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As filed with the Securities and Exchange Commission on November 13, 2002.
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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-15279
GENERAL COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)
STATE OF ALASKA 92-0072737
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 Denali Street
Suite 1000
Anchorage, Alaska 99503
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (907) 265-5600
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
The number of shares outstanding of the registrant's classes of common stock as
of October 25, 2002 was:
51,871,337 shares of Class A common stock; and
3,877,134 shares of Class B common stock.
1
INDEX
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
Page No.
--------
Cautionary Statement Regarding Forward-Looking Statements.................................................3
PART I. FINANCIAL INFORMATION
Item l. Consolidated Balance Sheets as of September 30, 2002
(unaudited) and December 31, 2001..................................................5
Consolidated Statements of Operations for the
three and nine months ended September 30, 2002
(unaudited) and 2001 (unaudited)...................................................7
Consolidated Statements of Stockholders' Equity
for the nine months ended September 30, 2002
(unaudited) and 2001 (unaudited)...................................................8
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2002 (unaudited)
and 2001 (unaudited)...............................................................9
Notes to Interim Condensed Consolidated Financial
Statements.........................................................................10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................24
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................43
Item 4. Controls and Procedures...............................................................44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................44
Item 4. Submission of Matters to a Vote of Security Holders...................................44
Item 6. Exhibits and Reports on Form 8-K......................................................46
Other items are omitted, as they are not applicable.
SIGNATURES................................................................................................47
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.
- 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;
- The efficacy of the rules and regulations to be adopted by the Federal
Communications Commission ("FCC") and state public regulatory agencies
to implement the provisions of the 1996 Telecom Act; the outcome of
litigation relative thereto; and the impact of regulatory changes
relating to access reform;
- Our responses to competitive products, services and pricing, including
pricing pressures, technological developments, alternative routing
developments, and the ability to offer combined service packages that
include long-distance, local, cable and Internet services;
- The extent and pace at which different competitive environments develop
for each segment of our business;
- The extent and duration for which competitors from each segment of the
telecommunication industries are able to offer combined or full service
packages prior to our being able to do so;
- The degree to which we experience material competitive impacts to our
traditional service offerings prior to achieving adequate local service
entry;
- Competitor responses to our products and services and overall market
acceptance of such products and services;
- The outcome of our negotiations with incumbent local exchange carriers
("ILECs") and state regulatory arbitrations and approvals with respect
to interconnection agreements;
- 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;
- Success and market acceptance for new initiatives, many of which are
untested;
- The level and timing of the growth and profitability of new
initiatives, particularly local telephone services expansion, Internet
(consumer and business) services expansion and wireless services;
- Start-up costs associated with entering new markets, including
advertising and promotional efforts;
3
- Risks relating to the operations of new systems and technologies and
applications to support new initiatives;
- Local conditions and obstacles;
- The impact of oversupply of capacity resulting from excessive
deployment of network capacity;
- 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, and transmission services
and the offering of these services in geographic areas with which we
are unfamiliar;
- The risks associated with technological requirements, technology
substitution and changes and other technological developments;
- Prolonged service interruptions which could affect our business;
- Development and financing of telecommunication, local telephone,
wireless, Internet and cable networks and services;
- Future financial performance, including the availability, terms and
deployment of capital; the impact of regulatory and competitive
developments on capital outlays, and the ability to achieve cost
savings and realize productivity improvements and the consequences of
increased leverage;
- Availability of qualified personnel;
- Changes in, or failure, or inability, to comply with, government
regulations, including, without limitation, regulations of the FCC, the
Regulatory Commission of Alaska ("RCA"), and adverse outcomes from
regulatory proceedings;
- Uncertainties in federal military spending levels and military base
closures in markets in which we operate;
- The ongoing global and domestic trend towards consolidation in the
telecommunications industry, which trend may be the effect of making
the competitors larger and better financed and afford these competitors
with extensive resources and greater geographic reach, allowing them to
compete more effectively;
- The financial, credit and economic impacts of WorldCom, Inc.'s
("WorldCom") bankruptcy filing on the industry in general and on us in
particular;
- A conversion of WorldCom's bankruptcy petition to Chapter 7, an
unfavorable classification of our service provider status for post July
21, 2002 services, unfavorable reauthorization of our pre-filing
contracts and agreements with WorldCom, or a migration of WorldCom's
traffic off our network without it being replaced by other common
carriers that interconnect with our network;
- The effect on us of pricing pressures, new program offerings and market
consolidation in the markets served by our major customers, WorldCom
and Sprint Corporation ("Sprint"); and
- Other risks detailed from time to time in our periodic reports filed
with the SEC.
You should not place undue reliance on any such forward-looking statements.
Further, any forward-looking statement, and such risks, uncertainties and other
factors speak, only as of the date on which they were originally made and we
expressly disclaim any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement to reflect any change in our
expectations with regard to those statements or any other change in events,
conditions or circumstances on which any such statement is based, except as
required by law. New factors emerge from time to time, and it is not possible
for us to predict what factors will arise or when. In addition, we cannot assess
the impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
4
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
ASSETS 2002 2001
- --------------------------------------------------------------------------- ---------------- ---------------
(Amounts in thousands)
Current assets:
Cash and cash equivalents $ 8,821 11,097
--------------- ----------------
Receivables:
Trade 72,947 58,895
Employee 382 358
Other 2,468 1,678
--------------- ----------------
75,797 60,931
Less allowance for doubtful receivables 14,753 4,166
--------------- ----------------
Net receivables 61,044 56,765
--------------- ----------------
Deferred income taxes, net 4,525 4,690
Inventories 4,704 3,462
Prepaid and other current assets 2,148 3,061
Property held for sale 1,037 481
Notes receivable with related parties 108 182
--------------- ----------------
Total current assets 82,387 79,738
--------------- ----------------
Property and equipment in service, net of depreciation 401,814 395,887
Construction in progress 13,769 8,121
--------------- ----------------
Net property and equipment 415,583 404,008
--------------- ----------------
Cable certificates, net of amortization of $26,884,000 at September 30,
2002 and December 31, 2001 191,132 191,132
Goodwill, net of amortization of $7,200,000 at September 30, 2002 and
December 31, 2001 41,191 40,940
Other intangible assets, net of amortization of $1,625,000 and $1,252,000
at September 30, 2002 and December 31, 2001, respectively 2,820 3,387
Deferred loan and senior notes costs, net of amortization of $7,017,000 and
$5,568,000 at September 30, 2002 and December 31, 2001, respectively 6,344 7,630
Notes receivable with related parties 5,625 3,246
Other assets, at cost, net of amortization of $19,000 and $70,000 at
September 30, 2002 and December 31, 2001, respectively 5,629 4,598
--------------- ----------------
Total other assets 252,741 250,933
--------------- ----------------
Total assets $ 750,711 734,679
=============== ================
See accompanying notes to interim condensed consolidated financial statements.
5 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
- -------------------------------------------------------------------------- ---------------- ----------------
(Amounts in thousands)
Current liabilities:
Current maturities of obligations under long-term debt and capital
leases $ 1,557 7,346
Accounts payable 36,917 36,464
Deferred revenue 16,040 11,129
Accrued payroll and payroll related obligations 10,745 15,289
Accrued liabilities 6,177 4,938
Accrued interest 3,256 8,049
Subscriber deposits 934 1,121
---------------- ----------------
Total current liabilities 75,626 84,336
Long-term debt, excluding current maturities 360,125 346,000
Obligations under capital leases, excluding current maturities 44,843 44,933
Obligations under capital leases due to related party, excluding
current maturities 709 703
Deferred income taxes, net of deferred income tax benefit 29,251 25,069
Other liabilities 5,617 4,339
---------------- ----------------
Total liabilities 516,171 505,380
---------------- ----------------
Redeemable preferred stocks 26,907 26,907
---------------- ----------------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000,000 shares; issued 51,721,337 and
50,967,196 shares at September 30, 2002 and December 31, 2001,
respectively 199,436 195,647
Class B. Authorized 10,000,000 shares; issued 3,877,134 and 3,882,843 shares
at September 30, 2002 and December 31, 2001, respectively; convertible on
a share-per-share basis into Class A common stock 3,276 3,281
Less cost of 316,554 and 296,554 Class A common shares held in treasury at
September 30, 2002 and December 31, 2001, respectively (1,836) (1,659)
Paid-in capital 11,117 10,474
Notes receivable with related parties issued upon stock option exercise (5,650) (2,588)
Retained earnings (deficit) 1,869 (2,771)
Accumulated other comprehensive income (loss) (579) 8
---------------- ----------------
Total stockholders' equity 207,633 202,392
Commitments and contingencies
---------------- ----------------
Total liabilities and stockholders' equity $ 750,711 734,679
================ ================
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,
2002 2001 2002 2001
-------------- -------------- --------------- --------------
(Amounts in thousands, except per share amounts)
Revenues $ 94,550 88,019 275,500 270,471
Cost of sales and services 30,375 32,743 92,473 108,660
Selling, general and administrative expenses 32,209 30,106 96,095 84,723
Bad debt expense 1,677 851 12,874 3,676
Depreciation and amortization expense 14,257 14,127 43,255 41,767
-------------- -------------- --------------- --------------
Operating income 16,032 10,192 30,803 31,645
-------------- -------------- --------------- --------------
Interest expense 7,477 7,510 20,304 24,467
Interest income 107 35 335 297
-------------- -------------- --------------- --------------
Interest expense, net 7,370 7,475 19,969 24,170
-------------- -------------- --------------- --------------
Net income before income taxes 8,662 2,717 10,834 7,475
Income tax expense 3,599 1,190 4,662 3,359
-------------- -------------- --------------- --------------
Net income $ 5,063 1,527 6,172 4,116
============== ============== =============== ==============
Basic and diluted net income per common share $ .08 .02 .08 .05
============== ============== =============== ==============
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, 2002 AND 2001
Accum-
ulated
Notes Other
(Unaudited) Class A Receivable Compre-
(Amounts in thousands) Class A Class B Shares With Retained hensive
Common Common Held in Paid-in Related Earnings Income
Stock Stock Treasury Capital Parties (Deficit) (Loss) Total
-----------------------------------------------------------------------------------
Balances at December 31, 2000 $182,706 3,299 (1,659) 7,368 (2,976) (5,258) --- 183,480
Net income --- --- --- --- --- 4,116 --- 4,116
Fair value of cash flow hedge, net of income
tax liability of $59 --- --- --- --- --- --- (89) (89)
-------
Comprehensive income 4,027
Tax effect of excess stock compensation expense
for tax purposes over amounts recognized for
financial reporting purposes --- --- --- 1,881 --- --- --- 1,881
Class B shares converted to Class A 11 (11) --- --- --- --- --- ---
Shares issued under stock option plan 3,182 --- --- --- --- --- --- 3,182
Amortization of the excess of GCI stock market
value over stock option exercise cost on date
of stock option grant --- --- --- 610 --- --- --- 610
Shares issued to Employee Stock Purchase Plan 688 --- --- --- --- --- --- 688
Acquisition of G.C. Cablevision, Inc. net
assets and customer base 2,388 --- --- --- --- --- --- 2,388
Payment received on note issued upon officer
stock option exercise --- --- --- --- 688 --- --- 688
Preferred stock dividends --- --- --- --- --- (1,580) --- (1,580)
-----------------------------------------------------------------------------------
Balances at September 30, 2001 $188,975 3,288 (1,659) 9,859 (2,288) (2,722) (89) 195,364
===================================================================================
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
Fair value of cash flow hedge, net of 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
===================================================================================
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,
2002 2001
-------------- --------------
(Amounts in thousands)
Operating activities:
Net income $ 6,172 4,116
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 43,255 41,767
Amortization charged to selling, general and administrative --- 26
Non-cash cost of sale --- 10,877
Deferred income tax expense 4,757 3,359
Bad debt expense, net of write-offs 10,587 2,127
Deferred compensation and compensatory stock options 870 1,081
Employee Stock Purchase Plan expense funded with issuance of
General Communication, Inc. Class A common stock 497 ---
Write-off of capitalized interest --- 170
Other noncash income and expense items 36 2
Change in operating assets and liabilities (18,567) 96
-------------- --------------
Net cash provided by operating activities 47,607 63,621
-------------- --------------
Investing activities:
Purchases of property and equipment (51,989) (46,663)
Advances and billings to Kanas Telecom, Inc. --- (5,632)
Payment of deposit --- (1,200)
Notes receivable issued to related parties (3,055) (525)
Payments received on notes receivable with related parties 946 772
Purchases of other assets (1,563) (1,154)
Cash received upon acquisition of Kanas Telecom, Inc. --- 228
-------------- --------------
Net cash used by investing activities (55,661) (54,174)
-------------- --------------
Financing activities:
Repayments of long-term borrowings and capital lease obligations (6,802) (13,000)
Long-term borrowings - bank debt 14,000 10,000
Payment of preferred stock dividend (1,018) (963)
Payment received on note receivable with related party issued upon
stock option exercise --- 688
Payment of debt issuance costs (382) (130)
Purchase of treasury stock (177) ---
Proceeds from common stock issuance 157 3,182
-------------- --------------
Net cash provided (used) by financing activities 5,778 (223)
-------------- --------------
Net decrease in cash and cash equivalents (2,276) 9,224
Cash and cash equivalents at beginning of period 11,097 5,962
-------------- --------------
Cash and cash equivalents at end of period $ 8,821 15,186
============== ==============
See accompanying notes to interim condensed consolidated financial statements.
