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As filed with the Securities and Exchange Commission on November 8, 2004
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, 2004
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 28, 2004 was:
54,205,376 shares of Class A common stock; and
3,865,686 shares of Class B common stock.
1
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
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, 2004
(unaudited) and December 31, 2003..................................................6
Consolidated Statements of Income for the
three and nine months ended September 30, 2004
(unaudited) and 2003 (unaudited)...................................................8
Consolidated Statements of Stockholders' Equity
for the nine months ended September 30, 2004
(unaudited) and 2003 (unaudited)...................................................9
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2004 (unaudited)
and 2003 (unaudited)...............................................................11
Notes to Interim Condensed Consolidated Financial
Statements.........................................................................12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................32
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................63
Item 4. Controls and Procedures...............................................................64
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................65
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...........................65
Item 6. Exhibits..............................................................................66
Other items are omitted, as they are not applicable.
SIGNATURES................................................................................................67
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 Private Securities Litigation Reform Act of 1995.
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 annual report on Form 10-K for the
year ended December 31, 2003.
o Material adverse changes in the economic conditions in the markets we
serve and in general economic conditions, including the continuing
impact of the following on the communications industry: high levels of
competition in the long-distance market resulting in pressures to
reduce prices; an oversupply of long-haul capacity; excessive debt
loads; and 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 Telecommunications Act of 1996
("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, Internet, and wireless 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
communications 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;
3
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 phone service
("DLPS") and wireless services;
o Start-up costs associated with entering new markets, including
advertising and promotional efforts;
o Risks relating to the operations of new systems and technologies and
applications to support new initiatives;
o Local conditions and obstacles;
o The impact on our industry and indirectly on us of oversupply of
capacity resulting from excessive deployment of network capacity in
certain markets we do not serve;
o Uncertainties inherent in new business strategies, new product launches
and development plans, including local telephone services, wireless
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 communications, 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"), the SEC, and adverse outcomes
from regulatory proceedings;
o Changes in regulations governing unbundled network elements ("UNEs");
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
communications industry, which may result in our competitors being
larger and better financed, and provide these competitors with
extensive resources and greater geographic reach, allowing them to
compete more effectively;
o Any continuing financial, credit and economic impacts of the MCI, Inc.
("MCI") bankruptcy filing on the industry in general and on us in
particular;
o The success of MCI's emergence from bankruptcy protection,
o A migration of MCI's or Sprint Corporation's ("Sprint") 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 significant customers, MCI
and Sprint;
4
o The effect on us of industry consolidation including the potential
acquisition of one or more of our large wholesale customers by a
company with commercial relationships with other providers;
o Under Statement of Financial Accounting Standard ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," we must test our goodwill and
other intangible assets with indefinite lives for impairment at least
annually. Under the SEC Staff Announcement Topic "Use of the Residual
Method to Value Acquired Assets Other than Goodwill," we must apply a
direct value method to determine the fair value of our cable
certificates for purposes of impairment testing no later than January
1, 2005. Impairment testing may result in a material, non-cash
write-down of our cable certificate or goodwill assets and could have a
material adverse impact on our results of operations; 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.
5
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 2004 2003
- ------------------------------------------------------------------------------------ ----------------- -------------------
Current assets:
Cash and cash equivalents $ 8,769 10,435
----------------- -------------------
Receivables 75,600 70,235
Less allowance for doubtful receivables 2,069 1,954
----------------- -------------------
Net receivables 73,531 68,281
Prepaid and other current assets 6,743 12,159
Deferred income taxes, net 5,621 7,195
Inventories 2,555 1,513
Property held for sale 1,046 2,173
Notes receivable from related parties 354 1,885
----------------- -------------------
Total current assets 98,619 103,641
----------------- -------------------
Property and equipment in service, net of depreciation 421,128 369,039
Construction in progress 19,940 33,618
----------------- -------------------
Net property and equipment 441,068 402,657
----------------- -------------------
Cable certificates 191,241 191,241
Goodwill 41,972 41,972
Other intangible assets, net of amortization of $2,087 and $1,656 at September 30,
2004 and December 31, 2003, respectively 5,078 4,195
Deferred loan and senior notes costs, net of amortization of $2,226 and $5,308 at
September 30, 2004 and December 31, 2003, respectively 9,102 5,757
Notes receivable from related parties 4,230 4,281
Other assets 9,315 9,276
----------------- -------------------
Total other assets 260,938 256,722
----------------- -------------------
Total assets $ 800,625 763,020
================= ===================
See accompanying notes to interim condensed consolidated financial statements.
6 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Amounts in thousands) (Unaudited)
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND September 30, December 31,
STOCKHOLDERS' EQUITY 2004 2003
- -------------------------------------------------------------------------------- ------------------ -----------------
Current liabilities:
Current maturities of obligations under capital leases $ 6,313 5,139
Accounts payable 27,350 34,133
Accrued payroll and payroll related obligations 14,025 17,545
Deferred revenue 13,844 21,275
Accrued liabilities 7,389 8,156
Accrued interest 2,860 8,645
Subscriber deposits 471 651
------------------ -----------------
Total current liabilities 72,252 95,544
Long-term debt 377,060 345,000
Obligations under capital leases, excluding current maturities 34,244 38,959
Obligation under capital lease due to related party, excluding current maturity 680 677
Deferred income taxes, net of deferred income tax benefit 35,985 24,168
Other liabilities 6,811 6,366
------------------ -----------------
Total liabilities 527,032 510,714
------------------ -----------------
Redeemable preferred stock 19,244 25,664
------------------ -----------------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000 shares; issued 54,139 and 52,589 shares at
September 30, 2004 and December 31, 2003, respectively 211,012 202,362
Class B. Authorized 10,000 shares; issued 3,866 and 3,868 shares at
September 30, 2004 and December 31, 2003, respectively; convertible on a
share-per-share basis into Class A common stock 3,267 3,269
Less cost of 380 and 338 Class A common shares held in treasury at September
30, 2004 and December 31, 2003, respectively (2,284) (1,917)
Paid-in capital 13,617 12,836
Notes receivable with related parties issued upon stock option exercise (4,351) (4,971)
Retained earnings 33,088 15,371
Accumulated other comprehensive loss --- (308)
------------------ -----------------
Total stockholders' equity 254,349 226,642
------------------ -----------------
Commitments and contingencies
Total liabilities, redeemable preferred stock, and stockholders' equity $ 800,625 763,020
================== =================
See accompanying notes to interim condensed consolidated financial statements.
