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As filed with the Securities and Exchange Commission on May 14, 2003
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-15279
GENERAL COMMUNICATION, INC.
(Exact name of registrant as specified in its charter)
STATE OF ALASKA 92-0072737
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 Denali Street
Suite 1000
Anchorage, Alaska 99503
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (907) 265-5600
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. Yes X No .
The number of shares outstanding of the registrant's classes of
common stock as of April 30, 2003 was:
52,037,082 shares of Class A common stock; and
3,874,107 shares of Class B common stock.
1
GENERAL COMMUNICATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003
TABLE OF CONTENTS
Page No.
--------
Cautionary Statement Regarding Forward-Looking Statements.................................................3
PART I. FINANCIAL INFORMATION
Item l. Consolidated Balance Sheets as of March 31, 2003
(unaudited) and December 31, 2002..................................................5
Consolidated Statements of Operations for the
three months ended March 31, 2003
(unaudited) and 2002 (unaudited)...................................................7
Consolidated Statements of Stockholders' Equity
for the three months ended March 31, 2003
(unaudited) and 2002 (unaudited)...................................................8
Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 (unaudited)
and 2002 (unaudited)...............................................................9
Notes to Interim Condensed Consolidated Financial
Statements.........................................................................10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................23
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...........................................................................46
Item 4. Controls and Procedures...............................................................46
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................47
Item 6. Exhibits and Reports on Form 8-K......................................................47
Other items are omitted, as they are not applicable.
SIGNATURES................................................................................................48
CERTIFICATIONS............................................................................................49
2
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Quarterly Report,
but should particularly consider any risk factors that we set forth in this
Quarterly Report and in other reports or documents that we file from time to
time with the Securities and Exchange Commission ("SEC"). In this Quarterly
Report, in addition to historical information, we state our future strategies,
plans, objectives or goals and our beliefs of future events and of our future
operating results, financial position and cash flows. In some cases, you can
identify those so-called "forward-looking statements" by words such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "project," or "continue" or the negative of those words
and other comparable words. All forward-looking statements involve known and
unknown risks, uncertainties and other important factors that may cause our
actual results, performance, achievements, plans and objectives to differ
materially from any future results, performance, achievements, plans and
objectives expressed or implied by these forward-looking statements. In
evaluating those statements, you should specifically consider various factors,
including those outlined below. Those factors may cause our actual results to
differ materially from any of our forward-looking statements. For these
statements, we claim the protection of the safe harbor for forward-looking
statements provided by the Securities Reform Act. Such risks, uncertainties and
other factors include but are not limited to those identified below and those
further described in Part I, Item 1. Factors That May Affect Our Business and
Future Results of our December 31, 2002 Form 10-K.
o Material adverse changes in the economic conditions in the markets we
serve and in general economic conditions, including the continuing
impact of the current depressed telecommunications industry due to high
levels of competition in the long-distance market resulting in
pressures to reduce prices, an oversupply of long-haul capacity,
excessive debt loads; several high-profile company failures and
potentially fraudulent accounting practices by some companies;
o The efficacy of laws enacted by Congress; rules and regulations to be
adopted by the Federal Communications Commission ("FCC") and state
public regulatory agencies to implement the provisions of the 1996
Telecom Act; the outcome of litigation relative thereto; and the impact
of regulatory changes relating to access reform;
o Our responses to competitive products, services and pricing, including
pricing pressures, technological developments, alternative routing
developments, and the ability to offer combined service packages that
include long-distance, local, cable and Internet services;
o The extent and pace at which different competitive environments develop
for each segment of our business;
o The extent and duration for which competitors from each segment of the
telecommunication industries are able to offer combined or full service
packages prior to our being able to do so;
o The degree to which we experience material competitive impacts to our
traditional service offerings prior to achieving adequate local service
entry;
o Competitor responses to our products and services and overall market
acceptance of such products and services;
o The outcome of our negotiations with Incumbent Local Exchange Carriers
("ILECs") and state regulatory arbitrations and approvals with respect
to interconnection agreements;
o Our ability to purchase network elements or wholesale services from
ILECs at a price sufficient to permit the profitable offering of local
telephone service at competitive rates;
o Success and market acceptance for new initiatives, many of which are
untested;
o The level and timing of the growth and profitability of existing and
new initiatives, particularly local telephone services expansion,
Internet services expansion and wireless services;
3
o Start-up costs associated with entering new markets, including
advertising and promotional efforts;
o Risks relating to the operations of new systems and technologies and
applications to support new initiatives;
o Local conditions and obstacles;
o The impact on our industry and indirectly on us of oversupply of
capacity resulting from excessive deployment of network capacity in
certain markets we do not serve;
o Uncertainties inherent in new business strategies, new product launches
and development plans, including local telephone services, Internet
services, wireless services, digital video services, cable modem
services, digital subscriber line services, transmission services, and
yellow page directories, and the offering of these services in
geographic areas with which we are unfamiliar;
o The risks associated with technological requirements, technology
substitution and changes and other technological developments;
o Prolonged service interruptions which could affect our business;
o Development and financing of telecommunication, local telephone,
wireless, Internet and cable networks and services;
o Future financial performance, including the availability, terms and
deployment of capital; the impact of regulatory and competitive
developments on capital outlays, and the ability to achieve cost
savings and realize productivity improvements and the consequences of
increased leverage;
o Availability of qualified personnel;
o Changes in, or failure, or inability, to comply with, government
regulations, including, without limitation, regulations of the FCC, the
Regulatory Commission of Alaska ("RCA"), and adverse outcomes from
regulatory proceedings;
o Uncertainties in federal military spending levels and military base
closures in markets in which we operate;
o The ongoing global and domestic trend towards consolidation in the
telecommunications industry, which trend may be the effect of making
the competitors larger and better financed and afford these competitors
with extensive resources and greater geographic reach, allowing them to
compete more effectively;
o The financial, credit and economic impacts of the WorldCom, Inc.
("WorldCom") bankruptcy filing on the industry in general and on us in
particular;
o A conversion of WorldCom's bankruptcy petition to Chapter 7,
unfavorable reaffirmation of our pre-filing contracts and agreements
with WorldCom, or a migration of WorldCom's traffic off our network
without it being replaced by other common carriers that interconnect
with our network;
o The effect on us of pricing pressures, new program offerings and market
consolidation in the markets served by our major customers, WorldCom
and Sprint;
o Under Statement of Financial Accounting Standard ("SFAS") 142, we must
test our intangibles for impairment at least annually, which may result
in a material, non-cash write-down of goodwill and could have a
material adverse impact on our results of operations and shareholders'
equity; and
o Other risks detailed from time to time in our periodic reports filed
with the SEC.
You should not place undue reliance on any such forward-looking statements.
Further, any forward-looking statement, and such risks, uncertainties and other
factors speak, only as of the date on which they were originally made and we
expressly disclaim any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement to reflect any change in our
expectations with regard to those statements or any other change in events,
conditions or circumstances on which any such statement is based, except as
required by law. New factors emerge from time to time, and it is not possible
for us to predict what factors will arise or when. In addition, we cannot assess
the impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
4
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
ASSETS 2003 2002
- --------------------------------------------------------------------------- --------------- ----------------
(Amounts in thousands)
Current assets:
Cash and cash equivalents $ 18,173 11,940
--------------- ----------------
Receivables:
Trade 58,717 63,111
Employee 318 391
Other 2,493 3,093
--------------- ----------------
61,528 66,595
Less allowance for doubtful receivables 13,929 14,010
--------------- ----------------
Net receivables 47,599 52,585
--------------- ----------------
Deferred income taxes, net 8,875 8,509
Prepaid and other current assets 8,541 9,171
Inventories 1,088 400
Property held for sale 1,037 1,037
Notes receivable with related parties 775 697
--------------- ----------------
Total current assets 86,088 84,339
--------------- ----------------
Property and equipment in service, net of depreciation 378,995 381,394
Construction in progress 13,190 16,958
--------------- ----------------
Net property and equipment 392,185 398,352
--------------- ----------------
Cable certificates, net of amortization of $26,857 and $26,884 at March
31, 2003 and December 31, 2002, respectively 191,159 191,132
Goodwill, net of amortization of $7,200 at March 31, 2003 and December 31,
2002 43,284 41,972
Other intangible assets, net of amortization of $1,178 and $1,848 at March
31, 2003 and December 31, 2002, respectively 3,513 3,460
Deferred loan and senior notes costs, net of amortization of $5,374 and
$4,110 at March 31, 2003 and December 31, 2002, respectively 8,900 9,961
Notes receivable with related parties 5,184 5,142
Other assets, at cost, net of amortization of $119 and $24 at March 31,
2003 and December 31, 2002, respectively 5,091 4,424
--------------- ----------------
Total other assets 257,131 256,091
--------------- ----------------
Total assets $ 735,404 738,782
=============== ================
See accompanying notes to interim condensed consolidated financial statements.
5 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
- -------------------------------------------------------------------------- --------------- ----------------
(Amounts in thousands)
Current liabilities:
Current maturities of obligations under long-term debt and capital
leases $ 16,804 1,857
Accounts payable 27,528 33,605
Deferred revenue 16,628 18,290
Accrued payroll and payroll related obligations 12,823 11,821
Accrued liabilities 5,372 5,763
Accrued interest 4,819 7,938
Subscriber deposits 825 889
---------------- ----------------
Total current liabilities 84,799 80,163
Long-term debt, excluding current maturities 342,700 357,700
Obligations under capital leases, excluding current maturities 43,653 44,072
Obligations under capital leases due to related party, excluding
current maturities 697 703
Deferred income taxes, net of deferred income tax benefit 18,411 16,061
Other liabilities, net of accumulated accretion of $589 and $0 at March
31, 2003 and December 31, 2002, respectively 6,665 4,956
---------------- ----------------
Total liabilities 496,925 503,655
---------------- ----------------
Redeemable preferred stocks 26,907 26,907
---------------- ----------------
Stockholders' equity:
Common stock (no par):
Class A. Authorized 100,000 shares; issued 52,032 and 51,795 shares
at March 31, 2003 and December 31, 2002, respectively 201,216 199,903
Class B. Authorized 10,000 shares; issued 3,874 and 3,875 shares at March
31, 2003 and December 31, 2002, respectively; convertible on a
share-per-share basis into Class A common stock 3,274 3,274
Less cost of 338 and 317 Class A common shares held in treasury at
March 31, 2003 and December 31, 2002, respectively (1,917) (1,836)
Paid-in capital 11,338 11,222
Notes receivable with related parties issued upon stock option exercise (5,650) (5,650)
Retained earnings 3,889 1,847
Accumulated other comprehensive loss (578) (540)
---------------- ----------------
Total stockholders' equity 211,572 208,220
Commitments and contingencies
---------------- ----------------
Total liabilities and stockholders' equity $ 735,404 738,782
================ ================
See accompanying notes to interim condensed consolidated financial statements.
6
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
2003 2002
-------------- ----------------
(Amounts in thousands, except per share amounts)
Revenues $ 92,777 88,210
Cost of sales and services 30,248 31,237
Selling, general and administrative expenses 32,993 31,301
Bad debt expense 597 581
Depreciation, amortization and accretion expense 13,501 13,958
-------------- ----------------
Operating income 15,438 11,133
-------------- ----------------
Other income (expense):
Interest expense (9,154) (6,591)
Amortization of loan and senior notes fees (1,073) (757)
Interest income 166 73
-------------- ----------------
Other expense, net (10,061) (7,275)
-------------- ----------------
Net income before income taxes and cumulative effect of a
change in accounting principle 5,377 3,858
Income tax expense 2,282 1,646
-------------- ----------------
Net income before cumulative effect of a change in
accounting principle 3,095 2,212
Cumulative effect of a change in accounting principle, net of
income tax benefit of $367 (544) ---
-------------- ----------------
Net income $ 2,551 2,212
============== ================
Basic and diluted net income per common share:
Net income before cumulative effect of a change in
accounting principle $ 0.05 0.03
Cumulative effect of a change in accounting principle, net
of income tax benefit of $367 (0.01) ---
-------------- ----------------
Net income $ 0.04 0.03
============== ================
See accompanying notes to interim condensed consolidated financial
statements.
