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As filed with the Securities and Exchange Commission on August 8, 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 June 30, 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 July 31, 2003 was:
52,126,671 shares of Class A common stock; and
3,870,679 shares of Class B common stock.
1
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2003
TABLE OF CONTENTS
Page No.
--------
Cautionary Statement Regarding Forward-Looking Statements.................................................3
PART I. FINANCIAL INFORMATION
Item l. Consolidated Balance Sheets as of June 30, 2003
(unaudited) and December 31, 2002..................................................5
Consolidated Statements of Operations for the
three and six months ended June 30, 2003
(unaudited) and 2002 (unaudited)...................................................7
Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 2003
(unaudited) and 2002 (unaudited)...................................................8
Consolidated Statements of Cash Flows for the six
months ended June 30, 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...................................................25
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................57
Item 4. Controls and Procedures...............................................................58
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................58
Item 4. Submission of Matters to a Vote of Security Holders...................................58
Item 6. Exhibits and Reports on Form 8-K......................................................59
Other items are omitted, as they are not applicable.
SIGNATURES................................................................................................60
CERTIFICATIONS............................................................................................61
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;
o Start-up costs associated with entering new markets, including
advertising and promotional efforts;
3
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 MCI (previously
"WorldCom, Inc.") bankruptcy filing on the industry in general and on
us in particular;
o A conversion of MCI's bankruptcy petition to Chapter 7, a significant
delay in MCI's emergence from bankruptcy, or a migration of MCI'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, MCI 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
(Amounts in thousands) (Unaudited)
June 30, December 31,
ASSETS 2003 2002
- --------------------------------------------------------------------------- ---------------- ---------------
Current assets:
Cash and cash equivalents $ 17,977 11,940
--------------- ----------------
Receivables:
Trade 70,549 63,111
Employee 320 391
Other 2,621 3,093
--------------- ----------------
73,490 66,595
Less allowance for doubtful receivables 13,522 14,010
--------------- ----------------
Net receivables 59,968 52,585
--------------- ----------------
Prepaid and other current assets 9,938 9,171
Deferred income taxes, net 8,829 8,509
Notes receivable with related parties 1,059 697
Property held for sale 1,037 1,037
Inventories 408 400
--------------- ----------------
Total current assets 99,216 84,339
--------------- ----------------
Property and equipment in service, net of depreciation 376,838 381,394
Construction in progress 13,530 16,958
--------------- ----------------
Net property and equipment 390,368 398,352
--------------- ----------------
Cable certificates, net of amortization of $26,775 and $26,884 at June
30, 2003 and December 31, 2002, respectively 191,241 191,132
Goodwill, net of amortization of $7,200 at June 30, 2003 and December 31,
2002 41,972 41,972
Other intangible assets, net of amortization of $1,327 and $1,848 at June
30, 2003 and December 31, 2002, respectively 3,393 3,460
Deferred loan and senior notes costs, net of amortization of $5,999 and
$4,110 at June 30, 2003 and December 31, 2002, respectively 10,838 9,961
Notes receivable with related parties 5,060 5,142
Other assets, at cost, net of amortization of $39 and $24 at June 30, 2003
and December 31, 2002, respectively 5,282 4,424
--------------- ----------------
Total other assets 257,786 256,091
--------------- ----------------
Total assets $ 747,370 738,782
=============== ================
See accompanying notes to interim condensed consolidated financial statements.
5 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Amounts in thousands) (Unaudited)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
- -------------------------------------------------------------------------- ---------------- ----------------
Current liabilities:
Current maturities of obligations under long-term debt and capital
leases $ 22,900 1,857
Accounts payable 29,227 33,605
Deferred revenue 18,094 18,290
Accrued payroll and payroll related obligations 13,933 11,821
Accrued interest 8,000 7,938
Accrued liabilities 5,987 5,763
Subscriber deposits 758 889
---------------- ----------------
Total current liabilities 98,899 80,163
Long-term debt, excluding current maturities 335,000 357,700
Obligations under capital leases, excluding current maturities 42,094 44,072
Obligations under capital leases due to related party, excluding
current maturities 691 703
Deferred income taxes, net of deferred income tax benefit 21,902 16,061
Other liabilities 6,807 4,956
---------------- ----------------
Total liabilities 505,393 503,655
---------------- ----------------
Redeemable preferred stocks 26,907 26,907
---------------- ----------------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000 shares; issued 52,112 and 51,795 shares
at June 30, 2003 and December 31, 2002, respectively 200,149 199,903
Class B. Authorized 10,000 shares; issued 3,874 and 3,875 shares at June 30,
2003 and December 31, 2002, respectively; convertible on
a share-per-share basis into Class A common stock 3,273 3,274
Less cost of 338 and 317 Class A common shares held in treasury at
June 30, 2003 and December 31, 2002, respectively (1,917) (1,836)
Paid-in capital 11,554 11,222
Notes receivable with related parties issued upon stock option exercise (5,650) (5,650)
Retained earnings 8,188 1,847
Accumulated other comprehensive loss (527) (540)
---------------- ----------------
Total stockholders' equity 215,070 208,220
Commitments and contingencies
---------------- ----------------
Total liabilities and stockholders' equity $ 747,370 738,782
================ ================
See accompanying notes to interim condensed consolidated financial statements.
