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As filed with the Securities and Exchange Commission on May 14, 2003
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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 .
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. Yes X No .
The number of shares outstanding of the registrant's classes of
common stock as of April 30, 2003 was:
52,037,082 shares of Class A common stock; and
3,874,107 shares of Class B common stock.
1
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
TABLE OF CONTENTS
Page No.
--------
Cautionary Statement Regarding Forward-Looking Statements.................................................3
PART I. FINANCIAL INFORMATION
Item l. Consolidated Balance Sheets as of March 31, 2003
(unaudited) and December 31, 2002..................................................5
Consolidated Statements of Operations for the
three months ended March 31, 2003
(unaudited) and 2002 (unaudited)...................................................7
Consolidated Statements of Stockholders' Equity
for the three months ended March 31, 2003
(unaudited) and 2002 (unaudited)...................................................8
Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 (unaudited)
and 2002 (unaudited)...............................................................9
Notes to Interim Condensed Consolidated Financial
Statements.........................................................................10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................23
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................46
Item 4. Controls and Procedures...............................................................46
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................47
Item 6. Exhibits and Reports on Form 8-K......................................................47
Other items are omitted, as they are not applicable.
SIGNATURES................................................................................................48
CERTIFICATIONS............................................................................................49
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 ("SEC"). In this Quarterly
Report, in addition to historical information, we state our future strategies,
plans, objectives or goals and 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," "project," or "continue" or the negative of those words
and other comparable words. All forward-looking statements involve known and
unknown risks, uncertainties and other important factors that may cause our
actual results, performance, achievements, plans and objectives to differ
materially from any future results, performance, achievements, plans and
objectives expressed or implied by these forward-looking statements. 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 Securities Reform Act. Such risks, uncertainties and
other factors include but are not limited to those identified below and those
further described in Part I, Item 1. Factors That May Affect Our Business and
Future Results of our December 31, 2002 Form 10-K.
o Material adverse changes in the economic conditions in the markets we
serve and in general economic conditions, including the continuing
impact of the current depressed telecommunications industry due to high
levels of competition in the long-distance market resulting in
pressures to reduce prices, an oversupply of long-haul capacity,
excessive debt loads; several high-profile company failures and
potentially fraudulent accounting practices by some companies;
o The efficacy of laws enacted by Congress; rules and regulations to be
adopted by the Federal Communications Commission ("FCC") and state
public regulatory agencies to implement the provisions of the 1996
Telecom Act; the outcome of litigation relative thereto; and the impact
of regulatory changes relating to access reform;
o 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 long-distance, local, cable and Internet services;
o The extent and pace at which different competitive environments develop
for each segment of our business;
o The extent and duration for which competitors from each segment of the
telecommunication industries are able to offer combined or full service
packages prior to our being able to do so;
o The degree to which we experience material competitive impacts to our
traditional service offerings prior to achieving adequate local service
entry;
o Competitor responses to our products and services and overall market
acceptance of such products and services;
o The outcome of our negotiations with Incumbent Local Exchange Carriers
("ILECs") and state regulatory arbitrations and approvals with respect
to interconnection agreements;
o Our ability to purchase network elements or wholesale services from
ILECs at a price sufficient to permit the profitable offering of local
telephone service at competitive rates;
o Success and market acceptance for new initiatives, many of which are
untested;
o The level and timing of the growth and profitability of existing and
new initiatives, particularly local telephone services expansion,
Internet services expansion and wireless services;
3
o Start-up costs associated with entering new markets, including
advertising and promotional efforts;
o Risks relating to the operations of new systems and technologies and
applications to support new initiatives;
o Local conditions and obstacles;
o The impact on our industry and indirectly on us of oversupply of
capacity resulting from excessive deployment of network capacity in
certain markets we do not serve;
o Uncertainties inherent in new business strategies, new product launches
and development plans, including local telephone services, Internet
services, wireless services, digital video services, cable modem
services, digital subscriber line services, transmission services, and
yellow page directories, and the offering of these services in
geographic areas with which we are unfamiliar;
o The risks associated with technological requirements, technology
substitution and changes and other technological developments;
o Prolonged service interruptions which could affect our business;
o Development and financing of telecommunication, local telephone,
wireless, Internet and cable networks and services;
o 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 and the consequences of
increased leverage;
o Availability of qualified personnel;
o Changes in, or failure, or inability, to comply with, government
regulations, including, without limitation, regulations of the FCC, the
Regulatory Commission of Alaska ("RCA"), and adverse outcomes from
regulatory proceedings;
o Uncertainties in federal military spending levels and military base
closures in markets in which we operate;
o The ongoing global and domestic trend towards consolidation in the
telecommunications industry, which trend may be the effect of making
the competitors larger and better financed and afford these competitors
with extensive resources and greater geographic reach, allowing them to
compete more effectively;
o The financial, credit and economic impacts of the WorldCom, Inc.
("WorldCom") bankruptcy filing on the industry in general and on us in
particular;
o A conversion of WorldCom's bankruptcy petition to Chapter 7,
unfavorable reaffirmation of our pre-filing contracts and agreements
with WorldCom, or a migration of WorldCom's traffic off our network
without it being replaced by other common carriers that interconnect
with our network;
o The effect on us of pricing pressures, new program offerings and market
consolidation in the markets served by our major customers, WorldCom
and Sprint;
o Under Statement of Financial Accounting Standard ("SFAS") 142, we must
test our intangibles for impairment at least annually, which may result
in a material, non-cash write-down of goodwill and could have a
material adverse impact on our results of operations and shareholders'
equity; and
o Other risks detailed from time to time in our periodic reports filed
with the SEC.
You should not place undue reliance on any such forward-looking statements.
Further, any forward-looking statement, and such risks, uncertainties and other
factors speak, only as of the date on which they were originally made and we
expressly disclaim any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement 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. New factors emerge from time to time, and it is not possible
for us to predict what factors will arise or when. In addition, we cannot assess
the impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
4
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
ASSETS 2003 2002
- --------------------------------------------------------------------------- --------------- ----------------
(Amounts in thousands)
Current assets:
Cash and cash equivalents $ 18,173 11,940
--------------- ----------------
Receivables:
Trade 58,717 63,111
Employee 318 391
Other 2,493 3,093
--------------- ----------------
61,528 66,595
Less allowance for doubtful receivables 13,929 14,010
--------------- ----------------
Net receivables 47,599 52,585
--------------- ----------------
Deferred income taxes, net 8,875 8,509
Prepaid and other current assets 8,541 9,171
Inventories 1,088 400
Property held for sale 1,037 1,037
Notes receivable with related parties 775 697
--------------- ----------------
Total current assets 86,088 84,339
--------------- ----------------
Property and equipment in service, net of depreciation 378,995 381,394
Construction in progress 13,190 16,958
--------------- ----------------
Net property and equipment 392,185 398,352
--------------- ----------------
Cable certificates, net of amortization of $26,857 and $26,884 at March
31, 2003 and December 31, 2002, respectively 191,159 191,132
Goodwill, net of amortization of $7,200 at March 31, 2003 and December 31,
2002 43,284 41,972
Other intangible assets, net of amortization of $1,178 and $1,848 at March
31, 2003 and December 31, 2002, respectively 3,513 3,460
Deferred loan and senior notes costs, net of amortization of $5,374 and
$4,110 at March 31, 2003 and December 31, 2002, respectively 8,900 9,961
Notes receivable with related parties 5,184 5,142
Other assets, at cost, net of amortization of $119 and $24 at March 31,
2003 and December 31, 2002, respectively 5,091 4,424
--------------- ----------------
Total other assets 257,131 256,091
--------------- ----------------
Total assets $ 735,404 738,782
=============== ================
See accompanying notes to interim condensed consolidated financial statements.