7
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Notes Accumulated
Class A Receivable Other
Class A Class B Shares Issued to Retained Comprehensive
(Unaudited) Common Common Held in Paid-in Related Earnings Income
(Amounts in thousands) Stock Stock Treasury Capital Parties (Deficit) (Loss) Total
--------------------------------------------------------------------------------------
Balances at December 31, 2001 $195,647 3,281 (1,659) 10,474 (2,588) (2,771) 8 202,392
Components of comprehensive income:
Net income --- --- --- --- --- 2,212 --- 2,212
Change in fair value of cash flow
hedge, net of change in income tax
liability of $67 --- --- --- --- --- --- 105 105
-------
Comprehensive income 2,317
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 255 --- --- --- 255
Shares issued under stock option plan 2,985 --- --- --- (2,971) --- --- 14
Amortization of the excess of GCI stock
market value over stock option
exercise cost on date of stock option
grant --- --- --- 103 --- --- --- 103
Purchase of treasury stock --- --- (177) --- --- --- --- (177)
Preferred stock dividends --- --- --- --- --- (509) --- (509)
--------------------------------------------------------------------------------------
Balances at March 31, 2002 $198,632 3,281 (1,836) 10,832 (5,559) (1,068) 113 204,395
======================================================================================
Balances at December 31, 2002 $199,903 3,274 (1,836) 11,222 (5,650) 1,847 (540) 208,220
Components of comprehensive income:
Net income --- --- --- --- --- 2,551 --- 2,551
Change in fair value of cash flow
hedge, net of change in income tax
benefit of $70 --- --- --- --- --- --- (38) (38)
-------
Comprehensive income 2,513
Tax effect of excess stock compensation
expense for tax purposes over amounts
recognized for financial reporting
purposes --- --- --- 2 --- --- --- 2
Shares issued under stock option plan 1 --- --- --- --- --- --- 1
Amortization of the excess of GCI stock
market value over stock option
exercise cost on date of stock option
grant --- --- --- 114 --- --- --- 114
Shares issued per G.C. Cablevision,
Inc. acquisition agreement 1,312 --- --- --- --- --- --- 1,312
Purchase of treasury stock --- --- (81) --- --- --- --- (81)
Preferred stock dividends --- --- --- --- --- (509) --- (509)
--------------------------------------------------------------------------------------
Balances at March 31, 2003 $201,216 3,274 (1,917) 11,338 (5,650) 3,889 (578) 211,572
======================================================================================
See accompanying notes to interim condensed consolidated financial statements.
8
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2003 2002
-------------- --------------
(Amounts in thousands)
Operating activities:
Net income $ 2,551 2,212
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion expense 13,501 13,958
Deferred income tax expense 2,282 1,646
Amortization of loan and senior notes fees 1,073 757
Cumulative effect of a change in accounting principle, net of
income tax benefit of $367 544 ---
Bad debt expense, net of write-offs (81) 124
Deferred compensation and compensatory stock options 249 251
Other noncash income and expense items (120) 110
Change in operating assets and liabilities (5,651) (6,809)
-------------- --------------
Net cash provided by operating activities 14,348 12,249
-------------- --------------
Investing activities:
Purchases of property and equipment (6,474) (16,069)
Payment of deposit (721) ---
Notes receivable issued to related parties (22) (5,669)
Payments received on notes receivable with related parties 22 3,587
Purchases of other assets (201) (428)
-------------- --------------
Net cash used by investing activities (7,396) (18,579)
-------------- --------------
Financing activities:
Repayments of capital lease obligations (478) (86)
Long-term borrowings - bank debt --- 9,000
Payment of preferred stock dividend (148) (150)
Payment of debt issuance costs (12) (130)
Purchase of treasury stock (81) (177)
Proceeds from common stock issuance --- 14
-------------- --------------
Net cash provided (used) by financing activities (719) 8,601
-------------- --------------
Net increase in cash and cash equivalents 6,233 2,271
Cash and cash equivalents at beginning of period 11,940 11,097
-------------- --------------
Cash and cash equivalents at end of period $ 18,173 13,368
============== ==============
See accompanying notes to interim condensed consolidated financial
statements.
9
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
The accompanying unaudited interim condensed consolidated financial statements
include the accounts of General Communication, Inc. ("GCI") and its subsidiaries
and have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. They should be
read in conjunction with our audited consolidated financial statements for the
year ended December 31, 2002, filed as part of our annual report on Form 10-K.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results of operations for interim periods are not necessarily indicative of the
results that may be expected for an entire year or any other period.
(l) Business and Summary of Significant Accounting Principles
In the following discussion GCI and its direct and indirect subsidiaries
are referred to as "we," "us" and "our".
(a) Business
GCI, an Alaska corporation, was incorporated in 1979. We offer the
following services:
o Long-distance telephone service between Anchorage, Fairbanks,
Juneau, and other communities in Alaska and the remaining
United States and foreign countries
o Cable television services throughout Alaska
o Facilities-based competitive local access services in
Anchorage, Fairbanks and Juneau, Alaska
o Internet access services
o Termination of traffic in Alaska for certain common carriers
o Private line and private network services
o Managed services to certain commercial customers
o Broadband services, including our SchoolAccess(TM) offering to
rural school districts and a similar offering to rural
hospitals and health clinics
o Sales and service of dedicated communications systems and
related equipment
o Lease and sales of capacity on two undersea fiber optic cables
used in the transmission of interstate and intrastate private
line, switched message long-distance and Internet services
between Alaska and the remaining United States and foreign
countries
(b) Principles of Consolidation
The consolidated financial statements include the accounts of GCI,
GCI's subsidiary GCI, Inc., GCI, Inc.'s subsidiary GCI Holdings,
Inc., GCI Holdings, Inc.'s subsidiaries GCI Communication Corp.,
GCI Cable, Inc., GCI Transport Co., Inc., GCI Fiber Communication
Co., Inc., GCI Fiber Co., Inc. and Fiber Hold Co., Inc. and GCI
Fiber Co., Inc.'s and Fiber Hold Co., Inc.'s partnership Alaska
United Fiber System Partnership, GCI Communication Corp.'s
subsidiaries Potter View Development Co., Inc., Wok 1, Inc. and Wok
2, Inc. and GCI Transport Co., Inc.'s subsidiary GCI Satellite Co.,
Inc. All subsidiaries are wholly-owned at March 31, 2003.
The consolidated financial statements include the consolidated
accounts of GCI and its wholly owned subsidiaries with all
significant intercompany transactions eliminated.
10 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(c) Earnings per Common Share
Earnings per common share ("EPS") and common shares used to
calculate basic and diluted EPS consist of the following (amounts
in thousands, except per share amounts):
Three Months Ended March 31,
2003 2002
------------------------------ -------------------------------
Income Shares Income Shares
(Num- (Denom- Per-share (Num- (Denom- Per-share
erator) inator) Amounts erator) inator) Amounts
---------- -------- ---------- ---------- --------- ----------
Net income before cumulative
effect of a change in accounting
principle, net of deferred tax
benefit of $367 $ 3,095 $ 2,212
Less preferred stock dividends:
Series B 361 361
Series C 148 148
---------- ----------
Basic EPS:
Net income before cumulative
effect of a change in accounting
principle, net of deferred tax
benefit of $367, available to
common stockholders 2,586 55,367 $.05 1,703 54,828 $.03
Effect of Dilutive Securities:
Unexercised stock options --- 293 --- --- 928 ---
---------- -------- ---------- ---------- --------- ----------
Diluted EPS:
Net income before cumulative
effect of a change in accounting
principle, net of deferred tax
benefit of $367, available to
common stockholders $ 2,586 55,660 $.05 $ 1,703 55,756 $.03
========== ======== ========== ========== ========= ==========
Common equivalent shares outstanding which are anti-dilutive for
purposes of calculating EPS for the three months ended March 31,
2003 and 2002, are not included in the diluted EPS calculations,
and consist of the following (shares, in thousands):
Three Months Ended
March 31,
2003 2002
----------- ----------
Series B redeemable preferred stock 3,062 3,062
Series C redeemable preferred stock 833 833
----------- ----------
Anti-dilutive common shares outstanding 3,895 3,895
=========== ==========
11 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Weighted average shares associated with outstanding stock options
for the three months ended March 31, 2003 and 2002 which have been
excluded from the diluted EPS calculations because the options'
exercise price was greater than the average market price of the
common shares consist of the following (shares, in thousands):
Three Months Ended
March 31,
2003 2002
----------- ----------
Weighted average shares associated with outstanding stock
options 4,510 239
=========== ==========
(d) Common Stock
Following is the statement of common stock at March 31, 2003 and
2002 (shares, in thousands):
Class A Class B
------------- --------------
Balances at December 31, 2001 50,967 3,883
Shares issued under stock option plan 480 ---
------------- --------------
Balances at March 31, 2002 51,447 3,883
============= ==============
Balances at December 31, 2002 51,795 3,875
Class B shares converted to Class A 1 (1)
Shares issued under stock option plan 13 ---
Shares issued per G.C. Cablevision, Inc.
acquisition agreement 223 ---
------------- --------------
Balances at March 31, 2002 52,032 3,874
============= ==============
(e) Redeemable Preferred Stocks
Redeemable preferred stocks at March 31, 2003 and 2002 consist of
(amounts in thousands):
2003 2002
------------- --------------
Series B $ 16,907 16,907
Series C 10,000 10,000
------------- --------------
$ 26,907 26,907
============= ==============
We have 1,000,000 shares of preferred stock authorized with the
following shares issued (shares, in thousands):
Series B Series C
------------- --------------
Balances at December 31, 2001 and 2002 and
March 31, 2002 and 2003 17 10
============= ==============
12 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
As of March 31, 2003, the combined aggregate amount of preferred
stock mandatory redemption requirements follow (amounts in
thousands):
Years ending March 31:
2004 $ ---
2005 ---
2006 10,150
2007 ---
2008 ---
--------
$ 10,150
========
Series B
The redemption amount of our convertible redeemable accreting
Series B preferred stock at March 31, 2003 and December 31, 2002
was $17,509,000 and $17,148,000, respectively. The difference
between the carrying and redemption amounts is due to accrued
dividends which are included in Accrued Liabilities.
Series C
The redemption amount of our convertible redeemable accreting
Series C preferred stock on March 31, 2003 and December 31, 2002
was $10,000,000.
(f) Asset Retirement Obligations
On January 1, 2003 we adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 provides accounting and
reporting standards for costs associated with the retirement of
long-lived assets. This statement requires entities to record the
fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially
recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement. Upon adoption, we recorded the cumulative effect of
accretion and depreciation expense as a cumulative effect of a
change in accounting principle of approximately $544,000, net of
income tax benefit of $367,000.
Assets that have been recorded for purposes of settling asset
retirement obligations have a fair value of approximately
$1,107,000 at March 31, 2003.
Following is a reconciliation of the beginning and ending aggregate
carrying amount of our asset retirement obligations at March 31,
2003 (amounts in thousands):
Balance at December 31, 2002 $ ---
Liability recognized upon adoption of SFAS
No. 143 1,565
Accretion expense for the three months
ended March 31, 2003 128
----------
Balance at March 31, 2003 $ 1,693
==========
13 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Following is the amount of the liability for asset retirement
obligations as if SFAS No. 143 had been applied at December 31,
2001 (amounts in thousands):
Balance at December 31, 2001 $ 1,350
==========
Balance at March 31, 2002 $ 1,565
==========
Balance at March 31, 2003 $ 1,693
==========
(g) Payments Received from Suppliers
On March 20, 2003 the SEC issued Emerging Issues Task Force
("EITF") Issue No. 02-16, "Accounting by a Reseller for Cash
Consideration Received from a Vendor" ("EITF No. 02-16"). We have
applied EITF No. 02-16 prospectively for arrangements entered into
or modified after December 31, 2002. Our cable services segment
occasionally receives reimbursements for costs to promote
suppliers' services, called cooperative advertising arrangements.
The supplier payment is classified as a reduction of selling,
general and administrative expenses if it reimburses specific,
incremental and identifiable costs incurred to resell the
suppliers' services. Excess consideration, if any, is classified as
a reduction of cost of sales and services.
Occasionally our cable services segment enters into a binding
arrangement with a supplier in which we receive a rebate dependent
upon us meeting a specified goal. We recognize the rebate as a
reduction of cost of sales and services systematically as we make
progress toward the specified goal. If earning the rebate is not
probable and reasonably estimable, it is recognized only when the
goal is met.
(h) Costs Associated with Exit or Disposal Activities
On January 1, 2003 we adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". Upon adoption of SFAS
No. 146, enterprises may only record exit or disposal costs when
they are incurred and can be measured at fair value. The recorded
liability will be subsequently adjusted for changes in estimated
cash flows. SFAS 146 revises accounting for specified employee and
contract terminations that are part of restructuring activities.
