As filed with the Securities and Exchange Commission on November 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 September 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 October 31, 2001 was:
50,772,673 shares of Class A common stock; and
3,885,784 shares of Class B common stock.
1
INDEX
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
Page No.
--------
Cautionary Statement Regarding Forward-Looking Statements.................................................3
PART I. FINANCIAL INFORMATION
Item l. Consolidated Balance Sheets as of September 30, 2001
(unaudited) and December 31, 2000..................................................5
Consolidated Statements of Operations for the
three and nine months ended September 30, 2001
(unaudited) and 2000 (unaudited)...................................................7
Consolidated Statements of Stockholders' Equity
for the nine months ended September 30, 2001
(unaudited) and 2000 (unaudited)...................................................8
Consolidated Statements of Cash Flows for the nine
months ended September 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...................................................21
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................38
Item 6. Exhibits and Reports on Form 8-K......................................................39
Other items are omitted, as they are not applicable.
SIGNATURES................................................................................................40
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 communications 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 in new markets;
and competitor responses to our products and services and overall market
acceptance of such products and services;
- The outcome of our ongoing negotiations with Incumbent Local Exchange
Carriers ("ILECs") and state regulatory arbitrations and approvals with
respect to new 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, some 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;
3
- Availability of qualified personnel;
- Changes in, or failure, or inability, to comply with, government
regulations, including, without limitation, regulations of the FCC, the
Regulatory Commission of Alaska, 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;
- Economic and other uncertainties arising from the events beginning
September 11, 2001;
- 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)
September 30, December 31,
ASSETS 2001 2000
- --------------------------------------------------------------------------- ---------------- ---------------
(Amounts in thousands)
Current assets:
Cash and cash equivalents $ 15,186 5,962
--------------- ----------------
Receivables:
Trade 58,176 49,872
Employee and other 896 378
--------------- ----------------
59,072 50,250
Less allowance for doubtful receivables 4,991 2,864
--------------- ----------------
Net receivables 54,081 47,386
--------------- ----------------
Prepaid and other current assets 5,134 2,505
Deferred income taxes, net 4,550 3,221
Inventories 3,598 5,717
Property held for sale --- 10,877
Notes receivable with related parties 338 241
--------------- ----------------
Total current assets 82,887 75,909
--------------- ----------------
Property and equipment in service, net of depreciation 379,439 347,802
Construction in progress 9,583 8,097
--------------- ----------------
Net property and equipment 389,022 355,899
--------------- ----------------
Cable franchise agreements, net of amortization of $25,389,000 and $21,509,000
at September 30, 2001 and December 31, 2000, respectively 181,504 184,983
Goodwill, net of amortization of $6,889,000 and $5,952,000 at September
30, 2001 and December 31, 2000, respectively 38,890 40,002
Other intangible assets, net of amortization of $1,155,000 and $729,000 at
September 30, 2001 and December 31, 2000, respectively 3,946 3,936
Property held for sale 1,555 1,550
Deferred loan and senior notes costs, net of amortization of $5,205,000
and $4,166,000 at September 30, 2001 and December 31, 2000, respectively 7,493 8,402
Notes receivable with related parties 2,903 3,235
Other assets, at cost, net of amortization of $68,000 and $63,000 at
September 30, 2001 and December 31, 2000, respectively 3,288 5,091
--------------- ----------------
Total other assets 239,579 247,199
--------------- ----------------
Total assets $ 711,488 679,007
=============== ================
See accompanying notes to interim condensed consolidated financial statements.
5 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
- -------------------------------------------------------------------------- --------------- ----------------
(Amounts in thousands)
Current liabilities:
Current maturities of obligations under capital leases $ 1,608 1,600
Accounts payable 36,794 29,094
Accrued payroll and payroll related obligations 13,206 10,385
Deferred revenue 10,648 9,477
Accrued interest 5,129 9,256
Accrued liabilities 5,096 4,134
Subscriber deposits and other current liabilities 2,450 1,362
--------------- ----------------
Total current liabilities 74,931 65,308
Long-term debt, excluding current maturities 332,700 334,400
Obligations under capital leases, excluding current maturities 45,695 46,882
Obligations under capital leases due to related party, excluding
current maturities 146 214
Deferred income taxes, net of deferred income tax benefit 24,713 22,057
Other liabilities 5,367 4,077
--------------- ----------------
Total liabilities 483,552 472,938
--------------- ----------------
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 49,704,825 and 48,642,870 shares at September 30, 2001 and
December 31, 2000, respectively 188,975 182,706
Class B. Authorized 10,000,000 shares; issued and outstanding 3,890,714 and
3,904,038 shares at September 30, 2001 and December 31, 2000,
respectively; convertible on a share-per-share basis into
Class A common stock 3,288 3,299
Less cost of 357,958 Class A common shares held in treasury at
September 30, 2001 and December 31, 2000 (1,659) (1,659)
Paid-in capital 9,859 7,368
Notes receivable with related parties issued upon stock option exercise (2,288) (2,976)
Retained deficit (2,722) (5,258)
Accumulated other comprehensive loss (89) ---
--------------- ----------------
Total stockholders' equity 195,364 183,480
Commitments and contingencies
--------------- ----------------
Total liabilities and stockholders' equity $ 711,488 679,007
=============== ================
See accompanying notes to interim condensed consolidated financial statements.
6
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------------- -------------- --------------- --------------
(Amounts in thousands, except per share amounts)
Revenues $ 88,019 75,906 270,471 215,609
Cost of sales and services 32,743 29,948 108,660 89,243
Selling, general and administrative expenses 30,957 27,052 88,399 77,439
Depreciation and amortization expense 14,127 13,296 41,767 38,890
-------------- -------------- --------------- --------------
Operating income 10,192 5,610 31,645 10,037
-------------- -------------- --------------- --------------
Interest expense 7,510 9,760 24,467 29,172
Interest income 35 196 297 554
-------------- -------------- --------------- --------------
Interest expense, net 7,475 9,564 24,170 28,618
-------------- -------------- --------------- --------------
Net income (loss) before income taxes 2,717 (3,954) 7,475 (18,581)
Income tax (expense) benefit (1,190) 1,602 (3,359) 7,205
-------------- -------------- --------------- --------------
Net income (loss) $ 1,527 (2,352) 4,116 (11,376)
============== ============== =============== ==============
Basic and diluted net income (loss) per common
share $ .02 (.05) .05 (.25)
============== ============== =============== ==============
See accompanying notes to interim condensed consolidated financial statements.