5 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
- -------------------------------------------------------------------------- --------------- ----------------
(Amounts in thousands)
Current liabilities:
Current maturities of obligations under long-term debt and capital
leases $ 16,804 1,857
Accounts payable 27,528 33,605
Deferred revenue 16,628 18,290
Accrued payroll and payroll related obligations 12,823 11,821
Accrued liabilities 5,372 5,763
Accrued interest 4,819 7,938
Subscriber deposits 825 889
---------------- ----------------
Total current liabilities 84,799 80,163
Long-term debt, excluding current maturities 342,700 357,700
Obligations under capital leases, excluding current maturities 43,653 44,072
Obligations under capital leases due to related party, excluding
current maturities 697 703
Deferred income taxes, net of deferred income tax benefit 18,411 16,061
Other liabilities, net of accumulated accretion of $589 and $0 at March
31, 2003 and December 31, 2002, respectively 6,665 4,956
---------------- ----------------
Total liabilities 496,925 503,655
---------------- ----------------
Redeemable preferred stocks 26,907 26,907
---------------- ----------------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000 shares; issued 52,032 and 51,795 shares
at March 31, 2003 and December 31, 2002, respectively 201,216 199,903
Class B. Authorized 10,000 shares; issued 3,874 and 3,875 shares at March
31, 2003 and December 31, 2002, respectively; convertible on a
share-per-share basis into Class A common stock 3,274 3,274
Less cost of 338 and 317 Class A common shares held in treasury at
March 31, 2003 and December 31, 2002, respectively (1,917) (1,836)
Paid-in capital 11,338 11,222
Notes receivable with related parties issued upon stock option exercise (5,650) (5,650)
Retained earnings 3,889 1,847
Accumulated other comprehensive loss (578) (540)
---------------- ----------------
Total stockholders' equity 211,572 208,220
Commitments and contingencies
---------------- ----------------
Total liabilities and stockholders' equity $ 735,404 738,782
================ ================
See accompanying notes to interim condensed consolidated financial statements.
6
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
2003 2002
-------------- ----------------
(Amounts in thousands, except per share amounts)
Revenues $ 92,777 88,210
Cost of sales and services 30,248 31,237
Selling, general and administrative expenses 32,993 31,301
Bad debt expense 597 581
Depreciation, amortization and accretion expense 13,501 13,958
-------------- ----------------
Operating income 15,438 11,133
-------------- ----------------
Other income (expense):
Interest expense (9,154) (6,591)
Amortization of loan and senior notes fees (1,073) (757)
Interest income 166 73
-------------- ----------------
Other expense, net (10,061) (7,275)
-------------- ----------------
Net income before income taxes and cumulative effect of a
change in accounting principle 5,377 3,858
Income tax expense 2,282 1,646
-------------- ----------------
Net income before cumulative effect of a change in
accounting principle 3,095 2,212
Cumulative effect of a change in accounting principle, net of
income tax benefit of $367 (544) ---
-------------- ----------------
Net income $ 2,551 2,212
============== ================
Basic and diluted net income per common share:
Net income before cumulative effect of a change in
accounting principle $ 0.05 0.03
Cumulative effect of a change in accounting principle, net
of income tax benefit of $367 (0.01) ---
-------------- ----------------
Net income $ 0.04 0.03
============== ================
See accompanying notes to interim condensed consolidated financial
statements.
7
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Notes Accumulated
Class A Receivable Other
Class A Class B Shares Issued to Retained Comprehensive
(Unaudited) Common Common Held in Paid-in Related Earnings Income
(Amounts in thousands) Stock Stock Treasury Capital Parties (Deficit) (Loss) Total
--------------------------------------------------------------------------------------
Balances at December 31, 2001 $195,647 3,281 (1,659) 10,474 (2,588) (2,771) 8 202,392
Components of comprehensive income:
Net income --- --- --- --- --- 2,212 --- 2,212
Change in fair value of cash flow
hedge, net of change in income tax
liability of $67 --- --- --- --- --- --- 105 105
-------
Comprehensive income 2,317
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 255 --- --- --- 255
Shares issued under stock option plan 2,985 --- --- --- (2,971) --- --- 14
Amortization of the excess of GCI stock
market value over stock option
exercise cost on date of stock option
grant --- --- --- 103 --- --- --- 103
Purchase of treasury stock --- --- (177) --- --- --- --- (177)
Preferred stock dividends --- --- --- --- --- (509) --- (509)
--------------------------------------------------------------------------------------
Balances at March 31, 2002 $198,632 3,281 (1,836) 10,832 (5,559) (1,068) 113 204,395
======================================================================================
Balances at December 31, 2002 $199,903 3,274 (1,836) 11,222 (5,650) 1,847 (540) 208,220
Components of comprehensive income:
Net income --- --- --- --- --- 2,551 --- 2,551
Change in fair value of cash flow
hedge, net of change in income tax
benefit of $70 --- --- --- --- --- --- (38) (38)
-------
Comprehensive income 2,513
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 2 --- --- --- 2
Shares issued under stock option plan 1 --- --- --- --- --- --- 1
Amortization of the excess of GCI stock
market value over stock option
exercise cost on date of stock option
grant --- --- --- 114 --- --- --- 114
Shares issued per G.C. Cablevision,
Inc. acquisition agreement 1,312 --- --- --- --- --- --- 1,312
Purchase of treasury stock --- --- (81) --- --- --- --- (81)
Preferred stock dividends --- --- --- --- --- (509) --- (509)
--------------------------------------------------------------------------------------
Balances at March 31, 2003 $201,216 3,274 (1,917) 11,338 (5,650) 3,889 (578) 211,572
======================================================================================
See accompanying notes to interim condensed consolidated financial statements.