Adoption of SFAS No. 146 did not have a material effect on our
results of operations, financial position and cash flows.
(i) Stock Option Plan
At March 31, 2003, we had one stock-based employee compensation
plan. We account for this plan under the recognition and
measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. We use the intrinsic-value method and
compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise
price. We have adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25.
We have adopted SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure". This Statement amends SFAS
No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used
14 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
on reported results. We have elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosure as required by SFAS No. 148.
Stock-based employee compensation cost is reflected over the
options' vesting period of generally 5 years and compensation cost
for options granted prior to January 1, 1996 is not considered. The
following table illustrates the effect on net income and EPS for
the three months ended March 31, 2003 and 2002, if we had applied
the fair-value recognition provisions of SFAS No. 123 to
stock-based employee compensation (amounts in thousands, except per
share amounts):
Three Months Ended
March 31,
2003 2002
------------ -----------
Net income, as reported $ 2,551 2,212
Total stock-based employee compensation expense included
in reported net income, net of related tax effects 23 59
Total stock-based employee compensation expense under the
fair-value based method for all awards, net of related
tax effects (474) (575)
------------ -----------
Pro forma net income $ 2,100 1,696
============ ===========
Basic and diluted net income per common share, as reported $ 0.04 0.03
============ ===========
Basic and diluted net income per common share, pro forma $ 0.03 0.02
============ ===========
(j) Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations
of credit risk are primarily cash and cash equivalents and accounts
receivable. Excess cash is invested in high quality short-term
liquid money instruments issued by highly rated financial
institutions. At March 31, 2003 and December 31, 2002,
substantially all of our cash and cash equivalents were invested in
short-term liquid money instruments at one highly rated financial
institution.
We have two major customers, WorldCom and Sprint Corporation. There
is increased risk associated with these customers' accounts
receivable balances. Our remaining customers are located primarily
throughout Alaska. Because of this geographic concentration, our
growth and operations depend upon economic conditions in Alaska.
The economy of Alaska is dependent upon the natural resources
industries, and in particular oil production, as well as tourism,
government, and United States military spending. Though limited to
one geographical area and except for WorldCom and Sprint, the
concentration of credit risk with respect to our receivables is
minimized due to the large number of customers, individually small
balances, and short payment terms.
(k) Reclassifications
Reclassifications have been made to the 2002 financial statements
to make them comparable with the 2003 presentation.
15 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
(2) Consolidated Statements of Cash Flows Supplemental Disclosures
Changes in operating assets and liabilities consist of (amounts in
thousands):
Three month periods ended March 31, 2003 2002
------------ ------------
Decrease in accounts receivables $ 5,066 519
Increase in inventories (688) (559)
Decrease in prepaid and other current assets 630 588
Decrease in accounts payable (6,075) (1,189)
Increase (decrease) in deferred revenues (1,662) 267
Increase (decrease) in accrued payroll and payroll
related obligations 1,002 (4,702)
Decrease in accrued interest (3,119) (3,616)
Increase (decrease) in accrued liabilities (391) 1,081
Increase (decrease) in subscriber deposits (64) 286
Increase (decrease) in components of other long-term
liabilities (350) 516
------------ ------------
$ (5,651) (6,809)
============ ============
We paid interest totaling approximately $12,273,000 and $10,207,000
during the three months ended March 31, 2003 and 2002, respectively.
Effective March 31, 2001 we acquired the assets and customer base of G.C.
Cablevision, Inc. Upon acquisition the seller received shares of GCI
Class A common stock with a future payment in additional shares
contingent upon the market price of our common stock on March 31, 2003.
At March 31, 2003 the market price condition was not met and
approximately 222,600 shares of GCI Class A common stock were issued.
(3) Intangible Assets
Cable certificates are allocated to our cable services segment. Goodwill
is primarily allocated to the cable services segment and the remaining
amount is not allocated to a reportable segment, but is included in the
All Other category in note 4.
Goodwill allocated to the cable services segment increased $1,312,000 due
to the issuance of 222,600 shares of GCI Class A common stock per the
G.C. Cablevision, Inc. acquisition agreement as further described in note
2. Cable certificates accumulated amortization decreased $27,000 at March
31, 2003 as compared to December 31, 2002, due to an adjustment of the
amortization previously recognized.
Amortization expense for amortizable intangible assets was $173,000 and
$208,000 for the three months ended March 31, 2003 and 2002,
respectively.
16 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Amortization expense for amortizable intangible assets for each of the
five succeeding fiscal years is estimated to be (amounts in thousands):
Years ending
December 31,
2003 $ 417
2004 $ 470
2005 $ 338
2006 $ 334
2007 $ 273
No intangible assets have been impaired based upon impairment testing
performed as of December 31, 2002 and no indicators of impairment have
occurred since the impairment testing was performed.
(4) Industry Segments Data
Our reportable segments are business units that offer different products.
The reportable segments are each managed separately and offer distinct
products with different production and delivery processes.
We have four reportable segments as follows:
Long-distance services. We offer a full range of common carrier
long-distance services to commercial, government, other
telecommunications companies and residential customers, through our
networks of fiber optic cables, digital microwave, and fixed and
transportable satellite earth stations and our SchoolAccess(TM)
offering to rural school districts and a similar offering to rural
hospitals and health clinics.
Cable services. We provide cable television services to residential,
commercial and government users in the State of Alaska. Our cable
systems serve 33 communities and areas in Alaska, including the state's
three largest urban areas, Anchorage, Fairbanks and Juneau. We offer
digital cable television services in Anchorage, Fairbanks, Juneau,
Kenai and Soldotna and retail cable modem service (through our Internet
services segment) in all of our locations in Alaska except Ketchikan
and Kotzebue. We plan to offer cable modem service in Ketchikan in
2003, and plan to continue to expand our product offerings as plant
upgrades are completed in other communities in Alaska.
Local access services. We offer facilities based competitive local
exchange services in Anchorage, Fairbanks and Juneau and plan to
provide similar competitive local exchange services in other locations
pending regulatory approval and subject to availability of capital.
Internet services. We offer wholesale and retail Internet services. We
offer cable modem service as further described under Cable services
above. Our undersea fiber optic cable allows us to offer enhanced
services with high-bandwidth requirements.
Included in the "All Other" category in the tables that follow are our
managed services, product sales and cellular telephone services. None of
these business units has ever met the quantitative thresholds for
determining reportable segments. Also included in the All Other category
are corporate related expenses including information technology,
accounting, legal and regulatory, human resources and other general and
administrative expenses.
We evaluate performance and allocate resources based on (1) earnings or
loss from operations before depreciation, amortization, net interest
expense and income taxes, and (2) operating income or loss.
17 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies in note 1.
Intersegment sales are recorded at cost plus an agreed upon intercompany
profit.
We earn all revenues through sales of services and products within the
United States of America. All of our long-lived assets are located within
the United States of America, except approximately 75% of our undersea
fiber optic cable system which transits international waters.
Summarized financial information for our reportable segments for the
three months ended March 31, 2003 and 2002 follows (amounts in
thousands):
Reportable Segments
--------------------------------------------------------
Long- Local Total
Distance Cable Access Internet Reportable All
Services Services Services Services Segments Other Total
------------------------------------------------------------------------------
2003
----
Revenues:
Intersegment $ 3,603 636 2,623 3,074 9,936 186 10,122
External 48,486 23,438 8,426 4,590 84,940 7,837 92,777
------------------------------------------------------------------------------
Total revenues $ 52,089 24,074 11,049 7,664 94,876 8,023 102,899
==============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, net interest
expense and income taxes $ 25,600 11,219 841 454 38,114 (8,550) 29,564
==============================================================================
Operating income (loss) $ 21,161 6,453 374 (1,395) 26,593 (10,530) 16,063
==============================================================================
18 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Reportable Segments
--------------------------------------------------------
Long- Local Total
Distance Cable Access Internet Reportable All
Services Services Services Services Segments Other Total
------------------------------------------------------------------------------
2002
----
Revenues:
Intersegment $ 5,329 496 2,673 2,143 10,641 186 10,827
External 50,068 21,346 7,308 3,573 82,295 5,915 88,210
------------------------------------------------------------------------------
Total revenues $ 55,397 21,842 9,981 5,716 92,936 6,101 99,037
==============================================================================
Earnings (loss) from
operations before
depreciation,
amortization, net interest
expense and income taxes $ 24,593 9,884 844 (2,935) 32,386 (7,071) 25,315
==============================================================================
Operating income (loss) $ 18,652 5,713 34 (3,825) 20,574 (9,217) 11,357
==============================================================================
A reconciliation of reportable segment revenues to consolidated revenues
follows (amounts in thousands):
Three months ended March 31, 2003 2002
--------------- ---------------
Reportable segment revenues $ 94,876 92,936
Plus All Other revenues 8,023 6,101
Less intersegment revenues eliminated in consolidation 10,122 10,827
--------------- ---------------
Consolidated revenues $ 92,777 88,210
=============== ===============
19 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
A reconciliation of reportable segment earnings from operations before
depreciation, amortization, net interest expense and income taxes to
consolidated net income before income taxes and cumulative effect of a
change in accounting principle follows (amounts in thousands):
Three months ended March 31, 2003 2002
-------------- ----------------
Reportable segment earnings from operations before
depreciation, amortization, net interest expense and income
taxes $ 38,114 32,386
Less All Other loss from operations before depreciation,
amortization, net interest expense and income taxes 8,550 7,071
Less intersegment contribution eliminated in consolidation 625 224
-------------- ----------------
Consolidated earnings from operations before
depreciation, amortization, net interest expense and
income taxes 28,939 25,091
Less depreciation and amortization expense 13,501 13,958
-------------- ----------------
Consolidated operating income 15,438 11,133
Less other expense, net 10,061 7,275
-------------- ----------------
Consolidated net income before income taxes and cumulative
effect of a change in accounting principle $ 5,377 3,858
============== ================
A reconciliation of reportable segment operating income to consolidated
net income before income taxes and cumulative effect of a change in
accounting principle follows (amounts in thousands):
Three months ended March 31, 2003 2002
--------------- ---------------
Reportable segment operating income $ 26,593 20,574
Less All Other operating loss 10,530 9,217
Less intersegment contribution eliminated in consolidation 625 224
--------------- ---------------
Consolidated operating income 15,438 11,133
Less other expense, net 10,061 7,275
--------------- ---------------
Consolidated net income before income taxes and cumulative
effect of a change in accounting principle $ 5,377 3,858
=============== ===============
(5) Commitments and Contingencies
Litigation and Disputes
We are routinely involved in various lawsuits, billing disputes, legal
proceedings and regulatory matters that have arisen in the normal course
of business.
On July 1, 1999, the APUC ruled that the rural exemptions from local
competition for the ILECs operating in Juneau, Fairbanks and North Pole
would not be continued, which allowed us to negotiate for unbundled
elements for the provision of competitive local service. Alaska
Communications Systems, Inc. ("ACS") requested reconsideration of this
decision and on October 11, 1999, the RCA issued an order terminating
rural exemptions for the ILECs operating in the Fairbanks and Juneau
markets. ACS has appealed these decisions. The appeal presently is before
the Alaska Supreme
20 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Court. On February 11, 2003, the Alaska Supreme Court heard oral
argument. One of the principal issues in dispute concerns the assignment
of the burden of proof. In accordance with instructions from the Alaska
Superior Court, the APUC assigned the burden to ACS at the remand
proceeding. At the oral argument, several Justices expressed concern with
the assignment of the burden. At this time, we cannot reasonably predict
what the outcome of the case will be or even what relief the Court might
order if it were to find that the burden of proof was improperly assigned
to ACS. An adverse decision from the Court, however, has the potential to
disrupt our ability to provide service to our Fairbanks and Juneau
customers over our facilities. We expect a decision from the Court during
the second or third quarter of 2003.
While the ultimate results of these items cannot be predicted with
certainty, we do not expect at this time the resolution of them, except
for the rural exemption proceedings described above, to have a material
adverse effect on our financial position, results of operations or
liquidity.