6
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------------- -------------- --------------- --------------
(Amounts in thousands, except per share amounts)
Revenues $ 95,939 92,740 188,716 180,950
Cost of sales and services 30,071 30,861 60,319 62,098
Selling, general and administrative expenses 34,294 32,585 67,287 63,886
Bad debt expense 802 10,616 1,399 11,197
Depreciation, amortization and accretion expense 12,800 13,912 26,301 27,870
-------------- -------------- --------------- --------------
Operating income 17,972 4,766 33,410 15,899
-------------- -------------- --------------- --------------
Other income (expense):
Interest expense (9,138) (6,236) (18,292) (12,827)
Amortization of loan and senior notes fees (625) (371) (1,698) (1,128)
Interest income 165 155 331 228
-------------- -------------- --------------- --------------
Other expense, net (9,598) (6,452) (19,659) (13,727)
-------------- -------------- --------------- --------------
Net income (loss) before income taxes and
cumulative effect of a change in
accounting principle 8,374 (1,686) 13,751 2,172
Income tax (expense) benefit (3,564) 583 (5,846) (1,063)
-------------- -------------- --------------- --------------
Net income (loss) before cumulative effect
of a change in accounting principle 4,810 (1,103) 7,905 1,109
Cumulative effect of a change in accounting
principle, net of income tax benefit of $367 --- --- (544) ---
-------------- -------------- --------------- --------------
Net income (loss) $ 4,810 (1,103) 7,361 1,109
============== ============== =============== ==============
Basic and diluted net income (loss) per common
share:
Net income (loss) before cumulative effect of
a change in accounting principle $ 0.08 (0.03) 0.12 0.00
Cumulative effect of a change in accounting
principle, net of income tax benefit of
$367 --- --- (0.01) ---
-------------- -------------- --------------- --------------
Net income (loss) $ 0.08 (0.03) 0.11 0.00
============== ============== =============== ==============
See accompanying notes to interim condensed consolidated financial statements.
7
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
Notes Accumulated
Class A Receivable Other
Class A Class B Shares Issued to Retained Comprehensive
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 --- --- --- --- --- 1,109 --- 1,109
Change in fair value of cash flow
hedge, net of change in income tax
liability of $151 --- --- --- --- --- --- (232) (232)
-----------
Comprehensive income 877
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 307 --- --- --- 307
Class B shares converted to Class A 2 (2) --- --- --- --- --- ---
Shares issued under stock option plan 3,166 --- --- --- (3,062) --- --- 104
Amortization of the excess of GCI stock
market value over stock option
exercise cost on date of stock option
grant --- --- --- 238 --- --- --- 238
Purchase of treasury stock --- --- (177) --- --- --- --- (177)
Preferred stock dividends --- --- --- --- --- (1,019) --- (1,019)
------------------------------------------------------------------------------------------
Balances at June 30, 2002 $198,815 3,279 (1,836) 11,019 (5,650) (2,681) (224) 202,722
==========================================================================================
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 --- --- --- --- --- 7,361 --- 7,361
Change in fair value of cash flow
hedge, net of change in income tax
benefit of $105 --- --- --- --- --- --- 13 13
-----------
Comprehensive income 7,374
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 63 --- --- --- 63
Class B shares converted to Class A 1 (1) --- --- --- --- --- ---
Shares issued under stock option plan 245 --- --- --- --- --- --- 245
Amortization of the excess of GCI stock
market value over stock option
exercise cost on date of stock option
grant --- --- --- 269 --- --- --- 269
Purchase of treasury stock --- --- (81) --- --- --- --- (81)
Preferred stock dividends --- --- --- --- --- (1,020) --- (1,020)
------------------------------------------------------------------------------------------
Balances at June 30, 2003 $200,149 3,273 (1,917) 11,554 (5,650) 8,188 (527) 215,070
==========================================================================================
See accompanying notes to interim condensed consolidated financial statements.
