398 16,957 19,412
Interest income 99 183 262 358
-------------- -------------- --------------- --------------
Interest expense, net 7,975 9,215 16,695 19,054
-------------- -------------- --------------- --------------
Net income (loss) before income taxes 436 (5,665) 4,758 (14,627)
Income tax (expense) benefit (270) 2,139 (2,169) 5,603
-------------- -------------- --------------- --------------
Net income (loss) $ 166 (3,526) 2,589 (9,024)
============== ============== =============== ==============
Basic and diluted net income (loss) per common
share $ (.01) (.08) .03 (.19)
============== ============== =============== ==============
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, 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 --- --- --- --- --- (9,024)
Tax effect of excess stock
compensation expense for tax
purposes over amounts recognized for
financial reporting purposes --- --- --- 192 --- ---
Class B shares converted to Class A 119 (119) --- --- --- ---
Shares issued under stock option plan 1,406 --- --- --- --- ---
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 --- --- --- 185 --- ---
Shares issued to Employee Stock
Purchase Plan 1,867 --- --- --- --- ---
Purchase of treasury stock --- --- (52) --- --- ---
Preferred stock dividends --- --- --- --- --- (896)
----------------------------------------------------------------------
Balances at June 30, 2000 $ 180,582 3,303 (1,659) 6,720 (2,539) (103)
======================================================================
Balances at December 31, 2000 $ 182,706 3,299 (1,659) 7,368 (2,976) (5,258)
Net income --- --- --- --- --- 2,589
Tax effect of excess stock
compensation expense for tax
purposes over amounts recognized for
financial reporting purposes --- --- --- 1,072 --- ---
Class B shares converted to Class A 7 (7) --- --- --- ---
Shares issued under stock option plan 1,391 --- --- --- --- ---
Amortization of the excess of GCI
stock market value over stock option
exercise cost on date of stock
option grant --- --- --- 386 --- ---
Shares issued to Employee Stock
Purchase Plan 688 --- --- --- --- ---
Acquisition of G.C. Cablevision, Inc.
net assets and customer base 2,388 --- --- --- --- ---
Payment received on note issued upon
officer stock option exercise --- --- --- --- 688 ---
Preferred stock dividends --- --- --- --- --- (945)
----------------------------------------------------------------------
Balances at June 30, 2001 $ 187,180 3,292 (1,659) 8,826 (2,288) (3,614)
======================================================================
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,
2001 2000
-------------- --------------
(Amounts in thousands)
Operating activities:
Net income (loss) $ 2,589 (9,024)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 27,639 25,594
Amortization charged to selling, general and administrative 17 495
Non-cash cost of sale 10,877 ---
Deferred income tax expense (benefit) 2,028 (5,603)
Bad debt expense, net of write-offs 1,851 619
Deferred compensation and compensatory stock options 675 376
Employee Stock Purchase Plan expense funded with issuance of
General Communication, Inc. Class A common stock --- 1,391
Write-off of capitalized interest 170 1,955
Other noncash income and expense items 54 (160)
Change in operating assets and liabilities (227) 4,217
-------------- --------------
Net cash provided by operating activities 45,673 19,860
-------------- --------------
Investing activities:
Purchases of property and equipment (28,443) (18,873)
Advances and billings to Kanas Telecom, Inc. (5,632) ---
(Payment) refund of deposit (1,200) 8,806
Purchases of property held for sale --- (1,550)
Purchases of other assets (895) (145)
Notes receivable issued to related parties (304) (829)
Payments received on notes receivable with related parties 754 582
Cash received upon acquisition of Kanas Telecom, Inc. 228 ---
-------------- --------------
Net cash used by investing activities (35,492) (12,009)
-------------- --------------
Financing activities:
Repayments of long-term borrowings and capital lease obligations (12,595) (10,280)
Proceeds from common stock issuance 1,391 1,856
Payment of Series B preferred stock dividend (963) ---
Payment received on note receivable with related party issued upon
stock option exercise 688 ---
Notes receivable with related parties issued upon stock option
exercise --- (372)
Payment of debt issuance costs (81) (128)
Purchase of treasury stock --- (52)
-------------- --------------
Net cash used by financing activities (11,560) (8,976)
-------------- --------------
Net decrease in cash and cash equivalents (1,379) (1,125)
Cash and cash equivalents at beginning of period 5,962 13,734
-------------- --------------
Cash and cash equivalents at end of period $ 4,583 12,609
============== ==============
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
and Fairbanks, Alaska
- Internet access services
- Termination of traffic in Alaska for certain common carriers
- Private line services
- Managed services to certain commercial customers
- Broadband services, including our SchoolAccess(TM) offering to
rural school districts and a similar offering to rural hospitals
and health clinics
- 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 Holdings, Inc.'s 85% controlling interest
in GCI Fiber Communication 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").