7
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
(Amounts in thousands, except per share amounts) 2004 2003 2004 2003
------------- ------------- --------------- --------------
Revenues $ 106,622 98,327 319,324 287,043
Cost of goods sold (exclusive of depreciation,
amortization and accretion shown separately below) 32,876 31,870 104,878 92,189
Selling, general and administrative expenses 37,324 35,262 108,830 102,549
Bad debt expense (recovery) (281) 533 (1,165) 1,932
Depreciation, amortization and accretion expense 15,297 13,067 46,759 39,368
------------- ------------- --------------- --------------
Operating income 21,406 17,595 60,022 51,005
------------- ------------- --------------- --------------
Other income (expense):
Interest expense (6,722) (8,845) (20,275) (27,137)
Loss on early extinguishment of debt --- --- (6,136) ---
Amortization and write-off of loan and senior
notes fees (400) (631) (3,414) (2,329)
Interest income 86 162 273 493
------------- ------------- --------------- --------------
Other expense, net (7,036) (9,314) (29,552) (28,973)
------------- ------------- --------------- --------------
Net income before income taxes and cumulative
effect of a change in accounting principle 14,370 8,281 30,470 22,032
Income tax expense 5,075 3,752 11,525 9,598
------------- ------------- --------------- --------------
Net income before cumulative effect of a change
in accounting principle 9,295 4,529 18,945 12,434
Cumulative effect of a change in accounting
principle, net of income tax benefit of $367 --- --- --- (544)
------------- ------------- --------------- --------------
Net income $ 9,295 4,529 18,945 11,890
============= ============= =============== ==============
Basic net income per common share:
Net income before cumulative effect of a change in
accounting principle $ 0.15 0.07 0.31 0.20
Cumulative effect of a change in accounting
principle, net of income tax benefit of $367 --- --- --- (0.01)
------------- ------------- --------------- --------------
Net income $ 0.15 0.07 0.31 0.19
============= ============= =============== ==============
Diluted net income per common share:
Net income before cumulative effect of a change in
accounting principle $ 0.15 0.07 0.30 0.19
Cumulative effect of a change in accounting
principle, net of income tax benefit of $367 --- --- --- (0.01)
------------- ------------- --------------- --------------
Net income $ 0.15 0.07 0.30 0.18
============= ============= =============== ==============
See accompanying notes to interim condensed consolidated financial statements.
8
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
Notes
Class A Receivable Accumulated
Class A Class B Shares Issued to Other
Common Common Held in Paid-in Related Retained Comprehensive
(Amounts in thousands) Stock Stock Treasury Capital Parties Earnings Loss Total
----------------------------------------------------------------------------------------
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
liability 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
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
Class B shares converted to Class A 3 (3) --- --- --- --- --- ---
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.
9 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
(Continued)
Notes
Class A Receivable Accumulated
Class A Class B Shares Issued to Other
Common Common Held in Paid-in Related Retained Comprehensive
(Amounts in thousands) Stock Stock Treasury Capital Parties Earnings Loss Total
----------------------------------------------------------------------------------------
Balances at December 31, 2003 $202,362 3,269 (1,917) 12,836 (4,971) 15,371 (308) 226,642
Components of comprehensive income:
Net income --- --- --- --- --- 18,945 --- 18,945
Change in fair value of cash flow
hedge, net of change in income tax
benefit of $207 --- --- --- --- --- --- 308 308
-------
Comprehensive income 19,253
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 534 --- --- --- 534
Class B shares converted to Class A 2 (2) --- --- --- --- --- ---
Shares issued under stock option plan 2,228 --- --- --- --- --- --- 2,228
Amortization of the excess of GCI stock
market value over stock option exercise
cost on date of stock option grant --- --- --- 247 --- --- --- 247
Conversion of Series B preferred stock to
Class A common stock 6,420 --- --- --- --- --- --- 6,420
Payments received on notes receivable
issued to related parties upon stock
option exercise --- --- --- --- 620 --- --- 620
Purchase of treasury stock --- --- (367) --- --- --- --- (367)
Preferred stock dividends --- --- --- --- --- (1,228) --- (1,228)
----------------------------------------------------------------------------------------
Balances at September 30, 2004 $211,012 3,267 (2,284) 13,617 (4,351) 33,088 --- 254,349
========================================================================================
See accompanying notes to interim condensed consolidated financial statements.