8
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2003 2002
-------------- --------------
(Amounts in thousands)
Operating activities:
Net income $ 2,551 2,212
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion expense 13,501 13,958
Deferred income tax expense 2,282 1,646
Amortization of loan and senior notes fees 1,073 757
Cumulative effect of a change in accounting principle, net of
income tax benefit of $367 544 ---
Bad debt expense, net of write-offs (81) 124
Deferred compensation and compensatory stock options 249 251
Other noncash income and expense items (120) 110
Change in operating assets and liabilities (5,651) (6,809)
-------------- --------------
Net cash provided by operating activities 14,348 12,249
-------------- --------------
Investing activities:
Purchases of property and equipment (6,474) (16,069)
Payment of deposit (721) ---
Notes receivable issued to related parties (22) (5,669)
Payments received on notes receivable with related parties 22 3,587
Purchases of other assets (201) (428)
-------------- --------------
Net cash used by investing activities (7,396) (18,579)
-------------- --------------
Financing activities:
Repayments of capital lease obligations (478) (86)
Long-term borrowings - bank debt --- 9,000
Payment of preferred stock dividend (148) (150)
Payment of debt issuance costs (12) (130)
Purchase of treasury stock (81) (177)
Proceeds from common stock issuance --- 14
-------------- --------------
Net cash provided (used) by financing activities (719) 8,601
-------------- --------------
Net increase in cash and cash equivalents 6,233 2,271
Cash and cash equivalents at beginning of period 11,940 11,097
-------------- --------------
Cash and cash equivalents at end of period $ 18,173 13,368
============== ==============
See accompanying notes to interim condensed consolidated financial
statements.
9
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
The accompanying unaudited interim condensed consolidated financial statements
include the accounts of General Communication, Inc. ("GCI") and its subsidiaries
and have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. They should be
read in conjunction with our audited consolidated financial statements for the
year ended December 31, 2002, filed as part of our annual report on Form 10-K.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results of operations for interim periods are not necessarily indicative of the
results that may be expected for an entire year or any other period.
(l) Business and Summary of Significant Accounting Principles
In the following discussion GCI and its direct and indirect subsidiaries
are referred to as "we," "us" and "our".
(a) Business
GCI, an Alaska corporation, was incorporated in 1979. We offer the
following services:
o Long-distance telephone service between Anchorage, Fairbanks,
Juneau, and other communities in Alaska and the remaining
United States and foreign countries
o Cable television services throughout Alaska
o Facilities-based competitive local access services in
Anchorage, Fairbanks and Juneau, Alaska
o Internet access services
o Termination of traffic in Alaska for certain common carriers
o Private line and private network services
o Managed services to certain commercial customers
o Broadband services, including our SchoolAccess(TM) offering to
rural school districts and a similar offering to rural
hospitals and health clinics
o Sales and service of dedicated communications systems and
related equipment
o Lease and sales of 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 subsidiary GCI, Inc., GCI, Inc.'s subsidiary GCI Holdings,
Inc., GCI Holdings, Inc.'s subsidiaries GCI Communication Corp.,
GCI Cable, Inc., GCI Transport Co., Inc., GCI Fiber Communication
Co., Inc., GCI Fiber Co., Inc. and Fiber Hold Co., Inc. and GCI
Fiber Co., Inc.'s and Fiber Hold Co., Inc.'s partnership Alaska
United Fiber System Partnership, GCI Communication Corp.'s
subsidiaries Potter View Development Co., Inc., Wok 1, Inc. and Wok
2, Inc. and GCI Transport Co., Inc.'s subsidiary GCI Satellite Co.,
Inc. All subsidiaries are wholly-owned at March 31, 2003.
The consolidated financial statements include the consolidated
accounts of GCI and its wholly owned subsidiaries with all
significant intercompany transactions eliminated.
10 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(c) Earnings per Common Share
Earnings per common share ("EPS") and common shares used to
calculate basic and diluted EPS consist of the following (amounts
in thousands, except per share amounts):
Three Months Ended March 31,
2003 2002
------------------------------ -------------------------------
Income Shares Income Shares
(Num- (Denom- Per-share (Num- (Denom- Per-share
erator) inator) Amounts erator) inator) Amounts
---------- -------- ---------- ---------- --------- ----------
Net income before cumulative
effect of a change in accounting
principle, net of deferred tax
benefit of $367 $ 3,095 $ 2,212
Less preferred stock dividends:
Series B 361 361
Series C 148 148
---------- ----------
Basic EPS:
Net income before cumulative
effect of a change in accounting
principle, net of deferred tax
benefit of $367, available to
common stockholders 2,586 55,367 $.05 1,703 54,828 $.03
Effect of Dilutive Securities:
Unexercised stock options --- 293 --- --- 928 ---
---------- -------- ---------- ---------- --------- ----------
Diluted EPS:
Net income before cumulative
effect of a change in accounting
principle, net of deferred tax
benefit of $367, available to
common stockholders $ 2,586 55,660 $.05 $ 1,703 55,756 $.03
========== ======== ========== ========== ========= ==========
Common equivalent shares outstanding which are anti-dilutive for
purposes of calculating EPS for the three months ended March 31,
2003 and 2002, are not included in the diluted EPS calculations,
and consist of the following (shares, in thousands):
Three Months Ended
March 31,
2003 2002
----------- ----------
Series B redeemable preferred stock 3,062 3,062
Series C redeemable preferred stock 833 833
----------- ----------
Anti-dilutive common shares outstanding 3,895 3,895
=========== ==========
11 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Weighted average shares associated with outstanding stock options
for the three months ended March 31, 2003 and 2002 which have been
excluded from the diluted EPS 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
March 31,
2003 2002
----------- ----------
Weighted average shares associated with outstanding stock
options 4,510 239
=========== ==========
(d) Common Stock
Following is the statement of common stock at March 31, 2003 and
2002 (shares, in thousands):
Class A Class B
------------- --------------
Balances at December 31, 2001 50,967 3,883
Shares issued under stock option plan 480 ---
------------- --------------
Balances at March 31, 2002 51,447 3,883
============= ==============
Balances at December 31, 2002 51,795 3,875
Class B shares converted to Class A 1 (1)
Shares issued under stock option plan 13 ---
Shares issued per G.C. Cablevision, Inc.
acquisition agreement 223 ---
------------- --------------
Balances at March 31, 2002 52,032 3,874
============= ==============
(e) Redeemable Preferred Stocks
Redeemable preferred stocks at March 31, 2003 and 2002 consist of
(amounts in thousands):
2003 2002
------------- --------------
Series B $ 16,907 16,907
Series C 10,000 10,000
------------- --------------
$ 26,907 26,907
============= ==============
We have 1,000,000 shares of preferred stock authorized with the
following shares issued (shares, in thousands):
Series B Series C
------------- --------------
Balances at December 31, 2001 and 2002 and
March 31, 2002 and 2003 17 10
============= ==============
12 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
As of March 31, 2003, the combined aggregate amount of preferred
stock mandatory redemption requirements follow (amounts in
thousands):
Years ending March 31:
2004 $ ---
2005 ---
2006 10,150
2007 ---
2008 ---
--------
$ 10,150
========
Series B
The redemption amount of our convertible redeemable accreting
Series B preferred stock at March 31, 2003 and December 31, 2002
was $17,509,000 and $17,148,000, respectively. The difference
between the carrying and redemption amounts is due to accrued
dividends which are included in Accrued Liabilities.
Series C
The redemption amount of our convertible redeemable accreting
Series C preferred stock on March 31, 2003 and December 31, 2002
was $10,000,000.