10 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(c) Net Income (Loss) Per Common Share
Net income (loss) used to calculate basic net income (loss) per
common share is increased (decreased) by preferred stock dividends
of ($470,000) and $455,000 for the three months ended June 30, 2001
and 2000, respectively, and ($945,000) and $896,000 for the six
months ended June 30, 2001 and 2000, respectively. 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,
2001 2000 2001 2000
------------ ------------ ------------- ------------
Weighted average common shares outstanding 53,057 51,418 52,820 51,341
Common equivalent shares outstanding 1,457 --- 1,201 ---
------------ ------------ -- ------------- ------------
54,514 51,418 54,021 51,341
============ ============ == ============= ============
Common equivalent shares outstanding which are anti-dilutive for
purposes of calculating the net loss per common share for the three
and six months ended June 30, 2001 and 2000, are not included in
the diluted net loss per share calculation, and consist of the
following (amounts in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
------------ ------------ ------------- ------------
Common equivalent shares outstanding 4,067 4,424 4,067 4,533
============ ============ ============= ============
Weighted average shares associated with outstanding stock options
for the three and six months ended June 30, 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 Six Months Ended
June 30, June 30,
2001 2000 2001 2000
------------ ------------ ------------- ------------
Weighted average shares associated with
outstanding stock options 4 2,579 94 2,359
============ ============ ============= ============
11 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(d) Common Stock
Following is the statement of common stock at June 30, 2001 and
2000 (shares, in thousands):
Class A Class B
----------------- ----------------
Balances at December 31, 1999 46,870 4,048
Class B shares converted to Class A 140 (140)
Shares issued under stock option plan 181 ---
Shares issued to Employee Stock Purchase Plan 335 ---
Warrant exercise 425 ---
----------------- ----------------
Balances at June 30, 2000 47,951 3,908
================= ================
Balances at December 31, 2000 48,643 3,904
Class B shares converted to Class A 9 (9)
Shares issued under stock option plan 470 ---
Shares issued upon acquisition of G.C.
Cablevision, Inc. net assets and customer
base 238 ---
----------------- ----------------
Balances at June 30, 2001 49,360 3,895
================= ================
(e) Redeemable Preferred Stocks
Redeemable preferred stocks consist of (amounts in thousands):
December 31,
June 30, 2001 2000
----------------- ----------------
Series B $ 22,572 22,589
Series C 10,000 ---
----------------- ----------------
$ 32,572 22,589
================= ================
We have 1,000,000 shares of preferred stock authorized with the
following shares issued at June 30, 2001 and 2000 (in thousands):
Series B Series C
------------- --------------
Balances at December 31, 1999 20 ---
------------- --------------
Balances at June 30, 2000 20 ---
============= ==============
Balances at December 31, 2000 20 ---
Shares issued in lieu of cash dividend
payment 3 ---
Shares issued upon acquisition of Kanas
Telecom, Inc. --- 10
------------- --------------
Balances at June 30, 2001 23 10
============= ==============
12 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
The combined aggregate amount of preferred stock mandatory
redemption requirements follow (amounts in thousands):
Years ending June 30:
2002 $ ---
2003 ---
2004 ---
2005 10,150
2006 ---
---------
$ 10,150
=========
Series B
The redemption amount of our convertible redeemable accreting
Series B preferred stock at June 30, 2001 and December 31, 2000 is
$22,893,000 and $23,474,000, respectively. The difference between
the carrying and redemption amounts is due to accrued dividends
which are included in Accrued Liabilities until either paid in cash
or through the issuance of additional Series B preferred stock.
Series C
We issued 10,000 shares of convertible redeemable accreting Series
C preferred stock as of June 30, 2001 to acquire a controlling
interest in Kanas Telecom, Inc. ("Kanas") (see note 4). The Series
C preferred stock is convertible at $12 per share into GCI Class A
common stock, is non-voting, and pays a 6% per annum quarterly cash
dividend. We may redeem the Series C preferred stock at any time in
whole but not in part. Mandatory redemption is required at any time
after the fourth anniversary date at the option of holders of 80%
of the outstanding shares of the Series C preferred stock. The
redemption price is $1,000 per share plus the amount of all accrued
and unpaid dividends, whether earned or declared, through the
redemption date. In the event of a liquidation of GCI the holders
of the Series C preferred stock shall be entitled to be paid an
amount equal to the redemption price before any distribution or
payment is made upon Junior Securities. The redemption amount on
June 30, 2001 was $10.0 million.
(f) 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 June 30, 2001, the amount of change in the
fair value of debt approximates the change in the fair value of the
interest rate swap.
(g) Sale of Fiber Capacity
During the first quarter of 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.
13 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
We account for the sale of fiber capacity as sales type leases if
substantially all of the benefits and risks of ownership have been
transferred to the purchaser. The accounting for the sale of fiber
capacity is currently evolving and accounting guidance may become
available in the future which could affirm our policy or require us
to change it. If we are required to change our policy, it is likely
the effect would be to recognize the gain from the sale of fiber
capacity over the term the capacity is provided. Such a change
would have a material effect on our statement of operations.
(h) Reclassifications
Reclassifications have been made to the 2000 financial statements
to make them comparable with the 2001 presentation.
(i) 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 and six month periods ended June 30, 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):
Six-month periods ended June 30, 2001 2000
------------- ------------
(Increase) decrease in receivables $ (7,503) 1,282
Decrease in prepaid and other current assets 200 264
(Increase) decrease in inventory 981 (743)
Increase in accounts payable 2,160 353
Increase in accrued liabilities 1,849 786
Increase in accrued payroll and payroll related obligations 924 198
Decrease in accrued interest 425 1,271
Increase (decrease) in subscriber deposits and other current
liabilities (115) 232
Increase in deferred revenues 899 7
Increase (decrease) in components of other long-term liabilities (47) 567
------------- ------------
$ (227) 4,217
============= ============
We paid income taxes totalling approximately $61,000 and $0 during the
six-month periods ended June 30, 2001 and 2000, respectively.