9
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
The accompanying unaudited interim condensed consolidated financial statements
include the accounts of General Communication, Inc. ("GCI") and its subsidiaries
and have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. They should be
read in conjunction with our audited consolidated financial statements for the
year ended December 31, 2001, 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 the interim periods ended September 30, 2002 and 2001,
are not necessarily indicative of the results that may be expected for an entire
year or any other period.
(1) General
In the following discussion, General Communication, Inc. and its direct
and indirect subsidiaries are referred to as "we," "us" and "our".
(a) Business
GCI, an Alaska corporation, was incorporated in 1979. We offer the
following services:
- Long-distance telephone service between Anchorage, Fairbanks,
Juneau, and other communities in Alaska and the remaining
United States and foreign countries
- Cable television services throughout Alaska
- Facilities-based competitive local access services in
Anchorage, Fairbanks and Juneau, Alaska
- Internet access services
- Termination of traffic in Alaska for certain common carriers
- Private line and private network services
- Managed services to certain commercial customers
- Broadband services, including our SchoolAccess(TM) offering to
rural school districts and a similar offering to rural
hospitals and health clinics
- Sales and service of dedicated communications systems and
related equipment
- 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 interim condensed consolidated financial statements include the
accounts of GCI, GCI's wholly-owned subsidiary GCI, Inc., GCI,
Inc.'s wholly-owned subsidiary GCI Holdings, Inc., GCI Holdings,
Inc.'s wholly-owned subsidiaries GCI Communication Corp., GCI
Cable, Inc., and GCI Transport Co., Inc., GCI Holdings, Inc.'s
94.4% controlling interest in GCI Fiber Communication Co., Inc.
("GFCC"), GCI Communication Corp.'s wholly-owned subsidiary Potter
View Development Co., Inc., GCI Cable, Inc.'s wholly-owned
subsidiary GCI American Cablesystems, Inc., GCI American
Cablesystems, Inc.'s wholly-owned subsidiary GCI Cablesystems of
Alaska, Inc., GCI Transport Co., Inc.'s wholly-owned subsidiaries
GCI Satellite Co., Inc., GCI Fiber Co., Inc. and Fiber Hold Co.,
Inc. and GCI Fiber Co., Inc.'s and Fiber Hold Co., Inc.'s
wholly-owned partnership Alaska United Fiber System Partnership
("Alaska United"). Effective October 31, 2002 GCI Fiber Co., Inc.
and Fiber Hold Co., Inc. became wholly-owned subsidiaries of GCI
Holdings, Inc. All significant intercompany transactions have been
eliminated.
10 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(c) Net Income Per Common Share
Net income 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,
2002 2001
------------------------------ -------------------------------
Income Shares Income Shares
(Num- (Denom- Per-share (Num- (Denom- Per-share
erator) inator) Amounts erator) inator) Amounts
-------- ---------- ---------- ---------- --------- ----------
Net income $ 5,063 $ 1,527
Less Preferred Stock dividends:
Series B 361 482
Series C 152 153
-------- ----------
Basic EPS:
Income available to common
stockholders 4,550 55,142 $ 0.08 892 53,165 $ 0.02
Effect of Dilutive Securities:
Unexercised stock options --- 717 --- --- 1,615 ---
-------- ---------- ---------- ---------- --------- ----------
Diluted EPS:
Income available to common
stockholders $ 4,550 55,859 $ 0.08 $ 892 54,780 $ 0.02
======== ========== ========== ========== ========= ==========
Nine Months Ended September 30,
2002 2001
------------------------------ -------------------------------
Income Shares Income Shares
(Num- (Denom- Per-share (Num- (Denom- Per-share
erator) inator) Amounts erator) inator) Amounts
-------- ---------- ---------- ---------- --------- ----------
Net income $ 6,172 $ 4,116
Less Preferred Stock dividends:
Series B 1,083 1,427
Series C 449 153
-------- ----------
Basic EPS:
Income available to common
stockholders 4,640 54,995 $ 0.08 2,536 52,699 $ 0.05
Effect of Dilutive Securities:
Unexercised stock options --- 1,176 --- --- 1,367 ---
-------- ---------- ---------- ---------- --------- ----------
Diluted EPS:
Income available to common
stockholders $ 4,640 56,171 $ 0.08 $ 2,536 54,066 $ 0.05
======== ========== ========== ========== ========= ==========
11 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Common equivalent shares outstanding which are anti-dilutive for
purposes of calculating EPS for the three and nine months ended
September 30, 2002 and 2001, 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,
2002 2001 2002 2001
------------ ------------ ------------ -----------
Series B redeemable preferred stock 3,062 4,067 3,062 4,067
Series C redeemable preferred stock 833 833 833 281
------------ ------------ ------------ -----------
Anti-dilutive common equivalent shares
outstanding 3,895 4,900 3,895 4,348
============ ============ ============ ===========
Weighted average shares associated with outstanding stock options
for the three and nine months ended September 30, 2002 and 2001
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,
2002 2001 2002 2001
------------ ------------ ------------ -----------
Weighted average shares associated with
outstanding stock options 4,573 3 756 88
============ ============ ============ ===========
Effective March 31, 2001 we acquired the assets and customer base
of G.C. Cablevision, Inc. The seller received 238,199 unregistered
shares of GCI Class A common stock with a future payment in
additional shares contingent upon the market price of our common
stock on a future date. At September 30, 2002 the market price
condition was not met and approximately 615,700 shares of GCI Class
A common stock would be issuable if this date was the end of the
contingency period. Additional shares, if any, will be issued after
March 31, 2003.
12 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(d) Common Stock
Following is the statement of common stock shares at September 30,
2002 and 2001 (in thousands):
Class A Class B
----------------- ----------------
Balances at December 31, 2000 48,643 3,904
Class B shares converted to Class A 13 (13)
Shares issued under stock option plan 811 ---
Shares issued upon acquisition of G.C.
Cablevision, Inc. net assets and customer
base 238 ---
----------------- ----------------
Balances at September 30, 2001 49,705 3,891
================= ================
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
================= ================
(e) Redeemable Preferred Stocks
Redeemable preferred stocks consist of (amounts in thousands):
September 30, December 31,
2002 2001
----------------- ----------------
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 at September 30, 2002 and 2001 (shares, in
thousands):
Series B Series C
------------- --------------
Balances at December 31, 2000 20 ---
Shares issued in lieu of cash dividend
payment 3 ---
Shares issued upon acquisition of Kanas
Telecom, Inc. --- 10
------------- --------------
Balances at September 30, 2001 23 10
============= ==============
Balances at December 31, 2001 and September
30, 2002 17 10
============= ==============
13 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Mandatory redemption of our Series C preferred stock is required at
any time after June 30, 2005 at the option of holders of 80% of the
outstanding shares of the Series C preferred stock. The combined
aggregate amount of preferred stock mandatory redemption
requirements follows (amounts in thousands):
Years ending September 30:
2003 $ ---
2004 ---
2005 10,000
2006 ---
2007 ---
--------
$ 10,000
========
Series B
The redemption amount of our convertible redeemable accreting
Series B preferred stock at September 30, 2002 and December 31,
2001 is $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 until either
paid in cash or through the issuance of additional Series B
preferred stock.
Series C
The redemption amount of our convertible redeemable accreting
Series C preferred stock on September 30, 2002 and December 31,
2001 was $10,150,000 and $10,000,000, respectively. The difference
between the carrying and redemption amounts at September 30, 2002
is due to accrued dividends which are included in Accrued
Liabilities until paid.
(f) Sale of Fiber Optic Cable System Capacity
During the first quarter of 2001 we completed a $19.5 million sale
of long-haul capacity in the Alaska United undersea fiber optic
cable system ("fiber system capacity sale") in a cash transaction.
The sale included both capacity within Alaska, and between Alaska
and the 48 contiguous states south of or below Alaska ("Lower 48").
We used the proceeds from the fiber system capacity sale to repay
$11.7 million of the Fiber Facility debt and to fund capital
expenditures and working capital.
The fiber system capacity sale contract gave the purchaser an
indefeasible right to use a certain amount of fiber system capacity
and expires on February 4, 2024. The term may be extended if the
actual useful life of the fiber system capacity extends beyond the
estimated useful life of twenty-five years. The fiber system
capacity sold is integral equipment because it is attached to real
estate. Because all of the benefits and risks of ownership have
been transferred to the purchaser upon full receipt of the purchase
price and other terms of the contract meet the requirements of
Statement of Financial Accounting Standard ("SFAS") No. 66,
"Accounting for Sales of Real Estate" we accounted for the fiber
system capacity sale as a sales-type lease. We recognized $19.5
million in revenue and $10.9 million in cost of sales from the
fiber system capacity sale during the first quarter of 2001.
The accounting for the sale of fiber system capacity is currently
evolving and accounting guidance may become available in the future
which could require us to change our policy. If we are required to
change our policy, it is likely the effect would be to recognize
the gain from future sales of fiber system capacity, if any, over
the term the capacity is provided.
14 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(g) 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, 2002 and December 31, 2001,
substantially all of our cash and cash equivalents were invested in
short-term liquid money instruments.
We have two major customers, WorldCom (see note 5) and Sprint. We
may experience increased risk associated with these customers'
accounts receivable balances. Our remaining customers are located
primarily throughout Alaska. Because of this geographic
concentration, our growth and operations depend upon economic
conditions in Alaska. The economy of Alaska is dependent upon the
natural resources industries, and in particular oil production, as
well as tourism, government, and United States military spending.
Though limited to one geographical area and except for WorldCom and
Sprint, the concentration of credit risk with respect to our
receivables is minimized due to the large number of customers,
individually small balances, and short payment terms.
(h) New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires
that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Use of the
pooling-of-interests method will be prohibited on a prospective
basis only. Adoption of SFAS No. 141 has not had a significant
impact on our results of operations, financial position or cash
flows.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 provides accounting and reporting
standards for intangible assets acquired individually, with a group
of other assets, or as part of a business combination. This
statement addresses how acquired goodwill and other intangible
assets are recorded upon their acquisition as well as how they are
to be accounted for after they have been initially recognized in
the financial statements. Under this statement, goodwill and other
intangibles with indefinite useful lives, on a prospective basis,
will no longer be amortized, however will be tested for impairment
at least annually, based on a fair value comparison. Intangibles
that have finite useful lives will continue to be amortized over
their respective useful lives. This statement also requires
expanded disclosure for goodwill and other intangible assets.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 replaces
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. However it retains the
fundamental provisions of SFAS No. 121 for recognition and
measurement of the impairment of long-lived assets to be held and
used and for measurement of long-lived assets to be disposed of by
sale. This statement applies to all long-lived assets, including
discontinued operations, and replaces the provisions of APB Opinion
No. 30, Reporting Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, for the disposal of segments
of a business. This statement requires that those long-lived assets
be measured at the lower of carrying amount or fair value less cost
to sell, whether reported in continuing operations or in
discontinued operations. Adoption of SFAS No. 144 has not had a
significant impact on our results of operations, financial position
or cash flows.