(6) Subsequent Event
On April 22, 2003 we amended our $225.0 million Senior Facility. The
amendment provides for the followings changes:
o The final maturity date has been extended to October 31, 2007,
o We may fund capital expenditures, including construction or
acquisition of additional fiber optic cable system capacity,
through our own cash flow or by draws on the revolving credit
facility of the Senior Facility not to exceed $25.0 million, and
o The definition of Excess Cash Flow has been changed to the
amount by which earnings before interest, taxes, depreciation,
and amortization exceeds certain fixed charges as defined in the
Senior Facility agreement plus one-time fiber sales to the
extent such fiber sales are not included in earnings before
interest, taxes, depreciation, and amortization,
The amendment requires us to prepay the term loan as follows (amounts in
thousands):
Date Amount
------------------------------------------ -----------
Quarterly from September 30, 2003 to
December 31, 2004 $ 5,000
Quarterly from March 31, 2005 to December
31, 2005 $ 6,000
Quarterly from March 31, 2006 to December
31, 2006 $ 8,000
Quarterly from March 31, 2007 to September
30, 2007 $ 10,000
The remaining balance of the term loan will be payable in full on October
31, 2007.
Under the amended Senior Facility capital expenditures, other than those
incurred to build or acquire additional fiber optic cable system
capacity, in any of the years ended December 31, 2003, 2004, 2005 and
2006 may not exceed:
o $25.0 million, plus
o 100% of any Excess Cash Flow during the applicable period less
certain permitted investments of up to $5.0 million during the
applicable period.
21 (Continued)
GENERAL COMMUNICATION, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
Under the amended Senior Facility we may not allow the ratio of total
indebtedness to annualized operating cash flow to be greater than:
Period Ratio
--------------------------------------------------------- ------
April 22, 2003 through December 30, 2003 4.25:1
December 31, 2003 through December 30, 2004 4.00:1
December 31, 2004 through December 30, 2005 3.75:1
December 31, 2005 through June 29, 2006 3.50:1
June 30, 2006 through June 29, 2007 3.25:1
June 30, 2007 through September 29, 2007 3.00:1
September 30, 2007 through October 31, 2007 2.75:1
Under the amended Senior Facility we may not allow the ratio of senior
secured indebtedness to annualized operating cash flow to be greater
than:
Period Ratio
--------------------------------------------------------- ------
April 22, 2003 through December 30, 2004 2.00:1
December 31, 2004 through September 29, 2006 1.75:1
September 30, 2006 through June 29, 2007 1.50:1
June 30, 2007 through September 29, 2007 1.25:1
September 30, 2007 through October 31, 2007 1.00:1
Under the amended Senior Facility we must either have repaid in full or
successfully refinanced our Senior Notes by February 1, 2007.
In connection with the amendment of the Senior Facility, we paid bank
fees and other expenses of approximately $2,554,000 in the second quarter
of 2003 which will be charged to Amortization of Loan and Senior Notes
Fees over the life of the amended agreement.
22
PART I.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
In the following discussion, General Communication, Inc. and its direct and
indirect subsidiaries are referred to as "we," "us" and "our."
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, we evaluate our estimates and
judgments, including those related to unbilled revenues, long-distance cost of
sales and services accruals, allowance for doubtful accounts, depreciation,
amortization and accretion periods, intangible assets, income taxes, and
contingencies and litigation. We base our estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. See also our Cautionary Statement
Regarding Forward-Looking Statements.
General Overview
We have experienced significant growth in recent years through strategic
acquisitions, deploying new business lines and expansion of our existing
businesses. We have historically met our cash needs for operations, regular
capital expenditures and maintenance capital expenditures through our cash flows
from operating activities. Cash requirements for significant acquisitions and
major capital expenditures have been provided largely through our financing
activities.
Consolidated revenues increased by more than $4 million during the first quarter
of 2003 as compared to the same period in 2002. Our operating income increased
by 38.7% in 2003. Our income before income tax and cumulative effect of a change
in accounting principle increased by 39.4% and our net income increased by
15.3%. Three of our reportable business segments experienced year over year
growth in units and revenues as we continued to strengthen our position in the
markets we serve. The long-distance services segment experienced a decrease in
year over year units and revenue. Operating income increased in the
long-distance services, cable services and local access services segments, and
operating loss decreased in the Internet services segment. Basic and diluted
earnings per share increased by 33.3% during the first quarter of 2003 as
compared to the same period in 2002.
Long-Distance Services Overview
First quarter 2003 long-distance services revenue represented 52.2% of
consolidated revenues. Our provision of interstate and intrastate long-distance
services, private line and leased dedicated capacity services, and broadband
services accounted for 94.6% of our total long-distance services revenues during
the first quarter of 2003.
Factors that have the greatest impact on year-to-year changes in long-distance
services revenues include the rate per minute charged to customers, usage
volumes expressed as minutes of use, and the number of private line, leased
dedicated service and broadband products in use.
23
Our long-distance services segment faces significant competition from AT&T
Alascom, Inc., long-distance resellers, and local telephone companies that have
entered the long-distance market. We believe our approach to developing,
pricing, and providing long-distance services and bundling different business
segment services will continue to allow us to be competitive in providing those
services.
Our contract to provide interstate and intrastate long-distance services to
Sprint was replaced in March 2002 extending its term to March 2007 with two
one-year automatic extensions to March 2009. Beginning in April 2002 the new
contract reduced the rate to be charged by us for certain Sprint traffic over
the extended term of the contract. Additional contractual rate reductions occur
annually through the end of the initial term of the contract.
Other common carrier traffic routed to us for termination in Alaska is largely
dependent on traffic routed to WorldCom and Sprint by their customers. Pricing
pressures, general economic deterioration, new program offerings, business
failures, and market consolidation continue to evolve in the markets served by
WorldCom and Sprint. If, as a result, their traffic is reduced, or if their
competitors' costs to terminate or originate traffic in Alaska are reduced, our
traffic will also likely be reduced, and our pricing may be reduced to respond
to competitive pressures. We are unable to predict the effect on us of such
changes, however given the materiality of other common carrier revenues to us, a
significant reduction in traffic or pricing could have a material adverse effect
on our financial position, results of operations and liquidity.
Due in large part to the favorable synergistic effects of our integrated
approach, the long-distance services segment continues to be a significant
contributor to our overall performance, although the migration of traffic from
voice to data continues.
Cable Services Overview
First quarter 2003 cable television revenues represented 25.3% of consolidated
revenues. Our cable systems serve 33 communities and areas in Alaska, including
the state's three largest population centers, Anchorage, Fairbanks and Juneau.
We generate cable services revenues from four primary sources: (1) digital and
analog programming services, including monthly basic and premium subscriptions,
pay-per-view movies and other one-time events, such as sporting events; (2)
equipment rentals and installation; (3) cable modem services (shared with our
Internet services segment); and (4) advertising sales. During the first quarter
of 2003 programming services generated 77.8% of total cable services revenues,
equipment rental and installation fees accounted for 7.8% of such revenues,
cable services' allocable share of cable modem services accounted for 10.7% of
such revenues, advertising sales accounted for 3.0% of such revenues, and other
services accounted for the remaining 0.7% of total cable services revenues.
Effective February 2003, we increased rates charged for certain cable services
and premium packages in six communities, including the state's three largest
population centers Anchorage, Fairbanks and Juneau. Rates increased
approximately 4% for those customers who experienced an adjustment.
The primary factors that contribute to year-to-year changes in cable services
revenues are average monthly subscription and pay-per-view rates, the mix among
basic, premium and pay-per-view services and digital and analog services, the
average number of cable television and cable modem subscribers during a given
reporting period, and revenues generated from new product offerings.
Our cable services segment faces competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment. We believe our cable television services will
continue to be competitive by providing, at reasonable prices, a greater variety
of
24
communication services than are available off-air or through other
alternative delivery sources. Additionally, we believe we offer superior
technical performance and responsive local customer service.
Local Access Services Overview
We generate local access services revenues from three primary sources: (1)
business and residential basic dial tone services; (2) business private line and
special access services; and (3) business and residential features and other
charges, including voice mail, caller ID, distinctive ring, inside wiring and
subscriber line charges. During the first quarter of 2003 local access services
revenues represented 9.1% of consolidated revenues.
The primary factors that contribute to year-to-year changes in local access
services revenues are the average number of business and residential subscribers
to our services during a given reporting period, the average monthly rates
charged for non-traffic sensitive services, the number and type of additional
premium features selected, and the traffic sensitive access rates charged to
carriers.
Our local access services segment faces significant competition in Anchorage,
Fairbanks, and Juneau from the ILEC ACS and from AT&T Alascom, Inc. We began
providing service in the Juneau market in the first quarter of 2002. We believe
our approach to developing, pricing, and providing local access services and
bundling different business segment services will allow us to be competitive in
providing those services.
Internet Services Overview
We generate Internet services revenues from three primary sources: (1) access
product services, including commercial, Internet service provider, and retail
dial-up access; (2) network management services; and (3) Internet services'
allocable share of cable modem services (a portion of cable modem revenue is
also recognized by our cable services segment). During the first quarter of 2003
Internet services segment revenues represented 4.9% of consolidated revenues.
The primary factors that contribute to year-to-year changes in Internet services
revenues are the average number of subscribers to our services during a given
reporting period, the average monthly subscription rates, and the number and
type of additional premium features selected.
Marketing campaigns continue to be deployed targeting residential and commercial
customers featuring bundled Internet products. Our Internet offerings are
coupled with our long-distance and local access services offerings and provide
free basic Internet services or discounted premium Internet services if certain
long-distance or local access services plans are selected. Value-added premium
Internet features are available for additional charges.
We compete with a number of Internet service providers in our markets. We
believe our approach to developing, pricing, and providing Internet services
allows us to be competitive in providing those services.
All Other Services Overview
Revenues reported in the All Other category as described in note 4 in the
accompanying Notes to Interim Condensed Consolidated Financial Statements
include our managed services, product sales, and cellular telephone services.
Revenues included in the All Other category represented 8.5% of total revenues
in the first quarter of 2003 and include managed services revenues totaling $5.4
million, product sales revenues totaling $1.6 million and cellular telephone
services revenues totaling $797,000.
25
RESULTS OF OPERATIONS
The following table sets forth selected Statement of Operations data as a
percentage of total revenues for the periods indicated (unaudited, underlying
data rounded to the nearest thousands):
Percentage
Three Months Ended Change (1)
March 31, 2003 vs.
(Unaudited) 2003 2002 2002
---- ---- ----
Statement of Operations Data:
Revenues
Long-distance services 52.2% 56.8% (3.2%)
Cable services 25.3% 24.2% 9.8%
Local access services 9.1% 8.3% 15.3%
Internet services 4.9% 4.0% 28.5%
All Other services 8.5% 6.7% 32.5%
--------------------------------------
Total revenues 100.0% 100.0% 5.2%
Cost of sales and services 32.6% 35.4% (3.2%)
Selling, general and administrative expenses 35.6% 35.5% 5.4%
Bad debt expense 0.6% 0.7% 2.8%
Depreciation, amortization and accretion expense 14.6% 15.8% (3.3%)
--------------------------------------
Operating income 16.6% 12.6% 38.7%
Net income before income taxes and cumulative
effect of a change in accounting principle 5.8% 4.4% 39.4%
Net income before cumulative effect of a change
in accounting principle 3.3% 2.5% 39.9%
Net income 2.7% 2.5% 15.3%
Other Operating Data:
Long-distance services operating income (2) 43.6% 37.3% 13.5%
Cable services operating income (3) 27.5% 26.8% 13.0%
Local access services operating income (4) 4.4% 0.5% 1,014.1%
Internet services operating loss (5) (30.4%) (107.1%) 63.5%
- --------------------------
1 Percentage change in underlying data.
2 Computed as a percentage of total external long-distance services revenues.
3 Computed as a percentage of total external cable services revenues.
4 Computed as a percentage of total external local access services revenues.
5 Computed as a percentage of total external Internet services revenues.
- --------------------------
Three Months Ended March 31, 2003 ("2003") Compared To Three Months Ended
March 31, 2002 ("2002").
Overview of Revenues and Cost of Sales and Services
Total revenues increased 5.2% from $88.2 million in 2002 to $92.8 million in
2003. The cable services, local access services and Internet services segments
and All Other Services contributed to the increase in
26
total revenues, partially off-set by a decrease in revenues in the long-distance
services segment. See the discussion below for more information by segment.
Total cost of sales and services decreased 3.2% to $30.2 million in 2003. As a
percentage of total revenues, total cost of sales and services decreased from
35.4% in 2002 to 32.6% in 2003. The long-distance services segment contributed
to the decrease in total cost of sales and services, partially off-set by
increases in cost of sales and services in the cable services, local access
services and Internet services segments and All Other Services. See the
discussion below for more information by segment.