10
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
(Amounts in thousands) 2004 2003
-------------- -------------
Cash flows from operating activities:
Net income $ 18,945 11,890
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, amortization and accretion expense 46,759 39,368
Loss on early extinguishment of debt 6,136 ---
Deferred income tax expense 11,435 9,598
Amortization and write-off of loan and senior notes fees 3,414 2,329
Compensatory stock options 248 393
Bad debt expense (recovery), net of write-offs 115 (679)
Deferred compensation 427 331
Cumulative effect of a change in accounting principle, net --- 544
Other noncash income and expense items 654 (383)
Change in operating assets and liabilities (25,267) (13,990)
-------------- -------------
Net cash provided by operating activities 62,866 49,401
-------------- -------------
Cash flows from investing activities:
Purchases of property and equipment, including construction period interest (82,810) (34,393)
Purchases of other assets and intangible assets (2,297) (955)
Payments received on notes receivable from related parties 1,847 22
Proceeds from sales of assets 1,190 ---
Payment of deposits --- (3,221)
Refund of deposit 699 ---
Additions to property held for sale (128) ---
Notes receivable issued to related parties (27) (99)
-------------- -------------
Net cash used in investing activities (81,526) (38,646)
-------------- -------------
Cash flows from financing activities:
Issuance of new Senior Notes 245,720 ---
Repayment of old Senior Notes (180,000) ---
Borrowing on Senior Credit Facility 20,000 ---
Repayment of Senior Credit Facility (53,832) (7,700)
Repayments of capital lease obligations (3,538) (1,402)
Payment of debt issuance costs (6,659) (2,605)
Payment of bond call premiums (6,136) ---
Payment of preferred stock dividends (1,042) (1,171)
Proceeds from common stock issuance 2,228 1,044
Payment received on note receivable from related parties issued upon stock
option exercise 620 ---
Purchase of treasury stock (367) (81)
-------------- -------------
Net cash provided by (used in) financing activities 16,994 (11,915)
-------------- -------------
Net decrease in cash and cash equivalents (1,666) (1,160)
Cash and cash equivalents at beginning of period 10,435 11,940
-------------- -------------
Cash and cash equivalents at end of period $ 8,769 10,780
============== =============
See accompanying notes to interim condensed consolidated financial statements.
11
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, 2003, 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 Origination and 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 our undersea fiber optic cable
system 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, and
o Distribution of white and yellow pages directories to
residential and business customers in certain markets we serve
and on-line directory products.
(b) Principles of Consolidation
The consolidated financial statements include the consolidated
accounts of GCI and its wholly owned subsidiaries with all
significant intercompany transactions eliminated.
12 (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,
2004 2003
---------------------------------- ----------------------------------
Income Shares Income Shares
(Num- (Denom- Per-share (Num- (Denom- Per-share
erator) inator) Amounts erator) inator) Amounts
---------- ----------- ----------- ---------- ----------- -----------
Net income $ 9,295 $ 4,529
---------- ----------
Less preferred stock dividends:
Series B 230 361
Series C 151 151
---------- ----------
381 512
---------- ----------
Basic EPS:
Net income 8,914 58,031 $ 0.15 4,017 55,707 $ 0.07
Effect of Dilutive Securities:
Unexercised stock options --- 1,000 --- --- 1,163 ---
Series B redeemable preferred
stock 230 1,677 --- --- --- ---
---------- ----------- ----------- ---------- ----------- -----------
Diluted EPS:
Net income $ 9,144 60,708 $ 0.15 $ 4,017 56,870 $ 0.07
========== =========== =========== ========== =========== ===========
13 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Nine Months Ended September 30,
2004 2003
---------------------------------- ----------------------------------
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 in 2003 $ 18,945 $ 12,434
----------- -----------
Less preferred stock dividends:
Series B 778 1,083
Series C 450 450
----------- -----------
1,228 1,533
----------- -----------
Basic EPS:
Net income before cumulative
effect of a change in accounting
principle, net of deferred tax
benefit of $367 in 2003,
available to common stockholders 17,717 57,027 $ 0.31 10,901 55,563 $ 0.20
Effect of Dilutive Securities:
Unexercised stock options --- 1,135 --- --- 531 ---
----------- ----------- ---------- ----------- ---------- -----------
Diluted EPS:
Net income before cumulative
effect of a change in accounting
principle, net of deferred tax
benefit of $367 in 2003,
available to common stockholders $ 17,717 58,162 $ 0.30 $ 10,901 56,094 $ 0.19
=========== =========== ========== =========== ========== ===========
14 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Common equivalent shares outstanding which are anti-dilutive for
purposes of calculating EPS for the three and nine months ended
September 30, 2004 and 2003 are not included in the diluted EPS
calculations and consist of the following (shares, in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------------ ------------ ------------ ----------
Series B redeemable preferred stock --- 3,062 1,677 3,062
Series C redeemable preferred stock 833 833 833 833
------------ ------------ ------------ ----------
Anti-dilutive common equivalent shares outstanding 833 3,895 2,510 3,895
============ ============ ============ ==========
Weighted average shares associated with outstanding stock options
for the three and nine months ended September 30, 2004 and 2003
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,
2004 2003 2004 2003
----------- ------------ ----------- -----------
Weighted average shares associated with outstanding
stock options 736 155 292 2,045
=========== ============ =========== ===========
(d) Common Stock
Following are the changes in common stock for the nine months ended
September 30, 2004 and 2003 (shares, in thousands):
Class A Class B
------------- ------------
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
============= ============
Balances at December 31, 2003 52,589 3,868
Class B shares converted to Class A 2 (2)
Shares issued under stock option plan 388 ---
Conversion of Series B preferred stock to Class A
common stock 1,160 ---
------------- ------------
Balances at September 30, 2004 54,139 3,866
============= ============
15 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(e) Redeemable Preferred Stocks
Redeemable preferred stocks consist of the following (amounts in
thousands):
September 30, December 31,
2004 2003
---------------- -----------------
Series B $ 9,244 15,664
Series C 10,000 10,000
---------------- -----------------
$ 19,244 25,664
================ =================
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, 2002 and
September 30, 2003 17 10
============= ============
Shares at December 31, 2003 16 10
Shares converted to GCI Class A common stock (7) ---
------------- ------------
Shares at September 30, 2004 9 10
============= ============
As of September 30, 2004, the combined aggregate amount of
preferred stock mandatory redemption requirements, including
dividends, follow (amounts in thousands):
Years Ending
September 30:
---------------
2005 $ 10,150
2006 ---
2007 ---
2008 ---
2009 ---
---------
$ 10,150
=========
Series B
The redemption amount of our Series B preferred stock at September
30, 2004 and December 31, 2003 was $9,653,000 and $15,887,000,
respectively. The difference between the carrying and redemption
amounts is due to accrued dividends that are included in Accrued
Liabilities.