7
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Notes
Class A Receivable Accumulated
Class A Class B Shares Issued to Retained Other
(Unaudited) Common Common Held in Paid-in Related Earnings Comprehensive
(Amounts in thousands) Stock Stock Treasury Capital Parties (Deficit) Loss Total
------------------------------------------------------------------------------------------
Balances at December 31, 1999 $176,740 3,422 (1,607) 6,343 (2,167) 9,817 --- 192,548
Net loss --- --- --- --- --- (11,376) --- (11,376)
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 206 --- --- --- 206
Class B shares converted to Class A 122 (122) --- --- --- --- --- ---
Shares issued under stock option plan 1,050 --- --- --- --- --- --- 1,050
Shares issued under officer stock
option agreements and notes issued
upon officer stock option exercise 888 --- --- --- (809) --- --- 79
Amortization of the excess of GCI stock
market value over stock option
exercise cost on date of stock option
grant --- --- --- 278 --- --- --- 278
Shares issued to Employee Stock
Purchase Plan 2,591 --- --- --- --- --- --- 2,591
Shares issued upon warrant exercise 425 --- --- --- --- --- --- 425
Purchase of treasury stock --- --- (52) --- --- --- --- (52)
Preferred stock dividends --- --- --- --- --- (1,362) --- (1,362)
------------------------------------------------------------------------------------------
Balances at September 30, 2000 $181,816 3,300 (1,659) 6,827 (2,976) (2,921) --- 184,387
==========================================================================================
Balances at December 31, 2000 $182,706 3,299 (1,659) 7,368 (2,976) (5,258) --- 183,480
Net income --- --- --- --- --- 4,116 --- 4,116
Fair value of cash flow hedge, net of
income tax benefit of $59 --- --- --- --- --- --- (89) (89)
Comprehensive income --- --- --- --- --- --- --- 4,027
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 1,881 --- --- --- 1,881
Class B shares converted to Class A 11 (11) --- --- --- --- --- ---
Shares issued under stock option plan 3,182 --- --- --- --- --- --- 3,182
Amortization of the excess of GCI stock
market value over stock option
exercise cost on date of stock option
grant --- --- --- 610 --- --- --- 610
Shares issued to Employee Stock
Purchase Plan 688 --- --- --- --- --- --- 688
Acquisition of G.C. Cablevision, Inc.
net assets and customer base 2,388 --- --- --- --- --- --- 2,388
Payment received on note issued upon
officer stock option exercise --- --- --- --- 688 --- --- 688
Preferred stock dividends --- --- --- --- --- (1,580) --- (1,580)
------------------------------------------------------------------------------------------
Balances at September 30, 2001 $188,975 3,288 (1,659) 9,859 (2,288) (2,722) (89) 195,364
==========================================================================================
See accompanying notes to interim condensed consolidated financial statements.
8
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2001 2000
-------------- --------------
(Amounts in thousands)
Operating activities:
Net income (loss) $ 4,116 (11,376)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 41,767 38,890
Amortization charged to selling, general and administrative 26 534
Non-cash cost of sale 10,877 ---
Deferred income tax expense (benefit) 3,359 (7,205)
Bad debt expense, net of write-offs 2,127 1,204
Deferred compensation and compensatory stock options 1,081 484
Employee Stock Purchase Plan expense funded with issuance of
General Communication, Inc. Class A common stock --- 2,115
Write-off of capitalized interest 170 1,955
Other noncash income and expense items 2 (251)
Change in operating assets and liabilities 96 8,650
-------------- --------------
Net cash provided by operating activities 63,621 35,000
-------------- --------------
Investing activities:
Purchases of property and equipment (46,663) (33,362)
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 (1,154) (1,385)
Payments received on notes receivable with related parties 772 617
Notes receivable issued to related parties (525) (1,022)
Cash received upon acquisition of Kanas Telecom, Inc. 228 ---
-------------- --------------
Net cash used by investing activities (54,174) (27,896)
-------------- --------------
Financing activities:
Repayments of long-term borrowings and capital lease obligations (13,000) (10,714)
Long-term borrowings - bank debt 10,000 ---
Proceeds from common stock issuance 3,182 1,475
Payment of Series B preferred stock dividend (963) ---
Payment received on note receivable with related party issued upon
stock option exercise 688 ---
Payment of debt issuance costs (130) (127)
Purchase of treasury stock --- (52)
-------------- --------------
Net cash used by financing activities (223) (9,418)
-------------- --------------
Net increase (decrease) in cash and cash equivalents 9,224 (2,314)
Cash and cash equivalents at beginning of period 5,962 13,734
-------------- --------------
Cash and cash equivalents at end of period $ 15,186 11,420
============== ==============
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) per common share ("EPS") and common shares used
to calculate basic and diluted EPS consist of the following
(amounts in thousands):
Three Months Ended September 30,
2001 2000
------------------------------ -------------------------------
Income Shares Loss Shares
(Num- (Denom- Per-share (Num- (Denom- Per-share
erator) inator) Amounts erator) inator) Amounts
-------- ---------- ---------- ---------- --------- ----------
Net income (loss) $1,527 $(2,352)
Less Preferred Stock dividends:
Series B 482 466
Series C 153 ---
-------- ----------
Basic EPS:
Income (loss) available to common
stockholders 892 53,165 $ .02 (2,818) 51,790 $ (.05)
Effect of Dilutive Securities:
Unexercised stock options --- 1,615 --- --- --- ---
-------- ---------- ---------- ---------- --------- ----------
Diluted EPS:
Income (loss) available to common
stockholders $ 892 54,780 $ .02 $(2,818) 51,790 $ (.05)
======== ========== ========== ========== ========= ==========
Nine Months Ended September 30,
2001 2000
------------------------------ -------------------------------
Income Shares Loss Shares
(Num- (Denom- Per-share (Num- (Denom- Per-share
erator) inator) Amounts erator) inator) Amounts
-------- ---------- ---------- ---------- --------- ----------
Net income (loss) $4,116 $(11,376)
Less Preferred Stock dividends:
Series B 1,427 1,362
Series C 153 ---
-------- ----------
Basic EPS:
Income (loss) available to common
stockholders 2,536 52,699 $ .05 (12,738) 51,254 $ (.25)
Effect of Dilutive Securities:
Unexercised stock options --- 1,367 --- --- --- ---
-------- ---------- ---------- ---------- --------- ----------
Diluted EPS:
Income (loss) available to common
stockholders $2,536 54,066 $ .05 $(12,738) 51,254 $ (.25)
======== ========== ========== ========== ========= ==========
11 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Common equivalent shares outstanding which are anti-dilutive for
purposes of calculating the net income (loss) per common share for
the three and nine months ended September 30, 2001 and 2000, are
not included in the diluted net income (loss) per share
calculations, and consist of the following (shares, in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
------------ ------------ ------------- ------------
Unexercised stock options --- 1,999 --- 2,461
Series B redeemable preferred stock 4,067 3,902 4,067 3,902
Series C redeemable preferred stock 833 --- 281 ---
------------ ------------ ------------- ------------
Anti-dilutive common equivalent shares
outstanding 4,900 5,901 4,348 6,363
============ ============ ============= ============
Weighted average shares associated with outstanding stock options
for the three and nine months ended September 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 (shares, in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
------------ ------------ ------------- ------------
Weighted average shares associated with
outstanding stock options 3 1,999 88 2,461
============ ============ ============= ============
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 the market price of our common
stock on a future date. At September 30, 2001 the market price
condition was met and no common stock would be issuable if this
date was the end of the contingency period.