We paid interest totalling approximately $16,532,000 and $16,987,000
during the six-month periods ended June 30, 2001 and 2000, respectively.
14 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
We recorded $1,072,000 and $192,000 during the six months ended June 30,
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 six months ended June 30, 2000 we funded the employer matching
portion of Employee Stock Purchase Plan contributions by issuing GCI
Class A common stock valued at $1,406,000. We purchased such shares on
the open market during the six months ended June 30, 2001.
We financed the purchase of satellite transponder capacity pursuant to a
long-term capital lease arrangement with a leasing company during the six
month period ended June 30, 2000 at a cost of $48.2 million.
Effective June 30, 2001 we issued $10.0 million of Series C preferred
stock in exchange for WorldCom, Inc.'s ("WorldCom") 85% controlling
interest in Kanas (see notes 1(e) and 3).
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) Acquisition of Kanas
On June 30, 2001 we completed the acquisition of WorldCom's 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. On June 30, 2001 we issued to WorldCom, a related party,
shares of Series C preferred stock (see note 1(e)) valued at $10.0
million. The corporation owning the fiber optic system is operated as GCI
Fiber Communication Co., Inc.
(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 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 Fairbanks and plan to provide
similar competitive local exchange services Juneau during 2002.
15 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
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 "All Other" category in the tables that follow are our
managed services, product sales, cellular telephone services, and
management services for Kanas, a related party (see note 3). None of
these business units have ever met the quantitative thresholds for
determining reportable segments. Also included in the All Other category
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 All
Other category includes revenues and costs associated with a sale of
undersea fiber optic cable system capacity (see note 1(g)).
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.
16 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Summarized financial information for our reportable segments for the six
month periods ended June 30, 2001 and 2000 follows (amounts in
thousands):
Reportable Segments
--------------------------------------------------------
Long- Local Total
Distance Cable Access Internet Reportable All
Services Services Services Services Segments Other Total
------------------------------------------------------------------------------
2001
Revenues:
Intersegment $ 9,925 754 3,754 2,659 17,092 169 17,261
External 96,087 36,919 12,141 5,753 150,900 31,552 182,452
------------------------------------------------------------------------------
Total revenues $ 106,012 37,673 15,895 8,412 167,992 31,721 199,713
==============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, net interest
expense and income taxes $ 40,686 18,518 4,395 (4,515) 59,084 (9,524) 49,560
==============================================================================
Operating income (loss) $ 29,145 8,493 2,733 (5,840) 34,531 (12,610) 21,921
==============================================================================
2000
Revenues:
Intersegment $ 6,742 739 3,146 1,281 11,908 --- 11,908
External 88,475 32,590 9,309 3,731 134,105 5,598 139,703
------------------------------------------------------------------------------
Total revenues $ 95,217 33,329 12,455 5,012 146,013 5,598 151,611
==============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, net interest
expense and income taxes $ 34,382 16,143 1,320 (4,706) 47,139 (17,006) 30,133
==============================================================================
Operating income (loss) $ 23,299 6,872 (1,246) (5,548) 23,377 (18,838) 4,539
==============================================================================
A reconciliation of reportable segment revenues to consolidated revenues
follows:
Six months ended June 30, 2001 2000
-------------- --------------
Reportable segment revenues $ 167,992 146,013
Plus All Other revenues 31,721 5,598
Less intersegment revenues eliminated in consolidation (17,261) (11,908)
-------------- --------------
Consolidated revenues $ 182,452 139,703
============== ==============
17 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
A reconciliation of reportable segment earnings from operations before
depreciation, amortization, net interest expense and income taxes to
consolidated net income (loss) before income taxes follows:
Six months ended June 30, 2001 2000
-------------- --------------
Reportable segment earnings from operations before
depreciation, amortization, net interest expense and
income taxes $ 59,084 47,139
Less All Other loss from operations before depreciation,
amortization, net interest expense and income taxes (9,524) (17,006)
Less intersegment contribution eliminated in consolidation (468) (112)
-------------- --------------
Consolidated earnings from operations before
depreciation, amortization, net interest expense
and income taxes 49,092 30,021
Depreciation and amortization 27,639 25,594
-------------- --------------
Consolidated operating income 21,453 4,427
Interest expense, net 16,695 19,054
-------------- --------------
Consolidated net income (loss) before income taxes $ 4,758 (14,627)
============== ==============
A reconciliation of reportable segment operating income to consolidated
net income (loss) before income taxes follows:
Six months ended June 30, 2001 2000
-------------- --------------
Reportable segment operating income $ 34,531 23,377
Less All Other operating loss (12,610) (18,838)
Less intersegment contribution eliminated in consolidation (468) (112)
-------------- -------------
Consolidated operating income 21,453 4,427
Interest expense, net 16,695 19,054
-------------- -------------
Consolidated net income (loss) before income taxes $ 4,758 (14,627)
============== =============
(5) Commitments and Contingencies
Acquisition
On June 15, 2001 we signed an agreement with Rogers Cable, Inc. to
acquire all of the stock of Rogers American Cablesystems, Inc., a cable
television service provider in Palmer and Wasilla, Alaska for $19.0
million in cash. The acquisition is subject to regulatory approval and is
expected to be finalized in the fourth quarter of 2001.