8
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2003 2002
-------------- --------------
(Amounts in thousands)
Operating activities:
Net income $ 7,361 1,109
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion expense 26,301 27,870
Deferred income tax expense 5,846 1,158
Amortization of loan and senior notes fees 1,698 1,128
Cumulative effect of a change in accounting principle, net of
income tax benefit of $367 544 ---
Bad debt expense, net of write-offs (488) 9,713
Deferred compensation and compensatory stock options 567 634
Other noncash income and expense items (254) 18
Change in operating assets and liabilities (9,935) (11,705)
-------------- --------------
Net cash provided by operating activities 31,640 29,925
-------------- --------------
Investing activities:
Purchases of property and equipment (17,375) (36,192)
Payment of deposit (721) ---
Notes receivable issued to related parties (48) (3,055)
Payments received on notes receivable with related parties 22 858
Purchases of other assets (403) (940)
-------------- --------------
Net cash used by investing activities (18,525) (39,329)
-------------- --------------
Financing activities:
Repayments of long-term borrowings and capital lease obligations (3,647) (395)
Long-term borrowings - bank debt --- 9,000
Payment of preferred stock dividend (1,020) (1,018)
Payment of debt issuance costs (2,575) (250)
Purchase of treasury stock (81) (177)
Proceeds from common stock issuance 245 104
-------------- --------------
Net cash provided (used) by financing activities (7,078) 7,264
-------------- --------------
Net increase (decrease) in cash and cash equivalents 6,037 (2,140)
Cash and cash equivalents at beginning of period 11,940 11,097
-------------- --------------
Cash and cash equivalents at end of period $ 17,977 8,957
============== ==============
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 of America 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 June 30, 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 June 30,
2003 2002
------------------------------ -------------------------------
Income Shares Loss Shares
(Num- (Denom- Per-share (Num- (Denom- Per-share
erator) inator) Amounts erator) inator) Amounts
---------- -------- ---------- ---------- --------- ----------
Net income (loss) $ 4,810 $(1,103)
Less preferred stock dividends:
Series B 361 361
Series C 150 150
---------- ----------
Basic EPS:
Net income (loss) available to
common stockholders 4,299 55,613 $ 0.08 (1,614) 55,040 $ (0.03)
Effect of Dilutive Securities:
Unexercised stock options --- 354 --- --- --- ---
---------- -------- ---------- ---------- --------- ----------
Diluted EPS:
Net income (loss) available to
common stockholders $ 4,299 55,967 $ 0.08 $(1,614) 55,040 $ (0.03)
========== ======== ========== ========== ========= ==========
11 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Six Months Ended June 30,
2003 2002
------------------------------ -------------------------------
Income Shares Loss 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 $ 7,905 $ 1,109
Less preferred stock dividends:
Series B 722 721
Series C 298 298
---------- ----------
Basic EPS:
Net income before cumulative
effect of a change in accounting
principle, net of deferred tax
benefit of $367, available to
common stockholders 6,885 55,489 $ 0.12 90 54,956 $ 0.00
Effect of Dilutive Securities:
Unexercised stock options --- 323 --- --- 1,058 ---
---------- -------- ---------- ---------- --------- ----------
Diluted EPS:
Net income before cumulative
effect of a change in accounting
principle, net of deferred tax
benefit of $367, available to
common stockholders $ 6,885 55,812 $ 0.12 $ 90 56,014 $ 0.00
========== ======== ========== ========== ========= ==========
Common equivalent shares outstanding which are anti-dilutive for
purposes of calculating EPS for the three and six months ended June
30, 2003 and 2002, are not included in the diluted EPS
calculations, and consist of the following for the three and six
months ended June 30, 2003 and 2002 (shares, in thousands):
Series B redeemable preferred stock 3,062
Series C redeemable preferred stock 833
--------
Anti-dilutive common equivalent shares
outstanding 3,895
========
12 (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 and six months ended June 30, 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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
----------- ----------- ---------- ----------
Weighted average shares associated with
outstanding stock options 4,775 131 4,653 135
=========== =========== ========== ==========
(d) Common Stock
Following is the statement of common stock at June 30, 2003 and
2002 (shares, in thousands):
Class A Class B
------------- --------------
Balances at December 31, 2001 50,967 3,883
Class B shares converted to Class A 6 (6)
Shares issued under stock option plan 533 ---
------------- --------------
Balances at June 30, 2002 51,506 3,877
============= ==============
Balances at December 31, 2002 51,795 3,875
Class B shares converted to Class A 1 (1)
Shares issued under stock option plan 93 ---
Shares issued per G.C. Cablevision, Inc.