If the conversion of Series B redeemable preferred stock to GCI
Class A common stock as described in note 1(e) had occurred on
September 30, 2001, it would not have had a material effect on our
basic and diluted earnings per share.
(d) Common Stock
Following is the statement of common stock at September 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 143 (143)
Shares issued under stock option plan 596 ---
Shares issued to Employee Stock Purchase Plan 448 ---
Warrant exercise 425 ---
----------------- ----------------
Balances at September 30, 2000 48,482 3,905
================= ================
Balances at December 31, 2000 48,643 3,904
Class B shares converted to Class A 13 (13)
Shares issued under stock option plan 811 ---
Shares issued upon acquisition of G.C.
Cablevision, Inc. net assets and customer
base 238 ---
----------------- ----------------
Balances at September 30, 2001 49,705 3,891
================= ================
12 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(e) Redeemable Preferred Stocks
Redeemable preferred stocks consist of (amounts in thousands):
September 30, December 31,
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 September 30, 2001 and 2000 (shares, in
thousands):
Series B Series C
------------- --------------
Balances at December 31, 1999 and
September 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 September 30, 2001 23 10
============= ==============
The combined aggregate amount of preferred stock mandatory
redemption requirements follow (amounts in thousands):
Years ending September 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 September 30, 2001 and December 31,
2000 is $23,375,000 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.
13 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
In October 2001, a Series B preferred stockholder converted 5,665
shares of Series B preferred stock to GCI Class A common stock
resulting in the issuance of approximately 1,021,000 shares of GCI
Class A common 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 3). 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 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 our common stock and other shares of our capital stock
hereafter issued which by its terms is junior to the Series C
preferred stock. Series B preferred stock is senior to Series C
preferred stock. The redemption amount on September 30, 2001 was
$10,153,000.
(f) Accounting for Derivative Instruments and Hedging Activities
Effective January 1, 2001, we adopted Statement of Financial
Accounting Standard 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 extends through
August 1, 2007 and is cancelable at the option of the counterparty
beginning August 1, 2002. We entered into the transaction to take
advantage of an anticipated decline in interest rates. Under SFAS
No. 133, the interest rate swap is accounted for as a fair value
hedge. 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.
During the nine month period ended September 30, 2001 we recognized
approximately $579,000 as a decrease to interest expense. As of
September 30, 2001, the amount of change in the fair value of debt
approximates the change in the fair value of the interest rate
swap.
Effective September 21, 2001, we entered into an interest rate swap
agreement to convert $25 million of variable interest rate debt
equal to the 90 day Libor rate plus 334 basis points to 3.98% fixed
rate debt. The interest rate swap terms mirror the underlying
variable rate debt, except the interest rate swap terminates on
September 21, 2004. We entered into the transaction to help
insulate us from future increases in interest rates. Under SFAS No.
133, the interest rate swap is accounted for as a cash flow hedge.
The initial fair value of the interest rate swap of approximately
$148,000 ($89,000 after deducting income taxes) is recorded in
other comprehensive income in the consolidated statements of
stockholders' equity. The change in the fair value of the interest
rate swap net of income taxes will be recorded as an increase or
decrease in other comprehensive income in the Consolidated
Statements of Stockholders' Equity in the period in which it is
recognized. The accrual of interest income or expense is recognized
in Interest Expense in the Consolidated Statements of Operations.
During the nine month period
14 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
ended September 30, 2001 we had recognized approximately $9,000 in
incremental interest expense resulting from this transaction.
(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.
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) Comprehensive Income (Loss)
Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" requires us to report and display
comprehensive income or loss and its components in a financial
statement that is displayed with the same prominence as other
financial statements. During the three and nine months ended
September 30, 2001 we had other comprehensive loss of approximately
($89,000) as a result of the cash flow hedge discussed in note
1(f). Total comprehensive income at September 30, 2001 was
$4,027,000. There were no components of other comprehensive income
during the three or nine months ended September 30, 2000.
(i) Reclassifications
Reclassifications have been made to the 2000 financial statements
to make them comparable with the 2001 presentation.
(j) 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 nine month periods ended September 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.
15 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in
thousands):
Nine-month periods ended September 30, 2001 2000
------------- ------------
(Increase) decrease in receivables $ (8,819) 3,677
(Increase) decrease in inventory 2,119 (1,126)
Increase in prepaid and other current assets (1,517) (580)
Increase in accounts payable 7,134 5,704
Increase in accrued payroll and payroll related obligations 2,821 2,302
Increase in deferred revenues 1,038 535
Decrease in accrued interest (4,127) (3,112)
Increase in accrued liabilities 1,397 671
Increase in subscriber deposits and other current liabilities 150 116
Increase (decrease) in components of other long-term liabilities (100) 463
------------- ------------
$ 96 8,650
============= ============
We paid income taxes totalling approximately $61,000 and $0 during the
nine month periods ended September 30, 2001 and 2000, respectively.
We paid interest totalling approximately $28,594,000 and $31,130,000
during the nine month periods ended September 30, 2001 and 2000,
respectively.