Series C
The redemption amount of our convertible redeemable accreting
Series C preferred stock on September 30, 2004 and December 31,
2003 was $10,000,000.
16 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(f) Asset Retirement Obligations
Upon adoption of SFAS No. 143, "Accounting for Asset Retirement
Obligations," 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, during the nine months ended September 30,
2003.
Following is a reconciliation of the beginning and ending aggregate
carrying amount of our asset retirement obligations at September
30, 2004 and 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
========
Balance at December 31, 2003 $ 2,005
Accretion expense for the nine months ended
September 30, 2004 134
Liability settled (6)
Other (43)
--------
Balance at September 30, 2004 $ 2,090
========
(g) Stock Option Plan
At September 30, 2004, 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," and SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." 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.
17 (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,
2004 and 2003, 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,
2004 2003 2004 2003
----------- ---------- ----------- ----------
Net income, as reported $ 9,295 4,529 18,945 11,890
Total stock-based employee
compensation expense included in
reported net income, net of related
tax effects 53 66 129 225
Total stock-based employee
compensation expense under the
fair-value based method for all
awards, net of related tax effects (594) (653) (1,682) (1,641)
----------- ---------- ----------- ----------
Pro forma net income $ 8,754 3,942 17,392 10,474
=========== ========== =========== ==========
Basic net income per common share
after cumulative effect of a
change in accounting principle, as
reported $ 0.15 0.07 0.31 0.19
=========== ========== =========== ==========
Diluted net income per common share
after cumulative effect of a
change in accounting principle, as
reported $ 0.15 0.07 0.30 0.18
=========== ========== =========== ==========
Basic and diluted net income per
common share after cumulative
effect of a change in accounting
principle, pro forma $ 0.14 0.06 0.28 0.16
=========== ========== =========== ==========
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.
(h) Variable Interest Entities
In December 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. ("FIN") 46 (revised December 2003),
"Consolidation of Variable Interest
18 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Entities," which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an
entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R, which was issued in January
2003, replaces FIN 46. We were required to apply FIN 46R to
variable interests in Variable Interest Entities ("VIEs") created
after December 31, 2003. For variable interests in VIEs created
before January 1, 2004, the Interpretation will be applied
beginning on January 1, 2005. For any VIEs that must be
consolidated under FIN 46R that were created before January 1,
2004, the assets, liabilities and non-controlling interests of the
VIE initially would be measured at their carrying amounts with any
difference between the net amount added to the balance sheet and
any previously recognized interest being recognized as the
cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date FIN 46R
first applies may be used to measure the assets, liabilities and
non-controlling interest of the VIE. At December 31, 2003, we did
not have VIEs. Adoption of this statement on January 1, 2004 did
not have a material effect on our results of operations, financial
position and cash flows.
(i) Use of the Residual Method to Value Acquired Assets Other than
Goodwill
On September 29, 2004, the SEC issued SEC Staff Announcement Topic
"Use of the Residual Method to Value Acquired Assets Other than
Goodwill," ("SEC Staff Announcement") requiring us to apply no
later than January 1, 2005 a direct value method to determine the
fair value of our intangible assets with indefinite lives other
than goodwill for purposes of impairment testing. We must also
recognize previously unrecognized intangible assets, if any, in the
determination of fair value for impairment testing purposes. Our
cable certificate assets are our only indefinite-lived assets other
than goodwill as of September 30, 2004. Our cable certificate
assets were originally valued and recorded using the residual
method. Impairment testing of our cable certificate assets in
future periods under SFAS No. 142 must use a direct value method
pursuant to the SEC Staff Announcement, which may result in a
material, non-cash write-down of our cable certificate assets and
could have a material adverse impact on our results of operations.
An impairment of our cable certificate assets, if any, recognized
upon the initial application of the direct value method will be
reported as a cumulative effect of a change in accounting
principle.
(j) Reclassifications
Reclassifications have been made to the 2003 financial statements
to make them comparable with the 2004 presentation.
19 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in
thousands):
Nine month periods ended September 30, 2004 2003
------------ ------------
Increase in accounts receivable $ (5,365) (9,315)
Increase in inventories (1,042) (137)
(Increase) decrease in prepaid and other current assets 5,416 (2,434)
Decrease in accounts payable (6,783) (2,802)
Increase (decrease) in deferred revenues (7,431) 2,211
Increase (decrease) in accrued payroll and payroll
related obligations (3,520) 3,745
Decrease in accrued interest (5,785) (4,977)
Increase (decrease) in accrued liabilities (252) 136
Decrease in subscriber deposits (180) (198)
Decrease in components of other long-term liabilities
(325) (219)
------------ ------------
$ (25,267) (13,990)
============ ============
We paid interest, including capitalized interest, totaling approximately
$27.1 million and $32.2 million during the nine months ended September
30, 2004 and 2003, respectively. We capitalized interest of approximately
$1.1 million and $0 during the nine months ended September 30, 2004 and
2003, respectively. Capitalized interest is recorded as an addition to
Property and Equipment.
In January and August 2004, 3,108 and 3,328 shares of our Series B
preferred stock, respectively, were converted to 560,000 and 599,640
shares of our Class A common stock, respectively, at the stated
conversion price of $5.55 per share.
