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As filed with the Securities and Exchange Commission on November 11, 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 September 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) 868-5600
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 October 31, 2003 was:
52,465,802 shares of Class A common stock; and
3,868,580 shares of Class B common stock.
1
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 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 September 30, 2003
(unaudited) and December 31, 2002..................................................5
Consolidated Statements of Operations for the
three and nine months ended September 30, 2003
(unaudited) and 2002 (unaudited)...................................................7
Consolidated Statements of Stockholders' Equity
for the nine months ended September 30, 2003
(unaudited) and 2002 (unaudited)...................................................8
Consolidated Statements of Cash Flows for the nine
months ended September 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...................................................28
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................62
Item 4. Controls and Procedures...............................................................63
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................63
Item 6. Exhibits and Reports on Form 8-K......................................................64
Other items are omitted, as they are not applicable.
SIGNATURES................................................................................................65
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 and the state of Alaska
legislature; 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 yellow page directories, local telephone
services expansion including deploying digital local telephone service,
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 Changes in regulations governing unbundled network elements ("UNE");
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 may make 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 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 The effect on us of industry consolidation and the acquisition of one
or more of our large wholesale customers;
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)
September 30, December 31,
ASSETS 2003 2002
- --------------------------------------------------------------------------- ---------------- ---------------
Current assets:
Cash and cash equivalents $ 10,780 11,940
--------------- ----------------
Receivables:
Trade 60,107 63,111
Employee 292 391
Other 2,602 3,093
--------------- ----------------
63,001 66,595
Less allowance for doubtful receivables 2,359 14,010
--------------- ----------------
Net receivables 60,642 52,585
--------------- ----------------
Prepaid and other current assets 11,605 9,171
Deferred income taxes, net 8,644 8,509
Notes receivable with related parties 1,053 697
Property held for sale 1,037 1,037
Inventories 537 400
--------------- ----------------
Total current assets 94,298 84,339
--------------- ----------------
Property and equipment in service, net of depreciation 371,564 381,394
Construction in progress 22,981 16,958
--------------- ----------------
Net property and equipment 394,545 398,352
--------------- ----------------
Cable certificates, net of amortization of $26,775 and $26,884 at
September 30, 2003 and December 31, 2002, respectively 191,241 191,132
Goodwill, net of amortization of $7,200 at September 30, 2003 and December
31, 2002 41,972 41,972
Other intangible assets, net of amortization of $1,522 and $1,848 at
September 30, 2003 and December 31, 2002, respectively 3,304 3,460
Deferred loan and senior notes costs, net of amortization of $6,630 and
$4,110 at September 30, 2003 and December 31, 2002, respectively 10,237 9,961
Notes receivable with related parties 5,246 5,142
Other assets, at cost, net of amortization of $52 and $24 at September 30,
2003 and December 31, 2002, respectively 8,229 4,424
--------------- ----------------
Total other assets 260,229 256,091
--------------- ----------------
Total assets $ 749,072 738,782
=============== ================
See accompanying notes to interim condensed consolidated financial statements.