We recorded $1,881,000 and $206,000 during the nine months ended
September 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 nine months ended September 30, 2000 we funded the employer
matching portion of Employee Stock Purchase Plan contributions by issuing
GCI Class A common stock valued at $2,115,000. We purchased such shares
on the open market during the nine months ended September 30, 2001.
We financed the purchase of satellite transponder capacity pursuant to a
long-term capital lease arrangement with a leasing company during the
nine month period ended September 30, 2000 at a cost of $48.2 million.
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 (see note 1(c)).
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).
(3) Acquisition of Kanas
Effective 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 to Valdez 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 now operated as GCI Fiber Communication Co., Inc.
("GFCC").
16 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(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, Sitka 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 in Juneau during 2002.
Internet services. We offer wholesale and retail Internet services. We
offer cable modem service in Anchorage, Fairbanks, Juneau, Sitka and
Valdez and plan to provide cable modem service in other areas 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.
17 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Summarized financial information for our reportable segments for the nine
month periods ended September 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 $ 14,982 1,189 6,024 4,264 26,459 169 26,628
External 149,979 56,032 18,538 8,772 233,321 37,150 270,471
------------------------------------------------------------------------------
Total revenues $ 164,961 57,221 24,562 13,036 259,780 37,319 297,099
==============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, net interest
expense and income taxes $ 70,544 27,853 6,873 (7,008) 98,262 (24,137) 74,125
==============================================================================
Operating income (loss) $ 53,213 12,814 4,334 (9,067) 61,294 (28,936) 32,358
==============================================================================
2000
Revenues:
Intersegment $ 11,148 1,108 4,885 2,156 19,297 --- 19,297
External 136,660 49,298 14,545 5,919 206,422 9,187 215,609
------------------------------------------------------------------------------
Total revenues $ 147,808 50,406 19,430 8,075 225,719 9,187 234,906
==============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, net interest
expense and income taxes $ 57,775 23,873 2,808 (7,123) 77,333 (28,167) 49,166
==============================================================================
Operating income (loss) $ 39,769 9,967 (596) (8,446) 40,694 (30,418) 10,276
==============================================================================
A reconciliation of reportable segment revenues to consolidated revenues
follows:
Nine months ended September 30, 2001 2000
------------- --------------
Reportable segment revenues $ 259,780 225,719
Plus All Other revenues 37,319 9,187
Less intersegment revenues eliminated in consolidation (26,628) (19,297)
------------- --------------
Consolidated revenues $ 270,471 215,609
============= ==============
18 (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:
Nine months ended September 30, 2001 2000
------------- --------------
Reportable segment earnings from operations before
depreciation, amortization, net interest expense and
income taxes $ 98,262 77,333
Less All Other loss from operations before depreciation,
amortization, net interest expense and income taxes (24,137) (28,167)
Less intersegment contribution eliminated in consolidation (713) (239)
-------------- --------------
Consolidated earnings from operations before
depreciation, amortization, net interest expense
and income taxes 73,412 48,927
Less depreciation and amortization expense (41,767) (38,890)
-------------- --------------
Consolidated operating income 31,645 10,037
Less interest expense, net (24,170) (28,618)
-------------- --------------
Consolidated net income (loss) before income taxes $ 7,475 (18,581)
============== ==============
A reconciliation of reportable segment operating income to consolidated
net income (loss) before income taxes follows:
Nine months ended September 30, 2001 2000
------------- --------------
Reportable segment operating income $ 61,294 40,694
Less All Other operating loss (28,936) (30,418)
Less intersegment contribution eliminated in consolidation (713) (239)
-------------- -------------
Consolidated operating income 31,645 10,037
Less interest expense, net (24,170) (28,618)
-------------- -------------
Consolidated net income (loss) before income taxes $ 7,475 (18,581)
============== =============
(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.
("Rogers"), a cable television service provider in Palmer and Wasilla,
Alaska for $19.0 million in cash. The acquisition has received regulatory
approval and is expected to be finalized in November 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.
19 (Continued)
Internal Revenue Service Examination
Our U.S. income tax return for 1999 was selected for examination by the
Internal Revenue Service during 2001. The examination commenced during
the third quarter of 2001. We believe this examination will not have a
material adverse effect on our financial position, results of operations
or our liquidity.
20
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 third quarter of 2001 long-distance services revenue represented
61.2% 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 95.6% of our
total long-distance services revenues during the third 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 9.6% to $8.1
million during the third quarter of 2001 as compared to the third 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 228.9% to
$4.5 million during the third quarter of 2001 as compared to the third quarter
of 2000. SchoolAccess(TM) services to nine school districts in Arizona and New
Mexico began in 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 third quarter of 2001, local access charges accounted for 66.0% of
long-distance cost of sales and services, fees paid to other long-distance
carriers represented 25.2%, satellite transponder lease and undersea fiber
maintenance costs represented 3.3%, and other costs represented 5.5% of
long-distance cost of sales and services.
Our long-distance selling, general, and administrative expenses have consisted
of operating and engineering, customer service, sales and communications,
management information systems, general and administrative,
21
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, 33.9% during the
third 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 27.5% to $22.3 million
during the third quarter of 2001 as compared to the third quarter of 2000. The
average rate charged other common carriers increased 4.5% during the same period
due to the discontinued carriage of certain low-margin wholesale minutes and
total minutes carried increased 8.8%. 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 extended the contract term to March
2006 and reduced the rate 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 to March 2004 with two one-year automatic extensions to
March 2006. The amendment reduced 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 third quarter of 2001, cable television revenues represented 21.7% 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 has received regulatory approval and is expected to be finalized in
November 2001. This acquisition will allow our facilities to pass an additional
10,000 homes 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 third quarter
of 2001 programming services generated 79.6% of total cable services revenues,
equipment rental and installation fees accounted for 9.7% of such revenues,
cable modem services accounted for 6.9% of such revenues, advertising sales
accounted for 3.4% of such revenues, and other services accounted for the
remaining 0.4% of total cable
22
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 third quarter of 2001 programming and copyright expenses
represented 46.7% of total cable cost of sales and selling, general and
administrative expenses, and general and administrative costs represented 45.0%
of such total. Marketing and advertising costs represented approximately 8.3% of
such total expenses.