(f) Asset Retirement Obligations
On January 1, 2003 we adopted 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. Upon adoption, we recorded the cumulative effect of
accretion and depreciation expense as a cumulative effect of a
change in accounting principle of approximately $544,000, net of
income tax benefit of $367,000.
Assets that have been recorded for purposes of settling asset
retirement obligations have a fair value of approximately
$1,107,000 at March 31, 2003.
Following is a reconciliation of the beginning and ending aggregate
carrying amount of our asset retirement obligations at March 31,
2003 (amounts in thousands):
Balance at December 31, 2002 $ ---
Liability recognized upon adoption of SFAS
No. 143 1,565
Accretion expense for the three months
ended March 31, 2003 128
----------
Balance at March 31, 2003 $ 1,693
==========
13 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Following is the amount of the liability for asset retirement
obligations as if SFAS No. 143 had been applied at December 31,
2001 (amounts in thousands):
Balance at December 31, 2001 $ 1,350
==========
Balance at March 31, 2002 $ 1,565
==========
Balance at March 31, 2003 $ 1,693
==========
(g) Payments Received from Suppliers
On March 20, 2003 the SEC issued Emerging Issues Task Force
("EITF") Issue No. 02-16, "Accounting by a Reseller for Cash
Consideration Received from a Vendor" ("EITF No. 02-16"). We have
applied EITF No. 02-16 prospectively for arrangements entered into
or modified after December 31, 2002. Our cable services segment
occasionally receives reimbursements for costs to promote
suppliers' services, called cooperative advertising arrangements.
The supplier payment is classified as a reduction of selling,
general and administrative expenses if it reimburses specific,
incremental and identifiable costs incurred to resell the
suppliers' services. Excess consideration, if any, is classified as
a reduction of cost of sales and services.
Occasionally our cable services segment enters into a binding
arrangement with a supplier in which we receive a rebate dependent
upon us meeting a specified goal. We recognize the rebate as a
reduction of cost of sales and services systematically as we make
progress toward the specified goal. If earning the rebate is not
probable and reasonably estimable, it is recognized only when the
goal is met.
(h) Costs Associated with Exit or Disposal Activities
On January 1, 2003 we adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". Upon adoption of SFAS
No. 146, enterprises may only record exit or disposal costs when
they are incurred and can be measured at fair value. The recorded
liability will be subsequently adjusted for changes in estimated
cash flows. SFAS 146 revises accounting for specified employee and
contract terminations that are part of restructuring activities.
Adoption of SFAS No. 146 did not have a material effect on our
results of operations, financial position and cash flows.
(i) Stock Option Plan
At March 31, 2003, we had one stock-based employee compensation
plan. We account for this plan under the recognition and
measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. We use the intrinsic-value method and
compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise
price. We have adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25.
We have adopted SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure". This Statement amends SFAS
No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used
14 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
on reported results. We have elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosure as required by SFAS No. 148.
Stock-based employee compensation cost is reflected over the
options' vesting period of generally 5 years and compensation cost
for options granted prior to January 1, 1996 is not considered. The
following table illustrates the effect on net income and EPS for
the three months ended March 31, 2003 and 2002, if we had applied
the fair-value recognition provisions of SFAS No. 123 to
stock-based employee compensation (amounts in thousands, except per
share amounts):
Three Months Ended
March 31,
2003 2002
------------ -----------
Net income, as reported $ 2,551 2,212
Total stock-based employee compensation expense included
in reported net income, net of related tax effects 23 59
Total stock-based employee compensation expense under the
fair-value based method for all awards, net of related
tax effects (474) (575)
------------ -----------
Pro forma net income $ 2,100 1,696
============ ===========
Basic and diluted net income per common share, as reported $ 0.04 0.03
============ ===========
Basic and diluted net income per common share, pro forma $ 0.03 0.02
============ ===========
(j) Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations
of credit risk are primarily cash and cash equivalents and accounts
receivable. Excess cash is invested in high quality short-term
liquid money instruments issued by highly rated financial
institutions. At March 31, 2003 and December 31, 2002,
substantially all of our cash and cash equivalents were invested in
short-term liquid money instruments at one highly rated financial
institution.
We have two major customers, WorldCom and Sprint Corporation. There
is increased risk associated with these customers' accounts
receivable balances. Our remaining customers are located primarily
throughout Alaska. Because of this geographic concentration, our
growth and operations depend upon economic conditions in Alaska.
The economy of Alaska is dependent upon the natural resources
industries, and in particular oil production, as well as tourism,
government, and United States military spending. Though limited to
one geographical area and except for WorldCom and Sprint, the
concentration of credit risk with respect to our receivables is
minimized due to the large number of customers, individually small
balances, and short payment terms.
(k) Reclassifications
Reclassifications have been made to the 2002 financial statements
to make them comparable with the 2003 presentation.
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):
Three month periods ended March 31, 2003 2002
------------ ------------
Decrease in accounts receivables $ 5,066 519
Increase in inventories (688) (559)
Decrease in prepaid and other current assets 630 588
Decrease in accounts payable (6,075) (1,189)
Increase (decrease) in deferred revenues (1,662) 267
Increase (decrease) in accrued payroll and payroll
related obligations 1,002 (4,702)
Decrease in accrued interest (3,119) (3,616)
Increase (decrease) in accrued liabilities (391) 1,081
Increase (decrease) in subscriber deposits (64) 286
Increase (decrease) in components of other long-term
liabilities (350) 516
------------ ------------
$ (5,651) (6,809)
============ ============
We paid interest totaling approximately $12,273,000 and $10,207,000
during the three months ended March 31, 2003 and 2002, respectively.
Effective March 31, 2001 we acquired the assets and customer base of G.C.
Cablevision, Inc. Upon acquisition the seller received shares of GCI
Class A common stock with a future payment in additional shares
contingent upon the market price of our common stock on March 31, 2003.
At March 31, 2003 the market price condition was not met and
approximately 222,600 shares of GCI Class A common stock were issued.
(3) Intangible Assets
Cable certificates are allocated to our cable services segment. Goodwill
is primarily allocated to the cable services segment and the remaining
amount is not allocated to a reportable segment, but is included in the
All Other category in note 4.
Goodwill allocated to the cable services segment increased $1,312,000 due
to the issuance of 222,600 shares of GCI Class A common stock per the
G.C. Cablevision, Inc. acquisition agreement as further described in note
2. Cable certificates accumulated amortization decreased $27,000 at March
31, 2003 as compared to December 31, 2002, due to an adjustment of the
amortization previously recognized.
Amortization expense for amortizable intangible assets was $173,000 and
$208,000 for the three months ended March 31, 2003 and 2002,
respectively.
16 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Amortization expense for amortizable intangible assets for each of the
five succeeding fiscal years is estimated to be (amounts in thousands):
Years ending
December 31,
2003 $ 417
2004 $ 470
2005 $ 338
2006 $ 334
2007 $ 273
No intangible assets have been impaired based upon impairment testing
performed as of December 31, 2002 and no indicators of impairment have
occurred since the impairment testing was performed.