acquisition agreement 223 ---
------------- --------------
Balances at June 30, 2003 52,112 3,874
============= ==============
(e) Redeemable Preferred Stocks
Redeemable preferred stocks at June 30, 2003 and 2002 consist of
(amounts in thousands):
Series B $ 16,907
Series C 10,000
-------------
$ 26,907
=============
We have 1,000,000 shares of preferred stock authorized with the
following shares issued (in thousands):
Series B Series C
------------- --------------
Shares at December 31, 2001 and 2002 and
June 30, 2002 and 2003 17 10
============= ==============
13 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
As of June 30, 2003, the combined aggregate amount of preferred
stock mandatory redemption requirements follow (amounts in
thousands):
Years ending June 30:
2004 $ ---
2005 10,150
2006 ---
2007 ---
2008 ---
--------
$ 10,150
========
Series B
The redemption amount of our convertible redeemable accreting
Series B preferred stock at June 30, 2003 and December 31, 2002 was
$17,148,000. 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 June 30, 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.
Following is a reconciliation of the beginning and ending aggregate
carrying amount of our asset retirement obligations at June 30,
2003 (amounts in thousands):
Balance at December 31, 2002 $ ---
Liability recognized upon adoption of SFAS
No. 143 1,565
Accretion expense for the six months ended
June 30, 2003 64
----------
Balance at June 30, 2003 $ 1,629
==========
14 (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 June 30, 2002 $ 1,457
==========
Balance at June 30, 2003 $ 1,629
==========
(g) Payments Received from Suppliers
On March 20, 2003 the Financial Accounting Standards Board 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, provided the amounts are
probable and reasonably estimable. 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 June 30, 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
15 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
method of accounting for stock-based employee compensation and the
effect of the method used 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 five years and compensation
cost for options granted prior to January 1, 1996 is not
considered. The following table illustrates the effect on net
income (loss) and EPS for the three and six months ended June 30,
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 Six Months Ended
June 30, June 30,
------------------------- ------------------------
2003 2002 2003 2002
----------- ---------- ----------- -----------
Net income (loss), as reported $ 4,810 (1,103) 7,361 1,109
Total stock-based employee
compensation expense included in
reported net income, net of related
tax effects 91 83 159 142
Total stock-based employee
compensation expense under the
fair-value based method for all
awards, net of related tax effects (451) (488) (925) (1,063)
----------- ---------- ----------- -----------
Pro forma net income (loss) $ 4,450 (1,508) 6,595 188
=========== ========== =========== ===========
Basic and diluted net income (loss)
per common share after cumulative
effect of a change in accounting
principle, as reported $ 0.08 (0.03) 0.11 0.00
=========== ========== =========== ===========
Basic and diluted net income (loss)
per common share after cumulative
effect of a change in accounting
principle, pro forma $ 0.07 (0.04) 0.10 (0.02)
=========== ========== =========== ===========
The calculation of total stock-based employee compensation expense
under the fair-value based method includes weighted-average
assumptions of a risk-free interest rate, volatility and an
expected life.
16 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(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 June 30, 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, MCI 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 MCI 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) Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others
On January 1, 2003 we adopted FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". This
Interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. This Interpretation
does not prescribe a specific approach for subsequently measuring
the guarantor's recognized liability over the term of the related
guarantee. This Interpretation also incorporates, without change,
the guidance in FIN No. 34, "Disclosure of Indirect Guarantees of
Indebtedness of Others", which is being superseded. Adoption of FIN
No. 45 did not have a material effect on our results of operations,
financial position and cash flows.
(l) Reclassifications
Reclassifications have been made to the 2002 financial statements
to make them comparable with the 2003 presentation.
17 (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):
Six month periods ended June 30, 2003 2002
------------ ------------
Increase in accounts receivable $ (6,894) (7,819)
Increase in inventories (8) (820)
(Increase) decrease in prepaid and other current assets (767) 455
Decrease in accounts payable (4,379) (1,124)
Decrease in deferred revenues (196) (162)
Increase (decrease) in accrued payroll and payroll
related obligations 2,112 (4,783)
Increase in accrued interest 62 196
Increase in accrued liabilities 224 1,258
Increase (decrease) in subscriber deposits (130) 202
Increase in components of other long-term liabilities
41 892
------------ ------------
$ (9,935) (11,705)
============ ============
We paid interest totaling approximately $18,230,000 and $12,631,000
during the six months ended June 30, 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 5.