Long-distance Services Segment Revenues
Total long-distance services segment revenues decreased 3.2% to $48.5 million in
2003.
Message Telephone Service Revenue from Common Carrier Customers
Message telephone service revenues from other common carriers (principally
WorldCom and Sprint) decreased 7.3% to $21.1 million in 2003 resulting from a
0.3% decrease in wholesale minutes carried to 187.1 million minutes and a 5.4%
decrease in the average rate per minute on minutes carried for other common
carriers. The average rate per minute decrease is primarily due to a reduced
rate charged by us for certain Sprint traffic due to a new contract commencing
April 2002.
The economic stagnation in the lower 48 states appears to have dampened demand
for services provided by our large common carrier customers. To the extent that
these customers experience reduced demand for traffic destined for and
originating in Alaska, it could adversely affect our common carrier traffic. A
protracted economic malaise in the lower 48 states or a further disruption in
the economy resulting from renewed terrorist activity could affect our carrier
customers which, in turn, could affect our revenues and cash flows.
We believe that our contract with WorldCom will ultimately be reaffirmed and
that we will reach an agreement with respect to the pre-petition receivables
balance and that WorldCom may ultimately exit bankruptcy with their business
intact. We cannot predict how long it may take WorldCom to complete the
bankruptcy process or what effect the process or the economy may have on their
traffic levels and ultimately, their requirements for service to and from
Alaska.
Message Telephone Service Revenue from Residential, Commercial and Governmental
Customers
Message telephone service revenues from residential, commercial, and
governmental customers decreased 15.5% to $10.2 million in 2003 primarily due to
the following:
o A 11.0% decrease in minutes carried for these customers to 71.9 million
minutes. The decrease is primarily due to the loss of approximately 3.0
million to 4.0 million minutes earned quarterly from a certain retail
customer,
o A 8.7% decrease in the average rate per minute to $0.094 per minute
paid by these customers due to our promotion of and customers'
enrollment in calling plans offering a certain number of minutes for a
flat monthly fee, and
o A 1.9% decrease in the number of active residential, commercial, and
governmental customers billed to 87,300 at March 31, 2003.
Revenue from Private Line and Private Network Customers
Private line and private network transmission services revenues decreased 0.1%
to $8.8 million in 2003.
Revenue from Broadband Customers
Revenues from our packaged telecommunications offering to rural hospital and
health clinic service and our SchoolAccess(TM) offering to rural school
districts increased 29.5% to $5.7 million in 2003. The increase is
27
primarily due to our new SchoolAccess(TM) offering called Distance Learning that
started in late 2002. Distance Learning is a video-conference based service and
is used by six school districts in Alaska.
Long-distance Services Segment Cost of Sales and Services
Long-distance services segment cost of sales and services decreased 25.5% to
$12.1 million in 2003. Long-distance services segment cost of sales and services
as a percentage of long-distance services segment revenues decreased from 32.4%
in 2002 to 24.9% in 2003 primarily due to the following:
o Reductions in access costs due to distribution and termination of our
traffic on our own local access services network instead of paying
other carriers to distribute and terminate our traffic. The statewide
average cost savings is approximately $.038 and $.078 per minute for
interstate and intrastate traffic, respectively. We expect cost savings
to continue to occur as long-distance traffic originated, carried, and
terminated on our own facilities grows,
o The FCC Multi-Association Group ("MAG") reform order reducing the
interstate access rates paid by interexchange carriers to Local
Exchange Carriers ("LECs") beginning July 2002, and
o A $2.3 million non-recurring refund ($1.9 million after deducting
certain direct costs) in 2003 from a local exchange carrier in respect
of its earnings that exceeded regulatory requirements.
The decrease in the long-distance services segment cost of sales and services as
a percentage of long-distance services segment revenues is partially off-set by
increased costs associated with additional transponder and network back-up
capacity in 2003 as compared to 2002.
Cable Services Segment Revenues and Cost of Sales and Services
Total cable services segment revenues increased 9.8% to $23.4 million and
average gross revenue per average basic subscriber per month increased $5.43 or
10.1% in 2003. Programming services revenues increased 9.6% to $18.2 million in
2003 resulting from the following:
o Basic subscribers served increased approximately 3,700 to approximately
136,300 at March 31, 2003 as compared to March 31, 2002,
o New facility construction efforts in 2002 and 2003 resulted in
approximately 5,700 additional homes passed, a 3.0% increase from March
31, 2002,
o Digital subscriber counts increased 16.2% to approximately 30,200 at
March 31, 2003 as compared to March 31, 2002. Programming services
revenues from digital subscribers increased $510,000 to $1.2 million in
2003 as compared to 2002, and
o Effective February 2003, we increased rates charged for certain cable
services and premium packages in six communities, including the state's
three largest population centers Anchorage, Fairbanks and Juneau. Rates
increased approximately 4% for those customers who experienced an
adjustment.
The cable services segment's share of cable modem revenue (offered through our
Internet services segment) increased $842,000 to $2.5 million in 2003 due to an
increased number of cable modems deployed. Approximately 96% of our cable homes
passed are able to subscribe to our cable modem service. We expect that that
number will increase to approximately 99% when we complete our upgrade of the
Ketchikan cable system which we expect to accomplish in the second quarter of
2003.
We now offer digital programming in Anchorage, Fairbanks, Juneau, Kenai, and
Soldotna, which markets represent approximately 80% of our homes passed at March
31, 2003.
In the second quarter of 2002 we signed new seven-year retransmission agreements
with the five local Anchorage broadcasters and began up-linking and distributing
the local Anchorage programming to all of our
28
cable systems. This was done to provide additional value to our cable
subscribers and to allow us to differentiate our programming from that of our
DBS competitors.
Cable services cost of sales and services increased 8.4% to $6.5 million in 2003
due to programming cost increases for most of our cable programming services
offerings. Cable services cost of sales and services as a percentage of cable
services revenues, which is less as a percentage of revenues than are
long-distance, local access and Internet services cost of sales and services,
decreased from 27.9% in 2002 to 27.6% in 2003.
In October 2002 we, along with the other largest publicly traded multiple system
operators ("MSOs") signed a pledge to support and adhere to new voluntary
reporting guidelines on common operating statistics to provide investors and
others with a better understanding of our operations. Our operating statistics
include capital expenditures and customer information from our cable services,
local access services and Internet services segments.
Our capital expenditures by standard reporting category for the three months
ending March 31, 2003 and 2002 follows (amounts in thousands):
2003 2002
--------- ---------
Customer premise equipment ("CPE") $ 1,276 1,333
Commercial 68 176
Scalable infrastructure 135 1,131
Line extensions 88 124
Upgrade/rebuild 72 1,286
Support capital 77 2,358
--------- ---------
$ 1,716 6,408
========= =========
During the three months ending March 31, 2003 we decreased our capital
expenditures for all of our reportable segments as compared to the same period
in 2002. The decrease was due to capital expenditure limitations required by our
Senior Facility, which we closed on November 1, 2002. In April 2003 we amended
our Senior Facility agreement which, among other items, increases the amount we
may incur for capital expenditures. For a discussion of the Senior Facility
amendment, see Liquidity and Capital Resources included in Part I, Item 2 of
this report.
The standardized definition of a customer relationship is the number of
customers that receive at least one level of service, encompassing voice, video,
and data services, without regard to which services customers purchase. At March
31, 2003 and 2002 we have 124,007 and 122,273 customer relationships,
respectively.
The standardized definition of a revenue generating unit is the sum of all
primary analog video, digital video, high-speed data, and telephony customers,
not counting additional outlets. At March 31, 2003 and 2002 we have 173,281 and
162,580 revenue generating units, respectively.
29
Local Access Services Segment Revenues and Cost of Sales and Services
Local access services segment revenues increased 15.3% in 2003 to $8.4 million
primarily due to growth in the average number of customers served. At March 31,
2003 an estimated 98,900 lines were in service as compared to approximately
89,800 lines in service at March 31, 2002. We estimate that our 2003 lines in
service total represents a statewide market share of approximately 20%. At March
31, 2003 approximately 1,900 additional lines were awaiting connection. The
increase in local access services segment revenues is also caused by a change in
how we provision local access lines in Fairbanks and Juneau. In 2002 we
primarily resold service purchased from ACS. In 2003 we are benefiting from our
build-out of facilities with an increased number of access lines provisioned on
our own facilities, unbundled network element ("UNE") loop and UNE platform
which allows us to collect interstate and intrastate access revenues. The
increase in local access services revenues described above was partially off-set
by the following:
o The FCC MAG reform order reducing the interstate access rates paid by
interexchange carriers to LECs beginning July 2002, and
o A reduction in July 2002 in interstate access rates charged by us to
interexchange carriers in response to an FCC order forcing a competitor
to reduce their interstate access rates.
Local access services segment cost of sales and services increased 20.0% to $5.6
million in 2003. Local access services segment cost of sales and services as a
percentage of local access services segment revenues increased from 64.4% in
2002 to 67.0% in 2003, primarily due to the following:
o Decreased network access services revenues from other carriers as the
number of customers purchasing both long-distance and local access
services from us increases, and
o The effect of the revenue decreases from interstate access rates
described above with no corresponding decrease in the cost of sales and
services.
Our access line mix continued to hold steady in 2003, with residential lines
representing approximately 56% of our lines, business customers representing
approximately 36%, and Internet access customers representing approximately 8%.
Approximately 91% of our lines are provided on our own facilities, leased local
loops, or using UNE platform.
The size of the local access services segment operating loss is exacerbated by
the allocation of the benefit of access cost savings to the long-distance
services segment. If the local access services segment received credit for the
access charge reductions recorded by the long distance services segment, the
local access services segment operating income would have increased by
approximately $1.8 million and the long distance services segment operating
income would have been reduced by an equal amount in 2003. Avoided access
charges totaled approximately $1.8 million during 2003 as compared to $2.0 in
2002. The decrease in the avoided access charge in 2003 is due to the FCC MAG
reform order reducing the interstate access rates paid by interexchange carriers
to LECs beginning July 2002 and a reduction in July 2002 in interstate access
rates charged by us to interexchange carriers in response to an FCC order
forcing a competitor to reduce their interstate access rates. The local access
services segment operating income is affected by our continued evaluation and
testing of digital local phone service and Internet protocol-based technology to
deliver phone service through our cable facilities.
Internet Services Segment Revenues and Cost of Sales and Services
Total Internet services segment revenues increased 28.5% to $4.6 million in 2003
primarily due to growth in the number of cable modems deployed. We had
approximately 71,600 Internet subscribers at March 31, 2003 as compared to
approximately 71,400 at March 31, 2002, of which approximately 38,600 are cable
modem subscribers at March 31, 2003 as compared to approximately 30,200 at March
31, 2002. The Internet services segment's allocable share of cable modem
revenues increased 51.3% to $2.0 million in 2003 as compared to 2002.
30
The Internet services segment does not share in plan fee revenues associated
with our bundled Internet and long-distance service package. Estimated annual
plan fees related to this service offering is in excess of $1.0 million per
quarter and those revenues are included in the long-distance services segment.
Internet services cost of sales and services increased 17.6% to $1.4 million in
2003, and as a percentage of Internet services revenues, totaled 30.6% and 33.4%
in 2003 and 2002, respectively. The 2003 decrease as a percentage of Internet
services revenues is primarily due to a $693,000 increase in Internet's portion
of cable modem revenue to $2.0 million that generally has higher margins than do
other Internet services products. As Internet services revenues increase,
economies of scale and more efficient network utilization continue to result in
reduced Internet cost of sales and services as a percentage of revenues.
We enhanced the value of our Internet offerings throughout 2002 through the
addition of electronic billing and presentment capabilities and the rollout of a
product called e-mail guard, which filters out e-mail spam and viruses. We
upgraded the download speeds of all of our cable modem Internet service
offerings. These new services and enhancements have proven to be popular with
our customers which we believe is helping to further solidify our customer
relationships.
All Other Revenues and Costs of Sales and Services
All Other revenues increased 32.5% to $7.8 million in 2003. The increase in
revenues is primarily due to the following:
o A $1.2 million increase in product sales to $1.6 million due to sales
of product to two customers in 2003, and
o A $659,000 increase in managed services revenue to $5.4 million in 2003
primarily due to a one-time payment of $327,000 from a customer to
acknowledge our ability to maintain certain costs below a stated
budget.
Revenues from our GCI Fiber system that runs along the oil pipeline corridor are
continuing to increase and we expect the annual revenue run rate to increase by
an additional four to five million dollars per year by the end of 2003.