We paid income taxes totaling $90,000 during the nine months ended
September 30, 2004. We paid no income taxes during the nine months ended
September 30, 2003.
(3) Intangible Assets
Cable certificates are allocated to our cable services segment. Goodwill
of approximately $41.0 million is allocated to the cable services segment
and approximately $1.0 million is allocated to the long-distance services
segment.
Amortization expense for amortizable intangible assets was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
-------------- ----------- ------------- -----------
Amortization expense $ 224 195 575 527
============== =========== ============= ===========
20 (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,
--------------
2004 $ 826
2005 806
2006 802
2007 740
2008 490
No indicators of impairment have occurred since the impairment testing
was performed as of December 31, 2003.
(4) MCI Settlement and Release Agreement
On July 21, 2002 MCI and substantially all of its active United States
subsidiaries filed voluntary petitions for reorganization under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy
Court. On July 22, 2003, the United States Bankruptcy Court approved a
settlement agreement for pre-petition amounts owed to us by MCI and
affirmed all of our existing contracts with MCI. MCI emerged from
bankruptcy protection on April 20, 2004. The remaining pre-petition
accounts receivable balance owed by MCI to us after this settlement was
$11.1 million ("MCI credit") which we have used and will continue to use
as a credit against amounts payable for services purchased from MCI.
After settlement, we began reducing the MCI credit as we utilized it for
services otherwise payable to MCI. Uncertainties exist with respect to
the potential realization and the timing of our utilization of the MCI
credit. We have accounted for our use of the MCI credit as a gain
contingency and, accordingly, will recognize a reduction of bad debt
expense as services are provided by MCI and the credit is realized. The
use of the credit is recorded as a reduction of bad debt expense. We have
realized the following amounts of the MCI credit against amounts payable
for services received from MCI (amounts in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
-------------- ----------- ------------- -----------
MCI credit realized $ 1,090 647 3,386 647
============== =========== ============= ===========
The remaining unused MCI credit totaled $4.5 million and $7.9 million at
September 30, 2004 and December 31, 2003, respectively. The credit
balance is not recorded on the Consolidated Balance Sheet as we are
recognizing recovery of bad debt expense as the credit is realized.
21 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(5) Long-term Debt
Draws on New Senior Credit Facility
In 2004 we drew the following amounts under the revolving credit portion
of our new Senior Credit Facility (amounts in millions):
January 2004 $ 10
May 2004 5
August 2004 5
-----
$ 20
=====
We re-paid the $10 million draw in February 2004 from proceeds of our new
Senior Notes offering discussed below.
Senior Notes Refinancing
In February 2004 GCI's wholly owned subsidiary GCI, Inc. sold $250
million in aggregate principal amount of senior debt securities due in
2014 ("new Senior Notes"). The new Senior Notes are an unsecured senior
obligation. We pay interest of 7.25% on the new Senior Notes. The new
Senior Notes were sold at a discount of $4.3 million. The Senior Notes
are carried on our Consolidated Balance Sheet net of the unamortized
portion of the discount of $4.1 million at September 30, 2004, which is
being amortized to Interest Expense over the life of the new Senior
Notes.
The net proceeds of the offering were primarily used to repay our
existing $180.0 million 9.75% Senior Notes ("old Senior Notes") and to
repay approximately $43.8 million of the term portion and $10.0 million
of the revolving portion of our new Senior Credit Facility. A semi-annual
interest payment of approximately $9.1 million was paid on August 15,
2004. The next semi-annual interest payment will be due on February 15,
2005. In connection with the issuance, we paid fees and other expenses of
approximately $6.4 million which are being amortized over the life of the
new Senior Notes.
The new Senior Notes sold in February 2004 were offered only to qualified
institutional buyers pursuant to exemptions from registration under the
Securities Act. On July 7, 2004, GCI, Inc. commenced an offer to exchange
the privately issued new Senior Notes for a like amount of new Senior
Notes that have been registered under the Securities Act and have
otherwise identical terms to the privately issued new Senior Notes
(except for provisions relating to GCI, Inc.'s obligations to consummate
the exchange offer). The exchange offer closing occurred on August 11,
2004, at which time all $250.0 million in aggregate principal amount of
the privately issued new Senior Notes were tendered and exchanged for the
new Senior Notes that have been registered under the Securities Act.
22 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
The new Senior Notes are not redeemable prior to February 15, 2009. At
any time on or after February 15, 2009, the new Senior Notes are
redeemable at our option, in whole or in part, on not less than thirty
days nor more than sixty days notice, at the following redemption prices,
plus accrued and unpaid interest (if any) to the date of redemption:
If redeemed during the twelve month period
commencing February 1 of the year indicated: Redemption Price
-------------------------------------------- --------------------
2009 103.625%
2010 102.417%
2011 101.208%
2012 and thereafter 100.000%
We may, on or prior to February 17, 2007, at our option, use the net cash
proceeds of one or more underwritten public offerings of our qualified
stock to redeem up to a maximum of 35% of the initially outstanding
aggregate principal amount of our new Senior Notes at a redemption price
equal to 107.25% of the principal amount of the new Senior Notes,
together with accrued and unpaid interest, if any, thereon to the date of
redemption, provided that not less than 65% of the principal amount of
the new Senior Notes originally issued remain outstanding following such
a redemption.
The new Senior Notes restrict GCI, Inc. and certain of its subsidiaries
from incurring debt in most circumstances unless the result of incurring
debt does not cause our leverage ratio to exceed 6.0 to one. The new
Senior Notes do not allow debt under the new Senior Credit Facility to
exceed the greater of (and reduced by certain stated items):
o $250 million, reduced by the amount of any prepayments, or
o 3.0 times earnings before interest, taxes, depreciation, and
amortization for the last four full fiscal quarters of GCI, Inc.
and certain of its subsidiaries.