15 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections". The following summarizes the effects of
SFAS No. 145:
- SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt", which required all gains and losses from extinguishment
of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect is
rescinded. Upon adoption of SFAS No. 145, companies will be
required to apply the criteria in Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions" ("Opinion No. 30"), in determining the
classification of gains and losses resulting from the
extinguishment of debt,
- SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements", amended SFAS No. 4 and is no longer
necessary since SFAS No. 4 has been rescinded,
- SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers", was issued to establish accounting requirements for
the effects of the transition to the provisions of the Motor
Carrier Act of 1980. Those transitions are completed and,
therefore, SFAS No. 44 is no longer needed, and
- SFAS No. 13, "Accounting for Leases", is amended to require
that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the
same manner as sale-leaseback transactions.
SFAS No. 145 will be effective for fiscal years beginning after May
15, 2002, with early adoption of the provisions related to the
rescission of Statement No. 4 encouraged. Upon adoption,
enterprises must reclassify prior period items that do not meet the
extraordinary item classification criteria in Opinion No. 30.
Unamortized bank fees and other expenses totaling $2.4 million
associated with the refinancing of the Senior Holdings Loan and the
Fiber Facility as previously discussed will not be classified as an
extraordinary item and will be charged to expense in the fourth
quarter of 2002. We are currently assessing any further impact of
this statement on our results of operations, financial position and
cash flows.
(i) Reclassifications
Reclassifications have been made to the 2001 financial statements
to make them comparable with the 2002 presentation.
16 (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, 2002 2001
------------- ------------
Increase in accounts receivables $ (14,678) (8,819)
(Increase) decrease in inventories (1,242) 2,119
(Increase) decrease in prepaid and other current assets 1,018 (1,517)
Increase in accounts payable 453 7,134
Increase in deferred revenues 3,911 1,038
Increase (decrease) in accrued payroll and payroll related obligations (4,544) 2,821
Decrease in accrued interest (4,793) (4,127)
Increase in accrued liabilities 1,239 1,397
Increase (decrease) in subscriber deposits (187) 150
Increase (decrease) in components of other long-term liabilities 256 (100)
------------- ------------
$ (18,567) 96
============= ============
We paid interest totaling approximately $25,097,000 and $28,594,000
during the nine months ended September 30, 2002 and 2001, respectively.
We received an income tax refund of approximately $95,000 and $0 during
the nine months ended September 30, 2002 and 2001, respectively. We paid
income taxes totaling approximately $0 and $61,000 during the nine months
ended September 30, 2002 and 2001, respectively.
During the nine months ended September 30, 2002 we funded the employer
matching portion of Employee Stock Purchase Plan contributions by issuing
GCI Class A common stock valued at $497,000. We purchased such shares on
the open market during the nine months ended September 30, 2001.
We financed the purchase of telephony distribution equipment pursuant to
a long-term capital lease arrangement with a leasing company during the
nine month period ended September 30, 2002 at a cost of approximately $1
million.
We acquired certain minority shareholder's interests in GFCC by issuing
15,000 shares of GCI Class A common stock in July 2002.
17 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(3) Intangible Assets
Effective with the adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets" on January 1, 2002, goodwill and cable certificates
(certificates of convenience and public necessity) are no longer
amortized. The following pro forma financial information reflects net
income and basic and diluted EPS as if goodwill and cable certificates
were not subject to amortization for the three and nine months ended
September 30, 2001 (amounts in thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
--------------------------- ---------------------------
Basic and Basic and
Net Income Diluted EPS Net Income Diluted EPS
------------- ------------- ------------ --------------
Net income, as reported $ 1,527 0.02 4,116 0.05
Add cable certificate amortization, net of
income taxes 712 0.01 2,136 0.04
Add goodwill amortization, net of income
taxes 183 --- 533 0.01
------------- ------------- ------------ --------------
Adjusted net income $ 2,422 0.03 6,785 0.10
============= ============= ============ ==============
Cable certificates are allocated to our cable services reportable
segment. Goodwill is primarily allocated to the cable services segment
and the remaining amount is not allocated to a reportable segment, but is
included in the All Other category in note 4.
Amortization expense for amortizable intangible assets for the three and
nine months ended September 30, 2002 and 2001 follow:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------- ----------- ---------- ----------
Amortization expense for intangible assets $ 180 1,801 567 5,355
========== =========== ========== ==========
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,
2002 $ 760
2003 374
2004 229
2005 123
2006 119
No intangible assets have been impaired based upon impairment testing
performed as of January 1, 2002 and no indicators of impairment have
occurred since the impairment testing was performed.
(4) Industry Segments Data
Our reportable segments are business units that offer different products.
The reportable segments are each managed separately and offer distinct
products with different production and delivery processes.
18 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
We have four reportable segments as follows:
Long-distance services. We offer a full range of common-carrier
long-distance services to commercial, government, other
telecommunications companies and residential customers, through our
networks of fiber optic cables, digital microwave, and fixed and
transportable satellite earth stations and our SchoolAccess(TM)
offering to rural school districts and a similar offering to rural
hospitals and health clinics.
Cable services. We provide cable television services to residential,
commercial and government users in the State of Alaska. Our cable
systems serve 33 communities and areas in Alaska, including the state's
three largest urban areas, Anchorage, Fairbanks and Juneau. We offer
digital cable television services in Anchorage, Fairbanks, Juneau,
Kenai and Soldotna and retail cable modem service (through our Internet
services segment) in Anchorage, Fairbanks, Juneau and several other
communities in Alaska. We plan to expand our product offerings as plant
upgrades are completed in other communities in Alaska.
Local access services. We offer facilities based competitive local
exchange services in Anchorage, Fairbanks and Juneau and plan to
provide similar competitive local exchange services in other locations
pending regulatory approval.
Internet services. We offer wholesale and retail Internet services. We
offer cable modem service in Anchorage, Fairbanks, Juneau and several
other communities in Alaska and plan to provide cable modem service in
other areas in 2003. Our undersea fiber optic cable allows us to offer
enhanced services with high-bandwidth requirements.
Included in the "All Other" category in the tables that follow are our
managed services, product sales, cellular telephone services, and, during
the nine months ended September 30, 2001, management services for Kanas
Telecom, Inc. ("Kanas"), a related party. 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 management information systems, accounting, legal and
regulatory, human resources and other general and administrative
expenses. In 2001, the All Other category includes revenues and costs
associated with the sale of undersea fiber optic cable system capacity
(see note 1(f)). The September 30, 2001 Form 10-Q "Industry Segments
Data" reported marketing expenses in the "All Other" category. Such 2001
expenses have been reclassified to the applicable four reportable
segments in the September 30, 2002 Form 10-Q.
We evaluate performance and allocate resources based on (1) earnings or
loss from operations before depreciation, amortization, net interest
expense and income taxes, and (2) operating income or loss. The
accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies in note 1.
Intersegment sales are recorded at cost plus an agreed upon intercompany
profit.
We earn all revenues through sales of services and products within the
United States of America. All of our long-lived assets are located within
the United States of America.
19 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Summarized financial information for our reportable segments and for the
All Other category for the nine months ended September 30, 2002 and 2001
follows (amounts in thousands):
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 7,179 32,798 558 33,356
External 156,221 65,322 23,510 11,412 256,465 19,035 275,500
------------------------------------------------------------------------------
Total revenues $ 172,799 66,865 31,008 18,591 289,263 19,593 308,856
==============================================================================
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) $ 53,134 18,472 (369) (11,111) 60,126 (28,616) 31,510
==============================================================================
2001
Revenues:
Intersegment $ 14,982 1,189 6,024 4,264 26,459 169 26,628
External 149,979 56,032 18,538 8,772 233,321 37,150 270,471
------------------------------------------------------------------------------
Total revenues $ 164,961 57,221 24,562 13,036 259,780 37,319 297,099
==============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, net interest
expense and income taxes $ 65,475 25,400 3,881 (9,001) 85,755 (11,630) 74,125
==============================================================================
Operating income (loss) $ 48,144 10,361 1,341 (11,060) 48,786 (16,428) 32,358
==============================================================================
A reconciliation of reportable segment revenues to consolidated revenues
follows (amounts in thousands):
Nine months ended September 30, 2002 2001
------------- --------------
Reportable segment revenues $ 289,263 259,780
Plus All Other revenues 19,593 37,319
Less intersegment revenues eliminated in consolidation (33,356) (26,628)
------------- --------------
Consolidated revenues $ 275,500 270,471
============= ==============
20 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
A reconciliation of reportable segment earnings from operations before
depreciation, amortization, net interest expense and income taxes to
consolidated net income before income taxes follows (amounts in
thousands):
Nine months ended September 30, 2002 2001
-------------- --------------
Reportable segment earnings from operations before
depreciation, amortization, net interest expense and
income taxes $ 97,702 85,755
Less All Other loss from operations before depreciation,
amortization, net interest expense and income taxes (22,937) (11,630)
Less intersegment contribution eliminated in consolidation (707) (713)
-------------- --------------
Consolidated earnings from operations before
depreciation, amortization, net interest expense
and income taxes 74,058 73,412
Less depreciation and amortization expense 43,255 41,767
-------------- --------------
Consolidated operating income 30,803 31,645
Less interest expense, net 19,969 24,170
-------------- --------------
Consolidated net income before income taxes $ 10,834 7,475
============== ==============
A reconciliation of reportable segment operating income to consolidated
net income before income taxes follows (amounts in thousands):
Nine months ended September 30, 2002 2001
-------------- -------------
Reportable segment operating income $ 60,126 48,786
Less All Other operating loss (28,616) (16,428)
Less intersegment contribution eliminated in consolidation (707) (713)
-------------- -------------
Consolidated operating income 30,803 31,645
Less interest expense, net 19,969 24,170
-------------- -------------
Consolidated net income before income taxes $ 10,834 7,475
============== =============
(5) WorldCom Chapter 11 Bankruptcy Filing
We provide long-distance and other services to WorldCom, a related party
and a major customer. We earned revenues from WorldCom, net of discounts,
totaling approximately $68.7 million for the nine months ended September
30, 2002. As a percentage of total revenues, WorldCom revenues totaled
24.9% for the nine months ended September 30, 2002. On July 21, 2002
WorldCom 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.
The filings have enabled WorldCom to continue to conduct business while
it develops a reorganization plan.
During the three and nine months ended September 30, 2002 we have
recognized $1.2 million and $11.0 million in bad debt expense for
uncollected amounts due from WorldCom, respectively. At September 30,
2002 the bad debt reserve for uncollected amounts due from WorldCom
("WorldCom reserve") totaled $11.6 million and consisted of all billings
for services rendered prior to July 21, 2002
21 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
that were not paid or deemed recoverable as of September 30, 2002 and
which have not been subsequently paid through the date of this report.
The WorldCom reserve includes approximately $655,000 in reserves
recognized prior to the bankruptcy in addition to the $11.0 million in
bad debt expense previously discussed. Any payments received on amounts
included in the WorldCom reserve will reduce the reserve and bad debt
expense in the period of receipt. We currently cannot predict the timing
or ultimate amount that WorldCom will pay on outstanding balances due us
as of their bankruptcy filing date of July 21, 2002. WorldCom has made
timely payments for services rendered subsequent to July 21, 2002.
(6) Commitments and Contingencies
Litigation and Disputes
We are routinely involved in various lawsuits, billing disputes, legal
proceedings and regulatory matters that have arisen in the normal course
of business. While the ultimate results of these items cannot be
predicted with certainty, we do not expect at this time the resolution of
them to have a material adverse effect on our financial position, results
of operations or our liquidity.
(7) Subsequent Event
On November 1, 2002 we closed a $225.0 million bank facility ("Senior
Facility") to refinance the Senior Holdings Loan and Fiber Facility. The
Senior Holdings Loan and Fiber Facility had balances of approximately
$120.1 million and $60.0 million, respectively, at September 30, 2002.
The Senior Facility includes a term loan of $175.0 million and a
revolving credit facility of $50.0 million. The Senior Facility matures
on November 1, 2004 and bears interest at LIBOR plus 6.50%. We are
required to pay a commitment fee equal to 1.5% per annum on the unused
portion of the commitment. If the outstanding debt is less than $112.5
million the commitment fee increases to 2.0% per annum on the unused
portion of the commitment.
On November 30, 2003 we are required to prepay the term loan in an amount
equal to 50% of the amount by which earnings before interest, taxes,
depreciation, and amortization exceeds certain fixed charges as defined
in the Senior Facility agreement ("Excess Cash Flow") during the year
ended September 30, 2003. On May 30, 2004 we are required to prepay the
term loan in an amount equal to 50% of the Excess Cash Flow during the
six months ended March 31, 2004.