5 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Amounts in thousands) (Unaudited)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
- -------------------------------------------------------------------------- ---------------- ----------------
Current liabilities:
Current maturities of obligations under long-term debt and capital
leases $ 24,017 1,857
Accounts payable 28,865 33,605
Deferred revenue 20,501 18,290
Accrued payroll and payroll related obligations 15,566 11,821
Accrued liabilities 6,605 5,763
Accrued interest 2,961 7,938
Subscriber deposits 691 889
---------------- ----------------
Total current liabilities 99,206 80,163
Long-term debt, excluding current maturities 330,000 357,700
Obligations under capital leases, excluding current maturities 40,529 44,072
Obligations under capital leases due to related party, excluding
current maturities 685 703
Deferred income taxes, net of deferred income tax benefit 25,380 16,061
Other liabilities 6,092 4,956
---------------- ----------------
Total liabilities 501,892 503,655
---------------- ----------------
Redeemable preferred stocks 26,907 26,907
---------------- ----------------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000 shares; issued 52,238 and 51,795 shares
at September 30, 2003 and December 31, 2002, respectively 200,950 199,903
Class B. Authorized 10,000 shares; issued 3,871 and 3,875 shares at
September 30, 2003 and December 31, 2002, respectively;
convertible on a share-per-share basis into Class A common stock 3,271 3,274
Less cost of 338 and 317 Class A common shares held in treasury at
September 30, 2003 and December 31, 2002, respectively (1,917) (1,836)
Paid-in capital 11,837 11,222
Notes receivable with related parties issued upon stock option exercise (5,650) (5,650)
Retained earnings 12,204 1,847
Accumulated other comprehensive loss (422) (540)
---------------- ----------------
Total stockholders' equity 220,273 208,220
Commitments and contingencies
---------------- ----------------
Total liabilities and stockholders' equity $ 749,072 738,782
================ ================
See accompanying notes to interim condensed consolidated financial statements.
6
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------------- -------------- --------------- --------------
(Amounts in thousands, except per share amounts)
Revenues $ 98,327 94,550 287,043 275,500
Cost of sales and services 31,870 30,375 92,189 92,473
Selling, general and administrative expenses 35,262 32,209 102,549 96,095
Bad debt expense 533 1,677 1,932 12,874
Depreciation, amortization and accretion expense 13,067 13,936 39,368 41,806
-------------- -------------- --------------- --------------
Operating income 17,595 16,353 51,005 32,252
-------------- -------------- --------------- --------------
Other income (expense):
Interest expense (8,845) (7,477) (27,137) (20,304)
Amortization of loan and senior notes fees (631) (321) (2,329) (1,449)
Interest income 162 107 493 335
-------------- -------------- --------------- --------------
Other expense, net (9,314) (7,691) (28,973) (21,418)
-------------- -------------- --------------- --------------
Net income before income taxes and
cumulative effect of a change in
accounting principle 8,281 8,662 22,032 10,834
Income tax expense 3,752 3,599 9,598 4,662
-------------- -------------- --------------- --------------
Net income before cumulative effect of a
change in accounting principle 4,529 5,063 12,434 6,172
Cumulative effect of a change in accounting
principle, net of income tax benefit of $367 --- --- (544) ---
-------------- -------------- --------------- --------------
Net income $ 4,529 5,063 11,890 6,172
============== ============== =============== ==============
Basic net income per common share:
Net income before cumulative effect of a
change in accounting principle $ 0.07 0.08 0.20 0.08
Cumulative effect of a change in accounting
principle, net of income tax benefit of
$367 --- --- (0.01) ---
-------------- -------------- --------------- --------------
Net income $ 0.07 0.08 0.19 0.08
============== ============== =============== ==============
Diluted net income per common share:
Net income before cumulative effect of a
change in accounting principle $ 0.07 0.08 0.19 0.08
Cumulative effect of a change in accounting
principle, net of income tax benefit of
$367 --- --- (0.01) ---
-------------- -------------- --------------- --------------
Net income $ 0.07 0.08 0.18 0.08
============== ============== =============== ==============
See accompanying notes to interim condensed consolidated financial statements.