Cable services face competition from alternative methods of receiving and
distributing television signals and from other sources of news, information and
entertainment. 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 $6.4 million
in the third quarter of 2001 representing 7.3% 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 52.5% of total local access
services cost of sales and selling, general and administrative expenses during
the third quarter of 2001. General and administrative and customer service costs
represented approximately 35.6% of such total expenses, marketing and
advertising costs represented approximately 9.1% of such total expenses, and
operating and engineering expenses represented approximately 2.8% 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 $3.0 million representing
3.4% of total revenues in the third quarter of 2001. The primary factors that
contribute to year-to-year changes in Internet services revenues are the average
number of subscribers to our services during a given reporting period, the
average monthly subscription rates, and the number and type of additional
premium features selected.
Operating and general and administrative expenses represented approximately
50.3% of total Internet services cost of sales and selling, general and
administrative expenses during the third quarter of 2001.
23
Internet cost of sales represented approximately 37.4% of such total expenses
and marketing and advertising represented approximately 12.3% 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
through June 30, 2001 (see note 3 in the accompanying Notes to Interim Condensed
Consolidated Financial Statements), 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 6.4% of total revenues
in the third quarter of 2001 and included network solutions and outsourcing
revenues totalling $4.7 million and communications equipment sales, cellular
resale and other revenues totalling $885,000.
Depreciation, amortization and net interest expense on a consolidated basis
decreased $1.3 million in the third quarter of 2001 as compared to the third
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 during the
first six months of 2001. 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, the $46.7 million
investment in other equipment and facilities during the first nine months of
2001 for which a partial year of depreciation will be recorded during 2001, and
an increase in average outstanding indebtedness in the third quarter of 2001.
24
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 Nine Months Ended
September 30, September 30,
Percentage Percentage
Change Change
2001 vs. 2001 vs.
(Unaudited) 2001 2000 2000 2001 2000 2000
---- ---- ---- ---- ---- ----
Statement of Operations Data:
Revenues
Long-distance services 61.2% 63.5% 11.8% 55.5% 63.4% 9.7%
Cable services 21.7% 22.0% 14.4% 20.7% 22.9% 13.7%
Local access services 7.3% 6.9% 22.2% 6.9% 6.7% 27.5%
Internet services 3.4% 2.9% 38.0% 3.2% 2.7% 48.2%
Other services 6.4% 4.7% 56.0% 13.7% 4.3% 304.4%
-----------------------------------------------------------------------
Total revenues 16.0% 25.5%
Cost of sales and services 37.2% 39.5% 9.3% 40.2% 41.4% 21.8%
Selling, general and administrative
expenses 35.2% 35.6% 14.4% 32.7% 35.9% 14.2%
Depreciation and amortization 16.0% 17.5% 6.2% 15.4% 18.0% 7.4%
-----------------------------------------------------------------------
Operating income 11.6% 7.4% 81.7% 11.7% 4.7% 215.3%
Net income (loss) before income
taxes 3.1% (5.2%) 168.7% 2.8% (8.6%) 140.2%
Net income (loss) 1.7% (3.1%) 164.9% 1.5% (5.3%) 136.2%
Other Operating Data (1):
Cable services operating income (2) 22.6% 18.5% 39.6% 22.9% 20.2% 28.6%
Local services operating income (loss) (3) 25.0% 12.4% 146.3% 23.3% (4.1%) 827.2%
Internet services operating loss (4) (106.9%) (132.4%) (11.4%) (103.4%) (142.7%) (7.4%)
<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 SEPTEMBER 30, 2001 ("2001") COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000 ("2000")
Revenues
Total revenues increased 16.0% from $75.9 million in 2000 to $88.0 million in
2001.
25
Long-distance revenues from residential, commercial, governmental, and other
common carrier customers increased 11.8% to $53.9 million in 2001. The increase
was largely due to the following:
- An increase of 27.5% in revenues from other common carriers (principally
WorldCom and Sprint) to $22.3 million in 2001,
- An increase of 9.6% in private line and private network transmission
services revenues to $8.1 million in 2001 due to an increased number of
leased circuits in service,
- An increase of 228.9% to $4.5 million in 2001 revenues from our packaged
telecommunications offering to rural hospitals and health clinics and our
SchoolAccess(TM) offering to rural school districts. The increase is
primarily due to an increase in circuits and services sold to rural
hospitals and health clinics from 10 circuits at September 30, 2000 to 51
circuits at September 30, 2001, and
- An increase of 5.6% in total minutes of use to 290.6 million minutes
primarily due to a 8.8% increase in wholesale minutes carried for other
common carriers. After excluding certain low-margin wholesale minutes no
longer carried on our network in 2001, comparable total minutes of use over
the prior year increased 17.1% and wholesale minutes carried for other
common carriers increased 27.3% over the prior year.
Long-distance revenue increases were partially offset by the following:
- A 2.0% decrease in our average rate billed per minute on long-distance
traffic to $0.119 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 4.5% 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 4.0% in the number of active residential, small business and
commercial customers billed to 87,500 at September 30, 2001 as compared to
September 30, 2000 primarily due to competitors' promotional offerings.
Cable revenues increased 14.4% to $19.1 million in 2001. Programming services
revenues increased 15.9% to $15.2 million in 2001 and average gross revenue per
average basic subscriber per month increased $5.02 or 10.4% in 2001 due to the
following:
- Basic subscribers served increased approximately 4,500 to approximately
123,000 (of which approximately 1,000 basic subscribers were acquired from
G.C. Cablevision, Inc. on March 31, 2001),
- Rates charged to subscribers in most systems increased as of February 2001,
- New facility construction efforts in 2000 and 2001 and the acquisition of
GC Cablevision, Inc. subscribers resulted in approximately 4,600 additional
homes passed which contributed to additional subscribers and revenues in
2001, and
- Digital subscriber counts increased 95.4% to approximately 21,300 at
September 30, 2001 as compared to September 30, 2000.
The cable services segment's share of cable modem revenue (offered through our
Internet services segment) increased $441,000 to $1.3 million in 2001.
Local access services revenues increased 22.2% in 2001 to $6.4 million. At
September 30, 2001 approximately 73,300 lines were in service as compared to
approximately 57,900 lines in service at September 30, 2000.
26
Internet services revenues increased 38.0% to $3.0 million in 2001 primarily due
to growth in the average number of customers served. We had approximately 67,900
active residential, commercial and small business retail dial-up Internet
subscribers at September 30, 2001 as compared to approximately 59,000 at
September 30, 2000. We had approximately 21,500 active residential, commercial
and small business retail cable modem subscribers at September 30, 2001 as
compared to approximately 13,000 at September 30, 2000.