(4) Industry Segments Data
Our reportable segments are business units that offer different products.
The reportable segments are each managed separately 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 33 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, Fairbanks, Juneau,
Kenai and Soldotna and retail cable modem service (through our Internet
services segment) in all of our locations in Alaska except Ketchikan
and Kotzebue. We plan to offer cable modem service in Ketchikan in
2003, and plan to continue 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, Fairbanks and Juneau and plan to
provide similar competitive local exchange services in other locations
pending regulatory approval and subject to availability of capital.
Internet services. We offer wholesale and retail Internet services. We
offer cable modem service as further described under Cable services
above. 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 and cellular telephone services. None of
these business units has ever met the quantitative thresholds for
determining reportable segments. Also included in the All Other category
are corporate related expenses including information technology,
accounting, legal and regulatory, human resources and other general and
administrative expenses.
We evaluate performance and allocate resources based on (1) earnings or
loss from operations before depreciation, amortization, net interest
expense and income taxes, and (2) operating income or loss.
17 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
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, except approximately 75% of our undersea
fiber optic cable system which transits international waters.
Summarized financial information for our reportable segments for the
three months ended March 31, 2003 and 2002 follows (amounts in
thousands):
Reportable Segments
--------------------------------------------------------
Long- Local Total
Distance Cable Access Internet Reportable All
Services Services Services Services Segments Other Total
------------------------------------------------------------------------------
2003
----
Revenues:
Intersegment $ 3,603 636 2,623 3,074 9,936 186 10,122
External 48,486 23,438 8,426 4,590 84,940 7,837 92,777
------------------------------------------------------------------------------
Total revenues $ 52,089 24,074 11,049 7,664 94,876 8,023 102,899
==============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, net interest
expense and income taxes $ 25,600 11,219 841 454 38,114 (8,550) 29,564
==============================================================================
Operating income (loss) $ 21,161 6,453 374 (1,395) 26,593 (10,530) 16,063
==============================================================================
18 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Reportable Segments
--------------------------------------------------------
Long- Local Total
Distance Cable Access Internet Reportable All
Services Services Services Services Segments Other Total
------------------------------------------------------------------------------
2002
----
Revenues:
Intersegment $ 5,329 496 2,673 2,143 10,641 186 10,827
External 50,068 21,346 7,308 3,573 82,295 5,915 88,210
------------------------------------------------------------------------------
Total revenues $ 55,397 21,842 9,981 5,716 92,936 6,101 99,037
==============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, net interest
expense and income taxes $ 24,593 9,884 844 (2,935) 32,386 (7,071) 25,315
==============================================================================
Operating income (loss) $ 18,652 5,713 34 (3,825) 20,574 (9,217) 11,357
==============================================================================
A reconciliation of reportable segment revenues to consolidated revenues
follows (amounts in thousands):
Three months ended March 31, 2003 2002
--------------- ---------------
Reportable segment revenues $ 94,876 92,936
Plus All Other revenues 8,023 6,101
Less intersegment revenues eliminated in consolidation 10,122 10,827
--------------- ---------------
Consolidated revenues $ 92,777 88,210
=============== ===============
19 (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 before income taxes and cumulative effect of a
change in accounting principle follows (amounts in thousands):
Three months ended March 31, 2003 2002
-------------- ----------------
Reportable segment earnings from operations before
depreciation, amortization, net interest expense and income
taxes $ 38,114 32,386
Less All Other loss from operations before depreciation,
amortization, net interest expense and income taxes 8,550 7,071
Less intersegment contribution eliminated in consolidation 625 224
-------------- ----------------
Consolidated earnings from operations before
depreciation, amortization, net interest expense and
income taxes 28,939 25,091
Less depreciation and amortization expense 13,501 13,958
-------------- ----------------
Consolidated operating income 15,438 11,133
Less other expense, net 10,061 7,275
-------------- ----------------
Consolidated net income before income taxes and cumulative
effect of a change in accounting principle $ 5,377 3,858
============== ================
A reconciliation of reportable segment operating income to consolidated
net income before income taxes and cumulative effect of a change in
accounting principle follows (amounts in thousands):
Three months ended March 31, 2003 2002
--------------- ---------------
Reportable segment operating income $ 26,593 20,574
Less All Other operating loss 10,530 9,217
Less intersegment contribution eliminated in consolidation 625 224
--------------- ---------------
Consolidated operating income 15,438 11,133
Less other expense, net 10,061 7,275
--------------- ---------------
Consolidated net income before income taxes and cumulative
effect of a change in accounting principle $ 5,377 3,858
=============== ===============
(5) Commitments and Contingencies
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.
On July 1, 1999, the APUC ruled that the rural exemptions from local
competition for the ILECs operating in Juneau, Fairbanks and North Pole
would not be continued, which allowed us to negotiate for unbundled
elements for the provision of competitive local service. Alaska
Communications Systems, Inc. ("ACS") requested reconsideration of this
decision and on October 11, 1999, the RCA issued an order terminating
rural exemptions for the ILECs operating in the Fairbanks and Juneau
markets. ACS has appealed these decisions. The appeal presently is before
the Alaska Supreme
20 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Court. On February 11, 2003, the Alaska Supreme Court heard oral
argument. One of the principal issues in dispute concerns the assignment
of the burden of proof. In accordance with instructions from the Alaska
Superior Court, the APUC assigned the burden to ACS at the remand
proceeding. At the oral argument, several Justices expressed concern with
the assignment of the burden. At this time, we cannot reasonably predict
what the outcome of the case will be or even what relief the Court might
order if it were to find that the burden of proof was improperly assigned
to ACS. An adverse decision from the Court, however, has the potential to
disrupt our ability to provide service to our Fairbanks and Juneau
customers over our facilities. We expect a decision from the Court during
the second or third quarter of 2003.
While the ultimate results of these items cannot be predicted with
certainty, we do not expect at this time the resolution of them, except
for the rural exemption proceedings described above, to have a material
adverse effect on our financial position, results of operations or
liquidity.
(6) Subsequent Event
On April 22, 2003 we amended our $225.0 million Senior Facility. The
amendment provides for the followings changes:
o The final maturity date has been extended to October 31, 2007,
o We may fund capital expenditures, including construction or
acquisition of additional fiber optic cable system capacity,
through our own cash flow or by draws on the revolving credit
facility of the Senior Facility not to exceed $25.0 million, and
o The definition of Excess Cash Flow has been changed to the
amount by which earnings before interest, taxes, depreciation,
and amortization exceeds certain fixed charges as defined in the
Senior Facility agreement plus one-time fiber sales to the
extent such fiber sales are not included in earnings before
interest, taxes, depreciation, and amortization,
The amendment requires us to prepay the term loan as follows (amounts in
thousands):
Date Amount
------------------------------------------ -----------
Quarterly from September 30, 2003 to
December 31, 2004 $ 5,000
Quarterly from March 31, 2005 to December
31, 2005 $ 6,000
Quarterly from March 31, 2006 to December
31, 2006 $ 8,000
Quarterly from March 31, 2007 to September
30, 2007 $ 10,000
The remaining balance of the term loan will be payable in full on October
31, 2007.