7
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 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 --- --- --- --- --- 6,172 --- 6,172
Change in fair value of cash flow
hedge, net of change in income tax
liability of $390 --- --- --- --- --- --- (587) (587)
-----------
Comprehensive income 5,585
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 5 (5) --- --- --- --- --- ---
Shares issued under stock option plan 3,219 --- --- --- (3,062) --- --- 157
Amortization of the excess of GCI stock
market value over stock option exercise
cost on date of stock option grant --- --- --- 336 --- --- --- 336
Shares issued to Employee Stock Purchase
Plan 497 --- --- --- --- --- --- 497
Shares issued to acquire minority
shareholders' interest in GFCC 68 --- --- --- --- --- --- 68
Purchase of treasury stock --- --- (177) --- --- --- --- (177)
Preferred stock dividends --- --- --- --- --- (1,532) --- (1,532)
----------------------------------------------------------------------------------------
Balances at September 30, 2002 $199,436 3,276 (1,836) 11,117 (5,650) 1,869 (579) 207,633
========================================================================================
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 --- --- --- --- --- 11,890 --- 11,890
Change in fair value of cash flow
hedge, net of change in income tax
benefit of $175 --- --- --- --- --- --- 118 118
-----------
Comprehensive income 12,008
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 222 --- --- --- 222
Class B shares converted to Class A 3 (3) --- --- --- --- --- ---
Shares issued under stock option plan 1,044 --- --- --- --- --- --- 1,044
Amortization of the excess of GCI stock
market value over stock option exercise
cost on date of stock option grant --- --- --- 393 --- --- --- 393
Purchase of treasury stock --- --- (81) --- --- --- --- (81)
Preferred stock dividends --- --- --- --- --- (1,533) --- (1,533)
----------------------------------------------------------------------------------------
Balances at September 30, 2003 $200,950 3,271 (1,917) 11,837 (5,650) 12,204 (422) 220,273
========================================================================================
See accompanying notes to interim condensed consolidated financial statements.
8
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2003 2002
-------------- --------------
(Amounts in thousands)
Operating activities:
Net income $ 11,890 6,172
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion expense 39,368 41,806
Deferred income tax expense 9,598 4,757
Amortization of loan and senior notes fees 2,329 1,449
Cumulative effect of a change in accounting principle, net 544 ---
Bad debt expense, net of write-offs (679) 10,587
Deferred compensation 331 533
Compensatory stock options 393 337
Employee Stock Purchase Plan expense funded with issuance of
General Communication, Inc. Class A common stock --- 497
Other noncash income and expense items (383) 36
Change in operating assets and liabilities (13,990) (18,567)
-------------- --------------
Net cash provided by operating activities 49,401 47,607
-------------- --------------
Investing activities:
Purchases of property and equipment (34,393) (51,989)
Payment of deposits (3,221) ---
Notes receivable issued to related parties (99) (3,055)
Payments received on notes receivable with related parties 22 946
Purchases of other assets (955) (1,563)
-------------- --------------
Net cash used by investing activities (38,646) (55,661)
-------------- --------------
Financing activities:
Repayments of long-term borrowings and capital lease obligations (9,102) (6,802)
Long-term borrowings - bank debt --- 14,000
Payment of preferred stock dividend (1,171) (1,018)
Payment of debt issuance costs (2,605) (382)
Purchase of treasury stock (81) (177)
Proceeds from common stock issuance 1,044 157
-------------- --------------
Net cash provided (used) by financing activities (11,915) 5,778
-------------- --------------
Net decrease in cash and cash equivalents (1,160) (2,276)
Cash and cash equivalents at beginning of period 11,940 11,097
-------------- --------------
Cash and cash equivalents at end of period $ 10,780 8,821
============== ==============
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 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 September 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 September 30,
2003 2002
------------------------------ -------------------------------
Income Shares Income Shares
(Num- (Denom- Per-share Num- (Denom- Per-share
erator) inator) Amounts erator) inator) Amounts
---------- -------- ---------- ---------- --------- ----------
Net income $ 4,529 $ 5,063
Less preferred stock dividends:
Series B 361 361
Series C 151 151
---------- ----------
Basic EPS:
Net income available to common
stockholders 4,017 55,707 $ 0.07 4,551 55,142 $ 0.08
Effect of Dilutive Securities:
Unexercised stock options --- 1,163 --- --- 717 ---
---------- -------- ---------- ---------- --------- ----------
Diluted EPS:
Net income available to common
stockholders $ 4,017 56,870 $ 0.07 $ 4,551 55,859 $ 0.08
========== ======== ========== ========== ========= ==========
11 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Nine Months Ended September 30,
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 $ 12,434 $ 6,172
Less preferred stock dividends:
Series B 1,083 1,083
Series C 449 449
---------- ----------
Basic EPS:
Net income before cumulative
effect of a change in accounting