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.
18
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 second quarter of 2001 long-distance services revenue represented
58.3% 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 95.0% of our
total long-distance services revenues during the second 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 37.1% to $9.2
million during the second quarter of 2001 as compared to the second 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 61.2% to
$3.8 million during the second quarter of 2001 as compared to the second 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 second quarter of 2001, local access charges accounted for 64.8% of
long-distance cost of sales and services, fees paid to other long-distance
carriers represented 27.7%, satellite transponder lease and undersea fiber
maintenance costs represented 3.3%, and other costs represented 4.2% of
long-distance cost of sales and services.
19
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, 34.3% during the second 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 9.3% to $19.2 million
during the second quarter of 2001 as compared to the second quarter of 2000. The
average rate charged other common carriers increased 7.5% during the same period
due to a certain category of wholesale minutes no longer carried for such
customers and the total minutes carried for such customers increased 1.7%. In
conjunction with our purchase of a controlling interest in Kanas (see note 3 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 second quarter of 2001, cable television revenues represented 22.1%
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.
On June 15, 2001 we signed an agreement with Rogers Cable, Inc. to acquire all
of the stock of Rogers American Cablesystems, Inc., a cable television service
provider in Palmer and Wasilla, Alaska for $19.0 million in cash. The
acquisition is subject to regulatory approval and is expected to be finalized in
the fourth quarter of 2001. This acquisition will result in an additional 10,000
homes passed and will add more than 7,000 subscribers.
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 second quarter
of 2001
20
programming services generated 80.1% of total cable services revenues, equipment
rental and installation fees accounted for 9.4% of such revenues, cable modem
services accounted for 6.3% of such revenues, advertising sales accounted for
3.4% of such revenues, and other services accounted for the remaining 0.8% of
total cable services revenues. The primary factors that contribute to
year-to-year changes in cable services revenues are average monthly subscription
and pay-per-view rates, the mix among basic, premium and pay-per-view services
and digital and analog services, the average number of 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 second quarter of 2001 programming and copyright expenses
represented 47.4% of total cable cost of sales and selling, general and
administrative expenses, and general and administrative costs represented 45.7%
of such total. Marketing and advertising costs represented approximately 7.0% of
such total expenses.
Cable services face competition from alternative methods of receiving and
distributing television signals and from other sources of news, information and
entertainment. We believe our cable television services will continue to be
competitive by providing, at reasonable prices, a greater variety of programming
and other communication services than are available off-air or through other
alternative delivery sources and upon superior technical performance and
customer service.
Local Access Services
We generate local access services revenues from three primary sources: (1)
business and residential basic dial tone services; (2) business private line and
special access services; and (3) business and residential features and other
charges, including voice mail, caller ID, distinctive ring, inside wiring and
subscriber line charges. Local exchange services revenues totaled $6.2 million
in the second quarter of 2001 representing 7.2% 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 53.4% of total local access
services cost of sales and selling, general and administrative expenses during
the second quarter of 2001. General and administrative and customer service
costs represented approximately 33.4% of such total expenses, marketing and
advertising costs represented approximately 8.6% of such total expenses, and
operating and engineering expenses represented approximately 4.6% of such total
expenses.
Our local access services segment faces significant competition in Anchorage
from the Incumbent Local Exchange Carrier ("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 $3.1 million representing
3.7% of total revenues in the second 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.
21
Operating and general and administrative expenses represented approximately
48.1% of total Internet services cost of sales and selling, general and
administrative expenses during the second quarter of 2001. Internet cost of
sales represented approximately 39.0% of such total expenses and marketing and
advertising represented approximately 12.9% of such total expenses.
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 All Other category as
described in note 4 in the accompanying Notes to Interim Condensed Consolidated
Financial Statements include 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).
Revenues included in the All Other category represented 8.7% of total revenues
in the second quarter of 2001 and included network solutions and outsourcing
revenues totalling $6.0 million, communications equipment sales, cellular resale
and other revenues totalling $1.5 million.
Depreciation, amortization and net interest expense on a consolidated basis
decreased $46,000 in the second quarter of 2001 as compared to the second
quarter of 2000 resulting primarily from 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 these decreases was an increase in our depreciation expense due 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 and the $28.4 million investment in other equipment
and facilities during the first six months of 2001 for which a partial year of
depreciation will be recorded during 2001.
22
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 Six Months Ended
June 30, June 30,
Percentage Percentage
Change Change
2001 vs. 2001 vs.