All Other costs of sales and services increased 47.0% to $4.7 million in 2003,
and as a percentage of All Other revenues, totaled 59.5% and 53.6% in 2003 and
2002, respectively. The increase in All Other costs of sales and services as a
percentage of All Other revenues is primarily due to the sales of product to two
customers in 2003 which have a higher costs of sales as a percentage of revenues
than do managed services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 5.4% to $33.0 million in
2003 and, as a percentage of total revenues, increased to 35.6% in 2003 from
35.5% in 2002. The 2003 increase in selling, general and administrative expenses
is primarily due to an increased accrual for company-wide success sharing bonus
costs and increased labor costs.
Marketing and advertising expenses as a percentage of total revenues decreased
from 3.7% in 2002 to 2.7% in 2003.
Bad Debt Expense
Bad debt expense increased 2.8% to $597,000 in 2003 and, as a percentage of
total revenues, decreased to 0.6% in 2003 from 0.7% in 2002.
31
Depreciation, Amortization and Accretion Expense
Depreciation, amortization and accretion expense decreased 3.3% to $13.5 million
in 2003. The decrease is primarily attributable to the decrease in depreciation
expense due to the $18.5 million in net deferred tax assets we recorded in
December 2002 associated with the Kanas Telecom, Inc acquisition, resulting in a
decrease to the recorded financial statement cost basis of associated property
and equipment.
The decrease in depreciation, amortization and accretion expense described above
was partially off-set by the following:
o An increase in depreciation expense due to our $59.2 million investment
in equipment and facilities placed into service during 2002 for which a
full year of depreciation will be recorded in 2003, and the $10.2
million investment in equipment and facilities placed into service
during 2003 for which a partial year of depreciation will be recorded
in 2003,
o Additional depreciation expense totaling $156,000 recognized in 2003
upon adoption of SFAS 143 (as further described in note 1(f) in Notes
to Interim Condensed Consolidated Financial Statements), and
o Accretion expense totaling $128,000 recognized in 2003 due to our
adoption of SFAS 143 (as further described in note 1(f) in Notes to
Interim Condensed Consolidated Financial Statements).
Other Expense, Net
Other expense, net of other income, increased 38.3% to $10.1 million in 2003.
The increase is primarily due to the following:
o Increased interest expense due to the increased interest rate paid on
our new Senior Facility,
o Increased deferred loan fee expense due to the increased deferred loan
fees associated with the new Senior Facility, and
o A non-recurring $431,000 net interest benefit earned in 2002 from two
interest rate swap agreements. The interest rate swap agreement which
resulted in the net interest benefit was called at no cost and
terminated on August 1, 2002.
Partially offsetting these increases was a decrease in the average outstanding
indebtedness in 2003.
Income Tax Expense
Income tax expense was $2.3 million in 2003 and $1.6 million in 2002. The
increase was due to increased net income before income taxes and cumulative
effect of a change in accounting principle in 2003 as compared to 2002. Our
effective income tax rate decreased from 42.7% in 2002 to 42.4% in 2003 due to
the effect of items that are nondeductible for income tax purposes.
At March 31, 2003, we have (1) tax net operating loss carryforwards of
approximately $196.2 million that will begin expiring in 2005 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 certain net operating loss carryforwards is subject to
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 2003.
32
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The following chart provides selected unaudited statement of operations data
from our quarterly results of operations during 2003 and 2002:
(Amounts in thousands, except per share amounts)
-------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------
2003
----
Revenues:
Long-distance services $ 48,486
Cable services $ 23,438
Local access services $ 8,426
Internet services $ 4,590
All Other services $ 7,837
------------
Total revenues $ 92,777
Operating income $ 15,438
Net income before income taxes and
cumulative effect of a change in
accounting principle $ 5,377
Net income before cumulative effect of a
change in accounting principle $ 3,095
Net income $ 2,551
Basic and diluted net income per common share:
Net income before cumulative effect of a
change in accounting principle $ 0.05
Cumulative effect of a change in accounting
principle $ (0.01)
Net income $ 0.04
2002
----
Revenues:
Long-distance services $ 50,068 52,375 53,778 48,711 204,932
Cable services $ 21,346 21,919 22,057 23,366 88,688
Local access services $ 7,308 8,106 8,096 8,561 32,071
Internet services $ 3,573 3,912 3,927 4,172 15,584
All Other services $ 5,915 6,428 6,692 7,532 26,567
-------------------------------------------------------------
Total revenues $ 88,210 92,740 94,550 92,342 367,842
Operating income (1) $ 11,133 4,766 16,353 13,473 45,725
Net income (loss) before income taxes (1) $ 3,858 (1,686) 8,662 1,488 12,322
Net income (loss) (1) $ 2,212 (1,103) 5,063 491 6,663
Basic and diluted net income (loss) per
common share (1) $ 0.03 (0.03) 0.08 0.00 0.08
--------------
1 The second and third quarters of 2002 include the provision of $9.7
million and $1.2 million, respectively, of bad debt expense for
estimated uncollectible accounts due from WorldCom.
--------------
33
Overview of Revenues and Cost of Sales and Services
Total revenues for the quarter ended March 31, 2003 ("first quarter") were $92.8
million, representing a 0.5% increase from $92.3 million for the quarter ended
December 31, 2002 ("fourth quarter"). The cable services and Internet services
segments and All Other Services contributed to the increase in total revenues,
partially off-set by a decrease in revenues from the long-distance and local
access services segments.
Cost of sales and services decreased from $31.1 million in the fourth quarter to
$30.2 million in the first quarter. As a percentage of revenues, fourth and
first quarter cost of sales and services totaled 33.7% and 32.6%, respectively.
The long-distance services segment contributed to the decrease in total cost of
sales and services, partially off-set by increases in cost of sales and services
in the cable services, local access services and Internet services segments and
All Other Services.
Long-distance Services Segment Revenues and Cost of Sales and Services
First quarter long-distance services segment revenues decreased 0.5% to $48.5
million as compared to the fourth quarter. The decrease resulted primarily from
reduced revenues from residential, commercial, and governmental customers and
private line revenues, off-set by an increase in broadband revenues.
Revenues from other common carrier customers remained steady in the first
quarter as compared to the fourth quarter at $21.1 million. Minutes carried for
other common carriers decreased 1.5% to 187.1 million minutes and the average
rate per minute on minutes carried for other common carriers decreased 3.1% in
the first quarter as compared to the fourth quarter.
The revenue effect of decreased minutes and rate per minute from other common
carrier customers was partially off-set by a non-recurring $920,000 incentive
credit provided to an other common carrier customer in the fourth quarter.
Revenues from residential, commercial, and governmental customers decreased 4.5%
to $10.2 million in the first quarter primarily due to the following:
o A 2.2% decrease in the average rate per minute to $0.107 per minute
paid by residential, commercial and governmental customers, and
o A 2.6% decrease in retail minutes carried for residential, commercial
and governmental customers to 71.9 million minutes.
Private line and private network transmission services revenues decreased 3.7%
to $8.8 million in first quarter as compared to fourth quarter. The decrease is
primarily due to approximately $175,000 in non-recurring credits given to
customers in 2003 and the effect of some customers choosing to purchase virtual
private network ("VPN") service in lieu of private line or frame relay service.
Our Internet services segment recognizes revenue from the sale of VPN services.
Long-distance revenues 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.
Revenues from our packaged telecommunications offering to rural hospital and
health clinic service and our SchoolAccess(TM) offering to rural school
districts increased 12.9% in the first quarter to $5.7 million. The increase is
primarily due to our new SchoolAccess(TM) offering called Distance Learning that
started in late 2002. Distance Learning is a video-conference based service and
is used by six school districts in Alaska.
34
Long-distance services cost of sales and services decreased 15.8% to $12.1
million in the first quarter. Long-distance services cost of sales and services
as a percentage of long-distance services revenues decreased from 29.5% in the
fourth quarter to 24.9% in the first quarter primarily due to the following:
o A $2.3 million non-recurring refund in the first quarter from a local
exchange carrier in respect of its earnings that exceeded regulatory
requirements, and
o The $920,000 incentive credit provided during the fourth quarter as
previously described.
Partially off-setting the increased long-distance services cost of sales and
services as a percentage of long-distance services revenues in the fourth
quarter were the favorable adjustments of $893,000. In the course of business we
estimate unbilled long-distance services cost of sales and services 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. We had no significant favorable or
unfavorable adjustments in the first quarter of 2003.
Cable Services Segment Revenues and Cost of Sales and Services
Cable services segment revenues remained steady at $23.4 million and average
gross revenue per average basic subscriber per month increased $0.17 or 0.3% in
first quarter. Programming services revenues increased 3.2% to $18.2 million in
first quarter resulting from the following:
o Basic subscribers served increased approximately 200 to approximately
136,300 at March 31, 2003 as compared to December 31, 2002,
o Homes passed increased approximately 1,500, a 0.7% increase from
December 31, 2002 primarily due to new facility construction efforts in
first quarter 2003 and a review of homes passed by the system acquired
from Rogers American Cablesystems, Inc.,
o Effective February 2003, we increased rates charged for certain cable
services and premium packages in six communities, including the state's
three largest population centers Anchorage, Fairbanks and Juneau. Rates
increased approximately 4% for those customers who experienced an
adjustment, and
o Programming services revenues from digital subscribers increased
$185,000 to $1.2 million in the first quarter as compared to the fourth
quarter. Digital subscriber counts decreased 1.1% to approximately
30,200 at March 31, 2003 as compared to December 31, 2002. The effect
of the decrease in digital subscriber counts was partially off-set by
the rate increase described above.
Cable programming services revenues have historically been highest in the winter
months because consumers spend more time at home and tend to watch more
television during these months.
The cable services segment's share of cable modem revenue (offered through our
Internet services segment) increased $231,000 to $2.5 million in first quarter
due to an increased number of cable modems deployed.
Advertising revenues decreased $461,000 to $695,000 in first quarter primarily
due to decreased political campaign advertising in the first quarter as compared
to the fourth quarter and the effects of normal seasonality.
Cable services cost of sales and services increased 9.3% to $6.5 million in the
first quarter as compared to the fourth quarter. Cable services cost of sales
and services as a percentage of cable services segment revenues, which is less
as a percentage of revenues than are long-distance, local access and Internet
services cost of sales and services, increased to 27.6% in the first quarter
from 25.3% in the fourth quarter. Equipment rental and installation, cable
services' allocable share of cable modem services and advertising sales revenues
do not have significant corresponding costs of sales and services. The increase
in cable
35
services cost of sales and services as a percentage of cable revenues is
primarily due to a decrease in revenues earned from equipment rental and
installation, cable services' allocable share of cable modem services, and
advertising sales revenues as a percentage of total cable services segment
revenues from 24.4% in fourth quarter to 22.2% in first quarter.
Local Access Services Segment Revenues and Cost of Sales and Services
Local access services segment revenues decreased $135,000 in the first quarter
to $8.4 million primarily due to an adjustment to an intrastate carrier common
line customer account. At March 31, 2003 an estimated 98,900 lines were in
service as compared to approximately 96,100 lines in service at December 31,
2002. The decrease in local access services segment revenues was due to the
cumulative effect of several individually insignificant items, most of which are
expected to be non-recurring.
Local access services segment cost of sales and services increased $408,000 to
$5.6 million in the first quarter. Local access services segment cost of sales
and services as a percentage of local access services segment revenues increased
from 61.2% in the fourth quarter to 67.0% in the first quarter. The increase in
cost of sales and services as a percentage of local access services segment
revenues is primarily due to decreased network access services revenues from
other carriers as the number of customers purchasing both long-distance and
local access services from us increases
The size of the local access services segment operating loss is exacerbated by
the allocation of the benefit of access cost savings to the long-distance
services segment. If the local access services segment received credit for the
access charge reductions recorded by the long distance services segment, the
local access services segment operating income would have increased by
approximately $1.8 million and the long distance services segment operating
income would have been reduced by an equal amount in the first quarter. Avoided
access charges totaled approximately $1.5 million in the fourth quarter.
Internet Services Segment Revenues and Cost of Sales and Services
Internet services segment revenues increased $418,000 to $4.6 million in the
first quarter primarily due to growth in the number of cable modems deployed.
Internet subscribers held steady at approximately 71,600 at March 31, 2003 as
compared to December 31, 2002, of which approximately 38,600 are cable modem
subscribers at March 31, 2003 as compared to approximately 36,200 at December
31, 2002. The Internet services segment's allocable share of cable modem
revenues increased $222,000 to $2.0 million in the first quarter as compared to
the fourth quarter.