principle, net of deferred tax
benefit of $367, available to
common stockholders 10,902 55,563 $ 0.20 4,640 54,995 $ 0.08
Effect of Dilutive Securities:
Unexercised stock options --- 531 --- --- 1,176 ---
---------- -------- ---------- ---------- --------- ----------
Diluted EPS:
Net income before cumulative
effect of a change in accounting
principle, net of deferred tax
benefit of $367, available to
common stockholders $ 10,902 56,094 $ 0.19 $ 4,640 56,171 $ 0.08
========== ======== ========== ========== ========= ==========
Common equivalent shares outstanding which are anti-dilutive for
purposes of calculating EPS for the three and nine months ended
September 30, 2003 and 2002 are not included in the diluted EPS
calculations and consist of the following (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 nine months ended September 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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
----------- ----------- ---------- ----------
Weighted average shares associated with
outstanding stock options 155 4,573 2,045 756
=========== =========== ========== ==========
(d) Common Stock
Following is the statement of common stock at September 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 ---
Shares issued to the GCI Employee Stock
Purchase Plan 200 ---
Shares issued to acquire minority
shareholders' interest in GFCC 15 ---
------------- --------------
Balances at September 30, 2002 51,721 3,877
============= ==============
Balances at December 31, 2002 51,795 3,875
Class B shares converted to Class A 4 (4)
Shares issued under stock option plan 216 ---
Shares issued per G.C. Cablevision, Inc.
acquisition agreement 223 ---
------------- --------------
Balances at September 30, 2003 52,238 3,871
============= ==============
(e) Redeemable Preferred Stocks
Redeemable preferred stocks consist of the following (amounts in
thousands):
September 30, December 31,
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 (in thousands):
Series B Series C
------------- --------------
Shares at December 31, 2001 and 2002 and
September 30, 2002 and 2003 17 10
============= ==============
13 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
As of September 30, 2003, the combined aggregate amount of
preferred stock mandatory redemption requirements follow (amounts
in thousands):
Years ending
September 30:
-------------
2004 $ ---
2005 10,150
2006 ---
2007 ---
2008 ---
--------
$ 10,150
========
Series B
The redemption amount of our Series B preferred stock at September
30, 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 September 30, 2003 and December 31,
2002 was $10,000,000.
(f) Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity
On July 1, 2003 we adopted SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as
a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. Adoption of SFAS
No. 150 did not have a material effect on our results of
operations, financial position and cash flows.
(g) 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.
14 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Following is a reconciliation of the beginning and ending aggregate
carrying amount of our asset retirement obligations at September
30, 2003 (amounts in thousands):
Balance at December 31, 2002 $ ---
Liability recognized upon adoption of SFAS
No. 143 1,565
Accretion expense for the nine months ended
September 30, 2003 96
----------
Balance at September 30, 2003 $ 1,661
==========
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 September 30, 2002 $ 1,511
==========
At the date of adoption we recorded net additional capitalized
costs of $654,000 in Property and Equipment in Service, Net of
Depreciation.
(h) 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.
(i) 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.
(j) Stock Option Plan
At September 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
15 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
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 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.
16 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
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 and EPS for the three and nine months ended September 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 Nine Months Ended
September 30, September 30,
------------------------- ------------------------
2003 2002 2003 2002
----------- ---------- --------- -----------
Net income, as reported $ 4,529 5,063 11,890 6,172
Total stock-based employee
compensation expense included in
reported net income, net of related
tax effects 66 59 225 202
Total stock-based employee
compensation expense under the
fair-value based method for all
awards, net of related tax effects (653) (856) (1,641) (1,918)
----------- ---------- --------- -----------
Pro forma net income $ 3,942 4,266 10,474 4,456
=========== ========== ========= ===========
Basic net income per common share
after cumulative effect of a
change in accounting principle, as
reported $ 0.07 0.08 0.19 0.08
=========== ========== ========= ===========
Diluted net income per common share
after cumulative effect of a
change in accounting principle, as
reported $ 0.07 0.08 0.18 0.08
=========== ========== ========= ===========
Basic and diluted net income per
common share after cumulative
effect of a change in accounting
principle, pro forma $ 0.06 0.07 0.16 0.05
=========== ========== ========= ===========
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.