(Unaudited) 2001 2000 2000 2001 2000 2000
---- ---- ---- ---- ---- ----
Statement of Operations Data:
Revenues
Long-distance services 58.3% 62.8% 11.1% 52.7% 63.3% 8.6%
Cable services 22.1% 23.3% 13.3% 20.2% 23.3% 13.3%
Local access services 7.2% 6.7% 29.1% 6.7% 6.7% 30.4%
Internet services 3.7% 2.8% 55.3% 3.1% 2.7% 54.2%
Other services 8.7% 4.4% 141.4% 17.3% 4.0% 463.5%
-----------------------------------------------------------------------
Total revenues 100.0% 100.0% 19.8% 100.0% 100.0% 30.6%
Cost of sales and services 39.6% 41.5% 14.2% 41.6% 42.4% 28.0%
Selling, general and administrative
expenses 34.6% 36.0% 15.0% 31.5% 36.1% 14.0%
Depreciation and amortization 16.0% 17.5% 9.5% 15.1% 18.3% 8.0%
-----------------------------------------------------------------------
Operating income 9.8% 5.0% 136.9% 11.8% 3.2% 384.6%
Net income (loss) before income
taxes 0.5% (7.9%) 107.7% 2.6% (10.5%) 132.5%
Net income (loss) 0.2% (4.9%) 104.7% 1.4% (6.5%) 128.7%
Other Operating Data (1):
Cable services operating income (2) 22.7% 22.3% 15.7% 23.0% 21.1% 23.6%
Local services operating income (loss) (3) 23.6% (3.3%) 1,036.5% 22.5% (13.4%) 319.3%
Internet services operating loss (4) (94.6%) (137.3%) (7.0%) (101.5%) (148.7%) (5.3%)
<FN>
--------------------------
(1)Includes customer service, marketing and advertising costs.
(2)Computed as a percentage of total cable services revenues.
(3)Computed as a percentage of total local services revenues.
(4)Computed as a percentage of total Internet services revenues.
</FN>
THREE MONTHS ENDED JUNE 30, 2001 ("2001") COMPARED TO THREE MONTHS ENDED
JUNE 30, 2000 ("2000")
Revenues
Total revenues increased 19.8% from $71.4 million in 2000 to $85.5 million in
2001.
23
Long-distance revenues from residential, commercial, governmental, and other
common carrier customers increased 11.1% to $49.9 million in 2001. The increase
was largely due to the following:
- An increase of 37.1% in private line and private network transmission
services revenues to $9.2 million in 2001 due to an increased number of
leased circuits in service,
- An increase of 9.3% in revenues from other common carriers (principally
WorldCom and Sprint) to $19.2 million in 2001,
- An increase of 61.2% to $3.8 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 157 schools at June 30, 2001, a
6.1% increase from June 30, 2000, and
- An increase of 0.5% in total minutes of use to 261.0 million minutes
primarily due to a 1.7% increase in wholesale minutes carried for other
common carriers. Comparable minutes over the prior year increased 15.5%,
after excluding certain low-margin wholesale minutes no longer carried on
our network. The minute growth is due primarily to increases in traffic
carried for other common carriers.
Long-distance revenue increases were offset by the following:
- A 5.4% decrease in our average rate per minute on long-distance traffic to
$0.114 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 a 7.5% increase in the average rate per
minute on minutes carried for other common carriers due to the discontinued
carriage of certain low-margin wholesale minutes, and
- A decrease of 5.5% in the number of active residential, small business and
commercial customers billed to 87,900 at June 30, 2001 primarily due to a
competitor's offering allowing customers to place unlimited intrastate and
interstate calls for a flat monthly fee. The competitor discontinued the
unlimited minutes offering in the second quarter of 2001.
Cable revenues increased 13.3% to $18.9 million in 2001. Programming services
revenues increased 6.2% to $15.1 million in 2001 resulting from an increase of
approximately 4,300 basic subscribers served to approximately 123,000 (of which
approximately 1,000 basic subscribers were acquired from G.C. Cablevision, Inc.
on March 31, 2001) and increased pay-per-view, premium, and digital service
revenues off-set by a decrease of $1.74 or 3.6% in average gross revenue per
average basic subscriber per month. New facility construction efforts in 2000
and 2001 resulted in approximately 3,500 additional homes passed which
contributed to additional subscribers and revenues in 2001. Digital subscriber
counts increased 104.4% to 18,200 at June 30, 2001 as compared to June 30, 2000.
The cable services segment's share of cable modem revenue (offered through our
Internet services segment) increased $850,000 to $1.2 million in 2001.
Local access services revenues increased 29.1% in 2001 to $6.2 million. At June
30, 2001 approximately 69,000 lines were in service as compared to approximately
54,600 lines in service at June 30, 2000.
Internet services revenues increased 55.3% to $3.1 million in 2001 primarily due
to growth in the average number of customers served. We had approximately 65,500
active residential, commercial and small business retail dial-up Internet
subscribers at June 30, 2001 as compared to approximately 59,000 at June 30,
2000. We had approximately 19,600 active residential, commercial and small
business retail cable modem subscribers at June 30, 2001 as compared to
approximately 11,100 at June 30, 2000.
The increase in other services revenues from $3.1 million in 2000 to $7.5
million in 2001 is primarily due to increased revenues from managed services.
24
Cost of Sales and Services
Cost of sales and services totaled $33.8 million in 2001 and $29.6 million in
2000. As a percentage of total revenues, cost of sales and services decreased
from 41.5% in 2000 to 39.6% in 2001.
Long-distance cost of sales and services decreased 4.0% to $18.6 million in
2001. Long-distance cost of sales as a percentage of long-distance revenues
decreased from 43.2% in 2000 to 37.4% 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 increased 15.8% to $5.1 million in 2001. 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 26.2% in 2000 to 26.8% 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 increased 17.9% to $3.5 million
in 2001. Local access services cost of sales and services as a percentage of
local access services revenues decreased from 61.9% in 2000 to 56.6% in 2001. As
local access services revenues increase, economies of scale and more efficient
network utilization result in reduced local access services cost of sales and
services as a percentage of local access services revenues.