The Senior Facility contains, among others, covenants limiting additional
indebtedness and prohibits any direct or indirect distribution, dividend,
redemption or other payment to any person on account of any general or
limited partnership interest in, or shares of capital stock or other
securities of GCI, Inc. and subsidiaries. Under the Senior Facility we
may not allow the:
- Total leverage ratio (as defined) to be greater than 4.5:1,
- Senior secured leverage ratio (as defined) to be greater than
2.25:1, and
- Interest coverage ratio (as defined) to be less than 2.50:1.
Capital expenditures, other than those incurred to build additional fiber
optic cable system capacity, in any of the years ended September 30,
2003, March 31, 2004 and September 30, 2004 may not exceed:
- $25.0 million plus,
- 50% of any Excess Cash Flow during the applicable period less
any permitted Investments (as defined) of up to $5.0 million during
the applicable period.
22 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
$3.0 million of the Senior Facility has been used to provide a letter of
credit to secure payment of certain access charges associated with our
provision of telecommunications services within the State of Alaska.
In connection with the funding of the Senior Facility, we paid bank fees
and other expenses of approximately $104,000 and $304,000 during the
three and nine months ended September 30, 2002 which will be charged to
amortization expense over the life of the agreement. Remaining
unamortized bank fees and other expenses totaling $2.4 million associated
with the Senior Holdings Loan and the Fiber Facility will be charged to
expense in the fourth quarter of 2002.
The refinancing agreement resulted in the classification of all Senior
Holdings Loan and Fiber Facility debt as long-term at September 30, 2002.
At June 30, 2002 the current portion of such debt was $36.6 million.
23
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, allowance for doubtful
accounts, depreciation and amortization periods, intangible assets, income
taxes, and contingencies and litigation. We base our estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. See also our Cautionary
Statement Regarding Forward-Looking Statements.
General Overview
We have experienced significant growth in recent years through strategic
acquisitions, deploying new business lines and expansion of our existing
businesses. We have historically met our cash needs for operations, regular
capital expenditures and maintenance capital expenditures through our cash flows
from operating activities. Cash requirements for significant acquisitions and
major capital expenditures have been provided largely through our financing
activities.
Long-Distance Services Overview
During the third quarter of 2002 long-distance services revenue represented
56.9% of consolidated revenues. Our provision of interstate and intrastate
long-distance services to residential, commercial and governmental customers and
to other common carriers (principally WorldCom, a related party, (see note 5 to
the Interim Condensed Consolidated Financial Statements for a discussion of
WorldCom's Chapter 11 bankruptcy filing) and Sprint), provision of private line
and leased dedicated capacity services and broadband services accounted for
95.7% of our total long-distance services revenues during the third quarter of
2002.
Factors that have the greatest impact on year-to-year changes in long-distance
services revenues include the rate per minute charged to customers, usage
volumes expressed as minutes of use, and the number of private line, leased
dedicated service and broadband products in use.
Long-distance services face significant competition from AT&T Alascom, Inc.,
long-distance resellers, and from local telephone companies that have entered
the long-distance market. We believe our approach to developing, pricing, and
providing long-distance services and bundling different business segment
services will continue to allow us to be competitive in providing those
services.
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
24
2002 the new contract reduced the rate to be charged by us for certain Sprint
traffic over the extended term of the contract.
Other common carrier traffic routed to us for termination in Alaska is largely
dependent on traffic routed to WorldCom and Sprint by their customers. Pricing
pressures, general economic deterioration, new program offerings, business
failures, and market consolidation continue to evolve in the markets served by
WorldCom and Sprint. If, as a result, their traffic is reduced, or if their
competitors' costs to terminate or originate traffic in Alaska are reduced, our
traffic will also likely be reduced, and our pricing may be reduced to respond
to competitive pressures. We are unable to predict the effect on us of such
changes, however given the materiality of other common carrier revenues to us, a
significant reduction in traffic or pricing could have a material adverse effect
on our financial position, results of operations and liquidity.
Cable Services Overview
During the third quarter of 2002, cable television revenues represented 23.3% of
consolidated revenues. The cable systems serve 33 communities and areas in
Alaska, including the state's three largest population centers, Anchorage,
Fairbanks and Juneau.
We generate cable services revenues from four primary sources: (1) digital and
analog programming services, including monthly basic or premium subscriptions
and pay-per-view movies or other one-time events, such as sporting events; (2)
equipment rentals or installation; (3) cable modem services (shared with our
Internet services segment); and (4) advertising sales. During the third quarter
of 2002 programming services generated 76.9% of total cable services revenues,
equipment rental and installation fees accounted for 9.3% of such revenues,
cable services' allocable share of cable modem services accounted for 9.6% of
such revenues, advertising sales accounted for 3.3% of such revenues, and other
services accounted for the remaining 0.9% of total cable services revenues.
The primary factors that contribute to year-to-year changes in cable services
revenues are average monthly subscription and pay-per-view rates, the mix among
basic, premium and pay-per-view services and digital and analog services, the
average number of cable television and cable modem subscribers during a given
reporting period, and revenues generated from new product offerings.
Cable services face competition from alternative methods of receiving and
distributing television signals and from other sources of news, information and
entertainment. We believe our cable television services will continue to be
competitive by providing, at reasonable prices, a greater variety of programming
and other communication services than are available off-air or through other
alternative delivery sources and superior technical performance and responsive
local customer service.
Local Access Services Overview
We generate local access services revenues from three primary sources: (1)
business and residential basic dial tone services; (2) business private line and
special access services; and (3) business and residential features and other
charges, including voice mail, caller ID, distinctive ring, inside wiring and
subscriber line charges. During the third quarter of 2002 local exchange
services revenues represented 8.6% of consolidated revenues.
The primary factors that contribute to year-to-year changes in local access
services revenues are the average number of business and residential subscribers
to our services during a given reporting period, the average monthly rates
charged for non-traffic sensitive services and the number and type of additional
premium features selected.
Our local access services segment faces significant competition in Anchorage,
Fairbanks, and Juneau from the ILEC Alaska Communications Systems, Inc. ("ACS")
and AT&T Alascom, Inc. We began providing
25
service in the Juneau market in the first quarter of 2002. We believe our
approach to developing, pricing, and providing local access services and
bundling different business segment services will allow us to be competitive in
providing those services.
Internet Services Overview
We generate Internet services revenues from three primary sources: (1) access
product services, including commercial, Internet service provider, and retail
dial-up access; (2) network management services; and (3) Internet services'
allocable share of cable modem services (a portion of cable modem revenue is
also recognized by our cable services segment). During the third quarter of 2002
Internet services segment revenues represented 4.1% of consolidated revenues.
The primary factors that contribute to year-to-year changes in Internet services
revenues are the average number of subscribers to our services during a given
reporting period, the average monthly subscription rates, and the number and
type of additional premium features selected.
Marketing campaigns continue to be deployed targeting residential and commercial
customers featuring bundled Internet products. Our Internet offerings are
coupled with our long-distance and local access services offerings and provide
free basic Internet services or discounted premium Internet services if certain
long-distance or local access services plans are selected. Value-added premium
Internet features are available for additional charges.
We compete with a number of Internet service providers in our markets. We
believe our approach to developing, pricing, and providing Internet services
allows us to be competitive in providing those services.
All Other Services Overview
Revenues reported in the All Other category as described in note 4 in the
accompanying Notes to Interim Condensed Consolidated Financial Statements
include our managed services, product sales, and cellular telephone services.
Revenues included in the All Other category represented 7.1% of total revenues
in the third quarter of 2002 and include managed services revenues totaling $5.4
million and product sales and cellular telephone services revenues totaling $1.3
million.
26
RESULTS OF OPERATIONS
The following table sets forth selected Statement of Operations data as a
percentage of total revenues for the periods indicated (unaudited, underlying
data rounded to the nearest thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
Percentage Percentage
Change(1) Change(1)
2002 vs. 2002 vs.
2002 2001 2001 2002 2001 2001
---- ---- ---- ---- ---- ----
Statement of Operations Data:
Revenues
Long-distance services 56.9% 61.2% (0.2%) 56.7% 55.5% 4.2%
Cable services 23.3% 21.7% 15.4% 23.7% 20.7% 16.6%
Local access services 8.6% 7.3% 26.6% 8.5% 6.9% 26.8%
Internet services 4.1% 3.4% 30.1% 4.2% 3.2% 30.1%
All Other services 7.1% 6.4% 19.5% 6.9% 13.7% (48.8%)
-----------------------------------------------------------------------
Total revenues 100.0% 100.0% 7.4% 100.0% 100.0% 1.9%
Cost of sales and services 32.1% 37.2% (7.2%) 33.6% 40.2% (14.9%)
Selling, general and administrative
expenses 34.1% 34.2% 7.0% 34.9% 31.3% 13.4%
Bad debt expense 1.8% 1.0% 97.1% 4.6% 1.4% 250.2%
Depreciation and amortization 15.1% 16.0% 0.9% 15.7% 15.4% 3.6%
-----------------------------------------------------------------------
Operating income 16.9% 11.6% 57.3% 11.2% 11.7% (2.7%)
Net income before income taxes 9.2% 3.1% 218.8% 3.9% 2.8% 44.9%
Net income 5.4% 1.7% 231.6% 2.2% 1.5% 50.0%
Other Operating Data:
Long-distance services operating income (2) 43.3% 31.1% 38.9% 34.0% 30.4% 16.5%
Cable services operating income (3) 29.0% 17.8% 88.0% 28.3% 18.5% 78.3%
Local access services operating (loss)
income (4) (10.2%) 48.4% (126.8%) (1.6%) 20.9% (109.5%)
Internet services operating loss (5) (93.7%) (127.8%) 4.6% (97.4%) (126.1%) (0.5%)
--------------------------
(1) Percentage change in underlying data.
(2) Computed as a percentage of total external long-distance services revenues.
(3) Computed as a percentage of total external cable services revenues.
(4) Computed as a percentage of total external local access services revenues.
(5) Computed as a percentage of total external Internet services revenues.
--------------------------
27
Three Months Ended September 30, 2002 ("2002") Compared To Three Months Ended
September 30, 2001 ("2001").
Revenues
Total revenues increased 7.4% from $88.0 million in 2001 to $94.6 million in
2002.
Long-distance services revenues from residential, commercial, governmental, and
other common carrier customers decreased 0.2% to $53.8 million in 2002. The
decrease was largely due to a 17.6% decrease in message telephone service
revenues from residential, commercial, and governmental customers to $13.7
million due to the following:
- A 15.3% decrease in retail minutes carried for residential, commercial,
and governmental customers to 75.5 million minutes,
- A 10.2% decrease in the average rate per minute on minutes carried for
residential, commercial, and governmental customers to $0.123 per minute
due to our promotion of and customers' enrollment in calling plans
offering a certain number of minutes for a flat monthly fee, and
- A decrease of 0.5% in the number of active residential, small business
and commercial customers billed to 87,100 at September 30, 2002.
Long-distance services revenue decreases described above were partially offset
by the following:
- An increase of 9.3% in message telephone service revenues from other
common carriers (principally WorldCom and Sprint) to $24.5 million in
2002 resulting from a 11.4% increase in wholesale minutes carried for
other common carriers to 224.5 million minutes. After excluding certain
low-margin wholesale minutes no longer carried for other common carriers,
comparable wholesale minutes carried for other common carriers increased
17.3% over the prior year. The increase in wholesale minutes carried for
other common carriers was partially off-set by a 1.8% decrease in the
average rate per minute on minutes carried for other common carriers due
to a reduced rate charged by us for certain Sprint traffic due to a new
contract commencing April 2002. After excluding certain 2001 low-margin
wholesale minutes not carried in 2002 for other common carriers, the
comparable average rate per minute decreased 6.0% from the prior year,
and
- An increase of 10.8% in private line and private network transmission
services revenues to $9.0 million in 2002 due to an increased number of
leased circuits in service.
Revenues from and minutes carried for WorldCom have increased in 2002 as
compared to 2001.