Amortization expense for amortizable intangible assets was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------------- ----------- ------------- -----------
Amortization expense $ 132 181 332 387
============== =========== ============= ===========
18 (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 $ 526
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) Long-term Debt
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.
19 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
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 $2,379,000 during the six months
ended June 30, 2003 which will be amortized over the life of the amended
agreement.
(5) 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
four largest urban areas, Anchorage, Fairbanks, the Matanuska-Susitna
Valley and Juneau. We offer digital cable television services in
Anchorage, the Matanuska-Susitna Valley, Fairbanks, Juneau, Kenai and
Soldotna and retail cable modem service (through our Internet services
segment) in all of our locations in Alaska except Kotzebue. We 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 to
both consumer and commercial customers. 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. Operating expenses for the preparation of our
new phone directory are included in the All Other category. The revenue
and costs of sales and service for our new phone directory will be
included in the All Other category upon their recognition.
We evaluate performance and allocate resources based on (1) earnings or
loss from operations before depreciation, amortization and accretion
expense, net other 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.
20 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
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 72% of our undersea
fiber optic cable system which transits international waters.
Summarized financial information for our reportable segments for the six
months ended June 30, 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 $ 7,251 1,258 5,015 6,382 19,906 372 20,278
External 100,056 47,310 17,671 9,380 174,417 14,299 188,716
------------------------------------------------------------------------------
Total revenues $ 107,307 48,568 22,686 15,762 194,323 14,671 208,994
==============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, net interest
expense and income taxes $ 53,239 22,806 1,607 1,339 78,991 (18,049) 60,942
==============================================================================
Operating income (loss) $ 43,482 13,744 (129) (361) 56,736 (22,095) 34,641
==============================================================================
2002
----
Revenues:
Intersegment $ 10,847 1,017 5,490 4,548 21,902 372 22,274
External 102,442 43,265 15,414 7,485 168,606 12,344 180,950
------------------------------------------------------------------------------
Total revenues $ 113,289 44,282 20,904 12,033 190,508 12,716 203,224
==============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, net interest
expense and income taxes $ 43,212 20,351 2,127 (5,658) 60,032 (15,806) 44,226
==============================================================================
Operating income (loss) $ 30,953 12,085 459 (7,432) 36,065 (19,709) 16,356
==============================================================================
A reconciliation of reportable segment revenues to consolidated revenues
follows (amounts in thousands):
Six months ended June 30, 2003 2002
--------------- ---------------
Reportable segment revenues $ 194,323 190,508
Plus All Other revenues 14,671 12,716
Less intersegment revenues eliminated in consolidation 20,278 22,274
--------------- ---------------
Consolidated revenues $ 188,716 180,950
=============== ===============
21 (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 and accretion expense, net other expense and
income taxes to consolidated net income before income taxes and
cumulative effect of a change in accounting principle follows (amounts in
thousands):
Six months ended June 30, 2003 2002
-------------- ----------------
Reportable segment earnings from operations before
depreciation, amortization and accretion expense, net other
expense and income taxes $ 78,991 60,032
Less All Other loss from operations before depreciation,
amortization and accretion expense, net other expense and
income taxes 18,049 15,806
Less intersegment contribution eliminated in consolidation 1,231 457
-------------- ----------------
Consolidated earnings from operations before
depreciation, amortization and accretion expense, net
other expense and income taxes 59,711 43,769
Less depreciation, amortization and accretion expense 26,301 27,870
-------------- ----------------
Consolidated operating income 33,410 15,899
Less other expense, net 19,659 13,727
-------------- ----------------
Consolidated net income before income taxes and cumulative
effect of a change in accounting principle $ 13,751 2,172
============== ================
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):
Six months ended June 30, 2003 2002
--------------- ---------------
Reportable segment operating income $ 56,736 36,065
Less All Other operating loss 22,095 19,709
Less intersegment contribution eliminated in consolidation 1,231 457
--------------- ---------------
Consolidated operating income 33,410 15,899
Less other expense, net 19,659 13,727
--------------- ---------------
Consolidated net income before income taxes and cumulative
effect of a change in accounting principle $ 13,751 2,172
=============== ===============
(6) 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 Alaska Public Utilities Commission ("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
22 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
the Alaska Supreme 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 are unable to
predict when the Court will issue their decision.
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.
Fiber Optic Cable System Construction Commitment
In June 2003 we began work on the construction of a fiber optic cable
system connecting Seward, Alaska and Warrenton, Oregon, with leased
backhaul facilities to connect it to our switching and distribution
centers in Anchorage, Alaska and Seattle, Washington. A consortium of
companies has been selected to design, engineer, manufacture and install
the undersea fiber optic cable system and a contract has been signed at a
total cost to us of $35.2 million. We expect to fund construction of the
fiber optic cable system through our operating cash flows and, to the
extent necessary, with draws on our Senior Facility.