The new Senior Notes limit our ability to make cash dividend payments.
We conducted a Consent Solicitation and Tender Offer for the old Senior
Notes. Through February 13, 2004 we accepted for payment $114.6 million
principal amount of notes which were validly tendered. Such notes
accepted for payment received additional consideration as follows:
o $4.0 million based upon a payment of $1,035 per $1,000 principal
amount, consisting of the purchase price of $1,025 per $1,000
principal amount and the consent payment of $10 per $1,000
principal amount, and
o $497,000 in accrued and unpaid interest through February 16, 2004.
The remaining principal amount of $65.4 million was redeemed on March 18,
2004 for additional consideration as follows:
o $2.1 million based upon a payment of $1,032.50 per $1,000
principal amount, and
o $833,000 in accrued and unpaid interest through March 18, 2004.
23 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
The total redemption cost was $186.1 million. The premium to redeem our
old Senior Notes was $6.1 million (excluding interest cost of $1.3
million) and was recognized as a loss on early extinguishment of debt, a
component of Other Income (Expense), during the nine months ended
September 30, 2004.
Compliance with the redemption notice requirements in the Indenture
resulted in a delay before final payment of some of the old Senior Notes.
As a result of such delay, our total debt increased during the overlap
period between the redemption of the old Senior Notes and the issuance of
the new Senior Notes making us out of compliance with Section 6.11 of our
Credit, Guaranty, Security and Pledge Agreement, dated as of October 30,
2003. We received a waiver from compliance with Section 6.11 until April
30, 2004. After the final redemption payment on March 18, 2004 we were in
compliance with Section 6.11.
New Senior Credit Facility Amendment
On May 21, 2004 we amended our $220.0 million new Senior Credit Facility.
The amendment reduced the interest rate on the $170.0 million term
portion of the credit facility from LIBOR plus 3.25% to LIBOR plus 2.25%.
The amendment reduced the interest rate on the $50.0 million revolving
portion of the credit facility from LIBOR plus 3.25% to LIBOR plus a
margin dependent upon our Total Leverage Ratio (as defined) as follows:
Total Leverage Ratio
(as defined) LIBOR Plus:
---------------------- -------------------
>3.75 2.50%
-
>3.25 but <3.75 2.25%
-
>2.75 but <3.25 2.00%
-
< 2.75 1.75%
The commitment fee we are required to pay on the unused portion of the
commitment was amended as follows:
Total Leverage Ratio
(as defined) Commitment Fee
--------------------- ------------------
>3.75 0.625%
-
>2.75 but <3.75 0.500%
-
< 2.75 0.375%
Under certain circumstances the amendment allows for an increase in the
term and revolving commitments not to exceed an aggregate commitment
increase of $50.0 million. Any additional term and revolving credit
facility commitments are payable in full on October 31, 2007.
In connection with the May 21, 2004 amended Senior Credit Facility, we
paid bank fees and other expenses of approximately $103,000 and $253,000
during the three and nine months ended September 30, 2004, respectively.
24 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(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 35 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, Soldotna, Kodiak, Seward, Cordova, Valdez, and Nome 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.
Revenue, costs of sales and service and operating expenses for our new
phone directories are included in the local access services segment.
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 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.
25 (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. All of our long-lived assets are located within the United
States of America, except approximately 82% 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, 2004 and 2003 follows (amounts in thousands):
Reportable Segments
---------------------------------------------------------
Long- Local Total
Distance Cable Access Internet Reportable All
Services Services Services Services Segments Other Total
-------------------------------------------------------------------------------
2004
----
Revenues:
Intersegment $ 10,490 1,866 7,053 2,460 21,869 558 22,427
External 159,111 75,243 34,558 19,592 288,504 30,820 319,324
-------------------------------------------------------------------------------
Total revenues $ 169,601 77,109 41,611 22,052 310,373 31,378 341,751
===============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, accretion,
net interest expense and
income taxes $ 91,010 33,190 (231) 6,409 130,378 (23,597) 106,781
===============================================================================
Operating income (loss) $ 71,368 19,118 (3,158) 3,669 90,997 (30,975) 60,022
===============================================================================
2003
----
Revenues:
Intersegment $ 10,139 1,900 7,277 1,792 21,108 558 21,666
External 153,248 71,009 27,211 14,302 265,770 21,273 287,043
-------------------------------------------------------------------------------
Total revenues $ 163,387 72,909 34,488 16,094 286,878 21,831 308,709
===============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, accretion,
net interest expense and
income taxes $ 85,212 31,253 (3,182) 3,667 116,950 (26,577) 90,373
===============================================================================
Operating income (loss) $ 70,629 17,812 (5,794) 1,138 83,785 (32,780) 51,005
===============================================================================
26 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
A reconciliation of reportable segment revenues to consolidated revenues
follows (amounts in thousands):
Nine months ended September 30, 2004 2003
--------------- ---------------
Reportable segment revenues $ 310,373 286,878
Plus All Other revenues 31,378 21,831
Less intersegment revenues eliminated in consolidation 22,427 21,666
--------------- ---------------
Consolidated revenues $ 319,324 287,043
=============== ===============
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, 2004 2003
-------------- ----------------
Reportable segment earnings from operations before
depreciation, amortization and accretion expense, net other
expense and income taxes $ 130,378 116,950
Less All Other loss from operations before depreciation,
amortization and accretion expense, net other expense and
income taxes 23,597 26,577
-------------- ----------------
Consolidated earnings from operations before
depreciation, amortization and accretion expense, net
other expense and income taxes 106,781 90,373
Less depreciation, amortization and accretion expense 46,759 39,368
-------------- ----------------
Consolidated operating income 60,022 51,005
Less other expense, net 29,552 28,973
-------------- ----------------
Consolidated net income before income taxes and
cumulative effect of a change in accounting principle $ 30,470 22,032
============== ================
27 (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, 2004 2003
--------------- ---------------
Reportable segment operating income $ 90,997 83,785
Less All Other operating loss 30,975 32,780
--------------- ---------------
Consolidated operating income 60,022 51,005
Less other expense, net 29,552 28,973
--------------- ---------------
Consolidated net income before income taxes and cumulative
effect of a change in accounting principle $ 30,470 22,032
=============== ===============
(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. While the ultimate results of these items cannot be
predicted with certainty we do not expect at this time the resolution of
them to have a material adverse effect on our financial position, results
of operations or liquidity.