Internet services cost of sales and services increased 21.8% to $1.3 million in
2001. Internet services costs of sales as a percentage of Internet services
revenues totaled 40.1% and 51.2% in 2001 and 2000, respectively. The Internet
services costs of sales decrease as a percentage of Internet services revenues
is primarily due to a $1.2 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 15.0% to $29.6 million in
2001 and, as a percentage of total revenues, decreased from 36.0% in 2000 to
34.6% in 2001. The increase in 2001 is due to increased health insurance costs,
increased accrual of a company-wide success sharing bonus and increased
allowance for doubtful accounts receivable.
Depreciation and Amortization
Depreciation and amortization expense increased 9.5% to $13.7 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 and the $28.4 million
investment in other equipment and facilities during the first six months of 2001
for which a partial year of depreciation will be recorded during 2001.
Interest Expense, Net
Interest expense, net of interest income, decreased 13.5% to $8.0 million in
2001. This decrease resulted primarily from decreased interest rates in 2001 on
our variable rate debt, approximately $285,000 earned from an interest rate swap
agreement described below, and decreased average outstanding long-term debt
balances.
25
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 $2.1 million in 2000 and ($270,000) 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
37.8% in 2000 to 61.9% in 2001 due to the effect of items that are nondeductible
for income tax purposes.
SIX MONTHS ENDED JUNE 30, 2001 ("2001") COMPARED TO SIX MONTHS ENDED
JUNE 30, 2000 ("2000")
Revenues
Total revenues increased 30.6% from $139.7 million in 2000 to $182.5 million in
2001. Excluding the fiber optic cable capacity sale in 2001 as described in note
1(g) in the accompanying Notes to Interim Condensed Consolidated Financial
Statements, total revenues increased 16.6%.
Long-distance revenues from residential, commercial, governmental, and other
common carrier customers increased 8.6% to $96.1 million in 2001. The increase
was largely due to the following:
- An increase of 43.8% in private line and private network transmission
services revenues to $18.5 million in 2001 due to an increased number of
leased circuits in service,
- An increase of 8.7% in revenues from other common carriers (principally
WorldCom and Sprint) to $37.1 million in 2001, and
- An increase of 61.0% to $6.4 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 157 schools at June 30, 2001, a
6.1% increase from June 30, 2000.
Long-distance revenue increases were offset by the following:
- A decrease of 2.1% in total minutes of use to 504.2 million minutes
primarily due to certain low-margin wholesale minutes no longer carried for
other common carriers. Comparable minutes over the prior year increased
12.6%, after excluding certain low-margin wholesale minutes no longer
carried for other common carriers. The minute growth is due primarily to
increases in traffic carried for other common carriers,
- A 5.7% decrease in our average rate per minute on long-distance traffic to
$0.116 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 a 10.3% increase in the average rate per
minute on minutes carried for other common carriers due to the discontinued
carriage of certain low-margin wholesale minutes, and
- A decrease of 5.5% in the number of active residential, small business and
commercial customers billed to 87,900 at June 30, 2001 primarily due to a
competitor's offering allowing customers to place unlimited intrastate and
interstate calls for a flat monthly fee. The competitor discontinued the
unlimited minutes offering in the second quarter of 2001.
26
Cable revenues increased 13.3% to $36.9 million in 2001. Programming services
revenues increased 6.2% to $29.8 million in 2001 resulting from an increase of
approximately 4,300 basic subscribers served to approximately 123,000 (of which
approximately 1,000 basic subscribers were acquired from G.C. Cablevision, Inc.
on March 31, 2001) and increased pay-per-view, premium, and digital service
revenues off-set by a decrease of $1.74 or 3.6% in average gross revenue per
average basic subscriber per month. New facility construction efforts in 2000
and 2001 resulted in approximately 3,500 additional homes passed which
contributed to additional subscribers and revenues in 2001. Digital subscriber
counts increased 104.4% to 18,200 at June 30, 2001 as compared to June 30, 2000.
The cable services segment's share of cable modem revenue (offered through our
Internet services segment) increased $1.4 million to $2.2 million in 2001.
Local access services revenues increased 30.4% in 2001 to $12.1 million. At June
30, 2001 approximately 69,000 lines were in service as compared to approximately
54,600 lines in service at June 30, 2000.
Internet services revenues increased 54.2% to $5.8 million in 2001 primarily due
to growth in the average number of customers served. We had approximately 65,500
active residential, commercial and small business retail dial-up Internet
subscribers at June 30, 2001 as compared to approximately 59,000 at June 30,
2000. We had approximately 19,600 active residential, commercial and small
business retail cable modem subscribers at June 30, 2001 as compared to
approximately 11,100 at June 30, 2000.
The increase in other services revenues from $5.6 million in 2000 to $31.6
million in 2001 is primarily due to the $19.5 million fiber capacity sale in
2001 as previously described and increased revenues from managed services.
Cost of Sales and Services
Cost of sales and services totaled $75.9 million in 2001 and $59.3 million in
2000. As a percentage of total revenues, cost of sales and services decreased
from 42.4% in 2000 to 41.6% in 2001. Excluding the fiber capacity sale in 2001,
total cost of sales and services as a percentage of total revenues decreased
from 42.4% in 2000 to 39.9% in 2001.