Under the amended Senior Facility capital expenditures, other than those
incurred to build or acquire additional fiber optic cable system
capacity, in any of the years ended December 31, 2003, 2004, 2005 and
2006 may not exceed:
o $25.0 million, plus
o 100% of any Excess Cash Flow during the applicable period less
certain permitted investments of up to $5.0 million during the
applicable period.
21 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Under the amended Senior Facility we may not allow the ratio of total
indebtedness to annualized operating cash flow to be greater than:
Period Ratio
--------------------------------------------------------- ------
April 22, 2003 through December 30, 2003 4.25:1
December 31, 2003 through December 30, 2004 4.00:1
December 31, 2004 through December 30, 2005 3.75:1
December 31, 2005 through June 29, 2006 3.50:1
June 30, 2006 through June 29, 2007 3.25:1
June 30, 2007 through September 29, 2007 3.00:1
September 30, 2007 through October 31, 2007 2.75:1
Under the amended Senior Facility we may not allow the ratio of senior
secured indebtedness to annualized operating cash flow to be greater
than:
Period Ratio
--------------------------------------------------------- ------
April 22, 2003 through December 30, 2004 2.00:1
December 31, 2004 through September 29, 2006 1.75:1
September 30, 2006 through June 29, 2007 1.50:1
June 30, 2007 through September 29, 2007 1.25:1
September 30, 2007 through October 31, 2007 1.00:1
Under the amended Senior Facility we must either have repaid in full or
successfully refinanced our Senior Notes by February 1, 2007.
In connection with the amendment of the Senior Facility, we paid bank
fees and other expenses of approximately $2,554,000 in the second quarter
of 2003 which will be charged to Amortization of Loan and Senior Notes
Fees over the life of the amended agreement.
22
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."
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, we evaluate our estimates and
judgments, including those related to unbilled revenues, long-distance cost of
sales and services accruals, allowance for doubtful accounts, depreciation,
amortization and accretion periods, intangible assets, income taxes, and
contingencies and litigation. We base our estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. See also our Cautionary Statement
Regarding Forward-Looking Statements.
General 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, regular
capital expenditures and maintenance capital expenditures through our cash flows
from operating activities. Cash requirements for significant acquisitions and
major capital expenditures have been provided largely through our financing
activities.
Consolidated revenues increased by more than $4 million during the first quarter
of 2003 as compared to the same period in 2002. Our operating income increased
by 38.7% in 2003. Our income before income tax and cumulative effect of a change
in accounting principle increased by 39.4% and our net income increased by
15.3%. Three of our reportable business segments experienced year over year
growth in units and revenues as we continued to strengthen our position in the
markets we serve. The long-distance services segment experienced a decrease in
year over year units and revenue. Operating income increased in the
long-distance services, cable services and local access services segments, and
operating loss decreased in the Internet services segment. Basic and diluted
earnings per share increased by 33.3% during the first quarter of 2003 as
compared to the same period in 2002.
Long-Distance Services Overview
First quarter 2003 long-distance services revenue represented 52.2% of
consolidated revenues. Our provision of interstate and intrastate long-distance
services, private line and leased dedicated capacity services, and broadband
services accounted for 94.6% of our total long-distance services revenues during
the first quarter of 2003.
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, leased
dedicated service and broadband products in use.
23
Our long-distance services segment faces significant competition from AT&T
Alascom, Inc., long-distance resellers, and 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.
Our contract to provide interstate and intrastate long-distance services to
Sprint was replaced in March 2002 extending its term to March 2007 with two
one-year automatic extensions to March 2009. Beginning in April 2002 the new
contract reduced the rate to be charged by us for certain Sprint traffic over
the extended term of the contract. Additional contractual rate reductions occur
annually through the end of the initial 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, general economic deterioration, new program offerings, business
failures, 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.
Due in large part to the favorable synergistic effects of our integrated
approach, the long-distance services segment continues to be a significant
contributor to our overall performance, although the migration of traffic from
voice to data continues.
Cable Services Overview
First quarter 2003 cable television revenues represented 25.3% of consolidated
revenues. Our cable systems serve 33 communities and areas in Alaska, including
the state's three largest population centers, Anchorage, Fairbanks and Juneau.
We generate cable services revenues from four primary sources: (1) digital and
analog programming services, including monthly basic and premium subscriptions,
pay-per-view movies and other one-time events, such as sporting events; (2)
equipment rentals and installation; (3) cable modem services (shared with our
Internet services segment); and (4) advertising sales. During the first quarter
of 2003 programming services generated 77.8% of total cable services revenues,
equipment rental and installation fees accounted for 7.8% of such revenues,
cable services' allocable share of cable modem services accounted for 10.7% of
such revenues, advertising sales accounted for 3.0% of such revenues, and other
services accounted for the remaining 0.7% of total cable services revenues.
Effective February 2003, we increased rates charged for certain cable services
and premium packages in six communities, including the state's three largest
population centers Anchorage, Fairbanks and Juneau. Rates increased
approximately 4% for those customers who experienced an adjustment.
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.
Our cable services segment faces 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
24
communication services than are available off-air or through other
alternative delivery sources. Additionally, we believe we offer superior
technical performance and responsive local customer service.
Local Access Services Overview
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. During the first quarter of 2003 local access services
revenues represented 9.1% 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, the number and type of additional
premium features selected, and the traffic sensitive access rates charged to
carriers.
Our local access services segment faces significant competition in Anchorage,
Fairbanks, and Juneau from the ILEC ACS and from AT&T Alascom, Inc. We began
providing service in the Juneau market in the first quarter of 2002. 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 Overview
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) Internet services'
allocable share of cable modem services (a portion of cable modem revenue is
also recognized by our cable services segment). During the first quarter of 2003
Internet services segment revenues represented 4.9% of consolidated revenues.
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.
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.
All Other Services Overview
Revenues reported in the All Other category as described in note 4 in the
accompanying Notes to Interim Condensed Consolidated Financial Statements
include our managed services, product sales, and cellular telephone services.
Revenues included in the All Other category represented 8.5% of total revenues
in the first quarter of 2003 and include managed services revenues totaling $5.4
million, product sales revenues totaling $1.6 million and cellular telephone
services revenues totaling $797,000.
25
RESULTS OF OPERATIONS
The following table sets forth selected Statement of Operations data as a
percentage of total revenues for the periods indicated (unaudited, underlying
data rounded to the nearest thousands):
Percentage
Three Months Ended Change (1)
March 31, 2003 vs.