The 56% increase in other services revenues to $5.6 million in 2001 is primarily
due to increased revenues from managed services.
Cost of Sales and Services
Total cost of sales and services increased 9.3% to $32.7 million in 2001. As a
percentage of total revenues, total cost of sales and services decreased from
39.5% in 2000 to 37.2% in 2001.
Long-distance cost of sales and services increased 1.8% to $19.9 million in
2001. Long-distance cost of sales as a percentage of long-distance revenues
decreased from 40.6% in 2000 to 36.9% in 2001 primarily due to the effect of
reassigning traffic carried by satellite transponders and fiber optic cable from
leased to owned capacity, 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, and a $450,000
non-recurring refund in 2001 from a local exchange carrier in respect of its
earnings that exceeded regulatory requirements. 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 16.1% to $5.2 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 26.8% in 2000 to 27.2% 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 20.9% to $3.5 million
in 2001. Local access services cost of sales and services as a percentage of
local access services revenues decreased from 56.0% in 2000 to 55.4% in 2001. As
local access services revenues increase, economies of scale and more efficient
network utilization continue to 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 13.5% to $1.2 million in
2001. Internet services costs of sales as a percentage of Internet services
revenues totaled 39.5% and 48.0% 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 allocable 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 continue to 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 14.4% to $31.0 million in
2001 and, as a percentage of total revenues, decreased from 35.6% in 2000 to
35.2% in 2001. The increased expense in 2001 is due to increased health
insurance and labor costs, increased accrual of a company-wide success sharing
bonus, and costs to operate GFCC (see note 3 to the accompanying Notes to
Interim Condensed Consolidated Financial Statements).
27
Depreciation and Amortization
Depreciation and amortization expense increased 6.2% to $14.1 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 $46.7 million
investment in other equipment and facilities during the first nine 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 21.8% to $7.5 million in
2001. This decrease resulted primarily from decreased interest rates in 2001 on
our variable rate debt and approximately $294,000 earned from an interest rate
swap agreement (further described in note 1(e) to the accompanying Notes to
Interim Condensed Consolidated Financial Statements).
As described in note 1(e) to the accompanying Notes to Interim Condensed
Consolidated Financial Statements, effective September 21, 2001, we entered into
an interest rate swap agreement to convert $25 million of variable interest rate
debt equal to the 90 day Libor rate plus 334 basis points to 3.98% fixed rate
debt.
Income Tax Benefit (Expense)
Income tax benefit (expense) was $1.6 million in 2000 and ($1.2) 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 40.5% in 2000 to 43.8% in 2001 due to the effect of items that are
nondeductible for income tax purposes.
NINE MONTHS ENDED SEPTEMBER 30, 2001 ("2001") COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2000 ("2000")
Revenues
Total revenues increased 25.5% from $215.6 million in 2000 to $270.5 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 16.4%.
Long-distance revenues from residential, commercial, governmental, and other
common carrier customers increased 9.7% to $150.0 million in 2001. The increase
was largely due to the following:
- An increase of 31.3% in private line and private network transmission
services revenues to $26.6 million in 2001 due to an increased number of
leased circuits in service,
- An increase of 10.5% in revenues from other common carriers (principally
WorldCom and Sprint) to $59.5 million in 2001,
- An increase of 83.4% to $10.9 million in 2001 revenues from our packaged
telecommunications offering to rural hospitals and health clinics and our
SchoolAccess(TM) offering to rural school districts. The increase is
primarily due to an increase in circuits and services sold to rural
hospitals and health clinics from 10 circuits at September 30, 2000 to 51
circuits at September 30, 2001, and
- An increase of 0.6% in total minutes of use to 795.1 million minutes
primarily due to a 2.2% increase in wholesale minutes carried for other
common carriers. After excluding certain low-margin wholesale minutes no
longer carried for other common carriers, comparable total minutes over the
prior year increased 13.9% and wholesale minutes carried for other common
carriers increased 24.1% over the prior year.
28
Long-distance revenue increases were partially offset by the following:
- A 3.4% decrease in our average rate per minute on long-distance traffic to
$0.118 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 8.1% 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 4.0% in the number of active residential, small business and
commercial customers billed to 87,500 at September 30, 2001 as compared to
September 30, 2000 primarily due to competitors' promotional offerings.
Cable revenues increased 13.7% to $56.0 million in 2001. Programming services
revenues increased 10.6% to $45.0 million in 2001 and average gross revenue per
average basic subscriber per month increased $5.02 or 10.4% in 2001 resulting
from the following:
- Basic subscribers served increased approximately 4,500 to approximately
123,000 (of which approximately 1,000 basic subscribers were acquired from
G.C. Cablevision, Inc. on March 31, 2001),
- Rates charged to subscribers in most systems increased as of February 2001,
- New facility construction efforts in 2000 and 2001 and the acquisition of
GC Cablevision, Inc. subscribers resulted in approximately 4,600 additional
homes passed which contributed to additional subscribers and revenues in
2001, and
- Digital subscriber counts increased 95.4% to approximately 21,300 at
September 30, 2001 as compared to September 30, 2000.
The cable services segment's share of cable modem revenue (offered through our
Internet services segment) increased $1.9 million to $3.5 million in 2001.
Local access services revenues increased 27.5% in 2001 to $18.5 million. At
September 30, 2001 approximately 73,300 lines were in service as compared to
approximately 57,900 lines in service at September 30, 2000.
Internet services revenues increased 48.2% to $8.8 million in 2001 primarily due
to growth in the average number of customers served. We had approximately 67,900
active residential, commercial and small business retail dial-up Internet
subscribers at September 30, 2001 as compared to approximately 59,000 at
September 30, 2000. We had approximately 21,500 active residential, commercial
and small business retail cable modem subscribers at September 30, 2001 as
compared to approximately 13,000 at September 30, 2000.
The 304.4% increase in other services revenues to $37.2 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
Total cost of sales and services increased 21.8% to $108.7 million in 2001. As a
percentage of total revenues, total cost of sales and services decreased from
41.4% in 2000 to 40.2% in 2001. Excluding the fiber capacity sale in 2001, total
cost of sales and services as a percentage of total revenues decreased from
41.4% in 2000 to 39.0% in 2001.