(7) Subsequent Events
On July 21, 2002 MCI and substantially all of its active U.S.
subsidiaries filed voluntary petitions for reorganization under Chapter
11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court.
Chapter 11 allows a company to continue operating in the ordinary course
of business in order to maximize recovery for the company's creditors and
shareholders. During the six months ended June 30, 2002 we recognized
$9.7 million in bad debt expense for uncollected amounts due from MCI.
During the three months ended September 30, 2002 we recognized an
additional $1.2 million in bad debt expense. At June 30, 2003 we had
total pre-petition amounts due from MCI of $12.9 million. At June 30,
2003 the bad debt reserve for uncollected amounts due from MCI ("MCI
reserve") totaled $11.6 million and consisted of all billings for
services rendered prior to July 21, 2002 that were not paid or deemed
recoverable as of June 30, 2003. The MCI reserve includes approximately
$0.7 million in reserves recognized prior to the bankruptcy in addition
to the bad debt expense previously discussed.
On July 22, 2003, the United States Bankruptcy Court approved the
settlement of pre-petition amounts owed to us by MCI and affirmed all of
our existing contracts with MCI. The settlement settles unpaid balances
due from MCI for services rendered prior to their bankruptcy filing date,
settles billing disputes between us, and establishes a right to set-off
certain of our pre-petition accounts payable to MCI. Under the terms of
the settlement:
o We will reduce our pre-petition accounts receivable from MCI by
approximately $800,000, and
o We may set-off approximately $1.0 million of our pre-petition
accounts payable to MCI. The $1.0 million in amounts due from
MCI which will be off-set by an equal amount of pre-petition
accounts payable was not included in the MCI reserve.
The remaining pre-petition accounts receivable balance owed by MCI to us
after these adjustments is $11.1 million which we will use as a credit
against amounts payable for future services purchased from
23 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
MCI. We expect to reduce the MCI reserve as we utilize credits for
services otherwise payable to MCI in the future. We expect to evaluate
the likelihood that we will receive full credit offset for our remaining
pre-petition accounts receivable balance when MCI exits bankruptcy
proceedings and may change our recognition method at that time.
On July 24, 2003, our contract to provide interstate and intrastate
long-distance services to MCI was extended for a minimum of five years to
July 2008. The agreement sets the terms and conditions under which we
originate and terminate certain types of long distance and data services
in Alaska on MCI's behalf. In exchange for extending the term of this
exclusive contract, MCI will receive a series of rate reductions
implemented in phases over the life of the contract.
24
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, 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. Historically, cash requirements for significant
acquisitions and major capital expenditures have been provided largely through
our financing activities. We expect to fund the construction of a new fiber
optic cable system through our operating cash flows and, to the extent
necessary, with draws on our Senior Facility, as further discussed in Liquidity
and Capital Resources included in Part I, Item 2 of this report.
Consolidated revenues increased by more than $3 million during the second
quarter of 2003 ("2003") as compared to the second quarter in 2002 ("2002"). Our
operating income increased by more than $13 million in 2003. Our net income
before income tax and cumulative effect of a change in accounting principle
increased by more than $10 million and our net income increased by almost $6
million. Three of our reportable business segments experienced growth in
external revenues from 2002 to 2003 as we continued to strengthen our position
in the markets we serve. The long-distance services segment experienced a
decrease in revenue in 2003 as compared to 2002. The long-distance services,
cable services and Internet services segments improved their operating results
in 2003. The operating results for the local access services segment decreased
in 2003. Basic and diluted earnings per share increased $0.11 per share in 2003
as compared to 2002.
Long-Distance Services Overview
Second quarter 2003 long-distance services revenue represented 53.8% 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 second quarter of 2003.
25
Factors that have the greatest impact on year-to-year changes in long-distance
services revenues may 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.
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.
On July 21, 2002 MCI and substantially all of its active U.S. subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy
Code in the United States Bankruptcy Court. Chapter 11 allows a company to
continue operating in the ordinary course of business in order to maximize
recovery for the company's creditors and shareholders. During the six months
ended June 30, 2002 we recognized $9.7 million in bad debt expense for
uncollected amounts due from MCI. During the three months ended September 30,
2002 we recognized an additional $1.2 million in bad debt expense. At June 30,
2003 we had total pre-petition amounts due from MCI of $12.9 million. At June
30, 2003 the bad debt reserve for uncollected amounts due from MCI ("MCI
reserve") totaled $11.6 million and consisted of all billings for services
rendered prior to July 21, 2002 that were not paid or deemed recoverable as of
June 30, 2003. The MCI reserve includes approximately $0.7 million in reserves
recognized prior to the bankruptcy in addition to the bad debt expense
previously discussed.