Internet services cost of sales and services increased $184,000 in the first
quarter to $1.4 million, and as a percentage of Internet services revenues,
totaled 30.6% and 29.2% in the first and fourth quarters, respectively.
All Other Revenues and Costs of Sales and Services
All Other revenues increased $304,000 to $7.8 million in the first quarter
primarily due to sales of product to two customers in first quarter.
All Other costs of sales increased $282,000 to $4.7 million in the first
quarter, and as a percentage of All Other revenues, totaled 59.5% and 58.1% in
the first and fourth quarters, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $59,000 to $33.0 million
in the first quarter as compared to $32.9 million in the fourth quarter. As a
percentage of revenues, selling, general and administrative expenses were 35.6%
and 35.7% in the first and fourth quarters, respectively.
36
Bad Debt Expense
Bad debt expense increased $347,000 to $597,000 in the first quarter as compared
to the fourth quarter. As a percentage of total revenues, first and fourth
quarter bad expense was 0.6% and 0.3%, respectively.
Other Expense, Net
Other expense, net of other income, decreased $1.9 million in the first quarter
to $10.1 million due to the recognition in the fourth quarter of $2.3 million in
unamortized deferred loan fees upon the refinance of our Senior Holdings Loan
and Fiber Facility on November 1, 2002. The decrease described above was off-set
by a $142,000 increase in interest expense to $9.2 million in the first quarter
as compared to the fourth quarter due to the increased interest rate paid on our
new Senior Facility starting November 1, 2002.
Net Income
We reported net income of $2.6 million for the first quarter as compared to net
income of $491,000 for the fourth quarter. The increase is primarily due to
decreased cost of sales and services caused by a $2.3 million non-recurring
refund in first quarter as previously described, partially off-set by
implementation of SFAS No. 143 in 2003 resulting in a cumulative effect of an
accounting change, net of income tax benefit of $367,000, of $544,000 in the
first quarter.
Liquidity and Capital Resources
Cash flows from operating activities totaled $14.3 million in 2003 as compared
to $12.2 million in 2002. The increase in 2003 is primarily due to increased
cash flow in 2003 from some of our segments and a $2.3 million non-recurring
refund from a local exchange carrier in respect of its earnings that exceeded
regulatory requirements. Uses of cash during 2003 included $6.5 million of
expenditures for property and equipment, including construction in progress,
principal payments on capital lease obligations of $478,000, and payment of a
$721,000 deposit on a workers' compensation stop-loss policy.
Net receivables decreased $5.0 million from December 31, 2002 to March 31, 2003
primarily due to the timing of payments received from a certain common carrier
customer.
Working capital totaled $1.3 million at March 31, 2003, a $2.9 million decrease
as compared to $4.2 million at December 31, 2002. The decrease is primarily
attributed to the classification of $15.0 million of our Senior Facility as
current maturities of long-term debt as of March 31, 2003, upon the April 22,
2003 amendment described below. The decrease was partially off-set by the
following:
o A $6.2 million increase in our cash balance at March 31, 2003 and a
$6.1 million decrease in accounts payable at March 31, 2003 as compared
to December 31, 2002, primarily due to decreased capital expenditures
during the three months ended March 31, 2003, and
o A $3.1 million decrease in accrued interest at March 31, 2003 as
compared to December 31, 2002, due to our semi-annual Senior Notes
interest payment made during the three months ended March 31, 2003.
The increases in working capital described above were partially off-set by a
$5.0 million decrease in net receivables at March 31, 2003 as previously
described.
On April 22, 2003 we amended our $225.0 million Senior Facility. The amendment
provides for the followings changes:
o The final maturity date has been extended to October 31, 2007,
o We may fund capital expenditures, including construction or acquisition
of additional fiber optic cable system capacity, through our own cash
flow or by draws on the revolving credit facility of the Senior
Facility not to exceed $25.0 million, and
37
o The definition of Excess Cash Flow has been changed to the amount by
which earnings before interest, taxes, depreciation, and amortization
exceeds certain fixed charges as defined in the Senior Facility
agreement plus one-time fiber sales to the extent such fiber sales are
not included in earnings before interest, taxes, depreciation, and
amortization,
The amendment requires us to prepay the term loan as follows (amounts in
thousands):
Date Amount
------------------------------------------ -----------
Quarterly from September 30, 2003 to
December 31, 2004 $ 5,000
Quarterly from March 31, 2005 to December
31, 2005 $ 6,000
Quarterly from March 31, 2006 to December
31, 2006 $ 8,000
Quarterly from March 31, 2007 to September
30, 2007 $ 10,000
The remaining balance of the term loan will be payable in full on October 31,
2007.
Under the amended Senior Facility capital expenditures, other than those
incurred to build or acquire additional fiber optic cable system capacity, in
any of the years ended December 31, 2003, 2004, 2005 and 2006 may not exceed:
o $25.0 million, plus
o 100% of any Excess Cash Flow during the applicable period less certain
permitted investments of up to $5.0 million during the applicable
period.
Under the amended Senior Facility we may not allow the ratio of total
indebtedness to annualized operating cash flow to be greater than:
Period Ratio
--------------------------------------------------------- -------
April 22, 2003 through December 30, 2003 4.25:1
December 31, 2003 through December 30, 2004 4.00:1
December 31, 2004 through December 30, 2005 3.75:1
December 31, 2005 through June 29, 2006 3.50:1
June 30, 2006 through June 29, 2007 3.25:1
June 30, 2007 through September 29, 2007 3.00:1
September 30, 2007 through October 31, 2007 2.75:1
Under the amended Senior Facility we may not allow the ratio of senior secured
indebtedness to annualized operating cash flow to be greater than:
Period Ratio
--------------------------------------------------------- -------
April 22, 2003 through December 30, 2004 2.00:1
December 31, 2004 through September 29, 2006 1.75:1
September 30, 2006 through June 29, 2007 1.50:1
June 30, 2007 through September 29, 2007 1.25:1
September 30, 2007 through October 31, 2007 1.00:1
Under the amended Senior Facility we must either have repaid in full or
successfully refinanced our Senior Notes by February 1, 2007.
38
In connection with the amendment of the Senior Facility, we paid bank fees and
other expenses of approximately $2,554,000 in the second quarter of 2003 which
will be charged to Amortization of Loan and Senior Notes Fees over the life of
the amended agreement.
The term loan is fully drawn and we have drawn $2.7 million against the
revolving credit facility plus a $3.0 million letter of credit, which leaves
$44.3 million available at March 31, 2003 to draw under the revolving credit
facility if needed. In April 2003, we made a $2.7 million principal payment on
the revolving credit facility resulting in an additional $2.7 million available
to draw under the revolving credit facility if needed.
We were in compliance with all loan covenants at March 31, 2003.
Our semi-annual Senior Notes interest payment of $8.8 million was paid in
February 2003 out of existing cash balances. Our next Senior Notes interest
payment of $8.8 million is due August 1, 2003.
Our expenditures for property and equipment, including construction in progress,
totaled $6.5 million and $16.1 million during the three months ended March 31,
2003 and 2002, respectively. Our capital expenditures requirements are largely
success driven and are a result of the progress we are making in the
marketplace. We expect our 2003 expenditures for property and equipment for our
core operations, including construction in progress, to total $40 million to $55
million, depending on available opportunities and the amount of cash flow we
generate during 2003. That number excludes any investment we may make with
respect to additional undersea fiber capacity. 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 facilities, continuing development of our Personal
Communication Services, or PCS, network, digital local phone service, and
upgrades to our cable television plant.
The financial, credit and economic impacts of WorldCom's July 2002 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 March 31, 2003, against which we have reserved $11.6 million. We believe that
payment for services provided to WorldCom subsequent to their bankruptcy filing
date will continue to be made timely, consistent with our status in WorldCom's
filing as a key service provider or utility to WorldCom.
A conversion of WorldCom's bankruptcy petition to Chapter 7, unfavorable
reaffirmation of our pre-filing contracts and agreements with WorldCom, or a
migration of WorldCom's traffic off our network without it being replaced by
other common carriers that interconnect with our network, could have a
materially adverse impact on our financial position, results of operations and
liquidity.
Dividends accrued on our Series B preferred stock are payable at the semi-annual
payment dates of April 30 and October 31 of each year. We will pay the $722,000
dividend due on April 30, 2003 in cash. Our next Series B preferred stock
dividend is due October 31, 2003.
Dividends accrued on our Series C preferred stock are payable in cash quarterly.
The long-distance, local access, cable, Internet and wireless services
industries continue to experience substantial competition, regulatory
uncertainty, and continuing technological changes. Our future results of
operations will be affected by our ability to react to changes in the
competitive and regulatory environment and by our ability to fund and implement
new or enhanced technologies. We are unable to determine how
39
competition, economic conditions, and regulatory 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 obtain new debt under acceptable terms and conditions
in the future may be diminished as a result.
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 Standard
In April 2003, the Financial Accounting Standards Board issued SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities".
SFAS No. 149 amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003, except for certain provisions that relate to SFAS
No. 133 Implementation Issues which should continue to be applied in accordance
with their respective effective dates, and for hedging relationships designated
after June 30, 2003. We do not expect implementation of SFAS No. 149 to have a
material effect on our results of operations, financial position and cash flows.
Critical Accounting Policies
Our accounting and reporting policies comply with accounting principles
generally accepted in the United States. The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions. The financial position and results of
operations can be affected by these estimates and assumptions, which are
integral to understanding reported results. Critical accounting policies are
those policies that management believes are the most important to the portrayal
of the Company's financial condition and results, and require management to make
estimates that are difficult, subjective or complex. Most accounting policies
are not considered by management to be critical accounting policies. Several
factors are considered in determining whether or not a policy is critical in the
preparation of financial statements. These factors include, among other things,
whether the estimates are significant to the financial statements, the nature of
the estimates, the ability to readily validate the estimates with other
information including third parties or available prices, and sensitivity of the
estimates to changes in economic conditions and whether alternative accounting
methods may be utilized under generally accepted accounting principles. For all
of these policies, management cautions that future events rarely develop exactly
as forecast, and the best estimates routinely require adjustment. Management has
discussed the development and the selection of critical accounting policies with
the Company's Audit Committee.
Those policies considered to be critical accounting policies for the three
months ended March 31, 2003 are described below.
o 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, financial health of specific customers, and our historical
write-off experience, net of recoveries. If the financial condition of
our customers were to deteriorate or if they are unable to emerge from
reorganization proceedings, resulting in an impairment of their ability
to make
40
payments, additional allowances may be required. If their financial
condition improves or they emerge successfully from reorganization
proceedings, allowances may be reduced. Such allowance changes could
have a material effect on our consolidated financial condition and
results of operations.
o We record all assets and liabilities acquired in purchase acquisitions,
including goodwill and other intangibles, at fair value as required by
SFAS 141. Goodwill and indefinite-lived assets such as our cable
segment franchise agreements are no longer amortized but are subject,
at a minimum, to annual tests for impairment. Other intangible assets
are amortized over their estimated useful lives using the straight-line
method, and are subject to impairment if events or circumstances
indicate a possible inability to realize the carrying amount. The
initial goodwill and other intangibles recorded and subsequent
impairment analysis requires management to make subjective judgments
concerning estimates of how the acquired asset will perform in the
future using a discounted cash flow analysis. Additionally, estimated
cash flows may extend beyond ten years and, by their nature, are
difficult to determine over an extended timeframe. Events and factors
that may significantly affect the estimates include, among others,
competitive forces, customer behaviors and attrition, changes in
revenue growth trends, cost structures and technology, and changes in
discount rates, performance compared to peers, material and ongoing
negative economic trends, and specific industry or market sector
conditions. In determining the reasonableness of cash flow estimates,
we review historical performance of the underlying asset or similar
assets in an effort to improve assumptions utilized in our estimates.