Long-distance cost of sales and services decreased 2.8% to $57.8 million in
2001. Long-distance cost of sales as a percentage of long-distance revenues
decreased from 43.5% in 2000 to 38.5% in 2001 primarily due to the effect of
reassigning traffic carried by satellite transponders and fiber optic cable from
leased to
29
owned capacity, 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, and a $450,000 non-recurring
refund in 2001 from a local exchange carrier in respect of its earnings that
exceeded regulatory requirements. 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 15.7% to $15.2 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 26.7% 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 22.4% to $10.2
million in 2001. Local access services cost of sales and services as a
percentage of local access services revenues decreased from 57.2% in 2000 to
54.9% in 2001. As local access services revenues increase, economies of scale
and more efficient network utilization continue to 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 14.5% to $3.6 million in
2001. Internet services costs of sales as a percentage of Internet services
revenues totaled 41.2% and 53.3% in 2001 and 2000, respectively. The Internet
services costs of sales decrease as a percentage of Internet services revenues
is primarily due to a $3.4 million increase in Internet's allocable 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 continue to 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 14.2% to $88.4 million in
2001 and, as a percentage of total revenues, decreased from 35.9% in 2000 to
32.7% in 2001. Excluding the fiber capacity sale in 2001, selling, general and
administrative expenses, as a percentage of total revenues, decreased from 35.9%
in 2000 to 34.7% in 2001. The increase in 2001 is due to increased health
insurance and labor costs, increased accrual of a company-wide success sharing
bonus, and incremental new costs to operate GFCC (see note 3 to the accompanying
Notes to Interim Condensed Consolidated Financial Statements).
Depreciation and Amortization
Depreciation and amortization expense increased 7.4% to $41.8 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 $46.7 million
investment in other equipment and facilities during the first nine 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 15.5% to $24.2 million in
2001. This decrease resulted primarily from decreased interest rates in 2001 on
our variable rate debt, approximately $579,000 earned from an interest rate swap
agreement (further described in note 1(e) to the accompanying Notes to Interim
Condensed Consolidated Financial Statements), and decreased average outstanding
long-term debt balances during the first six months of 2001. Partially
offsetting these decreases was an increase in our average outstanding capital
lease obligation balances resulting from the lease of satellite transponder
capacity.
30
As described in note 1(e) to the accompanying Notes to Interim Condensed
Consolidated Financial Statements, effective September 21, 2001, we entered into
an interest rate swap agreement to convert $25 million of variable interest rate
debt equal to the 90 day Libor rate plus 334 basis points to 3.98% fixed rate
debt.
Income Tax Benefit (Expense)
Income tax benefit (expense) was $7.2 million in 2000 and ($3.4) million in
2001. The change was due to our generation of net income before income taxes in
2001 as compared to a net loss before income taxes in 2000. Our effective income
tax rate increased from 38.8% in 2000 to 44.9% in 2001 due to the effect of
items that are nondeductible for income tax purposes.
At September 30, 2001, we have (1) tax net operating loss carryforwards of
approximately $143.6 million that will begin expiring in 2007 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
45% to 50% in 2001.
Our U.S. income tax return for 1999 was selected for examination by the Internal
Revenue Service during 2001. The examination commenced during the third quarter
of 2001. We believe this examination will not have a material adverse effect on
our financial position, results of operations or our liquidity.
31
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 53,892 149,979
Cable services 18,046 18,873 19,113 56,032
Local access services 5,958 6,183 6,397 18,538
Internet services 2,619 3,134 3,019 8,772
Other services 24,058 7,494 5,598 37,150
-------------------------------------------------------------
Total revenues 96,917 85,535 88,019 270,471
Operating income 13,042 8,411 10,192 31,645
Net income before income taxes 4,322 436 2,717 7,475
Net income 2,423 166 1,527 4,116
Basic and diluted net income (loss) per
common share 0.04 (0.01) 0.02 0.05
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 September 30, 2001 ("third quarter") were
$88.0 million, representing a 2.9% increase from $85.5 million for the quarter
ended June 30, 2001 ("second quarter"). The third quarter increase resulted from
a 8.1% increase in long-distance services revenue to $53.9 million primarily due
to a 16.5% increase in revenues from other common carriers to $22.3 million.
Long distance minutes increased 11.3% to 290.6 million minutes, primarily due to
a 28.4% increase in other common carrier minutes (principally WorldCom and
Sprint) off-set by a 14.6% decrease in minutes of traffic carried for customers
other than other common carriers. The long-distance average rate per minute was
$.117 and $.119 in the second and third quarters, respectively. The increase in
long-distance services revenue is off-set by a $1.9 million decrease in other
services revenue primarily due to a decrease in non-recurring project management
services revenue.
Long-distance revenues have historically been highest in the summer months as a
result of temporary population increases attributable to tourism and increased
seasonal economic activity such as construction, commercial fishing, and oil and
gas activities. Cable television revenues, on the other hand, are higher in the
32
winter months because consumers spend more time at home and tend to watch more
television during these months. Local service and Internet access services are
not expected to exhibit significant seasonality. Our ability to implement
construction projects is also hampered during the winter months because of cold
temperatures, snow and short daylight hours.
Cost Of Sales and Services
Cost of sales and services decreased from $33.8 million in the second quarter to
$32.7 million in the third quarter. As a percentage of revenues, second and
third quarter cost of sales and services totaled 39.6% and 37.2%, respectively.
The third 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, a 1.9% increase to $.119 in the average
rate per minute billed to customers, and a $450,000 non-recurring refund in the
third quarter from a local exchange carrier in respect of its earnings that
exceeded regulatory requirements. Partially off-setting the third quarter
decrease is an increase in 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 $1.4 million in the third
quarter as compared to the second quarter. As a percentage of revenues, third
quarter selling, general and administrative expenses were 35.2% as compared to
34.6% for the second quarter. The increase in selling, general and
administrative expenses in the third quarter as compared to the second quarter
is primarily due to incremental new costs to operate GFCC (see note 3 to the
accompanying Notes to Interim Condensed Consolidated Financial Statements).
Net Income
We reported net income of $1.5 million for the third quarter as compared to a
$166,000 for the second quarter. The increase is due to increased operating
income and reduced net interest expense, offset by increased income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities totaled $63.6 million in the nine month
period ended September 30, 2001 ("2001") as compared to $35.0 million in the
nine month period ended September 30, 2000 ("2000"), net of changes in the
components of working capital. The increase in 2001 is primarily due to the
fiber capacity sale in 2001 and increased cash flow from all service offerings.