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others Certain customers
have guaranteed levels of service. In the event we are unable to provide
the minimum service levels we may incur penalties or issue credits to
customers.
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 ("AULP West"). A
consortium of companies was selected to design, engineer, manufacture,
and install the undersea fiber optic cable system and a contract was
signed at a total cost to us of $35.2 million. In July 2004 we made our
final payment on the contract.
From inception through September 30, 2004 our capital expenditures for
this project have totaled approximately $50.1 million, most of which was
funded through our operating cash flows. We placed AULP West into service
in June 2004.
Fiber Optic Cable System Repair
Our undersea fiber optic cable system connecting Whittier, Valdez and
Juneau, Alaska and Seattle, Washington ("AULP East") experienced powering
irregularities during the first quarter of 2004. We completed the repair
of AULP East in July 2004 and recorded an estimate of the total repair
costs of approximately $400,000.
28 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Internal Revenue Service Examination
Our United States income tax return for 2000 was selected for examination
by the Internal Revenue Service during 2003. The examination was
completed in July 2004 and did not have a material adverse effect on our
financial position, results of operations, or our liquidity.
Our United States income tax return for 2001 was selected for examination
by the Internal Revenue Service during 2004. The examination began during
the second quarter of 2004. We believe this examination will not have a
material adverse effect on our financial position, results of operations,
or our liquidity.
Anchorage UNEs Arbitration
In June 2004 the RCA issued an order in our arbitration to revise the
rates, terms, and conditions that govern our access to UNEs in Anchorage.
The RCA's ruling set rates for numerous elements of Alaska Communications
Systems Group, Inc.'s ("ACS") network, the most significant being the
lease rate for local lines. The order increases the lease rate from
$14.92 to $18.64 per line per month. We estimate the ruling will increase
our local access services segment Cost of Goods Sold (exclusive of
depreciation, amortization and accretion shown separately) by as much as
approximately $1.7 million and $4.1 million during the years ended
December 31, 2004 and 2005, respectively. We have filed a petition for
reconsideration with the RCA. We cannot predict at this time the outcome
of the petition for reconsideration.
We and ACS have jointly filed an Anchorage Interconnection Agreement and
are awaiting approval from the RCA. The agreement, if approved, will have
a five-year term.
Rural Exemption
ACS, through subsidiary companies, provides local services in Fairbanks
and Juneau, Alaska. These ACS subsidiaries are classified as Rural
Telephone Companies under the 1996 Telecom Act, which entitles them to an
exemption of certain material interconnection terms of the 1996 Telecom
Act, until and unless such "rural exemption" is examined and discontinued
by the RCA. An April 2004 proceeding to decide the matter of rural
exemption was canceled upon our and ACS' joint settlement. The settlement
agreement includes the following terms, among others:
o ACS relinquishes all claims to exemptions from full local
telephone competition in Fairbanks and Juneau,
o New rates for unbundled loops in Fairbanks and Juneau will begin
January 1, 2005. We estimate the agreed upon rates will increase
our local services segment cost of sales and service
approximately $600,000 to $700,000 during the year ended
December 31, 2005,
o Extension of existing interconnection agreements between ACS and
us for Fairbanks and Juneau until January 1, 2008, and
o Resolution of UNE leasing issues for the Fairbanks and Juneau
markets.
29 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Galaxy XR
On August 3, 2004 Galaxy XR, our primary satellite used to provide voice,
data and Internet services to our rural Alaska customers, experienced a
failure of its secondary xenon ion propulsion system ("XIPS") that
maintains the satellite's proper orbital position. The primary XIPS had
previously failed in February 2004. The satellite is now using its backup
bi-propellant thrusters, which are a space flight proven technology, to
maintain its orbital position. The failure of the primary and secondary
XIPS had no impact on service to our customers. PanAmSat Corporation
("PanAmSat"), the owner and operator of Galaxy XR, believes there is
sufficient bi-propellant fuel on board the spacecraft to continue normal
operations until the first or second quarter of 2008. The term of our
Galaxy XR transponder purchase agreement extends through March 2012.
PanAmSat intends to replace the satellite prior to its estimated
end-of-life. We purchased a warranty as part of the original agreement to
cover a potential loss of this nature. We have an agreement in place that
provides backup transponder capacity on Galaxy XIII in the event of a
catastrophic failure of Galaxy XR. We do not believe failure of the
primary and secondary XIPS systems will have a material adverse effect on
our financial position, results of operations, or our liquidity.
Universal Service Administrative Company Account Receivable
The FCC directed the Universal Service Administrative Company ("USAC"),
the administrator of the Schools and Libraries and Rural Health Care
Universal Service Support Mechanisms, to change their accounting
methodology by October 1, 2004 to the same methodology that the Federal
Government uses. Among other things, USAC was informed that this required
them to change the rules that they use to account for various financial
transactions, including Funding Commitment Decision Letters ("FCDLs") in
those programs.