17 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(k) 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 September 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.
(l) 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.
(m) Derivative Instruments and Hedging Activities
On July 1, 2003 we adopted SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". SFAS No. 149
amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities".
Adoption of SFAS No. 149 did not have a material effect on our
results of operations, financial position and cash flows.
(n) Consolidation of Variable Interest Entities
On July 1, 2003 we adopted FIN No. 46, "Consolidation of Variable
Interest Entities". This Interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements", addresses
consolidation by business enterprises of variable interest
entities, which have one or both of the following characteristics:
1. The equity investment at risk is not sufficient to permit the
entity to finance its activities without additional subordinated
financial support from other parties, which is provided through
other interests that will absorb some or all of the expected
losses of the entity.
18 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
2. The equity investors lack one or more of the following essential
characteristics of a controlling financial interest:
a. The direct or indirect ability to make decisions about the
entity's activities through voting rights or similar rights.
b. The obligation to absorb the expected losses of the entity if
they occur, which makes it possible for the entity to finance
its activities.
c. The right to receive the expected residual returns of the
entity if they occur, which is the compensation for the risk
of absorbing the expected losses.
Adoption of FIN No. 46 did not have a material effect on our
results of operations, financial position and cash flows.
(o) Reclassifications
Reclassifications have been made to the 2002 financial statements
to make them comparable with the 2003 presentation.
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in
thousands):
Nine month periods ended September 30, 2003 2002
------------ ------------
Increase in accounts receivable $ (9,315) (14,678)
Increase in inventories (137) (1,242)
(Increase) decrease in prepaid and other current assets (2,434) 1,018
Increase (decrease) in accounts payable (2,802) 453
Increase in deferred revenues 2,211 3,911
Increase (decrease) in accrued payroll and payroll
related obligations 3,745 (4,544)
Decrease in accrued interest (4,977) (4,793)
Increase in accrued liabilities 136 1,239
Decrease in subscriber deposits (198) (187)
Increase (decrease) in components of other long-term
liabilities (219) 256
------------ ------------
$ (13,990) (18,567)
============ ============
We paid interest totaling approximately $32,242,000 and $25,097,000
during the nine months ended September 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 as described in note 6.
19 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Amortization expense for amortizable intangible assets was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------------- ----------- ------------- -----------
Amortization expense $ 195 180 527 567
============== =========== ============= ===========
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 $ 605
2004 487
2005 355
2006 350
2007 289
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) MCI Settlement and Release Agreement
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.
At the time of the petition for bankruptcy, we had approximately $12.9
million in receivables outstanding from MCI. At December 31, 2002 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 December
31, 2002.
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, we reduced the pre-petition amounts receivable from MCI
by $1.8 million and off-set our pre-petition accounts payable by $1.0
million. The majority of the difference reduced the MCI reserve with the
remainder recorded as bad debt expense.
The remaining pre-petition accounts receivable balance owed by MCI to us
after this settlement was $11.1 million ("MCI credit") which we have and
will use as a credit against amounts payable for future services
purchased from MCI. At settlement, all of the remaining pre-petition
amounts receivable due from MCI, which was fully reserved, was removed
from accounts receivable in our Consolidated Balance Sheet.