Cable services revenues increased 15.4% to $22.1 million in 2001. Programming
services revenues increased 11.5% to $17.0 million in 2002 and average gross
revenue per average basic subscriber per month increased $2.76 or 5.2% in 2002
resulting from the following:
- Basic subscribers served increased approximately 11,600 to approximately
134,600 at September 30, 2002 as compared to September 30, 2001 (the 2002
increase includes approximately 7,000 basic subscribers acquired from
Rogers American Cablesystems, Inc. ("Rogers") on November 19, 2001),
- New facility construction efforts in 2002 and the acquisition of Rogers
subscribers resulted in approximately 14,900 additional homes passed, a
8.2% increase from 2001, and
- Digital subscriber counts increased 33.8% to approximately 28,500 at
September 30, 2002 as compared to September 30, 2001.
The cable services segment's share of cable modem revenue (offered through our
Internet services segment) increased $803,000 to $2.1 million in 2002 due to an
increased number of cable modems deployed.
28
Local access services revenues increased 26.6% in 2002 to $8.1 million primarily
due to growth in the average number of customers served. At September 30, 2002
an estimated 95,000 to 100,000 lines were in service as compared to
approximately 73,300 lines in service at September 30, 2001. At September 30,
2002 approximately 2,500 additional lines were awaiting connection. The increase
in local access services revenues described above was partially off-set by the
following:
- The FCC Multi-Association Group ("MAG") reform order reducing the access
rates paid by interexchange carriers to local exchange carriers ("LECs"),
and
- A reduction in interstate access rates charged by us to interexchange
carriers in response to an FCC order forcing a competitor to reduce their
interstate access rates.
Internet services revenues increased 30.1% to $3.9 million in 2002 primarily due
to growth in the average number of customers served and the number of cable
modems deployed. We had approximately 71,400 active residential, commercial and
small business retail dial-up Internet subscribers at September 30, 2002 as
compared to approximately 67,900 at September 30, 2001. We expect the number of
active residential, commercial and small business retail dial-up Internet
subscribers may decline slightly in future quarters due to their conversion to
cable modem subscribers. We had approximately 33,000 active residential,
commercial and small business retail cable modem subscribers at September 30,
2002 as compared to approximately 21,500 at September 30, 2001. Approximately
850 cable modem subscribers were added with the Rogers acquisition on November
19, 2001.
The 19.5% increase in All Other revenues to $6.7 million in 2002 is primarily
due to a 14.0% increase in managed services revenues in 2002 to $5.4 million
primarily due to the provision of additional services to and increased revenues
from a certain customer.
Cost of Sales and Service
Total cost of sales and services decreased 7.2% to $30.4 million in 2002. As a
percentage of total revenues, total cost of sales and services decreased from
37.2% in 2001 to 32.1% in 2002.
Long-distance services cost of sales and services decreased 23.2% to $14.9
million in 2002. Long-distance services cost of sales as a percentage of
long-distance services revenues decreased from 36.0% in 2001 to 27.7% in 2002
primarily due to the following:
- Reductions in access costs due to distribution and termination of our
traffic on our own local services network instead of paying other
carriers to distribute and terminate our traffic. The statewide average
cost savings is approximately $.038 and $.078 per minute for interstate
and intrastate traffic, respectively. We expect cost savings to continue
to occur as long-distance traffic originated, carried, and terminated on
our own facilities grows,
- The FCC MAG reform order reducing access rates paid by interexchange
carriers to LECs, and
- In the course of business we estimate unbilled long-distance cost of
sales based upon minutes of use processed through our network and
established rates. Such estimates are revised when subsequent billings
are received, payments are made, billing matters are researched and
resolved, tariffed billing periods lapse, or when disputed charges are
resolved. In 2002 we had favorable adjustments of $1.5 million. Excluding
the favorable adjustments in 2002, the long-distance services cost of
sales as a percentage of long-distance services revenues was 30.6% in
2002.
Partially offsetting the 2002 decrease in long-distance services cost of sales
as a percentage of long-distance services revenues is a decrease in the average
rate per minute billed to customers as previously described.
Cable services cost of sales and services increased 10.8% to $5.8 million in
2002. Cable services cost of sales and services as a percentage of cable
revenues, which is less as a percentage of revenues than are long-
29
distance, local access and Internet services cost of sales and services,
decreased from 27.2% in 2001 to 26.1% in 2002. The decrease is due to increases
in equipment rental and installation, cable services' allocable share of cable
modem services and advertising sales revenues which do not have corresponding
costs of sales and services. Cable services cost of sales and services as a
percentage of cable programming services revenue were 34.0% and 34.2% in 2002
and 2001, respectively.
Local access services cost of sales and services increased 50.4% to $5.3 million
in 2002. Local access services cost of sales and services as a percentage of
local access services revenues increased from 55.4% in 2001 to 65.9% in 2002,
primarily due to the following:
- Decreased network access services revenues from other carriers as the
number of customers purchasing both long-distance and local access
services from us increases,
- An increase in the Anchorage loop lease rates paid to ACS as described
below,
- The effect of offering one to two months of free service to significant
numbers of new local access services customers acquired in 2002 while
continuing to incur cost of sales for such new customers,
- The FCC Multi-Association Group reform order reducing the access rates
paid by interexchange carriers to LECs,
- A reduction in interstate access rates charged by us to interexchange
carriers in response to an FCC order forcing a competitor to reduce their
interstate access rates, and
- The lease of wholesale circuits from the ILEC in Fairbanks and Juneau
pending completion of our own facilities enabling service transition to
unbundled network elements ("UNE") facilities and pricing.
The increases in local access services cost of sales as a percentage of local
access services revenues described above are partially offset by further
economies of scale and more efficient network utilization as the number of local
access services subscribers and resulting revenues increase.
ACS requested and received permission for a 7.7% increase in the UNE loop rate
to $14.92 and a 24% increase in their retail residential rates, both effective
in November 2001. The wholesale service rate we pay is tied to the retail
residential rate and increased approximately $2.25 per line. Additionally, the
cost of residential features increased 24% to approximately $1.35 per line. We
estimate that the increased rates will result in a 3.0% to 4.0% increase in our
local access services cost of sales as a percentage of local access services
revenue for the year ended December 31, 2002.
Internet services cost of sales and services increased 2.9% to $1.2 million in
2002, and as a percentage of Internet services revenues, totaled 31.3% and 39.5%
in 2002 and 2001, respectively. The decrease as a percentage of Internet
services revenues is primarily due to a $1.4 million increase in Internet's
portion of cable modem revenue that generally has higher margins than do other
Internet services products. As Internet services revenues increase, economies of
scale and more efficient network utilization continue to result in reduced cost
of sales and services as a percentage of revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 7.0% to $32.2 million in
2002 primarily due to increased labor and health insurance costs and incremental
new costs to operate GCI Fiber Communication Co., Inc. ("GFCC") and Rogers,
partially offset by a decreased accrual for company-wide success sharing bonus
costs. As a percentage of total revenues, selling, general and administrative
expenses decreased to 34.1% in 2002 from 34.2% in 2001, resulting from increased
revenues without a ratable increase in selling, general and administrative
expenses.
Marketing and advertising expenses as a percentage of total revenues decreased
from 3.5% in 2001 to 3.2% in 2002.
30
Bad Debt Expense
Bad debt expense increased 97.1% to $1.7 million in 2002 and, as a percentage of
total revenues, increased to 1.8% in 2002 from 1.0% in 2001. The 2002 increase
is primarily due to the provision of an additional $1.2 million in bad debt
expense for uncollected accounts from WorldCom resulting from substantially all
of its active U.S. subsidiaries filing voluntary petitions for reorganization
under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy
Court for the Southern District of New York on July 21, 2002. The $1.2 million
WorldCom bad debt expense in 2002 includes all unpaid billings for services
rendered from July 1, 2002 through July 21, 2002, net of a $3.5 million payment
received from a third party obligor that determined it was ultimately liable for
services provided by GCI to the third party under a contract that had been
assigned to WorldCom, and net of an estimated 10% recovery factor associated
with remaining outstanding WorldCom pre-petition balances.
At September 30, 2002 the WorldCom 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 September 30, 2002 and which have not been
subsequently paid through the date of this report. Any payments received on
amounts included in the WorldCom reserve will reduce the reserve and bad debt
expense in the period of receipt.
Depreciation and Amortization
Depreciation and amortization expense increased 0.9% to $14.3 million in 2002.
The increase is primarily attributable to an increase in depreciation expense on
our $68.0 million investment in equipment and facilities placed into service
during 2001 for which a full year of depreciation will be recorded during the
year ended December 31, 2002, and the $47.3 million investment in equipment and
facilities placed into service during the nine months ended September 30, 2002
for which a partial year of depreciation will be recorded during the year ended
December 31, 2002.
Partially offsetting the depreciation expense increases described above is the
discontinued amortization of Goodwill and Cable Certificates upon the adoption
of SFAS 142, "Goodwill and Other Intangible Assets" resulting in a decrease in
2002 amortization expense of approximately $1.6 million as compared to 2001.
Interest Expense, Net
Interest expense, net of interest income, decreased 1.4% to $7.4 million in
2002. This decrease resulted primarily from decreased interest rates in 2002 on
our variable rate debt. Partially offsetting these decreases was additional
interest expense in 2002 resulting from an increase in average outstanding
indebtedness.
Income Tax Expense
Income tax expense was $3.6 million in 2002 and $1.2 million in 2001. The change
was due to increased net income before income taxes in 2002 as compared to 2001,
as previously described. Our effective income tax rate decreased from 43.8% in
2001 to 41.5% in 2002 due to the effect of items that are nondeductible for
income tax purposes.
Nine Months Ended September 30, 2002 ("2002") Compared To None Months Ended
September 30, 2001 ("2001").
Revenues
Total revenues increased 1.9% from $270.5 million in 2001 to $275.5 million in
2002. Excluding the fiber optic cable system capacity sale of $19.5 million in
2001 as described in note 1(f) in the accompanying Notes to Interim Condensed
Consolidated Financial Statements, total revenues increased 9.8% in 2002.
31
Long-distance services revenues from residential, commercial, governmental, and
other common carrier customers increased 4.2% to $156.2 million in 2002. The
increase was largely due to the following:
- An increase of 14.4% in message telephone service revenues from other
common carriers (principally WorldCom and Sprint) to $68.2 million in
2002 resulting from a 17.8% increase in wholesale minutes carried for
other common carriers to 629.9 million minutes. After excluding certain
low-margin wholesale minutes no longer carried for other common carriers,
comparable wholesale minutes carried for other common carriers increased
24.5% over the prior year. The increase in wholesale minutes carried for
other common carriers was partially off-set by a 2.9% decrease in the
average rate per minute on minutes carried for other common carriers due
to a reduced rate charged by us for certain Sprint traffic due to a new
contract commencing April 2002. After excluding certain 2001 low-margin
wholesale minutes not carried in 2002 for other common carriers, the
comparable average rate per minute decreased 7.4% from the prior year,
and
- An increase in 2002 of 22.6% to $13.3 million in revenues from our
packaged telecommunications offering to rural hospitals and health
clinics and our SchoolAccess(TM) offering to rural school districts. The
increase is primarily due to an increase in circuits and services sold to
rural hospitals and health clinics and the provision of SchoolAccess(TM)
services to an additional nine school districts located in Arizona and
New Mexico beginning in July 2001.
Long-distance services revenue increases described above were partially offset
by a 8.0% decrease in message telephone service revenues from residential,
commercial, and governmental customers to $42.1 million due to the following:
- A 9.7% decrease in retail minutes carried for residential, commercial,
and governmental customers to 235.2 million minutes,
- A 3.1% decrease in the average rate per minute on minutes carried for
residential, commercial, and governmental customers to $0.127 per minute
due to our promotion of and customers' enrollment in calling plans
offering a certain number of minutes for a flat monthly fee, and
- A decrease of 0.5% in the number of active residential, small business
and commercial customers billed to 87,100 at September 30, 2002.
Revenues from and minutes carried for WorldCom have increased in 2002 as
compared to 2001.
Cable services revenues increased 16.6% to $65.3 million in 2002. Programming
services revenues increased 12.3% to $50.5 million in 2002 and average gross
revenue per average basic subscriber per month increased $2.95 or 5.7% in 2002
resulting from the following:
- Basic subscribers served increased approximately 11,600 to approximately
134,600 at September 30, 2002 as compared to September 30, 2001 (the 2002
increase includes approximately 7,000 basic subscribers acquired from
Rogers American Cablesystems, Inc. ("Rogers") on November 19, 2001),
- New facility construction efforts in 2002 and the acquisition of Rogers
subscribers resulted in approximately 14,900 additional homes passed, a
8.2% increase from 2001, and
- Digital subscriber counts increased 33.8% to approximately 28,500 at
September 30, 2002 as compared to September 30, 2001.