(Unaudited) 2003 2002 2002
---- ---- ----
Statement of Operations Data:
Revenues
Long-distance services 52.2% 56.8% (3.2%)
Cable services 25.3% 24.2% 9.8%
Local access services 9.1% 8.3% 15.3%
Internet services 4.9% 4.0% 28.5%
All Other services 8.5% 6.7% 32.5%
--------------------------------------
Total revenues 100.0% 100.0% 5.2%
Cost of sales and services 32.6% 35.4% (3.2%)
Selling, general and administrative expenses 35.6% 35.5% 5.4%
Bad debt expense 0.6% 0.7% 2.8%
Depreciation, amortization and accretion expense 14.6% 15.8% (3.3%)
--------------------------------------
Operating income 16.6% 12.6% 38.7%
Net income before income taxes and cumulative
effect of a change in accounting principle 5.8% 4.4% 39.4%
Net income before cumulative effect of a change
in accounting principle 3.3% 2.5% 39.9%
Net income 2.7% 2.5% 15.3%
Other Operating Data:
Long-distance services operating income (2) 43.6% 37.3% 13.5%
Cable services operating income (3) 27.5% 26.8% 13.0%
Local access services operating income (4) 4.4% 0.5% 1,014.1%
Internet services operating loss (5) (30.4%) (107.1%) 63.5%
- --------------------------
1 Percentage change in underlying data.
2 Computed as a percentage of total external long-distance services revenues.
3 Computed as a percentage of total external cable services revenues.
4 Computed as a percentage of total external local access services revenues.
5 Computed as a percentage of total external Internet services revenues.
- --------------------------
Three Months Ended March 31, 2003 ("2003") Compared To Three Months Ended
March 31, 2002 ("2002").
Overview of Revenues and Cost of Sales and Services
Total revenues increased 5.2% from $88.2 million in 2002 to $92.8 million in
2003. The cable services, local access services and Internet services segments
and All Other Services contributed to the increase in
26
total revenues, partially off-set by a decrease in revenues in the long-distance
services segment. See the discussion below for more information by segment.
Total cost of sales and services decreased 3.2% to $30.2 million in 2003. As a
percentage of total revenues, total cost of sales and services decreased from
35.4% in 2002 to 32.6% in 2003. The long-distance services segment contributed
to the decrease in total cost of sales and services, partially off-set by
increases in cost of sales and services in the cable services, local access
services and Internet services segments and All Other Services. See the
discussion below for more information by segment.
Long-distance Services Segment Revenues
Total long-distance services segment revenues decreased 3.2% to $48.5 million in
2003.
Message Telephone Service Revenue from Common Carrier Customers
Message telephone service revenues from other common carriers (principally
WorldCom and Sprint) decreased 7.3% to $21.1 million in 2003 resulting from a
0.3% decrease in wholesale minutes carried to 187.1 million minutes and a 5.4%
decrease in the average rate per minute on minutes carried for other common
carriers. The average rate per minute decrease is primarily due to a reduced
rate charged by us for certain Sprint traffic due to a new contract commencing
April 2002.
The economic stagnation in the lower 48 states appears to have dampened demand
for services provided by our large common carrier customers. To the extent that
these customers experience reduced demand for traffic destined for and
originating in Alaska, it could adversely affect our common carrier traffic. A
protracted economic malaise in the lower 48 states or a further disruption in
the economy resulting from renewed terrorist activity could affect our carrier
customers which, in turn, could affect our revenues and cash flows.
We believe that our contract with WorldCom will ultimately be reaffirmed and
that we will reach an agreement with respect to the pre-petition receivables
balance and that WorldCom may ultimately exit bankruptcy with their business
intact. We cannot predict how long it may take WorldCom to complete the
bankruptcy process or what effect the process or the economy may have on their
traffic levels and ultimately, their requirements for service to and from
Alaska.
Message Telephone Service Revenue from Residential, Commercial and Governmental
Customers
Message telephone service revenues from residential, commercial, and
governmental customers decreased 15.5% to $10.2 million in 2003 primarily due to
the following:
o A 11.0% decrease in minutes carried for these customers to 71.9 million
minutes. The decrease is primarily due to the loss of approximately 3.0
million to 4.0 million minutes earned quarterly from a certain retail
customer,
o A 8.7% decrease in the average rate per minute to $0.094 per minute
paid by these customers due to our promotion of and customers'
enrollment in calling plans offering a certain number of minutes for a
flat monthly fee, and
o A 1.9% decrease in the number of active residential, commercial, and
governmental customers billed to 87,300 at March 31, 2003.
Revenue from Private Line and Private Network Customers
Private line and private network transmission services revenues decreased 0.1%
to $8.8 million in 2003.
Revenue from Broadband Customers
Revenues from our packaged telecommunications offering to rural hospital and
health clinic service and our SchoolAccess(TM) offering to rural school
districts increased 29.5% to $5.7 million in 2003. The increase is
27
primarily due to our new SchoolAccess(TM) offering called Distance Learning that
started in late 2002. Distance Learning is a video-conference based service and
is used by six school districts in Alaska.
Long-distance Services Segment Cost of Sales and Services
Long-distance services segment cost of sales and services decreased 25.5% to
$12.1 million in 2003. Long-distance services segment cost of sales and services
as a percentage of long-distance services segment revenues decreased from 32.4%
in 2002 to 24.9% in 2003 primarily due to the following:
o Reductions in access costs due to distribution and termination of our
traffic on our own local access services network instead of paying
other carriers to distribute and terminate our traffic. The statewide
average cost savings is approximately $.038 and $.078 per minute for
interstate and intrastate traffic, respectively. We expect cost savings
to continue to occur as long-distance traffic originated, carried, and
terminated on our own facilities grows,
o The FCC Multi-Association Group ("MAG") reform order reducing the
interstate access rates paid by interexchange carriers to Local
Exchange Carriers ("LECs") beginning July 2002, and
o A $2.3 million non-recurring refund ($1.9 million after deducting
certain direct costs) in 2003 from a local exchange carrier in respect
of its earnings that exceeded regulatory requirements.
The decrease in the long-distance services segment cost of sales and services as
a percentage of long-distance services segment revenues is partially off-set by
increased costs associated with additional transponder and network back-up
capacity in 2003 as compared to 2002.
Cable Services Segment Revenues and Cost of Sales and Services
Total cable services segment revenues increased 9.8% to $23.4 million and
average gross revenue per average basic subscriber per month increased $5.43 or
10.1% in 2003. Programming services revenues increased 9.6% to $18.2 million in
2003 resulting from the following:
o Basic subscribers served increased approximately 3,700 to approximately
136,300 at March 31, 2003 as compared to March 31, 2002,
o New facility construction efforts in 2002 and 2003 resulted in
approximately 5,700 additional homes passed, a 3.0% increase from March
31, 2002,
o Digital subscriber counts increased 16.2% to approximately 30,200 at
March 31, 2003 as compared to March 31, 2002. Programming services
revenues from digital subscribers increased $510,000 to $1.2 million in
2003 as compared to 2002, and
o Effective February 2003, we increased rates charged for certain cable
services and premium packages in six communities, including the state's
three largest population centers Anchorage, Fairbanks and Juneau. Rates
increased approximately 4% for those customers who experienced an
adjustment.