Expenditures for property and equipment, including construction in progress,
totaled $46.7 million in 2001. Other uses of cash during 2001 included repayment
of $13.0 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 $10.0 million in long-term borrowings and $3.2 million from the
issuance of our common stock.
Trade receivables increased $8.3 million from December 31, 2000 to September 30,
2001 primarily due to an increase in other common carrier trade receivables and
broadband trade receivables related to our services to hospitals and health
clinics.
Working capital totaled $8.0 million at September 30, 2001, a $2.6 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.
33
On October 25, 2000, March 23, 2001 and October 31, 2001 we amended the Holdings
$150,000,000 and $50,000,000 credit facilities. The amendments provided for our
acquisition of Kanas and Rogers, and contain, among other things, provision for
payment of a one-time amendment fees of $433,000, changes in certain financial
covenants and ratios, and a limit of $70 million and $60 million for 2001 and
2000, respectively, for 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) and,
- fixed charges coverage ratio (as defined) of Holdings and certain of its
subsidiaries to exceed 1.00 to 1.00 from January 1, 2003 through March 31,
2004 (which adjusts to 1.05 to 1.0 in April, 2004 and thereafter).
We were in compliance with all loan covenants at September 30, 2001.
Our expenditures for property and equipment, including construction in progress,
totaled $46.7 million and $33.4 million during the first nine 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 $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.
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. Series B preferred stock dividends of $937,000 were paid in cash in
October 2001.
In October 2001, a Series B preferred stockholder converted 5,665 shares of
Series B preferred stock to GCI Class A common stock resulting in the issuance
of approximately 1,021,000 shares of GCI Class A common stock.
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. Series C preferred stock dividends of
$150,000 were paid in cash in October 2001.
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 and
technological changes will affect our ability to obtain financing.
34
We believe that we will be able to meet our current and long-term liquidity and
capital requirements, 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 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 ("FASB") 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 FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 provides accounting and reporting standards for intangible
assets acquired individually, with a group of other assets, or as part of a
business combination. This statement addresses how acquired goodwill and other
intangible assets are recorded upon their acquisition as well as how they are to
be accounted for after they have been initially recognized in the financial
statements. Under this statement, goodwill and other intangibles with indefinite
useful lives, on a prospective basis, will no longer be amortized, however will
be tested for impairment at least annually, based on a fair value comparison.
Intangibles that have finite useful lives will continue to be amortized over
their respective useful lives. This statement also requires expanded disclosure
for goodwill and other intangible assets. We will be required to adopt this
statement no later than January 1, 2002. At the date of adoption, we will be
required to complete a transitional intangible asset impairment test. Any
resulting impairment loss will be recognized as a cumulative effect of a change
in accounting principle. In connection with the adoption of this standard, our
unamortized goodwill balance will no longer be amortized, but will continue to
be tested for impairment. We estimate that 2002 amortization expense of goodwill
will be reduced by approximately $1.2 million. We are assessing which other
intangible assets should be categorized as having indefinite useful lives and
the total impact of such standard on our results of operations, financial
position and cash flows.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 provides accounting and reporting standards for costs
associated with the retirement of long-lived assets. This statement requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. We will be required to adopt this statement no later than
January 1, 2003 and do not expect this statement to have a material effect on
our results of operations, financial position and cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 replaces SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. However it retains the fundamental provisions of SFAS No. 121 for
recognition and measurement of the impairment of long-lived assets to be held
and used and for measurement of long-lived assets to be disposed of by sale.
This statement applies to all long-lived assets, including discontinued
operations, and replaces the provisions of APB Opinion No. 30, Reporting Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, for
the disposal of segments of a business. This statement requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. We will
35
be required to adopt this statement no later than January 1, 2002 and are
currently assessing the impact of this statement on our results of operations,
financial position and cash flows.
The Alaska Economy
We offer voice and data telecommunication and video services to customers
primarily throughout Alaska. As a result of this geographic concentration,
growth of our business and of our operations depends upon economic conditions in
Alaska. The economy of Alaska is dependent upon the natural resource industries,
and in particular oil production, as well as investment earnings, tourism,
government, and United States military spending. Any deterioration in these
markets could have an adverse impact on us. In fiscal 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 forecasts 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 $23.17 on November 5, 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
become depressed, 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. In the past year there has been a renewed effort to allow
exploration and development in the Arctic National Wildlife Refuge
36
("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. According to their public comments, neither Exxon Mobil,
BP or Phillips Petroleum, Alaska's large natural gas owners, believe either
natural gas pipeline makes financial sense based upon their preliminary
analysis. The governor of the State of Alaska and certain natural gas
transportation companies continue to support a natural gas pipeline.
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 September 30, 2001, we have borrowed $92.7 million
subject to interest rate
37
risk. On this amount, a 1% increase in the interest rate would cost us $927,000
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 September 30, 2001, the
interest rate spread between the fixed and swapped variable rate is 2.73%, an
annualized reduction in interest expense of approximately $1,365,000. As of
November 1, 2001, the interest rate spread between the fixed and swapped
variable rate is 4.18%, an annualized reduction in interest expense of
approximately $2,090,000.
On September 21, 2001, we entered into an interest rate swap agreement to
convert $25 million of variable interest rate debt equal to the 90 day Libor
rate plus 334 basis points to 3.98% fixed rate debt. 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 $250,000. As of September 30, 2001,
the interest rate spread between the variable rate and swapped fixed rate is
1.19%, an annualized increase in interest expense of approximately $298,000. As
of October 22, 2001, the interest rate spread between the fixed and swapped
variable rate is 1.52%, an annualized increase in interest expense of
approximately $380,000.
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 September 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 September 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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10.89 - Seventh Amendment to $50,000,000 Amended
and Restated Credit Agreements
Exhibit 10.90 - Seventh Amendment to $200,000,000 Amended
and Restated Credit Agreements
(b) Reports on Form 8-K filed during the quarter ended
September 30, 2001 - None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL COMMUNICATION, INC.
Signature Title Date
- -------------------------------------- -------------------------------------------- ------------------
/s/ President and Director November 12, 2001
- -------------------------------------- (Principal Executive Officer) -----------------------
Ronald A. Duncan
/s/ Senior Vice President, Chief Financial November 12, 2001
- -------------------------------------- Officer, Secretary and Treasurer -----------------------
John M. Lowber (Principal Financial Officer)
/s/ Vice President, Chief Accounting November 12, 2001
- -------------------------------------- Officer -----------------------
Alfred J. Walker (Principal Accounting Officer)
40