The cable services segment's share of cable modem revenue (offered through our
Internet services segment) increased $2.3 million to $5.7 million in 2002 due to
an increased number of cable modems deployed.
Local access services revenues increased 26.8% in 2002 to $23.5 million
primarily due to growth in the average number of customers served. At September
30, 2002 an estimated 95,000 to 100,000 lines were in service as compared to
approximately 73,300 lines in service at September 30, 2001. At September 30,
2002
32
approximately 2,500 additional lines were awaiting connection. The increase
in local access services revenues described above was partially off-set by the
following:
- The FCC MAG reform order reducing the access rates paid by interexchange
carriers to LECs, and
- A reduction in interstate access rates charged by us to interexchange
carriers in response to an FCC order forcing a competitor to reduce their
interstate access rates.
Internet services revenues increased 30.1% to $11.4 million in 2002 primarily
due to growth in the average number of customers served and the number of cable
modems deployed. We had approximately 71,400 active residential, commercial and
small business retail dial-up Internet subscribers at September 30, 2002 as
compared to approximately 67,900 at September 30, 2001. We expect the number of
active residential, commercial and small business retail dial-up Internet
subscribers may decline slightly in future quarters due to their conversion to
cable modem subscribers. We had approximately 33,000 active residential,
commercial and small business retail cable modem subscribers at September 30,
2002 as compared to approximately 21,500 at September 30, 2001. Approximately
850 cable modem subscribers were added with the Rogers acquisition on November
19, 2001.
The 48.8% decrease in All Other revenues to $19.0 million in 2002 is primarily
due to the $19.5 million fiber system capacity sale in 2001 as previously
described, partially offset by an increase in managed services revenue of $1.3
million to $15.6 million in 2002 primarily due to the provision of additional
services to and increased revenues from a certain customer.
Cost of Sales and Service
Total cost of sales and services decreased 14.9% to $92.5 million in 2002. As a
percentage of total revenues, total cost of sales and services decreased from
40.2% in 2001 to 33.6% in 2002. Excluding the 2001 fiber system capacity sale,
total cost of sales and services as a percentage of total revenues decreased
from 39.0% in 2001 to 33.6% in 2002.
Long-distance services cost of sales and services decreased 18.7% to $45.7
million in 2002. Long-distance services cost of sales as a percentage of
long-distance services revenues decreased from 37.5% in 2001 to 29.3% in 2002
primarily due to the following:
- Reductions in access costs due to distribution and termination of our
traffic on our own local services network instead of paying other
carriers to distribute and terminate our traffic. The statewide average
cost savings is approximately $.038 and $.078 per minute for interstate
and intrastate traffic, respectively. We expect cost savings to continue
to occur as long-distance traffic originated, carried, and terminated on
our own facilities grows,
- The FCC MAG reform order reducing the access rates paid by interexchange
carriers to LECs, and
- In the course of business we estimate unbilled long-distance cost of
sales based upon minutes of use processed through our network and
established rates. Such estimates are revised when subsequent billings
are received, payments are made, billing matters are researched and
resolved, tariffed billing periods lapse, or when disputed charges are
resolved. In 2002 we had favorable adjustments of $4.0 million. Excluding
the favorable adjustments in 2002, the long-distance services cost of
sales as a percentage of long-distance services revenues was 31.8% in
2002.
Partially offsetting the 2002 decrease in long-distance services cost of sales
as a percentage of long-distance services revenues is a decrease in the average
rate per minute billed to customers as previously described.
Cable services cost of sales and services increased 16.8% to $17.7 million in
2002. Cable services cost of sales and services as a percentage of cable
revenues, which is less as a percentage of revenues than are long-distance,
local access and Internet services cost of sales and services, increased from
27.1% in 2001 to 27.2%
33
in 2002. Equipment rental and installation, cable services' allocable share of
cable modem services and advertising sales revenues do not have corresponding
costs of sales and services. Cable services cost of sales and services as a
percentage of cable programming services revenue increased from 33.8% in 2001 to
35.1% in 2002. Cable services rate increases did not keep pace with programming
cost increases in 2002. Programming costs increased for most of our cable
services offerings, and we incurred additional costs on new programming
introduced in 2001 and 2002.
Local access services cost of sales and services increased 47.0% to $15.0
million in 2002. Local access services cost of sales and services as a
percentage of local access services revenues increased from 54.9% in 2001 to
63.7% in 2002, primarily due to the following:
- Decreased network access services revenues from other carriers as the
number of customers purchasing both long-distance and local access
services from us increases,
- An increase in the Anchorage loop lease rates paid to ACS as described
below,
- The effect of offering one to two months of free service to significant
numbers of new local access services customers acquired in 2002 while
continuing to incur cost of sales for such new customers,
- The FCC Multi-Association Group reform order reducing the access rates
paid by interexchange carriers to LECs,
- A reduction in interstate access rates charged by us to interexchange
carriers in response to an FCC order forcing a competitor to reduce their
interstate access rates, and
- The lease of wholesale circuits from the ILEC in Fairbanks and Juneau
pending completion of our facilities enabling service transition to UNE
facilities and pricing.
The increases in local access services cost of sales as a percentage of local
access services revenues described above are partially offset by further
economies of scale and more efficient network utilization as the number of local
access services subscribers and resulting revenues increase.
ACS requested and received permission for a 7.7% increase in the UNE loop rate
to $14.92 and a 24% increase in their retail residential rates, both effective
in November 2001. The wholesale service rate we pay is tied to the retail
residential rate and increased approximately $2.25 per line. Additionally, the
cost of residential features increased 24% to approximately $1.35 per line. We
estimate that the increased rates will result in a 3.0% to 4.0% increase in our
local access services cost of sales as a percentage of local access services
revenue for the year ended December 31, 2002.
Internet services cost of sales and services decreased 1.1% to $3.6 million in
2002, and as a percentage of Internet services revenues, totaled 31.3% and 41.2%
in 2002 and 2001, respectively. The decrease as a percentage of Internet
services revenues is primarily due to a $4.1 million increase in Internet's
portion of cable modem revenue that generally has higher margins than do other
Internet services products. As Internet services revenues increase, economies of
scale and more efficient network utilization continue to result in reduced
Internet cost of sales and services as a percentage of revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 13.4% to $96.1 million in
2002 and, as a percentage of total revenues, increased to 34.9% in 2002 from
31.3% in 2001. Excluding the fiber system capacity sale in 2001, selling,
general and administrative expenses, as a percentage of total revenues,
increased from 33.2% in 2001 to 34.9% in 2002. The 2002 increase in selling,
general and administrative expenses is primarily due to increased labor and
health insurance costs, incremental new costs to operate GFCC and Rogers, and
costs incurred for our unsuccessful bid to purchase certain of the assets of
WCIC, partially offset by a decreased accrual for company-wide success sharing
bonus costs.
34
Marketing and advertising expenses as a percentage of total revenues increased
from 3.2% in 2001 to 3.3% in 2002. Excluding revenues from the fiber system
capacity sale in 2001, marketing and advertising expenses as a percentage of
total revenues were 3.5% in 2001.
Bad Debt Expense
Bad debt expense increased 250.2% to $12.9 million in 2002 and, as a percentage
of total revenues, increased to 4.6% in 2002 from 1.4% in 2001. Excluding
revenues from the fiber system capacity sale in 2001, bad debt expense as a
percentage of total revenues was 1.5% in 2001. The increase in bad debt expense
in 2002 is primarily due to the $11.0 million bad debt expense for uncollected
accounts from WorldCom as previously described.
Depreciation and Amortization
Depreciation and amortization expense increased 3.6% to $43.3 million in 2002.
The increase is primarily attributable to an increase in depreciation expense on
our $68.0 million investment in equipment and facilities placed into service
during 2001 for which a full year of depreciation will be recorded during the
year ended December 31, 2002, and the $47.3 million investment in equipment and
facilities placed into service during 2002 for which a partial year of
depreciation will be recorded during the year ended December 31, 2002.
Partially offsetting the depreciation expense increases described above is the
discontinuation of amortization of Goodwill and Cable Certificates upon the
adoption of SFAS 142, "Goodwill and Other Intangible Assets" resulting in a
decrease in 2002 amortization expense of approximately $4.9 million as compared
to 2001.
Interest Expense, Net
Interest expense, net of interest income, decreased 17.4% to $20.0 million in
2002. This decrease resulted primarily from decreased interest rates in 2002 on
our variable rate debt and a $1.3 million net interest benefit earned in 2002
from our interest rate swap agreements. In 2001 we earned a $579,000 interest
benefit from our interest rate swap agreement. Partially offsetting these
decreases was additional interest expense in 2002 resulting from an increase in
average outstanding indebtedness.
The interest rate swap agreement which resulted in a net interest benefit was
called at no cost and terminated on August 1, 2002.
Income Tax Expense
Income tax expense was $4.7 million in 2002 and $3.4 million in 2001. The
increase was due to increased net income before income taxes in 2002 as compared
to 2001, as previously described. Our effective income tax rate decreased from
44.9% in 2001 to 43.0% in 2002 due to the effect of items that are nondeductible
for income tax purposes.
At September 30, 2002, we have (1) tax net operating loss carryforwards of
approximately $172.2 million that will begin expiring in 2007 if not utilized,
and (2) alternative minimum tax credit carryforwards of approximately $1.9
million available to offset regular income taxes payable in future years. Our
utilization of remaining net operating loss carryforwards is subject to certain
limitations pursuant to Internal Revenue Code section 382.
Tax benefits associated with recorded deferred tax assets are considered to be
more likely than not realizable through future reversals of existing taxable
temporary differences and future taxable income exclusive of reversing temporary
differences and carryforwards. The amount of deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced which would result in
additional income tax expense. We estimate that our effective income tax rate
for financial statement purposes will be 42% to 45% in 2002.
35
The Job Creation and Worker Assistance Act of 2002 was signed into law on March
9, 2002 and contains several provisions that are effective for tax years ending
in 2001, one of which relates to net operating losses. The Act amends Internal
Revenue Code ("IRC") Section 172(b)(1) to provide, generally, that a net
operating loss for a tax year ending in 2001 or 2002 can be carried back five
years, rather than the two-year carryback generally allowed by section
172(b)(1)(A). The Act also amends IRC Section 56(d)(1) to allow alternative
minimum tax net operating losses carried forward into tax years ending in 2001
or 2002 to be used without regard to the 90 percent alternative minimum taxable
income limitation that generally applies. In addition, alternative minimum tax
net operating losses generated in 2001 or 2002 and carried back to an earlier
year under IRC Section 172 are not subject to the 90 percent alternative minimum
taxable income limitation. SFAS No. 109 states that a change in tax law or rates
that affects deferred income taxes is recorded in the statement of operations in
the year of enactment.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The following chart provides selected unaudited statement of operations data
from our quarterly results of operations during 2002 and 2001:
(Amounts in thousands, except per share amounts)
-------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------
2002
Revenues:
Long-distance services $ 50,068 52,375 53,778 156,221
Cable services $ 21,346 21,919 22,057 65,322
Local access services $ 7,308 8,106 8,096 23,510
Internet services $ 3,573 3,912 3,927 11,412
All Other services $ 5,915 6,428 6,692 19,035
-------------------------------------------------------------
Total revenues $ 88,210 92,740 94,550 275,500
Operating income (1) $ 10,376 4,395 16,032 30,803
Net income (loss) before income taxes (1) $ 3,858 (1,686) 8,662 10,834
Net income (loss) (1) $ 2,212 (1,103) 5,063 6,172
Basic and diluted net income (loss) per
common share (1) $ 0.03 (0.03) 0.08 0.08
36
(Amounts in thousands, except per share amounts)
-------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------
2001
Revenues:
Long-distance services $ 46,236 49,851 53,892 50,715 200,694
Cable services $ 18,046 18,873 19,113 20,522 76,554
Local access services $ 5,958 6,183 6,397 6,691 25,229
Internet services $ 2,619 3,134 3,019 3,224 11,996
All Other services (2) $ 24,058 7,494 5,598 5,635 42,785
-------------------------------------------------------------
Total revenues $ 96,917 85,535 88,019 86,787 357,258
Operating income (2) $ 13,042 8,411 10,192 7,928 39,573
Net income before income taxes $ 4,322 436 2,717 1,184 8,659
Net income $ 2,423 166 1,527 473 4,589
Basic net income (loss) per common share $ 0.04 (0.01) 0.02 0.00 0.05
Diluted net income (loss) per common share (3) $ 0.03 (0.01) 0.02 0.00 0.05
1 The second quarter of 2002 includes provision of a $9.7 million bad debt
expense for estimated uncollectible accounts from WorldCom. The third
quarter of 2002 includes an additional provision of $1.2 million as
previously described.