The cable services segment's share of cable modem revenue (offered through our
Internet services segment) increased $842,000 to $2.5 million in 2003 due to an
increased number of cable modems deployed. Approximately 96% of our cable homes
passed are able to subscribe to our cable modem service. We expect that that
number will increase to approximately 99% when we complete our upgrade of the
Ketchikan cable system which we expect to accomplish in the second quarter of
2003.
We now offer digital programming in Anchorage, Fairbanks, Juneau, Kenai, and
Soldotna, which markets represent approximately 80% of our homes passed at March
31, 2003.
In the second quarter of 2002 we signed new seven-year retransmission agreements
with the five local Anchorage broadcasters and began up-linking and distributing
the local Anchorage programming to all of our
28
cable systems. This was done to provide additional value to our cable
subscribers and to allow us to differentiate our programming from that of our
DBS competitors.
Cable services cost of sales and services increased 8.4% to $6.5 million in 2003
due to programming cost increases for most of our cable programming services
offerings. Cable services cost of sales and services as a percentage of cable
services revenues, which is less as a percentage of revenues than are
long-distance, local access and Internet services cost of sales and services,
decreased from 27.9% in 2002 to 27.6% in 2003.
In October 2002 we, along with the other largest publicly traded multiple system
operators ("MSOs") signed a pledge to support and adhere to new voluntary
reporting guidelines on common operating statistics to provide investors and
others with a better understanding of our operations. Our operating statistics
include capital expenditures and customer information from our cable services,
local access services and Internet services segments.
Our capital expenditures by standard reporting category for the three months
ending March 31, 2003 and 2002 follows (amounts in thousands):
2003 2002
--------- ---------
Customer premise equipment ("CPE") $ 1,276 1,333
Commercial 68 176
Scalable infrastructure 135 1,131
Line extensions 88 124
Upgrade/rebuild 72 1,286
Support capital 77 2,358
--------- ---------
$ 1,716 6,408
========= =========
During the three months ending March 31, 2003 we decreased our capital
expenditures for all of our reportable segments as compared to the same period
in 2002. The decrease was due to capital expenditure limitations required by our
Senior Facility, which we closed on November 1, 2002. In April 2003 we amended
our Senior Facility agreement which, among other items, increases the amount we
may incur for capital expenditures. For a discussion of the Senior Facility
amendment, see Liquidity and Capital Resources included in Part I, Item 2 of
this report.
The standardized definition of a customer relationship is the number of
customers that receive at least one level of service, encompassing voice, video,
and data services, without regard to which services customers purchase. At March
31, 2003 and 2002 we have 124,007 and 122,273 customer relationships,
respectively.
The standardized definition of a revenue generating unit is the sum of all
primary analog video, digital video, high-speed data, and telephony customers,
not counting additional outlets. At March 31, 2003 and 2002 we have 173,281 and
162,580 revenue generating units, respectively.
29
Local Access Services Segment Revenues and Cost of Sales and Services
Local access services segment revenues increased 15.3% in 2003 to $8.4 million
primarily due to growth in the average number of customers served. At March 31,
2003 an estimated 98,900 lines were in service as compared to approximately
89,800 lines in service at March 31, 2002. We estimate that our 2003 lines in
service total represents a statewide market share of approximately 20%. At March
31, 2003 approximately 1,900 additional lines were awaiting connection. The
increase in local access services segment revenues is also caused by a change in
how we provision local access lines in Fairbanks and Juneau. In 2002 we
primarily resold service purchased from ACS. In 2003 we are benefiting from our
build-out of facilities with an increased number of access lines provisioned on
our own facilities, unbundled network element ("UNE") loop and UNE platform
which allows us to collect interstate and intrastate access revenues. The
increase in local access services revenues described above was partially off-set
by the following:
o The FCC MAG reform order reducing the interstate access rates paid by
interexchange carriers to LECs beginning July 2002, and
o A reduction in July 2002 in interstate access rates charged by us to
interexchange carriers in response to an FCC order forcing a competitor
to reduce their interstate access rates.
Local access services segment cost of sales and services increased 20.0% to $5.6
million in 2003. Local access services segment cost of sales and services as a
percentage of local access services segment revenues increased from 64.4% in
2002 to 67.0% in 2003, primarily due to the following:
o Decreased network access services revenues from other carriers as the
number of customers purchasing both long-distance and local access
services from us increases, and
o The effect of the revenue decreases from interstate access rates
described above with no corresponding decrease in the cost of sales and
services.
Our access line mix continued to hold steady in 2003, with residential lines
representing approximately 56% of our lines, business customers representing
approximately 36%, and Internet access customers representing approximately 8%.
Approximately 91% of our lines are provided on our own facilities, leased local
loops, or using UNE platform.
The size of the local access services segment operating loss is exacerbated by
the allocation of the benefit of access cost savings to the long-distance
services segment. If the local access services segment received credit for the
access charge reductions recorded by the long distance services segment, the
local access services segment operating income would have increased by
approximately $1.8 million and the long distance services segment operating
income would have been reduced by an equal amount in 2003. Avoided access
charges totaled approximately $1.8 million during 2003 as compared to $2.0 in
2002. The decrease in the avoided access charge in 2003 is due to the FCC MAG
reform order reducing the interstate access rates paid by interexchange carriers
to LECs beginning July 2002 and a reduction in July 2002 in interstate access
rates charged by us to interexchange carriers in response to an FCC order
forcing a competitor to reduce their interstate access rates. The local access
services segment operating income is affected by our continued evaluation and
testing of digital local phone service and Internet protocol-based technology to
deliver phone service through our cable facilities.
Internet Services Segment Revenues and Cost of Sales and Services
Total Internet services segment revenues increased 28.5% to $4.6 million in 2003
primarily due to growth in the number of cable modems deployed. We had
approximately 71,600 Internet subscribers at March 31, 2003 as compared to
approximately 71,400 at March 31, 2002, of which approximately 38,600 are cable
modem subscribers at March 31, 2003 as compared to approximately 30,200 at March
31, 2002. The Internet services segment's allocable share of cable modem
revenues increased 51.3% to $2.0 million in 2003 as compared to 2002.
30
The Internet services segment does not share in plan fee revenues associated
with our bundled Internet and long-distance service package. Estimated annual
plan fees related to this service offering is in excess of $1.0 million per
quarter and those revenues are included in the long-distance services segment.
Internet services cost of sales and services increased 17.6% to $1.4 million in
2003, and as a percentage of Internet services revenues, totaled 30.6% and 33.4%
in 2003 and 2002, respectively. The 2003 decrease as a percentage of Internet
services revenues is primarily due to a $693,000 increase in Internet's portion
of cable modem revenue to $2.0 million that generally has higher margins than do
other Internet services products. As Internet services 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 revenues.
We enhanced the value of our Internet offerings throughout 2002 through the
addition of electronic billing and presentment capabilities and the rollout of a
product called e-mail guard, which filters out e-mail spam and viruses. We
upgrade