After settlement, we began reducing the MCI credit as we utilize it for
services otherwise payable to MCI during the same period. The use of the
credit was and is expected to be recorded as a reduction of bad debt
expense. During the three months ended September 30, 2003 we utilized
approximately $1.0 million of the MCI credit against amounts payable for
services received from MCI during the same
20 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
period. The settlement discussed above and use of the MCI credit resulted
in net recovery of bad debt expense of approximately $647,000 during the
three months ended September 30, 2003.
The remaining unused MCI credit totaled $10.0 million at September 30,
2003. The credit balance is not recorded on the Consolidated Balance
Sheet as we are recognizing utilization of the credit as we incur charges
for services received from MCI.
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.
On October 31, 2003, MCI's reorganization plan was approved by the U.S.
Bankruptcy Court. We expect to evaluate the likelihood that we will
receive full credit offset for our remaining credit balance when MCI
exits bankruptcy proceedings and may change our recognition method at
that time.
(5) Long-term Debt
On April 22, 2003 we amended our $225.0 million Senior Facility. On
October 30, 2003 we closed a $220.0 million bank facility ("new Senior
Facility") to replace the amended Senior Facility as further described in
note 8.
(6) 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, Ketchikan,
Kenai and Soldotna and retail cable modem service (through our Internet
services segment) in all of our locations in Alaska except Kotzebue.
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.
Operating expenses to prepare our new phone directory are included in
the local access services segment. Revenue and costs of sales and
service for our new phone directory will be included in the local
access services segment upon their recognition.
Internet services. We offer wholesale and retail Internet services to
both consumer and commercial customers. We offer cable modem service as
further described in Cable services above. Our
21 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
undersea fiber optic cable systems allow 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 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.
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 systems which transit international waters.
Summarized financial information for our reportable segments for the nine
months ended September 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 $ 10,946 1,900 7,277 1,792 21,915 558 22,473
External 153,248 71,009 27,211 14,302 265,770 21,273 287,043
------------------------------------------------------------------------------
Total revenues $ 164,194 72,909 34,488 16,094 287,685 21,831 309,516
==============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, net interest
expense and income taxes $ 81,108 33,153 2,501 2,149 118,911 (26,709) 92,202
==============================================================================
Operating income (loss) $ 66,525 19,712 (111) (380) 85,746 (32,912) 52,834
==============================================================================
22 (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 $ 16,578 1,543 7,498 1,447 27,066 558 27,624
External 156,221 65,322 23,510 11,412 256,465 19,035 275,500
------------------------------------------------------------------------------
Total revenues $ 172,799 66,865 31,008 12,859 283,531 19,593 303,124
==============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, net interest
expense and income taxes $ 73,440 30,528 2,178 (8,444) 97,702 (22,937) 74,765
==============================================================================
Operating income (loss) $ 54,583 18,472 (369) (11,111) 61,575 (28,615) 32,960
==============================================================================
A reconciliation of reportable segment revenues to consolidated revenues
follows (amounts in thousands):
Nine months ended September 30, 2003 2002
--------------- ---------------
Reportable segment revenues $ 287,685 283,531
Plus All Other revenues 21,831 19,593
Less intersegment revenues eliminated in consolidation 22,473 27,624
--------------- ---------------
Consolidated revenues $ 287,043 275,500
=============== ===============
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):
Nine months ended September 30, 2003 2002
-------------- ----------------
Reportable segment earnings from operations before
depreciation, amortization and accretion expense, net other
expense and income taxes $ 118,911 97,702
Less All Other loss from operations before depreciation,
amortization and accretion expense, net other expense and
income taxes 26,709 22,937
Less intersegment contribution eliminated in consolidation 1,829 707
-------------- ----------------
Consolidated earnings from operations before
depreciation, amortization and accretion expense, net
other expense and income taxes 90,373 74,058
Less depreciation, amortization and accretion expense 39,368 41,806
-------------- ----------------
Consolidated operating income 51,005 32,252
Less other expense, net 28,973 21,418
-------------- ----------------
Consolidated net income before income taxes and cumulative
effect of a change in accounting principle $ 22,032 10,834
============== ================
23 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
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):
Nine months ended September 30, 2003 2002
--------------- ---------------
Reportable segment operating income $ 85,746 61,575
Less All Other operating loss 32,912 28,616
Less intersegment contribution eliminated in consolidation 1,829 707
--------------- ---------------
Consolidated operating income 51,005 32,252
Less other expense, net 28,973 21,418
--------------- ---------------
Consolidated net income before income taxes and cumulative
effect of a change in accounting principle $ 22,032 10,834
=============== ===============
(7) 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 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 new Senior Facility. During the nine
month period ended September 30, 2003 our capital
24 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
expenditures for this project have totaled approximately $4.8 million,
all of which has been funded through our operating cash flows.