2 The first quarter of 2001 includes $19.5 million of revenue and $7.3
million of operating income (after deducting direct operating costs)
from the sale of long-haul capacity in the Alaska United undersea fiber
optic cable system.
3 Due to rounding, the sum of quarterly net income (loss) per common share
amounts does not agree to total year net income per common share
amounts.
Revenues
Total revenues for the quarter ended September 30, 2002 ("third quarter") were
$94.6 million, representing a 2.0% increase from $92.7 million for the quarter
ended June 30, 2002 ("second quarter"). The third quarter increase resulted
primarily from a 2.7% increase in long-distance services revenues to $53.8
million. The increase in long-distance services revenues primarily resulted from
a 7.1% increase in revenues from other common carriers to $24.5 million
primarily due to the following:
- A 3.1% increase in minutes carried to 224.5 million minutes, and
- A 3.9% increase in the average rate per minute on minutes carried for
other common carriers.
Cost of Sales and Services
Cost of sales and services decreased from $30.9 million in the second quarter to
$30.4 million in the third quarter. As a percentage of revenues, second and
third quarter cost of sales and services totaled 33.3% and 32.1%, respectively.
The third quarter decrease as a percentage of revenues primarily results from
the following:
- Reductions in access costs due to distribution and termination of traffic
on our own long-distance and local services networks instead of paying
other carriers to distribute and terminate our traffic. We expect cost
savings to continue as traffic carried on our own facilities grows, and
- The FCC MAG reform order further reducing the access rates paid by
interexchange carriers to LECs as of July 1, 2002. The reduction in our
long-distance services segment's cost of sales and services as a result
of the FCC MAG order reform was greater than our local access services
segment's reduction in revenues caused by the reform order.
37
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $376,000 to $32.2 million
in the third quarter as compared to the second quarter. As a percentage of
revenues, third quarter selling, general and administrative expenses were 34.1%
as compared to 35.1% for the second quarter. The third quarter decrease in
selling, general and administrative expenses as a percentage of revenues is due
to increased revenues in the third quarter without a comparable increase in
expenses.
Bad Debt Expense
Bad debt expense decreased $8.9 million to $1.7 million in the third quarter as
compared to the second quarter. As a percentage of revenues, third quarter bad
debt expense was 1.8% as compared to 11.5% for the second quarter. The second
quarter bad debt expense included a $9.7 million bad debt expense for
uncollected accounts from WorldCom as compared to $1.2 million in additional bad
debt expense for uncollected accounts from WorldCom as previously described.
Net Income (Loss)
We reported net income of $5.1 million for the third quarter as compared to net
loss of ($1.1) million for the second quarter. The increase is primarily due to
the effect of the $9.7 million WorldCom bad debt expense in the second quarter
as previously described and increased revenues and decreased cost of sales,
selling, general and administrative expenses in the third quarter, partially
off-set by increased net interest expense and income tax expense in the third
quarter.
Liquidity and Capital Resources
Cash flows from operating activities totaled $47.6 million for the nine months
ended September 30, 2002 ("2002") as compared to $63.6 million for the nine
months ended September 30, 2001 ("2001"), net of changes in the components of
working capital. The decrease in 2002 is primarily due to the effect of the 2001
fiber system capacity sale partially offset by increased cash flow in 2002 from
some of our segments. Uses of cash during 2002 include $52.0 million of
expenditures for property and equipment, including construction in progress, and
payment of $3.1 million in notes receivable issued to related parties. Other
sources of cash in 2002 include $15.0 million in long-term borrowings and
receipt of $946,000 in repayments of notes receivable issued to related parties.
Gross trade receivables increased $14.0 million from December 31, 2001 to
September 30, 2002 primarily due to an increase in balances due from WorldCom
preceding their filing for Chapter 11 bankruptcy reorganization, and additional
broadband trade receivables related to our services to hospitals and health
clinics.
Working capital totaled $6.8 million at September 30, 2002, a $11.4 million
increase in working capital as compared to a deficit of ($4.6) million as of
December 31, 2001. The increase is primarily attributed to classification of
$5.7 million of our Senior Holdings Loan as current maturities of long-term debt
as of December 31, 2001. The Senior Holdings Loan and Fiber Facility were
subject to a refinancing agreement on November 1, 2002 as further described
below, resulting in the classification of all such debt as long-term at
September 30, 2002.
On November 1, 2002 we closed our $225.0 million Senior Facility to refinance
the Senior Holdings Loan and Fiber Facility. The Senior Holdings Loan and Fiber
Facility had balances of approximately $120.1 million and $60.0 million,
respectively, at September 30, 2002. The Senior Facility includes a term loan of
$175.0 million and a revolving credit facility of $50.0 million. The Senior
Facility matures on November 1, 2004 and bears interest at LIBOR plus 6.50%. We
are required to pay a commitment fee equal to 1.5% per annum on the unused
portion of the commitment. If the unused revolver is more than $25.0 million the
commitment fee increases to 2.0% per annum on the unused portion of the
commitment.
38
On November 30, 2003 we are required to prepay the term loan in an amount equal
to 50% of the amount by which earnings before interest, taxes, depreciation, and
amortization exceeds certain fixed charges as defined in the Senior Facility
agreement ("Excess Cash Flow") during the year ended September 30, 2003. On May
30, 2004 we are required to prepay the term loan in an amount equal to 50% of
the Excess Cash Flow during the six months ended March 31, 2004.
The Senior Facility contains, among others, covenants limiting additional
indebtedness and prohibits any direct or indirect distribution, dividend,
redemption or other payment to any person on account of any general or limited
partnership interest in, or shares of capital stock or other securities of GCI,
Inc. and subsidiaries. Under the Senior Facility we may not allow the:
- Total leverage ratio (as defined) to be greater than 4.5:1,
- Senior secured leverage ratio (as defined) to be greater than 2.25:1, and
- Interest coverage ratio (as defined) to be less than 2.50:1.
Capital expenditures, other than those incurred to build additional fiber optic
cable system capacity, in any of the years ended September 30, 2003, March 31,
2004 and September 30, 2004 may not exceed:
- $25.0 million plus,
- 50% of any Excess Cash Flow during the applicable period less any
permitted Investments (as defined) of up to $5.0 million during the
applicable period.
We expect our 2003 expenditures for property and equipment for our core
operations, including construction in progress, will total $40 million to $55
million.
$3.0 million of the Senior Facility has been used to provide a letter of credit
to secure payment of certain access charges associated with our provision of
telecommunications services within the State of Alaska.
In connection with the funding of the Senior Facility, we paid bank fees and
other expenses of approximately $104,000 and $304,000 during the three and nine
months ended September 30, 2002 which will be charged to amortization expense
over the life of the agreement. We expect to incur additional fees and expenses
totaling approximately $7.0 million during the fourth quarter of 2002 which will
be charged to amortization expense over the life of the agreement. The $7.0
million in additional fees and expenses will become part of the total
outstanding debt balance. Remaining unamortized bank fees and other expenses
totaling $2.4 million associated with the Senior Holdings Loan and the Fiber
Facility will be charged to expense in the fourth quarter of 2002.
On January 3, 2001 we entered into an interest rate swap agreement to convert
$50 million in 9.75% fixed rate to variable rate debt. This interest rate swap
agreement was called at no cost and terminated on August 1, 2002.
We were in compliance with all loan covenants at September 30, 2002.
Our semi-annual Senior Notes interest payment of $8.8 million was due August 1,
2002 and was paid in full at that time out of existing cash balances.
Our expenditures for property and equipment, including construction in progress,
totaled $53.0 million and $46.7 million during 2002 and 2001, respectively. We
expect our 2002 expenditures for property and equipment for our core operations,
including construction in progress, to total $65 million - $68 million. Planned
capital expenditures over the next five years include those necessary for
continued expansion of our long-distance, local exchange and Internet
facilities, supplementation of our existing network backup
39
facilities, continuing development of our Personal Communication Services, or
PCS, network, cable telephony, and upgrades to our cable television plant.
The long-distance, local access, cable, Internet and wireless services
industries continue to experience substantial competition and continuing
technological changes. Our future results of operations will be affected by our
ability to react to changes in the competitive environment and by our ability to
fund and implement new or enhanced technologies. We are unable to determine how
competition, economic conditions and technological changes will affect our
ability to obtain financing.
The telecommunications industry in general is depressed 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. Our ability to refinance existing debt and to obtain new debt under
acceptable terms and conditions in the long-term may be diminished as a result.
The financial, credit and economic impacts of WorldCom's bankruptcy filing on
the industry in general and on us in particular are not yet fully understood and
are not predictable. We currently cannot predict the timing or amount that
WorldCom will pay on outstanding balances due us as of their bankruptcy filing
date of July 21, 2002. Unpaid balances due from WorldCom for services rendered
prior to their filing date total approximately $12.9 million at September 30,
2002 for which we have reserved $11.6 million. We believe that services provided
to WorldCom subsequent to their bankruptcy filing date will be paid currently,
consistent with our status in WorldCom's filing as a key service provider or
utility to WorldCom's global network.
A conversion of WorldCom's bankruptcy petition to Chapter 7, an unfavorable
classification of our service provider status for post July 21, 2002 services,
unfavorable reauthorization of our pre-filing contracts and agreements with
WorldCom, or a migration of WorldCom's traffic off our network without it being
replaced by other common carriers that interconnect with our network, could have
a materially adverse impact on our financial position, results of operations and
liquidity.
We believe that we will be able to meet our current and long-term liquidity and
capital requirements, fixed charges and preferred stock dividends through our
cash flows from operating activities, existing cash, cash equivalents,
short-term investments, credit facilities, and other external financing and
equity sources. Should cash flows be insufficient to support additional
borrowings and principal payments scheduled under our existing credit
facilities, capital expenditures will likely be reduced.
New Accounting Standards
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 provides accounting and reporting standards for costs
associated with the retirement of long-lived assets. This statement requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. We will be required to adopt this statement no later than
January 1, 2003 and do not expect this statement to have a material effect on
our results of operations, financial position and cash flows.
In July 2002, the FASB issued SFAS No 146, "Accounting for Costs Associated with
Exit or Disposal Activities". Upon adoption of SFAS 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
40
are part of restructuring activities. We will be required to adopt this
statement no later than January 1, 2003 and do not expect this statement to have
a material effect on our results of operations, financial position and cash
flows.
Critical Accounting Policies
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our interim
condensed consolidated financial statements.
- We recognize unbilled revenues based upon minutes of use carried and
established rates, net of credits and adjustments.
- We estimate unbilled long-distance cost of sales based upon minutes of
use carried through our network and established rates. Such estimates
are revised when subsequent billings are received, payments are made,
billing matters are researched and resolved, tariffed billing periods
lapse, or when disputed charges are resolved.
- We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required
payments. We base our estimates on the aging of our accounts receivable
balances and our historical write-off experience, net of recoveries. If
the financial condition of our customers were to deteriorate, resulting
in an impairment of their ability to make payments, additional
allowances may be required.
- When recording depreciation expense associated with our telephony and
cable television distribution systems, we use estimated useful lives.
Because of changes in technology and industry conditions, we
periodically evaluate the useful lives of our telephony and cable
television distribution systems. These evaluations could result in a
change in useful lives in future periods.
- When recording amortization expense on intangible assets, we use
estimated useful lives. We periodically evaluate the useful lives of
our intangible assets. These evaluations could result in a change in
useful lives in future periods. Additionally, we periodically review
the valuation of our intangible assets. These reviews could result in
write-down of the value of intangible assets.
- We record a valuation allowance to reduce our deferred tax assets to
the amount that we believe is more likely than not to be realized.