On July 22, 2003, the United States Bankruptcy Court approved the settlement of
pre-petition amounts owed to us by MCI and affirmed all of our existing
contracts with MCI. The settlement settles unpaid balances due from MCI for
services rendered prior to their bankruptcy filing date, settles billing
disputes between us, and establishes a right to set-off certain of our
pre-petition accounts payable to MCI. Under the terms of the settlement:
o We will reduce our pre-petition accounts receivable from MCI by
approximately $800,000, and
o We may set-off approximately $1.0 million of our pre-petition accounts
payable to MCI. The $1.0 million in amounts due from MCI which will be
off-set by an equal amount of pre-petition accounts payable was not
included in the MCI reserve.
The remaining pre-petition accounts receivable balance owed by MCI to us after
these adjustments is $11.1 million which we will use as a credit against amounts
payable for future services purchased from MCI. We expect to reduce the MCI
reserve as we utilize credits for services otherwise payable to MCI in the
future. We expect to evaluate the likelihood that we will receive full credit
offset for our remaining pre-petition accounts receivable balance when MCI exits
bankruptcy proceedings and may change our recognition method at that time.
On July 24, 2003, our contract to provide interstate and intrastate
long-distance services to MCI was extended for a minimum of five years to July
2008. The agreement sets the terms and conditions under which we originate and
terminate certain types of long distance and data services in Alaska on MCI's
behalf. In exchange for extending the term of this exclusive contract, MCI will
receive a series of rate reductions implemented in phases over the life of the
contract.
26
We believe that MCI may ultimately exit bankruptcy with their business intact.
We cannot predict how long it may take MCI 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.
Recent announcements, hearings and media coverage reflect a political movement
that may be attempting to deny MCI from continuing to provide services to
government agencies. We estimate that 25% of our MCI revenues are attributed to
their provision of service to government agencies. Our MCI revenues could be
significantly reduced if MCI's government contract traffic moves from their
network to other carriers' networks for which we do not provide service to.
Other common carrier traffic routed to us for termination in Alaska is largely
dependent on traffic routed to MCI 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
MCI 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
Second quarter 2003 cable television revenues represented 24.9% of consolidated
revenues. Our cable systems serve 33 communities and areas in Alaska, including
the state's four largest population centers, Anchorage, Fairbanks, the
Matanuska-Susitna Valley 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 second quarter
of 2003 programming services generated 77.6% of total cable services revenues,
cable services' allocable share of cable modem services accounted for 11.4% of
such revenues, equipment rental and installation fees accounted for 7.0% of such
revenues, advertising sales accounted for 3.2% of such revenues, and other
services accounted for the remaining 0.8% of total cable services revenues.
Effective February 2003, we increased rates charged for certain cable services
and premium packages in six communities, including three of the state's four
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 may include 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, including but not limited to
direct broadcast satellite and, expected to begin in the third quarter of 2003,
digital video service over telephone lines, and from other sources of news,
information and entertainment. Several ILECs in the lower-48 states have
announced marketing arrangements to provide direct broadcast satellite services
along with local telephone and other services. Similar arrangements could
27
be extended to ILECs in the markets we serve in Alaska. We believe our cable
television services will continue to be competitive by providing, at reasonable
prices, a greater variety of communication services than are available off-air
or through other alternative delivery sources. Additionally, we believe we offer
superior technical performance and responsive community-based 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 second quarter of 2003 local access services
revenues represented 9.6% of consolidated revenues.
The primary factors that contribute to year-to-year changes in local access
services revenues may include 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 second quarter of
2003 Internet services segment revenues represented 5.0% of consolidated
revenues.
The primary factors that contribute to year-to-year changes in Internet services
revenues may include the average number of subscribers to our services during a
given reporting period, the average monthly subscription rates, the amount of
bandwidth purchased by large commercial customers, 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 5 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 6.7% of total revenues
in the second quarter of 2003 and include managed services revenues totaling
$5.3 million, cellular telephone services revenues totaling $905,000 and product
sales revenues totaling $215,000.
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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):
Three Months Ended Six Months Ended
June 30, June 30,
Percent- Percent-
age age
Change (1) Change (1)
2003 vs. 2003 vs.