Alaska Airline Miles Agreement
In August 2003 we entered into an agreement with Alaska Airlines, Inc.
("Alaska Airlines") to offer our residential and business customers who
make qualifying purchases from us the opportunity to accrue mileage
awards in the Alaska Airlines Mileage Plan. The agreement requires the
purchase of Alaska Airlines miles during the year ended December 31, 2003
and in future years.
Internal Revenue Service Examination
Our U.S. income tax return for 2000 was selected for examination by the
Internal Revenue Service during 2003. The examination is scheduled to
begin during the fourth quarter of 2003. We believe this examination will
not have a material adverse effect on our financial position, results of
operations or our liquidity.
(8) Subsequent Event
On October 30, 2003 we closed a $220.0 million new Senior Facility to
replace the April 22, 2003 amended Senior Facility. The new Senior
Facility reduces the interest rate from LIBOR plus 6.50% to LIBOR plus
3.25%. The new Senior Facility includes a term loan of $170.0 million and
a revolving credit facility of $50.0 million.
The repayment schedule for the term loan in the new Senior Facility is
unchanged from that in the April 22, 2003 amended Senior Facility. The
repayment schedule is as follows (amounts in thousands):
Date Amount
------------------------------------------ -----------
Quarterly from December 31, 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 new Senior Facility will be payable in full
on October 31, 2007.
We are required to pay a commitment fee on the unused portion of the
commitment as follows:
Commitment fee if the outstanding Commitment fee if the outstanding
revolving credit facility is > 50% revolving credit facility is
of the average revolving credit < 50% of the average revolving
Total Leverage facility commitments by the credit facility commitments by the
Ratio (as defined) lenders during such during such period lenders during such period
--------------------- ---------------------------------------- ----------------------------------------
> 3.75 1.00% 1.25%
-
> 3.25 but <3.75 0.75% 1.00%
-
> 2.75 but <3.25 0.50% 0.75%
-
< 2.75 0.50% 0.75%
25 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
We may not permit the Total Leverage Ratio (as defined) to exceed:
Period Total Leverage Ratio
-------------------------------------------------------- ------------------------
October 30, 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
We may not permit the Senior Secured Leverage Ratio (as defined) to
exceed:
Senior Secured
Period Leverage Ratio
-------------------------------------------------------- ------------------------
October 30, 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
The Interest Coverage Ratio (as defined) may not be less than 2.50:1 at
any time.
Capital expenditures, excluding up to $58.0 million incurred to build or
acquire additional fiber optic cable system capacity between Alaska and
the lower forty-eight states, 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 (as defined) during the applicable
period less certain permitted investments of up to $5.0 million
during the applicable period.
If the revolving credit facility exceeds $25.0 million, we may not incur
capital expenditures, other than those incurred to build or acquire
additional fiber optic cable system capacity, in excess of $25.0 million.
Under the new Senior Facility we must either have repaid in full or
successfully refinanced our Senior Notes by February 1, 2007.
$3.5 million of the new Senior Facility has been used to provide a letter
of credit to secure payment for our contract for the design, engineering,
manufacture and installation of the undersea fiber optic cable system
discussed in note 7. The letter of credit will be reduced to $1.8 million
after a contract payment estimated to be made in March 2004. The letter
of credit will be cancelled after the final contract payment date
estimated to be in April 2004.