In the past, USAC allocated funds for accounting purposes to pay for
services in those programs at the time an invoice submitted by a service
provider was approved for payment. Under the new accounting rules,
however, it has been determined that issuance of the FCDL is the point at
which an "obligation" occurs for Federal Government accounting purposes.
Another significant change requires USAC to have cash or federal
securities on hand at least equal to the value of all its outstanding
FCDLs. Until this decision, USAC was only required to have money on hand
when the vendor sent an invoice to USAC for payment.
USAC suspended issuance of FCDLs in early August, 2004, but indicated
that it has sufficient funds on hand to cover all FCDLs it had previously
issued. USAC also indicated that new funding commitments could not be
issued until additional unobligated funds are made available. On November
3, 2004, USAC announced that it had determined the amount of unobligated
cash available and issuance of FCDLs had resumed up to that amount. In
the future FCDLs will be issued as further cash is available through
Universal Service Fund receipts.
At September 30, 2004 we had approximately $5.4 million in outstanding
funding requests for which FCDLs had been suspended by USAC. We believe
that Universal Service funds will become available to USAC to cover these
FCDLs. If we conclude that we will not be able to collect part or all of
the outstanding balance from USAC, the provision of an allowance for
doubtful accounts could have a material adverse effect on our financial
position, results of operations and liquidity.
30 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Cable Services Property Acquisition
On August 24, 2004 we signed an Asset Purchase and Sale Agreement to
acquire the assets of Barrow Cable TV, Inc. We are awaiting the RCA's
approval of the acquisition. We expect to finalize the acquisition with a
cash payment of approximately $1.6 million during the first quarter of
2005.
31
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 of America. 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
Goods Sold (exclusive of depreciation, amortization and accretion shown
separately) ("Cost of Goods Sold") 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
Through our focus on long-term results, acquisitions, and strategic capital
investments, we strive to consistently grow our revenues and expand our margins.
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 funded 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 Credit Facility, as further discussed in Liquidity and Capital
Resources in this report.
32
Results of Operations
The following table sets forth selected Statement of Income data as a percentage
of total revenues for the periods indicated (underlying data rounded to the
nearest thousands):
Percentage Percentage
Change (1) Change (1)
Three Months Ended 2004 Nine Months Ended 2004
September 30, vs. September 30, vs.
(Unaudited) 2004 2003 2003 2004 2003 2003
---- ---- ---- ---- ---- ----
Statement of Income Data:
Revenues:
Long-distance services segment 51.2% 54.1% 2.6% 49.8% 53.4% 3.8%
Cable services segment 23.6% 24.1% 6.4% 23.6% 24.7% 6.0%
Local access services segment 10.8% 9.7% 21.0% 10.8% 9.5% 27.0%
Internet services segment 6.3% 5.0% 35.5% 6.1% 5.0% 37.0%
All other 8.1% 7.1% 23.9% 9.7% 7.4% 44.9%
--------------------------------------------------------------------------------
Total revenues 100.0% 100.0% 8.4% 100.0% 100.0% 11.2%
Selling, general and administrative
expenses 35.0% 35.9% 5.8% 34.1% 35.7% 6.1%
Bad debt expense (recovery) (0.3%) 0.5% (152.7%) (0.4%) 0.7% 160.3%
Depreciation, amortization and accretion
expense 14.3% 13.3% 17.1% 14.6% 13.7% 18.8%
Operating income 20.1% 17.9% 21.7% 18.8% 17.8% 17.7%
Net income before income taxes and
cumulative effect of a change in
accounting principle in 2003 13.5% 8.4% 73.5% 9.5% 7.7% 38.3%
Net income before cumulative effect of a
change in accounting principle in 2003 8.7% 4.6% 105.2% 5.9% 4.3% 52.4%
Net income 8.7% 4.6% 105.2% 5.9% 4.1% 59.3%
33
Percentage Percentage
Change (1) Change (1)
Three Months Ended 2004 Nine Months Ended 2004
September 30, vs. September 30, vs.
(Unaudited) 2004 2003 2003 2004 2003 2003
---- ---- ---- ---- ---- ----
Other Operating Data:
Long-distance services segment
operating income (2) 50.1% 45.7% 12.4% 44.9% 46.1% 1.0%
Cable services segment operating income (3) 23.6% 22.5% 11.5% 25.4% 25.1% 7.3%
Local access services segment operating
loss (4) (15.9%) (17.9%) (7.6%) (9.1%) (21.3%) 45.5%
Internet services segment operating
income (5) 22.1% 9.4% 219.3% 18.7% 8.0% 222.4%
--------------------------
1 Percentage change in underlying data.
2 Computed by dividing total external long-distance services segment operating
income by total external long-distance services segment revenues.
3 Computed by dividing total external cable services segment operating income by
total external cable services segment revenues.
4 Computed by dividing total external local access services segment operating
loss by total external local access services segment revenues.
5 Computed by dividing total external Internet services segment operating income
by total external Internet services segment revenues.
--------------------------
Three Months Ended September 30, 2004 ("2004") Compared To Three Months Ended
September 30, 2003 ("2003")
Overview of Revenues and Cost of Goods Sold
Total revenues increased 8.4% from $98.3 million in 2003 to $106.6 million in
2004. All of our segments and All Other Services contributed to the increase in
total revenues. See the discussion below for more information by segment.
Total Cost of Goods Sold increased 3.2% from $31.9 million in 2003 to $32.9
million in 2004. Our cable services, local access services and Internet services
segments and All Other Services contributed to the increase in total Cost of
Goods Sold, partially off-set by a decrease in long-distance services Cost of
Goods Sold. See the discussion below for more information by segment.
Long-Distance Services Segment Overview
Long-distance services seg