2003 2002 2002 2003 2002 2002
---- ---- ---- ---- ---- ----
Statement of Operations Data:
Revenues
Long-distance services 53.8% 56.5% (1.5%) 53.0% 56.6% (2.3%)
Cable services 24.9% 23.6% 8.9% 25.1% 23.9% 9.3%
Local access services 9.6% 8.8% 14.1% 9.4% 8.5% 14.6%
Internet services 5.0% 4.2% 22.4% 5.0% 4.2% 25.3%
All Other services 6.7% 6.9% 0.5% 7.5% 6.8% 15.8%
-----------------------------------------------------------------------
Total revenues 100.0% 100.0% 3.4% 100.0% 100.0% 4.3%
Cost of sales and services 31.3% 33.3% (2.6%) 32.0% 34.3% (2.9%)
Selling, general and administrative
expenses 35.8% 35.1% 5.2% 35.7% 35.3% 5.3%
Bad debt expense 0.8% 11.5% (92.4%) 0.7% 6.2% (87.5%)
Depreciation, amortization and accretion
expense 13.3% 15.0% (8.0%) 13.9% 15.4% (5.6%)
-----------------------------------------------------------------------
Operating income 18.8% 5.1% 277.1% 17.7% 8.8% 110.1%
Net income (loss) before income
taxes and cumulative effect of a
change in accounting principle 8.7% (1.8%) 596.7% 7.3% 1.2% 533.1%
Net income (loss) before
cumulative effect of a change in
accounting principle 5.0% (1.2%) 536.1% 4.2% 0.6% 612.8%
Net income (loss) 5.0% (1.2%) 536.1% 3.9% 0.6% 563.8%
Other Operating Data:
Long-distance services operating income (2) 45.2% 23.5% 89.8% 43.5% 30.2% 40.5%
Cable services operating income (3) 30.5% 29.1% 14.4% 29.1% 27.9% 13.7%
Local access services operating (loss)
income (4) (5.4%) 5.2% (218.2%) (0.7%) 3.0% (128.1%)
Internet services operating income (loss) (5) 1.4% (92.2%) 101.9% (3.8%) (99.3%) 95.1%
- --------------------------
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.
- --------------------------
29
Three Months Ended June 30, 2003 ("2003") Compared To Three Months Ended June
30, 2002 ("2002").
Overview of Revenues and Cost of Sales and Services
Total revenues increased 3.4% from $92.7 million in 2002 to $95.9 million in
2003. The cable services, local access services and Internet services segments
and All Other Services contributed to the increase in 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 2.6% to $30.1 million in 2003. As a
percentage of total revenues, total cost of sales and services decreased from
33.3% in 2002 to 31.3% 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 1.5% to $51.6 million in
2003.
Message Telephone Service Revenue from Common Carrier Customers
Message telephone service revenues from other common carriers (principally MCI
and Sprint) decreased 9.8% to $23.0 million in 2003 resulting from a 4.2%
decrease in wholesale minutes carried to 208.5 million minutes, a 1.8% decrease
in the average rate per minute on minutes carried for other common carriers, and
a re-rating of certain other common carrier minutes in 2002 that did not recur
in 2003.
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.
Message Telephone Service Revenue from Residential, Commercial and Governmental
Customers
Message telephone service revenues from residential, commercial, and
governmental customers decreased 14.5% to $10.2 million in 2003 primarily due to
the following:
o A 8.2% decrease in minutes carried for these customers to 72.4 million
minutes. The decrease is primarily due to the loss of approximately 1.0
million to 1.5 million minutes earned from a certain retail customer in
2002 but not earned in 2003 and the effect of customers substituting
cellular phone and prepaid calling card usage for direct dial minutes,
o A 9.0% decrease in the average rate per minute to $0.091 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 2.0% decrease in the number of active residential, commercial, and
governmental customers billed to 88,300 at June 30, 2003.
Revenue from Private Line and Private Network Customers
Private line and private network transmission services revenues increased 2.6%
to $9.4 million in 2003.
30
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 37.6% to $6.3 million in 2003. The increase is primarily due
to the following:
o 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,
o An increased number of circuits sold to rural hospitals and health
clinics, and
o Equipment sales to one customer.
Long-distance Services Segment Cost of Sales and Services
Long-distance services segment cost of sales and services decreased 13.8% to
$13.0 million in 2003. Long-distance services segment cost of sales and services
as a percentage of long-distance services segment revenues decreased from 28.9%
in 2002 to 25.3% 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 $.014 and $.051 per minute for
interstate and intrastate traffic, respectively. We expect cost savings
to continue to occur