Long-distance cost of sales and services decreased 7.6% to $36.8 million in
2001. Long-distance cost of sales as a percentage of long-distance revenues
decreased from 45.1% in 2000 to 38.3% 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 increased 15.5% to $10.0 million in 2001. 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 26.6% in 2000 to 27.1% 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 increased 23.2% to $6.6 million
in 2001. Local access services cost of sales and services as a percentage of
local access services revenues decreased from 57.8% in 2000 to 54.7% in 2001. As
local access services revenues increase, economies of scale and more efficient
network utilization result in reduced local access services cost of sales and
services as a percentage of local access services revenues.
27
Internet services cost of sales and services increased 15.0% to $2.4 million in
2001. Internet services costs of sales as a percentage of Internet services
revenues totaled 42.1% and 56.5% in 2001 and 2000, respectively. The Internet
services costs of sales decrease as a percentage of Internet services revenues
is primarily due to a $2.3 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 14.0% to $57.4 million in
2001 and, as a percentage of total revenues, decreased from 36.1% in 2000 to
31.5% 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 34.5% in 2001. The increase in 2001 is due to increased health
insurance costs, increased accrual of a company-wide success sharing bonus and
increased allowance for doubtful accounts receivable.
Depreciation and Amortization
Depreciation and amortization expense increased 8.0% to $27.6 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 and the $28.4 million
investment in other equipment and facilities during 2001 for which a partial
year of depreciation will be recorded during 2001.
Interest Expense, Net
Interest expense, net of interest income, decreased 12.4% to $16.7 million in
2001. This decrease resulted primarily from decreased interest rates in 2001 on
our variable rate debt, approximately $285,000 earned from an interest rate swap
agreement, and decreased average outstanding long-term debt balances. Partially
offsetting these decreases was an increase in our average outstanding capital
lease obligation balances resulting from the lease of satellite transponder
capacity.
Income Tax Benefit (Expense)
Income tax benefit (expense) was $5.6 million in 2000 and ($2.2) 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 38.3% in 2000 to 45.6% in 2001 due to the effect of items that are
nondeductible for income tax purposes.
At June 30, 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 $2.6
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
55% to 60% in 2001.
28
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 49,851 96,087
Cable services 18,046 18,873 36,919
Local access services 5,958 6,183 12,141
Internet services 2,619 3,134 5,753
Other services 24,058 7,494 31,552
-------------------------------------------------------------
Total revenues 96,917 85,535 182,452
Operating income 13,042 8,411 21,453
Net income before income taxes 4,322 436 4,758
Net income 2,423 166 2,589
Basic and diluted net income (loss) per
common share 0.04 (0.01) 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 June 30, 2001 ("second quarter") were $85.5
million, representing a 11.7% decrease from $96.9 million for the quarter ended
March 31, 2001 ("first quarter"). Excluding the first quarter fiber capacity
sale, total second quarter revenues increased 10.5%.
Cost Of Sales and Services
Cost of sales and services decreased from $42.1 million in the first quarter to
$33.8 million in the second quarter. Excluding the fiber capacity sale, cost of
sales and services totaled $31.2 million in the first quarter. As a percentage
of revenues, first and second quarter cost of sales and services totaled 43.4%
and 39.6%, respectively. Excluding the fiber capacity sale, cost of sales and
services totaled 40.3% as a percentage of revenues in first quarter. The second
quarter decrease as a percentage of revenues results from reductions in access
costs due to distribution and termination of traffic on our own long-distance
and local services networks instead of paying other carriers to distribute and
terminate our traffic. Partially off-setting the second quarter decrease is a
decrease in the average rate per minute billed to customers without a comparable
29
decrease in access charges paid by us, and increased cable programming costs
without a corresponding revenue increase. We expect cost savings to continue as
traffic carried on our own facilities grows.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1.7 million in the
second quarter as compared to the first quarter. As a percentage of revenues,
second quarter selling, general and administrative expenses were 34.6% as
compared to 28.7% for the first 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
We reported net income of $166,000 for the second quarter as compared to a $2.4
million for the first quarter. The decrease is primarily due to the fiber
capacity sale in the first quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities totaled $45.7 million in the six-month
period ended June 30, 2001 ("2001") as compared to $19.9 million in the
six-month period ended June 30, 2000 ("2000"), net of changes in the components
of working capital. The increase in 2001 is, in part, due to the fiber capacity
sale in 2001. Expenditures for property and equipment, including construction in
progress, totaled $28.4 million in 2001. Other uses of cash during 2001 included
repayment of $12.6 million of long-term borrowings and capital lease
obligations, advances to Kanas and payments on Kanas' behalf of approximately
$5.6 million (see note 3 to the accompanying Notes to Interim Condensed
Consolidated Financial Statements), payment of a $1.2 million equipment lease
deposit, and payment of $1.0 million in Series B preferred stock dividends.
Other sources of cash in 2001 include $1.4 million from the issuance of our
common stock.
Trade receivables increased $7.2 million from December 31, 2000 to June 30, 2001
primarily due to an increase in other common carrier trade receivables.
Working capital totaled ($1.8) million at June 30, 2001, a $12.4 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 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).
Under 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 through 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 June 30, 2001.
Our expenditures for property and equipment, including construction in progress,
totaled $28.4 million and $18.9 million during the first six months of 2001 and
2000, respectively. We expect our expenditures for property and equipment,
including construction in progress, for our core operations to total
approximately $55.0 to $60.0 million during the year ended December 31, 2001.
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.