In assessing the fair value of reportable operating segments, we may
consider other information to validate the reasonableness of our
valuations including public market comparables, multiples of recent
mergers and acquisitions of similar businesses and third-party
assessments. These evaluations could result in a change in useful lives
in future periods and could result in write-down of the value of
intangible assets. Because of the significance of the identified
intangible assets and goodwill to our consolidated balance sheet, the
annual impairment analysis will be critical. Any changes in key
assumptions about the business and its prospects, or changes in market
conditions or other externalities, could result in an impairment charge
and such a charge could have a material adverse effect on our
consolidated financial condition and results of operations. Refer to
Note 3 in the accompanying Notes to Interim Condensed Consolidated
Financial Statements for additional information regarding intangible
assets.
o We estimate unbilled long-distance segment cost of sales based upon
minutes of use carried through our network and established rates. We
estimate unbilled costs for new circuits and services, and when network
changes occur that result in traffic routing changes or a change in
carriers. Carriers that provide service to us regularly change their
networks which can lead to new, revised or corrected billings. Such
estimates are revised or removed when subsequent billings are received,
payments are made, billing matters are researched and resolved,
tariffed billing periods lapse, or when disputed charges are resolved.
Revisions to previous estimates could either increase or decrease costs
in the year in which the estimate is revised which could have a
material effect on our consolidated financial condition and results of
operations.
o Our income tax policy provides for deferred income taxes to show the
effect of temporary differences between the recognition of revenue and
expenses for financial and income tax reporting purposes and between
the tax basis of assets and liabilities and their reported amounts in
the financial statements in accordance with SFAS No. 109, "Accounting
for Income Taxes." We have recorded deferred tax assets of
approximately $79.2 million associated with income tax net operating
losses that were generated from 1980 to 2003, and that expire from 2005
to 2023. Pre-acquisition income tax net operating losses associated
with acquired companies are subject to additional deductibility limits.
We have recorded deferred tax assets of approximately $1.9 million
associated with alternative minimum tax credits that do not expire.
Significant management judgment is
41
required in developing our provision for income taxes, including the
determination of deferred tax assets and liabilities and any valuation
allowances that may be required against the deferred tax assets. In
conjunction with certain 1996 acquisitions, we determined that
approximately $20 million of the acquired net operating losses would
not be utilized for income tax purposes, and elected with our December
31, 1996 income tax returns to forego utilization of such acquired
losses. Deferred tax assets were not recorded associated with the
foregone losses and, accordingly, no valuation allowance was provided.
We have not recorded a valuation allowance on the deferred tax assets
as of March 31, 2003 based on management's belief that future reversals
of existing taxable temporary differences and estimated future taxable
income exclusive of reversing temporary differences and carryforwards,
will, more likely than not, be sufficient to realize the benefit of
these assets over time. In the event that actual results differ from
these estimates or if our historical trends change, we may be required
to record a valuation allowance on deferred tax assets, which could
have a material adverse effect on our consolidated financial condition
and results of operations.
Other significant accounting policies, not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the financial statements. Polices related to revenue
recognition and financial instruments require difficult judgments on complex
matters that are often subject to multiple sources of authoritative guidance.
Certain of these matters, including but not limited to the requirement to
account for the market value of stock options as compensation expense, are among
topics currently under reexamination by accounting standards setters and
regulators. Although no specific conclusions reached by these standard setters
appear likely to cause a material change in our accounting policies, outcomes
cannot be predicted with confidence. A complete discussion of our significant
accounting policies can be found in Note 1 in the Notes to Consolidated
Financial Statements included in our December 31, 2002 Form 10-K. A condensed
discussion of our significant accounting policies can be found in Note 1 in the
accompanying Notes to Interim Condensed Consolidated Financial Statements.
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 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 2002 the State's actual results indicate
that Alaska's oil revenues and federal funding supplied 47% and 43%,
respectively, of the state's total revenues. All of the federal funding is
dedicated for specific purposes, leaving oil revenues as the primary funding
source of general operating expenditures. In fiscal 2003 state economists
forecast that Alaska's federal funding and oil revenues will supply 51% and 44%,
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
1.003 million barrels produced per day in fiscal 2002. The state forecasts the
production of 0.994 million barrels per day in fiscal 2003, and a production
rate slightly above 1.0 million barrels per day starting in fiscal 2009. The
state attributes the production rate increase to future development of recent
discoveries in the National Petroleum Reserve Alaska and other new fields.
Market prices for North Slope oil averaged $21.78 in fiscal 2002 and are
forecasted to average $28.14 in fiscal 2003. State economists forecast the
average price of North Slope oil to decline to $25.28 in fiscal 2004. The
closing price per barrel was $25.20 on April 22, 2003. To the extent that actual
oil prices vary materially from the state's projected prices the state's
projected revenues and deficits will change. Every $1 change in the price of oil
results in a $50.0 to $60.0 million change in the state's revenue. The
production
42
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 2006. The
date the Constitutional Budget Reserve Fund is depleted is highly influenced by
the price of oil. 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. The governor submitted a
budget proposal to the Alaska Legislature on March 5, 2003 that included a
number of cost reductions totaling over $189 million, and proposed increased
revenues totaling over $100 million through, among other things, increased user
fees, license fees, motor fuel tax, gaming fees, and filing fees. The Alaska
Legislature is considering the governor's budget proposal and additional cost
reductions and revenue increases, including a proposal to institute a state
lottery and video gaming.
In 2002 the Alaska Legislature passed and the Governor signed legislation that,
among other things, extended the termination date of the RCA one year to June
30, 2003. The Governor supported a simple legislative amendment in House Bill
111 now before the Alaska Legislature that would extend the RCA termination date
for an additional four years. At the urging of several constituencies, the House
Labor and Commerce Committee has adopted lengthy amendments to House Bill 111.
We cannot determine at this time what the final legislation will include and its
ultimate outcome during this legislative session.
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 $2.4 billion are expected to
be distributed to the State of Alaska for highways and other federally supported
projects in fiscal 2003.
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. Energy Information Agency
estimates it could take nine years to begin oil field drilling 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 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 Conoco Phillips, Alaska's large natural gas owners,
believe either natural gas pipeline makes financial sense based upon their
preliminary analysis, though BP and Conoco Phillips have proposed certain
federal income tax incentives that would take effect if the price for Alaska
natural gas goes below a certain level. 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.
Development of the ballistic missile defense system project may have a
significant impact on Alaskan telecommunication requirements and the Alaska
economy. The proposed system would be a fixed, land-based, non-nuclear missile
defense system with a land and space based detection system capable of
responding to limited strategic ballistic missile threats to the United States.
The preferred alternative is
43
deployment of a system with up to 100 ground-based interceptor silos and battle
management command and control facilities at Fort Greely, Alaska.
The U.S. Army Corps of Engineers awarded a construction contract in 2002 for
test bed facilities. The contract is reported to contain basic requirements and
various options that could amount to $250 million in construction, or possibly
more, if all items are executed. Site preparation has been underway at Fort
Greely since August of 2001 and construction began on the Fort Greely test bed
shortly after the June 15, 2002 groundbreaking. The test bed is due to be
operational by September 30, 2004.
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
644,000 people. The State of Alaska's population is distributed as follows:
o 42% are located in the Municipality of Anchorage,
o 13% are located in the Fairbanks North Star Borough,
o 10% are located in the Matanuska-Susitna Borough, and
o 5% are located in the City and Borough of Juneau, and
o The remaining 30% are located in other communities across the State of
Alaska.
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.
Inflation
We do not believe that inflation has a significant effect on our operations.
44
Schedule of Certain Known Contractual Obligations
The following table details future projected payments associated with our
certain known contractual obligations as of December 31, 2002, the date of our
most recent fiscal year-end balance sheet. Our schedule of certain known
contractual obligations has been updated to reflect the April 22, 2003 amendment
of our Senior Facility and to include a certain purchase obligation.
Payments Due by Period
Less than 1 1 to 3 4 to 5 More Than 5
Total Year Years Years Years
------------------------------------------------------------
(Amounts in thousands)
Long-term debt $ 357,700 15,000 47,000 295,700 ---
Interest on long-term debt 87,750 17,550 35,100 35,100 ---
Capital lease obligations, including
interest 68,943 5,115 19,845 18,536 25,447
Operating lease commitments 67,673 11,780 18,607 12,878 24,408
Redeemable preferred stocks 27,298 --- 10,150 --- 17,148
Purchase obligation 3,962 3,962 --- --- ---
------------ ----------- ---------- ----------- ------------
Total contractual obligations $ 613,326 53,407 130,702 362,214 67,003
============ =========== ========== =========== ============
For long-term debt included in the above table, we have included principal
payments on our Senior Facility and on our Senior Notes. Interest on amounts
outstanding under our Senior Facility is based on variable rates and therefore
the amount is not determinable. Our Senior Notes require semi-annual interest
payments of approximately $8.78 million through 2007. For a discussion of our
long-term debt, see note 6 to the Notes to Consolidated Financial Statements
included in Part II of our December 31, 2002 Form 10-K.
For a discussion of our capital and operating leases, see note 12 to the Notes
to Consolidated Financial Statements included in Part II of our December 31,
2002 Form 10-K.
We have included only the maturity redemption amount on our Series B and C
preferred stock (cash dividends are excluded). Our Series B preferred stock is
convertible at $5.55 per share into GCI Class A common stock. Through April 30,
2003, dividends are payable semi-annually at the rate of 8.5%, plus accrued but
unpaid dividends, at our option, in cash or in additional fully-paid shares of
Series B preferred stock. The dividend due on April 30, 2003 was paid in cash.
Dividends earned after April 30, 2003, are payable semi-annually in cash only.
Mandatory redemption is required 12 years from the date of closing. Our Series C
preferred stock is convertible at $12 per share into GCI Class A common stock,
is non-voting, and pays a 6% per annum quarterly cash dividend. We may redeem
the Series C preferred stock at any time in whole but not in part. Mandatory
redemption is required at any time after the fourth anniversary date at the
option of holders of 80% of the outstanding shares of the Series C preferred
stock. For more information about our redeemable preferred stock, see note 1(e)
to the Notes to Consolidated Financial Statements included in Part II of our
December 31, 2002 Form 10-K.
Audit Committee
The Audit Committee, composed entirely of independent directors, meets
periodically with our independent auditors and management to review the
Company's financial statements and the results of audit activities. The Audit
Committee, in turn, reports to the Board of Directors on the results of its
review and recommends the selection of independent auditors.
45
The Audit Committee has approved the independent auditor to provide the
following services:
o Audit (audit of financial statements filed with the SEC, quarterly
reviews, comfort letters, consents, review of registration statements,
accounting consultations); and
o Audit-related (employee benefit plan audits and accounting consultation
on proposed transactions).
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 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 interest rate debt to 3.98% fixed rate debt plus applicable margin. As
of March 31, 2003, we have borrowed $177.7 million of which $152.7 million
subject to interest rate risk. On this amount, a 1% increase in the interest
rate would cost us $1,527,000 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 March 31, 2003, we have borrowed $44.5 million subject to interest rate
risk. On this amount, a 1% increase in the interest rate would cost us $445,000
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.
46
We may enhance, modify, and supplement internal controls and disclosure controls
and procedures based on experience.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding pending legal proceedings to which we are a party is
included in note 5 to the Interim Condensed Consolidated Financial Statements
and is incorporated herein by reference.
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
---------------------------------------------------------------
10.107 Amendment No. 1 to Credit, Guaranty, Security and
Pledge Agreement between GCI Holdings, Inc. and
Credit Lyonnais New York Branch as
AdministrativeAgent, Issuing Bank, Co-Bookrunner
and Co-Arranger, General Electric Capital
Corporationas Documentation Agent, Co-Arranger
and Co-Bookrunner and CIT Lending Services
Corporation as Syndication Agent, dated as of
November 1, 2002
99.36 Certifications Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.37 The Articles of Incorporation of Wok 1, Inc.
99.38 The Bylaws of Wok 1, Inc.
99.39 The Articles of Incorporation of Wok 2, Inc.
99.40 The Bylaws of Wok 2, Inc.
(b) Reports on Form 8-K filed during the quarter ended March 31,
2003 - None
47
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 May 9, 2003
- -------------------------------------- (Principal Executive Officer) -----------------------
Ronald A. Duncan
/s/ John M. Lowber Senior Vice President, Chief Financial May 9, 2003
- -------------------------------------- Officer, Secretary and Treasurer -----------------------
John M. Lowber (Principal Financial Officer)
/s/ Alfred J. Walker Vice President, Chief Accounting May 9, 2003
- -------------------------------------- Officer -----------------------
Alfred J. Walker (Principal Accounting Officer)
48
CERTIFICATION PURSUANT TO18 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: May 9, 2003 /s/ Ronald A. Duncan
Ronald A. Duncan
President and Director
49
CERTIFICATION PURSUANT TO18 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: May 9, 2003 /s/ John M. Lowber
John M. Lowber
Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
50