Because a portion of the new Senior Facility is a substantial
modification of the April 22, 2003 amended Senior Facility we will
recognize approximately $5.0 million in Amortization of Loan and Senior
Notes Fees during the three months ended December 31, 2003. The remaining
$2.2 million in Deferred Loan Costs, Net will continue to be amortized
over the life of the new Senior Facility.
26 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
In connection with the new Senior Facility, we paid bank fees and other
expenses of $850,000 in October 2003 which will be amortized over the
life of the new agreement.
27
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 new Senior Facility, as further discussed in
Liquidity and Capital Resources included in Part I, Item 2 of this report.
Consolidated revenues increased by $3.8 million during the third quarter of 2003
("2003") as compared to the third quarter in 2002 ("2002"). Operating income
increased by $1.2 million in 2003. Net income before income tax decreased
approximately $400,000 and net income decreased approximately $500,000. 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 local access services had operating income in 2003 and an
operating loss in 2002. The Internet services segment improved its operating
loss in 2003 as compared to 2002. The operating income for the long-distance
services and cable services segments decreased in 2003 as compared to 2002.
Basic and diluted earnings per share decreased $0.01 per share in 2003 as
compared to 2002.
Long-Distance Services Overview
Third quarter 2003 long-distance services revenue represented 54.1% 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 third quarter of 2003.
28
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.
At the time of the petition for bankruptcy, we had approximately $12.9 million
in receivables outstanding from MCI. At December 31, 2002 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 December 31, 2002.
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, we
reduced the pre-petition amounts receivable from MCI by $1.8 million and off-set
our pre-petition accounts payable by $1.0 million. The majority of the
difference reduced the MCI reserve with the remainder recorded as bad debt
expense.
The remaining pre-petition accounts receivable balance owed by MCI to us after
this settlement was $11.1 million ("MCI credit") which we have and will use as a
credit against amounts payable for future services purchased from MCI. At
settlement, all of the remaining pre-petition amounts receivable due from MCI,
which was fully reserved, was removed from accounts receivable in our
Consolidated Balance Sheet.
After settlement, we began reducing the MCI credit as we utilize it for services
otherwise payable to MCI during the same period. The use of the credit was and
is expected to be recorded as a reduction of bad debt expense. During the three
months ended September 30, 2003 we utilized approximately $1.0 million of the
MCI credit against amounts payable for services received from MCI during the
same period. The settlement discussed above and use of the MCI credit resulted
in net recovery of bad debt expense of approximately $647,000 during the three
months ended September 30, 2003.
The remaining unused MCI credit totaled $10.0 million at September 30, 2003. The
credit balance is not recorded on the Consolidated Balance Sheet as we are
recognizing utilization of the credit as we incur charges for services received
from MCI.
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
29
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.
On October 31, 2003, MCI's reorganization plan was approved by the U.S.
Bankruptcy Court. MCI has indicated that the company may emerge from bankruptcy
protection soon after the start of 2004. We expect to evaluate the likelihood
that we will receive full credit offset for our remaining credit balance when
MCI exits bankruptcy proceedings and may change our recognition method at that
time. We cannot predict what effect the bankruptcy and reorganization process or
the economy may have on their traffic levels and ultimately, their requirements
for service to and from Alaska.
Recent hearings, media coverage and a U.S. Attorney's office inquiry reflect a
political movement that may be attempting to deny MCI from continuing to provide
services to government agencies. We estimate that 25% to 27% 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.
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 and business consolidations 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
Third quarter 2003 cable television revenues represented 24.1% 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 third quarter
of 2003 programming services generated 75.4% of total cable services revenues,
cable services' allocable share of cable modem services accounted for 11.6% of
such revenues, equipment rental and installation fees accounted for 8.9% of such
revenues, advertising sales accounted for 3.3% 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
30
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 ("DBS") and, expected to begin