30
Dividends earned on our Series B preferred stock are payable at the semi-annual
payment dates of April 30 and October 31 of each year. The determination of
whether additional dividends will be paid in cash or additional fully-paid
shares of Series B 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.
We issued 10,000 shares of Series C preferred stock on June 30, 2001 to acquire
a controlling interest in Kanas (see note 3 to the accompanying Notes to Interim
Condensed Consolidated Financial Statements). The Series C preferred stock is
convertible at $12 per share into GCI Class A common stock, is non-voting, and
pays a 6% per annum quarterly cash dividend. We may redeem the Series C
preferred stock at any time in whole but not in part. Mandatory redemption is
required at any time after the fourth anniversary date at the option of holders
of 80% of the outstanding shares of the Series C preferred stock. The redemption
price is $1,000 per share plus the amount of all accrued and unpaid dividends,
whether earned or declared, through the redemption date. In the event of a
liquidation of GCI the holders of the Series C preferred stock shall be entitled
to be paid an amount equal to the redemption price before any distribution or
payment is made upon Junior Securities.
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 our negative working capital at June 30, 2001,
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. We plan to
fund the acquisition of Rogers American Cablesystems, Inc. through our senior
credit facility. Should cash flows be insufficient to support additional
borrowings, capital expenditures will likely be reduced.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations." SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Use of the pooling-of-interests method will be prohibited on a prospective basis
only. We do not expect that the adoption of SFAS No. 141 will have a significant
impact on our financial condition or results of operations.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach. Thus,
amortization of goodwill including goodwill recorded in past business
combinations, will cease upon adoption of SFAS No. 142, which for us will be on
January 1, 2002. We are currently evaluating what the effects of adopting SFAS
142 will be on our financial position and results of operations.
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
31
military spending. Any deterioration in these markets could have an adverse
impact on us. In fiscal 2001 the state's preliminary final results indicate that
Alaska's oil revenues and federal funding supplied 44% and 35%, respectively, of
the state's total revenues. Investment earning supplied only 0.2% of the state's
total 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. In fiscal 2002 the state forecasts that Alaska's investment
earnings, federal funding and oil revenues will supply 31%, 28% and 27%,
respectively, of the state's total projected revenues.
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 with an average
of 1.0 million barrels produced per day in fiscal 2001. The state forecasts the
production of 1.1 million barrels per day in fiscal 2002. The state continues to
forecast a temporary reversal of the production rate decline through fiscal 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 $27.92 in fiscal 2001 and is
forecasted to average $24.54 in fiscal 2002. The state forecasts the average
price of North Slope oil to decline to $21.41 in fiscal 2003. The closing price
per barrel was $25.08 on August 6, 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") takes steps to increase or decrease
production. 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 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 increase in residential and commercial natural gas prices and shortages in
California during the past year, in particular, have resulted in a renewed
effort to allow exploration and development in the Arctic National Wildlife
Refuge ("ANWR"). On August 2, 2001 the U.S. House of Representatives voted in
favor of opening ANWR and now the bill must go before the Senate. Deployment of
a natural gas pipeline from Alaska's North Slope to the lower 48 states has been
proposed to supplement natural gas supplies. A competing natural gas pipeline
through Canada has also been proposed. The economic viability of a natural gas
pipeline depends upon the price of and demand for natural gas. Either project
could have a positive impact on the state of Alaska's revenues and the Alaska
economy.
32
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 is 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.
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 June 30, 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 June 30, 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. As of August 1, 2001,
the interest rate spread between the fixed and swapped variable rate is 2.731%,
an annualized reduction in interest expense of approximately $1,365,000.
33
Our Fiber Facility carries interest rate risk. Amounts borrowed under this
Agreement bear interest at either Libor plus 2.5%-2.75%, or at our choice, the
lender's prime rate plus 1.25%-1.5%. Should the Libor rate, the lenders' base
rate or the leverage ratios change, our interest expense will increase or
decrease accordingly. As of June 30, 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 June 30, 2001, we have borrowed $47.0 million subject to interest rate
risk. On this amount, a 1% increase in the interest rate would cost us $470,000
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Date of the meeting: June 7, 2001
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
-------------------- -------------- -------------------
Stephen M. Brett 78,796,373 362,250
Donne F. Fisher 78,432,522 363,851
William P. Glasgow 78,439,223 357,150
James M. Schneider 71,177,376 7,618,997
Directors, in addition to those listed above, whose term of
office as director continued after the meeting:
Ronald R. Beaumont
Ronald A. Duncan
Paul S. Lattanzio
Stephen R. Mooney
Carter F. Page
Robert M. Walp
(c) Other matters voted upon: None
(d) Not applicable
34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 99.28 - The Bylaws of Potter View Development Co., Inc.
Exhibit 99.29 - The Articles of Incorporation of Potter View
Development Co., Inc.
(b) Reports on Form 8-K filed during the quarter ended June 30, 2001
- None
35
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 10, 2001
- -------------------------------------- (Principal Executive Officer) ------------------
Ronald A. Duncan
/s/ Senior Vice President, Chief Financial August 10, 2001
- -------------------------------------- Officer, Secretary and Treasurer ------------------
John M. Lowber (Principal Financial Officer)
/s/ Vice President, Chief Accounting August 10, 2001
- -------------------------------------- Officer ------------------
Alfred J. Walker (Principal Accounting Officer)
36