While we have considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the
valuation allowance, in the event we were to determine that we would
not be able to realize all or part of our net deferred tax assets in
the future, an adjustment to the deferred tax assets would be charged
to income in the period such determination was made.
- We have recorded revenues in the first quarter of 2001 associated with
a cash sale of indefeasible rights to use certain amounts of our fiber
system capacity. The fiber system capacity sold was treated as integral
equipment because it is attached to real estate. Because all of the
benefits and risks of ownership were transferred to the purchaser upon
full receipt of the purchase price and other terms of the contract meet
the requirements of SFAS No. 66, "Accounting for Sales of Real Estate,"
we accounted for the fiber system capacity sale as a sales-type lease.
The accounting for the sale of fiber system capacity is currently
evolving and accounting guidance may become available in the future
which could require us to change our policy. If we are required to
change our policy, it is likely the effect would be to recognize the
gain from future sales of fiber system capacity, if any, over the term
the capacity is provided.
- Potential refundable amounts attributed to ILEC excess earnings are
accounted for as gain contingencies since we cannot estimate future
refundable amounts nor do we know if or when we will receive such
refunds in the future. Such refunds are not recorded until realization
is a certainty upon receipt.
Geographic Concentration and the Alaska Economy
We offer voice and data telecommunication and video services to customers
primarily throughout Alaska. Because of this geographic concentration, growth of
our business and of our operations depends upon
41
economic conditions in Alaska. The economy of Alaska is dependent upon the
natural resource industries, and in particular oil production, as well as
investment earnings, tourism, government, and United States military spending.
Any deterioration in these markets could have an adverse impact on us. In fiscal
2001 Alaska's oil revenues and federal funding supplied 61% and 33%,
respectively, of the state's total revenues. Investment losses negatively
affected the state's total revenues in fiscal 2001 due to a decline in the value
of its stock market investments. Investment losses of approximately $615.2
million reduced the state's total revenues to approximately $3.8 billion. All of
the federal funding is dedicated for specific purposes, leaving oil revenues as
the primary funding source of general operating expenditures. In fiscal 2002
state economists forecast that Alaska's federal funding, oil revenues, and
investment earnings will supply 42%, 33% and 10%, respectively, of the state's
total projected revenues.
The volume of oil transported by the TransAlaska Oil Pipeline System over the
past 20 years has been as high as 2.0 million barrels per day in fiscal 1988.
Production has been declining over the last several years with an average of
0.991 million barrels produced per day in fiscal 2001. The state forecasts the
production of 1.011 million barrels per day in fiscal 2002, and a production
rate slightly above 1.0 million barrels per day through fiscal 2009. The state
attributes the production rate increase to future development of recent
discoveries in the National Petroleum Reserve Alaska, further development of
heavy oil in both the Kuparuk and Prudhoe Bay fields, and additional satellite
field development.
Market prices for North Slope oil averaged $27.85 in fiscal 2001 and are
forecasted to average $21.50 in fiscal 2002. State economists forecast the
average price of North Slope oil to decline to $20.50 in fiscal 2003. The
closing price per barrel was $25.01 on October 30, 2002. The production policy
of the Organization of Petroleum Exporting Countries and its ability to continue
to act in concert represents a key uncertainty in the state's revenue forecast.
The State of Alaska maintains the Constitutional Budget Reserve Fund that is
intended to fund budgetary shortfalls. If the state's current projections are
realized, the Constitutional Budget Reserve Fund will be depleted in 2004. If
the fund is depleted, aggressive state action will be necessary to increase
revenues and reduce spending in order to balance the budget. The governor of the
State of Alaska and the Alaska legislature continue to pursue cost cutting and
revenue enhancing measures.
In 2002 the Alaska Legislature passed and the Governor signed legislation that,
among other things, increased certain alcohol beverage taxes, increased the
state minimum wage to $7.15 per hour (adjusted for inflation in future years),
and extended the termination date of the RCA one year to June 30, 2003.
Tourism, air cargo, and service sectors have helped offset the prevailing
pattern of oil industry downsizing that has occurred during much of the last
several years. Funds from federal sources totaling $2.1 billion are expected to
be distributed to the State of Alaska for highways and other federally supported
projects in fiscal 2002.
Should new oil discoveries or developments not materialize or the price of oil
become depressed, the long term trend of continued decline in oil production
from the Prudhoe Bay area is inevitable with a corresponding adverse impact on
the economy of the state, in general, and on demand for telecommunications and
cable television services, and, therefore, on us, in particular. In the past
year, there has been a renewed effort to allow exploration and development in
the Arctic National Wildlife Refuge ("ANWR"). The U.S. Department of Energy
estimates it could take seven to twelve years to begin oil field production
after approval of ANWR exploration.
Deployment of a natural gas pipeline from the State of Alaska's North Slope to
the Lower 48 states has been proposed to supplement natural gas supplies. A
competing natural gas pipeline through Canada has also been proposed. The
economic viability of a natural gas pipeline depends upon the price of and
demand for
42
natural gas. Either project could have a positive impact on the State of
Alaska's revenues and the Alaska economy. According to their public comments,
neither Exxon Mobil, BP nor Phillips Petroleum, Alaska's large natural gas
owners, believe either natural gas pipeline makes financial sense based upon
their preliminary analysis, though Phillips Petroleum says it will move forward
with permitting of the project if certain federal income tax incentives are
included. The governor of the State of Alaska and certain natural gas
transportation companies continue to support a natural gas pipeline from
Alaska's North Slope by trying to reduce the project's costs and by advocating
for federal tax incentives to further reduce the project's costs. In April 2002
the U.S. Senate passed an energy bill mandating the following:
- A North Slope natural gas pipeline will follow the Alaska Highway
route,
- Gas producers will be allowed to take a credit on their federal income
taxes if prices fall,
- Alaskans along the pipeline route will have access to the gas, and
- Future gas discoveries will be allowed to move through the pipeline.
We have, since our entry into the telecommunication marketplace, aggressively
marketed our services to seek a larger share of the available market. The
customer base in Alaska is limited, however, with a population of approximately
627,000 people. The State of Alaska's population is distributed as follows:
- 42% are located in the Municipality of Anchorage,
- 13% are located in the Fairbanks North Star Borough, and
- 5% are located in the City and Borough of Juneau.
The remaining population is spread out over the vast reaches of Alaska. No
assurance can be given that the driving forces in the Alaska economy, and in
particular, oil production, will continue at appropriate levels to provide an
environment for expanded economic activity.
No assurance can be given that oil companies doing business in Alaska will be
successful in discovering new fields or further developing existing fields which
are economic to develop and produce oil with access to the pipeline or other
means of transport to market, even with a reduced level of royalties. We are not
able to predict the effect of changes in the price and production volumes of
North Slope oil on Alaska's economy or on us.
Seasonality
Long-distance revenues (primarily those derived from our other common carrier
customers) have historically been highest in the summer months because of
temporary population increases attributable to tourism and increased seasonal
economic activity such as construction, commercial fishing, and oil and gas
activities. Cable television revenues, on the other hand, are higher in the
winter months because consumers spend more time at home and tend to watch more
television during these months. Local access and Internet services are not
expected to exhibit significant seasonality. Our ability to implement
construction projects is also hampered during the winter months because of cold
temperatures, snow and short daylight hours.
PART I.
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various types of market risk in the normal course of business,
including the impact of interest rate changes. We do not hold derivatives for
trading purposes.
Our new Senior Facility carries interest rate risk. Amounts borrowed under this
Agreement bear interest at Libor plus 6.5%. Should the Libor rate change, our
interest expense will increase or decrease accordingly. On September 21, 2001,
we entered into an interest rate swap agreement to convert $25.0 million of
variable
43
interest rate debt to 3.98% fixed rate debt plus applicable margin. As of
November 1, 2002, we have borrowed $187.7 million of which $162.7 million
subject to interest rate risk. On this amount, a 1% increase in the interest
rate would cost us $1,627,000 in additional gross interest cost on an annualized
basis.
Our Satellite Transponder Capital Lease carries interest rate risk. Amounts
borrowed under this Agreement bear interest at Libor plus 3.25%. Should the
Libor rate change, our interest expense will increase or decrease accordingly.
As of September 30, 2002, we have borrowed $45.2 million subject to interest
rate risk. On this amount, a 1% increase in the interest rate would cost us
$452,000 in additional gross interest cost on an annualized basis.
PART I.
ITEM 4.
Controls and Procedures
Evaluation of disclosure controls and procedures
Within the 90 days prior to the date of this report, we carried out an
evaluation of the effectiveness of the design and operation of our "disclosure
controls and procedures" (as defined in the Securities Exchange Act of 1934
("Exchange Act") Rules 13a-14(c) and 15d-14(c)) under the supervision and with
the participation of our management, including our Chief Executive Officer and
our Chief Financial Officer. Based upon that evaluation, our Chief Executive
Officer and our Chief Financial Officer concluded that our disclosure controls
and procedures are effective.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in our
reports filed under the Exchange Act is accumulated and communicated to
management to allow timely decisions regarding required disclosure.
Changes in internal controls
There were no significant changes in our internal controls or, to our knowledge,
in other factors that could significantly affect our disclosure controls and
procedures subsequent to the date we carried out this evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding pending legal proceedings to which we are a party is
included in note 6 to the Interim Condensed Consolidated Financial Statements
and is incorporated herein by reference.
PART II.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Date of the meeting: June 6, 2002
Purpose of meeting: Annual shareholders meeting
44
(b) Name of each director elected at the meeting and the name of
each other director whose term of office as a director
continued after the meeting:
Name Votes for Votes withheld
--------------------- -------------- --------------
Ronald R. Beaumont 65,486,616 13,927,820
Paul S. Lattanzio 75,518,090 3,896,346
Carter F. Page 75,037,739 4,376,697
Robert M. Walp 65,548,586 13,865,850
Directors, in addition to those listed above, whose term of
office as director continued after the meeting:
Stephen M. Brett
Ronald A. Duncan
Donne F. Fisher
William P. Glasgow
Stephen R. Mooney
James M. Schneider
(c) Other matters voted upon:
Approving an increase in the number of shares of the
Company's common stock authorized and allocated to the
Company's Amended and Restated 1986 Stock Option Plan
("Stock Option Plan") by 2 million shares of Class A common
stock and otherwise amending the plan to provide for an
upper limit of 500,000 shares per year on the number of
shares that may be granted to a participant in the Stock
Option Plan.
Votes for: 66,208,088
Votes against: 12,598,551
Votes withheld: 607,797
(d) Not applicable
45
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.101 - Credit, Guaranty, Security and Pledge
Agreement between GCI Holdings, Inc. and Credit Lyonnais New
York Branch as Administrative Agent, Issuing Bank,
Co-Bookrunner and Co-Arranger, General Electric Capital
Corporation as Documentation Agent, Co-Arranger and
Co-Bookrunner and CIT Lending Services Corporation as
Syndication Agent, dated as of November 1, 2002.
Exhibit 99.36 - Certifications Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K filed during the quarter ended
September 30, 2002 - None
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL COMMUNICATION, INC.
Signature Title Date
- -------------------------------------- -------------------------------------------- -----------------------
/s/ Ronald A. Duncan President and Director November 8, 2002
- -------------------------------------- (Principal Executive Officer) -----------------------
Ronald A. Duncan (Principal Executive Officer)
/s/ John M. Lowber Senior Vice President, Chief Financial November 8, 2002
- -------------------------------------- Officer, Secretary and Treasurer -----------------------
John M. Lowber (Principal Financial Officer)
/s/ Alfred J. Walker Vice President, Chief Accounting November 8, 2002
- -------------------------------------- Officer -----------------------
Alfred J. Walker (Principal Accounting Officer)
47
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTIONS 302 AND 906 OF
THE SARBANES-OXLEY ACT OF 2002
I, Ronald A. Duncan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of General Communication,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
the quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly represent in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluations Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluations as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
or registrants board of directors (or persons performing the equivalent
function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in the
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluations, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002 /s/ Ronald A. Duncan
Ronald A. Duncan
President and Director
48
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTIONS 302 AND 906 OF
THE SARBANES-OXLEY ACT OF 2002
I, John M. Lowber, certify that:
1. I have reviewed this quarterly report on Form 10-Q of General Communication,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
the quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly represent in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluations Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluations as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
or registrants board of directors (or persons performing the equivalent
function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in the
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluations, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002 /s/ John M. Lowber
John M. Lowber
Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
49